Trustees Executors Ltd v Fund Managers Canterbury Ltd
[2014] NZHC 2444
•6 October 2014
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2014-485-4040 [2014] NZHC 2444
BETWEEN TRUSTEES EXECUTORS LTD
Plaintiff
AND
FUND MANAGERS CANTERBURY LTD
First Defendant
DELOITTE Second Defendant
DELOITTE LTD Third Defendant
GRAEME MAIN Fourth Defendant
AD MCBEATH AND OTHERS Fifth Defendants
YOGESH MODY First Third Party
Hearing: 20 August 2014 Counsel:
C M Stevens and N D Chapman for Plaintiff
D J Cooper for Second and Third Defendants
P R Jagose and J W Upson for First Third PartyJudgment:
6 October 2014
JUDGMENT OF WILLIAMS J
Introduction
[1] Yogesh Mody applies to strike out a third party notice issued against him by the second and third defendants, Deloitte and Deloitte Limited (together I refer to
TRUSTEES EXECUTORS LTD v FUND MANAGERS CANTERBURY LTD [2014] NZHC 2444 [6 October
2014]
these parties as Deloitte). Mr Mody is supported in that application by the plaintiff, Trustees Executors Ltd (TEL). Deloitte opposes.
[2] Mr Mody is an employee of TEL. He is the Southern Regional Manager of its Corporate Trust Division. It appears to be common ground that in this role he had primary responsibility within TEL for the oversight of Fund Managers Canterbury Ltd (FMCL), the first defendant.
[3] The context within which these issues arise is that TEL was appointed trustee of a fund managed by FMCL, the Canterbury Mortgage Trust Group Investment Fund (CMT). TEL alleges that the fund lost nearly $46 million prior to its being frozen by TEL’s intervention in 2008. TEL sues:
(a) FMCL as the issuer of the securities; (b) the directors of FMCL;
(c) the general manager of FMCL; and
(d) the fund’s auditor, Deloitte.
[4] The most important claim by TEL for the purposes of this interlocutory application is that against Deloitte. TEL essentially alleges Deloitte was negligent in carrying out its duties as auditor of the fund managed by FMCL. Deloitte resists this allegation and in return proffers an affirmative defence alleging that TEL was contributorily negligent. Deloitte says TEL failed to act as a reasonably diligent trustee in monitoring FMCL’s performance of its obligations under the trust deed, in not requiring FMCL’s breaches of the deed to be remedied, and in failing to take action in respect of investment guidelines and exposure limits both of which TEL knew were being routinely breached.
[5] Deloitte’s third party claim against Mr Mody sees Deloitte alleging that he was the individual within TEL who should have blown the whistle on FMCL which would have caused TEL to take the steps against FMCL it negligently failed to take.
[6] Mr Mody, supported by TEL, wants the third party notice struck out. Put simply, they argue:
(a) Mr Mody and Deloitte are not sued “in respect of the same damage” as required by s 17(1)(c) of the Law Reform Act 1936 – they have distinct, even opposite duties and, even on the facts as alleged by Deloitte, the damage each caused is necessarily different. Mr Jagose articulates this distinction in his submissions as follows:
TEL’s claim against Deloitte is for actual loss attributable to Deloitte’s alleged actions; Deloitte’s third party claim against Mr Mody is for TEL’s lost opportunity to avoid or mitigate that actual loss.
Thus, he argued, the loss is not only untenable, but distinctive.
(b)Even if that is wrong, the claim should be struck out because it is an abuse of process to continue the claim against Mr Mody when, by the principles of vicarious liability, he can be no more and no less liable than TEL. That is because Mr Mody’s liability is TEL’s liability and any requirement for contribution by the agent must be entirely subsumed by the vicarious liability of his principal.
[7] For Deloitte, Mr Cooper responds:
(a) The damage allegedly caused by Mr Mody and Deloitte must be the same. Both were required to oversee FMCL’s compliance with the fund’s trust deed and other obligations, and if either had pointed out to TEL that FMCL had breached those obligations, TEL would have required FMCL to remedy such breaches and would have suspended further lending to limit further loss.
(b)It is not a foregone conclusion that the obligations of TEL in contributory negligence and Mr Mody’s contribution under s 17 of the Law Reform Act are necessarily and entirely coincident. That judgement cannot be made until all the evidence is in. Only at that point can the trial Judge make the appropriate assessment.
[8] I have concluded that the damage alleged by TEL against Deloitte and that alleged by Deloitte against Mr Mody are indeed the same damage in terms of s 17 of the Law Reform Act. But despite that conclusion, I consider that the third party notice should nonetheless be struck out. In my assessment there is no reasonable possibility that Mr Mody’s responsibility as a contributor to Deloitte’s liability to TEL can be any greater than, or indeed any different to, the reduction in Deloitte’s liability to TEL by reason of TEL’s own contributory negligence. It would therefore be an abuse of process to allow Deloitte’s claim to proceed.
[9] I turn now to set out my reasons.
