UDC Finance Limited v Rout
[2015] NZHC 212
•19 February 2015
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2014-409-000577 [2015] NZHC 212
BETWEEN UDC FINANCE LIMITED
Plaintiff
AND
STEPHEN DALE ROUT First Defendant
AND
MARU STACEY ROUT Second Defendant
JANE ROUT and STEPHEN DALE ROUT as trustees of the SD and JM ROUT FAMILY TRUST
Third Defendants
Hearing: 5 February 2015 Appearances:
M D Pascariu for Plaintiff
A N Riches for Second DefendantJudgment:
19 February 2015
JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
[1] The plaintiff (UDC) sues the second defendant (Mr Rout) under a guarantee he signed on 13 June 2007 by which he, the first defendant Stephen Rout (his father), and three companies in which his father and others held shares, guaranteed repayment to UDC of all guaranteed amounts then or in the future payable to UDC by each of the other guarantors. UDC seeks judgment for the sum owed to it by Stephen Rout as guarantor of the indebtedness of three companies, Steve Rout Contracting Limited, Blue 9 Limited, and Southern L C Limited.
[2] Mr Rout does not deny that he signed the guarantee, nor does he dispute the amount claimed from him by UDC. He says, however, that he signed the guarantee
under undue influence, and that UDC is estopped from claiming any sum from him.
UDC FINANCE LTD v ROUT [2015] NZHC 212 [19 February 2015]
[3] UDC applies for summary judgment against Mr Rout, under r 12.2 of the
High Court Rules. This provides:
12.2Judgment when there is no defence or when no cause of action can succeed
(1) The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to a cause of action in the statement of claim or to a particular part of any such cause of action.
...
[4] The principles the Court is to apply on an application for summary judgment are summarised in Krukziener v Hanover Finance Ltd:1
[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (PC). In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ
84 (CA).
[5] In Auckett v Falvey, Eichelbaum J said:2
On a summary judgment application, the onus is on the plaintiff to show that there is no defence. On the present facts, the plaintiffs are able to pass an evidential onus to the defendants by exhibiting the contract which on its face, entitles them to the remedy they now seek. The defendants are then in a position of having to demonstrate a tenable defence. However, the overall position concerning onus on the application is that at the end of the day the question is whether the plaintiffs have satisfied the Court as to the absence of a defence.
[6] I take from these authorities that the correct approach of the Court is to consider the following:
1 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307.
2 Auckett v Falvey HC Wellington CP296/86, 20 August 1986.
(a) Does the evidence for the plaintiff establish a position which on its face would entitle it to the remedies it now seeks?
(b) If so, has the defendant demonstrated a tenable defence?
(c) The onus which shifts to the defendant is an evidential one only; the burden of proving that the defendant does not have a defence rests throughout with the plaintiff.
[7] Because Mr Rout accepts that he signed the guarantee on which UDC relies, and has no quarrel with UDC’s assessment of the amount it says Stephen Rout, and therefore he owes under the guarantee, UDC has established a position which, prima facie, entitles it to judgment in the sum claimed.
[8] The issues on this application, therefore, are whether Mr Rout has demonstrated that he has a tenable defence, either:
(a) on the basis of undue influence at the time that he signed the guarantee relied on by UDC; or
(b) on the basis that UDC is estopped from claiming under the guarantee and thus whether UDC has proved that Mr Rout does not have a defence to its claim.
First issue: has Mr Rout demonstrated that he has a tenable defence on the basis that he signed the guarantee under undue influence?
[9] It is necessary, first, to record the terms of the guarantee on which Mr Rout is sued, and how it came to be given. Since 1998 UDC had made financial facilities available to Steve Rout Contracting Limited, a company in which Stephen Rout and his wife were the shareholders. Stephen Rout was its sole director, and one of the guarantors of advances made by UDC.
[10] According to Mr Rout, he started working for Steve Rout Contracting Limited in 1999, when aged 16. He started by helping out with emergency works required to deal with flooding in Queenstown. After that he did not return to school and he did not complete School Certificate qualifications. He worked with the
company as a labourer, full-time. This involved him working “out in the field” doing various physical jobs. In 2001 he became a truck driver and in 2002 he was promoted to site supervisor. In 2004, when he says he was 24 years old, Mr Rout moved into the office for the first time. He says that he then began attempting to learn what he describes as “the other side of the business”. I note in passing that the dates given by Mr Rout do not entirely align. If he was 16 in 1999, he would have been born in 1983 so in 2004 he would have been 21, not 24. In his affidavit sworn in 2014 he says he is 31, supporting this position.
