Raph Engle Concepts Limited v SCL Holdings Limited
[2015] NZHC 1415
•24 June 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-3145 [2015] NZHC 1415
BETWEEN RAPH ENGLE CONCEPTS LIMITED
Plaintiff
AND
SCL HOLDINGS LIMITED First Defendant
SCL INDUSTRIES PARTNERSHIP (In
Rec & Liq)
Second DefendantSYSTEMS CONTROLS LIMITED Third Defendant
SCL DESIGN LIMITED Fourth Defendant
SCL INDUSTRIES TECHNOLOGIES LIMITED
Fifth Defendant
Hearing: 4 to 7 May 2015 Counsel:
RJ Hollyman for plaintiff
IF Williams and HE McQueen for defendantsJudgment:
24 June 2015
JUDGMENT OF FAIRE J
This judgment was delivered by me on 24 June 2015 at 11 am pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Metro Law, Auckland
Kemps Weir Lawyers, Auckland
Raph Engle Concepts Limited v SCL Holdings Limited [2015] NZHC 1415 [24 June 2015]
Contents
Introduction ............................................................................................................[1] Background ............................................................................................................[4] The causes of action .............................................................................................[17] The quantum of the claims ...................................................................................[21] The issues .............................................................................................................[22]
The first issue [28]
The second issue [30]
The first issue .............................................................................................................
The plaintiff ’s case [33]
The defendants’ case [35] Analysis ................................................................................................................[37] Leave to amend statement of claim and equitable assignment ............................[81] Result....................................................................................................................[95] Orders ...................................................................................................................[96] Costs ...................................................................................................................[100]
Introduction
[1] This proceeding commenced on 13 June 2013. At that time the plaintiff sued the first and second defendants. The claim arose from the non-payment of certain commissions due to the plaintiff from the second defendant.
[2] The second defendant was placed into liquidation on 22 November 2013. On
29 May 2014 an order was made joining the third, fourth and fifth defendants. The third amended statement of claim was filed on 3 June 2014 containing the causes of action against all defendants.
[3] The current position is that the plaintiff seeks to recover $281,717. The amended pleading and joinder of defendants followed earlier interlocutory applications in which:
(a) The plaintiff sought interim preservation or, alternatively, freezing orders which resulted in the first and second defendants giving undertakings designed to protect assets to the value of $338,944.76;
(b)The plaintiff sought summary judgment on a separate cause of action against the second defendant which was, in fact, entered on
13 September 2013; and
(c) The first defendant sought summary judgment on its defences against the plaintiff which, for reasons I need not go into, did not result in a judgment in the first defendant’s favour.
Background
[4] The defendants are part of a group of companies which operated together as SCL Group. They had expertise in operating systems. In 2010 the SCL Group was looking to acquire the assets of Veron Technologies International Ltd. That company had been involved in building carton freezer tunnels. The expansion into the refrigeration industry was a new area for the SCL Group.
[5] The second defendant was established as a new business entity for the sale of the refrigeration technology that had been held by Veron. Its partners were members of the SCL Group, who owned the Veron technology and the Wallace Corporation, which injected capital into the venture.
[6] The second defendant wished to engage the services of the plaintiff to assist its business. The plaintiff’s principal is Mr Raph Engle. He is a person with experience in the refrigeration industry and in marketing. The plaintiff owns intellectual property in respect of industrial refrigeration systems. Mr Engle is recognised as having a significant reputation in this area of work and also has an extensive network of business contacts.
[7] So that the arrangements between the plaintiff and the second defendant could be confirmed they entered into a single-page document entitled “Terms of Engagement”. It was signed by Mr Engle on behalf of the plaintiff and by Mr Chandler on behalf of the second defendant on 1 October 2010.
[8] The document, in its entirety, provided as follows:
Terms of Engagement
An agreement between SCL Industries Partnership and Raph Engle Concepts
Limited
For the purposes of these Terms of Engagement SCL Industries Limited Partnership will be known as SCLILP and Raph Engle Concepts Limited will be known as REC.
1. REC IP
IP owned by REC specifically relating to Multipass, CF1 and FC2 technologies will be available to SCLILP, on a globally exclusive basis, (excluding Latin America, determined as USA/Mexico border south).
In the event this engagement is terminated, SCLILP will maintain the right to use the REC IP, on a non exclusive basis for a period of 60 months from the date the engagement is concluded as long as the commission mechanisms described herein are afforded to REC.
Under no circumstances is the REC IP transferable to any third party without
REC’s written consent.
2. REC Resource
SCLILP will use REC for the purpose of selling, application design, pricing and in any other way considered appropriate for the ultimate benefit of SCLILP. In return REC will be paid an agreed monthly retainer of
$5,000.00+GST for a maximum period of 12 months only. During this period all out of pocket expenses directly related to the SCLILP business will also be reimbursed. In the event that REC does not take up ownership in SCLILP at the end of the 12 month period this agreement will end, and a new contract with REC will be considered.
3. PRODUCTS – Commission
All products that are ‘championed’ by REC now and those that may come to be championed by REC, such as (but not limited to) spirals and plate freezers, will be sold exclusively through SCLILP in the NZ and Australian market. This means that REC will provide SCLILP with a quotation including REC profit, SCLILP will then ‘on sell’ to the prospective Customer. This process will be done in an ‘open-book’ environment, thus ensuring pricing is kept ‘realistic’.
