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

Commerce Act: Astrazeneca v. Commerce Commission

Pharmaceutical companies are given special exemptions from the general provisions of anti-trust law when dealing with Pharmac. The Commerce Commission cannot use its investigative powers to go on general “fishing expeditions” in relation to negotiations over funding of drugs.

The Commerce Act 1986 prohibits restrictive trade practices which may limit competition. The Commerce Commission has power to investigate and prosecute.

Pharmac is in an unusual position. As the sole purchaser of drugs for the health service it is a monopsonist: a monopoly buyer. Legislation establishing Pharmac exempts it from Commerce Commission oversight when negotiating contracts for the bulk supply of medicines.

But Pharmac found the Commission to be a useful ally when negotiations with Astrazeneca over supply of beta-blocker drugs fell apart.

In 2007, with Astrazeneca product Betaloc IV about to come off-patent, the pharmaceutical company sought to commit Pharmac to a long-term contract by tieing further supply to the continued supply of another Astrazeenca product, Betaloc CR.

Pharmac went on the offensive with a press campaign accusing Astrazeneca of acting in an anti-competitive manner by attempting to tie supply of one product to another and holding patients to ransom as a result. If Pharmac agreed, Astrazeneca would retain a protected market for Betaloc IV even when generic competitors arrived and patients would be forced to pay a part charge for use of the Astrazeneca product.

The Commerce Commission swung into action, commencing an investigation and issuing a section 98 notice demanding Astrazeneca provide specific information. It alleged the company was acting in an anti-competitive manner in its negotiations.

The Supreme Court ruled that the specific wording of the legislation establishing Pharmac exempted not only Pharmac from the anti-competitive provisions of the Commerce Act, but also exempted any pharmaceutical companies in their negotiations with Pharmac.

It further ruled that the Commission can only issue a s.98 notice when it has some objective evidence of a breach of the Act. It cannot act on a suspicion or whim and then justify its actions retrospectively on the basis of anything found following an investigation.

The section 98 notice served on Astrazeneca was invalid. The court was told that by the time the case got to the Supreme Court, Astrazeneca had responded to the Commission’s enquiries. The Commission said it had closed its investigation, finding no breach of the Commerce Act.

Pharmac’s published policies make it clear that cross deals or bundled arrangements might be approved.

Astrazeneca v. Commerce Commission – Supreme Court (26.8.09)

12.09.002

Employment: Finau v. Atlas Specialty

Employees cannot be forced to cover for striking colleagues, they must agree to taking on the work.

The Court of Appeal ruled that Atlas Specialty incorrectly suspended two employees who refused to operate machinery when the regular operators were on strike. The two were entitled to arrears of wages for an unlawful suspension.

The dispute arose during wage negotiations in 2005. Staff who normally operated a coil slitter were on strike. Atlas asked two employees who were not on strike to handle the machine. They were competent to do the work, and regularly operated the coil slitter when the regular operators were on leave or away sick. They refused to do their colleagues work during the strike, and were immediately suspended.

The legal issue centred on the manner in which an employer could use strike breakers.

The employer argued that any employee who normally undertook the work in question could be required to do the strikers’ work.

The Court of Appeal said the Employment Relations Act 2000 prohibits the use of new employees, or contractors, to break a strike, but does allow existing employees to do the work – provided they agree to do so.

Employers argued this meant strikes could never be broken: employees would always refuse to cover for striking colleagues. The Court said there are other options: employees refusing to provide cover might carry out work being done by other existing employees who in turn might cover for the striking workers.

Finau v. Atlas Specialty – Court of Appeal (7.8.09)

10.09.003

Maori: Clarke v. Takamore

Cross-cultural differences in “body snatching cases” pit rights of individual freedom against the collective decisions of tribal custom. The High Court ruled that individual freedom takes priority where before death the deceased has made a clear choice about funeral arrangements.

Arrangements following the 2007 death in Christchurch of Jim Takamore gained national exposure when his body was taken by close relatives back to his home marae in the Bay of Plenty against the wishes of his grieving widow who planned to bury her late husband in Christchurch.

The court was told that Mr Takamore had chosen to live outside the tribal life and customs of Tuhoe, his tribe. He had lived in Christchurch for over twenty years and described himself as a “South Island Maori”, meaning he no longer identified with the life and traditions of his North Island ancestry.

Justice Fogarty ruled that under common law Mr Takamore was entitled to have his views respected on death, especially where he had chosen his widow to carry out these wishes as executor. The collective will of Tuhoe could not be imposed on his executor.

Evidence was given that Tuhoe tikanga for dealing with disputes over where a burial should take place could be settled by consensus or compromise, but failing that strong-arm tactics could be used relying on cunning, courage and determination.

The court case followed heated discussions following Mr Takamore’s death between his immediate family and relatives who had travelled down from the Bay of Plenty with the intention of returning his body to the home marae. Under Tuhoe custom, an important spiritual link exists between your place of birth and burial. The body was taken north, over the widow’s protestations.

