In this edition:

The latest on the "mere conduit defence"
Whether someone is making a representation themselves or merely passing on information from someone else for what it is worth is not always easy to determine.  The "mere conduit defence" is frequently claimed by those held liable for statements made by them from the information of others. more ...

"Entire Agreement" clauses and the Fair Trading Act
It has, until recently, been settled law that it is not possible to contract out of liability under the Fair Trading Act 1986 ("FTA") (save for those instances, in the context of commercial transactions, which involve substantial, independently advised parties negotiating from positions of equality). more ...

"Interest free" that isn't free
The Courts have again made it clear that for businesses to claim something is "free", the product or service must actually be free.  In other words, there can be no additional cost associated with the product or service. more ...

Introduction

Whether someone is making a representation themselves or merely passing on information from someone else for what it is worth is not always easy to determine.  The "mere conduit defence" is frequently claimed by those held liable for statements made by them from the information of others. 

In the recent decision of Red Eagle Corporation Ltd v Ellis 12/3/10 SCNZ SC72/2009, the Supreme Court overturned the Court of Appeal's decision that Mr Ellis was a "mere conduit", and held him liable for the information he passed on to another.

Facts

As with most FTA cases, the Supreme Court's decision in this case was very fact specific. The key facts were:

• Red Eagle Corporation Ltd was effectively owned by Mr Falkenstein and was used as the vehicle by which investments were made by him.  Mr Falkenstein was found to be an "experienced businessman" and a "sophisticated investor".
• Mr Ellis went into business with Ms Black in a venture to grow paua and abalone in Singapore.  The finance for this project was delayed and bridging finance was required.
• Mr Ellis and Mr Falkenstein were long-time acquaintances who met every six months to discuss investments and business matters.  Mr Ellis approached Mr Falkenstein for the required bridging finance of $150,000 (later increased to $250,000).
• Mr Ellis indicated that security would be given by way of a personal guarantee by Ms Black.  Mr Falkenstein was told that Ms Black owned property in Sydney with a net value of approximately $2 million.  Mr Falkenstein agreed to lend the money based on the fact that the security was in excess of the loan amount.  Ms Black sent him a Personal Statement of Financial Position which appeared to confirm the holdings of the property assets.  The loan agreement was executed after this.
• Mr Falkenstein did not conduct a title search on any of the properties listed.  After the loan was not repaid, it was discovered that Ms Black did not own the properties and she was declared bankrupt. Mr Falkenstein sought to recover his loss from Mr Ellis personally under section 9 of the FTA (which deals with misleading and deceptive conduct).
• It was accepted that Mr Ellis had acted honestly on the basis of false information given to him by Ms Black, but he had not attempted to verify what she had told him.

Decision of the Supreme Court

The Supreme Court found that Mr Ellis's conduct in representing to Mr Falkenstein that Ms Black had net property assets in Sydney worth approximately $2 million had a crucial continuing influence at the time the loan money was advanced by Red Eagle. This statement was held to be a representation of a concrete fact. The Court found:

In circumstances in which the representation was contained in a communication from a long-standing acquaintance with whom Mr Falkenstein had discussed business affairs for many years, and who was known to Mr Falkenstein as an investment banker, it certainly had the capacity to mislead or deceive even such a sophisticated investor as Mr Falkenstein.

This established a breach of section 9 of the FTA on the facts. The next question for the Court to consider was whether it should make an order under section 43 of the FTA for loss or damage suffered as a result of Mr Ellis's conduct.  In order to establish if an order was required under section 43, the Court looked at whether Mr Falkenstein was actually misled or deceived by Mr Ellis's conduct, and if so, whether Mr Ellis's conduct was an operating cause of Mr Falkenstein's loss or damage. The Supreme Court agreed with the earlier High Court decision on this point:

We see it as an inescapable inference that Mr Falkenstein acted as he did in making the loan because he trusted in Mr Ellis's integrity and believed that Mr Ellis would not have said in an unqualified way that Ms Black owned the Sydney properties unless he knew that to be so.

The Court determined that it was more likely that Mr Falkenstein would rely primarily on what he was told by Mr Ellis about the value of the properties, and would treat information from Ms Black as simply confirming what Mr Ellis had told him.

The Court discussed in what situation someone would be seen as a mere conduit. To be viewed as a conduit, and therefore not liable under section 9, a conveyor of misleading or deceptive information must have made it clear to the recipient that they are merely passing on information received from another.  A mere conduit cannot make it appear as though they have first-hand knowledge of the information. It must be obvious to the recipient that the information is second-hand, otherwise the person conveying the information must accept the risk that they will reasonably be taken by the recipient to have spoken from personal knowledge.  

The Court found that because Mr Ellis did not tell Mr Falkenstein that he was merely passing on information from Ms Black, he could not be seen as a mere conduit.

The Supreme Court agreed with the High Court that it was fair to assess Mr Falkenstein as 50% responsible for his own loss and it awarded damages accordingly.

It has, until recently, been settled law that it is not possible to contract out of liability under the FTA (save for those instances, in the context of commercial transactions, which involve substantial, independently advised parties negotiating from positions of equality).  The justification for this was that, as the FTA is consumer protection legislation, it would be contrary to its protective policy to allow contracting out. 

