Red Eagle Corporation Limited v Ellis HC Auckland CIV 2008 404 187
[2008] NZHC 2443
•30 July 2008
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2008 404 187
BETWEEN RED EAGLE CORPORATION LIMITED Plaintiff
ANDRICHARD JOHN OTLEY ELLIS Defendant
Hearing: 23 July 2008
Counsel: L Herzog for plaintiff
P Dale for defendant
Judgment: 30 July 2008 at 10am
RESERVED JUDGMENT OF DOBSON J
This judgment was delivered by me on 30 July 2008 at 10am pursuant to r 540(4) of the High Court Rules.
Registrar/Deputy Registrar
Date:…………………….
Solicitors:
Nigel Fagan, Auckland for plaintiff
Martelli McKegg Wells & Cormack, Auckland for defendant
RED EAGLE CORPORATION LIMITED V ELLIS HC AK CIV 2008 404 187 30 July 2008
[1] The plaintiff, a private investment vehicle for family interests of its alter ego, Mr Tony Falkenstein, pursues claims against the defendant (“Mr Ellis”) in relation to an unsecured loan advance made by the plaintiff to Mr Ellis’s then business partner, Ms Black, in August 2005. The advance was intended to be short term, but Ms Black defaulted. The plaintiff has subsequently obtained judgment against Ms Black, and had her bankrupted but all to no avail.
[2] The plaintiff now sues Mr Ellis in relation to his part in arranging the advance, on two causes of action. The first is for breach of the Fair Trading Act,
1986 claiming that a series of statements made in emails Mr Ellis sent to Mr Falkenstein constituted representations that were false or misleading or likely to mislead or deceive.
[3] The second cause of action pleads that Mr Ellis owed a duty of care to the plaintiff to ensure the representations were accurate, in circumstances where Mr Ellis ought reasonably to have appreciated reliance would be placed on those representations, and that the statements constituted negligent misstatement.
[4] A third cause of action for deceit was not pursued.
[5] The factual matters are within a relatively narrow compass. Messrs Falkenstein and Ellis had enjoyed periodic contact in a range of business contexts for a number of years. At one point, Mr Ellis had been an investment adviser with a firm of sharebrokers, and Mr Falkenstein bought and sold shares through him.
[6] Around 2002, Mr Ellis was working on investment opportunities with a firm of chartered accountants, and some of these opportunities were offered to Mr Falkenstein. It seems various investment opportunities have been proposed by Mr Ellis to Mr Falkenstein periodically since then. These involved offers of shares in new projects being promoted by Mr Ellis. His experience was that Mr Falkenstein undertook his own thorough due diligence, and that Mr Falkenstein was amply qualified to do so. Mr Falkenstein has a Bachelor of Commerce degree, was previously the financial controller of a substantial company and is currently a director of some eight companies, including one listed company. None of the
proposals made by Mr Ellis at various stages have led to commitments by Mr Falkenstein. Mr Falkenstein confirmed that the plaintiff invests totally in equity offerings, and had no investments in debt instruments. When realisations or dividends on those investments occur, the plaintiff’s practice was to leave the money in the bank (if not spent) until the next equity investment was committed to.
[7] Also in 2002, Mr Falkenstein had occasional contact with another firm in which Ms Black was involved, namely Ward Black, investment bankers.
[8] Mr Falkenstein’s dealings with Ward Black did lead to an equity investment in about 2002 of some $700,000 which has subsequently proved to be unsuccessful.
[9] In 2003, Mr Falkenstein became aware that Mr Ellis was contemplating going into business as an investment banker in his own right. Around the same time he learnt that Ms Black was parting company from Ward Black Limited. Mr Falkenstein effected an introduction between the two and the formation of Ellis Black Limited by Mr Ellis and Ms Black ensued.
[10] Between 2003 and 2005, Ellis Black made a number of further investment proposals to Mr Falkenstein. He considered they were professionally presented, but decided not to participate in any of them.
