National Bank of New Zealand Limited v D G and L J Eadie

IN THE COURT OF APPEAL OF NEW ZEALAND

CA18/02

BETWEEN	NATIONAL BANK OF NEW ZEALAND LIMITED
Appellant

AND	D G AND L J EADIE
Respondent

Hearing:	27 and 28 November 2002
Coram:	Keith J Blanchard J McGrath J
Appearances:	R J Craddock QC and D S Alderslade for Appellant J G Miles QC and J L Clark for Respondents
Judgment:	25 February 2003

JUDGMENT OF THE COURT DELIVERED BY BLANCHARD J

Introduction

In 1985, not long after New Zealand floated its dollar and currency control restrictions were lifted, the respondents, Mr and Mrs Eadie, borrowed the equivalent of NZ$500,000 in Swiss francs from Countrywide Building Society. (Countrywide later became a registered bank but at all times relevant to this case it remained a building society.) Soon afterwards, the New Zealand dollar began to fall quite substantially against the Swiss franc. It fell much less against the US dollar. But, because of a relatively inflexible arrangement Countrywide had made with Marac, its source of offshore funding, Countrywide would not permit the Eadies to switch the loan denomination to US dollars until about a year had elapsed. The Eadies have alleged that Countrywide misrepresented the situation to them when they committed themselves to the Swiss franc borrowing and that they suffered losses because of their inability to switch their loan to US dollars. They also alleged breach of contract and negligence on the part of Countrywide in advising them about the loan.
The High Court found that there had been a misrepresentation which induced the Eadies to undertake the borrowing and awarded them NZ$334,424.47 (a figure resulting from an agreement between counsel concerning quantum). The question of what interest should be awarded on that sum, both as to rate and duration, was reserved for further argument.
The defendant to the proceeding and present appellant, National Bank of New Zealand Ltd, later acquired Countrywide and has assumed responsibility for Countrywide’s liabilities.

Facts

Mr Eadie was an experienced businessman. He and his wife were the proprietors of a rest home business and owned several investment properties. Their debt levels were at around 50%. Prevailing domestic interest rates were extremely high at that time (over 20% p.a.). A loan in a foreign currency, at a much lesser nominal rate (about 6% p.a. was in contemplation) appeared very attractive. Mr Eadie consulted with a number of business associates and colleagues, including a foreign exchange loan manager, Mr Guthrie, a mortgage broker, Mr Single, and his own accountant and bank manager. In May 1985, through Mr Single, he made an application to Countrywide for an offshore loan. On 5 July Countrywide wrote to the Eadies confirming that, subject to completion of satisfactory documentation, a loan in the amount of the foreign currency equivalent of NZ$500,000 had been approved, to be secured over three properties and over a NZ$25,000 exchange reserve sinking fund to be established out of the proceeds of drawdown. Countrywide stipulated that exchange risk management was to be arranged with a management service approved by it. The Eadies intended to use Mr Guthrie’s company which was acceptable to Countrywide.
The Eadies accepted that loan offer. On 10 July Countrywide accordingly sent mortgage preparation instructions to its solicitors, Russell McVeagh McKenzie Bartleet & Co. Significantly, some further details were listed in those instructions. The drawing was to be in Swiss francs. The interest rate was to be SIBOR plus 4%. Seven days notice was to be given of drawdown, which was to be made prior to 26 July. All terms and conditions as set out in Countrywide’s “Standard Agreement” were to apply.
A copy of that agreement, titled “Foreign Currency Loan Agreement”, along with other draft loan documents, was sent to the Eadies’ solicitor, Mr Pritchard, on 25 July. The documents later executed were in terms of those drafts.
The Loan Agreement stated that the Lender (Countrywide) would make available to the Borrowers (the Eadies) a loan facility of the equivalent in Eurocurrency of NZ$500,000. “Eurocurrency” was defined as meaning “US dollars, Swiss francs, pounds stirling [sic], Japanese yen, Deutschmarks and such other currency or currencies as may be nominated by the Lender from time to time”.
Clause 2.1 provided for the facility to be available five business days after Countrywide had received certain documents in form and substance satisfactory to it. These documents included a copy of the Loan Agreement executed by the Eadies and a certificate from their solicitor “as to the validity and enforceability of the Agreement and the Securities”.
Clause 3 dealt with “Drawing” and in part provided:
3.2Upon receipt of the notice of drawing the Lender shall determine which Eurocurrency (hereinafter called the Applicable Eurocurrency) the advance is to be drawn in and shall forthwith notify the Borrowers of its determination.
Clause 4 dealt with “Interest and Taxes”. It is unnecessary to describe the content of that provision save that it provided for a rate of interest payable on the loan for each “Interest Period”, which was defined as meaning “a period nominated by the Lender at the beginning of each Interest Period, the first Interest Period beginning on the Drawdown Date…” (i.e. the date upon which the loan was first drawn down).
A definition of “Reference Banks” was also included in relation to the calculation of the applicable SIBOR Rate. It meant “Security Pacific National Bank and Marac Hong Kong Ltd and any other or further banks or prime financial institutions appointed by the Lender”. (Security Pacific was a significant shareholder in Marac.)
The Loan Agreement also contained the following relevant provisions:
5.Currency Option
5.1The Lender may in its absolute discretion convert the Loan (but not part only thereof) on any Interest Payment Date from the currency in which the Loan is then denominated to another currency (‘the New Currency’) (being a Eurocurrency) and the Lender shall give notice to the Borrowers of the currency in which the Loan is to be dominated.
5.2If the Loan is pursuant to clause 5.1 to be denominated as from an Interest Payment Date (the “Conversion Date”) in the New Currency then the Borrowers shall on the Conversion Date repay the Loan in the currency in which it is then denominated and the Lender shall forthwith readvance to the Borrowers an amount of the New Currency calculated by the Lender by:
(a)converting the Original NZ Dollar Value of the Loan to the New Currency at the Exchange Rate applying two Business Days before the Conversion Date for value on the Conversion Date;
(b)rounding the amount in the New Currency resulting from the calculation in (a) above up or down to the amount in the New Currency which is, in the conclusive opinion of the Lender, the nearest convenient amount.
Repayments and readvances to be made pursuant to this clause 5.2 may be made by book entries to such extent as the Lender deems appropriate.
5.3In the absence of the Lender giving a notice of conversion [in] respect of any Interest Payment Date the Loan shall remain dominated in the Interest Period commencing on that Interest Payment Date in the same currency as that in which it was denominated in the immediately preceding Interest Period.
…
14.4The Borrowers and each of them acknowledges the inherently speculative nature of decisions relating to anticipated currency movements and agrees that the Lender shall not be liable either in contract or in tort for any loss or damage (whether financial or otherwise) which may be suffered either directly or indirectly by the Borrowers or either of them as a result of decisions taken by the Lender as to the currency in which the Loan is to be denominated from time to time.
When Mr Eadie received a copy of the draft Loan Agreement he noted clauses 3.2 and 5.1. He and his wife had a meeting with Mr Guthrie on 29 July. Mr Guthrie was not happy about managing the exchange risk unless the loan could be redenominated from time to time. Mr Eadie made immediate contact with Mr Cotes-James of Countrywide. Whether this contact was merely a telephone conversation or whether a face to face meeting took place on 29 July, and the content of the conversation, was in dispute at the trial. The Eadies claimed that oral representations were made to them by Mr Cotes-James at a meeting, which they pleaded in their third amended statement of claim as follows:
[i]That the currency in which the loan was drawndown could be redenominated when a fluctuation in exchange rates required such a redenomination for the benefit of the Plaintiffs;
[ii]That the Plaintiffs were part of a group of borrowers and that the currency would be redenominated for that group should circumstances require;
[iii]That the requirement of the Plaintiff’s loan manager D L Guthrie & Sons Limited that the loan could be redenominated from time to time was possible.