[11] In 2004, Steve Rout Contracting Limited was expanding and had an opportunity to enter a 10 year supply contract with a developer of a very substantial planned project for approximately 200,000 cubic metres of concrete, at a contract value of some $40,000,000. At that point Steve Rout Contracting Limited was not involved in batching and selling concrete. It was Mr Rout’s task to do some business planning for this venture and obtain equipment quotes. He says, however, that his father handled the financing details of the proposal with finance suppliers. That included UDC.
[12] In June 2006 a company called Southern L C Limited was incorporated to manufacture and supply concrete. Mr Rout was appointed as a director, as was his father. The shares were all held by Blue 9 Limited of which Stephen Rout was the sole director, and he and his wife were the only shareholders.
[13] According to Mr Rout, he was not paid any director’s fees, rewarded on the basis of any share in the profits of the company, or indeed paid at all by that company. He received remuneration at $26 per hour for work he undertook for the company, but the paying company was Steve Rout Contracting Limited.
[14] In June 2007 Mr Rout was appointed a director of Procure Cement Limited. It seems this company was to supply cement for the concrete. Another company was incorporated as well, Procure Concrete Limited, but on the evidence before me there is no suggestion that Mr Rout was a director of this company. Mr Sunderland of UDC says that Southern L C Limited traded as Procure Concrete. The intricacies of which company performed which tasks are obscure but it is clear that by the time the
guarantee in question was signed, Mr Rout was a director of Southern L C Limited and Procure Cement Limited, both of which were to be engaged in the venture I have described.
[15] Since March 2004 and August 2004 respectively, Mr Rout had also been a director of Queenstown Hardfill Management Company Limited, and MOVENZ.Com. Mr Stephen Rout was also a director of both these companies. There were four other directors of the former, and in the latter Mr Rout held 100 of the 2,600 shares, and was one of 26 equal shareholders (on the evidence, his only shareholding in any company). There is no evidence before me of what, if anything, either of these companies did or what role, if any, Mr Rout played in either of them.
[16] UDC’s decision to fund the new venture was based at least in part by a business plan for the operation of the Procure Cement and Procure Concrete businesses, prepared by McCulloch and Partners, chartered accountants. In that document it is said that executive management of Procure Cement and Procure Concrete would be provided by Stephen Rout and Mr Rout, with day-to-day management provided by another person. The plan states that Procure Cement and Procure Concrete (Southern L C Limited):
are part of the Rout Group of companies which is actively involved in civil engineering contracting, screening and crushing contracting, landfill management, project management, property development and cartage contracting. The Rout Group operates throughout the South Island and in the Fijian Islands. Group turnover was around $10.5M for the 2006 year.
[17] The plan goes on to say that Procure Cement and Procure Concrete, while separate companies, operate as an integrated business and they “leverag[e] off relationships and activities” of other companies within the Rout group.
[18] The extent, if any, to which Mr Rout contributed to the preparation of this document is unclear. It was produced in evidence by Mr G E Hawke, an account manager with UDC, at the reply stage of affidavit exchange, so Mr Rout has not had an opportunity to give evidence on it. Mr Pascariu submits that because Mr Rout says in his affidavit that he was involved in planning the new venture, he was also involved in preparing this document. That is not established on the facts, and it
would appear to be generally inconsistent with the evidence Mr Rout gives about his involvement in the early stages of the new venture, and the arrangement and documentation of the funding provided for it by UDC.
[19] On 12 June 2007 Mr Rout signed documentation for a business loan of
$350,000 from UDC, and on 13 June for a further loan of $1,542,992.45. The former provided a current account with UDC, and the latter was applied to purchase of assets. In each case the borrower was Southern L C Limited. The former was backed by a “Cross-guarantee of Procure Cement Limited, Procure Concrete Limited, Stephen Dale Rout, Stacey Maru Rout & Southern L C Limited.”
