Renie Gibson Family Trustee (2016) Limited v Westpac Banking Corporation
[2018] NZHC 974
•8 May 2018
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
I TE KŌTI MATUA O AOTEAROA WHANGĀREI TERENGA PARĀOA ROHE
CIV-2015-404-2261 [2018] NZHC 974
BETWEEN RENIE GIBSON FAMILY TRUSTEE
(2016) LIMITED trustee of the RENIE GIBSON FAMILY TRUST
First PlaintiffBABYLON FARMS LIMITED
Second PlaintiffRENIE JEAN GIBSON
Third PlaintiffAND
WESTPAC BANKING CORPORATION
First Defendant
WESTPAC NEW ZEALAND LIMITED
Second DefendantHAMMONDS LAW
First Third PartyHAMMONDS TRUSTEES LIMITED
Second Third PartyRENIE JEAN GIBSON
Third Third Party
Hearing: 7 March 2018 (in Whangarei)
8 March 2018 (in Auckland)
Appearances:
Emma Smith and I Benson for the Plaintiffs
M V Robinson and M M Thomson for the Defendants
No appearances for the first and second Third Parties (excused)Judgment:
8 May 2018
RENIE GIBSON FAMILY TRUSTEE (2016) LIMITED trustee of the RENIE GIBSON FAMILY TRUST v WESTPAC BANKING CORPORATION [2018] NZHC 974
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 8 May 2018 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
………………………………………………….
Registrar/Deputy Registrar
CONTENTS
Paragraph
The parties [2]
The initial lending arrangements [6]
Changes to the arrangements [12]
Defaults [17]
The Plaintiffs’ claims [19]
The banks’ applications [28]
The plaintiffs’ pleadings [35]
Statement of claim of 30 September 2015 [39]
Amended statement of claim of 19 December 2016 [40]
Fair Trading Act cause of action [40]
Negligent misstatement cause of action [48]
Contractual misrepresentation cause of action
against Westpac Banking Corporation Ltd [68]
The duty of care cause of action [74]
The breach of fiduciary duty cause of action [77]
Breach of contract cause of actionagainst Westpac New Zealand Ltd [84]
Extension of time under s 28(b) of the Limitation Act 1950 [86]
Outcome [100]
[1] Renie Gibson is a truck driver, but she was once a dairy farmer. She lost her farm in the global financial crisis when the banks sold her up. She sues them for having misled her into financing the purchase of the farm with an interest swap agreement. The banks apply for summary judgment and to strike out the proceeding as they say that her claim is out of time.
The parties
[2] The Renie Gibson Family Trustee (2016) Ltd is the current trustee of the Renie Gibson Family Trust. In the beginning the trustees were Ms Gibson and Hammonds Trustees Ltd, a lawyer’s trustee company. In 2007 the trustees bought a farm on Babylon Coast Road near Dargaville. As this case concerns the transactions to finance the purchase, the original trustees would be the appropriate plaintiffs if proceedings had been brought while they were still in office. It seems to be accepted that their causes of action have vested in the new trustee.
[3] Babylon Farms Ltd is the operating company which owned the plant, equipment and livestock. Ms Gibson was its director.
[4] The defendants are two arms of the Westpac banking group. Westpac Banking Corporation is an Australian bank, but is registered in New Zealand as an overseas company. In New Zealand it carries on business under the style “Westpac Institutional Bank.” It used to operate more extensively in New Zealand,1 but under the Westpac New Zealand Acts 2006 and 2011, its New Zealand retail banking business and its New Zealand institutional banking business were vested in Westpac New Zealand Ltd under the local incorporation policy of the Reserve Bank of New Zealand. The local and the Australian arms of the Westpac bank have separate roles here. Ms Gibson dealt with the local bank; it made term loans to her; she also entered into an interest swap agreement with the Australian arm, but dealt with it through officers of the local arm.
1 See the Westpac Banking Corporation Act 1982.
[5] Hammonds Law, the first third party, is the law firm that acted for the trustees, Babylon Farms Ltd and Ms Gibson on the transactions in this case. The lawyer who advised them is a director of Hammonds Trustees Ltd, the second third party. They took no part in the banks’ application and were excused from appearing.
The initial lending arrangements
[6] Until 2007 Ms Gibson had been a sharemilker and a farm lessee. She bought the farm she worked on. Ms Gibson had banked with another bank when she was persuaded to finance the purchase through the Westpac banks. On 9 August 2007, these lending arrangements were made:
(a)a wholesale term loan (fixed and floating alternatives) for $2,800,000 by Westpac New Zealand Ltd to the Renie Gibson trustees;
(b)a wholesale term loan (fixed and floating alternatives) for $300,000 by Westpac New Zealand Ltd to the Renie Gibson trustees;
(c)an International Swap Dealers Association master agreement between Westpac Banking Corporation and the Renie Gibson trustees;
(d)a comprehensive guarantee by the Renie Gibson trustees, Babylon Farms Ltd and Ms Gibson personally to both banks;
(e)a Westpac New Zealand Ltd overdraft facility for Babylon Farm Ltd;
(f)a general security agreement by Babylon Farms Ltd in favour of the banks; and
(g)a registered first mortgage in favour of the banks over the farm.
[7] Under a letter of offer of 19 July 2007, the term loans by Westpac New Zealand Ltd were for 15 years, interest only. The letter of offer specified that the interest would be a floating rate: Westpac New Zealand Ltd’s 90 day offer rate plus a margin of 1.4% per month. The letter said nothing about an interest swap. The term loan agreements
did not follow the letter exactly. Interest was payable monthly in arrears at the floating rate of Westpac New Zealand’s 30 day bank bill bid rate plus a margin of 1.4%.2 The bank could increase or decrease the margin.3 There was a fixed rate option under which the borrower could request the bank to set a fixed interest for all or part of the loan.4 The fixed rate period would begin at the commencement or at the end of a floating rate period. The loans were repayable after five years.5 The main thing to note is the floating rate.
[8] Being new to interest swap agreements, I gratefully borrow descriptions by other judges. In Cygnet Farms Ltd v ANZ Bank New Zealand Ltd Palmer J said:6
Interest rate swaps
[15] At the most basic level an interest rate swap is an agreement between two parties in which one stream of future interest payments is exchanged for another based on a specified principal amount. Mostly commonly, interest at a floating rate is swapped for interest at an agreed fixed rate. That is achieved by a borrower and a lender theoretically paying the other at floating and fixed rates respectively and netting out the payments.
[16] So, for example, a borrower pays interest at a floating rate under a floating rate loan agreement. But under a swap agreement the borrower also agrees to pay interest at a fixed rate to the lender and the lender simultaneously agrees to pay interest at the floating amount to the borrower. Effectively, the borrower ends up paying interest at the fixed rate only, since payment and receipt at the floating rates net out. The lender ends up receiving the fixed rate. The lender, if a bank, will usually enter a correspondingly opposite transaction on the market to hedge its risk.
[17] Converting a floating rate loan to a fixed rate obligation through an interest rate swap means each party takes the usual market risk that the fixed rate may prove to be higher or lower than the floating rate. There are, however, some relevant differences between this sort of interest rate swap and a straight fixed rate loan:
(a)Banks often arrange a separate credit limit on a swap because it creates a potential obligation between the parties to make a net interest payment if the floating rate falls below the agreed fixed rate under the swap.
(b)The term of a swap is able to be lengthened or shortened if market rates change.
2 Clause 4.1 and definition of “floating rate”.
3 Clause 6.2.
4 Clause 4.2.
5 Clause 5.1.
6 Cygnet Farms Ltd v ANZ Bank New Zealand Ltd [2016] NZHC 2838, [2017] 2 NZLR 538 at [15]– [17].
(c)
The credit margin charged by a lender on the floating rate paid in relation to the underlying loan can be increased, unlike fixed rate loans.
[49] In the example given in the above diagram, the two floating base interest rates (at 8.64 per cent) cancel each other out. That leaves the customer paying interest at the swap rate on the swap transaction (fixed at 8 per cent), plus the credit margin on the loan.
(d)The way in which break fees are calculated for swaps is different to how they are calculated for fixed term loans (although the concept is similar).
[9]In Bushline Trustees Ltd v ANZ Bank New Zealand Ltd Edwards J said:7
Interest rate swaps
[45] An interest rate swap is a financial derivative which is used by borrowers to hedge the interest rate risk payable on a loan. The swap transaction is separate and distinct from the loan transaction. But the term “swaps” is sometimes used to refer to the swap and loan transaction combined.
[46] The loan transaction involves the borrower taking out a loan with the Bank for a sum of money with interest payable at a floating interest rate. That interest rate comprises a base rate (typically the 30 or 90 day bill rate or BKBM), plus a credit margin. In broad terms, the credit margin reflects the borrower’s creditworthiness.
[47] The swap transaction involves the borrower agreeing to make payments to the Bank at a fixed interest rate. In return, the Bank agrees to make payments to the borrower at the same floating base interest rate specified in the loan agreement, but without the credit margin. In other words, the parties agree to “swap” a floating rate interest rate for a fixed one.
[48] The transactions were represented in a diagram referred to in the evidence of Mr Derek Rankin. That diagram is reproduced (with some additions) below. The loan part of the transaction is represented on the left hand side of the diagram, and the swap transaction is represented on the right.
7 Bushline Trustees Ltd v ANZ Bank New Zealand Ltd [2017] NZHC 2520 at [45]–[51].
[50] If floating interest rates rise, the customer continues to pay the 8 per cent interest rate, plus the credit margin. If floating interest rates fall, the customer’s interest rate remains fixed at 8 per cent plus the credit margin. In that sense, swaps operate like a fixed rate loan.
[51] But there are also a number of differences between swaps and fixed rate loans:
(a)The key difference is that the credit margin component of the interest rate on the underlying loan can also fluctuate. Margins were relatively stable up until 2008. But the global financial crisis meant that the Bank’s costs of funds increased, and that was reflected in increased margins towards the end of 2008.
(b)An interest rate swap is a tradable instrument, which means it can be sold and bought, lengthened and shortened. Swaps therefore provide a level of flexibility in the management of interest rate risk which is not available on a fixed rate loan. The cost of that flexibility depends on the market value of the swap at the time, that is, whether it is “in the money” or “out of the money”. If the swap is “in the money”, the borrower receives a cash benefit. If the swap is “out of the money”, the borrower must pay to exit the swap.
(c)Break costs are also calculated differently to the break costs for a fixed rate loan. If the swap is “out of the money” at the time of termination, the break costs can be prohibitively high.
(d)Because the loan agreement and swap transactions are separate, there can be a mismatch between the maturity of the loan, and the maturity of the swaps. That mismatch means that the borrower is exposed if the underlying loan expires prior to the swaps, and is not rolled over on the same terms.
(e)Finally, borrowers who had swap agreements with the Bank were subject to an internal assessment which the Bank referred to as a Market Replacement Risk (MRR). The MRR is a tool used to assess the Bank’s exposure to a borrower with swaps. From the borrower’s perspective, the MRR can limit the amount of further lending the Bank is prepared to extend. Borrowers with fixed interest rate loans were not subject to a MRR.
[10] In this case the trustees’ loans were with Westpac New Zealand Ltd, but the swap was with Westpac Banking Corporation. The fixed interest rate under the swap with Westpac Banking Corporation was 8.25%. The fixed interest payable to Westpac Banking Corporation was set off against the floating rate interest it paid the trustees monthly to coincide with the trustees’ monthly payments to Westpac New Zealand under the term loans. The net effect was that the trustees paid interest at 8.25% plus the margin of 1.4% giving a total interest rate of 9.65%. They were shielded from fluctuations in the bank’s floating rate by the swap. The documentation for the swap
is complex. The master agreement plus schedules and addenda come to about 57 pages of difficult text. It was referred to as a “vanilla swap.” Tellingly, while counsel took care to explain the swap, they did not refer to the terms of the master agreement.
