Brkic v White
[2018] NZHC 1458
•18 June 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2015-404-003066
[2018] NZHC 1458
BETWEEN GORDAN BRKIC, EMILIJA BRKIC and NAGI FALTAUS
PlaintiffsAND
CAROLINE RUTH WHITE, CRUMMER TRUSTEES NO. 82 LTD and MARK
DONALD STALKER as Trustees of the GRAFTON ROAD TRUST
Defendant
Hearing: 26 to 28 February 2018 Appearances:
Phillip Rice for the Plaintiffs
Lawrence Herzog for the Defendants
Judgment:
18 June 2018
JUDGMENT OF MOORE J
This judgment was delivered by me on 18 June 2018 at 4:30 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/ Deputy Registrar Date:
BRKIC & ORS v WHITE & ORS [2018] NZHC 1458 [18 June 2018]
Introduction
[1] The plaintiffs are trustees of a family trust which owned a commercial unit in Auckland. They agreed to sell the unit to the defendants. In order to finance the purchase, the defendants entered into an ancillary loan agreement under which the plaintiffs provided vendor finance.
[2] The defendants did not repay the loan by the due date. The plaintiffs now seek repayment together with interest calculated in accordance with the terms of the loan.
[3] The defendants dispute liability. They claim that the agreement for sale and purchase (“the ASP”) was fraudulently altered by the plaintiffs and/or their agents after they had executed it and is thus unenforceable. In particular they claim cl 6, which contains the vendors’ warranties and undertakings, was unilaterally deleted after they had signed the ASP. They claim they would never have signed the ASP without that clause intact.
[4] The plaintiffs refute this. They say they insisted there should be no vendor warranties; the ASP arrived from the defendants’ solicitor with cl 6 deleted.
Factual background
[5] In order to properly assess the defendants’ claim and in particular examine the issue of whether the SPA was delivered to the plaintiffs with cl 6 intact or not, it is necessary to review the factual background in some detail.
[6] The plaintiffs are Gordan Brkic, Emilija Brkic and Nagi Faltaus. They are the trustees of the Brkic family trust, known as the Madeg Family Trust. Gordan and Emilija Brkic are husband and wife. Mr Faltaus is the Trust’s solicitor.
[7] In around 2005 a development company, Progression Development Ltd (“PDL”), was involved in reconfiguring a former parking building at 160 Grafton Road, Auckland. PDL owned a number of commercial units in the building.
[8] That company was owned and operated by Stephen Kelly. Mr Brkic first met Mr Kelly in about 2006 when Mr Kelly engaged him to provide engineering services during the construction of two additional floors to the top of 160 Grafton Road.
[9] In 2007 the Madeg Family Trust acquired Unit 3B1, which was commercial space situated on the top floor. The Madeg Family Trust’s original intention was to lease the unit to Mr Brkic’s engineering business, DHC Consulting Ltd (“DHC”).
[10] As it turned out, DHC never moved into Unit 3B1, which remained vacant. Attempts to find another tenant were unsuccessful. Some time later the building’s anchor tenant, Datacom, moved out.
[11] Mr Kelly and PDL plainly regarded Datacom’s departure as presenting a development opportunity involving the conversion of half the top floor of the building into residential apartments. In 2008 Mr Kelly approached Mr Brkic and asked him whether the Madeg Family Trust would agree to make the untenanted Unit 3B1 available to PDL as part of that development. The intention was to combine Unit 3B1 with PDL’s adjoining unit, Unit 3A4, and convert both into three new residential apartments (Units 303, 304 and 305).
[12] Mr Brkic agreed to the proposal. He says the Madeg Family Trust’s only contribution to the project was to provide Unit 3B1. Once complete, it would be paid market value and agreed on $469,820, based on the figure fixed by Prendos at the estimated completion date in 2011. The Madeg Family Trust’s involvement in the conversion was limited to Mr Brkic, through DHC, providing some engineering work for PDL in relation to new window openings and the addition of balconies. He otherwise had nothing to do with body corporate issues or consents.
[13] Over this period Mr Kelly was adjudicated bankrupt. He was automatically discharged three years later on 17 November 2011. During his bankruptcy he arranged for others to operate his companies and administer the development.
[14] Various combinations of the defendants and their close associates were involved in the building and development programme. For example, the third named defendant, Mr Stalker, provided services as an electrician.1 John Gray, the long term partner of Caroline White, the first named defendant, was initially engaged as a demolition contractor and later as the construction manager and site supervisor. He was also a director of Crummer Trustees No. 82 Ltd, the second named defendant. He was adjudicated bankrupt on 27 May 2009 and discharged on 15 June 2012.
