Zespri: Shanghai Neuhof v. Zespri International

The High Court dismissed claims by Chinese importer Shanghai Neudorf that Zespri was obliged to compensate it for fines totalling eight million dollars imposed by Chinese authorities for deliberate underpayment of kiwifruit import duties.  Shanghai Neudorf was the guilty party.  Courts will not support litigants where their claim is based on illegal or immoral behaviour.

Chinese authorities raided Shanghai Neudorf’s offices in June 2011 investigating underpayment of duty.  In China, evasion of duties is treated as a smuggling offence.   The company was convicted and fined.   Its managing director, Mr Liu, was also convicted and jailed.  Zespri suspended kiwifruit exports to China while the investigation was underway.  It later terminated its relationship with Shanghai Neudorf, appointing a new importer.

The court was told an assessment of duty payable is not straightforward because the final price is not known until product is sold in the Chinese market.  Zespri and Shanghai Neudorf fixed a value for imports, described as an Agreed Assessable Value.  It was for Shanghai Neudorf to pay customs duty based on this value.  Adjustments were made later on the basis of actual sales and a final liability for import duties determined.

The Shanghai People’s Court found that Shanghai Neudorf was liable for payment of import duties.  It was the purchaser of Zespri’s product.  Shanghai Neudorf was not selling on consignment as Zespri’s agent.

After conviction, Shanghai Neudorf sued without success in the New Zealand courts alleging Zespri was liable to indemnify it for the $8 million fine.  Justice Courtney said it could not recover.  The claim fell foul of the ex turpi causa rule: as a matter of public policy the courts will not enforce any claim based on a wrongful act.

The amount of unpaid duty totalled approximately $7.5 million.  Zespri is defending a separate claim by Shanghai Neudorf that Zespri is liable for this amount.

Shanghai Neuhof v. Zespri International – High Court (26.09.14)

14.044

EQC: Michalik v. Earthquake Commission

It was a dispute over repairs to only part of a small Wellington retaining wall but the Earthquake Commission poured a lot of resources into the case to entrench a rule that depreciated replacement cost not current replacement cost is the measure of compensation for wall collapses.

Mr Michalik took on the Earthquake Commission over compensation for damage following the partial collapse of a 1.5 metre high retaining wall at his Highbury home after heavy rain in July 2012.  The wall had been built in the 1970s from hollow triangular concrete blocks cemented in place.  It was not reinforced.  There is no drainage.  The wall does not comply with current Building Act requirements.

The Commission accepted liability as natural disaster damage.  Mr Michalik argued he was entitled to “new for old”: repair up to current building code requirements. 

Under the Earthquake Commission Act, retaining walls within 60 metres of a home are covered for indemnity value.  The Commission assessed the value of the land affected by the landslip at $4050 and the value of the damaged retaining wall at $3130 – collectively $7180.  Replacement cost for repair to current code requirements was estimated at over $18,000.

The High Court ruled that $3130 was the correct figure as compensation for damage to the wall .

It can be difficult to establish a value for a retaining wall alone.  Where a retaining wall is a substantial feature of a building construction, a separate value for the wall can be obtained by establishing a market value for the property with and without a wall in place.  In most cases a retaining wall is too small a part of an overall valuation to be separately valued.  In these instances, depreciated replacement cost is the appropriate methodology, Justice Williams said.

For Mr Michalik’s wall, determining depreciated replacement cost was a three step process.  First: the cost was estimated of building a retaining wall as close as possible to the damaged wall in materials and design (even though such a wall would not comply with current code requirements).  Secondly: depreciation was deducted.  A retaining wall has an assumed life of 80 years.  Mr Michalik’s wall was built in the 1970s.  Depreciation at 46% was deducted.   Thirdly: GST was added to the depreciated value.

On the figures before the court, it will cost Mr Michalik at least an extra $15,000 above the $3000 received from the Commission  to reinstate his damaged retaining wall.

Michalik v. Earthquake Commission – High Court (17.09.14)

14.043

Feltex: Houghton v. Saunders

The over three thousand disgruntled Feltex investors who joined a class action demanding compensation after the 2004 public float were left bereft after a High Court ruling that the float prospectus was not materially misleading as to content or omissions and that even if it were no compensation would have been payable since the share price did not drop noticeably immediately after the float.

Shareholders buying into Feltex in 2004 saw the share price drop by two-thirds over the next two years, with Feltex then going into liquidation.  A class action followed, claiming investors were misled when investing.

The 2004 public float enabled Credit Suisse First Boston to sell down its interest in carpet manufacturer Feltex.  While the prospectus identified numerous risks facing the business it generally portrayed an improving financial position for the company.  The issue price at $1.70 per share implied a gross dividend yield of 9.6%.  Six months after the float, directors reported trading results that were up on the previous period, announcing an interim dividend 15% higher than the interim dividend projected in the prospectus.  Then two months later, directors warned of a profit downgrade.  The quoted share price all but halved over the next two days trading.

Not surprisingly, investors considered they had been stung: the company’s prospects had been oversold in the float prospectus.  The Securities Commission investigated.  In a 2007 report, it concluded that the Feltex prospectus was not misleading in any material respect.

Justice Dobson reached the same conclusion after an eleven week hearing in the High Court.  In their class action, investors alleged the prospectus was misleading under a number of broad headings: undisclosed adverse trading trends; misstatements or omissions as to business risks; misleading or unreasonable assumptions as to future financial performance; misleading presentation of financial data; misstatements regarding management’s equity incentive plan; discrepancies between descriptions of how the final price would be set and how the book build did take place; and misrepresenting share value by painting Feltex in a more positive light than was justified.

Justice Dobson said the test as to whether a prospectus is misleading is through the eyes of a prudent non-expert who at least has a basic understanding of the narrative.  A prudent non-expert who does not understand a material part of any prospectus is obliged to get clarification before proceeding.  Content does not have to be “dumbed down” for less sophisticated readers.  The Feltex prospectus was 148 pages long.

There is some sympathy for investors where cautionary signals and descriptions of risk are buried near the end of a long document, His Honour said, but this was not such a case.  The Feltex prospectus signalled potential risks upfront.

In the investment statement headed “What are my risks?” Feltex included an extensive disclaimer cautioning potential investors not to place undue reliance on forward-looking statements.  Justice Dobson said this disclaimer removed the basis for any claim that investors were entitled to rely on prospectus projections.

