Covington Group Holdings Limited v Zhong
[2008] NZCA 584
•24 December 2008
IN THE COURT OF APPEAL OF NEW ZEALAND
CA671/2007
[2008] NZCA 584BETWEENCOVINGTON GROUP HOLDINGS LIMITED
Appellant
ANDLIN (LILY) ZHONG
First RespondentANDGOLDEN CITY DEVELOPMENTS LIMITED
Second RespondentANDWADSWORTH RAY
Third RespondentANDCORBETT CARTER
Fourth Respondent
Hearing:19 November 2008
Court:William Young P, Wild and Priestley JJ
Counsel:K W Fulton for Appellant
No appearance for First and Second Respondents
Judgment:24 December 2008 at 10 am
JUDGMENT OF THE COURT
A THE APPEAL IS DISMISSED.
B There is no order as to costs.
____________________________________________________________________
REASONS
Wild and Priestley JJ [1]
William Young P [52]
WILD AND PRIESTLEY JJ
(Given by Wild J)Introduction
[1] This is an appeal against a judgment of Associate Judge Abbott delivered on 22 November 2007, refusing a defendant’s application for summary judgment. The appellant submits the Associate Judge was wrong to refuse its application because none of the claims made by the plaintiffs (the first and second respondents to this appeal) was tenable.
[2] Events subsequent to the judgment under appeal have relevance.
Factual background
[3] By a first agreement dated 24 October 2003 the first respondent, Ms Zhong, agreed to purchase a commercial property in Auckland from the appellant, Covington Group Holdings Ltd. The purchase price was $3.8 million plus GST (if any). Ms Zhong paid $525,000 to Covington, comprising a deposit of $50,000 and $475,000 being the GST refund Ms Zhong obtained in respect of the purchase. That refund was facilitated by Covington submitting a tax invoice to Ms Zhong in advance of the stipulated settlement date.
[4] The GST on the taxable supply involved in the first agreement was effectively a “money-go-round”. This was the sequence:
·Covington submitted a tax invoice to Ms Zhong for $4,275,000 (the $3.8 million purchase price plus GST of $475,000) (clause 12.2 of the first agreement).
·Having been nominated purchaser by Ms Zhong, based on Covington’s tax invoice, the second respondent (Golden City Developments Ltd) filed a GST return claiming an input tax credit of $475,000 (clause 20.0).
·The IRD refunded $475,000 GST to Golden City.
·Having received that refund, Golden City paid the $475,000 GST to Covington (clause 12.1(1) – the GST date was specified in the agreement as being “within 10 days after the date on which the purchaser obtains her GST refund in respect of this transaction”.
·Covington filed a GST return which included an output tax credit on its $4,275,000 taxable supply to Golden City, i.e. Covington accounted to the IRD for the $475,000 GST component.
[5] Disputes then arose about the agreement, which Ms Zhong did not settle.
[6] Covington issued a proceeding in the High Court against Ms Zhong and Golden City.
[7] On 17 November 2004 – the first day of trial before Salmon J – Covington’s proceeding settled. The settlement terms were contained in a Deed of Settlement dated 17 November 2004 between Ms Zhong, Golden City and Covington. The operative clauses in that Deed obliged Ms Zhong as purchaser, and Covington as vendor, to enter into a new agreement for sale and purchase of the Auckland property. That new agreement was annexed to the Deed of Settlement. The purchase price was $2.3 million plus GST (if any). Two of the operative clauses in the Deed were:
1.2Ms Zhong shall make a total further payment to Covington in the sum of $3m comprising partly an agreed amount of damages and partly satisfaction of the purchase price under the new agreement. That amount is to be paid as follows:
(a) $350,000 towards damages in cash immediately; receipt of which is hereby acknowledged;
(b) $2,300,000 on or before 18 January 2005 comprising settlement of the new agreement; and
(c) $150,000 on or before 18 January 2004 in respect of damages; and
(d) $200,000 payable on or before 17 April 2006 in respect of damages.
