The Fair Trading Act 1986 was implemented to protect people from misleading and deceptive conduct and is one of the main planks of consumer-protection legislation in New Zealand. While previous cases have established the principle that, whether the conduct does, or is likely to, mislead or deceive is a question of fact to be viewed in the context of the surrounding facts and circumstances, a recent Supreme Court case has demonstrated that even experienced and sophisticated investors will have the benefit of protection under the Act in certain circumstances.

 

The case of Red Eagle Corporation Limited v Ellis involved a claim by the director of Red Eagle (Mr Falkenstein) that he had been misled and deceived by an investment banker (Mr Ellis) in relation to making a short-term loan of $250,000 to the banker’s business partner. Falkenstein was an experienced businessman and company director and had known Ellis for over 20 years. Ellis had worked as a sharebroker and investment adviser and had previously acted for Falkenstein in buying and selling shares. By 2005 Ellis was working as an investment banker and approached Falkenstein asking for a loan for an investment opportunity being promoted by Ellis’ business partner (Ms Black). Ms Black had advised Ellis that she had property assets in Sydney with a net value of approximately $2,000,000 and Ellis presented this information to Falkenstein with his request for the loan on the basis that the security would be a personal guarantee from Black (and Black subsequently provided a statement of financial position to Falkenstein setting out those details). This is where it all went wrong for both Falkenstein and Ellis as it turned out that Black did not actually own the Sydney properties and, needless to say, the loan was never repaid.

 

The Judge in the High Court found that, as the request for the loan came from Ellis and was backed by him, his representation to Falkenstein in relation to Black’s properties misled or deceived Falkenstein into making the loan. However it was also held that Falkenstein was careless in neglecting to protect his own position (he did not obtain any title searches for the properties or investigate any mortgage advances against the properties and prepared the loan documentation himself) and he was therefore held equally responsible with Ellis for the loss. Ellis’ liability was therefore fixed at $125,000.

 

The Court of Appeal disagreed with the High Court decision citing (amongst other things) the fact that all three participants in the deal were experienced investors and were capable of assessing the information provided and deciding whether or not to act on it. The Court of Appeal therefore rejected Falkenstein’s claim.

 

The Supreme Court however upheld the High Court decision stating that “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”.

 

While the specific fact situation of the Red Eagle case was important in establishing Ellis’ liability under the Act, the decision may well be a useful precedent for other experienced investors who are seeking to recover losses.

 

 

David Smillie is a partner in the law firm Gallaway Cook Allan.