Bank of New Zealand v Letele

[2012] NZHC 2121

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-2367 [2012] NZHC 2121

BETWEEN  BANK OF NEW ZEALAND Plaintiff

ANDTUI TAKAWAI LETELE Defendant

Hearing:         26 July 2012

Appearances: J Toebes for Plaintiff

No appearance for Defendant

Judgment:      20 August 2012

JUDGMENT OF ASSOCIATE JUDGE R M BELL

This judgment was delivered by me on    20 August 2012  at 12 midday

pursuant to Rule 11.5 of the High Court Rules.

...................................

Registrar/Deputy Registrar

Solicitors:

J T Law (Justin Toebes) P O Box 25 443 Wellington 6146

Email:    [email protected]

Copy for:

Tui Takawai Letele, Defendant.

BANK OF NEW ZEALAND V LETELE HC AK CIV-2012-404-2367 [20 August 2012]

Introduction

[1]      The Bank of New Zealand made four loans to Tui Takawai Letele, three in December 2010 and one in January 2011.  They were all table loans for 25 years and specified a monthly payment of principal and interest.      The first two were for

$300,000 each, the third was for $230,000 and the fourth was for $250,000.  All up, the bank lent Mrs Letele $1,080,000.

[2]      The security for the loans was a property at 160 Polo Prince Drive, Alfriston, Auckland. The bank took a registered first mortgage.  The bank says that Mrs Letele misled it into making the loans.  Mrs Letele did not pay instalments as they fell due. On 23 June 2011 the bank made demand on her for $1,090,498.91.   That was substantially more than the unpaid instalments and interest on those instalments.  On

21 July 2011 it issued a notice under s 119 of the Property Law Act 2007 based on non-compliance with that demand.  The relevant default identified in the Property Law Act notice was non-payment of $1,090,498.91 being the amount demanded in the letter of 23 June 2011.  Since then, Mrs Letele has left New Zealand and is now living in Australia.

[3]      The bank applied for summary judgment.  When the application was called

on 26 July 2012 I had queries about the bank’s case.   I adjourned the matter to

21 August 2012 and issued a minute setting out the matters I had questions about. They were:

(a)      Was the proceeding properly served on Mrs Letele, given the absence of a notice to a defendant served overseas under Form G6 of the First Schedule to the High Court Rules?

(b)Should I deal with the matter as undefended, when Mrs Letele was required to file any documents in opposition in the Palmerston North registry?

(c)      Has the bank proved service of the notice under s 119 of the Property

Law Act?

(d)      Is there a contractual power of acceleration on default? (e)     Is the bank’s demand of 23 June 2011 valid?

(f)       Is the notice under s 119 of the Property Law Act valid? (g)    Has the bank proved fraud to an adequate standard?

[4]      The bank has filed a memorandum in reply.  It addresses most but not all of these questions.   It proposes to file and serve an amended statement of claim and further evidence as to quantum and fraud, and to serve Mrs Letele afresh.

Was the proceeding properly served on Mrs Letele, given the absence of a notice to a defendant served overseas under Form G6 of the First Schedule of the High Court Rules?

[5]      Mrs  Letele  was  not  in  New  Zealand  when  the  proceeding  was  served. Associate Judge Sargisson made an order for substituted service by service of the proceeding on her daughter, Vicki Letele.  Vicki was served in Otahuhu, Auckland. The notice of proceeding does not contain a notice to a defendant served out of New Zealand in Form G6, required by r 6.31 of the High Court Rules.

[6]      The bank says that as Vicki Letele was served in New Zealand, then the notice  under  r  6.31  did  not  have  to  be  given.    In  Re  a  Debtor[1]   Sir  Wilfred Greene MR noted that the essential thing in service is that the documents are to be brought to the personal knowledge of the person whose concern it is.  Substituted service was ordered in this case as an appropriate way of bringing this proceeding to the personal knowledge of Mrs Letele when her whereabouts were not known.  As

[1] Re a Debtor [1939] 1 Ch 251 (CA) at 256.

the essential thing is the “personal knowledge of the defendant”, service takes place

where the documents come to the personal knowledge of the defendant, not where the plaintiff takes steps to bring the documents to her personal knowledge. The place

where the documents came to her personal knowledge was in Australia, where she lived, not in New Zealand.     Service took place in Australia.  Mrs Letele had to be served with a notice under r 6.31.  She was not.  Service was irregular.