[15] The development project started to encounter difficulties in 2010 as new owners acquired units in the building. Some opposed the development and complained that the construction work had been carried out without the body corporate’s consent. One applied to the High Court for the appointment of an administrator to manage the body corporate. This appointment was made on 1 October 2010. The administrator reported that the body corporate was moribund; it had never held an annual general meeting, had no funds or records, expenses had been processed through Mr Kelly’s company, works had not been authorised and there was non-compliance with the rules of the Unit Titles Act 2010.
[16] Despite a direction that construction was to cease, development work continued. This led to complaints being made to Auckland Council (“the Council”). In February 2011, the Council issued a stop work notice. Again, this direction was ignored and as a consequence, the Council issued a notice to fix in April 2011. That notice identified the building work which had been undertaken in breach of the Building Code and Building Act 2004. It was addressed to PDL and Mr Kelly as “supervisor”.
1 Mr Stalker was a trustee of the Grafton Road Trust at the relevant time and guarantor of the loan. He was sued in his dual capacity as borrower and guarantor. Sargisson AJ struck out the claims against him by consent in Brkic v Stalker [2016] NZHC 2259 at [4].
[17] Work nevertheless continued and in September 2011 the Council applied to the Department of Building and Housing for a determination regarding the notice to fix and the building consent issued to PDL under Part 3 of the Building Act. This process identified numerous deficiencies in the conversion work including decks to the new apartments intruding over common property and multiple penetrations through the common roof area. The Madeg trustees were named as interested parties.
[18] Ms White, her partner Mr Gray and Mr Kelly have had a long association with the development going back to at least July 2008 when one of Ms White’s companies leased two units to the body corporate manager. The deed of lease records Ms White’s signature as landlord and Mr McCall’s for the body corporate.2 Their signatures were witnessed by Mr Kelly. Ms White said in cross-examination that she was introduced to the property by Mr Gray who was working as a demolition contractor gutting the lower levels of 160 Grafton Road to create 99 apartments. He told her about what he was doing and the possibility of buying some of the units as an investment. She spoke with her accountant, Mr McCall, who said it would be a good investment. This led to sale and purchase agreements for four apartments on the third floor, before Mr Kelly changed the order of the development to the first floor. As a result, the agreements for the third floor apartments were replaced with two agreements in respect of four apartments to be constructed on the first floor. It seems that sometime later the project refocused on the third floor. At all times the proposed purchasers were the trustees of the Grafton Road Trust, the defendants in this proceeding.
The sale of Unit 3B1
[19] Quite how Ms White came to be involved in discussions around the purchase of the Madeg Family Trust’s Unit 3B1 is unclear but it seems to have naturally evolved from her earlier dealings with Mr Kelly, and Mr Gray’s close connection to the development. There is evidence of correspondence with PDL about purchasing this unit together and PDL’s Unit 3A4. A number of draft ASPs were signed recording PDL as the vendor of both units. The purchase price for both units was $1,010,000.
2 Mr McCall’s role was variously described in the evidence. Ms White referred to him as her accountant and Mr Kelly’s business partner in the development.
This was based on a valuation report commissioned by “Steve Kelle (sic) and John Gray” which noted:
“Units 3A4 and 3B1 must be held together because the new apartments developed over these two titles do not follow the existing unit plan boundaries but are built across the boundaries.”
[20] Ms White claims she never saw this report despite it apparently being commissioned by her partner Mr Gray. She does, however, admit to seeing a later valuation prepared by Brian Turner Valuers dated 23 August 2011. That report was addressed to the “Mortgage People” and was apparently commissioned to support the Grafton Road Trust’s funding application to the National Bank. The report records the combined value of the two units (3A4 and 3B1) as $1,087,500, based on the then current market value excluding the costs estimated to complete the works.
[21] At the same time, PDL was discussing with the Madeg Family Trust the purchase of Unit 3B1. But on 16 September 2011 PDL was placed in liquidation and with it, all agreements came to an end. However, despite this apparent set back, Mr Kelly continued his negotiations to sell both units to the Grafton Road Trust. For reasons which follow it seems that Mr Kelly did not keep Mr Brkic appraised of these developments.
[22] On 1 November 2011 the project architect, Mr Milic, wrote to the Mortgage People, apparently to satisfy the bank’s funding requirement that titles would issue within three months of settlement. The letter relevantly stated:
“Our company is currently managing the re-fit of the development of Level 3, 160 Grafton Road. The development has an approval by the ACC for an amendment to the current unit plan.
