ASB Bank Limited v Stevens HC Auckland CIV-2011-404-1621
[2011] NZHC 1523
•11 November 2011
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-1621
BETWEEN ASB BANK LIMITED Plaintiff
ANDGAVIN RAY STEVENS First Defendant
ANDRUSSELL DESMOND DYE Second Defendant
Hearing: 4 November 2011
Appearances: Ms N Chamberlain and Mr Z Kennedy for Plaintiff
Mr Paul F Chambers for First Defendant
Judgment: 11 November 2011 at 4:00 PM
JUDGMENT OF ASSOCIATE JUDGE DOOGUE
This judgment was delivered by me on
11.11.11 at 4 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors:
MinterEllisonRuddWatts, P O Box 3798, Auckland – [email protected]
Paul F Chambers, Barrister, Auckland – [email protected]
ASB BANK LIMITED V STEVENS & Anor HC AK CIV-2011-404-1621 11 November 2011
Factual background
[1] It is not disputed in this case that the first defendant, his brother Craig, and their company, Frontier Properties Ltd (FPL), were all customers of the plaintiff bank for a number of years and that the parties entered into certain loan agreements whereby the customers provided securities to the plaintiff. I shall refer to these customers as “the borrowers” in my judgment. These borrowers were involved in property development in the Auckland area when FPL and the first defendant encountered financial difficulties. As I shall describe in more detail below, the borrowers were not able to stay within the terms of the arrangements with the plaintiff. They sought further accommodation from the plaintiff but it would seem no agreement was possible and so the borrowers made arrangements with Westpac Bank to refinance the debt. The borrowers’ loans went into default and the plaintiff issued default notices and eventually enforced securities which it had over a number of properties owned by the borrowers. The bank has issued proceedings to recover the deficiency which it says remains unpaid.
[2] The first defendant does not dispute that he was a party to the facility agreement which was entered into between the borrowers and the bank in August
2008. The facility agreement provided for two facilities to be made available to the borrowers: a revolving credit facility and a term loan.
[3] The limit for the revolving credit facility was $621,000 and advances under it were provided on an “on demand” basis. The second facility, the term loan, was to be for an amount of $3,384,000 and repayment was to be made the following year on March 2009. While the term loan was repayable on March 2009, it was also agreed to be repayable on demand.
[4] It is not necessary to refer in detail to the terms of the facility agreement at this point other than to note cl 17.1 of the general terms and conditions for the facility agreement, which provided:
17.1 Set-Off: You irrevocably authorise us to apply (without prior notice or demand) any credit balance (whether or not due and payable) to which you are entitled on any account (in any currency) and at any of our offices, in or
stowards satisfaction of any indebtedness then due and payable by you to us but unpaid.
[5] A number of securities were provided in support of the advances which the plaintiff in due course made to the borrowers. As part of the security, all-obligations mortgages were provided over properties at:
a) Fork Road, Kumeu;
b) Sunnyside Road, Coatesville, Auckland; c) 156 Brightside Road, Stanmore Bay; and d) Lots 1, 2 and 3 of a property at Raglan.
[6] In the submissions made, there was no consistency of the names of the various loans that the parties referred to. I shall refer to the various loan balances as at 12 September 2008 (before proceeds of sale from the properties were applied in
reduction of any loans) as:
a) The Cravin Holdings facility, which was overdrawn by: $150,000 b) The Stevens and Frontier joint loan: $3,384,000 c) The Stevens peronal loan: $436,000
[7] I further understand that loan b) was effectively the rollover of an earlier advance. When it was agreed to be rolled over on 6 August 2008, an accompanying loan was entered into which provided for capitalisation of interest of $621,000 on loan b).
[8] The plaintiff now seeks summary judgment on its claim against the first defendant. It also seeks summary judgment or strike-out of the first defendant’s counterclaim application.
Background to the alleged breaches of contract or misrepresentations by the plaintiff
[9] In September 2008, the first defendant sold the Kumeu property for
$925,000. The net amount received on the sale of $817,836.67 was paid to the plaintiff. The plaintiff applied this sum in reduction of loans that the first defendant had with the plaintiff which were secured by the mortgage over the Kumeu property.
