Legal update on banking and commercial law - July 2012
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Contractual interpretation and limitations on claims for payment
Dorchester Finance Limited v Deloitte
This case was an appeal in June 2012 by Dorchester Finance Limited (Dorchester), from a High Court decision made in December 2010.
The High Court case involved a claim by Dorchester against Deloitte (the first defendant) and Perpetual Trust (Perpetual) (the second defendant). Perpetual, as Trustee under a trust deed for debt securities issued by Dorchester, engaged Deloitte to undertake an independent review of a deferred payment plan which was being proposed by Dorchester. As part of that engagement, Deloitte and Perpetual signed a letter of engagement which provided that:
"No action, regardless of form, arising under or relating to this engagement, may be brought by either party more than one year after the cause of action has accrued, except that an action for non-payment may be brought by a party not later than one year following the date of the last payment due to such party hereunder" (the "limit on action clause")
Dorchester also signed the letter of engagement agreeing to the constraints, limitations and disclaimers contained in the letter.
Deloitte rendered invoices to Perpetual late in 2008. These invoices were the subject of an independent review and were later revised and reissued in a single invoice in August 2010. The trust deed contained a term requiring Dorchester to indemnify Perpetual for all payments reasonably incurred, including expenses for the taking of any expert advice deemed necessary in relation to any default. Accordingly, Perpetual forwarded the revised Deloitte invoice to Dorchester seeking reimbursement by Dorchester under the indemnity.
It was not in contention that the latest date for Deloitte to commence action to recover the fees owing under the 2008 invoices, was December 2009 (even though Perpetual did not pass the invoices on to Dorchester until after that date) and that the limit on action clause was valid and effective. However, disagreement arose as to its meaning.
Dorchester claimed (amongst other things) that once the debt ceased to be enforceable, it ceased to survive and had no effect thereafter. The proceedings were heard and determined by Venning J, who determined that (amongst other findings) the limit on action clause did not extinguish the underlying debt.
Dorchester appealed this decision in the Court of Appeal. The Court of Appeal (judgment delivered by Asher J) determined, upon looking at a number of precedent cases that, in the absence of specific wording which provided for the debt to be extinguished upon expiry of the limitation period, the underlying debt continued to exist beyond the limitation period, even though no action could be brought in respect of that debt.
Because the debt was found to still exist, this finding allowed Perpetual to pay the invoice and seek reimbursement from Dorchester under the indemnity.
It is difficult to see how the distinction between the right to bring a claim for payment of a debt, versus the existence of the debt itself, is a useful distinction under a two counterparty scenario (unless the creditor is able to apply some form of set-off in respect of the debt, against a claim brought by the debtor). Ultimately, the case turned on the particular contractual interpretation of the limitation clause and contractual parties are therefore advised to consider the terms of any limitation on claims carefully before signing.
Duties of banker to its customer to not extend to collateral interests
The case of JoJaro Investments Limited v ASB Bank Limited involved a senior employee of an insurance company who stole nearly $4 million that the company had set aside to maintain its credit rating. The shareholders of the company could not afford to replenish the stolen capital so they sold their shares for nominal consideration.
The former shareholders said that the bank was liable to them on the basis there was an implied term in the various contracts they had with the bank and a duty of care that the bank not permit the fraudster to operate the account in breach of the mandate given to it by the company. The bank said that there was no such implied term and denied the existence of such a duty. The bank also said that the losses claimed by the plaintiffs were the company's losses, and not the plaintiffs.
The court found that there was a term (expressed or implied) in the primary contract between the company and the bank that the bank would not pay unauthorised cheques. That term, however, should not extend to third parties with collateral interests such as the plaintiffs. The court also found that the bank was not bound to warn third parties with collateral interests, such as the plaintiffs, of perceived misconduct by the fraudster in the operation of the company's accounts. Any such duty must be limited to a duty to warn the company. To oblige the bank to warn the plaintiffs standing behind the company would place an obligation on the bank that conflicted with its duty of confidence as banker to the company.
For these reasons, the direct rights of action the plaintiffs brought against the bank were unsustainable. The proper plaintiff bringing an action in this case would have been the company.
As an aside, the plaintiffs have since obtained an assignment of the company's rights of action against the bank and have issued separate proceedings. That action may succeed.
