Legal update on litigation and dispute resolution - July 2012
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To arbitrate or to litigate? Consistency is important
A recent decision of the English High Court highlights the importance of ensuring consistency in dispute resolution clauses in documents relating to the same or similar transactions.
The plaintiff bank in Deutsche Bank AG v Tongkah Harbour Public Co Ltd/Deutsche Bank AG v Tungkum Ltd  1 All ER 194, entered into a facility agreement and export contract with Tungkum Limited (TL), which contained an arbitration clause. On the same day, TL's parent company (TH) gave a guarantee of TL's liability to the bank. The guarantee did not contain an arbitration clause.
TL defaulted under the facility agreement and the bank began court proceedings seeking the sums due under both the facility agreement from TL and the guarantee from TH. TL and TH applied to have both sets of proceedings stayed on the basis that they should be submitted to arbitration.
The High Court granted a stay in respect of the claim under the facility agreement. However, it held that the bank was entitled to pursue its litigation under the guarantee, notwithstanding that it might raise the same or similar issues as the claim to be arbitrated. The Court noted that under the terms of the guarantee, the parties had expressly agreed that the court should have jurisdiction. Moreover, the defendants in the two sets of proceedings – while related – were different.
All losses are not the same: Third party claims must relate to the "same" damage
It is not unusual for a defendant to seek to join a third party to legal proceedings on the basis that that party has also contributed to the plaintiff's loss. However, as a High Court decision recently emphasised, there is no automatic right of joinder. It will only be permitted where the defendant and the third party are liable in respect of the damage or loss.
In Coutts v Davenports Harbour Lawyers (1/5/2012; HC Auckland, CIV 2011 404-4430), the plaintiffs' claim arose because their property was damaged by fire in the course of construction. They brought a claim against the first defendant law firm (Davenports), alleging that it had negligently failed to ensure that the property was adequately insured. Davenports issued a third party notice against the builders of the property, on the basis that it was their negligence that caused the fire.
The Court refused to allow the joinder. It noted that it was not enough that the damage caused by a defendant and a proposed third party was substantially or materially similar – it had to be identical. As, the damage allegedly caused by the builders was the destruction of the property, whereas the damage alleged against Davenports was the inability to claim insurance, Davenports were not entitled to seek a contribution from the builders.
Don't let go - Liens are easily lost
The worker's lien is an ancient, but commonly used, security right, which may assist a service provider to achieve payment of its fee. However, as the defendant in Bay Flight 2012 Limited v Flight Care Limited (21/3/2012, HC Napier, CIV 2012 441 092) recently discovered, in order for a lien to be enforceable, possession of the item in issue must not be relinquished, even temporarily.
The case involved a claim by the new owner of an aeroplane (BFL) against a company employed to repair it (FCL). Prior to the sale, FCL had been carrying out work for the former owner and was owed money by it. It had returned the aircraft to the owner for storage over the Christmas break, during which time the sale to BFL occurred. BFL then returned the aircraft to FCL so that that it could be assessed for a quotation for further servicing work, at which point FCL asserted a lien over it. BFL issued summary judgment proceedings against FCL for the return of the aircraft.
The Court found that FCL was not entitled to a lien. It noted that a lien is lost when – as here – a creditor voluntarily relinquishes possession of the goods. An exception to this rule will arise only in very limited circumstances. First, there must be redelivery of the goods for a limited and specific purpose, on the basis that they will be returned on completion. Second, it must be agreed before the redelivery that the lien will not be lost. As FCL was unable to establish that these conditions were met, the lien was held to have been lost.
Fair Trading Act: Not up to the public not to be misled - the onus is on the trader
The end of a distribution agreement can give rise to numerous legal issues. A recent High Court case illustrates that problems may occur when a former distributor continues to represent to the public that they have an association with products they are no longer authorised to sell.
In Mechanical Plastics Corp v Holdfast NZ Limited (30/3/2012; HC Hamilton, CIV 2007 419 000845), the plaintiff (MPC) became aware that its former distributor (Holdfast) was (amongst other things) supplying its own products in response to orders for MPC products, supplying its own products in MPC packaging and continuing to represent that it was the authorised distributor of MPC's products.
The Court held that Holdfast's conduct breached section 9 of the Fair Trading Act 1986 (in that it was likely to mislead and deceive) and that it also amounted to passing off. It rejected arguments by Holdfast that it was not liable because once its customers received the products, they could see that they were not in MPC packaging, would know that they were not related to MPC and could return the product if they were unhappy. Such an approach wrongly placed an onus on the customer not to be misled and deceived, which was not the intention of the Fair Trading Act.
The consequent award of injunctive relief against Holdfast and an enquiry into damages emphasises the importance for former distributors of making a "clean break".
Guarantees: Trustees may also be personally liable
While the law limits the personal liability of trustees in many circumstances, it is essential that trustees signing guarantees understand the precise effect of the document and the capacity in which they are signing it.
In Westpac New Zealand Limited v Chahil ( NZCA 123), Westpac successfully appealed against a High Court decision dismissing its application for summary judgment based on a guarantee. The guarantee had been given by C, who was a trustee of trusts to which Westpac advanced funds, as well as a borrower in his own right.