[11] On Friday, 29 July 2005 at 12.37 pm, Mr Ellis dispatched an email to
Mr Falkenstein in the following terms:
Subject: Interim Funding – AquaSystems Limited (‘ASL’)
Bottom-line Tony – the London bombing has delayed the uplifting of a US$8mill funding package. Annette has developed a marvelous working relationship with the Fund Manager who is very committed to this investment sector i.e.: consistent land based seafood growing to ‘feed the masses’ as a crucial worldwide problem due to rapid reduction of seafood from mother ocean severely under pressure to cope with pollution & massive over fishing.
Key points:
• Total business plan / key personnel / proven operating system &
infrastructure needs complete
• ASL independent valuation on ‘future earnings’ US$20mill+ (2 page summary available)
• $150K bridging finance required – carry an annual interest rate
@ 25%
• Required for between 14 – 45 days (happy to give supplier a minimum 30 day period)
• Happy to give an option formula to convert to equity if interested?
• Security by way of either / both a GSA over ASL Parent Co shares or a PG from Annette (has net property assets in Syd approx $2mil)
Essentially, we’re caught between the rock and hard place after all the large resources we’ve spent on this venture which is poised to take off. We have a two page snapshot plus our website below shows our backgrounds etc anything you can do over the next few days Tony would be hugely appreciated = Regards Rick
[12] One minute later at 12.38 pm, Mr Ellis dispatched a further email to Mr Falkenstein which had, as its subject “Nobody is listening!! (Aquaculture)” and began:
Tony, you are the one person who says ‘don’t say no, make it happen!’.
[13] It included comments:
…We are ‘caught short’ of $150K of interim funding in order for Annette to complete an US$8mil deal with a consortium in London in 10-30 days…Please have a serious read of the emails to follow – I’d really like to have a chat over the weekend if at all possible and then finalise our thoughts over lunch on Monday as arranged plus brainstorm a few other ideas together….- Annette has done considerable work on product branding / logos / value add (garlic/chili/lemon etc) & it is extremely exciting and demands your type of skills as time allows. Kindly digest the following emails & give me a call on mobile when you can = Cheers Rick
[14] The second email concluded with the following:
Ps: Rick & Annette’s resources are very tight currently but have funded this for several years now. Both are obviously 110% committed and totally confident that the lion share of operational building blocks are now in place to get the job done in accordance with the very thorough business plan (snapshot in email to follow).
[15] It appears that a third email, a further minute later at 12.39 pm, had attached to it some summaries prepared by Ms Black of the nature of the venture. The final sentence was:
“We now wish to run hard in finalising the funding to ensure we maximise the momentum that this project currently has = Cheers Rick.
[16] Each of these three emails was copied to Ms Black. Mr Ellis accepted in cross-examination that the first email was not drafted for individual dispatch to Mr Falkenstein, but as a circular email seeking funds from a number of potential investors. Mr Ellis was accordingly making the statements in it to some unknown number of those with whom he dealt.
[17] At 6.04 am the following morning, Mr Falkenstein responded to Mr Ellis in the following terms:
Hi Rick,
Sorry, I was away yesterday. I don’t think there is a problem with the bridging finance, at that rate!!! Personal guarantee in letter format would be sufficient, to avoid legal costs, with interest being paid weekly in advance. If all ok, and you want cheque on MOnday, then will need details of property assets – I could draw up draft personal guarantee.
Is Annette coming to lunch on Monday as well? Regards
Tony
PS Please send me the 2 page snapshot – I presume the email address is On Saturday evening, Mr Ellis acknowledged Mr Falkenstein’s response, commenting in respect of the proposed advance:
We’ll aim to bed it down over the next few days.
[19] On the morning of Monday, 1 August 2005, Mr Ellis telephoned Mr Falkenstein asking if the loan could be increased from $150,000 to $250,000. Mr Falkenstein indicated he was agreeable to that, and his evidence was that he commented that it would be fine as the security offered more than covered the loan request. Later that morning, Mr Falkenstein received a copy of a statement of
financial position that had been completed by Ms Black. Importantly to him, the assets listed included two properties in New South Wales, which were attributed values totalling more than $2 million. Mr Falkenstein treated these references as confirming the original comment Mr Ellis had made about Ms Black having net property assets in Sydney of approximately $2 million.
