VERO LIABILITY INSURANCE LIMITED v HEARTLAND BANK LIMITED (FORMERLY MARAC

FINANCE LIMITED) CA712/2013 [2015] NZCA 288 [7 July 2015]

IN THE COURT OF APPEAL OF NEW ZEALAND

CA712/2013

[2015] NZCA 288

BETWEEN

VERO LIABILITY INSURANCE

LIMITED

Appellant

AND

HEARTLAND BANK LIMITED

(FORMERLY MARAC FINANCE

LIMITED)

Respondent

Hearing:

26 May 2015

Court:

Randerson, Stevens and White JJ

Counsel:

C T Walker for Appellant

R J Hollyman and T P Mullins for Respondent

Judgment:

7 July 2015 at 11:30 am

JUDGMENT OF THE COURT

A The appeal is allowed and the cross-appeal is dismissed. The High Court

judgments on liability and quantum are set aside.

B The order for costs against the appellant in the High Court is set aside

save that the order requiring the appellant to pay Mr Jordan’s costs is

undisturbed.

C The respondent must pay the appellant costs for a standard appeal on a

band A basis with usual disbursements.

D Costs in the High Court are to be decided by that Court.

____________________________________________________________________

REASONS OF THE COURT

(Given by Randerson J)

Table of Contents

Para No

Introduction

Background facts

Rapson’s funding from Allied Finance

Daewoo’s collapse

Mr Atkinson becomes involved

Proposals to recover the Rapson debt

Proposals discussed at the Credit Committee meeting on

7 April 2003

CBC’s change of plan

The Credit Committee meeting of 13 May 2003

Subsequent events up to January 2004

Establishing the 464768 account

Lending under the 464768 account

Matters come to light

Did Mr Atkinson act dishonestly?

The Judge’s finding

Did MARAC know about the 464768 account?

Discussion

Did Mr Atkinson act with the clear intent of causing loss to

MARAC?

The meaning of “clear intent”

The Judge’s conclusions on the issue of intent to cause loss

Our conclusions on the issue of intent to cause loss

Proof of loss

The second judgment (quantum)

Conclusions

Costs issues

Disposition

[1]

[9]

[9]

[10]

[11]

[12]

[15]

[21]

[22]

[23]

[29]

[31]

[37]

[39]

[39]

[44]

[51]

[67]

[67]

[71]

[83]

[85]

[94]

[99]

[105]

[118]

Introduction

[1] The issue in this appeal is whether the appellant Vero is liable to indemnify

the respondent MARAC under an insurance policy providing cover for dishonesty by

employees.1 In the High Court, Courtney J found that Vero was liable.

2 In a second

1 Marac Finance Ltd is now known as Heartland Bank Ltd. For the purposes of this judgment we

will continue to refer to the respondent as MARAC. 2 Marac Finance Ltd v Vero Liability Insurance Ltd [2013] NZHC 2525, [2014] 2 NZLR 93

[liability judgment].

judgment, she fixed the quantum of the loss at the maximum available cover of

$1 million.3

[2] MARAC provided finance facilities to Rapson Holdings Ltd (Rapson), a

distributor of motor vehicles imported from Korea. Rapson encountered financial

difficulties in 2001. In the following year, MARAC appointed one of its senior

executives, Mr Grant Atkinson, to take responsibility for managing Rapson’s

account. Rapson continued to trade with MARAC’s support but, in early 2010,

MARAC claimed to have discovered for the first time that Mr Atkinson had

approved unauthorised advances and provided letters of credit to Rapson under a

new account. This was referred to in the evidence as the 464768 account. MARAC

alleged that Mr Atkinson had exceeded his delegated authority in approving the

advances and the letters of credit and that he had been dishonest in failing to disclose

this to MARAC’s Credit Committee or its Board of Directors.

[3] By the time MARAC claimed to have discovered what had happened,

Rapson was insolvent and had been for some time. It was placed in liquidation in

2010. In the meantime, MARAC made a claim on the insurance policy in February

2010. This provided cover for acts of dishonesty committed during a period of four

years prior to discovery of the loss. It is common ground that this period

commenced on 8 February 2006. MARAC claimed that losses in excess of the

maximum cover of $1 million were sustained during the period from 8 February

2006 to 8 February 2010.

[4] The operative clause of the policy relevantly provided:

The Insurer shall indemnify the Insured for their direct financial Loss

sustained at any time consequent upon a single act or series of related acts of

… dishonesty … committed by any Employee … which is:

(i) Committed with the clear intent to cause the Insured a Loss, and

(ii) Discovered by the Insured during the Policy Period …

[5] On appeal, Vero challenges the Judge’s findings that Mr Atkinson had

committed acts of dishonesty and that he had done so with the clear intent to cause

3 Marac Finance Ltd v Vero Liability Insurance Ltd [2014] NZHC 1974 [quantum judgment].

MARAC loss. An unusual feature of the case is that there is no evidence that

Mr Atkinson obtained any financial advantage from his conduct other than the

benefits associated with his continued employment with MARAC. Rather, the Judge

concluded that he was very likely motivated from 2005 onwards to avoid discovery

of the lending and to prevent his likely dismissal in consequence.4

[6] Vero also challenges the Judge’s finding that MARAC had proved it had

sustained a loss as a result of Mr Atkinson’s dishonest acts. The experts who gave

evidence about quantum were agreed that the payments received from Rapson in the

four year period exceeded the sums advanced. The Judge’s finding that loss was

proved depended on her acceptance of MARAC’s submission that the rule in

Clayton’s Case applied and that this was the way MARAC dealt with the payments

in practice.5 This meant that payments received during the four year period were to

be applied to the earliest outstanding advances, including those made prior to the

commencement of the four year period. On this approach, advances made during the

four year period and not repaid amounted to a sum in excess of the available

indemnity.

[7] MARAC has cross-appealed on costs issues and also seeks to support the

judgment in the High Court on other grounds.

[8] The main issues to determine are whether the Judge erred in:

(a) Finding Mr Atkinson acted dishonestly.

(b) Finding he had acted with the clear intent to cause loss to MARAC.

(c) Finding that MARAC had proved a loss of not less than $1 million.

(d) Making the costs awards.

4 Liability judgment, above n 2 at [108].

5 Devaynes v Noble (1816) 1 Mer 572 at 608–609, 35 ER 781 (Ch) at 793 [Clayton’s Case].

Background facts

Rapson’s funding from Allied Finance

[9] The general narrative is not in dispute and is drawn substantially from the

Judge’s more detailed summary.6 Rapson was the New Zealand distributor of

Daewoo and Ssangyong motor vehicles. Both Rapson and its retail subsidiary,

CBC Ltd, were funded through a $7.5 million Dealer Floorplan facility established

in 2000 with Allied Finance, which subsequently merged with MARAC. Floorplan

lending is a revolving credit facility under which the motor vehicle dealer draws

down money to purchase new vehicles and repays it from the proceeds of sales. The

facility has a fixed limit. Security is provided by way of a charge over assets

through a debenture or general security agreement together with guarantees and

other collateral security. MARAC’s internal stock auditors are required to visit

dealers every few weeks to ensure that the stock of motor vehicles held is adequate

to secure the amount advanced.

Daewoo’s collapse

[10] Soon after the Floorplan facility was established, Daewoo suffered a financial

collapse which posed a real threat to Rapson’s viability. Daewoo’s collapse revealed

serious lapses by MARAC staff in properly documenting and managing the Rapson

facility. Reports in 2001 noted that Rapson was effectively insolvent. CBC was also

to become insolvent and was wound up in 2003. The focus in 2001 was on trying to

recoup the debt, which stood at $6.87 million on 31 December 2001. No payments

had been made since that time in reducing the debt. The Board and MARAC’s

Credit Committee were concerned about the level of the Rapson debt.7 As the Judge

found, MARAC’s ongoing concern was centred on recovery of the Floorplan debt

and avoiding further exposure for MARAC.8

6 Liability judgment, above n 2, at [15]–[60].

7 The Credit Committee was a sub-committee of the MARAC board and during this period

comprised Mr B Jolliffe, Mr R Elworthy, Mr B Mogridge and Mr W Steel. 8 Liability judgment, above n 2, at [19].

Mr Atkinson becomes involved

[11] At a meeting on 1 March 2002 attended by the chair of MARAC’s Credit

Committee Mr Brian Jolliffe, it was decided that the Rapson account would in future

be managed by Mr Jolliffe and Mr Atkinson with the assistance of another staff

member.9 Mr Jolliffe had some 30 years banking experience. He was MARAC’s

CEO from mid-2000 to April 2009 and its managing director from July 2005 to June

2009. Mr Atkinson had been an advances manager with the company since 1996 and

was highly regarded. In early 2002 he had been promoted to General Manager —

Group Credit. The Judge found that, in reality, Mr Atkinson would take the major

role in managing the Rapson account.10

She added that, with hindsight, it seemed

likely he lacked some of the operational skills required to effectively take on that

task.

Proposals to recover the Rapson debt

[12] Over the ensuing months a number of proposals were discussed by the Credit

Committee, the MARAC Board and Rapson’s managing director Mr Russell

Burling. During this period there were ongoing negotiations between General

Motors and Daewoo with a view to the former taking over Daewoo or some other

form of financial restructuring. The realistic options at this point were for Rapson to

continue to trade pending the outcome of the negotiations or to be placed in

receivership. Mr Jolliffe recommended the former and proposed that MARAC

pursue the option of funding the importation of pre-sold Ssangyong vehicles based

on a 30 per cent deposit from bona fide dealers. Margins from each sale would be

retained by MARAC to reduce the Floorplan debt.

