Red Eagle Corporation Ltd v Ellis

• Jurisdiction: New Zealand
• Judge: Blanchard J
• Judgment Date: 12 March 2010
• Neutral Citation: [2010] NZSC 20
• Docket Number: SC 72/2009
• Court: Supreme Court
• Date: 12 March 2010

Between

Red Eagle Corporation Ltd

Appellant

and

Richard John Otley Ellis

Respondent

[2010] NZSC 20

Court:

Elias CJ, Blanchard, McGrath, Wilson and Anderson JJ

SC 72/2009

IN THE SUPREME COURT OF NEW ZEALAND

Appeal against a Court of Appeal decision which overturned an award of damages for misrepresentation under s9 Fair Trading Act 1986 — whether statements were misrepresentations — whether defendant was a mere conduit of information — whether appellant contributed to its own loss — whether loss caused — whether compensation should be awarded under s43 Fair Trading Act 1986.

Counsel:

L Herzog for Appellant

P J Dale for Respondent

A The appeal is allowed and the judgment of the High Court is restored.

B The appellant is awarded costs of $15,000 in this Court together with its reasonable disbursements to be fixed by the Registrar.

C The order for costs in the Court of Appeal is reversed. The High Court should fix costs in that Court if that has not already been done.

JUDGMENT OF THE COURT

REASONS

(Given by Blanchard J)

Introduction

1 Mr Tony Falkenstein is an experienced businessman and a company director. The appellant, Red Eagle Corporation Limited, is a vehicle through which his family interests make investments. The respondent, Mr Rick Ellis, is an investment banker who has known Mr Falkenstein for many years. In 2005 his business partner, through a company called Ellis Black Ltd, was Ms Annette Black.

2 In connection with an Ellis Black project primarily being promoted by Ms Black, Mr Ellis approached Mr Falkenstein seeking a short-term loan. He advised Mr Falkenstein that Ms Black had net property assets in Sydney of approximately $2 million. After Ms Black supplied Mr Falkenstein with a statement of assets and liabilities appearing to confirm details and values of such properties, but without making any further inquiries, Mr Falkenstein caused Red Eagle to make her an unsecured loan of $250,000 for a period of three months at an interest rate of 25 per cent per annum. That loan was to be used, at least in part, to meet expenses connected with the project.

3 It transpired that Ms Black was fraudulent. She did not own the properties. No part of the loan moneys was able to be recovered from her. She is now bankrupt.

4 Red Eagle sued Mr Ellis claiming that his advice to it, through Mr Falkenstein, was misleading or deceptive conduct, in breach of s 9 of the Fair Trading Act 1986, which reads:

9 Misleading and deceptive conduct generally

No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

Red Eagle sought an order under s 43 of that Act for payment of the amount of its loss plus interest. Section 43 in relevant part reads:

43 Other orders

(1) Where, in any proceedings under this Part of this Act, or on the application of any person, the Court finds that a person, whether or not that person is a party to the proceedings, has suffered, or is likely to suffer, loss or damage by conduct of any other person that constitutes or would constitute—

(a) A contravention of any of the provisions of Parts 1 to 4 of this Act;

…

the Court may (whether or not it grants an injunction or makes any other order under this Part of this Act) make all or any of the orders referred to in subsection (2) of this section.

(2) For the purposes of subsection (1) of this section, the Court may make the following orders—

…

(d) An order directing the person who engaged in the conduct, referred to in subsection (1) of this section to pay to the person who suffered the loss or damage the amount of the loss or damage:

5 In the High Court, 1 Dobson J gave judgment in favour of Red Eagle. He considered that Mr Falkenstein had been misled by the advice from Mr Ellis concerning the properties, but, because of Mr Falkenstein's own carelessness, Red Eagle should be treated as equally responsible for the loss of the principal amount of the loan. The Judge therefore fixed the liability of Mr Ellis under s 43(2)(d) at $125,000 with interest at the Judicature Act 1908 rate.

6 The Court of Appeal disagreed. 2 It allowed Mr Ellis's appeal and set aside the judgment. In this Court, Red Eagle seeks to have it restored. It does not challenge the 50 per cent reduction for contributory fault, nor has it sought to have the interest rate increased.

Facts

7 Mr Falkenstein and Mr Ellis first met in about 1978. Later, when Mr Ellis worked as a sharebroker and investment adviser, he acted for Mr Falkenstein in buying and selling shares. Over the years they would meet every six months or so for coffee and would discuss business and investment matters and, as Mr Ellis put it, “generally swap ideas”.

