Stick to the contract
By Jerome Veldsman
FTG Securities Limited v Bank of New Zealand, a decision of the New Zealand Supreme Court (the apex Court) on 26 August 2019 dealt with corporate arrogance to contractual obligations.
The facts are rather complicated, but the legal point is crisp.
Tuam Ventures borrowed money from Canterbury Finance, and as security ceded certain rights and mortgaged immovable property (the Securities) in favour of Canterbury Finance. As a later stage, Tuam also borrowed money from Bank of New Zealand, and the latter shared in the Securities. In terms of a contract (the Document), the Bank had first priority to NZD 7.5 million of the Securities, and Canterbury had priority to the next NZD 10 million of the Securities. The document also contained the following provision (the Consent Requirement):
Neither Party will transfer or assign any interest or right in or to that Party’s Securities to any person unless that person has entered into a deed or contract in a form approved by the other Party (which approval will not be arbitrarily or unreasonably withheld or delayed) by which that person agrees to be bound by the Document.
At a later stage, Canterbury assigned (ceded) its rights against Tuam and its Securities (under the Document) to Crown Asset Management. Canterbury did so without regard to the Consent Requirement. Some years later, Crown assigned its rights against Tuam and its Securities to FTG Securities. Crown alerted FTG to the Consent Requirement, but FTG wanted to keep the transaction confidential, and the transaction was entered into without regard to the Consent Requirement. Then Taum went insolvent, and the Securities became relevant. The Bank disputed that FTG had any right to the Securities. If the Bank was correct, FTG would get nothing, so FTG sued. FTG lost (on the basis that it had no legal standing to enforce the Document against the Bank) and appealed, to no avail. FTG then applied for leave to appeal to the Supreme Court. That application was declined, and the Supreme Court endorsed the following stated by the previous Court:
“We observe that this is not a harsh outcome. FTG has not failed on a technicality. FTG knowingly took a risk in participating in an assignment that was contrary to the express prohibition on assignment without the consent required by the [Document], which was for the benefit of [the Bank]. FTG cannot now seek to rely on the same contractual arrangement against [the Bank]. There is no unfairness in it being prohibited from doing so.”
Compliance with contractual obligations is not an elective, regardless of how “good” reasons for doing so may be perceived.