WILLIAM GEORGE PORTER BIRNIE CHARLES GILBERT PEARCE AND OUTWARD LIMITED PRICEMAKER LIMITED ROB DACRE ROGERS PLAYMAKER LABS LIMITED
[2024] NZHC 2665
•16 September 2024
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2020-485-759
[2024] NZHC 2665
BETWEEN WILLIAM GEORGE PORTER BIRNIE
First Plaintiff
CHARLES GILBERT PEARCE
Second Plaintiff
AND
OUTWARD LIMITED
First Defendant
PRICEMAKER LIMITED
Second Defendant
ROB DACRE ROGERS
Third Defendant
PLAYMAKER LABS LIMITED
Fourth Defendant
Hearing: 17 – 19 June 2024 Appearances:
R L Latton for Plaintiffs
P A Dowell, Director of the First, Second and Fourth Defendants R D Rogers, Third Defendant in person
Judgment:
16 September 2024
JUDGMENT OF McHERRON J
Table of Contents
Introduction[1]
The plaintiffs’ investment[5]
Settlement agreement[9]
Procedural issues — non-representation of defendants at trial[10]
Alleged representations[22]
Representation one — the backstop representation[24]
Representation two — the Blockhaus representation[27]
BIRNIE v OUTWARD LIMITED [2024] NZHC 2665 [16 September 2024]
Representation three — Maersk pilot[28]
Were the first three representations made to Mr Pearce?[31]
Inducement to invest — June 2018[36]
Representations inducing plaintiffs’ second tranche of investments in October 2018[37]
Representation four — Maersk pilot[38]
Representation five — Seabury due diligence[39]
Representation six — Maersk pilot[40]
Representation seven — Seabury representation B[41]
Applicable law[42]
Defendants’ response to allegations[57]
Agency — Mr Rogers[58]
First and second defendants were in trade[59]
Were the representations made?[60]
Representation one — backstop representation[61]
Representation two — Blockhaus representation[63]
Representations three, four and six — Maersk pilot[65]
Representations five and seven — Seabury due diligence[66]
Lack of due diligence by plaintiffs[68]
My assessment[69]
Representation one — the backstop representations[69]
Representation two — Blockhaus representations[83]
Representations three, four and six — Maersk pilot[93]
Representations five and seven — Seabury due diligence representations[98]
Summary of factual findings[101]
Was Mr Rogers an agent for Outward/Pricemaker?[104]
Mr Rogers is not liable in his own right[114]
Do the exclusion clauses provide a defence to the defendants?[115]
Remedy[134]
Breach of settlement agreement[147]
Result[151]
Costs[153]
Introduction
[1] The plaintiffs, William Birnie and Charles Pearce, were investors in the business of the first defendant, Outward Ltd. Outward was a start-up company carrying on business as a software developer, particularly of blockchain technology that would be used in international trade.1
1 A blockchain is a decentralised digital ledger that is distributed across computers worldwide linked by a peer-to-peer network. The ledger contains growing lists of records (blocks) that are securely linked together. Each block in the chain contains information about the previous block in the chain so the data in a block cannot be altered retroactively without altering all subsequent blocks. It is very secure and cannot be altered by unauthorised persons.
[2] The second defendant, Pricemaker Ltd, owned all the shares in Outward. From about April 2018, Outward and Pricemaker sought investors to fund Outward’s business.
[3] The structure of the investment offered to investors was a convertible note agreement, under which:
(a)Convertible notes in Outward would convert to Outward tokens upon the occurrence of a token generating event.2
(b)The Outward tokens would be used as part of a new blockchain process for the international trade of goods being developed by Outward.
(c)If the token generating event did not occur within a defined timeframe, the convertible notes could be converted into fully paid ordinary shares in Pricemaker, at a value of $4.09 per share.
[4] The plaintiffs allege that the third defendant, Rob Rogers, acting as Outward and Pricemaker’s agent, made various representations to them about the nature of Outward’s business and its plans. The plaintiffs allege they were induced by those representations to invest in Outward. They allege the representations were misleading and deceptive and that, if they had known the truth, they never would have invested. They seek a refund of the money they invested, plus interest.
The plaintiffs’ investment
[5] The plaintiffs invested a total of $325,000 in Outward’s convertible notes, as follows:
(a)on or about June 2018, $75,000 was invested by Mr Birnie and $75,000 was invested by Mr Pearce; and
2 A token generating event refers to creating a digital token (or cryptocurrency) and making it available for purchase by eligible users through a blockchain based network or service. The first time a new token (or cryptocurrency) is issued on a blockchain based network or service is referred to as the token generating event.
(b)on or about October 2018, a further $125,000 was invested by Mr Birnie and $50,000 was invested by Mr Pearce.
[6] Outward’s token generating event never occurred. The plaintiffs’ convertible notes were duly converted into shares in Pricemaker. Subsequently, those shares have been further converted into shares of Playmaker Labs Ltd, the fourth defendant.
[7]The plaintiffs allege that:
(a)the shares that they now own in Playmaker Labs are essentially worthless; and
(b)they are unable to sell the Playmaker Labs shares; and
(c)they have, in effect, suffered a total loss of the funds they invested.
[8]They seek:
(a)a declaration that the convertible note agreements are void ab initio; and
(b)to recover the full amount of their respective investments, plus interest:
(i)from Outward and Pricemaker, by way of refund under s 43(3)(e) of the Fair Trading Act 1986;
(ii)alternatively, against all the defendants, an order for damages in the sum of $325,000 on a joint and several basis.
Settlement agreement
[9] On or about 5 September 2022, all parties entered into a settlement agreement. The settlement agreement required Mr Rogers to purchase some of the plaintiffs’ Playmaker Labs shares for $100,000. Playmaker Labs was required to purchase the remainder of the shares for $200,000. Apart from a payment by Playmaker Labs of
$10,000, the third and fourth defendants paid no other amounts pursuant to that settlement agreement. The plaintiffs seek judgment against Mr Rogers and Playmaker Labs for breach of the settlement agreement, and damages reflecting the unpaid amount, plus interest.
Procedural issues — non-representation of defendants at trial
[10] None of the defendants were legally represented for the trial. On 14 May 2024, Radich J ordered that the solicitor and counsel for the first, second and fourth defendants were entitled to withdraw because those defendants had failed to pay legal fees on the agreed basis.3 Mr Rogers has represented himself for longer. Radich J noted that alternative representation could be arranged for the defendants or, if steps were not taken, the proceeding could be dealt with on a formal proof basis.
[11] The proceeding was called in the Judge’s Chambers List on 10 June 2024. Mr Rogers and Peter Dowell, the director of the first, second and fourth defendants, attended that telephone conference and confirmed that they would appear at the hearing. I convened a further telephone conference the next day at which Mr Rogers confirmed that he intended to give evidence and cross-examine the plaintiffs’ witnesses. Mr Dowell also sought leave to represent the first, second and fourth defendants at the trial. I noted that, as a director of each of those companies,
Mr Dowell had no right to represent them in legal proceedings.4
[12] At the telephone conference, Mr Dowell indicated that his companies were solvent but that he was the ultimate source of their funds and controlled how they would be spent. He had decided to withhold payment from his lawyers and apply those funds to other matters. Mr Latton, for the plaintiffs, submitted that this indicated the defendants had made a tactical decision to deploy funds elsewhere rather than genuine grounds justifying non-lawyer representation.
