Dilworth v Pirie

[2024] NZHC 1321

IN THE HIGH COURT OF NEW ZEALAND PALMERSTON NORTH REGISTRY

I TE KŌTI MATUA O AOTEAROA TE PAPAIOEA ROHE

CIV-2022-454-091

[2024] NZHC 1321

BETWEEN

SARAH ANN DILWORTH

First Plaintiff

CHRISTOPHER IAN REDPATH
Second Plaintiff

AND

CAROL ANN PIRIE, as executor of the estate of William John Redpath

First Defendant

CAROL ANN PIRIE

Second Defendant

Hearing:	8 & 9 April 2024
Counsel:	G M Richards for Plaintiffs M Freeman for Defendants
Judgment:	24 May 2024

JUDGMENT OF GRAU J

A loan by a son to his parents in 1994 and what, if anything, remains owing on it

[1]In 1994 a son, Ian Redpath, loaned his parents, William and Caroline Redpath,

$127,000 to enable them to purchase a new home where they could spend their retirement in greater comfort (the Loan). William and Caroline signed a Deed of Acknowledgement of Debt in respect of the Loan (the Loan Deed).

DILWORTH v PIRIE [2024] NZHC 1321 [24 May 2024]

[2]                 The parties to the Loan, Ian, William, and Caroline, are now all deceased. Caroline passed away in 2001, Ian passed away in 2017, and William passed away in 2021.1

[3]                 Ian’s final will did not forgive the 1994 Loan to his parents.2 Ian gifted it in equal shares to his children, Sarah and Christopher, with a direction that his children would not seek payment from their grandfather until six months after his passing. Sarah and Christopher honoured their father’s wishes. Ian’s estate received $100,000 from William’s estate on 20 January 2022 following correspondence between the parties’ lawyers.

[4]                 At issue in this case is what, if anything, William’s estate still owes in respect of the Loan:

(a)The plaintiffs, Sarah and Christopher, say William’s estate still owes the remaining $27,000 of the Loan principal, along with interest on the unpaid Loan balance, going back to 1994.

(b)The defendant, Ian’s sister Carol, is the executor of William’s estate. She says that the $27,000 portion of the Loan was payable and was repaid to Ian in 1994, some 28 years before this claim was commenced. The claim for repayment of the $27,000 is time-barred.

(c)Christopher and Sarah also say that interest at 10 per cent per annum has accrued on the unpaid Loan balance and this accrued interest became payable when it was demanded on 8 December 2021.

(d)Carol says no interest is owing because cl 4 of the Loan Deed is what is known as a “Marshall clause”, meaning that interest did not accrue unless and until it was demanded within 14 days of the anniversary of the Loan each year. Ian never demanded interest therefore no interest was payable or is owed now. But, even if interest was payable absent

1      This decision refers to the family members by their first names. No discourtesy is intended. It is solely for ease of reference.

2      Ian’s final will is dated 16 February 2010.

a demand (so that it accrued on the Loan), all but $50,000 of interest would be time-barred.

The Loan and Deed of Acknowledgement of Debt

[5]                 The central document in this proceeding is the Loan Deed, dated 13 July 1994, signed by William and Caroline. It is set out in full as follows:3

DEED OF ACKNOWLEDGEMENT OF DEBT

Dated 13th day of July 1994

BETWEEN WILLIAM JOHN REDPATH  of Palmerston North, Retired and

CAROLINE LANGMAN  REDPATH,  his wife, called the  “borrowers”  and

IAN REDPATH, of Auckland, Director (hereinafter called the “lendor”). In the circumstances the lendor has advanced to the borrowers by way of loan the sum of ONE HUNDRED AND TWENTY THOUSAND DOLLARS ($127,000).

NOW IT IS AGREED as follows:-

[1]The borrowers acknowledge that they are indebted to the Lendor in the aforesaid sum of ONE HUNDRED AND TWENTY THOUSAND DOLLARS ($127,000) hereinafter called the principal sum.

[2]The borrowers will repay the principal sum to the lendor “UPON DEMAND” which words shall have the same meaning as is described to them by the fifth schedule to the Chattels Transfer Act 1924.