[20] Mr Ellis and Ms Black attended at Mr Falkenstein’s office at lunchtime on
1 August, at which point the transaction was concluded by Ms Black signing a term loan contract prepared by Mr Falkenstein and also a personal guarantee which could only possibly be in relation to her own obligations as principal debtor under the term loan contract. Ms Black’s execution of those documents was witnessed by Mr Ellis.
[21] Sometime previously, Messrs Ellis and Falkenstein had agreed to have lunch that day, 1 August 2005, but in the end it was Mr Falkenstein and Ms Black who lunched together. Mr Ellis’s evidence was to the effect that he excused himself from the lunch to afford Mr Falkenstein and opportunity of assessing Ms Black and the venture she was promoting, on his own. The $250,000 advance was executed and the cheque handed over before the lunch occurred, so the lunch could not afford any opportunity for Mr Falkenstein to further assess the risk he was assuming in making the $250,000 advance.
[22] In mid-September, there was a single email exchange touching on progress with the financing for the project, and thereafter the documents represent requests by Mr Falkenstein for clarification as to interest payments, and subsequently requests for repayment of the principal.
[23] However, the loan was not repaid. The plaintiff subsequently obtained judgment against Ms Black and then had her adjudicated bankrupt in July 2007. The Official Assignee has determined that she had no assets and in particular never owned any property assets in Australia.
[24] It was not seriously contested that, at least at the time of the transaction, Mr Ellis was misled by Ms Black. His evidence was to the effect that he had been told by her that the properties referred to in her statement of financial position were
owned by a trust with which she was associated. That can only be evidence of the comments being made to Mr Ellis, but is clearly not evidence as to the truth of such a statement.
First cause of action: Fair Trading Act
[25] It was alleged that the 29 and 30 July 2005 emails contained representations that induced the plaintiff’s entry into the loan contract, and that such representations were false or misleading, or were likely to mislead or deceive. The representations were pleaded in the following terms:
The Representations
a)That “Rick and Annette’s resources are very tight currently but have funded this for several years now.”
b)That he and Ms. Black were “caught between a rock and a hard place after all the large resources that he has spent on this project which is about to take off.”
c) That he and Ms Black were “caught short of $150k interim funding.”
d)That the “London bombing has delayed the uplifting of a US 8 mil funding package.”
e)That he and Ms Black were “110% committed and totally confident that the lion’s share of operational building blocks are in place to get the job done.”
f) That the investment was an outstanding business opportunity” and the “exceptional and sustainable returns” that an investment in your business would provide.
g) That Ms Black had net property assets in Sydney of approximately
$2 million.” That could secure the loan.
h)That the project was “now operationally market ready after four years of planning.”
[26] These are to be measured against the statutory standard in s 9 of the Fair
Trading Act, namely:
No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
[27] If the circumstances are found to come within that provision, which can be likened to an enquiry on liability, then the issue becomes whether the plaintiff is entitled to any form of order under s 43 of the same Act, relevant parts of which provide:
43 Other orders
(1)Where, in any proceedings under this Part of this Act, or on the application of any person, the Court finds that a person, whether or not that person is a party to the proceedings, has suffered, or is likely to suffer, loss or damage by conduct of any other person that constitutes or would constitute—
(a)A contravention of any of the provisions of Parts 1 to 4 of this Act; or
(b)Aiding, abetting, counselling, or procuring the contravention of such a provision; or
(c)Inducing by threats, promises, or otherwise the contravention of such a provision; or
(d)Being in any way directly or indirectly knowingly concerned in, or party to, the contravention of such a provision; or
(e)Conspiring with any other person in the contravention of such a provision—
the Court may (whether or not it grants an injunction or makes any other order under this Part of this Act) make all or any of the orders referred to in subsection (2) of this section.
(2) For the purposes of subsection (1) of this section, the Court may make the following orders—
…
(d)An order directing the person who engaged in the conduct, referred to in subsection (1) of this section to pay to the person who suffered the loss or damage the amount of the loss or damage:
[28] Mr Ellis admitted that his participation in the matter was “in trade” for the purposes of s 9. However, he denied that any of the representations in his emails were or could be false or misleading.