It will be necessary later in this judgment to refer to the evidence about the conversation with Mr Cotes-James in greater detail.

On the same day, after speaking with Mr Cotes-James either at a meeting or by telephone, the Eadies signed a foreign exchange risk management agreement with Guthries.
On 31 July Mr Eadie wrote to Mr Cotes-James advising that the loan offer was acceptable provided Countrywide could “assist” with two points. One of those concerned a temporary difficulty in obtaining a release of an existing mortgage over one of the properties. The other was a request that Countrywide extend the date for draw down to 20 August. Mr Cotes-James replied on the same day confirming the delay in draw down, subject to the payment of 4% p.a. interest on the principal amount from 1 August to 20 August.
On 1 August the final loan documentation was sent to Mr Pritchard.
On 15 August Mr Eadie wrote to Mr Cotes-James in the following terms:
This is to advise you that I wish to draw down in Swiss Francs on my offshore loan on Monday 19th August 1985 with the exchange rate fixed at today’s rate (15^th August 1985).
The Eadies signed the documents at their solicitor’s office on 16 August and on the same day their solicitor sent the executed documents to Countrywide’s solicitors with a solicitor’s certificate which included the following statement:
The said Mortgage, Foreign Currency Loan Agreement and Deed of Charge impose valid, legal and binding obligations on the borrowers enforceable against the borrowers in accordance with the terms of the said documents.
The loan was drawn down in Swiss francs on 20 August 1985.
One of the difficulties in the case, resulting from the very long time which has elapsed since the events in question (as to which see Countrywide Banking Corporation v Eadie, CA234/99, judgment 26 June 2000), is that the documentation of Countrywide’s arrangements with Marac is not available. It is common ground, however, that Countrywide was restricted in its ability to change the currency in which it had borrowed the equivalent of NZ$5 million from Marac. Countrywide used that amount to advance separate loans to a number of borrowers including the Eadies, a Mr and Mrs Epp, whose loan was drawn down on 1 August, and a partnership consisting of Dr and Mrs Mapp and Mr & Mrs Moyle. Dr Mapp’s evidence will be referred to later. A contentious question at trial was the date at which Countrywide’s arrangements with Marac – and hence the restrictions to which it had agreed – were put in place. Did this occur before any conversation between Mr Cotes-James and the Eadies on 29 July?
The first of the Interest Periods on the Eadies’ loan ran from 20 August until 3 September. The latter date seems to have been a rollover date under the arrangements with Marac and hence applicable – on a back-to-back basis – to all of the loans funded by Countrywide from that source. It was Mr Eadie’s evidence that, even by that time, he and Mr Guthrie were wanting to change the loan into US dollars but Mr Cotes-James would not agree. On 3 September Countrywide advised that the currency of the loan from that rollover date until the next rollover date was Swiss francs.
Mr Guthrie arranged hedging contracts through the ANZ Bank on behalf of the Eadies but these proved to be unsatisfactory. By mid-October Mr Eadie was complaining to ANZ (but not to Countrywide) about the losses which he was suffering on those hedges, attributing responsibility to ANZ and Guthries.
The New Zealand dollar declined considerably against the Swiss franc over the next few months, but much less so against the US dollar. The worst of the losses were in the latter portion of 1985.
Countrywide eventually renegotiated its own borrowing facilities and, as from 28 August 1986, it was in a position to offer the Eadies an ability to change currencies. There is no complaint about anything which occurred after that time.

