Denarau Investments Ltd v Ludlow

[2008] NZCA 158

IN THE COURT OF APPEAL OF NEW ZEALAND

CA501/07
[2008] NZCA 158

BETWEENDENARAU INVESTMENTS LIMITED

Appellant

ANDTREVOR ALLAN LUDLOW AND CAROL ANNE BRAITHWAITE

First Respondents

ANDMINTER ELLISON RUDD WATTS

Second Respondent

Hearing:22 May 2008

Court:O'Regan, Priestley and Heath JJ

Counsel:P G Skelton for Appellant

M J Tingey for First Respondents

Judgment:10 June 2008 at 11.30 am

JUDGMENT OF THE COURT

A        The appeal is dismissed.

BThe first respondents are entitled to costs of $3,000 plus usual disbursements.

REASONS OF THE COURT

(Given by O’Regan J)

Introduction

[1]       This is an appeal against the decision of Associate Judge Sargisson, in which she granted summary judgment to the respondents.  She ordered the appellant, Denarau Investments Limited, to repay to the first respondents (the purchasers) the deposits they had paid for villas intended to be constructed as part of a resort development in Fiji. 

Issues

[2]       Two issues arise on the appeal.  These are:

(a)Whether a letter written on behalf of Denarau to the purchasers made it clear that Denarau did not intend to perform its obligations under the contracts and therefore amounted to repudiation in terms of s 7(2) of the Contractual Remedies Act 1979;

(b)If so, whether the fact that Denarau had a right to cancel the contract, thereby avoiding the obligation to construct the villas in terms of the contract, meant that the letter was no more than an indication that Denarau intended to avoid lawfully the contractual obligation and therefore did not amount to a repudiation in terms of the contract which entitled Denarau to cancel it.

Did the letter amount to repudiation?

[3]       The letter in question was written on 20 October 2006.  Before turning to its terms, we outline the factual and contractual context, drawing on the summary appearing in the Associate Judge’s judgment (with which neither party took issue).

Factual background

[4]       In August 2004, the purchasers entered into four written agreements with Denarau, the developer of the Fiji Beach Resort and Spa at Denarau Island in Fiji.  The agreements were essentially in identical terms, and each one provided for the grant of a title lease, and the construction of a villa and the sale of associated fittings, furnishings and equipment, as part of Stage 2 of the resort.

[5]       Each agreement included terms that:

(a)Required the purchasers to pay a deposit to Minter Ellison Rudd Watts as stakeholder to hold the deposit and the net interest earned on the deposit in trust for Denarau and the purchasers.

(b)Provided for the deposits to be paid back to the purchasers together with the net interest, unless Denarau became entitled to the deposits and/or to require settlement under the provisions of the agreement.

(c)Afforded to Denarau a right to decide it would not proceed with Stage 2 and to cancel all agreements relating to Stage 2. 

[6]       The right to cancel was provided for in cl 2.2 in these terms:

Cancellation by Denarau Investments:  If Denarau Investments for a reason determines (in its sole discretion) not to proceed with the Project as a whole, or any Stage of the Project which includes the villa to be constructed for the Purchaser, it may cancel the Sale Agreements by giving written notice to the Purchaser, upon which the provisions of Clause 3.2 shall apply.

[7]       Clause 3.2 provided, in the event of cancellation by Denarau, for the return of deposit money plus certain interest, but it ruled out claims for damages.

[8]       Under the agreements, Denarau also had the right to decide on the substitution of any finish, fitting or fixture of equivalent quality to that specified in the construction details, in which case there would be no adjustment to the sale price or liability for compensation.

[9]       The purchasers paid the four deposits totalling NZ$242,500.00 to Minter Ellison.

[10]     Denarau encountered difficulties with mounting costs.  On or about 20 October 2006 it wrote to the purchasers.  It sent four essentially identical letters, one for each villa property, informing them it was not prepared to complete the Stage 2 villas unless it could at least match the level of quality achieved in the completion of Stage 1.  It said it could not do this at the contract price, and it raised the need for substantial price increases (an increase of $210,000 for three villas, and of $235,000 for the fourth).

[11]     The total proposed increase for the four villas was NZ$875,000.00, taking the overall purchase price from NZ$2,640,000.00 to NZ$3,515,000.00.

[12]     The text of the letter for one of the villas, Villa 51C, which was repeated in the other letters with the necessary amendments as to price and valuation, stated:

I am writing to inform you of an important issue that has arisen, which involves your Villa and to ask for your understanding and co-operation.

The standard and amenity of the Stage 1 villas of the Fiji Beach Resort and Spa have surpassed everyone’s expectations and have set new bench marks for resorts at Denarau Investments Island and in Fiji generally.