[13] At the teleconference, I said I was not persuaded that Mr Dowell should be permitted to represent the defendants. I confirmed my preliminary view at the
3 Birnie v Outward Ltd [2024] NZHC 1197.
4 Re G J Mannix Ltd [1984] 1 NZLR 309 (CA).
beginning of the trial. Where a company has made a commercial decision not to instruct counsel and instead used its funds for other purposes, that will not, on its own, justify permitting a director of that company to act in court as its legal representative. As Cooke J stated in Re G J Mannix:5
In general, and without attempting to work out hard-and-fast rules, discretionary audience should be regarded, in my opinion, as a reserve or occasional expedient, for use primarily in emergency situations when counsel is not available or in straightforward matters where the assistance of counsel is not needed by the Court or where it would be unduly technical or burdensome to insist on counsel.
[14] As Mr Latton pointed out, Mr Dowell had no substantive personal involvement in the misrepresentations that are the core focus of the plaintiffs’ proceeding. Moreover, no prejudice has been identified as Mr Rogers, who represents himself, is party to all of the same causes of action and has adopted a very similar if not identical position in response to each of them.
[15] Mr Latton also pointed to the fact that none of the defendants served briefs of evidence in accordance with the agreed timetable and all would require leave to do so.6
[16] In my minute dated 11 June 2024, I directed that any applications for leave to serve late briefs of evidence were to be filed and served no later than Friday 14 June 2024.7 No applications for leave were filed within that deadline, or at all.
[17] In any event, as Mr Latton pointed out, the proceeding largely turns on documentary evidence. Full discovery occurred at the time when all parties were legally represented. As a result, a comprehensive bundle of documents was filed which, thanks to Mr Latton’s efforts, has been helpfully arranged and indexed in chronological order.
[18] Accordingly, I determined at the beginning of the trial that Mr Dowell would not be permitted to represent the first, second and fourth defendants. However, I
5 At 314.
6 Radich J had directed that the defendants’ evidence was due to be served on 6 May 2024.
7 Birnie v Outward Ltd HC Wellington CIV-2020-485-759, 11 June 2024 (Minute of McHerron J).
allowed him to sit with Mr Rogers at counsel’s table (apart from when other witnesses were giving their evidence, when he would not be permitted to remain in Court). Further, Mr Rogers could call Mr Dowell as his witness.
[19] Because Mr Dowell served no brief of evidence within the timeframe provided, Mr Latton reserved the right to recall his witnesses (the plaintiffs) to give further evidence following Mr Dowell’s evidence. In addition, Mr Latton requested that Mr Dowell provide a will say statement of his intended evidence no later than 8 am on the second day of the trial, 18 June 2024. I made directions accordingly.
[20] Mr Dowell and Mr Rogers also sought leave to call Erin Walshe (Outward’s Chief Executive Officer) as a witness. Mr Latton opposed this application primarily on the basis that no statement of evidence had been provided by Mr Walshe or any other notice that he would be called as a witness. For these reasons, I declined their application to call Mr Walshe.
[21]The trial therefore proceeded, with Mr Rogers:
(a)giving his own evidence;
(b)calling Mr Dowell as a witness;
(c)cross-examining the plaintiffs; and
(d)making submissions.
Alleged representations
[22] The plaintiffs’ case as argued at trial was based on seven alleged representations, all of which were made by Mr Rogers.8
[23] The first two alleged representations were both in an email dated 17 May 2018 from Mr Rogers to Mr Birnie. For convenience, I set out the entire email:
8 Additional representations were pleaded, however these were not relied on in the plaintiffs’ submissions at trial and so they are not discussed further in this judgment.
Representation one — the backstop representation
[24] The backstop representation was described by Mr Latton as the most significant representation upon which the plaintiffs’ case is founded. Without this representation they would not have commenced the proceeding at all.
[25] The backstop representation comprises the first two paragraphs underneath the heading “About the Convertible” in the 17 May 2018 email above, in particular the representations about the profitability, revenue, growth and valuation of the company in the second of those paragraphs.
[26]The plaintiffs allege that the same representation was made to Mr Pearce orally.
Representation two — the Blockhaus representation
[27] This representation was contained in the same email dated 17 May 2018 (as well, it is alleged, in oral representations to Mr Pearce) and is contained under the heading “Closing Tomorrow”, in particular the representation that “Outward has … been accepted into Blockhaus (which is a big step, even though I am a Centrality co- founder – they get 50-100 applications a month and take 2-4 of them)”.
Representation three — Maersk pilot
[28] This alleged representation was in an email from Mr Rogers dated 24 May 2018, in the second paragraph of which Mr Rogers advised Mr Birnie that a “pilot” would be happening within two to three months:9
[29] In cross-examination, Mr Rogers confirmed that in this email he was referring to the Maersk pilot involving Outward’s software.
Q.You were talking in that email about the pilot of this happening within two to three months.
A. Yes.
Q. You’re referring there to the pilot with Maersk?
A. I am referring there to the pilot with Maersk, yes.
9 Email addresses and names of other persons who were blind copied into this email have been redacted.
Q.Can you show any document in the bundle in which Maersk agreed to undertake a pilot of Outward’s software?
A. No.
[30]No such pilot ever eventuated.
Were the first three representations made to Mr Pearce?
[31] Neither of the 17 May 2018 and 24 May 2018 emails (above) containing the first three alleged misrepresentations was addressed to Mr Pearce. His evidence was that Mr Birnie suggested investing in Outward with him in about May 2018. At that time, he and Mr Pearce were flatting together. Mr Rogers, who was an acquaintance of Mr Birnie, visited the flat on a reasonably regular basis. It was on these occasions, when Mr Rogers was visiting the flat, that Mr Pearce first heard details about Outward. Mr Pearce said he knew there was no evidence Outward would succeed, but that Mr Rogers told him:
(a)he was acting as Outward’s agent in raising funds, and that Mr Rogers earned a commission from Outward for the funds he raised from them;
(b)about the backstop option, providing for the conversion of the investment in Outward into shares in Pricemaker, in a discussion at the flat in early- to mid-June 2018;
(c)Pricemaker was currently profitable, with annual revenue of about
$3 million across all its businesses;
(d)the convertible option conservatively valued Pricemaker at about
$9 million, and the company was growing quickly;
(e)Outward had been accepted into Blockhaus NZ Ltd, a blockchain based investment bank which specialised in and underwrote the sort of token generating event that Outward was seeking to drive its investment from;
(f)that, due to Blockhaus’s involvement, the token generating event was unlikely to be abandoned.
[32] Mr Pearce said he thought, based on these discussions with Mr Rogers, that Outward sounded like a “potentially exciting investment”. He understood that, by accepting Outward, Blockhaus was in essence telling the world that Outward was a serious investment opportunity.
[33] Under cross-examination by Mr Rogers, Mr Pearce confirmed that, in making his investments in Outward, he had relied on the representations Mr Rogers had made to him orally and the written documentation Mr Rogers drafted that Mr Birnie gave him. Mr Pearce also confirmed in cross-examination that he received a copy of the email from Mr Rogers to Mr Birnie dated 17 May 2018 (above at [22]). This email included financial information on which Mr Pearce relied before making his initial investment. The information on which he relied included that Pricemaker:
(a)was profitable;
(b)had $3 million annual revenue; and
(c)was valued at around $9 million.
[34] From this information Mr Pearce assessed that the backstop option would lower the risk of the investment.
[35] Mr Rogers did not dispute, and I accept, Mr Pearce’s evidence that Mr Rogers made the representations to him orally.
Inducement to invest — June 2018
[36] The plaintiffs allege that, on the strength of the first three representations, they were induced to invest in Outward’s business in June 2018. This led to the first tranche of their investment (see [5](a)] above).
Representations inducing plaintiffs’ second tranche of investments in October 2018
[37] The plaintiffs allege the following additional representations by Mr Rogers prior to their second tranche of investments in October 2018.