4. PROJECTS – Commission
For all projects secured by SCLILP that are attributable to REC by lead or prospect and/or REC IP, a commission equalling 5.5% of the total SCLILP contract value will be paid to REC by way of sales commission from any payments received, when received.
In the event that a discount is required to ‘lock-in’ a project under consideration then all participants, including SCLILP and REC and any local agent, will collectively consider reduced commission payments, (the value of which will be by negotiation) in order to secure the project.
The parties below agree that the above will form the ongoing working arrangement between REC and SCLILP.
[9] The second defendant secured three projects. They involved the design and building of significant refrigeration plants known as “tunnels” in Mexico, Venezuela and Thailand. The Mexican project known as the Sukarne project was secured in late November 2011. Sukarne is a Mexican multi-national meat processor. The contract value was US$5,292,000.
[10] The Venezuelan project is known as the FTI project. It was secured in January 2012 and was a project located in Venezuela for an Italian refrigeration company, Frigo Tecnica Internazionale SpA. The contract value of the FTI project was €5,100,000.
[11] The Thailand project, known as the Nestlé project, was secured in April 2012 and was for the multi-national food manufacturer Nestlé. It was an ice cream factory.
[12] The second defendant and the plaintiff agreed on set commission amounts for each project. Commission payments were paid by the second defendant to the plaintiff upon the second defendant receiving payments from its customer. The procedure followed was that the second defendant would advise the plaintiff that a project payment had been received. The plaintiff would then issue an invoice. The second defendant would then pay that invoice.
[13] At the time that the amounts were being agreed upon in relation to the three projects, the parties were also in discussion about the next Terms of Engagement, which were ultimately signed in March 2012. That agreement is not in issue in this proceeding.
[14] During 2012 the Sukarne and FTI projects foundered. The Sukarne project foundered because of faulty product or systems. The FTI project went into difficulties because of political issues. The second defendant, as a result of these difficulties, elected to stop paying all creditors save for those necessary to save the Sukarne project. Its object was to endeavour to have cash flow recommence.
[15] The FTI project was never revived. The Sukarne project was never brought to any satisfactory conclusion, which resulted in the second defendant suffering a substantial loss which led ultimately to its liquidation.
[16] The result was that the plaintiff did not receive the entirety of the commission payments that were due to it by the second defendant and which are now calculated at $281,717. That figure is accepted by the defendants.
The causes of action
[17] The plaintiff advances the current claim against the first, third, fourth and fifth defendants alleging a breach of trust and that they knowingly received money from the second defendant which was held by it on trust for the plaintiff.
[18] There are six causes of action, although as a result of the liquidation of the second defendant, only the prayers for relief in relation to the first cause of action E and F and the second to fifth causes of action are current. The balance of the first cause of action and the sixth cause of action now cannot proceed. The reason for this position is as follows. The second defendant is a limited partnership registered under s 51 of the Limited Partnership Act 2008. The appointment of a liquidator under s 89 makes applicable the provisions of Part 16 of the Companies Act 1993 by virtue of s 92 of the Limited Partnership Act. Accordingly, s 248(1)(c) of the Companies Act requires either the consent of the liquidator or an order of the court before any proceeding can continue. No such consent or order has been given or made. Effectively, therefore, apart from the prayers E and F of the first cause of action, the first cause of action and the sixth cause of action are currently stayed.
[19] The first cause of action against the remaining defendants seeks declarations that the second defendant held, or holds on trust for the plaintiff, funds received from
the projects which ought to have been paid to the plaintiff. It seeks declarations that it is entitled to trace its commission into amounts paid to these defendants from funds received and declaring that such traced funds are held for the benefit of the plaintiff and must be paid to the plaintiff or restored to the second defendant.
[20] The second, third, fourth and fifth causes of action are against the first, third, fourth and fifth defendants. They allege that each received payments from the second defendant knowing such payments were subject to trust obligations in favour of the plaintiff and that the second defendant had failed to pay the plaintiff and had paid them in breach of trust. The plaintiff seeks declarations of the trust and orders for payment or restitution.
The quantum of the claims
[21] The plaintiff’s claim against each of the remaining defendants, which is a joint liability claim, is limited to the amounts actually paid to each of the defendants by the second defendant. The total amount claimed is necessarily capped at
$281,717. The plaintiff asserts that the maximum contribution to that from each of
the four defendants is as follows:
The first defendant $66,787 The third defendant $281,717 The fourth defendant $271,717 The fifth defendant $66,787
The issues
[22] There was obviously considerable discussion between counsel immediately before trial. That led to two things. Firstly, the specific directions for trial dealing with the exchange of briefs and the preparation of a common bundle were not followed. That, in part, has caused some difficulty in the way the case was presented and the defendants’ approach to it. That position, in turn, arose by what I will call a short-cut approach to the issues.
[23] Counsel filed a joint memorandum on 1 May 2015, that is the Friday immediately before the commencement of the trial, which provided:
2.As a result of that conference, counsel wish to record agreement as to the outstanding issues for determination. The two issues which require determination are:
(a) in terms of liability, do the 2010 Terms of Engagement between the Plaintiff and the Second Defendant give rise to a trust and/or fiduciary obligations owed to the Plaintiff?
(b) in terms of relief, whether the lowest intermediate balance rule applies, and the effect of its application (and a query about an error in Mr Hussey’s report which he will address in evidence).