While there were justifiable criticisms of some content in the prospectus, he said, none of the criticised content was material.

Relying on expert evidence regarding efficient market theory, Justice Dobson said no damages would be payable even if there had been material misstatements or omissions in the prospectus.  Efficient market theory stipulates that the market price for publically traded shares will quickly assimilate the price effect of new information.  Once a less than fully informed market becomes fully informed, the impact of new information is very quickly reflected in the share price.

Feltex said since the share price exhibited no significant drop post-float until nine months after the prospectus was issued then any misstatement or omission in the prospectus was, nine months later, no longer relevant to the market price.

Investors had the opportunity to sell into the market at any time, rather than waiting until Feltex went into liquidation and then attempt to recover the price paid.

Houghton v. Saunders – High Court (15.09.14)

14.042

Belgrave Finance: Belgrave Finance v. Schofield & Buckley

Masterminds behind a commercial fraud against investors in Belgrave Finance have been ordered to pay $8.6 million dollars damages following action taken by insolvency specialists KordaMentha.

Belgrave Finance went into receivership in 2008.  Subsequent investigations found at least thirty per cent of the finance company’s loans were advanced to parties associated with Belgrave, a lending policy grossly in breach of the finance company’s trust deed which limited related party lending to two per cent.  Two Belgrave directors and Belgrave’s legal adviser were jailed for their part in the fraud.  Criminal penalties might give some satisfaction to investors, but that alone does not put money back in their pocket.

KordaMentha, acting as both receiver and liquidator of Belgrave Finance took civil action to recover compensation for funds lost.  A detailed investigation by KordaMentha identified that a Mr Raymond Schofield was the driving force behind Belgrave Finance.  Whilst not a director, he “pulled the strings” controlling company management.  Through a web of companies and a discretionary trust, Mr Schofield was the ultimate owner of Belgrave.  Over thirty per cent of Belgrave loans went to Mr Schofield and businesses associated with him.  The court was told many of these loans had unclear or inadequate documentation, and in some cases no documentation at all.  Accounting records were fudged to hide the fact that Mr Schofield was the borrower.

Justice Fogarty ruled that Mr Schofield was personally liable to pay damages for his part in dishonestly assisting Belgrave directors with the improper transactions.

Belgrave director, Mr Shane Buckley was also ordered to pay damages.  Justice Fogarty said Mr Buckley was in breach of his duties to the company by making the Schofield loans and actively concealing them.

Mr Schofield and Mr Buckley were held jointly liable to pay $8.6 million.  The court was told Mr Buckley was adjudicated bankrupt just after the High Court hearing.

Legal action by KordaMentha against Mr Stephen Smith, another Belgrave director, was suspended because Mr Smith became bankrupt prior to the hearing.

Belgrave Finance Ltd v. Schofield & Buckley – High Court (12.09.14)

14.041

Insurance: QBE Insurance v. Wild South

Where an insurance policy provides for automatic reinstatement of cover following loss then cover does continue without a break.  If an insurance company subsequently gives notice cancelling cover, it must pay for any losses arising in the interim prior to cancellation.

The Court of Appeal has definitively settled the effect of automatic reinstatement clauses in insurance contracts.   Operation of these clauses was at issue after successive earthquakes in Christchurch during 2010 and 2011.  Insurance companies argued they had an unspecified time within which to decide whether there had been “automatic” reinstatement of cover and that they could retrospectively cancel cover after a later earthquake had caused further loss to insured buildings.

The Court of Appeal ruling followed consolidated appeals by three different insurance companies: QBE Insurance, Vero Insurance and Lloyds.

The Court ruled that where there is an “automatic reinstatement” clause, cover resumes immediately following an insured loss.  Where cover is subsequently cancelled, notice of cancellation operates prospectively, not retrospectively.  A further or increased premium can be levied following automatic reinstatement.

QBE Insurance v. Wild South – Court of Appeal (10.09.14)

14.038

Ports of Auckland: Ziegler v. Ports of Auckland

A High Court challenge failed to overturn a trespass notice issued by Ports of Auckland against a former employee it alleges was disrupting port operations.  In addition, notice barring a union delegate from Port premises was upheld. 

In recent years, industrial unrest on the Auckland waterfront has received considerable media attention.  Ports of Auckland management say productivity must improve.

In November 2013, a trespass notice was given to former employee Kenneth Ziegler warning him to stay out of the Port.  He had been dismissed two months previously after allegations he had threatened to kill Port of Auckland’s general manger (operations).  He said a trespass notice prevented him from working for a private stevedoring company operating at the Port.

Ports of Auckland conceded that the waterfront area is a “quasi public space”.  Several thousand people access the Port daily: employees of the Port, staff from government departments and private contractors, as well as seamen crewing vessels docked in port.  Justice Woolford ruled there were no grounds for the court to review this trespass notice.  Issuing a trespass notice was not a public issue justifying judicial review; it was a private matter between Mr Ziegler and his former employer.  The fact that Mr Ziegler now cannot access the port to work for a private stevedoring company or to crew a vessel is an unfortunate but inevitable consequence of his previous behaviour, His Honour said.

In January 2014, Ports of Auckland advised union delegate David Phillips that he was barred from the Port.  He previously enjoyed unfettered port access assisting members of the Maritime Union and inspecting vessels on behalf of the International Transport Federation.  Two months later, Mr Phillips resigned as union delegate with the intention of working on the waterfront part-time as a stevedore.  The court was told access was denied following blog posts written by Mr Phillips labelling non-union labour as scabs, saying they should “live every day fearing a backlash and looking over their shoulders”.  Mr Phillips said refusal of access was in breach of his Bill of Rights entitlement to freedom of movement.  Justice Woolford said the Bill of Rights does not apply to commercial operations run by Ports of Auckland.  He ruled Ports of Auckland acted within the law by taking steps to protect both its commercial operations and the interests of its employees.

Ziegler v. Ports of Auckland – High Court (10.09.14)

14.039

Tax: ASB Bank v. Inland Revenue

ASB Bank is under investigation for tax avoidance over investments in Japanese bonds.  Following a preliminary court hearing, the High Court refused ASB access to Inland Revenue internal files about the investigation.

