Legal update on litigation and dispute resolution - October 2011
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Directors beware: untrue statements and the Securities Act 1978
A recent High Court decision highlights that directors of companies issuing documents subject to the Securities Act 1978 run the risk of personal criminal liability if those documents contain untrue statements. The case emphasises that unless directors have reasonable grounds for a belief that statements are true, that belief will not provide a defence.
In R v Moses (HC Auckland, CRI 2009-004-1388, 8 July 2011), Justice Heath convicted three directors of Nathans Finance NZ Ltd on five counts of breaching section 58 of the Act, on the basis that they had distributed to the public offer documents containing untrue statements. The directors were found not guilty on a sixth count.
Justice Heath rejected the directors' argument that the statements were not untrue as they were literally accurate, holding that the offer documents, when read as a whole by a "prudent but non-expert person", contained material misleading statements.
The directors were also unsuccessful in their argument that they should escape liability because they had had an actual belief based on reasonable grounds (including as a result of information provided by auditors and external advisers) that the statements were true. The Court held that the directors had a personal responsibility to ensure independently that the statements were true. When viewed objectively, given the information available to the directors at the time, the directors should have realised that the statements were misleading.
The three directors have recently been sentenced in the High Court (HC Auckland CRI 2009-004-1388, 2/9/2011, Heath J). Each sentence included a sum of reparation ranging from $150,000 to $450,000, and a term of imprisonment ranging from nine months home detention with 300 hours community work, to two years four months imprisonment. The directors' subsequent appeals against these sentences were unsuccessful.
Comparative advertising permitted – provided it is accurate
A retailer's claim that its rival's comparative advertising campaigns breached the Fair Trading Act 1986 has been held to be unsuccessful by the High Court. In Luxottica Retail New Zealand Ltd v Specsavers New Zealand Limited (HC Auckland, 22/6/2011, CIV 2010-404-5439, 22 June 2011), the advertisements in issue compared the prices of two pairs of progressive glasses at OPSM and Specsavers, based on mystery shopping exercises. The plaintiff, which operates the OPSM chain of stores, argued that the advertisements made various misleading and deceptive representations.
Associate Judge Faire granted summary judgment against the plaintiff, holding that the advertisements did not breach the Act as the statements they made were based on specific facts and the overall impression given by them was not misleading. In reaching his decision, Associate Judge Faire observed that there is nothing wrong in principle with comparative advertising as long as it is accurate. However, he also noted that comparative advertising may be misleading where it creates a half-truth by omitting material necessary to make the comparison fair. Nevertheless, the focus is on what is said and done, rather than on what is not said or done. The obligation is to avoid falsehoods, not provide compendious explanations. The test is an objective one, and must be determined on an overall assessment, having regard to the effect of the advertising on reasonable members of the public in all the circumstances.
The case confirms that comparative advertising, when properly undertaken, can be used as a legitimate form of marketing.
Sellers generally not responsible for non-conformity with overseas regulations
The Court of Appeal decision of Smallmon v Transport Sales Limited  NZCA 340 looked at the responsibility placed on an international seller to be aware of regulations applicable in the buyer's country. In line with international authority, the case confirms that where the United Nations Convention on the International Sale of Goods (CISG) applies, sellers are generally not responsible for compliance with the regulatory provisions or standards of the importing country.
In Smallmon, the Australian plaintiff had purchased trucks from the New Zealand based defendant company. When the trucks arrived in Australia, the Queensland authorities refused to register them. At first instance, the High Court found that CISG applied, and the plaintiff was precluded from suing under the domestic Sale of Goods Act 1908. The judge found that there were no special circumstances or other reasons why the seller should have been expected to be aware of the domestic regulations, and so the plaintiff's claim failed.
The Court of Appeal agreed with the High Court's reasoning, and also placed particular weight on the seller having recommended to the buyers expert Australian contractors to assist with the importation, and the buyers' own knowledge and experience as transport operators.
The Court of Appeal also held that, if it had been necessary for it to do so, it would have accepted the sellers' alternative argument that the fitness for purpose provision of CISG did not apply because the parties had agreed otherwise.