[11] The operation of the swap over time can be seen in monthly rate reset letters the Westpac Banking Corporation sent the trustees. In January 2008 the floating rate was 8.68% and the trustees were “in the money” to $645.26 for a loan amount of
$1,600,000. In January 2009 for a notional loan amount of $685,000 the floating rate was 5.23% and the trustees were out of the money to $9,009.93. In October 2009 for the same notional loan amount the floating rate was 2.83% and the trustees were out of the money to $13,780.16. In November 2009 for a loan with a notional amount of
$3,198,333 and a floating rate of 2.3% the trustees were out of the money for
$19,947.09. The different notional loan amounts reflect changes made to the arrangements.
Changes to the arrangements
[12] There were changes with both banks. In March 2008 Westpac New Zealand Ltd increased the term loan by $685,000 to $3,485,000 for the trustees to buy another property (a second runoff) on Babylon Coast Road with first mortgage security over the property. In December 2008 one of the facilities was increased by a further
$270,000 to remove some hardcore debt, monthly principal payments on that facility were increased from $1,667 to $2,000 and the margin was increased to 1.7%, which included a “Global Liquidity Cost” of .2% - Westpac’s costs of funds had increased with the global financial crisis. In October 2009, the limit of the facility was increased by $460,000 to $3,945,000 to refinance overdraft debt and to pay creditors, the maturity date of the facility was brought forward to 1 June 2010, the margin was increased to 2.5%, a global liquidity cost of .5% was added to the margin, and the overdraft limit for Babylon Farms Ltd was reduced to $100,000. The trustees and Babylon Farms Ltd signed their agreement to all these changes.
[13] As for the swap, I refer first to a letter by the Westpac Banking Corporation to the trustees dated 24 July 2007 headed “Swap Transaction” which is said to “confirm” the terms of the transaction, even though the parties had not made any agreement at
that stage. Another problem with the letter is that Ms Gibson says that she did not receive it until December 2007. All the same, it can be read as setting out in outline the terms for the swap. The notional amount of the loan is $1,6000,000, even though the amounts of the term loans by Westpac New Zealand Ltd were higher.8 The fixed interest rate is 8.22% but that may be a typographical mistake for 8.25%. The termination date is 10 August 2012.
[14] The second swap transaction was in April 2008. Westpac New Zealand Ltd wrote to Ms Gibson saying that she had cancelled her existing fixed rates and entered into a new fixed rate with Westpac. She was asked to sign the enclosed “termination agreements and the new fixed rate agreement”. The enclosure was a letter of 14 April 2008 from Westpac Banking Corporation which was said to confirm the terms of a swap transaction. The termination date remains 10 August 2012. The fixed rate is 8.25%. Schedules show calculation periods with notional loan amounts, one for fixed rate payment dates by the trustees and the other for floating rate payments by Westpac Banking Corporation. The first amount, with a start date of 14 April 2008, is $685,000 which I take to reflect the increase in the term loan amount in March 2008 in [11] above. The next amount, with a start date of 12 May 2008, is $3,768,330. For each start date afterwards the principal amount reduces to end on $1,983,330 for 10 August 2012. The first schedule also shows the fixed amounts payable for each calculation period but these do not consistently reduce in line with the reductions in the principal notional amounts. Ms Gibson signed and returned the letter.
[15] While there was a variation to one of the term loans in December 2008 by an increase of $270,000, there was no corresponding adjustment to the swap agreement.
[16] The third swap transaction was in November 2009. Westpac New Zealand Ltd sent the trustees’ lawyer an email:
Please find enclosed a document for execution that will alter Renies interest payment from the 16th of each month to the 21st and tie in better with the dairy
8So far no-one has explained why the notional amount is for this sum, when the total term loans were for more than that.
cheque. I have advised Renie that this needs signing and will be emailed to you today.
Westpac Banking Corporation’s letter of 10 November 2009 went further than that. While it reproduced the schedules in the letter of 14 April 2008 from November 2009 to August 2012 but changed the payment dates for each month, it introduced a new term as to early termination called the “Bermudan Option”. The plaintiffs say that this was a more complicated way to terminate the swap, but the banks do not accept that. Ms Gibson did not sign the confirmation until August 2010 and only after the banks had pressed her to sign.
Defaults
[17] As may be gathered from the arrangements in December 2008 and October 2009, the increases in facilities to reduce overdraft debt and to clear other creditors, the trustees and Babylon Farms Ltd had difficulty meeting all their commitments. The reasons for this have not been fully explored so far, but there is evidence to show that the difficulties were made worse by the global financial crisis. While the swap agreement might protect the trustees against rises in interest rates, the dramatic drop in interest rates with the global financial crisis was disastrous for them. They plead that the break cost of restructuring their banking arrangements in February 2009 was
$440,000. Increased margin rates and charges for global liquidity costs added to their burden. The interest rate under the Westpac New Zealand Ltd term loans was more than 11% per annum. The swap agreement would run on after the adjusted maturity date of 1 June 2010 for the Westpac New Zealand Ltd term loans. They would have to continue paying Westpac Banking Corporation substantial sums each month because of the large differences between the fixed rate and the lower floating rates. A bank statement for Babylon Farms Ltd for 19-26 July 2010 illustrates the plaintiffs’ plight. Bank loan repayments and interest charges came to $54,732, whereas the monthly milk cheque was $11,104.18. Ms Gibson gives comparable figures for bank charges for the remaining months in 2010. There was no way out.
[18] Westpac New Zealand Ltd terminated the banking arrangements on 31 August 2011 and made demand on the trustees for $4,537,467.99 and on Babylon Farms Ltd for $391,157.49. It appointed receivers for the company on 8 September 2011 and
served a notice under s 119 of the Property Law Act 2007 on the trustees on 30 September 2011. It sold the farm on 1 February 2012. The swap agreement was terminated on the same day. The receivership and sale did not realise enough to clear the debts to the banks.
The plaintiffs’ claims
[19] The backdrop to the case is the global financial crisis and the recession from 2008 to 2012. New Zealand went into recession in 2008 but there was already turmoil in financial markets in 2007. The banks knew that. The plaintiffs’ pleadings quote the banks’ Economic Update of 17 August 2007:
Sharemarkets are dropping, currencies swinging wildly, interest rates lurching, and no one is willing to lend the price of a cup of tea. Or probably give you a price for a cup of tea. Global debt markets are dysfunctional and central banks are pouring in cash to restore calm.
…
In local markets the most obvious effects have been a plummeting NZD and big falls in the sharemarket. However, NZ credit markets have not been left unscathed. The NZ 90-day rate has spiked higher on a lack of liquidity, and it is also now significantly more difficult to secure longer-term funding offshore. Fortunately for NZ, which tends to rely heavily on foreign funding, this has coincided with a marked upturn in funding for banks from increasing term deposits. At the same time, the market has been becoming increasingly convinced that the RBNZ tightening cycle is over, putting downward pressure on rates, offsetting effects of lower liquidity.
(Emphasis added by the plaintiffs)
[20] The plaintiffs plead that Westpac New Zealand Ltd ran a national advertising campaign aimed at dairy farmers claiming that it was familiar with farmers’ requirements and could structure financial arrangements that would work for them. It is quoted, “We’ve got a team of experts who can help you plan for the things you can control.” and “Whether it’s financial planning, currency or interest rate management
— our people have the real practical banking know how”. It offered expert advice and assistance in financial planning and management.
[21] Ms Gibson had the opportunity to buy the farm under an option in a lease. She met a representative of the bank to discuss proposals to finance the purchase. That led to the letter of offer of 19 July 2007 in [7] above. She understood it to be an offer of
an overdraft facility and term loan finance on conventional terms, interest only, either the bank’s wholesale rate plus a margin of 1.4% or a fixed interest rate. She signed her acceptance on 20 July. An ordinary reader would not understand that the proposal involved an interest swap.
[22] Another representative of the bank spoke to her at the stockyards. He told her that her borrowing could be structured to give security against increased interest rates. He proposed an “all in” fixed interest rate of 9.65% (8.25% plus a margin of 1.4%) and recommended that she take it to guard against increased interest rates. While he used “fixed rate”, he did not refer to swaps or give an adequate explanation of the structure and implications of using interest swaps, the effects of floating rate changes and increases in the bank’s funding costs. He did not discuss risks but presented the “fixed rate” as better than alternative structures. Ms Gibson acknowledges receiving a product disclosure statement but she did not consider it to be anything more than marketing material. The bank’s representative did not discuss the document or its relevance. There was no discussion of alternatives or the possibility of reduced interest rates and their implications.
[23] Ms Gibson was led to believe that she was entering into a fixed rate arrangement. The plaintiffs signed the agreements on 7 August 2007 with that understanding. They still believed that when they obtained an increase in the term loan in March 2008. That was confirmed by the letter in [14] above which referred to the “new fixed rate agreement”. The bank did not give her any advice about the wisdom of continuing with the interest swap, even though its Economic Update of February 2008 spoke of uncertainty in the world economy with abundant risks for New Zealand. Nor did it give her any fresh advice under the change in October 2009. Its letter of 8 October 2009 said after setting out the changes, “In all other respects, your banking arrangements remain unchanged.” At no time did the banks alert the plaintiffs to the wisdom of terminating the swap agreement in the face of falling interest rates, increasing margins and increased costs of funding passed on to customers. Ms Gibson’s lack of understanding can be seen in an email she had her lawyer send to the bank on 30 October 2009 asking how her overdraft could be so close to its limit so soon after she had refinanced it. The bank’s response was unsympathetic:
Your point about interest is noted, and just highlights the unsustainable debt loading the business has and the urgency to sell down assets to reduce debt and ensure the business can protect the remaining equity but also achieve a more robust cashflow. I can not reiterate this enough.
[24] Swap agreements are sophisticated financial transactions which require specialist knowledge to understand and manage. A good understanding of economics and financial management is required to know whether and when to enter into them and to terminate them. There is nothing in the case to suggest that Ms Gibson or her lawyers had those specialist skills.
[25] The plaintiffs’ case is that the banks let them down not only in August 2007 when the lending arrangements were first made but also later—down to October 2009. That included times when facilities were changed and there were new swap transactions. The current statement of claim has these causes of action:
(a)against both defendants for breaches of the Fair Trading Act 1986;
(b)against both defendants for negligent misstatement;
(c)against Westpac Banking Corporation for contractual mis- representation;
(d)against both defendants for breaches of duty of care;
(e)against both defendants for breaches of fiduciary duty; and
(f)against Westpac New Zealand Ltd for breaches of contract.
[26]Mr Robinson for the banks summarised the allegations against the defendants:
(a)they represented that the plaintiffs were entering into a fixed rate arrangement with an “all in” interest rate of 9.65%;
(b)they represented that swaps were an appropriate part of the plaintiffs’ banking arrangements and failed to provide information so that the plaintiffs could decide whether they were appropriate;
(c)they did not give an adequate explanation as to the terms, effects and implications of swaps (including financial modelling or applicable risk/benefit analysis);
(d)they represented that interest rates were more likely than not to increase;
(e)they gave no adequate or accurate explanation of the risk or impact of falling interest rates;
(f)they gave no adequate advice on the effects and implications of the December 2008 variation;
(g)they gave no adequate advice on the effects and implications of the October 2009 variation;
(h)they represented that there were no changes in the third swap except the change in payment date, but included the Bermuda termination option without explaining it;
(i)they were in a conflict of interest in advising the plaintiffs to enter into the swaps; and
(j)Westpac Banking Corporation wrongly implemented the second and third swap transactions.