…
3.4Save as is provided in this deed there shall be no further accounting between the parties.
[8] We have mentioned that the annexed new agreement stipulated a purchase price plus GST (if any). The agreement was the familiar REINZ/ADLS form 7th Edition (2) July 1999, and contained the standard printed term 12 in that form dealing with GST. That required the purchaser to pay the vendor the GST payable in respect of the supply under the new agreement to the vendor in one sum on the GST date.
[9] Amongst the further terms of sale in the new agreement was this one:
16.3Upon payment of the purchase price the Agreement for Sale and Purchase between the parties dated 24 October 2004 (“the prior agreement”) shall be cancelled and the vendor shall issue to the purchaser a credit note in respect of the tax invoice relating to the prior agreement and a tax invoice in respect of the transaction hereunder and shall otherwise comply in all respects with the provisions of section 25 of the Goods and Services Tax Act 1985.
[10] Again, Ms Zhong nominated Golden City as the purchaser under the new agreement. That agreement was settled and all the payments stipulated in clause 1.2 of the Deed of Settlement were made by Ms Zhong to Covington.
[11] Upon settlement of the new agreement Covington issued a credit note to Golden City in the following terms:
Golden City Developments Limited
C/- Wadsworth Ray
Solicitors
DX CP32519
AUCKLANDC R E D I T N O T E
Covington Group Holdings Limited
P O Box 105 422, Auckland
GST NO. 83-053-313PURCHASE 75-77 WAKEFIELD STREET AND 44 AIREDALE STREET, AUCKLAND CITY FROM COVINGTON GROUP HOLDINGS LIMITED
TO Purchase price of Wakefield Street and Airedale
Street properties as per tax invoice dated 4,275,000.00
Less purchase price of Wakefield Street and
Airedale Street properties 2,587,500.00Difference $1,687,500.00
Dated 18 January 2005
Purchase price of Wakefield Street and Airedale Street properties as amended by subsequent agreement undated but attached to deed of settlement dated 17 November 2004.
[12] Subsequently, Covington filed a GST return claiming an input tax credit of $187,500, being the GST on the price differential shown in the credit note it had issued to Golden City. IRD refunded that sum to Covington. The IRD subsequently issued a default assessment to Golden City for $187,500.
[13] Golden City’s solicitors wrote to Covington’s solicitors on 19 May 2005 asserting that, in claiming that GST refund, Covington had breached term 16.3 of the new agreement. This letter contained the following passage:
[Clause 16.3] made reference to the cancellation of the prior agreement and issuing by yours of Credit Notes in respect to the prior and revised transactions. The clause also made reference to strict compliance by yours with the provisions of Section 25 of the Goods and Services Tax Act 1985 (“the Act”). We note that Section 25(3B) of the Act includes a requirement that the issuer of the Credit Note make application to the Inland Revenue Department to request that the Commissioner dispense with the requirements as regards the issue of a Credit Note, the intention being that your client request that the Department treat the adjusted transaction as GST neutral. It would appear that your client has neglected or failed to take such action which in our client’s view is in clear breach of the terms of the agreed out of Court settlement. Our client agreed to settle the matter in Mr Stewart’s office on the basis that there would be no further GST liability in respect of the transaction. On settlement (18th January, 2005) your firm issued a Tax Invoice which made no reference to GST and our client concluded and accepted that this was consistent with the agreed settlement arrangement.
[14] On 3 June 2005 Covington’s solicitors replied. After referring to the credit note Covington had issued in compliance with s 25 Goods and Services Tax Act 1985, the letter continued:
The effect of issuing the credit note is that our client was entitled to an input credit for the amount of the reduction and your client was obliged to return an output credit for that amount. We fail to see how the consequences of lowering the purchase price of a GST rateable transaction could have any other consequence.
Our client claimed the input credit, but it appears from what you say that your client failed to return the output credit. If you have misunderstood the effect of the agreement from a GST perspective, that is a matter between you and your client.
Your demands that our client pays your client’s GST obligations and penalties are rejected.