Representation four — Maersk pilot
[38] The fourth alleged misrepresentation is contained in an email dated 17 August 2018, from Mr Rogers to Messrs Pearce and Birnie, in particular the representation in the first paragraph under the heading “1. OUTWARD” that Outward had delayed the token generating event to “probably have the Maersk pilot finished & ready to go to market with them => we can do a way bigger and more successful TGE”:
…
Representation five — Seabury due diligence
[39] The plaintiffs allege that on or around 20 August 2018 Mr Rogers advised them orally that due diligence was being undertaken on Outward by Seabury LLC, a major United States-based investor. The plaintiffs allege that this representation was repeated by Mr Rogers on 30 September 2018 via Facebook Messenger.
Representation six — Maersk pilot
[40] An email dated 5 September 2018, to Mr Birnie, Mr Rogers stated that “… currently Maersk are paying EY $2 million to design, oversee and document a Maersk centric pilot of Outward’s platform, which is expected to be completed by November”.
Representation seven — Seabury representation B
[41]As part of the same email dated 5 September 2018, Mr Rogers stated that:
Seabury, who have this idea already in mind have said they are prepared to look at an investment of $5 million for 20 per cent or US$30 million for 80 per cent. This offer is currently under due diligence and should be completed shortly.
Applicable law
[42] The plaintiffs allege that the seven representations described above were made in breach of s 9 of the Fair Trading Act 1986. That section provides:
Misleading and deceptive conduct
9 Misleading and deceptive conduct generally
No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
[43] The plaintiffs also allege that the defendants’ conduct in making the above representations was false and misleading as to the characteristics of Outward, in breach of s 13(b) of the Fair Trading Act, which provides:
False representations
13 False or misleading representations
No person shall, in trade, in connection with the supply or possible supply of goods or services or with the promotion by any means of the supply or use of goods or services,—
…
(b) make a false or misleading representation that services are of a particular kind, standard, quality, or quantity, or that they are supplied by any particular person or by any person of a particular trade, qualification, or skill, or by a person who has other particular characteristics; or
…
[44] Establishing liability under ss 9 or 13 of the Fair Trading Act involves a two- stage inquiry:10
(a)First, whether the conduct has been misleading and deceptive for the purposes of s 9 (or s 13) of the Fair Trading Act. Context is relevant, including the characteristics of the person affected. It is possible to frame this stage of the inquiry as whether a reasonable person in the plaintiffs’ position would likely have been misled or deceived by the representation.11
(b)Once a breach of s 9 (or s 13) has been established, the next stage is to establish if the loss or damage was caused by the conduct of the defendant for the purposes of s 43. This question engages a “common law practical or common-sense concept of causation”.12
[45] A claimant must actually have been misled or deceived by the defendant’s conduct. Moreover, the conduct must have been an effective cause of the claimant’s loss. However, it does not have to be the sole cause of the loss.
10 Red Eagle Corp Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492.
11 At [28].
12 At [29], quoting Wardley Australia Ltd v Western Australia (1992) 175 CLR 514 (HCA) at 525 per Mason CJ, Dawson, Gaudron and McHugh JJ, speaking of the equivalent Australian provision, s 82 of the Trade Practices Act 1974.
[46] Although the plaintiffs have included causes of action under s 35 of the Contract and Commercial Law Act 2017, in his oral submissions Mr Latton confirmed that these causes of action did not add anything materially to the Fair Trading Act causes of action. Accordingly, I limit my analysis to the Fair Trading Act causes of action and the action for breach of the settlement agreement.
[47] The plaintiffs allege that Mr Rogers was acting at all material times as an agent of Outward and Pricemaker, with authority to make the representations he did. The plaintiffs allege:
(a)Mr Rogers was responsible for raising money for Outward and Pricemaker, particularly in relation to the sums raised from the plaintiffs.
(b)Mr Rogers was paid commission based on the amount of investment he raised.
[48]An agency relationship can be created by:
(a)an express or implied agreement between principal and agent in which the agent consents to act as an agent;13 or
(b)a subsequent ratification by the principal of the agent’s acts done on its behalf;14 or
(c)estoppel under the doctrine of apparent or presumed authority.15
[49] No particular formalities are required to appoint an agent and no written agreement is necessary.16
13 Cynthia Hawes and Dale Lester Laws of New Zealand Agency (online ed) at [29]–[30].
14 At [42].
15 At [37]–[41].
16 At [32].
[50] Agency can be implied if there is conduct of the parties towards each other from which it is reasonable to infer consent to the relationship of agency.17
[51] Parties may be deemed to have entered an agency relationship even if they themselves do not recognise it or have not claimed it.18
[52] To establish actual authority, it is not necessary for the agency agreement to be contractual, but there must be an instruction or request from the principal and an undertaking of the duty or task by the agent.19
[53] Generally, an agent has whatever incidental authority might be necessary to carry out the terms of the express authority.20
[54] Under the Fair Trading Act, a principal is liable for the misleading and deceptive conduct of its agent.21
[55] However, the principal’s liability is confined to statements made by the agent that are within the agent’s real or apparent authority. The act relied on as binding the principal must be that of a particular class of acts which the agent is held out as having a general authority on behalf of the principal to do.22
[56] An agent may be personally responsible for making misleading or deceptive statements or misrepresentations, unless the “mere conduit” defence is applicable.23 However this has not been raised by the defendants in the present case.
Defendants’ response to allegations
[57] None of the defendants provided written submissions. The first, second and fourth defendants provided no oral submissions as they were not represented at the trial. Accordingly, the following summary of the defendants’ response to the plaintiffs’
17 At [30].
18 At [2].
19 At [28]; and Credit Services Investments Ltd v Evans [1974] 2 NZLR 683 (CA) at 694.
20 At [30].
21 Fair Trading Act 1986, s 45(2.
22 Shortal v Buchanan [1920] NZLR 103 (HC) at 105.
23 Red Eagle Corp Ltd v Ellis, above n 10, at [38].
allegations is drawn from the defendants’ statements of defence and Mr Rogers’ oral submissions at the trial.
Agency — Mr Rogers
[58] In their statements of defence, the defendants deny that Mr Rogers was an agent of Outward and Pricemaker. However, they admit that Mr Rogers (or more accurately a company with which he was associated, Jervois Strategy Ltd), was paid a commission for investments procured by him. Under cross-examination, Mr Dowell accepted that Mr Rogers was acting as an agent of Outward and Pricemaker in providing information to potential investors.
First and second defendants were in trade
[59]It was not disputed that the first and second defendants were in trade.
Were the representations made?
[60] In his closing submissions, Mr Rogers did not dispute that the representations were made. His focus was rather that the representations were “roughly correct”.
Representation one — backstop representation
[61] In relation to the first of the alleged misrepresentations, the backstop representation, Mr Rogers maintained that the representation that Pricemaker “is profitable & doing about $3m revenue across Australasia” was “roughly correct”. That information was based on information that Mr Rogers says he was told by Pricemaker based on a forecast they had.
[62] Mr Rogers acknowledged that Pricemaker’s revenue “fell short”. Mr Rogers emphasised that revenue varies from year to year, especially for growth-based information technology companies. Therefore, Pricemaker’s income in the 2017 and 2018 financial years is irrelevant. According to Mr Rogers, “[w]hat ultimately stalled Outward was COVID…[which] struck March 2020 and for a time world trade halted, then shifted to payments up front”.
Representation two — Blockhaus representation
[63] In relation to the alleged representation relating to Blockhaus, Mr Rogers maintained that this was not misleading and deceptive as Outward had been accepted into Blockhaus. He submitted that there is “obviously a grey area around what this word actually means” but Blockhaus wanted to do a token generating event for Outward as was clear from the term sheet Blockhaus provided.
