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High Court of New Zealand Decisions |
Last Updated: 23 January 2018
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IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND
REGISTRY
CIV-2008-404-005159
BETWEEN DAVID JOHN LESTER AND MELANIE
KAY LESTER First Plaintiffs
AND NEIL TONY HICKMAN AND MICHELLE LISA HICKMAN Second Plaintiffs
AND N & M HICKMAN LIMITED Third Plaintiff
AND JEANETTE MARY DICK Sixth Plaintiff
AND LEE ANDREWS Ninth Plaintiff
AND PEGGY ELIZABETH WHYTE Eleventh Plaintiff
AND DEBRALEE JANES Twenty-fourth Plaintiff
AND FRANK AND DIANNE CROCKETT Twenty-eight Plaintiffs
AND GEOFFREY VAN BEEK Thirty-ninth Plaintiff
AND GEOFFREY VAN BEEK Fortieth Plaintiff
AND NICOLA AND CRAIG JOHNSON Forty-fifth Plaintiffs
AND NICOLA AND CRAIG JOHNSON Forty-sixth Plaintiffs
AND DOUGLAS AND JANET BOGARDUS Fifty-ninth Plaintiffs
LESTER AND ORS V GREENSTONE BARCLAY TRUSTEES LIMITED AS TRUSTEE FOR THE
GREENSTONE BARCLAY TRUST AND ORS HC AK CIV-2008-404-005159 25 November 2009
AND DOUGLAS AND JANET BOGARDUS Sixtieth Plaintiffs
AND BRIAN CRAWFORD-GREEN Sixty-first Plaintiff
AND LINDSAY STEWART Sixty-eighth Plaintiff
AND GREENSTONE BARCLAY TRUSTEES LIMITED AS TRUSTEE FOR THE GREENSTONE BARCLAY TRUST
First Defendants
AND GE CUSTODIANS LIMITED Second Defendant
AND TASMAN MORTGAGES LIMITED Third Defendant
AND EXECUTIVE MORTGAGES LIMITED Fourth Defendant
AND VAULT REALTY LIMITED Fifth Defendant
AND JONATHAN MATHIAS Sixth Defendant
AND BLUE CHIP PREMIUM INCOME LIMITED
Seventh Defendant
AND ZELJAN UNKOVICH Eighth Defendant
AND FOSTER MILROY & TURKETO Ninth Defendant
Hearing: 11-15, 18-22, 25-28 May, 2-5, 29-30 June, 1, 3, 6, 8-9 July
2009
Appearances: P Dale and D Grove for Plaintiffs
B Stewart QC and D J Neutze for First Defendants
Judgment: 25 November 2009 at 2.15 p.m.
JUDGMENT OF VENNING J
2
This judgment was delivered by me on 25 November 2009 at 2.15 pm, pursuant to Rule 11.5 of the
High Court Rules.
Registrar/Deputy Registrar
Date...............
Solicitors: Ellis Law, Auckland
Brookfields, Auckland
Copy to: P J Dale/D W Grove, Auckland
B Stewart QC/D Neutze, Auckland
Table of Contents
Introduction
Para No
What this decision is about [1] What this decision is not about [4] Procedural background [6]
General background
The Blue Chip operation [10] The Blue Chip investment products [24] Mainstream product [25]
Joint venture product [28]
Premium Income Product (PIP) [35] The Barclay development [42] Profit share agreement [49] Underwrite agreement [54] Pleadings [65] Maria Hoani [76]
Agency [77]
Is there an agency relationship? [82]
Scope of the agency
Blue Chip marketing methods [122]
Real estate agents [148] What representations were made within the scope of the agency? [159] Imputation of the agents’ knowledge [160] Summary – misrepresentation [161]
Fair Trading Act [162] Positive defences to the representation claims [163] The general nature of the representations [168]
The entire agreement clauses [170] Affirmation/waiver/estoppels [179] Inconsistent statements [181] Statement of future fact/intention [185] Insolvency [188] Statement of opinion [198] Puffs [199]
Other grounds for cancellation [200] Valuation [220] Securities Act [225] Mainstream agreement [235]
Joint venture [254] PIP agreements [274] Tainting [292] The purpose or effect requirement [297]
The knowledge requirement [310]
Imputed knowledge [317] The individual plaintiffs’ cases
Lester [335]
Hickman [348]
Dick [364] Andrews [370] Whyte [381] Janes [388] Crockett [396] Van Beek [402] Johnson and Five J Holdings Limited [407] Borgardus [418] Crawford-Green [426] Stewart [433]
Summary [445]
Agency
Fair Trading Act
Other grounds for cancellation
Securities Act
Individual plaintiffs’ evidence
Result [446] Costs [447]
Introduction
What this decision is about
[1] Greenstone Barclay Trustees Limited (Greenstone Barclay) as trustee for
the Greenstone Barclay Trust is the developer of a property
known as Barclay on
Albert. The plaintiff investors have all agreed to buy apartments in
the Barclay from Greenstone
Barclay. The plaintiffs entered into the
agreements to buy their apartments as part of an investment promoted
by
Blue Chip Financial Solutions Limited (Blue Chip).
[2] The Barclay is now complete. Greenstone Barclay has called upon
the plaintiffs to settle the purchase of their apartments.
They have refused to
settle and have sought to cancel the agreements for sale and
purchase.
[3] This judgment deals with whether the plaintiffs have validly cancelled
their agreements for sale and purchase. It is a final
judgment on that issue
in relation to the plaintiffs whose cases were heard.
What this decision is not about
[4] In the same proceedings the plaintiffs raise causes of action against a
number
of lenders, mortgage brokers, valuers, Blue Chip entities and
solicitors. The plaintiffs’ other claims were not before
the Court. They
remain for hearing another day. The case heard by this Court was not
against Blue Chip or Mark Bryers,
although a lot of evidence was devoted to
those issues.
[5] While this decision determines whether the plaintiffs have validly cancelled the agreements for sale and purchase, it does not address whether the Court would order specific performance of those agreements against the individual plaintiffs. If necessary, that must also be for another day.
Procedural background
[6] There are a number of other proceedings before the Court involving
similar issues, particularly whether investors who agreed to
buy apartments as
part of their investment with Blue Chip are bound to complete the purchase of
those apartments given the failure
of the relevant Blue Chip companies.
Hundreds of investors are affected by these issues. The developers and
their bankers
are also affected by the refusal of the investors to
settle.
[7] In these and two associated proceedings, known as the Bianco and the Icon proceedings, counsel identified that the developers’ claims needed to be dealt with as
a matter of priority. It was also acknowledged that the legal and
factual issues involving the developers’ claims
were limited, at
least compared to the plaintiffs’ claims against the various other
parties. Rather than pursue interim
injunctive relief with a substantive
hearing likely some 18-24 months out, counsel agreed that the parties
would select
a number of investors and obtain a determination from the Court on
the issue of whether the selected investors were obliged to settle,
or whether
they had validly cancelled their agreements. The Court accordingly made an
order under r 10.15 of the High Court
Rules for determination of the
questions involving the selected investors and the relevant developers in
advance of the other
claims raised in these proceedings.
[8] The parties accept that this judgment can only formally bind
those parties selected as plaintiffs and participating
in the hearing,
but it is anticipated the judgment will provide assistance towards the
resolution of issues involving
the remaining plaintiffs.
[9] The three sets of proceedings involving the Barclay, Bianco and Icon developments were not consolidated as one proceeding, but the claims were heard at the same hearing. The individual plaintiffs’ claims in each case are separate and distinct, and there are differences in the position of the three developers, but there were witnesses whose evidence was common and relevant to all proceedings, including that of the employees of Blue Chip, valuers and accountants. Some of the principal issues in the cases were the same. For that reason, there is a degree of
repetition in the reasoning on those issues in the separate
judgments.
General background
The Blue Chip operation
[10] Blue Chip New Zealand Limited was established in 2000. The company
later changed its name to Blue Chip Financial Solutions
Limited and, more
recently, to Northern Crest Investments Limited, but throughout this judgment I
will refer to it as Blue Chip.
Mr Bryers was the driving force behind
the company. As the name suggests, the company promoted investments,
particularly
in property. Blue Chip became listed on the New Zealand Stock
Exchange through a reverse take-over by Newcall Group Limited in
2004.
[11] Blue Chip’s first public report, issued in March 2005, reported an
annualised net profit after tax of $9.6 million.
The report noted that
Jock Irvine, a senior lawyer, and Wyatt Creech, a former deputy prime
minister, had joined
the Board during that year. Mr Bryers was managing
director. He was described by Mr Irvine as:
an astute business leader of considerable intellect and energy. As a founder
of Blue Chip’s business, he brings a unique passion and commitment to
the future of [Blue Chip New Zealand].
[12] The report described the Blue Chip investment model in the following
way:
Blue Chip’s primary product allows people to tap into dormant equity or
put spare cash to rewarding use. ...
Our investment products are based on Auckland’s residential property.
Few other property markets in New Zealand have such a
strong record of growth
and yield. It is a robust and rewarding base for generating wealth,
delivering:
• Security ...
• Capital growth and yield ...
• Market performance ...
Proven Products
Blue Chip products deliver positive cash flow on a weekly basis. This cash
flow is underpinned by long-term fixed leases for
clients, supported
by annual tax benefits and the potential for attractive capital gains
if the property is sold.
Clients achieve these benefits either by investing cash or by using dormant
equity in their own home or business.
In most cases, a Blue Chip New Zealand subsidiary, Auckland Residential
Tenancies Limited (ART), leases a client’s property.
As part of that
lease, the Lessee undertakes to pay the rent to the client in each week of the
lease, whether or not the property
is occupied by a subtenant. ...
[13] The report identified the following entities as subsidiaries of Blue
Chip:
• Blue Chip Corporation Limited (BCCL);
• Blue Chip Financial Services Limited (BCFS);
• Blue Chip Homes Limited (BCHL);
• Auckland Residential Tenancies Limited (ART);
• ART Apartments Limited (ART Apartments);
• Bribanc Property Group Limited (Bribanc).
[14] The role of BCCL was described as facilitating the investment
process between licensees, clients and operational staff.
BCCL received a
royalty fee of 12.6 percent of the registered valuation of the property
from Ingot Holdings Limited (Ingot)
(a company associated with Mr Bryers) for
the use of intellectual property, the ART lease and disposition of
property.
[15] BCFS’s role was described as managing the business relationship with approved licensees who “approach and market” to potential Blue Chip clients. The report noted there was a nation-wide network of 12 licensee offices, and that each licensee was responsible for finding potential clients and working with them through the initial analysis stage of investment. BCFS would then step in to “support the investment process”. BCFS charged the client a fee of 2.95 percent of the registered
valuation of the investment property to reflect the work undertaken to
structure the transaction for the investor, arrange loan
funding and
provide advice on personal finance and estate matters.
[16] BCHL was described as a vehicle to ensure properties were
available for clients when they were ready to purchase them.
BCHL acquired
properties (usually from Ingot) on a regular basis to facilitate
this.
[17] ART was described as acting as the corporate lessee. It contracted to
pay a rental income to clients at a fixed rate under
a fixed term lease. ART
Apartments played a similar role in relation to short stay leases.
[18] Bribanc was said to encompass two businesses – property
management services for residential investment properties
in the greater
Auckland area, including inspections, rental appraisals, collection, repairs and
maintenance, qualifying tenants;
and strata management services and
managing body corporates on behalf of Blue Chip clients.
[19] The report for 2004 went on to identify a number of related
businesses, including Ingot. Ingot was described
as a significant and
quality developer of residential property in Auckland. The report said Blue
Chip had an agreement with
Ingot for the supply of residential investment
property by way of first refusal. It noted that Mr Bryers owned the
majority shareholding in Ingot.
[20] The report also recorded Tasman Insurance Brokers Limited,
Tasman Mortgages Limited and Tasman Mortgage Brokers
Limited as related
businesses, and noted that Blue Chip had entered a heads of agreement to acquire
them.
[21] The annual report for 2005 recorded that the group had made a
number of positive advances during the year. The
company had expanded into
Australia, had carried out 800 property transactions, and had
1,500 properties under
the management of Bribanc in the 12 months to 31
December 2005.
[22] The 2005 report further described the Blue Chip model and its relationship
with developers in particular as follows:
Blue Chip currently sources its clients from a network of Licensees and
Advisers in New Zealand and Australia.
That network is supported by Blue Chip’s own team of more than a dozen
dedicated account managers who oversee the technical
aspects of structuring
client portfolios.
One of Blue Chip’s core value propositions is that the company
undertakes the full sequence of roles from property sourcing
through to
a packaged ownership solution, including full asset management. As such, it
provides one seamless service rather
than the investor/owner needing to
deal with anything up to eight separate intermediaries.
The integrated nature of the Blue Chip business model provides
mutual benefits for clients, developers and Blue Chip
itself. For
example, by approaching developers and committing to a significant
volume of residential dwellings
during the development stage, Blue Chip
mitigates the developers’ largest single risk – demand. By
accessing the property
early, Blue Chip optimises the single most
important criterion in the investment equation – price. The next
biggest hurdles for investors are finance and property management and they
are also solved by Blue Chip.
[23] The report identified the benefits for investors of a Blue Chip
investment as:
Blue Chip New Zealand’s point of difference remains providing a
financial planning solution that utilises property, rather than
just providing a
property itself. Offering the associated services continues to appeal as a
hassle free investment without sacrificing
the returns. Investors know
up-front the returns to expect, which is more akin to a financial product than
a standard property
investment.
The Blue Chip investment products
[24] At material times Blue Chip marketed three investment products, known as
the mainstream product, the joint venture product, and
the premium income
product (PIP). It also used a put and call agreement in some cases, but not in
relation to the Barclay.
Mainstream product
[25] Mainstream investors purchased property, in this case apartments, in their own names (or using company or trust structures established on the advice of Blue Chip). The apartments were bought subject to a lease. As part of the package, the
investors agreed to purchase a furniture pack and also appointed Bribanc to
manage the property.
[26] The following documents were relevant to the mainstream
investment:
• the agreement for sale and purchase between the investor and the
vendor
(in this case Greenstone Barclay);
[27] The feature of the mainstream investment was that the investor purchased
an apartment with a guaranteed lease in place. Management
of the apartment
and all leasing issues were thereafter left to Bribanc.
Joint venture product
[28] Under the joint venture investment, the investor agreed to purchase the
apartment but also agreed, jointly with Blue Chip Joint Ventures
Limited, to establish a joint venture entity to engage
in the business of
owning and leasing the apartment.
[29] The documents relevant to the joint venture were:
• the agreement for sale and purchase between the investor and the
vendor
(in this case Greenstone Barclay);
• the joint venture agreement.
[30] The feature of the joint venture investment product was the
joint venture agreement. The parties to the joint venture
agreement were the
investor and Blue Chip Joint Ventures Limited. The purpose of the joint
venture was stated to be to enable
each party to engage in the business
of owning and renting residential property (and such other business as they
may
by resolution agree). The property was the apartment (and chattels). The
parties’ initial contributions were recorded to
be for the
investor:
The obligation and responsibility for all Borrowings on the property together
with such sums as shall be necessary to pay for that part of the
Property representing the land, buildings and
improvements ... together
with a contribution towards all costs and disbursements associated with
the Joint Venture
which obligation and responsibility shall represent 75% of
the Joint Venture Units.
And for the Blue Chip entities:
Arranging and causing all loans to be made to the Joint Venture for the Property, providing an agreement to indemnify the Joint Venture and [the investor] against all or any liability for operating cash shortfall from the Property ... and an agreement to assume management responsibility for the Property and the Joint Venture together with a contribution towards all costs and disbursements associated with the Joint Venture which sum, contributions and agreements shall represent 25% of the Joint Venture Units and that part of the Property representing the chattels, internal fittings and improvements ...
[31] Blue Chip Joint Ventures Limited agreed to pay a procurement
fee to the investor in consideration for the investor
agreeing to provide the
initial contribution.
[32] The joint venture was to continue until wound up unless the parties
earlier resolved to sell the property or terminate the
joint venture. In the
event of a sale in those circumstances the joint venture agreement provided for
distribution of the net proceeds
of five percent to the investor and 95 percent
to Blue Chip Joint Ventures Limited. On a winding up on the termination
date
the investor was entitled to receive 100 percent of the net proceeds
of sale.
[33] Until the joint venture was wound up, or terminated Blue Chip Joint
Ventures
Limited agreed to pay the interest on the costs of borrowing incurred by the
investor,
to indemnify the investor for any operating shortfall in the joint
venture, and to continue to pay the procurement fee.
[34] In short, the scheme of the joint venture investment was that in return for the investor providing the equity to enable the joint venture to purchase the apartment, (either by a direct investment or borrowing), Blue Chip Joint Ventures Limited agreed to pay the investor the procurement fee and meet all outgoings on the borrowing and property.
Premium Income Product (PIP)
[35] The documents relevant to the PIP agreement were:
• the agreement for sale and purchase between the investor and the
vendor
(in this case Greenstone Barclay);
• the premium income product agreement;
• a deed of nomination.
[36] The particular features of the PIP investment were the deed of
nomination and PIP agreement. The immediate return
to the investors was by
option fee.
[37] The PIP agreement was between Blue Chip Premium Income Limited and the
investor. Under the PIP agreement:
Income Limited was to pay the investor an option fee;
[38] The deed of nomination provided for the investor to nominate
Ravine Limited to take title to the property. The nomination
was expressed to
be operative from, and to take effect from the date the option was
exercised by Blue Chip Premium
Income Limited pursuant to the PIP
agreement.
[39] The PIP agreement also provided in cl 4 that:
(a) The Investor acknowledges and agrees that the Purchase Agreement
is binding on the Investor unless Blue Chip exercises the Option. The Investor also acknowledges they will settle the purchase of the Property with the Vendor if Blue Chip does not exercise the Option and that nothing contained in this Agreement shall be construed to constitute a representation by any party to the contrary.
[40] Clause 5 provided for the situation that would apply in the event Blue
Chip
Premium Incomes Limited did not exercise the option. It provided that
if:
(a) ... [Blue Chip] does not exercise the Option and the Investor settles the purchase of the Property ... Blue Chip shall pay the Investor’s reasonable costs (excluding the purchase price) relating to the settlement of the Property, including (without limitation) the Investor’s interest costs on the borrowing relating to the settlement
of that property, on an after tax basis.
(b) Blue Chip will pay the Investor’s reasonable costs in accordance with clause 5(a) by procuring the Lessee to enter into the Lease and
as a result thereof the Lessee will pay rent to the Investor which
shall be in an amount equivalent to the Investor’s reasonable costs
specified under clause 5(a), annualised and paid
monthly on the dates
set out. ...
(c) In the event the Investor is required to settle the purchase of the
Property under the Purchase Agreement, the Lease shall be amended
to include an option for the Lessee to purchase the Property at any time during the term of the Lease, or any renewal term, at the same purchase price paid by the Investor under the Purchase Agreement.
...
[41] In short, under the PIP agreement, the investor took on the obligation to
purchase the apartment, but the Blue Chip entities had the option
to accept nomination and settle the purchase. In exchange
for the investor
granting the option, Blue Chip Premium Income Limited agreed to pay the investor
an option fee. In the event Blue
Chip Premium Income Limited did not exercise
the option, the investor was obliged to settle the purchase, but Blue Chip
Premium Income
Limited agreed to pay the investor’s costs of settlement,
(apart from the balance of the purchase price, which was to be
provided by
the investor), including the investor’s costs of borrowing to
settle. If the investor settled the purchase,
the lessee was to have the
option to purchase the property at the original purchase price.
The Barclay development
[42] The directors of Greenstone Barclay are Messrs John Abel-Pattinson and
Kevin Cox. Both have been involved in property
development for a number
of years. They have been in business together for over 13 years, and
have built a number
of major developments in that time. Mr
Abel-Pattinson’s role is to generally manage the development, including
sourcing
development opportunities, arranging finance, obtaining consents and
structuring the development deals. Mr Cox’s role is
to project manage the
actual construction.
[43] Mr Abel-Pattinson and Mr Cox initially met Mr Bryers in early 2005
when
he asked them to act as consultants for a range of development projects then
being considered or undertaken by companies associated
with him. Their
principal dealings were with the property procurement arm of Blue Chip’s
business (sourcing apartment stock).
Neither had any direct exposure or
contact with the side of Blue Chip that dealt with the marketing or sale
of investment
products to Blue Chip’s investor clients.
[44] In October 2005 Mr Bryers asked Mr Abel-Pattinson whether they would consider developing an apartment building into which Blue Chip could introduce its investors. Mr Bryers, or at least interests associated with him (Ingot), had an option on a site for a proposed development in Albert Street. Mr Abel-Pattinson and Mr Cox agreed. Initially, the project was to proceed as a joint venture, but as each party was to have separate and distinct roles and responsibilities, Mr Abel-Pattinson said it
was later agreed it would just be a profit sharing agreement.
[45] Messrs Abel-Pattinson and Cox incorporated Greenstone Barclay to
undertake the project. Greenstone Barclay was to buy the site
from Ingot and
develop the apartment building. An entity associated with Mr Bryers and Blue
Chip, Lyell Limited, was to
introduce Blue Chip investors as
purchasers for the apartments. Greenstone Barclay and Lyell were to share
in any
net profits.
[46] As part of the arrangement Lyell was also to underwrite the
sales of the apartments so that if Greenstone Barclay
was unable to
achieve sufficient sales, Lyell would be obliged to purchase the unsold
apartments.
[47] The principal negotiations relating to the profit share
and underwrite agreements were conducted by Mr Abel-Pattinson
on behalf of
Greenstone Barclay, Mr Geoff Little on behalf of Ingot and Susan Anderson on
behalf of Blue Chip. As Lyell was a shelf
company, Mr Abel-Pattinson insisted
that a guarantee be provided by a parent Blue Chip company.
[48] Before confirming the arrangements, Mr Abel-Pattinson
undertook due diligence in relation to Blue Chip’s financial
position.
He noted that it was listed on the New Zealand Stock Exchange, and was in the
process of listing on the Australian Stock
Exchange. He took comfort from the
fact the company had a reputable board, including Mr Irvine and Mr Creech. He
also understood
that Macquarie Bank had undertaken due diligence, and had agreed
to become a cornerstone shareholder. Mr Bryers appeared in the
NBR rich list.
Based on that Mr Abel-Pattinson was satisfied it was safe to do business with
them. Greenstone Barclay went ahead
and completed the profit share and
underwrite agreements on 24 March 2006.
Profit share agreement
[49] Under the profit share agreement Lyell agreed to arrange funding to enable Greenstone Barclay to settle the purchase of the Albert Street site, and complete the development of the site. Lyell also agreed to have ART Apartments execute an assignment of lease from Barclay Management immediately prior to settlement of
the apartment sales. Blue Chip guaranteed Lyell’s obligations under
the agreement. Greenstone Barclay agreed, inter alia, to settle the
purchase of the land, build the apartments, settle the sales and have
Barclay Management assign the leases
to ART Apartments immediately prior to
settlement. Barclay Management was incorporated by Messrs Abel-Pattinson and
Cox to
satisfy their financiers’ requirement that a related company
take the lease on the apartments until settlement.
[50] The agreement contemplated that a committee of representatives from
both Greenstone Barclay and Lyell would make
all decisions in
relation to the development.
[51] The profit share agreement provided for Greenstone Barclay and
Lyell to divide the net profit on the development.
The net profit was defined
as the aggregate of the purchase price for all the units in the
development less the costs
of development, financing and sales. The
agreement was silent as to how losses, if any, were to be
apportioned.
[52] The profit share agreement included the following clause:
16. NO PARTNERSHIP
16.1 Nothing in this agreement shall create or constitute, or be deemed to create or constitute a partnership between the Parties, nor to constitute or create, or be deemed to create or constitute a party as an agent of any other party for any purpose whatsoever. No party shall have any authority or power to bind or commit, act or represent
or hold that party out as having authority to act as an agent of, or in any
way to bind or commit the other party to any obligation.
...
[53] The parties attached to the profit share agreement, a standard
form of agreement for sale and purchase to be used
in the sale of the
apartments.
Underwrite agreement
[54] The underwrite agreement provided that if Greenstone Barclay had not
sold
all apartments by the sunset date, Lyell was to purchase, to the maximum of the underwrite amount of $20 million dollars, any apartments which remained unsold. Again Blue Chip guaranteed Lyell’s obligations under the agreement. The parties
agreed on the overall price the apartments in the development were to be sold
for. It equated to about $7,800 per square metre.
[55] In exchange for providing the underwrite Lyell was to be paid an
underwrite fee of 12.6 percent of the sale price of each unit
sold. The
underwrite fee was to be paid in two instalments, the first on receipt
of the deposit, with the balance
on settlement of the
apartment.
[56] The underwrite agreement also authorised Lyell to procure a real estate
firm,
at its cost, to introduce purchasers to the units.
[57] It appears the underwrite agreement was later varied but not
in a material way.
[58] Mr Abel-Pattinson explained that Greenstone Barclay saw a number
of advantages in the agreements with Lyell and Blue
Chip. Ingot already had an
option (and resource consents) on the site, and Blue Chip had an
existing base of clients
looking to invest in apartments who would be readily
available to be introduced as purchasers of the apartments.
[59] As it turned out, Lyell did not arrange development funding for the
project. Greenstone Barclay was able to obtain finance through
its existing
relationship with Westpac Bank and a mezzanine financier, Boston
MFS. Greenstone Barclay obtained sufficient
funding from those parties to
finance both the purchase of the land and the development of the apartment
building.
[60] The funding from Westpac and Boston MFS was, however, subject
to a number of conditions, including:
[61] Greenstone Barclay went ahead with the development on the basis
of the profit share and underwrite agreements, and
the arrangements it had
made to fund the project. Lyell, and through it Blue Chip licensees and sales
agents, commenced marketing
and selling the apartments. Greenstone Barclay
started to receive sale and purchase agreements in relation to the development
from
April 2006 onwards. The majority of units were under sales contracts by
the end of October 2006.
[62] To further satisfy its financiers Greenstone Barclay obtained an
independent valuation of the apartments in November 2006. The
valuation was
prepared by PRP Auckland Limited and addressed to Westpac. A similar report
was sent to Boston MFS. The valuations
supported the schedule of prices that
Greenstone Barclay and Lyell had agreed for the development.
[63] The collapse of the Blue Chip business in early 2008 was as much a
surprise
to Mr Abel-Pattinson and Mr Cox as it was to Blue Chip’s investors and
the general public. It was only in February 2008 that
they learnt, through
industry gossip and reports in the media, that some Blue Chip subsidiaries were
in financial difficulties.
[64] Greenstone Barclay has now completed the development and has called
on the investors to settle the purchase of the apartments.
They have refused
to do so and, after taking legal advice, have sought to cancel the
agreements.
Pleadings
[65] In the fourth amended statement of claim the investor
plaintiffs variously plead the following causes of action against
Greenstone
Barclay:
• cancellation;
• breach of the Fair Trading Act 1986;
• breach of the Securities Act 1978; and
• no binding agreement (limited to one specific case).
[66] A number of preliminary issues arise in relation to the
pleadings. At the commencement of trial the pleadings also
included causes of
action based on unconscionable bargain. To make out a claim of unconscionable
bargain, the party alleging
it needs to show that he or she was in a position of
special disadvantage, that the stronger party knew or ought to have
known of this and that they used this knowledge to exploit or
victimise the complaining party: Attorney-General for England and Wales v
R [2003] UKPC 22; [2002] 2 NZLR 91 (CA) [2004] 2 NZLR 577 (PC)). At the conclusion of the
hearing Mr Dale conceded that none of the plaintiffs had
provided evidence of
special disadvantage. On behalf of the plaintiff investors he abandoned the
causes of action based on unconscionability.
They were removed from the fourth
amended statement of claim filed at the conclusion of the hearing.
[67] Towards the end of the trial Mr Dale raised the possibility he may seek
leave
to add a cause of action in promissory estoppel. But, on reflection, he
elected not to
do this. Again that was not pursued in the fourth amended statement of
claim.
