Austin v Polo Prince Manufacturing Limited
[2012] NZHC 1948
•6 August 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2012-404-000439 [2012] NZHC 1948
BETWEEN COLIN BERNARD AUSTEN AND ANNE ROSINA AUSTEN, AS TRUSTEES OF THE AR AUSTEN FAMILY TRUST AND THE CB FAMILY TRUST
Plaintiffs
ANDPOLO PRINCE MANUFACTURING LIMITED
First Defendant
ANDWILLIAM OWEN SOLOMON Second Defendant
Hearing: 11 July 2012
Appearances: K M Quinn for Plaintiffs
E Telle for Defendants
Judgment: 6 August 2012
(RESERVED) JUDGMENT OF ANDREWS J
[Plaintiffs’ application for summary judgment]
This judgment is delivered by me on 6 August 2012 at 3:00pm pursuant to r 11.5 of the High Court Rules.
..................................................... Registrar / Deputy Registrar
Solicitors/Counsel:
North Harbour Law, Orewa DX BP60001 (for Plaintiffs)
Neilsons Lawyers Limited, Onehunga DX EP71017 (for Defendants) Counsel:
K M Quinn, Bankside Chambers, Level 22, Lumley Centre, 88 Shortland Street, Auckland 1010 (Plaintiffs)
AUSTEN & AUSTEN V POLO PRINCE MANUFACTURING LTD & ANOR HC AK CIV 2012-404-000439 [6 August 2012]
Introduction
[1] In this proceeding the plaintiffs have applied for summary judgment against the defendants in respect of rental arrears under a lease of a commercial property. The first defendant (lessee) and second defendant (guarantor) do not deny that they are liable for rental arrears, but say that they are entitled to set-offs, or have counterclaims against the plaintiffs, that more than extinguish the plaintiffs’ claim. To that, the plaintiffs respond that the claimed set-offs and counterclaims are statute- barred, or simply cannot succeed.
Background
Parties
[2] The plaintiffs are Mr C B and Mrs A R Austen who, as trustees of the AR Austen and CB Austen family trusts (“the family trusts”), own a commercial property at Whangaparaoa (“the business premises”). In the same capacity, Mr and Mrs Austen were the directors and shareholders of Hypro Industries Limited (“Hypro”), which manufactured heated towel rails at the business premises.
[3] The first defendant, Polo Prince Manufacturing Limited (“Polo Prince”) was originally called Outdoor & Beyond Limited, then Hypro Engineering Limited, then Polo Prince. Throughout this judgment, the first defendant will be referred to as Polo Prince, to avoid confusion. The second defendant, Mr Solomon, and his wife Ms Preston, were the directors of Polo Prince.
Agreement for Sale & Purchase
[4] On 5 October 2005, Polo Prince (as purchaser) entered into an agreement with Hypro (as vendor) to buy Hypro’s business (“the agreement”). The purchase price specified in the agreement was $1.3 million, to be paid by way of a deposit of
$10,000, a further $120,000 when the agreement became unconditional, $770,000 on the possession date, and the balance over three years from the possession date.
[5] Pursuant to a variation to the agreement dated 20 October 2005, the purchase price was reduced to $950,000, to be paid by way of the $10,000 deposit, $85,000 when the agreement became unconditional, $225,000 on the possession date, and
$630,000 on the “final settlement date”, 31 March 2006. The variation to the agreement further provided that “the Vendor” (in fact, Mr Austen) would continue to work in the business and consult to the business, on a 30-hour week basis for a nil wage, up until 31 March 2006.
[6] Before the agreement became unconditional, Mr Solomon undertook due diligence, in the course of which he submitted a questionnaire to Mr Austen, seeking answers to each of the questions set out. The agreement became unconditional on
4 November 2005, possession was given on 1 December 2005, and the final payment was made on 31 March 2006.
Lease
[7] The agreement provided that Hypro was to arrange for the family trusts (as landlords) to grant Polo Prince a lease of the business premises for six years, with two rights of renewal, each for a further six years.