We undertake on behalf of our clients to have this plan processed and new titles issued. Realistically this process will take three months.”
[23] With PDL in liquidation, Mr Kelly arranged for another of his companies, Pleasant Forest Trust Company Limited (“Pleasant Forest”) to acquire the mortgage over Unit 3A4. It seems Mr Kelly’s intention was that Pleasant Forest would also purchase Unit 3B1 from the Madeg Family Trust and on-sell the two units together, in order to give the purchaser title to all three prospective properties.
[24] At the end of October 2011 Mr Kelly contacted Mr Brkic and told him he had found a buyer for both of the units. According to Mr Brkic this advice came as a surprise. He had not expected the units would sell, at least unconditionally, before the three apartments were completed and a code compliance certificate (“CCC”) issued.
[25] The purchasers, the Grafton Road Trust, were offering $469,820 for Unit 3B1 (being the amount PDL had agreed to pay the Madeg Family Trust for the unit). However, the purchase price would be paid in two tranches; a first payment of
$360,000 on settlement with the balance paid in six months’ time.
[26] Mr Brkic agreed to a delayed settlement provided security for the unpaid balance was given. All costs associated with the sale would be paid for by Mr Kelly’s interests and, significantly, Mr Brkic says no vendor warranties would be given. This was because the unit was still in an incomplete state and did not have a CCC; it was being sold on an “as is where is” basis.
[27] It seems that the next Mr Brkic heard of the sale was at the beginning of November 2011 when he received a telephone call from his lawyer Mr Faltaus, of St Mark Law, who told him he had been contacted by the law firm Jesse & Associates, acting for the purchaser, Pleasant Forest. Mr Brkic had never heard of Pleasant Forest. He believed the purchaser was the Grafton Road Trust.3 In any event, he gave Mr Faltaus the details of the purchase price and the vendor loan. In evidence he said he was explicit in his instructions; there would be no vendor warranties because the units were uncompleted and did not have a CCC. He says he told Mr Faltaus that the unit was being sold on an “as is where is” basis.
[28] In his evidence Mr Faltaus, the third defendant, confirmed Mr Brkic’s account and in particular his instructions; that Mr Brkic’s specific instructions were that there were to be no vendors’ warranties in the ASP because the property was being sold on an “as is where is” basis.
3 It appears that at that stage the intention was for Pleasant Forest to contemporaneously on-sell Unit 3B1 to the Grafton Road Trust.
[29] On 2 November 2011, Mr Faltaus telephoned Jesse & Associates and spoke with Ms Roberts, the solicitor then acting for the purchasers. He relayed Mr Brkic’s instructions. These he followed up by facsimile which set out the details, including the sale price of $469,820 to be satisfied by the payment of $360,000 on settlement date, with the balance of $109,820 to be advanced as a vendor’s loan secured by a registrable second mortgage with a deed of guarantee and indemnity to be executed by the trustees of the Grafton Road Trust. However, the facsimile message made no reference to Mr Brkic’s instructions that there were to be no vendors’ warranties.
[30] In earlier correspondence Ms Roberts had indicated that settlement was scheduled for 2 November 2011. However, in his conversation with Ms Roberts, Mr Faltaus advised that settlement could not proceed that day because the vendors were required to provide the purchaser with pre-contractual and pre-settlement disclosure statements under the Unit Titles Act 2010. Ms Roberts apparently replied that the purchasers would obtain these directly from the body corporate. Settlement was extended to 7 November 2011, then further deferred to 10 November 2011 before finally occurring on 11 November 2011.
[31] In a file note dated 8 November 2011, Ms Roberts recorded that Mr Faltaus required the identity of the purchaser on the ASP to be the same as the borrowers in the loan deed. Thus a last minute restructuring of the transaction at or about 8 November 2011 became necessary. The purchaser was changed from Pleasant Forest to the Grafton Road Trust. That necessitated a change in solicitors. Jesse & Associates maintained some involvement but Richard Allen, of Richard Allen Law was engaged to act for the Grafton Road Trust.
[32] This arrangement was confirmed when Ms Roberts sent the ASP and deed of loan to Mr Faltaus by courier. In the covering letter of 9 November 2011 she observed that her firm was facilitating the transaction and working both with Mr Faltaus and Mr Allen to ensure the transaction settled. She invited Mr Faltaus to amend his settlement statement so it was addressed to Grafton Road Trust, C/- Richard Allen Law. The covering letter recorded that the enclosed documents had already been signed by the purchaser. She asked that once the documents had been signed by
Mr Faltaus’ client one copy of the duplicate ASP be couriered to Richard Allen Law together with a certified copy of the deed of loan.