[68] Also, towards the conclusion of submissions, Mr Dale filed a
memorandum
to support an application to add a cause of action to be styled as “a breach of collateral obligations”. He proposed to seek leave to plead a collateral contract that the investors entered the agreements for sale and purchase with Greenstone Barclay in reliance upon a representation that the Blue Chip entities would perform their obligations pursuant to the various Blue Chip investment products. In support Mr Dale referred to the decision of Shanklin Pier Ld v Detel Products Ld [1951] 2 KB 854. Shanklin made a contract with X & Co for X & Co to repair and repaint Shanklin’s pier. Shanklin had the right to specify the materials to be used. Detel induced Shanklin to specify the use of a particular paint they made by giving an assurance as to quality. X & Co duly bought the paint from Detel, but it was unsatisfactory. Shanklin sued Detel for breach of representation. Detel argued there
was no contract between Shanklin and themselves because the paint had been
bought
by X & Co. Shanklin’s claim was upheld on the basis that,
in addition to the contract for the sale of the paint
between X & Co and
Detel, there was a collateral contract between Shanklin and Detel pursuant to
which, and in return for Shanklin
specifying that Detel’s paint should
be used, Detel guaranteed its suitability. The imposition of the
collateral
contract enabled Shanklin, which otherwise had no contract
with Detel, to enforce Detel’s representations against it.
[69] The Shanklin Pier case is distinguishable in a material way from
the present. The present facts do not support the importation of a collateral
contract.
No doubt the plaintiffs expected the Blue Chip companies to perform
their obligations under the various agreements when they agreed
to buy the
apartments from Greenstone Barclay. But there is no basis to impose a
collateral contract upon Greenstone
Barclay to hold it to any representation
concerning the performance of the Blue Chip entities. Greenstone Barclay itself
did not
make any representation to the plaintiffs, whereas in the Shanklin
Pier case, Detel had made a direct representation.
[70] If, as seems to be the case presented to the Court, the basis of the
plaintiffs’ claim is that the sales agents represented
that the Blue Chip
entities would perform their obligations under the contracts, then
Greenstone Barclay could only be fixed
with those representations if the
sales agent was Greenstone Barclay’s agent, and made those
representations
while acting within the scope of the agency. Such a
claim is based on agency and misrepresentation, but does not support
an argument
for a collateral contract.
[71] The proposed pleading of collateral contract was rather more an allegation that the plaintiffs’ contracts for the purchase of the apartments from Greenstone Barclay were, at least in some cases, conditional upon performance of the obligations by the Blue Chip companies under the Blue Chip investment products. But there was no such express condition in the standard agreement for sale and purchase. Absent such an express condition, it could only be incorporated into the agreements for sale and purchase by implication. There is no basis to imply such a condition to those contracts. It is not necessary to give business efficacy to the agreements for sale and purchase, which are entirely effective without it: BP Refinery (Westernport)
Pty Ltd v President Councillors and Ratepayers of the Shire of Hastings
(1977) 16
ALR 363, 376 (PC).
[72] After further discussion, Mr Dale again elected not to pursue the
application
for leave to amend and the collateral contract issue was not included in the
fourth amended statement of claim.
[73] Despite Mr Dale electing not to pursue the application for
amendment, the pleadings and the earlier cancellation letters
contain
references to the inability of the Blue Chip companies to perform their
obligations under the Blue Chip investment products
as in some way, providing a
basis for cancellation. Neither the letters nor the pleading clearly
articulate the basis for that
proposition.
[74] That leads to the next issue arising from the pleadings, the
identification of the principal cause of action as “cancellation”.
The term “cause of action” means all things necessary to give a
right of action. Cancellation is not itself a cause
of action. Cancellation is
a remedy that may be available to a party in certain circumstances, if they make
out the cause of action.
The role of pleadings is to properly identify the
factual allegations which make out the elements of the cause of action:
Invercargill City Council v Hamlin [1994] 3 NZLR 513 (CA), 536;
Letang v Cooper [1964] EWCA Civ 5; [1965] 1 QB 232 (CA) at 242 per Diplock LJ. I note the
High Court of Australia has recently confirmed the importance of pleadings
in civil litigation: Aon Risk Services Australia Ltd v Australian
National University [2009] HCA 27. Although I raised the issue of pleading
cancellation as a cause of action with counsel in opening, the last amended
statement of
claim repeats the same pleading.
[75] In this case the right to cancellation is said to arise in a number of ways. The principal one is misrepresentation. If there is a qualifying misrepresentation made out and the relevant provisions of the Contractual Remedies Act 1979 apply, the party relying on the qualifying misrepresentation might be entitled to cancel. But the cause of action is misrepresentation, not cancellation. The other grounds for cancellation are not clearly set out. As discussed with counsel, while the pleading is headed “cancellation”, in this judgment I analyse the matters pleaded in terms of the causes of action actually disclosed. I understood Mr Dale to accept that was
appropriate. I return to the other grounds for cancellation later in this
judgment.
Maria Hoani
[76] One of the plaintiffs was Ms Maria Hoani. Ms Hoani, however,
did not attend and give evidence in support of
her case. She was
unavailable to give evidence because of medical reasons. In the circumstances
I adjourn her claim. The
merits of it are not dealt with in this
judgment.
Agency
[77] Fundamental to the plaintiff investors’ causes of action based on
misrepresentation and the Fair Trading Act is
the proposition that the
Blue Chip Group (as defined in the pleadings) was Greenstone Barclay’s
agent.
[78] The plaintiffs defined the Blue Chip Group as:
• Blue Chip New Zealand Limited (in liquidation);
• Blue Chip Financial Solutions (NZ) Limited;
• Blue Chip Premium Income Limited;
• Blue Chip Joint Ventures Limited;
• Blue Chip Financial Solutions Australia Limited;
• Bribanc (in liquidation);
• Tasman Mortgages Limited;
• Executive Mortgages Limited;
• Blue Sky Holdings Limited (in liquidation);
• Monrad Limited;
• Boltors Limited;
• BFB Underwriters Limited;
• Amelia Limited;
• Northern Crest Investments Limited (Blue Chip in this judgment);
and
• Ravine Limited
The plaintiffs also plead that at all material times Mr Bryers was
the managing director of the Blue Chip Group. While
it is convenient to use
the term Blue Chip Group to refer to these entities, Blue Chip Group as defined
by the plaintiffs does not
have a separate legal identity. It remains
necessary to consider the role each entity played in the relevant
transactions.
Where I refer to Blue Chip Group in this judgment it is a
reference to the plaintiffs’ definition, but without ascribing
a legal
status to that “group”.
[79] The plaintiffs next plead that the knowledge of the Blue Chip
Group and Walters Law of the terms of the investment
products is able
to be imputed to Greenstone Barclay by reason of:
• the profit share agreement;
• the underwrite agreement;
• their use of common solicitors.
Mr Walters of Walters Law acted for Mr Bryers and Blue Chip in relation to
aspects
of the Blue Chip operation.
[80] The plaintiffs also plead that the conduct of the Blue Chip
Group (in particular the sales agents) is to be attributed
to Greenstone
Barclay by reason of the agency relationship, which is said to be founded on the
above particulars.
[81] The pleading generally raises the following issues relevant to
agency:
• Are the members of the Blue Chip Group generally, and the sales
agents
in particular, the agents of Greenstone Barclay?
• If there is an agency relationship, what is the scope of the
agency?
Is there an agency relationship?
[82] The starting point is to identify the nature of agency generally.
Bowstead and Reynolds on Agency (18th ed) sets out at art 1 a
definition of agency taken from the American restatement as follows:
Agency is the fiduciary relationship which exists between two persons, one
of whom expressly or impliedly manifests assent that the other should act on his behalf so as to affect his relations with third parties, and the other of whom similarly manifests assent so to act or so acts pursuant to the manifestation. The one on whose behalf the act or acts are to be done is
called the principal. The one who is to act is called the agent. ...
[83] Although Bowstead attempts a definition, Professor Dal Pont
suggests at para
1.1 of the Law of Agency (2nd ed) that the legal concept
of agency is complicated by several factors, most fundamentally the absence of
an accepted legal definition
of the term “agent” citing
Nottingham v Aldridge [1971] 2 QB 739 at 751 per Eveleigh J.
[84] Dal Pont goes on to observe at 1.2:
The narrowest legal definition of ‘agent’ connotes ‘an authority or capacity
in one person to create legal relations between a person occupying the position of principal and third parties’. A broader conception covers ‘a person who is able, by virtue of the authority conferred upon him, to create
or affect legal rights and duties as between another person, who is called his principal, and third parties. Wider again is the characterisation of an agent
as ‘a person who has authority to act on behalf of a principal, either generally or in respect of some particular act or matter’.
As Dal Pont notes each of the definitions in that passage reveals
that agency is defined in terms of its consequences.
The point is echoed in
Bowstead where the editor notes at 1-002 that “agency is a
relative notion and there are many acceptable uses of the term which do not
always coincide with each other”.
[85] In the present case the plaintiffs rely on a broad approach to agency.
They argue that the members of the Blue Chip Group,
particularly (but not
limited to) the sales agents employed by the licensees of Blue Chip and
therefore part of the Blue Chip Group,
had authority to act on behalf of
Greenstone Barclay in relation to the sale of the apartments to the investors,
so that Greenstone
Barclay is bound by their actions and particularly their
representations. An agency of that nature falls within the third category
discussed in the above passage from Dal Pont.
[86] The next consideration is the basis of the authority of the agent. The authority of an agent may be actual, where it results from a manifestation of assent that the agent should represent or act for the principal expressly or impliedly made by the principal to the agent, or apparent (also referred to as ostensible) where it results from such manifestation made by the principal to third parties: Bowstead art 22. Mr Dale accepted that the investors could not rely on apparent or ostensible authority in the present case. He conceded there was no evidence to suggest that
Greenstone Barclay represented to third party purchasers that the Blue Chip
selling agents had authority to act on its behalf.
The authority the
plaintiffs rely upon to create the agency is therefore actual
authority.
[87] As to actual authority:
An “actual” authority is a legal relationship between
principal and agent created by a consensual agreement
to which they alone are
parties.
Freeman & Lockyer (a Firm) and Others v Buckhurst Park Properties
(Mangal) Ltd
[1964] 2 QB 480 at 502 per Diplock LJ.
[88] The issue in the present case is whether there was such a legal
relationship created by a consensual agreement between Greenstone
Barclay and
the Blue Chip Group in general, and/or the sales agents in particular,
that the sales agents were authorised
to act as agents for Greenstone
Barclay.
[89] As noted, the actual authority may be either express or
implied. No particular formalities are required. It is not
necessary that there
be a legally binding contract of agency, but for an express agency there must be
an instruction or request from
the principal to the agent, and an
undertaking of the task by the agent: Morgans v Launchbury and Others
[1972] UKHL 5; [1972] 2 All ER 606, 613-614; Credit Services Investments Limited Ltd v
Evans [1974] 2 NZLR 683, 694. In the absence of express authority, the
conduct of the parties and the circumstances of the particular case
may indicate
that authority is to be implied: Council of the Shire of Ashford v
Dependable Motors Pty Ltd [1961] AC 336 (PC).
[90] The leading New Zealand authority on agency is the Supreme Court
decision
of Nathan v Dollars and Sense Ltd [2008] NZSC 20; [2008] 2 NZLR 557. Blanchard J,
delivering the decision of the Court, posed the question as to the existence of
an actual agency
as:
[8] ... whether expressly or by implication [the principal] utilised [the agent’s] services as its agent to procure execution of the loan documentation, including the mortgage. Did [the principal] make it [the agent’s] task to obtain execution, thereby creating an agency and prescribing
its scope? Did [the principal], to adapt the words of Dixon J in Colonial
Mutual Life Assurance Society Ltd v Producers and Citizens Co-operative
Assurance Co of Australia Ltd[1931] HCA 53; , (1931) 46 CLR 41 at pp 48 – 49, entrust to
[the agent] the function of representing it in its transaction with [the third
party] so that the service to be performed by [the agent]
consisted of standing in the place of [the principal] (or of
its solicitor) and
assuming to act in its right and not in an independent capacity?
[91] As noted, the plaintiffs rely, inter alia, on the profit
share and underwrite agreements as evidence of actual authority. They
are the only contracts that Greenstone
Barclay made with any members of the
Blue Chip Group.
[92] Lyell’s principal role under the profit share agreement was to
arrange funding
for Greenstone Barclay to enable Greenstone Barclay to purchase the
land and undertake and complete the development.
It could be
argued that by that arrangement, Greenstone Barclay appointed Lyell to act
on its behalf and as its agent
to seek out funding for that purpose. But the
terms of the profit share agreement do not take the matter further than that, or
make
Lyell or any member of the Blue Chip Group, Greenstone Barclay’s
agent generally.
[93] Further, cl 16 of the profit share agreement expressly provided
that the agreement was not to constitute or create
either party as agent of the
other party for any purpose whatsoever. That is a strong indication of
the parties’
intention that Lyell was not to be construed as Greenstone
Barclay’s agent at all, and certainly not for general purposes
under the
profit share agreement.
[94] While, as Mr Dale submitted, express language will not prevent
the Court from recognising an agency relationship if
that is what the true
nature of the parties’ arrangements amount to at law: South Sydney
District Rugby League Football Club Ltd v News Ltd & Others [2000] FCA 1541; (2000) 177
ALR 611, 645 – 647, in the present case, and subject to the issue of
partnership to which I refer shortly, the
arrangements between the parties as
recorded in the profit share agreement do not support a finding that
Lyell was to
be Greenstone Barclay’s agent generally. As noted,
Lyell’s role to act for Greenstone Barclay under the profit share
agreement was limited.
[95] Mr Dale submitted that as a result of the profit share agreement, the parties were effectively joint venture partners. If they were partners, then under general partnership law they could be agents for each other when conducting the business of the partnership, which could provide the basis for a more general agency. Mr Dale
pointed out that cl 3.2(a) of the profit share agreement referred to a joint venture. He argued that supported an interpretation of the parties’ relationship as one of partnership and agency. Ms Miller, Greenstone Barclay’s solicitor on property matters, suggested the reference to a joint venture was carried over from a prior precedent in error. Her evidence is consistent with Mr Abel-Pattinson’s evidence and the construction of the profit share document as a whole. Mr Abel-Pattinson said that while initially a joint venture was contemplated, in the end it was not pursued and instead the parties agreed on a profit share arrangement. Of course, the parties’ views are not determinative of the relationship, and even though the parties
to a profit share may agree to play different roles in a development, the
arrangement can still amount to a joint venture at law.
[96] In my judgment nothing turns on the reference to joint venture in cl
3.2(a). I
accept that it appears to have been included in error. The reference to
joint venture
in cl 3.2(a) does not make sense within the clause itself, or when the
agreement is read as a whole. As the clause reads, it would
have the joint
venture entity settling the purchase of the land, whereas the entire agreement
is based on the premise that Greenstone
Barclay will settle the purchase
of the land, not a third party or joint venture entity. The profit
share agreement
did not contemplate the creation of a separate joint
venture entity.
[97] Under the profit share agreement Greenstone Barclay and Lyell
agreed to work together towards Greenstone Barclay
developing the
Barclay on the Albert Street site, to have the completed apartments sold to
investor clients of Lyell and to
share the profits. To that extent the profit
share had features of a joint venture.
[98] However, that does not necessarily advance matters for the plaintiffs. The concept of a joint venture does not have a settled meaning. Commonly it is applied to a venture (often a one-off venture) undertaken by two separate and economically independent parties. A joint venture may in some cases constitute a partnership, but that will not necessarily always be so. Like other legal relationships the construction of the parties’ agreement overall is fundamental to establishing their relationship under it. Parties can engage in what may broadly be described as a joint venture without necessarily being partners. As Gault J in Chirnside v Fay [2007] 1 NZLR
433 (SC) confirmed:
[52] ... The term “joint venture” can cover many forms of
arrangement, not all of which necessarily will give rise to
fiduciary
obligations.
In Rummery v Matthews [2009] WWR 286 the Manitoba Queens Bench
confirmed that a joint venture need not constitute a partnership.
[99] Clause 16 of the profit share agreement provides further
support for the argument the parties were not partners. It
is an express
indication that the parties did not intend to create a partnership. There is
nothing in the balance of the agreement
or the parties’ relationship which
requires the imposition of a partnership upon them. The parties had quite
separate and distinct
roles to play in the development. Further, and
importantly, the agreement makes no provision for the adjustment of
losses,
which is an important feature of any partnership.
[100] I conclude that, even if the profit share agreement could
be categorised as being in the nature of a joint venture,
in this particular
case it does not constitute a partnership, nor appoint Lyell as Greenstone
Barclay’s general agent.
[101] If I am wrong in that analysis, it does not advance matters very far
for the plaintiffs. Even if Greenstone Barclay and
Lyell were partners, that
does not make the other members of the Blue Chip Group partners of
Greenstone Barclay. The
focus would have to be on what Lyell’s role
was, and what it did within the scope of any agency granted to it.
[102] The next document relied on by the plaintiffs is the underwrite agreement. The purpose of the underwrite agreement was to ensure that the units in the Barclay were sold, or if not, were underwritten by Lyell. Lyell had a role to play in selling the apartments on Greenstone Barclay’s behalf, and in advancing its own interests. Under the underwrite agreement Greenstone Barclay implicitly, if not expressly, granted Lyell authority to sell the apartments in the Barclay to satisfy its obligations under the underwrite agreement. In order to give practical effect to that Lyell was authorised to appoint a real estate agent (as a sub-agent) to sell the units. Clause 2.2 of the agreement expressly provided that Lyell was to:
use its best endeavours to procure a real estate firm at [its] cost ... to introduce purchasers to purchase the Units by the Sunset Date ... and shall act as liaison between [Greenstone Barclay] and those purchasers as and when required by [Greenstone Barclay] in facilitating payment of deposits under and effecting settlements pursuant to the Sale and Purchase Agreement ...
[103] Although there is reference in the clause to the use of a real
estate firm, it seems clear from Mr Abel-Pattinson’s
evidence that he
understood investor clients of Blue Chip would be approached by Blue Chip
sales agents or licensees,
and the apartments sold to them as part of the
investors’ investment with Blue Chip, rather than Lyell instructing real
estate
agents. The availability of a ready market was a principal reason why
Greenstone Barclay agreed to the arrangements with
Blue Chip, and
entered the arrangements with Lyell. The underwrite agreement thus
contemplated that sub-agents (other than
Lyell) would be used to market and sell
the apartments.
[104] The agreement also contemplated the use of sub-agents in other ways.
For example, at cl 6 Lyell or its agents were
granted access to the
units to install furniture and chattels and to lease the
units. Further, the parties apparently
contemplated that in order to sell the
units Lyell and/or the real estate agents or sub- agents would need to make
representations
to the purchasers because they included cl 9 in the following
terms:
REPRESENTATIONS AND WARRANTIES
9.1 In consideration of the Parties entering into this agreement, each of them represents and warrants to the other of them that any marketing material or other representations made by either of them
for and on behalf of the other of them in respect of the Units prior to
the sale thereof are and will be accurate and complete as at the date
of the relevant Sale and Purchase Agreement and shall not contain any omission of material facts or be misleading and all reasonable
enquiries shall have been made to verify the accuracy of any such
information.
(emphasis added)
[105] While there is a general rule that an agent may not delegate the authority given to him or her by their principal (unless the principal subsequently ratifies the act) the maxim does not operate where the principal has authorised the agent to engage a delegate to perform certain functions: Allam & Co Ltd v Europa Poster
Services Ltd [1968] 1 All ER 826, 832; S A Joseph and Rickard Ltd
v Lindley and
Others [1905] HCA 52; (1906) 3 CLR 280.
[106] In the present case, by appointing Lyell to sell its apartments and
expressly recognising that Lyell would appoint
real estate agents,
Greenstone Barclay implicitly agreed to Lyell using or appointing sub-agents
as sales agents. A validly
appointed sub-agent becomes the agent of the
principal for the purposes for which the appointment of the sub-agent is
made:
De Bussche v Alt (1878) 8 Ch D 286 (CA) at pp 310 –
311.
[107] Mr Chisholm, who argued this point on behalf of all the
developers, including Greenstone Barclay, submitted
that a sub-agency had
not been pleaded. Strictly he is correct, but while particulars of a
sub-agency were not
pleaded the plaintiffs do plead that by reason of,
inter alia, the underwrite agreement there was an agency relationship
between Greenstone Barclay and the sales agents. The sub- agency arises
from
the terms of the underwrite agreement, which permit a sub- agency. To
that extent it comes within the pleading.
[108] In Nathan v Dollars & Sense Ltd the Supreme Court
considered what was required to create a sub-agency in the circumstances of
that case. The Court held that
by instructing an Auckland solicitor
when the documents were likely to be signed elsewhere the principal
implicitly agreed
to the appointment of a sub-agent. Greenstone Barclay knew
that the apartments would be sold to Blue Chip investors. By agreeing
the
apartments would be sold to Blue Chip investors, (by Blue Chip sales
agents, not Lyell itself) at the least Greenstone
Barclay implicitly agreed to
the appointment of the sales agents as sub-agents.
[109] Mr Chisholm also submitted that rather than an agency relationship,
this was
a situation where the Blue Chip sales agents were acting as intermediaries,
or even principals in their own right. Mr Chisholm supported
his submission by
reference to Evans.
[110] In that case Mr Evans wanted to upgrade his car. He went to a car yard and spoke to a dealer about a car he was interested in. The dealer suggested Mr Evans
trade in his existing car and finance the balance. Mr Evans agreed. He
signed an agreement to lease the car. The lease
was for four years.
The lessor was Credit Services, a finance company used by the car dealer.
The lease contained an express
term that provided the lessee could not become
the owner of the car at the end of the lease. The dealer had been instructed
to
inform customers they could not purchase the car under the lease. Despite
that, the salesman told Mr Evans that if he paid a residual
value the car would
be transferred to him.
[111] Richmond J delivered the lead decision. He cited with approval the
House of Lords decision in Branwhite v Worcester Works Finance Ltd
[1969] 1 AC 552, where the majority approved the remarks of Pearson LJ in
Mercantile Credit Co Ltd v Hamblin [1965] 2 QB 242
concerning the relationship of the car dealer to the finance company.
In such transactions:
There is no rule of law that in a hire-purchase transaction the dealer never is,
or always is, acting as agent for the finance company or as agent for the
customer. In a typical hire-purchase transaction the dealer
is a party in his
own right, selling his car to the finance company, and he is acting primarily on
his own behalf and not as
general agent for either of the other two
parties. There is no need to attribute to him an agency in order to account for
his
participation in the transaction. Nevertheless, the dealer is to some extent
an intermediary between the customer and the finance
company, and he may
well have in a particular case some ad hoc agencies to do
particular things on behalf of one or the other or it may be both of
those two parties.
p 269 (emphasis added)
[112] In Evans there was an actual agency pursuant to which Credit
Services had delegated authority to the dealer when selling their cars, to
explain the nature and effect of the leasing transaction. While concluding
that the evidence in the case before him fell
short of establishing any
actual authority from Credit Services to the dealer to give an assurance of the
kind given to Mr Evans,
Richmond J found that Credit Services had delegated
authority to the dealer to explain to customers the general nature
and legal consequences of a leasing transaction, and that the
assurances given by the salesman were given
in the course (or scope)
of that authority.
[113] The case confirms that an agent may have more than one role, or there
may
be more than one principal in a transaction. In the present case, the sales agents were
primarily acting for Blue Chip in selling the Blue Chip investment product.
As will
be seen, in some cases they may also have been acting for the plaintiffs
themselves. But that does not exclude their also acting for
Greenstone Barclay
in relation to the sale of the apartments to the plaintiffs.
[114] I find that under the underwrite agreement Greenstone Barclay
appointed Lyell as its agent to market and sell the
apartments on its behalf
and, to the extent necessary, to delegate that marketing and sales role to real
estate agents or, as was
the case, sales agents or Blue Chip licensees instead
of real estate agents. Although the role of the sales agents may not have
been
expressly referred to in the underwrite agreement, Mr Abel-Pattinson was aware
that the apartments in the Barclay were to be
sold by Blue Chip sales
agents/licensees. Further, while he may not have been aware of the details of
the Blue Chip product, Mr
Abel-Pattinson was, I find, aware at a general
level that Blue Chip employed sales agents/licensees to market its
products,
and was accordingly aware that those sales agents/licensees would be
the people marketing the apartments on Greenstone Barclay’s
behalf. For
that reason cl 9.1 was included in the underwrite agreement. In my judgment,
therefore, Lyell and the particular sales
agents/licensees were appointed as
agents by Greenstone Barclay, and had actual authority to market and sell the
apartments on Greenstone
Barclay’s behalf.
[115] The authority was, however, limited to Lyell and its
delegates, namely the sales agents/licensees. There is
no basis to
argue, as Mr Dale sought to do, that because Lyell was part of the Blue
Chip Group the appointment of Lyell
as agent, and sales agents as
sub-agents, in some way led, by operation of law, to the appointment
of the Blue Chip
Group as a whole as Greenstone Barclay’s agents. Mr Dale
was not able to point to any authority to support that broad proposition.
That
is not surprising. As noted earlier, an agency relationship is a consensual
relationship between the principal and agent
alone (subject to sub-agencies).
Greenstone Barclay did not appoint the other members of the Blue Chip
Group as its
agents either specifically or generally.
[116] In their pleading the plaintiff investors also rely on the related
shareholding
of some of the Blue Chip companies and the use of common solicitors, Mr Walters’
firm, to support their argument that such a general agency relationship exists. But common shareholdings of certain companies, or the use of common solicitors do not,
of themselves, create an agency relationship. Mr Dale was not able to refer to any authority to support those propositions either. To the extent common shareholdings
or the use of common solicitors has any relevance it must be in relation to
the issue
of whether, accepting that an agency relationship exists, the knowledge of an
agent may be imputed to its principal. That, however,
is a quite different
issue. Of itself, common shareholding or the use of common solicitors cannot
support the existence of an
agency relationship in the first place which
must, insofar as it is based on actual authority, be
consensual.
[117] The pleading as to the use of common solicitors is not made out on
the facts
in any event. It is based upon an argument that at material times Walters
Law acted
for the Blue Chip Group and also for a company related to
Greenstone Barclay. Walters Law acted for Blue Chip in a variety
of ways, for
example, drafting the PIP agreement.
[118] Walters Law also acted for a separate company, Greenstone
Pitt Trustees Limited, in relation to certain conveyancing
aspects of
the Chatham development, another development undertaken by Messrs
Abel-Pattinson and Cox. But as Mr Walters
confirmed in his evidence, his
firm’s involvement in that development was limited to conveyancing
matters. Greenstone Pitt
Trustees Limited was a quite separate legal
entity to Greenstone Barclay. Mr Walters said he had never acted for Greenstone
Barclay. There is no evidence to support the allegation of a relationship
between Greenstone Barclay and Walters Law, which
would in turn support
some form of agency: El Ajou v Dollar Land Holdings plc [1993] EWCA Civ 4; [1994] 2 All ER
685.
[119] The position reached, prima facie, is that Lyell, and through
Lyell the Blue Chip sales agents, were agents of Greenstone Barclay for
the purposes of selling
apartments in the Barclay. There was, however,
no appointment by Greenstone Barclay, either expressly or by implication,
of
any other member of the Blue Chip Group as its agent for any
purpose.
[120] There is no particular significance in Lyell’s position as agent. There is no
evidence that Lyell made any relevant representations to the plaintiffs, or
that it had any role other than that defined by the profit
share and underwrite
agreements. The focus must be on the actions of the sales agents.
[121] That leads to the next and perhaps most important issue, namely the
scope of the sales agents’ authority as Greenstone
Barclay’s agents,
particularly given that at the time, the sales agents were also acting either as
agents of the investors
(pursuant to a written authority) and/or agents of Blue
Chip (or at least certain members of the Blue Chip Group) in selling the
Blue
Chip products. The sales agents thus held a number of roles. It is
necessary to consider the background to the
sales of the apartments and
the Blue Chip products generally, to identify the precise scope of the sales
agents’ authority
as it relates to Greenstone Barclay.
Scope of the Agency
Blue Chip marketing methods
[122] Evidence of Blue Chip’s marketing methods was given by
a variety of witnesses. A number of plaintiffs described
how the Blue Chip
financial products were marketed to them. Some licensees and sales agents also
gave evidence. They described
their contact with the investors and Blue Chip.
Mr Hutchins, a Blue Chip employee, gave direct evidence about Blue
Chip’s
relationship and contact with licensees regarding the Blue
Chip product. Mr Hutchins was employed by Blue Chip from
April 2005 until
28 September 2007, initially as operations team manager and later as a business
manager. From 28 September 2007
until February 2008 he was employed by Mide
Limited, which operated the Blue Chip business. Mide was controlled by Messrs
Neil Bell
and Rikki Flowerday who at the relevant time were directors of the
principal operating companies within the Blue Chip organisation.
