IN THE HIGH COURT OF NEW ZEALAND

CIV 2008-404-003460

BETWEEN BRUCE LEONARD BARTLE AND

DOROTHY JUDITH BARTLE
First Plaintiffs

AND BARTLE PROPERTIES LIMITED

Second Plaintiff

AND GE CUSTODIANS
First Defendant

AND TASMAN MORTGAGES LIMITED

Second Defendant

AND JONATHAN MATHIAS

Third Defendant

Hearing: 20-24, 27 & 28 April and 12 May 2009

Appearances: P J Dale and D W Grove for Plaintiffs

R B Stewart QC, M V Robinson and B J Upton for First Defendant
N Tetzlaff for Second Defendant (Granted leave to withdraw)
A Challis and R Scott for Third Defendant

Judgment: 30 September 2009

INTERIM RESERVED JUDGMENT OF RANDERSON J

This judgment was delivered by me on 30 September 2009

at 11 am, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar

Solicitors: Ellis Law, PO Box 4516, Auckland

Simpson Grierson, Private Bag 92518, Auckland
McElroys, PO Box 835, Auckland
Counsel: D W Grove, PO Box 130, Auckland 1140
R B Stewart QC, PO Box 2302, Auckland 1140

BARTLE And Anor V GE CUSTODIANS And Ors HC CIV 2008-404-003460 [30 September 2009]
INTRODUCTION .............................................................................................................................[1]

THE ISSUES ....................................................................................................................................[14]

THIRD DEFENDANT (MR MATHIAS)...............................................................................................[14]
FIRST DEFENDANT (GE) ................................................................................................................[14]
THE CASE AGAINST MR MATHIAS.........................................................................................[15]
THE FACTS.....................................................................................................................................[15]
EVENTS PRIOR TO THE SIGNING OF THE AGREEMENT FOR SALE AND PURCHASE ON
29 SEPTEMBER 2006......................................................................................................................[16]
THE FIRST MEETING WITH MR MATHIAS ........................................................................................[36]
EVENTS AFTER THE FIRST MEETING WITH MR MATHIAS ................................................................[70]
THE COMPLETION OF THE AGREEMENT FOR SALE AND PURCHASE..................................................[93]
EVENTS AFTER THE AGREEMENT FOR SALE AND PURCHASE WAS SIGNED.......................................[99]
THE MEETING BETWEEN THE BARTLES AND MR MATHIAS ON 7 NOVEMBER 2006......................[105]
EVENTS IN 2007...........................................................................................................................[107]
FACTUAL CONCLUSIONS IN RELATION TO THE CASE AGAINST MR MATHIAS ..[111]

DID MR MATHIAS OWE THE PLAINTIFFS A DUTY OF CARE AS ALLEGED IN

PARAGRAPHS 53 AND 53A ASOC? .........................................................................................[128]

DID MR MATHIAS BREACH ANY DUTY OF CARE OWED TO THE PLAINTIFFS IN ANY
OF THE RESPECTS ALLEGED IN PARAGRAPHS 56, 56A AND 57 ASOC? ...................[146]

DID THE PLAINTIFFS CONTRIBUTE TO THE LOSSES SUSTAINED BY THEM IN ANY

RESPECT IDENTIFIED IN PARAGRAPH 23 OF MR MATHIAS’ STATEMENT OF
DEFENCE? ....................................................................................................................................[161]

WHAT RELIEF, IF ANY, ARE THE PLAINTIFFS ENTITLED TO AGAINST MR

MATHIAS? ....................................................................................................................................[164]

CAUSES OF ACTION AGAINST THE FIRST DEFENDANT (GE) ......................................[167]

INTRODUCTION ............................................................................................................................[167]
TML AND EML...........................................................................................................................[173]
THE NEW ZEALAND MASTER TRUST AND SECURITY TRUST DEED AND THE MASTER ORIGINATION
AND SERVICING AGREEMENT (MOSA) DATED 22 JUNE 2006 .....................................................[176]
THE CORRESPONDENT DEED .......................................................................................................[180]
THE OPERATIONS MANUAL .........................................................................................................[187]
GENWORTH FINANCIAL ...............................................................................................................[190]
AMS LOAN PRODUCTS................................................................................................................[192]
THE BARTLES’ FIRST LOAN - $137,484.00 IN NOVEMBER 2006.....................................[197]

THE SECOND AND THIRD LOANS OF $125,791 AND $366,291 MADE IN SEPTEMBER
2007 .................................................................................................................................................[213]

ALTERATION OF DOCUMENTS .............................................................................................[232]

AUDIT CHECKS...........................................................................................................................[240]

WERE TML OR BLUE CHIP (NZ) LIMITED AGENTS OF GE ON THE BASIS ALLEGED
IN PARAGRAPH 35 ASOC IN ANY RESPECT AND, IF SO, WHAT WAS THE SCOPE OF
THE AGENCY?.............................................................................................................................[250]
WAS TML THE AGENT OF GE? ....................................................................................................[251]
WAS BLUE CHIP THE AGENT OF GE? ...........................................................................................[277]
DID TML HAVE KNOWLEDGE OF THE MATTERS IDENTIFIED IN PARAGRAPHS 32
AND 33 ASOC AND, IF SO, IS ANY SUCH KNOWLEDGE ATTRIBUTABLE TO GE AT
THE TIME EACH OF THE LOAN AGREEMENTS WERE MADE? ...................................[280]

DID ANY OF THE LOAN AGREEMENTS CONSTITUTE AN UNCONSCIONABLE

BARGAIN BY REASON OF ANY OF THE MATTERS IDENTIFIED IN PARAGRAPH 36
ASOC? ............................................................................................................................................[283]
LEGAL PRINCIPLES ......................................................................................................................[286]
EVALUATION OF THE FACTS AS TO UNCONSCIONABILITY............................................................[288]
THE NATURE OF THE FASTDOC 70 LOANS ...................................................................................[297]
CONCLUSIONS ON THE UNCONSCIONABILITY CAUSE OF ACTION ................................................[304]
WERE THE LOAN AGREEMENTS OR ANY OTHER CONTRACTS ENTERED INTO BY
THE BARTLES SUBJECT TO THE CREDIT CONTRACTS AND CONSUMER FINANCE
ACT 2003 AND, IF SO, WERE THE TERMS OF ANY SUCH CONTRACTS OPPRESSIVE
OR INDUCED BY OPPRESSIVE MEANS AS ALLEGED IN PARAGRAPHS 45 AND 46
ASOC? ............................................................................................................................................[312]
CONCLUSION ON THE CAUSE OF ACTION UNDER THE CCCF ACT.................................................[343]
DID GE OWE A DUTY OF CARE TO THE PLAINTIFFS AS ALLEGED IN PARAGRAPHS
49 AND 50 ASOC AND, IF SO, WAS GE IN BREACH OF ANY SUCH DUTY IN ANY OF
THE WAYS IDENTIFIED IN PARAGRAPH 51 ASOC?.........................................................[344]

WERE THE LOANS PROCURED BY FRAUD ON THE PART OF TML OR THE BLUE
CHIP GROUP AS ALLEGED IN PARAGRAPH 48 ASOC AND, IF SO, IS ANY SUCH
FRAUD ATTRIBUTABLE TO GE? ...........................................................................................[356]

SUMMARY AND DISPOSITION ...............................................................................................[360]

Introduction

[1] The first plaintiffs Mr and Mrs Bartle are pensioners. In 2006 they owned an
unencumbered home at Amber Drive, Whangarei worth about $400,000. They had
modest savings and a combined income of about $21,000 per annum. In this
proceeding they seek to recover damages for substantial losses flowing from their
investment in a scheme promoted by the Blue Chip group of companies which
collapsed in early 2008.

[2] The Bartles became aware of the investment opportunity through an

advertisement by Blue Chip New Zealand Limited. This company was a member of
the Blue Chip Group of companies the largest shareholder in which was
Mr Mark Bryers. The Blue Chip proposals were said to be attractive to people who
were “asset rich but cash poor”. People like the Bartles could use the equity in their
home to assist with the purchase of a residential apartment to secure an income
stream. The Bartles say they understood Blue Chip would be responsible for all
costs and expenses including payments due under any loans required. After four
years, the apartment would be sold and the Bartles would receive a small share of
any capital gain. In the meantime, they would have had the benefit of an augmented
income of $451 per fortnight (before tax) with no cash outlay from themselves.

[3] The Bartles were introduced to a Mr Michael Davis who acted as the sales
agent for Blue Chip throughout. Mr Davis recommended to the Bartles that they
obtain legal advice from the third defendant Mr Mathias. He is a sole practitioner
practising in Auckland who was said to be familiar with the Blue Chip investment
transactions.

[4] After making such inquiries as they could and taking advice from
Mr Mathias, the Bartles signed an agreement for sale and purchase on
29 September 2006 to purchase unit number 701 in an apartment building being
refurbished at 135 Symonds Street, Auckland. The purchase price was $552,000.
Although no finance had been confirmed at that stage, the agreement was
unconditional. Finance was subsequently arranged and advanced in three tranches
by the first defendant GE Custodians (GE). The advances were:
 • 8 November 2006 $137,484
• 28 September 2007 $125,791
• 28 September 2007 $366,291
$639,566

[5] The first two advances totalling $263,275 were made to the Bartles
personally and secured over the Amber Drive property. The third advance was made
to the second plaintiff Bartle Properties Limited, a company formed by the Bartles
for the purpose of purchasing the Symonds Street unit. The Bartles provided
personal guarantees of the obligations of Bartle Properties Limited to GE in respect
of the third advance and their guarantees were secured by the mortgage over Amber
Drive. Effectively therefore, Mr and Mrs Bartle personally are ultimately
responsible for all the advances. They stand to lose their Amber Drive property and
the investment unit unless they are successful in this proceeding.

[6] The Bartles understood their investment was to be a joint venture with the
Blue Chip group. While they realised they would have to borrow the initial advance
of $137,000 (and possibly another sum of $50,000), they say they did not understand
they would be responsible for the total borrowing. Rather they understood that Blue
Chip would provide any additional funding as well as taking care of all payments
and expenses. It is a critical feature of this case that, at the time the Bartles signed
the agreement for sale and purchase, the joint venture agreement had not been signed
or shown to them. That did not occur until 7 November 2006, more than a month
after they were committed to the purchase.

[7] The parties to the joint venture agreement were the Bartles and Blue Chip
Joint Ventures Limited, a Blue Chip subsidiary with negligible capital. There was
no guarantee from the parent.

[8] Mr and Mrs Bartle (or their newly formed company) also entered into other
agreements in connection with the investment including a deed of lease and a
property management agreement. The purchase of the Symonds Street unit was
completed in September 2007 and the title registered in the name of Bartle Properties
Limited. The fortnightly payments of $451 which the Bartles had been receiving
from December 2006 ceased shortly after the purchase of the unit was completed.
Investors were advised in November 2007 that Blue Chip was restructuring and the
group finally collapsed in early 2008 with substantial losses for a large number of
investors. Unsecured creditors are most unlikely to be able to effect any recovery
from that source. The mortgages secured over the Bartles’ Amber Drive property
and the Symonds Street unit are in default and the value of the Symonds Street unit
has dropped to a level thought to be about $250,000.

[9] It is common ground that subsequent analysis has shown that the Blue Chip
Group was insolvent at all times material to this proceeding. But it was accepted that
this fact was not known at material times by any of the parties to this proceeding.

[10] Mr and Mrs Bartle seek to recover damages from GE and Mr Mathias. The
second defendant, Tasman Mortgages Ltd (TML), is in liquidation and has taken no
steps. The Bartles had no direct dealings with GE, which is a company independent
of the Blue Chip group. TML and a related company, Executive Mortgages Limited
(EML), were parties to a “Correspondent Deed” with GE under which TML and
EML undertook certain responsibilities including obtaining financial information
from borrowers for the purpose of supporting loan applications. For present
purposes, TML and EML may be viewed collectively.

[11] The case against GE as lender raises a number of causes of action. It is said
that GE knew or ought to have known that the Bartles had no means to repay the
loan and that the loans constituted an unconscionable bargain or were oppressive
under the Credit Contracts and Consumer Finance Act 2003. It is also said that GE
owed a duty of care to the Bartles and breached that duty by advancing funds to them
when they knew or ought to have known that the plaintiffs had no independent
means to meet the mortgage payments. GE denies liability and says it had no
association with the Blue Chip group and no knowledge that the advances were
being made in connection with transactions marketed by or involving the Blue Chip
group. In this respect, the Bartles plead that TML and Blue Chip New Zealand
Limited were agents of GE and that the knowledge held by those companies as
agents can be attributed to GE as principal. GE denies the agency alleged. Fraud is
also alleged against GE but was not strongly pressed.
[12] The plaintiffs’ case against Mr Mathias is that he owed them a duty of care in
giving them legal advice in connection with their investment. A key allegation
against Mr Mathias is that he failed to warn the Bartles that the success of the
investment rested wholly or mainly on the viability of the Blue Chip group, and that
if the Blue Chip group failed, they would be responsible for the whole of the
advances made by GE with the risk of losing their previously unencumbered home.
Mr Mathias denies liability and says there was no contract of retainer between
himself and the Bartles until after the agreement for sale and purchase was signed.
Any meetings with the Bartles prior to that time were preliminary in nature. Only
general matters were discussed without reference to any identified property.

[13] It is said that this proceeding is a test case for over 300 Blue Chip investors
who entered similar transactions. For present purposes however, the focus must be
solely upon the case brought by the Bartles.

The Issues

[14] Against this background, the following issues arise. It is convenient to refer
first to the case against Mr Mathias and the judgment will proceed on that basis. The
issues are:

Third Defendant (Mr Mathias)

• Did Mr Mathias owe the plaintiffs a duty of care as alleged in paragraphs 53 and
53A of the amended statement of claim (ASOC) of 23 April 2009. If so, what
was the scope of any retainer and when did any such retainer arise?

• Did Mr Mathias breach any duty of care owed to the plaintiffs in any of the
respects alleged in paragraphs 56, 56A and 57 ASOC?

• If there was a breach of a duty of care by Mr Mathias, did the plaintiffs

contribute to the losses sustained by them in any respect identified in paragraph
23 of his statement of defence?
• What relief, if any, are the plaintiffs entitled to against Mr Mathias?

First Defendant (GE)

• Were TML or Blue Chip New Zealand Limited agents of GE on the basis alleged
in paragraph 35 ASOC in any respect and, if so, what was the scope of the
agency?

• Did TML have knowledge of the matters identified in paragraphs 32 and 33

ASOC and, if so, is any such knowledge attributable to GE at the time each of
the loan agreements were made?

• Did any of the loan agreements constitute an unconscionable bargain by reason

of any of the matters identified in paragraph 36 ASOC?

• Were the loan agreements, or any other contracts entered into by the Bartles
subject to the Credit Contracts and Consumer Finance Act 2003 and, if so, were
the terms of any such contracts oppressive or induced by oppressive means as
alleged in paragraphs 45 and 46 ASOC?

• Did GE owe a duty of care to the plaintiffs as alleged in paragraphs 49 and 50

ASOC and, if so, was GE in breach of any such duty in any of the ways
identified in paragraph 51 ASOC?

• Were the loans procured by fraud on the part of TML or the Blue Chip Group as
alleged in paragraph 48 ASOC and, if so, is any such fraud attributable to GE?

• If any causes of action are established against GE, what relief, if any, are the
plaintiffs entitled to against GE?
The case against Mr Mathias

The Facts

[15] The key witnesses in relation to the claim against Mr Mathias are the Bartles
and Mr Mathias. In addition, the Blue Chip sales agent Mr Davis gave evidence and
there was expert evidence from two lawyers, Mr P H Nolan for the Bartles and
Mr R V Eades for Mr Mathias. There is a substantial volume of documentary
evidence. Although a significant part of the factual background is not in issue, there
is a strong factual dispute as to the timing of meetings, who was present and what
was said at them.

Events prior to the signing of the agreement for sale and purchase on
29 September 2006

[16] Mr and Mrs Bartle are a retired couple who, at the time of the transactions,
were aged in their mid 60s. Neither has any professional qualifications. For some
28 years, Mr Bartle was a qualified meat inspector and later purchased a small one-
man cleaning business which he operated until his retirement in 2003. In the past
they had owned some rental properties on a small scale.

[17] In 2006 their unencumbered Amber Drive property was valued at

approximately $400,000. They had savings of about $65,000 and a combined income
of $21,736. They had no other assets of significance.

[18] I had the opportunity to see Mr and Mrs Bartle cross-examined at length. I
have no doubt as to their honesty although they were willing to accept that, in some
respects, their recollection of events may have been faulty. I find that the Bartles are
a couple of normal intelligence but who lacked sophistication in business matters.
That led them to misunderstand some aspects of what they were told and what they
read about the investment, but this does not affect my overall conclusions. In
important respects, their evidence is supported by Mr Davis.
[19] In mid 2006, they saw an advertisement about the Blue Chip group in the
New Zealand Herald. They made contact with Blue Chip and Mr Davis visited them
at their home on 22 June 2006. The meeting extended for some one and a half hours.
According to Mr Bartle, Mr Davis gave the Blue Chip group “a glowing
recommendation”. Mr Davis supported Mr Bartle’s evidence on this point. His
evidence was that the management of Blue Chip held regular meetings with the sales
staff which were upbeat in tone. They were instructed that Blue Chip was offering
an innovative and technical product of real advantage to the clients; Blue Chip sales
were backed up by independent valuations and rental appraisals; investors were able
to obtain independent advice from solicitors recommended by Blue Chip; Blue Chip
were experienced in the property market, knew the developers, and had a significant
market advantage through buying properties in bulk. In relation to joint venture
transactions, sales staff were told to emphasise to prospective investors that the
deposit remained in a solicitor’s trust account; investors had a guaranteed return and
income stream backed up by Blue Chip guarantees; Blue Chip guaranteed to buy
back the apartments; and there was “no risk to the investors”.

[20] Mr Davis said that the joint venture product was ideally suited for the type of
persons who usually had a modest income but significant equity in their home. He
told investors they would benefit from the investment proposed. In cross-
examination he agreed he would have been enthusiastic in his promotion to the
Bartles of the Blue Chip product which he believed in at the time. He agreed he
would have assured the Bartles that Blue Chip would “ take care of everything” and
that Blue Chip had the ability to pay all relevant fees and costs including the
mortgage payments. He was not concerned that the investors would be responsible
for the mortgage payments if anything went wrong because he and the other sales
staff were assured that Blue Chip was highly profitable with substantial backers from
merchant banks who were well funded. He agreed it was not in his interests or those
of Blue Chip to identify any risks involved with the investment. He emphasised
however that he told the Bartles and other investors it was important to obtain
independent legal advice before entering the transaction.
[21] Mr Davis also agreed that he and other sales staff were trained to say that
investing through Blue Chip was comparable to having money invested on term
deposit with a bank with a guaranteed interest rate over a particular term. He added:

We would never say “hey there is a possibility the bank is going to fall over
and you won’t get your money back...”.

[22] He went on to say that he and other sales staff were told to promote the
product on the basis that the investment was as safe as a term deposit because with
the joint venture structure and Blue Chip’s involvement, “they [Blue Chip] took [on]
board all risks”

[23] At or soon after the first meeting with the Bartles on 22 June 2006 Mr Davis
gave them a brochure from Blue Chip New Zealand described as “Your Guide to
Financial Planning Using Smart Residential Property Solutions”. Blue Chip New
Zealand is described in the brochure as a subsidiary of Blue Chip Financial Solutions
Limited, a publicly listed company on the New Zealand Exchange. The brochure
emphasises the innovative solutions offered by Blue Chip investments, the
company’s experience and expertise in property investment, the experience and
prominence of its directors and the substantiality of its shareholders. A note made
by Mr Bartle in the brochure supports his evidence that he was questioning how the
transaction would work. His note reads:

Query

To physically take ½ property value from 16 Amber Drive makes an

immediate mortgage. Who is going to pay that back? The money cannot be
in 2 places at once!! The tenant can only pay so much.

[24] The brochure outlined the “cashflow positive” nature of the investment
taking into account rent, tax efficiencies and any necessary working capital.
Potential projected outcomes were stated. These were based on certain assumptions
including Blue Chip exercising an option to buy the investment property after four
years; one hundred per cent funding through borrowed money; a mortgage interest
rate of 7.8 per cent per annum; a 6 per cent rental yield; and Auckland property
values doubling every 9.5 years.
[25] At the meeting on 22 June 2006, Mr Davis also obtained basic details from
the Bartles about their financial position which he recorded in a file note prepared
soon afterwards. The Bartles informed Mr Davis they were intending to travel to
Australia to see family but would be returning on 9 August 2006. Mr Davis records
in his file notes that the Bartles were “very keen” to hear back from him then with an
analysis of the proposed transaction. Mr Bartle was inclined to downplay the level
of enthusiasm he and his wife had for the transaction at that point but I accept they
were certainly very interested to receive further information.

[26] Mr Bartle said that at the first meeting or possibly the second one, Mr Davis
told them that the Blue Chip group was underwritten by Lloyds of London and this
gave him some additional comfort.

[27] During the first meeting, Mr Bartle said he raised some questions with
Mr Davis, stressing that he and his wife were on a fixed income by way of
superannuation and had no other means of supporting a mortgage. Mr Bartle
questioned how the transaction could work. He mentioned that the tenant of the
investment property would have to pay a substantial rent in order to cover the
mortgage payments and provide the contemplated fortnightly return to himself and
his wife. It was in that context that Mr Bartle says Mr Davis assured him there
would be no cash payments required on their part and that the Blue Chip proposal
“does work”. The Bartles were concerned to make sure the investment was safe and
that they were not risking their home. Mr Davis gave them those assurances because
he believed there were no risks.

[28] The Bartles completed a finance application dated 23 June 2006 (the day
following the first meeting with Mr Davis). The application is addressed to EML
and provides basic details of the Bartles’ assets and their income and outgoings.
Their occupations in each case were described as “Retired”. The Bartles both say
they would never have described themselves as self-employed since it was not true.
This evidence is material to an allegation I later deal with that various finance
application forms signed by the Bartles were altered subsequently by others to show
their occupations as self-employed (the suggestion being that this was done to
enhance their prospects of obtaining finance). The finance applications also give the
dates of birth for both Mr and Mrs Bartle as 1939 and 1940 respectively so that all
who saw these documents in 2006 and subsequently would have been aware that the
Bartles were in their mid-sixties.

[29] While the Bartles were in Australia, Blue Chip sent to them a document
described as a “Sample Analysis” dated 6 July 2006. These analyses were revised
on several occasions thereafter. The sample analysis of 6 July 2006 was made on
certain financial assumptions and did not relate to an identified property. The first
page contained the following summary of the proposed investment:

Your initial contribution will be: $197,494

Plus an additional amount of: $ 83,700
The total investment will be: $671,794
The property purchase price will be $593,000

[30] The sample analysis went on to set out “Guaranteed total extra income before
tax” amounting to $9,625 per annum which, over four years, would total $38,500. A
sum of $370 per fortnight (described elsewhere as a “procurement fee”) was said to
be:

...the payment you will receive from Blue Chip every second week, from the
date you pay your contribution until the date the property is sold. In addition
to this payment, Blue Chip will meet the interest on any associated
borrowing. The payment is made to you as income, without a deduction for
tax. At the end of each tax year you are required to submit a tax return and
pay tax, at your marginal rate, on a portion of the amount you received.

[31] In addition there could be a small portion of the net gain payable to the
Bartles when the property was sold, depending on the sale price. This portion was
estimated in the sample analysis to be $2,211 calculated on the basis of a “Joint
Venture Capital Split” of 97 per cent to the “Guarantee Party” and 3 per cent to the
“Equity Party”. This would be “in addition to the return of your contribution”.

[32] The weekly rental for the investment property was shown as $690 in the
sample analysis. There would be a “working capital” requirement for the joint
venture of $50,500.

[33] The Summary of Investment Outlay stated:

“Clients Equity Available in Existing Property $294,000
Deposit Payable $118,700
Total Conveyancing Expenses $28,294
Working Capital Facility $50,500
Clients Initial Contribution Required (Part One) $197,494
Clients Initial Contribution Required (Part Two) $83,700
Total Initial Contribution $281,194
=======

Client’s Cash Contribution $0

Client’s Contribution to Borrow Against Existing Property – Part One $197,494

Client’s Contribution to Borrow Against Existing Property – Part Two $83,700
Total Amount to Borrow Against Investment Property $390,600
Total Outlay $671,794”

[34] In this sample analysis, it is clear that the client’s “contribution” to borrow
against their existing property would be in two parts borrowing $197,494 as part one
and $83,700 as part two. The amount to be borrowed against the investment property
is stated to be $390,600 but the responsibility for this additional borrowing is not
stated. A cash flow analysis refers to a contribution of $148,737 from the
“Guarantor Party” but this is said to be “pre Top Up from Guarantor” which suggests
further contributions from Blue Chip as Guarantor. The subsequent analyses
provided were in the same standard form. None made it clear that the Bartles would
have ultimate responsibility for the total borrowings.

[35] At some point after the first meeting with Mr Davis, the Bartles began to
have cold feet about the Blue Chip investment and decided not to proceed. But after
they returned from Australia, the Bartles spoke again with Mr Davis. They remained
cautious and wanted further detail about the joint venture proposal. A second
meeting took place, the date of which is not certain. Emails from Mr Davis make it
clear that it must have been prior to 5 September. The Bartles and Mr Davis
suggested it was not until the second meeting that a joint venture arrangement was
discussed but this is inconsistent with the file note made by Mr Davis at the first
meeting on 22 June and with the sample analysis prepared on 6 July. I am satisfied
that the joint venture was mentioned at both meetings as Mr Bartle accepted when
cross-examined on this point.
The first meeting with Mr Mathias

[36] The Bartles had a number of questions and Mr Davis recommended that they
take legal advice from a lawyer who “could explain the product better” than himself.
Mr Davis confirmed that the Bartles specifically sought an explanation of “how the
transaction worked”. Mr Davis said he knew the Bartles had a lawyer in Whangarei
but he suggested they use a “Blue Chip lawyer” who would understand the Blue
Chip product whereas the Bartles’ own lawyer might not. Mr Davis emphasised to
the Bartles that the lawyer recommended by Blue Chip was independent and would
act in their best interests. He recommended Mr Mathias because he had met him and
introduced investors to him on other occasions. He considered Mr Mathias to be
good to work with and he had no reason to doubt his integrity.

[37] Thereafter, Mr Davis contacted Mr Mathias, sending him a “profile” of the

Bartles. No separate profile document was produced but I infer that the material sent
to Mr Mathias at this stage was either the EML finance application completed by the
Bartles on 23 June 2006 or a document containing very similar information
including their names, contact information and financial details. Mr Davis followed
up his initial communication to Mr Mathias with an email dated 5 September 2006
inviting Mr Mathias to telephone Mr Bartle “to firm up a meeting tomorrow”. The
email from Mr Davis was headed “J/V clients” which indicated clearly to
Mr Mathias that the Bartles were prospective clients contemplating entering into a
joint venture transaction with Blue Chip.

[38] Here, there is an important conflict of evidence which I must resolve

concerning the timing of meetings between the Bartles and Mr Mathias in 2006. All
three agree there were only two meetings between them in 2006. It is also agreed
that both of these meetings occurred at the Bartles’ home at Whangarei to which
Mr Mathias travelled from Auckland. In an affidavit filed at an earlier stage of the
proceedings, Mr Bartle said the first meeting with Mr Mathias took place on
27 October 2006 (after the agreement for sale and purchase was signed on
29 September). In his written brief before me, Mr Bartle said he was sure that his
recollection of the meeting date must have been incorrect and that the date of the
first meeting with Mr Mathias was on 29 September 2006 when the agreement for
sale and purchase was signed.

[39] The Bartles say the second meeting with Mr Mathias was on 7 November
2006 when the loan agreement for the sum of $137,000, the associated mortgage and
the joint venture agreement were signed. There is no dispute about this date and
those who were present.