The proceeding in the High Court
[15] On 16 May 2006 Ms Zhong and Golden City issued a proceeding against Covington seeking judgment for $187,500. The causes of action that remain relevant are three-fold:
a)Implied term/collateral agreement: It was an implied term of the Deed of Settlement or the new agreement, or it was a collateral agreement, that Covington would repay the $187,500 GST refund to Golden City.
b)Rectification: On 17 November 2005 Ms Zhong, Golden City and Covington agreed:
·The GST impact of the new agreement would be neutral, so that neither party would have to refund to the IRD or account to it for further GST payable by reason of the new agreement.
·Upon cancellation of the first agreement, Covington would account to Ms Zhong and Golden City for the GST paid by Golden City pursuant to the first agreement, to the extent that Golden City was obliged to refund or account to the IRD for GST upon cancellation of the first agreement.
Upon the basis of those agreements the Deed of Settlement and the new agreement should be rectified by adding a clause obliging Covington to refund or account to Ms Zhong or Golden City for the $187,500 GST refund.
c)Contractual Mistakes Act: A claim under the Contractual Mistakes Act 1977 seeking variation of the Deed of Settlement and new agreement in the same terms as for the rectification claim.
[16] The claims we have summarised are in a second amended statement of claim dated 22 November 2006.
[17] By application originally made on 15 June 2006, but amended on 17 October, Covington sought summary judgment against Ms Zhong and Golden City on all their causes of action. It is Judge Abbott’s dismissal of that application which Covington now appeals.
Subsequent events
[18] Since Covington filed its appeal, Ms Zhong has been adjudicated bankrupt. The Official Assignee has advised Covington that he will not be pursuing the proceeding, and has agreed to consent to orders dismissing Ms Zhong’s claim.
[19] Mr Fulton advised us that he had been told by Mr Chisholm, who appeared for both Ms Zhong and Golden City in the High Court, that Mr Chisholm had no instructions from Golden City, and has not been able to obtain any for some time.
[20] Mr Fulton also advised us that Golden City remains the owner of the property, and that he is not aware of any indications that Golden City is insolvent.
[21] For those reasons Mr Fulton contended that we should have regard “not only to the inherent lack of merit in the allegations, but also to the overall credibility of the claim going forward”. He also submitted that sharp focus must now come on what rights, if any, Golden City has.
Submissions on appeal
[22] The nub of Mr Fulton’s submissions, both to the Associate Judge in the High Court and to us, was that the relief Ms Zhong and Golden City were seeking under all their causes of action was fundamentally inconsistent with the express terms of the Deed of Settlement. Mr Fulton relied on both clauses 1.2 and 3.4 of the Deed. In combination, he submitted that they left no scope for Ms Zhong or Golden City to contend that the parties intended that Covington would make a payment of $187,500 to Golden City, or account to it for that sum of money.
[23] In dealing with that submission the Associate Judge started with clause 16.3 of the new agreement. Having set that clause out he said:
[23] The natural inference to be drawn from an agreement to issue a credit note for the sum previously invoiced is that credit will be given for all of the GST payable under that invoice.
[24] The issue for the present application is whether the other terms of the agreement conclusively negate this inference. For Covington to succeed it must show that the only possible interpretation to be put upon this clause, and the credit note to be issued under it, is that the parties were agreed that Golden City was only to receive a credit for the GST in relation to the new agreement.
[24] The Associate Judge then accepted that Covington’s argument as to the effect of clauses 1.2 and 3.4 of the Deed of Settlement was certainly one interpretation of the parties’ settlement agreement. But he held it was arguable that clause 16.3 of the new agreement required Covington to give Golden City credit for all the GST it had paid under the first agreement. He accepted an argument by counsel for Ms Zhong and Golden City:
[27] … that s 25 contemplates actual credit being given by the party issuing a credit note under that section, and that it is a representation both to the Inland Revenue Department and to the party to whom the note is addressed that the issuer of the note was providing a credit to the recipient as shown in the note, and including the GST component. It is axiomatic in my view that the issuer can only recover from the Inland Revenue Department if it has given, or is giving, the credit shown in the note.