[29] There are certainly difficulties for the plaintiff in establishing that the representations, with the exception of that in (g), are untruthful. Some of them are arguably defensible expressions of opinion, and some are promoters’ hyperbole. As
to the unequivocal representation regarding Ms Black’s property assets in Sydney, the fallback position for Mr Ellis was that there was no reliance on it, and it could accordingly not induce the making of the loan. In argument, Mr Dale for Mr Ellis relied on Mr Falkenstein’s acceptance in cross-examination that he had relied on the statement of financial position produced by Ms Black before the money was advanced, and Mr Falkenstein’s further acknowledgement that he would probably not have made the advance if he had not received that statement of financial position.
[30] As to the balance of the representations, there was no direct evidence that they were false in any absolute sense. That does not prevent them contributing to a form of misleading conduct.
[31] I accept that Mr Ellis’s reputation for reliability insofar as Mr Falkenstein was concerned was a material factor for Mr Falkenstein in evaluating the request for a loan and responding positively to it. The tenor of the representations linked Mr Ellis to the project as closely as it did Ms Black. He described both of them as being “110% committed”; Mr Ellis and Ms Black were treated equally in the comment that their resources “…are very tight currently but have funded this for several years now”.
[32] In this context, Mr Ellis portrayed himself as solidly supporting the venture, being one which he viewed as an “outstanding business opportunity”, and one to which he was financially and reputationally committed as a promoter.
[33] Although Mr Ellis was inclined to emphasise that he had, in other dialogue, emphasised that the venture was Ms Black’s pet project, and that she was the one leading it, in the dealings between his first request on 29 July and the advance on
1 August 2005, he was lending his name in an unqualified way to both the project, and to the prudence of the short term advance he requested on behalf of Ms Black. It was also Mr Ellis who asked that the amount be increased. The fact that the requests were made by Mr Ellis on behalf of Ms Black, rather than by Ms Black herself, tends to suggest that, of the two principals in Ellis Black Limited, he was the one with the stronger personal relationship with Mr Falkenstein.
[34] Relatively late in a thorough cross-examination, Mr Ellis suggested for the first time that he would have given Mr Falkenstein a disclaimer in the course of arranging the loan, to the effect that Mr Ellis was not in a position to verify his business partner’s financial position. When pressed, he suggested that such comment was made “during earlier coffees with Mr Falkenstein”. The prospect of such a disclaimer was not put to Mr Falkenstein at all. I am satisfied that, in the relevant period between 29 July and 1 August 2005, no such disclaimer was given, and nor had there been one at an earlier point in time in terms that would require qualification of what was said explicitly in the emails requesting a short term loan.
[35] Nor do I consider that the explicit reliance on Ms Black’s statement of financial position deprives the representations which preceded its provision to Mr Falkenstein of materially misleading effect. Certainly, Mr Falkenstein wanted to see the statement of position and it reassured him about the property assets, but the context was all important. The request came from Mr Ellis, and it was backed to the hilt by him. A provisional commitment to the loan, and agreement to increase it, were both made before Mr Falkenstein had sighted the statement of financial position. In the context of the dealings between Messrs Falkenstein and Ellis, it was then provided as confirmation of the assurances Mr Ellis had already given.
[36] This was not an investment in the ASL venture. It was a short term advance to one of the promoters, on terms that would give preferential entry into the venture if Mr Falkenstein later chose to become an investor. To the extent that it was a preamble to an equity investment, Mr Ellis was mindful that he should not be seen to be promoting it in any way, without satisfying himself that it was a sound proposition. The request for a loan was viewed in the same way. Mr Ellis’s evidence was that he raised with Ms Black the details of her personal statement of assets and liabilities on several occasions, including the day before he decided to approach Mr Falkenstein. He explained this was “…to ensure I wasn’t going to hoist my flag with a senior businessman unless there was reasonable [sic] and accuracy in her statement of affairs”. That implicitly acknowledges that Mr Ellis trades on his reputation for reliability with experienced investors, and this approach (made to Mr Falkenstein and to others) was treated by him in that light. It takes Mr Ellis out of the category of “mere conduit” where someone does no more than
pass on information received, and may avoid liability on the grounds that he has, in effect, not made the relevant representation (see e.g. the analysis of the Court of Appeal in Goldsbro v Walker [1993] 1 NZLR 394 at 398).
