IpsofactoJ.com: International Cases [2000] Part 2 Case 10 [NZCA]



Price Watehouse

- vs -

The Trustee Executors &

Agency Co. of N.Z. Ltd




28 MARCH 2000


Blanchard J

  1. The defendant auditors, Price Waterhouse, appeal against a refusal by Master Venning to strike-out a statement of claim in which the respondent, the Trustees Executors & Agency Company of New Zealand Ltd ("the trustee") seeks damages for losses suffered on the collapse of the Fortex Group in 1994. Three causes of action are pleaded, two in negligent misstatement, the third invoking the Contracts (Privity) Act 1982, but we are concerned only with the first two.

  2. Fortex issued debenture stock to a number of banks in connection with advances individually made by them. To secure the aggregate indebtedness it had executed a debenture trust deed under which Fortex and certain charging subsidiaries granted a charge over their assets to the trustee (cl 4.1). It acknowledged its indebtedness to the trustee in respect of the principal moneys outstanding from time to time in respect of the stock and covenanted with the trustee to make payment of principal and interest in accordance with the terms and conditions of issue of the stock (cl 3.1). No stockholder was to be entitled to enforce its rights and remedies directly against Fortex unless the trustee had failed to do so as required by the deed (cl 2.11). The deed placed on Fortex certain financial obligations including the observance of financial ratios. The trustee had a duty to exercise reasonable diligence to see whether or not any breach had occurred and whether available assets were sufficient to discharge the secured debts as they became due (cl 6.16). This entailed monitoring of the ratios. The security was enforceable by the trustee in the event of default. It had the power to appoint receivers.

  3. Under cl 5.3 Fortex covenanted that within 120 days after the end of each of its financial years and within 90 days after its financial half years it would deliver to the trustee a copy of its financial statements, audited in the case of those as at the end of a financial year. Each such report was to be accompanied by a directors’ certificate. Fortex also covenanted that it would when providing financial statements after each financial year furnish the trustee with a separate report from its auditors stating:

    1. whether or not in the performance of their duties as auditors they have become aware of any matter which in their opinion is relevant to the exercise of performance of the powers or duties conferred or imposed on the Trustee and if so, giving particulars thereof;

    2. whether or not their audit has disclosed any matter (and if so particulars thereof) calling in their opinion for further investigation by the Trustee in the interests of the stockholders;

    3. that they have perused the certificates given by the Directors pursuant to paragraph (b) of this clause since the last report by the Auditors and that so far as matters which they have observed in the performance of their duties are concerned the statements made in such certificates are correct; and

    4. whether or not the Company or its agents have duly maintained each Register in accordance with the provisions of this Deed.

  4. The directors’ certificates were to contain information concerning whether any enforcement event had occurred and was unremedied and concerning Fortex’s observance of financial covenants and ratios.

  5. On 23 March 1994 the trustee gave notice that the security had become enforceable and appointed receivers. On 8 August of that year Fortex was placed in liquidation. The stockholders face a considerable deficiency.

  6. The trustee’s third amended statement of claim details various alleged failures on the part of Price Waterhouse to detect serious financial problems, including fraud by company executives, at an earlier time. It is alleged as a first cause of action that the auditors owed the trustee a duty to use reasonable care in completing their separate report for the year ended 31 August 1992 and negligently breached that duty in particular respects. It is said that as a consequence the trustee was not made aware in or about December 1992 of the existence of enforcement events and breaches of covenant by Fortex and that it therefore did not exercise or lost the opportunity to exercise its enforcement powers, including appointing receivers.

  7. Paragraph 63 pleads as follows:


    Receivership: As a further consequence of the defendant’s breach of duty:


    The security created by the Trust Deed was diluted, damaged or diminished between March 1993 or thereabouts, when receivers would have been appointed, or would have ceased trading if appointed earlier, and March 1994 when receivers were in fact appointed, as follows:


    the anticipated actual deficit against stockholder lending (including interest) on realisation of the security through the receivership in March 1994 is $48,877,000 ("the anticipated actual deficit");


    the estimated deficit against stockholder lending (including interest) that would have arisen on realisation of the security through a receivership and cessation of trading in March 1993 is $10,376,000 (ie $38,115,000 less than the anticipated actual deficit);


    The Trustee [on behalf of stockholders], has suffered losses of $38,115,000;

    particulars of which are set out in schedules "I" to "M" hereto.