[20] The latter provided for four guarantees from Procure Cement Limited, Procure Concrete Limited, Stephen Rout and Stacey Rout. Both are signed by Stephen Rout and Mr Rout with their signatures witnessed by an unidentified person. Procure Cement Limited and Procure Concrete Limited have executed the document as guarantors, but it does not appear that Mr Rout signed in this capacity. For present purposes nothing turns on this point because Mr Rout is sued on another document he signed on 13 June the cross-guarantee, not the guarantee solely of the borrowing of Southern L C Limited.
[21] The cross-guarantee is considerably wider in its ambit. Under this document, each of the guarantors I have listed guarantees to UDC the due repayment of all guaranteed amounts from time to time payable to UDC by each of the other guarantors, as well as the performance by each of the other guarantors of all of their obligations under guaranteed facilities. Guaranteed amounts are defined widely and include all amounts payable to UDC at that time or later in respect of any guaranteed facilities provided to any of the guarantors by UDC, together with interest and expenses. Guaranteed facilities are also defined widely: the term refers to all facilities or arrangements pursuant to which UDC “may now or in future provide Financial Services to any of the Guarantors”.
[22] By this document, therefore, Mr Rout took on liability for all indebtedness that any of the guarantors then had, or might thereafter have, to UDC. The potential extent of this is amply demonstrated by the claim in this case. Mr Rout is sued for
the entire sum owing by his father, Stephen Rout, some $4,600,000. Of this, just under $2,600,000 is owed by Stephen Rout as guarantor of Steve Rout Contracting Limited, and just over $1,700,000 as guarantor of Blue 9 Limited, a company in which, as I have said, Mr Rout had no involvement when he entered the guarantee on which he is now sued, in 2007. Only $303,853 relates to the indebtedness of Southern L C Limited.
[23] Mr Rout has never been a director or shareholder of Steve Rout Contracting Limited. That company paid his hourly wage in the early days and although it is impossible to be certain without more evidence (including, perhaps, records such as time sheets and pay slips) it seems reasonable to suspect that some of the work Mr Rout did may, at times, have been for Steve Rout Contracting Limited. However, the thrust of the evidence is that once Mr Rout came into the office, his main involvement was with the concrete project not with the more general work of Steve Rout Contracting Limited and his father did not take the step of getting him more involved with Steve Rout Contracting Limited in a managerial or governance role. On the evidence before me it is not established that Mr Rout had a commercial relationship with Steve Rout Contracting Limited to any material degree, yet the greater part of the claim now made relates to the indebtedness of that company.
[24] Further, Mr Rout has not at any point been a director or shareholder of Blue 9
Limited. It carried on contracting operations after Steve Rout Contracting Limited was placed into receivership. Mr Rout was able to make arrangements for Blue 9
Limited to contract in Christchurch with City Care after the February 2011 earthquakes. There is no suggestion in the evidence that Mr Rout had anything to do with the financial management of Blue 9 Limited. He is, however, a party to an agreement with UDC entered in November 2013 relating to all the indebtedness of Blue 9 Limited, Steve Rout Contracting Limited and Southern L C Limited. The indebtedness of Southern L C Limited was then the same as is claimed in respect of that company now. The same applies to the indebtedness of Steve Rout Contracting Limited. The indebtedness of Blue 9 Limited was then around $1,000,000 more than at present. That company assumed responsibility for sale of various assets, which presumably accounts for the difference.
[25] There is sufficient in the evidence before me to conclude that by the time this deed was signed in 2013 there was a commercial relationship between Mr Rout and Blue 9 Limited, but that was not the position in 2007 when the company was merely a shell and not trading. Mr Rout is not, of course, sued as a guarantor of the indebtedness of that company, but rather as guarantor of the indebtedness of his father which includes his debt to UDC as a guarantor of Blue 9 Limited.
[26] I have set out in detail the evidence on the nature of the relationships between Mr Rout and the various companies whose activities have led to the debt now claimed because of the distinction drawn in relation to undue influence between, on one hand, cases where there are commercial relationships between guarantors and debtors, and on the other hand, cases where there are familial relationships between guarantors and debtors. Before examining the evidence on the personal relationship between Mr Rout and his father, who, according to Mr Rout, required him to sign the cross-guarantee in the first place, I refer to the principles to be considered.