There are two sorts of representation allegations here: actual misstatements and omissions. The omissions may be actionable where the banks were under a duty to speak or where they had to avoid half-truths. The difference may be relevant to the plaintiffs’ knowledge whether they had suffered a wrong. It is easier to say whether someone has put you wrong because they stated something incorrect than when they have not told you something they ought to have. Another matter of difference is whether the banks gave information or advised what the plaintiffs should do.
[27] The plaintiffs’ pleadings also allege that the swap transactions did not have contractual effect. Ms Gibson was informed of the first only after the event; her signature was not enough to bind the trustees; changes were made and she was informed after the event; she was never properly advised as to the effects of the transactions. The pleadings do not, however, say that these matters mean the transactions were ineffective. Instead, they seem to be run as part of the context for the pleaded causes of action. For this decision I do not regard these allegations as raising distinct limitation questions.
The banks’ applications
[28] The banks reject the allegations against them. They point out that they provided Ms Gibson with a product disclosure statement, which begins:
Decisions to enter into derivative or futures contracts are very important. They often have significant consequences. Read all documents carefully. Ask questions. Seek independent advice before committing yourself.
The statement runs for 12 pages. It describes swap agreements, how they work, the costs, significant benefits, significant disadvantages and risks, termination before maturity and gives examples. Further, the plaintiffs entered into the agreements after taking legal advice. The lawyer gave a certificate as to having advised all the guarantors. Ms Gibson must have understood what was going on after receiving the monthly rate reset letters and bank statements that showed transactions under the swap agreement. There are other important substantive issues in the case. Liability and quantum will be fully contested.
[29] The banks do not concede that the plaintiffs have a sound case on the merits. For these applications, their position can be understood as saying that while they will contest liability fully, a hearing on the merits is not required because all the causes of action are time-barred. Put simply, their case is:
(a)The relevant pleading for deciding the limitation question is the amended statement of claim of 19 December 2016;
(b)That was filed outside the applicable limitation periods under s 4 of the Limitation Act 1950 and s 43A of the Fair Trading Act;
(c)They focus mainly on the allegations against them for their conduct in July and August 2007, but say that allegations as to later conduct are also out of time; and
(d)There is no basis for extending time under s 28 of the Limitation Act.
[30] The banks apply for both strike out and summary judgment. Leave was required to apply for summary judgment out of time.9 I granted leave. The plaintiffs did not oppose.
[31] The strike-out application alleged that the pleaded allegations did not disclose a reasonably arguable cause of action but in the hearing the banks tendered an amended application that the claims against them were frivolous or vexatious or an abuse of process because they were statute-barred and that the first statement of claim does not disclose any cause of action against the banks. The amendment was appropriate. When a defendant contends that a statement of claim should be struck out because of an affirmative defence, rather than an absence of an arguable cause of action, the grounds for strike out are that the claim is frivolous or vexatious or an abuse of process.10
[32] In Murray v Morrel & Co Ltd Tipping J stated the test where a limitation defence is raised:11
I consider the proper approach, based essentially on Matai, is that in order to succeed in striking out a cause of action as statute-barred, the defendant must satisfy the Court that the plaintiff’s cause of action is so clearly statute-barred that the plaintiff’s claim can properly be regarded as frivolous, vexatious or an abuse of process. If the defendant demonstrates that the plaintiff’s proceeding was commenced after the period allowed for the particular cause of action by the Limitation Act, the defendant will be entitled to an order striking out that cause of action unless the plaintiff shows that there is an
9 High Court Rules 2016, r 12.4(2).
10 Ronex Properties Ltd v John Laing Construction Ltd [1983] QB 398 (CA); Matai Industries Ltd v Jensen [1989] 1 NZLR 525 (HC); and Murray v Morel & Co Ltd [2007] NZSC 27, [2007] 3 NZLR 721.
11 Murray v Morel & Co Ltd [2007] NZSC 27, [2007] 3 NZLR 721 at [33]–[34].
arguable case for an extension or postponement which would bring the claim back within time.
In the end the Judge must assess whether, in such a case, the plaintiff has presented enough by way of pleadings and particulars (and evidence, if the plaintiff elects to produce evidence), to persuade the Court that what might have looked like a claim which was clearly subject to a statute bar is not, after all, to be viewed in that way, because of a fairly arguable claim for extension or postponement. If the plaintiff demonstrates that to be so, the Court cannot say that the plaintiff’s claim is frivolous, vexatious or an abuse of process. The plaintiff must, however, produce something by way of pleadings, particulars and, if so advised, evidence, in order to give an air of reality to the contention that the plaintiff is entitled to an extension or postponement which will bring the claim back within time. A plaintiff cannot, as in this case, simply make an unsupported assertion in submissions that s 28 applies. A pleading of fraud should, of course, be made only if it is responsible to do so.
He said that in the context of a strike out application, for which little, if any, evidence is usually given. Here, both sides have given more than pro forma evidence. Under Tipping J’s second paragraph at least a burden of persuasion moves to a plaintiff whose claim appears to be statute-barred. When a defendant applies for summary judgment, it is necessary to bear in mind the Court of Appeal’s guidance in Westpac Banking Corporation v M M Kembla New Zealand Ltd:12
Except in clear cases, such as a claim upon a simple debt where it is reasonable to expect proof to be immediately available, it will not be appropriate to decide by summary procedure the sufficiency of the proof of the plaintiff's claim. That would permit a defendant, perhaps more in possession of the facts than the plaintiff (as is not uncommon where a plaintiff is the victim of deceit), to force on the plaintiff's case prematurely before completion of discovery or other interlocutory steps and before the plaintiff's evidence can reasonably be assembled.
The defendant bears the onus of satisfying the Court that none of the claims can succeed. It is not necessary for the plaintiff to put up evidence at all although, if the defendant supplies evidence which would satisfy the Court that the claim cannot succeed, a plaintiff will usually have to respond with credible evidence of its own. Even then it is perhaps unhelpful to describe the effect as one where an onus is transferred. At the end of the day, the Court must be satisfied that none of the claims can succeed. It is not enough that they are shown to have weaknesses. The assessment made by the Court on interlocutory application is not one to be arrived at on a fine balance of the available evidence, such as is appropriate at trial.
12 Westpac Banking Corporation v M M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA) at [63]– [64].
[33] A defendant’s summary judgment application is all or nothing. The defendant must show that none of the causes of action can succeed. On a strike out application, the court has the option of removing parts of the plaintiff’s pleading.
[34] The banks say that the second to sixth causes of action pleaded by the plaintiffs occurred before 1 January 2011, when the Limitation Act 2010 came into effect. While the Limitation Act 1950 has been repealed,13 it continues to apply to actions based on acts or omissions before 1 January 2011.14 Section 4(1) of the Limitation Act 1950 provides for a limitation period of six years from the date on which the cause of action accrued for various causes of action, including actions founded on simple contract or on tort (s 4(1)(a) and actions to recover any sum recoverable by virtue of any enactment (s 4(1)(d)). Section 4(9) provides that the limitation period may be applied by analogy to certain claims in equity. A different limitation test applies to the cause of action under the Fair Trading Act.15
The plaintiffs’ pleadings
[35] The plaintiffs have filed three pleadings: a statement of claim on 30 September 2015, an amended statement of claim on 19 December 2016 and a second amended statement of claim on 15 June 2017. The banks say that for their limitation arguments the amended statement of claim is relevant. The statement of claim does not count because it does not disclose any reasonably arguable cause of action and the amended statement of claim added entirely new causes of action. The second amended statement of claim has amendments but does not add new causes of action.
[36]Rule 7.77 of the High Court Rules says:
(1)A party may before trial file an amended pleading and serve a copy of it on the other party or parties.
(2)An amended pleading may introduce, as an alternative or otherwise,—
(a)relief in respect of a fresh cause of action, which is not statute barred; or
13 Limitation Act 2010, s 57.
14 Limitation Act 2010, s 59; and Limitation Act 1950, s 2A.
15 Fair Trading Act 1986, s 43A.
…
A plaintiff may not begin a proceeding that is statute-barred. That cannot be circumvented by amending pleadings to add causes of action that are out of time. As to whether an amendment adds a fresh cause of action, the Court of Appeal stated the principles in Transpower New Zealand Ltd v Todd Energy Ltd:16
The relevant principles as to when a cause of action is fresh are summarised in the
Ophthalmological case at [22]-[24] as follows:
(a)A cause of action is a factual situation the existence of which entitles one person to obtain a legal remedy against another (Letang v Cooper [1965] 1 QB 232 at 242 – 243 (CA) per Diplock LJ);
(b)Only material facts are taken into account and the selection of those facts “is made at the highest level of abstraction” (Paragon Finance plc v D B Thakerar & Co (a firm) [1999] 1 All ER 400 at 405 (CA) per Millett LJ);
(c)The test of whether an amended pleading is “fresh” is whether it is something “essentially different” (Chilcott v Goss [1995] 1 NZLR 263 at 273 (CA) citing Smith v Wilkins & Davies Construction Co Ltd [1958] NZLR 958 at 961 (SC) per McCarthy J). Whether there is such a change is a question of degree. The change in character could be brought about by alterations in matters of law, or of fact, or both; and
(d)A plaintiff will not be permitted, after the period of limitations has run, to set up a new case “varying so substantially” from the previous pleadings that it would involve investigation of factual or legal matters, or both, “different from what have already been raised and of which no fair warning has been given” (Chilcott at 273 noting that this test from Harris v Raggatt [1965] VR 779 at 785 (SC) per Sholl J was adopted in Gabites v Australasian T & G Mutual Life Assurance Society Ltd [1968] NZLR 1145 at 1151 (CA)).
Transpower also relies on Attorney-General v Carter17 where the Court observed:
[48] The circumstance that the underlying facts may be the same or similar does not save a cause of action from being fresh if the plaintiff seeks to derive a materially different legal consequence from those facts.
16 Transpower New Zealand Ltd v Todd Energy Ltd [2007] NZCA 302 at [61]–[62], repeated in
Commerce Commission v Visy Board Pty Ltd [2012] NZCA 383 at [141].
17 Attorney-General v Carter [2003] 2 NZLR 160 (CA).
Statement of claim of 30 September 2015
[37] Ms Gibson began the proceeding without using a lawyer and drew the first statement of claim. No lawyer would want to put their name to it. In a minute of 19 May 2016, I said that it would need to be amended. The banks say that it can be disregarded because it does not show any arguable cause of action. It is largely narrative but ends by alleging causes of action for breach of contract and in negligence. While the pleading refers to an investigation by the Commerce Commission into how banks marketed interest rate swaps to farmers, it does not allege that the banks misled the plaintiffs in 2007 or that the plaintiffs are not bound by the lending arrangements made in August 2007. The alleged breach of contract is:
The Defendants negligence to monitor the maturity date, the facility would have moved to the lower floating rate banking facilities, instead of the “out of control” payments required, leading to the demands of 31 August 2011.
The alleged breach of duty of care is in similar terms. The core complaint is that the banks ought to have monitored the loans so that alternative lending arrangements could be put in place to avoid the heavy interest burden when floating interest rates fell. No doubt particulars could be required. But the pleading cannot be dismissed out of hand. It is not a total write off, only deficient yet capable of effective repair.18 As the statement of claim was filed on 30 September 2015, it was within time under s 4(1)(a) of the Limitation Act 1950 for any contract breaches within the six years before. That covers the refinancing in October 2009 and the third swap transaction. For the claim in negligence the cause of action arises when the plaintiffs suffer loss or damage. In this case that may be the heavier interest costs incurred by the plaintiffs because the banks did not act earlier to prevent those losses. That is, losses after 1 October 2009 may be actionable on account of earlier breaches of duty. Inadequate as it is, the first statement of claim would have survived any strike out application alleging that it did not disclose an arguable cause of action or was out of time. It can therefore be considered when deciding whether the causes of action in the later pleadings are out of time.