[64] Mr Rogers emphasised that he did not agree with the plaintiffs’ submission that Outward had not been accepted into Blockhaus or that Pricemaker and Outward were not working with Blockhaus to finalise details of the token generating event.
Representations three, four and six — Maersk pilot
[65] In relation to the alleged representations relating to the Maersk pilot programme, Mr Rogers accepted that the pilot did not proceed. However, Mr Rogers said that Mr Walshe (as Outward’s Chief Executive Officer) was invited to a dinner in Amsterdam organised by a senior EY executive at which “the context was progressing this possibility”. On this trip, Mr Walshe also “met the grandson of the Maersk founder to discuss possibilities”. Mr Rogers denied that he made an oral representation to the effect that Maersk pilot programme had already started.
Representations five and seven — Seabury due diligence
[66] Mr Rogers testified that he had a number of discussions with the head of innovation for Seabury Marine, and one with the CEO of Seabury Marine, “in which the intent to [do] a deal was strongly flagged”.
[67] Mr Rogers acknowledged that Outward missed out on the opportunity with Seabury. However, Mr Rogers blamed Mr Birnie, for failing to entice Sir Owen Glenn to invest in the venture.
Lack of due diligence by plaintiffs
[68] Mr Rogers also submitted that it was abnormal and “very poor form” for wholesale investors, such as the plaintiffs, to make an investment without carrying out
their own due diligence. Mr Rogers submitted, the plaintiffs were excited about the possibility and the growth story and they “got washed along on that [excitement]” without doing the necessary work to satisfy themselves the investment was worth undertaking despite its risks. Mr Rogers emphasised he was not aiming to be misleading or deceptive.
My assessment
Representation one — the backstop representations
[69] The backstop representations stated that Pricemaker is “profitable & doing about $3m revenue across Australasia. It is growing exponentially & will probably grow by 100%+ over the next year. This convertible values it as c. $9m, which is 3x current revenue rate (probably nearer 2x by the time the convertible comes due) & about 1.5x capital invested to date at this point”.
[70] However, in its most recent financial accounts for the year to 31 March 2017, Pricemaker only had $112,566 total revenue. Rather than being profitable, its accounts record a loss of $920,681.
[71]The following year (to 31 March 2018), Pricemaker recorded total revenue of
$645,970. That year, it made a loss of $937,421.
[72] In the year to 31 March 2019, Pricemaker recorded total revenue of $735,360. It made a loss of $1,998,734.
[73] From these accounts it is apparent that, contrary to the backstop representation, Pricemaker had negative shareholders’ equity in each of the three years spanning the period on which the representation was made. It was not profitable and its revenue was about a fifth or a quarter of what Mr Rogers said it was.
[74] Despite its previous year’s revenue being only $645,970, Pricemaker forecast a revenue of $3.6 million for the year ending 31 March 2019. However, this forecast was based on a relationship with the chief transformation officer of Team Talk with whom an arrangement had been made to sell Pricemaker’s product. After the
departure of that individual from Team Talk in early May 2017, the Team Talk relationship “began to fall away”, according to Mr Rogers, and the basis for that revenue forecast was in doubt.
[75] Mr Rogers’ representation that Pricemaker was “profitable & doing about $3m revenue” appears to have been based on that revenue forecast. Yet Mr Rogers did not disclose that the representation itself was merely based on a forecast. Rather, the backstop representation was that Pricemaker was “doing” $3 million revenue. A reasonable person would consider that this meant that Pricemaker was currently earning that amount of revenue, not that it would begin to do so in future.
[76] Mr Rogers accepted that his representation would have been more accurate if he had said the figure came from a forecast. I agree that Mr Rogers should have qualified the representation in this way; in its unqualified form, the representation was misleading and deceptive.
[77] I accept the evidence of Mr Birnie and Mr Pearce that the backstop representation was the single most important representation that was material in inducing them to invest. The backstop option, as Mr Rogers described it, was “investor protection … put in there to make the risk-reward profile of this investment very attractive (by decreasing the risk)”. I accept the plaintiffs’ submission that the backstop representation was made specifically for the purpose of inducing their investment and that, without it, neither Mr Pearce nor Mr Birnie would have invested in the Outward convertible notes.
[78] I find that both Pricemaker and Mr Rogers knew that, at the time of the backstop representations:
(a)Pricemaker was not “doing” $3 million annual revenue;
(b)that figure was based on a forecast; and
(c)Pricemaker was not profitable.
[79] Absent any qualifications, it is understandable the plaintiffs treated the unequivocal representation made by Mr Rogers as to Outward’s revenue and value at face value.24
[80] I conclude that the backstop representations were misleading and deceptive for the purposes of s 9 of the Fair Trading Act. As part of the context, I have taken into account that Messrs Birnie and Pearce describe their occupations as investors and they accept that they are experienced wholesale investors. Despite that, the defendants are not entitled to be excused from a finding they engaged in misleading and deceptive conduct on the basis that an experienced investor would have realised through due diligence that what the defendants were saying was false. I consider that a reasonable person in the plaintiffs’ position and possessing their background and experience would likely have been misled or deceived by the backstop representation.
[81] My sympathies do not lie solely with the plaintiffs. I also agree with Mr Rogers that Messrs Birnie and Pearce ought to have been more thorough in their due diligence in relation to the backstop representation and in relation to Pricemaker’s revenue and value. But I consider that Mr Rogers exploited the fact that investors he had worked with, such as the plaintiffs, had “a trust level in a person like [him]”. Such people, Mr Rogers said, would be ready to “throw some money in if [Mr Rogers] thought it was a good idea”. This appears to have applied to the plaintiffs, who seemed beguiled by Mr Rogers’ ability to spin straw into gold.
[82] Accordingly, I uphold the plaintiffs’ claim that the backstop representations were misleading and deceptive in trade in breach of s 9 of the Fair Trading Act.
Representation two — Blockhaus representations
[83] In his closing submissions, Mr Rogers maintained that Outward had been accepted into Blockhaus. In his view, “there is obviously a grey area around what this word [“accepted”] actually means”. But there was “absolutely no question that Blockhaus was keen to do a [token generating event] for Outward pending going through their normal process…”.
24 Vining Realty Group Ltd v Moorhouse [2010] NZCA 104 at [53].
[84] “Accepted” is the past participle of the verb “to accept”. To “accept into”, in ordinary usage in the present context, means to admit.25 In a legal context, acceptance signifies a final and unqualified expression of assent to the terms of a contractual offer.26 In the context in which the expression “accepted into” was used in Mr Rogers’ 17 May 2018 email to Mr Birnie (above at [22]), I consider that a reasonable person, not necessarily with any legal training but familiar with the commercial context of what was being discussed in that email, namely an arrangement in which a third party, Blockhaus NZ Ltd, was to be engaged to arrange a token generating event for Outward, would understand that a final, unqualified and binding contractual arrangement between Blockhaus and Pricemaker had been settled and agreed.
[85] Yet, as Mr Latton’s cross-examination of Mr Rogers established, this was far from the case in relation to Blockhaus’s commitment to arranging a token generating event for Outward.
[86] First, Mr Rogers agreed that, as at 28 May 2018, there was no legally binding agreement between Blockhaus, Outward and Pricemaker.
[87] Second, Mr Rogers agreed there was no legal impediment to Blockhaus walking out on the arrangement, as there was no signed term sheet and the parties had not even agreed the contents of the term sheet.
[88] Third, Mr Rogers agreed that no legally binding relationship existed at that point and that Blockhaus had no obligation to raise money for the exercise.
[89] Fourth, no term sheet was ever signed and Blockhaus eventually walked away or drifted apart from Pricemaker and Outward.