Mr Takamore’s widow immediately got a court injunction to prevent his burial in the Bay of Plenty, but the burial went ahead in any event.

The Court ruled that members of Tuhoe had taken Mr Takamore’s body north without legal authority. His widow was entitled to have the body returned.

One complication however is that Mr Takamore was buried on private land at his home marae. Consent of his Tuhoe relatives was required to disinter his body. The case was adjourned to give all parties a chance to reflect on the court ruling. There was evidence that some Tuhoe were distressed that tribal members had taken Mr Takamore’s body north against the wishes of his widow.

Clarke v. Takamore – High Court (29.07.09)

10.09.001

Employment: McAlister v. Air NZ

Discrimination on grounds of age can be applied to airline pilots, but employers must first make an effort to adjust scheduling to minimise the problem.

Issues of age discrimination reached the Supreme Court when Air New Zealand faced United States restrictions on pilots aged 60 or older flying into its airspace. These pilots could fly into the US as first officer, but not as pilot-in-command.

In response, Air NZ policy was to demote senior long-haul pilots to first officer, enabling them to continue flying the US route.

In a test case, Mr McAlister argued this policy was age discrimination in breach of the Employment Relations Act 2000. Human rights legislation does permit age discrimination, provided age is a genuine occupational qualification.

In this case, US-imposed rules did make age a genuine occupational qualification for long-haul pilots.

But first, Air NZ had to establish that it could not adjust its staff scheduling to accommodate affected pilots without first demoting them. The case was referred back to the Employment Court to deal with this issue.

McAlister v. Air NZ – Supreme Court (20.07.09)

10.09.002

Trademarks: Intellectual Reserve v. Sintes

It looked like an unequal match: a sixty year old sole litigant arguing his own case in the Court of Appeal against the moneyed might of the Mormon Church.  But the Mormon Church failed in its attempt to block trademark registration for a logo phrased as “familysearch” designed to complement the litigant’s domain name: familysearch.co.nz.

The Church already holds trademark registration for the words “family search” under headings tied to geneaology. While approved, the logo’s registration was tagged to make it clear that others could still use the phrase “family search” and not be in breach of the trademark.

The Utah based church has an extensive archive with biographical details for over 400 million people.  The archive was established to assist in tracing the ancestors of current adherents.  The Mormon Church allows ancestors to be posthumously received into the faith.  This archive is commercially valuable.  Non-Mormons use the database to search their own family trees.

In New Zealand, a Mr Robert Sintes set up a web-based operation called New Zealand Family Tracing Service in 2000 to help individuals trace relatives spread around the world.

Initially the Church challenged use of his domain name, familysearch.co.nz.  The court was told this action had been discontinued.  It also challenged trademark registration arguing that the proposed logo was not “distinctive” as required by trademark legislation and that it would cause confusion.

Trademarks are not permitted where they are not distinctive to the owner’s goods or services and instead seek to appropriate some common word in the English language and stop others from using it in business; such as the names of towns or regions, or laudatory words like better or best.

The court expressed surprise that the Mormon Church had already obtained trademark rights in the words: family search.  These words are not distinctive to the Church’s religious interest in geneaology and are precisely the words any person would use when searching their family tree.

There was evidence that the words “family” and “search” are in the top two per cent of the most commonly used words in the English language.

The fact that Mr Sintes did not use these words alone, but instead surrounded the words with embellishments in the form of his logo meant that the logo in its entirety was distinctive.  Registration was permitted with the caveat that this did not stop others using the same words.

Intellectual Reserve v. Sintes – Court of Appeal (16.7.09)

08.09.004

Tax avoidance: BNZ v. CIR

The High Court has disallowed as tax avoidance a series of BNZ structured finance transactions described as tax machines having no commercial purpose or rationale.

Losses to the New Zealand taxpayer were estimated at $335 million, with benefits of $238 million accruing to National Australia Bank, owner of the Bank of New Zealand.

The transactions relied on international tax arbitrage, exploiting the tax asymmetries under which different legs of a structured finance deal could be viewed differently in different countries. For BNZ in New Zealand, the beauty of the scheme was that its costs would be deductible while income would be tax exempt. All this unravelled when the High Court ruled that the deals constituted tax avoidance and removed all the tax advantages gained. This included disallowing the funding costs incurred by the BNZ. The BNZ hotly argued that funding costs were part of the Bank’s ordinary fundraising activities unrelated to the disputed transactions and should still be allowed as a tax expense.

The transactions in question spanned eight tax years between 1998 and 2005. Colloquially called “repo” deals, they typically involve an equity investment in an overseas counterparty on the basis that the counterparty would buy back the shares. Financially, this amounts to secured collaterised borrowing. Economically, it is a loan secured by a pledge of shares. Legally, it is an offshore equity investment.

