FAI MONEY LIMITED v CRAWLEY AND JOHNSTON [2016] NZCA 219

FAI MONEY LIMITED v CRAWLEY AND JOHNSTON [2016] NZCA 219 [24 May 2016]IN THE COURT OF APPEAL OF NEW ZEALANDCA544/2015[2016] NZCA 219BETWEEN FAI MONEY LIMITEDAppellantAND GAVIN CRAWLEY AND RICHARDANTHONY JOHNSTONRespondentsHearing: 4 May 2016Court: Randerson, Stevens and Wild JJCounsel: B D Gustafson for AppellantS I Perese for RespondentsJudgment: 24 May 2016 at 9:00 amJUDGMENT OF THE COURTA The appeal is allowed in part.B The cross-appeal is dismissed.C The appellant is entitled to judgment for the principal sum of $300,000 together with default interest and solicitor/client costs to be fixed by the High Court against both respondents jointly and severally as trustees of the Puketaha Trust and the Puketaha No. 1 Trust on the basis that they are liable only to the extent of the assets of those trusts.D The High Court judgment is varied to provide that, in the event the judgment in C is not satisfied out of the assets of the trusts, the appellant is entitled to have recourse to the personal assets of each of the respondents jointly and severally to the extent of $137,000 plus interest thereon at the rate specified in the Judicature Act 1908 from the date the Swanson property owned by the trusts was sold.E The respondents must jointly and severally pay to the appellant costs for a standard appeal on a band A basis with usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Randerson J)Table of ContentsPara NoIntroductionBackground factsThe relevant terms of the loan agreement and guaranteesThe loan agreementThe guaranteesWere the respondents in breach of the warranty or covenantrelied upon by FAI?Breach of cl 7.1(c) of the loan agreementBreach of cl 14.4(d)(ii) of the loan agreementWhat was the extent of loss sustained by FAI?Are the respondents personally liable for FAI's losses?DiscussionResult[1][11][17][17][19][21][21][33][37][42][50][66]Introduction[1] This appeal arises from a loan agreement entered into in December 2009 in which the appellant (FAI) advanced $300,000 to a solicitor, Mr Edward Johnston. The borrowing was guaranteed by the respondents as trustees of two trusts, thePuketaha Trust and the Puketaha No. 1 Trust (together "the Trusts"). Therespondents were also principal obligors under the loan agreement.[2] The respondent Richard Johnston is an accountant and the brother of Edward Johnston. The respondent Mr Crawley is Edward Johnston's father-in-law. When Edward Johnston defaulted under the loan agreement, notices of demand were served on him and on the respondents. The loan was not repaid. FAI issued proceedings seeking recovery of $386,267.96 as well as ongoing default interest and costs. After the issue of proceedings Edward Johnston was adjudicated bankrupt. The claim therefore proceeded only against the respondents.1[3] The case in the High Court proceeded on FAI's second amended statement ofclaim. Although this referred in detail to the terms of the loan agreement and the associated guarantees, it did not explicitly plead a direct claim against the respondents as principal parties to the loan or as guarantors of the debt. Rather, it alleged two separate causes of action:(a) Negligent breach of a warranty in cl 7.1(c) of the loan agreement about the accuracy of financial information in a statement of position provided by Edward Johnston to FAI before the loan was made; and(b) Negligent breach of a covenant in cl 14.4(d)(ii) of the loan agreement not to dispose of the assets of the Trusts otherwise than in the normal course of business.2[4] Both the loan agreement and the guarantees contained clauses limiting the liability of the respondents in their capacity as trustees. The main focus of the case in the High Court was whether personal liability on the part of the respondents could be established or whether any claim against them by FAI was limited to the assets of the Trusts. It was important to FAI to establish personal liability on the part of the respondents since, on the evidence, the principal asset of the Trusts was a residential property in Swanson occupied by Edward Johnston, the value of which was substantially exceeded by liabilities secured over it. We will call this the property.1 Two other companies, Seabreeze Trustees Limited and Johnston Associates Trustees Limited, were joined as third defendants in circumstances we detail below but, since they were in liquidation, they were not pursued by FAI.2 A third cause of action against the respondents was abandoned at trial.[5] FAI's claim was heard by Keane J who delivered judgment on 28 August 2015.3 He held:(a) Both causes of action against Mr Crawley must fail;(b) The claim under the first cause of action based on cl 7.1(c) was not established;(c) FAI was entitled to judgment on the second cause of action based on cl 14.4(d)(ii) against Richard Johnston but only to the extent of $137,000;(d) FAI was entitled to costs on a scale 2B basis against Richard Johnston and disbursements; and(e) Mr Crawley was entitled to costs against FAI on a scale 2B basis and disbursements.[6] FAI appeals against the High Court judgment, contending the Judge erred in:(a) Failing to give judgment in favour of FAI against both respondents forthe full amount of FAI's claim together with default interest and costsin accordance with FAI's contractual entitlement, irrespective ofwhether the respondents were personally liable or their liability was limited to the assets of the trust; and(b) Failing to find that both respondents were personally responsible tothe full extent of FAI's claim for the debt, default interest andsolicitor/client costs.