[7]      I accept the bank’s submission that the absence of a notice under r 6.31 would not have made any difference.  Substituted service was completed 31 working days before the summary judgment application was called.  Under r 12.5, defendants who live in Australia may be served with a summary judgment application no less than

15 working days before the date of hearing.  It would have been futile for Mrs Letele to object to the New Zealand courts taking jurisdiction.   This is a wholly New Zealand case.  Both parties are New Zealanders.  All relevant events took place in New  Zealand.   All  relevant  contracts  and  other  dealings  are  governed  by New Zealand law.  The only foreign element is that Mrs Letele left New Zealand some time after she was served with the Property Law Act notice.   She could not have sensibly proposed that the case be heard outside New Zealand.

[8]      Accordingly   I   hold   that   service   was   effective,   notwithstanding   the irregularity.

Should I deal with the matter as undefended, when Mrs Letele was required to file any documents in opposition in the Palmerston North registry?

[9]      The notice of proceeding directed Mrs Letele to file any notice of opposition and any affidavit setting out her defence in the Palmerston North registry.  The bank has not addressed this aspect.  The bank has not shown that Mrs Letele has not taken the  steps  set  out  in  the notice  of  proceeding  to  defend  the  summary  judgment application.  I deal with the matter on the basis that Mrs Letele may have taken the steps  set  out  in  the  notice  of  proceeding  to  oppose  the  summary  judgment application.

Has the bank proved service of the notice under s 119 of the Property Law Act?

[10]     The bank has proved proper service of the notice under s 119 of the Property Law Act – affidavit of Tufosa Esene of 10 August 2011, attached to the affidavit of J W G Grant of 22 May 2012.

The typical procedure on a mortgage default

[11]     It is necessary to make some preliminary observations before considering the next three questions.

[12]   Many mortgages are security for loans under which the borrower pays instalments of interest or interest and principal.  Acceleration clauses are provisions that allow a mortgagee to require payment of all the sums secured by the mortgage upon default by the mortgagee.  Under s 119, a mortgagee cannot accelerate unless the mortgagee has given the mortgagor a notice that complies with s 120. The notice must tell the mortgagor the nature and extent of the default, the action required to remedy the default, the period for remedying the default, and the consequences if the default is not remedied.   Only if a mortgagor has failed to remedy the defaults following service of a complying notice may the mortgagee exercise any power of acceleration  and any power to  enter into possession of the mortgaged  property, manage the mortgaged property and recover any income from it, or sell the property.

[13]     The default which may allow a notice under s 119 to be given must be a default as defined in s 4 of the Act.

[14]     Section 119 of the Property Law Act 2007 provides:

119      Notice must be given to current mortgagor of mortgaged land of exercise of powers, etc

(1)       No amounts secured by a mortgage over land are payable by any person under an acceleration clause, and no mortgagee or receiver may exercise a power specified in subsection (2), by reason of a default, unless—

(a)       a  notice  complying  with  section  120  has  been  served (whether by the mortgagee or receiver) on the person who, at the date of the service of the notice, is the current mortgagor; and

(b)       on the expiry of the period specified in the notice, the default has not been remedied.

(2)      The powers are—

(a)      the mortgagee's power to enter into possession of mortgaged land:

(b)      the receiver's power to manage mortgaged land or demand and recover income from mortgaged land:

(c)      the mortgagee's or receiver's power to sell mortgaged land. (3)      Subsection (1) is subject to sections 125 and 126.

(4)       A notice required by this section may be given in the same document as a notice under section 118.