Overseas tax authorities have got wise to the tax avoidance possibilities inherent in these cross-border tax transactions. Under US tax law, they are treated as “abusive arrangements”. In the UK, the supposed equity leg of the transaction is treated and taxed as if it were debt.

The High Court was told that National Australia Bank had second thoughts in the mid-1990s about setting up these structured finance transaction through a UK subsidiary because of what was delicately described as potential tax “uncertainties”.

Instead, they were structured through the BNZ, its NZ subsidiary.

The first BNZ transaction, in 1995, was a five year deal consummated with the AIG group. Pricing on the transaction resulted in a positive tax benefit for the NZ taxpayer: BNZ gained an $18 million tax deduction; but the counterparty paid tax of $21 million – a net tax benefit of three million dollars.

For this initial transaction, BNZ obtained a binding ruling from Inland Revenue. This operates as advance advice from Inland Revenue as to how it will view a transaction should it later be included in a tax return. A strong point supporting the favourable ruling was the knowledge that the transaction would be tax positive for the NZ tax base.

BNZ then used the same template for subsequent structured finance deals which were tax negative for NZ, but did not apply for a binding ruling. Applying for a binding ruling would obviously disclose these transactions to Inland Revenue, Justice Wild commented in the High Court.

By fiddling with the pricing parameters, BNZ could make future deals tax negative. It resulted in BNZ offering counterparties funds at well below their normal cost of funds for their participation in an arrangement whereby there was an agreed share of the resulting tax benefits.

How the benefits were split was described as bearing no relation to any normal commercial considerations such as current market conditions or the credit status of the counterparties.

Inland Revenue called the deals “tax machines”. A formulaic approach was used, churning out tax losses for BNZ on a predetermined basis.

BNZ was concerned that overuse of the tax machine would affect its effective tax rate, which would become apparent from its published accounts.

In response, BNZ attempted to restructure the deals so as to consolidate the counterparty’s side of the transaction in its consolidated accounts – and did succeed in doing so in two of the transactions. Consolidation meant tax paid in the counterparty’s jurisdiction would be recorded in BNZ’s consolidated accounts, though that payment would be of no advantage to the NZ tax base.

Applying the first test for tax evasion from the Ben Nevis Case the question was did the transactions appear commercially and economically realistic.

Justice Wild answered: No. They returned high yields for BNZ with no risks other than tax. Those tax benefits were the benefit of expenses deductible against BNZ’s other income, and the tax exempt income received.

But despite this, the transaction was not tax avoidance if it fell within the scheme and purpose of a specific tax provision: the second test from Ben Nevis.

The tax provision relied on was the conduit relief regime which allows a “pass through” of foreign sourced income; from overseas sources, through a NZ subsidiary to the subsidiary’s foreign owner. This income passes through tax free, subject to a 15 per cent withholding tax.

Justice Wild ruled that the BNZ transactions were not within the scheme and purpose of the conduit relief regime. There was no income stream to pass through to its parent company. The transactions generated only tax benefits.

The High Court agreed with Inland Revenue that the effect of the transactions should be nullified as tax avoidance.

This had the effect of increasing BNZ’s tax liability by some $416 million, and triggering penalty interest of about $240 million.

BNZ Investments v. CIR – High Court (15.7.09)

09.09.001

Mortgage: Westpac v. Clark

Westpac Bank learnt it had no security worth enforcing after it was the victim of a sophisticated fraud lending $180,000 to a con artist masquerading as a woman owning property in Remuera, Auckland.

The con artist vanished, along with the money.  She left a trail of confusion behind: the property owner who knew nothing of the mortgage; a solicitor who had signed off on the legal documents; and the Bank which was out of pocket.

A central principle of the land registration system in New Zealand is that "the register is everything”.  Any interests registered against the title are enforceable, provided the person claiming the interest is not guilty of fraud.  Despite being an innocent victim, Westpac found this principle did not apply because while registration would give it security over the land this secured a non-existent loan.

To recover its losses, Westpac sued the solicitor who signed off on the legal documents.  He had certified to the Bank that the mortgage documents were in order and would be registered against the title, before the Bank released the money.  The solicitor had been conned by the fraudster who used a false passport and other documents to impersonate the true owner.

The fraud was discovered before the mortgage was registered, but the Bank sued the solicitor for negligence on the basis that if the mortgage had been registered it would have gained the protection of being “on the register” as secured creditor.

The Supreme Court pointed out that there is a difference between what is secured and what is owing.  Registration would have given Westpac security over the land.  But the Bank’s standard-form loan documents assumed that the person giving the security was the person taking out the loan.  The loan document was not enforceable against the true owner of the Remuera property: she never signed it; the fraudster did.  By contrast the mortgage document secured monies owed by the true owner.  In this case the true owner owed nothing.

The Court ruled that even if the solicitor had registered the mortgage on behalf of the Bank before the fraud was discovered, the Bank would be in no better position – it would have security but no loan enforceable against the owner of the property.