[37] I accordingly find that the representation made by Mr Ellis in relation to Ms Black’s property assets did, or was likely to mislead or deceive Mr Falkenstein, and that the context contributed by the remaining representations added to the prospects of Mr Falkenstein being misled or deceived.
[38] Matters raised in defence included the notion that Mr Ellis was involved solely as a conduit in relation to Ms Black’s assets, but I have found against that on the facts. It was also argued that Mr Falkenstein could not make out reliance on the representation in the email, because primary reliance was placed on the statement of assets and liabilities tendered before the loan was advanced. That point is not sustainable on the facts, as I have analysed them. Further, I am not satisfied that a plaintiff has any onus to establish reliance on the misleading conduct, for liability to arise under s 9. The enquiry as to reliance in the sense of causation is more apt under s 43, when assessing whether loss or damage has occurred by virtue of conduct which is in contravention of Parts 1 to 4 of the Fair Trading Act.
[39] The final argument against any award, or in any event against any significant award, was that an analysis akin to that on contributory negligence was appropriate. Reliance for Mr Ellis was placed on the Court of Appeal’s decision in Goldsbro v Walker, and in particular the passage from the judgment of Richardson J:
In particular I do not think the Court should be constrained under this legislation by consideration of the technical possibilities of contribution between joint and several tortfeasors under the Law Reform Act 1936 or of apportionment under the Contributory Negligence Act 1947. It is not necessary to impose a liability under s 43(2)(d) as if the direction were to pay common law damages, leaving it to the infringer to seek contribution from someone else. The Fair Trading Act is important economic and social legislation. In exercising the powers under the statute it is a matter of doing justice to the parties in the circumstances of the particular case and in terms of the policy of the Act. In many cases there may be no reason why the plaintiff should not obtain full recovery in respect of his or her loss but in others the culpability of third parties, the gross carelessness of the consumer, the minor role of the contravener of s 9, may lead to the conclusion that the justice of the case does not require that the full loss sustained by the consumer be visited on the contravener. (403-404)
[40] This point built on the argument that there was no reasonable reliance, by arguing that Mr Falkenstein was well qualified to evaluate the risks of this transaction for himself as an experienced businessman with substantial resources. Further, that he was well able to obtain professional advice about the risks, and how to protect himself by taking appropriate security, and that the 25% interest rate meant that this was a high risk investment which should have put him on his guard.
[41] In addition to the last point, it was argued for Mr Ellis that the terms of the advance included a free option to subscribe for shares in the proposed venture at a
20% discount to its placement price, which represented a further potential benefit arguably seen as increasing still further the rate of return on the short term loan.
[42] I find that, having relied on Mr Ellis’s recommendation of the advance, Mr Falkenstein was then careless in a number of material respects in neglecting to protect his position as the lender.
[43] He treated the reference to real estate assets supposedly owned by Ms Black as constituting “security” for his advance, without seeking any title search or enquiring as to the extent of any mortgage advances secured against the titles. As it transpired, such omissions led to the fundamental problem that the properties were not owned by the borrower at all.
[44] Mr Falkenstein has accounting qualifications, but no legal qualifications and elected to draft the loan documentation himself. The documents included a very simple loan contract, together with a legally ineffective “personal guarantee”. The terms of the second document provided in effect that Ms Black would indemnify the plaintiff against any loss it might suffer as a result of Ms Black’s default as borrower.
