Cygnet Farms Limited v ANZ Bank New Zealand Limited  NZHC 2838
Mr and Mrs Swan were dairy farmers from Taranaki. They borrowed $6 million from the National Bank to buy a dairy farm through their company Cygnet Farms Ltd. The bank had been promoting interest rate swaps to farmers. An interest rate swap is an agreement between two parties in which one stream of future interest payments is exchanged for another based on a specified principal amount. Cygnet took a swap deal to buy the farm. However when marketing the swaps the bank only represented the upsides of the swap.
When the global financial crisis hit in 2008 the swaps were more disadvantageous to Cygnet including the fact Cygnet could not take advantage of the fall in floating interest rates. In addition Cygnet suffered from the swaps in ways that would not have affected a fixed rate loan had they been advised to take this option which Cygnet were not told about. These disadvantages included the bank imposing an additional credit limit on Cygnet, higher break fees than a fixed rate loan and increased bank charges compared to a fixed rate loan.
Cygnet sought damages from the bank for negligence, negligent misstatement, pre-contractual misrepresentation, breach of contract and breach of s 9 of the Fair Trading Act 1986 (this claim however was out of time). The High Court found misrepresentations were made in the banks advertising of swaps as the bank failed to explain the downsides to this option including the bank’s ability to increase both the credit margin and credit limit and its failure to explain swaps break fees were calculated in a different basis than standard fixed rate loans. The judgment focuses on whether or not damages can be awarded.
No liability found in contract
The contract between Cygnet and the bank contained the words “[t]o the maximum extent permissible by law, the Bank will not be liable for the Customer’s loss in any circumstances.” The High Court held that these words constituted an exclusion clause, and that the bank could not be liable in contract law for misrepresentation.
The Court did not accept Cygnet’s argument that the pre-contractual representations constituted a separate contract to which the above exclusion did not apply. It said that the pre-contractual representations did not constitute a collateral contract. If Cygnet had not wanted its contractual rights to be governed by the above exclusion clause, it should not have signed the contract.
Liability in tort
The High Court found there was sufficient proximity in the bank’s relationship with Cygnet to establish a duty of care in tort. The bank breached its duty of care by failing to provide Cygnet with honest, accurate and correct information, and this resulted in financial loss to Cygnet. In a standard negligence case, once a duty and subsequent breach of that duty causing loss has been established, the plaintiff is able to recover damages to restore it to the position it would have been in had the misrepresentation not been made. However in this case the court was precluded from awarding such damages by the operation of section 6 of the Contractual Remedies Act 1979. Section 6(1)(b) provides that only contractual, not tortious, damages are available where a party to a contract has been induced to enter into that contract by a misrepresentation.
An unintended consequence?
Palmer J commented “The Act removes the ability of the plaintiffs to recover meaningful relief for a tort even when liability is established and liability in contract is not. Effectively Cygnet fails to achieve anything other than a moral victory and an award of costs.”
Parliament’s intention in passing the Contractual Remedies Act 1979was that the law of contract, not torts, would govern the availability of damages. However, it is clear from Palmer J’s comments that he was uncertain about whether Parliament appreciated the possibility of a plaintiff being successful in proving a tortious breach of duty yet unable to recover damages as was the case here. Palmer J has sent his decision to Parliament for consideration of this matter and a determination of whether or not a law change is merited.
Craig Langstone from Fee Langstone says the interrelation of duties owed in tort with duties imposed, or a liability excluded by contract is unclear and not always rational (a comment with which Cygnet Farms would no doubt agree!). The fact that a commercial party when selling a product can be negligent and cause a loss but not have to pay damages as a result seems wrong at a “moral” level. But as to whether Parliament will see fit to amend the Contractual Remedies Act 1979 as a result, we will have to wait and see.