[3]The borrowers will repay to the lendor the sum of TWENTY SEVEN THOUSAND DOLLARS ($27,000) being part of the principal sum on settlement of the sale of their unit being Unit 2, 67 Birmingham Street, Palmerston North.

[4]Pending demand being made by the lendor for repayment of the principal sum the borrowers will pay to the lendor interest on the principal sum or such part thereof shall for the time being remain owing computed from the 15th day of July 1994 at the rate of 10% per annum payable annually if demanded within fourteen days (14) of each due date in respect of interest.

[5]The borrowers jointly severally undertake when required by the Lender to execute at the cost of the borrowers a registerable memorandum of mortgage of land on the Auckland District Law Society form in respect of the property being acquired by them at [5c] Carroll Street,4 Palmerston North, and the borrowers for themselves and each of them, in terms of section 136 of the Property Law Act 1952 irrevokably appoint the lendor their Attorney to execute the said

3      Emphasis in original, footnote added.

4      The deed referred to “2a” Carroll Street, but it is common ground that the property William and Caroline acquired was 5c Carroll Street.

memorandum of mortgage in the name of and on behalf of the borrowers jointly and each of them severally.

[6]As can be seen in cl 1, William and Caroline acknowledged that they owed Ian

$127,000.

[7]       In cl 2, William and Caroline agreed to repay the principal sum of $127,000 to Ian “upon demand”, as defined by reference to the Chattels Transfer Act 1924.5

[8]       In cl 3, William and Caroline agreed to repay $27,000 of the principal sum to Ian when they settled the sale of their home at Unit 2, 67 Birmingham Street, Palmerston North.

[9]Clause 4 detailed the agreement as to the interest payable on the Loan.

[10]     Finally, cl 5 was an undertaking by William and Caroline that they would, when required by Ian, execute a registerable memorandum of mortgage in respect of the property they were acquiring, and that they would appoint Ian as their attorney to execute the memorandum of mortgage in their names and on their behalf.

[11]     William and Caroline signed the Loan Deed, which appears to have been witnessed by a Mr Hubbard, who was their lawyer at the time and is the person who likely drafted the Loan Deed.6

Documentary evidence about the Loan

[12]     It is common ground that in 1994 William and Caroline sold their property in Birmingham Street and purchased a property in Carroll Street where they lived for the remainder of their lives.

5      The fifth schedule to the Chattels Transfer Act 1924 provides that “upon demand” means “upon demand being made by notice in writing signed by the person entitled to make the demand, or any agent or clerk or servant of such person, served upon the person upon whom demand is to be made, either personally or by posting the same in a duly registered letter addressed to him at his usual or last known place of abode in New Zealand”.

6      Mr Hubbard is now deceased.

[13]     It is also common ground that, between 1994 and Ian’s death in 2017, Ian made no demand for repayment of either the Loan principal or any interest.

[14]     On 6 October 1994, William and Caroline’s lawyer, Mr Hubbard, wrote to them about the sale of their Birmingham Street property, including that “we have paid

$27,000 back to Ian as earlier agreed”. The attached account settlement statement included a notation of payment on 5 October 1994 with the details “TO J. W. Redpath as agreed … 27,000”. Mr Hubbard’s bill, dated 30 September 1994, set out the professional services rendered in relation to the sale, which included “Making repayment to Mr I. Redpath”.

[15]     William’s final will in 2019 appointed Carol as sole executor and trustee of his will and left her the residue. William’s final will made no reference to the Loan. However, his two earlier wills in 1996 and 2001 gave directions to his executor to repay Ian $100,000 “or such amount or part thereof as shall be owing at my death”.

[16]Ian also made a number of wills during his life:

(a)two wills in 1997, which made no reference to the Loan;

(b)one will in 2001 and two in 2008, which forgave all debts owed to him at the date of his death by any of his family members;

(c)one 2009 will, which forgave all debts to family, excluding the Loan to his parents; and

(d)the final 2010 will, which gifted the Loan to his children in equal shares.