Inland Revenue alleges tax avoidance in respect of foreign exchange losses arising on ASB investments in Japanese government bonds.  In particular, the Revenue is looking closely at the purpose and effect of hedging arrangements used by ASB.  The Bank denies any wrongdoing.

ASB told the High Court there was no tax avoidance, but if there was then no penalties should be imposed because it did not take an “unacceptable tax position” when filing its tax returns.  The Bank was seeking Inland Revenue internal documents to find departmental views which might support its argument that no penalties should be imposed.

The extent of tax avoidance alleged by Inland Revenue was not made public at the preliminary High Court hearing. 

There can be genuine differences of opinion between tax specialists as to the tax effect of a particular transaction.  Even if later found to be in the wrong, a taxpayer can be excused penalties if the tax position taken was “likely or not to be correct”.  This requires evidence that there was objective support for the tax position taken, even if it later proved wrong.

ASB Bank wanted Inland Revenue to hand over all emails, meeting notes and minutes relating to the investigation.  This would include the musings and debates of all staff: senior and junior.

Inland Revenue said there are strong public interest arguments against making disclosure.  Fair and frank exchanges of view between staff would be discouraged if they knew their comments would be disclosed.

Justice Asher ruled against the Bank.  Informal internal expressions of view can only be understood in context.  There may be a myriad of qualifying factors.  Comments may have been based on a lack of knowledge about the subject, or made with a misunderstanding of the background facts, or a particular internal document may be drafted as a contrary view taking the stance of a devil’s advocate.

ASB Bank Ltd v. Inland Revenue – High Court (10.09.14)

14.040

Maori: Paki v. Attorney-General

Recognising that its ruling might open future political claims by Maori for resource rents on water used to generate hydroelectric power, the Supreme Court has tip-toed around questions of riverbed ownership.  Judges are signalling that there is no general rule that Maori land ownership extends to rights over an adjoining river. To claim ownership, iwi and individual hapu need to prove rights over a river arising by custom and usage which have not been lost either by sale of adjoining land or by passage of time.

Mighty River Power has been a nervous bystander to claims for government compensation by Pouakanui hapu at Mangakino in the central North Island for alleged Treaty of Waitangi breaches in nineteenth century purchases of land.  Mighty River generates power from neighbouring dams at Maraetai and Whakamaru.

Pouakanui alleges a loss of mana in sales of hapu land to the Crown in 1887 and 1899 because the Crown did not tell them that the land sale included rights to the adjoining Waikato River.  It claims compensation for this loss of mana.  While Pouakanui has presumed all along that rights to the riverbed were sold in the nineteenth century, this might not be the case.  Following a landmark preliminary hearing in 2012 on the general principles applying to riverbed ownership (which depend upon whether or not a particular stretch of river is “navigable”) the Supreme Court left open the question of who owned the bed of the Waikato river at Mangakino in the 1880s.  The river at Mangakino was then a series of rapids passing through a steep gorge.

Revisiting the general question of river ownership in the Supreme Court, Chief Justice Elias  said there is no universal custom within Maoridom linking riverside ownership with riverbed ownership.  Any general rule is subject to proof of custom and usage drawn from the local history of a particular Maori community.   Land conveyancing rules applied by colonial settlers adopting English law do not apply to questions about Maori customary ownership of riverbeds.

Pouakanui did not provide evidence in court of any customary rights over the Waikato river at Mangakino; it simply claimed damages on the presumption that riverbed rights had been lost on sale.

The Supreme Court dismissed the Pouakanui claim for damages, regardless of whether the hapu had retained ownership of the Waikato river at Mangakino or not.  If Pouakanui enjoyed customary rights of ownership over the riverbed, then ancestors of the hapu would have been aware that selling the land would include a sale of riverbed rights, the court ruled.  Conversely, if the hapu did not enjoy customary rights it did nor suffer any loss in a sale of the riverbed and there is no basis for any claim.

Evidence was given that in 2002 and 2003 certificates of title were issued in the name of the Crown for the riverbed beneath both the Maraetai and Whakamaru dams.

Paki v. Attorney-General – Supreme Court (29.08.14)

14.037

Insurance: Ridgecrest v. IAG

Policy wording enabled a Christchurch building owner with an underinsured property recover more than the amount nominally insured because a reset clause in the policy meant the amount insured was reset after each of a successive series of earthquakes.  While multiple payouts resulted, the owner was not entitled to more than the replacement cost of the building.

IAG Insurance disputed the amount payable to Ridgecrest NZ Ltd following damage to Ridgecrest’s Gloucester Street building during a series of four earthquakes in 2010 and 2011.  IAG’s liability under the policy was stated as a maximum of $1.984 million in respect of each single “happening”.   This figure was less than the replacement cost of the building.

During the period of insurance, the Gloucester Street building was partially damaged in a series of earthquakes before being written off as a total loss following severe quakes in February and June 2011.  Taking a lead from marine insurance, IAG argued the earlier damage had “merged” into the total loss claim and it was liable to pay only the maximum sum fixed under the policy at $1.984 million.  The Supreme Court disagreed.  IAG’s policy wording entitled Ridgecrest to recover separately for losses arising from each separate earthquake.  A marine insurance “merger” argument could not apply when the policy reset after each of the separate events.  Ridgecrest could recover damage caused by each of the three initial earthquakes (up to the policy limit of $1.984 million for each quake) as well as $1.984 million for the total loss following the June 2011 quake.

But, as a general principle of insurance law, any insured cannot be placed in a better position than existed before the loss.  This meant Ridgecrest could recover more than the nominal sum insured of $1.984 million but could not receive compensation in excess of the replacement value of the building.   The court was not asked to rule on the amount actually payable.

Ridgecrest v. IAG – Supreme Court (27.08.14)

14.036

Fair Trading: Godfrey Hirst (NZ) v. Cavalier Bremworth

The dominant headline message in any advertisement must not be misleading the Court of Appeal ruled.  It is a breach of the Fair Trading Act to bait advertising with misleading headlines to attract custom and then heavily qualify in the fine print what is on offer.

Budget airlines and car hire companies have been notorious for advertising cheap deals which on closer examination prove to be anything but cheap.  The Court of Appeal set out rules governing headline messages when considering a legal challenge to Cavalier Bremworth’s 2013 launch of its new Habitat range of synthetic carpets.  Its advertising highlighted the resistance of this new carpet to wear and to stains, emphasising what it called “superb warranties” offered in support of the new product.  The fine print qualified these warranties out of existence.