[7] During the hearing before us, Mr Perese for the respondents accepted FAI was entitled to judgment against both respondents for the full amount of the debt owed under the loan agreement and guarantees together with interest at the default3 FAI Money Ltd v Johnston [2015] NZHC 2060.rate of 25.5 per cent and solicitor/client costs. This concession was on the basis thatthe respondents' liability was limited to the assets of the trust. We are satisfied therespondents could not resist FAI's claim on this basis since they were jointly andseverally liable for the payment of the loan as principal obligors under cl 14.2(b) of the loan agreement and cl 3.1 of the guarantees. As we have discussed at [3] above, the absence of a specific pleading on this issue may explain why the Judge made no finding on it. We invited counsel to agree upon the amount for default interest and costs and to file a memorandum. Unfortunately, agreement has not been reached. We will therefore enter judgment for the principal sum with interest and costs to be fixed by the High Court. For counsel's assistance we draw attention to this Court'sjudgment in Black v ASB Bank.4[8] The respondents deny FAI's contention that they have breached the warranty or the covenant relied upon by FAI and say they do not have any personalresponsibility for FAI's claims. Richard Johnston also cross-appeals against the finding that he is personally liable under the second cause of action to the extent of $137,000.[9] The issues on appeal are therefore:(a) Whether either or both the respondents breached the warranty and covenant relied upon by FAI;(b) If so, what is the extent of the loss; and(c) Are the respondents personally liable for any such loss in the sense that FAI may have recourse to their personal assets?[10] Before considering these issues, we will briefly set out the largely undisputed factual background and the relevant terms of the loan agreement and guarantees.4 Black v ASB Bank [2012] NZCA 384 at [69] to [107].Background facts[11] At the time of the loan, the Trusts owned the property in equal shares. In November 2009 Edward Johnston applied to FAI through a financial adviser for a 12 month loan in order to purchase a building in East Tamaki. At that time he supplied FAI with a statement of position dated 24 April 2009. It is not in dispute that the details provided in the statement grossly misrepresented not only the net value of the family home but also the extent of the net assets held by Mr Johnston, his wife and the Trusts. For example, it was represented the property had a value of $1.5 million and that it was not subject to any liabilities. The property was worth substantially less than $1.5 million and it transpired that, at December 2009, at least $3 million was owed to the Westpac bank under a mortgage secured over the property.[12] In reliance on the accuracy of the statement of position, FAI made a loan offer to Edward Johnston on 15 December 2009. The loan was for $300,000 including a loan fee payable to FAI of $27,000. The interest rate was 17.5 per cent per annum with a default rate of 25.5 per cent per annum. FAI required first rankinggeneral and specific security agreements over Edward Johnston's legal practiceincluding present and after-acquired debtors. As well, there was to be an all-obligations deed of guarantee and indemnity given by the Trusts.[13] Prior to the final execution of the loan documents FAI was supplied with a copy of the certificate of title for the property which showed there was a mortgage tothe Westpac bank registered in 2003 which had not been discharged. FAI's witnessesaccepted at trial that they had overlooked the registration of this mortgage and that they had not taken any steps to verify its terms or the extent, if any, of any debt outstanding to the Westpac bank. Rather, they said, they relied on the statement of position and the warranty under the loan agreement as to the accuracy of the information supplied in the statement.[14] The loan documents were executed on behalf of the Trusts on 21 December 2009 and 23 December 2009 respectively. The documents were signed personally by Edward Johnston and Richard Johnston. Mr Crawley did not sign any of thedocuments himself. Instead, all relevant documents were signed on his behalf by Edward Johnston acting under a power of attorney dated 1 December 2003 whichenabled him to exercise Mr Crawley's powers as trustee when Mr Crawley wastemporarily overseas or was incapacitated. Thereafter, FAI made the advance as agreed.[15] On 4 August 2011, the loan agreement was varied by deed. On that occasion Edward Johnston signed the deed for both trustees as their attorney. By that time, the loan balance had increased to $386,267.96. On the same day, Edward Johnston executed an admission of claim accepting liability for the increased sum. He made that admission on behalf of the respondents as their attorney, but qualified the admission by stating their liability was to be limited to the assets of the Trusts.[16] FAI began enforcement action against Edward Johnston and the respondents in late 2011. Then, on 17 February 2012, without the knowledge of FAI, the property was sold for $900,853.86 to two companies associated with Richard Johnston as trustees of a trust named the Ullaru Trust. It appears the sale was made under pressure from Westpac. As a result of the sale, Westpac was paid $898,679.65 in partial discharge of its first mortgage securing a collateral loan. The property was sold by Edward Johnston, again using his power of attorney for both Richard Johnston and Mr Crawley. Richard Johnston accepted he knew the sale was occurring although he claimed it was presented to him by Edward Johnston as a fait accompli. For his part, Mr Crawley said he had no knowledge of the FAI loan or the subsequent sale of the property.The relevant terms of the loan agreement and guaranteesThe loan agreement[17] Clause 7.1 of the loan agreement relevantly provides:7.1 General: The Borrower and each Guarantor represent and warrant that:(c) Financial Information: the financial information most recently forwarded to FAI disclosing the financial condition of the Borrower and each Guarantor presents a true and fair view of the condition of the relevant parties at the date of that information, and there has been no substantial adverse change in that condition since the date of that information.