[13] In August 2002, MARAC forwarded a letter of credit for the importation of

vehicles on a bailment basis with all sale proceeds being paid directly to MARAC in

repayment of the Floorplan debt. We note here that the alleged unauthorised issuing

of letters of credit which occurred later related to a different form of lending. Under

the latter form, MARAC issued letters of credit to Rapson’s bankers and advanced

9 Others present were Mr Atkinson, Mr Richard de Lautour (former CEO of Allied Finance Ltd

who had knowledge of the original Rapson loan facility) and a credit analyst, Ms Sarah Lee. 10

At [22].

funds to enable Rapson to acquire the vehicles upon their arrival in New Zealand.

This form of lending was typically referred to as “back-to-back”. The letters of

credit were to assist in the purchase of pre-sold vehicles. The purchase by Rapson

was expected to be followed almost immediately by the on-sale of the vehicles at

retail level, thereby providing funds to repay the amount covered by the letter of

credit. No specific security was taken in relation to this form of funding because

exposure was expected to be limited.

[14] The Judge found that while negotiations with Rapson continued, a temporary

wholesale business funding (WBF) facility was established for Rapson with an initial

advance of $315,339.72. The Judge found it was likely this was approved by the

Credit Committee to keep Rapson trading long enough to make a full assessment of

the best course for recovery of the Floorplan debt. By this stage, Rapson had

advised that it proposed to establish a new company in Australia to distribute

Ssangyong vehicles there.

Proposals discussed at the Credit Committee meeting on 7 April 2003

[15] In January 2003, Rapson wrote to MARAC with a formal proposal for the

resolution of the outstanding Floorplan debt.11

Rapson acknowledged that the debt

of around $6 million it then owed to MARAC could not be sustained by the

New Zealand business. MARAC’s security was limited effectively to the vehicle

stock with a value of about $1.5 million and joint and several guarantees which were

limited, collectively, to $500,000. On the other hand, Rapson Australia’s Ssangyong

distribution agreement was said to have been assessed by PricewaterhouseCoopers

as having substantial value. Rapson proposed that:

(a) $4.5m of the Floorplan debt be converted into a 45% shareholding in

Rapson Australia (the debt-for-equity swap).

(b) $1.25m of the residual debt be moved to provide floorplan finance to

CBC.

11

It is not clear who received this letter but it must have been seen at least by Mr Atkinson.

(c) $250,000 of the residual debt be converted to a flexible loan facility to

CBC on normal commercial terms.

[16] Further negotiations led to Mr Atkinson recommending to the Credit

Committee in April 2003 that it adopt a modified proposal:

Debt-for-equity swap $3 million

Floorplan debt $1.25 million

Term loan $1.75 million

Import letter of credit facility $500,000

[17] In respect of the letter of credit facility, Mr Atkinson said in his

recommendations:

We have over recent months provided 2 separate Letters of Credit on a

one-off basis to allow Rapson to import the Ssangyong product from Korea.

This product has been Rapsons best provider of earnings with margins

available in excess of any other of their products. Both the existing [letters

of credit] have been completed without adverse incident and full repayment

including interest and fees achieved.

To support the Rapson Ssangyong business we are requested to provide a

similar facility on an ongoing basis to guarantee HSBC (Rapson’s bank and

L/C provider) to enable the importation of the Ssangyong product. Although

this represents an additional debt exposure to this connection, it is warranted

on the basis of it providing/enhancing the source of our repayment by:

(a) the Ssangyong Rexton is providing high wholesale and retail

margins for Rapson and CBC.

(b) Supporting Rapson’s [Ssangyong] NZ business protects the

larger Australian business which although separate is viewed

by [Ssangyong] Korea as interlinked. The Australian

operation will provide our most likely avenue of full

recovery from this connection.

The terms of the provision of L/Cs will by necessity be stringent, including:

– Back to Back orders from Sub Distributor or Retail Purchaser (Written

confirmation to be sighted and held by MARAC)

– No more than NZD500,000 outstanding at any time

– For any vehicle going into Rapson/CBC stock, sufficient headroom must

be available within the Rapson Floorplan facility

– Settlement of amounts funded to be on delivery of vehicles.

(Emphasis added)

[18] When this proposal was considered at a Credit Committee meeting on 7 April

2003 attended by Mr Atkinson, the response was cautious. The minutes recorded:

We cannot and will not fund any further NZ downside. In this regard the

committee wants to see

– Monthly sales details Jan–Mar (CBC/Rapson)

– Cashflow from above

– Update cashflow/projections for next 3 months

The debt/equity swap was discussed and will require additional clarification

regarding:

– Structure – Entity used to hold equity

– Taxation advice (Aust/NZ)

– Terms of deal (put and call option)

– Board representation

– Accounting implications

Management has provided some views on some of these and additional

advice (external) will need to be sought.

In conclusion, the committee generally supports the restructure which

management can now tentatively discuss with Burling and seek

clarification/formal advice.

Further clarification to be provided to the committee at next meeting.

(Emphasis added)

[19] The Judge agreed with counsel for Vero that the minutes showed that the

Credit Committee was generally supportive of the restructuring provided that

MARAC did not fund further downside and subject to receiving further information

from management.12

However, she rejected counsel’s further submission that the

subsequent opening of the 464768 account was a natural step in implementing

MARAC’s strategy to keep Rapson trading.13

12

Liability judgment, above n 2, at [34]. 13

At [35].

[20] The Judge found that the Credit Committee considered the best prospect for

repayment of the Rapson debt was to avoid Rapson’s receivership.14

The Committee

subsequently agreed to the debt-for-equity swap and to letters of credit being

provided. The Judge saw these aspects of the proposal as being consistent with the

Committee’s stated objectives of preserving the New Zealand Ssangyong

distributorship to provide cash to reduce the Floorplan debt and accessing returns

from the more profitable Australian operation.

CBC’s change of plan

[21] One of the proposals discussed by the Credit Committee in April 2003 was

that the subsidiary CBC would continue to trade, with its retail business producing

funds to reduce the Floorplan debt. However, soon afterwards, in May 2003,

Rapson’s position changed significantly. Rapson had decided to exit the retail

operation altogether and maintain a much reduced wholesale operation. There was

then, as the Judge found, no basis on which to maintain the previous proposal so far

as it related to the restructuring of the debt around the New Zealand operation. The

uncertainty over which entity would continue trading and in what form meant that no

decision could be made regarding the proposals for a restructured Floorplan and term

loans.

The Credit Committee meeting of 13 May 2003

[22] Mr Atkinson reported on progress to a meeting of the Credit Committee on

13 May 2003. He noted that Rapson had commenced negotiations with another

dealer with a view to exiting the retail yard and maintaining only the wholesale

operation for Ssangyong in New Zealand. The Credit Committee minutes of the

meeting on that date record that management was “to continue to closely monitor the

position (cashflow/floorplan) to ensure no deterioration in our position”. Regular

verbal updates were to be provided each week. The minutes also recorded that

documentation for the debt-for-equity agreement with Rapson Australia had been

drafted and provided to Rapson for comment.

14

At [36].

Subsequent events up to January 2004

[23] In July 2003 there was email correspondence between Mr Burling and

Mr Atkinson regarding the execution of the share transfer for Rapson Australia. The

emails confirmed that MARAC was providing letters of credit for five new

Ssangyong Rexton vehicles against a specific order for those vehicles. The email

also recorded Mr Atkinson’s view that MARAC saw Rapson New Zealand providing

a source of repayment of the residual debt with profitability from a low overhead

Ssangyong wholesale operation.

[24] Prospects of any plan to restructure the Floorplan debt around CBC finally

came to an end when CBC was placed in voluntary liquidation on 1 August 2003.

[25] Despite MARAC’s apparent concern about the Rapson account, the Judge

noted there was no clear record of the Credit Committee’s final position regarding

the account. On that issue, the Judge said:15

[44] … Mr Jolliffe considered the position to be that the debt for equity swap

was to proceed but that no further revolving credit facilities were to be

extended and further finance made available only on the restricted basis of

back-to-back letters of credit so as to ensure that Marac was 100 per cent

covered for any imports. I have concluded that Mr Jolliffe’s recollection is

correct and, given the serious nature of Marac’s exposure on the Rapson

account, there could have been no misunderstanding about that on

Mr Atkinson’s part.

[26] After July 2003, the minutes of the Credit Committee meetings refer to

Rapson on only two more occasions. Mr Atkinson attended each of those meetings.

On 13 October 2003 the minutes record that the sale of outstanding vehicles was

progressing slowly but at prices at or above the level of provision made by MARAC

for bad debt. The minutes also record that documents for MARAC’s 50 per cent

shareholding in Rapson Australia had been executed. The Chairman asked for

further advice on possible recoveries via both the New Zealand company and

Australian shareholding.16

15

Liability judgment, above n 2. 16

We were told that the debt-for-equity arrangement did not ultimately proceed.

[27] Finally, on 23 January 2004, the Credit Committee approved a

recommendation from management to increase the provision for bad debt by

$100,000 from $4.449 million to $4.549 million. This was said to follow “extensive

discussions” on all aspects of the Rapson exposures and assets. The minutes also

record that the Committee approved the Chairman working with management as to

any write-off that may be taken at 31 December, within the provision approved for

bad debts.

