Zurich Australian Insurance Ltd v Mark Donald Withers

JurisdictionNew Zealand
JudgeHarrison J
Judgment Date16 December 2016
Neutral Citation[2016] NZCA 618
Docket NumberCA317/2015
CourtCourt of Appeal
Date16 December 2016
Between
Zurich Australian Insurance Limited
Appellant
and
Mark Donald Withers
First Respondent

and

Burvle Edward Swindle And Carolie Ann Terpening Swindle As Trustees Of The Swindle Family Trust
Second Respondents

and

Aorangi Forests Limited
Third Respondent

and

Orakei Securities Limited (In Liquidation)
Fourth Respondent

[2016] NZCA 618

Court:

Randerson, Harrison and Kós JJ

CA317/2015

IN THE COURT OF APPEAL OF NEW ZEALAND

Appeal against a High Court (“HC”) decision which found the appellant insurer was liable to indemnify the respondent — the first respondent appealed against the damages award in the primary judgment — cross-appeal by the second respondents against the reduction in the damages award for contributory fault — the first respondent had acted as the accountant for the company to which the second respondents had lent money — a HC decision— found that the first respondent had caused the second respondent's loss of $2.62 million and that he had breached his duties under the Fair Trading Act 1986 by making false and misleading statements in undertakings to the second respondent's agent, upon which they relied before advancing each annual loan — the HC reduced the first respondent's liability to 50 per cent of the second respondent's claim to reflect their contributory fault, principally through their agent's negligence what was the appropriate damages award — whether the second respondents were contributorily negligent — whether the appellant was not liable to indemnify the first respondent on the grounds of dishonesty.

Counsel:

A C Challis and H K Harkess for Appellant

J Long and SGT Ma Ching for First Respondent

D J Heaney QC and P A Robertson for Second, Third and Fourth Respondents

  • A The appeal is allowed and the judgment entered for the first respondent against the appellant is set aside. Judgment is entered for the appellant against the first respondent.

  • B The appeal by the first respondent is allowed to the extent that:

    • (a) The judgment sum of $1.31 million is set aside. Judgment is entered for the second respondent against the first respondent for the sum of $1,155,697.

    • (b) The first respondent is ordered to pay interest to the second respondents on the amended judgment sum in accordance with [42] of this judgment.

  • C The cross-appeal by the second respondents is dismissed.

  • D The application by the first respondent for leave to adduce further evidence is declined.

  • E The first respondent is ordered to pay the appellant costs for a standard appeal on a band A basis with usual disbursements.

  • F The second respondents are ordered to pay costs to the first respondent on the cross-appeal for a standard appeal on a band A basis (plus a 50 per cent uplift to reflect the first respondents limited success on the appeal against the damages award) with usual disbursements.

  • G Costs in the High Court are to be fixed by that Court.

JUDGMENT OF THE COURT
REASONS OF THE COURT

(Given by Harrison J)

Contents

Introduction

[2]

Background facts

[6]

Damages

[18]

Fresh evidence

[47]

Contribution to loss

[53]

Indemnity

[71]

Zurich's defence

[71]

Legal principles

[78]

Analysis

[86]

(a) Mr Withers' conduct

[86]

(b) Mr Withers' subjective knowledge

[92]

(c) Objective standards

[103]

Result

[112]

Postscript

[119]

Introduction
2

Burvle and Carolie Swindle are American citizens who loaned $1.5 million to the Vintage group of companies (Vintage) in each of 2008 and 2009 to a total of $3 million. The funds were advanced as annual working capital for Vintage's wine growing and producing business but the group used them for other purposes. Vintage repaid the Swindles $380,000 before defaulting and was later wound up. The Swindles have not recovered anything further from the company or various guarantors.

3

The Swindles claimed their net loss of $2.62 million was caused by Mark Withers, Vintage's accountant. Following a defended trial in the High Court, Peters J found that Mr Withers had breached his duties to the Swindles under the Fair Trading Act 1986 ( FTA) by making false and misleading statements in undertakings to the Swindles' agent upon which they relied before advancing each annual loan. 1 But the Judge reduced Mr Withers' liability to 50 per cent of the Swindles' claim to reflect their contributory fault, principally through their agent's negligence. 2 Judgment was entered for $1.31 million plus interest. 3

4

Peters J found that Zurich Australian Insurance Ltd, Mr Withers' professional liability insurer, was liable to indemnify him against the Swindles' judgment. 4 Zurich appeals against the indemnity judgment. Mr Withers appeals against the damages award in the primary judgment. And the Swindles cross-appeal against the reduction in the damages award for contributory fault. Mr Withers also seeks leave to adduce fresh evidence.

