Cygnet Farms Ltd v Anz Bank New Zealand Ltd

• Jurisdiction: New Zealand
• Judge: Palmer J
• Judgment Date: 28 November 2016
• Neutral Citation: [2016] NZHC 2838
• Docket Number: CIV-2013-485-010160
• Court: High Court
• Date: 28 November 2016

Between

Cygnet Farms Limited

Plaintiff

and

ANZ Bank New Zealand Limited

Defendant

[2016] NZHC 2838

CIV-2013-485-010160

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

Claim for damages in the relation to the defendant bank's alleged negligence, negligent misstatement, pre-contractual misrepresentation, breach of contract and breach of the Fair Trading Act 1986 when promoting interest rate swaps — the plaintiff had borrowed funds to purchase a dairy farm — the defendant had promoted interest rate swaps as a financial product — the defendant had agreed to structure a loan of nearly $4 million in the form of two interest rate swaps — the defendant had not explained to the plaintiff the potential downsides to swaps compared with fixed rate loans — the swaps were disadvantageous for the plaintiff when the 2008 Global Financial Crisis occurred as it could not take advantage of a precipitous fall in floating rates — whether the defendant made negligent misstatements in making its representations because it gave advice calling for special skill and competence on which the plaintiff relied and it failed to exercise reasonable care to ensure its representations were accurate — whether the defendant made pre-contractual misrepresentations, under s6 Contractual Remedies Act 1979 (“CRA”) (damages for misrepresentation) that induced the plaintiff to enter into the swaps and suffer loss — whether the defendant had a partly oral contract, or alternatively a collateral contract, regarding the level of service it would provide to the plaintiff which it breached causing the plaintiff loss — whether the defendant's representations were misleading and deceptive in terms of s9 FTA — whether the tort of “pure” negligence could impose liability on the defendant arising from its relationship with the plaintiff.

Appearances:

M D Branch and K F Shaw for Plaintiff

S M Hunter, M C Smith and M H A Ho for Defendant

JUDGMENT NO. 2 OF Palmer J

(the Substantive Judgment)

Contents

Summary	[1]
Facts	[6]
The Swans	[6]
The Swans and the Bank	[8]
A loan	[10]
Interest rate swaps	[15]
The Bank's swap presentation to the Swans	[20]
Documentation and agreement of the swaps	[27]
Cynget's experience of swaps	[34]
Commerce Commission settlement agreement [49] Key factual findings regarding representations	[55]
1 Like a fixed rate loan but with upside and flexibility	[57]
2 Suitability	[59]
3 Proactive service, help and advice	[62]
4 Forward start	[66]
The laws of misrepresentation	[67]
Five causes of action	[67]
The law of negligence	[70]
The law of negligent misstatement	[76]
Misrepresentation and damages in contract law	[81]
The Contractual Remedies Act and damages in tort	[92]
The Fair Trading Act 1986	[101]
Applying the laws of misrepresentation [105] Issue 1: What was the contract?	[106]
The exclusion clauses	[107]
The contractual effect of the exclusion clauses	[110]
Was there a collateral contract?	[115]
Issue 2: Did the Bank owe a duty of care in negligence? [118] What duties of care are alleged?	[118]
Was Cygnet's loss reasonably foreseeable?	[120]
Was there sufficient proximity in the Bank's relationship with Cygnet? [124] Expertise, promotion and vulnerability	[127]
The effect of the contract	[139]
Did the regulatory background enhance or detract from the duties?	[147]
Are there policy considerations negating the Bank owing a duty to Cygnet?	[151]
Issue 3: Did the Bank make misrepresentations?	[155]
1 Swaps were not a fixed rate loan with upside	[156]
2 The swaps were not suitable	[159]
3 Proactive advice was not provided	[162]
4 The forward start was not unreasonable	[165]
5 Cygnet did have to break the swap	[169]
Misrepresentations	[170]
Issue 4: Did Cygnet rely on the misrepresentations?	[171]
Issue 5: Fair Trading Act limitation	[175]
Issue 6: Causation, loss and damages	[182]
Causation and loss	[182]
Damages	[188]
Result	[192]

Summary

1 This is the first of several proceedings brought by customers in rural New Zealand in relation to banks' promotion of interest rate swaps to farmers before the Global Financial Crisis (GFC). Mr Craig Swan and Mrs Lisa Swan are dairy farmers in Taranaki. They also develop property. In 2007, through Cygnet Farms Ltd, they borrowed around $6 million from the National Bank to buy a dairy farm.