However, during our recent negotiations for the construction of Stage 2 we have come to the unfortunate realisation that it has become cost prohibitive to complete the Stage 2 villas to the standard and quality of Stage 1.  This is due to the booming Fiji economy and resulting demand on local resources which is having a significant inflationary impact on costs associated with construction.  We also need to allow for cost increases through to completion of your Villa, projected around March 2008.

We have limited choices available to us, if we are to proceed with Stage 2.  We can:

·     Compromise the standard, quality and size of the Stage 2 villas;

·     Cancel Stage 2 of the Resort altogether; or

·     Obtain your agreement to an increase in the sale price of your Villa and so retain the Stage 2 concept standards and quality.

There has been much debate and heartache as to the best way to resolve this issue without involving you, our valued purchaser, however we have no other realistic alternative.

Denarau Investments is not prepared to complete the Stage 2 villas unless we can at least match the level of quality achieved in the completion of Stage 1.  We also feel that it would be a great disservice to our existing villa owners in Stage 1, the project and yourself to compromise on standard and quality.

To not proceed with Stage 2 (while fully within Denarau Investments right under the provision of your Sale Agreement – see clause 2.2.) would be very disappointing for everybody involved in the project.

To complete the Resort to the standard achieved in Stage 1, we seek your agreement to an increase in the sale price of the Villa you have contracted to purchase.  To facilitate this, Denarau Investments proposes that you offer to vary your Sale Agreement so that the sale price of your Villa is increased by $235,000.00 from $550,000.00 to $785,000.00.  We estimate the current market value of your Villa to be $1,060,000.00.  After increasing your sale price as above this will provide you with a capital appreciate for your Villa.

In recognition of your commitment to the project, the agreement to the increase in the sale price of your Villa, Denarau Investments proposes to:

·     Accept that it is not necessary that you increase your deposit to 10% of the new purchase price – the existing deposit of $55,000.00 is all that is required to be paid until completion and settlement of the Villa; and

·     Waive the requirement for payment of the second 5% deposit due on the Villa being closed in.

Please refer to the attached Addendum to the Sale Agreement for your Villa which sets out the proposed increased sale price and terms.

We have discussed the above proposal with our financiers who have provided “approval in principle”, subject to their director’s approval and a successful conversion of existing Stage 2 sales to the revised prices as proposed by Denarau Investments.

Please sign the attached Addendum to the Sale Agreement and return it to us in the enclosed pre-addressed envelope and retain the copy for your records.  Please do this by no later than Monday 30 October 2006.

Once this process has been completed and other consultation with financiers, we will advise you of the outcome.

Thank you for being a dedicated purchaser of the Hilton Fiji Stage 2 Villas and for your kind understanding in these difficult circumstances.  I truly regret having to write this letter to you, but unfortunately I have no other alternative.  I am more than happy for you to call me to discuss this.  Phone …

[13]     Denarau attached to each letter a document called an “Addendum to Sale Agreement”.  The addendum incorporated an irrevocable offer that the purchasers were invited to make in order to vary the agreement for sale and purchase.  The terms of the offers provided for the increase to the sale price that Denarau required.  They also provided for the deletion of clause 2.2 of the agreement.

[14]     In the High Court reference was made to subsequent discussions and correspondence between Mr Mahon for Denarau and the purchasers, but there was considerable dispute about them and Mr Tingey for the purchasers accepted (as he had accepted in the High Court) that he could not rely on what transpired in a summary judgment context.  We do not intend therefore to outline what occurred: reference can be made to the Associate Judge’s judgment for the detail.

[15]     Eventually the purchasers wrote to Minter Ellison and Denarau to cancel their agreements.  Their letter of 7 November 2006 gave formal notice of cancellation and requested return of their deposits, specifying the bank account into which the payment should be made.  They subsequently confirmed that they would accept the deposits and interest as full and final settlement of Denarau’s obligations.  No payment was made, and eventually the purchasers made a formal demand on Minter Ellison and Denarau for the return of the deposits and, when this did not occur, commenced this proceeding.  Minter Ellison was a stakeholder and abided the decision of the Court both in the High Court and in this Court.

The Associate Judge’s approach

[16]     The Associate Judge, having correctly directed herself as to the legal requirements for repudiation, determined that the letter of 20 October made it clear that Denarau did not intend to perform its obligations under the agreements and that its conduct therefore amounted to repudiation.  She said that the letter made it abundantly clear that proceeding with Stage 2 at the prices provided for under the agreements was no longer an option, and thus indicated that a decision not to do what the contract provided was already decided.  She rejected the contention made on behalf of Denarau that the 20 October letter was an invitation to negotiate that left open the possibility that Denarau would honour the agreements it had with the purchasers.