The defendants will not contest the knowledge elements of knowing receipt; or that they are not bona fide purchasers for value without notice of the trust, for the purposes of tracing the trust property.
[24] A further complication arose in the course of the trial. In his closing submissions Mr Hollyman sought leave to amend the statement of claim.
[25] The amendment sought is in relation to paragraph 24 of the current statement of claim which provides as follows:
The meaning, intent and effect of the 2010 terms was that SCL Industries was required to hold on trust for REC and pay over to REC forthwith that part of any payments received for REC’s commission.
[26] The amendment sought by Mr Hollyman was an addition to paragraph 24 of the following words, namely:
By virtue of the payment clause 4 of the Terms of Engagement dated
1 October 2010 there is an equitable assignment of the future entitlement to commission that gives rise to a trust.
[27] The late amendment was opposed by Mr Williams. I set a timetable for the filing of submissions and indicated that I would reserve a decision on the amendment pending on receipt of such submissions. I will return to that specific matter shortly.
The first issue
[28] The first issue, therefore, requires a consideration of whether the first, third, fourth and fifth defendants received or benefited from payments made or due to the
second defendant in respect of the three projects which the second defendant was undertaking, namely the Sukarne, FTI and Nestlé projects and the commission payments that ought to have been paid to the plaintiff.
[29] The defendants’ principal defence and the matter that requires determination before moving on to the second issue, is that the second defendant was not required to hold moneys received on trust for the plaintiff and to pay the commission to the plaintiff from the moneys received, when received.
The second issue
[30] The second issue only arises if a finding is made in favour of the plaintiff on the first issue. Its ultimate effect is whether or not the amount that can be claimed against the first defendant reduces from $66,787 to $5,953.50.
[31] The issue is subject also to a late refinement in that a joint memorandum of counsel, filed on 5 May 2015, recorded the following agreement between the parties:
(a) Mr Hussy’s [sic] new Appendix D (attached) be admitted into evidence by consent, to replace Appendix D attached to his brief of evidence.
(b) Table 1(b) of Mr Hussey’s brief of evidence remains an accurate statement of the trust amounts traced by Mr Hussey to each defendant.
(c) If the lowest intermediate balance rule applies in the manner the defendants’ [sic] submit that it ought to, then the claim against SCL Holdings Ltd, the first defendant, reduces from $66,787 to
$5,953.50.
[32] Counsel confirm that the issue relates to the liability of the first defendant only.
The first issue
The plaintiff ’s case
[33] Mr Hollyman advanced matters on behalf of the plaintiff. He submitted that the plaintiff claims:
(a) That the second defendant held on trust funds received from the projects that ought to have been paid to the plaintiff. The plaintiff says that it is entitled to trace such funds held for its benefit and which had been received by the first, third, fourth and fifth defendants. The plaintiff says that the first, third, fourth and fifth defendants must pay the traced funds to the plaintiff;
(b)In respect of the second to fifth causes of action, that the first, third, fourth and fifth defendants each received payments from the second defendant knowing that such payments were subject to trust obligations in favour of the plaintiff and that the second defendant had failed to pay the plaintiff and had paid them in breach of trust. As a consequence, the plaintiff seeks a declaration of trust and seeks orders for payment of the moneys received, or restitution.
[34] There are the usual consequential claims for interest and costs which simply follow resolution of the main issues.
The defendants’ case
[35] Mr Williams advanced the following matters on behalf of the first, third, fourth and fifth defendants.
[36] The first, third, fourth and fifth defendants:
(a) Concede that they share knowledge with the directors and officers of the second defendant. However, they say that there was no trust with the result that the moneys cannot be traced. They accept that the total unpaid commissions owed by the second defendant to the plaintiff are
$281,717;
(b)Submit that the relationship between the plaintiff and the second defendant was an orthodox, or standard, creditor/debtor relationship;
(c) Submit that the plaintiff’s claim is restricted to a claim in contract against the second defendant. The plaintiff has no proprietary claim over the money received by the second defendant from the clients and therefore it cannot claw back through knowing receipt payments made by the second defendant to its other creditors, in this case, the first, third, fourth and fifth defendants;
(d)Submit that the Terms of Engagement do not on their face create a trust. The statement “from any payments received” in cl 4 is nothing more than the contractual event which requires a payment to be made. It defines the amount to be paid. The words “when received” do no more than determine the time when a payment is to be made. In short, the contract provides “what is to be paid” and “when it is to be paid”;
(e) Submit that there is nothing in the wider relationship to suggest a fiduciary relationship in which the plaintiff is entitled to repose trust and confidence in the second defendant. There is no partnership, no joint venture, no profit sharing agreement, and no vulnerability on the part of the plaintiff.
Analysis
[37] The starting point is that this case does not fall into one of the well- recognised categories of relationships which are presumed to give rise to fiduciary duties, for example, solicitor/client, agent/principal, or partners.
[38] What is required is a consideration of the relationship as a whole so that a determination can be made as to whether it was reasonable for the plaintiff to expect fiduciary duties to arise under the particular circumstances,1 or whether one was
entitled to place trust and confidence in the other.2
1 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [72]–[80]; Maruha Corporation v Amaltal Corp Ltd [2007] NZSC 40, [2007] 3 NZLR 192 (SC) at [21]–[22] and Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, [2007] 3 NZLR 169 (SC) at [31]-[32].
2 Chirnside v Fay, at [80];
[39] The parties’ objective intentions must be ascertained. Where there is a
contract it will be the starting point in determining the parties’ objective intentions.