[10] In his statement of defence, the first defendant says:
10.2What was also agreed between the plaintiff and the first defendant was that, from the funds received by the plaintiff from the sale of the Kumeu Property, $440,000.00 of the funds would be used by the plaintiff to reduce the first defendant’s Term Loan and then a partial reduction of the Revolving Credit Facility, given that the Term Loan was due to expire on 1 March 2009, with the balance being dispersed by the plaintiff to the first defendant, his brother Craig and on Term Deposit, so that working capital was available to continue with developments for the Orewa (Westhoe Heights), Coatesville, Stanmore Bay and Raglan properties and so that the plaintiff would then allow a renegotiation of the term of the Term Loan and Revolving Credit Facilities.
10.3Instead, the plaintiff used all of the funds received, contrary to the agreement reached between the parties, to pay off other unrelated loans that were not reaching the end of their term, thereby exposing the first defendant to an inability to repay part of the Term Loan before the expiry of the term of that Loan and ensuing penalty interest to be charged after the expiry of that Term Loan.
[11] The statement of defence does not provide particulars of the alleged agreement and the alleged representations such as when they were made or entered into, the parties involved, or the statements allegedly made by the principal participants. However, in argument before me it became apparent that the first defendant relies upon discussions which he had in September 2008 with Mr Hunwick, one of the bank’s managers. In successive parts of the statement of defence, the allegations about the Kumeu sale proceeds are again referred to with it being alleged that the plaintiff, by inducing the first defendant to pay it the proceeds of sale of the Kumeu property:
… misrepresented its true intent as to both the use of the sale proceeds and the first defendant’s ability to renegotiate the term of the Term Loan Facility, to the detriment of the first defendant.
[12] It is then pleaded that, as a result of that misrepresentation, financial loss was suffered. This is essentially the same loss that is claimed in regard to the alleged breach of agreement.
[13] There was also a submission made that the conduct of the bank breached an implied term of contract. Very little argument was addressed to this issue. Mr Chambers submitted in the course of his written material:
With no specific denial of that proposal document by ASB’s deponents, it is submitted that document, in and of itself, as a bank document tendered to Mr Stevens by an ASB representative on 12 September 2008, is a written term of a collateral contract, or an implied term of the existing facility agreements, or a representation made to Mr Stevens by ASB and relied upon by Mr Stevens to his detriment, or all three.
[14] The case for the defendant, so far as the implied term argument is concerned, would appear to be that the circumstances of the discussion of the document set out at paragraph [15] below somehow gave rise to an implied term that the bank would apply the proceeds of the Kumeu sale in the way alleged at paragraph [10] above.
[15] To resume the factual narrative, the position taken by the first defendant was later recorded in a draft letter, which the first defendant put in evidence, written by his solicitor on 8 October 2008. In the course of that letter the writer, Mr Woodhouse, asserted that the first defendant meet with Mr Hunwick to discuss a proposal document which had been submitted to the first defendant. As the proposal document has some significance to the overall case I will set it out in full:
STEVENS — SECURITY — 12 September 2008
Stevens G & C Group
Current Proposed
Security
161 Maungatawhiri Rd, Raglan (RV 8/07)
1,067
60%
640
640
Sunnyside Rd, Coatsville (RV 8/07) 1,750 50% 875 875 Fork Rd, Kumeu (GV 8/07) 1,200 50% 600 – 156 Brightside Rd, Stanmore Bay (PP 9/07) 3,734 70% 2,614 2,614 7,751 4,729 4,129 Facilities
G R & C W Stevens t/a Cravin Holdings
CFFF 12-3039-0104812-00 150
G Stevens & Frontier Properties Ltd
TLN 12-3109-0035307 3,384 3,219 CFFF 12-3109-0035307 (Capitalising Interest) 621 621
G Stevens
TLN – 12-3039-0099216-00 435
4,590 3,840
Scaled Security Surplus / (Deficit) 139 289
LVR 59% 59%
Req Proposed Alt Proposed
Debt Reduction 365 600 440 GST 105 105 105 Craig 300 140 140 Craig TRUST DEED 160 Gavin 125 50 50 Buffer 30 30 30 925 925 925
[16] The text set out above does not include some handwritten marks made on the note at the meeting.