18 Marshall v Marshall Futures Ltd [1992] 1 NZLR 316 (HC) at 324.
Amended statement of claim of 19 December 2016 Fair Trading Act cause of action
[38] This cause of action is fresh. The plaintiffs say that the banks infringed s 9 (misleading or deceptive conduct) and s 13 (false or misleading representations) of the Fair Trading Act. The relevant conduct, summarised in [26](a)–(h) above, occurred between August 2007 and October 2009. They seek relief under s 43(3)(a) and (f),19 a declaration that the second and third swap transactions are void, and an order for payment of the amount of the loss. Section 43A is the limitation provision:20
A person may apply to a court … for an order under section 43 at any time within 3 years after the date on which the loss or damage, or the likelihood of loss or damage, was discovered or ought reasonably to have been discovered.
[39] In Commerce Commission v Carter Holt Harvey Ltd the Supreme Court gave guidance:21
In short, time starts running when the applicant discovers or ought to have discovered that loss or damage has already occurred, or is likely to occur in the future. … If relief is sought for loss or harm already suffered, then time will start running from discovery (actual or constructive) of that fact.
…
For present purposes, the concept of discovery entails finding something out, in the sense of becoming aware of it. An applicant discovers the loss or damage when he or she acquires knowledge of it. In the Court of Appeal there was some discussion about the “extent” of knowledge required. Extent in this context is not concerned with the quality of the necessary knowledge. Rather it is concerned with the subject-matter of that knowledge. Is that subject- matter the certainty of loss or damage, the possibility of its having occurred, or some intermediate position? It is neither necessary nor desirable to attempt some qualitative description of the knowledge inherent in the concept of discovery. Put simply, an applicant either is or is not aware of the loss or damage. Furthermore, if there is any doubt about whether the applicant was actually aware of the loss or damage, the inquiry then moves to whether the applicant ought reasonably to have been aware of it. The Court will then have
19 These are the current provisions. The equivalent provisions under the version of s 43 in force between 2007 and 2009 were s 43(2)(a) and (d).
20 The limitation provision in force during the alleged conduct is former s 43(5), which said: “An application under subsection (1) may be made at any time within 3 years after the date on which the loss or damage, or the likelihood of loss or damage, was discovered or ought reasonably to have been discovered.” While there are no material differences, I have applied s 43A as it is procedural and does not affect substantive rights.
21 Commerce Commission v Carter Holt Harvey [2009] NZSC 120, [2010] 1 NZLR 379 at [27], [29]–[31].
to consider whether a reasonable person, situated as the applicant was, ought to have known that loss had occurred. No further refinement is required on either of these aspects of the matter.
…
Likelihood sets the standard for the discovery of future loss as well as being descriptive of it. In this context we consider likelihood means that loss is more probable than not. There is merit in adopting the same standard for past loss. What the applicant must therefore know to set time running in respect of past loss is that it is more probable than not that loss has occurred.
…
Adopting this standard represents an appropriate reconciliation of the interests of applicants and defendants, both for actual knowledge and for constructive knowledge. Time should not start running when past loss is just a mere possibility or something that could well have happened. Nor should the commencement of the three years be deferred until past loss is a near certainty. Likelihood of past loss in the sense that it is more probable than not strikes an appropriate balance between the competing interests in legislation the principal purpose of which is consumer protection. Any lesser degree of likelihood would be apt to have time running against plaintiffs too early to be a satisfactory reflection of the statutory purpose. On this basis, in a case like the present, the question to be answered is when did the Commission become aware that it was more probable than not that a person or persons had suffered loss. As loss is not relevant for present purposes unless it was occasioned by a contravention of the Act, the words “as a result of a contravention of the Act” are necessarily implicit in this question. The same concept of probability should apply, for present purposes, to the applicant’s awareness that loss has been occasioned by a contravention.
(Emphasis added)
[40] As to awareness that loss has been caused by a contravention, knowledge of the facts is required, not knowledge of the law.22 In Haward v Fawcetts, however, Lord Nicholls commented:23
In many cases the distinction between facts (relevant) and the legal consequence of facts (irrelevant) can readily be drawn. In principle the two categories are conceptually different and distinct. But lurking here is a problem. There may be difficulties in cases where a claimant knows of an omission by say, a solicitor, but does not know the damage he has suffered can be attributed to that omission because he does not realise the solicitor owed him a duty. The claimant may know the solicitor did not advise him on a particular point, but he may be totally unaware this was a matter on which the solicitor should have advised him. This problem prompted Janet O'Sullivan, in her article “Limitation, latent damage and solicitors' negligence” (2004) 20 PN 218, 237, to ask the penetrating question: unless a claimant knows his
22 Houghton v Saunders [2014] NZHC 2229, [2015] 2 NZLR 74 at [659].
23 Haward v Fawcetts [2006] 1 WLR 682 (HL) at 687, a case under s 14A of the Limitation Act 1980 (UK), a late knowledge provision extending time after the cause of action arose.
solicitor owes him a duty to do a particular thing, how can he know his damage was attributable to an omission?
A similar point arises here. The plaintiffs say that the banks misled them not only in what they said, but also in what they did not say.
[41] The banks are required to show to the standard in Westpac Banking Corporation v M M Kembla Ltd that the claim for breach of the Fair Trading Act is out of time under s 43A. The legal burden is on them throughout. I must be so confident as to be satisfied that a full hearing on the merits is not required. It is clear of course that Ms Gibson knew that she had suffered serious losses. She must have known that when she had to leave the farm when the banks sold it, if not earlier. That was in February 2012, more than three years before she began this proceeding. But that knowledge is not enough. The plaintiffs must also know (actually or constructively) that the losses were caused by the banks’ misleading or deceptive conduct or false or misleading representations. It is not clear that Ms Gibson made that connection more than three years before her lawyer filed the amended statement of claim on 19 December 2016. Her lack of understanding may be seen in her lawyer’s email of October 2009 in [23] above. Her affidavit shows that from late 2011 she went about obtaining information. She had made a complaint to the Banking Ombudsman in 2011 but neither she nor the banks say what she complained about. In late 2012 she became aware from the news media that the Commerce Commission was starting an investigation into banks’ marketing of swaps to farmers, including the Westpac banks. She started writing to the Commerce Commission in April 2013. The Commission announced that it completed its investigation in December 2013. It advised Westpac and the other banks that it had sufficient information to take proceedings against them under the Fair Trading Act. It planned to file in March 2014. The banks negotiated with the Commission. Westpac settled with it in early 2015. The Commission says that Westpac admitted out of court that in marketing and selling swaps between October 2005 and August 2008 it breached s 9 of the Fair Trading Act by representing that the swaps fixed the all up cost of the borrowing by the affected customers. It advised Ms Gibson of the settlement in February 2015. She received a settlement offer from the banks but did not accept it—it did not give her any tangible benefit. During 2013 Ms Gibson also asked the banks for copies of loan and other documents. While she knew the result of the Commission’s investigation into complaints of breaching
the Fair Trading Act, she did not allege misleading conduct in the original statement of claim.
[42] Under the Supreme Court’s decision in Commerce Commission v Carter Holt Harvey Ltd the required knowledge is awareness that it is more likely than not that losses were caused by the banks’ misleading or deceptive conduct or false representations. Suspicion is not enough. As the facts in that case show, investigations bring increased knowledge. In this case the evidence is not clear enough to show that Ms Gibson knew before 19 December 2013 that it was more likely than not that her losses were attributable to the banks’ misleading or deceptive conduct. That is a trial issue, which will require a careful examination of Ms Gibson’s understanding at various times of the causes of her losses. It may also require consideration of the awkward question Lord Nicholls referred to in Haward v Fawcetts.
[43] The next question is whether a reasonable person in Ms Gibson’s position would have known before 19 December 2013 that the plaintiffs’ losses were caused by the banks’ misleading conduct. The test is not what a judge would have known. While I might have some idea what I would have understood, there is no evidence to say what a reasonable dairy farmer with limited understanding or experience of sophisticated financial transactions would have known. It would be dangerous to make glib assumptions as to what Ms Gibson ought to have known. Relevantly Ms Smith cited Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq), where it was found that local government officials with tertiary qualifications in financial management did not understand the nature of SCDOs, sophisticated structured finance instruments in which councils, required to act prudently, had invested.24 The defendant had sold them as low risk when they were anything but that. Care is required in assessing what ordinary people know about complex financial transactions.
[44] An assessment of what a reasonable person in Ms Gibson’s shoes would understand is not suitable for summary judgment. The matter is analogous to plaintiffs’ claims for negligence in professional liability cases, which the courts
24 Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) [2012] FCA 1028.
routinely recognise as generally unsuitable for summary judgment.25 Evidence is required to establish what Ms Gibson ought to have known and when. That is a contestable issue which cannot be resolved now. I have reached the same position as the Supreme Court in Commerce Commission v Carter Holt Harvey Ltd:26
There must be no reasonable possibility that the Commission’s application was brought within time. If there is, the matter must go to trial, with the limitation point being a defence to be assessed on the basis of all the evidence led at trial.
[45] The cause of action under the Fair Trading Act cannot be struck out as out of time under s 43A. As it stays in, the summary judgment application must also fail, as the banks have not shown that none of the causes of action can succeed.
Negligent misstatement cause of action
[46] This is a new cause of action. There is no comparable cause of action in the statement of claim filed on 30 September 2015. For this claim to be within time under s 4(1)(a) of the Limitation Act the cause of action must have arisen within six years of the filing of the amended statement of claim, that is, after 19 December 2010. As the claim is in negligence, the cause of action did not accrue until the plaintiffs suffered damage. As an exception time starts running if the defendants have concealed the right of action by fraud.27 That is considered separately.28
[47] The plaintiffs rely on the representations in [26](a)-(h) above, which induced them to enter into not only the lending arrangements in August 2007, but also the changes with Westpac New Zealand Ltd in March 2008 (the increase in the term loan), in December 2008 (another increase in the facility, change to margin, the global liquidity cost) and October 2009 (maturity date brought forward, margin increased, increased global liquidity cost, overdraft refinanced). And the changes in the swap transactions with Westpac Banking Corporation in April 2008 and December 2008.29
25 Economy Services Ltd v Smith & Hughes (1989) 2 PRNZ 657; Ghent v Brinkman HC Wellington CP379/87, 11 September 1987; Ball v NZ Debt Repay Ltd (in liq) HC Auckland CP490/02, 5 August 2003.
26 Commerce Commission v Carter Holt Harvey [2009] NZSC 120, [2010] 1 NZLR 379 at [39].
27 Limitation Act 1950, s 28(b). The plaintiffs do not rely on the other exceptions under Part 2 of the Limitation Act including s 28(a) (action based on fraud) or (c) (mistake).
28 See [84]–[96] below.
29 Amended statement of claim, paragraph 126.
They say that but for the banks’ negligent misrepresentations they would not have entered into these transactions. They do not say that their reliance on the banks’ misrepresentations counts for any other purpose. While they allege negligence, they do not claim that the banks were fraudulent.
[48] There is a difficulty with the plaintiffs’ claims for negligent misrepresentation inducing them to enter into contracts with the banks: s 35(1)(b) of the Contracts and Commercial Law Act 2017:30
35 Damages for misrepresentation
(1) If a party to a contract (A) has been induced to enter into the contract by a misrepresentation, whether innocent or fraudulent, made to A by or on behalf of another party to that contract (B),—
(a)A is entitled to damages from B in the same manner and to the same extent as if the representation were a term of the contract that has been breached; and
(b)A is not, in the case of a fraudulent misrepresentation, or of an innocent misrepresentation made negligently, entitled to damages from B for deceit or negligence in respect of the misrepresentation.
