Absolute Fun Limited v Carson & Co HC Auckland CIV 2009-404-6171
[2010] NZHC 436
•17 March 2010
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV 2009-404-006171
BETWEEN ABSOLUTE FUN LIMITED
Plaintiff
AND CARSON & CO
Defendant
Hearing: 15 March 2010
Appearances: M A Karam for the Plaintiff M Smith for the Defendant
Judgment: 17 March 2010
JUDGMENT OF
ASSOCIATE JUDGE CHRISTIANSEN
This judgment was delivered by me on
17.03. 10 at 4.30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date...............
Solicitors/Counsel:
M Foley, Foley & Hughes, Auckland – [email protected]
WGC Templeton/MA Karam, Barristers, Auckland – [email protected] / [email protected]
M Smith, Gilbert Walker, Auckland – [email protected]
ABSOLUTE FUN LIMITED V CARSON & CO HC AK CIV 2009-404-006171 17 March 2010
[ 1 ] The summary judgment claim of the plaintiff (AFL) focuses upon the actions
of the defendant in connection with the receipt of a deposit paid by AFL. The defendant acted for Eastside Trustee Limited (in receivership and in liquidation) (Eastside) which carried on business as a trustee of a trust that developed a residential apartment and retail complex in Parnell (the development). Mr M Peters was the sole director and shareholder of Eastside. Eastside was placed into receivership in October 2008, and in liquidation on 1 December 2008.
On 18 January 2006 AFL entered into an agreement to purchase five commercial units and 16 car parks in the development from Eastside. A deposit of $500,000 was paid. The deposit was paid to the defendant to be held by it as stakeholder pursuant to the terms of the agreement.
On 5 March 2008 Eastside, through the defendant wrote advising it was ready, willing and able to settle. Before then it had satisfied the conditions of compliance and the production of certificate of title it had been required to. Subsequently and realising it had miscalculated the settlement date, the defendant wrote again shortly after the close of business on 7 March 2008 ‘properly invoking the settlement notice procedure’.
By letter dated 10 March 2008, AFL through its solicitors cancelled the agreement asserting a material breach of its terms and default on behalf of Eastside. It requested a refund of the deposit. In response and by letter dated 14 March 2008 Eastside, through the defendant advised AFL its cancellation was not accepted. On 26 March 2008 on Eastside’s instructions the defendant paid the $500,000 deposit to Eastside’s funder.
Of importance to the Court’s consideration of the summary judgment application are:
a) The contractual terms;
b)The factual detail leading up to the payment out of the deposit by the defendant;
c)The law concerning stakeholder obligations including whether at the time of payout the defendant was still a stakeholder.
Contractual terms
Relevantly they include:
“PRICE AND PAYMENT
Deposit: The sum of $500,000 payable in accordance with paragraph 2.
Balance: The balance of the Purchase Price shall be paid in one lump sum on the settlement date.
1. DEFINITIONS AND INTERPRETATION
1.1 In this Agreement:
“Settlement” means actual settlement whether or not it occurs on the Settlement Date.
“Settlement Date” means the latter of:
(a)The seventh Working Day after the date of the Purchaser (or the Purchaser’s solicitors) receives a copy of the Certificate of Practical Completion; or
(b)The seventh Working Day after the date that a search copy (as defined by section 172A of the Land Transfer Act 1952 of the Certificate(s) of Title of the Unit is available.
“Stakeholder” means Carson & Co, Law, Auckland.
2. DEPOSIT
2.1 The Purchaser shall pay to the Vendor the Deposit in the following
instalments and in the following manner:
(a)$500,000 within 15 working days after the signing of this Agreement either in cash to the Stakeholder who shall hold the Deposit in an interest bearing trust account until the Settlement Date ...
(b)If this Agreement is avoided by either party by virtue of any of the conditions not being satisfied, the Vendor shall, in additional to refunding the Deposit to the Purchaser, pay the Net Interest accrued thereon.
2.2 In consideration of the Purchaser entering into this agreement and
completing the purchase of the Property subject to a property management agreement the Vendor guarantees to the Purchaser a net return of 6% of the Purchase Price (the “Guaranteed Rental”). This guarantee shall apply from the Settlement Date and expire 24 calendar months from the Settlement Date (the “Guarantee Period”). During the Guarantee Period to the extent the net rental payable to the Purchaser is not sufficient to achieve the Guaranteed Rental then the vendor shall pay to the Purchaser each month any shortfall between the rental received and the Guaranteed Rental for that month.”
2.3 (a) ...