[8] Mr and Mrs Austen (as trustees of the family trusts) and Polo Prince entered
into a lease on 30 November 2005 (“the lease”). The lease was for six years from
1 December 2005, with two rights of renewal, each for six years. The annual rent was $126,418.18 plus GST ($10,534.85 plus GST per month). The interest rate applicable in the event of default in payment of the rent was five per cent per annum above the landlords’ bank overdraft rate. The lease also provided that Polo Prince was to pay the landlords’ legal costs (as between solicitor and client) of and incidental to the enforcement of the landlords’ rights and remedies under the lease.
[9] The lease contained a provision that all rent was to be paid without any deductions or set-off.
[10] Mr Solomon was guarantor of Polo Prince’s obligations to pay rent and to
perform the covenants in the lease, and indemnified the family trusts against any loss
they might suffer should the lease be disclaimed or abandoned by a liquidator or receiver. Mr Solomon’s liability was limited to a maximum of 12 months’ rental plus GST.
Events after 31 March 2006
[11] At the time Polo Prince purchased the business, Hypro’s major customer, by a substantial margin, was Heirloom International Limited (“Heirloom”), for which Hypro had fabricated “ladder” towel rails which Heirloom then completed by installing wiring and polishing the fabricated tubing. Hypro’s second biggest customer was HPM (NZ) Limited, for which Hypro had manufactured complete “S- bend” heated towel rails.
[12] In late March 2006 HPM stopped buying the S-bend towel rails. Mr Solomon said, in an affidavit in opposition to the application for summary judgment, that the reason HPM gave was that it wanted to sell ladder towel rails, but Polo Prince did not manufacture completed ladder rails. Mr Solomon decided to develop the business so that Polo Prince could manufacture and sell completed ladder towel rails to HPM, Heirloom and other customers. Mr Solomon said that Heirloom then told him, first, that there was an oral agreement in place with Hypro that the ladder rails would only be fabricated by Hypro, not completed, and secondly that the fabricated ladder rails would be sold exclusively to Heirloom. Mr Solomon said he was then told that Heirloom had agreed that it would continue buying fabricated towel rails from Hypro on the basis that they were exclusively supplied by Hypro. Thus, if Hypro, or Polo Prince, were to market ladder rails to other customers, it would immediately lose Heirloom’s custom.
[13] In late 2007, Heirloom’s monthly purchases suddenly dropped from about
$100,000 a month to about $5,000 a month by mid-2008.
[14] On 26 March 2009, Mr and Mrs Austen (as trustees of the family trusts), Polo Prince, and Mr Solomon executed a “Deed Deferring Payment of Rent”. This deed recorded that Polo Prince had requested, and the family trusts had agreed to, deferral of the rental payments due on 1 March and 1 April 2009. The deed then recorded the
parties’ agreement that in consideration for those two rental payments being deferred, the monthly rental payments due as from 1 May 2009 would be increased by $1,000 a month plus GST, up until the next rent review. The deed further recorded Mr Solomon’s agreement to the variation, and confirmation that his guarantee remained in full force.
[15] On 23 March 2010, the parties executed a “Deed of Variation of Lease”. This deed recorded that Polo Prince had “requested the lessor to come to its assistance”, which the family trusts had agreed to do. The deed provided that the rental was to continue unchanged until the next rent review, and Polo Prince was given a rent holiday for the months of March, April, and May 2010. Further, the family trusts agreed to meet payment of two instalments of local body rates.
[16] On 14 September 2010, the family trusts served a Notice of Breach of Lease on Polo Prince and Mr Solomon, in respect of failure to pay the rent for July 2010, partial failure to pay the rent for August 2010, failure to pay the rent for September
2010, and failure to pay local body rates and insurance. The Notice of Breach stated that a total of $45,794.87 was outstanding.
[17] On 14 October 2010, the parties executed a “Deed of Arrangement with Respect to Lease”. This deed also recorded that Polo Prince had requested assistance, which the family trusts had agreed to give. Under the deed, the annual rent was reduced to $78,000 per annum plus GST (from $138,420 plus GST), payable fortnightly as from 1 October 2010. The annual rental was inclusive of local body rates and insurance. Under the deed Polo Prince acknowledged that it owed arrears of rent of $17,983.68, which was to be repaid in instalments of $1,000 per month as from 1 April 2011. Polo Prince was also to pay the family trusts’ costs relating to the deed.
[18] The deed further provided that in the event of default the Deed of Arrangement would immediately cease, and the original terms of the lease, as varied, would immediately apply.