[27] In Gardiner v Westpac New Zealand Limited,3 the Court of Appeal reviewed recent cases on undue influence.4 Westpac sought to recover from Mr and Mrs Gardiner and their son, Zane Gardiner, the balance of advances made to their company, which they had guaranteed. The Gardiner’s first contention was that
Westpac had failed to meet obligations it owed to them at the time they gave their guarantees, with the result that their guarantees were unenforceable. In particular, Mr and Mrs Gardiner argued that they acted under the undue influence of their son. In the event the Court found that all the appellants had participated fully in the acquisition of a property for which funds were advanced and had agreed to provide
guarantees in the expectation that they would derive benefits from the venture.5
They also signed the documents after receiving legal advice. The guarantees were all found to be enforceable.
3 Gardiner v Westpac New Zealand Limited [2014] NZCA 537.
4 Barclays Bank Plc v O’Brien [1994] 1 AC 180 (HL); Wilkinson v ASB Bank Ltd [1998] 1 NZLR
674 (CA); Royal Bank of Scotland Plc v Etridge (No 2) [2001] UKHL 44, [2002] 2 AC 773;
Hogan v Commercial Factors Ltd [2006] 3 NZLR 618 (CA).
5 Gardiner v Westpac New Zealand Limited, above n 3, at [44].
[28] The Court of Appeal drew the following propositions from the cases reviewed:6
(a) In relation to relationships between surety and principal debtor other than wife and husband, Lord Brown Wilkinson in O’Brien held that “where the creditor is aware that the surety reposes trust and confidence in the principal debtor in relation to his financial affairs, the creditor is put on inquiry.”7
(b)In Wilkinson Blanchard J, delivering the judgment of Richardson P, Henry and Keith JJ, observed that a creditor will be put on inquiry when aware of facts giving rise to a presumption of undue influence.8
Undue influence is likely to be presumed if the guarantor has limited commercial ability, has a minimal financial stake in the enterprise guaranteed, and is in a relationship involving an emotional tie or dependency on the part of the guarantor towards the principal debtor.9
(c) In Etridge, the House of Lords considered eight appeals in which a wife had provided security for her husband’s indebtedness, or the indebtedness of a company through which he carried on business. The House of Lords extended the circumstances in which a financier will be put on inquiry to those situations where the relationship between the
debtor and the guarantor is “non-commercial”.10
(d)In Hogan, the Court of Appeal found that although in O’Brien and Etridge the focus had been on situations in which married women acted as sureties for their husbands, the benefit of the protection given by the rules relating to undue influence could not be confined to married
women or those in a sexual relationship with principal debtors. For that
6 At [28]-[34].
7 O’Brien, above n 3, at 198.
8 Wilkinson, above n 4, at 690.
9 At 690-691.
reason Etridge had extended the regime to all “non-commercial”
cases.11
(e) In Etridge Lord Nicholls had observed that banks could not be placed on inquiry only in cases where a debtor and a guarantor have a sexual relationship or where the relationship is one where the law presumes the existence of trust and confidence.12 His Lordship described that as an arbitrary boundary beyond which the law had already moved and noted that relationships in which undue influence can be exercised are infinitely various.13 His Lordship went on to discuss in detail the rationale for not defining categories of persons to whom the principles of undue influence will apply, but he excluded from the principles relationships between a debtor and a guarantor which are “commercial”.14 As instances of this, his Lordship referred to a guarantor being paid a fee, or a company guaranteeing the debts of another company in the same group. His Lordship then said “Those engaged in business can be regarded as capable of looking after themselves and understanding the risks involved in the giving of guarantees.”15
(f) There may be a difference between the approaches taken in Wilkinson and Etridge on when a creditor will be put on inquiry. Under Wilkinson this will occur when a financier has knowledge of facts leading to a presumption of undue influence. Under the approach taken in Etridge that will occur when the relationship between the principal debtor and the guarantor is non-commercial. The Court observed that to the limited extent that it considered the issue in Hogan, the Court of Appeal
in that case appeared to have favoured the Etridge approach.
11 Hogan, above n 4, at [43].
12 Etridge, above n 4, at [86].
13 At [86].
14 At [88].
15 At [88].
[29] There remains, therefore, a degree of uncertainty in this country on the circumstances in which a creditor will be put on inquiry over whether a surety is acting under undue influence. If the dictum of Lord Browne-Wilkinson in O’Brien were applied, UDC would be put on enquiry if Mr Rout were able to establish that UDC was aware that he reposed trust and confidence in the principal debtor which in this case is his father, Stephen Rout. If the Court were to adopt the approach of Blanchard J in Wilkinson, undue influence of Mr Rout would be presumed if he established that he had a minimal stake in the enterprises he guaranteed, and was in a relationship with his father which involved an emotional tie or dependency on him. But if the approach in Etridge is followed, and the circumstances fall within the
meaning of “commercial”16 as used by the House of Lords, a defence of undue
influence would not prevail.