[17] It was said that the purpose of the meeting was to discuss the proposal set out in the memorandum and that the memorandum contained an “alternative proposal” which represented middle ground proposed by the bank.
[18] It is important to note some additional elements of the background to the discussion which took place in September 2008. At that stage, the first defendant was in default in respect of arrangements entered into with the bank. The global financial crisis had commenced. The first defendant’s property development business was under strain financially. The Stevens and Frontier loan facility had only recently been entered into, on 14 August 2008. It is significant that the loan included an acknowledgement that the bank would capitalise interest for a further term of six months. That was undoubtedly because the first defendant did not have the cashflow to pay that interest. It included the further acknowledgement:
(b) Further debt reduction will also be required after six months, beyond the amount expected as net proceeds from the sale of the subdivided property at 161 Maungatawhiri Road, Raglan.
Consequently, this means the Borrower and/or Guarantors may need to consider selling additional property to reduce debt with the ASB,
if 156 Brightside Road, Stanmore Bay is retained beyond that
period.
[19] In summary, it was clear that the bank was looking to reduce its exposure to the first defendants. The first defendant, though, says that the effect of the
agreement was that there would be a split of the Kumeu proceeds with part going to repay the ASB liability and part being released to the first defendant and his brother so that they could continue property development activities specifically, in relation to the so-called Westhoe development at Orewa.
[20] But the defendant says that in breach of these arrangements, the bank in effect retained all of the proceeds of sale which were used to make payments towards Mr Stevens’ personal loan and the Cravin Holdings facility. The balance amount of
$343,000 was held in a long term deposit while the bank considered its further options, but was eventually used to make some repayments of the expenses incurred by Mr Stevens, and the greater part applied towards the Stevens and Frontier loan. The defendant apparently contends that not only were the funds applied in a way which was in breach of the agreement that he reached with the bank as to the application of the Kumeu sale funds, but also that the bank breached an implied obligation to pay off loans in a commercially sensible way with money, first of all applying the proceeds to loans which were coming to the end of the term rather than those that, if not paid off, would attract penalty charges.
Where Kumeu property sale proceeds should have gone
Variation of contract
[21] In opposing the claim that there had been an amendment to the contract, Mr Kennedy for the plaintiff submitted that the alleged agreement was unparticularised and vague. He further points to the inconsistency with the draft letter that Mr Woodhouse wrote on 8 October 2008 where he said at paragraph 15 that no agreement was able to be reached at the September meeting. Mr Chambers argued that the only thing that was not able to be agreed at that meeting was which account the money would be applied against.
[22] Mr Kennedy also referred to the proposal document set out at paragraph [15] above. He submitted that the proposal document is exactly consistent with what the bank eventually did and is inconsistent with the arrangement which Mr Stevens said was reached at the September meeting. Specifically, that document envisaged that the sale proceeds from the properties would be applied to the very loans that the
bank eventually applied them to. Mr Kennedy also submitted that in the end it made no difference to the overall position between Mr Stevens and the bank which loan account the sale proceeds from Kumeu were netted off against. He noted that the first defendant’s argument proceeded on the assumption that the term loan (the loan to Stevens and Frontier) was going to be in default at a prior date to the personal loan, and that it made sense that the bank should have taken steps to reduce the former instead of applying funds towards the latter.
[23] In any case, as Mr Kennedy pointed out, the loans were all linked and a default in one was a default in the others. Therefore, penalty interest was also accruing on the personal loan on this score as well.
[24] Further, Mr Kennedy submitted that any agreement to the effect that Mr Stevens would partially pay down the Stevens and Frontier facility and then be able to draw further funds later was entirely inconsistent with a situation where the bank was seeking to reduce its exposure. Not only would any amount that the bank recovered be drawn out again under Mr Stevens’ scenario, but in the meantime, the security position of the bank would have worsened because the Kumeu property over which it had previously held security would by then be gone once settlement with the purchaser had been completed.