[19] On 10 March 2011, the family trusts issued a further Notice of Breach of Lease, recording that Polo Prince had failed to pay rent due on 17 November 2010, the rent due in January and February 2011, the rent due on 1 March 2011, and the family trusts’ costs in relation to the Deed of Arrangement. On the same day,
10 March 2011, Polo Prince was placed in receivership. The receivers disclaimed the lease, but entered into an interim tenancy until 20 April 2011. Approximately 28 per cent of the business premises have been re-let as from 1 August 2011.
[20] A demand was made against Mr Solomon as guarantor on 11 March 2011.
Proceedings
[21] The plaintiffs’ statement of claim and application for summary judgment, supported by an affidavit by Mr Austen, were filed on 1 February 2012. The plaintiffs claim $69,983.61 (GST inclusive), plus interest, for arrears of rent against Polo Prince, and $159,183 (GST inclusive) against Mr Solomon, being the maximum for which he is liable under the cap to his guarantee.
[22] A notice of opposition was filed on behalf of Polo Prince and Mr Solomon on
20 March 2012, together with an affidavit by Mr Solomon. Further affidavits in support of the opposition were filed on 16 April 2012, sworn by Mr Solomon, Mr Van Straaten, Mr Lints, and Mr Barclay. Mr Solomon’s affidavit included as an exhibit a copy of a statement of claim filed by Polo Prince and Mr Solomon and Ms Preston as plaintiffs, against Mr and Mrs Austen (“the defendants’ statement of claim”), in a proceeding filed on 30 March 2012 (“the defendants’ proceeding”).1
[23] A reply affidavit sworn by Mr Austen was filed on 1 May 2012. Further affidavits sworn by Mr Solomon, and an affidavit by Ms Preston were filed on
25 June 2012, and a fourth affidavit sworn by Mr Solomon was filed on 4 July 2012.
The grounds of opposition to summary judgment
[24] In their notice of opposition to the application for summary judgment, Polo Prince and Mr Solomon claim that they have defences by way of set-off and/or counterclaim for:
(a) breach of contract under the Contractual Remedies Act 1979; (b) negligent misstatement;
(c) equitable estoppel;
(d) breach of an implied duty of good faith; (e) economic duress; and
(f) breach of s 9 of the Fair Trading Act 1986.
[25] The defences claimed by the defendants centre on alleged representations (allegedly misrepresentations) made about Hypro’s business by Mr Austen which, the defendants say, induced them to:
(a) enter into the agreement for sale and purchase; (b) subsequently enter into the lease and guarantee;
(c) pay over the first portion of the purchase price for the business on 1
December 2005; and
(d) complete payment of the purchase price on 31 March 2006.
[26] It is appropriate to record here that Mr Quinn, on behalf of the plaintiffs, made it clear at the hearing that the plaintiffs deny any misrepresentation, but have elected not to respond to the allegation (save for that denial), as to do so would be to
enter into disputed facts. The plaintiffs accept that if their arguments against the claimed defences do not succeed, the application for summary judgment must fail.
Summary judgment principles
[27] Counsel agreed that the applicable principles were summarised by the Court of Appeal in Krukziener v Hanover Finance Ltd,2:
The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried. The Court must be left without any real doubt or uncertainty. 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. 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. 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.
[citations omitted]
[28] With those principles in mind, I turn to consider the claimed defences.
Alleged misrepresentations
[29] Each of the claimed defences is founded on misrepresentations alleged to have been made to Mr Solomon. In his submissions, Mr Telle referred to the paragraphs in the defendants’ statement of claim in which the alleged misrepresentations are set out. These may be summarised as follows, by reference to the paragraph number in the statement of claim:
(a) representations in the material sent to Mr Solomon by the vendor’s
agent, on or about 8 September 2005 (paragraph 8);
(b)representations made by Mr Austen in early to mid-September 2005 (paragraph 9);
(c) representations made by Mr Austen in the course of agreeing the goodwill component of the purchase price (paragraph 12);
(d) representations made by the Austens and/or Hypro in early October
2005, in answers given to questions set out in a due diligence questionnaire;
(e) representations made by Mr Austen in the course of the due diligence process and/or leading up to or entering into the Agreement for Sale and Purchase; and
(f) representations made between 1 December 2005 and 31 March 2006 by Mr Austen, through his conduct and by virtue of various oral statements, reconfirming the representations he had made earlier (paragraph 19).