[15]     Also relevant are the definitions of “acceleration clause” and “default” in s 4:

4         Interpretation

In this Act, unless the context otherwise requires,—

acceleration clause  means an express or implied term in an  instrument which provides that, if there is a default, any amounts secured by a mortgage become payable (or may be called up as becoming payable) earlier than would be the case if there had not been a default.

...

default means—

(a)       a failure—

(i)       to  pay  on  the  due  date  any  amounts  secured  by  an instrument; or

(ii)      to perform or observe any other express or implied covenant in an instrument; or

(b)       any  other  event  (other  than  the  arrival  of  the  due  date)  on  the occurrence of which any amounts secured by an instrument become payable,  or  may  be  called  up  as  becoming  payable,  under  any express or implied term in the instrument

[16]     Typically, when a mortgagor defaults, the mortgagee serves a notice under s

119  of  the  Property  Law Act  requiring  the  mortgagor  to  remedy  the  specified defaults.   If those defaults are not remedied, the mortgagee may exercise the acceleration power to call up all the monies secured by the mortgage and may exercise the power of sale under the mortgage.   Thus the standard sequence is: default, s 119 notice, acceleration, and power of sale.

[17]     The  bank  has  not  followed  the  standard  pattern  in  this  case.    When Mrs Letele did not pay instalments under the table loans, the bank immediately called up the balances under all the table loans as well as the unpaid instalments.  In

its letter of 23 June 2011 it required the defendant to pay all these sums.   It then

relied on Mrs Letele’s failure to comply with that demand to issue a notice under s

119 of the Property Law Act.  On the expiry of the period for remedying the default in the notice, it did not exercise any power to accelerate but it has sold the property in Polo Prince Drive.

Is there a contractual power to accelerate on default?

[18]     In my minute of 31 July 2012, I said that I had not been able to find an acceleration provision in the bank’s documents.  The bank refers to paragraph 18.7 of the Home Loan – Master Facility Agreement:

18.7All the information, including financial information, provided by you or any other person on behalf of you, to us in connection with the facility documents is true, complete and accurate in all material respects.  You are not aware of any material facts or circumstances which have not been disclosed to us and which could affect our decision to provide financial accommodation to you.

That is not an acceleration clause under s 4 of the Property Law Act.  It is no more than a contractual term as to the truth of information Mrs Letele has provided to the bank.    Paragraph  18.7  may give the bank  remedies  for  breach  of contract,  but paragraph 18.7 does not by itself give any power to accelerate for default.  The bank has not identified any other provision giving it the power to accelerate. The bank has apparently lent out more than $1 million on table loans for 25 years without any contractual provision allowing it to accelerate on default by Mrs Letele.

Is the bank’s demand of 23 June 2011 valid?

[19]     The bank’s demand of 23 June 2011 required the defendant to pay the sum of

$1,090,498.91 as:

Immediate payment from you of all amounts which you either solely or jointly with any other person, are directly or contingently liable to the bank including (but not necessarily limited to) liabilities in respect of the items set out  in  the  statement  below,  and  also  payment  of  interest  in  respect  of amounts from date of demand to the actual payment, with interest rates specified in the demand.

[20]     The sum was calculated by adding together a number of components, which included arrears in payments under the term table loans, interest on those arrears, balances under the term loans and interest accrued on those balances.   The bank demanded payment as a debt then due to it.

[21]     Insofar as Mrs Letele had not paid instalments under the table loans, the bank was entitled to call for payment of those instalments and interest on those arrears. Those parts of its demand required the defendant to perform its primary obligations under the table loan agreements.   Mrs Letele’s failures to pay instalments were relevant defaults within the definition of “default” in s 4 of the Property Law Act. They were breaches of “primary obligations” as that term was used by Lord Diplock

in Photo Production Ltd v Securicor Transport Ltd.[2]

[2] Photo Production Ltd v Securicor Transport Ltd [1980] 1 AC 827 (HL) at 848-849

[22]     However, it is the demand for the balances under the term loans that requires consideration.   There is no contractual provision allowing the bank to call up the balances upon default.     Even if there were, the bank would not be entitled to exercise that power unless and until the requirements of s 119 of the Property Law Act had been complied with.