Other documentary evidence about the Loan: Ian’s notes

[17]      Sarah and Christopher have sought to adduce a number of documents authored by their father Ian:

(a)A statement of assets and liabilities as at 16 February 2010 which records “Loans if any, to Dad  ($150,000  approx  re  the  house  at  5C Carroll Street is not forgiven refer my will…”.

(b)A statement written by Ian and signed by him, dated 10 March 2012, which records the Loan principal owed was $127,000 and sets out his view on interest owing at 10 per cent per annum “for say past 18 years compounded”.

(c)A copy of the Load Deed on which Ian has made a handwritten annotation next to the clause which contemplates repayment of the

$27,000 from the Birmingham Street proceeds. The annotation reads “This never Happened”. Ian has then signed next to this annotation.

(d)Handwritten documents in Ian’s handwriting dated early 2016 where he records:

Deposit principal repayment: $27,000 was to be repaid but I told Mum that she was to put the 27,000 into her bank Acct for possible future health costs etc. It was not gifted but remained owing as part of the $127,000 original loan.

Interest Rate 10% PA on the $127000 loan accruing. Note: Deposit was never repaid to the lender.

…

Note The House Deposit was never repaid, I told Mum to hand onto it just in case she needed it for something.

…

(e)A transcript of some of Ian’s handwritten notes completed by his former wife, Marie, for the purposes of exchanges between the estates in March 2022.

[18]     Christopher and Sarah rely on these statements which set out Ian’s understanding of the status of the Loan, and in particular, his views on whether the

$27,000 was repaid in 1994 and whether interest was accruing on the Loan. It is their position that their father’s statements in these 2012 and 2016 documents set out the

true position; that the $27,000 portion of the Loan remained with William and Caroline and remained owing under the Loan Deed, and that interest was accruing on the Loan.

[19]     Carol has raised objections to the admissibility of these documents on the basis they are unreliable hearsay documents, as well as being post-facto subjective contractual understandings by Ian, which are inadmissible to the extent that they are tendered as an aid to interpretation of the meaning of the Loan Deed.

[20]     Prior to the hearing, the parties agreed that the documents could be provisionally admitted with submissions to be made in closing, both in respect of the documents and the affected passages in the evidence of the witnesses who were called at the hearing. There was significant reference to these documents by Sarah and Carol, who both gave evidence and were cross examined at the hearing.

[21]     It is not in dispute that Ian’s notes are hearsay statements. They are statements by a person who is unavailable. Nor does it appear to be at issue that they are sought to be adduced to prove the truth of their contents, in particular, that Ian did not receive payment of the $27,000 in 1994 when it was to be repaid in accordance with the Loan Deed (and/or that he either left it with his parents or received that payment but gave it back) and that interest was accruing on the Loan.

[22]     I note here I agree with Carol’s position that the statements cannot realistically be considered as business records as defined in s 19 of the Evidence Act 2006, thus the general exception to the admissibility of hearsay statements in s 18 must be made out.

[23]     The first question is whether the hearsay statements pass the threshold of reliability for admission. What is required is a reasonable assurance the statements are reliable, meaning they are of sufficient reliability for me to consider and draw conclusions as to the weight they should be given.7

[24]I consider the statements meet the threshold for admission:

7      R v Burr [2015] NZHC 1623 at [12].

(a)The authorship is not in question. Nor are there any indications to suggest any issues about Ian’s veracity. The evidence was that Ian had a good relationship with his father and was financially comfortable, so there is nothing to suggest he would have been exaggerating the amounts he believed were owed.

(b)One of the documents (listing assets and liabilities, including as an asset the loan to his father for the Carroll Street property) is signed and dated 16 February 2010 which suggests Ian intended it to have a degree of formality.

(c)It is clear that they are records made by Ian relating to his testamentary planning. Some of the notes were found with Ian’s last will.

[25]     However, although I have found Ian’s hearsay statements meet the threshold for admissibility as hearsay evidence, for the following reasons, they do not assist in determining whether his parent repaid $27,000 to him in 1994 or whether interest was and remained payable on the loan.

[26]     First, there is the timing of the statements. Ian’s statements in 2010, 2012 and 2016 were made between 14 and 22 years after Ian made the Loan to his parents, and some nine to 15 years after his mother died. Clearly, they are very far from a contemporaneous account of what Ian intended in 1994. And as noted above, at least until 2008, Ian intended to forgive the Loan to his parents.