I will refer to these representations as “the alleged misrepresentations”.
Breach of contract
[30] The defendants claim to have a defence by way of set-off, or a counterclaim, on the grounds that they relied on the alleged misrepresentations in entering into the agreement for sale and purchase, and therefore the lease and guarantee, and that they are entitled to relief under the Contractual Remedies Act 1979.
[31] This claimed defence need not be considered further. At the hearing, Mr Telle accepted that an action under the Contractual Remedies Act lies against the party to the contract – in this case Hypro – not the party’s agent (Mr Austen). Hypro is not a party to this proceeding, or the defendants’ proceeding. A claim under the Act is therefore not available to the plaintiffs.
Negligent misstatement
[32] Independently of the claim under the Contractual Remedies Act, Mr Telle submitted that the defendants had a defence by way of set-off, or a counterclaim, on
the grounds of an action in tort for negligent misstatement based on the alleged misrepresentations. He submitted that the claim was not time-barred, as time under the Limitation Act had not started to run until the final balance of the purchase price was paid on 31 March 2006. As the defendants’ proceeding was filed on 30 March
2012, the claim is, he submitted, within time (albeit only just). Mr Quinn submitted that any defence based on a claim of negligent misstatement is out of time.
[33] The issue is, therefore, whether a claim in tort of negligent misstatement is time-barred under the Limitation Act, s 4(1)(a) of which provides that an action founded on contract or tort must be brought within six years of the date on which the cause of action arose.3
[34] In Matai Industries Ltd v Jensen,4 Tipping J said, in relation to a defendant’s application to dismiss a proceeding on the grounds that the plaintiff’s claims were barred by the Limitation Act:
If the plaintiff in opposition to the defendants’ proposition can show that it has a fair argument that the claim is not statute-barred or that the limitation period does not apply or is extended for any reason, then of course the matter must go to trial. To hold the interests of plaintiffs and defendants in fair balance in this context the Court should in my view be slow to strike out a claim or cause of action altogether in limine but against that, if the position is quite clear, then a defendant should not be vexed by having to go to full trial when the answer is obvious and inevitable.
[35] Mr Quinn cited, as authority for his submission that the defendants’ claim for negligent misstatement is time-barred, the judgment of the Supreme Court in Davys Burton v Thom.5 In that case, proceedings were brought against solicitors in July
2002, in which it was alleged that they had given negligent advice in March 1990 as to the execution of a matrimonial property agreement. In December 1999 the Family Court had refused to treat the agreement as effective. The plaintiff argued that his cause of action in negligence had arisen in December 1999, so his claim against the
solicitors was within time.
3 Notwithstanding that the Limitation Act 2010 came into force on 1 January 2011, the Limitation
Act 1950 applies to this proceeding: see section 59 Limitation Act 2010.
4 Matai Industries Ltd v Jensen [1989] 1 NZLR 525 (HC) at 532.
5 Davys Burton v Thom [2008] NZSC 65, [2009] 1 NZLR 438.
[36] The Supreme Court unanimously held that the plaintiff’s cause of action arose in March 1990. This was because the plaintiff had suffered actual and quantifiable loss at that time, by obtaining an agreement that was not legally enforceable, even though the extent of the resultant damage would not become clear until later.6
[37] Mr Telle attempted to distinguish Davys Burton in two ways: first on the basis that the plaintiffs suffered loss when the final payment was made on 31 March
2006, so that their cause of action did not arise until then; and secondly on the basis of continuing misrepresentations alleged to have been made between December
2005 and 31 March 2006 (“the continuing misrepresentations”). These two contentions require separate consideration.
Did a cause of action arise on payment of the final balance of the purchase price?
[38] Mr Quinn’s response to Mr Telle’s submission was that it confused incurring an obligation under the Agreement for Sale and Purchase, and performing that obligation. Mr Quinn submitted that a claim in tort, like a claim under the Contractual Remedies Act, arose when the obligation to make the payments arose; that is, when the agreement was entered into, in October 2005. He submitted that, at that time (assuming that the facts as pleaded were true), the defendants received a “flawed asset”. They had agreed to purchase a business that had, they allege, Heirloom “locked in” as a customer, but had received a business that did not.