[18] Clause 14.4 materially provides:14.4 Trustees: Where the Borrower or any Guarantor is or is described (in this Agreement or elsewhere) to be a trustee of a trust, each such party warrants that:(a) Authority: they have the power to enter into this Agreement in their capacity as a trustee of the trust, and do so for the benefit of and for the purposes of the trust;(b) Capacity: they enter into this Agreement both in their personal capacity and as a trustee of the trust;(c) Recourse: (in addition to the charge created by this Agreement) FAI will have full recourse to their personal assets, subject only to any trustee limitation provision included in this Agreement or the Securities;(d) Negative Covenants: they will not permit, without the prior written consent of FAI:(ii) any of the trust's assets to be disposed of, transferred,distributed, loaned or advanced otherwise than in the normal course of the business of the trust;in each case during the currency of this Agreement;(f) Limitation of Trustee Liability: Notwithstanding any trustee limitation provision included in this Agreement or the Securities, FAI will have recourse to the personal assets of any trustee entering into this Agreement where FAI is unable to recover any part of the Loan, any Fees and any interest (whether accrued or compounded) under this Agreement or the Securities as a result of any breach of trust by that trustee, solely or together with any person, any lack of capacity, power or authority of that trustee to enter into this Agreement or to incur any indebtedness for the Loan, any Fees and any interest (whether accrued or compounded), or any dishonesty of that trustee.The guarantees[19] The guarantees are expressed in the form of a deed of guarantee and indemnity.5 Certain undertakings are given in cl 6. Relevantly:6 UndertakingsThe Guarantor undertakes to the Lender that it will:6.1.1 Swanson Road Property: not encumber in any way, including by way of a mortgage or other charge, the property situated at 35 Puketaha Road, Swanson as comprised of and described in Certificate of Title 164285;[20] Clause 18 of the guarantees provides:18 Trustee Limitation:18.1.1 Limitation: No Trustee will be liable to pay or satisfy any obligations or liabilities under this Deed other than out of the assets of the Puketaha Trust in respect of which that Trustee has entered into this Deed and in no circumstances will that Trustee be called upon or liable to satisfy any of those obligations or liabilities out of its personal assets.18.1.2 Enforcement: The Lender may only enforce its rightsagainst a Trustee to the extent of that Trustee's right ofindemnity out of the assets held by it in respect of the Puketaha Trust and provided that, if a Trustee acts fraudulently, negligently, or in breach of trust with a result that:(a) that trustee's right of indemnity, exoneration orrecoupment of the trust property of the Puketaha Trust; or(b) the actual amount recoverable by that Trustee in exercise of those rights,is reduced in whole or in part or does not exist, then to the extent that such right or the amount so recoverable is reduced or does not exist, the Trustee may be personally liable.5 Separate guarantees in identical form were executed for each Trust.Were the respondents in breach of the warranty or covenant relied upon by FAI?Breach of cl 7.1(c) of the loan agreement[21] In the High Court and in this Court the respondents did not challenge FAI'scontention that the statement of position was seriously inaccurate. Rather, Mr Peresechallenged the Judge's finding that the respondents were in breach of therepresentation and warranty under cl 7.1(c) of the loan agreement.6 He repeated the submission the respondents unsuccessfully raised in the High Court that the warranty under cl 7.1(c) was confined to financial information the respondents gave about themselves and did not extend to information Edward Johnston gave about himself.[22] We do not consider this argument is available on the facts since the information Edward Johnston provided to FAI in the statement of position included specific information about the property owned by the Trusts of which therespondents were the trustees. We are satisfied that the phrase in cl 7.1(c) "thefinancial condition of the Borrower and each Guarantor" is sufficiently wide toinclude both personal assets of the guarantors and any assets they hold as trustees. The financial condition of the guarantors would be enhanced to the extent of any assets of the Trusts since the trustees would ordinarily be entitled to an indemnityfrom those assets. We note too that the term "Borrower" under the loan agreement isdefined as including the Guarantors. Here, the evidence established that the representation that the property owned by the Trusts was worth $1.5 million and was unencumbered was relied upon by FAI when it agreed to make the loan. In fact, there was no equity in the property at all since at least $3 million was owed to theWestpac bank at the time of FAI's loan.