Aggarwal v DSD Homes Limited

[2023] NZHC 918

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV 2022-404-002195

[2023] NZHC 918

IN THE MATTER

of a claim for compensation for breach of warranty

BETWEEN

RAJESH AGGARWAL and SAKSHI KHANNA

Plaintiffs

AND

DSD HOMES LIMITED

First Defendant
DALVIR SINGH DHALIWAL

Second Defendant

Hearing:

20 April 2023

Appearances:

S Sharma for the Plaintiffs

No appearance by or for the Defendants

Judgment:

24 April 2023

JUDGMENT OF TAHANA J

This judgment was delivered by me on 24 April 2023 at 3.30pm Pursuant to Rule 11.5 of the High Court Rules

…………………………

Registrar/Deputy Registrar

Solicitors/Counsel: S Sharma, Auckland

AGGARWAL v DSD HOMES LIMITED [2023] NZHC 918 [24 April 2023]

Introduction

[1]    The plaintiffs seek to recover $166,956.00 (the GST amount) following an agreement to purchase a property in Manurewa from DSD Homes Ltd (DSD) (the agreement). The agreement included:1

(a)a warranty that DSD was not GST registered;

(b)that the purchase price was to be reduced by 15 per cent if DSD was in breach of the warranty; and

(c)that if it transpired after settlement that DSD was GST registered, the person signing the agreement (Mr Dalvir Dhaliwal) would be personally liable for any GST claim denied to the purchaser.

[2]    DSD was GST registered at the date of settlement. Inland Revenue denied the plaintiffs’ claim for an input credit (GST claim) because the transaction was zero-rated. The plaintiffs now seek to recover that amount from DSD and Mr Dhaliwal (the defendants).

[3]    The plaintiffs initially applied for summary judgment but the defendants have failed to file a defence. The hearing now proceeds by way of formal proof.

Background

[4]The plaintiffs are Ms Sakshi Khanna and her husband Mr Rajesh Aggarwal.

[5]    DSD is a residential property development business. Mr Dhaliwal, is the sole director and shareholder of DSD.

Agreement for sale and purchase

[6]    On 29 September 2021, Ms Khanna entered into the agreement with DSD to purchase a property at 44 McKean Ave, Manurewa (the property). The agreement was

1      Clause 23 of sale and purchase agreement.

signed by Ms Khanna as purchaser. Mr Dhaliwal signed the agreement on behalf of DSD as vendor. The parties used the Auckland District Law Society standard form (tenth edition) with further terms agreed between the parties.

[7]Relevant terms of the agreement include:

(a)Purchase price of $1,420,000.00 including GST, if any.

(b)DSD made a declaration that it was not GST registered.

(c)Settlement to occur on 14 June 2022.2

(d)Schedule 1 (relating to GST information) and cl 14 were crossed out.

[8]    In cl 14.1 of the agreement, DSD provided a warranty that DSD’s GST registration status as stated in the agreement was correct on the date of the agreement and would remain correct at the settlement date. On the front page of the agreement, DSD stated that it was not GST registered and would not be at the date of settlement.

[9]The agreement included a further term, cl 23, which states:

23.0 GST CLAUSE

The vendor warrants that they are not registered for GST as at the date of agreement and that they will not be registered for GST at settlement.

If the vendor is in breach of this warranty at settlement then the purchase price shall be reduced by 15%.

Further if, in consideration for the vendor agreeing to sell the property to the purchaser, if it transpires after settlement that the vendor is GST registered and the purchaser has already settled, then the person or persons signing below agree that they are liable in the[ir] personal capacity for any GST claim denied to the purchaser, as a result of deemed zero rating by IRD on the transaction to the purchaser resulting from the vendor misrepresenting their GST registration status under this agreement.

This clause is inserted for the sole benefit of the purchaser.

2      The signed agreement incorrectly specified the settlement date as 30 June 2021. This was subsequently varied by agreement.

[10]On or about 24 May 2022, the parties agreed to reduce the purchase price to

$1,280,000.00 and to vary the settlement date to 27 May 2022.

[11]   By deed of nomination dated 24 May 2022, Ms Khanna nominated herself and Mr Aggarwal to complete the purchase notice. The purchase notice was provided to DSD on 26 May 2022 and did not include any statement that DSD was GST registered.

[12]Settlement was completed on 27 May 2022.

Plaintiffs’ GST claim

[13]   The plaintiffs registered for GST on 19 April 2022 as they had decided to develop the property.

[14]   In June 2022, Ms Khanna and Mr Aggarwal made a GST claim on the purchase price to Inland Revenue for the GST component of the purchase price for the property.

