Securites Registry Limited and also suing in its capacity as the Trustee of the Securities Registry Trust and Securities Registry (No 2) Trust v Gomes

[2008] NZCA 567

IN THE COURT OF APPEAL OF NEW ZEALAND

CA650/2007
[2008] NZCA 567

BETWEENSECURITIES REGISTRY LIMITED AND ALSO SUING IN ITS CAPACITY AS THE TRUSTEE OF THE SECURITIES REGISTRY TRUST AND SECURITIES REGISTRY (NO 2) TRUST

Appellants

ANDVIRGINIA GOMES

Respondent

Hearing:14 October 2008

Court:William Young P, Robertson and Baragwanath JJ

Counsel:M C Black for Appellants

S M Hunter and N C Z Khouri for Respondent

Judgment:19 December 2008 at 11.30 a.m.

JUDGMENT OF THE COURT

A        THE APPEAL IS DISMISSED.

BTHE APPELLANT MUST PAY THE RESPONDENT COSTS FOR A STANDARD APPEAL ON A BAND B BASIS AND USUAL DISBURSEMENTS.

____________________________________________________________________

REASONS

Baragwanath J  [1]

William Young P (dissenting)  [44]

Robertson J  [67]

BARAGWANATH J

Background to appeal

[1]       This appeal from a judgment of Winkelmann J is based on a representation made by the respondent, Ms Gomes, to the appellant, Securities Register Ltd (SRL).

[2]       SRL had made a conditional offer to Tikitere Springs Estate Ltd, one of two companies controlled by Mr Barry Brill, to lend it $6 million for the development of a property at Rotorua.  The property comprised five lots including one (lot 3), on which a spa centre was to be built, which was subject to an agreement for its sale to another of Mr Brill’s companies, Pupuke Holdings Ltd, as trustee for the Pupuke Trust.  One of the conditions of SRL’s loan agreement with Tikitere was that:

[SRL] and its legal advisers are to receive confirmation that the deposit of $2,225,000 in respect of the Spa purchase by Pupuke Holdings Ltd has been paid.

[3]       At the time that Tikitere and Pupuke entered their agreement for sale and purchase, Tikitere owed Pupuke over $5 million.  Unknown to SRL, the companies agreed that the deposit would be paid by way of setoff against Tikitere’s debt to Pupuke.

[4]       Ms Gomes, who practised as a chartered accountant, was well familiar with the financial position of Mr Brill’s group, including Tikitere whose registered office was at her place of business.  At the request of Mr Brill, Ms Gomes executed and sent to SRL a letter which he had drafted.  It was dated 5 February 2001 and stated:

I act as the Accountant for Tikitere Springs Estate Limited and am able to confirm that the amount of $2,225,000 has been paid to the company by Pupuke Holdings Limited.  This is being held by the company as a deposit under an agreement to sell the Spa Centre to Pupuke Holdings Limited.

[5]       As an intended result of the letter, SRL treated the condition of its loan agreement as satisfied and on 21 February 2001 made the advance of $6 million to Tikitere.  Tikitere defaulted by failing to pay the principal due on 21 June 2001 and on 5 December 2002 went into liquidation.  SRL’s securities, which included a first mortgage over the Tikitere land, a debenture over the assets of SRL, and a personal guarantee by Mr Brill, realised a loss of over $7 million.

[6]       On discovering that the deposit had been “paid” by setoff rather than by cash SRL sued Ms Gomes for breach of an assumed duty of care and alternatively for negligent misstatement.  Mr Black conceded that a third claim, based on estoppel, added nothing to such claims.  A fourth claim, under the Fair Trading Act 1986, was met by a limitation plea. 

[7]       Winkelmann J held that SRL had failed to establish that the statement by Ms Gomes was inaccurate in any respect and dismissed the claim.  Nor, in her judgment, did any losses fall within the scope of the duty of care owed by Ms Gomes.  She held that the Fair Trading Act claim was time barred but in any event there was no misleading or deceptive conduct on the part of Ms Gomes.

[8]       SRL challenges each of the High Court’s conclusions.

The significance of the letter of 5 February 2001

[9]       The cause of action for negligent misstatement, recognised in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 (HL), turns on the nature of the relationship between plaintiff and defendant. In Lavarack v Woods of Colchester Ltd [1967] 1 QB 278 at 294 (CA) Diplock LJ stated:

… the law is concerned with legal obligations only … not with the expectations, however reasonable, of one [party] that the other will do something that he has assumed no obligation to do.

Legal obligation and thus liability under the present head depends on what the defendant has actually undertaken, whether expressly or by implication, and whether the undertaking has been honoured.  Here the obligation was to give an accurate response to the enquiry.