    (Mr Harrison QC confirmed that the words "on behalf of stockholders" are to be deleted from the pleading.)

  8. Alternatively, it is said that the trustee lost the opportunity to require Fortex to carry out certain re-structuring which would have preserved the value of the security.

  9. The other cause of action with which this appeal is concerned asserts that Price Waterhouse owed the trustee a duty to exercise reasonable care when conducting its audit for the year ended 31 August 1992 as it knew of the terms of the trust deed and that Fortex would supply the audited financial statements to the trustee and that they would be relied upon for the purposes of deciding whether breaches had occurred and upon enforcement action. The alleged consequences of breach are the same as for the first cause of action.

  10. The grounds for Price Waterhouse’s strike-out application, now pursued to this Court, are:

    1. The trustee is claiming for the amount of the unpaid debt to stockholders, not for diminution of the security;

    2. The debt is owned by the stockholders, not by the trustee, which accordingly cannot sue for it; and

    3. In any event, no duty of care in tort is owed directly by the auditors to the trustee (and, as is accepted, there is no contract between them).


  11. The first of these grounds is put forward notwithstanding the express pleading (quoted in para [7] above) and also found in the second cause of action, that the security created by the trust deed was diluted, damaged or diminished; and also notwithstanding the trustee’s acceptance that the words "on behalf of the stockholders" must be deleted from para 63.2.

  12. As the Master found, the basis of the claims is the loss in value of the security alleged to result from the auditors’ failure to detect trust deed breaches a year or so earlier than they came to light, and to report accordingly to the trustee. The legal title to the security is vested in the trustee, not in the stockholders. The trustee accordingly is entitled to bring a claim for a loss of this character.

  13. Mr Camp QC’s contention was that in reality the trustee is trying to sue for the losses suffered by the stockholders. He pointed to the quantum of the various claims in para 63 and referred the Court to schedule M which is headed "Summary of estimated recoveries compared with stockholders’ gross entitlement (including post enforcement interest)". It may be that the trustee will be in difficulty in relation to quantum. Arguably, a loss in the value of the security is not properly reflected in the net calculations appearing in this schedule. Mr Harrison QC was, however, able to demonstrate that the schedule contains particulars of estimated realisations of the assets over which the security was held by the trustee, showing a decrease of some $21 m from March 1993 to March 1994.

  14. A strike-out application is concerned with the pleading of a cause of action, not with questions of calculation of quantum. We are satisfied that, subject to the existence of a direct duty of care owed by Price Waterhouse to the trustee, the two causes of action, as actually pleaded, are directed to loss in value of the trustee’s security. The question of the ownership of that debt and any right of the trustee to sue for stockholders’ losses therefore does not arise on this appeal.


  15. To an extent Mr Camp was repeating arguments very recently and unsuccessfully advanced in this Court in Price Waterhouse v Kwan (CA80/99, 16 December 1999). There we held that a duty of care was owed by auditors of a trust account of a firm of solicitors to clients who had invested money through the firm’s nominee company, which acted as a trustee in respect of those investments. The arguments made for Price Waterhouse were summarised in para [3] of the judgment in that case.

  16. In the present case it is conceded for Price Waterhouse "for strike-out purposes" that there is a "sufficiently arguable case" for the necessary closeness of relationship or proximity between the auditors and the trustee, but counsel again submits "on a policy basis" that liability must follow the contractual chain; that the trustee has a cause of action in contract against Fortex which in turn is able to pursue a contractual right to reimbursement against the auditors but, crucially it is said, subject to their right to allege contributory negligence by Fortex. The trustee did not bargain for a direct contract with Price Waterhouse. A direct duty would permit the trustee to bring a claim that precludes the auditors from raising Fortex’s contributory negligence. (It is accepted by Mr Camp that Price Waterhouse can still raise in a direct claim any contributory negligence on the part of the trustee itself.)