[15]   Inland Revenue informed the plaintiffs that at the time of settlement DSD was GST registered and therefore their GST claim was declined as the transaction was zero-rated.

Procedural history

[16]   The  proceeding  was  filed  on  18  November  2022.  DSD  was  served  on 1 December 2022, and Mr Dhaliwal was served on 16 December 2022. The defendants failed to file a statement of defence by 1 February 2023.

First call – 7 February 2023

[17]   Mr Dhaliwal sent an email to the Auckland High Court Registry on 4 February 2023 seeking an adjournment for four months for personal reasons. On 6 February 2023, Campbell J directed that the Registrar inform Mr Dhaliwal that communications must be served on the plaintiffs.

[18]   At the first call, Mr Dhaliwal was deemed to have been served on 4 February 2023, given his email to the Registrar. The proceeding was adjourned until 28 March 2023 and the minute of that adjournment was to be emailed to Mr Dhaliwal.

Second call – 28 March 2023

[19]At the second call, Gault J allocated a formal proof hearing date.

[20]   As at the date of the formal proof hearing, 20 April 2023, the defendants had still not filed any defence to the claim.

Analysis

Legal principles for formal proof

[21]   Rule 15.9 of the High Court Rules 2016 (HCR) provides for judgment by way of formal proof if a defendant does not file a statement of defence. I must be satisfied that the plaintiffs’ evidence establishes each cause of action on which they rely.3

[22]   Duffy J has held that “the level at which a Judge is required to satisfy herself regarding the plaintiff’s evidence is much the same as it would be if the proceeding had gone to trial.”4 I therefore consider whether the evidence filed proves each of the causes of action.

Plaintiffs’ claim against the defendants

[23]The plaintiffs claim that:

(a)DSD has breached the warranties in cls 14.1 and 23 of the agreement by declaring that it was not GST registered at the time of the agreement and would not be GST registered at the time of settlement, when in fact it was.

3      High Court Rules 2016, r 15.9(4).

4      Ferreira v Stockinger [2015] NZHC 2916 at [35].

(b)Under cl 23, Mr Dhaliwal is personally liable if the purchasers are unable to make a GST claim because the vendor is GST registered.

Does the plaintiffs’ evidence establish the claims against the defendants?

[24]   The plaintiffs have provided an email dated 30 June 2022 from the Inland Revenue which states:

The sale and purchase agreement incorrectly states that the vendor was not GST registered, this is incorrect. The transaction is therefore zero rated, and your client is unable to claim the purchase as a second hand good. It is therefore proposed to remove this transaction from the GST return for the period ended 31 May 2022 …

[25]   The above Inland Revenue communication indicates that DSD was GST registered. This is contrary to the warranties in cls 14.1 and 23 of the agreement and I am satisfied that DSD has breached those warranties.

[26]   The Inland Revenue email also indicates that the transaction is zero rated and the claim was denied on that basis.

[27]   In communications between the plaintiffs and DSD’s solicitors after the Inland Revenue informed the plaintiffs of DSD’s GST registration status, DSD’s solicitor responded stating:

We have been advised that your clients intention at the time of the purchase was to occupy the property as their main home. We believe your client obtained their lending based on this.

Therefore your client has no basis to claim GST on this transaction.

[28]   The plaintiffs acknowledge that they initially wanted to purchase the property for personal use, but they later decided the property was not ideal for their family and instead they would develop the property. After coming to this decision they proceeded with settlement on that basis.

[29]   The issue is whether the defendants have a defence to the claim because they were not aware that the plaintiffs would be GST registered at the time of settlement.

[30]   The plaintiffs refer to Holdaway v Ellwood.5 In that case, the High Court allowed an appeal from the District Court and granted summary judgment to the appellants, the Holdaways.  The Holdaways had purchased a rural property from   Mr Ellwood. In the sale and purchase agreement Mr Ellwood warranted that he was not GST registered when in fact he was.

[31]   In the agreement, Mr Ellwood had stated that he was not GST registered which meant that the Holdaways were not required to complete Schedule 2 which related to GST information, but they did complete part of that schedule. The Holdaways stated that they were not GST registered and would not be at settlement. They also answered that they did not intend at settlement to use the property for making taxable supplies. Clause 15.2 of the agreement provided that the purchaser warranted that any particulars stated by the purchaser in Schedule 2 are correct as at the date of the agreement. Clause 15.3 provided that should that information change, the purchaser was required to notify the vendor.

[32]   One week before settlement, the Holdaways registered under the GST Act 1985. They did not notify Mr Ellwood.