[10]     To understand the significance of the letter it is necessary to see it in the context of the relationship between SRL and Ms Gomes.  Since there is no dispute that she owed a duty of care to SRL, the question is whether she acted carelessly so as to cause it loss.  That requires focus upon what Ms Gomes knew or should reasonably have understood about the transaction and about SRL’s position.

[11]     Tikitere owned 52ha of land near Rotorua on which it proposed to develop a five star international hotel together with a conference centre and a spa complex.

[12]     Initial funding was provided by Pupuke, which was Mr Brill’s family trust.  Pupuke’s statement of financial position as at 31 March 2000 showed a loan to Tikitere of $5,145,677 which constituted almost the whole of Pupuke’s net assets of $5,574,861.  A loan from Mr Brill to Pupuke had been increased from some $1.5 million the previous year to $2.5 million.  Tikitere’s statement of financial position as at 31 July 2000 showed that the debt to Pupuke had increased from $5,145,677 as at 31 March 2000 to $5,264,745.  Tikitere’s net assets remained at just over $1.5 million.

[13]     A loan application dated 20 December 2000 recorded that Tikitere had recently bought the development property for $3.34 million and had spent $7.771 million on renovation and upgrading.  Lot 3 was to comprise a 22,000 square-foot spa with treatment rooms, swimming pools, fitness centre, clubhouse and accommodation, together with sporting facilities.  The application for “Loan 1” was for $6 million from 15 January 2001 for four months.  It recorded by way of “further developing the Tikitere property” (which was picked up in condition 12 of the subsequent loan offer) that:

Construction has commenced on the Spa Centre and Stage 1 (50 suites) of the resort.  The Spa is to be completed by 30 April.  Subject to achieving 40% pre-sales (24% at present) Stage 1 of the Hotel will aim for completion on 31 August.

[14]     The application recorded as part of the contemplated repayment on 15 May 2001 “$4,450,000 Pupuke Holdings purchase”.  It included copy of an agreement for sale and purchase of Lot 3, which Mr Brill had executed on behalf of Tikitere as vendor and Pupuke as purchaser.  It provided for a price of $4.45 million and a deposit of 50 per cent – $2.225 million – payable immediately upon execution of the agreement.  Settlement was to be made in cash within seven days of Certificate of Practical Completion being issued.

[15]     On 22 January 2001, Mr Lance of SRL made an internal note stating that stage 1 of the project was construction of the spa complex and completion of the first 50 suites of the hotel.  He recorded:

… a trust controlled by Barry Brill, Pupuke Holdings Ltd in its capacity as trustee of Pupuke trust, has agreed to purchase the spa complex from Tikitere Springs estate (a sale and purchase agreement has been signed) for $4,450,000 (market value).  SRL will require evidence that deposit has been paid providing comfort that Pupuke Holdings can meet its obligations under the S & P agreement.

(Emphasis added.)

He also noted the “envisaged takeout at the end of Loan 1” of the Pupuke Holdings purchase $4.45 million.  He added that:

Repayment is derived by the sale of spa to a related party therefore we need to be comfortable this transaction can proceed, thus the condition in respect of the payment of the deposit (50%).

Mr Brill had presented a statement of his own financial position as: uncommitted annual income $2.7 million; surplus of assets over liabilities $7.854 million.

[16]     Mr Lance recommended making the $6 million loan and on 1 February 2001 Mr Epps, SRL’s chief executive, wrote to Tikitere offering the $6 million on a four-month interest only basis.  The offer was subject to the special conditions:

[SRL] & its legal advisers are to receive confirmation that the deposit of $2,225,000.00 in respect of the Spa purchase by Pupuke Holdings Ltd has been paid.

[SRL] receiving and being satisfied with Pupuke Trusts financial accounts for the year end 31/03/00.

Condition 12 stated:

You are to apply the loan for the purposes of refinancing your existing mortgage(s) & further developing the Tikitere property as specified in your application for finance.

[17]     There was no evidence whether SRL did in fact receive Pupuke Trust’s financial accounts for the year ended 31 March 2000.  But in its absence, and given its requirement for accounts of both Tikitere and Pupuke contained in cll 51.10 and 21.1.4 of SRL’s formal security document ([19] and [20] below), the maxim that due process is assumed to have been followed (omnia praesumuntur rite esse acta) must apply in favour of Ms Gomes.

[18]     SRL’s offer was accepted.  The formal documentation contained a clause requiring Pupuke to pay Tikitere a deposit of $2.225 million.  Ms Gomes’ letter was sent by Tikitere’s solicitor to SRL and was accepted as satisfying the special conditions.  The $6 million loan was made accordingly.