[28] It appears that the use of s 25 of the Goods and Services Tax Act 1985 was proposed as a convenient mechanism to avoid a further circular payment of GST, rather than to limit the GST that would be credited to Golden City. The overlay of the mechanism of s 25 of the Goods and Services Tax Act 1985 should not, in my view, obscure the underlying purpose of the issue of the credit note.
[29] Covington contends that this interpretation is at odds with the express provision in the settlement deed that there was to be no further accounting and should be rejected. I am not persuaded that that is necessarily so. The deed of settlement does not deal with GST. That was left for the new agreement (and the provision made in clause 16.3). This contention overlooks the fact that Covington has accepted that Golden City should get credit for the GST on the new agreement. If that is not inconsistent with the provision that there is to be no further accounting, it is difficult to see why it would be inconsistent to allow credit for all of the GST already paid. In my view the supposed inconsistency is resolved if one takes a view that clause 3.4 was not intended to extend to consequent GST adjustments, which were to be addressed by clause 16.3. There is some support for this in clause 3.4 itself which says that there is to be no further accounting “save as provided in this deed”. The deed obliged the parties to enter into the new agreement containing clause 16.3. The legal consequences of clause 16.3, arising on cancellation of the first agreement, are arguably an exception to there being no further accounting.
[25] Mr Fulton submits that this reasoning is erroneous. He reiterates to us the submission he made to the Associate Judge, that none of Ms Zhong and Golden City’s causes of action is tenable.
The evidence
[26] Before considering that contention, it is necessary to look at some of the other evidence that was before the Associate Judge.
[27] First, there was evidence as to what was said about GST in the settlement discussion on 17 November 2004 that resulted in the Deed of Settlement, bringing the earlier proceeding to an end. Upon well established principles, that evidence was inadmissible to controvert the Deed of Settlement or new agreement, but is admissible in support of the first cause of action alleging a collateral agreement/undertaking and/or the second cause of action seeking rectification.
[28] The settlement discussion was held in the chambers of Mr R B Stewart QC, who was senior counsel for Ms Zhong and Golden City. Mr Stewart was present, as were his junior, Mr Barker, his instructing solicitor, Mr Bierre, and Ms Zhong. Covington’s representatives were Mr O’Callahan and Ms Smith (senior and junior counsel for Covington, respectively), and Messrs Speedy, Holloway and Balgarnie from Covington.
[29] Mr Speedy deposed that there was no discussion “concerning treatment of any GST refunds”, and that Covington did not agree to “repay” any GST refund to either plaintiff. He said he left the meeting once the terms of settlement had been agreed, returning later in the day to sign the Deed of Settlement and new agreement.
[30] In his affidavit, Mr O’Callahan agreed that Messrs Speedy, Holloway and Balgarnie left with Ms Smith after the essential terms of settlement had been agreed. He remained to draft the formal settlement documentation with Messrs Stewart, Barker and Bierre. Mr O’Callahan said that GST was first raised by Mr Bierre when, together, they looked at the draft of the proposed new agreement. He said the outcome was clause 16.3. His recollection was that:
13. At no time did I agree with Mr Bierre (or anyone else acting for or representing Ms Zhong or Golden City) that the transaction would be “GST neutral” or that Covington would pay to Ms Zhong/Golden City any amounts in relation to the GST consequences of the agreement reached by the parties. I cannot discount the possibility that the phrase “GST neutral” was used at some point. However if it was used, it is a phrase that I consider unclear and confusing, hence the clarification I have referred to above that resulted in the final wording of the settlement deed and agreement for sale and purchase of real estate. …
[31] In her affidavit Ms Zhong recalled that the words “GST neutral” were used in the settlement discussion. She said that there was discussion as to how the agreement should be framed to achieve that result. She recalled Mr Stewart suggesting to Mr Bierre that advice be obtained from an accountant to that end.