(b) The purchaser acknowledges that the deposit is in all respects to be regarded as a deposit and does not include any penalty component with the intention that in the event of cancellation entitling the Vendor to forfeit and retain the Deposit, the entire Deposit may be forfeited and retained. If at the time of cancellation only part of the Deposit has been paid, the Vendor may forfeit and retain that part and sue the Purchaser for the balance of the deposit.
(Added by an addendum to the Agreement on 13 April 2006) 20. SETTLEMENT
20.1 The balance of the Purchase price shall be paid on the Settlement Date.
20.2 Settlement shall be effected and completed before 3.00pm on the Settlement Date.
31. DEFAULT AND REMEDIES
31.1 If the sale is not settled on the Settlement Date either party may at any time thereafter (unless the Agreement has first been cancelled or become void) serve on the other party notice in writing (“Settlement Notice”) to settle in accordance with this paragraph.
31.4 Upon service of a Settlement Notice the party on whom the Settlement Notice is served shall settle with 5 Working Days ... after the date of service of the Settlement Notice (excluding the day of service) and in respect of that period time shall be of the essence but without prejudice to any immediate right of cancellation by either party.
35. GENERAL
(c) ... A notice sent by facsimile transmission during a Working Day
between 9.00am and 5.00pm (New Zealand time) shall be deemed to be received upon completion of an error free transmission and in every other case shall be deemed to be received at 9.00am (New Zealand time) on the next working day after it is sent).
The facts leading to payment out of deposit
On 7 February 2008 at 8:55am by facsimile the defendant forwarded to AFL’s solicitor copies of recently issued certificates of title for the units being purchased.
By facsimile on 27 February 2008 at 2:50pm the defendant attached copies of Code Compliance and Practical Completion Certificates, thereby setting the “settlement date” for 7 March 2010 in accordance with the definition of “Settlement Date” in clause 1.1.
By facsimile dated 5 March 2008 at 4:42pm the defendant advised AFL’s solicitor that Eastside was “ready, willing and able” to settle.
[ 10] By facsimile dated 5 March 2008 at 5:15pm the defendant purported to invoke the settlement notice procedure under clause 31 of the agreement.
[ 11 ] By facsimile dated 7 March 2008 at 5:3 8pm to AFL’s solicitors the defendant wrote invoking the settlement notice procedure under clause 31 of the agreement.
[ 12] As at 9:00am 10 March 2008 the defendant’s facsimile of 7 March 2008 at 5:38pm is deemed to have been received by AFL per clause 35.5(c) of the agreement. By clause 31.4 settlement must be concluded within five working days after date of service, excluding the day of service.
[13] By letter dated 10 March 2008 AFL, through its new solicitors, cancels the agreement. The letter advised:
“... Your client has breached material terms of the agreement for sale and purchase and accordingly our client is entitled to cancel the agreement.
The vendor has through its director and manager, Matt Peters consistently warranted to our client that it would not be required to settle the purchase of the building. Our client entered into the agreement at an early stage of the development to assist the vendor and the vendor through Mr Peters covenanted that he would sell the units to a third party prior to completion. This covenant has been repeated on a number of occasions including in the presence of Bruce Dell [AFL’s former solicitor]. Your client is not entitled to breach that covenant now by requiring AFL to complete settlement of the purchase.
A material term of the agreement is the rental guarantee from Eastside... The vendor through Mr Peters has advised our client in recent days that the development has not sold as expected and he is having serious financial difficulties. On the basis of these statements our client believes that your client is unable to perform the substantial obligations it has under the rental guarantee.
On the basis of the above matters we consider that your client is in default under the agreement. We hereby give notice that our client is cancelling the agreement due to these defaults.
We require the deposit paid by our client to be refunded immediately. Please arrange for this to be deposited to our trust account.”
[ 14] By letter dated 14 March the defendant responded to AFL’s solicitors advising that each of AFL’s claims of breach of material terms; that AFL was not required to complete; and that Eastside was unable to perform, was rejected. The letter further stated:
“Your client took prolonged and extensive legal advice prior to entering into the contract with our client. The inclusion of the rental guarantee is totally inconsistent with your client’s claim that it was not intended it be required to settle. Whilst it was the intention of the parties to seek an on sale prior to the agreement there was always a likelihood that would not happen. Your client was fully aware of that when the contract was entered into and inserted the rental guarantee to remediate the consequences of having to settle.
... The cancellation is not accepted. A settlement notice has issued and our client’s rights and remedies are reserved.”
[15] 18 March 2008 was the last day for compliance with the settlement notice issued by the defendant on behalf of Eastside.