Strike out principles
[10] No party took issue with the applicable principles on strike out applications. They were set out by the Court of Appeal in Attorney-General v Prince and endorsed by the Supreme Court in Couch v Attorney-General.1 The principles guiding my decision are as follows:
(a) I must assume that the facts as pleaded are true unless they are entirely speculative and have no foundation.
(b)The cause of action must be clearly untenable even on those facts if the application is to succeed, but there is nonetheless a need for caution.
(c) The jurisdiction should be exercised rarely and only in clear cases.
(d)It does not necessarily matter if difficult questions of law are required to be resolved but even greater caution is required where the effect of striking a cause of action out is to resolve without properly tested
facts, the direction of the law in a developing area.
1 Attorney-General v Prince [1998] 1 NZLR 262 (CA) at [267]; Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].
The facts
[11] CMT was a “group investment fund” established in 1999 under the Trustee Companies Act 1967. It took investments from the public and on-lent that money on the security of mortgages against land and other assets of borrowers. TEL became the trustee of CMT on behalf of unitholders. FMCL was the fund’s manager. TEL alleges that due to numerous breaches of binding rules in relation to its lending activities, FMCL so mismanaged the fund as to lose nearly $46 million of unitholders’ funds up to 4 June 2008, the date when the fund was suspended by TEL. The alleged losses are linked to a total of 35 bad loans the total exposure for which equals the claimed sum.
[12] Units purchased by investors in CMT are “participatory securities” under the Securities Act 1978 and so the provisions of that Act apply to them. CMT was also subject to the Securities Act (Externally Managed Group Investment Funds) Exemption Notice 2003 which contains mandatory terms required to be included in any trust deed relating to CMT.
[13] TEL and FMCL entered into a trust deed in relation to the fund in which the parties agreed their respective roles and responsibilities. This deed was very much the focus of argument in relation to substantive liability before me, so I briefly summarise the relevant duties and powers of the parties below.
TEL's obligations under the trust deed
[14] In relation to TEL, the following clauses of the deed are relevant.
[15] Clauses 81 and 82 provide that TEL was bound to comply with FMCL’s investment directions unless TEL apprehended that such direction was in breach of the trust deed:
Directions of the manager
81The trustee’s primary duty shall be to act on any direction or request by the manager to invest the fund in authorised investments in accordance with the mortgage investment guidelines
82The trustee shall have the right not to act on any direction of the manager to invest in, acquire or dispose of any investment if in the opinion of the trustee, conveyed in writing to the manager, the proposed investment, acquisition or disposition is not in accordance with the mortgage investment guidelines or is contrary to the provisions of this deed. The trustee shall not be liable to unitholders or the manager for acting or refusing to act on any such direction given by the manager in respect of the investment, acquisition or disposal of any investment in accordance with the provisions of this deed
[16] TEL’s liability in that respect was circumscribed by cls 85, 130 and 135:
Trustee to monitor
85The trustee shall not in carrying out its duties be required to exercise any care, diligence or skill in respect of the investment of the fund, other than to monitor the manager’s obligations under this deed in respect of the investment of the fund
Trustee’s powers and duties and custodian’s appointment
Duty to act on direction
130The trustee shall act on the direction or request of the manager with respect to any action or question concerning and/or investments as provided in this deed
Trustee to supervise compliance with this deed
135The trustee shall exercise reasonable diligence to ascertain whether or not any breach of the terms of this deed or of the offer of units has occurred and, except where it is satisfied that the breach will not materially prejudice the interests of unitholders, shall do all such things as it is empowered to do to cause any breach of those terms to be remedied
[17] TEL also had specific powers in cl 136 including:
136.3to engage or employ any persons as agents, representatives, employees or independent contractors (including, without limitation, administration managers, registrars, underwriters, accountants, lawyers, appraisers, brokers or otherwise) in one or more capacities, and to pay compensation to such persons who are engaged or employed for services in as many capacities as such persons may be so engaged or employed
136.4to delegate any of the powers and duties of the trustee to any one or more agents, representatives,
officers, employees, independent contractors or other persons without liability to the trustee in the case of delegates prudently selected
FMCL’s obligations under the trust deed
[18] FMCL’s duties included those set out in cl 124:
Covenants by manager
124The manager covenants with the trustee and with the intent that the benefit of these covenants shall enure not only to the trustee but to the unitholders of the fund jointly and to each of them severally that in respect of the fund
124.1The manager will use its best endeavours to carry on and conduct its business as manager under this deed in a proper and efficient manner and to ensure that any undertaking, enterprise or scheme to which this deed relates is carried on and conducted in a proper and efficient manner
124.2The manager will use its best endeavours to ensure that the investments of the fund are properly managed
124.3As the trustee may from time to time require, the manager will make available to the trustee for inspection all the books of the manager relating to the fund
124.4The manager will pay all moneys belonging to the fund, received by the manager, to the trustee, in accordance with the directions from time to time of the trustee
124.5The manager will provide the trustee with a copy of each prospectus and investment statement and will allow the trustee a reasonable time to comment on such prospectus or investment statement prior to the issue of such prospectus or investment statement
124.6The manager will provide the trustee with a copy of all relevant certificates, notices and other documents the manager is required to provide to the trustee under the Securities Act 1978
124.7The manager shall forward without delay to the trustee copies of all notices, reports, circulars and other documents received by it relating to the trustee
124.8The manager shall forward to the trustee all notices, reports, circulars and other documents sent by it to unitholders at the same time as such material is sent to unitholders
[19] There was also an indemnity in the following terms:
Manager indemnifies trustee
149The manager indemnifies the trustee against all claims, costs, charges and expenses or other liability, contingent or otherwise, arising from or attributable to the manager’s directions, recommendations, advice or requests or the manager’s failure to perform any of its obligations, whether delegated or otherwise, or to comply with any of its responsibilities under this deed. This clause does not affect the manager’s right to an indemnity under clause 147.