[39] I accept Mr Quinn’s submissions. The defendants were legally obliged to make the final payment of $650,000 as soon as the Agreement for Sale and Purchase became unconditional in October 2005. Any cause of action in negligence arising from statements or representations made prior to incurring that obligation arose in October 2005. It is, therefore, “obvious and inevitable”7 that such a cause of action
is time-barred under the Limitation Act.
6 At [16] and [25] (per Elias CJ), [28] (per Blanchard J), [46] and [47] (per Tipping, McGrath and
Wilson JJ).
7 See Matai Industries, above n 4.
[40] The second limb of Mr Telle’s argument that the defendants had a valid claim in tort for negligent misstatement, which is not time-barred, was on the basis of Mr Solomon’s statement in his first affidavit in opposition to the application for summary judgment, that:
During [the period 1 December 2005 to 31 March 2006] Mr Austen continued to work as a consultant until 31 March 2006 and through his conduct or through oral assurances he repeated all of the above representations he made on behalf of Hypro the trust.
[41] An allegation to similar effect is made in the defendants’ statement of claim.
[42] Mr Telle submitted that during the period from December 2005 to March
2006, pursuant to a term agreed to in the variation to the agreement, Mr Austen worked in the business as a consultant and repeated each and every one of the pre- contractual representations, either by reiterating them or by conduct (by reassuring Mr Solomon, and not telling him anything different). Mr Telle submitted that, as a result, the defendants continued to rely on the alleged misrepresentations, and paid the final balance of the purchase price on 31 March 2006. He submitted that had there not been the continuing misrepresentations, the defendants would not have paid the final balance at all, or would have paid less than $650,000. Accordingly, he submitted, the claim for negligent misstatement, relying on the continuing misrepresentations, is within time.
[43] In Mr Quinn’s submissions in reply, he asked on what basis the defendants would not have had to pay the final balance of $650,000. His answer to that question was that the defendants would have had to say that they had not got what they bargained for. They would be saying that when the agreement became unconditional, they got a business which was not worth what they had agreed to pay for it. Accordingly, he submitted, a claim based on the continuing misrepresentations comes directly within Davys Burton, and is time-barred.
[44] There are, in my view, two ways in which the defendants’ claim based on the
continuing misrepresentations may be analysed.
[45] The first is that it is alleged that the claim is for the loss suffered by paying too much for the business: that had they been aware of the misrepresentations, the defendants would either have demanded that they pay a lower price, or not completed the purchase. This is a typical claim for reduction in the value of the asset obtained, akin to the fact situation in Davys Burton, and is the same loss as is alleged in respect of the pre-contractual representations. I am satisfied that any cause of action in respect of such a loss arose when the agreement became unconditional in October 2005, and would therefore be time-barred as from October 2011.
[46] The second analysis is that the defendants claim the practical loss of paying over the final balance of $650,000, in reliance on the continuing misrepresentations. However, as from October 2005 the defendants were contractually obliged to make the payment. The authors of The Law of Torts in New Zealand, in relation to the time at which loss is suffered, said:8
We can summarise the position in this way. There is actual loss where a plaintiff incurs an existing liability or suffers an existing diminution in value of land or personal property or a chose in action. A cause of action accrues at that date even though there has been no demand on the liability, or the loss has not crystallised, or there has been no out-of-pocket expenditure. ...
(emphasis added)
[47] The words that I have emphasised support my conclusion that any cause of action arose when the defendants entered into the Agreement for Sale and Purchase, not when they were required to perform their obligations under the agreement by making payment of the purchase price. On this analysis, also, any cause of action based on the continuing misrepresentations arose when the Agreement for Sale and Purchase became unconditional in October 2005 and would, therefore, be time- barred as from October 2011.
Conclusion as to claimed defence based on negligent misstatement
[48] I have concluded that it is “obvious and inevitable” that any claim of
negligent misstatement, whether based on pre-contractual representations or the continuing misrepresentations, is time-barred under the Limitation Act.
8 Stephen Todd (ed) The Law of Torts in New Zealand (5th ed, Brookers, Wellington, 2009) at
[26.5.05(2)].