[23]     As there is no contractual power to accelerate, the inquiry is whether there is any power under the general law to require immediate payment of the loan balances as a debt due to the bank.  The bank refers to the defendant’s fraud, and raises two matters:

(a)       rescission; and

(b)      cancellation.

[24]     Both  cannot  be right.    “Rescission” and  “cancellation” are incompatible. When a contract is rescinded, the parties are returned to the position that they were in at the outset.   The contract cannot be enforced.   On the other hand, cancellation under the Contractual Remedies Act operates prospectively only.  The parties are not

put  back  in  their  original  positions.     The  parties  are  relieved  from  future performance, but obligations that have already accrued may be enforced.[3]

[3] Contractual Remedies Act 1979, s 8(3); Garratt v Ikeda [2002] 1 NZLR 577 (CA).

[25]     Rescission  is  not  available  in  this  case.   At  common  law  and  equity,  a contract induced by fraud was voidable.  The innocent party could rescind, subject to the requirements of rescission being available.  But since the Contractual Remedies Act 1979 came into force, rescission has no longer been available as a remedy for contracts induced by fraud.  Section 7(1) makes that clear:

7        Cancellation of contract

(1)       Except as otherwise expressly provided in this Act, this section shall have effect in place of the rules of the common law and of equity governing the circumstances in which a party to a contract may rescind it, or treat it as discharged, for misrepresentation or repudiation or breach.

[26]     Section 7(1) stops the bank relying on rescission.

[27]     In any event, the bank would not be entitled to rescission.  Affirmation of a contract is a bar to rescission.  When the bank made its demand of 23 June 2011, it required payment of instalments under the table loans that had not been paid. In making  those  demands,  it  was  affirming  the  contract  because  it  was  requiring Mrs Letele to comply with the terms of the loan agreements.  It cannot at the same time require Mrs Letele to comply with the terms of the agreement and also ask to be put into its position at the outset.

[28]     Further, if the bank were to seek rescission, it would have to be prepared to restore Mrs Letele to her position at the outset.   That would require the bank to surrender its mortgage.  In fact, the bank has purported to exercise its rights under the mortgage, thereby continuing to affirm the loan agreements, not rescind them. Quite obviously, the bank would not want to surrender its security.  It does not make legal or business sense for the bank to rely on rescission.

[29]     Next, the bank says that the letter of 23 June 2011 and an earlier letter of

17 June 2011 (not yet put in evidence) were a cancellation of the table loans.   It refers to s 8(2) of the Contractual Remedies Act:

8        Rules applying to cancellation

...

(2)       The  cancellation  may  be  made  known  by  words,  or  by  conduct evincing an intention to cancel, or both. It shall not be necessary to use any particular form of words, so long as the intention to cancel is made known.

[30]     The bank’s submissions advise that the letter of 17 June 2011 told Mrs Letele about advice it had received from the ASB bank, and indicated that if the matter was not satisfactorily resolved a formal demand would be made for the whole amount outstanding.  By itself, that is not a cancellation of the table loans.

[31]     The letter of 23 June 2011 does not show any intention to cancel within s 8(2).  All it shows is a demand for payments of sums of money.  A demand for large sums of money, whether justified or not, is not the same as giving notice calling off future performance of an agreement. It is not possible to tell from reading the letter whether the bank continues to hold Mrs Letele to the terms of the loan agreement, or whether it is releasing her from performing them.  If it is the latter, it requires an insight beyond that of the ordinary reader.

[32]     Even if the bank had given a notice of cancellation under s 8, there is another question, whether the bank can call up the unpaid balances.  There is no contractual provision allowing it to do so.  The cancellation relieves Mrs Letele from performing the contract, including paying further instalments.[4]    But cancellation by itself does not give the bank any right to call up the loan balances as a debt due to it.