[40] But Mr Mathias says the first meeting he had with Mr and Mrs Bartle was on
7 September and the next meeting was not until 7 November. He says he was not
present when the agreement for sale and purchase was signed.

[41] Both the Bartles and Mr Mathias accepted that, at least in part, they had to
rely on the contemporaneous documents in order to assist their recollection as to
dates. Mr Mathias has a very sketchy file note written on the email to him of
5 September received from Mr Davis asking him to contact the Bartles to make a
meeting for the following day. The file note reads:

met with Bartles.

7.9.06.
answered all questions

[42] Mr Mathias’ diary also confirms that he had an appointment with the Bartles
at 4 pm on 7 September. That followed a meeting he had with another Whangarei
client at 3 pm. There is no record in Mr Mathias’ diary of any meeting with the
Bartles on 29 September (a Friday). His diary shows two meetings scheduled for
8.30 am and 10 am which he believes were meetings in Auckland. He said it was
unlikely he would have visited the Bartles in Whangarei on a Friday since this is a
day on which conveyancing transactions are normally settled in Auckland.

[43] Mr and Mrs Bartle stated in evidence that they met with Mr Mathias on
29 September when the agreement for sale and purchase was signed and that they
provided lunch for him. They said the visit lasted some two and a half hours.
Mr Mathias stated that he did not have lunch or any other meal with the Bartles on
29 September or on any other occasion. He explained that he suffers from diabetes
and makes his own arrangements for meals. He recalled a conversation with
Mrs Bartle about diabetes (since she apparently suffers from the same condition) and
also recalled Mrs Bartle showing him some paintings. However, he was sure this
happened either at the meeting on 7 September or at the later meeting on
7 November. He has a file note of the meeting on 7 November which indicates it
took place between 6 and 8 pm. Neither that time nor the 4 pm meeting time in his
diary for 7 September are consistent with a lunchtime meeting.

[44] I am satisfied, for reasons which I later outline, that it was Mr Davis who was
present when the agreement for sale and purchase was signed on 29 September and
not Mr Mathias.

[45] I conclude that, on the balance of probabilities, the first meeting between the
Bartles and Mr Mathias took place on 7 September 2006 and that they did not meet
again until the 7 November meeting. That is consistent with the files notes and diary
entries kept by Mr Mathias and my conclusion that it was Mr Davis (not
Mr Mathias) who was present when the agreement for sale and purchase was signed
by the Bartles on 29 September 2006. Although there are some further emails
between 15 and 26 September suggesting that the Bartles had more questions about
the proposed investment, there is no evidence that any meeting or discussion
between the Bartles and Mr Mathias took place other than those on 7 September and
7 November.

[46] While I have concluded that Mr and Mrs Bartle were mistaken about the date
of their first meeting with Mr Mathias I nevertheless accept in general terms the truth
of their evidence about what Mr Mathias told them at the meeting which I have
found took place between them on 7 September, prior to the Bartles signing the
agreement for sale and purchase. My impression was that the Bartles recalled the
details of their conversations well while Mr Mathias (understandably since he dealt
with many investors) was much more reliant on his usual practice than specific
recollections. His file notes are scant in the extreme.

[47] It is not in dispute that Mr Davis referred the Bartles to Mr Mathias because
of his experience and knowledge in the structure and operation of the Blue Chip
investment products and all related documentation including the form and structure
of the joint venture agreement. Mr Mathias informed the Court that he had
represented 50 or 60 Blue Chip investors in 2005. This continued into 2006 when he
had two staff in addition to himself specifically dealing with Blue Chip
conveyancing transactions at the rate of five or six a month. Blue Chip investors
were referred to him by Mr Davis and several other Blue Chip sales staff.

[48] Mr Bartle’s evidence was that he and his wife had a number of questions they
wished to have answered before agreeing to proceed with the proposal. Mr Bartle
prepared a list of issues in the following form:

Blue Chip Proposal

Considerations re. B L & D J Bartle 16 Amber Drive Whangarei

Trust and proposal to purchase property.

The price & locality of the new property?

The Costs would have to be all taken from the equity in 16 Amber Drive!

Tax return each year? Is this mandatory?

Costs
Administration
Quotable Values
Trust
Deposit for new property
Rates & Insurance

Question I heard an ad on Radio Pacific for property and they mentioned

Blue Chip investment. Is this part of your organisation?

The WINZ payments especially Judy who is receiving more each fortnight
due to Diabetes. Is this going to be acceptable by WINZ as we would be
earning more than the $80.00 per week

Choice of Trust people?

Proposed new bedroom addition to be financed by our funds.

Suppose the venture as a hard luck situation and we have to find plan b
The house would be mortgaged so would there be enough left over to be able
to us (sentinel) this facility?

After the 4 year period what happens?

Making of a will. Advantages & Disadvantages Essential requisite.

How long would this take to eventuate?

 Returns as offered. $130.00 *52 weeks = $6,760.00 *4 years = $27,040.00

An undisclosed return at the sale of the property.

Concern of losing control over our freedom that we.

[49] The list of issues is undated but there are several indications which help to
clarify at least the period during which it must have been prepared. First, it raises a
question about the price and locality of the new property. It is probable that the
Symonds Street unit was not identified as the property to be purchased until
26 September or shortly before. An analysis dated 13 September 2006 referred to a
property in Albert Street, Auckland and a net cashflow of $259 per fortnight. An
email from the Bartles to Mr Davis on 22 September referred to the purchase of “a
unit close to Queen Street in Auckland” and the fortnightly net return of $259 earlier
cited for the Albert Street property. The first reference to the Symonds Street unit
appears in a note made by Mr Mathias on an email sent to him by Mr Davis on
26 September referring to “Unit 7.1 Madison Symonds Street”. By this stage, the
analysis prepared on that date shows a purchase price of $522,000, total investment
cost of $634,284 and a net fortnightly return of $387 (or $451 before tax).

[50] A further indication of the period in which the list of issues was prepared by
the Bartles is the reference to the return offered of $130 per week. This was broadly
the figure included for the first time in the sample analysis of 6 July ($261 per
fortnight) and repeated in the analysis of 13 September 2006 ($259 per fortnight).

[51] I conclude that the list of issues was prepared by the Bartles sometime
between 6 July and 26 September. Since they did not return from Australia until
31 July, the period can be further restricted to some time after the date of their return
from Australia on that date until 26 September.

[52] Mr Bartle’s evidence was that he prepared the list of issues and discussed
them both with Mr Mathias and Mr Davis. A number of the issues raised are legal
questions such as the making of a will and questions about the formation of a trust.
Others relate to the structure and risks of the transaction, particularly the risk to their
home if the venture turned out to be “a hard luck situation and we have to find
plan b”. The list also refers to their concern about losing control over their freedom
which I infer probably relates to the formation of the trust.

[53] Mr Davis was very clear in his evidence that he referred all the Bartles’
questions of a legal nature and those to do with the structure of the transaction to
Mr Mathias and accounting issues to a Mr Kahn. The Bartles did not meet Mr Kahn
at any stage but say they directed their issues and questions about the transaction to
Mr Mathias. That is consistent with Mr Mathias’ file note relating to the
7 September meeting in which he refers to answering all the Bartles’ questions.

[54] I am satisfied on the balance of probabilities that when the Bartles met with
Mr Mathias on 7 September they had already prepared the list of issues referred to at
[48] above and used the list as the basis for their discussion with him. Mr Mathias
accepted the meeting lasted up to an hour.

[55] The list of issues prepared by Mr Bartle is consistent with his oral evidence,
supported by Mrs Bartle, as to the content of the conversation they had with
Mr Mathias. Their evidence was that there was a general discussion about the risks
associated with the transaction and they also asked him a number of questions.
Whenever issues were raised by them with Mr Mathias about costs or payments, he
assured them Blue Chip would take care of everything. Mr Bartle said they raised
the same concerns as he had earlier noted in the Blue Chip brochure and expressed to
Mr Davis. When these concerns were raised with Mr Mathias, he told them that
Blue Chip had the ability to pay all the fees and costs. When they pointed out to
Mr Mathias that they did not have any financial backing other than their home, they
were continually assured by Mr Mathias that there were no problems with the
transaction.

[56] There were questions about a comparison between the Blue Chip investment
proposal and another with a company named Sentinel. Mr Bartle also remembers
asking Mr Mathias a question about the four year period of the transaction and what
would happen at that stage. He was told that the fortnightly payments would then
cease, the investment property would be sold and the equity taken earlier from the
Bartles’ home would be returned to them. There was discussion about a will and
establishing a trust. Mr Bartle said Mr Mathias told them he would prepare the will
and set up a trust for ownership of the property.

[57] The impression Mr and Mrs Bartle received at the meeting was that
Mr Mathias had a great deal of confidence in Blue Chip. They agree he told them
there was risk with every investment but when he was asked what would happen if
Blue Chip collapsed, he replied “I have every confidence in bricks and mortar, trust
me I am a lawyer”. Mr Bartle says he also raised a question with Mr Mathias about
the rental received from the transaction since Mr Bartle knew a little about rental
properties from his previous experience. Mr Bartle told Mr Mathias he could not see
how Blue Chip could afford to pay the procurement fee. Mr Mathias assured him
Blue Chip would honour the agreement and take care of all the costs. Mr Bartle felt
that Mr Mathias was reinforcing everything Mr Davis had told them to the same
effect. The Bartles reminded Mr Mathias they were on a fixed income and were
retired with no funds to supplement any investment scheme if things went wrong.
Mr Bartle says that no warnings of any kind were given to them at the meeting.
Mr Mathias did not explain how the joint venture agreement worked except in the
very general terms that “Blue Chip would take care of everything”.

[58] Both Mr and Mrs Bartle said in evidence that Mr Mathias told them Blue
Chip would be responsible for any borrowing beyond their initial contribution. This
was consistent, they said, with their understanding that the proposal was for a joint
venture with Blue Chip. In the light of this understanding they did not consider it
unreasonable that Blue Chip should, at the end of the four year period, receive
virtually all of the capital gain anticipated when the investment unit was sold.

[59] Mr and Mrs Bartle were very clear in their evidence that they would not have
entered into the transaction without the assurance and comfort received from their
discussion with Mr Mathias prior to signing the agreement for sale and purchase.
While they were also influenced by Mr Davis and by a later discussion Mr Bartle
had with an acquaintance who had already invested through Blue Chip, their
evidence was that it was the advice received from Mr Mathias as a lawyer which was
critical to their decision to proceed.
[60] In a number of respects, Mr Mathias disputed the evidence given by the
Bartles as to what took place at the critical meeting which I have found took place at
the Bartles’ home on 7 September 2006. He accepted from the outset that he had
little independent recollection of the meeting and was largely dependent upon the
documents on his file and his appointment diary. He expressed his evidence largely
in terms of his general practice with Blue Chip investors such as Mr and Mrs Bartle.
He spoke of what he would have said if he had been asked to give advice of the kind
the Bartles said they were seeking from him. Mr Mathias did not recall seeing the
list of questions Mr Bartle had prepared but accepted in general terms that questions
were asked of him at the meeting.

[61] The general tenor of Mr Mathias’ evidence was that the meeting was of a
preliminary or introductory nature. He did not regard himself as having been
retained as a solicitor to advise the Bartles at that point because there was no specific
transaction in view at that time and any information provided to the Bartles was
general in nature. He did not regard the meeting as one at which he gave legal
advice and did not consider it was any part of his role to give advice to the Bartles
about the wisdom of the transaction. He did not regard himself as having a retainer
from the Bartles until he received a copy of the executed agreement for sale and
purchase several weeks after it was signed by the Bartles on 29 September 2006 and
he did not formally open a file until 7 November 2006. Any incidental
communications received in writing prior to that were kept on a general file of
correspondence in case he was later instructed formally to act for the Bartles in
connection with the transaction. Even then, he saw his role as strictly limited to
undertaking the conveyancing aspects of the transaction.

[62] There was some common ground between the Bartles and Mr Mathias about
certain aspects of their first meeting. Mrs Bartle agreed in cross-examination that
Mr Mathias had told them that he had previously acted for Blue Chip investors; that
he had not been informed by any of those who had entered Blue Chip investments
that they had experienced any significant problems; that Blue Chip was a publicly
listed company with audited accounts and high profile directors such as
Wyatt Creech and John Luxton; that a nominee company would be provided to
purchase the investment property; that the deposit for the property fees and other
costs would be raised by a mortgage over their home; that they would enter into a
joint venture with Blue Chip under which Blue Chip would be responsible for
meeting the payments under the mortgage and other expenses, less rent recovered;
that they would receive a fortnightly procurement fee from Blue Chip shortly after
signing the agreement for sale and purchase and throughout the term of the joint
venture; that after four years the property would be sold, with their share of the net
profit being about 10 percent with the larger share going to Blue Chip; that the
Bartles would not need to deal with the tenants or manage the property or collect the
rent; and that the unit would be subject to a lease and managed on their behalf.

[63] Where the Bartles and Mr Mathias parted company was in relation to the
risks of the transaction and further borrowing beyond the initial $137,000 which the
Bartles understood would be secured over their home. Mr Mathias said that if he had
been asked what would happen if Blue Chip collapsed, he would have told them that
they would be personally liable and that the promise to reimburse expenses given by
Blue Chip was “only as good as the company making it”. He denied making any
statements to the effect that Blue Chip would be taking out any additional
mortgages; that it was a bricks and mortar investment; that he could be trusted
because he was a lawyer; or that Blue Chip would take care of everything and would
honour their agreements.

[64] While Mr and Mrs Bartle were willing to accept that they may have been
mistaken as to the timing of meetings with Mr Mathias, they remained substantially
unshaken in cross-examination on those areas where their evidence conflicted with
that of Mr Mathias. In general, I find that Mr and Mrs Bartles’ account of the first
meeting with Mr Mathias is likely to be correct, although I accept they may have
misinterpreted parts of what they were told by Mr Mathias. It is clear that the
Bartles went to the meeting specifically to seek advice from Mr Mathias as the
lawyer recommended to them by Mr Davis with experience in Blue Chip investment
transactions. They went with a list of questions which I am satisfied were raised in
discussion with Mr Mathias even if the list itself was not produced for his inspection.
I am also satisfied that Mr Mathias knew that he was being approached by reason of
his specialised knowledge of Blue Chip transactions including their general structure
and how the joint venture investments worked.
[65] Mr Davis supports the evidence of Mr and Mrs Bartle that they sought the
advice of Mr Mathias because they wanted to know “how the transaction worked”.
While there may be room for doubt about the precise words used by Mr Mathias at
the meeting, I am satisfied that the general impression he conveyed to Mr and Mrs
Bartle was that the Blue Chip investment proposal was safe and that there were no
unusual risks associated with it. I am also satisfied that, in general terms, he
repeated the assurances the Bartles had received from Mr Davis that Blue Chip
would be responsible for all costs and expenses along with the outgoings in relation
to the borrowings. While Mr Mathias may not have stated in explicit terms that any
finance beyond the Bartles’ initial contribution would be borrowed by Blue Chip, the
Bartles would have been under the impression from the written materials and from
the discussions with both Mr Davis and Mr Mathias that Blue Chip would be
responsible for arranging the mortgage finance and meeting all costs and payments
due under the mortgages.

[66] In cross-examination, Mr Mathias volunteered that he regarded the first

meeting with the Bartles as “a PR type trip” to talk to them about his previous
investor clients and the fact that they had been paid their procurement fees without
any problem. His possibly unguarded use of the description of the meeting as a
“PR” exercise suggests he expected or at least was hopeful of receiving formal
instructions in due course to act for the Bartles in connection with the transaction. I
am satisfied however that the Bartles regarded the matter as much more than an
opportunity to meet Mr Mathias and were entitled to treat the meeting as a serious
occasion upon which the considered view of Mr Mathias as an experienced lawyer
was being sought.

[67] Critically, Mr Mathias did not draw to the attention of Mr and Mrs Bartle the
fact that they would be personally responsible for the entire borrowings in the event
of Blue Chip failing. While there was no specific unit proposed for the Bartles’
investment at the time of the first meeting, Mr Mathias was well aware of the general
structure of the joint venture agreement.

[68] In cross-examination, Mr Mathias acknowledged that the Bartles were taking

the entire risk of the transaction in the event that Blue Chip were to fail. He knew
that Blue Chip would not be assuming any responsibility to the lender by way of
personal covenant or guarantee and must have appreciated the vital importance to the
investor of the joint venture agreement. Yet he gave no advice to Mr and Mrs Bartle
to that effect, but instead gave them the impression it was safe to proceed with the
transaction. At the time of the meeting, Mr Mathias was aware that the Bartles were
pensioners and were most unlikely to have the means to meet borrowings for the
Blue Chip joint venture transactions which typically required total borrowings of
$500,000 to $600,000.

[69] While Mr Mathias had a thorough working knowledge of the structure of the
joint venture agreements used in transactions of this type, the Bartles had no such
knowledge. They did not receive advice about the structure of the joint venture
agreement from Mr Davis, Mr Mathias or anyone else prior to entering the
agreement for sale and purchase on 29 September 2006. Having signed the
agreement they were committed to the transaction. Yet the joint venture agreement
was not signed until 7 November 2006. Even then, Mr Mathias accepted that the
focus of the discussion at that time was the execution of the loan agreement and
mortgage relating to the initial advance of $137,000 and that there was little
discussion or advice given to the Bartles about the joint venture agreement and how
it operated.

Events after the first meeting with Mr Mathias

[70] On 13 September 2006 Blue Chip sent to the Bartles a further analysis, this
time described as an “Actual Analysis” in respect of a unit in the Barclay
development in Albert Street, Auckland. This analysis was in the same form as the
sample analysis of 6 July 2006 but with different sets of figures. The key figures
stated in the summary were:

Your initial contribution will be: $165,837 Payable immediately

Plus a second contribution of: $117,650 Payable at settlement
The total investment costs will be: $669,187

The property purchase price will be: $586,000

[71] The fortnightly procurement fee was stated to be $317.00 per fortnight or
$259.00 after tax.

[72] The analysis was otherwise in the same form as the earlier sample analysis
and showed that the client’s initial and second contributions were to be borrowed
against the existing property. A further sum of $385,700 was to be borrowed against
the investment property but, as with the earlier sample analysis, responsibility for
this borrowing was not explicitly stated. Once again, it was stated that Blue Chip
would meet all interest payments on the borrowing.

[73] On 15 September 2006, Mr Davis sent an email to Mr Mathias and also to

Mr Khan attaching a copy of the joint venture analysis for the Barclay unit and the
Bartles’ “profile”. Mr Davis informed Mr Mathias and Mr Khan that the Bartles
were “keen to proceed” and advised that he would “request they sign an ATP form to
get things moving”.

[74] The “ATP” was an authority to proceed confirming the appointment of Blue
Chip New Zealand Limited to carry out certain actions including applying for
finance on their behalf “from lenders approved by Blue Chip” based on the
completed Loan Application of 23 June 2006. An unsigned and undated form of
authority to that effect was produced. The authority went on to state that if a signed
letter of offer of finance was received from a lender approved by Blue Chip, Blue
Chip was to proceed immediately to prepare a draft sale and purchase agreement of a
residential property located in the greater Auckland area. The form also authorised
Blue Chip to collect personal information about the Bartles.

[75] The email from Mr Davis of 15 September 2006 asked Mr Mathias to call
the Bartles the following week “to clarify a quick question about setting up a Family
Trust”. Mr Mathias noted on a copy of this email that he had telephoned Mr Bartle
on 20 September 2006 but was informed he was at the doctors. Mr Mathias said that
he did not have any contact again with either Mr Bartle or Mrs Bartle until after the
agreement for sale and purchase was signed.
[76] On 22 September 2006 the Bartles sent an email to Mr Davis advising they
were happy to go ahead with the Blue Chip proposal from which they understood
they would receive $259 per fortnight. The email refers to Mr Davis having sent
them some further details but the communication from Mr Davis has not been
located. The Bartles’ understanding of the transaction at that stage was expressed as
follows:

What we are able to do is offer our home as collateral for the purchase of a
unit close to Queen Street in Auckland and we understand a mortgage would
be taken out on of [sic] our property almost immediately. This provides
finance for Blue Chip to build the unit, which in four years should be up, and
rentable. At this point it would be sold back to Blue Chip.

Your figures indicate that each fortnightly Friday evening a figure of

$259.00 would be deposited into our bank account. This figure is a tax paid
amount. At the end of the four years this contract ceases and the property
would be bought back from us. The lesser of the sold amount would be
returned back to us. This figure is not yet determined.

We understand that it would be in our best interest to have our business

made into a trust. This we believe would be financed by Blue Chip
including the associated cost ie. Valuation of our property 16 Amber Drive
Whangarei, legal fees, resource consent, any insurance costs, rates to
whatever council ie costs to finance the property.

[77] This communication shows that the Bartles were aware that their home would
be used as collateral for the purchase of the unit and that a mortgage would be taken
out on their property almost straight away. They also understood the return they
would receive. It also tends to confirm their understanding that Blue Chip would be
responsible for certain costs. However, the email is expressed only in general terms
and does not focus on the extent of borrowing. It serves to underline the Bartles’
evident misunderstanding about the true nature of the transaction.

[78] Certain other questions were outlined in the Bartles’ email of 22 September
2006 to Mr Davis but they tend to focus on minor details relating to tax and
superannuation payments.

[79] Mr Davis responded to the Bartles on the same day indicating they had “a
pretty good understanding of how it all works...”. Mr Davis said he would contact
Mr Khan to arrange for him to telephone the Bartles to clarify the issues raised. He
gave the Bartles the contact details for Mr Khan and also for Mr Mathias although he
does not otherwise refer to Mr Mathias in the email. It is not clear why the contact
details for Mr Mathias were given since he had already met the Bartles. Mr Davis
repeated what he had already told the Bartles about these two gentlemen:

I have recommended them for you as they have looked after hundreds of
Bluechip clients and have a thorough understanding on our Joint Venture
investment and therefore are in a position to give you prudent informed
advice whilst being independent of Bluechip.

They are also experts in Property Investment structuring and tax and can
therefore process all the components involved efficiently therefore reducing
the cost to you and for us which is a good thing.

[80] There was no evidence of any further communications between the Bartles
and Mr Khan or Mr Mathias around this time.

[81] On 26 September 2006 Mr Davis sent a further email to the Bartles with a
copy to Mr Mathias and Mr Khan. This email stated:

Hi Bruce and Dorothy

Find attached revised Analysis.

Nett fortnightly income now $387 p/fortnight with Purchase Price of
$552,000.
Good result and I am happy to deliver it to you.

Will advise Jonathan Mathias on your behalf regarding formation of Family

Trust and call you in the next few days to confirm an appointment with you
to get the Sale & Purchase Agreements signed and get the ball rolling.

Look forward to seeing you.

[82] The email refers to a revised analysis being attached. The first page of a
“Sample Analysis” dated 26 September 2006 was produced but the remaining pages
have not been located. It may be assumed that they are in similar form to the
previous analyses. For the first time, the analysis related to the Symonds Street unit
in the Madison development. The summary of the proposed investment stated:

Your initial contribution will be: $137,484 Payable immediately

Plus a second contribution of: $131,750 Payable at settlement
The total investment costs will be: $634,284

The property purchase price will be: $552,000

[83] The gross fortnightly return is stated to be $451 or $387 after tax. As with
the previous analyses, it is stated that “Blue Chip will meet the interest on any
associated borrowings”.

[84] Mr Mathias agreed that over the period from 15 September 2006 onwards,
the investment proposal was gathering pace. He accepted it was likely he would be
instructed to act in connection with the transaction although he maintained he had
not been formally instructed and had not received any relevant documents other than
the emails and analyses from Mr Davis. Mr Mathias noted on the email of
26 September from Mr Davis that it related to Unit 7.1 at the Madison development
in Symonds Street. The email also noted that Mr Davis would advise Mr Mathias on
behalf of the Bartles about the formation of a family trust. This suggests that the
Bartles were likely to have requested Mr Mathias (through Mr Davis) to proceed
with the family trust or at least to advise them about its formation.

[85] On 27 September 2006, Blue Chip New Zealand Limited prepared a letter to
Mr and Mrs Bartle providing certain documents and explaining the process for their
investment. The letter stated that Blue Chip had now selected the property which
would form the basis of the Bartles’ investment. The letter stated it was enclosing a
financial analysis; the agreement for sale and purchase; a property management
agreement; a deed of lease; invoices for the “Initial Contribution” which comprised
the deposit due on the property, a brokerage fee, valuation fees, contingencies for
costs and working capital due to the joint venture and, if applicable, furniture costs;
and a disclosure acknowledgement.

[86] It is unclear whether this letter was posted to the Bartles at their Whangarei
address or was taken to them on 29 September when the documents were signed.
Either way, the Bartles would have had very little time to analyse the letter and the
enclosures.

[87] The nature of the transaction was described in the following terms:

The transaction has been designed to provide you with a secure passive
income stream, with the risk and responsibility of interest payments
transferred to Blue Sky Holdings Limited.
 Under the terms of the transaction a corporate trustee will acquire title to the
legal property to be held in accordance with the terms of a “Joint Venture”
between yourself and Blue Sky. Under the terms of the Joint Venture you
are entitled to:

• Interest on the borrowings you raised to make this investment (which

will be adjusted to take account of any subsequent increase or decrease
in interest rates);
• A fixed fortnightly procurement fee, which is payable from the date of
payment of your Initial Contribution until such time as the property is
sold;
• Depreciation on the structural component of the property, which can be
used to defer the tax liability on your procurement fee; and
• An agreed share of the net sale proceeds on sale of the property.

You are the sole shareholders and directors of the corporate trustee.

Essentially, the Joint Venture will receive the rental income on the property
and pay all ownership costs. To the extent that the working capital collected
in your initial contribution by the Joint Venture is insufficient to meet these
Blue Sky will make a contribution to the Joint Venture.

The Joint Venture will appoint Blue Sky Holdings as the manager to deal
with matters of administration. To the extent that matters require approval
of the Joint venture parties you will control what is permitted by way of
voting rights.

The transaction continues until either you choose to wind it up or the

property is sold. On termination the property is sold and the sale proceeds
are applied:
• firstly to discharge the balance loan secured against the property;
• then to return the amount of your Initial Contribution,
• any surplus is then split in accordance with the sharing arrangement
detailed in the joint venture.

[88] The letter goes on to say that the Blue Chip investment advisor will take the
Bartles through each of the documents and answer any questions. The documents
will then be returned to Blue Chip for onward transmission to the Bartles’ solicitor
“along with the agreements that form the joint venture arrangement you are entering
into with Blue Sky Holdings Limited”. The Bartles were advised in the letter that
their solicitor would contact them to meet to advise on the joint venture documents.

[89] As to the initial contribution, the Bartles were advised in the letter that:

The initial contribution, which includes the deposit on the property, is

payable immediately. The joint venture does not commence until this
amount is paid in full. Upon payment you will start receiving the
procurement fee and payments in respect of interest on borrowings.
[90] The letter advised further that the purchase of the investment property would
not be settled until construction of the property was complete, legal title was issued
and any necessary certifications had been issued by approving authorities. The letter
advised that the agreement for sale and purchase would be in the standard Auckland
District Law Society form with certain modifications. The letter continued:

Blue Chip will not permit you to add “Special Conditions” to the Agreement.
As such you should not sign the agreement unless you are confident that you
are able to raise both the deposit and balance required to settle the property.
To provide you with comfort our Investment Advisor will have given you a
letter of offer of finance from a lender confirming the availability of funding.
You should consider carefully any conditions imposed by the lender in that
offer letter and your ability to satisfy these conditions.

[91] As to risks, the letter concluded:

Every investment has its risks. You should make sure that you are fully
aware of the risks and are satisfied with the investment before sign the
Agreement for Sale and Purchase of real Estate.

