Stockco Limited v Sharpin

[2018] NZHC 2486

IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY

I TE KŌTI MATUA O AOTEAROA ŌTEPOTI ROHE

CIV-2017-412-000015

[2018] NZHC 2486

BETWEEN

STOCKCO LIMITED

Plaintiff

AND

RICHARD ANDREW SHARPIN

First Defendant

AND

JOHN FRANCIS WILLIAMS

Second Defendant

AND

RURAL LIVESTOCK LIMITED

Third Party

Hearing:

18 September 2018 (Determined on the papers)

Counsel:

J L Bates for Plaintiff

R M Reeve for First Defendant

B M Stewart for Second Defendant H McIntosh for Third Party

Judgment:

21 September 2018

JUDGMENT OF ASSOCIATE JUDGE MATTHEWS

[On Application for Summary Judgment by Third Party]

[1]    The third party, Rural Livestock Limited (Rural) applies for summary judgment on the third party claim against it by the second-named defendant, John Williams (Mr Williams).

The parties and the pleadings

[2]    The plaintiff, Stockco Limited (Stockco) carries on business as a financier and lessor of livestock.

STOCKCO LTD v SHARPIN [2018] NZHC 2486 [21 September 2018]

[3]    It pleads that Mr Williams and his co-defendant, Mr Sharpin, were and are directors of RJL Farming Limited (RJL) which operated a stock grazing business at material times. RJL financed some of its activities through Stockco. Stockco pleads that Mr Williams and Mr Sharpin executed a Deed of Guarantee of the liability of RJL by which they assumed liability both as principal debtors and indemnifiers of RJL’s obligations.

[4]    Stockco pleads that RJL defaulted in liabilities to Stockco, and seeks judgment against Mr Sharpin and Mr Williams under the Deed of Guarantee.

[5]    Stockco applied for summary judgment against Mr Sharpin and Mr Williams, but was unsuccessful.1 Mr Williams then filed his third party claim against Rural. Rural is a livestock agency which acted for RJL in relation to RJL’s livestock trading. Mr Williams (and the first defendant, Mr Sharpin) were at material times employed as livestock agents by Rural, and they conducted some of the sale and purchase transactions relevant to Stockco’s claim.

[6]    Mr Williams’ claim against  Rural is pleaded in a statement of claim dated  14 September 2017. After pleading Stockco’s  claim  and  his  denial  of  liability, Mr Williams pleads (with names used in this judgment substituted):

7.RJL engaged [Rural] on or about May 2016 to sell dairy heifers (livestock) owned by RJL as its livestock agent.

8.As part of the agreement between [Stockco] and RJL, the sale proceeds of the livestock were to be paid by [Rural] to [Stockco], to be utilised by [Stockco] by way of repayment or partial repayment of the loan facility.

9.RJL and [Stockco] instructed [Rural] to pay the sale proceeds of all livestock sold by [Rural] as agent of RJL to [Stockco].

10.[Rural] as the agent of RJL sold 799 livestock owned by RJL between in or about May 2016 and October 2016, but has failed and/or refused to pay some or all of the sale proceeds of the livestock to either RJL or [Stockco].

11.If [Mr Williams] is found to be liable to [Stockco] for [its] claim,    [Mr Williams] claims to be entitled to an indemnity from [Rural] for any claim by [Stockco] for which he may be found liable in this proceeding.

1      Stockco Ltd v Sharpin & Williams [2017] NZHC 1999.

[7]Rural applies for summary judgment against Mr Williams on this claim.

[8]    Affidavits in support and opposition to Rural’s application were exchanged, and the application was set down for a fixture. During preparation for the fixture the Court drew to the attention of counsel a provisional view that the application may not yet be ready to be argued, in part because there was an issue about evidence to be admitted, but principally because although Rural maintained that as a matter of law Mr Williams did not have a cause of action against it, neither its submissions nor those of Mr Williams dealt with this issue (the legal issue).

[9]    After discussions with counsel the fixture was vacated and directions made by consent for the exchange of submissions on the legal issue. It was agreed with counsel that after this the Court would decide whether oral submissions would also be heard, and counsel were also informed that if either wished to have a hearing on the legal issue a hearing would take place.2 After that a judgment would be issued on the legal issue. If the decision of the Court was that the cause of action was not available, summary judgment would be entered for Rural, and that would be a final judgment of the Court. If the Court’s decision on the legal issue was the inverse, an interim decision would be released and the Court would then proceed to decide, after a further hearing or at least further submissions, the issue raised in relation to admissibility of evidence and would further consider the summary judgment application on the basis of both the facts and the law.