2 The National Bank is now part of ANZ and I refer to it as “the Bank”. 1 At the time, the Bank was promoting interest rate swaps as a financial product. The Bank represented to Cygnet that interest rate swaps were like a fixed rate loan but with upside and flexibility. It did not explain three potential downsides to swaps compared with fixed rate loans. It represented a swap was suitable for Cygnet. And it represented it would provide proactive advice to Cygnet about managing the risks and opportunities of its swaps. In January 2008 Cygnet agreed with the Bank to structure a loan of nearly $4 million in the form of two interest rate swaps. In its contractual documentation the Bank sought to exclude its liability.

3 The swaps were disadvantageous for Cygnet when the GFC hit in mid 2008 since it could not take advantage of a precipitous fall in floating rates. In addition, Cygnet suffered from the swaps in a number of ways which would not have affected fixed rate loans and which it did not know about in advance:

• (a) the Bank imposed an additional credit limit on Cygnet in relation to the swaps, which it would not have done for a fixed rate loan, and which later affected the margin it charged Cygnet;

• (b) the break fees were calculated differently, and were higher, than for fixed rate loans; and

• (c) the Bank increased the margin it charged on the underlying loan which it could not do on fixed rate loans.

4 Cygnet seeks damages for the Bank's alleged negligence, negligent misstatement, pre-contractual misrepresentation, breach of contract and breach of the Fair Trading Act 1986. All these are areas of law which can found liability for misrepresentation for similar, but not identical, reasons. I hold as follows:

• (a) An exclusion clause in the contract prevents liability in contract. There is no collateral contract by which this can be escaped.

• (b) The Bank's relationship with Cygnet was sufficiently proximate to establish a duty of care in tort for negligence. Some of the contractual exclusion clauses are sufficient to negative a duty of care in tort to provide reasonable advice but are not sufficient to negative a duty to provide honest, accurate and correct information. The Bank breached that duty by negligently making misrepresentations, founding liability in the torts of negligence and negligent misstatement. But s 6(1)(b) of the Contractual Remedies Act 1979 precludes Cygnet from recovering damages in tort.

• (c) The Fair Trading Act claim is out of time.

5 As sought, I make a declaration that the Bank breached its duty of care to Cygnet. But I am precluded by the Contractual Remedies Act 1979 from awarding Cygnet damages. This could be seen as a gap in the law. But it is the effect of the Act providing that the law of contract, not the law of torts, governs the awarding of damages where a misrepresentation induces entry into a contract. The Act removes the ability of plaintiffs to recover meaningful relief for a tort even when liability in tort is established and liability in contract is not. Effectively Cygnet fails to achieve anything other than a moral victory and an award of costs. Whether the law should be reformed is a matter for Parliament. I will forward a copy of this judgment to the Law Commission so it can decide whether to consider the issue for the future.

Facts

The Swans

6 Mr and Mrs Swan are good dairy farmers with a reputation for being able to improve the profitability of farms. From 2000 they leased Mr Swan's grandmother's farm in Cornwall Rd, near Eltham in Taranaki, as equal partners in the Swan Partnership. That farm was owned by the Swan Family Trusts Partnership which had agreed any capital gain would be distributed to the Swans.

7 Mr Swan is characterised by both parties as “entrepreneurial”, or “a bit of a wheeler and dealer”, with an eye to other profitable activities. The Swans have a sideline business in land development in Taranaki. In 2006, through Cygnet Land Developments Ltd, the Swans bought land at Bell Block outside New Plymouth which they started to develop and subdivide. They used second tier finance to acquire the land but subsequently, in February 2008, refinanced it with the Bank.

The Swans and the Bank

8 Around 2007 the Swans moved their banking to the New Plymouth branch of the National Bank. Mr Mike Fleming became their RM, or rural manager or sometimes relationship manager which accurately describes the position. The Swans were happy with Mr Fleming. He had farming experience and they felt he had their interests at heart. They trusted him and they treated him as a mate. Mr Swan talked to Mr Fleming up to three times a week to discuss how things were going.

9 As at November 2007 the Swans had two floating rate personal loans totalling $130,000 and two fixed rate home loans totalling $470,000 relating to beach properties at Mokau, north of Taranaki.

A loan

10 In November 2007, through Mr Fleming, the Swans asked the Bank for a loan of around $6 million to purchase a new dairy farm at Finnerty Rd, not far from their Cornwall Rd property. From around 12 November 2007 Mr Fleming was on leave so they dealt with Mr Kelly.

11 The Bank had confidence in the...