[45] The terms of the loan contract referred to the funds being applied in terms of a budget that was to be attached to it. The budget document was only produced after Mr Falkenstein had concluded his evidence, although it was common ground that it had indeed been attached at the time the loan contract was executed. In the absence of questioning of Mr Falkenstein about the implications of it, it is difficult to make
too much of the information revealed in the single page budget. However, it did specify that of the $250,000 advanced, $200,000 would be applied to repay other loans, and $10,800 was earmarked for the interest payments on the loan through August and September. That left less than $40,000 to service the ongoing costs of developing the proposal. There was no evidence that Mr Falkenstein questioned the budget, but it does suggest that Ms Black as promoter was certainly under considerable pressure to keep the venture afloat.
[46] The essential answer to these criticisms of his own standard of care was for Mr Falkenstein to repeat that he trusted Mr Ellis, the loan was only for a short term, and the existence of substantial real estate in Australia afforded a sufficient measure of comfort. Mr Falkenstein did not accept that it was a high interest rate, to reflect the extent of risk. Rather, he suggested that the interest rate was high to reflect the short term nature of the advance. He also took the view that more formal documentation, or involvement of advisers, was not justified because the term was so short that the return would have been disproportionately eroded by any professional fees.
[47] Whilst understanding this approach, I do not accept it as the rationale for the high interest rate. To a significant extent, that must have reflected the extent of the risk. Mr Falkenstein’s initial email response (quoted at [17] above) implicitly treated this as a very generous interest rate, and that must in part reflect risk. As Mr Dale argued, it is conventional for lenders in situations such as the present to impose the legal costs of documentation on the borrowers, and there is nothing to suggest that the additional obligation would not have been accepted in the present circumstances.
[48] Taking all these factors into account, I consider that Mr Falkenstein, having been misled or deceived so as to establish Mr Ellis’s liability under s 9, should be treated as equally responsible for the loss that ensued by virtue of his own contribution to that loss. Accordingly, the defendant’s liability under s 43(2)(d) of the Fair Trading Act is fixed at 50% of the principal sum, namely $125,000.
Second cause of action: negligent misstatement
[49] The circumstances of the relationship alleged to give rise to a tortious duty of care was sparsely pleaded:
14.The Defendant owed the plaintiff a duty of care to ensure that he did not mislead the Plaintiff by making representations that were likely to be relied upon by the Plaintiff as an inducement for the Plaintiff to enter into the loan agreement and the guarantee. (“the duty of care”).
[50] Mr Herzog for the plaintiff referred to the Court of Appeal decision in Attorney-General v Carter [2003] 2 NZLR 160 as an appropriate authority on the approach to assessing whether a duty of care arises:
[24] If the defendant has, or is deemed to have, assumed responsibility to the plaintiff to be careful in what is said or written, thereby creating proximity, it will usually, subject to policy considerations, be fair, just and reasonable to hold the defendant liable for want of care. Assumption of responsibility can be viewed as the rationale for liability for negligent misstatement and the underpinning of the tort at the highest level of generality. Indeed it can be said that whether the defendant should in any situation be required to assume responsibility to the plaintiff for negligently caused loss is simply another way of expressing the conventional inquiry whether it is fair, just and reasonable to impose a duty of care.
[51] The Courts are often assisted in imposing a duty of care by identifying an analogy with other situations in which a duty has previously been imposed. No such analogies were offered here. In his evidence, Mr Falkenstein characterised his relationship with Mr Ellis and Ms Black as “one of client and financial adviser”. That was disputed by Mr Ellis. There was no retainer paid at any stage, no fees had ever been charged, and the pattern of previous dealings between Messrs Ellis and Falkenstein was more that of promoter/potential investor.
[52] Under cross-examination, Mr Ellis described at some length his role in promoting new ventures. He did not conduct detailed analysis himself, but rather directed others, or at least satisfied himself as to the competence of those who undertook the detailed analyses before lending his name in a promotional role. In those situations involving greater complexity and more formality, his practice would be to specify a disclaimer denying liability for any inaccuracies and stipulating that all investors were to make investment decisions in reliance on their own judgement.
This describes a purely commercial relationship where the promoter is, in the broadest sense, selling an investment product, and the investors, as “buyers”, are firmly “on the other side of the fence”. Such relationships would ordinarily not constitute the requisite proximity for a duty of care to arise.