[49] Mr Telle submitted that the defendants had a defence by way of set-off, based on equitable estoppel. As set out in the defendants’ statement of claim the defendants “assumed and/or expected” based on the alleged misrepresentations (both pre-contractual and the continuing misrepresentations) that:
(a) Hypro was a viable business with a stable established client base with plenty of potential of grow; and
(b)Hypro had a strong and stable relationship with its customers, in particular its key customer Heirloom, and there was no concern about losing its clients and/or its key client any time in the near future, and so the purchase of the business was a good opportunity for them.
[50] The defendants contend that they were induced to enter into the agreement, and therefore the lease and guarantee, as a result of the plaintiffs’ encouragement. They submit that as a result of their unconscionable conduct, the plaintiffs should be estopped from taking steps and/or carrying out any acts contrary to the plaintiffs’ representations or promises, and the defendants’ assumptions or expectations. The defendants submitted that the plaintiffs are, therefore, estopped from pursuing any claim for unpaid rental.
[51] On behalf of the plaintiffs, Mr Quinn submitted that equitable estoppel could not apply in this case, where there is a contract between the parties, entered into after arms’ length negotiations, in a commercial setting. Any remedy should be sought under the Contractual Remedies Act or the tort of negligent misstatement. Mr Quinn further submitted that the claim of equitable estoppel was no more than a regurgitation of the defendants’ misrepresentation allegations. Further, as any remedy under the Contractual Remedies Act or negligent misstatement was time- barred, equity would follow the same limitation, with the result that any claim of equitable estoppel is also time-barred.
[52] The elements required to be proved for equitable estoppel (whether as a cause of action or a defence) are:9
(a) a belief or expectation has been created or encouraged through some action, representation, or omission to act by the party against whom the estoppel is brought;
(b)the party alleging the estoppel has reasonably relied on the belief or expectation;
(c) the party alleging the estoppel would suffer detriment if the belief or expectation is departed from; and
(d)it would be unconscionable for the party against whom the estoppel is brought to depart from the belief or expectation.
[53] I accept Mr Quinn’s submission that the defendants cannot succeed in establishing a defence based on equitable estoppel. The beliefs or expectations alleged by the defendants are to the effect that “Hypro was a viable business”, that “Hypro had a strong and stable relationship with its customers”, and “there was no concern about losing Hypro’s clients in the near future”. Those are not representations from which the plaintiffs are now trying to resile. Whether or not those representations can be met has, since the time the contract was entered into, been out of the plaintiffs’ control. Further, the plaintiffs’ claims for unpaid rental, and under Mr Solomon’s guarantee, are not contrary to the representations alleged by the defendants.
[54] I also accept Mr Quinn’s submission that, even if a defence based on equitable estoppel were available to the defendants, it would be time-barred. Where a remedy in equity, such as equitable estoppel, corresponds with a remedy at law,
such as misrepresentation, and the remedy at law is time-barred under the Limitation
9 See Gold Star Insurance Co Ltd v Gaunt [1998] 3 NZLR 80 (CA) at 86.
Act, the court of equity will act by analogy to the law, and will impose the same limitation.10
[55] The defendants’ claim of equitable estoppel corresponds to their claim for negligent misstatement. I have concluded that that claim is time-barred under the Limitation Act. The claim for equitable estoppel would also, therefore, be time- barred.
Breach of an implied duty of good faith
[56] Mr Telle submitted that the plaintiffs owed the defendant a duty of good faith (which he defined as a duty to act in good conscience, fairly and reasonably) both during negotiations leading up to the agreement and subsequent lease and guarantee, and in late negotiations when the business was failing and the defendants “had to bow to the plaintiffs’ demands in order to keep the premises and in order to keep the business going”.
[57] Mr Telle submitted that such a duty applied in the present case as the defendants “were the weaker parties” and “information was withheld from them”, throughout the negotiations. Mr Telle referred to judicial comments to the effect that a duty of good faith is a “developing area of law”, for example in Culverden
Retirement Village v Hill,11 and BP Oil New Zealand Ltd v MJS Services Ltd.12 He
submitted that, in the circumstances, the Court should be slow to strike out a defence claiming breach of a duty of good faith at the summary judgment stage.
