Sovereign Services Limited v McEwen
[2013] NZHC 2892
•1 November 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-2667 [2013] NZHC 2892
UNDER Part 12 of the High Court Rules IN THE MATTER
of an application for summary judgment
BETWEEN
SOVEREIGN SERVICES LIMITED Plaintiff
AND
DAVID ANDREW McEWEN Defendant
Hearing: 15 October 2013 Counsel:
J C Caird and T K Cunningham-Adams for Plaintiff
N A Farrands for DefendantJudgment:
1 November 2013
JUDGMENT OF GODDARD J
This judgment was delivered by me on 1 November 2013 at 3.00 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Simpson Grierson, Auckland for Plaintiff
Morrison Kent, Auckland for Defendant
SOVEREIGN SERVICES LIMITED v McEWEN [2013] NZHC 2892 [1 November 2013]
[1] Sovereign Services Limited (Sovereign) seeks summary judgment against Mr McEwen in the following terms for amounts due under a guarantee and indemnity dated 6 May 2002:
(a) the debit balance in commission account (Company Account) plus interest at the fringe benefit rate of 5.9 per cent per annum until the date of payment;
(b)the debit balance in commission account (Associate Account) plus interest at the fringe benefit rate of 5.9 per cent per annum until the date of payment;
(c) interest on the guaranteed indebtedness, being the total sum owed by Mr McEwen under the guarantee, at the rate of 10 per cent per annum until the date of payment; and
(d) costs on a solicitor/client basis and disbursements.
Background facts
[2] Sovereign provides financial services which include insurance and home loans. These services are sold through independent contractors known as financial advisers.
[3] In 2002, Sovereign appointed McEwen Financial Services Limited (the Company) as an independent contractor to sell Sovereign’s home loan, investment, and insurance services. The terms of the Company’s appointment with Sovereign were set out in a Distribution Financial Adviser Agreement dated 6 May 2002 (the Principal Agreement). Under the Principal Agreement, Sovereign set up a commission account in the Company’s name. Any commission earned by the Company on the financial services it sold was credited to the Company Account. Under the Principal Agreement, Sovereign required a personal guarantee, which in the Company’s case was provided by Mr McEwen as its director.
[4] The operative clauses of the Principal Agreement for the purposes of this proceeding are set out in the following paragraphs.
[5] Clause 16 provided as follows:
16. Commission
we can change the terms and rates of any of the Schedules (excluding the Schedule of Split Arrangements) at any time on written notice to you. See clause 40;
we can debit your Commission Account in accordance with the Schedules of Commission Debits and with any other amounts you owe us (whether under this Agreement or otherwise);
we have the right to charge interest at the Fringe Benefit Interest Rate calculated on a daily basis from time to time on any debit balance in your Commission Account;
to immediately pay to us any debit balance in your Commission
Account if we request you to do so in writing;
if we take debt recovery action against you, we can recover the costs of this action (including our legal fees from you).
...
[6] Clause 22 relating to proposals and applications inter alia provided that the financial adviser will undertake:
notto submit any application or proposal to us which you believe contains false or misleading information;
[7] Under cl 26, providing for associate financial advisers, the following terms are set out:
26. Associates
youare responsible for and accept liability for the conduct, representations and actions of any Associates you may have;
youare responsible for any amounts which your Associates (if any) may owe us under their Associate Financial Adviser Agreement with us;
...
to indemnify us in accordance with clause 33 in respect of your
Associates (if any);
...
[8] Clause 33 is the indemnity clause. It required the financial adviser:
to indemnify us against all damages, liabilities and expenses (including legal fees on a solicitor/client basis) which we may incur as a direct or indirect result of:
- a breach by you of this Agreement;
- a breach by your Associates (if any) of their Associate Financial
Adviser Agreement;
[9] Under the Deed of Guarantee and Indemnity required by Sovereign on the entry into the Principal Agreement, Mr McEwen, as adviser to Sovereign under the Principal Agreement, acknowledged that Sovereign had only agreed to enter into the Principal Agreement because he, as guarantor, had agreed to enter into the Deed of Guarantee and of Indemnity. Further, that he, Mr McEwen:
Unconditionally and irrevocably guarantees to Sovereign the due payment by the [Company] to Sovereign of all moneys the [Company] has agreed to pay under the [Principal] Agreement and the performance of all the [Company’s] other obligations under the [Principal] Agreement. Such moneys and obligations being “the Guaranteed Indebtedness” and the Guarantor will pay the Guaranteed Indebtedness to Sovereign if part or all of it is not paid when due; and
As an independent obligation, will indemnify Sovereign on demand against all claims, proceedings, expenses (including legal fees on a solicitor/client basis) costs, losses and obligations made against or incurred by Sovereign as a direct result of the [Company] breaching the [Principal] Agreement including failure to pay all of the Guaranteed Indebtedness when due.