Execution of the ASP
[33] Against that background I turn now to discuss the circumstances in which the ASP was executed. It is this issue which lies at the heart of the present dispute.
[34] The ASP (in duplicate) and the loan deed arrived at Mr Faltaus’ offices in a courier package about midday. As Ms Roberts’ covering letter stated the ASP (in duplicate) and loan agreement had already been signed by the Grafton Road Trustees as purchasers and borrowers/guarantors respectively.
[35] The ASP recorded the purchase price as the previously agreed sum of $469,820 which was to be paid in two instalments; the first ($360,000) on settlement on 11 November 2011 with the balance to be treated as a vendor loan totalling $109,820.
[36] According to Mr Faltaus he inspected the ASP and noted cl 6 had been deleted.4 The deletion was in the form of two diagonal lines drawn across the entire clause. However, the deletion had not been initialled by the purchasers. Mr Faltaus says he then made arrangements for Mr and Mrs Brkic to attend his offices for the purpose of signing the documents. Both he and Mr Brkic were cross-examined at some length about the circumstances surrounding the execution of these documents. Mr Brkic says he and his wife arrived in the afternoon and went into Mr Faltaus’ office. Mr Faltaus showed them the documents and confirmed they were consistent with what had been
4 Clause 6 in the 8th Edition of the Auckland District Law Society Inc’s Agreement for Sale and Purchase of Real Estate provides for vendors’ warranties and undertakings. It is not necessary to reproduce the detail for the purpose of this judgment. However, cl 6 relevantly provides that the vendor warrants and undertakes that at the date of the agreement the vendor has not received any notice or demand or has no knowledge of any requisition or outstanding requirement from any local or government authority or statutory body, from any other tenant of the property or from any other party; that where the vendor has done or caused or permitted to be done on the property any works, permits, resource consents or building consents required by law have been obtained and the works were completed in compliance with those consents or permits and, where appropriate, a CCC was issued; and where under the Building Act any building on the property requires a compliance schedule the vendor has complied with any such requirements, the building has a current warrant of fitness and the vendor is not aware of any reason which would prevent a building warrant of fitness from being supplied to the territorial authority when the building warrant of fitness is next due.
agreed. Mr Brkic says he signed and initialled the documents before handing them to Mrs Brkic for her to sign. They both used pens supplied by Mr Faltaus.
[37] After signing and initialling the other pages Mr Faltaus pointed out to Mr and Mrs Brkic that they had not initialled the deletion of cl 6. As a result, Mr Brkic says that he and his wife placed their initials adjacent to the alteration.
[38] Mr Faltaus’ account is broadly similar. He said before Mr and Mrs Brkic signed the document Mr Brkic asked him if it contained any warranty. Mr Faltaus pointed to the deletion. Mr Faltaus said that while Mr and Mrs Brkic were signing the documents he was working on his computer and not paying particular attention to what his clients were doing. When they had finished signing he checked the documents and noticed that Mr and Mrs Brkic had failed to initial the cl 6 deletion. In his presence they each initialled the variation.
[39] Mr Brkic said he was aware that the purchasers had not initialled the deletion, although they had initialled the bottom right corner of the page on which it appears.
[40] Mr Faltaus said he later spoke to Mr Allen about the deletion of cl 6. He said he could not remember who initiated the telephone call but he believed it took place on 9 or 10 November 2011. Although he made no file note, Mr Faltaus said Mr Allen raised the deletion of cl 6 and questioned its purpose. Mr Faltaus explained why the variation had been made and that it was by prior agreement. Mr Faltaus recalled Mr Allen stating he would get his clients’ instructions, but he never heard back from him.
[41] Ms White’s account of signing the ASP at Mr Allen’s offices paints a very different picture. She said she was certain that when she signed the ASP, cl 6 was intact. This was on 3 November 2011. She attended Mr Allen’s office for the specific purpose of executing the documents. When she signed them the other trustees, Mr Stalker and Mr Cleaver, had yet to execute the documents.
[42] Six days later she returned to Mr Allen’s offices and signed the loan deed. Again, it seems, she was on her own.