[23] Mr Perese submitted that FAI knew or ought to have known the correct position of the equity in the property since it had received the copy of the certificate of title to the property before agreeing to make the loan. The existence of the mortgage to Westpac was recorded and should have put FAI on inquiry to establishthe correct position. As noted earlier, FAI's witnesses accepted the title was madeavailable and that no inquiries were made about the Westpac mortgage.6 High Court Judgment, above n 3, at [47]–[49].[24] Mr Finnigan of FAI recommended the loan be approved and said he was not made aware of the Westpac mortgage. He relied on the warranty of the accuracy of the statement of position. His undisputed evidence was that the loan would not have been made had he known the true position or, alternatively, he would have insisted on further security.[25] Whether FAI had the means of establishing the true position may be relevant to the assessment of damages and the impact of any contributory conduct on their part. But we are satisfied this cannot be a defence to its breach of warranty claim. The purpose of requiring the warranty was to place responsibility on the borrower and any guarantors to provide to FAI accurate information about their financial position, which the borrower and guarantors are best placed to provide.[26] The Judge concluded that Richard Johnston was in negligent breach of the warranty under cl 7.1(c).7 He relied on the unchallenged evidence of an expert witness called by FAI, Mr Nolan, that a prudent professional trustee such as Richard Johnston should first have obtained from his brother all that he needed to verify the accuracy of the statement of position and, if not satisfied, the warranty should not have been given. Richard Johnston had not done either of those things. The Judge found he did not even appreciate that he had made such a warranty. That could only mean he did not read the documents with any care. Had he reviewed the statement of position, he would have seen at a glance that it contained highly material inaccuracies. Keane J found this failure resulted in FAI accepting the statement of position at face value.[27] Mr Perese did not seriously challenge these findings except in relation to thecause of the loss. We are satisfied the evidence supports the Judge's findings in allrespects, subject however, to our later conclusions about FAI's contribution to theloss.[28] The Judge took a different view about Mr Crawley's responsibility.Mr Crawley's evidence was remarkable for its brevity. It was that he had noknowledge whatsoever of the loan or the guarantee and no knowledge of the later7 High Court Judgment, above n 3, at [53]–[57].sale of the property. He was not asked to sign any documents. He first becameaware of these things only when FAI's court proceeding was served. Incross-examination he admitted he had no knowledge of the business carried on by Edward and Richard Johnston and never had any meetings or discussions about the property. He accepted he was not really aware of his responsibilities as a trustee. Mr Crawley was a flight attendant at the time the documents were executed by Edward Johnston under the power of attorney but Mr Crawley was unable to confirm whether he was overseas at the time the power of attorney was used to execute the loan documents. Although Mr Crawley offered during his evidence to check this point, Mr Perese does not challenge the Judge's finding that Mr Crawley's absenceoverseas was not established.[29] Keane J considered that the power of attorney Mr Crawley granted to Edward Johnston was authorised by ss 29 and 31 of the Trustee Act 1956.8 In particular, s 31 authorises a trustee to delegate trust powers or duties during any temporary absence from New Zealand or temporary incapacity. The power of attorney at issue was expressed in those terms. The Judge said Mr Crawley was entitled to rely on Edward Johnston exercising the power delegated only in the circumstances defined. The Judge also referred to s 31(3) of the Trustee Act which provides a defence to the donor of a power of attorney from a claim of a beneficiary of the trust where the donor proves the donee was appointed in good faith and without negligence. Keane J found on the facts FAI could not even begin to establish that Mr Crawley was ever distinctly negligent.[30] Mr Perese accepted the general rule that a trustee may not delegate his or her duties or powers. There are several exceptions to this general rule, namely when delegation is specifically permitted by the trust deed or by statute or is practically unavoidable and the particular agent is employed in the ordinary scope of his or her business.9 The delegation of trustees' powers and duties authorised by s 31 of theTrustee Act is strictly limited and it was not established on the evidence that8 High Court Judgment, above n 3, at [66]–[72].9 Commissioner of Inland Revenue v Newmarket Trustees Ltd [2012] NZCA 351, [2012] 3 NZLR 207 at [49]–[51].Edward Johnston exercised Mr Crawley's powers as trustee within those authorisedlimits.[31] It follows that Mr Crawley did not establish that the execution of the loandocuments under the power of attorney was within Edward Johnston's delegatedauthority. We are satisfied Mr Crawley had no appreciation of his responsibilities as a trustee of the Trusts and took no steps to fulfil his responsibilities in that respect. He was obliged to familiarise himself with the affairs of the Trusts, to take care of their assets, and to act in the best interests of the beneficiaries. Specifically in relation to the matters at issue, he was obliged to ensure he was kept informed about the intention to borrow money from FAI, to satisfy himself this was in the best interests of the beneficiaries, and to verify the accuracy of the details in the statement of position before executing or authorising the execution of the loan documents containing the warranty relied upon by FAI. As with Richard Johnston, he