[27]     Secondly, they are Ian’s personal reflections on the Loan to his parents—but there is no evidence about whether Ian shared his views with his parents. Nor is there any evidence about what his parents’ understanding of the terms of the Loan were, beyond that William’s 2001 will directed repayment to Ian of $100,000 “or such amount of part thereof as shall be owing at my death”. That suggests to me William thought he owed Ian $100,000, not $127,000. It was urged on me that “or such amount” meant more or less than $100,0000, such that it could mean $127,000. I do not accept that submission when the original Loan was for a specific amount—

$127,000, with $27,000 repayable the year it was made. In my view, William’s will

is consistent with William’s understanding (at least in 2001) that the $27,000 had been repaid as the Loan Deed required.

[28]     The orthodox approach to contractual interpretation, known as the objective approach, is set out in the oft-quoted passage of Arnold J in Firm PI 1 Ltd v Zurich Australian Insurance Ltd:8

… the proper approach [to contractual interpretation] is an objective one, the aim being to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”. This objective meaning is taken to be that which the parties intended. While there is no conceptual limit on what can be regarded as “background”, it has to be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning.

[29]     The approach to what can be regarded as “background” information is set out in the Supreme Court case of Bathurst.9 The Court was clear that whether background or extrinsic evidence can be used as an aid in contractual interpretation colours its admissibility under the Evidence Act in turn:10

The approach to be taken to contractual interpretation is governed by the law of contract, but it is the law of evidence that ensures the trial court’s inquiry focusses only on evidence that will materially assist in applying that test. The rules of evidence do not, therefore, operate independently of the law of contractual interpretation. Rather, the law of evidence serves the law of contract … it is the law governing the interpretation of contracts which fundamentally shapes what is relevant, and what is therefore admissible, extrinsic evidence.

[30]     Chief Justice Winkelmann and Ellen France J explained that evidence of what a party subjectively understood or intended the meaning of the contract to be will not be admissible if it was not communicated to the other party prior to contract formation. This is because an undeclared understanding or intention as to the meaning of a contract is not evidence that would have been available to the reasonable person having all of the information reasonably available at the time, and so is not relevant to the task of contractual interpretation.11

8      Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60] (footnotes omitted).

9      Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696.

10     At [55] per Winkelmann CJ and Ellen France J (footnote omitted).

11     At [48] and [68].

[31]     In this case, there is no evidence that Ian’s (much later) understanding of the terms of the Loan was communicated to his parents (or shared by them) before or after they signed the Loan Deed. Indeed, it appears more likely that Ian’s intention at the time of the Loan (and for some time after, at least up until 2008) was that he was not going to seek repayment at all. In contrast in 2001, his father William appeared to understand that the Loan was repayable. In my view, Ian’s notes, to the extent they set out Ian’s understanding of the terms of the Loan Deed, do not assist me in attempting to ascertain what Ian and his parents intended or agreed when Ian made the loan to his parents or afterwards.

[32]     I accept that it appears possible, based on Ian’s notes, that he told his parents to keep the $27,000 instead of them paying it when it was due (although that is contrary to their lawyer’s correspondence suggesting payment was made). It also appears possible that Ian may have received payment of $27,000 in accordance with the terms of the Loan Deed but returned the $27,000 to his mother. His notes say he told his mother to put it into her account and that it was never repaid, but that could mean either of the above. There is also no contemporaneous evidence about the basis on which that sum might have been returned or retained. For example, there is no evidence to suggest the Loan principal would remain at $127,000 as set out in the Loan Deed. That is what is suggested on behalf of Sarah and Chris.

[33]     I cannot, however, accept the submission that Ian could have given the $27,000 back, or let his mother retain it, under the existing terms of the Loan Deed. It would be inconsistent with the term requiring repayment, and no amendment or new loan deed followed. There is also no evidence that might point to Ian’s mother’s understanding of the basis on which she received or retained $27,000. It does not appear unreasonable to infer she could have understood the payment to be a gift, when, according to Ian’s notes, it was for her possible future health costs. The short point is that Ian’s notes cannot assist to determine what happened to the $27,000 that was payable in 1994.