The Court of Appeal said media campaigns must be judged from the perspective of all those targeted by an advertisement, excepting those consumers who are unusually stupid or whose reactions to the advertisement are extreme or fanciful.  In reading an advertisement, consumers are expected to take some reasonable care in interpreting the message.  But advertisers are still required to pitch an advertisement at the level expected of their target market bearing in mind the knowledge and acumen of customers they seek to attract.

The Court of Appeal was heavily critical of Cavalier’s 2013 advertising campaign.  The dominant message promised stains would wipe off easily, the carpet would not soil in its lifetime, the carpet would hold its colour for 25 years, the carpet would not crush under heavy foot traffic but would spring back and through its lifetime the carpet would be anti-static.  This dominant message was heavily qualified in a separate 23 page warranties booklet: the warranty was provided by a third party, not Cavalier; the warranties did not apply to carpet supplied for time-share properties or rental properties; the warranty did not extend for 25 years but reduced after 15 years; the warranty lapsed if the purchaser did not regularly vacuum the carpet and have it professionally steam cleaned every two years.  Excluded from the warranty against staining was virtually everything that conceivably could cause a stain, with that stain exclusion itself incorrectly cross-referenced to the wrong page of the warranty booklet.

In deciding whether a particular advertisement is misleading, it is the “dominant message” or “general thrust” which is critical, the Court of Appeal said.  It is not a case of separately analysing each individual statement; it is the overall impression which counts.  Any significant qualification from the headline message must be sufficiently prominent to come to the attention of targeted customers.  The greater the disparity between the headline message and the qualifying information, the greater is the requirement to draw customers’ attention to the true position in the clearest way possible.

Given that advertisements are designed to attract custom, it is no defence to a complaint about a misleading advertisement to say any customer would be made aware of all qualifications and exclusions by the point of sale; it is a breach of the Fair Trading Act to use a misleading headline message to draw a customer into a website or physical store and then later disclose the true position.

Godfrey Hirst (NZ) Ltd v. Cavalier Bremworth – Court of Appeal (27.08.14)

14.034

Joint Venture: Worldwide v. NZ Venue & Event Management

After gaining total management control in 2006 of the 12,000 seat Vector Arena in Auckland, the Australian-based Jacobsen family has cheerfully neglected to pay in full the $2.69 million compensation due to its former joint venture partner, Florida-based Worldwide Entertainment Group.  The Supreme Court imposed court-ordered interest to run from 2006 to such time as final payment is made.

Worldwide, together with the Jacobsen family, were parties to a joint venture for the construction and operation of the Vector Arena.  Worldwide held a 25% stake.  This joint venture came to an end in January 2006 when a US Federal Court in Florida put Worldwide Entertainment into receivership.  Appointment of receiver amounted to a “change of control” which triggered pre-emption rights in the joint venture agreement.  Jacobsen interests immediately assumed full management control of Vector Arena’s operations.  Convoluted litigation followed over what compensation was payable to Worldwide for its former 25% stake.  It was not until a court ruling in November 2011 that Jacobsen interests were ordered to pay Worldwide $2.69 million within 28 days, with interest running on any delayed payment.  Rather than making payment, Jacobsen argued court-ordered interest can be awarded only on the “recovery of debt or damages” and this was neither. It was a declaration as to the value of an interest in a business.

The Supreme Court ruled that the phrase “debt or damages” is not to be read too narrowly. It covers all cases where a claim is made for money.  In this case the appointment of a receiver triggered an immediate transfer of Worldwide’s stake in the joint venture to Jacobsen.  The joint venture agreement was silent on when payment was to be made, so the assumption is that payment and transfer were simultaneous, the Supreme Court said.  Worldwide was entitled to payment from early 2006, even though the amount to be paid was not finalised until late 2011.  Interest was payable from when notice of pre-emption was given in 2006.

The rates for court-ordered interest are set by government regulation.  They vary depending on inflation.  In this case, Jacobsen interests were ordered to pay 7.5% on the amount outstanding for the period 2006 to mid-2011, and 5.0% from mid-2011 to full payment.

Worldwide NZ LLC v. NZ Venue & Event Management – High Court (24.11.11) & Supreme Court (11.08.14)

14.035

Asset freeze: Twentieth Century Fox v. Dotcom

Kim Dotcom has been forced to disclose the extent and value of his worldwide assets to Hollywood film companies who allege he profited from the piracy of movies through his Megaupload file sharing site.  His extravagant lifestyle together with promises to fund the Internet political party in New Zealand and further promises to pay a US$5 million “bounty” to any whistleblower dishing the dirt on US government behaviour and Hollywood business practices raised suspicions that Mr Dotcom was not complying with an existing court order which was presumed to have frozen all his assets.

The US government is seeking to extradite Mr Dotcom who faces criminal prosecution in the United States for alleged copyright infringement.  As part of those proceedings, assets held in Germany, Hong Kong, the Netherlands, the Philippines, the United Kingdom, Australia and New Zealand were frozen with Mr Dotcom permitted to draw down a monthly allowance for living costs and legal expenses.

Collectively, Hollywood film studios suspect the Megaupload site earned profits of about US$175 million.  At its peak, the Megaupload site was the thirteenth most visited site on the internet with an average of fifty million visits a day.   Site visitors who uploaded copyrighted material received rewards, including payments in cash, calculated by reference to how often their files were downloaded by others.

A consortium of Hollywood studios is claiming over $US100 million against Mr Dotcom alleging copyright infringement.  They fear Mr Dotcom might be running down his assets when they saw him splashing around cash at a time when they thought all his assets had been frozen.  He resisted their court application for a list of all his assets.  In the High Court, Justice Courtney ruled that disclosure is required.  She said the Hollywood studios have a good arguable case for damages in excess of the $11.8 million dollars in New Zealand assets currently subject to a freezing order.  The Motion Picture Association of America provided over 190 pages of evidence summarising a FBI investigation into the operations of Megaupload as tenable evidence of copyright infringement. 