The claim against the solicitor failed.  It was for the Bank to pursue the fraudster.

Westpac v. Clark – Supreme Court (3.7.09)

08.09.009

Relationship Property: Rose v. Rose

On separation, a wife was able to claim a substantial share of her husband’s business on the basis that her work around the home and her income from selling cosmetics freed up her husband’s time and capital to develop what would otherwise be his separate property.

A Marlborough vineyard was the asset in question, with marital entitlements disputed after a 23 year marriage.  Two blocks of land were in issue: Cloverlea (owned by the husband at the time of the marriage and his separate property) and Poplar (farmed in partnership with relatives).

Generally, business assets held at the time of a marriage are separate property and remain separate property when the relationship comes to an end.  But any increase in the value of separate property attributable to the non-owner spouse is to be divided according to the contribution provided.

The Supreme Court drew a distinction between passive investment assets and a business requiring physical attention and application – such as a farm.

In respect of Cloverlea, the wife did not physically work on the property.  But the court ruled that a spouse could benefit separate property without physically working on it.  Indirect assistance could suffice.  In this case, the work done around the home and the wife’s employment outside the home were assistance.  Her financial contributions helped minimise farm debt.  There was evidence that part of Cloverlea would have been sold to reduce debt, but for her financial contribution.  It enabled the husband to contribute more resources to the farm: his separate property.  It did not matter that the husband in fact provided the greater proportion of cash for household living expenses.

As a result, the court ruled that the wife was entitled to 40% of the increase in value of the Cloverlea business over the period of the marriage.  This amounted to just under $300,000.

As regards Poplar, the husband’s share of the partnership increased during the marriage on inheritance from his father’s estate.  Generally, inherited assets remain as separate property, unless the assets are acquired for the “common use or common benefit” of both spouses.

Finance to develop Poplars into a vineyard was secured over the family home.  The husband had told his wife that “we own half [the vineyard]” indicating that his half share of the vineyard partnership was being treated as a marital asset.  Profits which would otherwise be available for family expenses were ploughed back into developing the vineyard.

The court ruled that the husband’s share of increases in the value of the Poplar partnership from the date of conversion into a vineyard to the end of the marriage was relationship property to be split 50/50.  The wife’s share amounted to $283,000.

Rose v. Rose – Supreme Court (19.05.09)

08.09.008 

Gift Duty: Begg v. Inland Revenue

A deferred gifting programme used by Public Trust clients has survived attack by Inland Revenue in the Court of Appeal.  The programme was designed to strip assets from older clients, circumventing asset testing for state social welfare benefits.

In a test case, the court was asked to rule on liability for gift duty on the deferred gifts.  Whether asset stripping could secure better social welfare benefits was not in issue.

Earlier this decade, the Public Trust offered a standard-form asset stripping trust for elderly clients having substantial equity in their family home.  The trust document recited that an annual gift of $27,000 was made to their children.  The figure chosen ensured each gift was under the threshold for payment of gift duty in any one 12 month period.  But no money was paid out.  Payment of the promised gift was deferred until the parents’ death.

This liability had the effect of reducing client assets by the amount of the promised gifts.

Inland Revenue claimed the supposed gifts were not a completed “disposition” at the time of the gift.  This would mean the accumulated total “gifts” were not treated legally as a gift until the parents’ died and the total sum promised was paid – with the result that the accumulated sum would exceed the 12 month gifting limit and gift duty would be payable.

The court ruled that the gift duty definition of a “disposition” was wide enough to include deferred gifts.  Words of gift in a trust amount to a “disposition”.  If not paid on the parents’ death, children had the right to sue their parent’s estates to recover payment.

Begg v. Inland Revenue – Court of Appeal (30.04.09)

08.09.007 

Maritime: Tasman Orient v. NZ China Clays

Which insurance companies will have to bear insured maritime losses turn on whether reckless navigation increased losses after the Tasman Pioneer ran aground off Japan en route to Busan in Korea.

The vessel from the Tasman Orient Line ran aground in May 2001 in the early hours during a heavy rain storm.  Cargo, including NZ Dairy Board exports, was lost as a result of the grounding and subsequent delayed salvage.

Dairy Board losses totalling some $US 498,000 arose when refrigerated reefers were left without power at some unidentified point in the voyage.  If the generators failed prior to the grounding, Tasman Orient accepts liability.  If they failed after the grounding, Tasman Orient says it was not liable, protected by exclusion clauses in its contract of carriage.

Standard international contracts of carriage for shipping exempt the carrier from liability for cargo losses after running aground except where losses arise from reckless management of the vessel.  The actions of the Tasman Pioneer captain in taking a shortcut through the Sea of Japan came before the New Zealand courts.

The court was told the normal route went through the Kanmon Strait.  Compulsory pilotage is required because of strong currents in the narrow strait.