The High Court judgment

In a reserved judgment delivered in the High Court at Auckland on 12 December 2001, Williams J comprehensively reviewed the evidence before making a number of factual findings. He referred to the inexperience in offshore borrowing and forex matters of Countrywide, and in particular of its executives, Mr Stephen-Smith and Mr Cotes-James, who dealt with the Eadies. Mr Stephen-Smith had spoken with the Eadies prior to the making of the loan offer but had no involvement with them thereafter. He played some part in making Countrywide’s arrangements with Marac. Mr Cotes-James did not. Mr Stephen-Smith was unable after such a lapse of time to recall much detail. His recollection was that the Marac facility was not concluded until very close to the Eadies’ drawdown date of 20 August.
The Judge found that:
…Messrs Stephen-Smith and Cotes-James probably told Mr Eadie and Mr Single as much as they knew about the forex loans likely to be available to Countrywide and, through Countrywide, to its customers. That would have included assurances as to the ability of borrowers or their forex managers to change currencies at request on rollover dates since the expert evidence shows that to have been a universal feature of such loans at that time. The information they gave Messrs Eadie and Single would also have been that borrowers could choose the currency of drawdown. The state of Countrywide’s negotiations to obtain access to international lines of credit and Messrs Stephen-Smith and Cotes-James’ lack of detailed experience in the management of forex loans was likely to have led to insistence to prospective borrowers that any such loan be managed by an experienced forex manager. The likelihood is that the Countrywide representatives would also have told Messrs Eadie and Single that if Mr Eadie proceeded with an offshore loan, he and his wife would be one amongst a group of borrowers. Further, drawdown in CHF [Swiss francs] was probably indicated as the likely currency in which the loan would be taken.

The Judge saw this as consistent with, in particular, the loan offer of 5 July and the evidence of Dr Mapp who had said that, as a result of meetings with Mr Cotes-James, his understanding was that “while Countrywide did not have complete flexibility we would be able to change the currency of our loan to minimise our loss”. Dr Mapp too had subsequently been refused a change of currency. His evidence had been of being told that he and his wife and their friends, the Moyles, were the third borrowers in the group and that the tranche was Countrywide’s first foray into international currency markets.

The Judge found, however, that although before receipt of the draft documents the Eadies may not have been aware that Countrywide, not they, would have the power to switch currencies, those drafts and Mr Guthrie’s advice (on 29 July) made it clear beyond doubt. The Judge took the view that by 29 July Countrywide’s arrangements with Marac were probably not finalised and details of that facility would have been “largely if not completely” unknown to Mr Cotes-James, who had not been involved in its negotiation. The Judge went on:
…It follows that when – as the Court accepts they did - Mr and Mrs Eadie asked Mr Cotes-James on 29 July about their ability or that of their forex manager to switch currencies contrary to what the draft security documents said, he is likely to have responded again with generalities, but now somewhat more specific in light of the drafts. He is also likely to have mentioned that the ability to switch currencies was that of Countrywide but that Countrywide would endeavour to co-operate with borrowers and their forex managers particularly if the group as a whole sought change. Keen as he was to proceed with a forex loan, in the Court’s view this information was not such a marked departure from that given Mr Eadie previously as to alert him to the significant change brought about if the loan proceeded in terms of the draft security documents. In their keenness to proceed he and Mrs Eadie heard Mr Cotes-James as if he were telling them that the terms of the draft forex agreement, particularly cl 5.1, would not, by co-operation between the parties, operate in its terms and in a way substantially different from that which Mr Eadie had previously understood. The way in which Mr and Mrs Eadie understood Mr Cotes-James allayed their concerns. One of the results is that, from Mr Eadie’s side, the correspondence between 29 July and 16 August focused on housekeeping matters relating to the loan. A more careful and experienced borrower might have recorded Mr Cotes-James’ assurances of 29 July in a letter but Mr Eadie did not do so.
While Williams J did not expressly make a finding that there was a meeting on 29 July between Mr and Mrs Eadie and Mr Cotes-James, his conclusions are obviously premised upon it. He said that it would be most unlikely that Mr Cotes-James would have failed to tell the Eadies on 29 July of Countrywide’s inability to switch currencies if he had then known that such was the case. The Judge added:
…What is more likely is that on some date between 29 July and the drawdown of the loan on 20 August Mr Cotes-James became aware that Countrywide could no longer switch currencies, not because of a wish not to co-operate with borrowers and their forex managers but because of the terms of the Marac facility.
The Judge described the finalisation of terms between Marac and Countrywide “at about this time” as a “fulcrum event”:
…Once that was agreed, the evidence from Messrs Stephen-Smith and Cotes-James was consistent that Countrywide was to borrow from Marac in CHF and had no ability or power to change the currency of that loan throughout the term of the facility. It therefore had to lend in CHF to its customers and it had no ability or power to permit customers to switch offshore currencies as long as its Marac facility remained in place. All it could do was permit customers to bring their loans back onshore if that were practicable.
In the view of the Judge:
…the terms of the forex agreement earlier set out indicated the possibility of repeated currency switching during the term of the loan and the earlier discussions with Mr Eadie underpinned what had been represented as the way in which cl 5.1 would be operated by Countrywide. The Court’s conclusion is that Countrywide represented that although it had the entire discretion to denominate the loan currency under cl 5.1, it would do so in consultation with borrowers and their forex managers and endeavour to accommodate their wishes, particularly if they were grouped. Once it had ended its ability to do anything other than maintain borrowers’ loans in CHF throughout the term of the Marac facility, in this Court’s view it was under an obligation to make clear to Mr and Mrs Eadie and their advisors that the discretion which Countrywide retained under cl 5.1 to denominate currencies other than CHF on rollover date was no longer a discretion at all as long as Countrywide owed money to Marac. [Emphasis added]