Twentieth Century Fox v. Dotcom – High Court (30.07.14)

14.032

Belgrave Finance: R. v. Hamilton

While not directly involved in management of failed finance company Belgrave Finance, Hawkes Bay lawyer Hugh Edward Staples Hamilton received a longer jail sentence at four years and nine months imprisonment than two Belgrave directors also convicted of fraud related offences.

Hamilton was convicted in May 2014 on fourteen charges of being party to theft by a person in a special relationship.  This followed legal advice and assistance provided to a Mr Raymond Schofield who acted behind the scenes at Belgrave Finance extracting funds for his own personal business ventures in breach of related party lending rules in Belgrave’s debenture trust deed.

The 1200 investors in Belgrave Finance, most retired and on fixed incomes, have received just under ten cents in the dollar since Belgrave went into receivership in May 2008.  Estimates of the amounts lost in lending to Schofield range from $12.5 million to $14.4 million.

The High Court was told Schofield was a valuable client for Hamilton.  He provided legal assistance for Schofield’s plans from 2005 to buy into Belgrave Finance while hiding his involvement in the company.  Hamilton set up a “clean” trust for Schofield, with Schofield’s mother-in-law as the settlor and named beneficiaries being the husband of each of her children – which would include Schofield.  Through this trust, an intermediary company, and compliant directors of Belgrave, Schofield controlled Belgrave Finance.  Hamilton, while notionally acting as legal adviser to Belgrave Finance, treated Schofield as his primary client.  Hamilton was convicted for his role in helping Schofield milk funds from Belgrave Finance.  Through his law firm, Hamilton prepared documentation for Schofield loans, backdating some documents at Schofield’s request and processed loan advances through his firm’s trust account.  Justice Faire said one of the aggravating features of Hamilton’s offending was the fact it arose through his role as a lawyer.  

Hamilton was sentenced to four years nine months imprisonment.  Belgrave directors Shane Buckley and Stephen Smith were earlier sentenced to three years and four years imprisonment respectively.

R. v. Hamilton – High Court (04.07.14)

14.030

Maori: NZ Steel v. Butcher

Stalled Treaty negotiations between government and Waikato iwi are hampering operations at the Glenbrook steel mill owned by Australian listed company Bluescope Steel.  Further areas for mining were opened up after the High Court released Bluescope from a 25 year old court undertaking not to mine ironsand from four identified culturally sensitive sites.

Government granted NZ Steel, now a Bluescope subsidiary, a one hundred year licence in 1966 to mine ironsands on the coast near Waiuku.  Under New Zealand law, the crown owns oil and mineral resources regardless of who owns the land on which it is found.  About twenty per cent of the NZ Steel licence area is described by Ngati Te Ata as wahi tapu: sacred ground where human remains are buried.  The original mining licence did exclude one area where there is a known burial ground.  Local sensitivities were engaged in 1990 when mining exposed parts of a human skeleton.

The High Court was told tripartite discussions started in 1990 between government, NZ Steel and representatives of Ngati Te Ata over how best to protect local interests.  Fearing that its mining concession would be unilaterally reduced by government, NZ Steel filed High Court proceedings to protect its position.  As a temporary measure, NZ Steel gave a court undertaking that it would not start mining in the affected areas until a court hearing took place.  A hearing date was set for early the following year, but no trial ever eventuated.  Instead prolonged and protracted negotiations have continued.

Evidence was given that over the ensuing twenty-five years, various governments have faced an ever-changing queue of claimants and an ever-changing list of demands.  Initially, Ngati Te Ata indicated it would accept mining in the wahi tapu areas, provided mining royalties were paid direct to Ngati Te Ata rather than the crown.  Nothing eventuated after neighbouring iwi claimed customary rights over the same land, claiming a share of any royalties.  Further negotiations stalled completely in 1998 when Ngati Te Ata decided to merge its wahi tapu claim with an overall Treaty settlement claim, stating its bottom line demand is a $170 million settlement.

The court was told NZ Steel has all but exhausted mining in the southern part of its licence area bar the wahi tapu areas.  It asked to be released from the earlier court undertaking since the wahi tapu areas provide the most economic prospects for continued mining.

The High Court released NZ Steel from its undertaking.  The undertaking was intended to be temporary; it was never intended to extend beyond the proposed trial date.  Justice Fogarty said ongoing arguments about royalty entitlements are a dispute between Ngati Te Ata and government.   NZ Steel is entitled to have the 1990 litigation brought to an end, he said.  Ngati Te Ata has not seen any need to push on with the 1990 litigation.  Instead it filed substitute court proceedings in 2013 under a different name.

NZ Steel v. Butcher – High Court (04.07.14)

14.031

Real Estate: Hokitika Property Ltd . Hurt

An immediate paper profit of some $217,000 was at stake when a company controlled by two chartered accountants with Gilligan Rowe and Associates failed in its High Court claim that there was a binding contract for its quick-fire purchase of an inner-city Auckland property from a cash-strapped family. 

Living at the O’Neill Street property in Ponsonby were Maria Hurt (who is on a benefit) and her daughter Wendy (who is separated and sole breadwinner for her four children).  The court was told they were in financial difficulty.  They were $3000 in arears on mortgage repayments.  Selling the O’Neill Street property and buying a cheaper property was being considered. 

Evidence was given that Wendy Hurt approached a Mr Toilolo, a South Auckland accountant and financial adviser who presents a radio programme on financial issues.  By coincidence, they discovered they were related.  Mr Toilolo offered to help and arranged to meet the family to discuss options.  He arrived late at O’Neill Street for their meeting, at a time when Wendy Hurt was leaving for work.  Mr Toilolo had with him a pre-prepared offer for sale of the property at $790,000 to a company called Hokitika Property Ltd: a company controlled by two chartered accountants with Gilligan Rowe, Mr Mathew Gilligan and Mr Salesh Chand.  Their valuer had earlier estimated the property’s value to be $872,000.  The court was told the then government valuation was approximately $900,000.  An independent valuation was to later assess the value as being $1.05 million at the time the sale was being negotiated.

Pressed as she was in a hurry to get to work, Wendy Hurt signed at $790,000 but asked Mr Toilolo not to tell the purchasers she had signed before he tried to get the price increased.  Wendy left and her mother Maria also signed after further discussions with Mr Toilolo.  He told Mr Chand the Hurts were looking for a better price.  Mr Chand authorised a $5000 increase and Mr Toilolo amended the agreement to $795,000.  Hokitika Properties thought it had a binding contract, but the Hurts refused to initial the amended price at $795,000.