[10] In 2008, Mr Eric Chuah, who was employed by the Company as a broker, approached Sovereign about becoming a financial adviser. It was agreed that Mr Chuah, who was relatively inexperienced but apparently demonstrating considerable talent, would sell Sovereign Financial Services on the Company’s behalf as an associate adviser. Accordingly, an Associate Agreement was entered into, permitting Mr Chuah to sell Sovereign Financial Services on the Company’s
behalf and a commission account in Mr Chuah’s name was set up as the Associate
Account.
[11] Under the Associate Agreement, Mr McEwen was the named Principal who signed on behalf of the Company as its Director.
[12] Mr Chuah gave every appearance of a stellar performance in the field, earning a number of commissions of which the Company and thus Mr McEwen were percentage beneficiaries. Mr Chuah’s share of the commissions he earned were paid into his Associate Account and the Company’s percentage of those commissions was paid into the Company Account. The Company received 15% of all Mr Chuah’s basic initial commission, 100% of his renewal commission and 100% of quality booster bonuses.
[13] By September 2009, however, Sovereign discovered that Mr Chuah (and consequentially the Company) had received commissions for policies issued on insurance applications submitted by Mr Chuah and underwritten by Sovereign that were not authentic. As I understood the evidence, Mr Chuah had submitted a number of policy applications for policy holders who were fictitious.
[14] On 17 December 2009, Sovereign obtained a default judgment against Mr Chuah for the commission paid to him; and on 23 April 2010 obtained summary judgment against Mr Chuah for the portion of his commission paid to the Company.
[15] On 15 September 2010, Mr Chuah was adjudicated bankrupt. Sovereign received no distribution in his bankruptcy.
[16] On 25 February 2010, Sovereign made demand on the Company under the Principal Agreement for payment of the debit balances in both the Commission Account and the Associate Account and for the costs incurred in the empty judgments obtained against Mr Chuah.
[17] On 28 June 2010, the Company was placed into liquidation and it was struck off the Register on 18 April 2012.
[18] On 17 May 2013, Sovereign filed this application for summary judgment against Mr McEwen as the ‘last man standing’. The application relies on the guarantee and indemnity signed by Mr McEwen under the Principal Agreement, and is based on his liability under the guarantee as if he were the sole principal and not merely a surety, and on his acceptance of liability for the conduct, representations and actions of Mr Chuah as the Company’s associate adviser under the Associate Agreement.
[19] The demand made is in the sum of $397,598.83 (including costs and interest). This includes the amounts defrauded and received directly by Mr Chuah and commission received by the Company as the result of Mr Chuah’s false insurance applications, plus costs incurred and interest. It also includes amounts claimed as commission claw-backs for policies that were cancelled or lapsed due to non-payment of premiums. Schedules of all credits and debits in the Company Account and the Associate Account have been put before the Court in evidence.
Grounds of opposition
[20] Mr McEwen opposes the application for summary judgment on the following four grounds:
(i) that the scope of the guarantee does not cover fraud by a third party;
(ii)that the contractual arrangements between Sovereign and the Company included an implied term that it was a condition of the Company’s liability to Sovereign that Sovereign would take reasonable care or reasonable steps to vet or check applications for insurance by the Company’s associates;
(iii)an equitable set-off whereby the Company would be entitled to cross-claim against Sovereign for breach of the implied term; and Mr McEwen entitled to set off the Company’s cross claim against his liability to pay the further debit balance in the Associate Account and part of the Company Account, and;
(iv)a challenge to the quantum claimed by Sovereign, as based on insufficient or a lack of comprehensible or admissible evidence filed to prove the amount
claimed as owing by the Company. This in reality relates only to $94,000 in the Company Account.
[21] The primary issue in opposition is the first ground of opposition: that of the scope of the guarantee and whether it covers money obtained by fraud.