[19]     The formal loan agreement was executed on 21 February 2001, 16 days after the date of Ms Gomes’ letter, by SRL as lender, Tikitere as borrower and Mr Brill as guarantor.  Prepared by SRL’s solicitors, it contained as “Representations, Warranties and Undertakings”:

5.1.10 Accounts.  Where the borrower is a company, its latest financial accounts … as delivered to the Lender:

(a) include those most recently prepared for the last period and as at the last date for which financial statements have been prepared;

…

[20]     It also contained:

21.      Special Conditions

21.1.As a precondition of the Lender advancing the Loan or any part of the Loan:

…

21.1.2The Borrower shall provide to the Lender a copy of the agreement for sale and purchase between the Borrower and Pupuke Holdings Limited (as trustee of the Pupuke Trust) (for the purposes of this clause 21, Pupuke) relating to the purchase by Pupuke of the spa complex to be developed by the Borrower on the Land (for the purposes of this clause 21, the Spa Development).  Such agreement for sale and purchase shall:

(a)provide for a purchase price of $4,450,000.00 to be payable in full upon settlement;

(b)provide for a settlement date which is prior to the Expiry Date;

(c)require Pupuke to pay to the Borrower a deposit of $2,225,000,00; and

(d)be conditional only upon the completion of the subdivision of that part of the Land on which the Spa Development is sited (and the Borrower warrants that the Borrower has taken all steps necessary to ensure that such subdivision is completed prior to the Expiry Date).

21.1.3The Borrower shall provide to the Lender evidence that the deposit of $2,225,000.00 under the agreement for sale and purchase relating to the Spa Development has been paid to the Borrower by Pupuke.

21.1.4The Borrower shall provide to the Lender financial accounts for the Pupuke Trust for the year ending 31 March 2000.  Such accounts shall be satisfactory to the Lender in its sole discretion.

21.2The Borrower acknowledges and agrees that the following sums are to be deducted from the Loan at draw down:

21.2.1  the Establishment Fee;

21.2.2a brokerage fee of $60,000.00 payable to Loan Plan 2000 Limited; and

21.2.3  four months pre-paid interest of $236,712.33

… 

21.4The Borrower shall keep the Lender fully informed of the Borrower’s progress with the Spa Development.  Failure to complete or sell the Spa Development prior to the Expiry Date shall be deemed an Event of Default …

21.5Notwithstanding that the Expiry Date may not have occurred, immediately upon settlement of the sale and purchase of the Spa Development to Pupuke the borrower shall apply the purchase price of $4,450,000.00 in reduction of the Loan.  Upon receipt of such sum, the Lender agrees to provide the Borrower with a discharge of its mortgage over that part of the Land on which the Spa Development is sited to enable the Spa Development and the relevant part of the Land to be transferred to Pupuke.

Mr Epps’ contention as to Ms Gomes’ obligation

[21]     Mr Epps deposed that SRL relied on the fact that the letter was from Tikitere’s accountant and confirmed that the deposit had actually “been paid” and was “being held”.  He claimed that the reason for the requirement of payment was to confirm that “actual funds” or money had been provided for the deposit so that “equity” had genuinely been introduced by Pupuke.

Was there a “payment” by Pupuke to Tikitere?

[22]     I am satisfied that there was a “payment” by Pupuke to Tikitere as represented by Ms Gomes and as the Judge found.

[23]     I have noted that the balance sheet for Pupuke Trust dated 31 March 2000 showed as a current asset a debt of $5,145,677 owed by Tikitere.  Mr PD Lane, chartered accountant, deposed that, according to the documents discovered by Tikitere, it was only when the 2001 financial statements of Tikitere were prepared that the debt owed by Tikitere to Pupuke was reclassified as a deposit by Pupuke.  Ms Gomes deposed that the journal entries referred to by Mr Lane were a partial record printed from information remaining on Ms Gomes’ system at the time of discovery and that journals which she created for the purpose of preparing Tikitere’s financial statements, reflecting payment of the deposit, were sent to the liquidator in 2002 which is why the payment is recorded in the annual financial statements.  Those journals are no longer available. 

[24]     The Judge accepted the evidence of Mr Brill that the setoff was effected and effective as from the date of signing the agreement.  She found credible the evidence of Ms Gomes that, since the setoff is reflected in the year end accounts, she must have processed the journals.  There is no basis for challenging such findings.