The vessel was behind schedule.  The captain elected to take a shortcut, cutting about 40 minutes off the journey.  Two groundings in quick succession damaged the hull, causing the vessel to list.  Instead of contacting the Japanese coastguard and looking to beach the damaged vessel, the captain steamed at full speed for the main channel in the Strait while the crew pumped water to maintain trim.

Nearly three hours after the grounding, the captain anchored and then alerted the authorities.  Crew were mustered and a story fabricated that the vessel had hit a submerged container.  The ship’s chart was doctored to hide the actual course travelled.

The court ruled that the decision to attempt the shortcut was “unwise”, but the captain had taken this route before, albeit in a smaller vessel.  The claim of reckless navigation arose not from attempting the shortcut, but from the delay in notifying authorities of the grounding.  There was evidence that this delay increased the amount of cargo damage.  Salvage tugs with high capacity pumps would have reached the vessel earlier but for the late notification.

Evidence from the salvors also indicated the Dairy Board reefers were without power during the salvage.  Power cables were cut.  They were hindering the salvage.  There were delays before replacement generators could be put on board.

The Court of Appeal found that the “outrageous” behaviour of the captain in continuing to run at full speed after the groundings and failing to notify the authorities amounted to reckless behaviour such that Tasman Orient could not hide behind the exclusion clause.  It was liable for losses caused by the delay, including losses to the Dairy Board’s refrigerated cargo.

Tasman Orient v. NZ China Clays – Court of Appeal (9.4.09)

08.09.006    

Copyright: Tiny Intelligence v. Resport Ltd

Ripping off merchandise sold to supporters of the Crusaders rugby team cost one entrepreneur $50,000 in payment of profits made.  The Supreme Court refused to award further damages to the true merchandiser as compensation for lost business opportunities.

Back in 2006, a company called Resport Ltd was held in breach of copyright when it produced toy swords and toy trumpets for sale to Crusader supporters.  This merchandise had the status of “artistic works” under copyright law.  A company called Tiny Intelligence Ltd held copyright.

Resport was ordered to hand over all stocks it held and to compensate Tiny Intelligence $50,000 as an assessment of the profit made on the merchandise sold.

There was evidence that Resport copied Tiny’s products not caring whether that amounted to a breach of copyright or not.  Given the flagrant breach, Tiny Intelligence argued it was entitled to more than just an account of profits made.  Lost revenue amounted to an opportunity cost – the cost of expanding its existing business relationships with the potential for new products and a bigger business.

The Supreme Court ruled that any award of additional damages would amount to a penalty or fine – exemplary damages.  This was possible where there had been a flagrant breach of copyright, but by asking for an account of profits Tiny Intelligence was barred from also getting exemplary damages.

The two categories of damages have separate origins.  Exemplary damages come from common law and are intended as a form of punishment and as a warning to others.  An account of profits is derived from equity.  Historically, the two categories of damages are not allowed in tandem.

Tiny Intelligence v. Resport Ltd – Supreme Court (8.04.09)

08.09.005

Resource Management: Kawarau Jet v. Queenstown Lakes

Kawarau Jet Services fought hard to prevent a competitor breaking its monopoly on tourist operations down the Kawarau River near Queenstown.  It successfully challenged approvals given to a rival.

Over the last twenty years, jet boat operations on the Kawarau have been consolidated.  The High Court was told that Kawarau Jet Services has spent over three million dollars to buy out competitors.  The company runs eight boats on the river, and has approval to operate up to 19 boats.

In 2008, Queenstown Lakes District Council granted to newcomer, Frontier Adventure Tours, a consent to run four commercial sightseeing tours per day on the river.  This consent proved to be unlawful.  By an oversight, the Council did not send details of the application to Kawarau Jet who was entitled to be told as an “affected person”.

Jet boat operations on Queenstown rivers can be dangerous; three people were killed in 2008.

On hearing of the new rival, Kawarau Jet moved swiftly.  It contacted Maritime New Zealand to have Frontier’s consent suspended and asked it to assess safety issues potentially arising with multiple operators on the river.  Maritime New Zealand lifted the suspension after being satisfied that radio protocols between the two companies could prevent collisions.  Frontier then started operations.

The High Court was then asked to rule whether the otherwise unlawful consent granted to Frontier should be validated, or should Queenstown Lakes be required to rehear the application.  

Kawarau Jet argued that its operations were seriously compromised by having Frontier on the river.  It had to reduce the frequency of its trips to minimise the likelihood of collisions and it was unable to exercise the full number of trips allowed by its own consents.

Frontier argued that requiring the Council to rehear its application would close down Frontier’s operations despite Maritime New Zealand having approved the safety protocols.

The High Court ordered that the Council rehear the application.  There were serious safety issues.  There was evidence that Frontier had specifically told the Council that prior written approval from  Kawarua Jet was not required.  And Frontier had decided to push on and purchase a boat after it had been warned that Kawarau Jet would be taking legal action.