[ 16] On 26 March 2008 the defendant, on Eastside’s instructions, paid the deposit of $500,000 to Eastside’s funder. No notice of this was given to the plaintiff or its solicitors.
[ 17] In a telephone conversation on 8 April 2008 between Mr Granger on behalf of the plaintiff and Mr Peters of Eastside, Mr Peters advised that the defendant had paid the deposit to Eastside’s financier.
[ 18] By letter dated 9 April 2008 AFL’s solicitors wrote to the defendant seeking confirmation that the deposits were still being held by the defendant. No response to that letter was received until 22 August 2008 when Buddle Findlay solicitors acting for Eastside advised that the agreement was cancelled by Eastside following noncompliance with its settlement notice. Buddle Findlay further advised that “consequent to cancellation, the deposit was forfeited to the vendor”.
[ 19] By letter dated 3 December 2008 AFL’s solicitors requested repayment of the deposit and interest accrued.
[20] By letter dated 5 February 2009 the defendant wrote to AFL’s solicitors advising:
“... Our role as stakeholder under the agreement for sale and purchase finished when you client did not complete settlement and the agreement was terminated in accordance with its terms. At that point we were obliged to pay the funds to Eastside’s financier. The arguments raised by you at the time are not sufficiently compelling for any other action to be considered.
Was the defendant at the relevant time the stakeholder and if so did it comply with the duties required of it?
[21 ] AFL’s case is that the defendant unlawfully paid out deposit monies it was holding as stakeholder and that the defendant at all material times acted as solicitor for Eastside in relation to the transaction instead of acting for both parties as stakeholder.
The key issue for AFL is whether the defendant has properly discharged its obligations as stakeholder.
Legal obligations of stakeholders
Usually an independent third party is engaged as stakeholder. Unquestionably the stakeholder is the agent both parties for whom funds are held. The stakeholder’s rights and obligations to those parties are determined by the contract creating the relationship. It is not a relationship of trustee and beneficiary.
Even if the stakeholder is a person for whom the funds are held or an agent of that person, it must act as though it was an independent third party.
The following extract from McMorland Sale of Land p188 describes, in general terms, a stakeholder’s obligations:
“The prime duty of the stakeholder is to hold the stake, in this case the deposit, until the person rightfully entitled to it becomes known...
The stakeholder holds the deposit on behalf of both parties for the period prescribed in the contract. In the meantime the stakeholder may not pay the deposit to either party without the consent of both. The onus relies entirely on the stakeholder to be certain that the person to whom the stake is paid is the person rightfully entitled to it. The stakeholder is not absolved from liability by acting on what proves to be the erroneous advice of one party. A stakeholder should check with the other party that the advice is correct.”
The relevant principles were summarised by Millett LJ in Manzanilla Ltd v Corton Property & Investments Ltd & Ors [1996] EWCA Civ 942 (13 November 1996):
“The following propositions emerge from the authorities:
(1)The relationship between the stakeholder and the depositors is contractual, not fiduciary. The money is not trust money; the stakeholder is not a trustee or agent; he is a principal who owes contractual obligations to the depositors: Potters v Loppert [1973] Ch. 399, 406; Hastingwood Ltd v Saunders Bearman [1991] Ch. 114, 123. The underlying relationship is that of debtor and creditor, and is closely analogous to the relationship between a banker and his customer.
(2)Until the specified event occurs, the stakeholder is entitled to retain the interest on the money. This is usually as his reward for holding the money: see Harington v Hoggart (1830), I B&Ad 577. The right may be excluded by special arrangement, and was excluded in the present case.
(3)Until the event happens the stakeholder holds the money to the order of both depositors and is bound to pay it (strictly speaking an equivalent sum) to them or as they may jointly direct: Rockeagle v Alsop Wilkinson [1992] Ch. 47.
(4)Subject to the above, the stakeholder is bound to await the happening of the event and then to pay the money to one or other of the parties according to the event. The money is payable to the party entitled on demand, and if the stakeholder fails to pay in accordance with a proper demand he is liable for interest from the date of the demand: Lee v Munn (1817) 8 Taunt. 45; Gaby v Driver (1828) 2 Y&J 549.
(5)If the occurrence of the event is disputed, the stakeholder cannot safely pay either party, for if he mistakenly pays the party not entitled the payment will not discharge his liability to the other. In these circumstances he may (i) interplead and pay the money into Court; (ii) retain the money pending the resolution of the dispute; or (iii) take the risk of paying one party. The choice is entirely his.