Subsequent developments
[43] According to Mr Faltaus that afternoon, 9 November 2011, Mr Allen advised he could settle the following day provided he had a pre-settlement disclosure statement. This was obtained from the body corporate by Jesse & Associates on 10 November 2011. Of significance it records:
“… there are unauthorised works on the Unit, including changes to Common Property which the Body Corporate has not consented to and if not reinstated the Body Corporate will take action and seek recovery of costs from the then current proprietor.”
and:
“… the Body Corporate has received notice from another Proprietor in relation to issuing proceedings against the Body Corporate for unauthorised development works and compliance matters.”
[44] Ms White denies ever seeing this document although, presumably, it was seen by Mr Allen because settlement of the purchase of Unit 3B1 occurred on 11 November 2011.
[45] On 15 November 2011, just days after settlement of the property, the Grafton Road Trust was served with a copy of the draft determination under the Building Act. The Madeg Family Trust were parties to the determination but according to Ms White did not disclose this to the Grafton Road Trust prior to settlement. Ms White said it was at this point she discovered the numerous deficiencies and problems associated with the development.
[46] Ms White said that it was not until 26 March 2014 when she was collecting her files from another solicitor that she discovered facsimile copies of the ASPs with cl 6 deleted and initialled by Mr and Mrs Brkic. She said she would never have signed the agreement if the vendors’ warranties clause was deleted. She thus formed the view the deletion was fraudulently made after she and the other trustees of the Grafton Road Trust had executed the SPA, so the vendors could avoid their obligations under cl 6.
As a consequence, she made complaints to the Serious Fraud Office and to the Law Society. Neither bore fruit.
These proceedings
[47] The statement of claim was filed on 17 December 2015. The claim is simple. It alleges the defendants were bound by the terms of the 9 November 2011 loan and were required to repay it together with interest.
[48] The plaintiffs brought a summary judgment application, which was considered by Sargisson AJ on 23 September 2016. In a careful and comprehensive judgment, she rejected the application. She was not able to exclude the possibility of fraudulent misrepresentation and fraudulent deletion of cl 6, noting the parties’ contrary positions in evidence were of a kind impossible to resolve at an early stage in the trial process.5 Relevantly she observed the plaintiffs were asking the Court to accept without further enquiry that the defendants agreed to the deletion of cl 6 without any apparent discussion between their solicitors.6 Overall she was of the view real issues remained to be tried and as such declined the application for summary judgment.
[49] A first statement of defence was then filed on 18 November 2016. It admitted the defendants’ failure to pay the loan but claimed they were induced to enter the loan agreement and the ASP by fraudulent misrepresentations and that the plaintiffs were in breach of the cl 6 warranties which were deleted by subterfuge.
[50] A three day trial was scheduled to commence on Monday 2 October 2017. On 29 September 2017 Downs J adjourned the trial because the defendants indicated they intended to join Mr Allen as a third party, alleging negligence. He considered it would be undesirable for the same set of facts to be dealt with in separate trials, particularly when the provenance of cl 6 assumed such significance in both.
[51] Despite the defendants’ stated intention to join Mr Allen no such steps were taken. Instead, an amended statement of defence and counterclaim was filed on 8 November 2017. While not substantially different from the previous statement of
5 At [54]-[56].
6 At [58].
defence, the new pleadings introduced a further defence that the plaintiffs had failed to provide proper disclosure; that the loan was oppressive and that the interest claimed amounted to a penalty.
[52] At the commencement of the hearing I heard the parties on whether I should grant leave to file the amended pleadings.
[53] Mr Rice, for the plaintiffs, pointed out that the amended statement of defence and counterclaim had been filed seven months after the close of pleadings date by which time all the plaintiffs’ evidence had been filed. Secondly, there were no particulars as to how the plaintiffs were alleged to have failed to provide proper disclosure, how the loan was oppressive or why the interest amounted to a penalty. Mr Rice also complained that the defendants had failed to provide, as requested, particulars of the alleged fraud.
[54] In response, Mr Herzog advised that he did seek to advance the defence that the terms of the loan were oppressive, or that the interest claimed amounted to a penalty. He thus abandoned those parts of the counterclaim.
[55] However, he submitted that the claim the plaintiffs failed to provide proper disclosure was inextricably linked to the issues around cl 6. It became apparent in the course of oral argument that Mr Herzog’s reference to “disclosure” was a reference to the plaintiffs’ alleged breaches under cl 6. Mr Herzog thus submitted there was no prejudice to the plaintiffs in including this claim because the central issue remained constant, namely who deleted cl 6.
[56] Mr Rice agreed that if the failure to disclose was confined to the issue of the defendants’ allegations under cl 6 then no objection could sensibly be made to granting leave.