The High Court recently affirmed the policy of consumer protection inherent in the FTA in Leigh & Anor v The MacEnnvoy Trust Ltd [HC Auckland CIV-2009-404-3631, 31 March 2010].  In this case, the plaintiffs agreed to buy two separate apartments "off the plans" in a residential development.  After discovering that the size of each apartment was 20% less than had been represented, the purchasers brought claims against the vendor and its agent for misrepresentation under the Contractual Remedies Act 1979 ("CRA") and misleading and deceptive conduct under the FTA. 

Both contracts included an "entire agreement" clause, pursuant to which the purchasers acknowledged that they had not been induced to enter into the contract by any representation made by the vendor, other than those expressly included in the contract.   Both purchasers asserted that they were entitled to cancel the contracts because the effects of the misrepresentation were to either, substantially reduce the benefit of the contract or to make the benefit substantially different from what was represented or contracted for by the vendor.

In respect to the purchasers' claim under the CRA, the Court determined that it was fair and reasonable that the entire agreement clause ought to be conclusive between the parties (largely because there was no disparity in respective bargaining strengths, the purchasers were not in a position of vulnerability, each party sought and received their own legal advice and was financially aware and relatively sophisticated).  As a result, the purchasers' contractual claims based upon alleged misrepresentation failed and neither were entitled to cancel the contract.

However, in regard to the purchasers' claim under the FTA, the Court was satisfied that the statements made by the vendor's agent constituted both misleading and deceptive conduct.  Accordingly the Court determined that the purchasers had established the first element of actionable conduct in breach of section 9 of the FTA and went on to consider the remedies available under the Act.  The Court determined that it had a broad discretion in this area and that the ultimate objective of an order under section 43 was to do justice between the parties in terms of the particular case and statutory policy. 

In this instance, the purchasers had sought the same remedy in respect of the FTA as under the CRA (namely a declaration of cancellation and return of the deposits).  Counsel for the purchasers submitted that an adverse finding on the entire agreement clause, leading to a rejection of the right to cancel under the CRA, ought not to fetter or limit the Court's broad discretion under the FTA.

This argument was rejected by Harrison J who considered the entire agreement clause was apposite in this context:

[59]    …the FTA's policy is not, I think, directed towards providing a relatively informed and sophisticated purchaser with a backdoor mechanism for achieving the same remedy of cancellation which she has effectively agreed to forego under the carefully structured terms of a contract for sale and purchase.  Nor is cancellation necessary to do justice between the parties.

Harrison J determined that the most appropriate means of doing justice between the parties under section 43(2) of the FTA was to order a variation to the agreements by reducing the purchase price to an amount sufficient to compensate the purchasers for the losses suffered as a result of the vendor's actionable conduct (based, as closely as possible, on an assessment of the difference between the actual price paid and its value had the vendor's representations about physical size been correct).

Accordingly, notwithstanding the policy reasons for preventing contracting out of the FTA (in consumer transactions), the Court in MacEnnvoy demonstrated a general reluctance to ignore the entire agreement clause when considering the remedies available for a breach of the FTA (particularly as the parties were both relatively informed and sophisticated). 

In light of this finding, consumers ought to be mindful of the fact that, absent instances where a Court may determine that it would not be fair and reasonable to uphold an entire agreement clause, there is a high possibility (particularly in circumstances where the relevant parties are relatively informed and sophisticated) that the Court's discretion to award damages or cancel/vary the contract as a result of a misleading or deceptive conduct may be fettered by the express agreed terms as between the parties. 

The Courts have again made it clear that for businesses to claim something is "free", the product or service must actually be free.  In other words, there can be no additional cost associated with the product or service.

Despite a number of companies being prosecuted for "interest free" claims in the past, the most recent being the $75,000 penalty imposed on Hill & Stewart in 2007, the Commerce Commission's view is that there has been a marked increase in potentially misleading "interest free" representations.

Given the Commission's concerns, it is not surprising that it took action against an Auckland-based car dealership for breaching the FTA for misleading conduct relating to "0% interest" or "interest free" claims.  The dealership pleaded guilty to the charges in March.

In late 2008 and early 2009, Tristram European Limited ran a promotional campaign offering 0% interest on new and used stock.  Some customers were told that the interest free finance offer was only available on the full retail price of the vehicles.  They were also told that a lesser vehicle price could be negotiated for cash or for a sale on interest-bearing terms.

There were two key representations which the dealership accepted were misleading. 

The first involved an undisclosed administration/documentation fee of approximately $350.  It admitted that the failure to include the fee in promotional material was a mistake and it rectified it in later advertising. 

The second, more serious, offending related to the interest free claims.  The interest free terms were only available on the "ticket" prices and not where customers had successfully negotiated a lower cash price.  In this case, the car dealership was prepared to negotiate a lower price for cash, with the ticket price exceeding the cash price by the calculated cost of interest to the dealership.  In essence, this created two-tiers of pricing and prevented the ticket price from being "interest free" as the cost of the interest was built into the ticket price.  The interest terms were therefore not "free", and any such claim was likely to mislead consumers (although there was no evidence of any actual harm or loss to consumers).

As Tipping J noted in 1996 in the Noel Leeming decision (which had similar facts to this case): "The essential vice, in short and simple terms, was that the advertised price was not the lowest price for which the Company would sell for cash.  The advertising gave that impression and further gave the impression that the Company was paying the interest when in reality for a credit transaction it was not the Company which was paying the interest but the consumer".

The recent prosecution against Tristram European Limited is a timely warning to retailers that claims such as "interest free", while appealing when business is slow, must still comply with the FTA.

© Russell McVeagh 2009. All rights reserved. www.russellmcveagh.com