[28] It is not in dispute that MARAC wrote off more than $5.5 million of the debt

due by Rapson and established a new separate account to receive repayments from

Rapson of the historic debt.17

Establishing the 464768 account

[29] The 464768 account was opened on 9 October 2003 but is not mentioned in

any Credit Committee minutes. It was termed a WBF which is a form of funding

used for floorplan accounts.18

It was entered in MARAC’s accounting system

known as Sovereign. There is no dispute that this account with all relevant

transactions was available for anyone within MARAC to access at any time. The

account had an initial credit limit of $212,000 with an initial advance of

$207,737.00. Four days before the meeting of the Credit Committee on 23 January

2004, there had been a partial repayment but a balance of $71,793.92 remained

outstanding of which $2,230.02 was in arrears. The Judge was in no doubt that if the

new account had been discussed at the meeting, it would have been mentioned in the

minutes.19

[30] The Judge found that when the account was established, CBC was in

liquidation and Rapson’s financial position had not improved.20

The Credit

Committee had not discussed further lending to Rapson and there was no record of a

decision to establish the account. MARAC had been unable to establish who

authorised the account. The Judge said only Mr Jolliffe and Mr Atkinson were in a

position to do so and she accepted Mr Jolliffe’s evidence that he knew nothing about

17

Account 20042610. 18

As noted above at [14], WBF means Wholesale Business Funding. 19

Liability judgment, above n 2, at [55]. 20

At [54].

it. She was also satisfied that Mr Atkinson was instrumental in setting up the

account. As we later discuss, Vero challenges the finding that members of the Credit

Committee or other senior employees of MARAC were not aware of the opening of

this account but there was no challenge to the finding that it was Mr Atkinson who

authorised its opening.

Lending under the 464768 account

[31] It is not in dispute that Mr Atkinson approved funding to Rapson through a

combination of advances under the 464768 account and letters of credit. Rapson

would request a letter of credit but this did not generally proceed on a back-to-back

basis. The Judge found that this method of funding did not fit the usual forms of

funding within MARAC.21

She referred to the evidence of MARAC’s former

General Manager — Consumer, Mr Christopher Flood, who described the funding

arrangements Mr Atkinson approved as blending a floorplan facility with letters of

credit. Mr Flood explained in evidence that the account operated like a floorplan

account. He could not find any evidence that it operated as a back-to-back credit

arrangement.

[32] It is not in dispute that the credit limit on the 464768 account exceeded

Mr Atkinson’s delegated authority. The actual account balances were from time to

time also in excess of his authority. The Judge detailed the extent of these

departures:22

[57] From June 2004 the credit limit on the account exceeded

Mr Atkinson’s delegated authority. On 28 June 2004, the credit limit was

increased to $1.833m, in excess of Mr Atkinson’s authority of $1.5m. By

February 2005, the credit limit had been increased to $4,537,160.23

From the

point that Mr Atkinson’s authority was increased to $3m the credit limit of

the account was never less than that, peaking at $5,057,000 in February

2006.

[58] For most of that period the actual account balance also exceeded

Mr Atkinson’s delegated authority. It only fell below $3m in the months of

January and December 2006.24

From mid-2008 the account was virtually

21

At [56]. 22

Liability judgment, above n 2 (footnotes added). 23

The relevant Sovereign records show that the credit limit was increased in February 2005 to

$3,383,039. 24

We note the account balance also fell below $3 million at other times in this period: June 2005,

late July–September 2005 and briefly in July 2006.

inactive; there were no advances after May 2008 and only a few repayments,

with those ceasing altogether in January 2009.

[33] Mr Atkinson admitted in evidence that the credit extended to Rapson over

this period exceeded his delegated lending authority. The Judge did not place

significant weight on his admissions, observing that Mr Atkinson remembered little

of the relevant periods.25

She was likely to have taken into account the

circumstances in which Mr Atkinson left MARAC as we later mention.26

Mr Atkinson made no attempt to dispute the evidence adduced by MARAC’s

witnesses on this topic.

[34] On the basis of the contemporaneous documents, Courtney J found that

neither the Board nor the Credit Committee had made any decision that would have

justified the lending. She found that the credit limits granted and the advances made

on the account occurred without the authority of the Credit Committee. She was

satisfied Mr Atkinson did not bring this lending to Mr Jolliffe’s attention after the

event to obtain hindsight approval and that he had not followed normal Credit

Committee procedures regarding credit limit increases or advances in excess of his

delegated authority.

[35] Finally on this topic, the Judge concluded that stock audits were not

undertaken on the regular basis expected for floorplan facilities. She noted that

Mr Atkinson could recall only one stock check that he had asked a staff member to

make. He could not recall any being undertaken by the internal stock auditors

charged with the regular audits. He added in evidence that his recollection was that

Rapson would be on the review list and stock audit list, but accepted in the light of

evidence presented that it was not on these lists.

[36] There is nothing in the minutes of other relevant meetings within MARAC

referring to the 464768 account or to the substantial lending through that account.

Mr Atkinson attended general managers’ meetings.27

The minutes of these meetings

25

At [59]. 26

See [37] below. 27

These were meetings of MARAC’s general managers having responsibility for various separate

functions within MARAC. The general managers had a similar level of seniority to

Mr Atkinson.

over the period May 2004 to September 2005 made brief mention of Rapson. In

2004, there are general references to the issuing of letters of credit and repayment

through the sale of imported vehicles but the reports in 2005 were generally limited

to references to the recovery of the old debt. Thereafter no minutes referring to

Rapson were produced. Mr Atkinson also provided reports to MARAC’s Board for

MARAC Investments Ltd. This included reports on progress on the debt-for-equity

swap. Mr Atkinson’s reports for 2005, 2006, 2007 and 2008 also referred to Rapson

New Zealand, describing MARAC’s position as a passive one for recovery of debt.

Matters come to light

[37] In late 2009 an audit officer reported some irregularities with the Rapson

account. Mr Atkinson did not return to work after 2 February 2010 in circumstances

indicating he was under major stress which undoubtedly impacted his ability to

recall detail. His departure from MARAC also resulted in difficulties in obtaining a

detailed brief of his evidence and led to him being confronted with documentary

records for the first time in Court. He was being asked to recall events up to ten

years before trial.

[38] On 8 February 2010 MARAC made a claim on the Vero policy.

Did Mr Atkinson act dishonestly?

The Judge’s findings

[39] Courtney J found that dishonesty in the context of the policy at issue meant

deliberately not acting in a straightforward way or in a way that an honest person

would act.28

This finding is not in dispute, although we have some reservations

about how helpful it is to introduce the notion of not acting in a straightforward way.

In Wong v Burt this Court relied on observations made by Lord Nicholls in Royal

Brunei Airlines Sdn Bhd v Tan for the proposition that dishonesty means “simply not

acting as an honest person would in the circumstances”.29

28

Liability judgment, above n 2, at [50] citing McMillan v Joseph (1987) 4 ANZ Ins Cas ¶60–822

(CA) and Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (PC) at 389. 29

Wong v Burt [2005] 1 NZLR 91 (CA) at [52] citing Royal Brunei Airlines Sdn Bhd v Tan,

above n 28, at 389 (emphasis added).

[40] Dishonesty involves both subjective and objective elements.30

In the context

of dishonest assistance, the Supreme Court in Westpac NZ Ltd v Map & Associates

Ltd adopted Lord Hoffmann’s remarks in Barlow Clowes International Ltd v

Eurotrust International Ltd summarising them in these terms:31

… although a dishonest state of mind is a subjective mental state, the

standard by which the law determines whether it is dishonest is objective. If

by ordinary standards a defendant’s mental state would be described as

dishonest, it is irrelevant that the defendant has different standards and does

not appreciate that his conduct, by ordinary standards, would be regarded as

dishonest.

[41] Courtney J was not prepared to find that Mr Atkinson set out to deceive

MARAC from the beginning.32

She thought it equally likely that, although he was

highly thought of within MARAC, he lacked the skills to actually manage the

464768 account. However, she was in no doubt that, by 2005 at the latest,

Mr Atkinson realised that the lending was beyond his authority and that he would be

in serious trouble if the Credit Committee came to know of MARAC’s increased

exposure. She considered it very likely that he would have lost his job in

consequence. At that point, she said, an honest person would have “come clean”

about the problem to his superiors. This would have required Mr Atkinson to have

disclosed the position to Mr Jolliffe or to the Credit Committee.

[42] The Judge then went on to make more detailed findings to support her

conclusion that Mr Atkinson had acted dishonestly from 2005 onwards. Her

conclusions were:33

(a) He did not tell his superiors about the unauthorised lending.

(b) Over a period of years he deliberately kept the state of the Rapson

account from the other general managers at their weekly meetings.

The notes he had prepared for these meetings made no reference to

the new facility and, in particular, no reference to its ballooning

30

Spencer v Spencer [2013] NZCA 449, [2014] 2 NZLR 190 at [126]. 31

Westpac NZ Ltd v Map & Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751 at [26] citing

Barlow Clowes International Ltd v Eurotrust International Ltd [2005] UKPC 37, [2006] 1 WLR

1476 at [10]–[19]. See also Fletcher v Eden Refuge Trust [2012] NZCA 124; [2012] 2 NZLR

227 at [64] to [67]. 32

Liability judgment, above n 2, at [61]. 33

Liability judgment, above n 2, at [69]–[75].

balance. She noted that Mr Atkinson had admitted under

cross-examination that the facility should have been disclosed to the

other general managers.

(c) Mr Atkinson also kept the state of the Rapson account from the Board

when he reported to it in June 2006. Despite the Board requesting a

report summarising “the entire Rapson position”, Mr Atkinson’s

report said nothing at all about the 464768 account even though, at

that time, it had a credit limit of more than $5 million and a current

balance due of $2.979 million.

(d) Mr Atkinson took steps to conceal the unauthorised advances by

suppressing the arrears of interest that were accruing on the Rapson

account. These adjustments had been made throughout 2009 by

which time all payments by Rapson had ceased. The Judge found

there was no good reason to take this step which had the effect of

ensuring that the account did not come to the attention of the

collections department for action. The only explanation could be that

Mr Atkinson was attempting to conceal the ever-increasing problem.