[40] The Supreme Court in Paper Reclaim Ltd v Aotearoa International Ltd said:3
When parties have formed a contract the correct approach is first to decide exactly what they have agreed upon. Only then should the court consider whether any particular aspect of their agreement gives rise to a relationship which can properly be characterised as fiduciary, imposing an obligation of loyalty on one or both parties, which supplements the express or implied contractual terms. It is not enough to attract an obligation of loyalty that one party may have given up more than the other in entering into the contract or that the contract may be more advantageous for one party than for the other. Nor is a relationship fiduciary in nature merely because the parties may be depending upon one another to perform the contract in its terms. That would be true of many commercial contracts which require co-operation. A fiduciary relationship will be found when one party is entitled to repose and does repose trust and confidence in the other.
[41] For the purpose of the contractual interpretation required in this case it is sufficient that I adopt the approach approved by the Supreme Court in Firm PI 1 Ltd v Zurich Australian Insurance Ltd t/a Zurich New Zealand:4
… the proper approach is an objective one, the aim being to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”. This objective meaning is taken to be that which the parties intended. While there is no conceptual limit on what can be regarded as “background”, it has to be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning.
(Citations omitted)
[42] I look specifically at the contract document to decide what it is exactly the parties have agreed upon. The document is described as “Terms of Engagement”. The subheading describes it as being an “agreement” between the second defendant and the plaintiff. The document does not purport to describe the relationship as a partnership or as a joint venture, or some other structure other than “an agreement”.
[43] Clause 1 refers to the possibility of an option for the plaintiff to purchase a shareholding. The oral evidence given suggests that this was never likely to happen
3 Paper Reclaim Ltd v Aotearoa International Ltd, above n 1, at [31].
4 Firm PI 1 Ltd v Zurich Australian Insurance Ltd t/a Zurich New Zealand [2014] NZSC 147 at
[60].
in any event. I am mindful of the fact that Mr Bates, called on behalf of the defendants, said that he thought it was a formal option. Clearly, he misunderstood the position because the second defendant could not grant an option to purchase its shares. It is arguable, also, that the document does not define the consideration to be paid, in any event. There is no suggestion of any tripartite agreement between the plaintiff, the second defendant and the shareholders of the second defendant.
[44] Clause 2 need not be considered further because it was no longer operative.
[45] Clause 3 appears to have no application to the current dispute. It provides that products championed by the plaintiff would be sold exclusively through the second defendant in New Zealand and Australian markets. That has nothing whatsoever to do with the carton freezer tunnel business and, in any event, was never used, as Mr Bates’ evidence confirmed.
[46] Clause 4 is central to the present dispute. It creates the plaintiff as a sales commission agent and requires it to be the entity to which the securing of a project from the third party principal is attributable. It refers to the payment due to the plaintiff as being a “sales commission”, being a percentage of the total value of the contract between the second defendant and its client, i.e. the principal. The commission is to be paid “from any payments received, when received”.
[47] In respect of the phrase “from payments received”, there is no express requirement in the document that the second defendant was to hold the payments received on trust. There is nothing that requires the second defendant to hold in a separate account the funds it receives from projects, or to hold in a separate account funds due as commission to the plaintiff.
[48] The phrase “when received” provides the time for payment – namely, it is when payment is received from the second defendant’s client. “When payment is received” is thus the trigger for the second defendant’s liability to pay the commission to the plaintiff. Mr Engle quite properly admitted in cross-examination that no commission would be due to the plaintiff if no payment was received from
the client. Accordingly, payment by the second defendant’s client is clearly the
trigger which creates the obligation to pay the commission.
[49] On the plain wording of the Terms of Engagement, it is evident that the parties did not expressly contemplate that the second defendant would hold the funds owed to the plaintiff on trust. However, the absence of express contemplation by the parties of a trust does not prevent its creation by the Court.5
[50] It is also evident that the Terms of Engagement put the plaintiff into a position of reliance on the second defendant’s honesty to inform it when a payment was received from the client, and the value of that payment so that the percentage of the commission could be correctly calculated. The question is whether this reliance was simply a dependence of one contracting party on another to perform the contract on its terms, or whether it gave rise to a fiduciary relationship. To determine this matter, I must consider the conduct of the parties and the wider context around the time of the formation of the contract to ascertain the objective meaning intended by the parties.
[51] The following comments by the Supreme Court Firm PI 1 Ltd v Zurich
Australian Insurance Ltd t/a Zurich New Zealand are pertinent:6
If the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant. But the wider context may point to some interpretation other than the most obvious one and may also assist in determining the meaning intended in cases of ambiguity or uncertainty.
[52] Fiduciary relationships and trusts are imposed by equity, even in circumstances where their existence was not expressly contemplated by the parties. The Supreme Court in Chirnside v Fay recognised the two kinds of circumstances
that give rise to fiduciary duties:7
5 Butler (ed) Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at
[13.1.1] and [13.1.2]; Fortex Group Ltd (in rec and liq) v Macintosh [1998] 3 NZLR 171 (CA) at
172-173, per Tipping J.
6 Firm PI 1 Ltd v Zurich Australian Insurance Ltd t/a Zurich New Zealand, above n 4, at [63].
[73] Many cases, textbooks and articles in learned journals have considered when and against what criteria the courts will find that a relationship gives rise to fiduciary duties. In essence, there are two situations in which that will be so. In the first, the relationship is of a kind which, by its very nature, is recognised as being inherently fiduciary. Most cases involving a breach of fiduciary duty are of this kind. They fall into one of the recognised categories of relationships which are inherently fiduciary. These include the relationships of solicitor and client, trustee and beneficiary, principal and agent, and doctor and patient.