5

We shall address, first, the issues of primary liability between the Swindles and Mr Withers — damages and contributory negligence — and, second, the issue of indemnity between Mr Withers and Zurich. Within each context we shall return more fully to the facts relevant to each issue.

Background facts
6

In broad outline, 5 the Vegar family owned the Vintage group of companies through which they conducted their wine growing and producing business at Matakana. Among the companies were Matakana Estate Ltd (Matakana) and Goldridge Estate Ltd (Goldridge) which made and sold the wine.

7

The Vegars raised money for the purpose of funding each year's wine vintage through the brokerage of Kingsley Turner. In turn he operated through corporate entities — Boston Securities Ltd and then Orakei Securities Ltd (Orakei) at the relevant times. The Swindles visited New Zealand frequently where they met Mr Turner. He introduced the Swindles to the Vegars and, after conducting due diligence inquiries, they agreed to lend funds to the Vintage companies.

8

The funding arrangements, which operated through a multiplicity of intermediaries, commenced in 2001 and continued without incident until 2009. The Swindles were never in a direct contractual relationship with Vintage. Instead, their family trust loaned monies to a related company, Aorangi Forests Ltd (Aorangi), which advanced the funds to Orakei. In turn Orakei advanced the funds to Vintage under a term loan facility agreement, charging a fee of 2.25 per cent of the principal deducted on drawdown and interest at a higher rate than was payable on the underlying loans from the Swindles. Orakei was only obliged to repay the Swindles on a no-recourse basis if and to the extent that the Vintage companies repaid funds. Each loan was for a term of two years, allowing the borrower sufficient time to sell the year's vintage and yield funds for repayment. Another advance would be made for the coming year although repayment on the preceding advance remained outstanding. Also, Orakei assigned to the Swindles its rights under the facility agreement.

9

The term loan facility agreement between Orakei and Vintage reflected the restrictions imposed by the Swindles on Vintage's use of the funds. For example, the 2008 facility agreement required Vintage to apply the funds to pay costs incurred in producing wine on these terms: 6

  • 2.3 Purpose: The proceeds of each Advance shall be applied by the Borrower solely for the purposes of meeting costs detailed in the Costs Schedule and not for any other purpose or for any unlawful purpose.

  • 2.4 Advances: The Borrower acknowledges and agrees that each Advance … shall be deposited into an account with a bank acceptable to the Lender (the “Costs Account”), which account shall be established solely for the purposes of meeting the costs specified in the Costs Schedule. Mark Withers is to be designated as a mandatory signatory to the Costs Account.

10

The costs account was the account into which each advance from the Swindles was paid. The production costs specified in the schedule were the projected costs of producing the year's wine. The schedule was detailed. Expenses were itemised for purchasing juice, bottling, freight and setup costs spread over the year of the loan. Also included were itemised forecasts of income from net sales, escalating as the year progressed. All items, both of expenditure and income, were given an exact dollar figure. Each costs schedule was incorporated in each annual facility agreement between Orakei and the Vintage companies. 7

11

The Vintage companies produced each year's vintage through what were designated as A and B companies. Each company produced different blends. But new companies were not incorporated annually. Instead, the names of the A and B companies were changed to reflect the year of the loan. So the wine was produced each year by a differently named company — in 2008, for example, by 08A and 08B.

12

Mr Withers and the Vegars had a long professional relationship. He was engaged to assist with tax planning and preparation of financial statements and income tax returns for the Vintage companies. As a condition precedent to their loans the Swindles required an undertaking addressed to Orakei or its predecessors from Mr Withers, acting in his capacity as the accountant to Vintage and the Vegar

family, that (a) he was a mandatory joint signatory for what was described as Vintage's costs account; and (b) the account would be used solely to meet production costs specified in a schedule attached to the undertaking. The costs schedule was to be attached to each facility agreement in the same form as the document which was to be attached to the undertaking. And Orakei was entitled to call up an advance and exercise all its rights if, among other things, Mr Withers ceased to be a mandatory joint signatory
13

As noted, the first of the two outstanding loans was made in April...

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