[25] I appreciate it is for the plaintiff bank to negative the existence of any defence. After considering the proof that the plaintiff in a summary judgment advances, the Court is not to enter summary judgment unless it is left without any
“real doubt or uncertainty”.[1] In the Krukziener decision, the Court of Appeal went
[1] Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162 (CA) at [26].
on to say:
The onus is on the plaintiff, but where its 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 will 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 (PC) at 341. 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 it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ
84 (CA).
[26] Had Mr Stevens unequivocally stated in his evidence that he had come to an agreement with the bank in September 2008 and set out exactly what was said at the meeting and what was agreed to, I would hesitate before finding that there was no arguable defence. But his evidence does not go that far and he speaks of “his understanding” which is not, of course, the same thing as what the parties actually agreed to. I consider that the various matters that Mr Kennedy has raised means that the Court cannot, taking a realistic approach, accept that there is any uncertainty remaining concerning the issue of whether or not the parties entered into the type of agreement that Mr Stevens now relies upon as a defence.
[27] Also, such contemporaneous documents that exist are not consistent with Mr
Steven’s account of matters.
[28] In any event, the purpose of the proposal document that the bank put forward was nothing more than to set out what options were being suggested by the bank as suitable for discussion at the October meeting. It either did or did not lead to an express amendment to, or variation of, the parties’ contractual arrangements. If the parties declined to agree that those terms should govern their future contractual relationship, then that is the end of the matter, at least so far as express terms of contract are concerned.
[29] There are, in any event, other difficulties with the alleged September 2008 agreement which I now discuss briefly. In the first place, the loan agreements between Mr Stevens and the bank provided at cl 23.4:
Amendments: Except as otherwise agreed in these General Terms, no amendment to any Document will be effective unless it is in writing signed by all the parties to that Document.
There was no agreement in writing entered into of the kind required by the general terms and conditions. In those circumstances I find myself in agreement with the submission for the plaintiff that the authority of Air New Zealand Ltd v Nippon
Credit Bank Ltd[2] is applicable in the circumstances of this case. The Court of Appeal there held that a variation to a contract cannot occur orally where it was expressly provided in the said contract that all variations were to be in writing signed by one of the parties.
[2] Air New Zealand Ltd v Nippon Credit Bank Ltd [1997] 1 NZLR 218 (CA).
[30] The first defendant attempted to negotiate around this point by asserting that the agreement he says he reached with the bank was a collateral contract and was not caught by cl 23.4 of the terms and conditions. Alternatively, the defendant submitted that in fact the variation to the contract was in written form. It was said that the document set out at [15] above pointed to an intention to vary the contract.
[31] I am not able to accept either submission. The document at [15] not only does not support the contention that the defendant advances but it is actually consistent with what the bank said it was proposing to Mr Stevens, namely, that the Stevens personal loan be paid off.
[32] By whatever means the amendments were made, whether a variation to an existing contract or a collateral contract, there was a need for such amending arrangements to be in writing and signed. That clearly did not happen.
Misrepresentation
[33] Mr Stevens also says that the bank misrepresented how it was going to deal with the funds from the sale of the Kumeu property. At a factual level, this submission encounters the same problems that the argument concerning variation of contract has met. There is a vagueness and equivocality about Mr Stevens’ evidence about what, if anything, the bank told him. Further, the only truly contemporaneous document attributable to the bank, the proposal sent to him ahead of the 2008 meeting, is at odds with what Mr Stevens said was his expectation about how the funds were going to be applied. There is, for example, reference to the debt owed by his brother Craig being paid down. Accordingly, that defence too must fail.
Implied term
[34] I deal next with whether the first defendant is able to show that the bank was
in breach of an implied term in the parties’ contract.
[35] The first defendant also contends that the contractual arrangements between the parties were not limited to those set out in the written documents which they executed. The first defendant contends that there was also an implied term along the lines that the bank would deal with the first defendant in a way that made
“commercial sense”. It is said that the conduct of the bank breached such a term.