The first of the causes of action considered by the Judge was under s6 of the Contractual Remedies Act 1979 alleging untrue oral representations by Mr Cotes-James “in or about August 1985”. The Judge observed that under s6 a misrepresentation must be a statement of past or present fact, not of opinion nor of law; that the misrepresentation must be made by or on behalf of another party to the representee; and that it must materially influence the representee into entering the contract. Countrywide had denied that the statements complained of were made. If the Court found to the contrary, Countrywide denied that the statements were misrepresentations. It also submitted that they were unclear and were no more than an expression of opinion about the future.
Before considering whether the statement he found had been made was a misrepresentation, Williams J stated his view that the statements pleaded (which of course were not identical to his finding) were statements of fact, not expressions of opinion about a future event. He said that they implied facts existing at the time they were made and were thus capable of amounting to a misrepresentation. “Statements about redenomination of forex loan currencies when circumstances indicated imply the present and continuing ability to carry out that action at the appropriate time”. They logically suggested “a level of knowledge and competence at the time the statements were made as to future events and the ability to take remedial action in relation to them”. The Judge also found that the statements were material in the Eadies’ decision to enter into the “forex security”, by which we take it the Judge meant the foreign exchange loan agreement.
Turning to whether the “statements pleaded” were misrepresentations, the Judge gave his view that, up to the point where Countrywide’s facility from Marac was finalised, statements made as to redenomination following exchange rate fluctuation, either for Mr and Mrs Eadie or for their group and either at the request of borrowers or their forex managers, were “phrased generally and were not incorrect”. However, the Judge’s view was that the situation changed once the Marac facility was finalised, thus ending Countrywide’s contractual ability to exercise its discretion and change loan currencies at borrowers’ requests. “The Court has held that Countrywide did nothing or did insufficient to bring that change of circumstances to Mr and Mrs Eadie’s knowledge”. Mr Eadie and his advisors had been told that redenomination of the currency was possible. That was not true after the Marac facility was finalised. Draw down had to be in Swiss francs. That would remain the currency of borrowing as long as the Marac facility “persisted”:
… Once the Marac facility was finalised Countrywide had no discretion. Despite that, the terms of the forex agreement indicated flexibility in currency choice during the course of the loan. True, cl 5.1 gave Countrywide complete discretion to switch the currency of the loan but the Court has held that Mr Cotes-James indicated that Countrywide would try to work with borrowers individually or in a group or their managers to exercise its discretion to assist them. The extinguishing of its discretion was a supervening event which made the earlier discussions incorrect by the time the forex agreement came to be signed. In those circumstances the Court’s view is that Countrywide came under an obligation to tell Mr and Mrs Eadie and their advisors of the change in circumstances. Having failed adequately so to do, it is liable to them for misrepresentation.
The Judge then rejected an alternative cause of action in breach of contract, which is not pursued to this Court. He also rejected a cause of action in negligence (now the subject of a cross-appeal) because it would be unnecessary and incorrect to impose such a duty of care:
… The principal reasons for reaching that view are that the legal relationship between these parties is entirely as set out in the security documents supplemented, as the Court has held, by the representations made by Mr Cotes-James which are to be treated as if they were terms of the contract. The facts are also the same. It accordingly follows that, apart, of course, from the differing legal concepts, a duty of care and the contractual obligations are congruent. It further follows that it is unnecessary and would not avail Mr and Mrs Eadie to any greater extent to hold that they were owed a duty of care by Countrywide.
Countrywide had pleaded an affirmative defence based on clause 14.4 of the agreement (see para [12]) above. The Judge took the view that the exemption applied only to claims in contract or tort, not to claims under s6 of the Contractual Remedies Act. (The Judge refers at one point to s7 but plainly he meant s6.) He said:
Where a statutory provision requires representations outside the terms of the contract to be treated “as if” the representations were a term of the contract for the purposes of damages, that is not plainly a claim arising out of contract.

Furthermore, the Judge saw clause 14.4 as plainly prospective in operation. By entering into the Marac facility, and for its duration, Countrywide had ended its ability to denominate the loan in anything other than Swiss francs. At the time it concluded the Marac facility that forex agreement, and thus clause 14.4, were not in effect. After its execution, and during the first year of the loan, Countrywide made no decisions as to the denomination of the loan currency, against liability for which clause 14.4 might have protected it. The affirmative defence was therefore rejected.