[30] Mr Pascariu submits that the facts in this case establish that Mr Rout entered the guarantee as part of a commercial venture from which he was to profit and in which he held a role as a director of the companies which would carry it out. He also had a commercial relationship with his father who was bringing him into the business on an increasing basis with a view to his taking over the operations of the family business in due course. He says that the guarantee was nothing more than a standard arrangement for cross-guarantees for the indebtedness of various members of a group carrying on business together, that there was no lending involved which was not for commercial reasons, that the wider group was supporting the new concrete venture, and that Mr Rout took risk for the purpose of attaining reward. Or, in other words, the case is squarely within the dictum of Lord Nicholls in Etridge, at [28](e) above.
[31] Mr Riches, however, says the position is different where there is a guarantee given by a son, of the business of a father (as here, in relation to the indebtedness of all the guaranteeing companies because Mr Rout did not have shares in any of them). He notes that in Etridge Lord Nicholls referred specifically to the relationship of a
father with his child (there, his daughter). His Lordship said:17
16 At [88].
As with wives, so with daughters, whether a bank is put on inquiry should not depend on the degree of trust and confidence the particular daughter places in her father in relation to financial matters. Moreover, as with wives, so with other relationships, the test of what puts a bank on inquiry should be simple, clear and easy to apply in widely varying circumstances. This suggests that, in the case of a father and daughter, knowledge by the bank of the relationship of father and daughter should suffice to put the bank on inquiry. When the bank knows of the relationship, it must then take reasonable steps to ensure the daughter knows what she is letting herself into.
The relationship of parent and child is one of the relationships where the law irrebuttably presumes the existence of trust and confidence …
But the law cannot stop at this point, with banks on inquiry only in cases where the debtor and guarantor have a sexual relationship or the relationship is one where the law presumes the existence of trust and confidence. That would be an arbitrary boundary, and the law has already moved beyond this, in the decision in Burch. As noted earlier, the reality of life is that relationships in which undue influence can be exercised are infinitely various. They cannot be exhaustively defined.
[32] His Lordship then proceeded with the discussion of relationships to which I have referred, and recorded his conclusion that different considerations apply where the relationship between debtor and guarantor is commercial.
[33] Leaving aside for the present the question of whether the issue before the Court can be decided on the basis that there is a sufficiently commercial flavour to the relationship between Mr Rout and his father, Mr Riches developed his argument by reference to the presumption of trust and confidence, in the passage to which I
have just referred. In UDC Finance Ltd v Down, the Court of Appeal said:18
[29] In relation to the first element, the existence of undue influence, a guarantor must establish either by presumption or by evidence that she gave the guarantee as a result of undue influence. In order to give rise to a presumption of undue influence, Ms Down would have to show that she placed trust and confidence in either her husband or Mr Moorhead with respect to her financial affairs. As the Judge observed neither the relationship between Ms Down and her husband, nor between Ms Down and Mr Moorhead is one of those defined relationships where trust and confidence with respect to financial affairs is presumed as a matter of law. Ms Down would instead have to show as a matter of fact that she reposed trust and confidence.
[30] Even if a guarantor is able to show, either as a matter of law or as a matter of fact that he or she placed trust and confidence in the other party in relation to the management of the guarantor’s financial affairs, he or she
18 UDC Finance Ltd v Down [2009] NZCA 192 (CA).
must also show that the transaction is of a nature that calls for explanation. As Lord Nicholls said in Etridge at [14]:
On proof of these two matters the stage is set for the Court to infer that, in the absence of a satisfactory explanation, the transaction can only have been produced by undue influence.
[34] Mr Riches says that the relationship of father and son is a relationship where the law irrebuttably presumes the existence of trust and confidence. Therefore if Mr Rout could also show that the transaction is of a nature that calls for explanation, the Court may infer that in the absence of a satisfactory explanation, the transaction can only have been produced by undue influence.