[36] As I understand it, the first defendant contends that the bank in conformity with the implied term ought to have applied funds received from the Kumeu sale in such a way that there would be “head room” under the credit facility which would enable the first defendant to complete his other developments, which he was in the course of carrying out, so that the profits from those other developments could be unlocked, enabling the first defendant to meet his liabilities in full.
[37] As well the bank ought to have applied proceeds of sale to reduce the first defendant’s term loan and generally in the order which has been claimed by the first defendant in his statement of defence.
[38] It is trite that the implied terms cannot be inconsistent with the express terms actually agreed: BP Refinery (Westernport) Pty Ltd v Shire of Hastings.[3] The bank had an express right to apply proceeds of security to any indebtedness owed to it under cl 17.1, which is set out above at [4]. Whereas under the suggested implied term, the bank would instead have to have regard to what was commercially sensible not just from its perspective but from that of the customer. Such an implied term is
[3] BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC).
therefore obviously inconsistent with the express obligations which the customer undertook and places the bank in a less advantageous position than it would be in if the express terms of the contract were applied without regard to any limitation of the kind for which the first defendant contends here. Therefore it would not be possible to conclude that the way in which the bank applied the proceeds of sale was contrary
to an implied term, as the implied term alleged by the defendant is contrary to the express term of cl 17.1.
Alleged failure to comply with the Property Law Act 2007
[39] The defendant claimed alternatively that the plaintiff had breached the requirements of the Property Law Act 2007 in two respects.
Section 176 of the Property Law Act
[40] The first defendant says that the bank breached the duty of care that it owed to him under s 176 when it sold the Stanmore Bay property at mortgagee sale. In relation to the s 176 point, Mr Chambers says in substance that the first defendant’s complaint is that the amount for which the property was sold, $2,607,000, was substantially less than the amount at which valuers had previously valued the property. It had previously been valued in September 2009 by a firm called Sheldons at $4,150,000 and again in April 2010 at $3,550,000. It is submitted therefore that the mortgagee breached its duty under s 176.
[41] Section 176 of the Property Law Act 2007 states:
176 Duty of mortgagee exercising power of sale
(1) A mortgagee who exercises a power to sell mortgaged property, including exercise of the power through the Registrar under section
187, or through a court under section 200, owes a duty of reasonable
care to the following persons to obtain the best price reasonably obtainable as at the time of sale:
(a) the current mortgagor: (b) any former mortgagor:
(c) any covenantor:
(d) any mortgagee under a subsequent mortgage:
(e) any holder of any other subsequent encumbrance.
(2) A mortgagee who exercises a power to sell mortgaged property may not become the purchaser of the mortgaged property except in accordance with section 196 or an order of a court made under section 200.
[42] The first defendant claims that the mortgagee breached its duty under s 176 when it sold the mortgaged property at Stanmore Bay by mortgagee sale on 15 June
2010.
[43] As Mr Kennedy submitted, s 176 is concerned with the processes that were followed when carrying out a mortgagee sale. Section 176 does not impose a requirement that a sale be obtained at any particular price. The section imposes a duty of “reasonable care” to obtain the best price reasonably obtainable.
[44] The opinions of valuers obtained on other earlier occasions as to what the property was likely to achieve at a mortgagee sale are irrelevant to the issue of how the mortgagee conducted the sale in this case. As to that, full details have been provided about how the sale was conducted. A reputable firm of real estate agents was retained and they appear to have carried out reasonable efforts to market the property. No criticism was made of the details of the steps taken by the agents whether as to the publicity given to the sale, the conducting of property visits or other steps. Indeed, it is significant that the amount which the sale realised was nearly identical to what the real estate agents had estimated it would achieve at mortgagee sale. Attention was drawn to the favourable fact that a resource consent had been obtained for sub-division of the property. In light of the fact that no particulars are given of the way in which the programme or aspects of it were deficient, I am quite unable to find fault with the steps taken by the mortgagee in conducting the sale.