FMA releases final guidance on effective disclosure
On 8 June 2012, the Financial Markets Authority (FMA) released its final guidance note on effective disclosure. The release follows extensive industry consultation after publication of the first draft in January and the second draft in April, of this year.
The FMA's guidance note on effective disclosure can be found here.
When does the final guidance note take effect?
The FMA will use the guidance note from 9 July 2012 as part of a risk-based assessment of newly issued disclosure documents. The FMA will use the guidance note from 1 January 2013 for the review of refreshed disclosure documents for continuous issuers. Continuous issuers will therefore need to consider the extent to which their disclosure documents comply with the guidance note the first time they issue a new investment statement and/or register a new prospectus after 1 January 2013.
Key areas of change from the last draft guidance note
In response to over 40 submissions (including from Buddle Findlay), the key changes to the final guidance note from the draft circulated in April are:
- Clarifying which aspects of the guidance note will apply to prospectuses, investment statements or both
- Reiterating that the guidance note does not create new law, rather that it will be used to assist the FMA in assessing compliance with the law
- Clarifying that by "materiality" the FMA means "information that is likely to affect the judgment of an intending investor when making a decision whether or not to invest"
- Recognising that some market participants use combined documents and clarifying that the guidance note will apply to these documents
- Explaining that while a key information section at the beginning of the document is not mandatory, the FMA considers it to be good practice to include one
- Clarifying that a prospectus must not cross-refer to information on a website or another document and that all material information must be in the prospectus
- Acknowledging that registered banks have different disclosure requirements and clarifying how the guidance note will apply, for example, to their investment statements
- Advising that application forms should be placed at the end of disclosure documents to help ensure that intending investors read the disclosure before filling in the application form.
The effect of the Financial Markets Conduct Bill on the guidance note
The FMA acknowledges that the guidance note will need to be updated when the Financial Markets Conduct Bill (which is currently before the Select Committee) is enacted, to reflect any changes in disclosure obligations.
FMA no longer provides a pre-registration vetting service
Although the FMA no longer provides the pre-registration vetting service previously provided by the Ministry of Economic Development, the guidance note emphasises that the FMA is keen to engage with issuers before they register disclosure documents as long as they relate to novel products, strategic issues, or complex, big or significant issues (for example, major IPO's).
FMA's approach to reviewing disclosure documents - emphasis on education
The FMA has the power to act if a disclosure document does not comply with legal requirements. However, the guidance note emphasises that the FMA will not move immediately to cancel or prohibit the publication of a disclosure document, unless the document fails to comply with legal requirements to such a degree that urgent action is required to protect the interests of investors. The FMA has said that, in most cases, it will engage with, and educate, the issuer first, before taking further action.
We commend the FMA on spending the time to consult with stakeholders, and providing several drafts of the guidance note before finalising it. We encourage the FMA to continue with this helpful process when drafting any further guidance or legislation.
New fees for Companies Office services, and new FMA and XRB levies
On 1 August 2012, the fees the Companies Office charges for various services it provides will change. In addition, the Companies Office will start collecting levies for the Financial Markets Authority (FMA) and the External Reporting Board (XRB). FMA and XRB levies will be included in most registration fees, annual return fees and the fee for registering a prospectus.
The levies will provide a much-needed source of revenue for the FMA and XRB. The government forecasts that the levies will provide $16.4 million of funding to the FMA and $3.66 million of funding to the XRB annually.
Compared to earlier drafts of the proposed approach to levies, the levies are now spread over a much larger base of persons. Correspondingly, each individual levy is smaller, often much smaller, than the levies that were originally proposed by the Ministry of Economic Development (as it was then).
Less positively, New Zealand financial institutions are now faced by something of a mishmash of levies, charges and fees payable to assorted New Zealand regulators (albeit sometimes the same person wearing different regulatory hats) at different times throughout the year. Take, for example, a listed company. As a company, it will be charged both a fee and a levy on incorporation to the Registrar of Companies, with further fees and levies payable each annual return. As a financial service provider, that company will also be obliged to pay further fees and levies to the Registrar of Financial Services on registration and on filing each annual confirmation (and, in certain circumstances, each time its directors or senior managers change). It will also be obliged to pay a fee and a levy to the Registrar of Financial Service Providers each time it registers a prospectus, while the FMA will issue it (at some stage) an annual invoice for still more levies. Finally, a fee (but not a levy) is payable to the Registrar of Companies when it files its financial statements.