In undertaking this transaction your risks include:

• The actual amount of capital gain and therefore your share of the net sale
proceeds on a specific property;

Blue Sky Holdings Take the risk of:

• Interest rate variations.

Should you have any residual concerns we encourage you to seek

independent advice before entering into the Agreement for Sale and
Purchase of Real Estate.

[92] The points of significance emerging from this letter are:

a) The joint venture is described only in general terms. The joint venture
agreement was not provided but was to be made available
subsequently.
b) The Bartles were advised that a corporate trustee would acquire title
to the property and would hold it in terms of the joint venture
agreement. When the documentation was later concluded, Bartle
Properties Limited held the title as trustee for the parties to the joint
venture, namely the Bartles and Blue Sky Ventures Limited (a
 company not mentioned in the letter or at any other stage prior to the
signing of the agreement for sale and purchase).
c) The Bartles were advised that the joint venture would be responsible
for the interest on the borrowings raised by them for the investment
and the fortnightly procurement fee. As well, Blue Sky would make
up any shortfall in the working capital required as a contribution to
the joint venture.
d) The Bartles’ initial contribution would be borrowed and was payable
immediately. This was the sum the Bartles understood was $137,484.
This sum comprised:
• Deposit on agreement for sale and purchase $ 55,200
• Brokerage fee (2.95% of purchase price) $ 16,284
• Working capital $ 55,200
• Registered valuation fee $ 400
• JV agreement fee $ 3,500
• Chattels and fit-out valuation $ 350
• On account of legal fees $ 2,700
• Contingencies on legal fees $ 1,500
• Trust formation costs $ 2,000
• Bare trustee incorporation fee $ 350
• Total $137,484

e) Various invoices and statements supporting these figures were

prepared at some point. It is not clear whether they were received by
the Bartles before they signed the agreement for sale and purchase.
Two undated statements and related invoices dated 28 September
2006 suggest they were not prepared prior to the letter of
27 September. The Bartles have no recollection of seeing these
statements and invoices at the time the agreement for sale and
purchase was signed and Mr Mathias said he did not receive copies of
them until some time later.
f) The focus of the letter is on the initial contribution but also indicates
that the Bartles had to be confident that they could raise both the
 deposit for the property and the balance required to settle the
purchase. However, this statement is immediately followed by
reference to a letter of offer of finance from a lender “confirming the
availability of funding”.
g) The general tenor of the letter confirms the Bartles’ understanding
that Blue Chip would be responsible for arranging the finance and
meeting all costs (including interest). Since all the loans were
“interest only” for the first five years and it was anticipated the
investment unit would be sold after four years, no capital repayments
would be required if the sale occurred within the five year period.
h) The letter makes no reference to the mortgage and guarantee
arrangements whereby the Bartles became personally responsible for
the total borrowing by way of personal guarantee and an all-
obligations mortgage over their Amber Drive property.
i) The statement about risk is of a general nature identifying only one
specific risk in relation to the amount of capital gain (about which the
Bartles understood they would be receiving only a very small share in
any event).
j) The letter does not identify the critical risk of the Bartles becoming
fully responsible for the total borrowing in the event of Blue Chip
failing and the obvious risk that they would lose their home in that
event.
k) The reference to seeking independent advice had been effectively
satisfied before this letter. On the recommendation of Mr Davis, the
Bartles had already seen Mr Mathias for advice which Mr Davis
assured them was independent.

The completion of the agreement for sale and purchase

[93] Earlier in this judgment, I touched on the conflict of evidence as to whether

Mr Mathias was present on 29 September 2006 when the Bartles signed the
agreement for sale and purchase at their home. I find that they were mistaken in this
respect and must have confused this occasion with one of the other several meetings
they had at their home with Mr Mathias in 2006 and 2007. There was nothing in
Mr Mathias’ diary to suggest he was present when the agreement for sale and
purchase was signed. The letter from Blue Chip of 27 September sets out the usual
practice of having the Blue Chip advisor present when the documents were signed.
The investment advisor would then return the documents to Blue Chip and
ultimately they would be sent to the solicitor.

[94] Significantly, Mr Davis entered a number of details in the agreement in his

own handwriting including the address and contact details for the Bartles on the front
page of the agreement; entering Mr Mathias’ name as the solicitor for the purchaser
on the front page; and entering the date of 29 September 2006 on the second page of
the agreement along with further contact details for the Bartles as purchaser. And,
even more importantly, Mr Davis has witnessed the signatures of Mr and Mrs Bartle
on the property management agreement they entered into on the same day,
29 September 2006. In cross-examination, Mr Davis accepted it was possible he had
uplifted the letter of 27 September from Blue Chip and taken it along with the
relevant documents to see Mr and Mrs Bartle. He also accepted it was possible that
they signed the documents in front of him. Although he suggested this was unlikely,
I find that this is what in fact occurred.

[95] The vendor under the agreement for sale and purchase is Symonds Street
Development Limited, a company not associated with Blue Chip. Evidence was
given by a director of Symonds Street Development Limited that this company was
responsible for the Madison development and had an underwriting agreement with
Blue Chip in terms of which Blue Chip would underwrite the sale of the apartments
in return for a commission from Symonds Street Development Limited. The total
purchase price for the Bartles’ unit in the development was $552,000 comprising:

• Unit $478,000
• Furniture package $ 24,000
• Carpark $ 50,000
• Total $552,000

[96] The evidence is unclear as to when the agreement for sale and purchase was
executed by Symonds Street Development Limited. In accordance with usual
business practice, it is likely the agreement was executed by the vendor subsequent
to 29 September when it was signed by the Bartles. It was not until 26 October that
Blue Chip emailed signed pages of the agreement for sale and purchase to
Mr Mathias. This was followed up on 9 November 2006 with the delivery of a
bundle of documents to Mr Mathias including the agreement for sale and purchase,
the deed of lease, the property management agreement and the statements and
invoices which had been mentioned in the letter to the Bartles of 27 September. I
conclude that the agreement for sale and purchase was executed by the vendor of the
unit somewhere between 29 September and 26 October but it is impossible to be any
more specific.

[97] A deposit of 10 percent was payable upon the signing of the agreement and
the balance of the purchase price was to be paid on the settlement date which was
defined as 15 business days after a certificate of practical completion, title and the
relevant code compliance certificate were issued. Attached to the agreement were
plans and specifications. The agreement was unconditional so far as the Bartles as
purchasers were concerned.

[98] The unit was sold subject to a lease from Symonds Street Development
Limited to a Blue Chip subsidiary, ART Apartments Limited, with Blue Chip New
Zealand Limited as guarantor. The lease was for a term of four years with an annual
rent of $33,280 or $640 per week (including GST). The lease contained a right of
first refusal under which Blue Chip could purchase the property if the lessor decided
to sell before the expiry of the term or received an offer to purchase.

Events after the agreement for sale and purchase was signed

[99] Mr Bartle sent an email to his brother on 29 September 2006 extolling the
virtues of the Blue Chip investment signed that day. He stated his understanding of
the arrangement in these terms:

We are explaining this to you as we feel if its suitable to you then why not
use it. The property in Symonds street is our unit from the date of settlement
which is very soon. The fortnightly taxable amount of $451.00 will be
deposited into our account. We expect to pay tax on this as arranged by the
accountant with Blue Chip. There are neither administration costs nor any
 bills to pay. A trust will be formed and this too will be paid for by Blue
Chip. After four years the unit will be sold and there are no real estate fees
to pay. We are then free to do it all again if we wish. Blue Chip also
arranges the accountant to manage the end of years transactions for tax
purposes.

Each two weeks $451x26=$1126.00 multiplied by 4 years = $46,904.00

before tax of course is a very good return and then we also receive an
undisclosed sum after the 4 years as well.

Had we taken the Sentinel option we would have surrendered a given figure
from which the family would have had to forfeit during that time. That is
the interest charges would have been adding up.

[100] Mr Bartle then goes on to explain in the email that he and his wife had
considered the opportunity many times, they had examined every aspect and could
not find any defects in the proposal. He also mentioned a former customer of his
cleaning business who was very satisfied with an investment she and her husband
had made with Blue Chip.

[101] It is clear from this email that the Bartles’ focus was on the fortnightly return.
No reference is made to borrowings or to any anxiety in that respect. Given the
enthusiastic salesmanship of Mr Davis and the lack of any warning from Mr Mathias
of the obvious risks involved, it is not surprising that Mr Bartle wrote to his brother
in the terms outlined.

[102] The Bartles had no involvement in arranging finance other than completing
from time to time declarations of their financial position on forms provided to them
by EML and the signing of loan agreements and mortgage documents when required.
On 10 October the Bartles received from TML details of the loan for the initial
contribution of $137,484. As they expected, this was to be secured by a first
mortgage over their Amber Drive property. They signed the loan proposal on
11 October 2006.

[103] Between 24 and 26 October there was an exchange of emails between the
Bartles, Mr Davis and a Ms Ironside of Blue Chip New Zealand indicating that the
Bartles were confused about the need for the company Bartle Properties Limited and
how that related to the trust they understood was to be established. Ms Ironside
commented to Mr Davis about the confusion in the minds of the Bartles in this
respect and added:

In fact they seem a little confused about it fullstop.

[104] Mr Davis passed on the emails to Mr Mathias and asked him to contact the
Bartles to explain matters to them. It seems that a legal secretary from Mr Mathias’
office attempted to contact the Bartles but was unable to do so.

The meeting between the Bartles and Mr Mathias on 7 November 2006

[105] Mr Mathias travelled to Whangarei on 7 November 2006 taking with him

documents for the Bartles to execute. These included the loan agreement for the
initial contribution of $137,484 to be provided by GE, a mortgage over their
Whangarei property, the joint venture agreement and a deed of trust. A file note
prepared by Mr Mathias indicates that he attended on the Bartles between 6 and
8 pm on 7 November, explained the documents and arranged for their execution.
Mr Mathias accepted that he explained the documents to the Bartles only in general
terms and that the focus was on the advance of $137,484 rather than the terms of the
joint venture agreement. The Bartles said there was little explanation of the
documents and they were simply asked to sign where Mr Mathias indicated. Given
the apparent length of the meeting, I am satisfied that Mr Mathias did provide a
general explanation of the loan documents but there was little focus on the terms of
the joint venture agreement and no discussion about the risks to which the Bartles
were exposed. It appears that the Bartles were content to continue with the
transaction to which they were committed at that stage in any event.

[106] Payment of the deposit on the agreement for sale and purchase and the other
costs included in the initial advance of $137,484 was completed on
9 November 2006. These included the working capital, brokerage, valuation fees
and legal costs earlier detailed. Thereafter, the Bartles began receiving the
procurement fees of $451 per fortnight from 8 December 2006. It is undisputed that
the fortnightly payments paid to the Bartles were sourced from the “working capital”
they had borrowed and paid to Blue Chip. Effectively the Bartles borrowed the
money which Blue Chip then paid back to them by the fortnightly payments. The
Bartles were also advised by Blue Chip that they (Blue Chip) would be meeting the
interest payments of $989 per month on the GE loan of $137,484.

Events in 2007

[107] Twelve months went by after the Bartles signed the agreement for sale and
purchase before the apartment was completed and settlement was required. In the
meantime, the Bartles signed a request provided by TML on 26 June 2007 for an
additional advance of $125,791. The Additional Advance Request included advice
that the additional sum would form part of the existing loan secured over the
Amber Drive property. More accurately, it was a variation of the existing loan and
mortgage. The Bartles also signed at this time declarations provided by EML as to
their financial position. On the same date, the Bartles also signed a loan proposal
provided to them by TML for a further loan of $366,291. The loan proposal
specified that the security would be a first mortgage over the unit to be purchased by
Bartle Properties Limited with a guarantee from Mr and Mrs Bartle.

[108] On 13 September 2007 Mr Mathias attended on the Bartles at Whangarei

when they executed the loan agreements and mortgage documents for the two
additional advances along with related documents. The additional loans were drawn
down on 27 September 2007 and the purchase of the unit was completed the
following day. The Bartles said it was not until the meeting on 13 September 2007
(12 months after they signed the agreement for sale and purchase) that they became
aware that they would be responsible for the total borrowing if Blue Chip failed.
Mrs Bartle said she discovered at this time that the monthly interest on the loans
would total nearly $5,000. (The interest on the initial advance of $137,791 was
about $1000 per month and on the two later advances in September 2007 of
$125,791 and $366,291 was about $1,000 and $2,900 per month respectively). This
sum would amount to approximately $60,000 per annum against annual rental under
the lease of the apartment of $33,280.

[109] Mrs Bartle asked Mr Mathias who would be responsible for the payments if
Blue Chip failed. His response was “you are”. Mr Mathias had no clear recollection
of this but accepted this would have been his response if asked. The Bartles said
they were shocked by this but did not take it further as the conversation was a
passing one at the conclusion of the meeting and they felt there was nothing they
could do at that stage in any event. I accept their evidence in this respect.

[110] Within eight days of signing the additional loan documents the Bartles were
advised by Blue Chip by letter of 21 September 2007, that their fortnightly payments
would be put on hold because “the existing joint venture structure of your Blue Chip
investment is now no longer sustainable.” This was said to be due to market
conditions and changes in the tax regime. The fortnightly payments to the Bartles
ceased around that time. Liquidators were appointed for the Blue Chip Group on
12 February 2008.

Factual conclusions in relation to the case against Mr Mathias

[111] Viewing the evidence as a whole, I find that the Bartles approached
Mr Mathias on the recommendation of Blue Chip for the purpose of obtaining
independent legal advice about the proposed Blue Chip joint venture investment.
They approached him in the knowledge that he was experienced and had special
expertise in relation to the Blue Chip joint venture investments. Mr Mathias was
aware that he was approached upon this basis for advice about this form of
investment. No specific property was then identified for the proposed investment
with the consequence that Mr Mathias did not receive any instructions at the time of
his meeting with them on 7 September 2006 to undertake any conveyancing or other
legal work on their behalf. He did not expect to be paid for his initial advice but, of
course, he looked forward to being formally instructed in due course and to the fees
to which he would then be entitled.

[112] Mr Mathias knew at the first meeting however that the Bartles were
prospective joint venture clients. He had a detailed knowledge of the structure of the
Blue Chip joint venture investments. I also find that he was aware that the Bartles
were pensioners and had limited resources. He knew they would be required to
borrow the total cost of the investment which typically involved expenditure of
between $500,000 and $600,000. He also knew that the Bartles would not have the
ability to service borrowings of that magnitude without the benefit of the promise by
Blue Chip to meet the total costs of borrowing in terms of the joint venture
agreement. In that respect, he appreciated that the terms of the joint venture and
Blue Chip’s ability to sustain the payments required were critical to the success of
the investment.

[113] Mr Mathias also knew that Blue Chip’s joint venture investments were
structured in a way which meant that the investors had sole legal responsibility to the
lenders for the entire borrowing under the guarantee and security arrangements and
that, in the event of Blue Chip failing to honour their obligations, there was a high
risk that investors like the Bartles would lose their home. In that respect, the Bartles
were seeking an assurance from Mr Mathias that their home would not be at risk if
they invested with Blue Chip and that, in general terms, the proposed investment was
safe for them to enter into.

[114] Mr Mathias was able to inform the Bartles that he had previously acted for
Blue Chip investors and no difficulties had been reported to him. He was also able
to repeat the information the Bartles had received from Mr Davis about the apparent
substantiality of Blue Chip as a public listed company with prominent directors. But
Mr Mathias did not see his role as extending to advice on what he called the
“wisdom” of the Blue Chip joint venture investments. He did not regard it as his
responsibility to inform the Bartles that they would be personally liable for the total
borrowings or of the risks to which they would be exposed if Blue Chip did not
honour its side of the bargain. He maintained he was not asked about this and
presumed the Bartles would have discussed the matter with Mr Davis. I am satisfied
that Mr Mathias gave no advice or warning to the Bartles in these respects at any
time prior to their signing the agreement for sale and purchase on 29 September
2006. Whether Mr Mathias was under a duty to inform the Bartles of these risks is
dealt with below.

[115] To the contrary, Mr Mathias reinforced the assurances given to the Bartles by
Mr Davis that Blue Chip would be responsible for all costs involved and he left the
Bartles with the clear impression that their home was not at risk and there should be
no problems for them if they entered a transaction of the type proposed.
[116] Mr Mathias did not receive formal instructions to act for the Bartles until
after the agreement for sale and purchase was executed on 29 September. But he
anticipated he would likely receive formal instructions from them because of the
referral from Mr Davis. The purpose of his trip to Whangarei from Auckland to
meet the Bartles was to discuss the proposed Blue Chip joint venture investment and
to give them advice with a view to receiving formal instructions to act on their behalf
in due course.

[117] In the period of just over three weeks between 7 and 29 September 2006,
there was no indication that Mr Mathias would not receive instructions to proceed
with the transaction. Indeed, all the indications were the other way in the form of
requests by the Bartles through Mr Davis for advice from Mr Mathias on issues such
as the trust which the Bartles understood would need to be established. During this
period, Mr Mathias was advised, for example, on 15 September 2006 by Mr Davis
that the Bartles were keen to proceed and he would obtain from them the form giving
authority to proceed.

[118] From the time of the first meeting on 7 September, Mr Mathias could
reasonably have anticipated that he would receive instructions to act on behalf of the
Bartles in connection with the investment which he knew would entitle him to
receive the substantial fees he usually charged for such transactions. Mr Davis was
in no doubt Mr Mathias was to act for the Bartles since he put Mr Mathias’ name on
the agreement for sale and purchase as the Bartles’ lawyer.

[119] While the Bartles were undoubtedly influenced by the enthusiasm of

Mr Davis for the joint venture investment, I am satisfied that the advice and
assurances received by the Bartles from Mr Mathias were also influential in their
decision to proceed. Indeed, I accept their evidence that they would not have
proceeded with the investment without the advice and assurances from Mr Mathias.

[120] The Bartles were not experienced in investments of the kind in question. Nor
were they sophisticated in business matters. They were therefore dependent on
Mr Mathias for advice as he must have appreciated. The Bartles did not receive
legal advice from anyone else and there was no indication to Mr Mathias that they
were doing so. Nor did he suggest to them they should obtain separate legal advice.
The Bartles were aware it would be necessary to borrow against their property and
said they understood they would need to borrow the initial advance of $137,000 and
possibly a further $50,000. It is not clear how they gained this impression. It could
not have come from Mr Mathias because, at the time of his discussion with them on
7 September, no specific investment proposal or figures were available for
discussion. At that time the Sample Analysis of 6 July 2006 referred to initial
contributions of $197,494 and $83,700 with a total investment of $593,000.

[121] The Bartles would certainly have been aware from the financial analysis
received on 26 September 2006 that their initial contribution (payable immediately)
was $137,484. But this analysis also stated they would be responsible for a second
contribution (payable at settlement) of $131,750. They would also have been aware
from this analysis that the purchase price of the property was $552,000 and that the
total investment cost was $634,284. The sample analysis and the letter of
27 September 2006 from Blue Chip emphasised however that Blue Chip would be
responsible for interest on any associated borrowing. As well the Bartles had been
assured by both Mr Davis and Mr Mathias that Blue Chip would take care of all
costs and expenses. This was confirmed by the letter dated 27 September 2006 the
Bartles received from Blue Chip.

[122] The possible additional $50,000 which the Bartles understood they might
have to provide is most likely a reference to the working capital requirement of
$55,200, yet this was included in the sum of $137,484.

[123] Since I accept the Bartles as honest witnesses, I can only conclude that at the
time they signed the agreement for sale and purchase there was a significant degree
of misunderstanding by them as to the actual amounts they would personally be
responsible for borrowing. What they clearly understood was that their property
would be mortgaged to provide a contribution by them towards the joint venture and
that Blue Chip would be contributing to the joint venture to the extent necessary to
complete the purchase. They also understood that Blue Chip would be responsible
for all costs and expenses and that they would receive $451 per fortnight (subject to
tax) over a period of four years. At the conclusion of that period, the property would
be sold, all borrowings repaid and they would receive a small share of any capital
gain. They were never told at any time prior to signing the agreement for sale and
purchase that they would be responsible personally for the total borrowings of over
$630,000 or that they stood to lose their home if Blue Chip collapsed. I am satisfied
that, if they had been aware of this, they would never have entered the transaction.

[124] The Bartles’ lack of appreciation of the risks they faced and the true nature
and structure of the transaction is understandable. None of the documentation prior
to the time they signed the agreement for sale and purchase described the nature of
the security arrangements or the guarantees associated with them. The joint venture
was described only in general terms and was not made available to them until
7 November 2006 when it was brought to them by Mr Mathias for signature some
five weeks after the Bartles had committed themselves to the purchase. By the time
the Bartles came to sign the loan and mortgage documents in 2006 it was too late for
them to avoid proceeding. They had been permitted to sign an agreement for sale
and purchase which was unconditional from their perspective without having
received any of the loan documentation and agreements essential for the success of
the transaction.

[125] By the time of the 2007 loans they must have been aware they were
borrowing all the money for the transaction. But they continued to believe Blue
Chip would be responsible for all the mortgage payments. After signing the 2006
mortgage, the fortnightly payments to them had been made and were continuing.
Blue Chip had also been providing the funds to meet the payments due to GE on the
2006 loan.

[126] The Bartles’ lack of sophistication in business matters was evident in a

number of respects. First, there was their confusion both before and after the
agreement for sale and purchase was signed over the formation of the company and
associated trust. Secondly, Mr Bartles’ understanding of how their equity in their
home would be used for the transaction revealed his lack of any real appreciation of
the concept of equity as a lawyer or experienced businessman would understand the
expression. In evidence, he variously described the equity as “the balance part of the
house”; “not the total ownership”; “the part that is available to you”; “the credit side
of your money”; and “the part of the house which I know is floating in the thing”.
He clearly did not understand that he and his wife would be borrowing a sum more
than 50 per cent greater than the value of their home at Amber Drive. This was
apparent from his note on the Blue Chip brochure referring to taking half the value
of the Amber Drive property.

[127] What came through plainly in the evidence of Mr and Mrs Bartle is that they
understood the joint venture involved an initial contribution by them to be raised by
a mortgage over their home but that the greater part of the funding needed would be
provided by Blue Chip. In their minds, that was consistent with Blue Chip receiving
all but a small portion of any capital gain on the property at the end of the four year
period. The Bartles regarded this as fair since they understood from both
Mr Mathias and Mr Davis that Blue Chip would be taking all the risk and meeting all
the costs. No-one disabused them of that notion and no-one informed them of the
risks they faced before they signed the agreement for sale and purchase. In reaching
that conclusion, I do not accept evidence given by Mr Davis in answer to a question
from me that he was “pretty sure” he would have told the Bartles they were
responsible for the total borrowings. I was not convinced by Mr Davis’ statement in
this respect which was given near the end of his evidence. If he had advised the
Bartles to this effect, it would have been completely contrary to the tenor of all the
remainder of his evidence.

Did Mr Mathias owe the plaintiffs a duty of care as alleged in paragraphs 53

and 53A ASOC?

[128] The Bartles plead that Mr Mathias owed them a duty of care and was
required to act to the standard of care expected of a reasonably competent solicitor.
The Bartles allege that a contract of retainer began at the time of their first meeting
with Mr Mathias on 7 September 2006. Alternatively, a duty of care was owed in
tort. Mr Mathias admits that he owed the Bartles a duty of care but denies there was
any relationship of solicitor and client at the time of the meeting on 7 September
2006. It was submitted on his behalf that no such relationship arose until he was
formally instructed after the agreement for sale and purchase was signed. If there
was any duty at the time of the preliminary meeting, it was to give correct answers to
the questions asked. It may be, although his statement of defence does not say so,
that Mr Mathias’ concession that he owed a duty of care was only intended to be
made in the context of a solicitor and client relationship once created.

[129] It is common ground that the nature of the duty owed by a solicitor to a client
is governed by the express or implied scope of the solicitor’s retainer: Gilbert v
Shanahan [1998] 3 NZLR 528, 537 (CA). When a relationship of solicitor and
client exists, there may be concurrent duties in both contract and tort.

[130] The first question to determine is whether a contract of retainer existed

between the Bartles and Mr Mathias at any time prior to the signing of the agreement
for sale and purchase on 29 September 2006. A contract of retainer may arise either
expressly or by implication. As Scott LJ observed in Groom v Crocker [1939] 1 KB
194 at 211:

The relationship is normally started by a retainer, but the retainer will be

presumed if the conduct of the two parties shows that the relationship of
solicitor and client has in fact been established between them.

[131] In Dean v Allin & Watts [2001] 2 Lloyd’s Law Reports 249 (CA) Lightman J
(delivering the leading judgment) said at 256:

... an implied retainer could only arise where on an objective consideration

of all the circumstances an intention to enter into such a contractual
relationship ought fairly and properly to be imputed to the parties.

[132] Consideration is not essential since a solicitor acting pro bono for a client
also owes a duty of care to the client: Webb Ethics, Professional Responsibility and
the Lawyer (2 ed 2006) at para 5.4. Nevertheless, relevant factors include whether
the party is liable for the solicitor’s fees and whether the solicitor has opened a file.
Whether a contractual relationship between the parties has existed in the past may
also be a relevant factor: Dean v Allin & Watts at 256. Of course, none of these
factors are determinative.

[133] I have concluded that a contract of retainer did not exist between the Bartles
and Mr Mathias until he received formal instructions to act on their behalf after the
agreement for sale and purchase was executed. The temptation to assume a contract
of retainer, arising from the fact of Mr Mathias’ visit to the Bartles’ home at the
request of Mr Davis, must be resisted and the circumstances analysed objectively.
At that point, no specific investment property was in contemplation and the Bartles
had not made any decision to proceed with the transaction. They did not give
Mr Mathias any instructions to undertake legal work on their behalf and there is no
evidence of any expectation that Mr Mathias would be entitled to a fee for the advice
he gave on that occasion. Nor was it clear at that stage that Mr Mathias would be
instructed to act on behalf of the Bartles if they decided to proceed with the Blue
Chip investment.

[134] The meeting was preliminary in nature and was for the purpose of clarifying
for the Bartles the questions they had about aspects of the contemplated investment
including the risks associated with it. I am satisfied that, after the 7 September
discussion, there was no further contact between Mr Mathias and the Bartles prior to
the execution of the agreement for sale and purchase. Mr Mathias was asked by
Mr Davis to contact the Bartles in relation to the contemplated trust but the telephone
message Mr Mathias left with the Bartles in response to that request was not
followed up by them.

[135] I have considered whether there may have been a limited contract of retainer
to provide advice to the Bartles at the meeting on 7 September but I have concluded,
for similar reasons, that, objectively considered, no relationship of solicitor and
client at that point was contemplated or should be imputed. There can be no doubt
that information and advice was sought by the Bartles from Mr Mathias on that
occasion and that he gave the advice in his capacity as a solicitor. However, the
circumstances are not such as to warrant a finding that a contractual relationship
ought fairly and properly to be imputed to the parties. At most, there was a prospect
that a solicitor and client relationship would be established in the event of the Bartles
determining to proceed with the investment.

[136] Nevertheless, a duty of care in tort may arise irrespective of any contract of
retainer between the parties. Such a duty is not limited to cases of negligent
misstatement falling within the narrower cause of action established by the House of
Lords in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 but extends
more widely to cases where the defendant’s conduct is such as to enable a court to
conclude there has been an assumption of responsibility for the performance of a
task. In some cases this may be a voluntary assumption of responsibility and, in
others, a deemed assumption of responsibility where the Court finds the imposition
of a duty of care is fair, just and reasonable: see the discussion by Tipping J in
Attorney-General v Carter [2003] 2 NZLR 160 (CA) at [22] to [32]. If the defendant
negligently performs or omits to perform the task then, subject to issues of
foreseeability and remoteness, he may be liable for losses flowing from the breach.