did none of those things and we are satisfied he was negligent in those respects. The protection expressed in s 31(3) of the Trustee Act is not available since it applies only in suits brought by a beneficiary.10[32] As the Judge noted, unlawful behaviour between donor and donee will not prevent the creation of an obligation between donor and a third party dealing with the agent in good faith: National Australia Finance Ltd v Fahey.11 It follows that the terms of the loan agreement and the guarantees bind Mr Crawley despite the power of attorney being exercised outside its terms.Breach of cl 14.4(d)(ii) of the loan agreement[33] FAI contended that the sale of the property in February 2012 to trustees of the Ullaru Trust at an undervalue and without its knowledge or consent amounted to a breach of the covenant in cl 14.4(d)(ii) of the loan agreement. It was sold without any marketing at a price of $900,853.86 (nearly $600,000 below the value Edward Johnston had ascribed to it in the statement of position). This occurred soon10 Nor could the protection under s 73 of the Trustee Act 1956 be invoked since it is dependent upon the trustee acting honestly and reasonably.11 National Australia Finance Ltd v Fahey [1990] 2 NZLR 482 (CA).after FAI made its demands. The undisputed evidence was that the market value of the property at the time was $1,150,000.[34] The sale was made by Edward Johnston using powers of attorney given to him by Richard Johnston and Mr Crawley. It will be recalled that Westpac was paid $898,679.65 from the sale proceeds in partial discharge of the debt under its first mortgage.[35] The Judge rejected Richard Johnston's evidence that he was unaware of thesale until Edward Johnson presented him with a fait accompli.12 He found that Richard Johnston was negligent in acceding to the sale knowing it was to the prejudice of FAI. In respect of Mr Crawley, Keane J found there was no evidence he knew about the sale, let alone that he enabled it to occur in breach of his obligations.[36] Mr Perese did not challenge the Judge's findings in respect ofRichard Johnston. We are satisfied they were proper findings on the facts. However,we accept Mr Gustafson's submission for FAI that Mr Crawley could not rely on hislack of knowledge to resist the allegation that he had acted in negligent breach of the obligation not to dispose of the property without the consent of FAI. For the reasons discussed at [31] above, Mr Crawley did nothing to fulfil his obligations as a trustee. We find he was negligent and in breach of the covenant not to sell the property without FAI's consent. It was his obligation to ensure he was aware of the proposedsale and to satisfy himself it was a proper transaction consented to by FAI. He did none of those things. There is no dispute that the sale was not in the normal course of business of the Trusts.What was the extent of loss sustained by FAI?[37] The Judge did not make any clear finding on this in relation to the first cause of action.13 He noted FAI's contention that it lost the opportunity to decline to makethe advance or to require other security. But he found FAI did not say it would have declined the advance.14 We accept Mr Gustafson's submission that Mr Finnigan's12 High Court Judgment, above n 3, at [77]–[80].13 High Court Judgment, above n 3, at [87].14 High Court Judgment, above n 3, at [83]–[84].evidence was clear on this point and was not seriously challenged. He did refer to both possibilities but, in the circumstances, FAI would have had no choice other than to decline the loan since there was no evidence Edward Johnston could provide any further security. If the true position had been disclosed, there was no equity in the property. It follows that FAI's loss on the first cause of action was the full amount ofthe loan with interest and its legal costs.[38] The Judge considered FAI must carry some responsibility for the loss since it had the certificate of title showing the Westpac mortgage and a further inquiry could easily have established Westpac had a priority of $1.1 million.15[39] The issue of contribution does not arise in respect of FAI's claim against the respondents as principal obligors but it is potentially relevant to FAI's claim fornegligent breach of the warranty (the first cause of action). As we have determined below that the respondents are not personally liable under the first cause of action, it is not strictly necessary for us to reach a conclusion on this point. But if it were necessary to do so, we would have found that FAI had contributed to the loss to the extent of 50 per cent. Whether this is characterised as contributory negligence or as an equitable share of responsibility for the loss is immaterial for these purposes. We are satisfied the contribution issue was sufficiently before the High Court despite the absence of detailed pleadings on this point other than the general allegation that FAI was the author of its own misfortune.[40] In relation to the later sale of the property (the second cause of action), thereis no challenge to the Judge's finding that FAI's loss was $137,000 made up asfollows:Actual market value $1,150,000Forced sale value: 90% of market value $1,035,000Less Westpac mortgage $ 898,000________Loss $ 137,00015 High Court Judgment, above n 3, at [86].[41] No issue of contribution to this loss arises since FAI was unaware of the sale until after it occurred.Are the respondents personally liable for FAI's losses?