[35] Mr Riches says that the facts show that this transaction is of a nature that calls for explanation, because it is not a guarantee only of the indebtedness of the borrowing of the companies involved in the new concrete venture, with which Mr Rout was to be involved on a commercial basis. Rather, it is a guarantee of actual and future indebtedness also, and most significantly, of the indebtedness of his father who was the principal driving force of the Rout group of companies. Mr Rout had no knowledge of such matters and arguably had no knowledge of the extensive ambit of the guarantee he signed. Mr Riches says he only signed because of the trust and confidence he reposed in his father (which on the evidence was actual, as well as being presumed).
[36] The basis for this submission is the evidence of Mr Rout on his relationship with his father in 2007. As I have noted he was then aged 24. He had no formal qualifications and all he knew of the business had been told to him by his father who wanted him and his brother Jesse to work in the business with a view to one day being able to take it over. He was eager to take this opportunity.
[37] At the time the guarantee was signed, his father and mother were about to go on holiday for the first time in 15 years. His father was eager to leave for his holiday and he wanted to get the documents for the loan signed up before he went. He called Mr Rout into his office on 13 June 2007 and informed him that as part of his stepping up as a director he wanted him to personally guarantee the debts of the company. He put the documents in front of him and told him to sign there and then. Mr Hawke of UDC Finance was also present. Mr Rout signed the documents.
At the time Gavin Hawke extremely (sic) excited to be providing finance for one of the largest deals in the country given that it was worth around
$10 million. The documents were put in front of me and I was told to sign
for the concrete side of the business. I signed a loan schedule on 12 June
2007 which is annexed and marked “D” to the affidavit of Roger Gray
Sunderland. I did not write my name but merely signed without reading the document.
[39] He then says:
Another document that I signed was a loan schedule guaranteeing the debts of Southern L C Limited in the amount of $1,537,965.45. They also had me sign a cross guarantee on the same day, I did not read this document nor initial the pages, I merely signed on the back page. My signature was witnessed by Gavin Hawke of UDC Finance.
At no point did either my father or Gavin Hawke suggest that I obtain legal advice or speak to a Solicitor in any way surrounding the document. I was not able to take it away and consider it. I did not feel I was in a position to say no, in particular due to the relationship with my father. We have worked together for a long time and at all stages of the business he always decided how things would be run and I merely followed his instructions.
[40] Mr Rout describes how from early in his life his father was the assistance coach of an ice hockey team in which he played. They travelled around the country together with the team for the season, which typically lasted around four months. They would have training two or three times a week. He says:
Given that he was a coach and had that position of authority, in addition to being my father, I have never really been in a position to refuse when he tells me to do things.
[41] Mr Rout says that in their working environment they were together 50 to 70 hours a week and then continued with ice hockey training for an additional 10 to 15 hours. He says:
We had a very close working relationship that was strong with mutual respect, we never argued and for the most part I took his advice and mentorship. There was no reason for me not to given that he had always been successful in business and I trusted him. He was a figurehead within the Queenstown community.
[42] Later in his affidavit Mr Rout asserts that he was pressured into entering the guarantees by his father.
I recall that my parents Steve and Jane were leaving the country at or around the time the loan and guarantee documents were to be signed and there was a pressure to have them signed so that the transaction could take place.
I did not carefully read the Cross Guarantee before I signed it and I did not consider obtaining independent legal advice. There was no time for this and I signed the document because my father was comfortable with it and I saw no issue with it. I turned up at my father’s office and was told “here are the documents, they’re fine, please sign them”.
I had no idea that this document would be relied on to rope me into my father’s own guaranteed debts to UDC. I thought that it only related to the debts owing by Southern L C Limited.
[44] Mr Hawke refers to the signing of the guarantee, but his recollection differs. He says:
I recall that I attended Stacey Rout’s office for execution of the loan and the cross-guarantee dated 13 June 2007 … To the best of my recollection, Stephen Rout was not present in Stacey Rout’s office. At the time of signing the Cross Guarantee, Stacey Rout signed an authority for UDC to complete documentation and a director’s certificate on behalf of Southern.
[45] Mr Hawke then notes that as a matter of general practice he recommends to all his clients that they seek independent legal advice, and although he does not remember whether he gave that specific advice to Mr Rout he notes that the cross- guarantee includes an acknowledgement that the guarantor has obtained legal advice. He then says:
As Stacey Rout was in a management role with the businesses operated by the Rout family, including in tendering for work and contracting on behalf of those businesses, I would have expected that he understood the nature of the loan and security documents he was signing, including the Cross Guarantee.