[58] In response, Mr Quinn submitted that it is clear from the documents surrounding the agreement, the lease, and the subsequent variations to the terms of the lease, that the defendants were represented by solicitors at all times, so could not be described as “weaker”. He also submitted that while it may be arguable that a
duty of good faith may be found in “relational” contracts, such as franchise
10 See Knox v Gye (1872) LR 5 HL 656 at 674; Commerce Commission v Roche Products (New Zealand) Ltd [2003] 2 NZLR 519 (HC) at [41] – [62]; and The Law of Torts in New Zealand, above n 8, at [26.5.10].
11 Culverden Retirement Village v Hill HC Auckland CIV-2008-404-5281, 25 November 2008 at
[34].
12 BP Oil New Zealand Ltd v MJS Services Ltd HC Palmerston North CIV-2009-454-829, 28
August 2009.
agreements,13 agency agreements,14 or joint venture contracts,15 the present contract was not of that nature. It was “transactional” rather than “relational”. Further, he submitted, any submission that a duty of good faith should be implied into the contract between the parties would need to meet the test set out in BP Refinery (Westernport) Pty Ltd v Shire of Hastings.16
[59] In Culverden Retirement Village, Woodhouse J refused to strike out a claim that Culverden was subject to a duty to act in good faith in exercising its powers under a contract with Mrs Hill, a resident of the Village. Culverden had exercised an option to purchase Mrs Hill’s retirement unit after having determined that she had breached a rule relating to the operation of the Village. They paid her $10,968.90 for her unit, for which she had previously paid $153,500. Woodhouse J accepted that whether a duty of good faith should be implied was “a developing area of the law, where there are conflicting opinions, such that a claim should not be struck out on an
interlocutory application before trial”.17 Mr Telle advised the Court that that
proceeding had not gone to trial.
[60] In BP Oil New Zealand Ltd v MJS, Associate Judge Gendall refused to strike out a claimed defence of breach of a duty of good faith in circumstances where the defendants had been commissioned agents for BP for some 15 years, and had then entered into a supply agreement believing that the parties would operate together in the future as they had done in the past, which did not occur. As I understand it, that proceeding has not gone to trial.
[61] I accept Mr Quinn’s submission that both Culverden and BP Oil New Zealand can be seen as concerning “relational” contracts: Culverden between Retirement Village owner and resident; and BP Oil New Zealand, between fuel supplier and retail agent. They can be distinguished on their facts from the present case, which concerns a single transaction: the sale of a business coupled with a lease of the
business premises. I do not accept Mr Telle’s submission that the fact that the
13 Bilgola Enterprises Ltd v Dymocks Franchise Systems (NSW) Pty Ltd [2000] 3 NZLR 169 (CA).
14 Stanley v Fuji Xerox New Zealand Ltd HC Auckland CP479/96, 5 November 1997.
15 McLachlan v Mercury Geotherm Ltd (in rec) [2006] UKPC 27, (2006) 7 NZCPR 135.
16 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC) at 283.
17 Culverden Retirement Village, above n 11, at [34].
transaction involved taking over the business premises amounted to “unusual circumstances” which justified implying a duty of good faith. There was no evidence to support such a submission.
[62] Further, I accept Mr Quinn’s submission that in the present case, the test for an implied term, as expressed in BP Refinery (Westernport) is not met. That test requires that the proposed implied term is reasonable and equitable; is necessary to give business efficacy to the contract (that is, the contract is not effective unless it is implied); is so obvious that it goes without saying; is capable of clear expression; and does not contradict any express term of a contract. As the Privy Council later
explained in Attorney-General of Belize v Belize Telecom Ltd,18 the five criteria just
set out are not a series of independent tests, each of which must be surmounted, but a collection of different ways of expressing the central idea that the proposed term must spell out what the contract actually means. I am satisfied that, in the present case, a duty of good faith is not necessary to give business efficacy to the agreement, lease and guarantee, nor is it so obvious that it goes without saying, nor is it what the agreement, lease and guarantee meant to provide.
[63] Accordingly, I conclude that the defendants cannot succeed in their claimed defence that the plaintiffs were in breach of an implied duty of good faith.