[25]     Ms Gomes expressed the opinion that the statements in her letter were entirely accurate.  $2.225 million had been paid to Tikitere by Pupuke as corporate trustee of the Pupuke Trust.  The relevant funds were, she said, “being held by Tikitere as a deposit on the spa centre”.

[26]     SRL did not stipulate for more than payment by Pupuke to Tikitere.  I agree with the Judge that there was payment by Pupuke of the $2.225 million.  The purpose of the payment was to discharge Pupuke’s obligation to provide Tikitere with the agreed deposit.  That was the legal effect of the setoff.  As the Judge observed at [31], the word “payment” can cover many ways of discharging obligations: White v Elmdene Estates Ltd [1960] 1 QB 1 at 16 (CA) (appeal dismissed in Elmdene Estates Ltd [1960] 1 AC 528 (HL)) applied in Re Mataura Motors Ltd [1981] 1 NZLR 289 at 292 (CA). In Payment Obligations and Financial Transactions (1983) at 11 Professor Sir Roy Goode has said:

Payment in a legal sense means … any act offered and accepted in performance of a money obligation.

It follows that payment may be effected by setoff, as occurred in MS Fashions Ltd v Bank of Credit and Commerce International SA (No 2) [1993] Ch 425 (CA).

Was there breach of obligation in stating that the payment was being held as a deposit?

[27]     The real issue in the case concerns not the making of payment to Tikitere but the fact that, as well as stating:

… the amount of $2,225,000 has been paid to the company by Pupuke Holdings Limited

Ms Gomes added:

This is being held by the company as a deposit under an agreement to sell the Spa Centre to Pupuke Holdings Limited.

The question is whether that constituted a representation by Ms Gomes that the deposit would be held frozen in some manner for some time and if so for what period and on what terms.

[28]     Read in isolation the statement “This is being held …” could mean “this is being held and will continue to be held undisbursed”, perhaps until the repayment of the SRL loan four months later. 

[29]     But any verbal expression is to be construed not in isolation but within the context known to the affected parties; what Lord Wilberforce termed “the matrix of fact”: see Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 at 82 (CA).

[30]     The essential problem for SRL is that the agreement for sale and purchase between Tikitere and Pupuke, which SRL had seen, contained no term that the deposit would be held undisbursed.  Clause 2 stated:

2.0 Deposit

2.1 The purchaser [Pupuke] shall pay the deposit to the vendor [Tikitere] or the vendor’s agent immediately upon execution of this agreement by both parties and /or at such other time as is specified in this agreement time being of the essence as to each such time.

2.2 The vendor shall not be entitled to cancel this agreement for non-payment of the deposit unless the vendor has first given to the purchaser three working days’ notice of intention to cancel and the purchaser has failed within that time to remedy the default.  No notice of cancellation shall be effective if the deposit has been paid before the notice of cancellation is served.

2.3 The deposit shall be in part payment of the purchase price.

2.4 Where this agreement is entered into subject to a condition expressed in this agreement, the person to whom the deposit is paid shall hold it as a stakeholder until this agreement becomes unconditional or is avoided for non-fulfilment of any condition under subclause 8.7(5)

[31]     Had there been a “condition under subclause 8.7(5)” there would have been an obligation under clause 2.4 to hold the deposit as stakeholder until the condition was fulfilled.  But there were no conditions.  So the factual matrix surrounding Ms Gomes’ letter contained the fact that Tikitere as vendor was under no obligation to hold and not use the deposit in accordance with what Mr Brill as its director considered to be the best interests of Tikitere (Companies Act 1993, s 131).

[32]     So for the appeal to succeed SRL must persuade us that it relied on Ms Gomes’ letter as altering and increasing the obligation owed by Tikitere to either Pupuke or to SRL, by holding the deposit pending, presumably, the repayment of Tikitere’s loan four months later.

[33]     A further part of the factual matrix is that SRL’s loan was of the full $6 million, less:

·company establishment fee     $120,000

·loan plan fee   $60,000

·pre-paid interest   $236,712.33

$416,712.33

[34]     To impute to the parties an intention to freeze a further $2.225 million would require greater specificity than the allusion in Ms Gomes’ letter to holding the money as a deposit, when they had not contracted that the deposit would be held unused in Titikere’s cashflow.

[35]     The verb “hold” has a range of senses.  Among them is the Oxford English Dictionary’s:

To have or keep as one's own absolutely or temporarily; to own, have as property; to be the owner, possessor, or tenant of; to be in possession or enjoyment of.

(2ed 1989.)

[36]     Another sense is “retain”, which would assist SRL’s argument.  But there is nothing in the context that would suggest that a reasonable person in the position of SRL would have taken Ms Gomes to be using the latter rather than the former sense. 

