Transport: Ports of Auckland v. Southpac

Port companies are permitted to shelter under the statutory liability limits contained in transport legislation even when cargo is damaged by port employees while under the control of stevedore companies sub-contracted to do the work, the Supreme Court has ruled. This decision saves port companies substantial increases in their liability insurance premiums.

The issue came to a head after a collision between a Ports of Auckland fork hoist and a Kenworth truck being unloaded from a vessel. The fork hoist packed a punch. The Kenworth needed repairs totalling $60,200.

Southpac Trucks, who imported the Kenworth from Australia, sued Ports of Auckland for negligence.

Goods transportation is governed by the Carriage of Goods Act 1979. The standard rule is that carriers’ liability is limited to $1500 per unit of goods carried, regardless of fault. Two categories of carrier enjoy the benefit of this rule: The “contracting carrier” who entered into the contract of carriage, and the “actual carrier” who had possession of the goods at the time of the damage. This recognises that goods pass through a chain of transport companies and couriers before reaching their end destination.

Knowing the rule, all parties can take insurance to the amount required for cover of their respective risks.

The “contracting carrier” in respect of the Kenworth truck was CP Ships (UK) Ltd, who carried the vehicle across the Tasman. CP Ships engaged Ports of Auckland to unload the vessel, which would make the Port the “actual carrier”. But the Port subcontracted the task to Southern Cross Stevedores Ltd who in turn further subcontracted the work to a company called Wallace Investments Ltd.

While being driven by a Wallace employee to the storage area dockside, the Kenworth was hit by a fork hoist driven by a Ports of Auckland employee. It was agreed, the fork hoist driver was negligent in failing to keep a proper lookout.

The owner of the Kenworth sued Ports of Auckland, arguing it couldn’t claim the benefit of limited liability under the standard rule because it was not acting as a carrier at the time of the accident, Wallace Investments was the “carrier”.

The Supreme Court ruled that Ports of Auckland was a “carrier” under the Act. You do not have to be “carrying” the goods to be a “carrier”. Ports of Auckland became a “carrier” when it procured Wallace Investments (through Southern Cross Stevedores) to unload the truck.

While it did not have physical possession of the truck at the time of the accident, Ports of Auckland could still claim to be a “carrier” with Wallace Investments as the “actual carrier”. This meant Ports of Auckland potential liability was limited to $1500.

Ports of Auckland v. Southpac Trucks – Supreme Court (30.10.09)

12.09.003

Tax Avoidance: Westpac v. CIR

Nine structured finance transactions involving funds totalling $4.36 billion engineered by Westpac Bank have been struck down by the High Court as tax avoidance. As a result, Inland Revenue has clawed back tax due and use of money interest totalling $961 million.

Westpac has suffered a similar fate to a tax case lost by the Bank of New Zealand last July. But learning from the BNZ case, Westpac concentrated on two narrow issues: the deductibility of a guarantee procurement fee (GPF) paid by Westpac as part of the structured finance transactions, and; whether an interest deduction could be legitimately claimed for the cost of funds borrowed to finance the transactions.

The common template used for these transactions saw a loan structured as an equity investment in offshore special purpose vehicles. The equity investments took the form of redeemable preference shares, structured so that the dividend paid was deductible for the issuer but was received tax free by Westpac as the shareholder.

This had the economic effect of having Westpac offset substantial expenditure against its New Zealand sourced income, with the counterparty who issued the preference shares able to borrow at significantly below market rates.

As part of the deal, Westpac paid to the counterparty a GPF fee to guarantee repayment of the preference shares on redemption. Tax benefits claimed for the GPF fee alone amounted to $176 million, or nearly 30% of the tax benefits claimed by Westpac.

The High Court disallowed a deduction for the GPF fees, ruling that they had no commercial justification. There was expert evidence that the owners of special purpose vehicles used for such structured transactions routinely gave such a guarantee as a matter of course, with no fee payable.

Westpac’s claimed cost of funds led to the remaining 70% of the tax benefits claimed.

Westpac gave evidence that funding for the transactions came out of its general pool of funds managed by its treasury division and claimed that the Bank’s general funding costs should be an allowable deduction in respect of the structured finance transactions.

In disallowing a deduction for the cost of funds, the High Court ruled that while Westpac’s general pool was the immediate source of funds, there was distinct capital raising on the London capital markets in the months prior to a structured finance transaction. Each transaction was of such a size and duration that specific funds had to be raised and allocated in advance. At its peak, Westpac had 18% of its assets committed to the structured finance transactions.

The High Court ruled that the transactions were void for tax purposes as tax avoidance. Justice Harrison said parliament would not have contemplated that the tax deductibility provisions would be used to provide funding to a counterparty at a price considerably below market rates by returning a share of the domestic taxation benefit derived from claiming a deduction for a non-existent expense.

The deductions for Westpac’s cost of funds and GPF were disallowed. Justice Harrison added that Westpac might count itself fortunate that Inland Revenue did not disallow Westpac’s claim that the income on the redeemable preference shares was exempt income.

Westpac v. CIR – High Court (7.10.09)

12.09.001