(e) In late 2009, Mr Atkinson lied to MARAC’s internal auditor,

Ms Darby, when she queried the Rapson account. The account then

had a credit limit of $4 million and a current balance of

$4.261 million. There were arrears of $28,162.70. Mr Atkinson’s

explanation to Ms Darby, repeated to the Chief Financial Officer

Mr Kam, was that Rapson was holding new motor vehicles wrapped

in plastic and stored in a warehouse. There is no dispute that this was

untrue.

(f) Mr Atkinson had never mentioned the 464768 account to his close

colleague Mr Flood. The Judge considered that an honest person in

Mr Atkinson’s position would have volunteered to Mr Flood that he

had lost control of the account and had not only exposed MARAC to

losses but was continuing to make unauthorised advances, thereby

increasing the exposure.

[43] The Judge’s final conclusion was expressed in these terms:34

[76] I find Mr Atkinson knew very well that he had no authority to

continue advancing money to Rapson under the facility but kept doing so

and lied to his colleagues and superiors in circumstances that required him to

make disclosure. The acts that I have described show a pattern of dishonest

behaviour over a period of years that satisfy me that Mr Atkinson was acting

dishonestly within the meaning of the policy.

Did MARAC know about the 464768 account?

[44] Vero maintained in the High Court and before us that there was no dishonesty

because senior executives in MARAC knew about the account and also knew that

MARAC was continuing to fund Rapson by issuing letters of credit that were not on

a back-to-back basis and were in excess of the initial lending limit of $500,000. This

submission was advanced on two main bases. The first was that the 464768 account

was entered in the MARAC Sovereign accounting system and was accessible by all.

The second was that Mr Jolliffe and other executives were aware that letters of credit

were being issued including by signing co-authorisations for the letters of credit.

[45] The Judge accepted that, at least in 2003 and 2004, Mr Jolliffe was aware that

letters of credit were being provided.35

She detailed letters of credit that Mr Jolliffe

had signed for substantial sums in July 2003 and July 2004. However, she found that

although Mr Jolliffe appreciated that Rapson was still trading, he was firm in his

assertion that he did not know that credit was being provided beyond the provision

of letters of credit on a back-to-back basis. He said there had been occasional

references in meetings to Rapson obtaining funding from another source and there

had been no reference to funding other than on a back-to-back letter of credit basis in

any of the documents he had seen or at general managers’ meetings. So he assumed

that funding was being obtained from another financier.

[46] Mr Flood was aware that letters of credit were being issued but denied any

knowledge of ongoing floorplan lending.

[47] Mr Bartholomew was a credit manager and a co-signatory to a number of the

letters of credit in 2003 and 2004. He also signed one letter of credit in 2005 and

34

Liability judgment, above n 2. 35

Liability judgment, above n 2, at [62].

another in 2006. The Judge found that Mr Bartholomew had virtually no knowledge

about Rapson or the basis on which the letters of credit were being issued. He was

below Mr Atkinson in the corporate hierarchy and had no other involvement with the

Rapson account. His evidence was that he was told by Mr Atkinson that the stock

being funded by the letters of credit was to be sold on a dealer network with Rapson

reimbursing MARAC the amount advanced within a short time.

[48] There were several MARAC executives who signed letters of credit for the

Rapson account who were not called to give evidence. The Funding and Treasury

Manager, Mr Mainwaring co-signed almost all the letters of credit with Mr Atkinson

between November 2004 and April 2008. During that period at least 36 letters of

credit were issued and Mr Mainwaring co-signed all but five of these. He was not

called to give evidence even though we understand he continued to be employed by

MARAC. No explanation was given for not calling him. The Judge noted that

Mr Mainwaring was below Mr Atkinson in the corporate hierarchy and in a different

department.

[49] The Judge found there were only two MARAC staff at the same level as

Mr Atkinson who co-signed letters of credit over the relevant period. These were

Mr Battersby, the General Manager — Business and Mr Williams, the then Chief

Financial Officer of Pyne Gould Corporation and the General Manager — Finance

and Treasury. Mr Battersby had signed one letter of credit in September 2004;

Mr Williams had signed two in November 2007 and April 2008. Neither of them

was called to give evidence by MARAC. Again no explanation was given.

[50] The Judge’s conclusions were:36

[66] Whilst I would have expected senior managers such as Mr Battersby

and Mr Williams to have requested assurance that any letter of credit they

signed was within the credit limit, as Mr Jolliffe claimed that he did, it is

evident that in each of those cases the answer would have been yes.

Mr Jolliffe gave evidence that he would not have signed letters of credit

without first being assured that “arrangements were appropriately in place”.

He did not believe that Marac was increasing its exposure as he believed the

letters of credit were back-to-back. The problem was not that letters of

credit were being provided; Mr Atkinson had authority to issue letters of

credit and it would be reasonable for those managers to accept his assurance.

36

Liability judgment, above n 2.

The problem was that the letters of credit being issued were not back-to-back

and were being funded from the unauthorised 464768 account.

[67] I am not satisfied that Marac either knew or ought to have known

about the nature and level of the lending under the 464768 account.

Discussion

[51] For Vero, Mr Walker made a concerted and detailed attack on the Judge’s

findings of dishonesty and lack of knowledge by MARAC’s senior executives as to

how the 464768 account was being operated. He pointed particularly to the Judge’s

finding that there was no dishonesty at the outset and up to 2005; the fact that the

account was not hidden from anyone within MARAC who might wish to access it;

and the steps taken by Mr Atkinson to have the letters of credit approved. These

included the appointment of a staff member, Mr Hershberger, to monitor the

advances and repayments from the account to ensure credit limits were observed.

Mr Walker also highlighted the failure of MARAC to call key witnesses, submitting

that adverse inferences should have been drawn as to the nature and extent of their

knowledge of the 464768 lending. Counsel also referred to the unexplained loss of

the Rapson lending file and other records which he submitted made it unfair to make

findings of dishonesty against Mr Atkinson.

[52] We have reviewed all the evidence ourselves but we are not persuaded that

the Judge’s finding of dishonesty was wrong. We take into account that the Judge

saw and heard the witnesses which is a distinct advantage in a case such as the

present. Recognising this, Mr Walker referred us to documentary evidence which he

submitted should have persuaded the Judge to a contrary view. We have considered

this material and will refer to it where appropriate.

[53] We accept there are some factors that point against a finding of dishonesty.

First, the 464768 account was opened at Mr Atkinson’s direction. It was not

disputed that it was available to anyone within MARAC who might have wished to

have had access to it. There is no doubt that a number of MARAC employees at an

operational level were aware of it and were involved with its operation although it

does not follow that MARAC’s employees at a more senior level were aware of the

extent and nature of the lending. Second, the Credit Committee generally supported

Rapson continuing to trade. Third, in 2003 and 2004 Mr Jolliffe was aware that

letters of credit were being provided for that purpose. No doubt this led to the Judge

not being satisfied that Mr Atkinson had been dishonest during the initial period

prior to 2005.

[54] However, it is equally clear from the available documents and Mr Jolliffe’s

evidence, accepted by the Judge, that the Credit Committee adopted a cautious

approach given Rapson’s past history of poor performance and that the Committee

authorised further lending to Rapson only on strict conditions, as Mr Atkinson had

himself proposed. In particular, there was to be no further “downside” and the letters

of credit were to be issued only on a back-to-back basis against orders for the

importation of vehicles where they had already been pre-sold in New Zealand.37

By

that means, MARAC’s exposure would be limited and should not have worsened if

this process had been adhered to. The Judge’s conclusion on this was supported by

the evidence of Mr Mogridge.

[55] Although Mr Walker sought to persuade us that some of the documents could

be interpreted as referring to floorplan lending we are not satisfied that any

references in these documents could be construed as authorising the opening of the

464768 account with Rapson operating on a new floorplan facility.

[56] As the Judge found, the 464768 account did not operate in the tightly

controlled fashion the Credit Committee envisaged. As a senior and trusted

executive, Mr Atkinson’s obligation was to report to the Credit Committee or

Mr Jolliffe that repayments were not occurring within a few days of the importation

of the vehicles as would have been the case if the back-to-back arrangement had

been in place. Importantly, it is not disputed that the credit limits on the 464768

account were well in excess of Mr Atkinson’s delegated authority throughout the

period and the amounts advanced increased to levels of up to $5 million at times.

Again, it was Mr Atkinson’s responsibility to obtain the appropriate approval from

the Credit Committee either before the increased lending or at least under MARAC’s

hindsight approval process. He did not do that and accepted in evidence he ought to

have done so.

37

See [18] above.

[57] We are not persuaded that we should disturb the Judge’s finding that the

senior executives at MARAC did not know about the account and the way in which

it was being operated. Although Mr Jolliffe and others were aware that further

lending to Rapson was proceeding, they had no reason to think it was not being

managed in the way Mr Atkinson had proposed in 2003 and 2004. Mr Atkinson had

ample opportunity to disclose the existence of the 464768 account at meetings of the

Credit Committee or of the general managers or to MARAC’s Board but he did not

do so, even when asked for a full report on the entire Rapson account. And, as

earlier noted, he described the approach to the Rapson situation in his reports to

MARAC Investments Ltd as being passive debt-recovery mode when he knew that

was not true.