[37]     Indeed, as counsel for the respondent submitted, SRL itself did not expect the deposit to be “preserved as an asset of Tikitere”.  It did not require that in the loan documents.  It did not refer to any such obligation in its internal assessment of its security position, either in relation to the initial advance or in relation to subsequent loan offers in June, August and December 2001.  SRL was aware from Pupuke’s 31 March 2000 accounts (which I take to have been provided to it as a condition of the loan) that Pupuke’s only significant asset was its loan to Tikitere.  It was also aware that the sale and purchase agreement specifically required the settlement balance to be paid in cash but had no such requirement in relation to the deposit.  It did not express any surprise when it was informed that the deposit had been spent on the project.

[38]     Ms Gomes was entitled to assume that SRL was familiar with its own letter of offer.  It is convenient to repeat condition 12 which  stipulated:

You are to apply the loan for the purposes of refinancing your existing mortgage(s) & further developing the Tikitere property as specified in your application for finance.

That clause is inconsistent with any obligation of Tikitere to hold the loan undisbursed.

[39]     It is true that cl 21.5 of the formal loan agreement of 21 February stated that:

… immediately upon settlement of the sale and purchase of the Spa Development to Pupuke the borrower shall apply the purchase price of $4,450,000.00 in reduction of the Loan.

[40]     But there is no reason to assume that on 5 February Ms Gomes knew that SRL would be including such special condition, which had not previously emerged, in its formal loan document.  It is therefore unnecessary to embark on construction of that clause, which, if it did impose an obligation on Tikitere to hold the money undisbursed, is inconsistent both with condition 12 of the offer and with cl 21.4 of the loan agreement.

[41]     I conclude that, while it is difficult to find commercial justification for the transaction between Tikitere and Pupuke, and the comfort SRL sought from the special condition of the loan offer for payment of the deposit has proved illusory, the responsibility for SRL’s losses does not lie at the door of Ms Gomes whose letter did not in the circumstances contain a misrepresentation.

[42]     I would therefore endorse Winkelmann J’s conclusion that there was neither breach of an assumed duty of care, negligent misstatement, nor misleading or deceptive conduct on the part of Ms Gomes.  Other issues do not require decision.

Decision

[43]     In accordance with the opinion of the majority the appeal is dismissed.  SRL must pay Ms Gomes’ costs for a standard appeal on a band B basis and usual disbursements.

WILLIAM YOUNG P

[44]     I have had difficulty understanding the commercial context in which the key events occurred.

[45]     The rationale for the agreement for sale and purchase between Tikitere and Pupuke is far from obvious.  Each was, for practical purposes, an alter ego of Mr Brill.  This is not to say that their independent legal identities should be confused.  There no doubt were good commercial reasons for their separate existence and operations.  But for all that, there is no obvious reason why Pupuke should have bought the spa complex.  Further, in circumstances where “payment” of the deposit was always going to be effected by journal entry and setoff, it is difficult to see what, in practical terms, changed as a result of the agreement being entered into. 

[46]     The terms of the agreement are also unusual.  The agreement was, in substance, “conditional” upon the completion of the spa complex.  I say this not because such a condition is specified in the agreement but rather because settlement was not required until a certificate of practical completion was available.  On an arm’s length transaction of this character, a purchaser would be unlikely to agree to pay a deposit of 50 per cent of the purchase price and even less likely to do so in the absence of a requirement for the deposit to be held by a stakeholder. 

[47]     All in all, it rather appears that the agreement was intended to provide some comfort to a lender.

[48]     It is clear that the agreement did, indeed, provide some comfort for SRL.  Their exposure analyses up to June 2001 proceeded on the basis that their takeout was to come, in large measure, from settlement of the sale of the spa complex which they anticipated would produce $4.45 million.  Their belief in this regard was no doubt a function of the way in which the loan application (prepared by Loan Plan) was expressed. 

[49]     The sale to Pupuke was the major plank of SRL’s exit strategy after the completion of stage 1 of the development.  SRL staff believed they were only committing to a short term loan, which would effectively be taken over by another lender when Pupuke had to raise funds to purchase the spa.  They were therefore keen to ensure that Pupuke would be able to raise these funds and, on Mr Lance’s evidence, payment of the deposit provided comfort that Pupuke would be able to meet its obligations on settlement.  Mr Epps’ position was that the deposit introduced funds into the transaction that would ultimately help to repay SRL.  To some extent, this was confirmed by Mr Brill in his evidence where he said he thought the purpose of SRL’s requirement was “to ensure that Tikitere had some real money of its own, rather than perhaps revaluations or accounting or loans from other parties and this was a multi million dollar injection into Tikitere which they seemed to regard as being material”.