In the High Court, Hokitika Properties said there was an agreed deal at $790,000 which had been varied by agreement to $795,000.

Judge Doogue ruled there had never been any binding contract in the first place.  The Hurts signed at $790,000 but the existence of their agreement was never communicated to Mr Chand at Hokitika Property.  He had been told only they were looking for a better price.  Hokitika Property had responded by offering $795,000 but this was never accepted by the Hurts.  There was no sale.

Hokitika Property Ltd v. Hurt – High Court (03.07.14)

14.029

Defamation: Rafiq v. Meredith Connell

The legal profession is placed in a special position when it comes to defamation: anything said in court and everything said or written when preparing for a court hearing enjoys an absolute protection from actions for defamation.  Mr Razdan Rafiq faced a high hurdle in a claim for five million dollars against Auckland law firm, Meredith Connell, for alleged defamation.

As Crown Solicitor for Auckland, Meredith Connell appears in court on behalf of many government departments.  Like all good legal firms, its job is to represent its clients’ position without fear or favour.  The High Court was told Meredith Connell acted for the Immigration Service in 2013 defending a defamation action brought by Mr Rafiq against the Service.  Mr Rafiq subsequently sued Meredith Connell alleging he was defamed by unnecessary and damaging statements made about him in the written and oral submissions made by the law firm while acting for the Immigration Service.  

Judge Bell struck out the claim against Meredith Connell.  The Defamation Act grants an absolute privilege to lawyers in respect of what is done in the course of preparing for trial and conducting a trial.  Even if Meredith Connell had made defamatory comments during the trial, or in the course of discussions with their client about the trial, the firm could not be sued for defamation.  The policy behind the rule is that lawyers and judges should not be hindered in their work by the threat of defamation actions being used as a tactic to silence them.

Mr Rafiq also alleged he had been defamed in a December 2013 email sent by Meredith Connell’s IT manager to the Police.  Absolute privilege under the Defamation Act did not apply to this email.  It was an administrative response to a request for information.  Attached to the email was a string of prior emails containing comments which reflected badly on Mr Rafiq.  Judge Bell was moved to say this was a case of self-inflicted defamation in that many of the comments in the email string presenting Mr Rafiq in an unflattering light were made by Mr Rafiq himself.  Judge Bell said the IT manager’s publication of the emails was protected at common law by a qualified privilege.  This privilege factored in the identity of the publisher (a law firm), the readership (the NZ Police and not the wider public), the context (ongoing concern by both Meredith Connell and the Police about Mr Rafiq’s behaviour) and the subject matter (the element of harassment in some of Mr Rafiq’s emails).

Mr Rafiq also sought to have Meredith Connell held liable for an allegedly defamatory news report published on a commercial website: lawfuel.co.nz.  This report summarised his 2013 defamation action brought against the Immigration Service.  Meredith Connell denied that any of its staff wrote the report.  Judge Bell said this claim would be struck out also.  The Defamation Act gives a qualified privilege to any fair and accurate report of court proceedings.  Mr Rafiq criticised the report as not being fair or accurate, but Judge Bell disagreed.  There was comment in the lawfuel report on the fact that the High Court judge had referred to Mr Rafiq’s use of insulting and contentious language and to Mr Rafiq’s attacks on the integrity of the court and his scurrilous allegations against judicial officers but these references were not highlighted or unfairly reported, Judge Bell said.

Rafiq v. Meredith Connell – High Court (02.07.14)

14.028

Relationship property: Jack v. Jack

Having given up her own career to support her husband in his career as a medical specialist, a former nurse was awarded seventy per cent of their net assets after their 26 year relationship came to an end.  The extra payment over and above her statutory entitlement to fifty per cent of relationship net assets amounted, in dollar terms, to thirty per cent of her husband’s current annual income.

A departure from the 50/50 rule in the Property (Relationships) Act is allowed where the division of functions within a family enhances the income-earning potential of one while reducing that of the other.  Any division of functions must be a real and substantial cause of the economic disparity.

The Jacks met in 1982 when Mr Jack was earning $100,000 a year as a registrar at Waikato Hospital.  She was a single mother caring for a three year old daughter while working as an enrolled theatre nurse.  The High Court was told she sold her flat and investment property in Hamilton and put the net proceeds of $40,000 towards a home in the capital when the family moved to Wellington.  Over the subsequent two decades, two sons were born and the family lived variously in Sydney, London, Norwich and back in Wellington as Mr Jack advanced his specialist medical skills.  After initially continuing to work part-time, Mrs Jack then concentrated on supporting her husband’s demanding career.  In her words: he did not have to come home and cook a meal; he did not have to tend to the childrens’ daily needs, make lunches, attend school functions or arrange play dates; he seldom attended their sporting commitments.  When the couple’s relationship came to an end in December 2008, net relationship assets amounted to $1.9 million.  Over the previous five years, Mr Jack’s annual income ranged from $800,300 to $1.06 million per year.

In the High Court, Justice Goddard ruled that Mrs Jack’s role in the home justified a departure from the usual 50/50 rule for the division of relationship property.  Her support for her husband while he studied for his specialist exams, her role as a homemaker and primary caregiver for the children while he established his practice, and her assistance with his networking and at times in his practice all provided a foundation for his successful career.

She said Mrs Jack sacrificed the opportunity to advance her own career as a nurse as a result of her role at home.  After separating she found work as a receptionist earning just over $25,000 a year.  Justice Goddard said Mrs Jack should not be criticised for not attempting to requalify as a nurse after the marriage came to an end.  Her lack of recent experience would count against her.

Jack v. Jack – High Court (1.07.14)

14.033

School Rules: Battison v. Melloy

Adolescence is a time for asserting independence and for testing boundaries. In a High Court challenge to rules governing hair length at St John’s College, Hastings, Justice Collins said the law requires school rules be clear and certain, be applied reasonably and if breached the penalty must match the offending.

St John’s College was told its suspension of sixteen year old student Lucan Battison for refusing to cut his hair shorter was unlawful because the School’s rules on hair were uncertain and the manner of his suspension was unreasonable.