[137] Liability of this kind has long been established in the case of a solicitor’s
liability to third parties in cases such as White v Jones [1995] 1 All ER 691, Allied
Finance and Investments Ltd v Haddow & Co [1983] NZLR 22 (CA), Gartside v
Sheffield, Young & Ellis [1983] NZLR 37 (CA) and Connell v Odlum [1993]
2 NZLR 257 (CA).

[138] Dean v Allin & Watts (above) is a helpful decision of the English Court of
Appeal elaborating on the circumstances in which a duty of care may be imposed in
tort in third party cases. The Court held there was no contract of retainer between
the plaintiff and the defendant firm but a duty of care was nevertheless owed by the
defendant solicitors to the plaintiff. The solicitors were found to have assumed
responsibility for putting in place an effective security for a series of loans which the
plaintiff had agreed to make to clients of the defendant firm. Lightman J explained
at [25] the alternative duties of care found to arise in the following terms:

Mr. Dean’s alternative case is that Mr. Dolan [the solicitor] owed to him a
duty of care not to make a misrepresentation as to the efficacy of the security
and also a duty of care arising from the assumption of responsibility for
putting in place an effective security, and that Mr. Dolan was in breach of
both these duties. The distinct legal characters of these two duties is
explained by Lord Justice Buxton in Andrew v Kounnis Freeman, [1999] 2
B.C.L.C. 641 at pp. 654-655:

Subsequent cases in their Lordships’ House have made clear that in Caparo
Industries plc v. Dickman [1990] BCLC 272, [1990] 2 AC 605 the House of
Lords had under review two different, but interrelated, types of case in
which liability might accrue for negligently caused economic loss. The first,
closely following Hedley Byrne Co Ltd v Heller & Partners Ltd [1963] 2 All
ER 575, [1964] AC 465, is where, in limited circumstances, advice is given
by an adviser to an “advisee” ...The second case is where, more generally,
the defendant’s conduct can be objectively analysed as involving an
assumption of responsibility for the performance of a task in the course of
 performing or omitting to perform which he foreseeably causes economic
loss to the plaintiff:...The latter and more general category of case is subject
to the controlling requirement that the imposition of a duty of care be seen as
being fair, just and reasonable: ...That requirement is seen as being present in
any case of negligence, whether involving economic or physical
damage...However, where the specific requirements of Hedley Byrne are
fulfilled that in itself establishes that the imposition of liability will be fair,
just and reasonable, and there is no room for separate inquiry on that point...

[139] The Court of Appeal found there was no evidence of negligent misstatement
in the narrow sense but concluded there was a wider duty of care in tort, Lightman J
stating at [40]:

In my judgment by parity of reasoning and in the analogous situation which

arose in this case, the law can and should impose a like duty of care on A &
W towards Mr. Dean in respect of the provision of an effective security, the
benefit of which to his knowledge the borrowers wished to confer on Mr.
Dean and which was fundamental to the loan transactions. There is the
necessary foreseeability of damage and the necessary relationship of
proximity for the law to impose such a duty of care and it is fair, just and
reasonable that such a duty should be imposed.

[140] It was submitted on behalf of Mr Mathias that negligent misstatement in the

narrow sense described in Hedley Byrne was not pleaded and that the facts of this
case were not analogous to those cases where a solicitor has been found to be under a
duty of care to a third party. While the amended statement of claim could have been
more clearly drafted, paragraphs 18 and 20 plead specific representations by
Mr Mathias as to the safety of the proposed investment and Blue Chip’s
responsibilities. At least in a broad sense, the duty of care and breaches alleged in
paragraphs 53 to 56 were linked to these representations but were expressed rather
more widely.

[141] I accept that the third party cases have arisen where a solicitor, in the course
of carrying out work for a client, has been found to owe a duty of care to a third
party who is sufficiently proximate and could reasonably have been expected to
suffer loss if the solicitor did not undertake the work with due care. However, I am
nonetheless satisfied that Mr Mathias did owe a duty of care to the Bartles at the time
of the meeting on 7 September 2006 whether in the narrow sense of negligent
misstatement set out in Hedley Byrne or the wider sense arising from an assumption
of responsibility as described in Dean v Allin & Watts and the cases cited in that
decision.
[142] The parties were in close proximity in legal terms, much more so than in the
third party cases. Mr Mathias was approached by the Bartles in his capacity as a
solicitor who, it is accepted, had special knowledge and expertise in the Blue Chip
investment schemes including the joint venture investment contemplated by the
Bartles. Mr Mathias was aware that Mr Davis had referred the Bartles to him by
reason of his experience and special knowledge of such transactions. An
appointment was arranged and Mr Mathias attended the Bartles at their home in
Whangarei, having travelled from Auckland for that purpose. It was a serious
occasion and the Bartles were entitled to expect that Mr Mathias would exercise due
care in providing accurate information to them in answer to their questions and in
responding to the assurances they sought about the safety of the contemplated
transaction. Although no specific contract of retainer had been entered into,
Mr Mathias hoped and expected he would receive instructions in due course to act on
their behalf.

[143] The present case is clearly distinguishable from the decision of

David Clarke J in Horsley v Burton Lawyers [2003] EWHC 3558 (QB) in which a
solicitor was sued for allegedly negligent advice. Ms Challis for Mr Mathias relied
on this case to support the contention that there was no solicitor and client
relationship and no separate obligation in tort. But the Court found that the solicitor
repeatedly told the plaintiff he could not answer her questions about an issue under
the law of New York in a medical negligence case and could not act on behalf of her
son. The Judge also found the solicitor had not given any wrong or misleading
advice. On that basis, no duty of care was found to exist either under the narrow
Hedley Byrne doctrine or on any wider basis.

[144] Here, Mr Mathias expressed no reservations about answering the Bartles’

questions and was willing to accept their instructions to act if they decided to
proceed with the investment. There can be no question that Mr Mathias knew the
Bartles were relying on him for advice and that, if his advice proved to be inaccurate
or misleading, the Bartles could suffer loss through entering into the contemplated
transaction. The possibility of such loss was clearly foreseeable. In these
circumstances, it is appropriate to conclude there was an assumption of responsibility
by Mr Mathias and that it is fair, just and reasonable to find that he owed the Bartles
a duty of care.

[145] As to the scope of the duty, I am satisfied that Mr Mathias was under a duty
of care to the Bartles in three key respects pleaded in paragraph 53(iii), (iv) and (vi)
ASOC:

• To ensure [the Bartles] understood the effect and implications of the transaction.
• To explain the risks associated with the transaction including the entering into of
substantial mortgages; and
• To give [the Bartles] independent advice as to the risks that they faced if the Blue
Chip Group did not honour its obligations.

Did Mr Mathias breach any duty of care owed to the plaintiffs in any of the
respects alleged in paragraphs 56, 56A and 57 ASOC?

[146] The essence of the several allegations of breach of duty of care in paragraph
56 ASOC is a failure by Mr Mathias to adequately and accurately inform the Bartles
of the risks of the proposed investment. This allegation is said to embrace the failure
to inform the Bartles of the risk that they could lose their home through inability to
service the borrowings, the failure to inform them of the marked inadequacy of
consideration under the joint venture agreement and the giving of assurances about
the viability of the Blue Chip Group.

[147] It was submitted on behalf of Mr Mathias that any duty of care he may have
had did not extend to giving advice about the wisdom of the transaction and was
limited to giving accurate answers to the questions asked of him. I accept that, in
general, a solicitor is not required to give advice (even to a client where a retainer
exists) about the wisdom of a transaction in the sense that, for example, a property to
be purchased is good value for money or that a business transaction would be
worthwhile. But here, the Bartles sought the advice of Mr Mathias about the risks
associated with a joint venture of the type promoted by Blue Chip and assurances as
to the substantiality of the Blue Chip Group. They approached Mr Mathias
specifically because they wanted his considered and expert view on whether it would
be safe for them to enter the transaction. In particular, they wished to have an
assurance that their home, which was then unencumbered, would not be put at risk if
they were to enter the transaction. On that score, Mr Mathias gave the Bartles the
assurances described at [115] above.

[148] In giving these assurances, I am satisfied Mr Mathias conveyed a very

misleading impression to the Bartles. There were such obvious risks to them in the
way the joint venture investments were structured that any competent solicitor
should have warned prospective investors such as the Bartles of those risks. In
particular, it should have been made clear to them that they would be borrowing a
sum substantially in excess of the value of their Amber Drive property and that, if
Blue Chip were to fail, the transaction was structured in such a way that the full
burden of the borrowings would fall upon the Bartles. Mr Mathias did not advise the
Bartles to this effect. Nor did he advise them they would be borrowing a sum well in
excess of the purchase price of the unit in order to pay all the relevant costs including
the working capital component which would then be used to pay them the fortnightly
payments. This gave a hollow ring to his advice that Blue Chip would be “taking
care of all the costs”. In fact, there was no capital contribution from Blue Chip at all.

[149] Since Mr Mathias knew the Bartles had few resources other than their home
and were pensioners, it would have been obvious to Mr Mathias that they could not
possibly meet their obligations in the event of Blue Chip’s collapse. These matters
clearly raised serious issues about the legal implications of the joint venture structure
they were considering entering into. The situation is analogous to the duty imposed
in a solicitor-client relationship to explain commercial matters which may be
straightforward to business people but may not be obvious to the unsophisticated:
see Webb at 5.4.1 referring to Provost Developments Ltd v Collingwood Towers Ltd
[1980] 2 NZLR 205 at 213 (CA); see also the observations of Laddie J in Credit
Lyonnais SA v Russell Jones & Walker [2002] 2 EGLR 65 at 67, as to the need to
point out obvious risks. Advice of this type is the very sort of advice a solicitor is
well qualified and expected to give.

[150] This was far from an ordinary conveyancing transaction. It is common

ground that the joint venture structure was critical to any assessment of the risk of
the transaction. Yet Mr Mathias did not explain this to the Bartles, despite his
detailed and extensive knowledge of how these transactions worked. His failures in
all these respects meant that the assurances he gave were seriously inaccurate. In
consequence, the Bartles were misled (albeit innocently) about the risks they would
face in entering the transaction.

[151] The Bartles relied on the advice given by Mr Mathias and I am satisfied
Mr Mathias knew that. As already noted, I accept the evidence from Mr and
Mrs Bartle that they would not have entered the transaction to purchase the
Symonds Street unit without the assurances given them by Mr Mathias. They
committed to the transaction within three weeks of the meeting with Mr Mathias on
7 September. It was entirely foreseeable on Mr Mathias’ part that they would enter
such a transaction and that they stood to suffer substantial loss if Blue Chip were to
fail.

[152] It was also pleaded that Mr Mathias was under a duty of care to advise the
Bartles of any conflict of interest. This allegation was not strongly pressed and,
rightly so. It is common ground that he did not act for Blue Chip in connection with
the transaction except in the limited respects I later describe.

[153] The statement of claim was amended during the hearing to introduce
allegations that Mr Mathias breached a duty of care by failing to advise the Bartles
not to execute any contractually binding documents without first receiving his advice
or advice from an independent solicitor. Alternatively, it was pleaded that he should
have advised the Bartles to bring the agreement for sale and purchase to him
immediately (or to another solicitor) so that consideration could be given to
exercising the statutory right to avoid the contract under s 225 Resource
Management Act 1991.

[154] These allegations were introduced after a suggestion from me that there may
have been some obligation in that respect if there was a contract of retainer between
the Bartles and Mr Mathias arising from the meeting on 7 September 2006. My
finding that no such retainer existed at that time effectively precludes the plaintiffs
relying on these additional allegations.
[155] Mr P H Nolan, an experienced solicitor, gave expert evidence for the Bartles
to the effect that, in his view, such a duty existed. However, his evidence in that
respect was premised on the existence of a solicitor and client relationship already in
existence. I am satisfied that, without such a relationship, there was no obligation on
Mr Mathias to give advice to that effect.

[156] As to s 225, any cancellation of the agreement for sale and purchase could
only take place within 14 days after the date of the making of the agreement. It is
difficult to reach any satisfactory conclusion about the date by which the agreement
was signed by both parties. The probabilities are that the 14 day period had expired
by the time Mr Mathias received instructions to act. More importantly, he did not at
any stage receive any instructions from the Bartles to attempt to avoid the agreement.
They did not do so of course because they were unaware of the risks to which they
had exposed themselves by entering into an unconditional agreement for sale and
purchase.

[157] The Bartles also pleaded that Mr Mathias should have taken steps to extract
them from the purchase by refusing to pay the deposit or to settle the purchase or by
negotiating with the vendors for a release from the transaction. Again, Mr Nolan
gave evidence as to the steps which he considered should have been taken in that
respect. Mr R V Eades, another experienced solicitor, gave expert evidence for
Mr Mathias to the contrary. His evidence was that the Bartles had entered into an
unconditional agreement which they were obliged to complete. There would have
been a need to weigh the risks of proceeding with the transaction against the risks of
not doing so including exposing themselves to an action for specific performance or
damages.

[158] In the absence of any instruction from the Bartles to take steps to avoid the
transaction, I do not accept that Mr Mathias was under any obligation to attempt to
do so. Whether he would have been successful in the circumstances is entirely
speculative.

[159] The final set of allegations against Mr Mathias is that he failed to inform the
Bartles about the unsatisfactory features of the documents involved in the
transaction. Mr Nolan gave extensive and compelling evidence about the
inadequacies in the documentation. He singled out for particular criticism the terms
of the joint venture document. Mr Eades agreed with many of Mr Nolan’s criticisms
of this document and accepted that the transaction was one-sided in Blue Chip’s
favour. It is unnecessary for me at this stage to detail the many fundamental
criticisms which were made. They focused on patent ambiguities in relation to the
respective contributions of the joint venture partners and the absence in key respects
of clear obligations on the part of Blue Chip. It was also pointed out that the Blue
Chip company selected as the joint venture partner was a subsidiary of Blue Chip but
with no guarantee or separate covenant from the parent. This emphasises the risks
inherent in the joint venture structure.

[160] In view of my finding that there was no contract of retainer until after the
agreement for sale and purchase was completed, I am satisfied there was no
obligation on the part of Mr Mathias to draw to the attention of the Bartles the plain
deficiencies in the documentation. When he was approached on 7 September 2006,
no specific transaction was in place and none of the documents had been prepared.
His obligation at that stage was, in response to the Bartles’ concerns, to answer their
questions including an explanation of the general nature of the transactions and the
risks presented. After the agreement for sale and purchase was signed the Bartles
were committed to the transaction. It would have been possible thereafter for
Mr Mathias to explain the deficiencies in the documentation and seek to have them
remedied. But, the real cause of the loss to the Bartles (once the transactions were
entered into) was the collapse of the Blue Chip Group. No amount of
documentation, however well drafted, could have avoided the losses they sustained.

Did the plaintiffs contribute to the losses sustained by them in any respect
identified in paragraph 23 of Mr Mathias’ statement of defence?

[161] Mr Mathias did not initially raise any plea of contributory negligence. But in
his amended statement of defence dated 24 April 2009, he contended that if the
plaintiffs were entitled to damages, then those damages should be reduced on
account of contributory negligence by the Bartles in four respects:
• Failing to retain him at the meeting on 7 September 2006.
• Failing to contact him after that date and at any time prior to 7 November 2006.
• Signing the agreement for sale and purchase and an associated property
management agreement without seeking advice from him.
• Determining to proceed on the basis of assurances from Mr Davis and without
taking any other advice.

[162] On the facts as I have found them to be, I am not persuaded there is any
substance in the contributory negligence allegations. It was not explained how the
position would have differed if Mr Mathias had been retained from the date of the
meeting on 7 September or at any other time prior to the signing of the agreement for
sale and purchase. Given the tenor of his evidence, it is highly unlikely he would
have counselled the Bartles against entering the transaction. His evidence was that
he had never advised a Blue Chip investor not to proceed. He had already given
them the assurances described which gave the Bartles the comfort to proceed with
the transaction in the belief that there were no untoward risks involved in their doing
so.

[163] The letter from Blue Chip of 27 September 2006 encouraged the Bartles to
seek independent advice before entering the agreement if they had any residual
concerns (see [90] above). However, as earlier noted, they had already obtained
independent advice from Mr Mathias and he had not expressed any concerns to
them. The Bartles did not proceed solely on the basis of assurances from Mr Davis.
On his recommendation, they acted prudently in taking advice from Mr Mathias who
Mr Davis recommended as an independent solicitor. Mr Mathias did not suggest to
them they should consult with him before signing any documents. Indeed, it was an
important plank of his defence that there was no relationship of solicitor and client
between himself and the Bartles until after the agreement for sale and purchase was
signed. I am not persuaded in the circumstances that there was any obligation on the
Bartles to do more. I find there is no basis for any contributory negligence on the
part of the Bartles.
What relief, if any, are the plaintiffs entitled to against Mr Mathias?

[164] The issue of damages was not canvassed in detail before me. At the time of
hearing, the Symonds Street unit had not been sold. Obviously, the sale price
received is a critical factor in assessing the losses the Bartles have undoubtedly
sustained. In broad terms their borrowings were approximately $640,000 and the
unit may be worth somewhere between $200,000 and $250,000. In addition, there
will be accrued interest on the borrowings and no doubt other costs and expenses yet
to be quantified. Counsel for Mr Mathias have raised a number of issues in relation
to the assessment of damages which have yet to be addressed.

[165] Accordingly, I will reserve the issue of damages which will need to be
determined at a further hearing if not settled between parties.

[166] I will also reserve Mr Mathias’ third party claim for indemnity against
Mr Davis. Prima facie, Mr Mathias is entitled to judgment against Mr Davis since
he has taken no steps. But this issue too will need to be finally determined at a
further fixture.

Causes of Action Against the First Defendant (GE)

Introduction

[167] GE Custodians (described in this judgment as GE) made all three loans to the
Bartles. GE is owned by an Australian based company GE Finance and Insurance
Limited which is ultimately owned by the General Electric Corporation of the United
States. GE Finance and Insurance operated in New Zealand through another
subsidiary, Australian Mortgage Securities (NZ) (AMS). Although GE and AMS
had different functions, they may be regarded as one for the purpose of this
proceeding.

[168] It is common ground that:

 a) GE and AMS had no ownership interest in the Blue Chip Group and
had no dealings or common directorships with the Blue Chip Group;
b) GE and AMS had no ownership interest in TML or EML and no
common directorships; and
c) the Bartles did not at any time have any direct dealings with GE or
AMS.

[169] For the purpose of this proceeding it was accepted on behalf of the Bartles
that GE had no actual knowledge that the loans were for the purpose of a Blue Chip
investment. It was also accepted that GE had no actual knowledge of the terms of
the joint venture arrangement with Blue Chip nor of any representations that may
have been given by Blue Chip or Mr Mathias to the Bartles in connection with their
investment. Further, it was agreed that GE did not actually know that the Bartles
would have insufficient income to support the repayment of the mortgage advances.

[170] In order to fix GE with knowledge of such matters, the amended statement of
claim of 23 April 2009 pleads in paragraph 35 that TML and Blue Chip New
Zealand Limited were agents of GE by virtue of the contractual relationships
between GE, AMS, TML and EML, the common ownership between GE and AMS
and the fact that, at material times, TML was a subsidiary of the Blue Chip Group.

[171] Other causes of action pleaded against GE focus on the nature of the loans
made by GE to the Bartles. These loans are known as “Fastdoc 70” loans. I will
deal with the nature of these loans in more detail subsequently but one of their
essential features is that borrowers are not required to supply income details or to
provide any income verification. The Bartles plead that GE was negligent in
advancing the loan monies to them or alternatively that the loans were oppressive or
unconscionable. An allegation of fraud is also made but, as earlier noted, was not
pressed in argument.

[172] Before addressing each of the specific causes of action, it is necessary to set
out some further background of the companies involved, the relevant terms of the
contractual arrangements between them, the manner in which the business
arrangements between the companies operated, and the documents relevant to the
specific loans made to the Bartles.

TML and EML

[173] TML was incorporated in November 2003 and was owned by a chartered
accountant, Mr J A Lowther, through a nominee company. Mr Lowther’s nominee
company also owned EML. The general manager of the companies was
Mr Mac Bycroft. In February 2004, Mr Bycroft contacted AMS with a view to
establishing a business relationship. Mr Bycroft described EML as a mortgage
broker with brokerage relationships with “all of the main funders”. TML (then
known as Tasman Home Loans Limited) was said to be the mortgage provider.
Mr Bycroft proposed that AMS enter into a business relationship with TML. The
company was said to have good business connections which would enable it to refer
potential borrowers to AMS for funding purposes. This approach resulted soon after
in AMS entering into a “Correspondent Deed” with TML. EML was the guarantor.
I will describe the terms of this document in more detail shortly.

[174] Thereafter, GE made a number of loans to borrowers sourced through TML

and EML. GE also made loans in New Zealand through approximately eight other
correspondents with whom it had similar contractual relationships.

[175] According to Companies Office records, the shares in TML and EML were
acquired on 14 March 2007 by Tasman Financial Group Limited, a company
forming part of the Blue Chip Group. There may have been a business connection
between Blue Chip and TML/EML prior to that date since the principal of Blue
Chip, Mr Mark Bryers, became a director of TML on 5 September 2006. On 31 May
2007 Lombard Group Limited signed a conditional agreement to acquire 70 per cent
of the shares in TML from Blue Chip. AMS gave its consent to the acquisition on
11 June 2007. The Managing Director of AMS, Mr J K Grant, gave unchallenged
evidence that he was not aware until June 2007 of any association between TML and
Blue Chip. He also understood at that date that Lombard was acquiring the total
share capital in TML. His evidence in that respect is supported by Lombard’s letter
to AMS at the time which refers to Lombard’s agreement to acquire TML from Blue
Chip and makes no reference to Blue Chip retaining any ownership interest in TML.
The records from the Companies Office show that Lombard acquired a 70 per cent
interest in TML from 6 August 2007, the remaining 30 per cent remaining in the
ownership of the Blue Chip subsidiary Tasman Financial Group Limited. From
16 June 2008, Lombard acquired the remaining 30 per cent interest in TML.

The New Zealand Master Trust and Security Trust Deed and the Master Origination
and Servicing Agreement (MOSA) dated 22 June 2006

[176] The arrangements between GE and AMS are controlled by the documents
described in the subheading above. Under these documents, GE held loans secured
over residential property as custodian trustee. The loans were secured by registered
mortgages. As further protection, GE held insurance cover against any losses it
might sustain through default under the mortgages. The secured loans were later
sold to finance and other investment houses. This type of financing is commonly
referred to as “securitisation”.

[177] Separate trusts were created under the Master Trust Deed and the MOSA
with GE as trustee. Each trust held the beneficial interest in a pool of mortgages.
Under the MOSA, AMS was appointed by GE as Trust Manager with responsibility
for sourcing the mortgages and for arranging the funding from the beneficiaries of
the trusts by way of the issue of mortgage-backed securities. AMS also had
responsibility for managing the process for approving loan applications, settling loan
transactions and managing the loans once granted. This included checking all loan
applications for compliance with the Master Trust Deed and MOSA’s funding
criteria; the draw-down of funds and repayment of loans; managing any arrears and
defaults under the mortgages; arranging the lender’s mortgage insurer (LMI);
creating and implementing loan products which met the minimum criteria set by the
LMI; and establishing and maintaining contractual relationships with third parties
whose role was to promote and source new loan business.

[178] The Master Trust Deed permitted AMS to use third party organisations
known as correspondents to source loan applications from mortgage brokers or from
the public directly. The correspondents were responsible to AMS for submitting
mortgage loan applications; carrying out credit checks; liaising with the borrowers;
obtaining valuations of the securities; liaising with AMS in relation to any loan
arrears; and marketing and promoting loan products provided by AMS.

[179] Correspondents were paid a fee based on the difference between the
wholesale interest rate and the retail rate accepted by the borrowers.

The Correspondent Deed

[180] In 2004 AMS appointed TML as a correspondent. A Correspondent Deed

was entered into between AMS, TML and EML (the latter in the capacity of TML’s
guarantor). The copy of the Deed produced in evidence is undated but there is other
material suggesting it was dated 9 June 2004. The broad obligations imposed on
TML were set out in clauses 2.1 and 2.2:

2.1 General

This Deed sets out the terms and conditions upon which the Correspondent
agrees to exercise certain powers and discretions and perform certain
obligations in relation to the origination and management of Loans and
Mortgages.

2.2 Operations Manual

In exercising its powers and performing its obligations under this Deed, the
Correspondent must comply and act in accordance with the Operations
Manual in all respects.

[181] Clause 3.1 of the Correspondent Deed described the status of TML as
Correspondent as that of an independent contractor but with an exception where
there was an express delegation of “Powers” contained in the Deed. The clause
provided:

3.1 Independent Contractor

Except for the express delegation to the Correspondent of the exercise of the
Powers contained in this Deed, the Correspondent agrees that in performing
its obligations under this Deed:

(a) It is an independent contractor and is not the agent, partner or

employee of AMS or the Mortgagee;

(b) It must not hold itself out as, or engage in conduct which would
lead others to believe that it is the Mortgagee under any
 Mortgage or the agent, partner or employee of AMS or any
Mortgagee;

(c) It will be solely responsible for the acts or omissions of its

employees or agents, or of independent contractors, advisers or
Representatives engaged by it in the performance of its
obligations under this Deed; and

(d) It must not (except as permitted by clause 3.2) issue any

promotional or advertising material which includes the name of
AMS, any Mortgagee or the provider of any Enhancement
without the prior written consent of AMS, that Mortgagee or
that Enhancement provider (as the case may be).

[182] The expression “Power” (singular) was defined in clause 1.1 as meaning,
“...in relation to a Mortgage Document, any right, power or discretion conferred on
the Mortgagee or AMS by that Mortgage Document or by any law”. That could
include, for example, the power under the Deed for TML to enforce a mortgage in
the case of default. The exception in clause 3.1 was not necessarily limited to the
“Power” identified in clause 1.1 in relation to mortgages. It was potentially wide
enough to include any other expressly delegated powers. However, the exception is
limited to powers as distinct from obligations. That distinction was carefully
maintained in clauses 2.1, 2.2 and 3.1.

[183] Clause 3.1(d) prohibited TML from issuing any promotional or advertising
material which included the name of AMS or any mortgagee without the written
consent of AMS or the mortgagee. An exception existed under clause 3.2 enabling
TML to use stationery or other material approved by or on behalf of AMS for use in
connection with a “Programme”, provided TML complied with the operations
manual in doing so. A “Programme” was defined as meaning a programme for the
origination and management of loans secured by mortgages in which AMS
participates as a manager, servicer or originator of mortgages.

[184] Clause 3.3 recognised the prospect that TML might be (or might be found to
be) the agent of AMS or a mortgagee and provided for TML to indemnify AMS
from any loss so arising. This was subject to the proviso that the indemnity only
applied where there was a holding out by TML or its employees that it was an agent
of AMS or a mortgagee:
 Specific Indemnity

The Correspondent must indemnify AMS for all costs, losses, damages,
claims and expenses suffered or incurred by AMS (including any liability
which AMS incurs or may incur to any Mortgagee) as a result of the
Correspondent or any employee, agent or other person engaged by the
Correspondent being, or being held to be, the agent, partner or employee of
AMS or any Mortgagee, provided that this indemnity shall only apply to the
extent that the aforesaid persons hold themselves out or represent themselves
to be the agent, partner or employee of AMS or any Mortgagee.

[185] It was not suggested that TML had in any way held itself out as agent for
AMS or GE by, for example, using AMS or GE headed stationery or in any other
way. Indeed, as I later describe, the Bartles signed documents in which they
acknowledged specifically that TML did not act as agents for the lenders.