Joint TEL and FMCL provisions
[20] Provisions jointly applicable both to the trustee and the manager included:
Investments
Investment policy
78The fund shall be invested in authorised investments in accordance with the investment policy
Mortgage investment guidelines
79The manager and the trustee shall from time to time agree upon mortgage investment guidelines for the manager to follow in connection with the fund. The manager will comply with the agreed mortgage investment guidelines. The mortgage investment guidelines may be amended from time to time by agreement between the manager and the trustee
[21] I pause briefly to note that investment guidelines were indeed agreed between TEL and FMCL. The guidelines restricted borrowing by any individual client or associated entity to no more than 5 per cent of the gross value of the fund. The parties also agreed a maximum exposure cap. This provided that the fund’s six largest exposures must not exceed 20 per cent of the total asset. TEL alleges both restrictions were breached. Their details were not traversed in any substantive way before me.
Degree of care and skill required
155No provision of clauses 147 to 163 shall have the effect of exempting the trustee or the manager, or any director or officer of the trustee or the manager, or indemnifying the trustee or the manager, or any such director or officer, against any liability for breach of trust where any such person fails to show the degree of care and diligence required of that person in that capacity, having regard to the provisions of this deed and the powers authorities and discretions conferred hereby
Liability limited
156The liability of the trustee and the manager under this deed, the act or at law shall at all times be limited to the assets from time to time of the fund
[22] Clause 159 purported to exempt both TEL and FMCL from liability if either relied on information or advice of employees, contractors or other advisors honestly believing in the authenticity of such advice:
Manager and trustee relying on advice
159The manager and the trustee may act on the opinion, or advice of, or a certificate, or any information obtained from any person listed in clause 135 3 [sic – it was common ground that the correct clause was
136.3] or other expert in New Zealand or elsewhere (which may be a related party of the manager or the trustee and whether obtained by the manager or the trustee) and the manager and/or the trustee, shall not be responsible for any loss occasioned by so acting so long as the manager and/or the trustee has no reason to believe that the opinion or advice is not authentic
[23] Counsel did not focus to any extent on TEL’s obligations under the Securities Act, but I note for completeness that Panckhurst J traversed the relevant provisions in Purdue v Perpetual Trust Ltd.2 In particular, any provision in a trust deed designed to exempt a trustee or indemnify it against liability for breach of trust where there has been a failure to show the appropriate degree of care and diligence is deemed to be void.3 And common law liability is preserved notwithstanding the provisions of the Securities Act.4
Yogesh Mody’s obligations
[24] As Southern Regional Manager of the Corporate Trust Division of TEL, Mr Mody had responsibility for TEL’s supervisory and monitoring functions in relation to FMCL and the fund. His obligations arose by virtue of his employment relationship with TEL. These obligations include the obligations of fidelity to his employer and the subordination of his own self interest to that of TEL. The case against Mr Mody is that he failed to warn TEL of the various breaches by FMCL of
the trust deed, securities legislation and lending policies and guidelines. Because of
2 Purdue v Perpetual Trust Ltd HC Christchurch CP85/94, 5 April 2001 at [19]-[22].
3 Securities Act 1978, s 61(1).
4 Section 65.
this failure, an unaware TEL did not intervene to require such breaches to be remedied, and/or to suspend or wind up the fund.
Deloitte’s obligations
[25] Deloitte carried out audit engagements in respect of CMT. It produced compliance reports in the course of the execution of its audits. Deloitte had statutory obligations under s 50 of the Securities Act, sch 3A of the Securities Regulations
1983, and s 16 of the Financial Reporting Act 1993.
[26] Section 50 of the Securities Act requires, among other things, the auditor to warn the trustee of any matters relevant to the exercise or performance of the powers and duties of the trustee, and under s 16 of the Financial Reporting Act 1993 the auditor must report to the Registrar of Companies any non-compliance with that Act.