[49] That appears to bar the plaintiffs’ damages claim in this cause of action. There are however ways around the bar, but they do not solve the problem entirely. First, in Cygnet Farms Ltd v ANZ Bank New Zealand Ltd, another claim by a farmer against a bank for misrepresentations as to interest swaps, Palmer J held that while a damages remedy was no longer available, the court could still make a declaration on finding liability.31 While that leaves the plaintiffs with a cause of action, success may not give them anything tangible.
[50] Second, s 35 does not bar damages claims in tort against those who are not parties to the contract. A defendant who induces the plaintiff by negligent misrepresentations to enter into a contract with a third party cannot avoid liability for damages in tort by invoking s 35.32 Westpac New Zealand Ltd is not a party to the
30 Formerly the Contractual Remedies Act 1979, s 6.
31 Cygnet Farms Ltd v ANZ Bank New Zealand Ltd [2016] NZHC 2838, [2017] 2 NZLR 538 at [5], [93]–[100] and [193].
32 Stephen Todd and others The Law of Torts in New Zealand (7th ed, Thompson Reuters, Wellington, 2016) at 5.8.06(4); Shing v Ashcroft [1987] 2 NZLR 154 (CA) at 158; Wakelin v RH & EA Jackson Ltd (1984) 2 NZCPR 195 (CA).
interest swap agreements but acted as an intermediary between the plaintiffs and Westpac Banking Corporation Ltd. Westpac New Zealand Ltd’s officers made the alleged negligent misrepresentations that induced the plaintiffs to make the interest swap agreements with Westpac Banking Corporation Ltd. Section 35 does not bar a damages claim for negligent misrepresentations against Westpac New Zealand Ltd for the interest swap agreements. On the other hand, s 35 is a defence to a damages claim in tort by the plaintiffs against Westpac New Zealand Ltd for the agreements it made with them. The availability of a tort claim for damages against Westpac Banking Corporation Ltd for inducing the plaintiffs to borrow from Westpac New Zealand Ltd seems unlikely, but there is not enough information to say that it should be dismissed out of hand. Evidence at trial may show that written materials of Westpac Banking Corporation Ltd had misrepresentations that led the plaintiffs to deal with Westpac New Zealand Ltd.
[51] In Murray v Morel & Co Ltd the Supreme Court held that, in general, for a claim where loss or damage is part of the cause of action (as it is in this cause of action) the six years under s 4(1)(a) of the Limitation Act run from the occurrence of damage, not from when it could or should have been discovered. Tipping J explained:33
In my view the numerous references in the Limitation Act to accrual of a cause of action can only be construed as references to the point of time at which everything has happened entitling the plaintiff to the judgment of the Court on the cause of action asserted. Save when the Limitation Act itself makes knowledge or reasonable discoverability relevant, the plaintiff’s state of knowledge has no bearing on limitation issues. Accrual is an occurrence- based, not a knowledge-based, concept. The Limitation Act as a whole is structured around that fundamental starting point. The periods of time selected for various purposes must have been chosen on that understanding. The circumstances of postponement and extension have themselves been similarly framed.
The Court clearly understood that a cause of action could arise before a plaintiff became aware of it and if the act did not allow for delayed knowledge in those circumstances the time to start a proceeding would be less than six years and might expire before the plaintiff learnt of the loss.34 After all a plaintiff could not sue in negligence claiming damages when no loss had to the plaintiff’s knowledge occurred.
33 Murray v Morel & Co Ltd [2007] NZSC 27, [2007] 3 NZLR 721 at [69].
34 At [70]–[73].
The Supreme Court said that legislative change was required35 and Parliament has responded with the late knowledge test under s 14 of the Limitation Act 2010. But here the 1950 act applies.
[52] The banks say that the plaintiffs have fallen into the hole exposed by the Supreme Court. They suffered financial loss on entering into the loan arrangements in August 2007. The six years to sue ran out in August 2013. Their argument relies on the Supreme Court’s judgment in Davys Burton v Thom.36 In that professional negligence case a pre-nuptial matrimonial property agreement provided that a property was to be the separate property of the husband. The agreement was invalid because the lawyer who witnessed the wife’s signing of the agreement did not give the required certificate as to independent advice. The purported agreement was made in 1990. It was found to be invalid in a Family Court proceeding in 1999. The husband sued in 2002. His claim was held to be out of time because he suffered his loss in 1990. That was because he received a flawed asset, an agreement which was void unless validated.
[53] The judgments distinguish between an immediate loss as a result of a breach of duty (even though quantifying the loss may be difficult) and cases where loss is contingent, that is, where it is uncertain whether loss will occur. In the latter case damage occurs only when the contingency occurs. Tipping, McGrath and Wilson JJ said:37
In summary, a cause of action in tort for negligence does not exist and hence time does not start running for the purposes of the Limitation Act unless and until the plaintiff has suffered some actual and quantifiable loss, harm or damage as a result of the breach of duty involved. Damage will be contingent, and hence not actual for limitation purposes, if the plaintiff will suffer no damage at all unless and until a contingency is fulfilled. That will be so if the damage results from the plaintiff being exposed to a liability which is contingent on the occurrence of a future uncertain event. A good example is where the liability is that of a guarantor and is contingent on a default by the principal debtor, in contrast to the undertaking (as in Gilbert) of a direct and present liability which falls due in the future. The distinction may well be thought to be a fine one, but in any regime of limitation apparently similar cases may fall on opposite sides of the line which divides those which are barred from those which are not. A reduction in the value of an asset, whether tangible or intangible, constitutes actual damage and exists as soon as the asset becomes less valuable.
35 At [2] and [76].
36 Davys Burton v Thom [2008] NZSC 65, [2009] 1 NZLR 437.
37 At [46] per Blanchard J.
[54] More recently the Supreme Court has given further guidance in Duthie v Roose:38
Many limitation cases have concerned circumstances in which the negligence of the defendant has created the potential for harm which, as events developed, matured into an actual loss. In issue has been the point at which the potential for harm constituted a loss. This has led to a not entirely satisfactory set of distinctions most particularly between contingencies which mean that a loss has not been suffered and those which bear merely on the quantification of loss which has already occurred. In applying that distinction, the courts have resorted to further categorising cases by reference to various labels, such as for instance “damaged asset” or “exposure to a contingent liability” (as in Davys Burton) and “no transaction” or “flawed transaction” (as in Maharaj). In the latter case, Lord Wilson discussed the distinction between “no transaction” and “flawed transaction” cases in this way:
… it is essential to bear in mind that the central concept behind the “no transaction” and the “flawed transaction” cases is different. For in the latter the claimant does enter into a “flawed transaction” in circumstances in which, in the absence of the defendant’s breach of duty, he would have entered into an analogous, but flawless, transaction. In the former, however, the claimant also enters into a transaction but in circumstances in which, in the absence of the defendant’s breach of duty, he would have entered into “no transaction” at all. The difference in concept dictates a difference in the inquiry as to whether, and if so when, the claimant suffered actual or measurable damage. In the “flawed transaction” case the inquiry is whether the value to the claimant of the flawed transaction was measurably less than what would have been the value to him of the flawless transaction. In the “no transaction” case the inquiry is whether, and if so at what point, the transaction into which the claimant entered caused his financial position to be measurably worse than if he had not entered into it …
A slightly awkward feature of this language is that “flawed transaction” refers to the transaction which was entered into, whereas “no transaction” is a reference to the counter-factual, that is what the plaintiff would have done if properly advised.
Although attempts to apply the distinctions of the kind just discussed — that is the damaged asset or exposure to a contingent liability or the no transaction or flawed transaction distinctions — may be useful in terms of facilitating discussion of what are sometimes elusive issues, the descriptions are not terms of art. Unless used carefully and in a way which is closely focused on the occurrence of loss, they may result in distracting semantic debate, a point which the present case illustrates, as we will explain.
[55] The banks referred to Smith v Singleton and MacDonald v Somerset Smith Partners, both cases where strike out applications against investment advisers had
38 Duthie v Roose [2017] NZSC 152, 28 NZTC 23-035 at [55]–[56].
succeeded on limitation arguments because the plaintiffs had suffered immediate losses on making their investments.39 On the other hand the plaintiffs submitted that this was a “no transaction” case, as described in Maharaj v Johnson.40 The investment advisers cases and Davys Burton v Thom are distinguishable on their facts. Given the caution given in Duthie v Roose, I am wary of using the flawed transaction/no transaction analysis. I will consider instead what losses the banks may be liable for on account of their alleged misrepresentations.
[56] Before doing so, I add two comments. First, an argument that a cause of action has accrued before a plaintiff has been able to ascertain whether a breach of duty has caused any damage and that time to sue has been shortened or gone altogether is not attractive. On a strike-out or summary judgment application it should be scrutinised carefully.
[57] Second, I compare the law’s approach in dealing with limitation in the context of physical damage to buildings. In Pirelli General Cable Works Ltd v Oscar Faber & Partners a strict occurrence approach was applied when the plaintiff could not have discovered the damage, but it was recognised that that led to unjust results.41 In England the Latent Damage Act 1986 (UK) addressed the problem. Courts also found ways to soften the effect of the rule. Damage was distinguished from mere defects in a structure, so that time did not run only because of the occurrence of a defect.42 Claims that a building was “doomed from the start” are rarely successful.43 More strikingly, in New Zealand it has been accepted that damage to a building occurs only when it is discoverable, because the relevant loss, reduced value of the asset, only occurs on discovery.44 That maintains consistency with principle while giving a fairer application of the limitation rule. It departs from the approach in cases such as Davys Burton v Thom by selecting only one form of loss, reduced value, whereas the other cases accept that any detriment capable of measurement in money terms may count,
39 Smith v Singleton [2015] NZHC 1643 and MacDonald v Somerset Smith Partners [2015] NZHC 1839.
40 Maharaj v Johnson [2015] UKPC 28.
41 Pirelli General Cable Works Ltd v Oscar Faber & Partners [1983] 2 AC 1 (HL).
42 D & F Estates Ltd v Church Commissioners [1988] 3 WLR 368 (HL).
43 See the discussion in Andrew McGee Limitation Periods (7th ed, Thomson Reuters, London, 2014) 5.013-5.016.
44 Invercargill City Council v Hamlin [1996] 1 NZLR 513 (PC), Murray v Morel & Co Ltd [2007] NZSC 27, [2007] 3 NZLR 721 at [39]–[42].
even if the detriment cannot be detected at the time.45 In short, in cases of physical damage to buildings arguments of immediate loss before the damage can be detected are rarely likely to be successful. As a matter of policy, it is not clear why cases of pure financial loss should be treated more strictly against plaintiffs than cases of physical damage where the loss is considered in financial terms. The question is why banks should get away with arguments that do not work for the construction industry.
[58] To decide when the plaintiffs suffered damage it is necessary to work out what losses the banks can be liable for because of their alleged negligent misstatements. Losses for which the banks are not responsible do not count. In Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd Lord Hoffmann stated the general principle in cases of negligent information and negligent advice:46
… a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them.
The principle thus stated distinguishes between a duty to provide information for the purpose of enabling someone else to decide upon a course of action and a duty to advise someone as to what course of action he should take. If the duty is to advise whether or not a course of action should be taken, the adviser must take reasonable care to consider all the potential consequences of that course of action. If he is negligent, he will therefore be responsible for all the foreseeable loss which is a consequence of that course of action having been taken. If his duty is only to supply information, he must take reasonable care to ensure that the information is correct and, if he is negligent, will be responsible for all the foreseeable consequences of the information being wrong.