[42] Given his conclusion that Mr Crawley was not in breach in either of the respects alleged by FAI, the Judge made no finding of personal liability against Mr Crawley in the sense that FAI was entitled to recourse against his personal assets.He reached the opposite conclusion in respect of FAI's ability to have recourse toRichard Johnston's personal assets in respect of the award of $137,000 under thesecond cause of action.16[43] This is a critical issue on appeal since the respondents say FAI has no ability to seek recourse against their personal assets. On the other hand, FAI supports theJudge's conclusion it could have recourse to Richard Johnston's personal assets butsays the Judge should have reached this conclusion in respect of Mr Crawley as well.[44] The Judge considered both cl 14.4(d)(ii) of the loan agreement and cl 18.1.2 of the guarantees. Addressing the former, the Judge said:17[35] Clause 14.4(f), therefore, requires FAI to establish two things. First, that the trustees were in breach of trust or lacked relevant capacity or authority or were dishonest. Secondly, that, as a result of that breach, they deprived FAI of the ability to recover all or some of the debt then owed from the assets of the two trusts. (On the present pleading that claim is confined to one in dishonesty, which FAI does not pursue.)[45] He considered cls 18.1.1 and 18.1.2 to be more obviously prescriptive, noting that cl 18.1.2 was awkwardly drawn. Keane J then said:18[38] Despite the difference between these two clauses and cl 14.4(f), I consider that they are essentially to the same effect. FAI is entitled to recourse out of the personal assets of a trustee only if, and to the extent that, a qualifying breach by the trustees deprived it of recourse to the trust assets.16 High Court Judgment, above n 3, at [90].17 High Court Judgment, above n 3.18 High Court Judgment, above n 3.[39] To the extent that there is any difference between cl 14.4.(f) and the two clauses, and one is more permissive than the other, FAI is entitled under cl 23.3 of the loan agreement to elect on which it will rely. Clause 23.3 says"in the event of any conflict between the provisions of this Agreement andany of the securities, then FAI shall determine in their absolute discretionwhich prevails".[40] Clause 14.4(f) may appear more permissive, but FAI does not contend that the trustees lacked capacity, power or authority, or rely on dishonesty; and I have denied FAI the ability to contend for a breach of trust.FAI does have recourse to the trustees' personal assets under cl 18.1.2, if itcan establish that its lack of recourse to trust assets resulted from their negligence.[46] The reference in [40] of the High Court judgment to FAI being denied the ability to rely on a breach of trust in terms of s cl 14.4(f) arises from an attempt by FAI during the hearing to amend its pleadings. The Judge considered it was too late to amend and that it would expose the respondents to a further source of liability in an unhelpfully abstract way.19[47] We are satisfied the Judge ought to have permitted an amendment so that FAI could rely on breach of trust. The pleaded allegation was negligence in the capacity of the respondents as trustees. In the circumstances, this amounts to a breach of trust. The allegation was not one of breach of trust generally. Rather, it wasconfined to the respondents' failure to verify the accuracy of the statement ofposition and allowing the later sale to proceed at an undervalue and without FAI's consent. The respondents' failures in these respects constituted a failure in theirduties as trustees. Mr Perese was unable to persuade us that the respondents would suffer any prejudice if an amendment were granted in those terms or that the respondents would have dealt with the case any differently. To the extent necessary, we grant an amendment to permit FAI to rely on breach of trust in the respects described in this paragraph.[48] In respect of cl 18.1.2 of the guarantees, Mr Gustafson submitted in summary:(a) Properly interpreted in the light of its commercial purpose, the clause meant that if the respondent trustees were negligent in a way that19 High Court Judgment, above n 3, at [31].caused FAI loss in the recovery of the debt then FAI could have recourse to the personal assets of the respondents.(b) It did not matter whether the acts of negligence occurred prior to the grant of the loan, at the time of the loan, or subsequently.(c) If the negligent acts of the respondents had the result that their right of indemnity from the Trusts' assets was reduced in whole or in part or that the right "does not exist" then FAI could have recourse to theirpersonal assets.(d) Here, the respondents' negligence included their failure to verify theaccuracy of the statement of position; allowing the property to be charged to such an extent that it was worthless as a security; and allowing the subsequent sale to occur at an undervalue.[49] As to cl 14.4(f), Mr Gustafson submitted it was drawn more widely than cls 18.1.1 and 18.1.2. The conduct of the respondents amounted to a breach of trust within the meaning of cl 14.4(f). The breach of warranty as to the accuracy of the statement of position had resulted in FAI advancing the money and, but for that breach, it would not have done so. The result of the breach of trust in this respect had resulted in FAI being unable to recover any part of the loan, or its fees and interest. FAI was therefore entitled to have recourse to the personal assets of the respondent trustees. This interpretation was, counsel submitted, consistent with the literal words of the clause and the commercial purpose of the loan agreement.Discussion[50] Counsel addressed us on the approach to interpreting the contracts in question. We were referred to the majority judgment of the Supreme Court inFirm PI 1 Ltd v Zurich Australian Insurance Ltd, where the general approach was summarised in these terms:2020 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 (footnotes omitted).