[27] Deloitte also had obligations under the trust deed. Clause 210 provides:
Audit
210All financial statements prepared in accordance with clause 208 shall be audited by the auditor who shall report in the terms required by the Financial Reporting Act 1993, or as required by the exemption notice
[28] Clause 217 requires the manager to provide the trustee a certificate covering the preceding financial year. That certificate must include:
Auditor’s direct report
…
217.1whether or not in the performance of their duties as auditors they have become aware of any matter which in their opinion should cause, or have caused the exercise or performance of powers or duties conferred or imposed on the manager or the trustee by the act, this deed, or by law, which have not been exercised or performed, and if so, giving particulars thereof
217.2whether or not their audit has disclosed any material breach of this deed or any other matter calling in their opinion for further investigation by the trustee in the interests of unitholders, and if so, particulars thereof
[29] Deloitte also had general duties to perform statutory and contractual obligations with the skill, care and diligence of a reasonable auditor.5 These duties were to be performed to codified auditing standards and the auditor’s duty was one of independence in “antagonistically” applying professional judgement and scepticism to the financial statements and other information considered in the audit process.
TEL’s allegations against Deloitte
[30] TEL alleges Deloitte’s various audit reports and advisory letters failed to:6 (a) notify TEL of the breaches by FMCL of its lending requirements;7 (b) assess whether proper records were kept;
(c) assess whether the trust deed, management agreement, investment guidelines, loan manual, and office manual were adhered to;
(d)assess whether FMCL’s financial statements complied with generally accepted accounting practice and showed a true and fair view of the fund;
(e) assess whether reports and certificates provided by FMCL and its directors were correct, fair and reasonable;
(f) assess whether or not the method of valuation of the fund’s
investments complied with the trust deed;
(g)assess whether or not there had been any material breach of the trust deed by FMCL, or any other matter calling for further investigation;
(h)assess whether or not there had been any failure by FMCL to act as it should have in response to any matter;
5 Dairy Containers Ltd v NZI Bank Ltd [1995] 2 NZLR 30 (HC) at 54.
6 Statement of Claim at paragraph 85.
7 Particulars of these is set out in Appendix D to the Statement of Claim.
(i)compare significant items in the financial reports with those in previous periods for material deviation;
(j)obtain and/or control third party confirmations of relevant matters which contributed to the amounts and disclosures in the financial statements;
(k)assess the validity of the amounts and disclosures in the draft financial statements as advised by FMCL and its agents against credible and proper records; and
(l)exercise the skill and care that a reasonably skilful and careful auditor would exercise.
[31] The effect of these failures was, TEL says, that it (TEL) continued to allow new investments and re-investments when it would have suspended the fund before June 2008 had the failures been apparent.
Deloitte’s allegations against TEL
[32] Deloitte responds with an affirmative defence against TEL in contributory negligence arguing essentially that TEL did not perform its own watchdog functions as trustee with the necessary skill and care required of it. In particular, Deloitte alleges that any loss suffered by TEL arose by its own failure to:8
(a) exercise reasonable diligence in monitoring FMCL’s obligations under the trust deed in respect of the investment of the fund under cl 85 of the trust deed;
(b)exercise reasonable diligence to ascertain whether or not any breach of the terms of the trust deed or the offer of units had occurred, and except where TEL was satisfied that the breach would not materially prejudice the interests of unitholders, TEL’s failure to do all such
things as it was empowered to do to cause any breach of these terms to be remedied (cl 135 of the trust deed); and
(c) exercise reasonable diligence in winding up the fund and carrying out the duties under cl 258 of the deed.
[33] Deloitte further alleges that TEL was aware of breaches of the exposure limits contained in cl 6.1 of the investment guidelines (restricting borrowing by any individual client or associated entity to no more than 5 per cent of the gross value of the fund) and breaches of the requirement that the six largest exposures of the fund must not exceed 20 per cent of total asset.9 That is because monthly managers’ certificates and reports to TEL in 2006, 2007 and 2008 all pointed to these breaches.
Deloitte’s allegations against Mr Mody
[34] Deloitte then issued a third party notice in respect of Mr Mody alleging that it was Mr Mody’s responsibility to ensure that TEL monitored FMCL in accordance with cls 85, 134 and 135 of the trust deed. Deloitte says he failed to ensure that TEL carried out its duties with the care, diligence and skill required of a trustee in TEL’s position.
[35] Deloitte says Mr Mody was aware of the breaches of the exposure limits in cl 6.1 of the investment guidelines and the 20 per cent ceiling in respect of the fund’s six largest exposures. And, due to his failure to exercise due care, diligence and skill, TEL failed to identify these breaches. Had they been so identified, Deloitte alleges that:
TEL would have had the opportunity to ensure that either FMCL complied with the investment parameters thereafter (thereby preventing further loans from being made which were allegedly outside the investment parameters) or would have ensured that the fund was wound up in September 2006.
[36] There is a further allegation that when these breaches came to the notice of TEL, Mr Mody went about winding up the fund negligently and caused further loss. TEL subsequently withdrew this allegation from the third party claim.
[37] It will be seen that the primary allegations against Mr Mody essentially mirror those levelled by Deloitte at TEL in contributory negligence. The essence of the claim against Mr Mody is that he was the individual with direct responsibility for the oversight of FMCL on behalf of TEL, and his failure to perform his functions with due skill, care and diligence meant TEL failed to intervene earlier than it did in performance of its own obligations.