[10]   In the event counsel filed submissions together with a joint memorandum indicating that the Court should proceed to decide the legal issue on the basis of those submissions.

[11]   This judgment is issued after consideration of the written submissions of counsel on the legal issue.

2      Minute of telephone conference dated 28 May 2018.

Mr Williams’claim

[12]   Although principal submissions were filed first by Rural, as the applicant for summary judgment, with the burden of satisfying the Court that Mr Williams’ case against it cannot succeed as a matter of law, it is convenient to set out first the basis on which Mr Williams says he has a claim. This is because, as can be seen from the pleading reproduced in paragraph [6], the basis upon which Mr Williams claims to be entitled to an indemnity from Rural is not stated. It emerges from the submissions now filed before the Court. For Mr Williams, Mr Stewart says that Rural owed him a duty of care in tort arising out of a special relationship. Mr Stewart says that to establish that a duty of care is owed by virtue of a special relationship the Court will make a two-stage enquiry:

(a)First, is there a sufficient degree of proximity or closeness of relationship between the alleged tortfeasor and the plaintiff who claims to have suffered damage?

(b)Secondly, are there policy considerations which should lead the Court to negative, reduce or limit the scope of the duty or to whom it is owed?3

[13]   Mr Stewart argues that a special relationship is established when this test is considered.

[14]   Mr Stewart’s first argument is directed at proximity. He says there is a sufficient proximity between Stockco, Mr Williams and Rural by virtue of a contractual matrix existing between all of them for the purpose of buying and selling livestock. Stockco agreed to advance monies to enable RJL to acquire and trade livestock. Mr Williams guaranteed the obligations of RJL to Stockco in a separate Deed of Guarantee. RJL used the funds advanced by Stockco to buy livestock through Rural as its appointed livestock agent in each case, and Stockco’s advances were paid to Rural which then paid its vendor clients after deduction of its commission.

3      Anns v Merton London Borough Council [1978] AC 728, affirmed in South Pacific Manufacturing Co Ltd v New Zealand Security Consultants and Investigations Ltd [1992] 2 NZLR 282, and Attorney-General v Prince [1998] 1 NZLR 262.

[15]   Conversely, Mr Stewart says that when RJL wished to sell stock, Rural was aware that in all cases the sale proceeds were to be paid direct to Stockco and not to RJL, to be utilised in repayment of debt owed by RJL to Stockco.

[16]   Mr Stewart says that because of the close relationship between all these parties, and in the circumstance that Mr Williams was one of Rural’s higher performing stock agents over a number of years, Rural through its relevant employees:

would have been aware that Mr Williams and his fellow director Mr Sharpin would have been required to guarantee the obligations of RJL … to Stockco.

[17]   In support of this, Mr Stewart also says Stockco advanced money to other Rural clients, and indeed was a major client of Rural’s, because not only did it fund purchases of stock by Rural’s clients, it also traded stock itself and used Rural as its agent.

[18]   From these facts Mr Stewart also infers that Rural and its employees would have been aware of Stockco’s standard requirement for the sale proceeds of stock sales to be paid direct to Stockco.

[19]   Thus, Mr Stewart draws a conclusion that there is a sufficient relationship of proximity between Rural and Mr Williams for Rural to foresee that a failure to make payment of money owed by RJL to Stockco would cause RJL to default on its loan with the consequence that Stockco  would  make  demand  on  its  guarantee  from Mr Williams. Therefore, Mr Stewart says, Rural owed Mr Williams a duty of care to uphold its end of what he describes as “the bargain” which he describes as the keeping of records of livestock sales and proceeds and making payment promptly to RJL farming by way of direct payments to Stockco. Mr Stewart concludes this part of his argument by saying that it is a well-established principle at law that a duty of care is owed if a reasonable person in the defendants’ position could have avoided damage by exercising reasonable care and was in such a relationship to the plaintiff that he or she ought to have acted to do so.4 Mr Stewart says that had Rural taken all steps to ensure that it paid all monies owed to RJL direct to Stockco, Mr Williams would not have any liability to Stockco under his guarantee.