[22] There is a distinct overlap between the second and third grounds of opposition, as the third ground is dependent on a favourable finding on the second ground. That is, there can only be a set-off in equity if the Court first finds the implied term contended for.
Argument in support of opposition
[23] Dealing with the primary ground of opposition first, Mr Farrands correctly submitted that the extent of a person’s liability under a guarantee will depend on the nature and terms of the guarantee. It is a question of construction in each case.
[24] The argument that the guarantee and indemnity does not extend to cover loss caused by the fraud of a third party (an associate in this case), relies on a construction requiring that contingency to be expressly excluded. In arguing this, Mr Farrands sought to distinguish a case cited by Mr Caird in support of Sovereign’s claim that the contingency of fraud should be construed as covered by the terms of the guarantee in this case.
[25] The cited case, Moody and another v Condor Insurance Ltd and another,1 concerned a defendant company in the business of guaranteeing corporate risk guarantees. The issue in that case was the obligations that the guarantee in question was intended to fulfil and what the parties to the instrument set out to do by it. The following passages from the judgment of Park J, in relation to liability by the guarantor to a third party creditor arising from fraud by the debtor, are the relevant extracts:
[38] In my judgment it is quite wrong, and inconsistent with the inherent nature of a guarantee, that the guarantor should be freed from liability to the third party creditor if the guarantor can, after the event, establish that he was
1 Moody and another v Condor Insurance Ltd and another [2006] 1 All ER 934.
deceived by the debtor ...... when he agreed to give the guarantee. Of course the guarantor is assumed to be wholly innocent of any form of dishonesty or impropriety, but it must also be assumed for the purpose of evaluating the argument that so is the third party creditor. I have to postulate a case where either an innocent creditor (here Mr Moody and Mr Miller) or an innocent guarantor (here Condor) must suffer from the dishonesty perpetrated by a principal debtor (here Group, making the assumption, which I do for the sake of argument but no more, that there was dishonesty on the party of Group and Mr Dowd). Which of the two innocent parties should bear the risk? The answer must surely be, unless the contract of guarantee says otherwise, the guarantor.
[39] ... Whether Condor did those things or not, it seems to me to be quite wrong that, if it guarantees to an innocent third party a liability of another person, and if the third party would not have been prepared to give credit to the other person without the guarantee, it can repudiate its liability to the innocent third party if the other person turns out to have been a rogue. That was surely one of the risks for which Condor was paid when it agreed to accept the guarantee liability.
[40] Of course, if a guarantor is willing to accept the risk that a debtor may be or may become insolvent, but is not prepared to accept the risk that a debtor may be a fraudster, the guarantor can seek to have included in the contract of guarantee a provision which excludes liability if there has been any fraud on the part of the debtor. It will then be up to the third party to decide whether he is willing to go ahead and allow credit to the debtor on the basis of a guarantee which is restricted in that way. But if the guarantor does not exclude loss caused by fraud from the risks which he or it is prepared to cover (and Condor did not), then, if the debtor defaults on the liability to the creditor, in my opinion the guarantor is liable on his or its guarantee whatever may have been the cause of the default.
[26] Mr Farrands sought to distinguish the decision in Moody v Condor because the specialist nature of the first defendant’s business in that case was corporate risk guarantees.
[27] In the circumstances of the present case, Mr Farrands submitted that Sovereign cannot be seen as an “innocent creditor” because Sovereign arguably was at fault in failing to take reasonable steps to prevent the frauds (a reference to the second and third grounds of opposition).
[28] Returning to the construction of the guarantee in question, Mr Farrands cited a number of authorities and in particular the decision of the Court of Appeal in
Pogoni v R & W H Symington & Co (NZ) Ltd,2 and the following passage from the judgment of the Court:3
It is plain that the decision in Bank of New Zealand v Baker turned on the meaning of the relevant clause in the guarantee, and in every case cited to us, or which we have read, the question is purely one of construction to determine whether surety’s right to treat the guarantee as discharged has been effectively excluded ...
[29] The plain meaning approach is also relevant to the second ground of opposition, contending for an implied term by which Sovereign would be responsible for checking all insurance applications submitted directly to it by Mr Chuah under the Associate Agreement. In his affidavit filed in this proceeding, Mr McEwen provided a number of reasons why it was his understanding that Sovereign would check all applications submitted by Mr Chuah. His reasons covered factual aspects relating to the processing of the applications submitted by Mr Chuah. These included the fact that Mr Chuah had been given regular training sessions by Sovereign and had attended meetings with Sovereign, and that the applications generated by Mr Chuah were sent direct to Sovereign for approval and not sent through the Company’s office.
