Negligence: Tauranga Law v. Appleton

There is no liability for negligent advice where the advice is ignored; negligence did not cause the loss.  One investor was not entitled to recover from a Tauranga law firm his $90,400 deposit lost when Blue Chip went under because he was determined to push on with the investment regardless of the advice he was given.

The Supreme Court was told John Appleton, together with his family trust, invested in a Blue Chip project after attending one of the company’s seminars.  In 2004, he signed up for an apartment to be built in Turner Street, Auckland, at a price of $356,896 with a deposit of $101,910 payable up front.  The project collapsed.

Legal paperwork signed by Mr Appleton went to Tauranga Law who were to act as his solicitors.  Mr Appleton approached Bank of New Zealand for a loan to pay the deposit.  Wary of inflated apartment prices then apparent in Auckland, the Bank was unwilling to lend the full $101,000 requested.  The Blue Chip group then agreed to take a lesser amount of $90,468 as the deposit.

Tauranga Law, who had been acting for a number of Blue Chip investors, sent out a standard form three page letter to Mr Appleton setting out details of his transaction and some of the risks inherent in the proposed project.  The contents of this letter were subject to close scrutiny in the courts.  The letter stated Tauranga Law was not commenting on the transaction’s commercial merits but did indicate that the project might not be completed satisfactorily and that he might lose his deposit.   Mr Appleton was critical: he argued the letter did not emphasise that on paying a deposit he would become an unsecured creditor of the Blue Chip group and that the shell company he was buying the apartment from had no right to the land on which the apartments were to be built, had no funds to complete the construction and had no right to force Blue Chip to either undertake the project or to sell the building to it.  He said he would have cancelled the contract if this had been made specific.

The Supreme Court said even if Tauranga Law’s advice was negligent, Mr Appleton would have gone ahead regardless.  There was evidence that Mr Appleton did not take much notice of the three page letter when it arrived.  In his words: “He felt confident with the deal he had.”  Mr Appleton’s and his family trust’s loss of the $94,400 deposit was not caused by any Tauranga Law negligence.

Tauranga Law v. Appleton – Supreme Court (19.02.15)

15.009

Consulting: Prophecy Networks v. Revera

Wellington chartered accountant William Giesbers failed in his claim for a success fee of $3.6 million on the 2013 sale of cloud services company Revera Ltd to Telecom.   

The High Court was told Mr Giesbers had agreed back in 2007 to assist Revera in a possible trade sale when Hewlett-Packard was expressing interest in buying Revera’s data centre business.  Through his company, Prophecy Networks Ltd, Mr Giesbers negotiated a consulting contract with Revera.  He reorganised the group ready for sale by amalgamating Revera with a subsidiary. He prepared an information memorandum for intending purchasers.  And he negotiated an agreement for future services in facilitating any trade sale.  Prophecy Networks was to receive a base fee of $25,000 whether there was a sale or not and a further success fee calculated on a sliding scale for any sale of twenty million dollars or more.

Nothing came of Hewlett-Packard’s initial interest.  Six years later, Telecom (prior to its rebranding as Spark) purchased Revera in a deal valued at $96.5 million.

Mr Giesbers first heard of this sale through the news media.  He invoiced Revera for $3.6 million as a success fee based on the 2007 consulting contract.  He said the 2007 contract still stood.  The wording of the contract applied to any sale, he said, not just a sale to Hewlett-Packard.

Justice Brewer ruled that the 2007 consulting contract was for a limited period only.  The wording of the contract indicated that it was to operate only for any sale to Hewlett-Packard or to any other buyer surfacing around that time.  The 2007 information memorandum Mr Giesbers prepared had a limited shelf life.  The data incorporated rapidly became stale over time.  The consulting agreement was not of indefinite duration.  It had expired by the time of the Telecom deal.

His Honour also ruled that the 2007 consulting contract had been terminated in 2008 when Mr Giesbers was told to put in his invoice for $25,000 as agreed payment since no sale had then been made.  This was clear and unambiguous evidence that the consulting contract was at end, His Honour said.  Evidence was given that Mr Giesbers did not invoice Revera the $25,000 in 2008 as requested.

Prophecy Networks v. Revera – High Court (19.02.15)

15.010

Insolvency: Allied Concrete v. Meltzer

In deciding who should be the winners and who the losers when a company goes belly-up, the Supreme Court decided it would follow the Australian rules.  That is what parliament intended even if it is not what New Zealand insolvency legislation says exactly.

A company wound up insolvent does not have enough to pay every creditor in full.  There is a conflict: collective realisation sees assets realised and creditors sharing; but this conflicts with the need for individual justice – a business paid up to two years previously could see the liquidator demanding back money received.  Creditors squeal when a liquidator seeks to recover money received well in the past, money which has been applied for business purposes and is not sitting in a bank account readily available.

Insolvency rules governing voidable payments have been in a state of flux for the last two decades with several major changes to legislation.  Each change has met with howls of protest that the rules lack certainty and disrupt business.

In a test case involving payments made by three different insolvent companies, the Supreme Court was asked to provide some clarity.  Current rules allow the liquidator of an insolvent company to recover payments made in the previous two years.  To resist repayment, a creditor must prove three things: at the time payment was made (1) it acted in good faith; (2) it did not suspect the debtor company was insolvent, and (3) it gave value.  Arguments have raged over the phrase “gave value”.  The Court of Appeal ruled that this was limited to new benefits given to the debtor company in return for the payment now under attack.  This interpretation meant creditors who had supplied goods and services in the past on credit could not claim they had provided “value” when later paid.  If this later payment was made inside the two year time limit they were out of pocket, having to pay back the cash received.