8 From about 2002, Mr Ellis introduced some investment opportunities to Mr Falkenstein but none was taken up. In that year Mr Falkenstein was dealing with a firm of investment bankers, Ward Black Ltd, and met Ms Black. He made an investment of a controlling shareholding in a company to which she introduced him but which apparently has not prospered.

9 In 2003 Ms Black parted company with Mr Ward and sought a new business partner. She was introduced to Mr Ellis by Mr Falkenstein and went into business with him in Ellis Black Ltd.

10 One of the projects which Ms Black brought with her was a venture to grow paua and abalone for Asian markets in the waters off Singapore using South African technology. The company formed for this purpose was Aqua Systems Ltd (ASL). Mr Ellis was not a director or shareholder in that company, but by 2005 he had spent several hundred hours assisting Ms Black with the project, meeting his own travel expenses in New Zealand and overseas to visit potential investors. Ms Black had promised him a right to take up shares in ASL. By July 2005 a Canadian company called Aurum Capital had expressed a willingness to provide substantial funding for the venture but delays were encountered and bridging finance was urgently needed.

11 It was agreed between Mr Ellis and Ms Black that he would approach Mr Falkenstein, which he did by means of several emails sent between 12.37 pm and 12.39 pm on Friday 29 July 2005. The first of them, and for present purposes the most significant, was as follows:

Subject: Interim Funding – AquaSystems Limited (‘ASL’)

Bottom-line Tony – the London bombing has delayed the uplifting of a US$8mil funding package. Annette has developed a marvellous working relationship with the Fund Manager who is very committed to this investment sector i.e.: consistent land based seafood growing to ‘feed the masses’ as a crucial worldwide problem due to rapid reduction of seafood from mother ocean severely under pressure to cope with pollution & massive over fishing.

Key points:

• • Total business plan / key personnel/ proven operating system & infrastructure needs complete

• • ASL independent valuation on ‘future earnings’ US$20mil+ (2 page summary available)

• • $150k bridging finance required – carry an annual interest rate @ 25%

• • Required for between 14 – 45 days (happy to give supplier a minimum 30 day period)

• • Happy to give an option formula to convert to equity if interested?

• • Security by way of either / both a GSA over ASL Parent Co shares or a PG from Annette (has net property assets in Syd approx $2mil)

Essentially, we're caught between the rock and hard place after all the large resources we've spent on this venture which is poised to take off. We have a two page snapshot plus our website below shows our backgrounds etc anything you can do over the next few days Tony would be hugely appreciated = Regards Rick (emphasis added)

12 A second email included the following statement:

Rick & Annette's resources are very tight currently but have funded this for several years now. Both are obviously 110% committed and totally confident that the lion [sic] share of operational building blocks are now in place to get the job done in accordance with the very thorough business plan (snapshot in email to follow).

The rest of the emails consisted of a vigorous promotion of ASL's prospects with detail about the “outstanding business opportunity” it presented.

13 Mr Falkenstein responded the next day, Saturday:

Hi Rick,

Sorry, I was away yesterday. I don't think there is a problem with the bridging finance, at that rate!!! Personal guarantee in letter format would be sufficient, to avoid legal costs, with interest being paid weekly in advance. If all ok, and you want cheque on Monday, then will need details of property assets – I could draw up draft personal guarantee.

Is Annette coming to lunch on Monday as well? Regards

Tony

PS Please send me the 2 page snapshot

The reference to the “property assets” is of course to those in Sydney mentioned in the first of Mr Ellis's emails.

14 On the Monday morning, 1 August 2005, Mr Ellis rang Mr Falkenstein seeking an increase in the loan to $250,000. Mr Falkenstein agreed “as the security offered more than covered the loan request”. By “security” Mr Falkenstein was referring to the “personal guarantee” from Ms Black offered by Mr Ellis in the first email. At 11.43 am on the same day, Ms Black sent Mr Falkenstein a printed form “Personal Statement of Financial Position” which she had filled in and signed. It recorded, inter alia, two properties at Sydney addresses to which she attributed aggregate values of $3.140 million and a mortgage to an Australian bank of $1.230 million, resulting in a claimed equity of approximately $2 million. Ms Black's net worth was shown as $3.052 million, which included an amount attributed to her share of ASL.

15 Just over an hour later, Mr Ellis and Ms Black went together to Mr Falkenstein's office. Mr Falkenstein had drawn up a Term Loan Contract document to record a loan of $250,000 to Ms Black by Red Eagle repayable on 1 November 2005 but with a right of early repayment on 10 working days' notice....