[30] Mr McEwen said from the early stages of his time as an associate adviser, Mr Chuah “appeared to be achieving stellar results”. Mr McEwen was aware of this prowess because of the amount of percentage commission payments received in the Company Account as the result of Mr Chuah’s efforts. He said:
Based on the amount of the premium payments being received, [Mr Chuah]
was writing expensive insurance packages, for example in the regions of
$4,000 per year for some applicants for health, trauma cover and income protection insurance. It is generally unusual for applicants to apply for such
a comprehensive and expensive package but [Mr Chuah] appeared to be
writing many of these policies. I expected that appropriate underwriting could be expected by Sovereign to correlate with the risk to the insurer on
such policies. In other words, with greater cover being applied for, I
expected that an increasingly stringent standard of underwriting would be undertaken given the risk of paying out on claims was increased with the more substantial packages. As a general rule, a more comprehensive package provides more means for an insured to make a claim and therefore increases the risk for the insurer.
2 Pogoni v R & W H Symington & Co (NZ) Ltd [1991] 1 NZLR 82.
3 At 85.
I did take steps to check with Sovereign that they were happy with the applications and they confirmed that they were. In particular, I noticed that many of the premium payments being received were received on a quarterly basis. [Mr Chuah] told me this correlated with the milk solid payments to the farmers (who were his supposed major client-base). I called Sovereign accounts to check whether this was normal. I was told that the premium payments were coming through and everything was fine. I called the Sovereign BDM and the answer was the same, all is fine. However, this must have been based on what [Mr Chuah] had told them, not the farmers, as there were none.
In actual fact, when Sovereign later investigated how [Mr Chuah] had been operating his fraudulent scheme, they ascertained (and told me) that he had been making all of the premium payments himself in cash at one branch of the ASB Bank that was local to him.
...
Sovereign only identified that there were problems with Mr Chuah’s applications 14 months after he had started acting as an Associate agent. Had Sovereign taken steps to check the veracity of the applications presented by Mr Chuah from the outset, Sovereign would not have suffered the loss that it now seeks to claim against me as Guarantor. In guaranteeing the obligations of MFSL, I expected that Sovereign would apply prudent, responsible and secure business practices to prevent this sort of thing happening.
All it would have taken is for Sovereign to call some of the fictitious insurance applicants to determine from an early stage that the applications were false. That is how Sovereign eventually identified there were problems with Mr Chuah’s applications, when it called some of his supposed clients for testimonials. None of the clients existed and Sovereign then pulled all of his files to check matters further.
...
After Sovereign pulled [Mr Chuah’s] files and made further inquiries such as calling the applicants (who did not exist), it realised that the bulk of his applications were on behalf of false or fictitious people.
[31] The success of the third ground of opposition, namely equitable set-off, is, as noted, dependent on a favourable finding on the second ground of opposition.
[32] In relation to quantum, the essential submission was that there was a lack of verification of the amounts claimed and how these were made up.
Discussion: are the terms of the guarantee clear and unambiguous?
[33] It is impossible to read the relevant clauses of the Principal Agreement and particularly the terms of the guarantee as anything other than clear and categorical.
In my view, they unequivocally spell out the extent of the guarantee and indemnity, which allows for no exceptions.
[34] To import an exclusion of liability for fraud or dishonesty into such clearly stated provisions as clauses 26 and 33 of the Agreement (relating to the acceptance of liability for and indemnification against “all liabilities and expenses” incurred directly or indirectly by the Company or by an Associate of the Company), would not accord with the clear objective of the guarantee, which must be construed objectively with the factual context and bearing in mind the purpose of the
guarantee: Quainoo v New Zealand Breweries Limited.4
[35] I accept Mr Caird’s submission, supported by the observations of Park J in Moody v Condor, that if a guarantor intends to exclude liability arising from the fraud of a principal debtor, then the guarantor is required to specifically exclude those circumstances from the scope of the guarantee. If a guarantor has not specifically sought to exclude fraud, then the interests of the innocent creditor will be preferred over those of the guarantor. The fact that the specialist nature of the first defendant’s business in Moody v Condor involved corporate risk guarantees makes no difference.