[45] It is true that the discrepancy between the actual sale price and the valuations which were obtained would be difficult to explain in normal market conditions. However, the property market is a dynamic one and by the date the Stanmore Bay property went to tender, the global financial crisis was deeply imbedded. There was a very low level of activity in the market, which is demonstrated by the fact that the real estate agent’s marketing proposal obtained in 2010 noted that there was little demand for properties on the Whangaparaoa peninsula with only one recorded sale in the previous 18 months in Orewa. Quite simply, what occurred seems to me to be consistent with the picture that the market and the property prices in the area fell quite sharply around the time of the tender.
[46] Moreover, there is no reason why the bank (which clearly has experience in managing forced sales) would go along with a flawed marketing arrangement which would be likely to yield less than a properly considered and executed marketing plan
would yield for the property. This is not a case where the mortgagee only needed to generate a limited return from the sale in order to clear its own debt. At the end of the sale process, as the fact that these proceedings have been brought shows, there was still a substantial deficit left to the bank and in respect of which it is an unsecured creditor of the first defendant.
[47] My conclusion is that the first defendant has not laid any evidential foundation for a submission that there is a reasonable possibility that as mortgagor in this case, he would be able to prove a breach of s 176. It is possible that he could. But he has not laid out any evidence which suggests that the Court could conceivably find in his favour. All he has, as I have said, to put forward that claim, is the contrast in the estimated values of $4,150,000 as at September 2009 and
$3,550,000 as at April 2010 and the actual sale price of $2,607,000 as at June 2010 which, for the reasons I have attempted to explain, is equivocal.
[48] It is a matter of judgement whether the mortgagor has an arguable defence. That does not mean that, when considering that matter, the Court is limited to considering whether there might be a theoretical basis for such a cross-claim. The Court is required to do what it can to assess the persuasiveness of such a case and consider whether a Judge dealing with the matter at trial might be given cause to hold that the mortgagor successfully proved a breach of s 176. In making that assessment, the Court has regard to what the mortgagor has demonstrated in the evidence it has put before the Court at summary judgment, together with an outline of the probable arguments it would put forward at trial, to assess whether it at least meets a standard so that at trial, a court would not dismiss the claim as being without merit and unlikely to succeed. I do not view the first defendant’s claim in this case as meeting that standard. In my view, there is no arguable claim that the first defendant would have a set-off available to him arising from the circumstances of the mortgagee sale.
Section 119 of the Property Law Act
[49] I understand that the remaining point arising from the Property Law Act concerns a claim that the s 119 notices of defaults which were served on the first defendant were invalid because the bank was in breach of its contractual or other obligations to the first defendant, which gave rise to set-offs and that therefore it was not entitled to claim that the first defendant was indebted to it in the amounts stated in the default notice. The alleged breach of s 119 therefore depends upon my findings as to whether there were other breaches giving rise to set-offs, and cannot found a standalone defence to the plaintiff’s claim. I will now go on to consider whether there was a breach of the CCCFA giving rise to a set-off.
Credit Contracts and Consumer Finance Act 2003
[50] A further possible source for rights of set-off according to the first defendant was that in its dealings with the first defendant, the plaintiff breached the Credit Contracts and Consumer Finance Act 2003 (the CCCFA). Broadly speaking, the grounds said to constitute the breach cover the same areas that I have discussed earlier when considering whether the plaintiff had breached its contract (whether the original contract or as allegedly amended) and whether there had been misrepresentations.
[51] The CCCFA, so far as relevant, applies to consumer credit contracts. Such a contract is one which is covered by s 11(1)(b) of the Act which provides that, amongst other criteria, the debtor must enter “into the contract primarily for personal, domestic, or household purposes”.
[52] Mr Chambers also referred me to the provisions of s 13 of that Act. That provides as follows:
13 Presumption relating to consumer credit contract
In any proceedings in which a party claims that a credit contract is a
consumer credit contract, it is presumed that the credit contract is a consumer credit contract unless the contrary is established.