Kawarau Jet Services v. Queenstown Lakes – High Court, Invercargill (09.03.09)

08.09.002

Real Estate: Stevens v. Premium Real Estate

Auckland real estate firm Premium Real Estate was ordered to pay $660,000 damages and refund commission of $67,000 for failing to tell its client material information about a prospective purchaser.

During sale negotiations it was impressed on the client that the purchaser had fallen in love with the North Shore cliff-top property and wanted to occupy the home, while the agent knew that the purchaser was looking to make a quick resale at a profit.  After buying for $2.575 million, the purchaser sold five months later for $3.555 million.

The court ruled the agent’s collusion in supporting the purchaser’s buying strategy was a breach of the real estate agent’s duty of loyalty to a client.

Damages were calculated on the difference between the two sale prices, after netting out the commission deducted on each sale.  In addition, the real estate agent was ordered to refund the commission received on the first sale.  The court ruled the agent breached a duty of trust owed to the client by deliberately and dishonestly misleading the client about the purchaser’s motives.

In a subsequent hearing before the Supreme Court, the agent wanted to revisit the calculation of damages.  There had been earlier evidence that the purchaser made improvements to the property before reselling and that in the five month period between sale and resale the market for similar properties was booming, rising at a rate of 15%-16% per annum.

The court refused a further hearing.  The real estate agent had the chance to argue these points at the first Supreme Court hearing, but did not.

Stevens v. Premium Real Estate – Supreme Court (6.3.09 & 3.4.09)

08.09.003

Resource Management: Progressive Ent v. Nth Shore City

Resource management applications and appeals extending over nearly two decades in a commercial dispute between competing supermarkets added weight to arguments for less red tape over planning issues.  It was alleged Progressive Enterprises was using a planning appeal simply to stall the opening of a new supermarket by competitor Pak ‘N Save.

The business complaint is that competitors are using public benefit criteria in resource management legislation to mask their own private benefit.

After preliminary legal skirmishes in the 1990s,  Pak ‘N Save was refused permission by the North Shore Council for a supermarket covering some 6300 square metres.  In 2002, an appeal to the Environment Court was unsuccessful.  The major issue concerned traffic volumes and the difficulty of access off a main road.

Pak ‘N Save revamped its proposal, reducing the size of the proposed supermarket by about 20 per cent.  This, together with changes to the surrounding road network, saw Council approval given to the project.  Progressive appealed to the Environment Court.  It lost.  It then appealed on to the High Court claiming the Environment Court had not properly considered the effect on traffic of this revamped proposal and that giving approval damaged the integrity of the District Plan.  The High Court dismissed the appeal.

The High Court ruled that the Environment Court’s 2002 decision was not to be treated as a binding precedent in later hearings.  The Environment Court is not bound by its previous decisions.  And, in any event, the facts were different – Pak ‘N Save had put forward a different proposal.  The High Court also ruled that effects on traffic had been properly considered.  While some increased traffic congestion was expected, this was small in magnitude and limited in duration.

Progressive elected not to appeal the High Court ruling.  Pak ‘N Save was then in a position to officially open its supermarket, in a building which had been completed considerable time previously.   

Progressive Enterprises v. North Shore City – High Court, Auckland (25.02.09)

08.09.001

Tax avoidance: Ben Nevis v. CIR (1)

General tax avoidance provisions can be used to hammer taxpayers not party to the tax scheme but who enjoy the benefit, the Supreme Court emphasised in its ruling on the Trinity tax schemes.  Well-heeled taxpayers have had substantial tax deductions disallowed and face penalties of up to 100% of the tax benefits claimed.

What has become known as the Trinity Scheme involved a forestry development in Southland.  Much of the money came from high income earners in the major cities looking to reduce their tax bills.  Trinity offered an attractive tax deferral.  The potential benefits are seen with the tax losses claimed by Dr Garry Muir, the tax lawyer who set up the Trinity scheme: using the scheme he claimed a loss for tax purposes of some $898,000 for the 1997 tax year and $967,000 for the 1998 tax year.

The tax benefits flowing from the Trinity scheme arose from a timing mismatch: the date a liability arose and the date payment was due.

Taxpayers signing up to the scheme became liable to pay in fifty years a premium of just over $2,050,000 per plantable hectare for the right to plant and mill a forest, but payment of this premium was artificially accelerated by having promissory notes signed.  This had the legal effect of discharging the original debt due in fifty years, and replacing it with another debt.

The Court said there was no transfer of real value by substituting one form of obligation for another.  The promissory notes were an artificial payment implemented for tax purposes.

Other features pointed to a lack of commercial reality to the scheme.

The premium was paid for a licence to plant out trees on land.  The tax syndicate had already funded the purchase of the land, by paying over three times its cost as bare land, in return for an option to acquire ownership of the land in fifty years time at half of its then value.

On the available evidence, it was unlikely that a hectare of Douglas fir forest would be worth $2,050,000 in fifty years time.  This figure appears to be the after tax amount the mature forest was expected to yield.