[59] In this case it will be necessary to find out whether the bank’s representations gave information or went further and advised the plaintiffs what to do. The alleged representations may go both ways. That cannot be clearly established now. It is a trial issue. Here I consider the matter as giving information only without advice as to a course of action. Under Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd
45 Forster v Outred & Co [1982] 1 WLR 86 (CA) at 94.
46 Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191 (HL) at 214.
the banks are liable only for losses caused by their information being wrong. It is arguable for the plaintiffs that those losses did not begin in August 2007. Take, for example, the representation that the plaintiffs were entering into a fixed rate arrangement with an “all in” interest rate of 9.65%. Under the term loans the trustees began paying interest plus margin totalling 9.65%. On the plaintiffs’ case, the margin was increased later and they had to pay more onerous interest than had been represented. The increased costs of the banks’ loans were losses attributable to the inaccuracy of the banks’ representations. That damage occurred when those increased costs were charged, not earlier. To say that the plaintiffs suffered losses right from the outset is a “doomed to fail” argument. It is hard to see how that argument can apply in this case. It means that it was always certain that the plaintiffs would fail. Presumably Ms Gibson must have provided budgets and similar information to support her application for finance and the banks must have assessed the plaintiffs’ ability to meet their commitments. The banks were unlikely to have provided loans and an overdraft if it was certain that the plaintiffs would default. It will be difficult for the banks to argue that the unforeseen was inevitable right from the time of the loans. This case is more within the circumstances the Chief Justice described in Davys Burton v Thom:47
Where a plaintiff has been induced by a misrepresentation to part with property, make payments, or incur liabilities in the context of an executory contract, the plaintiff may not suffer any loss until the net position obtained after benefits gained through the transaction are brought into account.
[60] Two more comments. First, I am dealing only with the losses arising from the banks’ representations being wrong, but not with the consequences of those losses. The time of loss counts, not the time that consequences took effect. The distinction may be hard to apply, but one way of looking at the matter is that expenses and liabilities incurred may be losses, but insolvency caused by those expenses is a consequence. Second, as the banks are responsible only for the losses attributable to their information being wrong, the plaintiffs will not be able to claim for losses from other causes. By December 2008 the trustees refinanced overdraft debt that had become hardcore. That suggests that Ms Gibson had trouble trading solvently aside
47 Davys Burton v Thom [2008] NZSC 65, [2009] 1 NZLR 437 at [17].
from the interest swap agreement. There will be causation questions which will go to damage and the measure of damages.
[61] For the plaintiffs’ claim for negligent misrepresentation to be within time under s 4(1)(a) of the Limitation Act, the losses had to occur within six years before the amended statement of claim, that is, after 19 December 2010. It is arguable for the plaintiffs that the losses were intermittent rather than continuous. That distinction has been recognised in cases of physical damage. In Bowen v Paramount Builders (Hamilton) Ltd, Cooke J cited Salmond on Torts with approval:48
But where the act of the defendant is not actionable per se, but is actionable only if it produces actual damage, and it produces damage twice at different times, is there one cause of action, or are there two? If, for example, the defendant by an act of negligence has created a source of danger which on two successive occasions causes personal harm to the plaintiff, is the plaintiff barred from recovery for the second harm because he has already recovered damages or accepted compensation for the first? Both on principle and on authority it seems that when an act is actionable only on proof of actual damage, successive actions will lie for each successive and distinct accrual of damage. But where the damage sued for in the second action is not in reality distinct from that sued for in the first, but is merely a part of it or consequential upon it, it cannot be recovered. For it is clear that the second damage in order to be recoverable in a second action must arise directly from the wrongful act of the defendant and not indirectly through the damage already sued for. In other words, compensation for the first damage includes compensation for all the ulterior consequences of that damage whether already accrued or not, but it does not include compensation for entirely distinct damage accruing from the defendant's act independently of the damage first sued for.
So long as the distinction between losses and consequences is kept in mind, it is arguable that the plaintiffs suffered distinct losses, not one continuous loss. Westpac Banking Corporation sent monthly rate reset letters which stated the amount payable under the interest swap for that month. Under the term loans interest was payable monthly. Each liability under a rate reset letter was separate and distinct from debts for other reset letters. Each monthly interest charge under the terms loans was a distinct debt. Each of these liabilities was a separate loss and gave its own cause of action.
48 Bowen v Paramount Builders (Hamilton) Ltd [1977] 1 NZLR 394 (CA) at 424. See also Maberley v Henry W Peabody & Co of London Ltd [1946] 2 All ER 192 at 194; Morris v Redland Bricks Ltd [1970] AC 652 (HL) at 664; Mr Albert Borough Council v Johnson [1979] 2 NZLR 234 (CA) at 240, 243-244; Askin v Knox [1989] 1 NZLR 248 (CA) at 255; S v G [1995] 3 NZLR 681 (CA) at 687.
[62] Monthly liabilities that fell due under the term loans and the interest swap from 20 December 2010 were losses that occurred within six years before the amended statement of claim. I take it that there were no more monthly charges after the demand of August 2011. Even so, the negligent misrepresentation cause of action cannot be dismissed for being out of time under s 4(1)(a). If the plaintiffs wish to claim for losses occurring before 19 December 2010, it will be necessary to consider whether an extension under s 28(b) has the required air of reality.
[63] The banks say that Babylon Farms Ltd suffered an immediate loss when it signed the guarantee. As well as Davys Burton v Thom, they referred to Gilbert v Shanahan, which involved a guarantee.49 The Court of Appeal’s approach in that case is in line with the Supreme Court’s decision in Davys Burton v Thom on contingent liabilities.50 The banks rely on this:51
But Mr Gilbert’s obligations under the guarantee were not those of a guarantor simpliciter. They were those of a principal debtor/covenantor. He thereby incurred a present liability for the rent, albeit that liability was dischargeable in the future on the days when rent fell due under the lease. He also assumed a present obligation to perform the other covenants under the lease. There was no contingency in those present obligations.
They say that that applies here because of a principal debtor clause in their guarantee, cl 7:
This document imposes upon you a principal obligation. In addition to your guarantee obligations you agree to perform the obligations of the Customer as if you were the Customer. That means that the Secured Parties can require you to pay the Guaranteed Money whether or not they have made demand on the Customer.
Your liability under this document is independent and unconditional. It does not depend on any other right or obligation and is not subject to any condition. Your liability is not affected by anything which might otherwise release you from all or part of your obligations or limit them (if this clause was not in this document).
[64] The banks’ argument misses the point that in deciding when Babylon Farms Ltd suffered its losses, it is in the same position as the customers whose obligations it guaranteed. They suffered damage only when they incurred losses that arose from the
49 Gilbert v Shanahan [1998] 3 NZLR 528 (CA).
50 See 539-544.
51 At 544.
banks’ representations being wrong. In terms of the judgments in Gilbert v Shanahan and Davys Burton v Thom, those liabilities were contingent. There was no certainty that the customers would incur them. Babylon Farms Ltd as a principal debtor suffered damage at the same time as the customers, not earlier. Any claim by it for negligent misrepresentation is in time to the same extent as the other plaintiffs.
[65] Before leaving this cause of action, I record that I have dealt only with liability for giving incorrect information. Liability for giving advice as to a course of action is different. The losses and their consequences may be more extensive. They are likely to have occurred earlier. One basis for the plaintiffs’ damages claim is to put them back into the position they would have been in if they had not acted on the banks’ advice in 2007. Those losses seem to have occurred in 2007. Establishing that any claim for giving unsound advice as to a course of action is within time will be more difficult.
Contractual misrepresentation cause of action against Westpac Banking Corporation Ltd
[66] This claim under s 35(1)(a) of the Contract and Commercial Law Act is new. The statement of claim of 30 September 2015 does not allege such a cause of action. The plaintiffs rely on the same representations as for the negligent misrepresentation cause of action and say that they were induced by them to enter into the swap transactions.
[67] Under s 35 a claim for damages based on misrepresentation inducing entry into a contract is assimilated to a claim for damages for breach of contract: “in the same manner and to the same extent as if the representation were a term of the contract that has been breached”. Because of that assimilation a damages claim for contractual misrepresentation is not available if a claim for breach of contract in the same circumstances would be time-barred. A cause of action for breach of contract arises on the occurrence of the breach, even if damage has not yet occurred. Likewise, a damages claim under s 35(1)(a) accrues when the representee enters into the contract, not when it suffers loss or damage.52
52 See Bushline Trustees Ltd v ANZ Bank New Zealand Ltd [2017] NZHC 2520 at [165] as an example in the context of a bank interest swap agreement.
[68] The latest that the plaintiffs could say that they entered into an agreement under the influence of the Westpac Banking Corporation Ltd’s misrepresentations is August 2010 when Ms Gibson signed the confirmation for the third swap. That assumes that that agreement had not already taken effect. That was more than six years before the amended statement of claim was filed in December 2016. The claims are out of time under s 4(1)(a) of the Limitation Act, unless time is extended under s 28(b).
[69] The plaintiffs say, however, that a different limitation period applies to the guarantee that they signed on 9 August 2007 because it is a deed. They refer to s 4(3) of the Limitation Act 1950:
An action upon a deed shall not be brought after the expiration of 12 years from the date on which the cause of action accrued.
The guarantee is in writing and is called a deed. It has been signed as a deed by those to be bound by it.53 The guarantee is in favour of both banks.
[70] Westpac Banking Corporation Ltd acknowledges that it is a deed, but it says say that s 4(3) does not apply. It refers to Lee v Lee where the section was held not to apply to a proceeding to set aside transactions for undue influence, unconscionable bargain and breach of fiduciary duty.54 But in giving that ruling the Court of Appeal made the point that the plaintiffs in that proceeding were not suing on the deeds or seeking damages for their breach.55 That distinguishes that case. A claim for damages for breach of a deed is an action upon the deed: it seeks recognition and enforcement of the deed. By assimilation under s 35(1)(a) of the Contract and Commercial Law Act a claim for damages for contractual misrepresentation is available. A claim for damages for breach of the guarantee would be within time. A claim for damages for misrepresentation inducing entry into the guarantee, a deed, can similarly be brought within 12 years. The time limit has not expired yet.
[71] Accordingly the claim for damages for misrepresentation inducing the plaintiffs to give the guarantee is within time under s 4(3). There is no need to deal with extensions of time under s 28 for that claim. On the other hand, the trustees’
53 Property Law Act 1952, s 4, and Companies Act 1993, s 180(1)(a)(ii).
54 Lee v Lee [2015] NZCA 514, [2016] NZAR 61 at [55].
55 At [55].
contractual misrepresentation claims for the swap transactions are out of time under s 4(1)(a), unless time is extended under s 28.
The duty of care cause of action
[72] The plaintiffs say that the banks owed them a duty of care as their bankers and financial advisers to give them competent, expert and diligent advice and assistance in good faith in relation to their banking and financing requirements without being influenced by any conflict of interest between their interests as bankers and their duties to the plaintiffs as their customers. But for the banks’ breaches of these duties, they would not have entered into the banking arrangements using swap transactions but would have used more conventional means, a combination of fixed and floating rate loans. The allegations cover the period from July 2007 to 2009.
[73] The cause of action is outside s 35 of the Contract and Commercial Law Act and does not rely on misrepresentations. Instead of asserting that the banks made misleading statements of fact, it alleges that the banks were under positive duties to advise the plaintiffs but failed to do so. It is an alternative to the second and third causes of action. The Law of Torts in New Zealand recognises that such a cause of action may be open:56
The negligence action is still available in the case of a negligent statement not amounting to a representation of fact and therefore not actionable under the 1979 Act even though it induces a contract between the parties. Negligence in the exercise of professional judgment perhaps could be an example.