[53] However, the present dealings were not the same as the previous pattern. This was not an equity investment, but rather a short term loan advance. Relative to the thorough due diligence conducted previously, Mr Ellis seemed surprised that Mr Falkenstein did not ask more questions before committing to the loan. That does suggest reliance on what Mr Falkenstein was told, but if Mr Ellis reasonably expected the independent analysis that Mr Falkenstein had undertaken previously, the prospect of reliance would not be apparent at the time Mr Ellis sought the loan from him. From Mr Falkenstein’s perspective, this was different because it was a short term loan. Implicitly, his only interest was in the prospect of being repaid. For him, this was very different from prior proposals that he take an ownership stake in a new venture.
[54] As Ms Black’s business partner, Mr Ellis was better placed than Mr Falkenstein to assess and check the veracity of statements she made about her own financial position. They were after all in an ongoing and close business relationship. The terms of Mr Ellis’s first email referring to the Sydney property implied at least an acceptance of her word from a position in which he was able to check, or otherwise some degree of independent knowledge. As against that, Mr Falkenstein did not seek details of the “security”, received and considered Ms Black’s assets and liability statement before concluding the contract, and accepted that he would probably not have invested without receiving that document.
[55] Having regard to the nature of the prior relationship and the circumstances of this particular dealing between Messrs Ellis and Falkenstein, I consider that the prior relationship was not one in which a tortious duty would arise, and the different context of the invitation to advance a loan did not change the relationship sufficiently to transform it into a relationship in which such a duty did arise on the particular occasion.
[56] I find that the predominant aspect of the dealings remained the promoter/broker position for Mr Ellis, and the position of potential investor for Mr Falkenstein. I have not overlooked that distance was maintained between the parties in earlier dealings by a disclaimer constituting part of the terms on which Mr Ellis sought investments from Mr Falkenstein, whereas I have found that there was no such warning against any reliance given in the present dealing. Again, I do not see that as sufficient in all the circumstances to attribute to Mr Ellis an assumption of responsibility to take care with the accuracy of matters put to Mr Falkenstein. It is not a situation in which it would be fair, just and reasonable to deem the defendant had assumed such a responsibility.
[57] Although claims under the Fair Trading Act and for breach of a tortious duty of care are not necessarily inconsistent, in the present circumstances I am reinforced in my view that no duty of care was owed by Mr Ellis, by the finding of his liability for misleading conduct “in trade”. As an experienced investor with apparently substantial resources, Mr Falkenstein might be a somewhat unusual “consumer” in the sense that the Fair Trading Act is designed to afford protection to consumers. Nonetheless, he has suffered loss as a result of a mercantile dealing involving a representation that is now established as being false. That loss arose in circumstances where someone on the other side of the transaction misled or deceived him as to the factual situation, rather than someone on his own side of the transaction negligently assessing the risks of entering into it.
[58] Accordingly, I find that the second cause of action is not made out. In the event that I am wrong on that, and a duty of care was owed, then I would find such a duty of care to be breached by the unqualified terms in which Mr Ellis conveyed the extent of Ms Black’s net equity in real property. Further, on a similar analysis to that in [42] to [48] above, I would find that Mr Falkenstein’s conduct constituted contributory negligence by the plaintiff, reducing the entitlement to damages by
50%.
Interest
[59] The claim originally sought interest at the contract rate of 25% per annum from the date of default by Ms Black. In the course of submissions, Mr Herzog accepted that the interest able to be claimed in the proceedings is limited to interest at Judicature Act 1908 rates. The plaintiff is entitled to interest on the judgment sum from the date of the commencement of the proceedings to the date of payment, at the relevant Judicature Act rate.
Costs
[60] In view of the partial nature of the plaintiff’s success, I invite the parties to settle the matter of costs. If necessary, a Memorandum from the plaintiff seeking costs is to be filed and served within 28 days of delivery of this judgment. Any response on behalf of the defendant is to be filed and served within 14 days of
service of the plaintiff’s Memorandum.
Dobson J
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