[36] The very point of Sovereign expressly requiring the guarantee to extend to associate advisers is clearly intended to ensure the Principal Adviser is responsible for any shortcomings by the Principal’s Associate.
[37] This ground of opposition does not disclose a defence.
Discussion: implied term
[38] Both counsel referred to the decision in Hickman v Turn and Wave Ltd,5 in which the Court of Appeal acknowledged the five points in BP Refinery Westernport Ltd v Shire of Hastings6 as the helpful indicia for considering whether a particular
term ought to be implied.
4 Quainoo v New Zealand Breweries Limited [1991] 1 NZLR 161 (CA).
5 Hickman v Turn and Wave Ltd [2011] NZCA 100.
6 BP Refinery Westernport Ltd v Shire of Hastings (1977) 180 CLR 266.
[39] Those five indicia are whether the particular term sought is: (a) reasonable and equitable;
(b) necessary to give business efficacy;
(c) so obvious that “it goes without saying”;
(d) is capable of clear expression; and
(e) does not contradict any express term of the contract.
[40] The indicia are not necessarily determinative in themselves, however. The ultimate question, as identified in Hickman v Turn and Wave Ltd, is:
what a reasonable person would have understood the contract to mean. This is construed objectively by a notional reasonable person with knowledge of the relevant background.
[41] Applying the five indicia approved in Hickman v Turn and Wave, it cannot be suggested that the specific terminology employed throughout the Principal Agreement and the particularity and emphasis incorporated in it permits the importation of any extraneous or further terms. The particular term which it is sought to imply fulfils none of the indicia identified in BP Refinery: nor would a reasonable person understand the Principal Agreement to embrace the concept that Sovereign was to undertake a checking-up process, when all responsibility and acceptance of liability for the conduct, representations and actions of any associates is expressly placed on the principal.
[42] Despite the able submissions of Mr Farrands, this ground of opposition discloses no defence.
Discussion: equitable set-off
[43] The failure of the second ground of opposition means the third ground of opposition also fails.
Discussion: quantum
[44] Liability is established and summary judgment for the claim will be entered.
[45] In relation to quantum, the documents attached to the statement of claim and exhibited to Mr Baker’s affidavits comprise a schedule of all Sovereign policies sold by Mr Chuah. The Schedules to Mr Baker’s two affidavits show the debit balances in both the Company Account and the Associate Account, and the particulars of commission payments or the like and claw-back sums in each account. As at May
2012 the schedules show the interest in the Company account accrued to 4 April
2013 at the fringe benefit rate; and the commensurate balance and amount of interest accrued in the Associate Account at the relevant dates, and the expenses incurred.
[46] The schedules reflect the split arrangements between the Company and Associate Accounts, evidencing that 15% of Mr Chuah’s initial commission payments were received into the Company Account.
[47] On the basis of these particulars, there is no reason to conclude that quantum is in issue and that an up to date sum to include all accrued interest and costs cannot be simply arrived at.
Conclusion
[48] The principles of summary judgment are clear and are not in dispute.
[49] This is a straightforward claim for recovery under a guarantee and indemnity. The guarantee was essential to Sovereign’s decision to appoint the Company as a financial adviser and essential to Sovereign’s entry into the Associate Agreement. Mr McEwen is liable to pay the debit balance in the Associate Account and those amounts in the Company Account relating to Mr Chuah’s agency. His liability in that regard cannot be avoided on the grounds of fraudulent conduct by Mr Chuah for the reasons I have found, and there is no room to read in the implied term sought.
[50] Nor is there any doubt as to the quantum of loss that Mr McEwen is unfortunately liable for under the guarantee.
[51] In conclusion, I am satisfied there is no defence to the plaintiff’s claim and no issue about quantum and judgment should be entered accordingly.
Result
[52] Summary judgment is entered against Mr McEwen for: (a) the sum of $397,598.83;
(b) daily interest on the sum of $140,450.62 at the fringe benefit rate of
5.9% per annum from 5 April 2013 to the date of actual payment;
(c) daily interest on the sum of $168,018.37 at the fringe benefit rate of
5.9% per annum from 5 April 2013 to the date of actual payment;
(d)daily interest on the Guaranteed Indebtedness (ie the total sum owed by the defendant under the Guarantee) at the rate of 10% per annum from 5 April 2013 to the date of actual payment; and
(e) the costs of an incidental to this proceeding on a solicitor-client basis.
Goddard J
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