[38] Having set out that background at length, I turn now to address the two key arguments advanced by Mr Mody and TEL. They are:
(a) that the liability of Deloitte and Mr Mody does not arise “in respect of the same damage” in terms of s 17(1)(c) of the Law Reform Act; and
(b)that Deloitte’s claim is an abuse of process because Mr Mody’s liability in contribution is co-extensive with TEL’s contributory negligence.
“… in respect of the same damage …”
[39] Section 17(1)(c) of the Law Reform Act allows a defendant to seek contribution from joint or concurrent tortfeasors provided that their liability arises “in respect of the same damage”. If it does so arise, then s 17(2) allows the Court to apportion to that non-defendant tortfeasor responsibility for such sum as is “just and equitable having regard to the extent of that person’s responsibility for the damage”.
Arguments
[40] Mr Jagose for Mr Mody submits that the duties of Mr Mody and Deloitte were distinctive. It must follow, Mr Jagose says, that the damage each is alleged to have caused must also be different.
[41] In support of his distinctive duties argument, Mr Jagose points to the specific pleadings. The harm pleaded against Deloitte was the financial impact of “new investments and re-investments when the fund would otherwise have been placed
into suspension by TEL.”10 The claim by Deloitte against Mr Mody is not pleaded so directly, Mr Jagose argues. Rather it is pleaded as a failure by Mr Mody to exercise such skill and care in the discharge of his functions as a manager at TEL as to ensure that TEL had an opportunity to intervene in respect of FMCL’s non- compliance. That must, he argues, be different damage.
[42] Deloitte on the other hand says that in respect of both Deloitte and Mr Mody, the harm alleged was in allowing TEL to proceed to authorise further lending without having been warned of the extensive breaches by FMCL of the trust deed, the investment guidelines and other binding constraints where such warnings would have caused TEL to intervene, freeze the fund and stop new lending.
[43] As Mr Cooper submitted:
In other words, Deloitte says that any failure to ascertain breaches by the Manager was also a failure by Mr Mody and hence responsibility for loss arising from a failure to ascertain those breaches is also a responsibility of Mr Mody. If Deloitte’s alleged “failure to ascertain” breaches by the Manager caused damage to TEL, then Deloitte says that Mr Mody’s failure to ascertain those same breaches by the Manager was also a cause of that same damage.
Analysis
[44] The “damage” referred to in s 17(1)(c) is not to be mistaken for damages. It relates to the harm or loss suffered by the common victim, it does not speak to quantum. “Same” here means literally a harm that is indivisible as between the two tortfeasors. Similar is not enough. I found useful Sir Richard Scott V-C’s practical
discussion in Howkins v Harrison & Tyler11 cited and approved in Eastgate Group v
Lindsey Morden Group Inc:12
That test is this: Suppose that A and B are the two parties who are said each to be liable to C in respect of ’the same damage’ that has been suffered by C. So C must have a right of action of some sort against A and a right of action of some sort against B. There are two questions that should be asked. If A pays C a sum of money in satisfaction, or on account, of A’s liability to C, will that sum operate to reduce or extinguish, depending on the amount, B’s liability to C? Secondly, if B pays C a sum of money in satisfaction or on
10 Statement of Claim at paragraphs 86-87.
11 Howkins v Harrison & Tyler [2001] Lloyd’s Rep PNI (CA).
12 Eastgate Group v Lindsey Morden Group Inc [2002] 1WLR 642 (CA) at 649.
account of B’s liability to C, would that operate to reduce or extinguish A’s
liability to C?
[45] On reflection, that approach seems a rather obvious, and with respect,
helpful, way of thinking about “the same damage” in this case.
[46] The most recent (and most emphatic) restatement of the principles in this area as applicable in New Zealand is that contained in the Court of Appeal decision in Hotchin v New Zealand Guardian Trust Company Ltd.13 In that case, the appellant sought to join two trustee companies (in a similar position to that of TEL in this case) in proceedings brought by the Financial Markets Authority against the directors of Hanover Finance. The proceeding against the directors related to allegedly untrue statements made in prospectuses when offering debt securities.
[47] The Court of Appeal found that no damage caused by the trustee companies could be the same as that allegedly caused by the directors. The respective damage alleged was, the Court found, different in both kind (failure of monitoring as against reliance on untrue statements) and in time prior to as against past investment.
[48] Harrison J writing for the Court referred to the House of Lords decision in Royal Brompton Hospital v Hammond14 and the New Zealand Supreme Court decision in Marlborough District Council v Altimarloch Joint Venture Ltd as applicable decisions of high authority.15 He reduced their effect to the following essential propositions:16
(1) Section 17 of the [Law Reform Act] was enacted as a remedial measure. Its purpose was to cure the injustice resulting where one wrongdoer was able to escape liability to a third party which elected to sue another wrongdoer liable for the same damage, regardless of relative causative potency or moral blameworthiness between the two wrongdoers. Section 17(1)(c) did not, however, alter the underlying common law principles.
(2) The phrase “damage” in this context means loss, harm or injury. By comparison, “damages” represent the measure of loss and amount of money recoverable by way of compensation for the damage suffered.