[186] The Correspondent Deed also relevantly provided:

a) Clause 4.1 - any mortgage proposals were to be provided to AMS in

accordance with the Operations Manual and any relevant mortgage
insurance policy. This was to include requirements as to form,
information, documents and otherwise.
b) Clause 4.2 - TML was to give AMS all information it requested in
relation to particular mortgage proposals as reasonably required to
enable AMS to consider such proposals.
c) Clause 4.3 provided that AMS (not TML) would decide whether to
accept a mortgage proposal.
d) Clause 4.4 placed certain obligations on TML to inform AMS of any
information considered to be material to its decision to accept or reject
the mortgage proposal in the following terms:

4.4 Adverse Information

(a) If after accepting a Mortgage Proposal in accordance with clause

4.3, but prior to settlement of the relevant Mortgage, AMS
becomes aware of information that might reasonably be
considered adverse and material to its decision to accept or
reject that Mortgage Proposal, AMS may reject that Mortgage
Proposal notwithstanding its earlier acceptance of that Mortgage
Proposal.
 (b) If the Correspondent becomes aware of information prior to
settlement of a Mortgage which might reasonably be considered
as material to AMS’ decision to accept or reject the relevant
Mortgage Proposal, the Correspondent must notify AMS of that
information promptly after becoming aware of it.

e) If AMS accepted the mortgage proposal then clause 4.5 required TML
to implement the proposal in terms of the Operations Manual and “to
use the same degree of skill and care as would be used by a
responsible and prudent mortgagee”.
f) TML was required under clause 4.6 to ensure all mortgage documents
were in the form required by the operations manual. But in practice
the mortgage documents were prepared and execution obtained
through solicitors acting for AMS.
g) Clause 5 required TML to “manage each Mortgage using the same
degree of skill and care as would be used by a responsible and prudent
mortgagee and in accordance with [the Deed, the Operations Manual,
any requests or directions from AMS and all applicable laws]”.
h) Under clause 6.1, TML was permitted to accept for itself or AMS
certain prescribed fees but was not otherwise authorised to collect
payments due under the mortgages and was to ensure all payments
were made to the mortgagee.
i) Clause 7.2 required TML to maintain stated records and clause 7.4
placed obligations on TML to produce books, records and information
as required by AMS. It also permitted AMS to carry out “spot
audits”.
j) Clause 7.5 provided:

7.5 Compliance with Laws

The Correspondent must comply with all Laws in

performing its obligations under this Deed, including
(without limitation):

(a) those relating to or regulating the engaging in of

misleading, deceptive and unconscionable conduct; and

(b) the Credit Contracts Act.

k) Clause 7.7 provided:

 7.7 Correspondent’s Judgment

The Correspondent must (upon and subject to the terms of this

Deed and to any requests made or directions given by AMS)
exercise its own judgment, skill and discretion in performing its
obligations under this Deed.

l) Under clause 9, TML was required to take such enforcement action as

it considered reasonably necessary in respect of defaulting
mortgagors, but it was not authorised to take legal proceedings in the
name of AMS or the mortgagee without consent.
m) Under clause 12.1 TML gave a number of representations and
warranties as to: compliance with the provisions of the Deed and the
Operations Manual; the accuracy of information provided to AMS;
that the loan application had been “fully investigated” by the
correspondent in accordance with the Operations Manual; and that the
requirements of the Credit Contracts Act had been complied with in
regard to the loan.
n) Clause 12.1(j) provided:

The Correspondent is not aware of any circumstances relating to the

Mortgage, the Property, the Mortgagor or any Guarantor which
could reasonably be expected to cause a prudent investor to:

(i) regard the Mortgage as an unacceptable investment;

(ii) expect the Mortgagor to default under the Mortgage; or
(iii) diminish the value or marketability of the Property from that
stated in the Valuation;

The Operations Manual

[187] The Operations Manual in force as from 1 October 2005 was an extremely
detailed document running to some 120 pages in length. It contained a description of
the loan products available and detailed the processes which TML must follow in
relation to each. It described the processes TML was to follow in preparing a loan
application including interviewing the applicant, undertaking a credit check, and
obtaining valuations or other relevant documentation. It also described the relevant
loan documentation and the processes for instructing solicitors and for settlement of
the transaction. The documents to be retained on TML’s file were described in
considerable detail as were the processes for mortgage collection and the
management and enforcement of mortgages in default.

[188] The following clauses are of particular relevance for present purposes:

a) Clause 2.3 noted the right of AMS to inspect all documents and
records maintained by TML and stated that AMS would review
relevant documents and records at least annually.
b) Clause 4.4 stated that:
The ability of the borrower to repay the loan without substantial
hardship and in accordance with the loan terms is paramount in the
assessment of a mortgage proposal.

Clause 4.4 went on to set out the material required in order to verify a
borrower’s income, but then stated:

The above requirements are waived where the applicant applies for a
Fastdoc product; in such a case, the applicant is required to swear a
declaration as to income/affordability.

c) Clause 4.7 stated that a borrower must have a clear credit history and
a stable employment record and provided that credit checks must be
undertaken with a recognised credit bureau in respect of all potential
borrowers and guarantors.

d) Clause 5.1 reiterated that TML was to exercise care when dealing
with borrowers and guarantors and clause 5.2 stated that:

As a matter of general policy, AMSNZ does not allow

Correspondents to use the AMSNZ or AMS name in advertising and
promotional material.

e) Clause 6.1 prescribed the loan submission process:

6.1 Process

Correspondents must have acceptance procedures that ensure the

loans meet the requirements of the Trustee, AMSNZ, and the
mortgage insurers.
 Step Activity
1 Interview applicant and receive a completed loan
application.
2 Undertake a credit analysis of applicant.
3 Order the valuation (if applicable).
4 If valuation is satisfactory, complete LMI application and
forward to an approved mortgage insurer.
5 If LMI approved, forward the Loan Proposals to the
applicant.
6 When loan proposal accepted, forward the Mortgage
Purchase Application (“MPA”) to AMSNZ.
7 If accepted, AMSNZ will issue instructions to the solicitor
(via the Correspondent for checking and verification of all
details).

f) In respect of the preparation of mortgage purchase applications, step 1

required TML to make a preliminary assessment of the application
and to explain to the applicant the terms and conditions of the loan
and contract documentation. The manual also stated under clause 6.1:

Correspondents must consider carefully the information provided in

the loan application and any declaration (for Fastdoc loans). It is the
Correspondent’s responsibility to determine whether any
information provided warrants further enquiry. If so, sufficient
enquiry must be made by the Correspondent before proceeding
further with the application. If sufficient enquiry is not made in
circumstances where it is warranted, any loss or damage suffered as
a result by AMS will be the Correspondent’s responsibility.

g) The manual also provided under step 2 that TML was to evaluate the
creditworthiness of the borrower in accordance with prescribed
guidelines and under step 5 that the prescribed loan proposal was
“indicative only and does not oblige the Trustee to make the loan
available. It is a non-binding statement of intention.”
h) Clause 7.2 dealt with an “Approved Solicitor” who was to act on
behalf of GE as trustee:

AMSNZ and the Correspondent engage an Approved Solicitor to act

on behalf of the Trustee in relation to the documentation of
mortgages.

The borrower’s nominated solicitor is appointed by AMSNZ to act

on behalf of the Trustee in relation to the settlement of the loan and
registration of the mortgage.
 The primary point of contact for both the Approved Solicitor and the
borrower’s solicitor is the Correspondent. All inquiries regarding
the loan are to be directed to the Correspondent who is in turn, if
necessary, to liaise with AMSNZ. Verbal or preliminary instructions
to the Approved Solicitor should not be given which contradict the
AMSNZ written instructions.

The Correspondent is to refer all questions of a legal nature from the

borrower’s solicitor to the Approved Solicitor.

The Correspondent has an overriding responsibility to ensure that the

Approved Solicitor undertakes all tasks and obligations set out under
the programme.

The Approved Solicitor agrees that the Correspondent or the

Borrower, and not AMSNZ or the Trustee, shall be liable to bear the
costs and disbursements of the Approved Solicitor and the
Correspondent indemnifies and agrees to keep indemnified AMSNZ
and the Trustee in respect of all such costs and disbursements.

[189] As already noted, in practice, AMS instructed the “Approved Solicitor”.

Genworth Financial

[190] The lender’s mortgage insurer in respect of the Bartles’ loans was a company
registered in Australia and trading as Genworth Financial. Genworth had
underwriting guidelines, the terms of which were not in evidence. It is evident that
Genworth had a significant role in developing loan products and in stipulating the
condition of any such loans. Genworth Financial policy update material issued on
8 August 2005 described the conditions of a new LMI product known as “Asset
Plus” in the following terms:

Announcing the launch of our newest LMI product – ASSET PLUS. This
new product will provide full cover for Loans up to 70% LVR, with no
income evidence or personal financial details required. Borrowers can be
self-employed, PAYE, or even non-residents. In essence, we have taken the
“No-Doc" aspect out of our existing Low-Document product, and replaced it
with new, further enhanced parameters in our new ASSET PLUS product.

Premium rates for this new product will be the same as the standard Low
Document product.

[191] It appears that Genworth had a definition of the expression “self-employed

borrower” although that definition was not produced in evidence. It seems likely
that the use of this expression explains its use in the operations manual and in loan
application material prepared by TML and EML. I mention this because the Bartles
say that they always described themselves in documentation signed by them as
“Retired” and they claim that some documentation was later altered by others
without their knowledge or agreement.

AMS Loan Products

[192] AMS had three loan products:

• Fastdoc 70 (also known as “No doc”).

• Fastdoc 80 (also known as “Lo doc”).
• A fully verified income loan.

[193] The Fastdoc 70 loans made to the Bartles required them to make a declaration
that they could afford to meet the payments due under the loan. A registered
valuation was also required specifying that the loan value ratio (LVR) was between
65 per cent and 70 per cent. Details of income were not required and it was not
necessary for the borrower’s income to be verified. The criteria for the Fastdoc 80
loans stipulated that the borrower must declare income, assets and liabilities. A
registered valuation was required confirming the LVR was less than 80 per cent.
Under the fully verified income loan there could be a maximum LVR of 100 per cent
but the borrower had to provide fully verified income, assets and liabilities and a
registered valuation if the LVR exceeded 80 per cent.

[194] In essence, the lender’s risk was managed on the Fastdoc 70 product by
requiring a lower maximum LVR, obtaining the borrower’s declaration of
affordability and completing a satisfactory credit check. No doubt the existence of
the 100 per cent insurance cover also provided the lender with substantial comfort.

[195] The Fastdoc 70 product was designed for borrowers who were prepared to
sign the declaration as to their ability to repay the loan but who, for a variety of
reasons, might be unable to provide any evidence of income. Mr Grant explained
that there were a number of borrowers during the relevant period who could meet the
Fastdoc 70 criteria but not the Fastdoc 80 or verified income loan criteria. His
evidence was that many investors were taking advantage of increasing property
values in order to purchase investment properties in circumstances where they might
not personally have any independent income to service the debt. Such borrowers
could be relying on rental streams and/or the increase in capital value of the
property. Mr Grant said a number of people were making very successful
investments by this means.

[196] Mr Grant accepted that GE placed substantial reliance on the borrower’s

declaration that they could afford to repay the loan without hardship. He said GE
was not aware at the time of the Bartles’ financial position. Given the information
now available in that respect, Mr Grant accepted that the Bartles were not in a
position from their own resources and the rental income from the investment unit to
meet their obligations under the mortgages and that, if GE had known that, the loans
would not have been made.

The Bartles’ First Loan - $137,484.00 in November 2006

[197] Mr Grant gave a detailed description of the processes and documents

involved in each of the three loans made to the Bartles. The first step in relation to
the first loan was the completion by the Bartles of a finance application addressed to
EML on 23 June 2006. Mr Davis completed this document for the Bartles and
obtained their signatures. The application was then given to EML/TML. A copy
may also have been kept by Blue Chip. This document stated that the Bartles were
born in 1939 and 1940 respectively. Their occupations were stated as “Retired”.
Their combined annual income from their joint pension was said to be $21,736.00;
their monthly expenses $1,005.00; and their total net assets $568,000. This
document was not passed on to AMS or GE.

[198] Mr and Mrs Bartle declared in the application that the information provided
was true and correct. They acknowledged that the information would be used by
EML to determine their eligibility for the finance they were seeking and that the
information might be disclosed to lenders. A number of potential lenders were listed
including TEA Custodians (Pacific) Limited which, I understand, had been a trustee
operating in a similar way to GE prior to June 2006.
[199] Mr Davis’ evidence was that once Blue Chip had decided that the Bartles
qualified as purchasers, he arranged for the Bartles to sign the Authority to Proceed
(discussed at [74]) around 15 September 2006. This was an authority to Blue Chip,
but the evidence is unclear about the exact role Blue Chip played in relation to the
loans. It is reasonable to infer that Blue Chip personnel liaised with EML/TML to
provide some of the initial information needed to support the application to AMS for
loan finance and that Blue Chip personnel were aware of the usual terms upon which
GE provided finance. However, there is no evidence that Blue Chip had any further
direct role in connection with the raising of finance after the completion of the
original finance application.

[200] On 11 October 2006, the Bartles each signed the “Fastdoc Declaration of
Financial Position”. These documents appear to have been faxed to the Bartles by
TML and faxed back very soon afterwards duly signed. They were a one-page
document describing the amount of the loan, the term and the monthly repayments.
The documents recorded that the lender recommended that all applicants seek
independent legal and financial advice before obtaining a loan. The Bartles details
as borrower included (in typewritten form) a description of their occupation as “Self-
Employed Investor”. The form then provided for the following declaration of
financial position:

3. Declaration of Financial Position

I/My/We/Our (being individual, individual Trust, Company, or Company

Trust) certify warrant and represent to you that:

(a) I am/we are aware of our financial obligations under my/our proposed
loan with you;
(b) I/we have declared all details of my/our income in Section 4 below,
which is a true and accurate representation of my/our financial position.
(Not required for Fastdoc 70)
(c) I am/we are satisfied, and for Company and/or Company Trustee
applicants have resolved at a duly held board meeting that our
obligations to you will not adversely impact on our ability to meet all
my/our other financial obligations (including living expenses) as and
when they fall due.
(d) I/we confirm that I/we can comfortably afford all repayments
resulting from this loan, without incurring substantial financial
hardship and;
(e) I/we are not relying on you to verify or review my/our financial
position.
 (f) For Trustee applicants – The declarant has been properly appointed and
remains entitled to act as Trustee of the Trust.
(g) For Company applicants – I am a director of the Company.
(h) For Company and Company Trustee applicants – that the Company or
Trustee, at a duly convened board meeting resolved that the Directors or
Trustee submit an application on behalf of the Company/Trustee for the
proposed loan.

I/We acknowledge that you are relying on this statement in considering

whether or not to approve my/our loan application.

(Emphasis added only in respect of (d) and (e) above).

[201] On the same day, Mr and Mrs Bartle signed their acceptance of a loan
proposal provided to them by TML on TML letterhead. This was also faxed to them
by TML and faxed back shortly after. The letter stated at the beginning:

We have pleasure in advising that your loan has been approved in principle.
Following are the indicative terms and conditions that will apply: ...

[202] The loan proposal set out the main elements of the loan including the amount
of the borrowing, the interest rate, the monthly payments and the security, being a
first registered mortgage over the Amber Drive property. The loan proposal also
stated that the purpose of the loan was “To utilise equity for investment purposes”.
The lender was stipulated to be GE Custodians in its capacity as Trustee. TML was
described as the “Mortgage Servicer”.

[203] The loan proposal stated expressly:

The Mortgage Servicer [TML] does not act as an agent of any of the above
parties in relation to the proposed loan.

(The “above parties” included Mr and Mrs Bartle and GE Custodians).

[204] The letter concluded:

The summary set out above and in the attached Schedule(s) is an indication
only of the principal terms which may apply to your loan if you proceed. It
is not an offer to enter into a loan and it is not intended to be nor is it a
disclosure for the purposes of the Credits Contracts and Consumer Finance
Act. The loan will be made available subject to the legally binding security
documentation, loan agreement and other requirements which we will
prepare, being completed to our satisfaction. This documentation will
prevail over this letter. Shortly after returning this letter you will be
contacted regarding the signing of the documents. If you do not comply
with any of the conditions of this letter or if any circumstances occur which
 in our opinion makes completion of the matter undesirable, we have the right
to cancel the approval in principle (whether or not you have signed the
duplicate copy of this letter and returned it to us) without being liable for
damages for doing so and you agree to reimburse us for any costs incurred
by us.

[205] On 17 October 2006, TML sent a Mortgage Purchase Application (MPA) to

AMS. The MPA stated:

Pursuant to the Correspondent Deed dated 9th June 2004 between Australian
Mortgage Securities (NZ) (“AMSNZ”) and [Correspondent], the Applicant
hereby requests AMSNZ to accept the purchase of the mortgage loan
outlined in the attached Schedule 1 on the Settlement Date. Any capitalised
term used in this Mortgage Purchase Application and not otherwise defined
in this Application has the same meaning as in the Correspondent Deed. We
hereby certify in respect of the mortgage loan outlined in Schedule 1 that as
at the date of this Application:

1. The information contained in this Mortgage Purchase Application and

all attachments is correct.

2. Each Mortgage to be purchased complies with the criteria set out in the
Operations Manual (as amended from time to time) except for
registration, and upon registration, the mortgage loan will meet all
criteria in the Operations Manual.

3. We are not aware, nor have been able to ascertain by reasonable

enquiry, of any reason or circumstance under which the borrower
might be unable to pay in accordance with the terms set out in the
loan contract or not without substantial hardship.

4. We are not in default under the Approved Correspondent Deed and each
mortgage loan is to be acquired by the Trustee pursuant to and in
accordance with the Correspondent Deed. (Emphasis added).

[206] Attached to the MPA were a number of documents along with details of the
loan. The LVR was stated to be 58 per cent. A schedule answered positively a
number of questions about the steps taken in preparing the application. These
included advice that a record of interview with the borrower was on file. Also
attached to the MPA was a copy of the Fastdoc declarations signed by the Bartles;
the loan proposal and the Bartles’ acceptance of it; details of the government
valuation of the Amber Drive property obtained from a credit agency; an acceptance
of the proposal by Genworth Financial, which was providing 100 per cent insurance
cover to the lender; and a declaration by the Bartles to the effect that the loan was to
be used primarily for business or investment purposes and that it would not be
treated as a consumer credit contract as defined by the Credit Contracts and
Consumer Finance Act 2003.

[207] Ms P Goundar was the employee at AMS who checked the MPA and
approved the loan. Ms Goundar was not available to give evidence but her superior
Mr I Vallabh gave evidence of the process involved based on his review of the AMS
files. After approval of the loan, AMS instructed Sanderson Weir, solicitors, by
letter dated 20 October 2006 to act on behalf of the lender. AMS forwarded copies
of the loan agreement, the mortgage documents and other relevant documents
prepared by Sanderson Weir to Mr Mathias as the Bartles’ solicitor. Mr Mathias was
requested by AMS to act as solicitor for the lender “to make all necessary
investigations in regard to the title(s) of the security property(ies), arrange for the
signing of all documents, settlement of the loan advance and registration of the
mortgage.” The letter stated that the documents were to be returned immediately if
Mr Mathias did not wish to act for the lender.

[208] The instructions from the lender were further elaborated in the following
terms:

Extent of instructions

In acting for the lender, you are asked to investigate and approve all matters
that you consider necessary and prudent to protect the Lender’s interests and
ensure that it obtains the required security for the advance. Although this
letter is not intended to be exhaustive in setting out these matters, we would
expect you to search the relevant titles and investigate all title matters
including any land covenants, memorials or other aspects of the title which
may detrimentally affect our interest) and undertake any other investigations
that you consider appropriate. We would expect you, for example, to advise
us if there is any prior interest or any other matter affecting the property over
which security is taken or affecting the Borrower(s) that may adversely
affect a lender’s position. In addition, if your clients are obtaining a LIM
report that contains information which may have an impact on the value of
the mortgaged property or which could adversely affect a lender’s position,
we expect you to inform us.

If you are aware or become aware that any of the details in the loan contract,
mortgage or guarantee is incorrect, incomplete or inaccurate, such as the
name of any borrower, guarantor or mortgagor, or if any property is
misdescribed, then we would ask that you advise us and obtain our approval
to any required changes.
[209] The letter of instructions then gave details of the requirements for settlement
including the need for a solicitor’s certificate in accordance with a draft provided.
Mr Mathias was asked to contact TML in relation to any questions about the
financial details of the loan or AMS in relation to any other aspects of the
documents.

[210] On 8 November 2006, Mr Mathias sent the documents duly executed to

Sanderson Weir along with his solicitor’s certificate. The funds advanced under the
mortgage were paid from Sanderson Weir to Mr Mathias that day. At the time of
settlement, TML gave AMS a written certificate to the effect that the warranties in
the Correspondent Deed would be correct at the date of settlement; TML was not in
default under the Deed; TML was “not aware nor have we been able to ascertain by
reasonable enquiry, of any reason or circumstances under which the borrower(s)
might be unable to pay in accordance with the terms set out in the Loan Contract or
not with substantial hardship”; TML had reviewed the solicitor’s certificate,
schedule and direct debit form and found them in order for settlement; and that any
special conditions in the loan proposal have been or will be satisfied prior to
settlement.

[211] Mr Grant asserted in his evidence that all steps required by the operations
manual had been met and his evidence in that respect was not substantially
challenged. I accept his evidence that there was nothing on the face of the
documentation received by AMS or GE which indicated any fraud in relation to the
loan or anything else of an untoward nature. Although AMS had received the
Fastdoc declaration signed by the Bartles on 11 October 2006, it did not receive the
finance application of 23 June 2006 which the Bartles had earlier provided to EML
and which included details of their ages and income.

[212] The interest on the loans was paid to GE from the Bartles’ bank account and
from deposits made into their account by Blue Chip. The payments by Blue Chip
into the Bartles bank account continued until early February 2008 but the payments
to GE from the Bartles’ account continued until April 2008.
The Second and Third Loans of $125,791 and $366,291 made in September
2007

[213] It will be recalled that further advances of $125,791 and $366,291 were made
to the Bartles or Bartle Properties Limited simultaneously in September 2007 to
enable completion of the purchase of the apartment. By this stage, the operations
manual had been amended with effect from February 2007. The provisions relevant
to Fastdoc loans were:

3.3 Fastdoc Loans – Overview

One of the product enhancements offered by AMS NZ is a Fastdoc loan.

Fastdoc loans refer to loans where self-employed borrowers self-certify their
income and/or affordability of the loan. There are two types of Fastdoc
loans currently offered. The Fastdoc80 loan has a maximum LVR of 80%
and is available for loans from $30,000 to a maximum of $1,000,000. The
Fastdoc70 loan has a maximum LVR of 70% and is available for loans from
$30,000 to a $1,000,000 (subject to location restrictions)

3.4 Fastdoc Credit Analysis

The credit analysis process for Fastdoc loans is the same as for other (non-
Fastdoc) loans with the following exceptions.

3.4.1 Fastdoc80

• Principal borrowers must be self-employed;

• Self-employed borrowers make a declaration as to their income and
affordability of the loan and the usual verification of income is not
undertaken;
• Self-employed borrowers must demonstrate they have been self-
employed for at least two years.

Where a co-borrower earns PAYE income, that income must be verified by

the same process as for other (non-Fastdoc) loans; and the usual NSR [Net
Surplus Ratio] test (minimum 1.00:1) is applied.

3.4.2 Fastdoc70

All borrowers made a declaration as to affordability. No statement of

income is provided and no NSR test is applied.

[214] Paragraph 10.3 of the revised operations manual stated:

10.3 Borrower Income

Correspondents must not submit loan applications to AMS NZ for approval

unless the Correspondent is completely satisfied, having made all reasonable
enquiries of the borrower, that the borrower will be able to meet its
 obligations under the loan contract in accordance with its terms without
substantial hardship. Income for all borrowers must be established to be
sustainable and adequate to repay the proposed new debt and any existing
debt, plus interest and fees within an agreed term.

[215] Paragraph 10.6 of the revised operations manual confirmed that:

... For self-employed applicants using a Fastdoc product, a declaration of

affordability (Fastdoc 70) ... will be accepted in lieu of the [NSR
calculation].

[216] The revised operations manual also stated at 14.1.1:

Correspondents must consider carefully the information provided in the loan

application and any declaration (for Fastdoc loans). It is the
Correspondent’s responsibility to determine whether any information
provided warrants further enquiry. If so, sufficient enquiry must be made by
the Correspondent before proceeding further with the application. If
sufficient enquiry is not made in circumstances where it is warranted, any
loss or damage suffered as a result by AMS NZ will be the Correspondent’s
responsibility.

[217] The MPA requirements in the revised operations manual were similar to
those already discussed for the first loan. These requirements applied to the new
loan of $366,291 to be secured over the apartment, but the further advance of
$125,791 to be secured over the Amber Drive property did not require the same level
of detail since the additional advance was to be made within the existing security.
The requirements for the additional advance over Amber Drive included an
acceptable valuation, approval from the mortgage insurer, compliance with the
“program parameters” and the further advance having a first ranking priority.

[218] The Bartles completed a finance application on 26 June 2007. As with the
finance application they had completed a year before, their dates of birth were stated.
Someone other than the Bartles entered in handwriting their occupation as “Self-
employed Investor” and the period of their “employment” as 12 months. Details of
their assets and liabilities were stated and their monthly expenses. However, unlike
the finance application they had completed in 2006, there were no details given of
their income. Mr Grant explained that this was because details of their income were
not required for the Fastdoc 70 loans. Otherwise, the finance application was in the
same form as the earlier one.
[219] Fastdoc declarations were signed by the Bartles in respect of the two
additional advances on 26 June 2007 and 26 July 2007 respectively. These were in
the same form as the previous Fastdoc declarations already described. In each case,
their occupations were typed in as “Self-Employed Investor”.

[220] Loan proposals for each of the two additional advances were made to the
Bartles by TML and were accepted by them on 26 June 2007. These included details
of the amounts of the advance and the monthly repayments. The loan proposal for
the sum of $125,791 did not contain any statement that TML was not acting as an
agent of the lender, but the TML loan proposal of the same date for the advance of
$366,291 contained a statement to that effect in the same form as the original loan of
$137,484 given the year before.

[221] TML submitted MPA’s to AMS in respect of the two additional advances on
5 September 2007. The MPA’s were in the same form as the MPA submitted by
TML to AMS in 2006. In particular, they contained the declaration by TML that
they were not aware of any reason or circumstance under which the borrower might
be unable to meet the terms of the loan (or not without substantial hardship).

[222] Mr Grant gave detailed evidence of the documents submitted to AMS by

TML and the processes which then followed. It is unnecessary to rehearse these in
any detail. It is sufficient to say that, in general terms, events followed a similar
pattern to that already described in respect of the first advance. Relevantly for
present purposes, the Fastdoc declarations in respect of the two advances made in
2007 were provided to AMS. Unlike the 2006 advance, the finance application
submitted by the Bartles to EML was provided to AMS. This meant that AMS had
knowledge by this time in 2007 of the Bartles’ dates of birth as well as their assets,
liabilities and monthly expenses but not their income.

[223] Ms Goundar was one of two AMS employees who dealt with the 2007
application. The other was a Ms T Ziegler. Ms Ziegler and Mr Vallabh gave
evidence of the process followed. Mr Vallabh did not see anything untoward in the
documentation provided to AMS or the processes followed. In his view, there was
nothing to suggest that the loan should not have been approved in accordance with
the established procedures and guidelines.

[224] Dealing with the description of the Bartles in some of the documents as
“Self-employed Investors”, he noted that the MPA’s were checked by Ms Goundar
and that none of the information required in terms of the operations manual was
missing. Mr Vallabh noted there had been some discussion between Ms Goundar
and a TML employee, a Ms Foo. The matters discussed with Ms Foo included
confirming margin figures; checking the government valuation of Amber Drive
(which by then had increased substantially since the 2006 application); and obtaining
confirmation that the Bartles would sign the further advance agreement (for the
$125,000), the balance loan agreement and the declaration of loan purpose required
for the Credit Contracts and Consumer Finance Act 2003.