…
[75] The second situation in which a relationship will be classed as fiduciary depends not on the inherent nature of the relationship but upon an examination of whether its particular aspects justify it being so classified. No single formula or test has received universal acceptance in deciding whether a relationship outside the recognised categories is such that the parties owe each other obligations of a fiduciary kind. The literature in this field is voluminous. No useful purpose would be served by an attempt at a general survey. …
[53] What is required in this case is an examination of the nature of the parties’ relationship to determine whether the dependence the plaintiff had on the second defendant gave rise to fiduciary duties.
[54] In the same case the Supreme Court found that a fiduciary relationship will be found to exist where one party is entitled to place trust and confidence in the other not to act in a way which is contrary to the former’s interests:8
[80] It is clear from the authorities that relationships which are inherently fiduciary all possess the feature which justifies the imposition of fiduciary duties in a case which falls outside the traditional categories; all fiduciary relationships, whether inherent or particular, are marked by the entitlement (rendered in Arklow as a legitimate expectation) of one party to place trust and confidence in the other. That party is entitled to rely on the other party not to act in a way which is contrary to the first party’s interests. There can be little doubt that, at least prima facie, the relationship between Mr Chirnside and Mr Fay was such that Mr Fay was entitled to repose and did repose trust and confidence in Mr Chirnside. Hence their relationship was, at least prima facie, of a fiduciary kind.
[55] Their Honours rejected the idea that a fiduciary relationship was confined to occasions of express agreement or undertaking, thereby leaving the door open for equity to intervene when necessary:9
[86] At the very least the undertaking can be implicit from the circumstances, and the true principle, in our view, resides in the idea that the circumstances must be such that one party is entitled to repose and does repose trust and confidence in the other. The existence of an agreement or undertaking is no more than a frequent manifestation of such circumstance.
[56] This was similar to the position earlier taken by the Court of Appeal in Watson v Dolmark Industries Ltd,10 where Gault J, repeating his observations in Liggett v Kensington,11 refused to narrow the scope of relationships which could give rise to fiduciary duties, warned against finding their existence too easily wherever obligations of confidence and good faith are found:12
Much has been written as to the nature of fiduciary relationships. No clear test has emerged by which the existence of fiduciary obligations may be determined. The judgments of the members of the High Court of Australia in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR
41 indicate the difficulties in identifying the essential elements in any particular relationship. The almost infinite variations in relationships between persons one to another are good reason for avoiding hard and fast rues. It is easy to engage in question begging by regarding a particular relationship as one that should give rise to obligations of confidence and good faith and then to conclude that therefore the elements of a fiduciary relationship are present.
[57] Gault J then went on to give the following attributes to the nature of the relationship between the parties that creates fiduciary duties:13
Generally it is appropriate to look for circumstances in which one person has undertaken to act in the interests of another or conversely one has communicated an expectation that another will act to protect or promote his or her interests. There are elements of reliance, confidence or trust between them often arising out of an imbalance in strength or vulnerability in relation to the exercise of rights, powers or the use of information affecting their interests. Telling indications may be that persons having taken, or been entrusted with opportunity to protect or benefit others stand in a position also to prefer their own interests. Assistance is to be gained by way of analogy from relationships generally regarded as giving rise to fiduciary obligations such as those of trustees, partners, solicitors, investment advisors, stockbrokers and the like.
[58] The same principles as those expressed by Gault J were summarised by the
Supreme Court of Canada in Alberta v Elder Advocates of Alberta Society.14 There
9 Chirnside v Fay, above n 1.
10 Watson v Dolmark Industries Ltd [1992] 3 NZLR 311 (CA).
11 Liggett v Kensington (1992) 4 NZBLC 102,574 (CA).
12 Watson v Dolmark Industries Ltd, above n 10, at 319.
13 At 319.
the Court with tasked with determining whether a fiduciary relationship exists between the provincial government and residents in a special medical facility for the elderly. Like its counterpart in Chirnside v Fay, the Canadian Supreme Court began by distinguishing between fiduciary duties that arise out of recognised relationships and those which arise in particular circumstances only. The Court labelled the latter as “ad hoc fiduciary relationships”. It then defined three elements which must be present before fiduciary duties may arise in the ad hoc category of relationships.
[59] Summarised, these elements are:15
(a) An express or implied undertaking by the alleged fiduciary act in the best interests of the alleged beneficiary;
(b)The fiduciary must have a discretionary power over the beneficiary, and the beneficiary must be vulnerable to the fiduciary’s control; and
(c) The beneficiary has a legal or substantial practical interest that stands to be adversely affected by the alleged fiduciary’s exercise of discretion or control.
[60] These elements were elaborated by McLachlin CJC as follows:16
[30] First, the evidence must show that the alleged fiduciary gave an undertaking of responsibility to act in the best interests of the beneficiary: Galambos, at paras, 66, 71 and 77-78; and Hodgkinson, per La Forest J., at pp. 409-10. As Cromwell J. wrote in Galambos, at para. 75: “what is required in all cases is an undertaking by the fiduciary, express of implied, to act in accordance with the duty of loyalty reposed on him or her.”