[123] The picture that emerges from the evidence is that, apart from some plaintiffs who were related to or knew Blue Chip employees or sales agents, most plaintiffs were introduced to the Blue Chip products through Blue Chip’s marketing strategy and/or by Blue Chip’s various licensees and sales agents operating throughout the
country. The investors were typically existing clients of the
licensees or sales agents, or were referred to the licensees
or sales
agents by a friend or family member, or were followed up after attending a
public presentation. In some cases
the investors responded to cold
calling by telephone and were then visited by licensees or sales agents
following up an
expression of interest.
[124] Some of the sales agents were independent, in that they operated
their own financial advisory business and the Blue Chip product
was just one of
the investment products they marketed and sold. Others were directly licensed
by Blue Chip to sell Blue Chip investment
product exclusively. (I refer to both
hereafter as sales agents).
[125] The sales agents first obtained details of the proposed
investors’ financial circumstances. If borrowing was
required, that
information would then be referred to mortgage brokers to determine whether
the investors qualified to purchase
the proposed property. If the
investor qualified (for which they generally required sufficient equity
to support the
borrowing necessary to settle the purchase of the
investment property) the sales agent would then have the investor sign
an
authority to proceed. The authority appointed Blue Chip as the
investors’ agent, and entitled Blue Chip to seek finance
on behalf of the
investor for the purchase (if finance was required) and also to locate a
property for the investor. A
financial analysis was prepared for the
investor setting out the returns. The documentation the investor would
receive
(the agreement for sale and purchase of the apartment and the
documentation for the Blue Chip product) was then assembled
and provided to the
investor, generally for execution in the presence of the sales agent.
Typically the process would
involve a number of meetings between the
sales agent and the investor.
[126] An issue arises as to the extent of Greenstone Barclay’s knowledge of the Blue Chip products and sales agents’ methods. Mr Dale submitted it was relevant, because he argued that Greenstone Barclay’s knowledge of the Blue Chip product, in particular, was such that it took the relationship of Greenstone Barclay and the sales agents well beyond that of the usual vendor and real estate agent. Without necessarily accepting that even if Greenstone Barclay had such detailed knowledge it would have that effect, I propose to consider the evidence of the extent of
Greenstone Barclay’s knowledge of the Blue Chip products and marketing
methods.
[127] Mr Abel-Pattinson said that he was unaware of the detail of the
investment products marketed and sold by Blue Chip sales agents.
Further,
neither he nor Mr Cox had any dealings with the sales agents or
licensees as such. In cross- examination
Mr Abel-Pattinson confirmed his
understanding was that Blue Chip introduced investment properties to their
investors, in
this case apartments sold with leases in place. He thought that
Blue Chip then advised the investors about forming the appropriate
entity to
invest in the particular product. Mr Abel-Pattinson understood there were
different types of investment vehicles
an investor could use, such as a family
trust, a loss attributing qualifying company (LAQC) or some other standard
investment model.
Blue Chip would set up the entity for the investor. He
understood that the investors would buy the apartments with leases in place
as
rental investments, and that Blue Chip would manage all rental and tenancy
issues so the investors could receive rental from the
management company without
having to be “hands on” managers.
[128] While he had that general understanding, Mr Abel-Pattinson said that
neither
he nor Greenstone Barclay directly involved themselves in the sales to the
Blue Chip investors, and had no knowledge of the detail
of the Blue Chip
investment products. Greenstone Barclay left the sales of the apartments to
Lyell and the sales agents. He and
Greenstone Barclay took comfort from
the fact the agreements were to be entered on the standard form agreement
for sale
and purchase form settled by their solicitors, (as attached to the
profit share agreement) and that the purchasers were
required to pay a
substantial deposit of between 10 and 15 percent in each case.
[129] Although they did not deal with or have any contact with the sales agents or licensees, Mr Abel-Pattinson and, to a lesser degree Mr Cox did attend meetings with the sales and procurement managers at Blue Chip’s head office. The profit share agreement provided for monthly meetings of a management committee made up of representatives of both Blue Chip and Greenstone Barclay. The focus of those meetings was initially on the design and construction of the building, but as the development progressed, the meetings with the sales and procurement managers were primarily to review the level of sales.
[130] Kevin Miles, who was initially employed by Blue Chip to
look after licensees, but then later had a role in developing
the investment
products, was called by the plaintiffs to give evidence. Mr Miles said that at
one of those sales meetings, attended
by Mr Abel-Pattinson and Mr Cox, he gave a
presentation about the joint venture product. Mr Abel-Pattinson and Mr Cox
denied being
present or seeing any such presentation.
[131] I generally accept Mr Miles’ evidence on this point. I
am satisfied that during the course of one of
the meetings to review
sales, attended by Mr Abel- Pattinson, (but perhaps not Mr Cox, as Mr Miles
was prepared to concede)
Mr Miles made a presentation to explain in general
terms the joint venture product marketed by Blue Chip. The presentation
consisted
of about six or seven slides, which Mr Miles spoke
to.
[132] But, as noted, the main purpose of the meetings Mr Abel-Pattinson
attended was to review the level of sales of the
apartments. The
progress, in terms of the number of apartments, sold would have been the
overriding focus of his attention.
Mr Abel-Pattinson had no particular reason to
concern himself with the Blue Chip products, and certainly not the detail of
them.
I accept that Mr Miles’ presentation would not have made any
particular impact on Mr Abel-Pattinson, and that it failed to
register with him
at the time.
[133] If Mr Abel-Pattinson was alerted to, or had his attention drawn to
the detail
of the Blue Chip products such as the joint ventures and PIPs then in my view he is the type of person who would have made further inquiries about them from the senior management of Blue Chip. Both Mr Abel-Pattinson and Mr Cox are experienced property developers. Their financiers had required them to personally guarantee borrowing in excess of $40 million dollars for the Barclay development. They were reliant upon the sales of the apartments to the purchasers being genuine and enforceable. If they had any concerns about the way the apartments were being sold by the Blue Chip sales agents or licensees, or the products they were sold with, I am satisfied they would have raised such concerns because they had a lot to lose. They were not put on inquiry. As noted, the agreements delivered to their solicitors from time to time were in the standard form stipulated, and were accompanied by the
required deposits.
[134] Mr Dale submitted that Mr Abel-Pattinson must have known about the
Blue Chip joint venture investment product, because
it was referred to
in a number of email exchanges, either directed to Mr Abel-Pattinson or which
he was copied into. The
first was an exchange of emails on 31 May 2007 that
refer to a joint venture. The email chain starts with an internal Blue Chip
report
noting an update of sales. That report did not mention the phrase
joint venture. It was forwarded by Geoff Little to
Mr Abel-Pattinson, who
noted:
That’s fantastic news! Any idea on where the contracts actually are? ...
Mr Abel-Pattinson’s email was in turn forwarded by Mr Little
to Mr Mudaliar, a Blue Chip employee. Mr Little asked:
Need answer for our JV partner on whereabouts of contracts, see
memo below.
The reference to our JV partner is a reference to Greenstone
Barclay. It is not a reference to the joint venture
agreements used
by Blue Chip in marketing the apartments to investors.
[135] The issues then become confused in Mr Mudaliar’s response. In
the response
he did refer to joint venture documents being the joint venture agreements entered into between the Blue Chip entity and the investors, but the email was quite detailed
in its terms. Apart from noting at one point that five agreements were being sent across today for execution it did not directly address the issue that Mr Abel-Pattinson was interested in, which was where the agreements for sale and purchase that he was waiting for were. While the email was copied to Mr Abel-Pattinson, his interest in the detail of its contents would have been limited. What he wanted was the agreements for sale and purchase. That was his focus. I accept Mr Abel-Pattinson’s evidence that if he saw the email, (which was copied to him rather than addressed to him), he simply did not pay attention to the detail of it, and the references to JV documents would not have registered with him. The particular email also has to be considered in the context of the volume of emails received by Mr Abel-Pattinson on a daily basis. I accept his evidence that he received (by way of original, forwarded
and copied emails) hundreds of emails a day, and did not read every email
copied to him. Some he just filed. If he did happen to
read the email, I
accept he did not place any significance on the reference to the joint venture
product.
[136] To similar effect are the references to the joint venture product in
a series of letters and emails regarding the issue of
dual-key apartments. Mr
Abel-Pattinson’s focus was on the issue of dual-key apartments, which he
did not support. He had
no particular interest in what Blue Chip called its
investment products.
[137] Mr Dale also took Mr Abel-Pattinson to a further email exchange on 12
July
2006. The original email from Mr Abel-Pattinson to Mr Little included a copy
of a variation to the correct sales schedules attached
to the underwrite
agreement. There then followed an internal Blue Chip email, which does not seem
to have been copied to Mr Abel-Pattinson,
from Mr Little to Mr Miles,
Richard Cole and Mr Walters confirming the joint venture management team had
verified the
figures and approved the variation. As the email was not copied to
Mr Abel-Pattinson there is no basis to conclude he was aware
of it. But in any
event, the reference to joint venture is, in context, a reference to the profit
share agreement with Greenstone
Barclay. It has nothing to do with the joint
venture investment product marketed by Blue Chip to investors.
[138] During cross-examination of Mr Abel-Pattinson, Mr Dale also
sought to make something of an email from Mr Abel-Pattinson
in December 2006
where he noted that sales were at approximately 76 percent and deposits
at 63 percent, and said he was
hoping for draw-down on Friday 15 December
2006. In the email Mr Abel-Pattinson made the observation:
Westpac will be suspicious if [the deposits] all come in on the last
day.
Mr Dale suggested an inference could be drawn from that observation that Mr Abel- Pattinson and Greenstone Barclay had something to hide. Mr Abel-Pattinson explained that he was referring to the problem of leaving sales confirmations and deposits until shortly before the Christmas break, which put pressure on the bank to provide the draw-down before Christmas. It was for that reason he had made the point in the email that it was important to Greenstone Barclay that the draw-down
happened before Christmas or “otherwise no turkey for
us”. I accept Mr Abel- Pattinson made the comment which,
on its face
was unusual, because of his concern to keep the deposits trickling in on a
regular basis rather than leaving it to the
last minute to send them all across.
I do not accept the comment has the significance that Mr Dale sought to attach
to it.
[139] So on this aspect of the case, I do not accept the evidence supports
Mr Dale’s submission that Greenstone Barclay
was aware of the
detail of the Blue Chip investment products. It follows I decline to draw
the inference he submitted
could be drawn, that Greenstone Barclay knew that the
plaintiff investors were relying on Blue Chip’s assistance to settle
the purchase of the apartments. From Greenstone Barclay’s point of
view the purchasers had the means to settle their
obligations under the
agreements for sale and purchase, as evidenced by payment of the
deposit. Greenstone Barclay had
no interest in the Blue Chip investment
products.
[140] In summary to this point, I find that the sales agents had actual
authority to
act as agents of Greenstone Barclay in selling the apartments to
the investor purchasers. However, and importantly, they
were not acting as
Greenstone Barclay’s agents when selling Blue Chip investment products.
In selling Blue Chip investment
products the agents were acting as sales
agents of Blue Chip (and also perhaps as agents for the
investors).
[141] I now turn to the issue of whether the representations made
by the sales agents about Blue Chip, and the Blue
Chip investment products,
which the investors rely on to support the claims in misrepresentation
and breach of the Fair
Trading Act, can be said to have been made
within the scope of the agency granted by Greenstone Barclay to Lyell,
and through Lyell to the sales agents to sell the
apartments.
[142] The Evans case discussed above highlights the importance of
identifying the exact nature of the agency when considering the scope of the
agency.
In Nathan v Dollars & Sense Ltd the Supreme Court went on
to consider the issue of the scope of the agency:
[30] The scope of the task that an agent is appointed to perform must be
determined in a commercially realistic way according to the circumstances,
especially when there is no general agency and
the agent therefore
has a limited function. It may matter how that task is framed when the
Court is considering whether
the agent’s conduct was within its scope.
...
[32] Atiyah has pointed out in his seminal treatise on Vicarious Liability
in the Law of Torts (1967), p 178 that there are two stages of inquiry: first, what acts has the principal authorised and, secondly, is the agent’s act so connected with those acts that it can be regarded as a mode of performing them? It is, Atiyah said, essential to keep these two stages of the inquiry distinct.
[143] In this case it is necessary to consider whether the
representations by the sales agents about the Blue Chip investment
products
and the status of Blue Chip can be said to be either an unauthorised mode of
performing the authorised act of selling the
apartments or otherwise so
connected with the authorised agency that it can be treated as a mode of
performing the act of selling
the apartment and therefore done within the
agency.
[144] Greenstone Barclay did not authorise the sales agents to make
representations about the Blue Chip investment products, but
that is not the
issue. As Blanchard J went on to say at [39] of Nathan v Dollars &
Sense Ltd:
... although the question of whether the principal was liable for an agent’s conduct is often addressed by asking whether that conduct fell within the scope or course of the agent’s authority, this methodology has the capacity to suggest that the conduct of the agent for which a third party seeks to make the principal liable must have been authorised in some way by the principal. That, as we have seen, is not the case, but the concept of authority can unconsciously influence the inquiry in an unhelpful way. The more precise
formulation is whether the conduct of the agent fell within the scope of the
task which the agent was engaged to perform.
[40] In order to determine that question, the Court must concentrate on the nature of the tasks to be performed on behalf of the principal and on how the use of the agent for that purpose has created risk for the third party. Without a sufficiently close connection between the task for which an agent
was engaged and the unlawful action of that agent, so that the wrong can be
seen as a materialisation of the risk inherent in the task, it will be neither fair
nor proper to impose vicarious (strict) liability on a principal who has not
necessarily been guilty of any personal negligence and so would not be
directly liable to the claimant. Strict liability of this kind is exceptional and
is not to be imposed unless fully justified by these considerations.
Certainly, just the opportunity to commit the wrongful
act or the
existence of some merely incidental connection will not suffice.
(emphasis added)
[145] After referring to the following passage at [44] from Fisher in
Agency Law
2000 at p 197 Blanchard J continued:
“Since the essence of agency law is the representation of the
principal by the agent, it seems that vicarious
liability is one
mechanism that functions as a loss allocation rule within agency law in
particular and tort law in general.
Vicarious liability works upstream in
an attempt to find the prime cause for why an agent acted for another
person. So long
as the agent acted within his or her actual ... authority,
then, all other things being equal, the principal has an imposed liability
that
is justified by the very act of placing the agent in a position where the agent
could represent the principal. The control
device used by the courts in
this sphere centres upon the actual ... authority of the
agent.”
We would qualify this passage by saying that what must be shown is a close
connection with what was authorised. That is what allows the agent’s act to
be treated as being within the scope of the agency. (emphasis
added)
[146] In summary, Blanchard J concluded:
[48] The tenor of Lister v Hesley Hall, the Canadian authorities referred
to by the Law Lords Bazley v Curry and Jacobi v Griffiths] and
cases which have followed [S v Attorney-General [2003] NZCA 149; [2003] 3 NZLR 450
(CA)] is that someone who creates an agency in which there is a risk
of improper behaviour by
an agent (or, as in this case, by someone entrusted
with a sub- agency) should expect to bear responsibility where that risk
eventuates
and loss is thereby caused by the agent to a third party. The nature
of that risk and the extent of the liability will depend upon
the nature and
scope of the agency.
[147] In the present case the sales agents were selling both Blue Chip investment products and Greenstone Barclay’s apartments. They were agents for both Blue Chip and Greenstone Barclay. Insofar as Greenstone Barclay authorised them to act as its agents to sell the apartments, Greenstone Barclay are liable for representations within the scope of that agency. Blue Chip are liable for the representations made by the sales agents about Blue Chip or the Blue Chip investment products. Prima facie, however, representations by the sales agents about Blue Chip and the Blue Chip investment products fall outside the scope of the agency or task granted by Greenstone Barclay to the sales agents.
Real estate agents
[148] In selling the apartments for Greenstone Barclay the sales
agents were effectively acting instead of, and in
the place of, real
estate agents (which the underwrite agreement contemplated could be used).
The authorities confirm that
a real estate agent is not normally
authorised to make representations regarding matters unrelated to the
property as such
representations are not within the scope of the agency. In
McAlpine Snowline Ltd v Wethey (1986) 2 NZCPR 388 Wethey agreed
to purchase McAlpine’s property. He failed to settle. McAlpine elected
to resell and
sued for the loss on resale. Wethey alleged the agent had
misrepresented the likelihood of his obtaining finance and tenants. Henry
J
considered whether the alleged misrepresentations were within the scope of the
estate agent’s authority and concluded:
I do not think either statement could be said to have been made by Mr Prier within the scope of his ostensible authority. The statement as to availability
of finance was quite unrelated to the property and clearly was made by Mr
Prier in his personal capacity. The statement as to finding a tenant in its context is also concerned with Mr Prier's own belief as to the future situation and the assistance he would render Mr Wethey after the purchase. Mr McVeigh relied on Mullens v Miller (1882) 22 Ch.D. 194, which concerned representations made by a surveyor employed by a vendor as to the readiness
of a third party to buy or to rent the property in question. Sir James Bacon,
V-C., said at p.199:
“Now a great deal of time has been occupied, and a great many cases
have been referred to, on the question of the authority
of an agent. A man
employs an agent to let a house for him; that authority, in my opinion, contains
also an authority to describe
the property truly, to represent its actual
situation, and, if he thinks fit, to represent its value. That is within the
scope of the agent's authority; and when the authority is changed, and
instead of being an authority to let it becomes
an authority to find a
purchaser, I think the authority is just the same. I think the principal does
thereby authorize his agent
to describe, and binds him to describe truly,
the property which is to be the subject disposed of; he authorizes the
agent
to state any fact or circumstance which may relate to the value of the
property. ”
Accepting the principle there enunciated, I am of the view the present facts
are not within it. Neither statement really related to
the property in the sense
referred to, and there is nothing in the evidence to suggest that any quality or
defects in it, unknown
to Mr Wethey, contributed to either problem which later
eventuated.
[149] Reference can also be made to other authorities to the same effect: Power v
Atkins [1921] NZGazLawRp 79; [1921] NZLR 763; Hill v Harris & Another [1965] 2
QB 601; MacCormick
v Nowland & Others (1988) ANZ Conv R 316; Sheppard-Johnson v
Luey & Others
(1991) 1 NZ ConvC 190, 741; Vettese & Another v Kemp &
Others [2000] SASC 154; (2000) 77 SASR 53; Lazarus v J L Morrison & Another (No. 1)
[1906] NZGazLawRp 99; [1906] 8 GLR 717; Goulet et al v Clarkson [1949] 1 DLR
847; Kadner v Brune Holdings Pty Ltd [1973] 1 NSWLR 498;
Sharplin v Henderson [1990] 2 NZLR 134; Thompson v Henderson
& Partners Pty Ltd (1990) 58 SASR 548.
[150] Greenstone Barclay has authorised the sales agents to market
and sell its apartments. Greenstone Barclay would
be fixed with
representations the sales agents made about the apartments, such as
their amenities and value. However,
representations about Blue Chip and
the Blue Chip investment products are unrelated to Greenstone Barclay’s
apartments,
and are not within the scope of the authority granted by
Greenstone Barclay.
[151] In the present case, the fact the selling agents were also acting for
Blue Chip when selling the Blue Chip investment products
is particularly
relevant. It provides further support for the conclusion the selling agents
were not acting within the scope of
their authority from Greenstone Barclay when
making representations about the Blue Chip investment products (assuming
for
present purposes they were unauthorised by Blue Chip). In making
those representations they were only acting within the
scope of the authority
provided by Blue Chip but not within the scope of authority provided by
Greenstone Barclay.
[152] The point is well illustrated by the case of Saunders v Leonardi (1976) 1 BPR 9409. In that case Mr Saunders was looking to purchase a business. Mr Leonardi was looking to sell his business. Mr Leonardi appointed Cabban and Co, Mr Harrop’s employers, as agent to sell his business. Apart from acting as real estate and business agents Cabban and Co also carried out valuations and finance broking. Mr Saunders entered into agreements to purchase Mr Leonardi’s business, but ultimately was unable to settle. He sought to recover the deposit on the basis that he signed the agreement for sale and purchase upon the faith of statements, representations and warranties made by Mr Harrop that loan finance was available to him to complete the contracts. Holland J found that the statements attributed to Mr
Harrop were made within the scope of his employment with Cabban
and Co, and were not made on the basis of any express
authority from Mr
Leonardi to Mr Harrop to find finance for Mr Saunders. The Judge was not
prepared to imply actual authority.
This was despite the fact Mr Leonardi
had employed Cabban and Co to sell the business, knew that Mr Saunders needed
finance, took
Mr Saunders to his own solicitors to seek finance and knew that Mr
Harrop claimed to be in a position to procure finance and had
offered to do so.
Further, Mr Leonardi had in fact agreed to and did pay for an
accountant’s report knowing that
the report was required to
support an application for finance Mr Harrop was pursuing. Holland J found that
Mr Harrop’s
endeavours to procure finance were made at the
request and with the authority of Mr Saunders alone, and that in pursuing
those endeavours Mr Harrop was acting as agent for Mr Saunders, not Mr
Leonardi.
[153] Holland J rejected the submission that any representations made by
a sales agent to a prospective purchaser to induce
him to enter a
contract was within the agency and binding on the principal, even if the
agent had no express authority to
make the particular representations, or to act
on behalf of the principal in respect of the subject matter about which the
representation
was made. He held that Mr Saunders could not visit upon Mr
Leonardi responsibility for the false representations of his own
agent made in
the course of such an agency. Importantly the Judge found:
The fact that Mr Harrop was at the same time acting as agent for
Mr Leonardi to sell his property is, I think, irrelevant
unless the
representations came within the scope of his authority to act for Mr Leonardi
and were made in pursuance thereof. I do
not think they did and later on I will
deal with this point further.
[154] Further, as to scope Holland J went on to acknowledge that if it was
within the agent’s authority to make true statements
with respect to the
subject matter the principal is liable to bear the consequences of untrue
statements, but then noted:
However, the employment of an agent to sell or negotiate a sale does not authorize the agent to do more than what is generally considered to be in the ordinary course of the business of an agent in selling the kind of property in question for a principal and what is reasonably incidental thereto: Presser v Caldwell Estates Pty Ltd [1971] 2 NSWLR 471 per Asprey JA at 405. Colonial Mutual Life Assurance Society Ltd v Producers & Citizens Co- operative Assurance Co of Australia Ltd.
[155] In Saunders v Leonardi Holland J held there was no evidence
that it was a common practice of business selling agents to procure
finance for the
purchaser. Unless the vendor had undertaken to provide or
find finance the provision of finance was entirely the purchaser’s
own
problem. If the purchaser had enlisted the aid of the vendor’s agent to
find finance it became a matter between the purchaser
and the agent, separate
from and independent of the duties entrusted to the agent by the
vendor.
[156] Mr Dale sought to distinguish the present case from the
reasoning in Saunders v Leonardi on the following grounds:
• Blue Chip was not a real estate agent;
• Blue Chip held itself out as offering property based
investments;
• Greenstone Barclay knew Blue Chip offered financial
services;
• Blue Chip “directly participated” as a
guarantor.
[157] There are a number of responses to those points.
granted by Greenstone Barclay. Mr Harrop’s employers, Cabban and Co
held themselves out as offering financial services. The
vendor was not fixed
with representations made about those financial services.
• Finally, while Blue Chip guaranteed the underwrite agreement, that
was
a commercial requirement imposed by Greenstone Barclay. It cannot
extend the scope of the authority Greenstone Barclay
gave the sales
agents in relation to the apartments.
[158] In this case there are a number of other indicia which support the conclusion that the scope of the sales agents’ authority to bind Greenstone Barclay was limited
to matters relating to the apartment so that the representations about Blue
Chip and the Blue Chip product were outside the
scope of the task
Greenstone Barclay had engaged them to perform. The first is the fact the
authority was limited to obtaining
offers from the purchasers. Next is the
requirement that the agreements for sale and purchase be completed using the
standard
form included in the schedule to the underwrite agreement. By
insisting this form be used Greenstone Barclay limited
the ability of the
sales agents to present amended offers. Then there is the clause in the
underwrite agreement which restricted
the scope of the agents’
authority regarding representations. It expressly provided that:
9.1 ... any marketing material or other representations made by either of
them for and on behalf of the other of them in respect of
the Units prior to the
sale thereof are and will be accurate and complete as at the date of the
relevant Sale and Purchase Agreement
and shall not contain any omission of
material facts or be misleading and all reasonable enquiries shall have
been made
to verify the accuracy of any such information.
Finally, there is cl 27 of the agreement for sale and purchase, which expressly records that representations about the Blue Chip investment products were outside the scope of the agreement for sale and purchase.
What representations were made within the scope of the
agency?
[159] In summary to this point, I reject the general submission
that Greenstone Barclay is liable for the representations
made by the sales
agents about Blue Chip or the Blue Chip investment products. The scope of
the authority was limited
to matters relating to the apartment.
Greenstone Barclay would be fixed with representations made by the
selling
agents about the apartments. But the evidence of such representations
is very limited, and is addressed when the individual cases
of the various
plaintiffs are considered. Greenstone Barclay is not liable for
representations about Blue Chip
or the Blue Chip products as such were outside
the scope of the task Lyell and the sales agents were engaged to perform for
Greenstone
Barclay.
Imputation of the agents’ knowledge
[160] There is no evidence Lyell had relevant knowledge to be imputed.
This topic
is more directly relevant to the issue of tainting in any event, and is
addressed in that section of the judgment.
Summary – misrepresentation
[161] Given the above findings, the plaintiffs’ causes of action in
misrepresentation cannot succeed to the extent they are
based on representations
made by the selling agents about Blue Chip or the Blue Chip investment products.
Nevertheless, in the event
I am wrong in this conclusion, I still address the
representations relied on by each of the plaintiffs in the section of
the judgment dealing with their individual cases.
Fair Trading Act
[162] The plaintiffs’ causes of action under the Fair Trading Act are also based on the representations made by the sales agents. Given the above findings, the Fair Trading Act causes of action cannot succeed either, at least to the extent they are
based on the sales agents’ representations about Blue Chip or
the Blue Chip investment products.
Positive defences to the representation claims
[163] Greenstone Barclay raised a number of positive defences to
the plaintiffs’ claims to be entitled to cancel
the agreements
for sale and purchase based on the representations by the sales
agents.
[164] Before addressing the positive defences, one further issue about the
plaintiffs’ cases needs to be addressed. A
common theme in a
number of the plaintiffs’ evidence was that they did not read
the agreements for sale
and purchase. Some even said they had not
appreciated they were entering agreements for sale and purchase at
all.
[165] The plaintiffs do not plead non est factum (that is, that the agreement for sale and purchase was not their document). Even if pleaded it could not have succeeded.
As a condition of establishing a plea of non est factum, the party
raising it must be able to show that, notwithstanding their error, (which
may have resulted from an erroneous
explanation or description of the
document given to him or her by someone else) they have acted with all
reasonable care
in the circumstances. If the mistaken belief arises because
acting in reliance on an adviser, the party did not take steps to
read and
understand the document prior to signing it, the plea is not
available: Bradley West Solicitors Nominee Co Ltd v Keeman [1994] 2 NZLR
111.
[166] None of the plaintiffs’ evidence supports the plea of non
est factum. They either chose not to read the agreements for sale and
purchase before signing them, or relied on solicitors’ or other
advisers before signing the agreements for sale and purchase. At best
they were careless. Prima facie they are bound by the terms of the
agreements for sale and purchase executed by them.
[167] In the absence of non est factum, the fact that a party has signed a document without reading it does not excuse them from the consequences of signing. As Hillyer J said in IFC Securities Ltd v Sewell [1990] 1 NZLR 177 at 182:
It is well established that mere carelessness on the part of a person signing
will not enable that person to avoid the presumption
that he did
intend to sign the document. It is only in exceptional circumstances that a
party of full age and understanding
will not be bound by his signature
to a document, whether he reads or understands it or not.
The general nature of the representations
[168] The representations pleaded by the individual plaintiffs vary
from case to case, but there is a degree of
repetition. The
representations pleaded include statements to the effect that:
• Blue Chip would buy back or on sell the apartments;
• At the end of a four year period Blue Chip would take over the
property
or on sell it;
• Blue Chip was financially strong;
• The investments were safe;
• There was little or no risk;
• The purchase price of the apartments was at market value;
• The investors’ obligations were guaranteed by Blue Chip;
[169] The various positive defences need to be applied, as relevant, to the
particular representations and cases of each individual
plaintiff, but are
considered generally as follows.