Denarau’s submission

[17]     On behalf of Denarau, Mr Skelton argued that, when considered in the context of the underlying contractual arrangements between Denarau and the purchasers, the 20 October letter could not fairly be interpreted as a clear statement that Denarau did not intend to perform its obligations under the contracts.  The fundamental obligation of Denarau under the terms of sale was the obligation in cl 4.1 to “commence, construct and complete the Villa in a proper and professional manner in accordance with all statutory and regulatory requirements of all Relevant Authorities with all finishes and fittings, substantially in accordance with the Construction Details”.  But this was subject to the following:

(a)Clause 4.2, which provided that Denarau could construct the project in stages, and that Denarau was not “under any obligation to complete every stage or to fully develop the whole of the Project”;

(b)Clause 4.2(a), which provided that the purchasers acknowledged that Denarau reserved the right at its sole discretion to not commence, to stop, to restart and/or to change any aspect of the development of the Project or any Stage of the Project;

(c)Clause 4.3, under which the purchasers acknowledged that the Layout Plan attached to the agreements was preliminary and not detailed, and had yet to be developed into final working drawings and specifications.  The purchasers also acknowledged that the project, and the villas which were to be built on their behalf could be subject to change and amendment;

(d)Clause 4.4, under which Denarau had the right to substitute new finishes, fittings or fixtures of equivalent quality to those specified in the Construction Details in the contracts.

[18]     Mr Skelton also pointed to two other important provisions of the terms of sale:

(a)Clause 5.4, which provided that there was no target date for settlement of the sale of the villas to the purchasers.  This clause specifically provided that Denarau gave no warranty as to when practical completion would be achieved, and the purchasers acknowledged that prospective settlement dates were indicative only and not binding on Denarau so as to give any claim for compensation by the purchasers;

(b)Clause 2.2, under which Denarau could cancel the contracts if, for any reason, it determined “not to proceed with the Project as a whole, or any Stage of the Project which includes the Villa to be constructed for the [purchasers]”.  In the event of such cancellation occurring, provision was made that the deposits paid and the interest earned on them while held by the stakeholder (Minter Ellison) would be repaid to the purchasers, but the purchasers would have no other claims against Denarau.

[19]     In short, Mr Skelton said the obligations of Denarau were conditional on a number of factors, and the net effect of this was that Denarau retained a considerable degree of discretion about when and if it performed the obligation to build the villas purchased by the purchasers.

[20]     Mr Skelton said that when the 20 October letter was read in light of that background, it could not fairly be characterised as a clear indication that Denarau did not intend to perform the contractual obligation. 

[21]     Mr Skelton also emphasised the high threshold for a finding that a communication from a contracting party amounts to a repudiation.  In that respect in relied on the decision of this Court in Starlight Enterprises Ltd v Lapco Enterprises Ltd [1979] 2 NZLR 744 in which Woodhouse J said that what is required is that “one party has demonstrated quite distinctly an absolute refusal to perform his obligations according to the contract” (at 745). Woodhouse J continued by formulating the following test: “Has the party said to be renunciating acted in such a way as to lead a reasonable person to believe that he has no further intention of meeting his obligations under the contract?”: at 745 – 746.

[22]     Starlight was dealing with the common law test, because the events in that case occurred before the coming into force of the Contractual Remedies Act.  Nevertheless, Mr Skelton said it was an indication of the stringency of the test required.  He also relied on the statement by Fisher J in Betham v Marjetts [1996] 2 NZLR 708 at 711:

The question is whether in all the circumstances the communication should be regarded as an irrevocable indication that the party concerned would take no further steps to perform his or her obligations under the contract or alternatively that he or she would perform it only in a manner substantially inconsistent with the obligations the contract imposed.

[23]     For our part we do not derive a lot of assistance from attempts to re-phrase the statutory wording.  Section 7(2) says that a party repudiates “by making it clear that he does not intend to perform his obligations under [the contract] or, as the case may be, to complete such performance”.  We do not think that needs any judicial embellishment. 

[24]     We accept Mr Skelton’s point that Denarau had a high degree of discretion available to it.  It could have, for example, said to the purchasers that it was considering exercising its right to cancel under cl 2.2, but before it did so it wanted to explore the possibility of a price increase which would make the project more attractive to it and therefore make the cancellation option less attractive.  That would not have involved any decision on its part not to proceed at the initial price nor a communication of such a decision.  Alternatively, it could have indicated that it did not intend to commence construction of Stage 2 of the project immediately, but if purchasers were prepared to pay more it would be more likely to commence immediately.  This would have had a similar effect. 