[32] Mr Bierre disagreed with Mr Speedy. He deposed that there was apparent acceptance by all parties present, including Mr Speedy, that the replacement transaction would be structured so that no further GST would be payable by any party, in particular Golden City. Referring to the follow up discussions he had with Mr O’Callahan, Mr Bierre deposed:
21.… I had absolutely no doubt that it was agreed by myself, Mr O’Callahan and Mr Stewart QC that there was no further GST to be paid or collected and that the section 25 procedure allowed the parties to “short circuit” the system in the case where as here there had been a reduction in the purchase price and therefore an over-collection and over-payment of GST on the original supply. I explained this to Ms Zhong and she seemed to understand how this would work.
[33] Mr Stewart also swore an affidavit. He exhibited a letter he had sent Mr O’Callahan on 12 November. Without prejudice, that letter outlined possible terms of settlement, including:
(a)Revised purchase price at $2.6m including the $50,000 deposit paid, ie $2.55m plus deposit.
There will need to be a GST adjustment with the Revenue which will see $175,000 of the GST paid to date being unwound. The GST impact will be neutral as between all parties including the Revenue.
[34] Mr Stewart deposed that, once the settlement figures had been agreed on 17 November, the settlement negotiations moved to the issue of GST. Mr Stewart essentially endorsed what Mr Bierre had said, namely that the discussion about GST was resolved by the insertion of clause 16.3 in the new agreement. Mr Stewart stated:
12.Neither Mr Speedy of Covington nor his solicitors, Brent O’Callaghan and Dale Smith of Carter & Partners, were overly interested in the GST issue given that it was neutral to the parties. In essence, they left it to Mr Bierre to confirm how the matter should be dealt with between the parties so as to ensure that GST had a neutral impact on the parties in terms of the settlement and to ensure that it was dealt with in accordance with the requirements of the IRD.
[35] The Associate Judge also had an affidavit in reply sworn by Mr O’Callahan. We think the Judge was entitled to view the content of that affidavit as rather more submission than evidence.
[36] Notable in all that conflicting evidence is the one item of documentary evidence, namely Mr Stewart’s letter of 12 November. That unequivocally refers to Ms Zhong seeking a settlement in which “the GST impact will be neutral as between all parties including the Revenue”.
[37] The Associate Judge also had evidence of the parties’ conduct subsequent to the Deed of Settlement of 17 November 2004, in the form of the correspondence and documentation that preceded and accompanied the settlement of the new agreement, which occurred on 18 January 2005. The points that emerge from this are:
·On 12 January 2005 Covington’s solicitor sent Golden City’s solicitor a settlement statement which included GST of $287,500 on the new purchase price of $2,300,000.
·On 13 January Golden City’s solicitor raised a concern about this, stating that clause 16.3 applied.
·In a fax the same day, Covington’s solicitor accepted that clause 16.3 applied.
·On 17 January Covington’s solicitor received a telephone call from Mr Bierre in which he referred to clause 16.3 and said that it was “agreed in a meeting with the accountant and Brent O’Callahan that GST would be neutral”. Later that day Covington’s solicitor sent Mr Bierre an amended settlement statement which did not contain GST on the purchase price. She also sent a draft credit note which gave Golden City credit for the GST on the $1,500,000 difference between the old and the new purchase prices, namely $187,500.
·On 18 January Covington’s solicitor received from Mr Bierre a faxed letter dated 17 January (which had obviously crossed with her own faxed letter sent the previous day) in which Mr Bierre requested an amended settlement statement and stated:
Our client will of course be required to include the credit note in their next GST return and will have to refund to the Inland Revenue Department the amount “overclaimed” by our client as the result of the original tax invoice. Your client will of course be entitled to a refund of the amount “overpaid” by it as a result of the issue of the original tax invoice in this matter. Thus by giving our client an appropriate credit in your settlement statement the taxation treatment of this “adjustment” remains neutral for both parties.