In the High Court, C had successfully opposed Westpac's summary judgment application on the basis of a clause in the guarantee which limited the banks' rights of recovery against independent trustees. However, the Court of Appeal held that while as an independent trustee, C's liability was indeed limited, this limitation did not protect him to the extent he had also signed the guarantee in his separate capacity as a personal guarantor.
The judgment of the Court of Appeal underlines that a party may sign a guarantee in two capacities and that a limitation of liability in respect of one of those capacities will not necessarily be effective in relation to the other.
"The client told me to do it!" – Lawyers must enquire into suspicious transactions
Dishonest assistance is an equitable doctrine which imposes liability on "accessories" to breaches of trust. This form of liability may arise where service providers such as banks or solicitors have facilitated such breaches by their clients, notwithstanding that they consider that they were obliged to act in accordance with their client's instructions.
In Fletcher v Eden Refuge Trust and Others  NZCA 124, the Court of Appeal rejected an argument by the solicitor that he was not liable for dishonest assistance, as he was obliged to accept and disburse the funds misappropriated by his client in accordance with section 89(1) of the Law Practitioners Act 1982 (which applied at the time of the relevant events but which has since been repealed).
Section 89 obliged solicitors to hold money received for or on behalf of others in a trust account and to pay it out as that person directed. The Court of Appeal held that while the requirements of the section were strict and, in ordinary circumstances, required the practitioner to comply with a client's instructions as to the disbursement of funds, the obligation was not absolute and did not apply in all circumstances.
A lawyer whose suspicions of a client's intended breach of trust were sufficiently strong and who failed to make inquiry might well become liable for dishonest assistance, notwithstanding the obligation under section 89(1). A solicitor with such suspicions should make inquiry. He or she might pay the money into court and seek directions or retain the money in the trust account and commence inter-pleader proceedings. A lawyer taking such steps would have a defence to a claim based on an alleged breach of the obligation under section 89(1).
Leaky buildings: Council not responsible for unauthorised building certifier
"Leaky home" syndrome has resulted in a number of important decisions from New Zealand's highest Courts, across a broad spectrum of legal issues. A recent example is McNamara v Auckland City Council  NZSC 34 in which a majority of the Supreme Court found that the Council was not liable for accepting a Code Compliance Certificate (CCC) from a private certifier, notwithstanding that the certifier was not authorised to issue it.
The plaintiff claimed that the Council owed, and had breached, a duty of care to accept and act only on certificates which were within the authority specified for the certifier in the Building Industry Authority's public register. It also claimed that the Council's advice to the plaintiffs that a CCC had been issued amounted to negligent misstatement. The Supreme Court upheld the decision of the Court of Appeal to strike out the plaintiff's claims.
The majority of the Supreme Court held that the Council is entitled, under section 50 of the Building Act 1991, to rely on CCCs issued by building certifiers under sections 43 or 56 of the Act which, on their face, are not invalid. As such, the Council was not under a duty to assess the validity of the CCC. Furthermore, even if (as the plaintiffs alleged) the Council officers who dealt with the CCC were aware of the limitations on ABC's certifying ability, those officers were not required to go behind the CCC in order to determine whether ABC had in fact been acting outside its authority when issuing it.
The majority also agreed with the Court of Appeal that the Council's advice that a CCC had been issued was not a negligent misstatement. They observed that the CCC was regular on its face and that the Council's advice was true in a literal sense. They also held that the Council's statement could not reasonably be relied upon as implying that the CCC had been issued in conformity with ABC's certifying competence, given that such an assessment was not a necessary part of the Council's statutory functions.
The Supreme Court's decision further delineates the scope of local authorities' liability in relation to "leaky buildings". This is likely to be of particular interest to potential plaintiffs in cases where other potential defendants are no longer in existence.
Confidentiality: Patent Attorney allowed to stay on the case
The issue in Generics UK Ltd v Yeda Research & Development Co Ltd  EWCA Civ 726 was whether an in-house patent attorney should be barred from carrying out work for the plaintiff in relation to the proceeding, given that she had previously worked for one of the defendants. It was accepted by the parties that she did not presently remember any relevant confidential information, but the defendant alleged that she might later remember it, albeit subconsciously, with the result that it could be used against them.
The English Court of Appeal was unanimous that the injunction sought by the defendant should not be granted, as there was no real risk that the alleged confidential information, which was in any event peripheral to the litigation, would be released by the patent attorney. However, the members of the Court differed in their analysis of the relevant legal principles.
Sir Robin Jacob held that the established principles applying to advisers in private practice who had worked for both parties to litigation should be applied. As a result, he held that the burden lay on the new employer to satisfy the Court that there was no real risk of disclosure. In contrast, Etherton LJ found that, as the patent attorney was "in-house", as opposed to being in private practice, the burden was on the former employer to satisfy the Court of the probability of wrongful disclosure or use of confidential information. His reasoning was based, in part, on the fact that an employee can be expected to perform similar functions for each successive employer and, in order to pursue her career, will need to take to each employer, the knowledge, skill and experience she has previously gained.