13 Hotchin v The New Zealand Guardian Trust Company Ltd [2014] NZCA 400.
14 Royal Brompton Hospital NHS Trust v Hammond [2002] UKHL 14, [2002] 1 WLR 1397.
15 Marlborough District Council v Altimarloch Joint Venture Ltd [2012] NZSC 11; [2012] 2 NZLR
726.
16 Hotchin v New Zealand Guardian Trust Company Ltd, above n 12 at [26].
The composite phrase “the same damage” does not mean substantially or materially similar damage. The words mean the identical damage.
(3) The requirement of a common or shared liability, often expressed as being of a co-ordinate nature, underlies the right of contribution and operates as the medium for apportioning responsibility between two or more wrongdoers. The words “in respect of the same damage” confirm that the loss or damage caused by concurrent wrongdoing must be one indivisible loss (“the whole of the damage”) to be apportioned between those liable.
(4) On this basis, parties which are jointly or concurrently liable on a common demand to a claimant are accountable for their respective shares of the damage – the common demand being predicated upon the direct and independent liability of each for the damage suffered by the plaintiff.
(5) Liability between wrongdoers must be of the same nature and to the same extent, thereby incorporating the concepts of equal or comparable culpability and causal significance. The question of whether liability is of the same nature “requires a comparison of the nature of the liability of each party, not the consequences” – that is, each party has to perform substantially the same obligation. The question of whether the liability is to the same extent simply requires a comparison of that requirement between each party but a right of contribution is unavailable to the extent that there is no common liability.
(footnotes omitted)
[49] Harrison J’s discussion of the position with joint tortfeasors in the context of leaky building cases made it clear that the fact joint tortfeasors owe very different duties and cause damage in different ways does not prevent one being liable in contribution to the other under s 17 as long as the damage is identical. Harrison J’s discussion was as follows:
[54] Mr Gedye also sought support for Mr Hotchin’s claim by analogy to claims for contribution between a local authority and negligent builder where both are liable for the costs of repairing defective workmanship. He said in such a case the council will be liable for losses flowing from negligently issuing a code of compliance certificate for which the builder has no liability. The builder will be liable for losses from negligent building work for which the council has no liability. Contribution is available because by different causes of action, different pathways of causation and different measures of loss, the council and the builder are liable for the same damage.
[55] However, as Mr Smith pointed out, an entitlement to contribution could only arise in such cases where the respective torts have resulted in the same damage. An example is where the builder negligently constructs a
flashing which the council negligently fails to detect on inspection. Liability would be common or conjoint. The building owner could sue each party independently for the same damage, being the cost of repairs, regardless of the basis of liability. Each had assumed a duty to protect the owner from that damage.
[50] That seems to answer what I apprehend to be the essence of Mr Jagose’s
argument under this head.
[51] I note also the decision of the New South Wales Court of Appeal in Daniels v Anderson, a case in which AWA Ltd sued Deloitte in respect of AWA’s foreign exchange trading losses.17 Deloitte had failed to point out to AWA that AWA had no systems to track and monitor foreign exchange activity. Deloitte sued Mr Hooke, the chair and chief executive officer of AWA, as a joint tortfeasor.
[52] In essence the Court found that Mr Hooke too had an obligation to monitor the company’s foreign exchange trading activity and failed to discharge that obligation. The Court quickly accepted that Deloitte and Mr Hooke were responsible for the same damage.18
[53] That case is really on all fours with the case before me except that Mr Hooke was a director and chief executive of AWA rather than a less senior manager (as Mr Mody was). But I do not see that difference as material in establishing whether Deloitte and Mr Hooke caused the same damage in that case.
[54] The fact of the matter is that in this case TEL alleges that Deloitte in its role as auditor should have seen FMCL’s multiple non-compliances with the trust deed, lending policies, the investment guidelines and other binding policies and practices, and should have blown the whistle long before 2008. The allegation against Mr Mody is essentially the same: that in his role as a manager in TEL, he too should
have identified ongoing non-compliances and blown the whistle long before 2008.
17 Daniels v Anderson (1995) 37 NSW LR 438 (NSWCA).
18 At 579. The Court did have some difficulty with the subsequent question of whether contribution from Hooke can be obtained in the face of findings in respect of AWA’s contributory negligence. I will come back to that.
[55] The damage alleged to be caused by both of them is obviously the same: the loss of $46 million in unitholder investments because, in their respective roles, both Deloitte and Mr Mody failed to warn TEL earlier.
[56] To apply the practical test in Howkins v Harrison & Tyler: if Deloitte paid TEL in settlement of its claim against Deloitte, would that coincidentally reduce or extinguish Mr Mody’s exposure by the same amount? And if Mr Mody settled a claim by TEL against him, would that settlement coincidentally reduce Deloitte’s exposure by the same sum? The answer to both questions must be yes.
[57] I find accordingly that Deloitte and Mr Mody are responsible “in respect of
the same damage” in terms of s 17(1)(c) of the Law Reform Act.
Is Mr Mody’s liability in contribution co-extensive with TEL’s contributory
negligence?