[225] The documents also show that Ms Goundar queried the reference in the
documents to the Bartles being described as “Self-employed Investors”. On that
point, Ms Foo confirmed to Ms Goundar on 6 September 2007 by email that the
Bartles had previously had some investment properties (now sold) and also had some
term investments which they were still managing. This was a reference to a sum of
$98,000 which the Bartles had advised they had made up partly from cash and partly
from a term deposit.

[226] Mr Vallabh added that there were numerous indications in the documents
supporting the description of the Bartles as self-employed investors. The loans were
described in a number of documents as being for the purpose of purchasing an
investment unit in Auckland and utilising the Amber Drive property for investment
purposes. The whole purpose of the loans as understood by AMS/GE was to
purchase the unit with a view to securing an income stream with the potential for
capital gain.

[227] An internal AMS document signed by both Ms Gounder and Ms Ziegler

summarised the total borrowing amounting to $629,540, the value of the unit and
Amber Drive as totalling $932,545 and an LVR of 67 per cent. The strengths of the
application for the 2007 loans were described in this document as:
 • Excellent payment history with previous loan.
• Self-employed for 1 year.
• Clear CRA.

[228] The payment history is a reference to payments made under the first loan
taken out the year before. The reference to a 12 month history of being “self-
employed” also refers to the nearly 12 month period since the first loan which was
taken out for investment purposes. The “Clear CRA” is a reference to a clear credit
check as confirmed by TML.

[229] One could criticise the description of the Bartles as “self employed” in the
natural meaning of those words. However, in the context of the requirements of the
operations manual for financing transactions of this type, the Bartles fell within the
“self-employed” category, denoting a person who did not have an employer and who
was therefore unable to provide the income details and verification required for GE’s
other loan products. Ms Ziegler confirmed that all the relevant details had been
provided and she saw no reason not to approve the loan.

[230] Settlement proceeded in a similar manner to that described in respect of the

2006 advance. The transactions were settled on 28 September 2007 with Sanderson
Weir and Mr Mathias assuming the same roles as previously. The letter of
instructions to Mr Mathias differed slightly from the 2006 instructions by the
addition of a request to Mr Mathias to return the documents sent to him if he
believed he would “be unable to obtain the informed consent of all other parties for
whom you will be acting in this transaction”. Again, Mr Grant asserted without
significant challenge that the processes followed in respect of the 2007 advances fell
within the terms of the operations manual. In cross-examination, he conceded that
the operations manual had not been complied with in one respect: there were more
than four advances made to purchase units in the apartment block in which the
Bartles’ unit was located. There is no evidence however that this non-compliance
had any bearing on the value of the loan securities or that AMS or GE were aware of
it at the time. Mr Grant also asserted that there was nothing on the face of the
documentation received by AMS or GE which indicated there was any fraud or
anything untoward in relation to these loans. I accept his evidence in that respect.
[231] In late 2007, Mr Grant became aware of adverse publicity surrounding the
Blue Chip Group. On 21 February 2008, Mr Bycroft of TML advised GE that it
might have an exposure as a result of the Blue Chip collapse around that date.
Mr Grant says this was the first time AMS or GE had become aware of any such
risk. Steps were taken over the ensuing months to obtain details of the number of
Blue Chip related loans on AMS’ books. On 15 July 2008 AMS gave notice to TML
that no new loan applications should be submitted and the Correspondent Deed was
formally terminated on 4 December 2008.

Alteration of Documents

[232] Mr Dale was critical of alterations made to some of the documents prepared
by TML. Mr Dale sought to rely on this evidence for two purposes. First, to support
a submission that TML had failed to comply with the operations manual by altering
some documents without obtaining the approval of the Bartles and their initials to
any changes. Secondly, to establish that AMS and GE ought to have been aware of
the changes made and taken steps to ensure this did not recur. It is therefore
necessary to discuss the evidence presented on these issues.

[233] The first finance application form signed by the Bartles on 23 June 2006 and
addressed to EML described their occupation as “Retired” and contained accurate
details of their income. This remained on the TML file and was never sent to AMS
or GE. There were also two copies of this form on the TML file which described the
Bartles’ occupation as “Investor” and deleted their income details. These copies
appear to incorporate some material from the original form completed by the Bartles.
One was unsigned. The other appeared to incorporate a copy of the signature page
from the original finance application. There is no evidence that these copies were
used in any way or sent to AMS or GE. They were probably prepared by someone in
TML. Mr Dale sought to characterise the altered documents as an attempt to falsely
represent the Bartles’ income but this submission cannot be sustained since they
were not used for any purpose and the Bartles’ true occupation and income remained
on the TML file.
[234] An experienced document examiner, Ms L Morrell, gave evidence of
examining 10 documents from the TML file. Her brief of evidence was admitted by
consent. In relation to documents in connection with the first loan in 2006, a number
of alterations were made by twinking out certain entries and rewriting them. None
of the changes made appear to have been material.

[235] In respect of 2007 documents, attention was focused on the finance

application signed by the Bartles on 26 June 2007 and submitted to EML. As noted
above, someone had inserted in their own handwriting a description of the Bartles as
“Self-employed Investors” and had entered in respect of the period employed the
words “12 months”. Ms Morrell’s evidence was that the only alteration made to the
identified words appeared to be the twinking out of the letter ‘M’ under the word
“self”. In other words, there is no evidence that the identified words had been
altered from some other entry such as “Retired”. The conclusion must be that the
Bartles did not include their occupation when they signed the form and their
occupations were added by someone else later.

[236] Ms Morrell also gave unchallenged evidence that the Fastdoc declarations
signed by the Bartles on 26 June 2007 in respect of the loan for $366,291 had been
altered by copying them and then altering the declarations signed by the Bartles for
that loan so they could be used for the $125,791 loan application. These declarations
also describe the Bartles as “Self-employed Investors”. These words were added in
handwriting by someone other than the Bartles.

[237] Mr Vallabh accepted that the changes made to these documents required
initialling by the Bartles and that changing the documents in this way did not comply
with the operations manual. Importantly however, the original documents remained
on the TML file and copies were faxed to AMS. Any twinking or altering of the
original documents is not readily noticed. Mr Vallabh’s evidence was that reviewing
the materials on the AMS file, AMS would have accepted the documents as being
correct. Ms Ziegler was responsible for reviewing the documents submitted in
support of the loan applications in 2007. It was not suggested to her that she ought
to have noticed the alterations to the documents although, in fairness to Mr Dale, he
asked me at the time to record that his lack of cross-examination of Ms Ziegler did
not imply acceptance of her evidence.

[238] Mr Dale accepted that AMS had not been responsible for the alterations to
the documents. The probabilities are that the person responsible was someone from
TML/EML. Having reviewed the material myself, I do not consider AMS can be
criticised for failing to notice the alterations in the materials faxed to them. In all
probability, the alterations were made with a view to ensuring that the operations
manual and the AMS loan criteria were met. None of the alterations were inaccurate
or misleading. The reference to the Bartles as “Self-employed Investors” must be
understood in the context of the specific financial transactions at issue and how those
terms were understood by TML and AMS.

[239] It is also relevant to note that both Mr and Mrs Bartle accepted they could
have signed documents (such as the Fastdoc declarations) describing them as “Self-
employed Investors” without noticing that description.

Audit Checks

[240] It will be recalled that AMS were entitled to conduct spot audits of loan files
held by their correspondents. In 2006 and 2007, Mr R Philpott was the Chief
Appraiser for GE home lending. He gave evidence of two audits of TML undertaken
on behalf of GE in 2006. The first was conducted in March 2006. The results were
communicated by Mr Philpott in a letter to Mr Bycroft of TML on 24 March 2006.
The letter confirmed that between July 2005 and February 2006, TML settled a total
of 113 GE loans. Twelve completed files were selected representing 10.71 per cent
of the total files. Seven further files were selected from loans approved but not then
settled. Seven of the 19 files reviewed were found to have various defects in relation
to documents held. There was some evidence of the whiting-out of documents.
Mr Philpott advised TML that this was not acceptable and that any alteration to the
loan applications were to be initialled by the borrowers. One file of particular
concern was a proposed loan to a 97 year old pensioner. Mr Philpott noted in his
comments to TML that:
 Whilst we cannot discriminate due to age there is good case law to suggest
that this type of lending could be deemed unconscionable.

[241] The loan proposed to the elderly pensioner was withdrawn. Mr Philpott’s
overall conclusion was:

Files are well maintained and in good order although it is noted that some
are generally accessible in the main office area. To comply with privacy
provisions files should be secured in lockable cabinets.

Overall a satisfactory report.

[242] Mr Philpott said in evidence that Mr Bycroft had been co-operative with the
audit and he formed the impression that Mr Bycroft knew what he was doing and
was a good operator. His main concern was with the loan to the elderly gentleman
which did not in the end proceed. He did not see the other matters to do with the
whiting-out of documents as being fraudulent or designed to mislead AMS about the
finance applications. He formed the view that they could equally have been
undertaken to ensure accuracy.

[243] In September 2006, TML drew to the attention of AMS some alterations
made to three valuations. This was investigated by Mr Philpott who concluded that
the documents had most likely been altered by the borrowers themselves. There was
no suggestion TML was at fault in any way but procedures were tightened to reduce
the risk of this occurring again and the issue dealt with.

[244] Mr Philpott’s staff conducted a further audit of TML files in December 2006.
There had been a “volume spike” in the number of loans being sourced through TML
and it was considered a further audit was timely. The audit report of 3 January 2007
recorded that, during the period March 2006 to November 2006, TML settled a total
of 451 loans. Thirty seven files were sampled representing eight per cent of all files.
Files were randomly selected. Short-comings were found in relation to all 37 files
sampled. The standard of file presentation was found to be poor. One key issue was
that certain documents had not been placed on the file. There were no alterations
effected by whiting-out on loan application forms as had been earlier found.
[245] A schedule of detailed findings was provided along with a summary of the
shortcomings identified. TML was invited to respond which it did by letter of
30 January 2007. In the letter, TML accepted that shortfalls in the areas identified
were unacceptable and were being taken seriously by TML. However, the accuracy
of the findings was disputed and a detailed response was given in relation to each file
sampled. The letter concluded by saying that TML had identified some minor areas
requiring improvement and steps had been taken to address those issues.

[246] In cross-examination, Mr Philpott accepted that the second audit had revealed
a “sloppy operation” on the part of TML and accepted that it would have been a
prudent step to follow matters up after the audit report was received. He noted that
the response from TML had been sent to Mr P Lacey who, at the time, was a senior
executive in Australian Financial Investment Group (NZ) Limited, a company
associated with GE/AMS.

[247] Mr Grant said that there was no suggestion from the audits of any deliberate
attempt by TML staff to mislead AMS in respect of loan applications. He discussed
the December 2006 audit with Mr Bycroft. He did not have any specific recollection
of the discussion other than Mr Bycroft’s strongly expressed view that the auditors
had missed locating documents on the files. Mr Grant did not consider that the
audits had raised “red flag” issues and there was nothing to suggest any connection
between TML and Blue Chip. At the time of these audits, the arrears position of
loans referred by TML was generally good. If there had been misrepresentation or
poor performance by a correspondent, he would have expected a high rate of arrears
or default. That was not the case with TML until much later, after the Blue Chip
collapse. By way of contrast, AMS had terminated correspondent deeds with two
other correspondents in consequence of regular reviews conducted by AMS.

[248] No further audit of TML was conducted after December 2006, in part at least
because there were restrictions on relevant staff travelling from Australia to New
Zealand for costs reasons. However, from June 2007 a system of monthly meetings
with TML was established.
[249] I am not persuaded that the outcomes of the audits were such as to give rise
to any serious areas of concern. The alteration of some documents in the first audit
was dealt with and not found again in the second audit. There is no evidence these
were material or intended to mislead. The second audit revealed unsatisfactory
document control in all files sampled. This was disputed by TML and was followed
up by Mr Grant. I accept Mr Grant’s evidence that no “red flag” issues were raised
other than the loan proposed to an elderly gentleman which did not proceed. There
is no evidence of a practice of lending to pensioners and nothing to alert AMS or GE
to a need to make further inquiries. Whether any such inquiry would have revealed
any concerns or might have led to the Bartles’ loans not proceeding is entirely
speculative.

Were TML or Blue Chip (NZ) Limited agents of GE on the basis alleged in
paragraph 35 ASOC in any respect and, if so, what was the scope of the agency?

[250] Relevantly for present purposes, and in summary form, paragraph 35 of the
ASOC pleads that TML and Blue Chip New Zealand Limited were the agents of GE
by reason of:

a) The contractual relationships between GE/AMS and TML/EML.

b) GE entrusting the obtaining of the financial information to support the
loan application to the Blue Chip Group and TML.
c) GE entrusting TML to take all steps to ensure that the Bartles
qualified for finance and thereafter approving the finance provided on
behalf of GE.

Was TML the agent of GE?

[251] It is convenient to deal first with the claim that TML was the agent of GE. It
was submitted on behalf of the Bartles that TML had either express or implied actual
authority to act as the agent of GE at least for specified purposes. Mr Dale expressly
disavowed any reliance on apparent or ostensible authority. First, some basic
propositions:
 a) Agency is a legal relationship between principal and agent created by
agreement (contractual or otherwise). Actual authority may arise by
express agreement between principal and agent or may be implied by
words or conduct as determined from the whole of the circumstances.
b) Although the fullest manifestation of an agency relationship includes
the authority of the agent to affect the principal’s relations with third
parties, an agency relationship may arise where one party acts on
behalf of another but does not have power to, for example, commit the
principal to a contract with a third party: Bowstead & Reynolds on
Agency (18 ed 2006) at para 1-001.
c) Although there may be no general agency relationship between two
parties, a specific or limited agency may arise through one party
entrusting another to undertake specific tasks on his or her behalf.
d) The scope of any such agency is to be ascertained by applying
ordinary principles of construction including the course of business
between the parties: Bowstead at para 2.029 and Freeman and
Lockyer v Buckhurst Park Properties (Mangal) Limited [1964] 2 QB
480, 502 per Diplock LJ.
e) The terminology used by the parties in describing their relationship is
not necessarily conclusive. An agency relationship may arise even
though the agreement creating it purports to exclude the possibility:
Bowstead at para 2.032. But weight should ordinarily be given to the
language the parties use: GE Dal Pont Law of Agency (2 ed 2008) at
[1.4].

[252] The leading New Zealand authority is the decision of the Supreme Court in
Dollars and Sense Limited v Nathan [2008] 2 NZLR 557, a case concerned with the
fraudulent execution of a mortgage by the son of one of the registered proprietors.
Blanchard J, delivering the decision of the Court, described the test for establishing
agency in the following terms at [8]:

The first question which this Court must address is whether expressly or by
implication D & S [the mortgagee] utilised Rodney’s [son’s] services as its
agent to procure execution of the loan documentation, including the
mortgage. Did D & S make it Rodney’s task to obtain execution, thereby
creating an agency and prescribing its scope? Did D & S, to adapt the words
 of Dixon J in Colonial Mutual Life Assurance Society Ltd v Producers and
Citizens Co-operative Assurance Co of Australia Ltd [(1931) 46 CLR 41 at
pp 48-49], entrust to Rodney the function of representing it in its transaction
with the parents so that the service to be performed by Rodney consisted of
standing in the place of D & S (or of its solicitor) and assuming to act in its
right and not in an independent capacity?

[253] There have been a series of cases involving issues of agency as between
finance companies and dealers of motor vehicles or consumer goods. The general
trend has been against a finding of agency in such cases but each case must be
considered on its own facts and an ad hoc agency may be found even if no general
agency is established.

[254] In Branwhite v Worcester Works Finance [1969] 1 AC 552 a majority of the

House of Lords (Lords Morris, Guest and Upjohn) endorsed the following statement
by Pearson L.J. in Mercantile Credit Co. Ltd v Hamblin [1965] 2 Q.B. 242, 269:

There is no rule of law that in a hire-purchase transaction the dealer never is,
or always is, acting as agent for the finance company or as agent for the
customer. In a typical hire-purchase transaction the dealer is a party in his
own right, selling his car to the finance company, and he is acting primarily
on his own behalf and not as general agent for either of the other two parties.
There is no need to attribute to him an agency in order to account for his
participation in the transaction. Nevertheless, the dealer is to some extent an
intermediary between the customer and the finance company, and he may
well have in a particular case some ad hoc agencies to do particular things on
behalf of one or the other or it may be both of those two parties.

[255] On the facts, their Lordships in Branwhite held that the dealer was not the
agent of the financier. In a well-known passage Lord Upjohn (with whom Lord
Guest agreed) stated at pp 578-579:

[A]ll he [the Dealer] is doing is to fill in a document which he submits on

behalf, as I think clear, of the would-be hirer which contains a proposal for
hire-purchase finance. It is quite clear that in law and in fact the finance
company are not bound to accept it; they may refuse the transaction because
on investigation (which they made, in fact, in this case) they do not think
that the would-be hire-purchaser is worthy of credit. They may equally
refuse it on any other ground ... I cannot see how, in fact, it is possible to
spell out of this transaction that in these circumstances the dealer is in any
way a general agent for the finance company. ...[I]n submitting the hire-
purchase forms to the finance company he is submitting them as proposals
on behalf of the would-be hire-purchaser. ... The county court judge held
against any ostensible agency, and I entirely agree with him. I do not think in
this day and age, when everyone is familiar with the form of hire-purchase
transaction, the fact that the dealer is in touch commercially with a finance
company to whom he invites the hirer to address a proposal form with the
 hire charges filled in is sufficient to constitute any ostensible agency ... My
Lords, it is no doubt true that for some purposes the motor dealer acts as an
agent in the loose sense of being a go-between for the intending purchaser
and the finance company. He fills in the forms on behalf of the intending
purchaser: he no doubt has information which enables him to fill in some of
the details, and he has a supply of forms, which enables him to perform
those useful business functions. But, so far as relevant to the question before
your Lordships, I do not think the doctrine of agency enters into it at all.

[256] For a more recent English authority see Shogun Finance Ltd v Hudson [2002]
Q.B. 834 where a majority of the English Court of Appeal (Dyson & Brooke LJJ)
held that a motor vehicle dealer was not the agent of the finance company in the
circumstances. Dyson LJ stated at [44]:

It is true that the claimant company had delegated to the dealer the task of
performing various functions, including the ascertainment of the identity of
the hirer, and conveying the driving licence and the draft agreement signed
by the rogue. For these purposes, the dealer acted as the company’s agent in
what Lord Upjohn described as the “loose sense of being a go-between for
the intending purchaser and the finance company”. But it seems that the
dealer had no authority to make any decisions that were binding on the
claimant company. It certainly had no authority to enter into the contract on
behalf of the claimants. It was merely an intermediary for the purposes of
obtaining and communicating information about the hirer to the company.

[257] Branwhite was approved by the New Zealand Court of Appeal in Credit
Services Investments Ltd v Evans [1974] 2 NZLR 683 per Richmond J at 690. In
that case, the Court was concerned with an assurance given by a motor vehicle dealer
to a customer that, contrary to the terms of the lease the customer had signed, he
would be able to obtain ownership of the car at the conclusion of the lease by
payment of its residual value. Any such agreement would have been void under the
Hire Purchase and Credit Sales Stabilisation Regulations 1957 then in force. The
dealer was authorised by the finance company (Credit Services) to hand customers a
circular explaining the terms upon which Credit Services was prepared to lease
motor vehicles and to supply to the customer any further information the customer
might require. The Court found that although the existence and contents of the
circular were unknown to the customer, the form constituted cogent evidence of an
authority delegated by Credit Services to the dealer to explain to customers the
general nature and legal consequences of a leasing transaction. It was found that the
assurances given by the dealer were in the course of an actual authority delegated to
the dealer by Credit Services and it did not matter that the dealer was not authorised
to give the specific assurance he gave. It was sufficient that he gave the assurance in
the context of his mandate from Credit Services to explain the terms of the lease and
to supply information about it: per McCarthy P at 686, Richmond J at 690. It
followed that Credit Services was bound as principal by the dealer’s assurance.

[258] Mr Dale responsibly referred me to Dal Pont Law of Agency (above) at [1.32]
where the learned author expresses the view that:

Being characterised as a ‘broker’, a finance broker is prima facie the agent

of the borrower. Though the facts may indicate that a finance broker is an
agent of the lender, it has been noted that ‘such an agency will not readily be
inferred.’ That the broker introduces a client to a lender, and the broker’s
commission or fee for doing so is sourced from the lender, does not itself
justify such an inference; nor is the fact that the broker completes the
lender’s forms, or arranges the signing of documents, conclusive of an
agency to the lender. In the words of a New South Wales judge:

“The fact that the broker approached a finance company, arranged for
execution of documents, provided details of ... the [borrower’s] financial
position, arranged for the obtaining of an invoice from the supposed vendor,
and otherwise took steps to enable the smooth application for and
completion of the transaction, in no way constitutes him the agent for the
[lender].”

[259] The Victorian Court of Appeal adopted a similar approach in Custom Credit
Corporation Ltd v Lynch [1993] 2 VR 469 when considering the relationship
between a caravan dealer and a finance company. The leading judgment was
delivered by Marks J who said at 486:

It is necessary to say a little more about agency in the present context. It is

true to say, as Mr. North submitted, that agency depends on the facts of a
particular case: Branwhite v. Worcester Works Finance Ltd. [1969] 1 A.C.
552, at pp. 573, 587. The position of Mr. Cheap might be considered to have
been analogous to that of a finance or insurance broker. In Con-stan
Industries of Australia Pty. Ltd. V. Norwich Winterthur Insurance
(Australia) Ltd (1986) 160 C.L.R. 226, at p. 234, the High Court
unanimously said: “...under the general principles of the law of agency, a
broker is the agent of the assured, not the insurer ...There will be rare
circumstances in which a broker may also be an agent of the insurer, but the
courts will not readily infer such a relationship because a broker so placed
faces a clear conflict of interest between his duty to the assured on the one
hand and to the insurer on the other.

[260] The Court found that the dealer was not the agent of the financier despite the
dealer completing and obtaining signature to the relevant contracts; varying the
arrangements; explaining the effects of the contract; arranging and obtaining the
signature of the guarantor and receiving commission.

[261] A key consideration in a case such as the present is whether GE (through

AMS) expressly or impliedly authorised TML to represent it in dealing with the
Bartles as prospective borrowers, either generally or in respects material to the
Bartles’ claim against GE. The mere fact that a task has been entrusted to another is
plainly not sufficient to create an agency relationship. Obviously enough, one party
may contract with another for the provision of services without creating any agency.
Ordinarily, the court will look to determine whether the circumstances show an
agreement that the agent will represent the principal in some respect or carry out an
act on the principal’s behalf.

[262] An agency may in some circumstances be created when the affected third
party is not aware of the existence of the agency but where the third party has
specifically acknowledged that the alleged agent is not acting as the agent of the
alleged principal, this fact should normally be given significant weight in
determining the relationship between the parties.

[263] Another consideration may be the degree of control exercised by the alleged
principal over the alleged agent. Where little discretion is conferred upon the alleged
agent, this may be a factor pointing away from a relationship as independent
contractor and towards a finding of agency. But care must be taken not to give
undue weight to this factor since a relationship as an independent contractor is
perfectly possible even when the other party exercises significant control or
prescribes the contractual terms with a high degree of specificity.

[264] In support of his submission that there was an agency relationship between
GE and TML, Mr Dale relied upon the provisions of the Correspondent Deed and the
Operations Manual. He also submitted that the tasks undertaken by AMS could not
have existed without an agency relationship; that it did not matter that TML did not
have authority to approve loans since all TML had to do was to provide an
application within GE’s LVR (accompanied by a Fastdoc declaration) and the loan
would be granted; and he submitted there was no evidence that TML held itself out
as an independent broker assuming independent obligations to the Bartles.

[265] I agree that the starting point must be the documents evidencing the
agreement between AMS and TML. The first and obvious difficulty in the way of a
submission that there was an agency relationship is the terms of clause 3.1. Not only
did TML agree that it was an independent contractor and not the agent, partner or
employee of AMS or GE, but it also agreed not to hold itself out or engage in any
conduct which would lead others to believe that it was the mortgagee or the agent,
partner, employee of AMS or any mortgagee. Further, it agreed that it would be
solely responsible for the acts or omissions of anyone it employed including any
agents or independent contractors. And TML acknowledged that it would not,
except as permitted by clause 3.2, issue any promotional or advertising material
including the name of AMS or any mortgagee without the prior written consent of
AMS and the mortgagee. There is no reason not to give full weight to the express
terms of clause 3.1.

[266] Importantly, it is not suggested that TML or EML ever held themselves out
as agents for AMS or GE. Nor did they ever use GE/AMS letterhead. The loan
proposals signed and accepted by the Bartles in 2006 and 2007 acknowledge that
TML did not act as agent for them or for GE. It must therefore be accepted not only
that TML did not purport to act as agent for GE or AMS but also that the Bartles
acknowledged at the time that TML was not so acting.

[267] TML’s acceptance in clause 3.1 that, in performing its obligations under the
Deed, it was not the agent of AMS or GE did not apply where there was an express
delegation to TML of the exercise of the “Powers” contained in the Deed. A clear
distinction is drawn between the exercise of powers by TML and the performance of
its obligations. Almost all the provisions of the Deed and the accompanying
Operations Manual were expressed in terms of obligations on the part of TML. The
primary role of TML under the Deed was the origination of loans and mortgages.
Effectively, it gathered prescribed information from potential borrowers within
defined parameters and submitted loan applications to AMS for approval. TML was
only one of nine Correspondents AMS dealt with in New Zealand who acted in a
similar way.

[268] Once a loan was approved by AMS, TML’s role was effectively over. In
practice, AMS then instructed solicitors to prepare the mortgage documents and all
related documents. TML was to arrange for all mortgage payments to be paid
directly to GE. Any funds it did receive were to be paid forthwith to GE.

[269] The only remaining role for TML was to manage the mortgages once granted
and it was entitled to exercise the powers of the mortgagee under each mortgage.
These provisions (under clause 5 of the Deed) appear to be the only express
delegation of “Powers” which could fall within the exception to clause 3.1. The
exercise of those powers is not at issue in this proceeding.

[270] The Operations Manual was comprehensive in describing the loan products
available from GE, the criteria required for approval and the processes TML was to
follow in preparing applications for loan approval. In these respects, the contractual
arrangements appear to be similar to those described in a number of the English and
Australian authorities already cited. The provision of such information and the
specification of the processes to be followed in gathering and presenting loan
applications simply recognises the commercial reality that a broker must have a
reasonable degree of specificity about the lender’s requirements in order to present
loan applications which will have the best prospects of being accepted by the lender.
The provision of such information by the broker is an essential part of the process
and does not signify an agency relationship. In carrying out its role, the broker is
acting independently and is not carrying out functions on behalf of the lender or
purporting to represent the lender.

[271] There are several provisions in the Operations Manual which obliged TML to
exercise some judgment. For example, TML was to make a preliminary assessment
of the LVR and explain to the applicant the terms and conditions of the loan contract
and documentation. This was one factor which weighed in favour of an agency
being established in Credit Services Investments Ltd v Evans (above) but there is no
issue about any information being given by TML to the Bartles in this case and the
contractual provisions here are radically different. TML was also required to
consider the information provided in the loan application and any declaration
provided for Fastdoc loans. The Operations Manual stipulated that it was TML’s
responsibility to determine whether any information provided warranted further
inquiry. If so, TML was obliged to make that further inquiry and was liable to AMS
for any loss suffered if sufficient inquiry was not made. Mr Dale placed particular
reliance on clause 4.4 of the Operations Manual which referred to the paramount
importance of the borrower’s ability to repay the loan without substantial hardship
and in accordance with its terms. However, the same clause provided that there was
no requirement for a borrower’s income to be verified in relation to a Fastdoc
product.