Submissions for the appellant

Mr Craddock QC submitted that in essence the representation alleged by the Eadies in their statement of claim and in Mr Eadie’s evidence, said to have been given in a precise and detailed way, was that Countrywide had assured him that he or his manager, Mr Guthrie, could change the currency in which the loan had been denominated and that this induced the Eadies to enter into the loan agreement. But this assertion had been in conflict with contemporary documents, including the loan agreement, and with the evidence of Countrywide’s witnesses. It was improbable that Mr Cotes-James would have given assurances which were contrary to Countrywide’s documents. Moreover, the Judge had not accepted that there had been such a representation. Yet, notwithstanding his rejection of material parts of the Eadies’ evidence, and his rejection of another alleged misrepresentation – that they had been told by Countrywide that there was no risk in foreign exchange transactions – the Judge had found instead what Mr Craddock submitted was a significantly different representation. Counsel contended that on the basis of the evidence the Judge had been wrong to find that the representation found by the Judge had actually been made or that, if it had been made, that it had been a factor inducing the Eadies to enter into the loan agreement.
A crucial step in the Judge’s reasoning leading to the finding of the representation was that the terms of the Marac loan were not known to Countrywide’s witnesses as at 29 July 1985. That was not, it was submitted, a justifiable inference from the evidence of Mr Cotes-James and the contemporary documents. The Russell McVeagh instruction of 10 July referred to Swiss francs. The Epps loan on 1 August seems to have been the second of the loans from the $5 million borrowed from Marac. It was hardly likely that it would have occurred within a day or so of the arrangement with Marac being put in place. Counsel suggested that the Marac loan must have been arranged at least by early July. In support of this proposition, he pointed to the evidence of Dr Mapp who had known that Countrywide had limited flexibility.
Nor, it was submitted, was it a proper finding by the Judge that the representation which he found had been made on 29 July, or even that a face to face meeting had occurred between the Eadies and Mr Cotes-James. Neither the note made by Mr Cotes-James of a telephone call on that day, nor the letter written by Mr Eadie on 31 July accepting the loan, mentioned it. Mr Eadie’s actions after losses began to be incurred were said to be inconsistent with the existence of such a representation.
The terms of the alleged representation were said to be uncertain and unworkable. The representation was oral and was inconsistent with the written loan agreement and the solicitor’s certificate. The parol evidence rule prevented reference being made to it. It had never been put to Mr Cotes-James, when he was cross-examined, in the form found by the Judge.
In any event, Mr Craddock submitted, there was no evidence that the Eadies were induced by such a representation. What they claimed had induced them were representations which the Judge had found not to have been made. They had said that nothing short of complete control of the choice of currency was acceptable to them.
Counsel said that, if there had been a representation as found, Countrywide had retained an ability to switch the whole of the $5 million advance from Marac by repaying the loan and reborrowing in a different currency.
Clause 14.4 was also said to bar the Eadies’ claim for loss or damage as a result of decisions by Countrywide as to the currency denomination. The determination of the initial drawdown under clause 3.2 was said to be a decision for the purposes of clause 14.4. A decision to remain in Swiss francs at a rollover date, even if made contrary to the (alleged) representation by Mr Cotes-James was also protected by that clause as the representation was under s6 of the Contractual Remedies Act to be treated as if it were a contractual term.
Finally, Mr Craddock submitted that the damages figure had been agreed only in relation to the representations which the Eadies actually asserted, and which had not been accepted by the Judge. Hence the question of quantum was at large and Countrywide should have been given the opportunity of making submissions on it in the High Court. On the basis of the representation actually found by the Judge only nominal damages could have been awarded. Countrywide was entitled to consider the wishes of the other borrowers and its own position and, in the end, had a discretion, as the Judge had found.

Submissions for the respondents

Mr Miles QC submitted that there was no material difference in the representation found by the Judge and those which were pleaded. The Eadies’ case was put on the basis that Countrywide had made representations that it had the ability to switch currencies for the benefit of the group of borrowers and would be influenced by them in exercising its discretion under clause 5.1. The Judge had been right to find that the making of that representation was established by the evidence. Countrywide’s witnesses had acknowledged that in the first meetings there may have been discussions about possible switching of currencies. Dr Mapp had been given the same understanding that Countrywide had a degree of flexibility with the loan. The evidence was that it was highly unusual for a borrower not to be able to switch currencies. It was implicit in clause 5.1 that this could be done. Mr Eadie must have thought when he wrote to Countrywide stipulating the currency of draw down that he had a choice. The key element in the misrepresentation was that Countrywide had a discretion and could exercise it in a benign way to accommodate the borrowing group. It was this understanding that caused the Eadies to accept the loan.
It was submitted that, to the extent the Judge’s conclusion was based upon a finding that the Marac arrangement had not been concluded by 29 July, he had been correct. Mr Stephen-Smith had thought it occurred close to the Eadies’ draw down date. But even if that were not so, it was very possible that Mr Cotes-James, whose honesty was accepted by the Judge – he would not have set out to mislead – had on 29 July been unfamiliar with the detail of the Marac arrangement. His evidence showed signs of confusion about the effect of the Marac arrangement. He may well have been similarly confused at the time.
The Judge had also been right to accept the Eadies’ evidence that the meeting on 29 July took place. The Countrywide executives were slack about making file notes. The Eadies were more likely to have an accurate recollection. The transaction was important and unique for them, as it was for Dr Mapp. In contrast, it did not have the same importance for the Countrywide executives and they had not committed their recollections to writing until quite recently.
It was submitted that clause 14.4 provided no protection for Countrywide. It did not in fact make any decision because it had abdicated its ability to do so.
The parol evidence rule was said to be inapplicable. The representation found was not a term of the contract – merely to be treated as if it were. In any event, the rule was said to have diminished influence in modern times and not to prevent evidence of an inducing misrepresentation.
Mr Miles said that the damages figure had been agreed upon on the basis of the case as pleaded and run on the pleadings. Countrywide should not be permitted to resile from its agreement. The damages were, besides, appropriate to the consequence of the misrepresentation as the Eadies would not have entered into the loan agreement, and would have avoided the losses if the misrepresentation had not been made.
In a submission in support of the cross-appeal, Mr Miles said that Countrywide had been negligent in the advice given to the Eadies. In the early stages of the negotiations with Countrywide they had been told they would be able to switch currencies. Clause 5 appeared to indicate that Countrywide could facilitate this. Yet Countrywide had negligently failed to tell them that it had put itself in a position in relation to Marac which made it impossible, or at least very difficult, to switch currencies.