[58] Under this head, Mr Jagose argues that there is complete identity between TEL and Mr Mody so far as Deloitte’s contributory negligence claim is concerned. Deloitte, he argues, must therefore elect at the outset which of the two to proceed against. To allow a claim in contributory negligence against TEL, and a separate claim in contribution against Mr Mody risks permitting the auditor to be paid twice: once by way of reduction of liability to TEL, and second, by way of contribution from Mr Mody for what I have decided is the same damage.
[59] Supporting that argument, Mr Stevens for TEL argues that Deloitte’s pleading against Mr Mody “discloses no … case appropriate to the nature of the pleading” in terms of r 15.1(1)(a) of the High Court Rules because it is inevitable that Mr Mody can never be required to contribute. That is because TEL is vicariously liable for all of the actions Deloitte alleges have been undertaken by Mr Mody. That means, Mr Stevens says, any contribution that Mr Mody might have been required to make would have already been met by the reduction in Deloitte’s liability to TEL as a result of the contributory negligence affirmative defence.
[60] For Deloitte, Mr Cooper argues that the cases are unanimous in saying that any election to be made between the two should await the conclusion of the trial and
be assessed not by the defendant, but by the Judge at that point. He says Mr Mody could point to no case in which a third party claim has been struck out on the basis he advances.
Analysis
[61] It is clear that the Courts are reluctant to strike out a third party claim on this ground. The leading authority in New Zealand is that in ANZ Banking Group (NZ) Ltd v Dairy Containers Ltd.19 In that case, the Court of Appeal allowed ANZ to seek contribution from the New Zealand Dairy Board (the owner of Dairy Containers Ltd) while at the same time claiming contributory negligence against the plaintiff itself (Dairy Containers Ltd). Thomas J said:20
In the end, the questions of contribution and apportionment of blame will come down to the trial Judge’s assessment of issues of causation and the various parties’ respective responsibility for the losses suffered by DCL. These issues and that responsibility could differ in kind and extent as between DCL and NZDB and can probably be assessed separately. Of course, the trial Judge would need to be careful not to assess the culpability attaching to a given set of facts twice over. But that would not be a difficult exercise. For this reason, I consider that NZDB should be joined in both proceedings.
[62] In the event, the matter also came to trial before Thomas J.21 At trial too he considered that it is open to a defendant to seek contribution from a joint tortfeasor notwithstanding that the wrong complained of may also constitute contributory negligence. He repeated that in the end, it is for the presiding Judge to decide on the grounds of justice and equity what should be done in relation to a claimed contribution.
[63] In that case, having heard all the evidence, the Judge disallowed the contribution claim against the New Zealand Dairy Board.
[64] He gave four reasons.22 First, the additional third party claim unnecessarily complicated the litigation. Second, s 17 is focused on damage attributable to the
relevant defendant. It did not relate to damage attributable to both the defendant and
19 ANZ Banking Group (NZ) Ltd v Dairy Containers Ltd CA156/92, 17 December 1992.
20 At 22-23.
21 Dairy Containers Ltd v NZI Bank Ltd, above n 5.
22 At 86-87.
the plaintiff. Third, contribution should await resolution of the contributory negligence claim against the plaintiff. And fourth, there is no prejudice in disallowing contribution where the negligence in issue, is negligence that would found the defence of contributory negligence – there being no question as to the ability of the plaintiff to pay where the claim is in fact a defence.
[65] A more recent decision of Associate Judge Osborne in Walter Peak Corporate Trustee Ltd v Anderson Lloyd maintains this pre-trial reluctance.23 In that case Anderson Lloyd sought to join three third parties, one of whom was a director of the plaintiff. The three parties had, in various capacities, represented the plaintiff in negotiations. Associate Judge Osborne granted leave to the defendant to issue the third party notices. While co-extensive responsibility may well ultimately have been a bar, the learned Judge took the view that at trial a court may find the relationships between the parties or the capacities of the third parties to be of a different nature. The Judge found:24
Through having all relevant parties before the Court there will be the opportunity, as Thomas J noted [in Dairy Containers], for the individual responsibilities and contributions to be assessed and for those to be taken into account directly in relation to matters such as contributory negligence. I accept, as Mr Morley submitted, that before trial one cannot confidently predict that the negligence or breach of duty by a third party will necessarily translate into an equivalent and co-extensive contributory negligence by the plaintiff. That is something that calls for full examination at trial when the nature of all relationships is established.
[66] There is also extensive post-trial discussion of the issue of identification in the New South Wales appellate decision in Daniels v Anderson, a case to which I have already made reference. Here, Clarke and Sheller JJA found that even though there was not necessarily a strict correspondence between the acts and omissions of Mr Hooke (properly to be taken into account in establishing the contributory negligence of AWA), and those acts which constituted his “notional liability” to AWA
for negligence, the former was at least a subset of the latter.25 This raised the
23 Walter Peak Corporate Trustee Ltd v Anderson Lloyd HC Dunedin CIV-2009-412-389,
9 December 2011.
24 At [54].
25 Daniels v Anderson, above n 17, at 579.
question of identification to which Mr Jagose referred. The Judges in Daniels cited
Dr Glanville Williams from Joint Torts and Contributory Negligence:26
In any case where the doctrine of identification is applied to reduce P’s recovery against D1, it necessarily follows that D1 must not be allowed contribution from D2 (the party with whom P was identified) under the Tortfeasor’s Act, for that would not be ‘just and equitable’ with s 6(2) of the Act. The damage is assessed against D1 corresponding exclusively to his own share of the responsibility, he has no right of contribution.