[58] Mr Walker placed particular reliance on Mr Hershberger’s evidence. He was

a junior staff member of MARAC working in a collections role. Between 2002 and

2007 his supervisors were Mr Bartholomew and Mr Atkinson. He was appointed by

Mr Atkinson to assist in managing the Rapson account and was responsible for

dealing with Rapson’s requests for letter of credit funding. Mr Hershberger

described the process for obtaining the two signatures required from authorised

MARAC signatories for each letter of credit. He said his general practice was to

provide to the second signatory a copy of the letter of credit already signed by

Mr Atkinson along with a screenshot of the 464768 account from the Sovereign

accounting system or his handwritten notes on Rapson’s letter of request. These

showed the current amount outstanding on the 464768 account, the New Zealand

dollar equivalent of the advance requested in US dollars, and the total amount which

would be outstanding by Rapson if the letter of credit were approved. This was

designed to ensure that the advances remained within the credit limit for the account.

[59] There was some documentary evidence to support Mr Hershberger’s

evidence on this topic but, in answer to questions from the Judge, Mr Hershberger

was unable to recall details of this process except on one specific occasion. He said

Mr Atkinson had generally signed the letters of credit first and the second signatory

signed where required without further discussion. We note too that Mr Jolliffe was

not challenged with Mr Hershberger’s evidence about the process he followed.

[60] The Judge did not refer specifically to Mr Hershberger’s evidence in this

respect. But she clearly placed weight on Mr Atkinson’s senior and trusted position

in the company and we consider it likely that the second signatories relied on that

and paid little attention to the details of the state of Rapson’s account. Nevertheless,

it must at least have been clear to the second signatories that the letters of credit were

for substantial sums well in excess of the $500,000 limit initially discussed in 2003

and 2004 by the Credit Committee. However, as the Judge said, Mr Bartholomew

and Mr Mainwaring were at a more junior level than Mr Atkinson and could be

expected to place considerable trust in his abilities in overseeing the Rapson dealings

and approving the advances.

[61] As noted, Mr Walker submitted that an adverse inference about the nature and

extent of the knowledge by key personnel of the 464768 account should be drawn

because MARAC did not call witnesses such as Mr Mainwaring, Mr Battersby and

Mr Williams.38

We have already mentioned Mr Mainwaring who was at a lower

level in the hierarchy but who was very frequently involved as a co-signatory. The

involvement of the other two was limited.39

Neither Mr Atkinson nor

Mr Hershberger made any direct assertion that any executives at senior levels were

aware of floorplan lending or that the back-to-back arrangements for the letters of

credit were not being adhered to. We are not prepared to draw any adverse

inferences from the fact that MARAC did not call these witnesses. MARAC was not

required to call them to prove dishonesty on Mr Atkinson’s part. Calling these

witnesses would not explain or elucidate dishonesty. Nor, given the substantial lapse

of time since the relevant events, could it reasonably be inferred that the witnesses

would be able or willing to elucidate the issue of whether they knew that the lending

to Rapson was not proceeding on the conditions originally stipulated by the Credit

Committee in 2003.

[62] The specific matters identified by the Judge which we have summarised at

[42] above support the finding of dishonesty. We note in particular Mr Atkinson’s

38

See Perry Corp v Ithaca (Custodians) Ltd [2004] 1 NZLR 731 (CA) at [153]–[154]; Forivermor

Ltd v ANZ Bank New Zealand Ltd [2014] NZCA 129 at [15]; Morgenstern v Jeffreys [2014]

NZCA 449, (2014) 11 NZCLC ¶98-024. 39

As noted at [49] above.

failure to disclose the 464768 account to the Board in June 2006, despite the Board’s

request that he was to provide a report of the entire position of the Rapson account.

[63] During the hearing of the appeal, we raised an issue about whether it was

alleged Mr Atkinson had acted dishonestly by advancing funds when he knew that

there was insufficient security in terms of the vehicles held by Rapson. Mr Atkinson

was questioned on this subject. However, there was no pleading of dishonesty on

that footing and no finding was made by the High Court on that issue. In any event,

the evidence of the instructions given by Mr Atkinson to Mr Hershberger and the

latter’s steps to reconcile the advances with vehicles sold by Rapson suggests there is

no sound evidential basis for a finding of dishonesty along those lines. Rapson only

held a limited stock of vehicles itself, distributing the imported vehicles through a

number of retailers in various parts of the country. This would have made the ready

inspection of stock more difficult.

[64] Although the annual accounts for Rapson showed stock levels reducing, the

most relevant accounts during the four year period were those for the year ended

31 March 2007.40

There is no evidence as to when MARAC received these

accounts. We infer it was likely to have been in the latter half of 2007 by which time

the bulk of the advances had already been made.

[65] Mr Hollyman referred us to an email from a Rapson staff member to

Mr Atkinson on 13 March 2007. It provided a “spreadsheet of vehicles paid for but

Marac not paid”. These totalled $2.15 million in value. Mr Atkinson accepted this

should have alerted him to take action but he had not done so. The Judge made no

finding about this communication. We agree with Mr Walker that it is unclear

whether the email refers to vehicles that had been sold by Rapson or to vehicles

awaiting sale. If the latter, Rapson was under no obligation to account to MARAC

for the proceeds until a sale occurred and, as we later discuss, Rapson was meeting

its obligations on current lending during this period.

40

The accounts for the year to 31 March 2007 showed that stock levels had reduced to $2,250,808

from $3,948,153 at 31 March 2006.

[66] We acknowledge there are several considerations suggesting there was no

dishonesty on Mr Atkinson’s part, but we nevertheless conclude for the reasons

outlined that there was sufficient evidence to uphold the Judge’s finding that from

2005 Mr Atkinson committed acts of dishonesty in relation to the Rapson account.

Did Mr Atkinson act with the clear intent of causing loss to MARAC?

The meaning of “clear intent”

[67] The Judge noted that the expression “clear intent” in the insuring clause was

acknowledged by both parties to have been derived from the “manifest intent”

wording introduced to the standard wordings of fidelity policies in the 1980s. The

Judge cited a recent paper by Messrs Keeley and Nelson for the proposition that

coverage for a bank’s loss due to employee dishonesty is intended to be narrow,

limited to embezzlement and acts of that type.41

The policy rationale was that banks

and other financial institutions are in the business of making loans and are in the best

position to avoid the risk of non-payment. On the other hand, banks are not as well

equipped to protect against the risk of losses through dishonesty of employees.

[68] Courtney J explained that the introduction of references to clear or manifest

intent to cause loss was to counter United States decisions interpreting dishonesty as

including reckless acts by an employee.42

She was satisfied there was no distinction

between manifest intent and clear intent for these purposes, citing a decision of the

United States Court of Appeals for the Sixth Circuit for the proposition that

“manifest intent” meant “apparent or obvious” intent without necessarily requiring

that the employee actively wish for or desire a particular result.43

[69] The Judge reviewed authorities in the United States, Canada and the United

Kingdom in a comprehensive manner concluding that:44

[103] … in every case it is a question of fact as to whether the employee

intended to cause loss. But proof of intent to cause loss does not require

41

Michael Keeley and Christopher A Nelson “Critical Issues in Determining Employee Dishonesty

Coverage” (2009) 44 Tort Trials & Ins Prac LJ 933 at 934–935. 42

Liability judgment, above n 2, at [82]. 43

Federal Deposit Insurance Corp v St Paul Fire and Marine Insurance Co 942 F 2d 1032 (6th

Cir 1991) at 1035. 44

Liability judgment, above n 2.

proof that the employee also desired that outcome. Intent can only be

proven by reference to all the available evidence, including subjective

statements by the employee concerned (if available) and circumstantial

evidence. Knowledge that the act in question would result in loss to the

employer will be a significant piece of circumstantial evidence. It may,

either alone or together with other evidence, satisfy the Court that the

employee intended to cause loss to the employer. The fact that the employee

did not desire the loss may also be a relevant piece of circumstantial

evidence but is not necessary for, and will not preclude, a finding of intent to

cause loss.

[70] Counsel accepted this summary as correct and it is therefore unnecessary for

present purposes to review the authorities canvassed in the High Court.

The Judge’s conclusions on the issue of intent to cause loss

[71] Addressing the facts on the issue of intent to cause loss the Judge found:45

[109] Whilst there are aspects of Mr Atkinson’s conduct that are not

consistent with an intention to cause Marac loss, after weighing them against

the conduct that I have found to be dishonest I find that the overwhelming

weight of evidence is towards that intent. I conclude that from about

mid-2005 the advances that Mr Atkinson made were made knowing that they

would cause Marac loss and intending, though not necessarily desiring, that

outcome.

[72] The Judge provided a number of supporting reasons for this conclusion.

First, Mr Atkinson was unable to give any coherent account of his motivation. He

had little memory of the period and the Judge found that his evidence was of limited

assistance in identifying his motivation.46

However, we note the Judge’s earlier

finding that, in failing to disclose the 464768 account, Mr Atkinson was very likely

motivated by an intention to avoid the risk that his mismanagement of the account

would result in his dismissal.

[73] The Judge rejected a submission made on Vero’s behalf that Mr Atkinson had

assiduously chased the residual debt owed by Rapson under the old facility.47

The

Judge said that little return was achieved and she did not see Mr Atkinson’s conduct

in this respect as assisting in identifying intent in relation to the unauthorised

lending. We accept Mr Walker’s submission that the Judge was wrong to conclude

45

Liability judgment, above n 2. 46

No doubt for the reasons we have mentioned at [37]. 47

Liability judgment, above n 2, at [105].

that there was little return achieved in relation to the debt owing on the old account.

After substantial write-offs, a reduced balance of the old debt was transferred to a

new recovery account.48

In fact, the evidence disclosed that substantial sums were

repaid including some $415,000 in the four year period from 8 February 2006. We

consider that the evidence in this respect is not consistent with Mr Atkinson

intending to cause MARAC loss.