[57] The issues were further refined at the end of counsel’s closing submissions when Mr Herzog abandoned his claim in misrepresentation. The only remaining issue for determination is whether the ASP was, as Mr Herzog submitted, “fraudulently tampered with”.
The respective claims
[58] As is apparent, the plaintiffs merely seek recovery of the sum owing under the loan agreement, being $109,820, and interest calculated at the contractually provided rate from 10 May 2012, being 22 per cent.
[59] The defendants’ position is more complicated. They allege fraud arising from the deletion of cl 6 from the ASP by subterfuge. The defendants’ amended statement of defence is a difficult document to navigate, but as I understand it they claim that because the deletion was fraudulent, rectification of the ASP should be ordered and damages awarded arising from the various breaches of warranty in cl 6.
[60] For the defence two witnesses were called; Ms White and a forensic document examiner, Ms Morrell.
[61] Ms White gave evidence that on 3 November 2011 she signed the ASP at Mr Allen’s office. In giving her account of the events she referred to one of several iterations of the ASP between the Madeg Family Trust and the Grafton Road Trust she discovered when examining Mr Allen’s file in March 2014. Ms White said this is the form of the ASP she signed in Mr Allen’s offices. On this version, only Ms White’s signature is recorded as purchaser. She explained the absence of the signatures of her fellow trustees on the basis she believed they would be signing the document sometime later. Beside her signature are Mr Kelly’s initials. Both Mr Kelly and Ms White initialled each page towards the bottom righthand corner. None of the deletions on the first page7 are initialled. The special condition contained in cl 18, relating to vendor finance, is not initialled. Significantly cl 6 is intact.
[62] Curiously, Ms White was unable to explain why Mr Kelly was present. At one point she said she believed he was a representative of the Madeg Family Trust and later she said she believed he was connected with the developer and was helping to facilitate the sale.
7 Relating to the legal description, conditions and tenancies.
[63] The only ASP bearing the signatures of all the Grafton Road Trust trustees as purchasers and the signatures of Mr and Mrs Brkic, as vendors, is the agreement which Mr Faltaus sent to Mr Allen after his clients had signed it. This is the document Ms White claims was forged after she and the other trustees signed it. A facsimile header shows it was sent from St Mark Law to Mr Allen at 1:29 pm on 9 November 2011. It was part of a 23 page message sent at that time which also included a covering letter, the settlement statement and the loan deed dated 9 November 2011.
[64] The original version of this ASP was examined by Ms Morrell. Her evidence was that Mr and Mrs Brkic’s initials and signature were made in black ink. However, the diagonal lines deleting cl 6 were in blue ink as were Mr and Mrs Brkic’s initials appearing beside the deletion. Ms Morrell was unable to differentiate between the blue ink of Mr and Mrs Brkic’s signatures and the blue ink used on the crossing out. While the ink appeared to be similar she was unable to be any more specific.
[65] Obviously the inference the defence seeks to draw from Ms Morrell’s evidence is that Mr and Mrs Brkic, using the same blue pen, crossed out cl 6 and initialled the deletion at about the same time; in other words after the defendants had executed the document. Mr Herzog submits that common sense and logic dictates that cl 6 was deleted after Ms White and the other Grafton Road Trust trustees signed the ASP for the following reasons:
(a)there is no logical reason why a purchaser would delete the warranty clause;
(b)there is no documentary evidence from the plaintiffs or from Jesse & Associates as to who sent the ASP by courier to Mr Faltaus on 9 November 2011, and as such the suggestion it arrived with cl 6 deleted “does not pass the threshold of credibility”;
(c)if Mr Faltaus had, as he claimed, discussed the deletion of cl 6 with Ms Roberts, he or Ms Roberts would have acknowledged this in writing;
(d)Mr Brkic knew the vendors would be in breach of the cl 6 warranties if the clause was not deleted;
(e)only Mr and Mrs Brkic’s initials appear beside the deletion;
(f)there is no evidence that Mr Faltaus relayed Mr Brkic’s instructions to delete cl 6 to either Ms Roberts or Mr Allen; and
(g)Mr Faltaus has no contemporaneous file notes confirming his instructions from Mr Brkic that the property was to be sold on an as is where is basis.
Analysis
[66] The evidence easily satisfies me that cl 6 was deleted by the time the executed ASP arrived by courier in Mr Faltaus’ offices on 9 November 2011. My reasons follow.