Economic duress
[64] Mr Telle submitted that the defendants were, because of their financial circumstances (as a result of purchasing the business, and entering into the lease and guarantee) placed under economic duress when they entered into the variations to the lease. He submitted that there was “undue threat or pressure” that the lease, and therefore the premises, would be lost, after he and his wife had put everything financially and physically into the business. He submitted that the defendants had no choice but to succumb to the economic pressure and enter into the variations to the
lease.
18 Attorney-General of Belize v Belize Telecom Limited [2009] UKPC 10, [2009] 1 WLR 1988 at
[27].
[65] Mr Quinn submitted that a claim of duress could not succeed, as it is clear on the face of the documents evidencing the lease variations that they were entered into at the defendants’ request, and benefitted the defendants by giving them rent holidays and more lenient payment terms.
[66] In McIntyre v Nemesis DBK Ltd,19 the Court of Appeal held that claim of economic duress is best analysed by asking:
(a) Was there a threat against, or illegitimate pressure exerted on, the other party?
(b)If so, did that cause the other party, by compulsion or coercion, to enter into the agreement?
(c) If duress is found, did the coerced party subsequently affirm the agreement?
[67] I accept Mr Quinn’s submission that the defendants cannot claim economic duress (claimed only in respect of the variations to the lease) as a defence to the plaintiffs’ claim. The variations were all to the defendants’ benefit – they allowed the defendants rent holidays and/or eased their payment terms. Further, the defendants were at all times represented by independent solicitors.
Breach of s 9 of the Fair Trading Act
[68] Mr Telle submitted, by reference to the alleged misrepresentations, that the plaintiffs had engaged in misleading and deceptive conduct, leading to the defendants having a counterclaim pursuant to s 9 of the Fair Trading Act.
[69] Mr Telle acknowledged that pursuant to s 43(5) of the Fair Trading Act, any such claim was required to be brought within three years after the date on which the loss or damage, or the likelihood of loss or damage, was discovered, or ought
reasonably to have been discovered. He submitted that it was not until Polo Prince
19 McIntyre v Nemesis DBK Ltd [2009] NZCA 329, [2010] 1 NZLR 463 at [25].
went into receivership that the defendants’ loss was “reasonably discoverable”. He submitted that until that time, the defendants continued to operate, and did everything possible to make the business survive, in the hope and belief that it would survive.
[70] Mr Quinn submitted that the defendants’ loss was reasonably discoverable long before receivership. He pointed to Mr Solomon’s affidavit evidence, at [33] – [39] of his first affidavit, that:
(a) He was told by Heirloom in late 2006 or early 2007 of the oral agreements with Hypro;
(b)At the same he was told by Heirloom of the possibility of it sourcing ladder towel rails from China; and
(c) Between late 2007 and mid-2008 Heirloom’s monthly purchases decreased from about $100,000 per month to about $5,000 per month on average.
[71] Mr Solomon’s evidence was that this was a serious matter. He said that he spoke to his accountant at the time, to the effect that he had been sold a business that was turning into a “dead duck” relatively shortly after it was purchased.
[72] In the light of Mr Solomon’s evidence, I accept that it is not seriously arguable that the defendants’ loss was not reasonably discoverable until Polo Prince went into receivership in 2010. As Mr Quinn submitted, Mr Telle’s submissions appear to confuse suffering damage with learning the extent of the loss. I accept Mr Quinn’s submission that the issue which led to the defendants’ loss was not only reasonable discoverable, but was actually known to the defendants, by mid-2008, at the latest, when they knew that Heirloom was leaving, and Heirloom’s purchases decreased dramatically.
[73] Accordingly, I am satisfied that a defence based on a claim under the Fair
Trading Act cannot succeed, as such a claim was required to be made within three
years of mid-2008; that is, by mid-2011. As it was not made by that time, it is now out of time.
Result
[74] I am satisfied that none of the matters raised by the defendants as defences or counterclaims can succeed.
[75] Accordingly, the plaintiffs are entitled to an order for summary judgment, as claimed in the application for summary judgment, as follows:
(a) For $69,983.61 against the first defendant, and
(b) For $159,183.00 against the second defendant.
[76] The plaintiffs are also entitled to costs and disbursements on a 2A basis, in accordance with the High Court Rules.
Andrews J
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