The entire agreement clauses
[170] Greenstone Barclay pleads the entire agreement clause in
response to the plaintiffs’ claims for misrepresentation.
Each
agreement for sale and purchase executed by the plaintiff investors
contained an entire agreement clause in
the following terms:
27. ENTIRE AGREEMENT/BLUE CHIP REPRESENTATIONS
27.1 This arrangement records the entire arrangement between the parties
relating to the matters dealt with in this agreement and
supersedes all previous
arrangements whether written, oral or both, relating to such matters.
27.2 In particular the purchaser acknowledges that any representations made by representatives of the Blue Chip group relating to financial packages between the purchaser and the Blue Chip group are independent of and unrelated to this agreement and may not be relied on by the purchaser in relation to their obligations in respect
of this agreement.
[171] The clause contains an express acknowledgement that any representations by representatives of the Blue Chip Group relating to financial packages between the purchaser and the Blue Chip Group are independent of and unrelated to the agreement, and may not be relied on by the purchaser in relation to their obligation
in respect of the agreement. Section 4(1) of the Contractual Remedies Act 1979 can limit the application of such a clause. Section 4(1) enables the Court to go behind clauses, such as the entire agreement clause, which seek to exclude liability for pre- contractual representations. The issue is whether it is fair and reasonable that the provision should be conclusive, having regard to all the circumstances of the case, including the subject matter of the transaction, the respective bargaining strengths of the parties and whether the party seeking to invoke s 4 had solicitor’s advice. As an aside, I note that s 4(2) does not apply. Clause 27 does not itself purport to preclude the Court from inquiring into the authority of the sales agent.
[172] In Brownlie v Shotover Mining Limited CA181/87 21
February 1992 the Court of Appeal observed that it was highly
desirable written contracts should be drawn
so as to state all of the
intended contract and avoid the uncertainties which can arise from allegations
of verbal representations
or collateral warranties. The Court noted that if
the parties had not agreed to include express warranties in their written
contract
it would be reasonable to state expressly that verbal
warranties were also excluded. Brownlie involved a commercial
contract between commercial parties, each with separate legal advice. The
subject matter and value of
the transaction was also sufficiently substantial
to justify the expectation that each party would be familiar with its
terms, and intend to be bound by them. The respective bargaining strengths of
the parties were effectively neutral. The exclusion
clause was upheld and
given effect to.
[173] There are a number of other examples of exclusion clauses to which effect has been given in a commercial context: Herbison v Papakura Video Ltd [1987] 2
NZLR 527; and Hall v Warwick Todd Ltd (2000) 9 TCLR 448.
Against those authorities is Snodgrass v Hammington (1994) ANZ ConvR
159. Ellis J held that in the context of a sale of property, it would
not be fair or reasonable to
allow the plaintiffs to shelter behind the
provision when they negligently made representations which they should have
realised
the defendants would rely on.
[174] In the present case, the application of the clause may differ depending on the particular circumstances of each individual plaintiff. However, there are features of the clause which support Greenstone Barclay’s argument that it should be given effect to. The second part of the clause, cl 27.2, is directed specifically at representations made by representatives of the Blue Chip Group, which would include the sales agents. Greenstone Barclay as vendor of the apartments was aware that the apartments were to be sold by sales agents who, at the same time, were selling Blue Chip investment products. Greenstone Barclay was clearly concerned to ensure that any representations made by those agents about Blue Chip or the Blue Chip investment products were not to affect its position under the agreements for sale and purchase. Greenstone Barclay had no control over individual sales agents. It could do no more than insert a clause, such as cl 27, to protect itself from representations by the sales agents outside the scope of the authority Greenstone
Barclay had given them. That provides support for the argument that
the clause should be given effect to.
[175] The entire agreement clause is also relevant to the plaintiffs’
claim under the Fair Trading Act. It has long been
established it is not
possible to contract out of the Fair Trading Act: Smythe v Bayleys Real
Estate Ltd (1993) 5 TCLR 454, 472:
The requirements of the Act are mandatory. In enacting the
legislation, Parliament sought to protect the consumer from unfair
trading and
it would be inconsistent with that objective to permit a person engaged
in trade to exempt him or herself
from liability under the Act. In effect,
this would be to allow such persons to opt out of the operation of the Act and
the regime
decreeing fair trading in the public interest
p 472
[176] But the clause does not directly seek to exclude the
provisions of the Act. The Act would still apply in
relation to
representations about the apartments. In David v TFAC Ltd [2009] NZCA 44; [2009] 3
NZLR 239 the Court of Appeal considered the issue in a commercial context. The
case involved a franchising business called
James’ Home Services (JHS).
The franchise was started in Australia. The Davids (who bought the master
franchise in New Zealand)
were found liable by the High Court under s 9 of the
Act for misleading Mr and Mrs Grisdale (who had purchased a JHS
franchise from them) about the prospect of success for JHS in New Zealand. The
franchise agreement contained a clause stating
that the Grisdales should
obtain independent legal and accounting advice. The High Court decided it was
unreasonable to give
weight to the independent legal advice and acknowledgement
clauses as the effect would be to defeat the purpose of the
Fair
Trading Act. However, the Court of Appeal disagreed with this
assessment:
[65] While we hesitate to disagree with the Judge on an assessment of this
type, we consider that the Judge was wrong to discount
the effect of the
independent advice requirement and acknowledgement clauses in the way
that he did. The JHS documentation
was consistent in saying clearly
and repeatedly that those considering taking up a JHS franchise should
obtain independent
legal, accounting and business advice from
people with experience in franchising. The documents made it clear
that JHS would assist those independent advisors by providing
information and such like. Far from being downplayed
or
“buried”, this advice was placed to the forefront.
[66] We accept that the failure to take independent advice in the face of a recommendation or requirement to take it will not excuse conduct that is
misleading or deceptive. Where a person wrongfully conceals information
for example, it is no defence to say that the
other party could
have discovered it by seeking independent advice or asking the right questions.
But here the purpose of emphasising
the need for advice from experienced
independent advisors was so that those advisors could assist potential
franchisees,
particularly those without experience, by advising on the legal,
financial and business aspects of the proposed franchise
arrangement.
Clearly the JHS people were unwilling to provide such advice themselves, but
were willing to provide relevant information
to independent
advisers.
[177] In the case of PAE (New Zealand) Ltd v Brosnahan HC WN
CIV-2005-485-
843 10 September 2008 Mallon J considered the effect of an entire agreement
clause similar to that in the present case, and
held that it was an
effective answer to the claim under the Fair Trading Act. In the
context of a commercial
agreement Mallon J considered that if the Court was
to find liability under s 9 then it would be turned into a general warranty
despite
the parties’ agreement to the entire agreement clause, and the
specific warranties that they had addressed in an express provision.
The Judge
considered that either the parties had agreed the only
relevant representations were in relation
to the express warranties, or
alternatively, the misrepresentations were not causative of any loss,
because the plaintiffs
had the opportunity to make further inquiries and did
not do so. They therefore agreed there would only be liability in respect
of
representations that were included as warranties.
[178] The present case does not involve commercial contracts
between business people. The start point must be that the
Fair Trading Act is
designed as protective consumer legislation. But the clause does not purport to
exclude the operation of the
Fair Trading Act entirely, rather the
effect is to limit Greenstone Barclay’s responsibility to
those
representations relating to the apartment itself. The Fair Trading
Act would still apply to representations of that nature.
Further, some of the
plaintiffs were experienced business people. Determination of the impact
of the entire agreement
clause under the Fair Trading Act cause of
action will again be affected by the particular circumstances of the
individual
plaintiffs.
Affirmation/waiver/estoppel
[179] Greenstone Barclay says that in certain instances the plaintiffs affirmed the agreements for sale and purchase after having full knowledge of the
misrepresentation by the Blue Chip sales agent, or alternatively they
have waived their rights so as to now be estopped.
Greenstone Barclay relies
primarily on s 7(5) of the Contractual Remedies Act.
[180] The issue of affirmation may be relevant to those plaintiffs who
continued to accept payments from Blue Chip, or sought
to enforce their
agreement with Blue Chip after becoming aware of the nature of their
commitments under the agreement for sale
and purchase. Again, the circumstances
of each plaintiff’s case differ.
Inconsistent statements
[181] Greenstone Barclay also relies upon the proposition that a party may
not rely
on an oral representation that is inconsistent with or contradicted by the terms of a written agreement: Lysnar v National Bank of New Zealand Limited [1935] NZLR
129. In A M Bisley & Co Ltd v Thompson [1982] 2 NZLR 696 the
Court of Appeal discussed the principle and confirmed its application to the
case where a purported collateral
statement was in direct conflict with
the main object of the written contract.
[182] In response, Mr Dale referred to the following passage from Evans
to submit that extrinsic evidence could be given of a collateral
understanding directly in conflict with the terms of the
written
agreement:
In Carrolls Case [1973] 1 NZLR 246, 254 lines 26-27, I left
open the question whether extrinsic evidence could be given of
a collateral understanding directly in conflict with the terms of the
written agreement. That, of course, is the position
in the present case. I am
of the opinion that such evidence can be given, as under reg 8(b) the
Court is not concerned
with the strictly contractual obligations.
But in Evans the evidence was admissible because under the relevant
regulation the Court was not concerned with strictly contractual obligations.
In the present case, the Court is concerned with strictly contractual
obligations under the agreement for sale and purchase.
[183] The most obvious example of the application of the principle in this case is
the representation relied upon by a number of plaintiffs who entered PIP agreements, namely that they would not have to settle the purchase. That is completely contrary
to the express provisions of the agreement for sale and
purchase. The investors could not rely on such a representation.
It is
inadmissible.
[184] Mr Stewart suggested that the representation to the joint venture or mainstream investors that Blue Chip would re-purchase the property was also contrary to the terms of those investments. While there was no obligation to buy- back under either investment product, a representation that Blue Chip would buy- back the property is not directly inconsistent with the agreement for sale and purchase. For the same reason, the representation that Blue Chip would exercise the option to purchase under the PIP agreement is not directly contrary to the terms of the agreement for sale and purchase. It follows that I conclude that the effect of this particular principle is limited to the circumstances where the investors say the sales agent directly represented to them that they would not have to settle the agreement
for sale and purchase, in other words that it was effectively not a binding
agreement.
Statement of future fact/intention
[185] Finally on this point, there is the issue of whether the
misrepresentations are categorised as statements of fact or intention.
Except
to the extent that it implies that the intention does exist, a statement of
intention is not actionable as a statement of
fact. If a person is induced
to enter into a contract by another parties’ genuine statement of
intention to do
or refrain from doing some act in the future, and that
intention is not carried out, he or she will have no cause of action or claim
unless the statement is a contractually binding promise: New Zealand Motor
Bodies Limited v Emslie [1985] 2 NZLR 569; Marston v Lane HAM
HC CIV-2003-419-0315 22 December 2003 Paterson J. Again, this principle
needs to be applied to the individual cases
of the plaintiffs where
applicable.
[186] A further issue arises on this point. The representation that
Blue Chip intended to exercise the option to purchase
can be broken down into
two elements.
• That the relevant Blue Chip entity had the present intention to exercise the
option; and
• That the relevant Blue Chip entity had the financial
ability to exercise the option.
[187] The evidence does not support a finding that when the
various agreements were entered into the relevant Blue Chip
entity did not have
the present intention to exercise the option and settle. The issue of the
solvency of the relevant Blue Chip
entity is therefore important.
Insolvency
[188] To support the general allegation that the Blue Chip Group was
insolvent in
2006 and 2007 the plaintiffs called the evidence of Mr David Ross, an
experienced chartered accountant. They also referred to
the evidence of
Mr Dean Larsen, a former employee of Blue Chip Financial Solutions Limited.
Mr Larsen first became involved
in considering the joint venture product
sometime after June 2006. He ultimately became concerned at the
viability
of the joint venture product. The calculations he carried out
“on the back of the envelope” led him to conclude
that the annual
capital growth necessary for Blue Chip to break even on a property
sold under a joint venture was not
realistic. He raised the matter at a number
of meetings with other employees of Blue Chip. But despite his concerns
the
joint venture products continued to be sold until about late October,
early November 2006.
[189] In September 2006 Mr Larsen was asked to put together a viable property investment product that would generate income for an investor. That investment evolved into the PIP product. Mr Larsen was instrumental in the design and implementation of that product. He explained that the PIP investment product was designed to warehouse stock so that when the apartments were completed they could be sold to mainstream investors. Ultimately, Mr Larsen became concerned that the PIP product was or would be misused. His employment with Blue Chip was terminated in December 2006. Mr Larsen’s evidence does not establish that Blue Chip was insolvent when he left in December 2006. His evidence provides an insight into the way the Blue Chip organisation was run, and raises issues about the
assumptions upon which Blue Chip’s business model proceeded, but it is
not directly probative on the issue of the solvency or
otherwise of any of the
Blue Chip entities during 2006.
[190] Mr Ross did comment directly on the issue of solvency. He concluded,
after reviewing the Companies Office records for
Blue Chip, (here I
repeat I refer to Northern Crest Investments Limited, formerly Blue
Chip Financial Solutions
Limited) for the years ended 31 December 2004, 2005
and 2006 that the Blue Chip Group was effectively insolvent from the latter part
of 2004. Mr Ross’ opinion was primarily based on the advances made to
Ingot. For the year ended 31 December 2005 the
accounts recorded advances of
52½ million dollars. The accounts to the year ended 31 December 2006
showed advances of 42½
million dollars. As Ingot was a private company
there were no financial accounts available for Mr Ross to analyse.
Maranc Limited (formerly Ingot) was liquidated on 6 June 2008. The
liquidators were not called to give evidence. On the
basis that the solvency
of the Blue Chip Group depended upon repayment of the loans by Ingot,
Mr Ross concluded that
the Blue Chip Group was insolvent as at December 2004.
Mr Ross also made reference to a number of board reports, which
he
submitted identified issues which supported his conclusion of insolvency. He
also criticised Blue Chip’s revenue recognition
policy, and concluded
that the value of intangible assets, including goodwill, was effectively
zero.
[191] Mr Grant Graham, a partner in Korda Mentha, and experienced in the insolvency area, gave evidence on behalf of the defendant developers. Mr Graham made a number of points. He rejected Mr Ross’ criticism of Blue Chip’s revenue recognition policy. He noted the policy was disclosed as required and was an acceptable basis for accounting for revenue. In his opinion, it was unnecessary for Blue Chip to prepare its accounts on a cash basis. Mr Graham also criticised Mr Ross’ conclusion that the value of the intangible assets, goodwill and intellectual property being carried by the Blue Chip balance sheet would be zero. He considered that without an analysis of what the intangible assets were, and what values were ascribed to them, it was not possible to form a view as to their proper value. Mr Graham also criticised Mr Ross’ reliance upon the liquidation of Ingot as a basis for concluding that Blue Chip was insolvent by late 2004. In his opinion, it was
necessary to establish the position of Ingot with greater precision before
relying on the fact it was subsequently placed in
liquidation to prove
the wider Blue Chip organisation was insolvent. In his opinion, Mr
Ross’ conclusion could
not be justified on the limited information Mr
Ross relied on.
[192] In cross-examination, Mr Ross accepted the general proposition that
even if one company within a larger group is insolvent
it does not
flow through to other related companies unless there are interlocking
exposures and/or guarantees. Mr
Ross also accepted that Blue Chip Premium
Income Limited, the counterparty to the PIP agreements, was not part of the Blue
Chip Group
as he had defined it. He also accepted he could not give any opinion
on the solvency or insolvency of Blue Chip Joint Ventures
Limited, or Blue
Chip Financial Solutions Australia Limited in the absence of financial
accounts for those companies.
[193] The substantial sums recorded in Blue Chip’s annual reports as
advances to Ingot, a company directly controlled by Mr
Bryers, do raise a number
of questions. The solvency or otherwise of Ingot and its ability to repay at
relevant times would certainly
impact on Blue Chip’s solvency.
[194] But the accounts before the Court do not disclose which subsidiary of
Blue Chip actually had the Ingot receivable as
an asset in their
balance sheet. The consolidated accounts refer to the item, but do not identify
which subsidiary held the
receivables. I am conscious that a number of
responsible professionals and business people were directors on the Blue Chip
Board.
They have not been heard. There is a lack of full information before
the Court.
[195] The evidence discloses that Blue Chip, or at least certain companies within the Blue Chip organisation were vulnerable because of the advances to Ingot. The evidence of Mr Larsen also shows that towards the end of 2006 those within the Blue Chip Group had identified issues with the joint venture product. They were looking to put in place a different investment package for investors. This led to the development of the PIP product. The assumption that underlay the continued viability of the joint venture product, namely the continued increase in value of the Auckland property market, was at best, optimistic.
[196] There is insufficient information before the Court to enable
it to make a finding, even on the balance of
probabilities, as to
the insolvency or otherwise of Blue Chip and the various entities
within the Blue Chip organisation
at specific times, such as December
2004, or even later during 2006 and 2007 when the relevant transactions
occurred. As was made
clear in the cross-examination of Mr Ross, Blue Chip
itself is not in liquidation. An application to liquidate it was
dismissed. Nevertheless, there are signs that the Blue Chip organisation
was vulnerable, particularly towards the end of
2007 when it was under pressure
to meet underwrite targets to achieve the cash flow it required. That does not
directly affect Greenstone
Barclay, however, given the timing of the sales in
issue.
[197] The plaintiffs do not satisfy the Court that at the
relevant time (when the representations were made) Blue Chip
did not have the
financial ability to exercise the option.
Statement of opinion
[198] Related to the issue of whether the representations were a statement
of future fact or intention is the issue of whether
the representations
were statements of opinion. An expression of opinion is not a
representation of fact: McAlpine Snowline Ltd v Wethey. This
issue is relevant to a number of the representations relating to the
Blue Chip organisation’s strength,
profile, size and status.
Puffs
[199] Exaggerated marketing hyperbole is generally not actionable. A
limited number of the representations fall into this
category.
Other grounds for cancellation
[200] For the reasons set out at [68] – [72] above Mr Dale abandoned the application to amend the pleadings to add a cause of action based on a collateral contract argument. In the general pleadings and specific causes of action raised by
individual plaintiff investors, there are pleadings that seek to support the
cancellation
on grounds other than misrepresentation. Mr Neutze submitted it was
unnecessary to address those issues as the plaintiffs had abandoned
their
application to amend the pleadings to argue a collateral contract, but
aspects of the pleading to support cancellation
are not directly related to
the issue of representations under a collateral contract.
[201] The general pleading to support cancellation (other than
misrepresentation) is
to the following effect:
• ART Apartments is in liquidation and unable to fulfil its
obligations;
• Bribanc is in liquidation and unable to fulfil its obligations;
and
[202] I accept the criticism of Greenstone Barclay’s counsel that the
pleadings do not articulate, either in the general section
or the individual
plaintiffs’ section, how the failure or liquidation of the above
companies provides a ground to
cancel the agreements for sale and
purchase.
[203] Implicit in the plaintiffs’ pleading is that the breach by the various Blue Chip entities of their obligations to the plaintiffs in some way operates to release them from their obligations to Greenstone Barclay under the agreements for sale and purchase. Mr Dale argued that an ingredient of the transactions, when considered as a whole, was that the purchasers were relying upon the Blue Chip companies’ financial support to complete the agreements for sale and purchase, and that that support was essential to them. Without it they would not have entered into the agreements for sale and purchase. He reasoned from that, that given the failure of a
number of Blue Chip entities the plaintiffs were entitled to
cancel.
[204] For the reasons discussed earlier, a term that the
agreements for sale and purchase were conditional upon performance
of the
joint venture or PIP agreements cannot be implied into the agreement for sale
and purchase.
[205] There are a number of other conceptual difficulties with the
argument. The step linking the plaintiffs’ reliance
on Blue Chip
performing under the Blue Chip investment products, and their being
entitled to cancel the agreement
for sale and purchase is missing.
Any representations made to the plaintiffs about the returns they would
receive
from Blue Chip, the support or assistance that Blue Chip would provide
them if they were required to settle, and the security
of Blue Chip,
might affect Blue Chip. However, for the reasons set out above, the
representations were not made on behalf
of Greenstone Barclay, nor
within the scope of the task the selling agents were engaged by Greenstone
Barclay to perform.
Blue Chip may be bound by such representations, but
Greenstone Barclay is not.
[206] Next, the agreement for sale and purchase is itself, with the
exception of the lease and addendum, unrelated to any
of the other
documents entered into by the plaintiffs. In particular, it is unrelated to
the joint venture, PIP and other
Blue Chip investment product documents. This
is because the obligations under the agreement for sale and purchase are not
tied to
or conditional upon those other documents.
[207] As noted earlier, the plaintiffs’ obligations under the
sale and purchase agreements are not expressed to
be collateral to, related to
or conditional in any way upon Blue Chip’s performance of its
obligations under the Blue
Chip investment products. The agreements for
sale and purchase in fact contain an express clause having the contrary
effect.
[208] It follows that while the liquidation of the joint venture partner (Blue Sky Holdings Limited or Blue Chip Joint Ventures Limited) may entitle the plaintiffs to cancel the joint venture agreement, it does not entitle the plaintiffs to cancel the agreement for sale and purchase which, subject to the addendum and lease, is a self contained agreement. The terms of the joint venture agreement do not support the
plaintiffs’ argument either. Under the joint venture agreement the
plaintiffs had the obligation and responsibility for all
borrowings on the
property, together with such sums as were necessary to pay for the property.
While the Blue Chip joint venture
entity agreed to pay the ongoing costs of the
borrowing, the obligation to borrow and settle lay with the
plaintiffs. Similarly,
under the PIP agreements, the plaintiffs were, in
the event that the option was not exercised, obliged to settle the
purchase.
[209] Blue Chip New Zealand Limited was the vendor of the
furniture packs in some instances. But the agreements for
sale and purchase
were not conditional upon or related to the furniture pack
agreements.
[210] Nor is the liquidation of Bribanc relevant. There was only one
reference in the agreements for sale and purchase to a building
manager. This
was the provision requiring the vendor to procure the body corporate
to enter into a building
management agreement, “as the vendor may
nominate”, prior to settlement with such party on usual and reasonable
commercial
terms. It was not tied to Bribanc. The management agreement
between the plaintiffs and Bribanc was for the day to
day management of
the plaintiffs’ individual units. It was in relation to matters arising
after settlement. The liquidation
of Bribanc cannot impact on the obligation to
settle under the agreements for sale and purchase.
[211] The only contractual interrelationship between the agreements
for sale and purchase and documents involving companies
within the Blue Chip
organisation was the lease attached to the addendum to the agreements
for sale and purchase. Pursuant
to the addendum the purchaser requested
Greenstone Barclay to enter a lease on the terms set out in the
lease,
and acknowledged the apartment was sold subject to the lease. The
lease attached to the standard agreement presented to the
Court had Barclay
Management as lessee, a company related to Greenstone Barclay. It was
anticipated that there would be an
assignment at settlement to a Blue
Chip company. In relation to short-stay apartments, Greenstone Barclay
and Lyell
contemplated that ART Apartments would be the lessee. In
some instances, Blue Chip New Zealand Limited was noted as
guarantor.
[212] Greenstone Barclay’s financier, Westpac, required Greenstone Barclay to
modify or vary future sales to provide for Greenstone Barclay to be the
guarantor, reserving the right to Greenstone Barclay
to substitute Blue
Chip New Zealand Limited as guarantor in its place on settlement.
[213] At its highest, the plaintiffs’ case must be that
under the Contractual Remedies Act, they could cancel the
agreement for sale
and purchase for breach of contract. The breach they allege is that they
contracted with Greenstone Barclay
to purchase an apartment subject to a lease,
and that ART Apartments is in liquidation and unable to fulfil its obligations
as lessee.
[214] The contract sought to be cancelled must be the agreement
for sale and purchase. Greenstone Barclay has not
repudiated that
agreement. Greenstone Barclay seeks to hold the plaintiffs to the agreement.
Section 7(2) does not apply. The
plaintiffs would only be able to cancel the
agreement for sale and purchase if s 7(3)(b) or (c) applied, namely that a term
of the
agreement for sale and purchase (as amended by the addendum) was broken,
or it was clear that it would be broken by Greenstone Barclay.
The term must
be the provision of a lease in the name of ART Apartments as lessee. A party
may only cancel under s 7(3) if the
parties have expressly or impliedly agreed
that the performance of the term, namely that ART Apartments will be the
lessee,
is essential to them or the effect of the breach is to substantially
reduce the benefit of the contract, substantially increase the
burden, or make
the benefit or burden substantially different from that represented or
contracted for. A principal difficulty with
the reliance on the failure of ART
Apartments is that the leases before the Court show the lessee as
Barclay Management
(and its successors or assigns), not ART
Apartments.
[215] There is a further difficulty for the plaintiffs, because
none of them led evidence to the effect that the identity
of ART Apartments
as the lessee was essential to them. Nor could it be, given that under the
agreements the lessee was Barclay
Management (and its successors or
assigns).
[216] While it may have been essential to the plaintiffs that the apartment be purchased with a lease in place, that was and remains the position. The identity of the lessee cannot be said to have been essential to them.
[217] Even in the absence of an express term, the Court may imply a term as
being essential to the parties. In Progeni Systems v Hampton Studios
Limited HC CHCH CP105/86 11 August 1987 Tipping J said at 39:
... the truth of a representation will be essential when the representation is of such fundamental importance to the representee in his consideration whether
to enter into the proposed contractual relationship that without it he would
not have contracted with the representor either at all or on those particular
terms.
[218] Again, the identity of the lessee does not meet the test for
implication as an essential term. Only the existence of the
lease could be said
to be essential, not the identity of the lessee. The sale is still subject to a
lease. Greenstone Barclay cannot
arrange an assignment to a company in
liquidation. Barclay Management will remain as lessee until there is a
further
approved assignment. Nor is there any evidence to suggest the
plaintiffs’ benefit would reduce, or their burden increase
if an
alternative lessee was put in place (as the lease permits).
[219] It follows that while each case must be considered individually
the general pleading as to cancellation does not support
the cancellation on
any basis outside the misrepresentations raised.
Valuation
[220] Before moving to the cause of action under the Securities Act, I
briefly refer
to the issue of valuation. In closing Mr Dale submitted that the
plaintiffs allege generally that the purchase prices
for the apartments were
inflated as part of the Blue Chip scheme. He argued that the values of
the apartments were relevant
to the causes of action in misrepresentation
and the Fair Trading Act.
[221] Mr Dale accepted that little attention was given by the plaintiffs
with PIP and put and call agreements to the purchase price,
but he argued that
the valuation of the apartments was of interest to those plaintiffs with
mainstream and joint venture
investments.
[222] The general pleading regarding valuation is not particularly clear. In the
fourth amended statement of claim there are a number of references to
valuation, but only in a limited way. For instance, there is
a reference at
para 21 that:
Valuations of the properties sold by the Blue Chip Group were undertaken by Morley and Associates or Axiom Rolle PRP Valuation Services Limited, both of which had a close association with the Blue Chip Group, and neither
of which were independent.
And in a section discussing the joint venture agreements the following is
stated:
in the preceding paragraphs that the properties were being purchased at a price not greater than the current market value of the
properties.
That is the extent of the pleading in relation to valuation. The individual
plaintiffs’
pleadings make scant reference to the valuations.
[223] The references in the pleading to valuation and valuers do
not support allegations of misrepresentation or
breach of the Fair
Trading Act by reason of overstated valuations. The evidence led
does not show that the
valuations Greenstone Barclay obtained were
from Blue Chip related companies. From Greenstone Barclay’s point of
view the valuers were independent.
[224] The pleadings and evidence generally do not support Mr Dale’s
submission
on the effect of the valuations, at least in relation to Greenstone
Barclay.
Securities Act
[225] The other principal cause of action pleaded is breach of the Securities Act 1978. The plaintiffs say that the Blue Chip products are securities under the Securities Act, and as they were offered to the public without an authorised advertisement or prospectus, they are in breach of Part 2 of the Act, and are therefore invalid and of no effect. In relation to the joint venture and PIP agreements they accept that the agreements for sale and purchase are themselves exempted from the
Securities Act, but say that the agreements are nevertheless tainted by the
illegality
of the Blue Chip investment products. In relation to the mainstream
agreements and other agreements for sale and purchase, which
included the
provision of leases, the plaintiffs say the lease arrangements amounted to
debt securities so that the agreements
for sale subject to the leases are
themselves invalid and of no effect.