[74] This cause of action is not new. It restates the negligence cause of action in the original statement of claim—see [37] above. The core allegation is the same. As the original pleading was within time under s 4(1)(a) of the Limitation Act, so is this cause of action. I said above that damage or loss occurring after 1 October 2009 was actionable even if the banks’ acts or omissions happened before. That also applies here. It is not possible on this application to say which of the banks’ acts or omissions before 1 October 2009 caused loss after that date. There is no specific evidence on
56 Stephen Todd and others The Law of Torts in New Zealand (7th ed, Thompson Reuters, Wellington, 2016) at 5.8.06(4) at page 241, referring to the Contractual Remedies Act 1979, s 6.
that issue. It is a trial matter. Accordingly, the duty of care cause of action cannot be
struck as time-barred under s 4(1)(a).
The breach of fiduciary duty cause of action
[75] As it is not possible to read the original statement of claim as alleging a breach of fiduciary duty, this cause of action is new. As it is a claim in equity, it is not subject to the six year rule under s 4(1) of the Limitation Act, unless it is barred by analogy under s 4(9):
This section shall not apply to any claim for specific performance of a contract or for an injunction or for other equitable relief, except in so far as any provision thereof may be applied by the Court by analogy in like manner as the corresponding enactment repealed or amended by this Act, or ceasing to have effect by virtue of this Act, has heretofore been applied.
The rule goes back before the Limitation Act 1950. In Knox v Gye Lord Westbury said:57
Where the remedy in Equity is correspondent to the remedy at Law, and the latter is subject to a limit in time by the Statute of Limitations, a Court of Equity acts by analogy to the statute, and imposes on the remedy it affords the same limitation.
If the bar by analogy does not apply, there is no fixed time limit for a claim in equity, but a court of equity may refuse relief in its discretion for laches. That does not arise here because laches can rarely be a ground for strike out or summary judgment.58 The banks do not allege laches.
[76] In Johns v Johns the Court of Appeal explained how the section is to be applied:59
The fiduciary claim will always prima facie survive the statutory barring of an allied common law or indeed equitable claim. There will be a bar by analogy only when the fiduciary claim parallels the statute-barred claim so closely that it would be inequitable to allow the statutory bar to be outflanked by the fiduciary claim. In order to determine how close the parallel is the Court must examine not only the underlying facts but also the nature of the relationship between the parties and the policy and purpose of the different causes of
57 Knox v Gye (1872) LR 5 HL 656 (HL) at 674.
58 Matai Industries Ltd v Jensen [1989] 1 NZLR 525 (HC) at 545.
59 Johns v Johns [2004] 3 NZLR 202 (CA) at [80]–[81].
action. If there is a sufficient difference in any material respect, the suggested parallel is unlikely to be close enough to make it appropriate in equity to apply an analogous bar.
…
The judgments in Matai Industries and S v G should not be read as suggesting that the issue can be concluded solely by reference to the degree of concurrence of the factual allegations. That of course must be the first focus because, if there is no sufficient degree of concurrence in that respect, the suggested analogy is likely to fail at that point. If, however, there is factual concurrence in the sense that the different causes of action are simply different ways of putting the same factual complaint, and there are no policy or other reasons militating against it, the case for an analogous bar is likely to have been made out.
[77] The pleading of this cause of action follows the fourth cause of action very closely except that the banks are alleged to have been in fiduciary relationships with the plaintiffs, owed fiduciary duties, breached those duties and but for those breaches, the plaintiffs would not have entered into the swap transactions. The banks submit that as that adopts the same format as the cause of action for breach of duty of care, substituting “breach of fiduciary duty” for “breach of duty of care”, the causes of action are close enough to parallel each other. That does not necessarily follow. It is necessary to consider whether the statement of claim alleges breaches of the same duty.
[78] A useful starting point is Millet LJ’s description of a fiduciary in Bristol and West Building Society v Mothew:60
A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances, which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary.
60 Bristol and West Building Society v Mothew [1998] Ch 1 (CA) at 18.
He also pointed out that not every breach of a duty by a fiduciary is a breach of fiduciary duty:61
It is similarly inappropriate to apply the expression to the obligation of a trustee or other fiduciary to use proper skill and care in the discharge of his duties. If it is confined to cases where the fiduciary nature of the duty has special legal consequences, then the fact that the source of the duty is to be found in equity rather than the common law does not make it a fiduciary duty. The common law and equity each developed the duty of care, but they did so independently of each other and the standard of care required is not always the same. But they influenced each other, and today the substance of the resulting obligations is more significant than their particular historic origin. In Henderson v. Merrett Syndicates Ltd [1995] 2 AC 145, 205 Lord Browne- Wilkinson said:
“The liability of a fiduciary for the negligent transaction of his duties is not a separate head of liability but the paradigm of the general duty to act with care imposed by law on those who take it upon themselves to act for or advise others. Although the historical development of the rules of law and equity have, in the past, caused different labels to be stuck on different manifestations of the duty, in truth the duty of care imposed on bailees, carriers, trustees, directors, agents and others is the same duty: it arises from the circumstances in which the defendants were acting, not from their status or description. It is the fact that they have all assumed responsibility for the property or affairs of others which renders them liable for the careless performance of what they have undertaken to do, not the description of the trade or position which they hold.”
[79] In light of that, the obligations in the duty of care and the fiduciary duty causes of action are distinct, even though the factual allegations are the same. The obligations serve different purposes. In the first the plaintiffs allege a duty of care arising from an assumption of responsibility which goes to whether the banks have met the requisite standard of care. That does not involve a breach of fiduciary duty. In the second the question is whether the banks breached the fiduciary duties described by Millet LJ. That goes to the obligation of loyalty, not to keeping to a standard of care. The causes of action are alternative, not parallel. The court may find that one cause of action is proved, but not the other.
[80] Accordingly, the cause of action for breach of fiduciary duty is not caught by analogy under s 4(9) because it is not sufficiently parallel to a common law cause of action. It is therefore not time-barred. And two more comments. First, the duty of
61 At 16–17.
care cause of action alleges that the banks should not have been influenced by any conflict of interest. That may be relevant to the cause of action for breach of fiduciary duty, but it does not go to a breach of a duty of care. Second, the general rule is that banks do not owe their customers fiduciary duties. Their relationship is purely contractual.62 Banks can normally be expected to advance their own commercial interests ahead of their customers’. They are not charitable bodies. On the other hand, the courts have sometimes recognised that banks owe fiduciary duties to their customers, one case being when they have assumed the role of the customer’s adviser. That is more commonly found in cases of investment advice.63 Advice on a lending transaction is a less likely setting for a fiduciary duty, but it cannot be dismissed out of hand. It may be arguable that Westpac New Zealand Ltd came under such a duty when it acted as intermediary between the plaintiffs and Westpac Banking Corporation Ltd. If it acted as the plaintiffs’ agent in arranging the transactions with Westpac Banking Corporation, it may be found to have owed fiduciary obligations. That however is a matter for trial. The banks did not apply for strike out on the ground that they did not owe the plaintiffs any fiduciary duties.
[81] If I am wrong in rejecting limitation by analogy under s 4(9), the parallel common law cause of action is the breach of duty of care. Both fiduciary and common law duties ran during the agreements. Loss would be assessed in the same way. There is however a difference in timing. Because the breach of fiduciary duty was pleaded for the first time in the amended statement of claim, only losses occurring in the six years before 19 December 2016 can be taken into account, unless time is extended under s 28.
Breach of contract cause of action against Westpac New Zealand Ltd
[82] The plaintiffs plead that Westpac New Zealand Ltd acted as both banker and financial adviser to them and owed them contractual duties to act fairly and reasonably in their best interests as customers, to provide financial advice and assistance expertly, diligently and in good faith so that their financial affairs were managed fairly, reasonably and advantageously to them. If it had carried out those duties properly,
62 Foley v Hill (1842) 2 HL Cas 28 (HL).
63 Woods v Martins Bank [1959] 1 QB 55.
they would have been able to refinance with a floating rate arrangement subject to prevailing market rates. Its breaches of those duties caused losses.
[83] This is not a fresh cause of action but a repleading of the claim for breach of contract in the statement of claim of 30 September 2015. It is within time for any breaches of contract from October 2009, but is out of time for earlier breaches of contract, unless time can be extended under s 28(b) of the Limitation Act.
Extension of time under s 28(b) of the Limitation Act 1950
[84] To sum up how the time limits under the Limitation Act 1950 apply to the causes of action so far:
(a)The Limitation Act does not apply, as the Fair Trading Act has its own limitation provision, s 43A. The first cause of action is arguably within time.
(b)The negligent misrepresentation cause of action is within time only for loss or damage occurring after 19 December 2010. That part of the cause of action based on earlier loss is out of time.
(c)The claim for contractual misrepresentation against Westpac Banking Corporation is out of time except for the claim based on inducement to give the guarantee.
(d)The cause of action for breach of duty of care is within time for damage occurring from 1 October 2009, but is out of time for earlier losses.
(e)The Limitation Act does not apply to the claim for breach of fiduciary duty, but if limitation by analogy were to apply, it is within time only for losses occurring after 19 December 2010.
(f)The claim against Westpac New Zealand Ltd for breach of contract is within time for breaches after 1 October 2009, but out of time for earlier breaches.
[85] Now to see whether time to sue can be extended for concealment by fraud under s 28. That applies to parts of the second, third, fourth and sixth causes of action. It applies to the fifth cause of action only if there is limitation by analogy. Section 28 says:
Postponement of limitation period in case of fraud or mistake
Where, in the case of any action for which a period of limitation is prescribed by this Act, either—
(a)the action is based upon the fraud of the defendant or his agent or of any person through whom he claims or his agent; or
(b)the right of action is concealed by the fraud of any such person as aforesaid; or
(c)the action is for relief from the consequences of a mistake,—
the period of limitation shall not begin to run until the plaintiff has discovered the fraud or the mistake, as the case may be, or could with reasonable diligence have discovered it:
…
With the legal burden of proof on the summary judgment application, the banks need to show that any extension under s 28 is not fairly arguable. There must be an air of reality to the fraudulent concealment allegation.
[86] To the plaintiffs’ claim that their claims are not barred because of s 28(b), the banks deny both concealment and fraud. They point out that they gave Ms Gibson the product disclosure statement in July 2007 which described how interest swaps work, and the plaintiffs received monthly rate reset letters under the swap agreement as well as monthly bank statements which showed the amounts in the rate reset letters debited or credited to the plaintiffs’ accounts. The plaintiffs therefore had all the information they needed to work out whether they had any causes of action. Ms Gibson’s assertion that she did not find out that she had any claims against them until she found out about the results of the Commerce Commission investigation is therefore implausible.
[87] That has to be considered in the light of the courts’ approach to s 28(b). “Fraud” means more than actual dishonesty. The courts have drawn on equity, which
traditionally prevented a party from using a statute as an instrument of fraud.64 Mahon J’s decision in Inca Ltd v Autoscript (NZ) Ltd remains authoritative.65 He held that fraud means not only actual fraud or deceit but also equitable fraud, which applies in cases where there is a breach of a special duty which arose out of a special relationship. It is not enough merely to allege that a defendant’s reliance on a limitation statute is unconscionable. Mere non-disclosure in the absence of a duty of disclosure is not equitable fraud. Time does not stop running unless there is a breach of a recognised duty to disclose the relevant facts. The obligation to disclose the existence of the cause of action arises in two situations: a fiduciary relationship between the plaintiff and the defendant and some other legal relationship, including a contract, where there was a duty to disclose facts as to the cause of action. The concealment must be wilful.