[67] First, Mr and Mrs Brkic were well aware of the many complications associated with this development. They knew a CCC was yet to issue. I accept Mr Rice’s submission that it is inherently implausible that the parties would have agreed to include cl 6, which includes a warranty that a CCC had been issued for works permitted to be done by the vendor, when that was patently not the case. Had cl 6 been operative the Madeg Family Trust would have been in breach from the moment it executed the agreement. Furthermore, Mr Brkic’s account is supported by the trust’s solicitor, Mr Faltaus. Not only did Mr Faltaus have an independent recollection of Mr Brkic’s instructions but he also would have been aware of Mr Brkic’s exposure to liability had he permitted Mr and Mrs Brkic to sign an agreement which included the vendors’ warranties.
[68] Secondly, this was not a sale to parties unfamiliar with the development at 160 Grafton Road. Mr Gray had worked closely with Mr Kelly since at least mid- 2008. Ms White’s own involvement, as discussed earlier, was extensive. The Prendos valuation of 30 May 2011 appears to have been jointly commissioned by Mr Kelly and Mr Gray. It was that valuation which identified the need for Units 3A4 and 3B1 to be
held together because new apartments developed over those titles did not follow existing unit plan boundaries. Given it was Mr Gray who Ms White said first suggested this purchase as an investment option, it is inconceivable he would also not have told her of these boundary issues.
[69] Mr Gray is Ms White’s partner. His close connection to the business arrangements of the Grafton Road Trust can also be seen in a handwritten document dated 15 November 2011, that is a week after the ASP and loan agreement were signed. In her evidence, Ms White said that the handwriting looked like Richard Allen’s. The document is an authority to transfer Grafton Road Trust monies to Jones Lang Wooton. It is signed by Mr Stalker, Mr Cleaver (for Crummer Trustees No. 82 Ltd) and Mr Gray, who is expressly recorded as signing for Caroline White.
[70] Furthermore it must be relevant that although Ms White claims she learned of the problems associated with the development three months after signing she took no steps to protect her position for several years.
[71] Given these and other factors I find Ms White’s claim that she was unaware of the defects and difficulties associated with the development as incapable of belief. Given her background, knowledge and her close connection with Mr Kelly and Mr Gray in this development, she knew the planning and logistical challenges which lay ahead better than Mr Brkic. The evidence reveals that she is a sophisticated and experienced dealer in commercial property. She made a conscious commercial decision to enter the agreement with the Madeg Family Trust knowing and accepting the risks. Against that background she knew that no vendor could be expected to give the warranties and undertakings contained in cl6.
[72] Thirdly, I do not believe Ms White’s account of how it was she signed the ASP in which cl 6 is still intact. This is the document I discussed earlier which also bears Mr Kelly’s initials. Ms White said she signed this ASP at Mr Allen’s office on 3 November 2011. But that claim does not withstand scrutiny because the identity of the purchaser, at Mr Faltaus’ insistence, was not changed from Pleasant Forest to the Grafton Road Trust until 8 November 2011 at the earliest. And in any event this document is signed only by Ms White. While its actual provenance is uncertain the
most likely explanation is it was an early version which was not pursued. In the absence of evidence from either Ms Roberts or Mr Allen it is difficult to be more specific. However, it would seem that various iterations of the ASP were created and signed by the purchasers.
[73] Fourth, and relatedly, is another undated iteration of the agreement, the precise provenance of which is also uncertain. Although no signatures appear in the space reserved for the vendors, the space left for the signatures of the purchasers bears the signatures of Ms White, Mr Cleaver and Mr Kelly. Each page bears the initials of all three. Significantly cl 6 is deleted. The only cogent explanation is that this document was part of the editorial evolution towards the final version. In one sense it is an evolutionary intermediary between the early version discussed above and the final version executed by all parties. It differs from the earliest version because it bears more purchaser signatures and, significantly, contains a deleted cl 6.
[74] Fifth, although Mr Kelly’s role in the signing of the various iterations of the ASP remains unclear, his initials can be found on all versions including those where only the signatures of the trustees of the Grafton Road Trust appear. I also regard Ms White’s apparent inability to explain Mr Kelly’s involvement in and around the signing of the various versions of the ASP unconvincing, particularly when she said she thought he might have been a representative of the Madeg Family Trust. Why a representative of the Madeg Family Trust would be present to initial the ASPs and, on occasions, witness the purchasers’ signatures is inexplicable, particularly given the wealth of other evidence showing Ms White’s and Mr Gray’s wider involvement with Mr Kelly in this development. Certainly, it has never been suggested he was present or involved when Mr and Mrs Brkic signed the agreement in Mr Faltaus’ offices. And yet his initials appear adjacent to the deletion of cl 6. They could only have been put there before the ASP arrived in Mr Faltaus’ offices. His initials also appear beside Ms White’s signature on the last page, leading to the strong inference he was with Ms White when she signed this document and initialled cl 6 in her presence.