[226] It is necessary to briefly refer to the statutory scheme of the
Securities Act to give context to the argument. The purpose
of the Securities
Act is stated to be to establish a Securities Commission, to consolidate and
amend the law relating to the offering
of securities to the public, and to
extend the application thereof.
[227] The focus of the Securities Act is on the offer of securities to the
public: s 3. Section 33 provides that no security shall
be offered to the
public for subscription unless the offer is made in or accompanied by
an authorised advertisement,
or is made in a registered prospectus and,
in the case of a debt security, the issuer has appointed a trustee
in
respect of the security and a copy of the trust deed is
registered.
[228] Section 37 confirms that:
(1) No allotment of a security offered to the public for
subscription shall be made unless at the time of the subscription
for
the security there was a registered prospectus relating to the
security.
Any allotment made in contravention of the provisions of s 37 is invalid and
of no effect: s 37(4). Allot is defined to include
sell, issue, assign and
convey. Allotment has a corresponding meaning.
[229] Section 7 restricts the territorial scope of the Act to New
Zealand.
[230] Fundamental to the Act is the concept of what constitutes a
security. Security is defined broadly as:
Any interest or right to participate in any capital, assets, earnings, royalties,
or other property of any person; and includes – [relevantly
for present purposes]:
(a) An equity security; and
(b) A debt security; ...
Regulations made under the Act may declare other interests or rights to be a
security for the purposes of the Act or not.
[231] A debt security is defined as:
Debt security means any interest in or right to be paid money that is, or is
to be, deposited with, lent to, or otherwise owing by, any person (whether or
not the interest or right is secured by a charge
over any property);
and includes—
(a) A debenture, debenture stock, bond, note, certificate of deposit, and
convertible note; and
(b) An interest or right that is declared by regulations to be a
debt security for the purposes of this Act; and
(c) A renewal or variation of the terms or conditions of any such
interest or right or of a security referred to
in paragraph (a) or
paragraph (b); of this definition; —
but does not include—
(d) An interest in a contributory mortgage where the interest is offered by a
contributory mortgage broker; or
(e) Any such interest or right or a security referred to in paragraph (a)
or paragraph (c) of this definition that is declared by regulations not to be
a debt security for the purposes of this Act:
[232] An equity security is defined as:
Equity security means any interest in or right to a share in, or in
the share capital of, a company; and includes—
(a) A preference share, and company stock; and
(b) A security that is declared by regulations to be an equity security for
the purposes of this Act; and
(c) A renewal or variation of the terms or conditions of any such
interest or right or a security referred to in
paragraph (a) or
paragraph (b) of this definition;—
but does not include any such interest or right or a security referred
to in paragraph (a) or paragraph (c) of this
definition that is
declared by regulations not to be an equity security for the purposes of this
Act.
[233] Section 5 of the Act provides for a number of exemptions to the application
of the Act including:
(1) Nothing in Part 2 of this Act shall apply in respect of—
...
(b) Any estate or interest in land for which a separate certificate of title
can be issued under the Land Transfer Act 1952 or the
Unit Titles Act 1972,
other than any such estate or interest that—
(i) Forms part of a contributory scheme; and
(ii) Does not entitle the holder to a right in respect of a specified part
of the land for which a separate certificate of
title can be so issued;
or
[234] Against that background, I turn to the plaintiffs’
cases in relation to the different Blue Chip investment
products.
Mainstream agreement
[235] The investors plead:
[236] Mr Dale developed the argument by submitting that the offer of the
lease was
an offer of a debt security, as the right to be paid rental was a right to be paid money that “is or is to be otherwise owing by any person”. He submitted it was unremarkable that such a right should be subject to the Act as the apartments were marketed as investments. He submitted it was relevant that the promised lease did not commence until sometime in the future, and the investor was exposed to the risk that the lessee and guarantor may not be able to comply with their obligations.
[237] On that basis he submitted a distinction could be made
between what he categorised as “every day”
sales and purchases of
property which are subject to an existing lease, and the present situation where
the vendor was offering,
not just the property, but also to put in place a
lease. Mr Dale submitted that it was “more than arguable” that the
lease was not merely ancillary to the estate or interest in land.
[238] Mr Dale submitted a broad approach should be taken
to the words, “otherwise owing”. He
relied on the following
passage from the Court of Appeal judgment in Culverden Retirement Village
Ltd v Registrar of Companies (1996) 1 BCSLR 162 (CA) at
166:
We agree that one would not ordinarily expect the term "debt security" to
refer to an agreement for the sale and purchase of land.
On the other hand, the
words "or otherwise owing" are of the widest ambit, and they are not
qualified in the definition
itself. They are effectively qualified by
the provisions of section 5. The scheme of the Act appears to be to cast the
net
in the widest possible terms, and then to rely on specific exclusions to
limit its scope. An agreement for sale and purchase of a
dwellinghouse or of
other land is excluded, subject to a stated exception, by section 5(1)(b). We
see no reason to read down the
wide language of the definition.
[239] Culverden sold townhouse units to retired people on terms that the
purchaser was bound to resell and Culverden was
bound to repurchase
the unit when the purchaser ceased to occupy it, either during the
purchaser’s life or, at the latest,
on their death. The resale price
was calculated according to a formula based on the original price with
deductions
for replacement, the care charge and the costs of renovating
the unit to the same condition as at the time of purchase plus
an inflation
adjustment. The formula would in some cases yield a lower price than the
original purchase price. The Registrar
of Companies took the view that
Culverden was an issuer of securities in respect of offers to sell units in the
retirement village
under the Securities Act. Culverden argued the transactions
were not securities and they were, in any case, exempted by s
5(1)(b). The
Court of Appeal rejected Culverden’s arguments holding that the
right granted to the unit holder
under the buy-back provision was a
debt security, and Culverden was the issuer of the security. The
Court did
not think the exception could be read as applying to an
offer of debt securities as consideration for the purchase of
land.
[240] Culverden repeated its arguments in the Privy Council. The Privy Council
(at [1997] 1 NZLR 257 (PC)) left the point open of whether the definition of
debt security envisaged a transaction whereby the
consideration on both
sides was an obligation to pay or repay money. Their Lordships said they
“incline to the view
that this is too narrow a reading” but did not
need to determine the issue because on the facts the money agreed to be paid
by
Culverden was by way of repayment of money previously paid to it by the unit
holder in any event. Unit holders were at risk that,
having paid the original
price to Culverden, it may not have been able to honour its repayment
commitment. The right granted
to the unit holder under the buy-back
provision was therefore a debt security. The Privy Council went on to note at
261
the requirements of s 33 and 37A were:
intended to afford protection to members of the public who are invited to pay, and do pay, substantial sums of money to [Culverden] against, in part,
its promise to repay all or a large part of it in due course.
[241] The same point had been made in the Court of Appeal. The Court
expressly noted that it was Culverden’s commitment
to buy back
that came within the definition of debt security, and further, that
Culverden retained the equitable
ownership of the unit created by the
buy-back provision in the contract. In the course of their opinion the
Privy Council
at 260 did not seem to agree with the Court of Appeal that the Act
prima facie applied to agreements for sale and purchase of land:
The right acquired under the buy-back provision was not
granted in isolation. It cannot be equated with the
right of a seller under
an ordinary contract for the sale of land.
The Privy Council considered that the exemption in s 5(1)(b) would apply
where the provision in issue could be described as ancillary
to the purchase of
the land. They considered that whether the associated provision was ancillary
required the Court to consider
the substance of the overall
transaction.
[242] The lease associated with the mainstream investment and the rental
due under
it are quite different to the buy-back features in issue in
Culverden.
[243] The only money payable in the future under the mainstream investments are the monthly payments from the lessee. There is no right to participate in the future
debts of others. Debt security is a subset of security. The Act defines a
security as:
any ... right to participate in any capital, assets, earnings ... or other property
of any person
As Fisher J observed in DFC Financial Services Ltd v Abel [1991] 2
NZLR 619 at
626:
Broadly speaking, the expression "security" seems intended to embrace any
interest in, or right to participate in, present or future
property, including
the existing or future debts owed by others.
That concept does not apply to the rental payments due by a lessee under a
lease. The element of participation is lacking.
[244] Other important features present in Culverden are
not present in the mainstream investments. There is no payment by the
investor in relation to the lease itself. The
money paid by the investor under
the mainstream investment is for the purchase of the property. While the
lessee has an
option to purchase, there is no buy-back obligation on the
lessee requiring it to repay money to the investor. The obligation
to pay
rental arises under the lease itself. There is no pooling of moneys for
distribution amongst investors. The returns are
specific to the
particular apartment.
[245] Mr Dale acknowledged that if a property was purchased subject to an existing lease it would not be a debt security, but suggested the present situation was caught, because the lease was to be put in place for the future. There is no principled basis to distinguish the sale of an apartment off the plans subject to a lease, from the sale of an existing apartment subject to an existing lease, when the basis for the application of the Securities Act, as advanced by the plaintiffs, is said to be that the investor (lessor) has a right to be paid money that is, or is to be otherwise owing by the lessee. As submitted by counsel for the developers any commercial building sold is sold as much as an investment in the lease and the guarantor’s covenants as it is for the investment in the freehold itself. The value of the property is very much affected by the underlying leases. The risk of the lessee not complying with obligations exists whether the lease is in existence at the time or not.
[246] Further, where there is a change in the parties by sale or assignment
of the lease (as in the present case), the investor
acquires the interest in the
land, including the rights to the rental, by operation of law.
[247] The relevant documentation is the agreement for sale and purchase
between Greenstone Barclay and the investor, the addendum,
which contains the
request by the investor purchaser that Greenstone Barclay enter a lease on the
terms set out in the form attached,
and the lease. By the addendum the
investor acknowledges the apartment is sold subject to the lease. The lease is
between Greenstone
Barclay as lessor, and the lessee. The right to the rental
stream under the lease does not pass by virtue of any contract or offer
of
security between the investor and the lessee, but rather by operation of law:
Property Law Act 2007 s 233.
[248] Reference can be made to Maunder-Hartigan v Hamilton
(1984) 2 ACLC 438 in the Supreme Court of Western Australia. In
that case the purchasers were offered a fee simple
interest in a
strata title unit subject to a 10 year lease. They were also required
to enter a management agreement.
An issue arose as to whether the vendor was a
dealer in securities when selling strata title units. The issue for the Court
was
whether the proprietary interest obtained by the purchasers constituted a
security or not. While the case turned on the particular
statutory wording in
issue, the general principles are of interest. The Court observed generally at
447:
What the [investors] did by way of investment was to enter
into a transaction to purchase the unit subject
to a lease with a
guaranteed net return ... for the duration of the lease.
...
What the [investors] enjoy is not profit from the Management Agreement
considered as a business undertaking or scheme, but rent
by reason of their
entitlement as reversioners to the benefit of the lease ...
[249] In that case, as in the present, there was no connection between the
lessee and the investor except by operation of
law. The lessee
contracted with the vendor lessor. In my judgment therefore, the right
to receive rental payments
under the lease is not a debt
security.
[250] In any event, in this case the lease can properly be described as ancillary to
the interest in land which was the subject of the sale and purchase
agreement. In Culverden the buy-back was a transaction that was always
to take place in the future. Culverden had to buy and the purchaser, or their
survivors,
had to sell. It was the repayment commitment which triggered the
operation of the Act. This was a quite separate and cardinal
feature of that
transaction. By contrast, the lease in the present case is properly described
as ancillary to the purchase of the
apartment, and would be exempt: s
5(1)(b).
[251] The exemption in s 5(1)(b) could possibly apply on another
ground. The exemption applies in respect of any estate
or interest in
land for which a separate certificate of title can be issued under the Land
Transfer Act 1952 or the Unit
Titles Act 1972, other than an estate or interest
that forms part of a contributory scheme and does not entitle the holder to a
right
in respect of a specified part of the land for which a separate
certificate of title can be so issued.
[252] The exclusions to the exemption do not apply in the present case. The lease does not form part of a contributory scheme. Further, a lease is an interest in land
for which a separate title can be issued: s 66 Land Transfer Act. While the
decision whether to issue a separate title is for the
Registrar, there is
statutory provision for a title to be issued. That suggests Parliament
accepted a lease can provide a special
interest in land.
[253] I conclude that the Securities Act does not apply to the agreements for sale and purchase subject to a lease. Therefore, the mainstream investment is not subject
to the provisions of the Act.
Joint venture
[254] The investors plead:
66. The joint venture agreements involve the investor acquiring shares in
a joint venture company, and contributing working capital to the
company, with profits and losses being divided by shareholders
...
67. The joint venture company acquired the property.
68. The transaction as a whole provided for the acquisition of shares in a
company.
[255] Earlier, at 61, it was pleaded that the transactions (including the
joint venture) breached s 73 [sic] of the Securities Act
in that they
constituted debt securities for the purposes of the Act, and were offered
to the public without an authorised
advertisement or
prospectus.
[256] In the course of submissions Mr Dale expanded on the investors’
argument in relation to the joint venture documentation.
While accepting that
an offer of a joint venture interest in land of itself comes within the
exemption in s 5(1)(b),
he submitted there were other rights under
the joint venture documentation that amounted to debt and equity securities
that were not subject to exemption.
[257] Mr Dale argued that the right to be paid interest payments and
procurement fees are rights to be paid money otherwise owing
by any person, and
so came within the definition of debt security. He argued that the
investor is at risk that, having
borrowed money which it contributed to the
joint venture, the joint venture partner may be unable to honour its payment
commitments.
He submitted those rights could not be said to be merely ancillary
to the exempted offer of a joint venture interest in land. They
were important
and fundamental features of the joint venture agreement.
[258] Further, Mr Dale submitted that as the investor was to hold
shares in a company to be incorporated for the purposes
of the joint venture,
the shareholding was an equity security as it was “any interest in or
right to a share in, or in the
share capital, of a company”. He argued
that the fact the company was intended to own nothing more than land did not
bring
it within the s 5(1)(b) exemption in respect of the shares in the joint
venture company.
[259] I deal with the second argument first. The fact that the
transaction provided
for the acquisition of shares does not make it an equity security subject to Part 2 of
the Securities Act. The only shares to be acquired are the shares in the
joint venture company. The joint venture company is
a bare trustee that
holds the land for the joint venture partners. The company is no more than
a vehicle to hold the land.
[260] The position is similar to that discussed in the authorities referred
to by Mr Neutze: Brothers v McMahon 1953, 115 N.E 2d 116; and
State of Ohio v Silberberg 1956, 139 N.E 2d 342. Again, while
the statutory provisions are different, the general principles are
applicable. In
the latter case the owner of the real estate project sold
undivided interests in units to individual purchasers. The
contracts
for sale and purchase there made provision for the incorporation of a
company to take title of the building
project, and issue the unit
owner’s shares according to the value of their ownership. It was argued
this provision
brought the transaction within the relevant definition of
security. The Supreme Court of Ohio held the fact that the purchaser’s
interest in the property was held by shares, did not bring the transaction
within the operations of the Securities Law. At 346
the Court noted
that:
The formation of the corporation is plainly a means for operating
and maintaining the property as a whole. ...
The purchasers were
buying real estate and not shares in a corporation. ...
[261] In the present case the underlying substance of the joint venture
is the purchase of an interest in land. That is what
the plaintiffs invested
in, not shares in a company. Further, it is relevant that the definition of a
contributory scheme excludes
arrangements involving five or less investors.
That supports an interpretation that where there are five or less persons
involved in an investment they have sufficient control of the decision making,
so as not to require a registered offer or prospectus.
In the present case
there are only two “investors”, and the plaintiff investor
has control over the joint
venture through their shareholding.
[262] I conclude that the shareholding aspect of the joint venture does not
make it
an equity security.
[263] I turn to the issue of debt security. Mr Dale emphasised that in Culverden the Privy Council confirmed that financial transactions may be simple or complex, and that a single offer may lead to a single transaction containing several components,
one or more of which may be within the statutory definition of securities,
and others not. He submitted that the payments of
interest and the
procurement fee were separate components within the overall joint venture
transaction and came within the
definition of a debt security.
[264] It is necessary to consider the substance of the transaction. As
the Court of
Appeal held in Society of Lloyd’s & Oxford Members’ Agency
Ltd v Hyslop [1993] 3
NZLR 135 at p 141:
In each case it is crucial to keep in mind that the true
character of a transaction can only be ascertained after careful
consideration
of the legal arrangement actually entered into and carried out and the
forms adopted cannot be dismissed
as mere machinery for effecting other
purposes. Interrelated documents may be considered together but the legal rights
and
obligations of particular parties turn on the terms of their
agreements.
[265] The parties to the joint venture agreed that the investor would
purchase the property and the apartments together with fit-out.
The investor
provided the deposit and was to settle the purchase. The Blue Chip
entity was to pay the costs of borrowing
required to settle. To recognise
the investor’s contribution of the deposit the, Blue Chip entity also
agreed to pay the investor
the “procurement fee” during the term of
the joint venture.
[266] Taken as a whole, the transaction is an unnecessarily
complicated joint venture structure between the investor
and the Blue
Chip entity enabling them to share in the benefits of purchasing the
apartments. It does not initially seem
to meet the concept of a security as a
“right to participate in any capital, assets, earnings ... or other
property of any
person”. On one view, the property in which the
investor obtains rights, the apartment, is the joint venture
property,
which it effectively controls. It seems strange that in such a
situation, Parliament would require the appointment
of a trustee and
creation of a trust deed: s 33(2).
[267] However, I accept the force of Mr Dale’s argument that in Culverden the Privy Council accepted that even a single transaction may have several components, one or more of which may be within the definition of “debt security”. That provides a basis for an argument that the payment of the procurement fee and reimbursement
of the borrowing costs can be said to be a “right[s] to be paid money
that is, or is to be, ... owing by,” the Blue Chip
entity.
[268] In this case, there is also an argument for the plaintiffs
that the Blue Chip entity can be seen to be an issuer,
because the joint
venture investments required the investor to pay substantial sums of money to
the Blue Chip entity, quite apart
from the deposit on the apartment paid to the
vendor. To that extent, I accept for present purposes that the Blue Chip entity
can
be said to be, in relation to the joint venture product, a person “on
whose behalf any money paid in consideration of the allotment...
is
received”.
[269] However, notwithstanding the acceptance of the argument for
the plaintiffs that the payments under the joint
venture might prima
facie come within the definition of a debt security, in my view the
exception in s 5(1)(b) applies to them as the payments are in
respect of
an interest in land. The procurement fee and borrowing costs payable
under the terms of the joint venture
between the plaintiff and the Blue
Chip entity are directed at the acquisition of an estate or interest in
land.
[270] Mr Dale submitted that the developers’ reliance on the
exemption, and in particular the phrase “in
respect of” was
overstated. He argued that the exemption in s 5(1)(b) operates by reference to
the underlying right or interest
so that Part 2 does not apply in respect of
estates or interest in land, proprietary rights to chattels, and so on. He
submitted
that if a security is being offered that otherwise would require a
registered offer or prospectus in accordance with s 33
in Part 2,
the offer is prohibited unless the s 5 exemption applies to it.
[271] The answer lies in the Privy Council decision in Culverden. As Their Lordships noted the Act was not intended to protect ordinary buyers of land, which is made clear by the exemption in s 5(1)(b). But they then concluded the exemption did not apply in that case because the component that fell within the definition of debt security could not be characterised as ancillary to an ordinary purchase of land. The repayment right in that case was a cardinal feature of the transaction. The issue in this case is whether the additional rights, which are said to engage the requirements in Part 2 can be said to be ancillary to a purchase of land.
[272] The substance of the transaction created by the joint venture
agreement is the purchase and ownership of the apartment
by the joint
venture partners. The repayment of the borrowing costs and the payment of the
procurement fee are part of the joint
venture agreement, which is directed at
the purchase of an interest in land. The obligation to pay the procurement fee
arises from
payment of the deposit on the land. The obligation to pay interest,
which is conditional, only arises when the land is purchased.
The features
that the plaintiffs characterise as debt securities can properly be said
to be ancillary to the purchase of
an interest in land, as opposed to ancillary
to the agreement for sale and purchase, for example.
[273] I conclude that, even if the payments of the interest and
procurement fee could be said to amount to a debt security,
in the
circumstances of this case, they are properly to be regarded as ancillary to the
purchase of land, and so are “in respect
of” an interest in land.
Therefore the exemption applies.
PIP agreements
[274] In relation to the PIP agreements the plaintiffs plead:
71. The PIP agreements involved the plaintiffs, as purchasers, agreeing
to purchase an interest in land and which gave the Blue Chip option holder
the right to acquire the investor’s interest.
[275] Mr Dale submitted that the right to be paid the option
fee, the right to repayment of the deposit (more accurately
the reimbursement
of the deposit amount) if the option was exercised, and the right to be paid
reasonable costs if the investor had
to settle, were all rights “to be
paid money that is, or is to be ... otherwise owing by, any person”. He
submitted
those rights came within the definition of debt security,
notwithstanding that they arose without the investors having
paid any
money to Blue Chip.
[276] Mr Dale submitted that the transaction was effectively an advance or loan of money (the deposit) to Blue Chip in exchange for the procurement fee and was thus
a debt security. He submitted that a conclusion that the rights
under the PIP agreements were debt securities was consistent
with the object
of the protection of investors under the Act. Mr Dale argued that the
exemption did not apply, as the relevant
rights were not in relation to an
estate or interest in land.
[277] There are three operative provisions of the PIP
agreement. These are the grant by the plaintiff investor to the
Blue Chip
entity of the option to accept the deed of nomination, the assumption of the
rights and obligations as purchaser under
the agreement for sale and purchase;
and the corresponding obligation on behalf of the Blue Chip entity to pay the
option fee.
Whether the option is exercised or not is at the discretion of the
Blue Chip entity. The PIP agreement goes on to provide that
in the event it
does not exercise the option, then the Blue Chip entity will pay the
plaintiff investor’s
reasonable costs associated with the
settlement of the property, including interest costs associated with the
borrowing.
[278] The PIP agreement is a complicated form of option,
but an option nevertheless.
[279] The money paid by the investor under the PIP agreement is the
deposit. That
is important because Part 2 of the Act applies to the offer on allotment of
securities
by an issuer. For Part 2, and the Act to apply, there must be a relevant issuer of the debt securities. Issuer is defined in the Act as meaning:
(a) In relation to ... a debt security, ... the person on whose behalf any
money paid in consideration of the allotment of
the security is
received.
[280] The deposit is the only money that can be said to be paid in
consideration of the allotment of the debt security. That deposit
is paid to
the vendor (and held by a stakeholder) as opposed to being paid to the Blue Chip
entity. Even taking a broad view of
the definition of “on behalf
of”, so as to interpret it as “for the benefit of” the deposit
paid by the
plaintiff investor is not paid for the benefit of the
Blue Chip entities. At most it is held for both the vendor developer
and the
purchaser. If that contract becomes unconditional it becomes the
property of the vendor. If the contract is not
confirmed it is returned to
the purchaser. The deposit is not held for the benefit of the Blue Chip
entity.
[281] This can be contrasted with the situation in Culverden
where the Court of Appeal at 167 analysed the transaction as:
In terms of the statutory definitions, Culverden is the person
acting in the promotion or management of the scheme. Culverden
is the person
allotting the securities by allotting to applicants units which it agrees to buy
back, and it is the person who receives
the purchase price paid by intending
occupiers as the consideration for the unit and for the other rights conferred
on them under
the contract.
[282] Mr Dale submitted, in response to this point, that this situation was
the same
as the following example: Party A asks the public to pay Party B money on
Party A’s promise that it will pay the principal
plus interest
to the subscribers. While Party A does not receive the money, the Act applies.
In that case I agree that the Act
would apply, but that is because the money is
clearly received by Party B “on behalf of” or “for the benefit
of”
Party A. That is not the case of the deposit.
[283] Again, the substance of the transaction is important. The PIP agreement granted an option to the Blue Chip entity to purchase an interest in land. Such an option provides the grantee with an equitable interest in the land: Mackay and Another v Wilson and Another (1947) 47 NSWLR 315.
[284] There are other features of the payments themselves that the
developers say present difficulties for the argument that
the payments
under the PIP are debt securities.
[285] The option fee is the only payment that must be paid
whether or not the option is exercised. The payment
of the
purchaser’s costs of borrowing and the reimbursement of the
deposit amount are conditional upon respectively,
the non exercise or
exercise of the option. Counsel for the developers submitted that as
conditional payments they
could not be said to be “money that
is, or is to be ... otherwise owing by any person”. However,
the definition applies to moneys that may become payable in the future.
Taking a broad interpretation, that could apply to
payments which may be
conditional. In any event, in the present case either the costs of the
borrowing will be paid
(in the event the option is not exercised) or the deposit
sum will be reimbursed (in the event the option is exercised). To that
extent,
I accept they could arguably come within the definition. But for the reasons
given I do not consider that the payments can
be categorised as debt securities
in the first place.
[286] In the event I am wrong, I go on to consider whether the
exemption in s 5(1)(b) applies.
[287] Mr Dale submitted the exemption did not apply because in
his submission s 5(1) operated by reference to the
underlying right or
interest. He argued that if prima facie a security was being offered
in breach, then the question is whether that right, or security is itself
an estate or interest
in land and clearly the option fee, repayment of
costs, or payment of the deposit was not.
[288] I am not able to accept that argument. On that interpretation the feature of the transaction that was a debt security would have to be, itself, an interest in land for the exemption to apply. But that was not the approach of the Privy Council in Culverden. The Privy Council accepted that the exemption would apply where the feature of the transaction in issue could properly be categorised as ancillary to the purchase of an interest in land. That is consistent with the use of the words “in respect of”.
[289] In any event, in terms of the PIP agreement the option fee is clearly
in respect
of an interest in land. The exemption would also apply to the
right to be paid reasonable settlement costs, as again
those costs are in
respect of an estate or interest in land.
[290] The last issue is the reimbursement of the deposit. The obligation
under the deed of nomination is to reimburse a sum of
money equivalent to the
deposit rather than the deposit itself. Again, in my judgment, s
5(1)(b) applies. If the
reimbursement of the deposit can be
characterised as a debt security it is only payable in respect of an
estate
or interest in land. It is paid in exchange for the transfer
by the plaintiff investor of their interest in the land.
[291] I conclude on the basis of the pleadings in this case, and
the arguments advanced, that the Securities Act does
not apply to the relevant
transactions.
Tainting
[292] The plaintiffs plead:
(i) The purpose or object of the Blue Chip transactions were to assist or
promote debt security; and
(ii) the Third Defendant (sic) [Greenstone Barclay] knew, or
should have known, of the illegality of the Blue Chip
transactions.
[293] While s 37(4) invalidates an allotment of a security in
breach of s 37, the plaintiffs accept that the agreements
for sale
and purchase are themselves exempt from the provisions of the Act because of
s 5(1)(b).
[294] Mr Dale clarified in submission that the plaintiffs’ argument is that even though the agreements for sale and purchase are exempt from the provisions of the Act, the Blue Chip investment products were sold in breach of the Act, and the
agreements for sale and purchase are “related agreements caught by the common law concept of tainting”. The general principle is stated in Burrows, Finn & Todd Law
of Contract in New Zealand (3rd ed 2007) at 13.5
as:
A contract may be tainted by illegality if it was designed to
assist or promote a different contract which was in breach
of a
statute:
[295] Mr Dale argued that where the Blue Chip products were sold in breach
of the Securities Act, the agreements for sale and purchase
were tainted with
that illegality and were also unenforceable.
[296] For a contract to be tainted by the illegality of another
transaction, and thus unenforceable, two things must be shown:
Portland Holdings Limited v Cameo Motors Limited [1966] NZLR 571
(CA).
The purpose or effect requirement
[297] Counsel agreed that the leading New Zealand authority is Portland Holdings. Cameo had entered into a hire purchase agreement with a customer to sell a car. The form was not properly completed. As a consequence, it did not comply with the relevant regulations and was illegal and void. The agreement was subsequently assigned by way of mortgage to Portland. The customer fell into default. Portland repossessed the car and, after crediting the amount recovered from selling it, sued Cameo for the balance of moneys due under the agreement. Cameo raised a defence that the original agreement was illegal, and the assignment was tainted with the illegality, so that Portland could not recover against it.
[298] Although the argument was accepted at first instance it was rejected
by the
Court of Appeal. McCarthy J reviewed the relevant law and concluded at 578
that:
... they ... convey what to me is the determining factor, the intention
behind the second contract to assist or give effect to the
illegality.