[60] Given the issues in the case, it is not necessary that we discuss the approach to contractual interpretation in any detail. It is sufficient to say thatthe proper approach is an objective one, the aim being to ascertain "themeaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been availableto the parties in the situation in which they were at the time of the contract".This objective meaning is taken to be that which the parties intended. Whilethere is no conceptual limit on what can be regarded as "background", it hasto be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning.[61] The requirement that the reasonable person have all the background knowledge known or reasonably available to the parties is a reflection of the fact that contractual language, like all language, must be interpreted within its overall context, broadly viewed. Contextual interpretation of contracts has a significant history in New Zealand, although for many years it was restricted to situations of ambiguity. More recently, however, it has been confirmed that a purposive or contextual interpretation is not dependent on there being an ambiguity in the contractual language.[51] The majority in Firm PI also observed that the scope for resort to relevant background was itself contextual.21 Relevantly to the present context, the judgment of the Supreme Court of the United Kingdom in Re Sigma Finance Corp (in admin rec) was also referred to.22 There, the interpretation of a security trust deed was in issue. Lord Collins said that the background was not relevant "except in the most generalised way", and added:23Where a security document secures a number of creditors who have advanced funds over a long period it would be quite wrong to take account of circumstances which are not known to all of them. In this type of case it is the wording of the instrument which is paramount. The instrument must be interpreted as a whole in the light of the commercial intention which may be inferred from the face of the instrument and from the nature of thedebtor's business. Detailed semantic analysis must give way to business common sense [52] In Firm PI, the majority went on to consider the scope of commercial purpose and business common sense.24 We do not need to canvass all of the materialdiscussed except to note the majority's acceptance of the importance of thecontractual language when interpreting a contract. For example:2521 At [62].22 Re Sigma Finance Corp (in admin rec) [2009] UKSC 2, [2010] 1 All ER 571.23 Re Sigma, above n 22, at [37] per Lord Collins. Lord Hope and Lord Mance concurred with Lord Collins' judgment.24 Firm PI, above n 20, at [77]–[79] and [88]–[93].25 Firm PI, above n 20, at [88] (footnotes omitted).Where contractual language, interpreted in the context of the contract as a whole, has a natural and ordinary meaning, the courts will generally giveeffect to that as they "do not easily accept that people have made linguistic mistakes, particularly in formal documents". The "primary source forunderstanding what the parties meant is their language interpreted inaccordance with conventional usage". It requires a "strong case" to persuadea court that something must have gone wrong with the language.[53] And further:26[93] All this means that where contractual language, viewed in the context of the whole contract, has an ordinary and natural meaning, a conclusion that it produces a commercially absurd result should be reached only in the most obvious and extreme of cases.[54] More recently the following observations by Lord Neuberger in the United Kingdom Supreme Court's decision in Arnold v Britton in the context of a dispute over a lease are instructive:27[15] When interpreting a written contract, the court is concerned to identify the intention of the parties by reference to "what a reasonable personhaving all the background knowledge which would have been available to the parties would have understood them to be using the language in thecontract to mean", to quote Lord Hoffmann in Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101, para 14. And it does so by focussing on the meaning of the relevant words, in this case clause 3(2) of each of the 25 leases, in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the lease, (iii) the overall purpose of the clause and the lease, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidenceof any party's intentions.[55] In this case, the interpretation of any clauses limiting the liability of trustees must be considered against the liability that the law would otherwise impose on trustees. The general rule is that trustees are personally liable for breach of their duties as trustees and for debts or other obligations they incur on behalf of the trusts. However, the ability of creditors to have recourse to the personal assets of trustees may be constrained by any agreement by the person to whom the liability is owed(such as a lender) to limit the trustee's personal liability.2826 Firm PI, above n 20, at [93] (footnote omitted).27 Arnold v Britton [2015] UKSC 36, [2015] AC 1619. Lord Sumption and Lord Hughesconcurred with Lord Neuberger's judgment.28 Andrew Butler Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009) at 441–442 citing Muir v City of Glasgow Bank (1879) 4 App Cas 337.[56] We first address cls 18.1.1 and 18.1.2 of the guarantees. We agree with Keane J that these clauses are not well drawn. They are to be read together and in the context of the entire document as well as the associated loan agreement. It was not suggested any background material should be taken into account. Clause 18.1.1 is explicit in declaring that in no circumstances will the trustees be called upon tosatisfy any obligation or liability under the deed out of personal assets. The trustees'obligations or liabilities are to be satisfied only out of the assets of the trust.