[75] Sixth, despite Mr Herzog’s submission to the contrary, I do not regard it as particularly significant that the trustees of the Grafton Road Trust did not initial the deletion of cl 6. An examination of the document as a whole reveals that other
significant alterations and deletions were also not initialled. For example, the deletions on the first page relating to finance conditions and tenancies were not initialled and neither is cl 18, an important addition relating to the vendor finance condition. In other words, none of the deletions or special conditions, including cl 6, were separately initialled by the purchasers.
[76] Seventh, as Mr Rice points out, Mr Faltaus’ evidence that cl 6 was deleted from the ASP when he received it, already signed, from Jesse & Associates is uncontradicted. He underlined the defendants could have subpoenaed Ms Roberts or Mr Allen to contradict Mr Faltaus’ claim. In his oral submissions he went further and submitted that an adverse inference should be drawn from the defendants’ failure to call these witnesses where, as in this case, an allegation, whether affirmative or negative, forms an essential part of the defendants’ case.8 In such cases the proof of such an allegation must be rest on that party. As fraud is an essential part of the defence it is for the defendants to bear the legal burden of proving it.
[77] I agree. Subject to a waiver of privilege both Ms Roberts and Mr Allen could have given direct, first hand evidence of their involvement with the parties, the form of the ASP and the circumstances around its signing and the deletion of cl 6. It would appear that Ms Roberts drafted the document following her discussions with Mr Faltaus and his instructions as to which terms it should include. Furthermore, assuming, as Ms White asserted, the defendants signed the ASP in Mr Allen’s offices, Mr Allen would be uniquely placed not only to give evidence of the form of the document when it was signed but also the form of the document when it was received by him from Mr Faltaus after Mr and Mrs Brkic had signed it.
[78] And yet, neither of these potentially key witnesses was called in circumstances where the seriousness of the allegation and the nature of the defence might have expected such a course. Their absence as witnesses is unexplained and telling. For these reasons I am satisfied this is a proper case where an adverse inference should be drawn although, in doing so, I would note that this factor is just one of several which lead me to conclude that cl 6 was deleted by the time the defendants signed the ASP.
8 See Ithaca (Custodians) Ltd v Perry Corp [2004] 1 NZLR 731 (CA) at [144]-[155].
[79] As to Ms Morrell’s evidence I note it is largely equivocal and does not materially contradict the plaintiffs’ case. While the blue ink used to cross out cl 6 is similar to the ink used by Mr and Mrs Brkic to initial the deletion it is also similar to the ink used by Mr Stalker when he signed as one of the purchasers. That Mr and Mrs Brkic’s signatures are in black and their cl 6 initials are in blue is explained by the sequence around the signing; that after they signed the ASP, Mr Faltaus then discovered they had not initialled the cl 6 deletion. Mr and Mrs Brkic picked up a different (presumably blue) pen and initialled the deletion.
[80] Finally, I find it to be no coincidence that in March 2014, around the time the plaintiffs sought to enforce the loan, Ms White appears to have first discovered what she now claims to be evidence of fraud.
Conclusion
[81] I am satisfied the defendants’ defence of fraud must be rejected. The ASP is valid; there were no vendor warranties given and thus no breach. The balance of the purchase price of $109,820 is payable in accordance with the loan agreement in terms of cl 18 of the ASP .
[82] The loan agreement required repayment by 10 May 2012. It was not repaid by that date. The defendants are in default. The loan agreement provides that in the event of default, interest is payable at 22 per cent per annum.
[83] The Madeg Family Trust has made demand for the repayment of the principal and the defendants have failed to make payment.
Result
[84] The plaintiffs are entitled to judgment in their favour. Judgment is entered for the plaintiffs in the sum of $109,820 with interest calculated at the rate of 22 per cent per annum from 10 May 2012.
Costs
[85] The plaintiffs, as the successful party, are entitled to costs. I am of the view that 2B costs are appropriate. I invite the parties to confer with a view to filing a consent memorandum. In the event of disagreement, the parties are to file memoranda within 25 working days of the date of this judgment. No memorandum is to exceed three pages in length.
Moore J
Solicitors/Counsel: Mr Rice, Auckland Mr Herzog, Auckland
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