These are all in addition to fees payable to other organisations (for example, NZX and approved dispute resolution schemes), and on-application fees for exemptions and rulings.
There are also some potentially arbitrary distinctions in the various classes of levy. Persons in more than one class must pay multiple levies (except persons in the multiple sub-classes of class 6). Some levies (for example, banks and insurers) are calculated with reference to the total assets held or premium revenue by the banking or insurance group. However, other levies (for example, fund managers) must be paid on a per-entity basis. Depending on the particular corporate structure adopted, there may be disproportionate affects on certain financial institutions.
The situation is not helped by the relatively scattered sources of fee and levy-charging powers. Potentially affected financial institutions should refer to (among other specific legislation and regulations, for example, relating to limited partnerships or building societies) the following regulations:
- Financial Markets Authority (Levies) Regulations 2012
- Financial Markets Authority (Fees) Regulations 2011
- Financial Service Providers (Fees and Levy) Regulations 2010
- Financial Service Providers (Dispute Resolution – Reserve Scheme Fees) Rules 2010
- Financial Advisers (Fees) Regulations 2010
- Securities (Fees) Regulations 1988
- Securities Markets (Fees) Regulations 2003
- Financial Reporting (Fees and Forms) Regulations 2007
- Companies Act 1993 Regulations 1994 (schedule 2).
We would welcome the relevant regulators providing a comprehensive statement of all fees and levies payable. Such administrative action could greatly simplify the approach to fees and levies. In the meantime, however, please feel free to contact Buddle Findlay to discuss your particular situation.
"Dastardly rumours as to the price of marrows"
Kuehne + Nagel International Ag v Commerce Commission (CA, 31/5/2012,  NZCA 221, Arnold, Stevens, and Wild JJ)
A recent Court of Appeal case relating to alleged price fixing arrangements in the freight forwarding industry highlights the risks of cartel conduct (which is proposed to be criminalised soon). Penalties totalling €169 million were awarded by the European Commission earlier this year in relation to the arrangements, and penalties totalling $8.85 million have already been awarded in New Zealand.
One of the alleged price fixing arrangements considered in the case includes coded messages sent via email and meetings of a "Gardening Club", in which participants used gardening terms and vegetable names to conceal their activities. For example, an email quoted in the case began: "Fellow Gardeners, I am hearing dastardly rumours as to the price of marrows being sold by the one gardener who did not appear at the last horticultural review…Gardener Cat-Weasel from the greenhouses of Geo…It appears they are giving their marrows to everyone and anyone…Not as agreed."
The key issue considered by the Court of Appeal in this case (in addition to whether there was a serious issue to be tried in respect of the alleged price fixing arrangements) was whether New Zealand courts have jurisdiction to bring proceedings against overseas holding companies in relation to conduct of a New Zealand subsidiary. Under the Commerce Act, conduct engaged in on behalf of a company by a director or agent of the company (within the scope of his or her actual or apparent authority) is deemed to have been engaged in also by the company. In this case, it was held that the alleged price fixing arrangements were given effect to by a New Zealand company on behalf of its Swiss-based holding company, and therefore, the New Zealand High Court has jurisdiction to bring proceedings against the holding company.
Court of Appeal overturns Vector victory
Commerce Commission v Vector Limited  NZCA 220
The Court of Appeal has upheld the Commerce Commission's appeal against the September 2011 High Court decision Vector Limited v Commerce Commission under Part 4 of the Commerce Act 1986. The background to this was the Commission's decision not to set an input methodology for starting price adjustments when carrying out a "mid-point price reset" for electricity distribution businesses (EDBs) subject to price control. The Court of Appeal held that the Commission's decision was lawful and that it was not necessary for the Commission to specify an input methodology for EDBs' starting price adjustment. The Court was of the view that Part 4 balances certainty against the Commission's role as a regulator that, ultimately, must make regulatory determinations for the long-term benefit of consumers. This decision provides a more practical pathway for navigating Part 4 than the High Court ruling, perhaps at the expense of regulatory certainty in the short term.
Read more about the Court of Appeal decision and related regulatory developments in our June 2012 public law legal update, available here.