[74] The Judge dealt next with the evidence of Mr Hershberger. The Judge

discounted Mr Hershberger’s evidence finding that it was “distinctly odd” that he

would have been asked to undertake work which would normally have fallen within

the ambit of somebody else at MARAC.49

However, it was not suggested to

Mr Atkinson that Mr Hershberger had been recruited to assist him for any sinister

reason and we see no such reason. Mr Hershberger said he never received any

direction or suggestion to hide what was happening with the Rapson account. He

also gave evidence that he was specifically directed by Mr Atkinson to monitor the

lending to Rapson including the preparation of spreadsheets matching the vehicles

for which letters of credit were provided with the repayments applicable to those

vehicles when resold in New Zealand. In our view, the fact that Mr Atkinson

engaged Mr Hershberger to carry out these responsibilities is not consistent with

Mr Atkinson intending to cause loss to MARAC. The opposite is the case. We refer

below to the significance of the spreadsheets in more detail.50

[75] Next, there was evidence that Mr Atkinson had declined approval for some

letters of credit in cases where approving them would have put the 464768 account

in excess of its credit limit. The Judge accepted this happened but said the real issue

was that Mr Atkinson should not have been issuing letters of credit funded through

the facility at all. In the absence of anything that might assist in understanding why

Mr Atkinson did that, she regarded this aspect as neutral. For ourselves, we regard

Mr Atkinson’s evidence in this respect as inconsistent with someone who was

intending to cause MARAC loss. To the contrary, it is an indicator that he was

48

An account numbered 20042610. 49

Liability judgment, above n 2, at [106]. 50

See below at [78].

endeavouring to secure compliance with the credit limits even if he had not obtained

approval for them.

[76] The Judge accepted that there was some truth in Mr Walker’s submission on

behalf of Vero that Mr Atkinson did not gain personally from his conduct and that

putting MARAC into a bad loan situation could only harm him. The Judge reiterated

her view that Mr Atkinson was very likely motivated from about 2005 onwards to

avoid dismissal and did so by continuing to fund Rapson, thereby postponing the

discovery of his previous unauthorised lending. She was satisfied Mr Atkinson

could not genuinely have thought that Rapson would be able to repay the continued

advances and considered he was “simply postponing the inevitable”.51

[77] The Judge’s finding on this point is significant and requires review. As we

have already noted, in the four year period from 8 February 2006, the expert

accounting witnesses were in agreement that the amounts received from Rapson on

the 464768 account exceeded the amounts advanced. The advances made during

that period totalled $14,713,505 while the total repayments received in the same

period amounted to $16,084,947.52

[78] We asked to view Mr Hershberger’s spreadsheets and these were provided

subsequent to the hearing.53

Mr Hollyman for MARAC submitted these should not

be viewed as a complete record. But they are sufficient in our view to show that, at

Mr Atkinson’s direction, Mr Hershberger kept records of the amounts advanced for

the purchase by Rapson of specific motor vehicles as well as a record of the sales of

identified vehicles and the amounts repaid from those sales for every month over the

period January 2005 to April 2008, shortly before the last of the advances made in

May 2008. The creation and content of these records are also inconsistent with a

clear intent on Mr Atkinson’s part to cause MARAC loss. Rather, they demonstrate

a concern to ensure that Rapson was meeting its obligations to repay the MARAC

advances and a serious attempt to keep track of the sale of vehicles, matching them

with the purchase of vehicles under the letters of credit.

51

At [108]. 52

Of this sum $415,000 was applied to the old debt (the 20042610 account). 53

These were produced in the High Court but were not included in the case on appeal.

[79] From Mr Atkinson’s perspective, that was being achieved over the critical

four year period from 8 February 2006 even though repayments were not necessarily

happening on the back-to-back basis originally envisaged. Repayments were being

made during this period to an extent that more than covered the advances and

interest. As well, payments to reduce the historic debt were continuing. Moreover,

while the level of debt was increasing over the period, that reflected an increase in

the sums advanced on each letter of credit as authorised in each case by two

signatories. Correspondingly, repayments also increased reflecting the sales of larger

numbers of motor vehicles as well as interest.

[80] The result was that the overall level of debt was not increasing significantly

over the four year period until early in 2008. For example, at the beginning of the

four year period, the debt stood at $3,633,300.07. There were relatively brief periods

in 2006 and 2007 when the debt exceeded $4 million but, generally, the debt

remained at about the level that was outstanding at the beginning of the four year

period. It was not until March 2008 that the debt exceeded $4 million again, the last

advances being made on 19 May 2008.54

Even after that time, further repayments

were made.

[81] There are two other relevant considerations on the issue of intent to cause

loss. First, the Judge accepted that there was no dishonesty in relation to the opening

of the 464768 account in 2003 and made no finding that dishonesty had occurred

until 2005.55

Secondly, there is no doubt Mr Atkinson did not receive any financial

advantage from the transactions other than the benefits associated with his

continuing employment with MARAC.56

Nor did he have any connection with

Rapson or Mr Burling and there was no suggestion he intended to benefit them.

54

We assume that Rapson had ceased trading around this time since no further requests for letters

of credit appear to have been made after that time. 55

See our discussion at [53] above. 56

Mr Flood accepted that Mr Atkinson did not receive any advantage through making the

unauthorised loans but suggested he may have obtained bonuses that he was not entitled to

through covering up the loans. He suggested there would have been write-offs of the Rapson

debt which would have reduced the profits upon which bonuses were calculated. Any

advantages that might have been gained by this were never quantified and the Judge made no

finding on this. The issue was put to Mr Atkinson only briefly and he denied ever turning his

mind to this as a reason for the lending.

[82] The United States authorities show that it is difficult to establish the

necessary clear intent to cause the insured loss in circumstances outside the classic

embezzlement cases where the employee’s gain is inevitably the employer’s loss. To

take two examples: in Glusband v Fittin Cunningham and Lauzon Inc the Second

Circuit Court of Appeals held there was no manifest intent to cause loss where a

securities trader got in over his head, concealed losses, and ran up new losses trying

to recover the debt.57

The Court held that the evidence indicated the employee

intended to benefit the insured, no matter how reckless and imprudent his conduct

may have been. And in Municipal Securities Inc v Insurance Co of North America a

broker exceeded her lending limits, concealed trading transactions from her

employers and continued lending to recoup prior losses and protect her job

security.58

The Court of Appeals for the Sixth Circuit held she did not have a

manifest intent to cause her employer loss. Her intent was to make money, not cause

her employer loss.

Conclusions on the issue of intent to cause loss

[83] The onus lay on MARAC to prove on the balance of probabilities that

Mr Atkinson had a clear intent to cause MARAC loss.59

We recognise the

advantages enjoyed by the trial Judge in a case of this nature but we are satisfied in

the circumstances of this case that the Judge erred in finding that Mr Atkinson

intended to cause loss to MARAC. Rather, our conclusion is that Mr Atkinson

realised after a period that the advances made exceeded his delegated authority. His

dishonesty lay in his attempts to avoid this coming to the attention of the Credit

Committee or Mr Jolliffe so as to reduce the risk of probable dismissal or some form

of internal discipline. We are not persuaded that MARAC proved that Mr Atkinson

recognised the inevitability of loss through his actions. Mr Hollyman referred us to

evidence from Mr Atkinson which was submitted to be an admission to that effect.

We do not view the evidence in that light. Mr Atkinson accepted only that

MARAC’s loss was the outcome of his mismanagement of the file, not that he

intended loss to occur. Indeed, he denied any deliberate attempt to conceal or to

57

Glusband v Fittin Cunningham and Lauzon Inc 892 F 2d 208 (2d Cir 1999). 58

Municipal Securities Inc v Insurance Company of North America 829 F 2d 7(6th Cir 1987). 59

Z v Dental Complaints Assessment Committee [2008] NZSC 55, [2009] 1 NZLR 1 at [102] and

[105] as to the standard of proof.

cause MARAC loss. Our assessment is that Mr Atkinson’s conduct was directed

towards recovery of MARAC’s debt, however inadequately he may have approached

his duties. His conduct was consistent with a belief (most likely misguided) that

through continued trading and Rapson’s Australian operation the debt would

eventually be repaid. That was the course the Credit Committee had authorised him

to pursue.

[84] Vero therefore succeeds on this ground of appeal.

Proof of loss

[85] The Judge found that MARAC’s approach to quantifying the loss was

unsatisfactory.60

MARAC had not called a forensic accountant at the first hearing.

Rather, it had relied solely on Mr Flood’s evidence that, as at 30 January 2010, the

balance of the 464768 account stood at $4,432,511.29. Of that, at least $2.15 million

was unrecovered advances and these losses would not have been incurred had

Mr Atkinson not concealed his unauthorised advances. This was based on

Mr Flood’s evidence that if MARAC had known the extent of its exposure it would

have closed the account immediately and demanded repayment. If it had done so,

Mr Flood’s evidence was that MARAC would have obtained substantial repayment

since Rapson’s accounts had shown at earlier stages that there was significant

inventory.

[86] The Judge held that this approach was wrong. The essence of her reasoning

is captured in these paragraphs:61

[110] Insurance policies invariably require a causal connection between

the specified peril and the loss. However, the quality of that connection

varies. It may be the close and direct connection of proximate cause

signalled by words such as “caused by”.62

In comparison, expressions such

as “arising out of” are regarded as being much broader, not requiring such a

close causal nexus. The expression “consequent upon”, used in this

operative clause, is one that carries a both causative and sequential

connotation but does not require a close causal connection.63

60

Liability judgment, above n 2, at [122]. 61

Liability judgment, above n 2. 62

Naviera de Canarias SA v Nacional Hispanica Aseguradora SA (The Playa de las Nieves)

[1978] AC 853 (HL) at 881. 63

Insurance Commission of Western Australia v Container and Handlers Pty Ltd [2004] HCA 24,

(2004) 206 ALR 335 at 341.