The court was told Lucan has naturally curly hair.  School rules require hair to be off the collar and out of eyes.  Twice in March 2014, teachers demanded Lucan cut his hair shorter, against his wishes.  This issue became more contentious several months later, two weeks after the appointment of Mr Paul Melloy as the School’s new principal.  Evidence was given that Lucan’s hair had been much the same length for all the time he had been at the School.

Lucan was suspended by the headmaster for refusing to shorten his hair.  This suspension was confirmed by the School Board’s disciplinary committee.

Justice Collins said the Education Act allows schools to suspend students if the student’s  gross misconduct or continual disobedience is a harmful or dangerous example to other students.  A decision to suspend must be based on reasonable grounds.  This creates a high threshold for suspension, he said.

There was no evidence that Lucan’s hair length amounted to a harmful or dangerous example to other students.  The mere fact that a teacher demanded he cut his hair was not grounds alone for suspension.  The Board’s disciplinary committee did not comply with the Education Act, Justice Collins ruled.  It did not exercise independent judgment as to whether Lucan’s offer to wear his hair in a bun constituted compliance with the School’s hair rule.  The disciplinary committee simply endorsed the headmaster’s decision to suspend.  There was evidence that other schools in the Hawkes Bay region allowed pupils of both gender to wear their hair long, provided it was in a ponytail.

In any event, the punishment must fit the crime.  There must be a correlation between the offending and the punishment.  The degree of Lucan’s continued disobedience was not great enough to warrant suspension, Justice Collins said.

In conclusion, Justice Collins said St John’s hair rule was invalid on the grounds of uncertainty.  He contrasted the general wording in the School’s hair rule with the carefully prescribed rules governing dress standards and wearing of the School uniform.  All students and parents knew in advance of the School’s uniform requirements.  The hair rule was capable of different interpretations by students, parents, teachers, the principal and the Board.

Battison v. Melloy – High Court (27.06.14)

14.027

Greymouth Petroleum: Sturgess v. Dunphy

The Court of Appeal has set parameters for warring parties within dysfunctional Greymouth Petroleum to negotiate the sale of a 13.8 per cent stake held by former chief operating officer John Sturgess after the court ruled Sturgess failed to do his job properly.

Greymouth is a closely held company with extensive oil and gas interests in New Zealand and Chile.  Joint venture investors fell out with Mr Sturgess after complaints he was incurring expenditure without authority, was failing to properly report to the board and was proving misleading and evasive when asked to account for company performance.

Mr Sturgess was initially willing to sell his stake to the remaining joint venture participants but later changed his mind, fearing the value placed on his shares would not price in expectations of future profitability for Greymouth’s Chilean prospects.

Founded in 2002, Greymouth Petroleum is owned 13.8% by interests associated with Mr Sturgess; 52.1% by interests associated with Mark Dunphy (who is executive chairman); and 34% by Peter Masfen.  By 2011, Mr Sturgess was estranged from his joint venture partners.  The court was told Mr Sturgess was aggrieved that he had not been given an enhanced shareholding in a Chilean venture.  Messrs Dunphy and Masfen said they fell out because Mr Sturgess began to act unilaterally and irresponsibly.

Mr Sturgess had taken to secretly recording meetings with fellow directors.  At a tense board meeting in February 2011, directors attempted without success to have Mr Sturgess take a three month “holiday” from his position as chief operating officer.

After a seven week High Court trial, Justice Gilbert ruled Mr Sturgess was primarily to blame for the dysfunctional relationship: he had failed to report properly to the board and to Mr Dunphy; he had conducted drilling and exploration operations without approval and sometimes negligently; and he had committed the company to unauthorised capital expenditure. 

Several instances stood out.  In 2009, Mr Sturgess approved a fracking operation at a Taranaki drill site without board approval and contrary to professional advice.  The well was not suited to fracking.  The operation wasted one million dollars.  In respect of a 2010 seismic survey in Taranaki,  Mr Sturgess  unilaterally committed the company to costs of a survey which later proved to be wasted and then in turn threw good money after bad by trying to rework the data.  In relation to operations in Chile, there was evidence of Mr Sturgess failing to keep the board informed of operational problems which had arisen at various sites.

In the High Court, Mr Sturgess said he would step down as director and was willing to sell his 13.8% stake in the company, provided he got fair market value.  Six months later in the Court of Appeal, he wanted to hold on to his shares as a passive investor.  The court was told there were already differences of opinion over Greymouth’s dividend policy.

The Court of Appeal ruled that the only way forward was to have Mr Sturgess exit from the company and sell his shares.  It applied the terms of the shareholder agreement signed by each of the three investors when the company was formed: the fair value of the shares was to be fixed by an arbitrator; Messrs Dunphy and Masfen could purchase Mr Sturgess’ shares at this price; if they did not purchase, Mr Sturgess was free to offer the shares to anyone else at the same price.  If Mr Sturgess seeks to offer the shares to a third party at a lower price than the arbitrated fair value, Messrs Dunphy and Masfen have the right to buy at this more favourable price.

Sturgess v. Dunphy – Court of Appeal (24.6.14)

14.026

Partnership: Kidd v. Worldwide Leisure

A legal spat between two overseas millionaires over ownership of Huka Lodge has returned to the New Zealand courts.

Once they were friends and business associates.  Mr Michael Kidd and Mr Alexander Pieter van Heeren made their fortunes as steel traders in South Africa during the 1970s.  Apartheid South Africa was then an international pariah facing economic sanctions.  They both looked to transfer funds away from South Africa.  In 1984 the luxury tourist lodge at Huka Falls was purchased for $1.3 million.  Title was taken through a nominee to hide the South African connection given the then sensitivity of trading with South Africa.  Mr Kidd alleges Huka Lodge was purchased out of joint business funds and he is part-owner of the property.  He says interests associated with Mr van Heeren hold his share of the property as trustee.   This question has never been resolved.  To force the issue, Mr Kidd registered a caveat over the land title for Huka Lodge.  This has the effect of preventing any sale of Huka Lodge or registration of any mortgage against the title without Mr Kidd first agreeing.

Their dispute got an airing in the High Court for the second time in two decades when Mr van Heeren applied to have the caveat removed.  This reopened round one of their business dispute heard in the New Zealand courts back in 1996.  The 1996 hearings were adjourned when Mr van Heeren argued Mr Kidd had earlier signed what was called “an indemnity” which purported to settle all their business disputes worldwide.  The New Zealand courts decided any question about the validity of this indemnity had to be decided by South African courts.  The New Zealand High Court was told it took 13 years to get a final decision from South Africa with a judge there ruling that Mr Kidd was induced to sign the indemnity following misrepresentations made by Mr van Heeren – the indemnity was void.