·On 18 January Mr Bierre returned the draft credit note to Covington’s solicitor, with handwritten amendments which had been made by Golden City’s accountant (Ms Carter of Corbett Carter Ltd). The gist of these amendments was that the figures in the credit note needed to be GST inclusive, the accountant explaining:
The GST Act suggest that amounts should be GST inclusive figures, why I don’t know.
·On 18 January Covington’s solicitor sent Mr Bierre an amended credit note in the terms we have set out in [11].
Decision
[38] The Associate Judge correctly directed himself as to the approach he should take, confronted with a dispute on material facts. He summarised the principles in [19] of his decision, in particular referring to this Court’s decision in Bilbie Dymock Corporation Ltd v Patel (1987) 1 PRNZ 84. The Associate Judge also referred to the decisions of this Court holding that evidence of parties’ subsequent conduct is a legitimate aid to contractual interpretation. There is now the decision of the Supreme Court in Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZLR 277.
[39] All that evidence, particularly the documentary evidence, demonstrates that it is at least arguable that the parties settled on these common assumptions:
·Covington would give Golden City a credit note for the GST Golden City had paid on the first agreement, because that agreement had been cancelled and the new agreement substituted.
·The effect of that credit note and s 25 of the GST Act was that the parties’ GST returns would achieve GST neutrality for the new transaction, i.e. neither vendor nor purchaser would have to pay, nor be entitled to receive a refund of, GST.
[40] Put differently, as it stands, the evidence supports Golden City’s contention that the position of Covington being $187,500 better off, and Golden City worse off to a corresponding amount, is not consistent with the parties’ agreement.
[41] What cannot be contested is that, upon settlement, Covington gave Golden City a credit note for the difference between the GST it had paid on the taxable supply in the first agreement ($475,000), and the GST payable by Golden City on the supply under the new agreement ($287,500). Having given that credit to Golden City and obtained a refund of that GST differential, Covington now declines to account to Golden City for it. As the Associate Judge said, that refusal to account is inconsistent with the inference to be drawn from the credit note. A cannot consistently give credit to B, and retain the benefit of that credit (i.e. the GST refund) for itself.
[42] We think the Associate Judge was right to point to potential difficulties with the way in which Golden City’s claims are presently framed. But, as he pointed out, the Court will generally allow amendment to remedy any defect in the pleading of an essentially meritorious cause of action.
[43] Any implication of a term into the Deed of Settlement or rectification of it would be problematic to say the least, because of clauses 1.2 and 3.4. But the same difficulties do not apply to the new agreement.
[44] Any force in Mr Fulton’s submission that the Deed of Settlement, and in particular its clause 1.2, is the document stipulating the only payments to be made between the parties is blunted by a combination of two factors. The first is that the Deed simply does not deal with GST, whereas the new agreement does. The second point is clause 3.6 of the Deed itself, which provides:
3.6The parties [sic] rights and obligations under the new agreement shall co-exist with the terms of this Deed.
[45] Mr Bierre’s evidence as to the provenance of clause 3.6 was:
25.During negotiations, and prior to the completion of the deed I queried whether the parties needed a clause that would prevail if there were any inconsistencies between the new agreement and the settlement deed. Mr O’Callahan did not see the need for the inclusion of such a clause. I recall that he was adamant that the deed would take priority over the new agreement, but he conceded that if we were concerned about that position, clause 3.6, which provides for the deed and the new agreement to co-exist, could be added.
26.I was worried that Covington might simply try and rely on the new agreement if there was nothing in the deed to tie the two documents together. In the event, it seems that this is precisely what Covington has tried to do by claiming a GST refund under the new agreement but not accounting for the same back to Golden City to ensure that the effect of the new transaction was neutral for both parties from a GST perspective.
[46] Implication of a term into the new agreement, or a finding that there was a collateral undertaking by Covington, requiring Covington to account to Golden City for any GST refund (the first causes of action) are both tenable arguments. So is the second cause of action insofar as it seeks the rectification of the new agreement by inserting a term to similar effect.