[111] However, the looser causative language is countered by the

requirement that the loss be “direct financial” loss. I have identified various

acts of dishonesty by Mr Atkinson. Some involve the actual advancing of

money in circumstances that make the act dishonest. Clearly, those acts

were capable of resulting in a direct financial loss for the purposes of the

operative clause. Others involve misleading Marac over the state of the

Rapson account. Whilst they are capable of resulting in loss in the sense of

depriving Marac of the opportunity to avoid further losses, a loss of

opportunity is not a direct financial loss. So it is only acts that had as their

consequence Marac actually parting with money that could be the subject of

claim under this policy.

[87] The Judge went on to refer to the definition of “loss” in cl 2.11 of the policy:

“Loss” means the direct financial loss (other than salaries, commissions,

fees, bonuses, promotions, awards, profit sharing, pensions or other

employee benefits paid by the Insured, which are not deemed direct

financial loss) sustained by the Insured in connection with any single act or

series of related, continuous or repeated acts (which shall be treated as a

single act) of … dishonesty … committed by any Employee …

[88] Courtney J noted endorsement 4 which relevantly provides:

It is noted and agreed that the Insurer shall not indemnify the Insured for

any Loss sustained at any time consequent upon a single act or series of

related acts of … dishonesty … committed more than 48 months prior to the

Discovery of the Loss.

[89] Reference should also be made to cls 4.1 and 4.3 of the policy which the

Judge found further limited the amount of indemnity available:

The Insurer shall not be liable to make any payment for:

4.1 Consequential loss

Indirect or consequential loss of any nature, including any loss of income

(including but not limited to interest and dividends) not realised by the

Insured or any other person or organisation because of a Loss covered under

this policy, except as provided under Extension 3.6.

…

4.3 Credit risks

Loss resulting from the complete or partial non-payment of or default under

any:

(a) credit agreement, extension of credit or hire purchase agreement;

(b) loan or transaction in the nature of a loan …

However, this exclusion does not apply to any Loss resulting from

fraudulent or dishonest acts of an Employee or unless the agreement was

originally obtained from the Insured by any other person not in collusion

with such Employee by virtue of Forgery, Counterfeiting or Computer or

Funds Transfer Fraud, in which event the amount of such Loss shall be

determined to be the amount of money paid out, advanced or withdrawn, less

all money received from any source, including payments, interest,

commissions and the like.

[90] The Judge noted that the limit of indemnity of $1 million was for “any one

Loss and in the aggregate” with a deductible of $100,000 for “each and every

Loss”.64

[91] The Judge accepted Vero’s submission that MARAC could claim only for

loss consequent on acts of dishonesty committed after 8 February 2006. The Judge

viewed what had occurred as not just one series of related acts; she considered it was

a straightforward matter to apply the four year cut-off date by reference to the date

the advances were made. She went on to conclude that the starting point in

calculating the quantum of the loss was to recognise that there was a claimable loss

to MARAC each time an unauthorised advance was made after 8 February 2006.

Repayments during that time might need to be taken into account because, on the

evidence, she concluded it seemed certain that most if not all of the repayments were

made from further advances by MARAC. Since quantum had not been addressed in

that way by counsel, she was unable to reach a view as to what MARAC’s properly

adjusted loss under the policy was. The Judge also said that the exclusion of interest

and penalties under exclusion 4.1 and the correct approach to the deductible, were

also to be taken into account.

[92] A further factor was that the Judge had concluded that Vero was in breach of

its obligations under condition 5.9 of the policy to appoint an investigative specialist

to investigate the loss. Had it done so, she considered many of the quantum issues

would have been avoided. It was for this reason that she considered that the

inadequacies in the proof of quantum were not fatal. The result was that the

High Court found for MARAC on the question of liability but invited counsel to

confer on the issue of quantum and to file further submissions on that subject if

agreement could not be reached.

64

Liability judgment, above n 2, at [11].

[93] Mr Walker was critical of the Judge’s decision to effectively allow MARAC

to have “a second bite of the cherry” but we are satisfied that it was within her

discretion in the circumstances to permit MARAC a further opportunity to properly

quantify and prove its loss.

The second judgment (quantum)

[94] The parties were unable to agree on quantum and a further hearing took place

in the High Court on 19 June 2014. By that time, briefs of evidence had been

prepared by two chartered accountants with expertise in forensic accounting.

MARAC relied on the evidence of Mr B P Jordan while Vero called evidence from

Mr J C Hagen. The key facts on which the experts agreed were:

(a) The balance owing by Rapson to MARAC at 8 February 2006 on the

464768 account was $3,633,300.

(b) Advances made by MARAC to Rapson after 8 February 2006 totalled

$14,713,505.

(c) Total repayments made by Rapson to MARAC after 8 February 2006

were $16,084,947, of which $415,000 was paid into the 20042610

account (representing the old debt).

[95] If repayments made after 8 February 2006 were first applied to the

outstanding balance at 8 February 2006, then the loss would exceed the $1 million

indemnity limit irrespective of the way in which the $100,000 deductible under the

policy was applied and regardless of the exclusion of interest and penalties under the

policy.

[96] The difference between the experts was that Mr Jordan considered that

payments received after 8 February 2006 should first be applied to the outstanding

balance at 8 February 2006 whereas Mr Hagen considered that the balance due at

8 February 2006 should be excluded from consideration. Courtney J agreed that the

correct approach to calculating MARAC‘s loss was to identify the direct financial

loss flowing from advances made after 8 February 2006. That followed from

treating endorsement 4 as an exclusion.65

However, in the Judge’s view,

endorsement 4 said nothing about whether repayments made after 8 February 2006

were to be applied to advances made before that date. She considered that the

answer to that question depended on how the 464768 account operated.

[97] On that issue, the Judge accepted arguments advanced on behalf of MARAC,

repeated in this Court, that the 464768 account had operated as if it were a current

account with repayments being credited against the earliest advances. She rejected

Vero’s argument that the rule in Clayton’s Case was displaced because the advances

were made to support letters of credit that funded specific vehicles. She did not

consider that Mr Hershberger’s evidence about the operation of the account

(including his evidence about the spreadsheets as we have discussed above at [78]),

supported Vero’s argument on this point. That was because it was not possible to

relate all the repayments back to specific advances; Mr Atkinson had himself treated

the 464768 account as a wholesale business funding facility; and the Sovereign

account printout showed the account being managed as a running balance with

repayments being applied against the existing balance in reduction of the oldest

debts first. The Judge also took into account an acknowledgement made on Vero’s

behalf that repayments of $494,975.87 made between 8 and 27 February 2006 could

not properly be treated as applying to losses in the period after 8 February 2006

because they pre-dated any advance made during that period.

[98] The Judge expressed her conclusions in these terms:66

[39] These pieces of evidence combine to satisfy me that the nature of the

464768 account was a revolving credit facility in which there was no

particular pattern in terms of advances or repayments save that repayments

would be applied in reduction of the earliest advances (and accrued interest

or penalties). Had Mr Atkinson managed the Rapson account as the Board

had decided he should, advances would have only been made under letters of

credit on a back-to-back basis. It was Mr Atkinson who extended the nature

of the relationship to a WBF account and I am satisfied that it was fully

understood and intended that monies received by Marac would be applied in

reduction of the oldest advances. As a result, the circumstances fall within

the scope of the rule in Clayton’s case and repayments to Marac by Rapson

after 8 February 2006 are to be treated as being applied first against the

balance of $3.336m existing as at that date. The result is that Marac

sustained losses after 8 February 2006 in excess of $1m.

65

Set out above at [88]. 66

Quantum judgment, above n 3, at [39].

Conclusions

[99] Despite Mr Hershberger’s evidence about the spreadsheets he maintained and

the identification of repayments from the sale of identified vehicles, we accept

Mr Hollyman’s submission that the material he compiled was incomplete. We agree

with the Judge that the 464768 account was, in practice, operated on a first-in

first-out basis. However, as we shortly explain, we do not view the way in which

repayments were allocated as determinative.

[100] We agree with Mr Walker that the rule in Clayton’s Case is, in truth, a fiction,

founded on a presumed intention. Further, the rule may be displaced by an

agreement to the contrary or evidence pointing to a contrary conclusion.67

We accept

too that the rule may be displaced even by a “slight counterweight”: Russell-Cooke

Trust Co v Prentis.68

[101] But our view is that the application of the rule in Clayton’s Case is not the

critical question. The real issue is whether there is coverage under the policy for

direct loss consequent upon acts of dishonesty committed after 8 February 2006. We

do not accept MARAC’s submission that the Judge erred in dividing acts of

dishonesty between those that occurred before and after 8 February 2006. While

both the insuring clause and endorsement 4 referred to loss sustained “at any time” it

must be a loss consequent upon acts of dishonesty committed after 8 February 2006.

The natural meaning of these provisions in the policy is that the direct financial loss

must flow from the unauthorised advances made on and after that date. It follows in

our view that losses sustained through acts of dishonesty involving advances to

Rapson prior to 8 February 2006 are to be excluded from consideration. This means

that the losses sustained at 8 February 2006 amounting to $3,633,300 must be

excluded for the purpose of calculating the loss in terms of the policy.