He also noted later at 578:
... knowledge of the illegality is, I believe, an essential
before the subsequent contract will be held to be
tainted so as to defeat the
rights of someone not a party to the earlier contract, but knowledge of itself,
is not, I believe sufficient.
I think that in those cases there must be
something more than mere knowledge, some element of assistance given to the
illegality.
[299] Turner J said at 581:
As regards contracts, not between the two original parties to an illegal contract, but between one of them and a third party, the policy of the law appears to me to render unenforceable by the taint of illegality those contracts, ex facie legal, the purpose and object of which is to secure in the
future some illegal or immoral end. The principle
appears to me well expressed in 8 Halsbury's Laws of England, 3rd ed.
128 where it is stated:
An agreement which is innocent in form cannot be enforced if it
is entered into for the purpose of carrying out or assisting
in carrying out an
illegal transaction.
(emphasis added)
[300] In Portland Holdings the contract of assignment came
some time after the original, illegal contract. While the difference in
timing of the two
documents was a feature of that case, the principle has
broader application.
[301] In Equiticorp Industries Group Ltd (In Statutory Management) v The
Crown (Judgment no 47) [1998] 2 NZLR 481 Smellie J also considered the issue
of tainting. When summarising the requirements, he also noted that the question
was whether the second (not necessarily in time) contract had as its purpose or
object the assistance or promotion of the illegal
transaction, citing with
approval the above passage of Turner J.
[302] So the first issue is whether the agreements for sale and purchase had as their purpose or object the assistance or promotion of the illegal transaction, namely the entering into the Blue Chip investment products in breach of the Securities Act.
[303] While, on the plaintiffs’ argument the agreements for sale and
purchase have been used to promote the illegal transaction,
it is the purpose
behind the challenged agreements that is important. The prima facie
purpose or object of an agreement for sale and purchase is clear. It is
to convey the vendor’s property to the purchaser.
The agreement for sale
and purchase may have been used by the Blue Chip entities as part of its
promotion of the Blue Chip investment
products, but it does not follow that the
agreement had as its purpose, to assist or promote that illegal transaction.
If, in addition
to the agreement itself being innocent in form (as in
this case), the purpose of the parties to it can be independently
justified so that the transaction stands on its own (as in this case), it is
difficult to see how it can be said that the agreement
was entered into for the
purpose of carrying out or assisting in the illegal transaction.
[304] The fact that the plaintiffs may have entered into the agreements for
sale and purchase as part of an investment with Blue
Chip does not itself
support a finding that that was the purpose or object of the agreement. The
agreements for sale and purchase
of the apartments have a purpose independent of
the joint venture and PIP agreements.
[305] The Trustees of the K D Swan Family Trust v Universal College of Learning CA255/02 23 September 2003 is another Court of Appeal decision that has considered the issue of tainting. The Swan Family Trust agreed to assist the local Polytechnic to develop a sports facility on land owned by the Wanganui District Council. The proposal involved the Trust purchasing the existing buildings on the land from the YMCA, and funding the development of the new facility. The Polytechnic was then to take a lease of the completed facility for a period of 20 years with an option to buy. Various documents were entered into between the Polytechnic and the Trust. These included a deed of nomination in relation to the sale of the buildings which nominated the Trust as the purchaser, and an agreement to lease between the Trust as lessor and the Polytechnic as lessee. The lease was entered into on the basis that the District Council would agree to sell the land to the Trust. Subsequently, the District Council agreed to sell the land, but it was discovered that savings could be made on stamp duty if the Polytechnic purchased the land and then on sold it to the Trust. The Trust agreed to that proposal. The
Polytechnic mortgaged the land back to the District Council for the
full purchase price. The land was transferred subject
to that mortgage. The
Trust took over and assumed the liability of the payments under the mortgage,
but the Polytechnic was not
released from its obligations under the mortgage.
The two agreements for sale and purchase, the first between the District
Council and the Polytechnic, and the second between the Polytechnic and the
Trust were completed. The memorandum of lease
between the Trust and the
Polytechnic was then executed.
[306] The parties subsequently discovered that the Polytechnic was
an institution under the Education Act 1989, and was
required to obtain written
consent from the Chief Executive of the Ministry of Education to both sell
assets and otherwise raise
money. The Court of Appeal concluded that the
mortgage arrangements required the consent of the Chief Executive. As the
mortgage
was entered into without the consent it was prima facie
illegal. When considering the position of the lease the Court agreed with
counsel’s concession that, standing by itself, the
lease would not have
required consent. But the Court went on to consider whether the
lease was tainted by the illegality
of the mortgage:
[83] The lease was, however, part of a transaction which arguably
required consent from the Secretary in relation
to one of its
constituent steps, viz, the mortgage. The respondent submitted that the
lease was, therefore, tainted
by the illegality of that earlier step.
...
[85] ... we are not concerned with severance of a provision in a lease, but with the question whether the agreement to grant a mortgage tainted the lease with any illegality. This is because the mortgage was the subject of a separate agreement between [the Polytechnic] and [the District Council], made at a different time from the agreement with the Trust which called for the granting of the lease.
The Court then concluded that the lease was not tainted by the
illegality of the mortgage finding inter alia that:
[87] ... the lease is legally independent of the other components of the transaction, and in particular of the mortgage. ... to enforce the lease the Trust has no need to rely upon any of the preceding steps; the trustees can stand on their unchallenged title under the Land Transfer Act 1952 as registered proprietors of the fee simple estate out of which the lease has been granted. The Trust therefore has no need to rely upon any illegality even if its title was acquired in a transaction which itself contained an illegal step: Tinsley v Milligan [1993] UKHL 3; [1994] 1 AC 340.
Finally the Court concluded:
[90] We are fortified in our view by a consideration of the decision of the
Privy Council in Carney v Herbert [1985] AC 301, on appeal from the
Supreme Court of New South Wales. There a shareholder in a company,
who had agreed
to sell his shares, took a mortgage from the
company's subsidiary to secure the purchaser's payment obligations.
The sale agreement and the mortgage were both part of a
single composite transaction: p309. After the shares
were transferred, the
purchaser defaulted and resisted the vendor's claim for payment on the
basis that the sale agreement
was tainted by the illegality of the mortgage.
It was accepted that the mortgage was illegal because it contravened
financial
assistance provisions in companies legislation. Delivering
the judgment of their Lordships, Lord Brightman held
that the illegal
mortgage could be severed from the sale agreement because it did not go to the
heart of the transaction and its
elimination left the subject matter of
the contract and the parties' primary obligations unchanged: p316.
Although
the case was concerned with severance, the same principles are
applicable to the present case.
[307] In the present case, the agreement for sale and purchase is
legally independent of the Blue Chip investment products.
Greenstone Barclay
is able to enforce its rights under the agreement for sale and purchase as
vendor without reference or resort
to the Blue Chip investment products.
Greenstone Barclay had no interest in the Blue Chip investment products sold to
the investors.
Its sole interest was the sale of the apartments. Greenstone
Barclay’s rights against the plaintiffs are entirely contained
within the
agreements for sale and purchase. The agreements for sale and purchase do not
refer to or incorporate the joint venture
or PIP products.
[308] The focus is on the purpose of the contract that is sought to be
impeached or tainted. Where a party seeks to enforce a contract,
their claim
will be defeated if the contract was entered for an illegal purpose:
Alexander v Rayson [1936] 1 KB 169; Tinsley v Milligan [1993] UKHL 3; [1993] 3
All ER 65. However, where the contract in issue is independent of the
impugned transaction or contract (in
this case the Blue Chip investment
product) so that the party does not need to rely on it for any purpose, then the
contract
will be enforceable: Tinsley v Milligan per Lord
Browne-Wilkinson at p 86. The agreements for sale and purchase are such
independent contracts in this case.
[309] In the words of Turner J, the evidence falls short of establishing
any degree
of assistance in this case which would require a Court to hold that the agreements for sale and purchase are tainted in the hands of Greenstone Barclay. Greenstone
Barclay was not required to do anything under the Securities Act. The
agreements
for sale and purchase stand independent of the Blue Chip products.
There is no evidence that Greenstone Barclay set
out to assist Blue
Chip in its breach of the Securities Act. In my judgment, the first limb
required for the agreements
for sale and purchase to be tainted, namely
that they had as their purpose or object the assistance or promotion of
the illegal transaction, is not made out.
The knowledge requirement
[310] The second requirement is knowledge. Although in Portland
Holdings it was unnecessary, given the primary finding, for the Court
to consider the issue of knowledge, the members of the Court
went on to
discuss it. The Court confirmed that knowledge of the illegality was
required. As to that knowledge, McCarthy
J observed at 579:
... Much less, in my view, does [the law] mean that A is necessarily obliged
to know that certain things which B has done amount to a breach of a statutory regulation. There is no duty cast on him to be vigilant. In the present case the law required certain action by [Cameo] and that law was broken by [it], not by [Portland]; and although [Portland] did know of the
circumstances which constituted the illegality, I do not think that a person in
the position of [Portland] must be taken to have known that what [Cameo]
did amounted to a failure to comply with a duty cast on [it] by a regulation,
when in truth [Portland] did not know that. (emphasis added)
[311] In Equiticorp Smellie J noted that McCarthy J had also
observed in Portland
that:
Plainly, in my view, if there was no such knowledge, actual or constructive,
then there can be no taint.
Based on that observation, Smellie J went on to conclude that given the recent developments in the law: Baden v Société Générale pour Favoriser le Développement du Commerce et de l'Industrie en France SA [1992] 4 All ER 161; and Royal Brunei Airlines Sdn Bhd v Tan [1995] UKPC 4; [1995] 2 AC 378, a wilful and reckless failure to make the inquiries an honest and reasonable person would have made would be sufficient knowledge.
[312] It was submitted for the developers that that was to place
the knowledge requirement too high, bearing in
mind that the concept
of tainting arises from the maxim ex turpi causa non oritur actio
(one who knowingly enters into a contract with an improper object
cannot enforce his rights thereunder). A classic case that
exemplifies the
maxim is Pearce and Another v Brooks (1866) LR 1 Ex 213, 217. The
plaintiffs sued the defendant, a prostitute, for the hire of a brougham carriage
which he knew she
was going to use to entertain her clients. It
was held that he could not recover the cost of hire. Pollock CV
said:
I have always considered it as settled law, that any person who contributes
to the performance of an illegal act by supplying a thing with the knowledge that it is going to be used for that purpose, cannot recover the price of the
thing so supplied ... Nor can any distinction be made between an illegal and
an immoral purpose; the rule which is applicable to the matter is, Ex
turpi causa non oritur actio.
[313] While acknowledging the force of the argument for the
developers, particularly in light of the comments of
McCarthy J noted at [309],
in this case it is unnecessary for me to decide the point. Accepting for
present purposes that the test
suggested by Smellie J is correct, the
requirement is not made out in this case.
[314] The nature of the illegality is relevant. The Blue Chip agreements
are not, on their face, illegal as such. They are not,
for example, a sham nor
an attempt to avoid tax: Alexander v Rayson. The illegality arises from
the failure of Blue Chip to provide an authorised advertisement, or to issue
a prospectus. The evidence
does not support the plaintiffs’ argument that
an honest and reasonable person in the position of the developers would have
made inquiries about that particular issue.
[315] Further, in the present case, Greenstone Barclay had no detailed
knowledge
of the Blue Chip investment products. In the absence of such knowledge,
there can
be no basis to suggest it should have concerned itself with the Blue Chip
investment products or to make such inquiries.
[316] To answer the evidence that Greenstone Barclay did not have any
knowledge
of the detail of the Blue Chip investment products, the plaintiffs sought to impute the knowledge that the Blue Chip Group (including Lyell) and the sales agents had of the products to Greenstone Barclay.
Imputed knowledge
[317] As noted above, the plaintiffs plead that the knowledge of
the Blue Chip Group (including the sales agents)
and Walters Law of the
terms of the PIP, joint venture, mainstream and other Blue Chip
investment products can be
imputed to Greenstone Barclay.
[318] I have already concluded that the evidence and related
principles do not support the underlying basis for that
submission in relation
to Mr Walters. I have found that Mr Walters was not Greenstone Barclay’s
agent. However, I have
also found that Lyell and the Blue Chip sales agents
were Greenstone Barclay’s agents for the purpose of selling the
apartments.
For present purposes I accept that Lyell (as a member of the Blue
Chip organisation) and the sales agents (through their use of
the Blue Chip
investment products) were familiar with the detail of the Blue Chip investment
products. Can their knowledge of
those products be imputed to
Greenstone Barclay?
[319] The law is not entirely satisfactory on this issue. The
editor of Bowstead makes the observation that the area of
imputed knowledge is constituted by a plethora of cases in different
contexts,
which are extremely difficult to reduce to any order.
[320] At para 8–207, Bowstead identifies four circumstances
where a principal will
be held to have acquired knowledge through his or her agent. The
first and most relevant to this case is:
The law may impute to a principal knowledge relating to the subject-matter
of the agency which the agent acquires while acting within the scope of his
authority.
[321] As Bowstead acknowledges it may follow from the proposition that where the agent acquires knowledge other than when acting for the principal – whether before he adopted an agent function, or after, but while he was engaged on different business – that knowledge should not be imputed to the principal: Taylor v Yorkshire Insurance Co Ltd [1913] 2 Ir.R. 1 at 21; Mountford v Scott [1818] EngR 125; (1818) 3 Madd. 34 at 40.
[322] The original authority identified as supporting the
proposition is Wyllie v Pollen [1863] EngR 94; (1863) 3 DeGJ & S 596. At
601 Lord Westbury LC said:
To affect the principal with notice, the agent’s knowledge must have
been derived in the particular transaction in hand, or
be shewn to have been in
that transaction present to his mind: and further, it must have been
knowledge of something material
to the particular transaction; and
something which it was the agent’s duty to communicate to his
principal; the
whole doctrine of constructive notice resting on the
ground of the existence of such a duty on the part of the agent.
[323] That statement of principle was cited with approval in
Waller v Davies [2005] 3 NZLR 814. The same approach was also
supported in Burmeister v O’Brien [2008] NZHC 1359; [2008] 3 NZLR
842.
[324] Bowstead notes that the principle has been rejected by
the Restatement Second and Restatement Third and, if correct, creates an
important
limitation on the doctrine. Professor Watts has also criticised the
approach in ‘Imputed Knowledge in Agency Law – Knowledge
Acquired
Outside Mandate’ [2005] NZ Law Review 307. He argues that there is no firm
rule of agency law that principals are
affected only by knowledge of facts
learned by agents in the course of carrying out their mandate for the principal.
But if there
is such a rule its scope and operation is dependent on:
(1) The issue of law to which the state of knowledge is relevant; (2) The role the agent is given to perform;
(3) Whether the agent is acting for more than one principal in the relevant
transaction; and
(4) The degree of certainty that the crucial facts were present in
the agent’s mind.
[325] While the rule has been criticised by Professor Watts it has been
accepted by the Court of Appeal in Niak v Macdonald [2001] NZCA 123; [2001] 3
NZLR 334 where at [26] the Court stated:
[26] The knowledge of an agent is not automatically imputed to that
agent’s principal. A general statement of the legal position in Fridman’s
Law of Agency (7th ed) at p 349 is:
“. . . the knowledge must relate to the transaction under
which the agent can bind the principal and the
agent must be under a
duty to communicate the information to the principal . . .. But the cases show
the general rule to
be that the knowledge of the agent must be
acquired by him in connection with the principal’s business, if it is to
affect the principal.”
[27] The position was considered by this Court in Jessett Properties Ltd
v UDC Finance Ltd [1992] 1 NZLR 138. Hardie Boys J, giving
the judgment of the Court, said at p 143:
“The general principle that notice given to or knowledge acquired by an
agent is imputed to his principal only if the agent
was at the time employed on
the principal’s behalf is recognised in the texts and the cases: . . ..
This accords with good
sense and justice. Thus if notice is given to an agent in
reliance on his ostensible authority to receive it, the principal will
be
estopped from denying receipt of the notice: . . .. But there is no reason to
prevent the principal from denying receipt in the
absence of such
reliance.”
After considering various statements as to the basis of the rule
the Judge said at p 143:
“Whichever be the true basis, it is apparent that knowledge acquired before the agency began, or probably even during its currency but outside the scope of the engagement, should not in general be imputed
to the principal.”
Two exceptions to the general rule were noted. First, where the principal “purchases the previously obtained knowledge of the agent” in relation to the particular subject-matter, and secondly, where the agent is “an agent to know”. Neither exception applied in this case.
[326] The underlying rationale for imputing the knowledge of an
agent to a principal is to protect an innocent third
party who may reasonably
presume an agent will fulfil his or her duty and report all facts that affect
the principal’s interest.
If the principal wishes to transact his
business through the use of an agent then a third party dealing with
that
agent should not be troubled to ensure that the agent passes on to the
principal relevant information held by the agent concerning
the transaction, and
equally, the third party should be able to accept the agent’s
representation (within the scope
of his or her authority) will bind the
principal. That rationale does not, however, support the imputation of all of
the agent’s
knowledge, whenever and in whatever capacity gained, to the
principal.
[327] There is a logical difference between the imputation of knowledge gained by the agent in the course of acting within the scope of the task authorised by the
principal, and knowledge gained even at the same time, but when acting within
the scope of a task authorised by another principal.
[328] In El Ajou v Dollar Land Holdings plc & Anor
[1993] EWCA Civ 4; [1994] 2 All ER 685 the English Court of Appeal discussed the relevant
general principles. A brief reference to the facts
is necessary. A had
substantial funds under the control of an investment manager. The manager
was bribed to invest A’s
money, without his authority, in
fraudulent schemes operated by three Canadians through the medium of two Dutch
companies.
The proceeds of the fraudulent schemes ultimately found their way
to provide finance to DLH. On the advice of S DLH had
been acquired
by persons unconnected with the Canadians’ fraud. S had been introduced
to the purchasers by F, a fiduciary
agent who acted for the Canadians.
DLH’s affairs were conducted by its controlling shareholders and S. F was
the chairman
of DLH, but played no active part in its management. S had
approached F for assistance with finance, and F had introduced S to
the
Canadians who had provided finance to DLH. F had also misappropriated
money due to the Canadians. A meeting took place
at DLH. DLH agreed to
guarantee F’s indebtedness to the Canadians to a certain limit. When the
Canadians subsequently withdrew
funding from DLH, S purchased DLH from
the Canadians. When A discovered the fraud he brought proceedings against DLH.
A
sought to recover the money DLH had received from the Canadians on the grounds
that DLH had received the money with the knowledge
that it
represented the proceeds of fraud, or that DLH had knowledge of the
fraud before it brought the Canadians
out.
[329] On the issue of imputation the Court held that F’s knowledge could not, as a matter of law, be imputed to DLH because he had acted as the agent of DLH in the transaction, and DLH was under no duty to inquire about the source of the offered money. Even if, in his capacity as DLH’s agent he was under a duty to inform DLH that the moneys were the proceeds of fraud, that duty alone was not a ground for imputing such knowledge. Moreover, as he had acquired the information about the fraud while acting for the Canadians, and not in his capacity as agent for DLH, the principle that communication to an agent is deemed to be communication to the principal did not apply. While acknowledging that in certain cases a principal may have a duty to investigate, the Court held that in receiving the traceable assets DLH
had no duty to investigate. There was nothing to put it on inquiry. Nourse LJ noted the importance of the fact that the agent F, had acquired his knowledge of the fraud
as a director and agent of another entity. He considered that F
had no duty to communicate it to DLH.
[330] The position is even stronger from Greenstone Barclay’s point
of view. The knowledge that the sales agents had of the
various Blue Chip
investment products were obtained by them as agents of Blue Chip.
There is no basis to impute
that knowledge to Greenstone Barclay. The
sales agents owed no duty to tell Greenstone Barclay about the details of the
Blue Chip
investment products.
[331] The extent of the agent’s knowledge that is to be
imputed to the principal must be informed by the scope
of the agent’s
authority and the role that the agent is carrying out in a particular case. The
different roles of Lyell and
the sales agents (in particular) are relevant to
the issue. Lyell and the sales agents were authorised by Greenstone Barclay to
sell the apartments in the Barclay. That was the extent of the task Greenstone
Barclay authorised them to undertake. The knowledge
Lyell and the sales agents
had (or gained) about the Blue Chip investment products was acquired outside
the scope of that agency,
and in the course of acting for Blue
Chip. Therefore this knowledge was obtained as part of a quite
different
agency relationship. Any knowledge the sales agents may have had of
the joint venture and PIP agreements was not material
to the transaction
that Greenstone Barclay had entrusted to them, which was selling the
apartments.
[332] Even with detailed knowledge of the Blue Chip investment
products, there would be an issue whether Greenstone
Barclay should
have been put on inquiry given the nature of the illegality in this case.
In Abbott v UDC Finance Ltd [1991] NZCA 97; [1992] 1 NZLR 405 (CA) the Court of
Appeal discussed UDC’s position as lender in a transaction that was in
breach of
the Securities Act:
... None of these matters suggests any involvement of UDC other than as a lender. They do not suggest any knowledge on the part of UDC of any breach of the Securities Act. It was submitted that [UDC] should have investigated the proposed borrowers and ensured that the requirements of the Securities Act were complied with in respect of the allotment of interests to them. No basis was suggested for imposing such an obligation, nor was any pleaded. ...
p 415
[333] In the present case the pleading on the issue is scant. It
is that the first defendant knew or should have known
of the illegality of
the transactions. I have found Greenstone Barclay did not know. No
particulars are provided to suggest why
Greenstone Barclay should have known or
should have investigated. The evidence on this issue, such as it is, suggests
otherwise.
Without knowledge of the detail of the Blue Chip products,
Greenstone Barclay’s case on the issue is even stronger.
[334] I conclude that even if the joint venture and PIP products were sold
in breach
of the Securities Act, the agreements for sale and purchase were not tainted
by that illegality. They remain enforceable. I now
turn to the individual
plaintiffs’ cases.
The individual plaintiffs’ cases
Lester
[335] The Lesters are in their forties. Mr Lester is a
self-employed upholsterer earning $30,000 to $40,000 per annum.
Mrs Lester is
employed as a teacher aide earning approximately $12,000 per annum. They own
their own home at Albany, which is
worth between $520,000 and
$575,000. Before making the Blue Chip investment the house was subject to a
mortgage of $122,000.
They had equity in their home of between approximately
$395,000 and $450,000.
[336] The Lesters were initially contacted by a telemarketer, and shortly
after were visited by Mr Ty Jones, who told them
he was an
independent financial adviser contracted to Blue Chip through his company TCL
Consultants Limited.
[337] The Lesters agreed to buy unit 14.4 in the Barclay for $575,000. The agreement is dated 7 July 2006. They have paid a deposit of $86,250, borrowing the funds to do so. They also entered into a joint venture agreement with Blue Sky Holdings Limited dated 4 August 2006, an agreement for a furniture pack with Blue Chip New Zealand Limited and a property management agreement with Bribanc. The Lesters also completed an addendum to the agreement for sale and purchase
regarding the lease. The lease provided for Barclay Management to be
lessee, and
Blue Chip New Zealand Limited to be guarantor.
[338] Mr Jones met with the Lesters on 20 April 2006. The Lesters signed an
EML finance application that day. Mr Jones advised them
to get independent legal
advice before investing and recommended two lawyers, Mr Mathias and Mr Unkovich
because they knew the
Blue Chip products and had advised other
investors. Mr Lester said that Mr Jones thought their lawyer would not be able
to
understand the Blue Chip product, and may try to dissuade them from
investing.
[339] Two weeks later, in early May, Mr Jones returned with a set of documents described as the Blue Chip investment proposal. On 1 June 2006 the Lesters signed
a letter of authority appointing Blue Chip New Zealand Limited as
their agent to inter alia:
[340] Subsequently, Mr Jones returned again on 7 July 2006 and gave them a Blue Chip letter dated 6 July 2006, and a number of other documents including the sale and purchase agreement, the furniture pack agreement and the property management agreement. Mr Lester said they executed those documents on 7 July 2006. At around that time the Lesters also signed fast-doc declarations to raise a first mortgage from GE Custodians Limited. The mortgage let them refinance their existing first mortgage, and to borrow the initial contribution for the Blue Chip investment. The same day the Lesters signed the agreement for sale and purchase they completed an acknowledgement document. The acknowledgement document recorded, inter alia, that they had received a copy of the documents in the sale and purchase pack prior to signing the agreement for sale and purchase and property management agreement, and understood and had been advised that the transaction
involved risks.
[341] In his evidence Mr Lester confirmed he was aware of the risks. He
said he asked Mr Jones about that and was told as far
as risk was concerned Blue
Chip were “about as safe as you could get”, or words to
that effect. Mr Lester
specifically asked Mr Jones if there was any way
they might lose their house through investing with Blue Chip because if
there
was they would not proceed. Mr Lester said Mr Jones replied that
“nothing is 100 percent safe, but in saying that
you may as well say Blue
Chip is”.
[342] Mr Lester understood that the investment worked on the basis
that they would use the equity in their home
to purchase an
apartment, and they would be partners with Blue Chip in the apartment, which
would take about two years to
build. Blue Chip would use their equity to pay the
deposit on the apartment, and then after two years Blue Chip would take the
balance
of the equity, and in return they would receive a fortnightly
procurement fee from Blue Chip from the day they signed up. The procurement
fee would continue until the apartment was sold. Mr Lester pressed Mr
Jones about the issue of risk and was reassured by
Mr Jones.
[343] All the representations pleaded to support the Lester’s claim,
that they home detention entered the agreements in
reliance upon
misrepresentations, were made outside the scope of the task given to the
selling agents by Greenstone Barclay.
For completeness, however, I refer to the
representations.
[i] The joint venture agreement with Blue Chip New Zealand
Limited would be for a term of four years, and that
thereafter the
capital contribution would be repaid by Blue Chip New Zealand Limited, or
alternatively the lease rolled over so
that there were no costs payable
by the first plaintiffs.
Mr Lester’s evidence was slightly different to the pleaded
representation. He said that he asked Mr Jones what would happen
if the
apartment did not sell after four years, who would sell it and who would set the
sale price:
... Mr Jones responded that if it did not sell after four years, which he
said in over seven years of Blue Chip being in business had never
happened, Blue Chip would roll over our agreement for
another two years and
nothing would change. We would still be receiving our procurement fee
until the apartment was sold
no matter what. He said that then after six years
Blue Chip would sell the apartment.
I asked Mr Jones what would happen if it did not sell after six years. Mr
Jones said that that has never happened, but that Blue Chip
would roll over our
agreement for another two years with no changes again. Then after eight
years, Blue Chip would sell the
apartment, pay us back all of our money
they had taken, plus a few hundred dollars on top.
I persisted and said that what if the apartment still did not sell. Mr
Jones responded that Melanie and I would have a fantastic apartment
to ourselves which we could sell by ourselves, and Blue Chip would pull out of the deal with us after eight years. He said not to even think
about that because it would not happen. Mr Jones said our apartment
would be sold within four years as all previous Blue Chip investor
apartments had, and we would then be free to reinvest
with Blue Chip as most
other investors had done, but if we did not want to reinvest there would be no
pressure to do so.
The terms of the joint venture agreement were not inconsistent with
the representation. Mr Jones’ representation
was as to Blue
Chip’s present intention.
[ii] The Lesters did not need to sight a registered valuation of
the property because they were not going to have
to provide funds to
maintain the investment, and that that would be Blue Chip New Zealand
Limited’s responsibility.
Mr Lester did not give evidence to support this allegation. In fact he said
that Mr Jones showed them a valuation of the apartment,
and he remembered the
figure of $575,000 being mentioned, although he does not have a copy of the
valuation.
[iii] That the joint venture would receive all of the income and pay all
of the ownership costs.
Mr Lester did not give any evidence to support this
representation.
[iv] In the event that the working capital for the joint venture was
insufficient to meet costs Blue Sky Holdings Limited would make
a contribution to the joint venture.
Mr Lester did not give evidence to support this representation.
[v] The Blue Chip investment was 100 percent safe.
Mr Lester’s evidence was that Mr Jones said, in response to
his question about the possibility of losing their home:
Nothing is 100% safe, but in saying that, you may as well say Blue
Chip is.
Mr Jones’ response made it clear that nothing was safe. The comment
about
Blue Chip was no more than puffery.
[vi] The only thing that the first plaintiffs had to be concerned about
was paying tax on the procurement fee every year and
that Blue Chip
would take care of everything else until the apartment was sold.