[57] This limitation of the trustees' liability is reinforced by cl 18.1.2, whichprovides that FAI as the lender may only enforce its rights against the trustees to theextent of the trustees' right of indemnity from the assets of the Trusts. But there is a proviso or exception to this general limitation where the trustees act fraudulently, negligently or in breach of trust with either of the results specified in sub-clauses (a) and (b). These sub-clauses also focus on the extent to which the trustees' right of indemnity from the trust property is reduced in whole or in part or does not exist. Where this state of affairs exists, the trustees may be personally liable.[58] We do not consider cl 18.1.2 has any application in respect of the first cause of action. We are satisfied the clause only applies to the actions of the trustees after the loan is made.[59] These are our reasons. First, in their natural and ordinary meaning, the words apply prospectively and are not apt to cover the actions of the trustees prior to the loan being made. Although Mr Gustafson did not finally press the submission thyat cl 18.1.2 could extend to breach of duty by the trustees prior to the grant of the loan, the parties could not have intended there would be liability extending for an indefinite period prior to the loan being made. Second, the clause focuses on any actions of the trustees that could impair their right of indemnity from the assets of the Trusts. This suggests that the clause is aimed at imposing personal liability on the trustees where, for example, their negligence has resulted in the diminution of the value of trust assets or their disposal at an undervalue. Again, this must refer to actions taken after the making of the loan. It is a considerable and unjustified stretch of the natural meaning of the words to construe them as applying to acts by the trustees which caused FAI to enter into the loan in the first place.[60] Third, it is important to consider the security documents as a whole. Any responsibility by the respondents for their conduct prior to the making of the loan is dealt with by the warranty under cl 7.1(c) of the loan agreement. This supports our view that cl 18.1.2 is to be construed as applying only to the conduct of the respondents after the loan is made, and which has the effect of diminishing, impairing or losing altogether their right of indemnity or the amount they may recover from the assets of the Trusts.[61] We do not overlook the words "or does not exist" with regard to the right ofindemnity but we do not consider these words support Mr Gustafson's argument thatthe right of indemnity did not exist because the assets of the Trusts were worthless.The words "or does not exist" are apt to refer to actions by a trustee who puts it outof his or her power to enforce a right of indemnity, such as by agreeing not to seek indemnity.[62] However, we are in agreement with the Judge that cl 18.1.2 applies to the second cause of action in which the trustees negligently disposed of the property at an undervalue without FAI's consent. This action by the trustees was after the loanwas made and falls naturally within the meaning of cl 18.1.2 for the reasons already discussed.[63] We accept that cl 14.4 of the loan agreement is structured differently and more widely than cls 18.1.1 and 18.1.2 of the guarantee. Under cl 14.4(c), FAI may have recourse to the personal assets of the trustees subject only to any limitation provision included in the loan agreement or the other securities (which, by definition, include the guarantees). A further distinction is that cl 14.4(f) does notfocus on the impairment of the trustees' right of indemnity in respect of the assets ofthe Trusts. Rather, it applies directly to identified actions of the trustees which result in FAI being unable to recover the loan, fees and interest.[64] Despite these differences, we do not consider cl 14.4(f) applies so as to enable FAI to have recourse to the personal assets for the acts of the trustees prior to or at the time the loan was made. There is one exception to this: loss arising due to lack of capacity, power or authority of the trustees to enter into the loan (which doesnot apply here). Our reasons for this conclusion are substantially the same as those discussed in respect of cl 18.1.2 of the guarantee at [58]–[59] above.[65] We conclude that FAI is not entitled to have recourse to the personal assets of the respondent trustees under the first cause of action but FAI may have recourse to the personal assets of both respondents under the second cause of action.Result[66] The formal orders are:(a) The appeal is allowed in part.(b) The cross-appeal is dismissed.(c) The appellant is entitled to judgment for the principal sum of $300,000 together with default interest and solicitor/client costs to be fixed by the High Court against both respondents jointly and severally as trustees of the Puketaha Trust and the Puketaha No. 1 Trust on the basis that they are liable only to the extent of the assets of those trusts.(d) The High Court judgment is varied to provide that, in the event the judgment in C is not satisfied out of the assets of the trusts, the appellant is entitled to have recourse to the personal assets of each of the respondents jointly and severally to the extent of $137,000 plus interest thereon at the rate specified in the Judicature Act 1908 from the date the Swanson property owned by the trusts was sold.(e) The respondents must jointly and severally pay to the appellant costs for a standard appeal on a band A basis with usual disbursements.Solicitors:Macky Robertson Limited, Auckland for Appellant