The tax scheme included what was described as risk management insurance, to cover the possibility that values on maturity would be less than $2,050,000 per hectare at a time when the promissory notes fell due.  The insurance premium paid was also claimed by investors as a tax deduction.

This insurance was underwritten by a special, single purpose, company (CSI) based in the British Virgin Islands.  Dr Muir controlled CSI. The Supreme Court said the evidence suggests CSI was not intended to be anything more than a pro forma vehicle for obtaining anticipated tax benefits.  This view was reinforced by the unorthodox treatment of payments made to what was supposedly an independent stand-alone insurer.  Of the $US3.6 million paid to CSI as premium income, ninety per cent found its way back by way of loans to the family trusts of Dr Muir and his then business partner, a Mr Bradbury.

The Supreme Court ruled that the claimed deductions for the licence premium and the insurance premium coupled with the use of promissory notes to alter the incidence of actual payment amounted to a tax avoidance arrangement and were void for tax purposes.

The taxpayers affected did not invest personally; they channelled their investments through “loss attributing qualifying companies” (LAQC).  LAQCs are treated like accounting vehicles with tax benefits and liabilities passing through to the underlying owners.

Having ruled that the Trinity schemes were void for tax purposes, the owners of each investing LAQC faced a reassessment of their personal tax liability on the basis that they were “persons affected by” the void arrangements.  This meant substantial tax losses claimed in each individual’s tax return was disallowed.

In addition, individual investors were held open to penalties calculated at 100% of the tax shortfall in each case for having adopted an “abusive tax position”.  This arises when a taxpayer adopts an “unacceptable interpretation” of tax law which results in the avoidance of tax.

Ben Nevis v. Commissioner of Inland Revenue – Supreme Court (19.12.08)

03.09.001           

Tax avoidance: Ben Nevis v. CIR (2)

Scalpel or sledgehammer?  Judges in the Supreme Court are divided on how anti-avoidance rules in tax law should apply.

While the general anti-avoidance provision in tax law is expressed broadly, says the Supreme Court, its purpose cannot be to strike down arrangements which involve no more than appropriate use of specific provisions.  What amounts to an “appropriate use” of a specific tax provision can be difficult to discern.

Two judges, a minority in the five-judge Supreme Court, were more cautious.  In their view, it is too wide to determine appropriate use by looking at the scheme of the Act as a whole.  Instead, they look at statutory tax allowances as little mini-codes within tax legislation.  If the use (or misuse) of a specific tax provision falls outside its intended scope in the scheme of the Act, then its use is not authorised within the meaning of the specific provision.

The effect of this subtle twist is that the tax authorities could simply disallow a new tax dodge as not being within the scope of a claimed statutory provision, without needing to use the heavy sledge hammer which is the blanket anti-avoidance rule.

The Trinity tax case centred on depreciation claimed on a capital asset: a licence paid to use land for forestry.  The High Court disallowed the depreciation claimed as a deduction.  The Court of Appeal and the Supreme Court both allowed the deduction, but then set aside the tax benefits under the general anti-avoidance rules in tax law.

Ben Nevis v. Commissioner of Inland Revenue – Supreme Court (19.12.08)

03.09.002  

Business Reconstructions: Elders v. PGG Wrightson

Company reconstructions using the court supervised Part 15 procedure risk legal challenges if there is a failure to fully disclose details of who is affected, the Supreme Court warns.

The 2005 merger of Wrightson with Pyne Gould Guiness reached the Supreme Court when Elders New Zealand argued that the merger triggered its right to take full ownership of 13 stock saleyards.  Control of saleyards is valuable as they can represent a local monopoly over stock sales.

The court was told Wrightson and Elders jointly owned the yards, with each side having rights of pre-emption: a right of first refusal should either joint owner wish to sell.  Elders argued the merger with Pyne Gould Guiness operated like a sale and triggered its right of first refusal.

The case centred on the legal interpretation of reconstruction rules in the Companies Act 1993.  The Part 15 procedure requires a court application; procedures using Parts 13 or 14 do not.  Legal advisers have choices: what can be achieved under Parts 13 and 14 can also be achieved under Part 15.  The Part 15 procedure is far more costly.

Wrightson’s merger in 2005 used the Part 15 procedure, though a Part 13 reconstruction was a possibility.

Elders agreed that a Part 13 merger would not trigger its rights of pre-emption, but argued that the Part 15 procedure is fundamentally different and did trigger these rights.

The Court ruled that while the procedures were different, the effect was the same and that Elders could not enforce its right of pre-emption.

But Part 15 does not require a compulsory disclosure to major investors of the proposed reconstruction, unlike Part 13.  It is for lawyers putting the Part 15 procedure in place to ensure that there is provision for proper disclosure to affected investors.

The Court warned that any failure to make proper disclosures could mean a subsequent reconstruction or merger is challenged and overturned.