The Marac arrangement

We are persuaded by Mr Craddock’s analysis that the Judge erred in reaching his conclusion that the Marac arrangement was not in place by 29 July 1985. It is very unlikely that Countrywide would have made a loan offer to the Eadies in early July and contemplated drawdown by 26 July (as they did in their instructions to their solicitors of 10 July) without having first obtained a binding agreement with a provider of foreign currency. The Eadie loan approval was signed off by Mr Stephen-Smith on 24 June. The loan offer was made on 5 July. On 10 July Countrywide instructed its solicitors that the drawing was to be in Swiss francs. All this suggests that the Marac arrangement had already been made. Mr Stephen-Smith’s recollection was that it was later – close to the time of the Eadies’ drawdown. But that cannot be correct as the Epps transaction, which was not the first out of the $5 million Marac borrowing by Countrywide, occurred on 1 August. It is much more likely that the draw down which Mr Stephen-Smith remembered as being close to the time of the Marac arrangement was of the first of the loans.
Importantly, in his evidence Mr Cotes-James, speaking about the acceptance by the Eadies of the loan offer of 5 July (which they signed at that time) said that “by this stage” the arrangements with Marac were in place “otherwise we could not have instructed our solicitors to prepare the documentation for the loan to Mr & Mrs Eadie”. By that stage, he said, the choice of currency was fixed, as recorded in his instructions to the solicitors.
For these reasons we differ from the Judge and consider that the Marac arrangement must have been concluded by early July 1985 at the latest. Hence from that time Countrywide was committed to a borrowing in Swiss francs. Mr Stephen-Smith explained in his evidence that Countrywide was taking part of a larger loan arranged by Marac and the selection of currency was determined by Marac. There was inflexibility for Countrywide because they themselves were part of a group.
Mr Cotes-James also said that Countrywide did have a discretion to change currencies provided they could get enough people to roll into a different currency – if they could get $5 million in the particular rollover. They needed to get all the borrowers to agree. But, in contrast, Mr Stephen-Smith who was involved in the negotiations of the Marac loan, gave no evidence that Countrywide had an ability to require Marac to change currencies. (It does appear, however, that Countrywide must have had an ability to repay Marac on a rollover date, for otherwise it would not have given (in cl 6.2) such a right to its own borrowers, i.e. to repay in New Zealand dollars.)

Was there a meeting on 29 July?

We agree with the Judge’s implicit conclusion that a meeting did occur between Mr & Mrs Eadie and Mr Cotes-James on 29 July. We are very conscious of Mr Craddock’s submission urging caution in the making of a credibility finding – as between Mr and Mrs Eadie, on the one hand, and Mr Cotes-James, on the other – in circumstances in which the event in question occurred many years ago, memories are far from fresh and could be unreliable. But we are satisfied that there is a sufficient basis in the evidence to support the view that a meeting did occur on 29 July. Certainly, there was no minute of it, but Mr Cotes-James was not in the habit of making such minutes. When cross-examined he did not deny the possibility that a meeting had occurred, although he could not recall it. Mr Eadie was very definite. He said the meeting was “quite memorable”.Mrs Eadie attended only the one meeting with Mr Cotes-James and remembered it as occurring on the day when she and her husband saw Mr Guthrie, although she was rather vague about the detail of what was said. She did however recall Mr Guthrie saying on that day that he would not manage the loan unless the currency switching question was sorted out. That was why she and her husband had gone to see Mr Cotes-James.

The representation

The Judge found that Countrywide represented that, although it had the entire discretion to denominate the loan currency under cl 5.1, it would do so in consultation with borrowers and their forex managers and endeavour to accommodate their wishes “particularly if they were grouped”. We think that by the words which we have put in quotation marks the Judge was attempting to convey that the representation was conditioned upon the borrowers, or most of them at least, speaking (directly or through their managers) with one voice.
Mr Craddock submitted that the representation found by the Judge was essentially different from what had been pleaded and inconsistent with Mr Eadie’s evidence. But we do not see it that way. The assertion was pleaded broadly. The pleading adequately encompassed the representation found by the Judge (see pleadings (i) and (ii) in para [13] above, read together) – that Countrywide had the ability to redenominate for the group of borrowers should circumstances require.
In his evidence Mr Eadie at times certainly put the matter a good deal higher, contending that he had been assured that Mr Guthrie could direct a change of denomination at a rollover date. But in his prepared brief of evidence, referring to the meeting on 29 July, he said:
Mr Cotes-James gave us a detailed description of how Countrywide administered the currency changing. He said that Countrywide would borrow a parcel of offshore funds. Countrywide would then make those funds available to clients in the currency of their choice. Those clients were grouped in currencies and that my first roll over after drawdown would fall in with that group. He explained that if the currency of my choice became unfavourable, that is, strengthened, it would not only be to my advantage to change currency but also the other members of the group. Faced with this situation Countrywide would of course comply with the Managers request to change currency.
He went on to explain that Countrywide only wished to have a governing influence in this process. He gave an example of a manager or client destroying themselves with constant and unwise changes. This explanation seemed perfectly reasonable. I finished by asking him directly “So Mr Guthrie can change the currency on roll over?” he replied “Yes”.