[88] In Matai Industries Ltd v Jensen, Tipping J endorsed Mahon J’s judgment in Inca Ltd v Autoscript (NZ) Ltd and also noted that a failure to disclose cannot be wilful if the defendant is unaware of the matter. That requires knowledge of the essential facts going to the cause of action.66
[89] Some cases have recognised that there may be concealment under s 28(b) in the way that a wrong is committed, even in the absence of a special relationship. In Beaman v ARTS Ltd,67 the first case under the English equivalent of s 28(b), the English Court of Appeal drew on the Privy Council’s decision in Bulli Coal Mining Co v Osborne, a case of trespass where there was no special relationship:68
The contention on behalf of the appellants that the statute is a bar unless the wrongdoer is proved to have taken active measures in order to prevent detection is opposed to common sense as well as to the principles of equity. Two men, acting independently, steal a neighbour's coal. One is so clumsy in his operations, or so incautious, that he has to do something more in order to conceal his fraud. The other chooses his opportunity so wisely, and acts so
64 See Lord Westbury in McCormick v Grogan (1869) LR 4 HL 82 at 97:
The Court of Equity has, from a very early period, decided that even an Act of Parliament shall not be used as an instrument of fraud; and if in the machinery of perpetrating a fraud an Act of Parliament intervenes, the Court of Equity, it is true, does not set aside the Act of Parliament, but it fastens on the individual who gets a title under that Act, and imposes upon him a personal obligation, because he applies the Act as an instrument for accomplishing a fraud.”
65 Inca Ltd v Autoscript (NZ) Ltd [1979] 2 NZLR 700 (SC).
66 Matai Industries Ltd v Jensen [1989] 1 NZLR 525 (HC) at 534–536.
67 Beaman v ARTS Ltd [1949] 1 KB 550.
68 Bulli Coal Mining Co v Osborne [1899] AC 351 (PC) 363.
warily, that he can safely calculate on not being found out for many a long day. Why is the one to go scot-free at the end of a limited period rather than the other? It would be something of a mockery for courts of equity to denounce fraud as ‘a secret thing,’ and to profess to punish it sooner or later, and then to hold out a reward for the cunning that makes detection difficult or remote.
In Beaman v ARTS Ltd the court held that the defendant bailee had fraudulently concealed the right of action when it sold goods it was holding in England but did not tell its bailor who was out of the country. This line of cases may be distinguished as involving active concealment, whereas Mahon and Tipping JJ were addressing passive non-disclosure.
[90] To show that s 28(b) does not apply the banks need to show that they did not actively conceal the right of action or that they were not under any duty of disclosure to the plaintiffs. At this stage, any claim that the bank actively concealed the right of action does not have the required air of reality. While it is appropriate to apply the caution expressed by the Court of Appeal in Westpac v M M Kembla NZ Ltd not to
force on the plaintiff's case prematurely before completion of discovery or other interlocutory steps and before the plaintiff's evidence can reasonably be assembled
it is not disputed that the banks did give Ms Gibson the product disclosure statement and sent the plaintiffs rate reset letters and bank statements. That gets rid of any suggestion of active concealment.
[91] To avoid an extension of time for passive non-disclosure the banks need to show that there was no special relationship that required them to make disclosure to the plaintiffs. Their case must be that even if they made misrepresentations to Ms Gibson which led the plaintiffs to enter into each of the transactions in issue, it was up to the plaintiffs to find out the misrepresentations. They did not have to tell Ms Gibson that they had misled her. Once the plaintiffs and the banks had entered into the transactions, the plaintiffs were on their own. The banks were not under any duty to disclose and, even if they were, they did send the plaintiffs accurate information, the rate reset letters and monthly bank statements. No further after-sales service was required.
[92] That position represents standard banking practice. Any claim that the banks owed some positive duty to disclose must show that the standard position does not apply here. These factors make it arguable that the banks had to do more than hold their cards close to their chest:
(a)The interest swap agreement was complex and unusual. It was not a common mechanism for financing farmers without large holdings. It was difficult to understand. Most people would struggle to get their heads around the ISDA master agreement. Not only is much of the language technical but it requires a deep understanding of financial concepts.
(b)Operating the agreement, for example, working out whether to terminate and how much may be payable by one side to the other on termination, requires specialist knowledge held by a person with tertiary qualifications in finance or equivalent.
(c)There was a significant risk of serious financial loss from entering into the interest swap agreement without a clear understanding how it worked.
(d)There was a significant risk of serious financial loss from operating the agreement without a clear understanding of movements in interest rates, macro-economic conditions and financial matters.
(e)Ms Gibson did not have any expertise in interest swaps and was vulnerable to the interest swap transactions going very sour.
(f)Westpac’s explanation of the interest swap agreement was perfunctory, a meeting at the stock yards and giving Ms Gibson a product disclosure statement.
(g)Westpac New Zealand Ltd knew that she did not have the knowledge or skills to understand or manage an interest swap agreement
competently. It must have appreciated that there was a risk that proper explanations had not been given or understood.
(h)Westpac could not reasonably expect that in her farming community Ms Gibson would be able to find experts who could assess the merits or otherwise of entering into the interest swap agreement and managing it successfully.
(i)Westpac New Zealand Ltd was not a party to the interest swap agreement, but was the intermediary that brought the plaintiffs and Westpac Banking Corporation together. Whereas Westpac Banking Corporation would be keen to maximise its position under the swap agreement, Westpac New Zealand Ltd need not be.
(j)Westpac New Zealand Ltd had expertise in interest swap agreements. It knew how they operated. It employed teams of economists and highly-qualified financial experts.
(k)Westpac New Zealand Ltd advised Ms Gibson to use the interest swap agreement.
(l)Westpac New Zealand Ltd was in a position to monitor the performance of the interest swap agreement. It kept records of transactions under the agreement, the monthly rate resets, and was also aware of economic conditions and the movements in interest rates.
(m)It held itself out as able to advise farmers on planning and managing their finances. See its advertising in [20] above. That went beyond merely giving information.
(n)It did advise Ms Gibson about financing the purchase of the farm before the lending arrangements of August 2007.
(o)The banks have not identified any contractual provision negating a duty of disclosure.
(p)It was in Westpac New Zealand Ltd’s own interest for the plaintiffs to operate the swap agreement successfully. It would not want its customer to fail.
[93] Consider the argument that any duty of care to explain matters properly stopped in August 2007 when the loan agreements were signed. Having drawn the plaintiffs into a complex financing arrangement which they could not be expected to understand or operate under representations that the banks could give them real practical know how, it is offensive for the banks to say that all advice was off once the agreements were signed. The law has recognised that a duty of care in tort may be imposed in cases of induced reliance69 and where one person has assumed responsibility to another for a matter, including during contractual performance.70 Both arguably apply here. In the circumstances of a bank selling a complicated financial product to an unsophisticated customer who lacks the skills to understand or manage it, when the bank has the required expertise and has held out that it will provide advice, it would be unjust to say that the duty to advise did not run on after the swap agreement was signed. This applies all the more so if the bank did offer advice during the loans, as the plaintiffs plead it did. It would still have to offer sound advice.
[94] While not accepting that they were under any duty to disclose, the banks do not say that if they were under a duty their earlier misrepresentations and breaches of duty would not have come to light. It is arguable for the plaintiffs that any financial adviser knowing the changing economic conditions and the falling interest rates would have seen that the interest swap was unsound and that the plaintiffs should get out of it. That would have exposed the banks’ misrepresentations and breaches of duty.
[95] The banks say that any concealment must be wilful. Before discovery it is not possible to rule on that definitively, but at this stage of the case wilful non-disclosure cannot be dismissed. Banks have clearly defined systems and procedures which are likely to be documented. If a bank has a policy of not giving advice to customers after loan agreements are signed, even if the customers have been misled, that may be wilful
69 Midland Bank Trust Co Ltd v Hett, Stubbs & Kemp [1979] Ch 384.
70 Henderson v Merrett Syndicates Ltd [1995] 2 AC 145 (HL).
non-disclosure. If the bank did give advice but deliberately refrained from warning the trustees about the interest swap agreement they had entered into, that could be wilful. The Commerce Commission investigation found that Westpac New Zealand had misled a number of customers on interest swap agreements. That may assist in showing systemic conduct including as to post-contract advice.
[96] It is not possible now to say exactly when Ms Gibson found out the facts to establish that she had causes of action against the banks, but it seems to be during the period of the Commerce Commission investigation into Westpac’s selling of interest swap agreements. It was arguably within six years of her statement of claim dated 30 September 2015 and of her amended statement of claim of 19 December 2016. For the banks to say that the proceeding is out of time even if time has been extended under s 28(b) requires a finding that in the absence of advice from the bank a reasonable person in Ms Gibson’s position would have found out earlier than she did. That question cannot be decided in a summary judgment application. It is another trial issue. For this case it is arguable that a reasonable person with Ms Gibson’s lack of experience in interest swap agreements would not have discovered all the required facts more than six years before the relevant pleadings.
[97] The case for an extension of time under s 28(b) has the required air of reality under Murray v Morel & Co Ltd. I have suggested an obligation to disclose under a duty of care in tort. There may be other ways of formulating a duty of disclosure, but for this decision it is not necessary to explore them all. The duty is to advise, which goes to what course the plaintiffs should follow, not just to give information. If a breach of a duty to advise on the appropriate course is found and it is in time, the damages may be more extensive than for acting on incorrect information.71
Outcome
[98] As time may arguably be extended under s 28(b) of the Limitation Act, the limitation position for each cause of action is now:
71 See [58] and [65] above.
(a)the Fair Trading Act cause of action is arguably within time under s 43A. Section 28 does not apply;
(b)the negligent misrepresentation claim is arguably within time for all losses if time is extended under s 28(b);
(c)the contractual representation claim on the guarantee is within time under s 4(3) of the Limitation Act. The other contractual representation claims are arguably within time if time is extended under s 28(b);
(d)the cause of action for breach of duty of care is arguably within time for damage whenever it occurred if time is extended under s 28(b);
(e)the Limitation Act does not apply to the claim for breach of fiduciary duty, but if limitation by analogy were to apply, it is arguably within time for all losses on an extension under s 28(b); and
(f)the claim against Westpac New Zealand Ltd for breach of contract is within time for breaches after 1 October 2009, and is arguably within time for earlier breaches if time is extended under s 28(b).
[99] That means that none of the causes of action can be removed on the banks’ application for strike out and summary judgment. The fact that the plaintiffs’ causes of action have survived the banks’ application means only that it has not been possible to decide the limitation defences summarily. Those defences are for trial.
[100] The plaintiffs are entitled to costs. They have succeeded. Costs on defendants’ unsuccessful applications are not decided the same way as for unsuccessful plaintiffs’ applications.72 Defendants are better able to assess the case and anticipate matters that plaintiffs may raise. The defendants could do so in this case. I see no injustice in the plaintiffs recovering costs on the application, even if they are ultimately unsuccessful.
72 Commercial Factors Ltd v Meltzer [2017] NZHC 30, [2017] NZCCLR 7; Commissioner of Inland Revenue v Robertson [2017] NZHC 31, (2017) 28 NZTC 23-000.
Both sides put in considerable preparation and must have spent much more time than is allowed under band B.
[101] Ahead of the next case management conference I ask counsel to confer as to discovery and further directions.
[102]I make these orders:
(a)the defendants’ summary judgment application is dismissed;
(b)the defendants’ strike out application is dismissed;
(c)the defendants are to pay the plaintiffs costs on the application. If the parties cannot agree, memoranda may be filed;
(d)the Registrar is to arrange a telephone case management conference for further directions. It need not be in a week when I shall be sitting in Whangarei; and
(e)leave is reserved to apply further.
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Associate Judge R M Bell
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