[34]     The financial transactions extracted from Ian’s computer do not assist either. It was suggested that they supported the position that there was no repayment of

$27,000 as there was no record of it in the spreadsheet. However, there was also no record of the loan of $127,000.

[35]     Nor am I assisted by the evidence given at the hearing by Sarah and Carol. I have no doubt they were honest witnesses who were doing their best to assist, but their evidence could only amount to their assumptions of what they thought the various documents meant. Neither had any direct involvement in, or knowledge of, the Loan or the Loan Deed or the parties’ understandings of it either at the time or later. The only thing that is clear from their evidence is that Ian was a good son and father, who generously provided his parents with a more comfortable life in their later years and provided for his children after he died.

[36]     Thus, I am left with the original Loan Deed which required payment of $27,000 in 1994, as well as documentary evidence that $27,000 was repaid to Ian in 1994. In my view, the correspondence from Mr Hubbard points strongly towards repayment having been made to Ian:

(a)First, Mr Hubbard’s 6 October 1994 letter said the $27,000 was “paid back to Ian as earlier agreed”. That is consistent with the terms of the Loan Deed which required repayment on the settlement of the sale of the Birmingham Street unit.

(b)Next, there is the settlement statement detailed “TO J. W. Redpath as agreed … 27000”. Again, that is consistent with payment being made. Although the notation refers to “J W”—not William’s initials, W J, nor Ian’s initials, I W—I am of the view this is more likely a typographical error than a reference to payment being made to William, not Ian. That is because it would make no sense at all to pay William; it would mean he was paying himself.

(c)Further, there is the bill for legal services that includes “Making repayment to Mr I. Redpath”.

[37]     I was asked to find that Mr Hubbard could have made a mistake. Again, that would amount to speculation, as against two very clear records of payment to Ian and one that is not as clear but is much more readily explicable as payment to Ian than to his father.

[38]     Accordingly, I am satisfied on the balance of probabilities that Ian’s parents repaid $27,000 to Ian in 1994, therefore the principal amount owing on the original Loan after that time was $100,000, and any interest payable would relate to that sum.

Is interest payable on the Loan?

[39]As above, the interest clause in the Loan Deed, cl 4, was in the following terms:

Pending demand being made by the lendor for repayment of the principal sum the borrowers will pay to the lendor interest on the principal sum or such part thereof shall for the time being remain owing computed from the 15th day of July 1994 at the rate of 10% per annum payable annually if demanded within fourteen days (14) of each due date in respect of interest.

[40]     Sarah and Christopher take the position that cl 4 is intended to operate such that interest is accruing and is payable upon demand. They say that it operates such that interest can be demanded annually, but the right to interest is not extinguished if not demanded every year, with the interest continuing to accrue. Accordingly, interest was owing and remained payable when demand was made for repayment of the unpaid Loan principal and any interest in December 2021.

[41]     Carol’s position is  that  cl  4  is  what  is  known  as  a  “Marshall  clause”.  A Marshall clause means that there is a right to interest payable on demand, but interest does not accrue unless it is demanded. She says Ian never demanded interest, therefore no interest is owing.

[42]     Marshall clauses are explained in the commentary in Working with Trusts as follows:12

Marshall clauses are clauses in loan agreements that give a right to demand interest, but where that interest is not usually demanded. These clauses are commonly used in family trust arrangements instead of interest-free loans, and

12     Collette McKenzie and Emma Richards Working with Trusts (online ed, Thomson Reuters) at [9.6].

were particularly prevalent prior to the abolishment of gift duty in 2011, as without such a clause, a liability to gift duty would likely have arisen in relation to the interest foregone.

The term “Marshall clause” originates from the case Re Marshall (deceased) [1965] NZLR 851 (CA), which considered whether a right to demand interest under an instrument was a dutiable gift where that right was not exercised. The Court held that the failure to demand interest was not a dutiable gift and, as a consequence, Marshall clauses were and still are commonly used in intra- family transactions.