In context, the representation was directed at the fact that the
investment would not need to be actively managed by
the Lesters, and that
Blue Chip would attend to that. To that extent it was accurate as
that is what the documentation
and arrangements under the joint venture
provided.
[vii] Blue Chip had never failed any of its investors.
There is no evidence that as at July 2006 when the representation was made
that Blue Chip had failed any investors.
[viii] If the apartment had not been on sold at the end of the
four year period Blue Chip would roll over the agreement
for another two years
and the first plaintiffs would continue to receive a procurement fee
until the apartment was sold.
This was a statement of Blue Chip’s intention. There is no evidence that it
was not Blue Chip’s intention at the time this investment was
made.
[ix] Blue Chip was too big a company ever to fail and that it had
millions
in the bank and huge assets.
This was said by Mr Jones in response to Mr Lester’s query about Blue
Chip going under. Mr Jones said:
Blue Chip was too big a company to go down, plus they have queues
miles long of people waiting to invest with them, they
had millions in the
bank and huge assets. He said again to me to remember who was on the
board.
[344] In context, the statements about the size of the company and the
queues of waiting investors were clearly puffery. The company
report as at 2006
disclosed that Blue Chip had $1.4 million in cash and $109 million of
assets.
[345] The Lesters also said they relied upon written
representations contained in the letter of 6 July. However, Mr Lester
did not
say that he read that letter, or relied on it in entering the agreement for sale
and purchase. By contrast, Mr Lester said
on several occasions in his evidence
that he did not read the documents provided to him.
[346] The representations do not provide a basis for cancellation of the
agreement
for sale and purchase. For the reasons given above, nor does the fact that
Blue Sky Holdings Limited and Blue Chip New Zealand are
in liquidation provide a
basis for cancellation.
[347] The Lesters were aware that in entering into the agreement for sale and purchase and joint venture agreement they were undertaking a commitment to fund the purchase of the apartment. They knew that the purchase was to be funded through borrowing on the existing equity of their home and the apartment. They were advised to seek legal advice. They were aware of the risks involved, but proceeded with the investment. As Mr Lester said they were mainly in it for the procurement fees. They needed help with their income more than anything else.
Hickman
[348] Mr and Mrs Hickman bought three apartments in the Barclay. They
were, however, probably the single largest investor
in Blue Chip
overall. In total they agreed to buy 18 apartments and invested by way of
deposit $974,600.
[349] Mr Hickman and his family immigrated to New Zealand in 2006. They
were required to invest a million dollars in New Zealand
to assist with their
immigration application. Mr Hickman was a keen golfer. He first learnt of Blue
Chip because of its sponsorship
of the New Zealand Open at Gulf
Harbour. Mr Hickman was impressed by the apparent substance of Blue Chip. He
was aware
that in addition to the golf they sponsored a rugby stadium at Mt
Maunganui, and that Blue Chip was listed on the New Zealand Stock
Exchange. Mr
Hickman had been a partner in a sharebroking firm in the United Kingdom. He
checked Blue Chip out, and estimated
it was worth about 250 million
dollars. He was so impressed he decided to buy shares in the
company.
[350] Through golf Mr Hickman met a Blue Chip licensee Murray Kereama. Mr
Kereama convinced Mr Hickman to invest with Blue
Chip. Mr Hickman was
attracted by the 16 percent interest being offered on the PIP
investments.
[351] Mr Hickman said that he had a meeting with Mr Kereama in early
December
2006. At that meeting he explained the immigration investment
requirement, and that he only wanted the money invested for
two years. He said
Mr Kereama told him that Blue Chip could sell the apartments onto other
investors if they were not
finished within two years, and that whatever
happened Blue Chip guaranteed to buy them back so that he would not have to
settle or
worry about the matter further. He decided to proceed. In the
finance application and statement of affairs, Mr and Mrs Hickman
confirmed they
had total assets of $5,037,500 with liabilities of $900,000, leaving a net
asset balance of $4,137,500, and
that Mr Hickman’s income for
the previous year had been $300,000.
[352] Mr Hickman said that after playing golf on 20 December 2006 with Mr Kereama, Steve Haggie and a friend, they all went to his home. Mr and Mrs
Hickman were then presented with a bundle of contracts. Mr Kereama’s
wife Penny was also present. She worked in the office
of Le Pine and Co, who
are solicitors in Taupo. Mr Hickman said they went through and signed the
agreements, but he did not have
time to read them. However, he accepted
he was given a list of the apartments, and where the money was being
invested.
It is apparent that Mr Hickman’s attention was drawn to the
broad detail of the agreements as he said he noticed the prices
of the
apartments, queried the values with Mr Kereama and asked how the apartments had
been chosen. He said he was reassured that
he would not have to complete
the purchase. Later, Mr Hickman signed up for a mainstream agreement as
well.
[353] Under cross-examination, Mr Hickman was reluctant to accept that he
knew
he was entering agreements for sale and purchase in respect
of the various apartments. But ultimately he acknowledged
that he was aware
he was entering into an obligation to purchase the apartments, but said that he
expected the apartments would
be bought back from him.
[354] Mr Hickman identified three meetings with Mr Kereama, the
first in early December when he discussed having
a million dollars to
invest for immigration purposes, a second in mid December, about the
14th, when Mr Kereama suggested Blue Chip use the million dollars as
a deposit on specified apartments and then the final meeting on 20
December when
the agreements were signed.
[355] Although the purchase of property in New Zealand involves a different process to the purchase of property in the United Kingdom, and Mr Hickman sought to downplay his financial knowledge, he knew he was signing agreements for sale and purchase. He is a businessman experienced in financial matters. He was a partner in a stockbroking firm in the United Kingdom. He had earned a substantial income in that practice, and had accumulated assets in excess of four million dollars. I am satisfied that Mr Hickman was well aware when he signed the agreements for sale and purchase that he was agreeing to purchase the apartments. He had a number of brochures relating to the PIP product available to him. The brochures expressly confirmed that the investor had to be in a position to settle the properties if required. No doubt he expected that Blue Chip would purchase the apartments back from him.
That does not, however, alter the fact that he was aware he was
assuming an obligation to purchase the apartments when
he and his wife entered
the agreements for sale and purchase on 20 December.
[356] Mr Hickman proceeded with the transaction because he was impressed by
the apparent wealth and performance of Blue Chip, its
association with the New
Zealand Golf Open, its listing on the Stock Exchange and the
involvement of Macquarie Bank.
[357] In terms of the specific representations, it is pleaded that at the
first meeting
Mr Kereama represented:
[i] Blue Chip invested in the Auckland property market;
[ii] Blue Chip were market leaders;
[iii] Blue Chip marketed apartments that were due to be
built;
[iv] Even if the apartments are unfinished Blue Chip could on sell them to
other Blue Chip investors; and
[v] Whatever happened Blue Chip agreed to buy back any apartments in which
any funds were invested so that at no stage
would the
Hickmans be required to actually settle a purchase of any
apartment.
The representations at [i] to [iv] are borne out by the
evidence. Blue Chip invested in the Auckland property market. It was a
market leader. The evidence of
the valuers is that Blue Chip accounted for
approximately 32 percent of sales off the plan. Blue Chip marketed apartments
that
were due to be built, and even if the apartments were not finished Blue
Chip could and did on sell apartments to other investors
from time to
time.
As to representation [v], Mr Hickman’s evidence was that “we would not have to settle or worry about the matter further if we decided to invest because whatever happened Blue Chip guaranteed to buy them back”. That
is an actionable representation against Blue Chip and the Blue Chip
agent. But like the other representations relied
on by Mr Hickman, it
was made outside the scope of any agency granted by Greenstone Barclay to the
sales agent. Insofar as
the representation includes the statement that the
Hickmans would not have to settle the purchase, the representation is directly
contrary to the express terms of the agreement for sale and purchase which
provided for and required settlement. It is inadmissible
for the reasons
discussed earlier.
[358] It is pleaded that at the second meeting Mr Kereama also represented
that:
[i] Blue Chip would utilise the one million as a deposit on
specified apartments.
The one million dollars did represent deposits on specified
apartments.
[ii] Blue Chip might seek a further 20 percent, but this was
unlikely as they had never done so before.
The reference to the further 20 percent was confirmed in other evidence as
being the balance of the equity that investors would be
required to invest to
enable them, if necessary, to borrow the 70 percent to complete the purchase.
The evidence is that when these
representations were made this had not yet been
necessary.
[iii] If necessary the apartments would be passed onto new
investors coming into Blue Chip.
Again the evidence is that from time to time apartments were
reallocated amongst investors.
[iv] Blue Chip is a huge company listed on the Stock
Exchange.
The representation that Blue Chip was a huge company is puffery. The representation that Blue Chip was listed on the New Zealand Stock Exchange
is correct.
[v] Macquarie Bank and Goldman Sachs had just invested into
Blue Chip.
Macquarie Bank and Goldman Sachs had invested in Blue Chip.
[vi] That the Hickmans had no need to be concerned
because the developments had not even commenced.
This seems irrelevant.
[vii] The worst that could happen was Blue Chip would buy the properties
back at the same price and return the deposits together with
interest.
This was a representation as to Blue Chip’s future intention. It had
nothing
to do with Greenstone Barclay’s position, or the
Hickman’s obligation to Greenstone Barclay under the agreement
for
sale and purchase. On the present evidence it has not been established that
as at December 2006, when these agreements were
signed, Blue Chip did not intend
to exercise the option under the PIP agreements, nor that it was not financially
able to do so.
[viii] All the deposits were held in a lawyer’s trust
account under the Hickmans’ name and were secured by
lawyers’ fidelity funds.
The deposits were to be held in a lawyer’s trust account.
[359] The representations at the third meeting referred to in the statement
of claim are:
[i] Blue Chip had decided to invest the one million into 18
apartments.
While not strictly accurate, as it was the Hickmans who were investing or buying the apartments, the correct position was apparent from the documentation.
[ii] A list of apartments was provided.
This is not an actionable misrepresentation.
[iii] The apartments had been carefully chosen and valued at the
right price by a professional independent of Blue Chip.
The representation the apartments had been carefully chosen
is not actionable. It is in part salesman’s
puff. The
representation that the apartments had been valued “at the right price
by a professional independent of Blue
Chip” is not, when analysed, an
actionable representation about the value of the apartments on behalf of
Greenstone
Barclay. Further, it is difficult to see any reliance. Mr Dale
accepted in closing that the valuation was not relevant to those
plaintiffs
investing in the PIP agreements as they expected Blue Chip to exercise the
option. The representation is also said to
be on behalf of Blue Chip, not
Greenstone Barclay. Finally, the evidence is that Greenstone Barclay (even if
not Blue Chip) had
obtained a valuation to support the sales prices.
[iv] The Hickmans did not have to worry about the choice of apartments and
how they were valued because Blue Chip guaranteed to buy
them back at the
price on the list and in addition pay interest on the investment
moneys of 16 percent.
In his evidence-in-chief Mr Hickman did not expressly give evidence to support this precise representation. He did say his understanding was that the investment would be used by Blue Chip to purchase apartments which would be sold to new PIP or mainstream investors. He was told they had nothing to worry about, and they should just enjoy the 16 percent return. However, as noted, in cross-examination he finally accepted that he knew that rather than Blue Chip purchasing the apartments, he and Mrs Hickman were purchasing the apartments. In the event the valuation it was not significant because Mr and Mrs Hickman had been assured that Blue Chip would be taking over the obligations.
[v] The Hickmans did not need to read the agreements.
This was bad advice, but it is not an actionable misrepresentation as
such.
[360] It is also pleaded that the Hickmans were not told that
even if Blue Chip exercised the option it would
not relieve them of
their obligation to settle. It is arguable whether Mr Kereama’s
failure to expressly
advise about this is an actionable
representation, but if actionable, it provides a claim against Mr Kereama and
Blue Chip,
not Greenstone Barclay.
[361] Any actionable representations were made by Mr Kereama on behalf of
Blue
Chip, and are not related to Greenstone Barclay. They were made outside the
scope of the agency and tasks authorised by
Greenstone
Barclay. Further, in Mr Hickmans’ case, given Mr Hickman’s
background, it would be fair and reasonable
for cl 27 of the agreement for sale
and purchase to apply to defeat any claim based on misrepresentation, and
also to answer
any misrepresentation under the Fair Trading Act relating
to Blue Chip or the Blue Chip investment products. While Mr Hickman
did not
take legal advice he was experienced in business and investing
generally. He advises others about investing.
[362] Finally, it is pleaded that as ART Apartments is in liquidation, the
lease will now not be honoured. For the reasons
set out above, the
liquidation of ART Apartments does not provide a basis for cancellation. Mr
Hickman did not give any evidence
about that issue. The identity of ART
Apartments as lessee was of no moment to him. What was important was the
lease,
which remains in place.
[363] None of the grounds for cancellation are made out.
Dick
[364] Mrs Dick and her late husband agreed to buy unit 14.3 in the Barclay
on 30
June 2006. Subsequently, they concluded a joint venture agreement and associated documents. The joint venture agreement is dated 5 September 2006. Mrs Dick is now 64. She gave her evidence fairly. She and her husband had owned and operated
a number of pharmacies. They have owned seven homes of their own, and a
beach home at Pauanui, but before their involvement
with Blue Chip had
never had an investment property. Before the investment they owned their own
home in Howick, had cash on
hand of about $5,000 and a mortgage over that home
for approximately $80,000.
[365] The Dicks became involved in Blue Chip after attending a
seminar. After expressing interest at the seminar,
a salesperson, Mr
Michael Davis came to their home. Mrs Dick said that Mr Davis
explained that Blue Chip only
bought good quality houses and
apartments, and that Blue Chip would repurchase or sell the property
within four to
six years depending on the market. Mrs Dick acknowledged that
she broadly understood the sample analysis provided to her,
including
the purchase price of the apartment and the borrowing that was required. Mr
Davis told them that they could not insist
that the property be sold at the end
of four years, but that if it was not sold after eight years they would own it
and could do
with it what they wished.
[366] Mrs Dick generally understood that as a consequence of the investment
she and her husband were committing to the purchase
of an apartment. Before
signing the agreement for sale and purchase, Mr and Mrs Dick discussed
Blue Chip with their
solicitor, Mr McDell. Mr McDell was called to
give evidence. Mr McDell made inquiries about Blue Chip, and had
been
provided with the sample analysis document. Mr McDell spoke to Mr Dick on 26
June. Mr McDell had a hand-written file note
of that discussion. The note
records:
Risks
If Blue Chip couldn’t pay you or your mortgage then:
(a) You have title but subject to 110% borrowing; and
(b) Market rental won’t cover it the interest all the interest
– sell the investment property to repay loans
– may not receive
30% loan over home, may not clear 30% loan over house.
[367] I accept the evidence of Mr McDell that he advised the Dicks (through Mr Dick) of the risks associated with the proposed investment. Mr McDell was clear that he gave that advice prior to the agreement for sale and purchase being
concluded. Despite that advice Mr and Mrs Dick signed the agreement for sale
and purchase on 30 June 2006. On 5 September 2006
they completed the joint
venture and other agreements, and on 7 September 2006 paid the
deposit.
[368] The representations pleaded in relation to the Dick’s claim
are:
[i] They were purchasing the apartment at a price fixed
by an independent registered valuation.
As a representation about the value of the apartments, this would
be a representation within the scope of the agency granted
by Greenstone
Barclay to Mr Davis. But Mrs Dick’s evidence was equivocal about the
issue. The only evidence she gave about
the issue of valuation was in the
context of the discussions leading up to the execution of the joint venture
agreement. She said
at that time that Mr Davis “had told us that the
price of the property had been fixed based on a registered valuation
but
I never saw any such valuation.” Implicitly that is a representation
that the value of the apartment in the agreement
for sale and purchase
was supported by a registered valuation. It was a matter of fact. A
valuation was obtained sometime
later from PRP, which supported a valuation of
$10,000 more than the purchase price in the agreement for sale and purchase.
Mrs
Dick then referred to an email dated 10 August relating to the rental
being set by external valuers. She said that in
the email of 10 August there
was a promise to forward the valuation, but that never occurred. But in her
evidence Mrs Dick said
they never felt the need to actually read the
valuation. In the circumstances it cannot be said that the Dicks relied
on
such a representation in entering the agreement.
[ii] That Blue Chip only bought good quality houses and
apartments.
There is no evidence that that representation is wrong. There is no
challenge
to the quality of the Barclay.
[iii] That there was no risk associated with the transaction and that the
Dicks’ investment would be safe.
In cross-examination, Mrs Dick accepted she could not be sure
whether anyone actually said there was no risk. In any event,
I accept Mr
McDell’s evidence that he explained to Mr Dick, before the Dicks
entered into the agreement for sale
and purchase, that there were
risks associated with the transaction. They went ahead
nevertheless.
[iv] That the Dicks would not be entitled to own the property because of
the terms of the joint venture agreement, but might be able
to own the property
after an eight year period.
This statement does not provide a basis for an actionable
misrepresentation.
[v] That the Dicks would receive a fortnightly income stream of $420 and
that all other payments associated with the transactions
would be paid
by Blue Chip.
This representation was clearly on behalf of Blue Chip. It was an accurate
statement of the Blue Chip entities’ obligation
under the joint
venture agreement.
While the Dicks were perhaps naive, they did receive legal advice
before entering the transaction. In the circumstances,
it would not be
unfair or unreasonable for cl 27 to apply to answer the claims
against Greenstone Barclay based
on the misrepresentation and Fair
Trading Act causes of action.
[369] For the reasons previously given, the liquidation of Blue Sky Holdings Limited, Blue Chip New Zealand Limited and Bribanc does not entitle Mrs Dick to cancel the agreement for sale and purchase with Greenstone Barclay.
Andrews
[370] Ms Andrews owns her own home in Manukau valued at
approximately $450,000. Prior to the Blue Chip investment she
had a mortgage of
$125,000. She was introduced to Blue Chip by her partner Norman
Knaggs. Mr Knaggs began working for
Blue Chip in mid to late 2006. In
December 2006 Mr Knaggs explained the PIP agreement to Ms Andrews in general
terms. He told her
it would be sensible for her to utilise the equity she had
in her house, and to earn the extra income.
[371] Ms Andrews said that Mr Knaggs reassured her that if Blue
Chip had not sold the apartment within two years
they would pay any
costs until the apartment was sold, and that there was no prospect of Blue
Chip going into liquidation because
it was worth 80 million dollars. Mr Knaggs
also said the developer would cover all costs instead of Blue Chip if
something
happened. Ms Andrews went ahead and signed agreements to
purchase two units in the Barclay, and also completed two PIP agreements.
Her
bank approved her finance application for $95,000 in order to pay the deposits.
Subsequently, and until November 2007,
the payments were made leaving
her with a surplus of approximately $680 per month after payment of
the mortgage.
[372] Ms Andrews and Mr Knaggs also gave evidence that they
believed the agreements for sale and purchase had been altered
after they had
signed them. They said standard clauses in the agreements for sale and purchase
had been deleted.
[373] Ms Andrews’ evidence was that she had not agreed to
the deletions or amendments to the agreements for sale
and purchase, and notes
that her initials did not appear on any of the documents signed. Mr Knaggs gave
evidence to the effect that
he would not have allowed Ms Andrews to agree to the
amendments made to the agreements, and the deletions were not part of the
agreements
Ms Andrews signed.
[374] Mr Abel-Pattinson gave evidence that the deletions were standard. The deletions in Ms Andrews’ agreements for sale and purchase were exactly the same deletions applied to all the sale and purchase agreements. That was the form of the agreement settled on and attached to the profit share agreement.
[375] Ms Andrews and Mr Knaggs’ evidence is based on ex post facto reasoning. They did not raise the issue for some 20 months after the agreements were made, and not until Ms Andrews was trying to avoid her obligations under the agreements. Mr Knaggs was not a convincing witness. He also sold an apartment in the Barclay to Mr Hohepa. When initially questioned about the Hohepa agreement he was of the view that it did not have any deletions. When the agreement was shown to him as having deletions, which were not initialled, he then changed his evidence and said that the deletions were not in the Hohepa agreement at the time it was signed either. The agreement was otherwise complete. The suggestion that the additional special conditions of sale that were added in typewritten form were included, but that the deletions were not is simply not credible, given the evidence of the agreed standard
form.
[376] Further, at one point Mr Knaggs accepted that he would have
seen the agreements in February or March 2008, but
when it was put to him that
the matter was not raised until August 2008 he suggested the earlier date might
be wrong.
[377] Mr Knaggs, who advised investors, maintained that there was an
obligation
on Blue Chip to exercise the option. When taken through the PIP agreement he
was then constrained to accept there was no obligation
on Blue Chip
to exercise the option. He also finally conceded that there was nothing in
the PIP agreement that said there
was an obligation for the developer to step in
as both he and Ms Andrews had said in their evidence-in-chief. Mr Knaggs
then
conceded that he could not remember exactly what he had said to Ms
Andrews, and could not remember telling her whether he
had said to her
that the developer would step in if something happened to Blue
Chip.
[378] I reject the evidence of Ms Andrews and Mr Knaggs that the agreements for sale and purchase were altered after Ms Andrews signed them and also that Mr Knaggs told her the developer would step in if something happened to Blue Chip. The evidence about that was a belated attempt by Ms Andrews and Mr Knaggs to improve Ms Andrews’ position after the failure of the Blue Chip entities. As noted, there is nothing in the documentation to suggest that Greenstone Barclay would “step in” if Blue Chip failed to exercise its option under the PIP agreement.
[379] The representations alleged by Ms Andrews are:
[i] That Blue Chip would on sell the property within two years for a good
profit margin.
This representation was made by Mr Knaggs, Ms Andrews’ boyfriend.
There
is no suggestion in his evidence that he had any authority from Greenstone
Barclay to make that representation. It is a representation
as to Blue
Chip’s intention. It is not a matter that impeaches or affects Greenstone
Barclay.
[ii] That in the interim Ms Andrews would receive interest at the rate
of
16 percent.
The agreement with Blue Chip provided for this. The net rate received
by
Ms Andrews was eight percent because she had borrowing costs to
meet.
[iii] That if for any reason Blue Chip had not sold the apartment within
two years they would pay any costs that were accrued to Ms
Andrews until such
time as the apartment was sold.
This was also a term of the PIP agreement. Blue Chip’s failure to
comply with that is a breach of the PIP agreement.
[iv] That in the event of Blue Chip failing the developer would
instead cover all of the costs.
Dealt with above. This was not established on the evidence.
[vi] That any moneys invested by Ms Andrews would remain in a
lawyer’s trust account and be completely safe.
The deposit moneys were paid into solicitor’s trust account and remain
there pending decision.
[380] No other basis is advanced for cancellation by Ms Andrews in the pleading.
Whyte
[381] Mrs Whyte is retired. She owns her own home in Howick and, prior to the investment, had approximately $500,000 in savings. In early 2007 she was looking
for an investment to produce regular income from her savings to
supplement her superannuation. At the time her nephew,
Logan Devoy, was
employed by Blue Chip as a sales agent. Mrs Whyte eventually agreed to invest
with Blue Chip. Mrs Whyte agreed
to buy three apartments, two in the
Bianco and one in the Barclay. She entered PIP agreements with Blue Chip
Premium
Income Limited.
[382] Mrs Whyte saw the investment as a way to not only increase her
income, but also to assist her nephew. In her evidence
she accepted
that she thought she was aware she was signing agreements for sale
and purchase, but that Mr Devoy
had explained to her that at the end of
the investment period Blue Chip would be taking over the obligation to purchase
the property,
and that she would not be obliged to do so.
[383] Mrs Whyte did not seek legal advice before entering into
any of the agreements because she trusted the advice
given by her nephew, Mr
Devoy. She felt that she understood the arrangement sufficiently from
his explanations. She understood
she would receive regular monthly interest
payments from the deposits, and that ultimately Blue Chip would step in
and take
over the purchase of the apartments before she was required to
settle.
[384] Mr Devoy also gave evidence. He said that he had a general
understanding
as to how the Blue Chip investment products worked. He said he understood
that Blue Chip was obliged to repurchase the property
at the end of the
investment period under the PIP agreement, but was unable to explain the basis
for that understanding. This is
contrary to the express terms of the
PIP agreement itself, and also to the promotional material used with the
PIP agreement.
[385] In relation to the sales to his aunt, Mr Devoy said that he believed he had explained to her that she might have to settle the purchase agreements if something went wrong, but he was very confident that that would not occur. He said he told her
that he would purchase them himself if necessary. Unfortunately, he
is not in a financial position to do that now.
[386] The representations pleaded on behalf of Mrs Whyte are:
[i] That she would receive a monthly option fee.
The representation is correct, she was to receive a monthly option fee under
the PIP agreement.
[ii] That there were no hidden costs.
Mrs Whyte did not give evidence to support this representation.
[iii] That Blue Chip would take care of all of the issues
relating to the purchase and management of the property.
This was a representation on behalf of Blue Chip, and beyond the scope of any
agency granted by Greenstone Barclay to Mr Devoy.
[iv] That the Blue Chip Group would take over the sale and
purchase agreement before settlement and return her deposit.
Again, this representation was made outside the scope of any agency
Mr Devoy had to sell the apartment on behalf
of Greenstone Barclay.
The representation was about the actions of Blue Chip, and was not related to
the apartment or to Greenstone
Barclay.
[v] There was no need for her to consult her own lawyer or accountant as
the scheme was a simple and safe investment.
Mrs Whyte did not give evidence that Mr Devoy told her there was no
need
to consult her own lawyer or accountant. She said that she did not seek advice because she trusted her nephew’s advice, and felt she understood the arrangements.
[387] Mrs Whyte recorded her own solicitor’s name and contact details on the agreement for sale and purchase. Her solicitor gave her written advice on 11 April
2007 after discussing the matter with her nephew. Her solicitor said
he had considerable disquiet about the set-up.
He set out his concerns
in a letter. Mrs Whyte did not take any further legal steps in response to
that advice. She spoke
to her nephew, but was reassured by him that it
would be alright. She continued to accept the payments under the
PIP
agreements. There is force in Greenstone Barclay’s argument that
with knowledge of her rights Mrs Whyte
affirmed her contractual
obligations under the PIP, and implicitly, her obligation to settle.
Janes
[388] Ms Janes is a 51 year old single parent of two children.
She is currently employed as a receptionist earning
$23,000 a year. Prior to
her involvement with Blue Chip she had never invested in anything. She
owned a home with a government
valuation of $550,000 (valued for the purposes
of the investment at $610,000, which she thought was correct in the
prevailing
market). The home was however, subject to a substantial mortgage of
$214,000.
[389] After responding favourably to a telemarketer, Ms Janes was visited
by Mr
Ty Jones, a financial adviser contracted to Blue Chip. She explained her financial circumstances to Mr Jones. He convinced her that her limited financial situation was
no impediment to her investing in a joint venture product. He
recommended Mr Mathias of Mathias Law as an independent adviser
who understood
Blue Chip. He also told her that Blue Chip was very safe, “the
safest I could get”. Mr
Jones referred to the financial strength of
Blue Chip, the fact there was an ex deputy prime minister and former cabinet
minister
on the Board, and that the company was listed on both the New Zealand
and Australian Stock Exchanges.
[390] Ms Janes said that she would not invest in Blue Chip if there was any
chance
of losing her home. Mr Jones replied: “Nothing is 100% safe, but in
saying that you may as well say Blue Chip is.”
[391] Ms Janes agreed to buy an apartment in the Barclay and enter into a joint
venture agreement with Blue Sky Holdings Limited. She also completed
the necessary documentation to borrow her contribution
to the joint venture,
which at the time was $181,000. The financier, Executive Mortgages
Limited, also refinanced the existing
$214,000 owing by Ms Janes on her home.
Therefore, the remarkable situation occurred that a financier was prepared
to advance
over $395,000 to Ms Janes despite her limited income of
$25,000.
[392] Ms Janes said that Mr Jones explained the investment on the following
basis:
• she would be a partner with Blue Chip;
• the apartment would take approximately two years to
build;
• Blue Chip would use some of the equity money to pay for the deposit
on the apartment;
• after two years Blue Chip would take the balance of the equity that
she had agreed to give them;
• in return Blue Chip would pay her a fortnightly
procurement fee of just under $550; and
• Blue Chip would pay her enough to cover the borrowing.
Mr Jones told her that Blue Chip would sell the apartment within four years and pay her back “plus a few grand”. Ms Janes queried what would happen if the apartment did not sell within the four years. Mr Jones said that had never happened in the seven years he had been with Blue Chip, but if it did happen Blue Chip would simply roll over the agreement for another two years and nothing would change. She said she persisted in asking what would happen, and he said that after eight years she would have an apartment she could sell for herself and Blue Chip would pull out of the deal. He told her not to think about that as the apartment would be sold in the same way that all the others had been.