[90] Fifth, Outward was not one of the two to four companies per month that Blockhaus went on to do a token generating event with. Not only did it not do a token generating event with Blockhaus but Outward did not go on to do a token generating event at all.
25 Lesley Brown ed New Shorter Oxford English Dictionary (Clarendon Press, Oxford, 1998).
26 B A Garner Dictionary of Modern Legal Usage (2nd ed, Oxford University Press, 1995).
[91] In my view, the representation that Outward had been “accepted into” Blockhaus implied that a binding agreement had been reached that would lead to a token generating event for Outward. This was untrue. As at May 2018, Outward and Pricemaker had not signed a term sheet with Blockhaus. Discussions with Blockhaus were only at an embryonic stage. Outward was nowhere near being accepted into Blockhaus. No legal relationship existed. Outward was never accepted into Blockhaus.
[92] Accordingly, I uphold the plaintiffs’ claim that the Blockhaus representation was misleading and deceptive in trade.
Representations three, four and six — Maersk pilot
[93] No documents were disclosed on discovery showing any work being undertaken by Outward or Pricemaker on a pilot programme with Maersk (or anyone else). No Outward pilot programme occurred at all.
[94] Indeed, on 5 September 2018, Mr Walshe emailed Mr Rogers referring to several “contacts” who were interested in a pilot programme and wanted more information. From that email, it was clear (and would have been clear to Mr Rogers) that no pilot programme was in place at that time. Moreover, the defendants presented no evidence to support their statements that Maersk was currently spending $2 million with EY to develop a pilot programme.
[95] Mr Latton submitted that I should not accept Mr Rogers’ evidence in chief that “Maersk was investing millions of dollars with EY to look at doing blockchain based software platform … and they were looking to use Outward as a platform”. Indeed, I agree with Mr Latton that there was no evidence that Mr Rogers or Pricemaker knew:
(a)what Maersk was spending with EY;
(b)that a pilot was being developed; or
(c)that there was any intention to include Outward in any pilot.
[96] I do not accept that the dinner Mr Walshe was said to have had in Amsterdam, or his meeting with the grandson of the Maersk founder, shows a pilot was being developed. Some internal discussions took place at Outward about a proposed pilot. However, those discussions never even identified who would take part in the pilot.
[97] Accordingly, I uphold the plaintiffs’ claim that the representations relating to a Maersk pilot, representations three, four and six, were misleading and deceptive in trade.
Representations five and seven — Seabury due diligence representations
[98] The only evidence supporting the truth of the Seabury representations — that Seabury was prepared to look at an investment in Outward of $5 million for 20 per cent or US$30 million for 80 per cent, an offer represented to be currently under due diligence and to be completed shortly — was of some early discussions between Outward, Mr Rogers and Mr Laggner, an intermediary. No non-disclosure agreement had been signed. Nor was there any evidence of due diligence being undertaken by Seabury.
[99] I accept the plaintiffs’ submission that Seabury had not expressed any interest in investing in Outward’s business and was not undertaking due diligence. Neither Mr Rogers nor Pricemaker could reasonably claim that they believed otherwise.
[100] I uphold the plaintiffs’ claim that the representations relating to Seabury carrying out due diligence for an investment in Outward were misleading and deceptive in trade.
Summary of factual findings
[101] Accordingly, I accept the plaintiffs’ submissions that the backstop representations, the Blockhaus representations, the representations relating to the Maersk pilot and the Seabury due diligence representations were untrue. None of those representations were based on facts. I would not go so far as to say the defendants knew those representations to be false. However, I accept the plaintiffs’
submission that the defendants were reckless as to whether those representations were true, because:
(a)In respect of the backstop representation, the discovered documents reveal that Mr Rogers had no information about Pricemaker’s financial status. Moreover, the representation he made was at odds with the reality of the company’s financial health. Both Pricemaker and Mr Rogers knew that the $3 million figure was not what Pricemaker was “doing” in revenue and both knew that the company was not profitable. The recklessness of the representations is shown by Mr Rogers’ use of forecast information as if it were current financial data.
(b)Mr Rogers was reckless as to the truth of the Blockhaus representation as he could not reasonably have understood that Outward had been accepted into Blockhaus. That was only an aspiration, but was conveyed to the plaintiffs as reality.
(c)In relation to the Maersk pilot, there was no convincing evidence of any discussion concerning a pilot of Outward’s software with Maersk or any other entity. Even though Mr Rogers was aware that there was no pilot as at 5 September 2018, he persisted in telling the plaintiffs that Maersk were spending $2 million with EY to develop a pilot programme. However, as he ultimately accepted, Mr Rogers did not know:
(i)what Maersk was spending with EY;
(ii)whether any pilot was being developed; or
(iii)whether there was any intention to include Outward in any pilot.
(d)As with the other representations, I consider that the defendants could not have had any reasonable belief in the accuracy or truth of the
Maersk pilot representations and they were reckless in making those representations.
(e)Similarly, in respect of the Seabury due diligence, it was clear that Seabury had expressed no interest in investing and was not undertaking due diligence in respect of Outward. Mr Rogers and Pricemaker knew that and yet Mr Rogers continued to make the representation.
[102] I uphold the plaintiffs’ claims that each of the representations were misleading and deceptive conduct in trade by Outward and Pricemaker, in breach of s 9 of the Fair Trading Act.
[103] However, I do not consider that s 13(b) of the Fair Trading Act fits comfortably with the facts. The representations were not made in connection with the supply or possible of services by Outward, as it had not yet commenced its blockchain business and the plaintiffs were not considering purchasing or being induced to purchase Outward’s services. Rather, the representations were made in connection with the promotion of the convertible note agreements for sale by Pricemaker. The representations which I have found to be misleading and deceptive in trade were not as to the “particular characteristics” of Pricemaker. Rather the representations were as to the characteristics of Outward. It follows, in my view, that s 13(b) does not apply in these circumstances. I dismiss the plaintiffs’ claim under that provision.
Was Mr Rogers an agent for Outward/Pricemaker?
[104] In my opinion, Mr Rogers was not an agent for Outward and Pricemaker. Rather, the correct position is that it was his company, Jervois Strategy Ltd, that was acting as Outward and Pricemaker’s agent. Under cross-examination, Mr Dowell referred to a mandate that was signed with Jervois Strategy Ltd, of which Mr Rogers is a director. Mr Dowell recalled that Mr Rogers raised around $700,000 for Outward and the balance of the $1.2 million came from other current shareholders and investors that Outward had been approached by.
[105]Several Jervois Strategy Ltd invoices to Pricemaker were produced:
(a)an invoice dated 22 May 2018 for $5,778.72 “commission on Will Birnie funds”;
(b)an invoice dated 3 July 2018 for $3,000 as “commission on Charles Pearson [sic] $75k”;
(c)an invoice dated 14 September 2018 for $4,000 for “commission on Charles $50k”;
(d)an invoice dated 17 September 2018 for $10,000 “commission on Will
$125k”.
[106] These invoices correspond with the four pleaded investments (two each by Mr Birnie and Mr Pearce) that are the subject of the plaintiffs’ claim.
[107] A Jervois Strategy Ltd services agreement was entered into between Jervois Strategy Ltd, Bill Laggner, Pricemaker and Outward listing “potential investors that JSL [Jervois Strategy Ltd] & BL [Bill Laggner] will approach” as potential investors.