[43]     Gift duty was a feature of New Zealand taxation law since 1885 until its abolishment in 2011. It was intended to discourage the gifting of assets before death (to protect the base for estate duties that were formerly charged) and to raise revenue. When estate duties were abolished in 1992, gift duties were retained to protect against income tax avoidance.13

[44]     By charging nil or low interest at less than market rate, a loan becomes a gift (and the payment of money by a lender to a borrower constitutes a disposition in the context of gift duties).14 However, gift duties could be avoided in two ways:

(a)by making the loan repayable upon demand (as opposed to being for a fixed term); or

(b)by including a Marshall clause.

[45]     As explained above, a Marshall clause is drafted in terms that allows a lender to demand interest on an annual basis whilst also avoiding the nil or low interest from being regarded as a gift if there has been a failure to demand.15 If interest is not demanded, then no interest exists in respect of which a gift duty can be applied.16 It follows that interest cannot accrue without demand a being made; if demand is not made under a Marshall clause, no consideration is provided to or by a person (since there is no debt), and therefore there is no accrual income or expenditure.17

13     Policy Advice Division, Inland Revenue Department Gift duty abolition (Inland Revenue Department, Special Report, 1 September 2011) at 1.

14     T Blennerhassett Laws of New Zealand Gift Duty: Adequacy of Consideration (online ed) at [87];

New Zealand Trusts Commentary (online ed, Wolters Kluwer) at ¶143-025.

15     New Zealand Trusts Commentary, above n 14, at 143-025.

16     Re Marshall [1965] NZLR 851 (CA) at 855.

17     New Zealand Trusts Commentary, above n 14, at 103-050.

[46]Both of these avoidance techniques are used in the Loan Deed.

[47]     Carol’s counsel helpfully provided me with a colour-coded comparison between cl 4 in the Loan Deed and the clause at issue in the case of Re Marshall itself. I agree that there is no material difference between the two. When placed in this context, it appears the entire Loan Deed—and cl 4 in particular—was drafted to avoid a gift duty by making it clear that both the principal Loan amount and the interest payable were only payable on demand. It follows that cl 4 is to be interpreted as a Marshall clause. Reading cl 4 in this way explains why there is reference to both the principal and the interest being payable on demand. It also means that the whole clause is intended to be read together to give it full effect; the beginning of the clause cannot be severed from the rest of it, as was suggested to me by counsel for Sarah and Christopher.

[48]     Interpreting cl 4 as a Marshall clause means that, because Ian never demanded interest payments from his parents within the terms of cl 4—that is, within fourteen days of each anniversary of the Loan Deed —there has never been any interest payable on the Loan. As explained in Re Marshall, strictly speaking, this means that no interest exists that can be paid or can otherwise accrue. In short, Carol does not owe any interest to Sarah and Chris.

[49]     It was suggested to me that it would not have made sense for Ian to seek repayment of the Loan principal (or the interest) when his parents were alive. But it would also have made sense that Ian (who was an accountant) would have wanted to avoid paying tax unnecessarily. Thus, I also consider a Marshall clause is a natural reading of cl 4. It is also consistent with the altruistic nature of the Loan to his parents, and his generosity in general. I do not accept the submission that it would have made no commercial sense. This was not a commercial loan. I observe again here that Ian’s earlier wills forgave his parents’ debt to him. It was only much later that Ian’s attitude to the Loan appears to have changed. It may be coincidence, but I also note that change in attitude is in the years near to the abolition of gift duty.

Result

[50]     Because the $27,000 of the Loan principal was paid in 1994, any claim in relation to it is time-barred under the Limitation Act 2010.

[51]     No interest was payable on the Loan unless it was demanded annually. No interest has therefore accrued on the Loan that is now payable.

[52]Sarah and Christopher’s claims fail.

[53]     Carol is entitled to costs. The parties are to endeavour to agree as to quantum. In the event that they cannot, counsel are to file short memoranda (of no more than five pages, not including schedules) within 10 working days of this decision for a final costs award to be determined by me on the papers.

Grau J

Solicitors:

Cochrane Law, Palmerston North for Plaintiffs

Thomas Dewar Sziranyi Letts, Lower Hutt for Defendants