VERO LIABILITY INSURANCE LIMITED v HEARTLAND BANK LIMITED (FORMERLY MARAC FINANCE LIMITED) CA712/2013 [2015] NZCA 288

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 ZEALANDCA712/2013[2015] NZCA 288BETWEEN VERO LIABILITY INSURANCELIMITEDAppellantAND HEARTLAND BANK LIMITED(FORMERLY MARAC FINANCELIMITED)RespondentHearing: 26 May 2015Court: Randerson, Stevens and White JJCounsel: C T Walker for AppellantR J Hollyman and T P Mullins for RespondentJudgment: 7 July 2015 at 11:30 amJUDGMENT OF THE COURTA 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 asidesave that the order requiring the appellant to pay Mr Jordan's costs isundisturbed.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 ContentsPara NoIntroductionBackground factsRapson's funding from Allied FinanceDaewoo's collapseMr Atkinson becomes involvedProposals to recover the Rapson debtProposals discussed at the Credit Committee meeting on7 April 2003CBC's change of planThe Credit Committee meeting of 13 May 2003Subsequent events up to January 2004Establishing the 464768 accountLending under the 464768 accountMatters come to lightDid Mr Atkinson act dishonestly?The Judge's findingDid MARAC know about the 464768 account?DiscussionDid Mr Atkinson act with the clear intent of causing loss toMARAC?The meaning of "clear intent"The Judge's conclusions on the issue of intent to cause lossOur conclusions on the issue of intent to cause lossProof of lossThe second judgment (quantum)ConclusionsCosts issuesDisposition[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 second1 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 seniorexecutives, 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 disclosethis 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 Losssustained 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 hadcommitted acts of dishonesty and that he had done so with the clear intent to cause3 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 thefour 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 inClayton'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 factsRapson's funding from Allied Finance[9] The general narrative is not in dispute and is drawn substantially from theJudge'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 andother collateral security. MARAC's internal stock auditors are required to visitdealers 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 financialcollapse which posed a real threat to Rapson's viability. Daewoo's collapse revealedserious 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'sCredit Committee were concerned about the level of the Rapson debt.7 As the Judgefound, MARAC's ongoing concern was centred on recovery of the Floorplan debtand avoiding further exposure for MARAC.86 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 CreditCommittee 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'sCEO 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 CreditCommittee, the MARAC Board and Rapson's managing director Mr RussellBurling. 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. Underthe latter form, MARAC issued letters of credit to Rapson's bankers and advanced9 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 ofcredit 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 vehiclestock 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 Ssangyongdistribution 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 millionFloorplan debt $1.25 millionTerm loan $1.75 millionImport 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 andL/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 thelarger 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 monthsThe 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 implicationsManagement 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 thesubsequent opening of the 464768 account was a natural step in implementingMARAC's strategy to keep Rapson trading.1312 Liability judgment, above n 2, at [34].13 At [35].[20] The Judge found that the Credit Committee considered the best prospect forrepayment 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 themeeting on that date record that management was "to continue to closely monitor the position (cashflow/floorplan) to ensure no deterioration in our position". Regularverbal 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 regardingthe 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 centcovered for any imports. I have concluded that Mr Jolliffe's recollection is correct and, given the serious nature of Marac's exposure on the Rapsonaccount, 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 MARACfor bad debt. The minutes also record that documents for MARAC's 50 per centshareholding in Rapson Australia had been executed. The Chairman asked for further advice on possible recoveries via both the New Zealand company and Australian shareholding.1615 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 alsorecord 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.17Establishing 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 systemknown 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 inliquidation 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 aposition to do so and she accepted Mr Jolliffe's evidence that he knew nothing about17 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 totime 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 wasincreased to $1.833m, in excess of Mr Atkinson's authority of $1.5m. ByFebruary 2005, the credit limit had been increased to $4,537,160.23 From thepoint that Mr Atkinson's authority was increased to $3m the credit limit ofthe 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 ofJanuary and December 2006.24 From mid-2008 the account was virtually21 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.26Mr Atkinson made no attempt to dispute the evidence adduced by MARAC'switnesses 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 wassatisfied Mr Atkinson did not bring this lending to Mr Jolliffe's attention after theevent 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 meetings25 At [59].26 See [37] below.27 These were meetings of MARAC's general managers having responsibility for various separatefunctions 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 forMARAC Investments Ltd. This included reports on progress on the debt-for-equityswap. Mr Atkinson's reports for 2005, 2006, 2007 and 2008 also referred to RapsonNew 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 notacting as an honest person would in the circumstances".2928 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. Ifby ordinary standards a defendant's mental state would be described asdishonest, 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 increasedexposure. She considered it very likely that he would have lost his job inconsequence. 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 ballooning30 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] citingBarlow 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 areport summarising "the entire Rapson position", Mr Atkinson'sreport 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'sexplanation 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 inMr Atkinson's position would have volunteered to Mr Flood that hehad 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 assumedthat 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 and34 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 creditwithout 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'sfinding 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 thatthe Judge's finding of dishonesty was wrong. We take into account that the Judgesaw 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 notdisputed 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 itdoes not follow that MARAC's employees at a more senior level were aware of theextent and nature of the lending. Second, the Credit Committee generally supportedRapson 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'sevidence, accepted by the Judge, that the Credit Committee adopted a cautiousapproach given Rapson's past history of poor performance and that the Committeeauthorised further lending to Rapson only on strict conditions, as Mr Atkinson hadhimself proposed. In particular, there was to be no further "downside" and the lettersof 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 Bythat 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 bythe 