[67] The learned Judges accepted that this meant the undeniably negligent Mr Hooke managed to escape any liability, but, in accordance with Dr Williams’ view, to adopt any other approach would be to allow the defendant to double-dip.27
[68] With these authorities and judicial reluctance to assume co-incident liability at the pre-trial stage firmly in mind, the issue for me is whether there is any reasonable prospect that at trial, it may be found that the liability of Mr Mody and the contributory negligence of TEL are not completely co-extensive.
[69] Mr Cooper argues that there was at least some prospect of this and that it was far too early to say whether findings of fault against Mr Mody would necessarily translate into an equivalent and co-extensive contributory negligence by TEL. Mr Cooper points to the terms of cl 136.3 (see [17] above) which provides that TEL can perform its duties as trustee by engaging employees; then cl 155 which contemplates that such employees may be liable personally for failure to exercise the requisite skill and care; and then cl 159 which provides that neither the manager nor the trustee will be responsible for any loss occasioned by reason only of reliance on the opinion, advice, certificate or other information obtained from an employee where there is no reason to believe the opinion or advice to be inauthentic.
[70] Mr Cooper submits that these matters need to be properly tested before co-
extensive “identification” is the conclusion.
[71] As Mr Stevens points out, none of the authorities cited related to a third party claim in contribution against an employee of a contributorily negligent plaintiff.
26 At 579, citing G L Williams Joint Torts and Contributory Negligence (Stevens, London, 1951) at
446.
27 At 580.
Rather, the relationships disclosed in Dairy Containers, Walter Peak and Daniels v Anderson were inherently complex, ambiguous and (when viewed from a pre-trial stand point) capable of producing unexpected results after all the evidence was in. It is not surprising that the Courts were reluctant to prevent the claim to contribution proceeding when the nature of the relationships themselves (let alone their implications) could not be fully known before the evidence was given. That is not the position with respect to Mr Mody. He is an employee and nothing else. Clause
159 of the trust deed as argued by Mr Cooper does not change that vis-á-vis the auditor. Nor does that clause purport to exclude the general law of vicarious liability.
[72] In support of the argument that it is not possible to resolve questions of contribution under s 17 until the Court has settled the plaintiff’s contributory negligence, Mr Cooper called in aid the House of Lords’ decision in Fitzgerald v Lane.28 In that case, Lord Ackner overturned a trial award on the basis that the trial Judge telescoped those two questions into a single apportionment between the plaintiff (in contributory negligence) and the two defendants as contributors. The effect of this elision, was in that case (an automobile accident causing personal injury) to cause the trial Judge to overestimate the appropriate contribution by the
defendants by as much as 100 per cent.
[73] The difficulty for Mr Cooper is that there was no possibility in that case that the two defendant drivers each of whom struck the plaintiff could be said to have had entirely coincident liability. By definition, the damage they caused could not be indivisible. The error for which the House of Lords overturned the trial Judge’s decision would not have arisen if the two defendants were not separate drivers, but employer and employee necessarily responsible for the same damage.
[74] It must follow that I am able confidently to predict pre-trial what the trial Judge in Dairy Containers and the post-trial appeal court in Daniels v Anderson could conclude after the event; and that is that Mr Mody’s responsibility cannot on any view of the pleadings be seen as other than co-extensive with that of TEL. There is no ambiguity or complexity in the contractual, commercial or general tort
relationships between Mr Mody, TEL and (if necessary) Deloitte that would give rise
28 Fitzgerald v Lane [1989] 1 AC 328 (HL).
to any doubt about that inevitable conclusion. There is therefore no reason in this case to apply the cautious approach understandably adopted by Judges at the interlocutory stage in the cases I have reviewed.
[75] It follows that Deloitte would either be permitted to double-dip if it claimed contributory negligence against TEL and contribution from Mr Mody, or the claim in contribution against Mr Mody will by its very nature be a waste of the Court’s time, there being no possibility that it can succeed.
[76] I conclude therefore that Mr Mody’s presence before the Court will not be necessary to justly determine the issues arising in this litigation in terms of appropriate limits on parties as provided by r 14.1(a). On the contrary, as Gallen J (sitting with lay member Dr Brunt) concluded in Clear Communications v Sky Network Television Ltd, the addition of a third party “must add immeasurably to the complexity, delay, disposition and cost of the proceedings”.29
[77] The third party notice and claim against Mr Mody are struck out accordingly.
[78] Mr Mody will be entitled to costs. Brief memoranda may be filed if necessary.
Williams J
29 Clear Communications v Sky Network Television Ltd HC Wellington, CP19/96, 1 August 1997 at
78.
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