[53] Mr Kennedy submitted that the loan in this case was not of that kind. The
loan that was repaid (the Stevens personal loan) was in fact part of Mr Steven’s
business arrangements. He referred me to the fact that in the loan application itself the term loan was described as “commercial”. In July 2008, the personal loan was one of several described in a document entitled “application for limit” which described lending as being “commercial”. The letter of offer pursuant to which the advance was made again described the loan in these terms:
Type of facility: Commercial term loan
[54] Therefore, even if in the course of asserting rights under the CCCFA Mr Stevens could overcome the express “no set-off” clause, which I will discuss below, he does not have an arguable defence that he has any such right because of the commercial nature of the loan. I note that he himself has not given evidence as to the nature of the loan being of a non-commercial type. The loan agreement which he accepted and which described the loan as being commercial is therefore particularly decisive in telling against his contention that he has a realistic defence based upon the CCCFA.
Set-off
[55] To summarise to this point, I have concluded that there was no breach of contract, no actionable misrepresentation, no breach of s 176 of the Property Law Act, nor any breach of the CCCFA. I do not accept that there was any contractual variation agreed to and, even if it were, it was not confirmed in writing and is therefore invalid. Nor is a term bearing the contractual arrangements between the parties to be implied.
[56] In case I am incorrect in my conclusion, I will also consider the effect of the
“no set-off” provision in the bank’s terms and conditions.
[57] The first issue is whether the wording of the clause acts to exclude set-offs and counterclaims generally. Mr Kennedy referred me to cl 4.4 of the bank’s terms and conditions which provided:
4.4 Payments to be Free and Clear: Each payment under any Document shall be unconditional and free and clear of any restriction, and shall be in full, without any deduction or withholding whatsoever (whether in respect of tax, set-off, counterclaim, charges or otherwise) unless such deduction or withholding is required by law.
[58] The defendant did not dispute that the “no set-off” clause was part of the contract that the parties entered into.
[59] It is clear on the basis of a number of decided cases, including that of Gielens v Broadway Developments Ltd,[4] that such a clause is enforceable. In Gielens, Venning J held that a clause in an agreement which required that rent be paid without any deductions or set-off was enforceable, and that a claim for set-off could not be used against a claim for payment of rent. A further example was provided by Mr Kennedy in his submissions, of a case where the Court concluded in the
[4] Gielens v Broadway Developments Ltd HC Auckland CIV-2008-404-4654, 3 November 2008 at [19].
circumstances of a finance agreement that such a “no set-off” provision was also enforceable: Cregten v Compark Properties Ltd.[5] I consider that those cases are correctly decided, with respect. I conclude that even if any claim for damages was available for breach of contract or misrepresentation, it cannot be set-off against the amount which is owing to the bank.
[5] Cregten v Compark Properties Ltd HC Auckland CIV-2009-404-2415, 4 August 2009 at [52] per Faire AJ.
[60] It is not possible therefore for the first defendant to contend that he has an arguable defence based upon counterclaims arising out of breach of contract, alleged collateral contract, an implied term or misrepresentation, as these claims cannot be set- off against the amount for which the plaintiff sues the first defendant.
[61] Mr Chambers, however, submitted that set-offs pursuant to the two statutes mentioned above (that is, the Property Law Act 2007 and the CCCFA) were in a different category. The effect of his submission was that public policy would not permit that relief obtained under a statute could be overcome by a “no set-off” provision in a contract.
[62] Mr Kennedy did not accept that there was any such public policy requirement. While he agreed that the bank would not contract out of the provisions of the two Acts under discussion, it was his submission that the bank was not attempting to mount an argument to that effect. He submitted that it was one thing to
contend that the parties could not contract out of statutory rights, but it was quite
another to claim that any right to compensation for breach of those statutes’ provisions must necessarily be able to be set-off. Mr Kennedy pointed out that the legislation certainly did not expressly say that that was the case. Nor, in his submission, did it follow that such a conclusion as to the meaning of the statutes was necessary if the statutes were not to be deprived of effect.
Property Law Act
[63] The question is whether, as a matter of implication, the policy of the Property Law Act requires that the right to compensation under s 176 trump “no set-off” clauses.
[64] There is nothing inherent in the subject matter of s 176 which suggests that such a result was intended. Before the Court could accept the first defendant’s position, it would need to conclude that the right under s 176 included not just a right of action but also priority of that claim over the plaintiff’s claim.