[46] There is a clear conflict in the evidence on whether Mr Stephen Rout was present when Mr Rout signed the guarantee, and on whether the signing took place in the office of Mr Rout, or that of his father. The latter point seems to be of little significance; if the influence of his father was as significant to Mr Rout as he says, the room in which the document was signed is unlikely to matter. The former point is possibly of more significance, the presence of the source of influence perhaps adding an additional element to its force.
[47] The difficulty with the evidence on an application for summary judgment is that it is not given in person, so neither Mr Rout nor Mr Hawke can be observed by the Court giving evidence, or being cross-examined on it. By that means, the Court could make a more informed informed view on the true extent to which Mr Rout’s will was effectively driven by his father, and for that matter, on whether Mr Hawke might be open to criticism for getting the documents signed by Mr Rout without making sure that, despite the acknowledgement in the documents, he did in fact read them carefully, fully understand them and take legal advice on them.
[48] If the defence of undue influence is open to the Court on the basis of Mr Rout’s relationship with his father,19 in my judgment Mr Rout has put sufficient evidence before the Court to establish the availability, on the facts, of a defence of undue influence. The strong argument for UDC however is that the relationship between Mr Rout and each of the other cross guarantors is commercial and the relationship of father and son on which Mr Rout relies is irrelevant.
[49] The judgment in Gardiner does not give guidance on when a relationship between a debtor and a guarantor will be considered to be commercial. Furthermore, little guidance is given in the judgment of Lord Nicholls in Etridge. One example cited is where a guarantor is being paid a fee, and another is where a company is guaranteeing the debts of another company in the same group. In this judgment, these examples precede the statement that those engaged in business can be regarded as capable of looking after themselves and understanding the risks involved in the giving of guarantees.
[50] If this claim were based on a guarantee given by Mr Rout solely of the indebtedness incurred by the companies intending to take part in the concrete venture, of which he was a director, in my view there could be no arguable case but that the overall flavour of the transaction was commercial. On such a claim, a defence of undue influence could probably not succeed if the law in this country follows the approach in Etridge. Plainly Mr Rout was involved on a commercial basis with that venture and, in relation to it, with Stephen Rout. His duties may not
have involved arranging finance but he was aware that finance was needed and
19 In accordance with the principles summarised at [28] above, and discussed below.
indeed he obtained quotes for the items for which finance was required. It may be otherwise if the law is as stated in Wilkinson, because of the relationship between Mr Rout and his father.
[51] The guarantee he signed, however, was far broader. The evidence establishes sufficiently for the purpose of demonstrating that there is an arguable defence on this application for summary judgment the following propositions:
• Mr Rout was in a relationship of trust and confidence with his father when he signed the cross-guarantee. He was relatively new to the business side of the family enterprises, he was relatively young and inexperienced in business, and he had looked up to his father in a number of roles all of his life. He was keen to get ahead and the key to that occurring was his father. There is a sufficient foundation in the evidence for the Court to find at trial that UDC was on inquiry that Mr Rout may be acting under undue influence.
• The ambit of the guarantee was not explained to him by Mr Hawke or his father. He did not read it. It was not suggested to him that he take independent legal advice and he did not do so. Mr Hawke was present at the time of signing and on one version of events, so also was Stephen Rout.
• Mr Rout did not know that by signing the guarantee he was taking personal responsibility for all indebtedness to UDC by all the guarantors including in particular his father who, himself, had guaranteed indebtedness to UDC for other businesses within the family enterprise, and would continue to do so. Further, his father told him he was signing for “the concrete side of the business”. This might refer to his committing only the concrete companies to the debt, not himself personally, or it might mean he was guaranteeing only the debts incurred for the concrete venture.
[52] It follows that, in my opinion, it is established, to the extent necessary to defend this application (that is, it is arguable) that, even if the principle in Etridge is
applied in New Zealand, the guarantee relied on encompasses responsibility for indebtedness that may be outside the contemplation of commercial arrangements as they have been discussed in this context, in Etridge and the cases decided since Etridge. The guarantee certainly relates in part to indebtedness for which Mr Rout may be responsible, as I have said, because he was commercially involved in the activities of the companies engaged in the concrete venture. It included, however, actual and potential indebtedness of companies which Stephen Rout owned and ran. It is not established that Mr Rout was commercially involved (in the sense that term has been applied in this context to date) with his father in respect of these companies. This directs me to conclude that summary judgment could not be entered on the claim, even if the principle in Etridge is applied.