[4] Contractual Remedies Act, s 8(3)(a).

[33]   On cancellation, the bank retains the right to recover damages for misrepresentation.[5]   The bank has not pleaded its case as a claim for damages.  The bank has not shown a calculation of losses, as would be required for a damages

claim.    Payment  of  contractual  damages  is  a  secondary  obligation  under  Lord

Diplock’s  classification  in  Photo  Production  Ltd  v  Securicor  Transport  Ltd. A damages claim for misrepresentation against Mrs Letele under s 6(1)(a) of the Contractual Remedies Act is for an unliquidated sum.  It is not a claim in debt.  The distinction between a claim in debt and a claim for damages is relevant to default under s 119 of the Property Law Act.  At this point it is enough to note that a claim for damages could not be a basis for the bank to call up the loan balances as a debt due to the bank.

[5] Contractual Remedies Act, ss 6(1)(a) and 8(4).

[34]     It may be that instead of claiming damages, the bank was calling up the unpaid balances under the loans as some kind of restitutionary claim.  Restitutionary claims after cancellation may be awarded under s 9 of the Contractual Remedies Act. Claims under s 9 take the place of common law restitutionary claims (for example, for quantum meruit and money had and received) following cancellation of a contract.[6]    Under s 9, whether an award is made, its terms and the amount of any payment are in the discretion of the court.  Section 9 says:

[6] See the informative discussion of the legislative history of the Contractual Remedies Act in

Brown & Doherty Ltd v Whangarei County Council [1990] 2 NZLR 63 (HC) at 66-67.

9        Power of Court to grant relief

(1)When  a  contract  is  cancelled  by  any  party,  the  Court,  in  any proceedings or on application made for the purpose, may from time to time if it is just and practicable to do so, make an order or orders granting relief under this section.

(2)      An order under this section may—

(a)       Vest in any party to the proceedings, or direct any such party to transfer or assign to any other such party or to deliver to him the possession of, the whole or any part of any real or personal property that was the subject of the contract or was the whole or part of the consideration for it:

(b)       Subject  to  section  6  of  this Act,  direct  any  party  to  the proceedings to pay to any other such party such sum as the Court thinks just:

(c)       Direct any party to the proceedings to do or refrain from doing in relation to any other party any act or thing as the Court thinks just.

(3)Any such order, or any provision of it, may be made  upon and subject to such terms and conditions as the Court thinks fit, not

being in any case a term or condition that would have the effect of preventing a claim for damages by any party.

(4)In considering whether to make an order under this section, and in considering the terms of any order it proposes to make, the Court shall have regard to—

(a)      The terms of the contract; and

(b)       The extent to which any party to the contract was or would have been able to perform it in whole or in part; and

(c)       Any expenditure incurred by a party in or for the purpose of the performance of the contract; and

(d)       The value, in its opinion, of any work or services performed by a party in or for the purpose of the performance of the contract; and

(e)       Any benefit or advantage obtained by a party by reason of anything done by another party in or for the purpose of the performance of the contract; and

(f)       Such other matters as it thinks proper.

(5)No order shall be made under subsection (2)(a) of this section that would have the effect of depriving a person, not being a party to the contract, of the possession of or any estate or interest in any property acquired by him in good faith and for valuable consideration.

(6)No order shall be made under this section in respect of any property, if any party to the contract has so altered his position in relation to the property, whether before or after the cancellation of the contract, that, having regard to all relevant circumstances, it would in the opinion of the Court be inequitable to any party to make such an order.

(7)      An application for an order under this section may be made by—

(a)      Any party to the contract; or

(b)      Any person claiming through or under any such party; or

(c)       Any other person if it is material for him to know whether relief under this section will be granted.

(Emphasis added)

[35]     Because awards under s 9 are discretionary, the obligation to pay them arises on the court giving judgment.  When it made its demand on 23 June 2011, the bank could not rely on a claim under s 9 as a debt already due.