[393] The representations Ms Janes relies on are:
[i] That she would receive a fortnightly procurement fee.
The representation is essentially a contractual term of the
documents completed between Ms Janes and Blue Chip.
[ii] That there were no hidden costs.
Ms Janes did not give evidence that she was told there were no hidden costs.
Mr Jones did tell her Blue Chip would pay for
the associated costs
of refinancing, which it did (albeit using Ms Janes’ contributions for
the joint venture).
[iii] That Blue Chip would take care of all of the issues
relating to the management of the property.
Like with [i] this was a contractual term.
[iv] That the Blue Chip Group would buy back the property after a four
year period.
The representation arises from Ms Janes pressing Mr Jones about the
arrangement. He told her that if the apartment did
not sell within the four
years Blue Chip would roll over the agreement for another two years
and nothing would change.
She would continue to receive the procurement fee
until the apartment sold and she received her original sum back. This was a
representation on behalf of Blue Chip about Blue Chip’s future intention.
It was not within the scope of authority Greenstone
Barclay had given the sales
agents to sell the apartments.
[v] That she was protected from risk.
Mr Jones told her a lawyer would create a family trust so that she could never lose her home on any investment that used her house as security, which is a
slightly different issue. Mr Jones said “nothing was 100 percent safe
but you may as well say Blue Chip is”, which was
a puff. That is not a
representation that she was protected from risk.
[vi] That she did not need to consult a lawyer.
The representation alleged is not supported by the evidence. Ms
Janes’ evidence was that Mr Jones had said she
could seek legal
advice from her own lawyer if she wanted to, but he discouraged her from doing
that. He did suggest she see
Mr Mathias which she did, but not until after she
had signed the various agreements.
[vii] That the Blue Chip Group would cause to put in place all
finance.
Ms Janes did not give evidence about this specific representation, but she
did say that the effect was that Blue Chip arranged finance
on her behalf.
This was a representation made on behalf of Blue Chip, and not within the scope
of any authority granted by Greenstone
Barclay.
[viii] That Blue Chip Group would indemnify her against any cash shortfall
arising out of the joint venture.
This was a representation made on behalf of Blue Chip. It was not within the
scope of the agency granted by Greenstone Barclay.
[ix] The Blue Chip Group would repurchase the unit at the end
of four years.
Again this was a representation on behalf of Blue Chip. It was not within
the scope of the agency granted by Greenstone Barclay.
[394] It is also pleaded that as Blue Chip Joint Ventures Limited was unable to perform its obligation, Ms Janes was entitled to cancel. But for the reasons given above, the failure of Blue Chip Joint Ventures Limited cannot release Ms Janes from her obligation under the agreement for sale and purchase to Greenstone Barclay.
[395] As is the case with a number of other investors, the Court has a
great deal of sympathy for the position Ms Janes finds herself
in. But whatever
remedies she has, they do not lie against Greenstone Barclay.
Crockett
[396] Mrs Crockett is 60 years old. She is a qualified orthopaedic nurse. She and her husband invested in a Blue Chip PIP investment product on the recommendation
of a long time family friend, Owen Payne. Mr Payne was a Blue Chip adviser
with
Blue Chip Waikato.
[397] Mrs Crockett and her husband (who is now deceased) had built up
assets by investing with their daughter and son-in-law.
Initially they bought
a small block of flats in Te Puke, next a house in Rotorua and then other
properties with a value of approximately
$500,000. There is, however, a
mortgage of $475,000 over those investment properties. Apart from the
investment properties,
Mrs Crockett and her husband owned their own property
which is in two lots. One lot is valued at $490,000 and the other
at
$585,000.
[398] Mr and Mrs Crockett agreed to buy an apartment in the
Barclay on 25 February 2007. On the same day they completed
a PIP agreement
with Blue Chip Premium Income Limited and other related
documentation.
[399] Mrs Crockett said that they discussed their involvement with Blue Chip with their lawyer, Ms Henderson of Fenton McFadden, when they went to see her for another matter. Ms Henderson told them to be cautious. She queried why they were getting involved with Blue Chip when they were doing better financially with small investments on their own. Mrs Crockett explained that they liked the idea of getting income without the hassles of dealing with a rental property. Ms Henderson considered there were issues with the Blue Chip documentation and took those up with Blue Chip. It is apparent that before the mortgage documentation was completed and the moneys drawn down to pay the deposit, Ms Henderson was actively involved on behalf of the Crocketts. Despite Ms Henderson’s reserve and caution, Mrs Crockett and her husband decided to proceed with the investment, drew
down the money and paid the deposit.
[400] The representations Mrs Crockett relies on are:
[i] That they would receive 16 percent interest per annum on the
deposit.
That was a contractual term of the agreement. In this case, they
had the interest cost associated with their borrowing.
[ii] That the Blue Chip Group would buy back the property.
Mrs Crockett said that “we were assured that [Blue Chip]
would definitely step in to purchase the property at the
same price we had
agreed to pay before we were called on to settle”. Mr Payne,
however, represented what Blue Chip
would do in relation to the
agreement. These representations were made on behalf of Blue Chip and
were not made
within the scope of the Greenstone Barclay
agency.
[iii] They would not have to settle the purchase.
That is contrary to the express terms of the agreement for sale and purchase
and is inadmissible.
[401] Mrs Crockett pleads no further grounds to support
cancellation.
Van Beek
[402] Mr Van Beek is 49 years old, currently living and working
in Western Australia. Mr Van Beek purchased one unit
in the Barclay on 29
March 2007. He completed a PIP agreement as well.
[403] Mr Van Beek has retained a property in Rotorua on a lifestyle block of approximately seven acres. He also has a 20 percent interest in a forestry block, owned in the name of ADC Forestry Limited. Before the particular investment in
issue, Mr Van Beek had a number of investments with Blue Chip. In his words
as at January 2007 “my Blue Chip investments
were generally doing
well”. He was receiving all the payments due in respect of them.
However, he was concerned that
after three years one of the apartments had still
not been completed. He asked that the contract be cancelled. He says he
went to the Blue Chip office to sign cancellation documents and retrieve
the deposit. When there, however, he says he was
met by a Ms Thompson, Linda
Rewita and Kay Swenson. He says it was put to him that he would not be released
from the previous investments
unless he entered alternative investments with
Blue Chip. He agreed to do so. He accepted in cross- examination he did
not
give any particular attention to the agreements or to read them.
He did know that by signing the agreements he was going
from having agreed to
buy an apartment for $320,000 to agreeing to buy two apartments for
almost a million dollars.
He said that Ms Rewita told him that
“it didn’t matter because I would never be expected to
actually
pay for the apartments”. Ms Rewita also assured him that
the purchase prices were based on “reliable independent
registered
valuations”. He saw letters from Vault Realty Limited giving rental
appraisals for the two apartments. He assumed
that the sale and purchase
agreements had rental guarantees similar to the other investments he had made
with Blue Chip.
[404] In cross-examination Mr Van Beek accepted that he
could not really remember what Ms Rewita had said
to him by way of
explanation about the agreements. But he accepted that he knew that
in relation to the Barclay
he was signing a sale and purchase
agreement.
[405] The representations pleaded on behalf of Mr Van Beek are:
[i] He would receive interest of 16 percent per annum on the amount of the
deposit.
There was a contractual clause binding Blue Chip to pay that amount. The pleading that the fee would be paid by Mr Van Beek from the ‘working capital’, which was paid as part of the joint venture agreement, is misconceived. The source of the 16 percent payment is not relevant. Blue Chip Premium Income Limited was obliged to pay under the terms of the PIP
agreement.
[ii] That there were no hidden costs.
No evidence was led to support this representation. The contributions
required under the joint venture were set out.
[iii] That the Blue Chip Group would buy back the
property.
Mr Van Beek said he never expected to actually pay for the apartments. To
that extent the representation is contrary
to the express terms
of the agreement for sale and purchase. It is inadmissible.
It seems that Mr Van Beek assumed that what he was signing was similar to the
other agreements that he had signed, and the arrangements
were the same. To
that extent he was acting under a misapprehension. But that does not
equate to a representation, let
alone a representation on behalf of Greenstone
Barclay, or one that binds Greenstone Barclay.
[iv] That he did not need to consult his own lawyer or accountants. They
would not understand how the Blue Chip concept worked.
Mr Van Beek did not give direct evidence to support this representation. Mr
Van Beek had a lawyer who acted for him from time to
time. He could have
referred the matter to him.
[406] Mr Van Beek does not plead any other basis for
cancellation.
Johnson and Five J Holdings Limited
[407] Mrs Johnson gave evidence for herself and on behalf of her husband. They have purchased one apartment in the Barclay by agreement for sale and purchase dated 25 October 2006.
[408] They have a combined annual income of approximately $75,000 per
annum. Before they became involved with Blue Chip they had
no borrowing and
owned a family home worth between $525,000 and $600,000. They had previously
bought a two bedroom rental property,
which they sold for no capital gain, but
later they had fortuitously made a $50,000 profit on the sale of a
section.
[409] Recently Mr Johnson became self employed. As a result their
combined income may be slightly less than Mrs Johnson
estimated.
[410] Following a telemarketing approach Mr and Mrs Johnson were visited by
Mr Frank Vusoniwailala, a Blue Chip agent. He
emphasised the financial
strength of Blue Chip. He referred to Macquarie Bank’s involvement,
said that Blue Chip was
listed on the New Zealand Stock Exchange and was looking
to list on the Australian Stock Exchange. The agent also told them that
Jock
Irvine, John Luxton and Wyatt Creech were all on the Board of Blue Chip. That
was a major selling point to the Johnsons.
[411] Initially the Johnsons purchased a mainstream investment. Before
doing so they were introduced to Mr Turketo of Foster Matenga
and Milroy. Ms
Johnson was aware Mr Gordon Matenga was the coroner for Hamilton. After
checking with the Law Society they accepted
Mr Turketo would be an
appropriate person to seek advice from about the proposed investment. They
were aware that Mr Bryers
had been a bankrupt or nearly bankrupt in the
past, but after discussing the matter generally with Mr Turketo, they
agreed to go ahead with the mainstream investment. At the same time the company
Five J Holdings Limited was formed. Initially, the
mainstream investment
performed well. In September 2006 the Johnsons approached the agent and
told him they would like
to do another mainstream investment. It was at
that stage that the agent recommended a joint venture product. Ms
Johnson’s
evidence was that:
As far as we were concerned Blue Chip was bullet proof. Blue Chip staff had
helped us every step of the way. I remember thinking
their office staff were
young, enthusiastic and knowledgeable.
By this stage neither Mrs Johnson nor her husband were concerned about the security of the investment. They were confident that Blue Chip was a sound
company.
[412] The Johnsons were required to refinance to proceed with the
joint venture agreement. The agent told them that
they would need to raise a
$168,300 deposit against the equity in their home, and pay that over
to Blue Chip at the
time of entering the joint venture. In return Blue
Chip would then pay them the fortnightly procurement fee of $401.92, and
also the interest on the borrowing of $168,300. When the apartment was
complete, which was scheduled for November
2008, the Johnsons were to pay
Blue Chip a further $110,200. Blue Chip would continue to pay procurement fees
and all the mortgage
repayments through to October 2010, at which time Blue Chip
would then buy back the apartment.
[413] The Johnsons agreed to go ahead on 17 October 2006. On or
about 25 October 2006 they met with Mr Turketo and asked
him some more
questions about the Blue Chip joint venture agreement. They then signed the
Blue Chip joint venture investment documents.
Mr Turketo was asked what would
happen if Blue Chip goes off the radar. His response was that they
would have to fund
the mortgage until settlement and pay the $110,200 in
about November 2008. The unit would then be theirs to own and manage and
they
would get the rent. In reliance on the advice they proceeded with the
agreement.
[414] Ms Johnson said she did not appreciate that she was signing an
agreement for sale and purchase, and always understood that
she was just
entering a joint venture agreement. But given the transactions they had
undertaken in the past, the documents
they signed, and the advice they
received, they should have appreciated that they were entering a binding
agreement for sale and
purchase.
[415] The representations the Johnsons rely on are:
[i] That they would receive a fortnightly procurement fee.
The joint venture contract provided for a fortnightly procurement
fee.
[ii] That there were no hidden costs.
Ms Johnson did not give any evidence to support this representation.
The pleading seems to be based on the additional
money over and above
the deposit contributed by the joint venture investors. But the
requirement to contribute working
capital was disclosed in a letter dated 17
October 2006.
[iii] That Blue Chip would take care of all of the issues
relating to the management of the property.
The Johnsons entered a property management agreement with
Bribanc.
[iv] The Blue Chip Group would buy back the property after a four year
period if the apartment capital growth increased by a minimum
of 30
percent.
In context, this representation seems to relate to the mainstream agreement, not the joint venture in relation to the Barclay. In any event it was expressed
to be conditional.
[v] That they did not need to consult their own lawyer or accountants as
they would not understand how the Blue Chip concept worked.
Apart from the issue as to its legal effect, it is not clear
whether this representation was made. In any event, on
Ms Johnson’s
evidence she and her husband took advice from Mr Turketo. They relied on
Mr Turketo’s advice.
If the advice was inadequate the Johnsons’
remedies lie elsewhere.
[416] Given the legal advice, it would be fair and reasonable to apply cl
27 to the representations in this case.
[417] The Johnsons also plead that Blue Chip New Zealand Limited was no longer able to perform its obligations under the joint venture agreement. The agreement was actually with Blue Chip Joint Ventures Limited, which is also in liquidation. But for the reasons given above, the failure of that company cannot discharge or release the Johnsons from their obligations to Greenstone Barclay.
Bogardus
[418] Mr Bogardus is a 60 year old physiotherapist. He and his
wife live in Kaikohe. They also have a property in the
Bay of Islands, which
has been damaged by a slip. On 18 October 2006 Mr and Mrs Bogardus agreed to
buy two units in the Barclay.
They also entered a joint venture agreement with
Blue Chip Joint Ventures Limited on 11 December 2006. At the time of
entering
the agreements, their combined income was $41,000 per year. They
had, in total, assets of approximately 1.83 million dollars
and liabilities of
$490,000. The property at the Bay of Islands was valued at $700,000, but with
the land slip its value has decreased.
A purchaser had recently declined to
proceed with a contract at $540,000 as a result of the slip. Despite that, their
other property
had increased in value to $750,000. Mr and Mrs Bogardus also
have an interest in a forestry partnership worth about $50,000,
and
other investments of about $20,000.
[419] The joint venture agreement was not the first investment
that Mr and Mrs Bogardus had made through Blue Chip.
They had made an
earlier successful investment, which had returned them approximately $82,000
over a three and a half year period
by leveraging off the equity in their home.
In Mr Bogardus’ words they got “exactly what we had been
promised”.
[420] Before the first investment was due to settle, an agent, Mr Stephens,
spoke to them and encouraged them to enter the joint
venture agreements. Mr
Bogardus said that Mr Stephens told them that they would need to borrow
approximately $285,000, secured
against their home, and that the money
would be used to make a deposit regarding two apartments. Blue Chip
would
then pay them a taxable income of $1250 fortnightly and pay the
costs of servicing the mortgage. Mr Bogardus said Mr Stephens
told them that at
the end of four years Blue Chip would buy the apartments, repay the mortgage
on the home, and Blue Chip
would take the capital gain. Mr Bogardus
said that Mr Stephens told them that there would be no risk in the
investment as the deposits would remain in a solicitors trust account for the
entire four years. He emphasised that Blue Chip would
carry all the
risk.
[421] That meeting took place in September 2006. The first investment settled on
about 11 October 2006. Following execution of the agreements, their
mortgage application was subsequently approved by the
BNZ on 12 December 2006
and the deposits paid.
[422] Mr Bogardus said he did not read the agreements for sale
and purchase before signing. Mr and Mrs Bogardus also
signed a disclosure
acknowledgement, but said they did not read that either. The disclosure
acknowledgement noted receipt of the
copy of the documents contained in the sale
and purchase pack, including the agreement for sale and purchase.
[423] The representations relied on by Mr and Mrs Bogardus are:
[i] That they would receive a fortnightly procurement fee.
The fortnightly procurement fee was a contractual term expressly
provided for in the joint venture agreement.
[ii] That there were no hidden costs.
Mr Bogardus did not give any evidence to support this representation. If the
reference to hidden costs is a reference to the working
capital requirement,
there was a letter from Blue Chip to Mr and Mrs Bogardus. That letter set out
the deposit required and
the separate working capital facility under the
head of a pro forma statement of account. The pro forma statement
of
account was sent out on 13 October 2006, prior to execution of the agreement on
18 October 2006.
[iii] That the Blue Chip would take care of all the issues relating to the
management of the property.
Mr Bogardus did not give evidence that this representation was
made. Further, Bribanc contracted to provide management services.
[iv] That Blue Chip Group would buy back the property after a four year period
Mr Bogardus’ evidence on this relates to the initial discussions he had
with Mr Stephens in September 2006. At that time, Mr
Stephens told him that at
the end of the four years Blue Chip would buy the apartments, repay
the mortgage and take
the capital gain. To the extent that this was an
actionable representation about what Blue Chip would do, it related specifically
to Blue Chip and the joint venture agreement. It did not relate to the
agreement for sale and purchase, or Mr Bogardus’ obligations
under the
agreement for sale and purchase. It was not a representation within the scope
of any authority from Greenstone Barclay.
[424] In this case there is also an issue as to reliance. My
assessment of Mr Bogardus’ evidence is that the decision
to proceed with
this transaction was because of the successful outcome from his first investment
with Blue Chip. Mr Bogardus was
not particularly concerned with the
documentation or what was to occur. He was prepared to take the risk
associated with
the joint venture because the previous investment had been
successful.
[425] It is also pleaded that Mr and Mrs Bogardus are entitled
to cancel because Blue Chip Joint Ventures Limited is
in liquidation. For the
reasons given above that claim cannot succeed.
Crawford-Green
[426] Mr Crawford-Green is 66 years old. He is retired. During his working
life
he ran his own company in Seattle for a period. The company had an
annual turnover of US20 million dollars and employed
85 people. He has also
worked in a variety of positions, including as a stock broker. In 2000 he
retired to Nelson. His assets were
essentially held in trust, although
controlled by him. The value of assets he held appeared to be approximately
$833,000. Like a
number of other investors in Blue Chip he was looking to
increase his income.
[427] Mr Crawford-Green was introduced to Blue Chip by Mr Ross Baldwin. Mr Baldwin was a family friend. He provided Mr Crawford-Green with some background to Blue Chip, including the 2004 annual report. This impressed Mr
Crawford-Green. Mr Baldwin also discussed the mainstream and joint
venture investment products and invited Mr Crawford-Green
to attend a
presentation by Mr Laws, the new Blue Chip New Zealand sales manager. Mr
Crawford-Green attended the seminar presented
by Mr Laws. He said a
deciding factor was when an older gentleman and his wife stood up at the
end of the seminar
and spoke in an impromptu fashion about how they
had become Blue Chip clients in Tauranga in 2001. They said that
they
had just sold their first investment property for a profit, and had bought two
more joint venture properties.
[428] Mr Crawford-Green also discussed matters with two other
Blue Chip representatives, Mr Stevenson, a representative
from Southland and
the New Zealand South Island sales manager, and Mr Corcoran, a solicitor. Mr
Crawford-Green was enthusiastic
about the concept of using the equity in his
properties to provide him with additional income. During June 2006, while he
was
overseas, he received the relevant sale and purchase documents and joint
venture agreements. He signed the agreements for sale
and purchase at that
time, although the joint venture agreements themselves were not put in
place and effected until September
2006. This was because of code
compliance issues he had relating to his new home. Prior to giving effect to
the agreements, Mr
Crawford-Green received a comprehensive letter from his
solicitors, Knapps in Nelson, analysing the transactions that Mr Crawford-Green
had agreed to enter.
[429] Mr Crawford-Green concluded an email exchange with his
solicitor on 13 September 2006 with the prescient comment:
I guess I have to hope Bluechip does not go bottoms up.
It is apparent Mr Crawford-Green was aware of the risks, but both
he and his solicitor took some comfort that he
was party to an
agreement to purchase a real apartment in Auckland, as opposed to
investing in a debenture from
a finance company.
[430] The representations alleged on behalf of Mr Crawford-Green
are:
[i] That he would receive a fortnightly procurement fee.
The representation is essentially of a contractual term.
[ii] That there were no hidden costs
Mr Crawford-Green did not give evidence to support this
representation. Further, Mr Crawford-Green was well aware of the
costs. He
understood the documentation.
[iii] That Blue Chip would take care of all of the issues
relating to the management of the property.
To the extent this is relevant, Mr Crawford-Green made an agreement
with
Bribanc to manage the property.
[iv] That Blue Chip Group would buy back the property after a four year
period.
Mr Crawford-Green did not give evidence to support this
representation.
[v] That the Blue Chip Group was a substantial profitable company and had
substantial assets.
Mr Crawford-Green assumed that the Blue Chip Group was a substantial and
profitable company with substantial assets from the
information that he
himself gleaned. His evidence does not support the allegation that this was a
specific representation made
to him by or on behalf of Blue Chip. It
is apparent that Mr Crawford-Green was impressed by the presentation at the
seminar,
and the apparent professionalism of the company. That was
underlined by, in his words, “the comprehensive and
stylish set
of annual accounts” and the extensive research he carried out himself on
the internet.
[431] There are no actionable representations made in relation to Mr Crawford- Green. In any event, any representations made were made on behalf of Blue Chip, and were not within the scope of any agency granted by Greenstone Barclay to Mr Baldwin. Further, he was in receipt of legal advice. He had experience in business.
It would not be unfair or unreasonable for cl 27 to apply to his situation,
if relevant.
[432] Mr Crawford-Green also relied on the failure of Blue Chip
Joint Ventures Limited to support cancellation of
the agreement for
sale and purchase. For the reasons set out above, the failure of Blue
Chip Joint Ventures Limited
does not provide a basis for
cancellation.
Stewart
[433] Mr Stewart is 60 years old and living in Gisborne. He works
part-time presently as a caregiver with CCS. Mr Stewart
has some business
experience. He ran his own business for six years between 1993 and
1999, and prior to that had
worked in insurance and as an underwriter and
sales person. At the time of making the investments in Blue Chip he
disclosed
that he had an unencumbered property worth $140,000, in
Gisborne and investments of $190,000. In his evidence, Mr
Stewart said
that the correct figure was $330,000. In total Mr Stewart entered three PIP
agreements and signed three agreements
for sale and purchase, the first of which
concerned an apartment in the Barclay dated 25 January 2007.
[434] Mr Stewart sought investment advice from Vanessa Hayes of
Life Broker Services in Gisborne. Vanessa Hayes
recommended a Blue
Chip investment (she had made Blue Chip investments herself), and
Mr Stewart then attended
a presentation by Messrs Lynch and McIntosh.
Mr Lynch was the licensee of Blue Chip in Remuera, while Mr McIntosh was the
operations manager.
[435] Mr Stewart said that he was looking for a two year
investment because he was looking to purchase a property in
either Napier or
Tauranga towards the end of 2008.
[436] Mr Stewart said that he was told by the Blue Chip representatives during the presentation that he would not have to worry at all about buying an apartment. Blue Chip would either purchase the property or find a purchaser. On that basis he went ahead.
[437] Ms Hayes was called to give evidence. She agreed that her
understanding of the PIP agreement came from Mr Lynch’s
explanation. She said that in the presentation to Mr Stewart, Mr Lynch
made it clear that the purpose of the PIP
agreements was to provide Blue
Chip with a stock of apartments that it could sell at a later stage to
mainstream investors. She
said that Mr Lynch said there was a risk Blue Chip
would be unable to find a mainstream investor before Mr Stewart had to settle
under the agreement. However, Mr Lynch told them they would make
particular efforts to find a purchaser and the risk was
low. Ms Hayes
confirmed in cross-examination that she was pretty confident that she expected
Blue Chip would take over the obligation
under the PIP agreement, and that she
was aware from Mr Stewart’s financial circumstances that he would not be
able to arrange
the finance to purchase them himself.
[438] Mr Stewart went ahead with the agreement to purchase the
unit in the Barclay. As his other investment
moneys matured, he
purchased two more apartments in February 2007 and March 2007.
[439] In his evidence, Mr Stewart sought to downplay his knowledge
of the obligations he assumed in entering the
agreements for sale and
purchase and PIP agreements.
[440] Having heard Ms Hayes and Mr Stewart give evidence I accept that
Ms
Hayes, who also invested money in Blue Chip and has lost money, was more
reliable
on this aspect. I am satisfied that Mr Stewart knew and understood the
nature of the obligations he was entering into when
he signed the
agreements for sale and purchase. He was interested in, and pursued the
interest rates offered by Blue Chip
on the investment products. However, he
was aware that he was signing an agreement for sale and purchase, which
committed
him to purchase the property, if Blue Chip did not exercise the option
under the PIP agreement. He was prepared to run that risk
because he had
been told it was a low risk. Before completing the agreement to purchase
the Barclay apartment he received
a final analysis sheet which set out his
expected return and recorded:
You should not proceed with an investment unless you are completely comfortable with the risks and costs involved.
Those risks had been explained by Mr Lynch.
[441] Mr Stewart knew he had signed agreements to buy the apartments. He
signed
a letter directed to Mr Lynch asking him to forward the three
sale and purchase agreements to Ms Hayes so she could
hold them (instead of a
solicitor). Mr Lynch, Mr McIntosh and Ms Hayes all believed that Blue Chip
would exercise the option and
that there was a very low risk that Mr Stewart
would have to settle. But they all nevertheless recognised the risk. Their
belief
is confirmed by Mr McIntosh’s email to Ms Hayes dated 10 January
2007 in which he said:
It doesn’t really matter what property he is given as he will most likely
never have to settle on it.
(emphasis added)
[442] As to the specific representations alleged:
[i] He could invest his cash assets in the Blue Chip Group for a period of
two years.
On the evidence I find that Mr Stewart was told and understood
that his investment with Blue Chip was an investment using
the PIP product, and
that he was signing and committing himself to purchase an apartment. There was
an expectation that Blue
Chip would exercise its option and he would
be repaid within a period of two years. But there was a risk that
may not happen. Mr Stewart was aware of that risk.
[ii] At the conclusion of the two year period Blue Chip would purchase the
property, the subject of the investment, or find
a purchaser to
complete the property, and that he would not be obliged to complete the
purchase.
This representation was not made in the terms alleged. Mr Stewart was never told he would not be obliged to complete the purchase. He was told there was a risk he may be required to settle, but that was a low risk.
[iii] He would receive a return of 12 percent per annum on his
investment.
The representation was true. Blue Chip contractually committed to pay the
option fee and did so until it failed.
[iv] The investment was like a term deposit.
Mr Stewart did not give evidence to support this representation.
[v] He was not to worry, Blue Chip will take over the
purchase.
There was an expectation Blue Chip would take over the purchase, but there
remained the risk that Mr Stewart would be required to
settle.
[vi] That Blue Chip would meet all of the costs associated with
the proposed purchase.
This representation was not supported by Mr Stewart’s
evidence.
[vii] Blue Chip was a substantial company with the financial ability to
take over the purchase of the property at the end of two years.
I accept that a representation to this effect was made, but it was made in
the context that there remained a risk, albeit a low one,
that Blue Chip would
not exercise the option to purchase.
[443] To the extent that the representations are made out, they are
representations
as to Blue Chip’s obligations under the PIP agreement. They are not
representations within the scope of any authority the agents
had from Greenstone
Barclay.
[444] Mr Stewart does not plead any further basis for cancellation. His
claims must
be dismissed.
Summary
[445] In summary the principal findings are:
Agency
Fair Trading Act
of
the agency, the Fair Trading Act causes of action cannot succeed:
[162].
Other grounds for cancellation
Securities Act
• The mainstream and PIP agreements are not debt securities for the purposes
of the Securities Act: [249] and [285].
• Further, the exemption applies: [250] – [253]; [286] –
[291].
[269] – [273].
Individual plaintiffs’ evidence
Result
[446] The plaintiffs’ claims for declarations they have
validly cancelled the agreements for sale and purchase
and related relief
must be dismissed.
Costs
[447] Costs are reserved.
Venning J
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URL: http://www.nzlii.org/nz/cases/NZHC/2009/2376.html