There was no question of any lack of disclosure in this case as the Court ruled Elder’s rights of pre-emption continued after the merger, while not being triggered by the merger.

Elders v. PGG Wrightson – Supreme Court (5.12.08)

01.09.001

Maritime: Birkenfeld v. Kendall

The judicial system does not operate to further personal crusades into maritime accidents once a wrong has been remedied.  So ruled the Court of Appeal in long-running litigation following an accident at the yachting venue prior to the Athens Olympics.

The Court was told that US Olympic windsurfer, Kimberly Birkenfeld, was seriously injured while training prior to the Athens Olympics after a collision between her craft and a support boat skippered by Bruce Kendall, part of the New Zealand yachting squad.  She was left partly paralysed and would have drowned but for Mr Kendall’s quick rescue.

Ms Birkenfeld sued for compensation.  She claimed $15 million general damages.  The accident occurred outside New Zealand and was not covered by accident compensation.  In the High Court, she was awarded damages of just over $560,000, based on the no-fault formula for compensation calculated  under the Marine Transport Act 1994 together with an international convention governing liability for marine accidents.  This limits liability for damages to a sum fixed by the weight of the vessel involved in the accident; in this case the vessel was a lightweight rigid inflatable boat being used by Yachting New Zealand.

Yachting New Zealand immediately offered to pay some $743,000 to Ms Birkenfeld.  It was willing to pay extra immediately in order to finalise all litigation.

This led the High Court to order a stay of proceedings on the basis that Ms Birkenfeld was receiving all she was entitled.  Ms Birkenfeld declined the offer.  The Court of Appeal was told that the money has since been paid to the Public Trust to be held in trust on her behalf.

Ms Birkenfeld appealed to the Court of Appeal seeking a ruling that Mr Kendall caused the collision due to his negligence.  Liability is disputed.

Ms Birkenfeld claims she was run down while stationary with her sail in the water.  Mr Kendall  claims she hit him from behind at speed while he was trying to take evasive action.  There do not appear to be any independent witnesses to the collision.

Apart from the question of compensation, Ms Birkenfeld said the public interest requires a ruling as to who was negligent in order to provide lessons for the future.

The Court ruled that it was not for the judicial system to decide negligence in these cases of marine accidents.  Legislation provides a formula for compensation with limitations on liability and also establishes a system of enquiries into the cause of maritime accidents, if such an enquiry is considered necessary.  It was not necessary for a parallel system of enquiry to operate through the courts using judges who have no maritime experience.

Birkenfeld v. Kendall – Court of Appeal (4.12.08)

01.09.002

Family finances: Busch v. Zion Wildlife

Litigation is an expensive way to settle family arguments over money.  The High Court recommended that Whangarei “Lion Man”, Craig Busch, try mediation in a financial dispute with his mother.

Their dispute followed over $1.7 million in financing provided by Mrs Busch in July 2006 to rescue her son’s wildlife park at Kamo, near Whangarei.  The court was told that Craig Busch had been under extreme emotional and financial pressure culminating in a charge of assault against his former partner and a falling out with his business partner at the wildlife park.

His mother’s $1.7 million loan was used to refinance business operations.  As security, Mrs Busch was given control of the business with Craig Busch entitled to resume control once the debt was repaid.

One potential source of repayment was revenue from film and television rights over future wildlife programmes – Craig Busch having earned his reputation as the “Lion Man” on the basis of earlier media exposure.  However, future film rights required use of business assets now under his mother’s control.  The earlier financing agreement was extended with a supplementary agreement in 2007 to cover filming rights: copyright and intellectual property rights.

The 2007 agreement stated that filming rights remained with the business under Mrs Busch’s control, but the approval of Craig Busch was required should the business enter into joint ventures for the production or distribution of filmed material.  This was designed to protect Craig Busch’s position.  The 2007 agreement provided that two-thirds of the net income from film productions would go in reduction of the money owed Mrs Busch, and the remaining one-third was payable to Craig Busch as a “bonus”.  Any joint venture arrangement would have the effect of reducing the pot to be divided two-thirds:one-third.

Craig Busch went to court after learning that a joint venture company had been set up, without his approval, for a future series of The Lion Man.  He asked the High Court for orders removing his mother from overall control and the appointment of independent directors.  The Court was not willing to remove Mrs Busch from control without there first being an extended court hearing with full evidence.  She had provided a substantial sum in emergency financial aid to rescue the business and was entitled to remain in control as protection for her investment until the case could be fully argued.

Justice Heath went on to suggest continuing the litigation was not the best course of action.  He said there were three ways out of the impasse: first for Mrs Busch to buy out her son’s remaining shareholding in the business and to assume complete control; second, for Craig Busch to refinance the business and buy out his mother; and third, for the business to be sold as a going concern to a third party.  The value of the business would be dependent on Craig Busch being willing to participate in any film ventures.

Busch v. Zion Wildlife – High Court (3.12.08)

01.09.003