[102] We agree with Mr Walker’s submission that it makes no difference whether,

as a matter of accounting, MARAC allocated the repayments made after 8 February

2006 to amounts due for advances made prior to 8 February 2006. If MARAC

67

See the discussion by this Court in Re Registered Securities Ltd [1991] 1 NZLR 545 (CA) at

553–554. 68

Russell-Cooke Trust Co v Prentis [2002] EWHC 2227, [2003] 2 All ER 478 (Ch) at [55].

advanced funds that were used to fund a payment back to it, MARAC did not suffer

a loss through the transaction. It was no worse off. In simple terms, all the

unauthorised advances made after 8 February 2006 were more than offset by

repayments made during that period.

[103] In assessing loss in terms of the policy some recognition must be given to the

use of the word “direct”. This tends to confirm our view that there was no direct loss

from the acts of dishonesty during the four year period. The loss found by the Judge

arose only indirectly by virtue of MARAC applying the repayments made after

8 February 2006 as a matter of accounting to the debt incurred prior to that date. It

must be accepted that the prior debt arose from acts committed before 8 February

2006 and is not therefore covered by the policy.

[104] We conclude that even if MARAC had succeeded in establishing dishonesty

by Mr Atkinson with the clear intent to cause MARAC loss, it did not establish that

it suffered direct financial loss in consequence during the period covered by the

policy.

Costs issues

[105] In the liability judgment, Courtney J found there was a breach by Vero of

condition 5.9 of the policy which places an obligation on Vero to appoint an

investigative specialist to investigate the facts behind the “Loss” and to determine

the quantum of the “Loss”. We set out the relevant parts of conditions 5.9 and 5.10

of the policy relating to the obligation to appoint an investigative specialist and the

arbitration clause:

5.9 Use of Investigative Specialists

(a) An Investigative Specialist will be nominated by the Insured and

approved by the Insurer with respect to any Loss notified under this

policy. The Investigative Specialist shall not be any entity or person

with a clear conflict of interest.

(b) The Investigative Specialist shall:

(I) investigate the facts behind the Loss; and

(II) determine the quantum of the Loss; and

(III) advise when and how the Insured’s controls were or may

have been breached; and

(IV) summarise recommendations which may prevent future

similar Losses; and

(V) issue their report, in a format approved by the Insurer, in

duplicate to the Insured and to the Insurer.

(c) The Insurer will pay the expense of the Investigative Specialist

unless the Loss is not covered and in that event expense will be

shared equally between the Insurer and the Insured. The

Deductible amount is not applicable to the expense of the

Investigative Specialist and such expense paid by the Insurer will

be in addition to the Limit of Liability specified under Item 4 of the

Schedule.

…

(e) The report issued by the Investigative Specialist will be binding and

definitive as respects the facts and quantum of the Loss only.

…

5.10 Arbitration

After a joint review of the Investigators report, if the Policyholder

and the Insurer cannot agree upon the settlement of Loss, the

Insurer at the Policyholder’s request, will submit the dispute to

arbitration. The arbitration panel shall consist of an arbitrator

selected by the Policyholder and one selected by the Insurer, with a

third independent arbitrator selected by the first two arbitrators. The

cost of arbitration will be paid by the Insurer and will be in addition

to the Limit of Liability. The Insured and the Insurer agree to abide

by the outcome of the arbitration, which shall be conducted

according to the legal rules governing commercial arbitration in the

jurisdiction in which the policy is issued. The Insured and the

Insurer shall enter into an appropriate form of arbitration contract to

this effect.

[106] In its statement of claim, MARAC claimed solicitor-client costs as a

consequence of Vero’s refusal to appoint an investigative specialist when requested.

Vero had taken the view that the matter should be determined by the Court since it

considered the policy did not respond to the claimed loss and because it contended

the investigative specialist’s role did not extend to deciding whether the claimed loss

resulted from dishonesty.

[107] By the time of the quantum judgment, Courtney J’s attention had been drawn

to authorities making it clear that costs may not be recovered as damages.69

The

Judge also found that cl 5.9 did not prevent MARAC requesting that the dispute be

referred to arbitration under cl 5.10 or otherwise. It did not do that but elected to

initiate proceedings in the High Court.

[108] In view of the Judge’s conclusions, MARAC sought indemnity costs in the

High Court on a solicitor-client basis. Courtney J declined to award indemnity costs,

taking into account that MARAC had been granted an indulgence by being allowed

to adduce additional quantum evidence after the first judgment.

[109] The Judge ordered costs on a 2B basis in favour of MARAC for the liability

hearing but awarded no costs to either party in relation to the quantum hearing, other

than to order that Vero pay Mr Jordan’s costs as an expert witness.

[110] On its cross-appeal, MARAC challenged the Judge’s findings on the costs

issues. It says that, by reason of the breach of condition 5.9 of the policy, the Judge

should have ordered Vero to pay on an indemnity basis all the costs incurred by

MARAC in both the liability and quantum hearings.

[111] Mr Mullins presented this part of the argument for MARAC. He submitted

that the Judge had erred in several respects. First, the Judge had erred in finding that

an award of damages for breach of condition 5.9 was precluded by the general rule

that the costs of pursuing a claim may not be recovered as damages. We consider

that this general rule is beyond argument and has been consistently applied by the

courts.70

Mr Mullins submitted that costs could be awarded as damages in

exceptional circumstances citing A v B (No 2) and Pipeline Services WA Pty Ltd v

ATCO Gas Australia Pty Ltd.71

However, we agree with the Judge that these cases

are distinguishable since they involved awards of costs on an indemnity basis where

a party had successfully applied for a stay of court proceedings on the basis that the

69

Quantum judgment, above n 3, at [4] citing Simpson v Walker [2012] NZCA 191, (2012) 28

FRNZ 815 and Chick v Blackwell [2003] NZHC 1525. 70

Berry v British Transport Commission [1962] 1 QB 306 (CA) at 316–317, 319. 320–321;

Herbison v Papakura Video Ltd (No 2) [1987] 2 NZLR 720 (HC) at 735; Simpson v Walker,

above n 69; Boswell v Millar [2014] NZCA 314, [2014] 3 NZLR 332 at [50]. 71

A v B (No 2) [2007] EWHC 54 (Comm), [2007] 1 Lloyd’s Rep 358 at [11] and Pipeline Services

WA Pty Ltd v ATCO Gas Australia Pty Ltd [2014] WASC 10.

dispute was the subject of an arbitration agreement. No stay application was made

here.

[112] Secondly, while acknowledging MARAC had abandoned any claim to direct

damages in reliance on condition 5.9, it was submitted that the Judge should have

awarded indemnity costs under the High Court Rules on the basis of her finding that

Vero had breached the obligation under condition 5.9 to appoint an investigative

specialist.

[113] The principal obligation under cl (b) of condition 5.9 was to appoint an

investigative specialist to investigate the facts behind the “Loss” and the quantum of

the “Loss”. Under cl (c) of the condition Vero was obliged to pay the expense of the

investigative specialist “unless the loss is not covered”. In that event, the expense

was to be shared equally with MARAC. Clause (e) of the condition provided that

the report issued by the specialist would be “binding and definitive as respects the

facts and quantum of the Loss” only.

[114] The Judge did not accept Vero’s submission that the use of the defined term

“Loss” (referring to loss sustained in connection with dishonesty committed by an

employee) meant that the specialist’s role only arose where the loss fell within the

ambit of the policy. Rather, she considered that condition 5.9 contemplated the

appointment of a specialist before it is known whether the claimed loss was covered.

On that footing, “Loss” under this condition was to be read as the claimed loss.

[115] It must be acknowledged that condition 5.9 is poorly drafted. The use of the

expression “the facts behind the Loss” suggests that the investigation was to be

limited to establishing the factual circumstances in which the loss arose and its

quantum rather than determining whether this arose from dishonesty that was clearly

intended to cause loss to the insured. On the other hand, cl (e) appears to

contemplate that the report would cover matters beyond the facts and quantum,

arguably including findings on dishonesty and intent to cause loss.

[116] But we are not persuaded the Judge was wrong to decline to award indemnity

costs to MARAC on a solicitor-client basis. First, indemnity costs are only to be

awarded in exceptional cases.72

Secondly, an award of indemnity costs is a

discretionary decision and the Judge was entitled to take into account that MARAC

was granted an indulgence in being permitted to make further submissions and

adducing additional evidence as to quantum.73

Thirdly, whether the matter could

have been referred to arbitration is beside the point since there is no evidence that the

costs incurred by MARAC in the High Court would have been any different from

those it would have incurred in an arbitration or would have been materially reduced

if an investigator had been appointed.

[117] Although we do not accept that the Judge was wrong to refuse indemnity

costs to MARAC, we do not propose to disturb the award made in MARAC’s favour

for the costs of its expert witness Mr Jordan. It seems to us that this award was

appropriate since Vero was at least obliged under condition 5.9 to investigate the

background facts and the quantum of the loss.

Disposition

[118] For the reasons given the appeal is allowed and the cross-appeal is dismissed.

The High Court judgments on liability and quantum are set aside. The order for

costs against the appellant in the High Court is set aside save that the order requiring

the appellant to pay Mr Jordan’s costs is undisturbed.

[119] Counsel were agreed that costs in this Court should follow the event and

should be awarded on the basis of a standard appeal, band A. Accordingly, the

respondent must pay the appellant costs for a standard appeal on a band A basis with

usual disbursements.

[120] Costs in the High Court are to be decided by that Court.

Solicitors: Gilbert Walker, Auckland for Appellant Lee Salmon Long, Auckland for Respondent

72

Bradbury v Westpac Banking Corp [2009] NZCA 234; [2009] 3 NZLR 400 at [28]. 73

High Court Rules, r 14: costs at discretion of court.