[31] The existence and character of the undertaking is informed by the norms relating to the particular relationship: Galambos, at para. 77. The party asserting the duty must be able to point to a forsaking by the alleged fiduciary of the interests of all others in favour of those of the beneficiary, in relation to the specific legal interest at stake.
[32] The undertaking may be found in the relationship between the parties, in an imposition of responsibility by statute, or under an
14 Alberta v Elder Advocates of Alberta Society 2011 SCC 24, [2011] 2 SCR 261 at [36].
15 At [36].
16 At [30].
express agreement to act as trustee of the beneficiary’s interests. As
stated in Galambos, at para. 77:
The fiduciary’s undertaking may be the result of the exercise of statutory powers, the express or implied terms of an agreement, or, perhaps, simply an undertaking to act in this way. In cases of per se fiduciary relationships, this undertaking will be found in the nature of the category of relationship in issue. The critical point is that in both per se and ad hoc fiduciary relationships, there will be some undertaking on the part of the fiduciary to act with loyalty.
[Emphasis added]
[33] Second, the duty must be owed to a defined person or class of persons who must be vulnerable to the fiduciary in the sense that the fiduciary has discretionary power over them. Fiduciary duties do not exist at large; they are confined to specific relationships between particular parties. … ad hoc fiduciary relationships must be established on a case-by-case basis.
[34] Finally, to establish a fiduciary duty, the claimant must show that the alleged fiduciary’s power may affect the legal or substantial practical interests of the beneficiary: Frame, per Wilson J., at p. 142.
[35] In the traditional categories of fiduciary relationship, the nature of the relationship itself defines the interest at stake. However, the party seeking to establish an ad hoc duty must be able to point to an identifiable legal or vital practical interest that is at stake. The most obvious example is an interest in property, although other interests recognised by the law may also be protected.
[61] It follows that the nature of the relationship between the plaintiff and the second defendant must have entitled the plaintiff to repose trust and confidence in the second defendant, and that the plaintiff did in fact do so. This entitlement would have been due to an express or implied undertaking by the second defendant that it would act in the best interests of the plaintiff, and that following this undertaking, the plaintiff would have been vulnerable to the second defendant’s discretionary power not to exploit the plaintiff’s interests.
[62] Mr Engle alleged in his brief of evidence in reply and under cross- examination that shortly after the agreement was signed he had concerns that the second defendant would not honour the obligation to pay the commission when payment was received from the second defendant’s client. He described that Mr Chandler, as the CEO of the second defendant, assured him that the second defendant would honour the obligation. In cross-examination Mr Engle admitted that
this was a personal assurance given by the CEO, and that he was not told anything more than what he already understood the agreement to mean.
[63] There was some contention as to whether this exchange occurred before or after the contract was signed, but if it occurred after, then the evidence is that of post-contractual conduct, and may be used to ascertain the meaning of the contract pursuant to Wholesale Distributors Ltd v Gibbons Holdings Ltd.17
[64] For reasons that follow, I do not consider that the relationship between the parties to the Terms of Engagement was of a kind that gave rise to fiduciary duties.
[65] First, Mr Chandler’s personal assurance as the CEO of a contracting party did not amount to an express or implied undertaking to act in the best interests of the plaintiff ahead of the second defendant’s own interests. It was nothing more than an affirmation of the term already agreed to by the parties in writing to settle Mr Engle’s concerns. It did not entitle the plaintiff to repose trust and confidence in the second defendant that was somehow different to the expectation that as the other contracting party, the second defendant would not default on its contractual obligations.
[66] Although it is arguable that the second element set out in Elder Advocates is satisfied, namely that the plaintiff was vulnerable to the second defendant’s power of discretion not to inform it when a payment from a client was received, that did not amount to anything more than the second defendant’s discretion to uphold or to breach the contract it had signed. In other words, the second defendant did not take upon itself the task of acting to protect the plaintiff’s interest in getting paid the commission. It simply faced a choice as to whether to expose itself to legal liability for breach of contract. To use the words of Tipping J in Paper Reclaim, this was a standard contractual relationship where the parties depended upon one another to perform the contract in its terms, and that, of itself, does not create fiduciary duties.
[67] Moreover, this is not a case where one party is significantly stronger than the other. Both the plaintiff and the second defendant, and their respective directors, are
17 Wholesale Distributors Ltd v Gibbons Holdings Ltd [2007] NZSC 37; [2008] 1 NZLR 277.
experienced businessmen and engineers. The document that the parties drew up is their work. They did not have the assistance of lawyers. . Mr Engle was closely involved in the projects and hence was not completely in the dark about when the second defendant would be paid or how much. It is not suggested that there was any inequality between the parties that might lead to an implication that a trust arose. The first mention of fiduciary duties and the existence of a trust occurred when the plaintiff commenced action after taking legal advice. The modus operandi of the contracts discloses that in fact the plaintiff took directions as to what was required of it from officers of the second defendant.
[68] In essence, there is nothing that indicates that the plaintiff was entitled to repose trust and confidence in the defendant that was above and beyond the trust and confidence two contracting parties would normally repose in one another.
[69] Second, the relationship does not bear any of the hallmarks of a partnership, joint venture, or profit sharing agreement, any of which could create fiduciary obligations. I keep however in mind the following statement by Tipping and Blanchard JJ in Chirnside v Fay:
[71] … In the end the key point is not how, precisely, the relationship is described, but rather whether the relationship between the parties was of a kind which gave rise to fiduciary duties on each side.