  17. We agree with Master Venning’s analysis that the contractual situation does not lend itself to categorisation as a contractual chain; that there are inter-related contracts but they do not form or establish a chain as such. "They deal with distinctly different issues". Fortex has its own claim against Price Waterhouse, which it is pursuing in separate proceedings, although the Court was informed that there is likely to be a conjoint hearing. It is suing, through its receivers, for its own losses. Any recovery may benefit the stockholders but Fortex’s claim is not limited to the amount they have lost. As already mentioned, the present claim is for the loss in value of the security which is not a claim Fortex could bring. (We were told from the bar that the three litigants have entered into a deed ensuring that there will not be double recovery.)

  18. We can see no policy reasons for denying the trustee the right to sue direct. The position is very similar to that in the Kwan case, albeit without the statutory background referred to in the judgment. The trustee brings its claim in respect of its interest as security holder. That is an interest quite distinct from Fortex’s ownership of the assets it says were prejudiced by Price Waterhouse’s negligence. The auditors admit that they knew the audited accounts and the separate reports were to be delivered to the trustee and were intended to be relied upon by it. Therefore it is arguable that Price Waterhouse assumed a responsibility to supply the trustee with information pertinent to its separate interest as mortgagee of the assets of the Fortex group, that is, information about the financial position of Fortex. If that is established at trial, why should Price Waterhouse then be able to obtain a reduction in damages otherwise payable to the trustee by pointing to Fortex’s misconduct and carelessness? For these were the very things which, it will be argued, Price Waterhouse was supposed to detect and report on to the trustee. Such contributory negligence of Fortex towards Price Waterhouse is something which should not affect the trustee’s claim as mortgagee. And if the trustee was itself guilty of negligence, and the diminution in the security is attributable in whole or in part to that cause, there is nothing to preclude Price Waterhouse from raising that matter in its defence.

  19. In these circumstances there is no good reason for refusing to permit a direct claim. To allow it will not circumvent contractual arrangements designed to exclude the existence of an obligation owed directly by the auditors to the trustee and to require any claim to be made via the debtor company. The alleged duties on the part of Price Waterhouse in contract to Fortex and in tort to the trustee are readily capable of co-existing. There is no short-circuiting of the contractual structure (Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, 195).

  20. Nor is the policy argument put forward on behalf of Price Waterhouse assisted by pointing to the fact that the receivers who are bringing the Fortex claim against the auditors were appointed to that office by the trustee pursuant to the trust deed. They were of course appointed as agents of Fortex and are acting in that capacity, not on behalf of the trustee.

  21. It is true, as Mr Camp submitted, that the trustee has also chosen to put forward a third cause of action under the Contracts (Privity) Act in which it seeks to rely upon the contract between Fortex and Price Waterhouse. In doing so it necessarily faces a defence raising the contributory negligence of Fortex. However, the fact that a third party may take advantage of that Act and choose to sue on a contract should not in itself deprive the third party of the right to bring a claim in tort unless of course the promise contained in the contract conferring a benefit on the third party contains a limitation or restriction on liability or quantum with which the tort claim would be inconsistent. It is not suggested that is the case here.

  22. The appeal is dismissed with costs of $5,000 to the respondent together with its reasonable expenses, including travel and accommodations costs of counsel, to be fixed by the Registrar in the absence of agreement.


Henderson v Merrett Syndicates Ltd [1995] 2 AC 145

Price Waterhouse v Kwan (CA80/99, 16 December 1999)


Contracts (Privity) Act 1982


M R Camp QC and B M M McKinlay for Appellant (instructed by Duncan Cotterill, Christchurch)
R Harrison QC and M G Colson for Respondent (instructed by Bell Gully, Wellington)

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