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 trustedexecutive, 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 464768account were well in excess of Mr Atkinson's delegated authority throughout theperiod 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 fromthe Credit Committee either before the increased lending or at least under MARAC'shindsight 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 theCredit Committee or of the general managers or to MARAC's Board but he did notdo 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 wasa 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 fordealing 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 Sovereignaccounting system or his handwritten notes on Rapson's letter of request. Theseshowed 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'sevidence 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 wasnot 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 positionin the company and we consider it likely that the second signatories relied on thatand 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 notrequired to call them to prove dishonesty on Mr Atkinson's part. Calling thesewitnesses 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's38 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'srequest 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 thelatter's steps to reconcile the advances with vehicles sold by Rapson suggests there isno 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 nodishonesty 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 from2005 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 wasacknowledged 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 thatcoverage 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 requiringthat 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 employeeintended to cause loss. But proof of intent to cause loss does not require41 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 notconsistent 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 earlierfinding 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 conductin this respect as assisting in identifying intent in relation to the unauthorisedlending. We accept Mr Walker's submission that the Judge was wrong to conclude45 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 Judgediscounted Mr Hershberger's evidence finding that it was "distinctly odd" that hewould 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 regardMr 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 was48 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 onbehalf 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 continuedadvances and considered he was "simply postponing the inevitable".51[77] The Judge's finding on this point is significant and requires review. As wehave 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 providedsubsequent 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 aclear intent on Mr Atkinson's part to cause MARAC loss. Rather, they demonstratea 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 criticalfour 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 classicembezzlement cases where the employee's gain is inevitably the employer's loss. Totake 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 thatMARAC's loss was the outcome of his mismanagement of the file, not that heintended loss to occur. Indeed, he denied any deliberate attempt to conceal or to57 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 directedtowards recovery of MARAC's debt, however inadequately he may have approachedhis duties. His conduct was consistent with a belief (most likely misguided) thatthrough continued trading and Rapson's Australian operation the debt wouldeventually 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 wasunsatisfactory.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, thebalance 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 wouldhave closed the account immediately and demanded repayment. If it had done so, Mr Flood's evidence was that MARAC would have obtained substantial repaymentsince Rapson's accounts had shown at earlier stages that there was significantinventory.[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 causesignalled by words such as "caused by".62 In comparison, expressions suchas "arising out of" are regarded as being much broader, not requiring such a close causal nexus. The expression "consequent upon", used in thisoperative clause, is one that carries a both causative and sequential connotation but does not require a close causal connection.6360 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 therequirement 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 asingle 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 ofrelated acts of dishonesty committed more than 48 months prior to theDiscovery 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 lossIndirect or consequential loss of any nature, including any loss of income (including but not limited to interest and dividends) not realised by theInsured or any other person or organisation because of a Loss covered under this policy, except as provided under Extension 3.6.4.3 Credit risksLoss 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 inthat way by counsel, she was unable to reach a view as to what MARAC's properlyadjusted 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 financialloss flowing from advances made after 8 February 2006. That followed fromtreating 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 rejectedVero'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 notconsider 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 oldestdebts first. The Judge also took into account an acknowledgement made on Vero'sbehalf 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 withinthe 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 andthe identification of repayments from the sale of identified vehicles, we accept Mr Hollyman's submission that the material he compiled was incomplete. We agreewith 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 accepttoo 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 ofdishonesty between those that occurred before and after 8 February 2006. Whileboth the insuring clause and endorsement 4 referred to loss sustained "at any time" itmust 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 MARAC67 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 theuse of the word "direct". This tends to confirm our view that there was no direct lossfrom 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 5.10of 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 Specialistunless 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 theInvestigative 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 ArbitrationAfter a joint review of the Investigators report, if the Policyholderand the Insurer cannot agree upon the settlement of Loss, theInsurer 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 theInsurer shall enter into an appropriate form of arbitration contract to this effect.[106] In its statement of claim, MARAC claimed solicitor-client costs as aconsequence 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 contendedthe investigative specialist's role did not extend to deciding whether the claimed lossresulted 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 theHigh 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 costsissues. 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 the69 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 aninvestigative 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 theinvestigative specialist "unless the loss is not covered". In that event, the expensewas 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 anemployee) meant that the specialist's role only arose where the loss fell within theambit 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 theexpression "the facts behind the Loss" suggests that the investigation was to belimited 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 beawarded 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 indemnitycosts to MARAC, we do not propose to disturb the award made in MARAC's favourfor 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 requiringthe 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 AppellantLee Salmon Long, Auckland for Respondent72 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.