[70] Mr Engle did assert that the respective parties treated each other as partners. That seems to have arisen for the first time when the parties began negotiations in relation to the 2012 Terms. Mr Bates denied acknowledging that a partnership existed or was intended. There is no reference to a partnership in the 2010 or 2012
Terms. Mr Engle acknowledged that he in fact was never a partner. Indeed, the evidence suggests that Mr Engle’s relationship with one of the limited partners of the second defendant made it unlikely that a partnership between the plaintiff and the second defendant would be effected.
[71] The parties did not contribute to the costs of running one another’s business, and all commercial risks were undertaken, enjoyed and suffered independently. It follows that the structure of the relationship did not impose fiduciary duties.
[72] Third, I am not convinced that the parties contemplated a trust around the time the Terms of Engagement were signed.
[73] Mr Williams drew attention to the fact the there is no stipulation as to where funds received from the third party contractor were to be found. He noted that both the High Court and Court of Appeal in the Stiassny v North Shore City Council cases held that it was fatal to the notion that a trust duty arose that the parties could not stipulate that there would be a discrete backing arrangement.18
[74] Mr Williams correctly distinguished the decision Westpac Banking Corporation v Savin.19 That case involved monies received not by the principal but by the agent, which were then not accounted to the agent’s principal. A boat broker obtained authority to sell boats on behalf of the boat owner. There was a specific agreement between the boat owner and the broker as to how the commission was to be calculated. The boat broker received the proceeds of sale and did not account to the principal for those proceeds. The court held that the broker was in breach of its fiduciary duty when it paid the money into its trading account, thus treating the
proceeds of sale as its own funds. It is readily apparent that the situation analysed by the Court of Appeal in that case is quite different and distinguishable from the situation that I must consider. The fundamental difference is that the contractual right to receive payment from the third party principal, who had contracted with the second defendant, was always to be the second defendant.
[75] Mr Engle gave evidence that at the time of signing he was assured by both Mr Chandler and Mr Bates that the commission would be paid specifically out of the funds received from the second defendant’s client. Mr Chandler denies giving any such assurance. Mr Bates says that the only oral assurances made were that the plaintiff would be paid when the second defendant was paid. That, of course, is the very stipulation that was set out in the contract itself.
[76] In cross-examination Mr Engle repeated the allegation:
18 Stiassny v North Shore City Council [2008] 1 NZLR 825 (HC) and North Shore City Council v
Stiassny [2008] NZCA 522, [2009] 1 NZLR 342 (CA).
19 Westpac Banking Corporation v Savin [1985] 2 NZLR 41 (CA).
Q. And what you tell us in your second reply brief is that both of these gentlemen assured you that REC would be paid specifically – would be specifically paid out of funds received?
A. Yes.
Q. Now if we removed the word “specifically” there is no difference
between that statement and the agreement is there?
A. The, my recollection of that was that when Phil [Mr Bates] reneged on the original sums and re-negoti –
Q. No, we are talking about the first assurances –
A. No, but I’m, that’s what I am getting back to. I was concerned about getting paid because the money didn’t come to me, the money came to SCL. I didn’t want any mixture, I didn’t want profit sharing with this company, ‘cos I had to go through the accounting and that’s easily manipulated. What I wanted to do is a very clean simple commission and it was a concern to me and I raised it on several occasions.
[77] Following this line of questioning Mr Engle gave evidence of the personal assurance given to him by Mr Chandler that the second defendant would not dishonour the agreement.
[78] Despite what Mr Engle said about mixing funds above, later on Mr Engle stated that he did not ask for the funds from the second defendant’s client to be kept separately:
Q. Did you ever ask SCL LP to put your money as you understood it into a discreet account?
A. No. Why would I do that, when they got paid they paid, end of conversation.
[79] I agree with Mr Williams’ submission that a failure by both parties to stipulate separate account to keep the commission funds, together with the fact that the second defendant did not set up such an account is a strong indicator that no trust was contemplated by the parties nor, in the absence of fiduciary duties, could now be created by the Court. There is no representation conveyed in the evidence that money would be held on trust. I can find nothing in the oral evidence to suggest that a trust was understood to exist by any of the parties concerned.
[80] This also goes to support the first point above; that the second defendant did not give an express or implied undertaking that it would act in the plaintiff’s best interests, being acts that are beyond the scope of a standard debtor/creditor relationship.
Leave to amend statement of claim and equitable assignment
[81] I briefly return to the question of an amended pleading and the matters referred to in [25] to [28] of this judgment.
[82] Mr Hollyman submitted first that an amendment to the statement of claim was not required. He submitted that his research could find no decisions to the effect that an equitable assignment must be pleaded where it is alleged that an agreement, in context, gives rise to a trust, and it is intended to rely on an equitable assignment to establish the trust. He submitted that the paragraph 24 in its current form was a sufficient identification of the issue. I repeat the pleading below:
The meaning, intent and effect of the 2010 Terms was that SCL Industries was required to hold on trust for REC and to pay over to REC forthwith that part of any payments received for REC’s commissions.
[83] Mr Hollyman submitted that the pleading is sufficient and no leave is required because the facts and the circumstances of the agreement give rise to a trust either on their face or because of the effect of an equitable assignment which gives rise to a trust immediately after the payments were received.