[272] These provisions, along with the obligation to disclose to AMS any adverse
circumstances which might affect the loan, required the exercise of some degree of
judgment by TML, and tend to indicate an independent contractor relationship rather
than agency. Since TML was dealing directly with the potential borrower, GE and
AMS were dependent upon TML to provide them with any relevant information
which might bear upon their decision to approve the loan. That was an essential part
of the arrangement since neither GE nor AMS had any direct dealings with the
borrowers.

[273] Mr Dale also referred to the provisions enabling AMS to give directions,
request information and carry out spot audits of TML’s files and processes. This
suggests a reasonably significant degree of control over TML’s operations which is a
factor which sometimes tends to point away from an independent contractor
relationship. However, it is only one factor and, of course, it is not uncommon for
one party to have powers of this kind over the other in a normal independent
contractor relationship.

[274] I have considered a very recent decision of the Supreme Court of New South
Wales Permanent Trustee Company Limited v O’Donnell (and related proceedings)
[2009] NSWSC 902 where Price J held in several similar sets of proceedings that
low-doc loans and related mortgages should be set aside as unjust under the
Contracts Review Act 1980 (NSW). The Court considered whether a joint venture
partner (Streetwise) was the agent of a mortgage manager and loan provider (Tonto).
Despite contractual terms stipulating that the relationship was that of independent
contractor, a relationship of agency was found. In turn, Streetwise was found to be
the agent of the lender (Permanent Trustee Company Limited).

[275] Plainly, each case must be considered on its own facts. This decision is
clearly distinguishable on a number of grounds. Important factors not present here
include the use by Tonto of Streetwise letterhead; conduct between the two strongly
suggestive of agency; the very high degree of access which Streetwise had to
Tonto’s records; and the fact that Streetwise was itself the joint venture partner with
the borrowers in the investments proposed.

[276] Viewed overall, I find that TML was not the agent of either GE or AMS. Its
function was that of a non-exclusive originator of loan applications which it then
submitted to AMS for approval. In summary, I reach that conclusion on the basis of
the express terms of the Correspondent Deed and the Operations Manual; the
absence of any evidence that TML was held out as an agent; the absence of any
conduct by TML which might be interpreted as that of an agent; the fact that TML
had no ability to approve loans or to bind AMS or GE in any way; and the express
acknowledgements by the Bartles (as the third parties affected) that TML was not
acting as an agent.

Was Blue Chip the agent of GE?

[277] This issue can be dealt with shortly. Since it was accepted that neither GE
nor AMS had any contact or relationship with the Blue Chip Group, Mr Dale was
obliged to submit that Blue Chip was a sub-agent of TML. This submission must
necessarily fail for lack of any evidence that TML delegated any of its functions to
the Blue Chip Group. The only role that Blue Chip had was the limited one of
completing the initial finance applications and providing them to EML. Neither GE
nor AMS had any knowledge of this. There is no evidence as to how this very
limited role was initiated. The initial completion of these applications is not in issue.
[278] The mere fact that TML and EML were acquired by a company in the Blue
Chip Group from 14 March 2007 (well after the initial loan was made in 2006) is not
sufficient to establish an agency relationship. It was not until June 2007 that AMS
was even aware of any association between TML and Blue Chip. At that time,
Mr Grant understood that the whole of the share capital in TML was being acquired
by Lombard.

[279] Obviously too, a sub-agency would first require an agency to be established

between GE/AMS and TML. My finding against that proposition necessarily
precludes any prospect of a sub-agency being established.

Did TML have knowledge of the matters identified in paragraphs 32 and 33

ASOC and, if so, is any such knowledge attributable to GE at the time each of
the loan agreements were made?

[280] It is important to record that the ASOC does not now plead any cause of
action against TML, presumably because it is in liquidation. However, the Bartles’
claim against GE depends in part on whether specified knowledge and conduct on
the part of TML can be attributed to GE in relation to the loan transactions. Since
there is no basis to find that GE had any actual knowledge of such matters, the only
basis upon which such knowledge could be attributed or imputed to GE is on the
basis that TML was the agent of GE or upon some form of constructive knowledge.
The specifically impugned conduct by TML was the alteration of the various
documents supporting the finance applications. The knowledge sought to be
imputed to GE through AMS focused on TML’s awareness that the Bartles were not
self-employed investors and had insufficient income to meet their commitments on
the GE advances.

[281] If I had found that TML was GE’s agent, I would have had no difficulty in
attributing the specified conduct and knowledge to GE through AMS. However, my
finding that there was no such agency relationship precludes the imputation of
TML’s conduct and knowledge in these respects. Further, as I later find, there was
nothing which might have alerted GE to the Bartles’ circumstances or put it on
inquiry.
[282] The ASOC also sought to attribute to GE knowledge of the representations
said to have been made by Mr Davis and Mr Mathias about the Blue Chip
investment as well as knowledge that the investment was a high-risk venture for the
Bartles, heavily weighted in favour of Blue Chip. Given my findings on the agency
and sub-agency issues, there can be no basis for the imputation of any such
knowledge to GE. Nor is there any evidence that TML had any knowledge of any
representations made by Mr Davis and Mr Mathias. Mr Stewart accepted that TML
knew the loans raised by the Bartles were for the purpose of a Blue Chip investment
but there is no evidence of any greater knowledge on its part of the details of the
investment such as the terms of the critical joint venture agreement.

Did any of the loan agreements constitute an unconscionable bargain by reason

of any of the matters identified in paragraph 36 ASOC?

[283] The essential basis for this cause of action is that the loan agreements and
mortgages entered into between GE and the Bartles constituted an unconscionable
bargain because GE knew or ought to have known that the Bartles did not have
sufficient financial reserves to sustain the mortgage payments; alternatively GE had
no reasonable foundation for believing the Bartles could meet the mortgage
payments; there were no real benefits to the Bartles in entering the transaction; Blue
Chip Group was at all material times insolvent; and false or misleading
representations were made to the plaintiffs in connection with the investment. There
was no suggestion that the terms of the loans themselves were in any way oppressive
or outside normal commercial practice.

[284] Mr Dale put the case under this heading on two alternative bases:

a) The Bartles did not have sufficient income to sustain the total
borrowings of $639,566; or
b) Even with the benefit of the related joint venture agreement with Blue
Chip, the loan agreements with GE were unconscionable in that they
were heavily weighted in favour of Blue Chip and put all the risk on
the Bartles in the event of Blue Chip collapsing.
[285] Mr Stewart accepted that, in hindsight, and with the knowledge GE now has,
there was a high level of risk associated with the loans to the Bartles but submitted
that the loans were not unconscionable on either of the bases suggested by Mr Dale.
Mr Stewart further submitted that a key factor in assessing this cause of action was
the (accepted) lack of knowledge by AMS or GE of the Bartles’ true income position
and the lack of any actual knowledge of Blue Chip’s involvement in the transaction.
In the light of my findings as to agency, neither AMS nor GE had any imputed
knowledge of those factors. Mr Stewart also relied upon the fact that the Bartles
obtained independent legal advice from Mr Mathias in connection with the
borrowings.

Legal Principles

[286] The principles upon which equity will intervene in the case of
unconscionable bargains are not in dispute. The leading New Zealand case is
Gustav & Co Limited v Macfield Limited [2008] 2 NZLR 735. The Supreme Court
accepted at [6] that the Court of Appeal’s decision [2007] NZCA 205 had dealt fully
and accurately with the authorities. The Court of Appeal helpfully summarised the
relevant principles at [30]:

1. Equity will intervene to relieve a party from the rigours of the common
law in respect of an unconscionable bargain.

2. This equitable jurisdiction is not intended to relieve parties from “hard”

bargains or to save the foolish from their foolishness. Rather, the
jurisdiction operates to protect those who enter into bargains when they
are under a significant disability or disadvantage from exploitation.

3. A qualifying disability or disadvantage does not arise simply from an

inequality of bargaining power. Rather, it is a condition or
characteristic which significantly diminishes a party’s ability to assess
his or her best interests. It is an open-ended concept. Characteristics
that are likely to constitute a qualifying disability or disadvantage are
ignorance, lack of education, illness, age, mental or physical infirmity,
stress or anxiety, but other characteristics may also qualify depending
upon the circumstances of the case.

4. If one party is under a qualifying disability or disadvantage (the weaker

party), the focus shifts to the conduct of the other party (the stronger
party). The essential question is whether in the particular circumstances
it is unconscionable to permit the stronger party to take the benefit of
the bargain.
 5. Before a finding of unconscionability will be made, the stronger party
must know of the weaker party’s disability or disadvantage and must
“take advantage of” that disability or disadvantage.

6. The requisite knowledge may be that of the principal or an agent, and

may be actual or constructive. Factors associated with the substance of
a transaction (for example, a marked imbalance in consideration) or the
way in which a transaction was concluded (for example, the failure of
one party to receive independent advice in relation to a significant
transaction) may lead to a finding that the stronger party had
constructive knowledge. So, in the particular circumstances the
stronger party may be put on enquiry, and in the absence of such
enquiry, may be treated as if he or she knew of the disability or
disadvantage.

7. “Taking advantage of” (or victimisation) in this context encompasses

both the active extraction and the passive acceptance of a benefit.
Accordingly, as Tipping J said in Bowkett at 457, an unconscionable
victimisation will occur where there are:

... circumstances which are either known or which ought to

be known to the stronger party in which he has an
obligation in equity to say to the weaker party: no, I cannot
in all good conscience accept the benefit of this transaction
in these circumstances either at all or unless you have full
independent advice.

8. If these conditions are met, the burden falls on the stronger

party to show that the transaction was a fair and reasonable one
and should therefore be upheld.

[287] As to the relevance of any marked imbalance in consideration the Court of

Appeal added at [31]:

While factors such as a marked imbalance in consideration or procedural

impropriety are generally present in unconscionability cases, neither is a
prerequisite for relief. However, if there is no significant imbalance in
consideration or if the weaker party received full independent advice it is
unlikely that any issue of unconscionability will arise.

Evaluation of the Facts as to Unconscionability

[288] In Gustav, the Supreme Court held that the time to assess whether a
transaction is unconscionable is at the time the contract is entered into. In the
present context the key questions are therefore:
 a) At the time the loan agreements were signed and the mortgages
executed, were the Bartles under a qualifying disability or
disadvantage?
b) If so, did GE know of any such disability or disadvantage and did GE
take advantage of that state of affairs?

[289] These issues overlap to a considerable extent and it is convenient to deal with
them together. Addressing the issue of the existence of any qualifying disability or
disadvantage, there is nothing to suggest that the Bartles’ age or health were relevant
factors or that they had any intellectual or other disability. On the other hand, they
were not experienced in business matters generally nor had they been involved in
any significant investment of the kind involved here. Their understanding of the
structure, implications and risks associated with the investment was far from
complete. In particular, as I have found, they did not know and were not advised
that the entire risk of the substantial borrowings would fall upon them if Blue Chip
were to fail. Nor did they understand that there was a real risk that they would lose
their home in that event. From the point of view of the Bartles, they expected that
Blue Chip would meet all the costs and would pay the mortgages. Without Blue
Chip’s undertaking in that respect, they could not possibly have met the payments
due from their limited income and other resources. However there were
corresponding actual and potential benefits in the investment. The Bartles would
receive the fortnightly payments, which would significantly enhance their income.
The unit then valued at $527,000 was acquired for the joint benefit of themselves
and Blue Chip. At the end of the four year period, the Bartles understood the unit
would be sold and, if there were any capital gain, they would receive a minor share
of that gain. Any such gain was not a matter of any great consequence to them.
What was important was the enhanced income.

[290] From the GE perspective, it had no knowledge of Blue Chip’s involvement in

the transaction and was not aware that the Bartles were pensioners with only modest
income. GE understood that the purpose of the advances was to buy the unit for
investment purposes. By the time of the 2007 advances, GE was aware that the
Bartles were aged in their 60s but did not have any knowledge of their actual
income. In that respect, GE had the Fastdoc declarations signed by the Bartles
declaring that they could “comfortably afford all repayments resulting from this loan,
without incurring substantial financial hardship”. GE also had the certificates
provided by TML in support of the mortgage purchase applications to the effect that
TML was not aware of any circumstances under which the borrower might be unable
to pay or might not be able to pay without substantial hardship. A clear credit check
on the Bartles was also received.

[291] Although the total borrowings were substantial, GE was aware that they did
not exceed 70 per cent of the total value of the Amber Drive property and the
investment unit. It was not suggested that the valuations were anything other than
accurate at the time the loans were made. By that time too, GE was aware that the
payments due under the initial advance of approximately $137,000 made in 2006 had
been paid regularly from the Bartles’ bank account for nearly 11 months.

[292] In these circumstances, I am satisfied there was nothing which ought to have
put GE or AMS on inquiry in relation to the ability of the Bartles to meet their
mortgage commitments. Two other factors need to be borne in mind. The first is
that, by the time the loan contracts were entered into, the Bartles were already
committed to the purchase of the investment unit by unconditional contract and
could not settle without the funds to be borrowed. The fact that the Bartles had
signed an unconditional contract was not something for which GE was responsible.
There is no evidence that GE knew of this although TML probably knew. GE had
no reason to suppose that the purchase of the unit was anything other than a normal
property investment transaction. Secondly, the fact that Mr Mathias was providing
independent legal advice to the Bartles in connection with the loan transactions is a
material factor both as to the extent of any disability or disadvantage the Bartles may
have been labouring under and as to whether GE “took advantage” of their disability
or disadvantage. As Lord Brightman put it in the advice of the Privy Council in
O’Connor v Hart [1985] 1 NZLR 159 at 171:

An unconscionable bargain in this context would be a bargain of an

improvident character made by a poor or ignorant person acting without
independent advice which cannot be shown to be a fair and reasonable
transaction. (Emphasis added).
[293] Mr Dale submitted that, in the circumstances of this case, the advice of
Mr Mathias was inadequate or wrong and that this fact meant that little weight
should be given to his advice. But Mr Stewart cited Bradley West Solicitors
Nominee Co Ltd v Keeman [1994] 2 NZLR 111 at 126-127 for the proposition that a
person is not at a special disability or disadvantage merely because his or her
solicitor did not properly explain the transaction. Mr Stewart accepted that, where a
defendant has actual or constructive notice that legal advice given is neither adequate
nor independent, it is open for the Court to find unconscionability or undue
influence. However, I accept Mr Stewart’s submission that GE had no knowledge
that the advice given by Mr Mathias was inadequate or wrong and that there was no
reason to put it on inquiry in that respect. I also accept Mr Stewart’s submission
that, in the absence of such a finding, GE was entitled to assume that Mr Mathias
would properly advise the Bartles about the risks involved in the transaction: Bank of
Baroda v Rayarel [1995] 2 FLR 376 per Hirst LJ at 384-385 and per Hoffmann J at
386.

[294] Mr Stewart submitted that the mere fact that GE also instructed Mr Mathias
to obtain execution of the loan documents did not mean he was acting as GE’s agent.
If that had been the case it could have resulted in the imputation of knowledge to GE
beyond that arising from the limited retainer GE gave to Mr Mathias. In Barclays
Bank v Thomson Plc [1997] 4 All ER 816 Simon Brown LJ referred to a series of
decisions of the English Court of Appeal, at 821:

The starting point for consideration of these rival arguments must be the
trilogy of recent Court of Appeal decisions which clearly establish a bank's
entitlement to rely upon a solicitor's certificate that proper advice has been
given to the signatory of a relevant instrument even though that solicitor acts
principally for the very person against whose undue influence the signatory
must be guarded: Massey v Midland Bank plc [1995] 1 All ER 929, Banco
Exterior International v Mann [1995] 1 All ER 936 and Bank of Baroda v
Rayarel [1995] 2 FLR 376.

[295] Simon Brown LJ added at 826:

...a bank is entitled to expect a solicitor to regard himself as owing a

professional duty to the signatory alone when advising upon the execution of
the charge (irrespective of who is paying his fee), it cannot matter whether
the solicitor is introduced by the signatory, or by whoever is to benefit from
the loan, or by the lender. If, as the cases establish, it is reasonable for the
lender to trust the solicitor to decide for himself whether a conflict of interest
 disables him from advising properly and requires him to make way for
another—and this is so even if the solicitor is acting principally for whoever
is to benefit from the transaction and against whose undue influence,
therefore, the person to be advised needs protection—then a fortiori it must
be so when the solicitor is introduced and retained by the bank.

(3) On this approach there is really no room for the concept of agency, at any
rate with regard to advising the signatory. When discharging that aspect of
their retainer, the solicitors are acting exclusively for the signatory, not the
lenders. They cannot at that stage have two clients: such a notion would
defeat the very purpose of their retainer which is to give the signatory
independent advice.

(4) One reaches the same result by applying s 199 of the Law of Property
Act 1925, as Morritt LJ did in Stepsky's case. Knowledge acquired by
solicitors whilst tendering independent advice to a signatory does not come
to them as agents for the lenders. At that time their professional duty is owed
to the signatory alone.

It is time to state my conclusions. I can do so really quite shortly. I see no

distinction in principle between Aboody's case and the present case. In my
judgment, however, the appellants' remaining arguments are to be preferred.
They are, indeed, compelling. I can see no good reason whatever why a
bank, perhaps conscientiously instructing solicitors to give independent
advice to a signatory who might otherwise go unadvised, should thereby be
disabled from relying on the solicitors' certificate that such advice has been
properly given. The contrary argument founded on the agency principle is
wholly artificial and to my mind now discredited.

[296] The solicitor representing GE at the time of the loans transaction was
Mr J R Flaws. He provided a brief of evidence to the Court which was admitted by
consent. In that brief, Mr Flaws carefully outlined the steps taken in relation to the
loan transactions and his firm’s dealings with Mr Mathias in that respect. His
unchallenged evidence was that the loan transactions were entirely conventional in
nature and that the settlement processes were in accordance with normal legal
practice including GE as lender instructing Mr Mathias to represent it in the respects
earlier outlined in this judgment and to provide the usual solicitor’s certificate to GE
upon completion of the transactions. Mr Flaws also stated, without contradiction,
that there was nothing in the documents or in the dealings his firm had with
Mr Mathias to suggest that the Bartles did not understand the consequences of the
transaction and there was no reason to suppose that they had not been given an
opportunity to review the documents before signing them. There was no indication
that the Bartles had not signed all the necessary documents without receiving
independent advice (with the exception of the guarantees they provided in respect of
the loan made to Bartle Properties Limited where they expressly waived their right to
independent advice).

The Nature of the Fastdoc 70 Loans

[297] A substantial part of the Bartles’ case as advanced by Mr Dale related to the
nature of the Fastdoc transactions and the propriety of the lender placing reliance
solely on compliance with the 70 per cent LVR and the borrowers’ declaration that
they had the means to meet the mortgage obligations. The nature of the Fastdoc 70
loans made to the Bartles is described in more detail at [192] to [196] above, along
with a summary of Mr Grant’s evidence on that subject.

[298] GE also called expert evidence on this subject from Mr S J Anderson.

Mr Anderson’s qualifications and experience as an expert in financial matters were
not challenged. Amongst other things, he has undertaken research into the personal
loan and mortgage market in New Zealand and Australia. His evidence was that
Fastdoc loans were introduced into the existing banking market in New Zealand for
borrowers who were not able to meet the lending criteria of the traditional banks.
People in this category who wished to borrow had been exposed to much higher
interest rates and punitive terms set by lenders. The AMS Fastdoc product was one
of the first of its kind but a number of other companies also operated loans on a
similar basis. At the time the loans were made to the Bartles, most banks operated in
this sector and most still do, even if at lower volumes than previously. The market
for such loans was never large. Mr Anderson estimated that it was less than five per
cent of the total home loan market when this type of loan was at its peak.

[299] Mr Anderson confirmed Mr Grant’s evidence that the Fastdoc loans and other
similar products were aimed at borrowers without the financial history a lender
would generally require. They were intended for people with limited capacity to
prove their ability to meet their payment obligations but who nevertheless believed
they would be able to do so. People in this category were typically self-employed,
recent immigrants, consultants and others who, for various reasons, found it difficult
to prove income over a two to three year period. These products were aimed at
individuals who typically had either a large deposit or a substantial equity in existing
property and wished to invest.

[300] Loans falling into this category were perceived as carrying greater risk and
lenders would generally charge interest rates that were perhaps one to two per cent
higher than interest rates on more traditional forms of lending. The interest rates
charged to the Bartles were in the nine to ten per cent range. Fastdoc loans of the
type provided to the Bartles were not usually designed for long periods of time.
Often they were used as a bridge over a period of two to five years after which the
borrower would have sufficient financial history to gain funding from more
traditional sources.

[301] Fastdoc lenders would rely on declarations by the borrower as to income

and/or affordability without requiring verification. The increased credit risk
resulting was offset in part by lenders requiring lower LVRs in the range of 60-70
per cent. This compared with the usual range of 80-95 per cent for income-based
mortgages. The lower LVRs used for the Fastdoc products were of benefit to both
borrowers and lenders in providing protection should property values fall. Lenders
received further protection against default through mortgage insurance companies.

[302] Mr Anderson’s view was that loans of the kind at issue in this proceeding
were a useful market tool in providing access to lending for home ownership or
investment in cases where funding would not otherwise be available. He saw loan
products of this type as having a legitimate place in the market.

[303] Mr Anderson was cross-examined about the collapse of the sub-prime

mortgage market in the United States. Mr Anderson did not accept that there was a
valid comparison between the sub-prime market in the United States and the lo-doc
loan market in New Zealand. In New Zealand, the LVR percentage was generally
set at lower levels than in the United States and the total market for loans of this type
was a lot smaller in New Zealand. He agreed with Mr Dale that it was not
acceptable practice for a lender to make loans to people it knew could not meet the
mortgage commitments. He agreed that the lender was dependent on the lower
LVR, a clear credit check on the individuals and the declaration by the borrower that
the loan could be serviced. However, he pointed out that the arrangements which
GE had with TML through the Correspondent Deed and Operations Manual were a
usual means of operation by lenders in this market and that TML had provided a
certificate to GE as to compliance with the procedures required by the Deed and
Operations Manual. In answer to questions about the age of the borrowers,
Mr Anderson stated the obvious proposition that many retired people have
substantial investment income and it is not to be assumed from the mere fact that
they are retired that they will not have the ability to service further borrowing.

Conclusions on the Unconscionability Cause of Action

[304] I conclude that the evidence falls well short of establishing that the loan
transactions constitute an unconscionable bargain on any of the grounds relied upon
by the Bartles. I am not persuaded that the Bartles were under any special disability
or disadvantage which materially diminished their ability to assess whether the
borrowing was in their best interests. Any vulnerability they may have had by virtue
of their unfamiliarity with transactions of this kind and any inequality of bargaining
power was (or ought to have been) redressed by the availability to them of
independent legal advice. The fact that this advice was flawed cannot be relied upon
by the Bartles in relation to the issue of unconscionability. GE was entitled to
assume that Mr Mathias would provide proper independent legal advice to them
since neither AMS nor GE had any reason to suppose that the Bartles were not
receiving proper advice.

[305] There is no evidence that GE acted improperly by taking advantage of the

Bartles. GE had no direct dealings with the Bartles and did not have any knowledge
that the Bartles were entering into any arrangement with Blue Chip. Nor did GE
have any details of the joint venture arrangements with Blue Chip. GE did not know
of the Bartles’ limited financial circumstances and their inability to meet the
mortgage commitments. There was nothing to alert GE to this possibility or to put it
on inquiry.

[306] As to GE’s reliance on an LVR no higher than 70 per cent, a clear credit
check and the declaration by the Bartles that they could afford to meet the mortgage
payments, it is easy to criticise loans of this type with the advantage of hindsight.
But the evidence establishes that loan products of this type were not uncommon at
the time and suited borrowers who, to use Blue Chip’s advertising material, were
“asset rich but cash poor”. In the buoyant property market prevailing at the time of
these loans, investors could expect at least to recover their money from the sale of
real estate if not to make a capital gain. But for the downturn in the market, which
was a significant contributing factor in the collapse of the Blue Chip Group, the
outcomes anticipated by the Bartles may have been realised.

[307] In response to inquiries from the Court as to the fate of Fastdoc loans made
by GE for the purpose of Blue Chip investments, evidence was supplied on the basis
of an order that some of it would be treated as confidential to the Court and the
parties. The object was to obtain evidence, if available, as to the proportion of loans
made on a Fastdoc basis as opposed to those where the borrower’s income was fully
verified. The aim was also to ascertain the extent of any mortgages in default and a
comparison of the default rate between the different categories of loans. In the end,
the information obtained does not materially assist. It is evident however that just
over 70 per cent of the loans made by GE in respect of Blue Chip investments were
Fastdoc loans, the majority of which were the Fastdoc 70 loans. Just under 30 per
cent were income-verified loans. As might be expected given the property market, a
significant proportion of the loans are in default. The default rate is substantially
higher for Fastdoc loans than the income verified loans but I accept Mr Stewart’s
submission that the disproportion in the default rate may be explained, at least in
part, by other factors and that little useful guidance can be obtained from the
information provided.

[308] I have concluded that Fastdoc loans of the type at issue here are not to be
treated as inherently unconscionable. I accept that loans of this type can and do fill a
useful gap in the mortgage market and are quite capable of operating satisfactorily
for both borrower and lender. They carry a higher degree of risk in relation to the
borrower’s personal covenants than more conventional lending which would
ordinarily require the verification of the borrower’s income. The increased risk to
the lender is recognised by slightly higher interest rates and is mitigated by lending
criteria stipulating a much lower LVR than is usual for fully verified loans. The
adoption of a lower LVR is a protection for both borrower and lender against a fall in
property values or other adverse circumstances.

[309] The Blue Chip investment in which the Bartles became involved with the
associated substantial borrowing was undoubtedly an improvident transaction from
their perspective and was correctly characterised by Mr Stewart in his submissions as
a high-risk venture. Mr Grant also frankly accepted that GE would not have made
the advances if it had been aware at the time of the Bartles’ financial position. But
on the basis of the knowledge GE had at the time, there was nothing improper about
the advances made and no question of bad faith or dishonest conduct on behalf of
either GE or AMS. GE was entitled in the circumstances to rely on the Bartles’
declaration that they could meet the loan commitments. This declaration was
supported by TML’s certificate that there were no adverse circumstances which
might affect GE’s decision to approve the loan applications.

[310] It may be foolish or improvident for borrowers to enter into a transaction of

this type when their means are insufficient to enable them to meet the loan
commitments or where, in a case like the present, a third party on whom they
depended proves to be unreliable. But the law does not intervene on the grounds of
unconscionability in circumstances where the borrowers are of full capacity, the loan
is on normal commercial terms and any relative weakness in bargaining power or
lack of complete understanding can be addressed by the receipt of independent legal
advice. In such circumstances, the lender is entitled to proceed on the assumption
that the borrowers must take responsibility for their own actions. The position may
be different if the lender has actual or constructive knowledge that the borrower
cannot pay, but that is not the case here.

[311] This is not a case where equity should intervene to relieve the Bartles from a
transaction which has ultimately proved to be calamitous from their point of view.
Their proper remedy is against their lawyer who, as I have found, failed to give them
the legal advice to which they were entitled.
Were the loan agreements or any other contracts entered into by the Bartles
subject to the Credit Contracts and Consumer Finance Act 2003 and, if so, were
the terms of any such contracts oppressive or induced by oppressive means as
alleged in paragraphs 45 and 46 ASOC?

[312] It is common ground that the loan agreements entered into between the
Bartles and GE were credit contracts for the purposes of the Credit Contracts and
Consumer Finance Act 2003 (the CCCF Act) and that the associated mortgages were
security interests as defined in the same Act. Mr Dale rightly abandoned a
submission that the joint venture agreement with Blue Chip and any other contracts
arranged by Blue Chip associated with their investment were collateral contracts or
linked transactions in terms of s 119 CCCF Act. The ASOC sought an order under
s 120 CCCF Act reopening the loan agreements on the grounds that they were
oppressive or that GE had induced the Bartles to enter into the loan contracts by
oppressive means. The term “oppressive” is defined in s 118:

Meaning of oppressive

In this Act, oppressive means oppressive, harsh, unjustly burdensome,

unconscionable, or in breach of reasonable standards of commercial practice.