[108] Although the parties alleged Mr Rogers made the representations at the heart of their claim, in reality he made those representations as agent for the company of which he was a director, Jervois Strategy Ltd. That company was responsible for raising money for Pricemaker and Outward, in particular from Mr Birnie and Mr Pearce. Mr Rogers:
(a)had actual authority to make representations to induce investors, as he acknowledged in his cross-examination;
(b)was held out to be an advisor to Pricemaker and Outward;
(c)assisted with drafting the Outward investment white paper;
(d)emailed Mr Walshe about how to convince investors to invest and gave progress reports on investors he had persuaded to invest. In turn, Mr Walshe emailed Mr Rogers about meetings he had been having with
various parties and encouraging Mr Rogers to “make it rain”. Mr Rogers accepted this meant he was to use the information to try and get more investors on board;
(e)put together the whole idea of the backstop, involving the conversion of convertible notes into Pricemaker shares. This correspondence made it clear that Mr Rogers was Pricemaker’s and Outward’s agent for bringing in investments and that was clearly understood by all parties; and
(f)was authorised to provide information to investors in the course of his agency.
[109] However, Mr Rogers did these things on behalf of Jervois Strategy. It was Jervois Strategy that was paid commission based on the investment contributions it/Mr Rogers raised.
[110]Section 45(2) of the Fair Trading Act provides:
(2)Any conduct engaged in on behalf of a body corporate—
(a) by a director, servant, or agent of the body corporate, acting within the scope of that person’s actual or apparent authority; or
(b) by any other person at the direction or with the consent or agreement (whether express or implied) of a director, servant, or agent of the body corporate, given within the scope of the actual or apparent authority of the director, servant or agent—
shall be deemed, for the purposes of this Act, to have been engaged in also by the body corporate.
[111] The phrase “on behalf of” in the opening words of s 45(2) is construed broadly,27 as long as something is done “for” the company.28 “Actual or apparent authority”, is also a phrase to be interpreted broadly.29 In Commerce Commission v
Debra Wilson The Fair Trading Act Handbook (LexisNexis, Wellington, 2018) at [22.37], citing
Trade Practices Commission v Tubemakers of Australia Ltd [1983] 47 ALR 719 (FCAFC).
28 Wilson, above n 27, at [22.39], citing Lisciandro v Official Trustee and Bankruptcy [1995] FCA 716, (1995) ATPR 41–436 at 40, 903–40 and 904.
29 Wilson, above n 27, at [22.46], citing Giltrap City Ltd v Commerce Commission [2004] 1 NZLR 608 (CA) at [79]–[80].
Amark Publishing (New Zealand) Ltd, a case involving an employee who had lied to prospective advertisers in the defendant’s publication, the Court rejected a submission that this was outside the scope of the employee’s actual or apparent authority:30
If the false and misleading actions of employees cannot be sheeted home to the employer because, even although the employee may be advancing the business interests of the employer, the employer has not expressly or implicitly authorised the conduct, it can be seen that a loophole would be open to employers in defence of prosecutions against them so that the true beneficiary of the false or misleading conduct might never be brought to account.
[112] I consider that this proposition applies equally in the context of an agent and principal relationship, as existed between Mr Rogers and Outward. In my view, Outward and Pricemaker should not escape from liability in respect of the misleading and deceptive statements of their agent, Mr Rogers. I reject their defence that, in making the representations, Mr Rogers was acting outside his actual or ostensible authority.
[113] Therefore, I find that Jervois Strategy Ltd was Outward and Pricemaker’s agent. Outward and Pricemaker are liable for the misleading and deceptive conduct of Mr Rogers, on behalf of Jervois Strategy.
Mr Rogers is not liable in his own right
[114] I do not uphold the plaintiffs’ claim that Mr Rogers is liable in his own right. Even if he was acting as the first and second defendants’ agent in his own right, his conduct would be attributable to those companies.31 However, in reality, the agency relationship was with Jervois Strategy Ltd (of which Mr Rogers is a director) and all commission for sale of convertible note agreements was invoiced by and paid to that company. Jervois Strategy is not joined as a party to this claim and so the Court cannot order any relief against it.
30 Commerce Commission v Amark Publishing (New Zealand) Ltd (1989) 3 TCLR 567 (DC).
31 Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517 (CA).
Do the exclusion clauses provide a defence to the defendants?
[115] Section 5D of the Fair Trading Act is a limited exception to the general rule that the Act’s provisions have effect despite anything to the contrary in any agreement.32
[116] In particular, the defendants rely on the following provisions of the convertible note agreements:
1(d) The Investor understands that the proposed OUT, proposed OUT platform and the Draft White Paper are at a development stage and the high level of discount on conversion provided to the Investor under this Agreement is reflective of the significant risk that the Investor is taking in making this investment at this stage. The Investor accepts that they have been given the opportunity to obtain independent financial, investment and legal advice regarding this investment before entering into this Agreement.
3. The investor acknowledges and agrees that:
…
(d)they accept there is no warranty or representation whatsoever, whether express or implied, regarding the performance or success of the OUT, the OUT platform (or any associated smart contract system) or Pricemaker or shares in Pricemaker;
(e)they accept that, with regard to the OUT, no market liquidity can be guaranteed and the value of OUTs over time may experience extreme volatility or depreciate in full;
(f)neither Pricemaker, Outward nor any of their respective directors will be liable for any loss or damage (whether direct, indirect, consequential or otherwise) suffered by the Investor as a result of the issue of the Convertible Note or any information provided by or on behalf of Pricemaker or Outward.
[117]Other relevant provisions from the convertible note agreements include:
(a)Clause 3(a) which provides that “the Investor acknowledges and agrees that they are a ‘close business associate’ of Pricemaker and Outward or a ‘wholesale investor’, as defined in the Financial Markets Conduct Act 2013”.
32 Fair Trading Act 1986, s 5C.
(b)Clause 6, which provides that the convertible note agreement constitutes “the entire agreement of the parties in respect of the matters covered by this Agreement and supersedes all previous agreements in respect of those matters”.
[118]Section 5D of the Fair Trading Act provides:
5D No contracting out: exception for parties in trade
(1)Despite section 5C(1) and (2), if the requirements of subsection (3) are satisfied, parties to an agreement may include a provision in their agreement that will, or may (whether directly or indirectly), allow those parties to engage in conduct, or to make representations, that would otherwise contravene section 9, 12A, 13, or 14(1); and in that case,—
(a) the provision is enforceable; and
(b) no proceedings may be brought by any party to the agreement for an order under section 43 in relation to such a contravention of section 9, 12A, 13, or 14(1).
(2)A provision of the kind referred to in subsection (1) includes, for example,—
(a) a clause commonly known as an entire agreement clause:
(b) a clause that acknowledges that a party to the agreement does not rely on the representations or other conduct of another party to the agreement, whether during negotiations prior to the agreement being entered into, or at any subsequent time.
(3)The requirements referred to in subsection (1) are that—
(a) the agreement is in writing; and
(b) the goods, services, or interest in land are both supplied and acquired in trade; and
(c) all parties to the agreement—
(i)are in trade; and
(ii)agree to contract out of section 9, 12A, 13, or 14(1); and
(d) it is fair and reasonable that the parties are bound by the provision in the agreement.
(4)If, in any case, a court is required to decide what is fair and reasonable for the purposes of subsection (3)(d), the court must take account of all the circumstances of the agreement, including—
(a) the subject matter of the agreement; and
(b) the value of the goods, services, or interest in land; and
(c) the respective bargaining power of the parties, including—
(i)the extent to which a party was able to negotiate the terms of the agreement; and
(ii)whether a party was required to either accept or reject the agreement on the terms and conditions presented by the other party; and
(d) whether the party seeking to rely on the effectiveness of a provision of the kind referred to in subsection (1) knew that a representation made in connection with the agreement would, but for that provision, have breached section 12A, 13, or 14(1); and
(e) whether all or any of the parties received advice from, or were represented by, a lawyer, either at the time of the negotiations leading to the agreement or at any other relevant time.