(6)If he takes the second course, he may notify the parties that he is content to abide the outcome of the dispute. There is then no need to join him in any proceedings which are taken to resolve it. If he is not joined, the Court cannot order the money to be paid to the successful party. All it can do is to declare that the successful party is entitled to give a good receipt for the money: see Smith v Hamilton [1951] Ch. 175.
(7)If the stakeholder is not content to abide the outcome of the proceedings, he may be joined in order to bind him. This was done in the present case, albeit on the application of the stakeholder.”
In this case there is no dispute that by the terms of the agreement the defendant was appointed stakeholder and thereafter accepted the responsibilities that appointment entailed. The difference between the parties’ positions is that the defendant asserts its role as a stakeholder ceased on 7 March 2008, which was the “settlement date” as defined in the agreement. Therefore it was no longer a stakeholder when the monies from its trust account were paid out on 26 March. As such, they were obliged to distribute the funds in accordance with instructions from the vendor after 7 March 2008.
The AFL’s position is that:
a)The funds were paid out after the defendant was on notice of the dispute as to the rightful owner of the stake, and, in accordance with its primary duty as a stakeholder, the defendant was obliged to retain the funds until that dispute was resolved; and
b)The “settlement date” was deferred beyond 7 March 2008 in any event due to the issue of a settlement notice by the defendant on behalf of Eastside, which deferred the settlement date to 18 March 2008.
The defendant’s case is that on settlement Eastside was entitled to receive the purchase price, including any deposit and Absolute Fund was entitled to receive the property. Therefore on the settlement date, 7 March 2008, the deposit became a debt payable by the defendant to Eastside on demand.
Summary judgment principles
There is no dispute regarding these. The plaintiff must satisfy the Court that the defendant has no defence to the claim. The Court must be left without any real doubt or uncertainty... but where a plaintiff’s evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA).
The Court does not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331; [1979] 3 WLR 373 (PC).
In the end the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).
In the present case there are no material disputes of fact. It is clear that the defendant paid out the funds after it had been made aware of the dispute between the parties.
The form of the order sought by AFL upon its summary judgment application is important. Originally by its application AFL sought an order that the defendant pay the deposit into Court or to a Court approved third party to hold in an interest bearing account until the dispute between Eastside and AFL is resolved, through settlement, litigation or otherwise. In short there is still an issue between Eastside and AFL about whether or not AFL’s purported cancellation of the contract was legally effective. But, that is not a matter before this Court and appropriately the hearing of AFL’s application for summary judgment was confined to it seeking:
“A declaration that the defendant has paid out the deposit funds without notice to AFL and in breach of its obligations as a stakeholder.”
[34] Therefore, the dispute between Eastside and AFL apart, the declaration sought concerns the defendant’s actions in paying the deposit out on 26 March 2008. Considerations
[35] AFL relies upon the often quoted authority of Mitchell v Baile Property Group Ltd (HC), Auckland, CP 1759/91, 28 April 1992, Master Kennedy-Grant, wherein it was stated that it is clear that the primary obligation of a stakeholder is to retain the stake until the party rightfully entitled to it is known. Also relied upon is Neate v Manchester Home Centre Ltd (HC) Christchurch, CP 343/89, 22 April 1991 where Tipping J at p21 stated:
“The onus lies entirely on the stakeholder to be certain that to whom the stake is paid is the person rightfully entitled to it. The stakeholder is not absolved from liability by acting on what proves to be the erroneous advice of one party; the stakeholder should check with the other party that the advice is correct.”
[36] Fundamental to AFL’s case is that the defendant was on notice of a dispute. Therefore, it should have held the stake until the dispute regarding ownership of the deposit was determined in accordance with proposition 5 of Millett LJ in Manzanilla. The defendant had three options open to it, namely:
(1) Interplead and pay the money into Court;
(2) Retain the money pending the resolution of the dispute; or
(3) Take the risk of paying one party.
[37] Further and to the extent that the defendant relies upon the date of 7 March (the settlement date) as providing the authority to make payment out, AFL asserts that settlement date was deferred until 18 March which was the final date for compliance with Eastside’s settlement notice. Therefore, AFL asserts the settlement
date became 18 March and by that date the defendant had knowledge of the plaintiff’s cancellation and should have taken no further action regarding the deposit that was likely to prevent its repayment to AFL.
A failure to act in this way, Mr Karam submits, amounts to an abrogation of the role of a stakeholder for which the defendant is liable to AFL.