[50]     Although SRL treated the $4.45 million as available even on a “worst case scenario”, the legal position was that Tikitere could only call upon Pupuke to settle if the spa complex was completed.  Realistically, the “worst case scenario” was along the lines of what emerged, with the spa complex (along with the rest of the development) never being completed.

[51]     Also unclear is why the SRL loan staff reached the position of anticipating that $4.45 million would be paid on settlement.  They knew that the loan agreement provided for a deposit of $2.225 million.  Had that been paid in cash, there was no requirement under the sale and purchase agreement for Tikitere to hold the deposit (because the contract was not, in terms, conditional).  SRL never sought specific information (or undertakings) as to the physical existence and ring-fencing of the $2.225 million.  Conceivably the SRL staff assumed that the corollary of the settlement being subject to practical completion (and in this sense “conditional”), would have been a requirement for the deposit to be separately held (perhaps by a stakeholder).

[52]     Thinking along these lines (which is at least suggested, if not made explicit, in some of the oral evidence at trial) might be thought to be associated with a recognition that settlement might not occur and thus inconsistent with the “worst case scenario” assessment that $4.45 million was going to be available.  As well, if the $2.225 million had been held by a stakeholder pursuant to an orthodox stakeholding arrangement, non-completion of the agreement by reason of Tikitere’s default in completing the spa complex would presumably have resulted in the deposit being returned to the purchaser, Pupuke.

[53]     SRL witnesses asserted, and this is consistent with the contemporaneous documentation, that they believed that $2.225 million had been inserted into the development project by Pupuke.  It is, however, as Mr Hunter stressed, difficult to see why Mr Brill would have organised his affairs in that way.  If he, via Pupuke, had been able to put up $2.225 million in cash by way of the deposit, he would presumably have sought only $3.775 million from SRL instead of the $6 million that was borrowed.

[54]     All of that said, it is clear that SRL staff got it into their heads that settlement of the sale and purchase was practically inevitable (so that the funds produced would thus be available even on a “worst case scenario”) and that on settlement the total purchase price (that is $4.45 million) would be paid by Tikitere to SRL.  The latter proposition is made crystal clear by clause 21.5 (above [20]) of the loan agreement (not entered into until 21 February 2001) but was at least implicit (or foreshadowed) by the loan application, the internal SRL analysis of the proposal and the initial loan offer.

[55]     The very limited contemporaneous documentation, the rather formal written evidence prepared on behalf of the SRL witnesses and the very limited extent to which they were cross-examined makes the precise reasoning process of the SRL personnel difficult to reconstruct.  Clearly, however, the words “paid” and “held”, which Mr Brill devised and which were adopted, at his suggestion, by Ms Gomes in her letter of 2 February 2001, significantly contributed to SRL’s mistaken assumptions.

[56]     When Ms Gomes wrote her letter, she knew that it was required as part and parcel of the loan process.  So she knew that there was a particular commercial context.  It is that context rather than a “words and phrases legally defined” approach which is of controlling significance in terms of what her representation meant (or could fairly be taken as meaning).  The context included:

(a)The proposition, advanced by Tikitere (through its agent Loan Plan) to SRL, that SRL’s takeout would, as to $4.45 million, come from the purchase; and

(b)The particular term of the loan offer that required her certificate. 

Against that background, the letter she wrote naturally bore the meaning which was attributed to it by SRL, namely that $2.225 million in cash had been paid and was held (ie was represented by a particular asset and most likely a bank deposit in that amount).  Read in this light I consider that the letter was simply untrue.

[57]     This should not be taken as an indication that Ms Gomes set out to mislead SRL.  But she knew that her independent certification was being called for and would be relied upon by SRL.  Even on what she knew, describing the deposit as having been “paid” and “held” was a bad fit for what had happened.  If Pupuke had paid the deposit in cash and Tikitere had then used that money either to reduce debt or acquire assets, it would plainly have been an abuse of language (and untrue) to say that the deposit was still “held”.  In the overall context of the case she was extremely unwise to sign the letter in this form without making appropriate inquiries as to the context in which it was to be used.  I have no doubt that she was negligent.

[58]     More difficult from my point of view is whether her negligence was causative of loss.

[59]     It is important to note that the initial loan offer was so conditional as, in effect, to be indicative only.  Mr Brill, by his own evidence, can be taken to have realised that SRL was looking for more substantiality to the deposit than some book entries.  Although the evidence of the SRL witnesses was not as specific on this point as might be expected, I think it more likely than not that the advance would not have been made if the true position as to the deposit had been revealed. I think it follows from this that causation in fact, on a “but for” basis, has been established.  But that is not enough; there must be a reasonable nexus between the inaccuracy of the information provided and the loss suffered, see South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191 (HL). This requirement for such nexus may either serve to limit the extent to which damages are recoverable or result in no loss being able to be established.