(5)To avoid doubt, nothing in this section—
(a) prevents the Commission from bringing proceedings for an offence under this Act (including an offence under section 12A, 13, or 14(1)) against a party to the agreement referred to in subsection (1):
(b) limits the application of subpart 3 of Part 2 of the Contract and Commercial Law Act 2017.
[119] Section 5D(3) provides that certain requirements must be satisfied before a court will uphold a provision in an agreement allowing parties to engage in conduct or make representations that would otherwise contravene ss 9, 12A, 13, or 14(1) of the Fair Trading Act.
[120] On first impression, I had reservations about the application of at least two of those requirements in s 5D(3).
[121] First, I was not entirely convinced that the convertible notes were acquired by parties who are “in trade” in accordance with s 5D(3)(c)(i) or that the notes were acquired in trade in accordance with s 5D(3)(b). Mr Pearce’s evidence was that he was “acting personally with my funds”.
[122] Second, I also have reservations as to whether it would be fair and reasonable for the plaintiffs to be bound by cl 3(f) of the convertible note agreements. I say this not because of anything related to the subject matter of the agreement, or the value of
the goods. However, I consider that s 5D(4)(c) of the Fair Trading Act is implicated in respect of the bargaining power of the respective parties. In particular, the plaintiffs do not appear to have been able to negotiate the terms of the convertible note agreements. Rather, it appears they were required to accept or reject the agreement on the terms and conditions presented by Pricemaker.
[123] Third, there was some information asymmetry as between the plaintiffs and the defendants. It was not clear how the plaintiffs could reasonably be expected to carry out due diligence (as the defendants suggested they should have) when no information was available by which the plaintiffs could have double checked the representations made to them by Mr Rogers. Rather, to some extent, if they were to proceed with the investment, they had to trust that what he said to them was true.
[124] Fourth, neither plaintiff appears to have received advice from a lawyer before entering into the transaction. The exclusion clause purportedly relied upon does not expressly purport to contract out of the Fair Trading Act. Perhaps the parties did not turn their minds at all to the application of the Fair Trading Act, let alone specifically agreeing to contract out of ss 9 or 13.33
[125] On the other hand, despite these reservations, I note that Mr Birnie accepted that he received a “rebate”, which he later accepted was the same as a commission, in respect of the money invested by Mr Pearce. His commercial involvement in bringing another investor (Mr Pearce) onboard certainly supports considering at least Mr Birnie to be a wholesale investor. Moreover, Mr Pearce and Mr Birnie signed an agreement defining themselves as “wholesale investors” or “close business associates” in terms of the Financial Markets Conduct Act 2013. Further, the Pricemaker white paper document promoting the convertible note agreements made it very clear that the agreements were only available to wholesale investors, that the investment carried risk, and that the disclosure requirements in the Financial Markets Conduct Act did not apply. Mr Birnie and Mr Pearce each had worked at an investment bank and claimed to have certain expertise in that area. And, in the statement of claim, each of them describes his occupation as an “investor”.
33 Philip Moore & Co Ltd v Surridge [2018] NZHC 562 at [145].
[126] For these reasons, I accept the defendants’ argument that Outward and Pricemaker were not required to make any disclosure under Part 3 of the Financial Markets Conduct Act.34
[127] The definition of “in trade” in the Fair Trading Act includes “any … activity of commerce”, which this certainly was. Both Mr Birnie and Mr Pearce acknowledged that the investment in Outward carried with it a degree of risk, being a start-up company. The exclusion clause in the convertible note agreements is a clear agreement to contract out of any disclosure obligations. Moreover, it clearly excludes liability for any loss or damage suffered by the investor as a result of the issue of the note itself or any information provided by or on behalf of Pricemaker and Outward.
[128] I consider that, by the above exclusion clauses, Outward and Pricemaker have contracted out of the requirements in ss 9 and 13 of the Fair Trading Act. Further, I consider that it is fair and reasonable that Mr Birnie and Mr Pearce are bound by that provision in the convertible note agreements. The primary reason I consider it to be fair and reasonable that the plaintiffs are bound by the exclusion provision is their negligible due diligence. Rather, they relied solely on Mr Rogers’ representations as pleaded.
[129]It was put to Mr Pearce in cross-examination that:
(a)it was strange he did not ask for a single piece of information about Pricemaker; and
(b)that, in any due diligence of a private equity investment, a request for at least three years of prior accounts would be very common.
[130] Mr Pearce reluctantly accepted these propositions and confirmed that he relied on the representations Mr Rogers provided orally and written documentation he had drafted that was forwarded to him by Mr Birnie. Mr Birnie also accepted that apart from the statements about Outward provided by Mr Rogers, he had not carried out his own due diligence on the investment. It is telling that neither Mr Birnie nor Mr Pearce
34 Financial Markets Conduct Act 2013, sch 1, cl 3 (exclusion for wholesale investors).
sought validation of the backstop representations by requesting a copy of Pricemaker’s accounts.
[131] In my view, the plaintiffs took a significant risk in relying on the statements made by Mr Rogers, which I have found were misleading and deceptive. However, in light of their previous investment experience and the absence of any due diligence carried out by them, I consider it is fair and reasonable that:
(a)Mr Birnie and Mr Pearce are bound by the provision in their convertible note agreements excluding Outward and Pricemaker’s obligation to make disclosure under the Financial Markets Conduct Act; and
(b)the defendants’ liability in respect of loss or damage suffered by Mr Birnie and Mr Pearce is excluded under the terms of the convertible note agreements.
[132] I agree with the observation of Heath J in Aldrie Holdings Ltd v Clover Bay Park Ltd that, in certain situations, the principle of caveat emptor still has some part to play in the exercise of the discretion to award compensation under s 43 of the Fair Trading Act.35 That case involved a contract for sale and purchase of a dairy farm. The purchaser chose not to carry out any material due diligence but to rely principally on oral statements made in the course of pre-contractual negotiations. For that reason, the compensation claimable was reduced by 50 per cent. I agree with Heath J that although the purpose of s 9 is to dissuade misleading statements that a reasonable person could rely on to their detriment, it is equally important to dissuade purchasers of significant assets to be dissuaded from entering into contracts without undertaking due diligence, or making it clear that reliance was being placed on the representations.36 In my view, these observations apply to Mr Birnie and Mr Pearce in respect of their decision to invest in Outward’s business through purchase of the convertible note agreements. They failed to carry out any due diligence. Any
35 Aldrie Holdings Ltd v Clover Bay Park Ltd [2016] NZHC 250 (2016) 17 NZCPR 127 at [84]-[89].
36 At [89].
statement of reliance on Mr Rogers’ representations is likely to have been precluded by the exclusion provisions in the convertible note agreements.
[133] For the above reasons, I conclude that it is fair and reasonable for the defendants’ obligations under the Fair Trading Act (and for that matter s 35 of the Contract and Commercial Law Act) to be excluded under s 5D.
Remedy
[134] In case I am wrong in respect of the effect of the exclusion clauses on the defendants’ liability under the Fair Trading Act. I will briefly consider the application of s 43 of the Fair Trading Act. That section provides for the remedies available in respect of the plaintiffs’ claim for breach of that Act (relevantly):
43 Other orders
(1)This section applies if, in proceedings under this Part or on the application of any person, a court or the Disputes Tribunal finds that a person (person A) has suffered, or is likely to suffer, loss or damage by conduct of another person (person B) that does or may constitute any of the following:
(a) a contravention of a provision of Parts 1 to 4A (a relevant provision):
(b) aiding, abetting, counselling, or procuring a contravention of a relevant provision:
(c) inducing by threats, promises, or otherwise a contravention of a relevant provision:
(d) being in any way directly or indirectly knowingly concerned in, or party to, a contravention of a relevant provision:
(e) conspiring with any other person in the contravention of a relevant provision.