The case will provide some comfort for New Zealand businesses dealing with counterparties in a country which is also a party to CISG, such as Australia. While it does not contain a definitive statement as to what are likely to constitute the "special circumstances" in which a seller will be deemed to know of foreign regulations, it indicates that the mere fact that a party has previously sold goods of the same type to buyers in that country will not be sufficient.
Court can order solicitor to disclose client's contact details
The English High Court has recently held that where a client is in contempt of court and in breach of disclosure orders, the Court can order their solicitors to reveal the client's contact details, even when those details are given in confidence. However, it stopped short of ordering the release of legally privileged information.
In JSC BTA Bank v Solodchenko & Ors  EWHC 2163, JSC BTA Bank applied for disclosure of information about Mr Shalabayev by his solicitors, Clyde & Co. Mr Shalabayev was a defendant in an action by JSC BTA Bank attempting to recover proceeds of AAA-rated investment bonds worth US$209 million, which the Bank claimed had been fraudulently misappropriated. Mr Shalabayev was in breach of disclosure orders in a freezing order granted against him and had been found guilty of continuing contempt of court.
The English High Court ordered Clyde & Co to disclose all past and present contact details they held for Mr Shalabayev, but did not order the disclosure of Mr Shalabayev's financial information.
In making the order for disclosure of Mr Shalabayev's contact details, Justice Henderson held that although the Court had jurisdiction to order disclosure, courts should respect express conditions of confidentiality as far as possible. Confidentiality in this case was overridden by the strong public interest in ensuring obedience with court orders, and the fact that disclosure would help trace the assets subject to the freezing order.
While the decision demonstrates that client confidentiality is not an absolute right, it is significant that it stopped short of eroding the principle of legal professional privilege. The High Court dismissed the application for disclosure of Mr Shalabayev's financial information, holding that the information was likely to be privileged and that if the order sought was made, it would inhibit Mr Shalabayev's right to seek legal advice.
Care required when using information gained as a result of a past joint venture
The Court of Appeal decision In Curtis v Gibson  NZCA 373 (CA) highlights that a party to a former joint venture may still owe fiduciary duties to the other parties even after the joint venture has come to an end. As a result, care must be taken in considering whether to make unilateral use of information gained during the currency of the venture.
In Curtis, the appellant argued that the respondent had breached his fiduciary obligations in respect of a former joint venture by pursuing business opportunities that had arisen under the joint venture after the joint venture had ended. In the High Court, it was held that there had been no joint venture, and that even if there had been a joint venture, the respondent had not breached any fiduciary duty in relation to it.
The Court of Appeal, however, found that there had been a joint venture, and noted that fiduciary obligations may arise in joint ventures where some positive steps towards the implementation of a joint plan have taken place, even if that implementation is not completed. The Court also observed that upon the termination of a joint venture, confidentiality obligations may remain, and that the former joint venturers must still act equitably towards each other. Applying this principle to the dispute at issue, the Court found that the respondent had breached his fiduciary obligation by exploiting a business opportunity gained during the currency of the joint venture for his own benefit to the exclusion of the appellant.
Trade marks: the case of the allegedly misleading beach sandal
A Brazilian manufacturer of beach footwear has been unsuccessful in its attempt to prevent the registration of a trade mark by a rival in New Zealand.
The case of Sao Paulo Alpargatas S.A. v But Fashion Solutions Comercio E Industria De Artigos Em Pele LDA (HC Wellington, CIV-2010-485-2473, 5 July 2011) involved an opposition by Sao Paulo to the registration by But Fashion Solutions' of the 'CUBANAS' trade mark on the basis that it was too similar to Sao Paolo's registered trade mark 'HAVAIANAS' and that its use would be likely to deceive or cause confusion.
At first instance, the Assistant Commissioner of Trade Marks had rejected these arguments and found that Sao Paulo had not discharged its burden of showing that its own trade mark was well known. The Assistant Commissioner also found that the trade marks had strong visual and aural differences which meant they would be perceived as conceptually different.