[53] I therefore find this to be the position. First, if the principle to be applied is that of the Court of Appeal in Wilkinson, it is sufficiently established that a defence of undue influence may be available to Mr Rout. Unless and until Etridge is applied in New Zealand, Wilkinson states the law.
[54] Secondly, a decision to apply the principle in Etridge and not that in Wilkinson should not, in my view, be made in the context of a summary judgment application. In Couch v Attorney-General, in the context of an application to strike out a proceeding, the Chief Justice expressed caution against deciding cases
involving novel duties of care on a summary basis.20 Whilst the present context is
materially different, the reasons given by the Chief Justice for caution resonate where, on a summary basis, the Court is asked to determine which of two principles should be applied to facts established by affidavit, but untested by cross- examination. The Chief Justice said:
[32] It is often not easy to decide whether a duty of care not previously recognised by authority is owed to the plaintiff, as Woodhouse J in Takaro acknowledged and as is amply demonstrated on the authorities. It may be unrealistic to expect that the pleadings and arguments to support a claim will always be adequate at an early stage of the proceedings. Caution in disposing of such cases on a summary basis is necessary both to prevent injustice to claimants and to avoid skewing the law with confident propositions of a legal principle or assumptions about policy considerations undisciplined by facts.
20 Couch v Attorney-General [2008] NZSC 45; [2008] 3 NZLR 735. Applied by the Court of
Appeal in Blain v Evan Jones Construction Ltd [2013] NZCA 680 at 62.
[55] In Gardiner, the Court noted the different approaches taken in Wilkinson and Etridge, a point recognised also in Hogan, but did not decide which approach should be taken.21 After noting that in Hogan a final decision on whether the principles enunciated in Etridge would be applied in New Zealand should be left “for a case in which the issue arose more clearly, and where the Court had the benefit of full information as to industry practice”,22 the Court said: “We do not consider it necessary in the present case to finally determine whether the principles enunciated in Etridge should be applied in New Zealand.”23
[56] The Court found on the facts that Westpac had taken sufficient steps to insulate itself from the possibility that Mr and Mrs Gardiner may have acted under the undue influence of their son. The Court also said, however: “We also record that this is not a situation where one or more members of a family agree to guarantee the indebtedness of other members of the family when they were not deriving any
benefit themselves from the transaction.”24
[57] Here, Mr Rout agreed to guarantee the indebtedness of another member of his family, his father, when arguably he was not deriving any benefit, or any material benefit, from so doing. Any benefit he stood to derive arose from the lending for the concrete venture, though even in that respect he was not a shareholder in any of the companies, so apart from his being employed to work in the new venture there was no other apparent tangible benefit to him. And there is no evident benefit in having also guaranteed all the indebtedness of Stephen Rout, and through him, Steve Rout Contracting Limited and Blue 9 Limited.
[58] Thirdly, if the principle to be applied is that in Etridge, it is also necessary to determine whether the term “commercial” is sufficiently broad to encompass the circumstances of this case. The scope for argument on this point is readily apparent from the facts I have summarised; a decision on this point should not be made on a
summary basis for the reasons I have given in [54] and [55].
21 Gardiner, above n 3.
22 Gardiner, above n 3, at [43].
23 At [44].
24 At [44].
[59] For these reasons, UDC has not established that Mr Rout does not have an arguable defence of undue influence.
Second issue:
[60] The finding on the first issue is sufficient to determine this application. UDC may now take this case to trial. In that circumstance it is preferable that I do not make any finding on the second issue.
Outcome
[61] The application for summary judgment is dismissed.
[62] At the conclusion of the hearing both counsel accepted that costs should follow the event. On reflection, given the principle in NZI v Philpott, I think costs
should be reserved, and I so direct.25
J G Matthews
Associate Judge
Solicitors:
Minter Ellison Rudd Watts, Auckland. Saunders & Co, Christchurch.
25 NZI v Philpott [1990] 2 NZLR 403.
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