Mr Karam further submits that, in the circumstances of this case, the fact that settlement date was deferred is consistent with the ‘price and payment’ and ‘default and remedies’ provisions of the agreement, referred to earlier in paragraph 6 herein under the heading Contractual Terms. Under the ‘price and payment’ section there is provision that “the balance of the purchase price shall be paid in one sum on settlement date”. For AFL it is submitted that if the settlement notice procedure is invoked (and the settlement date, as defined in the agreement, has come and gone) then the settlement date must automatically become the last date of the expiry of the settlement notice. The settlement notice provision itself provides that “If the sale has not settled on the settlement date either party may at any time thereafter... serve on the other party notice in writing (settlement notice) to settle in accordance with this paragraph”. Because, in this case, Eastside invoked the settlement notice procedure, Mr Karam submits the consequent effect was that the settlement date was deferred until the last day for compliance with the settlement notice (18 March 2008). But by 18 March the agreement had been cancelled by AFL and therefore the defendant should have retained the funds until determination of the parties’ dispute. Also for AFL it is submitted that at the relevant time the defendant did not rely on the narrow interpretation of the “settlement date” that it does now. Rather, as is evidenced by the wording of its letter of 5 February 2009 (referred to in paragraph 20 above) the defendant considered that its role as stakeholder ended “when your client did not complete settlement and the agreement was terminated in accordance with its terms”. This Mr Karam submits indicates that the defendant considered that its role as stakeholder ended after non-compliance by AFL with the settlement notice issued on behalf of Eastside.
Considerations
[40] I take a different view than that advanced for AFL. It is clear from the authorities that if in time it should be proved the defendant has paid the deposit to the wrong party then it may be required to account for that error. The real issue is whether the defendant was entitled to take the risk of paying out when it did. That issue focuses upon the defendant’s contractual obligations to the party, it does not involve considerations of breach of trust and the kind.
[41 ] A dispute between AFL and Eastside over cancellation rights remains. That is, AFL’s claim to be entitled to the deposit has not yet been resolved. That is an issue for another day. But, by its summary judgment application AFL asserts the defendant was wrong to make a payment at all even though as it might turn out, it may have correctly been paid to Eastside. Therefore the summary judgment application seeks a declaration that the defendant was in breach of its stakeholder obligations, even though it may have paid the deposit to the party entitled to it.
It is correct that whilst still in possession of a stake a stakeholder is under an obligation to ensure it is paid to the party that was entitled to it and on notice of the dispute could interplead, retain the funds or take the risk of paying to one party. (Emphasis added) But for those obligations to apply AFL needs to prove also that the stake had not by that time become payable to one of the parties.
I agree with the submission of Mr Smith that it is open for AFL to come to the Court to claim it was actually entitled to the deposit. However in this case its claim amounts to little more than that there is as dispute that it might be entitled to the deposit, when on the other hand it might be shown that it was not.
Critical in the current analysis is the need to determine when the defendant’s stakeholder contract concluded. The defendant says its contract ended on 7 March 2008. AFL says the settlement date was deferred until 18 March 2008. In my judgment the settlement date was the earlier of those two.
The settlement date was a contractually defined event. It does not change because a purchaser fails to settle or because the vendor elects to exercise one of the remedies available to it to deal with the purchaser’s default, including the use of the settlement notice process. The issue of a settlement notice does not defer the settlement date. As the interpretation provision of the contract provides – ‘settlement’ means actual settlement whether or not it occurs on the Settlement Date. That definition expressly contemplates the settlement may not occur on the settlement date.
The defendant’s stakeholder obligations did not change because there was a dispute between the parties about who was entitled to the deposit; its obligation remained to pay the money to the party who was entitled to it. It is arguable as at 7 March the money held by the defendant no longer represented a joint deposit, but it instead had become payable on demand to one of the parties. The defendant’s position is that as at 7 March 2008 AFL lost the right to demand payment and Eastside solely was entitled to it.
As at 7 March 2008 a transformation occurred. Arguably the defendant’s obligations regarding payment out was confined to a direction from Eastside, and no longer subject to a direction from AFL, notwithstanding that prior to payment out AFL gave notice of its claim to repayment of the deposit. I repeat, AFL does not by its summary judgment application seek to establish that it was the party entitled to receive the deposit.’
Summary
AFL has not satisfied the Court that the defendant has no arguable defence upon the summary judgment application.
Judgment
[49] The summary judgment application is dismissed.
[50] This is a proper case for fixing costs. If the parties cannot agree upon these then I will receive memoranda from them and make a decision upon the papers.
Associate Judge Christiansen
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