In the context of the whole passage it is plain that Mr Eadie must have regarded Mr Guthrie’s ability to change the currency as dependent on Mr Guthrie’s wishes coinciding with those of other members of the borrowing group and as subject always to Countrywide’s “governing influence” in the process. Pleading (iii) in para [13] above likewise had to be read along with pleadings (i) and (ii).
We consider it more probable than not that a representation in the terms found by the Judge was made by Mr Cotes-James at a face to face meeting with the Eadies on 29 July and that it did satisfy the Eadies and lead them to go ahead with the offshore loan. Such a representation was not inconsistent with the Loan Agreement for it was made clear to the Eadies that, ultimately, Countrywide had the “governing influence”. Mr Eadie accepted in cross-examination that it was reasonable that Countrywide should have guidance or control over currency changes. If Countrywide did not consider that it was appropriate for the group of borrowers to change currency, then it retained the discretion to refuse a change. But if it was in their interest, and there was a clear majority view, there would not appear to be any reason for Countrywide to refuse to facilitate that desire.
Unfortunately, however, the representation was misleading, and therefore a misrepresentation, because it implied that Countrywide had an ability, in practical terms, to effect a change in currency and because it was inconsistent with Countrywide’s contractual arrangements with Marac as described by Mr Stephen-Smith. As he said, “Countrywide had to comply with the terms of the Marac drawn down [sic] as determined by Marac”. Yet, in his evidence, Mr Cotes-James said that Countrywide did have a discretion to change currencies provided it could get enough people to roll into a different currency. Herein, we think, lay the seeds of the confusion and of the misrepresentation. Mr Cotes-James was plainly referring when he said “enough people” to the Countrywide borrowing group, not the Marac borrowing group, for he added “provided we can get enough people to roll into a different currency and switch tranche” and “if we could get $5 million in the particular rollover, 5m NZ, yes we could have rolled it over into another currency”. It seems to us very likely that he told the Eadies on 29 July something along these lines. But Mr Cotes-James had not been involved in the making of the Marac arrangement and, as we know from Mr Stephen-Smith and as transpired when the first rollover date arrived, things were not actually that simple. Mr Cotes-James was evidently confused about the nature of the problem confronting Countrywide as a result of its entry into the Marac arrangement and gave the Eadies incorrect advice based on his own misunderstanding of this position.
It is said for Countrywide that the representation would not have been made by Mr Cotes-James because it was unworkable. We do not agree. If Countrywide had itself had an ability to change the currency of its $5 million borrowing, the assurance given by Mr Cotes-James could well have been workable, provided that there was a majority view amongst its borrowers concerning a particular currency switch. The Loan Agreement gave Countrywide the power to require all borrowers to accept its determination of currency upon a rollover. The problem was that, contrary to what was implicit in the representation, Countrywide itself could not change the currency, except perhaps if it and all the other borrowers from Marac were of the same mind.
Mr Craddock suggested in argument that in fact any representation made by Mr Cotes-James, as found by the Judge, did not really misstate the position because Countrywide retained the ability to repay the $5 million to Marac and reborrow in a different currency. There is however no evidence of Countrywide’s ability, as at 29 July, to fund a replacement foreign currency loan, as contemplated by the Loan Agreement, from another source. It was not until a year later that it made another arrangement which gave it that resource. Nor does Countrywide’s refusal to contemplate a switch on the rollover dates in September 1985 and March 1986 – despite complaints from Dr Mapp and Mr St Clair Brown, as well as Mr Eadie – suggest that this was something which Countrywide was intending to do, at least in the medium term.
Thus, accepting, as the Judge did, that Mr Cotes-James acted honestly towards the Eadies, even on the basis that the Marac arrangement – contrary to the view of the Judge – was already in place on 29 July, we consider it more probable than not that Mr Cotes-James made a misrepresentation to the Eadies on that date along the lines found by the Judge. There is abundant evidence from the Eadies themselves and from Mr Single – supported by Mr Guthrie’s evidence concerning his firm’s policy – of Mr Eadie’s concern that he and his wife should have the ability to switch currencies if that became desirable. The assurance given by Mr Cotes-James, while not going as far as Mr Eadie would no doubt have wished, would have been sufficient to bring him to a decision to proceed and to accept a loan initially, as he thought, denominated in Swiss francs. To someone who believed that Countrywide had the necessary flexibility there may have seemed little risk that there would be a variety of views among the borrowers from Countrywide concerning what to do when a rollover date approached. He knew nothing of the terms on which Countrywide had itself borrowed. Mr Eadie himself said that he did not give consideration to what Countrywide might do if its borrowers and their managers could not reach agreement. It must have seemed to him, as it evidently did to Mr Cotes-James, that what would be good for one borrower from Countrywide would be likely to be good for, and desired by, all. The evidence of Mr Guthrie also suggests that Mr Eadie must have reported on the conversation with Mr Cotes-James in satisfactory terms, or else Mr Guthrie would not have gone ahead with the forex management contract. It is worth recalling in this connection that Mr Eadie was taking a cautious approach. He was not hell-bent on an offshore loan and had investigated carefully. He is very unlikely to have intended to mislead Mr Guthrie about the outcome of the meeting with Mr Cotes-James. And he is unlikely to have misunderstood what he was told by Mr Cotes-James.
It does not appear that Mr Eadie had in contemplation at any relevant time any currency other than Swiss francs. Given that Countrywide had committed itself to Swiss francs, and that it had no other funding source, it seems most unlikely that Countrywide would have encouraged Mr Eadie towards a draw down in any other currency. Mr Eadie’s letter of 15 August, primarily, it would seem, written to fix the date of draw down, refers to Swiss francs but, contrary to what Mr Eadie said in his evidence, it appears to do so more by way of confirmation of what had been agreed about the initial currency, rather than being intended as a true nomination. (In terms of cl 3.2 the choice of the initial currency was of course a matter for Countrywide, as Mr Eadie was well aware.)
Counsel for the appellant submitted that if an assurance as found by the Judge had been made by Mr Cotes-James it would surely have been mentioned in Mr Eadie’s follow-up letter or noted in Mr Cotes-James’s record of the telephone call from Mr Eadie on 29 July; and, he said, it was to be expected that some record would have been made of the complaints which Mr Eadie said he had later made when currency switching was refused on rollover dates. Nor had there been any mention of any complaint about Countrywide in Mr Eadie’s letter in October 1985 to the ANZ Bank.
The absence of any mention in Mr Eadie’s letter of 31 July of an assurance from Mr Cotes-James given at the meeting of such an important matter might at first suggest that no such assurance had been given, particularly when the record of the telephone call also omitted it. But the telephone call and the letter may well have dealt only with a matter which had come to Mr Eadie’s attention after the meeting, namely a delay unexpectedly caused by the absence overseas of a mortgagee whose signature of a release of mortgage would not be available until 20 August. It would seem that the Eadies’ solicitor was not advised of this temporary problem until 29 July. There is a letter of that date from the mortgagee’s solicitors. They had apparently telephoned Mr Pritchard before sending it, for the advice from Mr Eadie to Mr Cotes-James by telephone was more specific than the letter about the date of the mortgagee’s return.In his evidence Mr Eadie said that he did not remember the phone call, so he did not give any timing for it. In relation to the letter, he said that it related to “two matters…that would delay the issuing of the loan.”
There is no record of the complaints which Mr Eadie said he made when rollover was refused but, as already mentioned, Mr Cotes-James was not a regular maker of file notes. Mr Eadie believed that Mr Cotes-James was acting honestly. He was at first told there had been a technical hitch. He said he was given the impression that Countrywide was “working on the issue”. He was reluctant to push a complaint too strongly because that would risk losing Mr Cotes-James’s cooperation. That may well have been why he did not put his concerns in writing to Countrywide at that time. It is to be noted that Dr Mapp, whose impression about Countrywide’s ability to facilitate currency switching was similar to that of Mr Eadie, had a concern that if legal action were threatened against Countrywide he and his partners would lose their negotiating position. He was conscious, as no doubt Mr Eadie was, that as a result of the rise of the Swiss franc against the New Zealand dollar Countrywide was in a position to demand topping up payments.
As for the letter to the ANZ Bank, it was not to be expected that in a letter to another institution trying to place blame on it for the inadequacies of hedging arrangements to which Countrywide was not a party Mr Eadie would raise a complaint about Countrywide which was irrelevant in that context.
In summary, although our reasons differ in some respects from those of Williams J, particularly in relation to the timing of Countrywide’s arrangement with Marac, we are of the same view that Mr Cotes-James misrepresented to the Eadies at the meeting on 29 July 1985 its ability, in its discretion, to denominate on a rollover date a currency other than Swiss francs if that were the wish of a majority of the borrowers and their advisers. In fact, Countrywide lacked that ability because it was one of a group of borrowers from Marac, as the evidence of Mr Stephen-Smith explains. We also take the view, in agreement with the Judge, that this misrepresentation concerning a matter of great moment to Mr Eadie was a factor inducing the Eadies to commit themselves to the offshore loan in Swiss francs.