[36]     The bank did not cancel the table loans in its letter of 23 June 2011.  In the absence of cancellation, over the terms of the loans Mrs Letele was required to pay instalments as they fell due plus interest on arrears, but she could not be required to pay  the  unpaid  loan  balances  immediately.     Even  if  the  bank  could  show cancellation, that did not entitle it to call up the unpaid balances as debts due to it on

23 June 2011. The demand for the unpaid balances was invalid.

Is the notice under s 119 of the Property Law Act valid?

[37]     The Property Law Act notice stated that the default was the failure to pay the indebtedness of $1,090,498.91 as at 23 June 2011.  It was that default that had to be remedied under the notice. The bank relies on the failure to remedy that default.

[38]     Mrs Letele was not indebted to the bank in the sum of $1,090,498.91 at

23 June 2011, for the reasons given above.  The bank may have had claims against her, but they were not in debt, and they could not be the basis for a default for a Property Law Act notice.  That point becomes clearer when the meaning of “default” is considered.  The definition of “default” in s 4 refers to a failure to comply with some contractual provision, express or implied.  The first limb refers to “pay on the due date any amounts secured by an instrument”.[7]    That refers to a failure to pay sums falling due on dates fixed for payment under the relevant instrument, that is, debts.   The second and third limbs[8]  of the definition refer to express or implied terms.  Defaults under this definition are failures to comply with primary obligations in Lord Diplock’s sense.   They are not defaults in meeting secondary obligations, such as claims for damages, or defaults in making restitution following cancellation.

[7] Property Law Act 2007, s 4(a)(i).

[8] Property Law Act 2007, s 4(a)(ii) and (b).

[39]     Mrs Letele owed the bank unpaid instalments of $13,746.20 and interest of

$114.44 on those arrears.    The bank could have issued a Property Law Act notice requiring those defaults to be remedied.   Instead, it claimed a default of a vastly greater amount. It overstated the amount of the default to be remedied by about

$1,076,000.  This gross overstatement of the default invalidates the notice.  The bank

is not entitled to rely on Mrs Letele’s failure to pay the sum demanded in the notice.

[40]     The bank says that it has now sold the property at Polo Prince Drive.  If it has done so under its mortgage, it does not appear to have met the requirements of s 119 of the Property Law Act because it did not serve a valid notice on Mrs Letele.

Is there adequate proof of fraud alleged by the plaintiff?

[41]     The bank’s memorandum does not take issue with that part of my minute where I found that the evidence as to fraud was less than compelling.   Instead, it proposes to adduce further evidence.

Further directions

[42]     Even if the plaintiff were to provide updating evidence as to quantum and to give compelling admissible evidence as to Mrs Letele’s fraud, I am not satisfied that the bank would be entitled to summary judgment, at least not for anything more than the unpaid instalments and interest on those arrears.   There are fundamental difficulties with the bank’s case, arising from the absence of any contractual power to accelerate, the invalidity of the bank’s demand of 23 June 2011, the invalidity of the notice under s 119 of the Property Law Act and the absence of a power to sell the Alfriston property.   In some summary judgment applications, it is possible to do running repairs.  However, this case needs a thorough overhaul.  The bank needs to reassess its claim, re-formulate it, and then prove its claim under a fresh re- formulation.   If the bank were to seek an immediate judgment for amounts approximating the balances of its loans, it might consider cancelling the loans and claiming damages or in restitution.  Such claims are not necessarily appropriate for summary judgment.

[43]     I dismiss the application for summary judgment.  No useful purpose would be served by giving the bank the opportunity to file the extra documents it proposes, because they will not address the deeper problems in the case.

[44]     The bank is entitled to continue with its proceeding to a substantive hearing. Once the plaintiff has established how it wishes to proceed, it should ask for a case management conference so that further directions can be given.

...........................................

R M Bell

Associate Judge