[47] Irrespective of the merit of the underlying arguments, Mr Fulton contended that relief was not available to Golden City, as opposed to Ms Zhong. He argued that, as a nominee, Golden City “is simply the party to whom it is nominated title will be conveyed and that the obligations to pay the purchase price rested squarely on Zhong: Field v Fitton [1988] 1 NZLR 482 and Lambly v Silk Pemberton Ltd [1976] 2 NZLR 427 (CA)”.
[48] We think that submission overlooks the likely impact of ss 4 and 8 of the Contracts (Privity) Act 1982. The new agreement stipulated that the purchaser was “Lily Zhong and/or nominee”. Ms Zhong had nominated Golden City purchaser under the first agreement, and Golden City was a party to the Deed of Settlement.
[49] For those reasons, we uphold the Associate Judge’s decision, which he expressed in this way:
[50] To succeed on this application, Covington had to satisfy me that the plaintiffs could not succeed on any of their causes of action (including any that were reasonably capable of being advanced with amendment to the pleading). It has not done so.
[51] I find that the plaintiffs have an arguable case for an enforceable agreement on the basis that the effect of the new agreement was to be ‘GST neutral’. There may also be arguments open to the plaintiffs but not yet pleaded as to a part oral/part written agreement or an estoppel by convention.
Result
[50] We dismiss the appeal.
[51] As neither Ms Zhong nor Golden City took any steps to respond to the appeal, there will be no costs order in their favour.
WILLIAM YOUNG P
[52] At the hearing of the appeal, I was inclined to the view that the appeal should be allowed. I have now changed my mind but take a narrower view of the merits of the case than the majority. Accordingly, I think it appropriate to write separately.
[53] Initially I saw the case as controlled by cl 3.4 and in particular considered that the arguments advanced in the High Court on behalf of Ms Zhong and Golden City were impermissibly inconsistent with that clause. On reflection, however, I think that I took too narrow a view of the situation.
[54] On the evidence it seems reasonably clear (and at least is seriously arguable) that the parties did not settle the first case on the basis that once GST was factored in Covington would be $187,500 better off (and Ms Zhong and Golden City correspondingly worse off) than on the figures provided for in the settlement and that by the same amount. I think it probable, to say the least, that the parties assumed that there would be no GST gains and losses either way. That certainly seems to have been the view of those representing Ms Zhong and Golden City and I would be surprised if anyone on the Covington side had a different view. It is important to note that those who were primarily involved did not have a particularly sophisticated grasp of the detail of the GST implications of the transaction. The language which was adopted in cl 16.3 seems to have come from someone who was not at the meeting.
[55] I think that the case for Ms Zhong and Golden City must come down to what is explicit or implicit in cl 16.3 of the sale and purchase agreement or the possible rectification of that clause. Otherwise it runs straight into cl 3.4 of the settlement agreement. I know that the expression “credit note” comes from s 25 of the Goods and Services Tax Act 1986 and in that section has a particular meaning. But it must still be interpreted as part of the contract between the parties. In that context, I am inclined to the view that the parties should be taken to have envisaged a credit being given for the GST which had been paid less what was owed on the revised transaction. In the alternative, I think it reasonably open to argument that the agreement should be rectified so as to require such a credit to be given. On this approach, Golden City should have received a credit of $187,500 on the settlement (ie paid $187,500 less than it did) which would be off-set by the GST adjustments which were to follow.
[56] I note that the approach I have just outlined was proposed on 17 January 2005 by the solicitor acting for Golden City but the point then seems to have been lost sight of along with the reality that Golden City had incurred a GST liability of $187,500 which was later going to come to charge.
[57] If this approach is right, Ms Zhong and Golden City in effect paid $187,500 too much on settlement and have an arguable case to recover that money. Given that Golden City was a party to the settlement deed and was the party which settled (and on my tentative view paid $187,500 too much) it has a very credible basis for pursuing a claim independently of Ms Zhong, albeit that the pleadings as they currently stand need some attention.
Solicitors:
Meredith Connell, Auckland for Appellant
Hornabrook Macdonald, Auckland for First and Second Respondents
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