4      Graham Barclay Oysters Pty Ltd v Ryan [2002] HCA 54.

Discussion

[20]   A self-evident  difficulty  with  Mr  Stewart’s  argument  that  Rural  owed  Mr Williams a duty of care in tort is that it is not pleaded. As noted, the pleading simply refers to Mr Williams being entitled to an indemnity from Rural, without any basis for that indemnity being specified, and judgment is sought by way of an indemnity for such amount as may be found to be owing by Mr Williams to Stockco.

[21]   This caused Rural’s counsel, Mr McIntosh, to present a lengthy and detailed submission, first, in which he analysed all bases at law on which an indemnity can be found to exist,  and  presented  argument  in  relation  to  each  one.  It  also  drove Mr Stewart to have to indicate an intention to amend Mr Williams’ pleading, a step he said he would take after the completion of discovery, to plead the cause of action described in his submissions. He informed the Court, as well, that Mr Williams also has a separate claim against Rural in relation to losses said to have been incurred in relation to trading undertaken by him in his own right, which will be incorporated in an amended statement of claim.

[22]   Additionally, Mr Stewart says that Mr Williams intends to seek leave to add RJL as a third party. RJL is, as I have said, under the control of Mr Williams and the first defendant, Mr Sharpin. Once joined, Mr Williams intends to arrange for it to serve a fourth party notice on Rural. Given an intention to add parties and replead, Mr Stewart says as a matter of policy and in the interests of procedural efficiency all issues between the relevant parties involved in the dispute should be dealt with in the same proceeding.

[23]   Whilst this principle is of general application, there are very real issues with the Court taking into account intended amendments on an application for summary judgment, which is based on the pleading as it stands. That pleading was filed in October 2017. As well, it received considerable scrutiny from the Court, and in conversation with counsel, at the time of the intended first fixture on Rural’s summary judgment application, as discussed earlier. It was certainly plain from the time of that discussion and the consequent Minute that the legal basis upon which Mr Williams claimed indemnity by Rural had caught the attention of the Court and was to be

examined in submissions on exactly that point, and then considered in the context of Rural’s application for summary judgment. At no point prior to filing his submissions in opposition to the application was the basis of Mr Williams’ claim enunciated in any formal document; nor, in particular, was an amended statement of claim giving particulars of the alleged indemnity filed and served. For that matter, leave to do so was not sought as part of the timetable set when the Court considered the position in May.

[24]   Rural is entitled to have the Court consider its application for summary judgment on the pleading as it stands. However, as this process has evolved, at this point the application is being considered on the basis of a legal issue only and is therefore akin to a strike out application. If it were such an application, the Court could give an opportunity for amendment, if that would cure a defect in a pleading which would otherwise be struck out. In this circumstance the Court will consider the present pleading in light of the explanation given by counsel as to what was intended. Counsel for Rural has thoroughly canvassed the argument presented for Mr Williams and is not therefore prejudiced by the paucity of detail in the pleading.

[25]   However, the Court will not take into account other proposed amendments which Mr Williams says arise out of his and RJL’s relationship with Rural. Nor, in any event, is it of assistance in the present case that Mr Williams alleges a separate claim against Rural in respect of his own stock trading activities, nor that by his direction of RJL, a claim may be made by RJL against Rural. On the information before me, I agree with Mr McIntosh that Mr Williams’ alleged personal claim is irrelevant to the present case, as it does not arise out of the same facts and would not on the face of it, at least, appear to meet the tests for a third party claim. Nor would the Court be assisted, in any event, by Mr Williams’ alleged claim against RJL for indemnity for any liability he may have to Stockco, which is an orthodox claim by a guarantor, or one principal debtor, for indemnity from the other principal debtor. Those matters are therefore put to one side, with the Court considering the pleading as it stands, but taking into account the belated explanation on behalf of Mr Williams as to what that pleading was intended to mean.

[26]   Turning to the question whether Mr Williams’ alleged right to indemnity exists, I accept two preliminary points made by Mr McIntosh. First, there is nothing before the Court to show that a duty of care as alleged has already been recognised at law. Secondly, there is nothing before the Court to show that the existence of such a duty of care may currently be emerging. It must be considered as novel.

[27]   Mr McIntosh submits that the relationship between Mr Williams and Rural is not special, and thus is not such that a duty of care would be imposed on Rural. On this, Mr McIntosh makes a number of points. First, he points to Rural’s evidence that it would only pay the proceeds of sale of RJL’s stock direct to Stockco when asked to by Stockco, or  some  information  in  the  sale  in  question  alerted  it  to  do  so.  Mr McIntosh says, and I agree, that this evidence can be accepted in light of the evidence from Mr Williams that there may not have been a standing instruction to Rural. To the extent, therefore, that Mr Stewart’s argument relies on Rural being aware that in all cases the sale proceeds of stock for RJL were to be paid to Stockco in reduction of RJL’s debt, it is not on a sound foundation.