[60]     SRL has, in substance, recognised this principle by limiting its claim to damages of $2.225 million (on the basis that this is what the letter from Ms Gomes related to).  The difficulty, however, is that if the facts were as SRL assumed (which I will treat as the counter-factual) and $2.225 million had been paid and was held as at 2 February 2001, SRL may not necessarily have been any better off when it came to realise on the security, as I will explain.

[61]     This counter factual assessment is complicated by the muddled thinking that affected SRL’s assumptions.  For instance, if the money had been paid but was held pursuant to an orthodox stakeholder arrangement, it would have been required to be paid back to Pupuke in the event that settlement could not be achieved because the spa complex was not completed.  On the other hand, if the deposit had been paid then, under the terms of the sale and purchase agreement as executed, that money became the property of Tikitere which could, as between it and Pupuke, have spent the money as it chose.  So on the counter-factual there is the possibility that even if Tikitere had $2.225 million as at 2 February 2001, it might have dissipated that money by the time the loan from SRL was to be repaid.

[62]     Recognising, as I do, the conceptual difficulties involved, I think that a pragmatic approach has to be taken and there is a limit to the hypothesising which is appropriate.  If Tikitere had received $2.225 million and was holding it as a discrete sum, that money would, unless dissipated, have been subject to the securities taken by SRL and would have been available when the loan fell due for repayment.  For the period between 21 February 2001 and 21 June 2001 (when the loan fell due for repayment) the effect of clause 21.5 of the agreement on my interpretation would have required such discrete sum not to be applied otherwise than for payment to SRL.  On that basis it is reasonable to treat SRL as worse off by $2.225 million by reason of the misrepresentation than it would have been if the representation had been true.  In saying this I recognise that there is something of a timing issue in that Ms Gomes’ letter referred to the situation as at 2 February 2001 and clause 21.5 of the loan agreement did not come into effect until 21 February 2001.  I do not, however, regard the possibility of dissipation between those dates as controlling given the undertaking which Tikitere gave in the loan agreement that there had been no material change in circumstance in relation to any statements earlier made (cl 5.1.11).

[63]     To put this in very simple terms:

(a)When Ms Gomes said the deposit was paid and held she represented to SRL that the sum of $2.225 million had been paid by Pupuke to Tikitere and existed as an identifiable asset as at 2 February 2001;

(b)This was untrue;

(c)Ms Gomes acted negligently when she wrote the letter;

(d)As a result of her negligent misrepresentation, SRL entered into the loan agreement under which it lost in excess of $7 million; and

(e)Having therefore established causation on a but for basis, causation in law is also established because on my assessment of the counter-factual (ie the position that would have been obtained had the representation been true) Tikitere would have had an asset of $2.225 million which would have been available to SRL when Tikitere defaulted.

[64]     What makes me uncomfortable about the conclusion which follows (namely that SRL was entitled to recover $2.225 million in damages together with interest and costs against Ms Gomes) is that it does not make any allowance for the very large contribution that SRL made to its own losses.  The facts of the case might be thought to leave considerable scope for a finding of contributory negligence.  I have therefore been tempted either to make an allowance for contributory negligence or alternatively to allow Ms Gomes an opportunity to argue for contributory negligence.

[65]     In the end, I have concluded this would not be appropriate.  Contributory negligence was not pleaded and was thus not focussed on as a defence at trial.  The written evidence of the SRL witnesses was comparatively brief and their cross-examination limited, to say the least.  If specifically challenged as to the basis for the beliefs which influenced the lending decisions made, they may conceivably have come up with credible and cogent answers.  The case for a post judgment amendment is thus far less strong than in Brown v Heathcote County Council [1987] 1 NZLR 720 (PC). In that case there were two defendants who claimed for damages, only one of which pleaded contributory negligence. The defendant that had pleaded contributory negligence was held to be not liable. After judgment, the unsuccessful defendant sought to adopt the successful defendant’s pleading of contributory negligence (together with findings made by Judge on that point) but failed in the High Court, Court of Appeal and Privy Council.

[66]     Accordingly, I would allow the appeal and enter judgment for the appellant in the sum of $2.225 million together with interest at judicature rates from 21 June 2001.

ROBERTSON J

[67]     I have had the opportunity to consider the judgments of William Young P and Baragwanath J.