Rather than looking closely at the wording of the insolvency rules, the Supreme Court concentrated on the policy reason behind the rules deciding that giving “value” could include payment made for goods and services delivered in the past.  The court emphasised that these creditors would still have to also prove that they acted in good faith and did not suspect the debtor company was insolvent when making payment – significant requirements, not easily met, said the court.

Allied Concrete v. Meltzer – Supreme Court (18.2.15)

15.008

Gambling: Pub Charity v. Internal Affairs

Pub Charity has been accused of gaming the legal system, using a legal subterfuge when trying to wriggle out of a one day suspension of its operations imposed as a penalty way back in 2011 for breaching its gaming licence.  The High Court has ordered Pub Charity serve its one day penalty on 30 March 2015.

Pub Charity was set up in 1987.  By 2008 it was operating over 1700 gaming machines at nearly 180 pubs and clubs.  The High Court was told Pub Charity had gross revenue of over $69 million for the year ending September 2008, making donations of more than $25 million to community groups.

Under its gaming licence, Pub Charity is required to limit venue costs to 16 per cent of its profits.  Gaming legislation seeks to maximise net proceeds for distribution to community groups, minimising operating costs. Internal Affairs took an interest when Pub Charity overshot this limit by $286,200 for the twelve month period ending July 2009.  This overspend breached the limit by 0.46 per cent.  Pub Charity said in its defence that it was difficult to monitor expenditure centrally when it operated from so many venues.  Evidence before the court indicated that Pub Charity’s business approach is to maximise venue costs up to the allowed limit, not to reduce expenditure as much as possible.

Internal Affairs imposed a one day suspension of Pub Charity gaming machines as penalty.  Penalties of up to six months suspension can be ordered. Pub Charity’s one day suspension was to have occurred in July 2011.  No suspension took place while Pub Charity fought a series of appeals through the Gambling Commission, the High Court and the Court of Appeal.  Internal Affairs won the final round.  The Court of Appeal sent the case back to the Gambling Commission to set the penalty.  Pub Charity promptly withdrew from the field of battle, declaring it had withdrawn from the case.  There were no longer any legal proceedings on foot, and Pub Charity challenged Internal Affair’s ability to reset a suspension date.

Back in the High Court, Pub Charity was arguing it was off the hook: first because the earlier litigation had collapsed and secondly because Internal Affairs had issued a written warning which Pub Charity said served as a substitute for the ordered suspension.  In June 2013, Internal Affairs had placed on record with Pub Charity a formal warning in respect of three breaches: the overspend of $286,200; a grant of $220,000 for the running of the Queenstown National Sevens Tournament as not being a grant for a charitable purpose; and costs of some $52,500 for what was considered unnecessary building alterations at four gambling venues.

Justice Mallon ruled that Internal Affairs could set a new date for the suspension, regardless of Pub Charity deciding to abandon its appeal.  She said the date for suspension would be Monday 30 March 2015, unless Pub Charity and Internal Affairs agree to a different date.  Evidence was given that Mondays are the quietest days for gambling.  Justice Mallon suggested Internal Affairs remove from its files the Pub Charity warning letter.  This avoids any suggestion that Pub Charity is receiving both a suspension and a warning in respect of the same breach.

Pub Charity v. Internal Affairs – High Court (17.02.15)

15.006

Copyright: Jeanswest v. G-Star

Retailer Jeanswest was punished by the Court of Appeal with a further penalty of $50,000 for trying to hide the fact that it had blatantly copied G-Star’s iconic biker jean.

G-Star is proud of its biker jean, having sold over 13 million pieces since launching the product in 1996 at the Cologne clothes fair.  The jean is modelled on the distinctive creased look occurring when wet trousers are moulded to a motorcyclist’s legs.

G-Star sued in 2013, alleging breach of copyright by Jeanswest in selling similarly styled jeans through its chain of 27 outlets in New Zealand.   The High Court ruled there had been a breach of copyright.  Damages of $325 only were awarded; the profit margin on 62 pairs sold.

G-Star appealed the level of damages awarded.  The Court of Appeal ordered Jeanswest to pay a further $50,000 damages.  These were exemplary damages to punish Jeanswest for its behaviour.  The court said there was blatant copying by Jeanswest amounting to a flagrant infringement of G-Star’s copyright in the style of jean. 

Fashion houses get irate over copying.  G-Star emphasised that knock-off artists do not bear the design costs.  They latch on to a hot-selling style and steal it.  The copier gains an incalculable benefit at little cost while the uniqueness of the copied brand is diminished.

The Court of Appeal was also very critical of the way Jeanswest acted at the High Court trial.  During the pre-trial discovery process, Jeanswest was very late in handing over a copy of the sample order sent to China for the manufacture of the disputed jeans.  This sample order was a critical document in determining whether there had been copying.  Jeanswest manipulated the court hearing date by stating that a material witness was pregnant and would not be available at a later date.  She was not a material witness.  She didn’t work for Jeanswest at the time the disputed jean went into production.  In any event, Jeanswest did not call her as a witness in the High Court.  The court also highlighted the glaring inconsistency between Jeanswest’s persistent denial of copying on the one hand, while on the other hand failing to call witnesses who could be in a position to provide proof of this denial.

Jeanswest v. G-Star – Court of Appeal (17.02.15)

15.007