In dismissing Sao Paulo's appeal against this decision, Justice Mallon found that the trade marks were sufficiently distinct overall and therefore it was unlikely that the use of But Fashion Solutions' trade mark would cause confusion. While Justice Mallon considered that Sao Paulo had established that its trade mark was well known in New Zealand (noting in this regard that the term HAVAIANAS has been mentioned in the New Zealand media without the need to state what the product actually was) the other requirements for refusal regarding the likelihood of confusion were not met. Key factors leading to this conclusion were the differences in font and script, the distinctive picture used in relation to the CUBANAS mark and the differences in the appearance and sound of the first part of each name. Justice Mallon also noted that because a tropical holiday or beach theme is not a unique or unusual brand feature, the similar theme of the two marks is not a factor which weighed heavily in the assessment of likely confusion.
The case demonstrates that the threshold for opposing a trade mark on the grounds of similarity or that it is likely to deceive or confuse is relatively high. The mere fact that the mark contains certain similarities to an existing registration will not necessarily be sufficient to prevent its entry onto the register.
Guarantee given as a director may also give rise to personal liability
The issue considered by the High Court in Ravensdown Fertiliser Co-Operative Ltd v Eveleigh (HC Palmerston North, CIV 2010-454-831, 30 June 2011) was whether a guarantee given by two directors of a company was given solely in their capacity as directors and therefore did not bind them personally. Although the case involved a summary judgment application only, the judgment contains an interesting analysis of the legal principles applicable in determining whether a personal guarantee has been given.
The Court started its analysis with the principle that a guarantee must clearly show that the alleged guarantor is binding himself to repay the sum secured if the principal debtor defaults. Accordingly, the words of the guarantee are paramount, although the Court recognised that the intention of the parties is also relevant. Applying these principles to the guarantee at issue, the Court found that it was clearly signed by the directors in their capacity as directors of and on behalf of the company. In this regard, it was relevant that the guarantee contained the words "I/We the Directors of the Company agree to guarantee […]" and that in signing the guarantee, the defendants had crossed out the words "Partner" and "Trustee" from the attestation clause, leaving the word "Director".
However, the Court noted that as a person is able to sign a contract in a dual capacity, the directors may also have signed in their personal capacities. The directors denied that they had done so, arguing that they had merely signed an acknowledgment, that the wording of the documentation was unclear and should be interpreted in favour of the directors and that the plaintiff failed to draw the attention of the defendants to the guarantee requirement and clause.
In the context of the summary judgment application, the Court was unable to reach a final view. However, it noted that in the present case, the presumption that if a signer of a contract purports to sign on behalf of a company he is signing only in that capacity may very well not be displaced by the confusing wording of the document or any extrinsic evidence.
On that basis, the case was referred to a full trial. In the event that that trial proceeds, a further report will be provided in a later edition of this update.
Novel arguments about losses in professional negligence claims
The High Court has recently held that, where a professional gives negligent advice causing loss, the benefits of the competent part of the advice cannot generally be offset against the losses arising from the negligent aspects of the same advice.
In Jones v WHK Sherwin Chan & Walshe (HC Wellington, CIV 2009-485-1324, 25 July 2011) the defendants were the former accountants for Sir Robert Jones. The defendants admitted that they had provided Sir Robert with negligent tax advice. The Court was asked to determine the quantum of defendants' liability. The defendants claimed (among other things) that they were entitled to set off the value of the benefits that had accrued to Sir Robert as a result of the competent part of their advice against the losses flowing from the negligent aspects of their advice.
However, the Court held that an innocent party who has relied on negligent professional advice, and irrevocably changed its position in doing so, is not required to subtract related benefits from the loss suffered; unless it can be put in the position it would have been in had the advice been correct. This was not the case for Sir Robert, who had not received a net gain and was worse off because of the tax liability arising from the negligent advice. As a result, the residual tax efficiency flowing from the negligent advice was not a benefit that could be offset against the price paid to fix the flawed advice. The Court also refused to accept mitigation arguments raised by the defendants.
The case highlights the difficulties faced by negligent professionals when disputing losses that a plaintiff has suffered following reliance upon negligent advice.