[68]     Like the President, I am sceptical that only a small part of the substance of this transaction has been provided in evidence.

[69]     The arrangement between Tikitere Springs Estate and Pupuke Holdings appears to have been essentially uncommercial.  The loan made by SRL to Tikitere was to be no more than a very temporary financing arrangement.

[70]     There is a disconnect between Tikitere’s obligation as stated in SRL’s loan agreement with SRL on the one hand, and the letter prepared by Mr Brill (who controlled both Tikitere and Pupuke) and executed at his request by Ms Gomes on the other.  The SRL loan agreement required simply  that:

[SRL] and its legal advisers are to receive confirmation that the deposit of $2,225,000 in respect of the Spa purchase by Pupuke Holdings Ltd has been paid.

The letter prepared by Mr Brill for Ms Gomes provided:

I act as the Accountant for Tikitere Springs Estate Limited and am able to confirm that the amount of $2,225,000 has been paid to the company by Pupuke Holdings Limited.  This is being held by the company as a deposit under an agreement to sell the Spa Centre to Pupuke Holdings Limited.

[71]     Setting aside the minutiae and linguistic distinctions, SRL’s case is that it advanced to Tikitere $6 million on the basis that Pupuke had paid a deposit of $2.225 million, and that the deposit was being held by Tikitere.  At first blush, that is an improbable proposition.

[72]     It is common ground that the $6 million was needed for the Tikitere development, and was essential for the sale and purchase of the spa complex.

[73]     Given the relationship between the vendor, Tikitere and the purchaser, Pupuke, I have difficulty in understanding why Tikitere would borrow $6 million from a third party (SRL) if there had to be $2.225 million, available as ready cash, in a deposit which was just going to be “held”.  Both Tikitere and Pupuke were, in real terms, alter egos of Mr Brill.  That makes it improbable both that one of those companies would provide ready money to the other and “hold” it, and that a third party creditor would be sought out unless fresh credit, rather than setoff, was required. 

[74]     My puzzlement is increased as the loan agreement itself made no mention of the sum being “held” once it was received.  Setting aside Ms Gomes’ letter, there is nothing to indicate that either of the parties to the financing arrangement envisaged that the deposit sum would be sequestered as discrete collateral.

[75]     The concept of the deposit being “held” was introduced by the letter dictated by Mr Brill and signed by Ms Gomes.  That letter was not part of the loan contract, and there is no persuasive evidence of its incorporation into that contract.

[76]     Doubtless, if taken in isolation, Ms Gomes’ letter contains an error.  Had Ms Gomes enquired, she would have discovered that the deposit was not being “held” as a separate and accessible sum.  There was merely a book entry, recording that the deposit sum had been transferred, and there was no intention that the money should be held. 

[77]     The evidence does not include any satisfactory explanation as to why the money was to be held.  All that is available to us, and all that has been conjectured, is that the deposit sum, if held, would be available to Tikitere as a reserve to repay SRL.

[78]     Although it was contended that SRL sought, as a condition of its loan to Tikitere, an actual injection of fresh money it did not in terms require that to occur.  Like Baragwanath J I am satisfied that the transaction which took place between Tikitere and Pupuke (which amounted to a setoff of part of Pupuke’s debt to Tikitere) was, in law, a payment.  Unless the loan contract between SRL and Tiktere precluded an accounting exercise, then a setoff such as that which took place was a legitimate satisfaction of Tikitere’s obligation to pay a deposit.

[79]     The issue before us is how far beyond the words of the loan contract the Court is entitled to enquire, and whether it is appropriate to examine what SRL, as the recipient of Ms Gomes’ letter, could reasonably have understood her words to have meant.  SRL had to establish that it relied upon the word “held”.  Since the word “held” appeared for the first time in Ms Gomes’ letter and not in any of the preceding contractual documentation, it is difficult to accept that the contractual relationship was premised upon the deposit being held as a key condition.

[80]     There is no evidence that the appellants required that the deposit be held.  That is not altered simply because Ms Gomes, in a letter subsequent to the loan contract, stated that it was in fact “held”.  There is no evidence that SRL granted Tikitere the loan on an understanding that the deposit would be held, or that SRL subsequently acknowledged and relied upon Ms Gomes’ representation that the deposit sum was paid and held.  The evidence does not establish that, at any juncture, SRL proceeded on the basis that the money was being held, as opposed simply to being paid. 

[81]     Accordingly I am of the view that SRL cannot succeed in its claim and that the appeal should be dismissed.

Solicitors:
Craig Griffin & Lord, Solicitors, Auckland for Appellants
Gilbert Walker, Solicitors, Auckland for Respondent