[25]     That is not, however, what Denarau did.  Rather, the letter of 20 October:

(a)Outlined that constructing the villas to the standard and quality required “has become cost prohibitive”;

(b)Indicated the limited choices, of which there were three, namely compromising standards, cancelling or obtaining agreement to a price increase.  The first of those options, which in context must be seen as the option of completing for the initial price, was ruled out: “Denarau is not prepared to complete the Stage 2 villas unless we can at least match the level of quality achieved in completion of Stage 1”;

(c)Asked the purchasers to sign an offer to pay more for the villas, which would then be discussed with Denarau’s financiers.  The letter stated that once that had happened, Denarau would advise purchasers of the outcome;

(d)Thanked the purchasers for their dedication to the project and expressed regret about having to seek a price increase, “but unfortunately I have no other alternative”.

[26]     Mr Skelton said the indication that purchasers would be advised of the outcome indicated that a number of choices were still in play, and that no decision had been made.  We do not see that as assisting Denarau’s case, however, because the choices that remained in play, when the letter is read in full, were cancellation or proceeding at an increased price.  The possibility of proceeding at the contracted price had already been ruled out.

[27]     Mr Skelton argued that this case was similar to Starlight in which it was found that no repudiation had occurred.  In Starlight the contract at issue was a contract for the manufacture of travel bags at $3.00 per bag.  The manufacturer wrote to Starlight after having delivered 500 or so bags and advised that the new price “will have to be $4.10 as from now on”.  The manufacturer said it would step up production to avoid any further increases.  This communication was interpreted by Starlight as a repudiation and it wrote to the manufacturer cancelling the contract and refusing to accept further bags when they were delivered.  The manufacturer’s position was based on a misunderstanding on its part of the legal position: it believed that it was allowed to increase the price.  In those circumstances this Court determined that the letter was an expression of erroneous interpretation of the contract, rather than a refusal to comply with the contract. 

[28]     This Court determined that, having regard to that error, and the expression by the manufacturer of its intention to continue manufacturing the bags, the letter could not be read as a repudiation.

[29]     Associate Judge Sargisson distinguished Starlight from the present case.  She accepted the submission made by Mr Tingey (who appeared for the purchasers both in the High Court and in this Court) that Starlight was a narrow exception for mistaken interpretation of a party’s contractual rights.  No such mistake had occurred in this case.  We agree with that analysis of Starlight.

[30]     We are satisfied that the Associate Judge correctly interpreted the letter of 20 October as a clear statement by Denarau that it did not intend to perform its obligation to construct the villas purchased by the purchasers.  The first ground of appeal therefore fails.

Did Denarau’s right to cancel mean there was no repudiation?

[31]     This argument focused on cl 2.2, which gave Denarau the right to cancel the contract at any time.  Thus, Mr Skelton argued, Denarau’s indication of an intention not to complete the project was no more than an indication of intention to cancel, which it was perfectly entitled to do.  He relied on the judgment of the Privy Council in Reda v Flag Ltd [2002] UKPC 38 for that proposition.

[32]     In Reda, two executives of Flag were employed under contracts which entitled them to remuneration set at a proportion of that of the chief executive of Flag.  When a new chief executive was appointed on much more favourable terms than his predecessor, the executives insisted on a commensurate improvement in their own terms of employment.  Flag responded by terminating the executives’ contracts of employment, for the purpose of preventing them achieving that outcome.  The Privy Council found that the exercise of the right of termination without cause in those circumstances, was a valid exercise of that power, notwithstanding the purpose for which it was done.

[33]     We do not see this case as assisting the position of Denarau.  Denarau did not exercise its right of cancellation: if it had done so, there could have been no argument as to the validity of its actions, and the case would have been on all fours with Reda v Flag Ltd.  But that is not what Denarau did.

[34]     In the course of argument another possibility emerged: that there was a third option available to Denarau, in addition to performance of the contract and cancellation of the contract.  That was the option of doing nothing, which cl 4.2 entitled Denarau to do.  In that event there would be no completion of the project, but no cancellation either, with the stakeholder continuing to hold the deposits paid by purchasers.  The argument was that the 20 October letter could be seen as an indication by Denarau that it would not complete the project in the circumstances then prevailing, which would be consistent with the rights of Denarau under cl 4.2. 

[35]     Again, we do not see that argument as assisting in the circumstances of this case because Denarau’s letter of 20 October did not indicate a delay or reconsideration of completion at current prices, but rather was a complete rejection of that possibility.

[36]     Mr Skelton argued that cancellation of the contract was an alternative method of performance of the contract, and therefore an indication of intention to cancel was simply an indication of the adoption of that alternative method of performance.  However, we accept the submission made by Mr Tingey that cancellation is not an alternative method of performance: rather it is an action which brings to an end the contract which imposes the requirement to perform.

[37]     We are satisfied that the second ground of appeal must also fail.

Result

[38]     We dismiss the appeal.

Costs

[39]     We award costs of $3,000 plus usual disbursements to the first respondents.

Solicitors:
Anderson Creagh Lai, Auckland for Appellant
Bell Gully, Auckland for First Respondents
Minter Ellison Rudd Watts, Auckland for Second Respondents