[313] While the ASOC asserted a number of grounds in support of this cause of
action, the claim rests principally on the same grounds as those already canvassed in
relation to unconscionability. The relief sought in terms of s 127 included orders
that the mortgage over the Bartles’ Amber Drive property be discharged; vesting in
GE the plaintiffs’ rights to the unit; and directing that GE meet the Bartles’ costs.

[314] Three matters can be quickly cleared away. First, since neither AMS nor GE
had direct dealings with the Bartles, any argument that oppressive means were used
by AMS or GE to induce the Bartles to enter into the loan agreements cannot be
sustained (save possibly for the argument that the failure to obtain details of the
Bartles’ income may have amounted to oppressive conduct). Secondly, it was not
suggested that TML had used any oppressive means to induce the Bartles to enter the
loan agreements. Thirdly, GE had no knowledge of any representations made to the
Bartles by Mr Davis or Mr Mathias and their conduct cannot be attributed to GE.
[315] As Mr Dale accepted in his final submissions, the issue of any possible
oppression in terms of the CCCF Act comes down to the propriety of GE advancing
substantial sums to the Bartles without taking any steps to investigate their income or
to require TML to do so. Given my findings in relation to unconscionability, the
only question is whether s 118 CCCF Act provides any additional ground upon
which the Court might intervene to reopen the contracts. In view of Mr Dale’s
acceptance that the terms of the loan agreements were not themselves oppressive, the
focus of any application to reopen the loan agreements must be on the issue of the
Bartles’ capacity to meet the mortgage payments and any knowledge that GE had or
ought to have had in that respect.

[316] The meaning of the expression “oppressive” under the corresponding s 9

Credit Contracts Act 1981 was discussed by Vautier J in Italia Holdings (Properties)
Ltd v Lonsdale Holdings (Auckland) Ltd [1984] 2 NZLR 1, 15-16:

I agree that the individual adjectives and phrases set forth in s 10 (sic) are to
be read disjunctively. In each case, however, in my view, something more
than an inquiry into whether a particular contract is advantageous or
disadvantageous from the point of view of the party applying must certainly
be intended. The word "oppressive" clearly connotes that some real
detriment or hardship is involved. The word "harsh" is indicative of
something of the same nature. The phrase "unjustly burdensome" clearly
shows, for example, that the fact that the performance of the contract is
difficult for the party applying is insufficient. Injustice must be shown to
exist as well. The word "unconscionable" is of course the same word as was
used in the Moneylenders Act and there are numerous decisions showing
that that word was interpreted as requiring something more than an inquiry
into whether a contract was fair or unfair to one party or the other. The final
phrase, "in contravention of reasonable standards of commercial practice" is
admittedly a wide ranging concept and embraces something that was not
included in the previous legislation. It surely in my view, however, requires
something more than a simply uninformed conclusion as to what is fair or
unfair from the standpoint of commercial dealings. Except in the plainest of
cases I would consider that some evidence as to what the standards of
commercial practice are relative to the particular type of contract under
consideration would be necessary before the Court could conclude that those
standards were contravened in the particular case. It would be difficult to
argue in my view that an applicant under the Credit Contracts Act could
succeed in having a credit contract set aside by setting up facts which would
have been insufficient to enable a person in an unequal bargaining situation
to have a contract entered into by him set aside on equitable grounds.
[317] The issue of reasonable standards of commercial practice was also discussed
by Tipping J delivering the judgment for the Court of Appeal in Greenbank New
Zealand Ltd v Haas [2000] 3 NZLR 341 at [24]:

The various words which together form the definition of the term
“oppressive” all contain different shades of meaning but they all contain the
underlying idea that the transaction or some term of it is in contravention of
reasonable standards of commercial practice.

[318] In Greenbank, the Court was dealing specifically with an allegation that a
very high interest rate was oppressive. In that context, compliance or otherwise with
reasonable commercial standards in the finance industry was clearly relevant in
determining whether the contractual term was oppressive within the meaning of the
section. But the existence of similar practices by others in the market will not
necessarily control the outcome of an inquiry into whether oppressive contractual
terms or the use of oppressive means are established.

[319] I agree with the observations made by the learned editors of Gault on
Commercial Law vol 3 at CF 118.05 that:

While the fact that a practice is widespread may be evidence that it is not
oppressive it clearly cannot be conclusive of it.

[320] As Hammond J observed in Huirama v Trimac Finance Ltd (2000) 8 NZCLC

262,154 at [101]:

...[I]t cannot be for the finance industry itself to dictate what is oppressive
and what is not.

[321] In assessing whether there has been a breach of reasonable standards of

commercial practice, the whole of the relevant circumstances are to be considered:
see the opening words of the guidelines set out in s 124. Those circumstances
include the factors that would be relevant to consideration of issues of
unconscionability in equity as identified by the Court of Appeal in Gustav cited at
[286] above. The expression “breach of reasonable standards of commercial
practice” takes colour from the words that precede it and is to be interpreted as
requiring proof of contractual terms, or the use of means to induce someone to enter
into a credit contract, which are more than simply out of line with normal
commercial practice. If the threshold required to establish oppression is set too low,
sanctity of contract could be compromised and undesirable uncertainty in the
commercial sector could arise. Injustice, unfairness or unreasonableness of a serious
nature will be required for the relevant terms or conduct to be properly described as
oppressive within the meaning of s 118. As Wallace J stated in Didsbury v Zion
Farms Ltd (1989) 1 NZConvC 190,229 at 190,238, the purpose of the oppression
provisions is to give the Court a power to intervene where there is a sufficiently
serious element of unfairness.

[322] Mr Dale referred the Court to three decisions of the Court of Appeal of
New South Wales. The most recent is Kowalczuk & Another v Accom Finance Pty
Ltd [2008] 252ALR 55. In that case, the appellants sought relief against the
enforcement of a mortgage in favour of the respondent. Relief was sought under the
general law principles relating to unconscionable transactions as well as under
ss 51AA and 51AC of the Trade Practices Act 1974 (Cth) and the Contracts Review
Act 1980 (NSW). The appellants also sought relief from their solicitor who had
provided independent advice on the security documents.

[323] The terms of the Contracts Review Act (NSW) are materially different from
those under s 118 CCCF Act. Under s 7 of the New South Wales Act, the Court may
grant relief where it finds “a contract or a provision of a contract to have been unjust
in the circumstances relating to the contract at the time it was made ...” (emphasis
added). In determining whether a contract or a provision of a contract is unjust, the
Court is required to have regard to the public interest and to all the circumstances of
the case. The legislation then sets out a series of matters to which the Court is to
have regard. The legislation specifically provides that the Court must disregard any
injustice arising from circumstances not reasonably foreseeable at the time the
contract was made.

[324] The mortgages were granted over two properties owned by Mr Kowalczuk
and a family trust he effectively controlled. Mr Kowalczuk was induced to mortgage
his properties by a fraudster who promised he would invest the borrowings for
substantial returns. The fraudster disappeared and the investments failed. The loans
were short term but with high compound interest rates and much higher rates for
default. They were for sums which, in total, exceeded $1 million. Mr Kowalczuk
was a motor mechanic earning approximately $45,000 per year. He signed an
application form stating that his income was $100,000 in connection with the first
loan and stated that the “plan for repayment” was “bank refinanced”. He also
declared that he was unaware of any circumstances which might affect his ability to
make repayments.

[325] The trial Judge rejected all the claims brought by Mr Kowalczuk and his
company. In the Court of Appeal, a further cause of action under the Fair Trading
Act (NSW) was permitted. The judgment of the Court was delivered by Campbell
JA. At [96] Campbell JA addressed a submission on behalf of Mr Kowalczuk that it
was inevitable he would default under the first loan:

It can be accepted that pure asset lending — described by Basten JA in

Khoshaba at [128] as being “to lend money without regard to the ability of
the borrower to repay by instalments under the contract, in the knowledge
that adequate security is available in the event of default” — is in at least
some circumstances unjust within the meaning of the Contracts Review Act,
or unconscionable: Elkofairi v Perpetual Trustee Co Ltd (2003) 11 BPR
20,841; [2002] NSWCA 413 at [57]–[59] and [79] (Elkofairi) per Beazley
JA (with whom Santow JA and MW Campbell AJA agreed); Khoshaba at
[92] per Spigelman CJ (with whom Handley JA agreed on this point), at
[128] per Basten JA. However whether lending on the basis that the loan can
adequately be repaid from the security, is in the circumstances of any
particular case unconscionable or unjust, depends on other matters as well.
Thus, in Elkofairi the facts that neither the applicant nor her husband had
any income, the loan in question was for 5 years, and the security was over
the applicant’s only asset (involving the proposition that the applicant had no
other resources from which to service the loan) and that the secured property
was the applicant’s home, were all relevant matters in reaching the
conclusion that the transaction was both unconscionable and unjust. In
Khoshaba, other factors relevant to the conclusion of injustice were that the
applicants were a husband and wife, one of whom earned $43,000 pa and the
other of whom was a pensioner, the lender had no information at all about
the purpose for which the loan was being sought, and the security was over
their home.

[326] Campbell JA continued at [99]:

I would accept that in some circumstances knowledge of a high degree of

risk that there might be a default in payment of interest or principal so that a
mortgagee sale would result, could be unjust lending, even though it could
not be said that the lender knows that there will be default. However I do not
accept that a lender is always bound to carry out a detailed investigation of
the practicality of an intending borrower actually being able to carry through
the plan the borrower says he or she has for repayment of the loan. In the
 present case, Mr Kowalczuk stated to Accom that he proposed to pay the
Berowra loan out through bank refinance, and the Haberfield loan through
refinancing with FirstLoan (the same brokers through whom Mr Kowalczuk
was able successfully to refinance the Berowra loan) and there was no
occasion for Accom to doubt that he would be able to do so. Thus, even if
[counsel for the appellant] is right in saying that there can be pure asset
lending if the lender knew that there was a high risk that the intended means
of repayment might fail, in the present case Accom did not have knowledge
of that type.

[327] Campbell JA agreed with the trial Judge that Mr Kowalczuk was not in a
position of special disability and that, in the circumstances, the first loan was not one
in relation to which the respondent realised, or should have realised, that default with
consequent resort to the security property was inevitable or even highly likely
(at [123]). The Court of Appeal also upheld the trial Judge’s conclusion that the
second loan was not unconscionable under the general law and did not contravene
either the Contracts Review Act or the Trade Practices Act.

[328] The main focus of the case thereafter was on the very high interest rates
applicable under the mortgages. In respect of the first loan, the interest rate was
48 per cent with a default rate of 96 per cent. For the second loan, the ordinary rate
was 60 per cent with a default rate of 120 per cent. In each case, the default rates of
interest were to be compounded. In these circumstances, it is not surprising that the
Court found that relief should be granted under the Contracts Review Act in relation
to interest. In summary, the appeal was dismissed save in respect of the interest
rates.

[329] The case is distinguishable from the present on two main grounds. First,
there is no question in the present case of any unconscionable interest rates or other
terms of the contract falling into that category. Secondly, there is no evidence that
GE knew of the Bartles’ limited resources or had any reason to suppose that the
Bartles were unable to meet the mortgage payments. One could add that there was
no evidence of any breach by GE of its usual lending requirements or operational
procedures. There was no obligation on the part of GE to inquire into the Bartles’
circumstances for the reasons already discussed.

[330] A different conclusion was reached by the New South Wales Court of Appeal
in Elkofairi v Permanent Trustee Co Ltd (2002) 11 BPR 20,841 in relation to a loan
of some $750,000 granted to a husband and wife and secured by a mortgage over
their jointly owned property. The appellant wife had received little education, had
trouble speaking or writing in English and was oppressed by her husband. Although
this was not known to the respondent lender, there was no information in the loan
application form as to the nature of the business or investment intended and
inadequate financial information had been provided in support of the application.
Part of the sum borrowed was used to repay an existing mortgage but the balance of
some $250,000 was never received by the appellant wife and she did not receive any
benefit from it.

[331] Beazley JA delivered the leading judgment. He concluded at [56]:

In my opinion, notwithstanding that the respondent did not have knowledge

of the appellant’s lack of education and her language and domestic
difficulties, her lack of income, in the circumstances of this transaction – that
is a large borrowing secured over her only asset, in circumstances where the
application form failed to disclose any income for either husband or wife –
placed her in a special position of disadvantage. Though the full extent of
that special position of disadvantage was not known to the respondent,
nonetheless the absence of any relevant financial information was sufficient
to put the respondent on notice of the appellant’s lack of capacity to meet the
repayment obligations under the mortgage. That left as the only source of
repayment the selling of her only asset, as again the respondent must be
taken to have known.

[332] A submission on behalf of the respondent that it did not need to be concerned
with the fact that the borrowers had no income because the loan was amply secured
was not accepted. However, this was on the express basis that the respondent knew
the appellant had no income (at [57]).

[333] This decision is also distinguishable on the footing that the appellant was
found to be under a special disability and, unlike the present case, there was evidence
that the lender knew (or was taken to have known) that the borrowers could not meet
the mortgage payments. A further distinguishing fact is that the lender in Elkofairi
was not aware of the purpose for which the funds were being borrowed. In the
present case, GE knew that the advances were for the purpose of investing in a
residential unit for which it had a registered valuation showing there was ample
security.
[334] The last of the Australian cases cited is Perpetual Trustee Co v Khoshaba
[2006] NSWCA 41. There are some similarities with the present case. The
appellant, Perpetual Trustee Company Limited, had entered into the loan agreement
as trustee for a securitised mortgage programme managed by an entity called
Resimac Ltd which, in turn, had entered into a Mortgage Origination and
Management Deed with a company named Australia Mortgage Wholesalers Pty
Limited (AMW). It was the latter’s role to assess the loan on behalf of Resimac. It
does not appear to have been in dispute that AMW was the agent of Resimac.

[335] Mr and Mrs Khoshaba were pensioners and members of the Assyrian
community in Sydney. They became aware of a pyramid investment scheme. They
were persuaded by others to borrow $120,000 from the appellant to invest in this
scheme. The scheme turned out to be fraudulent and the Khoshabas lost all their
money. They sought relief under the Contracts Review Act 1980 (NSW) when
Perpetual sought to enforce the loan against them. Perpetual was unaware of the
investment in this scheme.

[336] The Khoshabas were both pensioners and had limited understanding of
English. There were some serious shortcomings in the loan application.
Mr Khoshaba was falsely stated as being employed and earning a salary of $43,000.
He was not aware that this information had been included in the application. The
part of the application which inquired as to the purpose of the loan was left
unanswered. After the loan application was submitted, it was amended (without the
knowledge of the Khoshabas) to show Mrs Khoshaba as a joint applicant. Her
signature on the form had been forged.

[337] Another feature of the case was that the Mortgage Origination and
Management Deed required AMW to satisfy itself as to the correctness of the
information contained in the loan application by carrying out certain steps prescribed
by Resimac’s internal lending guidelines. Those steps were not taken. The trial
Judge found that Perpetual, through AMW, should have been aware of matters which
rendered the loan agreement unjust and that AMW had sufficient notice to demand
that steps be taken to ensure the Khoshabas knew what they were doing. The trial
Judge also found that if AMW or Resimac had discovered that the respondents were
pensioners, the loan would never have been made. The trial Judge noted further that
if AMW had carried out its responsibilities correctly, it would have been plain that
the Khoshabas were the putative victims of a fraud and the loan would never have
proceeded. He was also satisfied that Resimac and AMW should have ensured that
the Khoshabas were given the opportunity of obtaining independent legal or
accounting advice. If that advice had been obtained, any company professional
would have advised against entry into the transaction. It was held that the absence of
sufficient evidence of the Khoshaba’s employment or income or details of the loan
purpose “called out for simple inquiry of the Khoshabas as to whether or not they
had been independently advised” (at [21]).

[338] The principal judgment on appeal was given by Spigelman CJ. He

considered that the relevant factors (not all of which favoured a finding that the loan
agreements were unjust) included:

• Perpetual had no involvement in and no knowledge of the investment.

• There was a failure to comply with Perpetual’s own guidelines,
particularly the failure to establish the purpose of the loan.
• There was also a failure by AMW to carry out its obligation to verify
employment and income details of the borrowers and to ensure
documents were properly executed.
• The security granted was over the family home of a low income earner
and a pensioner.
• The fact that Perpetual was content to lend on the value of the security
without relevant inquiry into the Khoshabas’ income.
• The failure to recommend independent advice was not considered to be
relevant because Spigelman CJ considered that the Khoshabas were likely
to have entered the transaction regardless of any recommendation as they
were persuaded by what he described as “the overwhelming enthusiasm
of their compatriots in the Assyrian community...” (at [91]).
• The fact that the Khoshabas were unaware of the deficiencies and false
statements made in the loan application.

[339] Spigelman CJ concluded at [92]:

 The conflicting considerations are finely balanced. Had the Appellant or its
representatives made any inquiries about the purpose of the loan I would
have allowed the appeal. I do not mean to suggest that the Appellant had to
determine that the proposed investment was reasonable and capable of
servicing the loan. It is the indifference, suggesting that the Appellant was
content to proceed on the basis of enforcing the security, which I find
determinative.

[340] Handley JA focused his attention on AMW’s failures as Resimac’s agent in

neglecting to satisfy itself that the information on the loan application was correct
and to approve or reject applications in accordance with Resimac’s guidelines (at
[102] – [103]). Basten JA pointed out at [115] that the Contracts Review Act (NSW)
may permit relief in circumstances where the conscience of the defendant is not
affected. Basten JA considered the relevant factors to be the failure to verify the
accuracy of the income figures stated in the loan application (which he said meant
that “....the lender should be taken not to have relied upon the ability of the
borrowers to make instalment repayments on time...” (at [124]); the failure to inquire
as to the purpose of the loan; the fact that Perpetual was content to lend money
which would be immediately dissipated; and the disadvantages the Khoshabas were
under, having regard to their relative lack of education and experience in business.
Although those circumstances would probably not, in Basten JA’s view, have
justified a finding that the Khoshabas were under a special disadvantage or disability
for the purposes of the equitable principles of unconscionable dealing, they were
sufficient to satisfy the requirements of the particular public interest in treating “pure
asset lending” contracts as unjust. In this last respect, Basten JA said at [128]:

To engage in pure asset lending, namely to lend money without regard to the
ability of the borrower to repay by instalments under the contract, in the
knowledge that adequate security is available in the event of default, is to
engage in a potentially fruitless enterprise, simply because there is no risk of
loss. At least where the security is the sole residence of the borrower, there
is a public interest in treating such contracts as unjust, at least in
circumstances where the borrowers can be said to have demonstrated an
inability reasonably to protect their own interests, for the purposes of, for
example, s 9(2)(e) or (f). That does not mean that the Act will permit
intervention merely where the borrower has been foolish, gullible or
greeedy. Something more is required: see Esanda Finance Corp Ltd v Tong
(1997) 41 NSWLR 482 at 491 (Handley JA) cited with approval in Elkofairi
(supra) at [77] by Beazley JA.

[341] The Khoshaba case is clearly distinguishable. The Bartles were not under
any disability that could not have been met by independent legal advice, which GE
was entitled to assume they received; GE knew the loans were to enable the purchase
of an investment unit and the funds were applied to that purpose; TML did not make
any false representations to AMS; TML was not the agent of AMS; the operations
manual did not require TML to obtain details of the borrower’s income; TML
certified to AMS that no adverse circumstances were known; the Bartles declared
they could meet the loan commitments; and there was nothing to put GE or AMS on
inquiry as to their ability to service the loans.

[342] As a general proposition, I accept that a lender who advances money with
actual or constructive knowledge that the borrower has no means to meet his or her
commitments under the terms of the advance may in some circumstances be taken to
have acted unconscionably and in breach of reasonable standards of commercial
practice, but the existence of any such knowledge on the part of GE has not been
established in this case.

Conclusion on the cause of action under the CCCF Act

[343] For the reasons given, I am not persuaded that there is any basis to conclude
that the loan contracts were oppressive within the meaning of the CCCF Act.

Did GE owe a duty of care to the plaintiffs as alleged in paragraphs 49 and 50

ASOC and, if so, was GE in breach of any such duty in any of the ways
identified in paragraph 51 ASOC?

[344] The ASOC asserts that GE owed a duty of care to the plaintiffs because of its
knowledge and expertise as a lender of mortgage funds to residential purchasers and
its knowledge that many of those who borrowed from it were unsophisticated
investors; GE’s knowledge of prudent lending criteria; and the commercial risks
involved.

[345] It is pleaded that GE owed a duty to the plaintiffs:

a) Not to advance mortgage monies when there was no, or no

reasonable, expectation that the borrower would be able to service the
loan;
 b) Not to take advantage of the vulnerability of investors who were
entering into imprudent commercial transactions;
c) To ensure that potential borrowers had sufficient income to meet the
mortgage commitments;
d) To make reasonable inquiries into the financial circumstances of the
borrowers, including ascertaining whether they were reliant upon any
assurances or promises from any third party and whether there was a
reasonable foundation for believing that any such assurances or
promises were a sufficient safeguard to the plaintiffs; and
e) To exercise reasonable care and skill.

[346] It is said that GE breached its duty by:

a) Lending through TML when it knew that TML had, on previous

occasions, fraudulently altered loan applications;
b) Having actual or constructive knowledge that the plaintiff had no
independent means to meet the mortgage payments;
c) Having actual or constructive knowledge that the plaintiffs were only
entering into a loan transaction as a result of representations made to
them by Blue Chip.

[347] Mr Dale acknowledged in his closing submission that the Court would be
obliged to reject this cause of action on the basis of decided authority, suggesting
that the matter might require closer analysis by the appellate courts.

[348] Mr Dale did not cite any authority for the proposition that a lender owes to a
borrower a tortious duty of care of the kind alleged. A lender may owe a duty of
care to the borrower where the lender’s advice is sought and given but a lender is not
under a duty to give unsolicited advice about the wisdom of projects in which the
borrowed funds are to be invested: Banbury v Bank of Montreal [1918] AC 626 per
Lord Finlay LC at 654-655. For further authority, see Chapman v Barclays Bank Plc
[1998] PNLR 14 per Otton LJ and Lloyds Bank Plc v Cobb (unreported, Court of
Appeal 18 December 1991 per Scott LJ at 3). See also Lipkin Gorman v Karpnale
Ltd [1991] 2 AC 548. Outside cases of that kind, a lender owes no duty of care in
tort to the borrower and is entitled to act in its own interests without regard to those
of the borrower.

[349] Mr Stewart also referred to the New Zealand Court of Appeal’s decision in
Dovey v Bank of New Zealand [2000] 3 NZLR 641 at [36] where Tipping J,
delivering the judgment of the Court, rejected a submission that there was an implied
term of the contract between banker and customer to advise on the wisdom of a
customer’s proposed transaction. I note too the decision of Stevens J in Krtolica v
Westpac Banking Corporation [2008] NZCCLR 24 where the Court rejected the
proposition that the bank owed a duty of care in tort not to deepen the borrower’s
insolvency by advancing further funds that could not be repaid (at [97] – [101]).

[350] Finally, mention should be made of Tipping J’s decision in Shivas v Bank of
New Zealand [1990] 2 NZLR 327, 368-369 where the Court rejected the proposition
that a bank owed a duty of care to explain the guarantee, warn the guarantor, or
recommend that the guarantor obtain separate advice.

[351] In the light of the authorities, I find that GE did not owe to the Bartles a duty
of care of the kind pleaded. In order to protect its own interests, a lender will usually
make inquiries to ascertain that it is commercially sensible to make the loan. But it
is not bound to do so and the nature and extent of any such inquiries is entirely a
matter for the lender’s own judgment. If it lends without making adequate inquiries,
it only has itself to blame. Equally, a borrower must assume responsibility to protect
his or her own position and take such advice as he or she considers appropriate. It
would be a curious state of affairs if a borrower could seek funds from a lender and
then complain that the lender had complied with that request. It is a different matter
of course if the borrower seeks advice from the lender and the lender then gives
negligent advice. In such circumstances there may be an assumption of responsibility
which does not ordinarily apply. But that is not the case here.

[352] There are other formidable difficulties in the way of this cause of action.
These include the Fastdoc declarations made by the Bartles that they could
comfortably afford all repayments and their acknowledgement that they were not
relying on AMS/GE to verify or review their financial position. Secondly, the
Bartles were advised to obtain independent legal advice and did so. In these
circumstances, the Bartles could not establish that they placed any reliance on GE or
that GE assumed any responsibility towards them.

[353] There is no sound policy reason to impose upon a lender a duty of care in tort
to the borrower given the wide range of other remedies available, including a claim
for negligent misrepresentation; a claim under the Contractual Remedies Act 1979
for innocent misrepresentation; the equitable remedies available in cases of
unconscionability; a claim based on fraud or duress; and the statutory remedies
available under the CCCF Act; all of which provide substantial protection to lenders
against exploitation.

[354] On the facts, there is no evidence of any breach of duty in any of the respects
identified in the ASOC.

[355] I conclude that this cause of action must fail.

Were the loans procured by fraud on the part of TML or the Blue Chip Group
as alleged in paragraph 48 ASOC and, if so, is any such fraud attributable to
GE?

[356] This issue may be quickly resolved on the basis of my factual findings. It
was not alleged that GE or AMS were guilty of fraud. The only basis upon which
this cause of action could succeed is that there was fraud on the part of TML or Blue
Chip and that such fraud could be attributed to GE on the basis of agency. In view
of my findings rejecting the proposition that TML or Blue Chip were agents of GE,
this cause of action must fail.

[357] It must also fail for another reason. There was no evidence of fraud on the
part of Blue Chip and I am not satisfied that TML was guilty of fraud through the
alteration of documents. As discussed earlier in this judgment, some documents
were altered by employees of TML. I am satisfied that the alterations were
immaterial and most were made for the innocent purpose of correcting errors. They
were not intended to and did not deceive anyone.
[358] The main complaint was about the description of the Bartles as “self-
employed investors”. I am satisfied that the description of the Bartles in this way
was not material. There is no evidence to support the allegation originally made that
descriptions of the Bartles as “retired” were altered to read “self-employed
investors”. It is true that in some documents they were so described, but the Bartles
themselves acknowledged that they may have signed documents in which they were
described in that fashion. I am satisfied on the balance of probabilities that they did
sign some documents in which they were described in that way.

[359] I have also concluded that the expression “self-employed investors” is to be

understood in the context of the particular loan products offered by GE/AMS. The
expression was used to denote proposed borrowers who did not have employment
and were therefore unable to provide verified income. In the context in which the
phrase was used, it was not inaccurate. It was not intended to deceive, and it did not
deceive, AMS or GE. I am confident that if this had been explained to the Bartles at
the time, they would not have been concerned. Their objective was to obtain the
loans so that the transaction could proceed. No actions on the part of TML were
inconsistent with that objective.

Summary and Disposition

[360] The claim by the first and second plaintiffs against the first defendant GE
Custodians is dismissed. The first defendant is entitled to judgment against the first
and second plaintiffs.

[361] The first plaintiffs are entitled to judgment against the third defendant
Mr Mathias on the issue of liability.

[362] I will refrain from formally entering judgment at this stage. This judgment is
issued on an interim basis with the following issues reserved for further
consideration:

a) The assessment of damages against the third defendant in favour of

the plaintiffs.
 b) Whether judgment should be entered against the third defendant in
favour of the second plaintiff as well as the first plaintiffs.
c) Whether judgment should be entered against the second defendant on
the claim for indemnity brought by the third defendant.
d) Costs.

[363] The Registrar is requested to arrange a telephone conference with counsel as

soon as convenient to discuss how and when these remaining issues can be promptly
disposed of.

______________________________
A P Randerson J
Chief High Court Judge