[65] The obvious commercial objective of including a “no set-off” clause in lending documents is to ensure that the cashflow of the mortgagee is not interrupted. In essence it is a “pay now, argue later” type of provision. It is not obvious that the mortgagor’s rights under s 176 are concerned with the immediate financial consequences of raising a claim under s 176, in addition to founding a right of claim. The subject matter of s 176 may be contrasted with the position under the Construction Contracts Act 2002, which did not create any new rights but was concerned with regulation of the priority in which such rights could be asserted. Under that Act, s 79 was designed to ensure that builders’ cashflows were not disrupted by customers withholding payments on the basis of asserted counterclaims. The provision limited the circumstances in which such a cross-claim could have that effect. Fairly strict compliance with the regularity terms of the statute was required before the builders’ rights to immediate payment could be defeated.
[66] Claims under s 176 could only arise “after the event”, in the sense that compensation could only be recovered after a mortgagee sale had been transacted in a way that amounted to a breach of the mortgagee’s duty. It is not a case where the legislature was concerned to protect the rights of one party or the other pending a
court’s resolution of their dispute. There was no reason why it should be implied that the plaintiff’s right to recover should be deferred until after the claimed breach of s 176 had been determined by the court. It is not self-evident, in other words, that, in addition to identifying a need to create the type of right given by s 176 to mortgagors, the legislature must also have intended to go further and considered that the understandable commercial reason why “no set-off” clauses were included in contracts must defer to the mortgagors’ rights to maintain liquidity or solvency pending the outcome of the dispute.
Credit Contracts and Consumer Finance Act
[67] No substantial submissions were made to me concerning whether a “no set- off” provision could be ignored in the case of alleged breaches of the CCCFA. It may be that a court could conclude that to uphold a “no set-off” provision would be inconsistent with the objectives of the statute which was enacted to protect debtors. There may be greater force to an argument in this case than for the Property Law Act because the remedial provisions of the CCCFA which allows the court to reopen the parties’ credit contract for reasons of oppressiveness seem to be underpinned by the recognition that the relationship of creditor and debtor is one in which the debtor can be particularly vulnerable. In such circumstances, it may be possible for a court to conclude that where there is a possibility that advantage has been taken of a debtor, all of the creditor’s remedies ought to be arrested until the court has had an opportunity to examine the circumstances of the parties’ transaction.
[68] If I had concluded that there had arguably been a breach of the CCCFA, I might have come to the view that it would be inconsistent with the policy of the Act to give effect to the “no set-off” provision at this stage of the proceedings. However, as I have found above that the contract here clearly did not fall within the Act’s definition of “consumer credit contract”, the point is moot.
The counterclaim
[69] The plaintiff seeks judgment under r 12.2(2) of the High Court Rules in its favour on the counterclaim brought by the defendants. Judgment can be given in circumstances where “none of the causes of action … can succeed”.
[70] The issue that arises is not the exact reverse of the matter considered on the plaintiff’s application, which is whether the defendant has an arguable defence. In such a case, the court evaluates the evidence and comes to a conclusion generally expressed in terms of probability or likelihood as to whether the matters advanced by the defendant could be accepted by the court at trial. An application for summary judgment against a (in this case, counterclaim) plaintiff under r 12.2(2) seems to me to impose a rather stricter requirement. It may be unlikely — even very unlikely — that the defendant’s claim will succeed and yet the court still might not conclude that it is the type of claim that cannot succeed. This is not a case where the plaintiff can claim to have an incontrovertible “king hit”-type answer to the defendant’s counterclaim.
[71] The result will be that the plaintiff’s application for summary judgment on
the counterclaim is dismissed.
Conclusion
[72] The plaintiff shall have judgment as sought in the statement of claim. The parties should confer on costs and, if they are unable to agree on that issue, have leave to file memoranda — from the plaintiff within 21 days and the defendants 14 days thereafter. I grant leave to the parties to apply for further orders by way of
settling the terms of the judgment.
J.P. Doogue
Associate Judge
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