Back in New Zealand for round two, Mr van Heeren said Mr Kidd’s breach of trust claim was woefully out of time.  Huka Lodge was purchased in 1984 and Mr Kidd is alleging that purchase to be a misuse of business funds held in trust on his behalf.  Any claims for breach of trust must be brought within six years.

Judge Bell said the caveat will remain.   The argument is not that there was a breach of trust itself, but that jointly owned business funds were used to purchase Huka Lodge and the Lodge is held in trust for both Mr Kidd and Mr van Heeren.  Any evidence to support this claim has yet to be heard in the New Zealand courts.

Kidd v. Worldwide Leisure Ltd – High Court (16.06.14)

14.025

Leaky Homes: Osborne v. Auckland City

Despite a last-ditch offer of an out of court settlement by Auckland City nervous that the Supreme Court would rule against it in a leaky home case, the Supreme Court issued its ruling regardless, saying it was in the public interest to have a final judicial ruling on time limits for leaky home claims.  This court ruling has increased the number of homeowners who can potentially claim taxpayer-funded compensation for leaky homes.

John Anthony Osborne and Helen Osborne fought long and hard to get a definitive ruling on whether they were entitled to seek compensation for their leaky home.  They purchased a newly constructed home in 1997, finding shortly afterwards that it leaked.  The court was told they decided to seek compensation under the Weathertight Homes Resolution Services Act.  If eligible, they could recover part of their repair costs from government and Auckland City – having to pay 25 per cent of the repair costs themselves.  To be eligible, they had to bring their claim within ten years of the house being built.  Auckland City said they were out of time: construction was sufficiently advanced that the house was habitable by August 1996.  They didn’t bring their claim within ten years of that date.  The Supreme Court ruled that a house is not “built” merely when it is habitable; it is “built” when Council issues a code compliance certificate.  In the Osbornes’ case, the final certificate was issued in April 1997 and they had claimed within ten years of that date.

After the Supreme Court heard legal argument in November 2013 and before issuing its ruling in June 2014, Auckland City attempted to suppress the case.  The court was told Auckland City offered to settle with the Osbornes on the condition that the Supreme Court did not release its judgment.  Litigants sensing that a court may rule against them might seek suppression to avoid an adverse result becoming public knowledge.  The Supreme Court said that even if litigants decide to discontinue an appeal, the court has a discretion to still issue its ruling.  The Supreme Court said it would have released its judgment in this case even if there had been an agreed out of court settlement and a formal abandonment by the Osbornes of their appeal.  The legal point at issue affected homeowners other than the Osbornes and it was in the public interest for the court ruling to be made public.

Osborne v. Auckland City – Supreme Court (10.06.14)

14.024

Rates: Mangawai Ratepayers v. Kaipara District

Mangawhai ratepayers got sympathy but not much more in their High Court challenge to cost blowouts exceeding $20 million on their local sewage scheme.   The cost overruns stand, the construction loans are still payable and the increased rates stand.  Local councillors responsible have been turfed out of office with government appointed commissioners installed to run Kaipara District until new elections scheduled for October 2015.  Kaipara’s chief executive has departed.

It has been a sorry tale of local body incompetence.  Out of their depth in negotiating and signing a public/private partnership deal to construct and operate a sewage reticulation and treatment system for the Northland seaside town of Mangawhai, district councillors left angry ratepayers carrying the can.  Many ratepayers have suffered stress, anxiety and financial hardship by having to pay rates at a significantly higher level than anticipated.  What for some was the purchase of an idyllic retirement home by the sea at Mangawhai has turned into a nightmare.   A number face a forced sale at a significant capital loss to avoid meeting potentially even higher rates.

Between 2005 and 2007, Kaipara District entered into a series of contracts for a new Mangawhai sewage system.   Initial public consultation documents disclosed a cost of some $35.6 million.  By the time the project was complete the cost had ballooned to $57.7 million, nearly all on borrowed money.  And five years later, with unpaid interest on the debt capitalised, the debt was up to $63.3 million.

A 2013 report by the Auditor-General concluded that Kaipara District “lost control” of the project.  By late 2007, Kaipara District did not know what was being built, what it would cost, how many properties it would service or how it would be funded.

The court was told Kaipara District staff and councillors made a series of catastrophic decisions on the basis of insufficient information.  The contract was signed at a price already in excess of a benchmark figure set by Kaipara District.  Funding was arranged through bankers ABN Amro Bank.  Only after signing contracts for the construction of a sewage treatment plant did Kaipara District realise there was no provision in the contract to deal with treated wastewater.  Twelve months on the scope of the project was doubled, with no public consultation.  Purchase of a farm at a cost of $11.1 million to deal with wastewater added substantially to the increased costs.

In the High Court, Justice Heath was moved to say that it was incomprehensible that a democratically elected council, in conjunction with its executive team, could increase the cost of a major infrastructure project by some $22.1 million without consulting ratepayers.  A consortium of Mangawai ratepayers challenged the validity of rates levied by Kaipara District.

The High Court ruled that Kaipara District failed to give the required public notice necessary for an infrastructure project of this size.  This failure meant the decision to proceed with the project and to levy rates to pay for the project were both unlawful. 

ABN Amro loans financing the unlawful project remain enforceable as a “protected transaction”.  Rules in the Local Government Act enable financiers to get a certificate from borrowing councils stating that all proper procedures have been followed.  These certificates reduce the cost of council borrowing; financiers then do not have to audit the minutae of council projects to make sure all required steps have been taken.  ABN Amro obtained the necessary certificate to support its funding of the Mangawai sewage project.

In December 2013, government passed legislation validating retrospectively the unlawful sewage contract and the otherwise unlawful rates levied.  Ratepayers complained this unjustifiably took away their legal right to challenge what Kaipara District had done.  Justice Heath noted it was common to use validating legislation to legitimise local council mistakes and he ruled that ratepayers’ loss of their legal rights in this case was legitimate in a free and democratic society.

Mangawhai Ratepayers v. Kaipara District Council – High Court (28.05.14)

14.021