[33]   Relying on Mr Ellwood’s warranty, the Holdaways lodged an input tax credit claim with Inland Revenue. It was declined because Mr Ellwood was GST registered. The Holdaways then made a demand on Mr Ellwood for the input tax credit amount they were denied, claiming that he had breached his contractual warranty.

[34]   The High Court allowed the Holdaways’ claim on appeal from the District Court. Mallon J held that it was foreseeable that the purchasers’ GST registration status might change – “it was to be anticipated in the ordinary course of things that they could well become registered for GST.”6 In these circumstances it was foreseeable that if they did register for GST and claim a tax credit, that this would be denied if Mr Ellwood breached his warranty. This was a loss that arose naturally from the breach of contract.

5      Holdaway v Ellwood [2019] NZHC 792.

6      Holdaway v Ellwood [2019] NZHC 792 at [21].

[35]   Mallon J held that the Holdaways were entitled to summary judgment for the GST amount and were entitled to recover accounting fees incurred in relation to making the rejected GST claim.

[36]   In this case, there is no warranty by the plaintiffs as to their GST registration status. Clause 23 of the agreement also specifies the consequences if DSD breaches the warranty in cl 23, being:

(a)the purchase price will be reduced by 15 per cent; or

(b)if the breach is discovered after settlement, the purchaser is entitled to claim the GST component if their GST claim is declined because the vendor is GST registered.

[37]   The decision in Holdaway v Ellwood indicates that a purchaser’s failure to notify the vendor of its GST registration status is not a defence to a claim for breach of warranty, nor does it result in the damages not being reasonably foreseeable. Here, cl 23 specified the damages if DSD was GST registered, so the consequences of breach were clear to DSD and reasonably foreseeable. The failure of the plaintiffs to inform the vendor of their registration status is not a defence to their claim.

[38]   In addition, cl 23 provides that Mr Dhaliwal is personally liable for any GST claim denied to the plaintiffs “as a result of deemed zero rating by IRD on the transaction.” Mr Dhaliwal was also therefore aware of the consequences if DSD breached the warranty.

[39]I am satisfied that the plaintiffs have proven that:

(a)DSD breached cls 14.1 and 23 of the agreement;

(b)Mr Dhaliwal is personally liable for DSD’s breach of cl 23 of the agreement; and

(c)The plaintiffs are entitled to recover the GST component of the purchase price ($166,956.00).

Interest

[40]   The plaintiffs claim interest on $166,956.00 at 14 per cent per annum pursuant to s 22 of the Interest on Money Claims Act 2016 (the Act) for the period from settlement (27 May 2022) until the hearing date (20 April 2023).

[41]   The agreement provides an interest rate for late settlement of 14 per cent. Clause 10 of the agreement prescribes provisions for claims for compensation under the agreement. Clause 10.8(8) provides that the party liable to make payment shall pay interest to the other party at the interest rate for late settlement. I am therefore satisfied that the plaintiffs are entitled to interest at the rate of 14 per cent per annum as specified in the agreement. The defendants are therefore liable to the plaintiffs for interest at 14 per cent per annum on $166,956.00 for the period from 27 May 2022 to 20 April 2023.

Costs

[42]   The plaintiffs have been successful in their claim and are entitled to costs. The plaintiffs claim costs on a category 2B basis and disbursements, totalling $14.440.78, as follows:

Item	Particulars	Allocated days (at $2,390.00 per day)	Amount
1	Commencement of proceeding	3.0	$7,170.00
11	Memorandum for first call (on 7 February 2023)	0.4	$956.00
12	Appearance at first call	0.2	$478.00
11	Memorandum for second call (on 28 March 2023)	0.4	$956.00
12	Appearance at second call	0.2	$478.00
24	Preparing and filing of written submissions	0.6	$1,434.00
28	Obtaining judgment without appearance	0.3	$717.00
29	Sealing judgment	0.2	$478.00
Total costs	5.30	$12,667.00

Disbursements
Filing fees	$1,350.00
Process service fees	$423.78
Total disbursements	$1,773.78

Conclusion

[43]   I am satisfied that the defendants have breached the agreement and caused loss to the plaintiffs. I make the following orders:

(a)The first and second defendants are jointly and severally liable to the plaintiffs for $166,956.00;

(b)The first and second defendants are jointly and severally liable to pay interest on $166,956.00 at 14 per cent per annum for the period from 27 May 2022 to 20 April 2023; and

(c)The first and second defendants are jointly and severally liable to pay to the plaintiffs costs and disbursements as set out at [42] above.

Tahana J