(2)The court or the Disputes Tribunal may make 1 or more of the orders described in subsection (3)—
(a) whether or not the court grants an injunction, or the court or the Disputes Tribunal makes any other order, under this Part; and
(b) whether or not person A made the application or is a party to the proceedings.
(3)The orders are as follows:
(a) an order declaring all or part of a contract made between person A and person B, or a collateral arrangement (for example, a collateral credit agreement) relating to such a contract,—
(i)to be void; and
(ii)if the court or the Disputes Tribunal thinks fit, to have been void at all times on and after a date specified in the order, which may be before the date on which the order is made:
(b) if an order described in paragraph (a) is made in respect of a contract that is associated with a collateral credit agreement, an order vesting in person B all or any of the rights and obligations of person A under the collateral credit agreement:
(c) an order in respect of a contract made between person A and person B, or a collateral arrangement (for example, a collateral credit agreement) relating to such a contract,—
(i)varying the contract or the arrangement in the manner specified in the order; and
(ii)if the court or the Disputes Tribunal thinks fit, declaring the varied contract or arrangement to have had effect on and after a date specified in the order, which may be before the date on which the order is made:
(d) if an order described in paragraph (c) is made in respect of a contract that is associated with a collateral credit agreement, and if that order results in person A no longer having property in the goods that are the subject of the contract, an order vesting in person B the rights and obligations of person A under the collateral credit agreement:
(e) an order directing person B to refund money or return property to person A:
(f) an order directing person B to pay to person A the amount of the loss or damage:
(g) an order directing person B, at person B’s own expense, to repair, or to provide parts for, goods that have been supplied by person B to person A:
(h) an order directing person B, at person B’s own expense, to supply specified goods or services to person A.
…
[135]Specifically, the plaintiffs seek:
(a)an order under s 43(3)(a)(ii) declaring the convertible note agreements to be void ab initio; and
(b)an order pursuant to s 43(3)(e) directing the first and second defendants refund the purchase price of those agreements.
[136]Alternatively, the plaintiffs seek an order that the defendants pay damages of
$325,000 on a joint and several basis.
[137] As is clear from s 43(1) the plaintiffs must establish that they have suffered, or are likely to suffer, loss or damage by the conduct of the defendants that, in the present case, amounts to a breach of s 9 of the Fair Trading Act.
[138] Mr Rogers, in his evidence, said that in order to realise value for the plaintiffs’ Playmaker Labs shares they would need to find someone to buy those shares. He accepted that this would be a “long burn operation”. He referred to this as a “key sort of constraint with these things”. However, he denied the plaintiffs had lost money because “the value of the company is still strong”.
[139] Mr Latton criticised Mr Rogers’ claim as a “mantra” that the defendants had repeated throughout the proceeding. Mr Latton submitted there is no credibility to the assertion that Playmaker Labs has value. To the contrary, he submitted the evidence leads inescapably to the conclusion that the plaintiffs’ Playmaker Labs shares have no value.
[140] As Mr Latton pointed out, the defendants have adduced no objective evidence as to the shares’ value. Nor were the defendants’ assertions as to various commercial deals that Playmaker Labs had in train supported by any evidence that would support the defendants’ claims that the shares have value. Like the misleading and deceptive representations themselves, these assertions lacked support and I was unable to give them any weight.
[141] Moreover, I accept Mr Latton’s submission that the value of the shares is somewhat of a red herring given the plaintiffs’ primary submission that they would never have invested in Outward if they had known the true situation, particularly in relation to the backstop representation.
[142] Without more information, I do not accept the defendants’ allegation that the Playmaker Labs shares now held by the plaintiffs have value and therefore that the plaintiffs have lost nothing. To the contrary, the evidence available leads to a reasonable inference that the shares have no or negligible value, other than that agreed in respect of the settlement agreement. I will turn to this aspect of the plaintiffs’ claim shortly.
[143] The defendants adduced no expert evidence as to the current value of the Playmaker Labs shares. They made various assertions about deals underway involving Playmaker Labs. However, these assertions were unsupported by evidence.
[144] I agree with Mr Latton’s submission that the defendants’ assertions, about the value of the Playmaker Labs shares, have a familiar air. Indeed, the foundation of the plaintiffs’ case is that hopes and dreams were presented as current fact. The plaintiffs were sold the promise of a lucrative investment in Outward’s business, on the basis of financial information that was simply wrong.
[145] Moreover, Playmaker Labs has had an opportunity to repurchase the shares in the settlement agreement but did not do so. In this regard, Mr Latton alluded to Playmaker Labs’ failure to pay its lawyers resulting in their withdrawal. It was not suggested that the lawyers were not providing competent services for a fair and reasonable fee. From Playmaker Labs’ default it can reasonably be inferred that it lacks funds to pay its debts as they come due.
[146] Nevertheless, for the reasons outlined, I do not accept that the plaintiffs are entitled to orders declaring the convertible note agreements void ab initio and refunding the funds invested by them.
Breach of settlement agreement
[147] The terms of the settlement agreement are summarised above at [9]. There was an agreement to amend the settlement agreement, imposing a time limit of three working days to allow the defendants to deal with any failure to make payment and setting a date for filing a notice of discontinuance. This change was made to ensure that payment was made in a timely fashion so the litigation could be ended in a timely
way. Under the settlement agreement, once the third and fourth defendants purchased the plaintiffs’ Playmaker Labs shares, the plaintiffs would instruct their lawyers to withdraw their claim and accept the $300,000 paid as full and final settlement of the proceeding.
[148] The plaintiffs also undertook not to progress the proceeding or any related proceeding unless any payment was not made by the due date and the default was not remedied within three working days.
[149] I do not accept the defendants’ contention that time was not of the essence in relation to performance of the settlement agreement. Rather, I accept the plaintiffs’ submissions that the plain words of the settlement agreement establish, to the contrary, that time is essential. Moreover, it is not feasible to suggest that a payment deadline can be postponed indefinitely against the background of litigation progressing to trial according to a timetable. In other words, the plaintiffs needed to progress the trial of this matter having already given the third and fourth defendants the opportunity to pay the settlement sum as agreed, but not paid.
[150] I therefore accept that the third and fourth defendants are liable to pay the plaintiffs damages for breach of the settlement agreement in the sum of $190,000 for the fourth defendant and $100,000 for the third defendant, plus interest. Those sums are equal to what would have been paid if the defendants had not breached the settlement agreement, putting the plaintiffs in the position they would have been in if the agreement was honoured.
Result
[151]The plaintiffs’ first to fourth causes of action are dismissed.
[152] The plaintiffs will have judgment on the fifth cause of action for breach of the settlement agreement:
(a)The third defendant must pay the plaintiffs $100,000 in damages for breach of the settlement agreement.
(b)The fourth defendant must pay the plaintiffs $190,000 in damages for breach of the settlement agreement.
(c)These sums are subject to interest under the Interest on Money Claims Act 2016 from the date of due payment under the settlement agreement.
Costs
[153] The plaintiffs seek costs on a 2B basis uplifted by 50 per cent to reflect breach of a reasonable settlement agreement. My preliminary view is that no uplift is justifiable given the plaintiffs’ lack of success in respect of their primary arguments for damages in respect of the representations. However, if necessary, I will allow the parties to file and serve submissions on that question (no longer than five pages) within 14 days of the date of this judgment. I will then determine costs on the papers.
McHerron J
Solicitors:
Palmer Macauley Solicitors, Kerikeri for Plaintiffs
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