Parol evidence rule

The parol evidence rule has no application to this situation. The representation made by Mr Cotes-James did not directly contradict the Loan Agreement – in particular, cl 5.1 which gave Countrywide an “absolute discretion” concerning the conversion of the currency of the loan. Mr Cotes-James made it clear, as Mr Eadie accepted, that Countrywide retained a “governing influence”. It could always decline to act in accordance with the wishes of the group of borrowers, but the indication was given that it did not intend to do that unless it thought that what they were doing was not in their own interests. Moreover, the complaint in this case is not about Countrywide’s discretion, but about the fact that it actually had no ability to exercise any discretion because of the inflexible arrangement it had made with Marac. Countrywide had caused the Eadies to believe that it had a discretion which it did not possess.

Clause 14.4

We do not consider that this clause prevents the Eadies’ claim. It contained an agreement by the Eadies that Countrywide would not be liable for financial loss suffered by them directly or indirectly “as a result of decisions taken by [Countrywide] as to the currency in which the Loan is to be denominated from time to time”. Mr Craddock’s argument that this provision was apt to cover a decision by Countrywide about the currency of the initial draw down can be accepted. Clause 3.2 required Countrywide upon receipt of a notice of draw down to determine in which Eurocurrency the advance was to be drawn. The Loan Agreement therefore contemplated a decision as to the currency in which the loan would initially be denominated.
But we do not accept that Countrywide in fact made any such decision either at that time or on any relevant rollover date. Countrywide was already committed to Swiss francs. It had already fettered, at least in practical terms, its ability to denominate the Eadies’ loan in anything other than Swiss francs either at draw down or on a rollover. Clause 14.4 is obviously designed to protect Countrywide if, a choice of currency actually being available, it made a decision which proved unsatisfactory for the borrower. It is not designed to protect Countrywide against its own decision to bind itself, and therefore its borrowers, to a particular currency with no practical ability to effect a currency switch.

Quantum of damages

Because the misrepresentation made by Countrywide was, in our view, in terms of the pleading and the evidence and there was an agreement on quantum, it is not open to Countrywide to contest this issue on appeal. But it is as well to add that we also consider that the evidence establishes that the Eadies, as a result of their enquiries and particularly the advice of Mr Guthrie, are unlikely to have proceeded with the loan but for the misrepresentation. The position as explained to them by Mr Cotes-James may possibly have been unworkable or uncertain in particular instances (assuming Countrywide had itself actually been able to accommodate a currency switch). But that is not the point. The real question is whether the assurance given to the Eadies, however unworkable it might have proved to be in certain circumstances, did cause them to take up the loan. If they had not taken it up – and had instead continued with a domestic borrowing or managed to obtain a more flexible offshore loan, which the evidence shows was available in the market from other lenders who held banking licences – they would not have found themselves faced with unavoidable ongoing losses from a loan which could not be switched, as they wished, into US dollars. If the assurance had not been misleading, and Countrywide had flexibility, there is no reason to suppose that it would have arbitrarily refused to facilitate a switch to US dollars.

The cross-appeal

We agree with Williams J, for the reasons he gave, that if the claim based on misrepresentation had failed, the claim in tort must also have failed, for it was dependent on establishing negligence by Countrywide in the giving of the assurance to the Eadies by Mr Cotes-James. There was no need for the imposition of the further obligation in these circumstances.

Result

Both the appeal and the cross-appeal are dismissed. The appellant must pay the respondents’ costs on the appeal in the sum of $10,000 together with their reasonable disbursements, including travel and accommodation costs of their counsel, to be fixed if necessary by the Registrar.

Solicitors:

Chapman Tripp Sheffield Young, Auckland for Appellant

Edwards Clark Dickie, Auckland for Respondents

[2003] NZCA 32

25 February 2003