[84] Mr Hollyman submitted that the plaintiff’s claim for relief is for breach of trust. It seeks to recover trust property in the first cause of action and/or in respect of the knowing receipt of trust property in the second cause of action. He submitted that the causes of action, (ie, the legal, or in this case, the equitable, results) are clear from the pleading. The factual basis for the establishment of the trust, that is the source of the obligation, is the Terms of Engagement. Therefore, the statement of claim in its present form is sufficient. On that basis, he submitted no amendment is required.
[85] Mr Williams submitted that the current pleading does not sufficiently disclose the allegation of an equitable assignment on the ground that throughout the proceeding, the focus of the arguments had been on whether the second defendant and the plaintiff had a fiduciary relationship, and if so, whether that relationship gave rise to a trust obligation. Mr Williams submitted that the plaintiff’s original claim is distinct from the claim that the nature of the parties’ relationship created an equitable assignment and with it, an equitable duty.
[86] The underlying question for granting or declining leave to amend the pleading is whether the pleading, in its current form, sufficiently discloses the general nature of the plaintiff’s claim.20 The inquiry calls for a consideration of whether the facts and the circumstances of the Terms of Engagement created an equitable assignment which gave rise to a trust immediately after the payments from clients were received.
[87] Mr Hollyman submitted that the second defendant’s trust and fiduciary obligations in relation to the payments arose because that was the objective intention of the parties as recorded in the express terms of the Terms of Engagement and read in the context of the joint venture. He confirmed that no trust is alleged to arise solely from the joint venture relationship. He noted that a fiduciary obligation can be limited to individual aspects of a commercial relationship and referred to the
Supreme Court decision in Maruha Corporation Ltd v Amaltal Corporation Ltd.21
[88] Mr Hollyman confirmed what he alleged was being assigned was that part of the second defendant’s entitlement to payments received from its clients that represented the 5.5 per cent commission due to the plaintiff. In essence, Mr Hollyman submitted that the second plaintiff agreed to pay the plaintiff’s commission specifically out of the total paid by a particular client. Mr Hollyman agreed that the plaintiff’s entitlement to the commission did not crystallise until after
the payment was received by the second defendant from the customer.
20 High Court Rules, r 5.26(a).
21 Maruha Corporation Ltd v Almatal Corporation Ltd [2007] NZSC 40 at [21], [2007] 3 NZLR
192 (SC).
[89] I accept the general legal principles cited by Mr Hollyman, namely that an equitable assignment is effective only if an intention of the assignor to part with its dominion over the property can be proved;22 and that there is no requirement for a particular form of words to create an equitable assignment. However, on the facts of this case, I do not consider that the plaintiff can prove the necessary intention existed.
[90] The Terms of Engagement are nothing more than a simple contract for the second defendant to pay a sum of money held by it to the plaintiff at a particular time on certain conditions being fulfilled. I can find no basis at all for the proposition that an equitable assignment is intended. The argument simply reframes the plaintiff’s main contention that a trust exists because the parties agreed that payments to the plaintiff were to specifically come out of the client’s payment, and not out of the second defendant’s mixed funds. That contention was rejected above on the basis that there is nothing to objectively show that the parties intended for payments to the second defendant to be treated in such a way.
[91] Mr Hollyman and Mr Williams disagreed on how an equitable assignment in this case could be enforced, if it does exist. In particular, the disagreement centred on the dispute whether an equitable assignment may be enforced against the debtor, in this case, the second defendant’s client. Mr Hollyman submitted that the question of enforcement should be separated from the question of whether the assignment exists at all. It is however unnecessary to determine this point given that no equitable assignment exists in this case.
[92] Accordingly, I reach the conclusion that it is unnecessary to consider the alternative proposition that an amendment to the statement of claim be approved because, in reality, it all adds nothing to the position already analysed.
[93] I conclude that the Terms of Engagement do not support the existence of a fiduciary relationship or a trust as sought by the plaintiff. Nor do they evidence an
equitable assignment.
22 Smith v Perpetual Trustee Co Ltd (1910) 11 CLR 148.
[94] This conclusion makes it unnecessary to consider the second, and subsidiary, issue that arises in this proceeding.
Result
[95] The plaintiff therefore fails on its first to fifth causes of action inclusive. I have already referred to the fact that the sixth cause of action is effectively stayed. The defendants are entitled to judgment accordingly.
Orders
[96] There are matters that do require formal orders as a result of the conclusion I
have reached.
[97] On 17 June 2013 Keane J recorded the resolution of the application seeking interim preservation orders and freezing orders by the first and second defendants giving undertakings to which I referred to in [3](a) of this judgment. Counsel’s submissions confirm that the undertakings given by the first and second defendants were in the following terms:
Pending agreement between the parties or directions from the court, SCL Holdings Ltd and SCL Industries Ltd partnership undertake not to remove from New Zealand, deal with, dispose or diminish the net value of their assets except in so far as the value exceeds $338,944.76. (Or such other sum as represents commissions received as claimed by the plaintiff.)
[98] It is appropriate, having regard to the conclusion I have reached that I direct that the first and second defendants be discharged from the undertaking given.
[99] I order accordingly.
Costs
[100] The defendants have been successful and ordinarily are entitled to costs. I propose to give counsel the opportunity of agreeing on costs. In the event that there is no agreement, memoranda in support, opposition and reply on the question of
costs shall be filed and served at seven-day intervals. The memoranda shall be
referred to me on receipt for consideration of the appropriate order.
JA Faire J
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