[28]   Secondly, Mr McIntosh says that although there was what he describes as a collection of different legal relationships between the parties, all co-existing in one factual situation, that is not a position that has been recognised in previous cases as being sufficiently special to create a special relationship in which the Court will impose a duty of care. No authority was presented by Mr Stewart to support his converse proposition. Nor, for that matter, did he describe or define in any conceptual sense what the special relationship was said to be. On analysis, his proposition comes down to a stock agency owing a duty of care to a guarantor of loans made by a third party to a farming entity to pay the proceeds of sale of stock to the lender without an express instruction always to do so, or a course of business conduct in which that invariably occurred. Further, whilst failure to pay a borrower’s proceeds of sale to its creditor might cause a default on a loan, it is by no means clear that that would inevitably be the position. Rural was not a party to the loan arrangements between Stockco and RJL, nor therefore in possession of current knowledge about the state of that credit arrangement, other possible sources of repayment of advances, or whether, for any reason, there was a prospect that a guarantee may be called upon.

[29]   As Mr McIntosh submits, the duty asserted could only possibly arise if it had been knowingly and expressly accepted by Rural that it was under a duty to pay the proceeds of sale of RJL’s stock to Stockco and there is no evidence that occurred. Even then, whether that duty would be owed to a guarantor, as distinct from the debtor, is moot. Mr Williams asserts responsibility for an omission, the non-payment of monies, on the part of Rural but the evidence does not establish conduct by Rural that might amount to inducing reliance by Mr Williams on it so acting, or an assumption of responsibility to so act, such as might found a duty in tort.

[30]   For these  reasons  I  find  that  there  is  no  special  relationship  between  Mr Williams and Rural giving rise to a duty of care in tort on the part of Rural to   Mr Williams to pay the proceeds of sale of RJL’s stock to Stockco, which might lead to the consequence that Rural must indemnify Mr Williams for his liability to Stockco as guarantor of the indebtedness of RJL.

[31]   Given this finding it is not necessary to dwell at length on the question of whether there are policy reasons against the imposition of such a duty. Briefly, however, I accept two submissions made by Mr McIntosh. First, if Mr Williams was found liable to meet his guarantee he would not be without a remedy. He would be entitled to indemnification by RJL. Secondly, either Stockco or RJL may endeavour to enforce against Rural all payment obligations that they believe Rural is in breach of. Thus, the proposed  new  duty  of  care  is  not  necessary  as  a  protection  for Mr Williams.

[32]   If Rural were found to owe a duty of care to Mr Williams, it would owe the same duty to guarantors of the liability of all farming entities who had borrowings secured over stock that Rural sold, which would certainly open the floodgates to potential claims. There is no logical basis upon which such a duty would be restricted to circumstances where the other contractual arrangements in place in the present case were present, for example Mr Williams being an employee of Rural. Logically, it might be thought that such a duty may also be owed by real estate agents to creditors secured over real estate, in relation to funds received such as deposits under sale contracts. Whilst consideration of policy is not the province of an application which is being determined on a summary basis, the factors to which I have referred are

manifestly plain, sufficiently so to warrant reference in the present context, and support a conclusion that the duty of care propounded by Mr Williams ought not to be imposed.

Outcome

[33]   Accepting that the cause of action pleaded by Mr Williams against Rural alleges a duty of care in tort giving rise to an indemnity, I find that the duty of care is not owed and the cause of action, therefore, cannot succeed.

[34]   Consistent with the position recorded in the Minute of the Court dated 28 May, after discussions with counsel, the consequence is that summary judgment is entered for Rural.

[35]   Provisionally, I consider that Rural is entitled to costs on a 2B basis with disbursements, including an additional day for preparation of submissions given that the basis of the pleaded indemnity was not disclosed until Mr Williams’ submissions in opposition were filed and served. However, there may be factors relevant to costs of which I am not aware, so counsel may file memoranda (not exceeding three pages) within 10 working days if agreement is not reached.

J G Matthews Associate Judge

Solicitors:

Brown & Bates, Napier

Wilkinson Rodgers Lawyers, Dunedin Simpson Western, Auckland

Van Aart Sycamore Lawyers, Dunedin