Dominion Finance Group Limited v Kheong

[2012] NZHC 1485

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2011-409-001085 [2012] NZHC 1485

BETWEEN  DOMINION FINANCE GROUP LIMITED

Plaintiff

ANDLOOI TECK KHEONG Defendant

Hearing:         26 March 2012

(Heard at Christchurch)

Appearances: J E Bayley/E E Thiele for Plaintiff

G A Cooper for Defendant

Judgment:      11 July 2012

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

[as to plaintiff ’s summary judgment application]

[1]      The defendant (Mr Kheong) obtained vendor finance when purchasing a unit in  a  Queenstown  development.    The  vendor  assigned  its  interest  in  the  loan agreement to the plaintiff, Dominion Finance Group Limited (“Dominion”) which now sues the defendant for principal and interest under the loan agreement.

[2]      Dominion seeks summary judgment.

[3]      Mr Kheong says he has arguable defences.

Mr Kheong’s purchase and loan

The pleadings

[4]      Dominion,  in  its  statement  of  claim,  identified  the  loan  obtained  by

Mr Kheong  from  Wensley  Developments  The  Beacon  Limited  (“Wensley”),  as

DOMINION FINANCE GROUP LIMITED V KHEONG HC CHCH CIV-2011-409-001085 [11 July 2012]

assigned by Wensley to Dominion.  Dominion’s affidavit in support of its summary judgment application (sworn by Gregory John Pearce, a “contractor” assisting Dominion with winding up its lending facilities) similarly spoke of the loan agreement.

[5]      Mr Kheong, in addition to his notice and evidence in opposition, has elected to file a draft statement of claim as against a director of Wensley, Greg Wensley. Mr Kheong says that the loan agreement is not the only relevant contract and history. He refers to a fuller history of the dealings between Wensley and himself.

The history of the sale and purchase

[6]      Mr Kheong, on 6 June 2008, entered into an agreement for sale and purchase of a unit at The Beacon, an apartment block developed by Wensley at Queenstown.

[7]      The following narrative is taken from the evidence of Mr Kheong, and is taken to be at least arguable for present purposes.

[8]      Mr Kheong had entered discussions with Wensley representatives in May

2008.  His discussions were with Christine Anderson, Wensley’s Sales Manager, and with  Mr  Greg Wensley.    The  apartments  had  been  developed  and  marketed  as capable of earning income from both capital growth and short-term rental to holidaymakers.  Wensley had devised a scheme whereby apartments were marketed and sold as investments. The package involved:

(a)       An investor would purchase an apartment.

(b)The investor was promised a nine per cent per annum return on the investment for the first two years. To effect that, Wensley entered into a two-year lease of the apartment from the purchaser.  Wensley then collected all proceeds from the letting of the apartment and was liable for all outgoings on the apartment for the lease period.

(c)      A managing agent was engaged to manage the apartment, maintain it, and let it out to holiday makers.

(d)GST on the purchase would be covered by a GST claim to be made by the purchaser.

[9]      The documentation provided by Wensley to purchasers included the form of agreement for sale and purchase, a lease agreement, and a management agreement.

[10]     From a valuation report obtained in June 2008 for borrowing purposes, it appears that previously hectic market activity in Queenstown had come to an end in the first quarter of 2008.

[11]     From May 2008, Mr Kheong had his negotiations with Ms Anderson and Mr Wensley.  They expressed confidence in Mr Kheong’s ability to re-sell the unit for a profit within a few years of purchase.  For his part, he indicated that he would be borrowing the entire purchase price in anticipation of a significant increase in the value of the unit with a view to resale within two years of purchase or refinancing thereafter.   Ms Anderson and Mr Wensley explained a guaranteed return on investment in the first two years.   Mr Kheong explained to them that guaranteed rental repayments would be an essential aspect of the deal as they would enable him to meet the interest payments on the loan that would be needed for the purchase.

[12]     The agreement for sale and purchase which was signed on 6 June 2008 (for

$2,193,750) was conditional on finance.

[13]     Mr Kheong’s Singaporean bank, later in June, obtained the valuation of the unit, which assessed a market value for mortgage purposes of $1,900,000.  On that basis the Bank would approve a loan of $1,425,000.  Wensley agreed to a reduction of the purchase price to $1,900,000 and confirmed that a vendor loan for the remaining $475,000 would be provided by Wensley, thereby enabling Mr Kheong to finance the full purchase price.

[14]     Mr Kheong settled his agreement to purchase the unit on 25 November 2008. A loan agreement (for $475,000.00) and a deed of lease were executed on the same date.

[15]     The lease agreement required Wensley to pay to Mr Kheong monthly rental payments of $10,687.50 for two years.

[16]     In the meantime, unbeknown to Mr Kheong at the time, another Wensley entity (Wensley Developments The Club Limited) had gone into liquidation on 11

November 2008.   Mr Kheong’s evidence is that the liquidation had occurred as a consequence of that company not being able to honour guaranteed rental payments in respect of leases it had entered into with purchases of apartments at another development, The Club.

The assignment of the loan agreement

[17]     In  early  December  2008,  Mr  Kheong  received  a  notice  of  assignment advising that Wensley had assigned the loan agreement to Dominion (then in receivership).  A covering letter requested Mr Kheong to sign and return an attached “consent and acknowledgement” in which it was stated that Mr Kheong acknowledged receipt of the notice of assignment and agreed to:

... hereby consent to that assignment notwithstanding any restrictions in the

Loan to the contrary.

[18]     The acknowledgement stated that:

1.      The loan amount is $475,000.00.

2.My obligations under the Loan are binding and enforceable against me.

[19]     Mr Kheong had been given no prior indication that Wensley intended to assign the loan agreement. He did not sign or return the acknowledgement.

[20]     Dominion has produced a Deed of Assignment and Defeasance dated 20

November  2008  (“the Assignment  Deed”)  between  Wensley  and  Dominion.    It records that Wensley as transferor assigns to Dominion absolutely all of Wensley’s right, title and interest under the loan documents.    Wensley is required contemporaneously with the execution of the Assignment Deed to deliver to Dominion various documents including:

[b] a duly executed consent from the Borrower to the assignment of the Loan Documents under this deed (in the form provided in Schedule 2 of this Deed);

Schedule 2 is the same form of Consent and Acknowledgement which Mr Kheong was (unsuccessfully) asked to execute when he was sent the notice of assignment.

The loan agreement

[21]     The copy of the loan agreement produced in evidence is undated.  Dominion pleads that it was entered into “on or about November 2008” and Mr Kheong says that it was entered into on 25 November 2008 when the purchase agreement was settled.

[22]     The loan agreement included provisions to the effect that:

(a)       the loan was for a term of 24 months from the settlement of the purchase agreement;

(b)       the interest rate was 0 per cent per annum;

(c)       default interest was payable at 8 per cent above the commercial

overdraft rate at the Lender’s bank;

(d)       Mr Kheong was not entitled to set-off or reduce any obligation (of any type and on any account whatsoever) that he had to the lender, against any sum payable by the lender to Mr Kheong under the agreement; and

(e)       the  lender  may  assign  and  transfer  all  or  any  of  its  rights  and obligations under the loan agreement.

The deed of lease

[23]     The deed of lease for the unit is dated 24 November 2008. [24]         The deed of lease contains provisions to the effect that:

(a)       the term of the lease is two years from the settlement of the sale and purchase agreement; and

(b)       the annual rent is $128,250 plus GST per annum payable monthly in arrears, the first rental payment being due on 25 December 2008.

[25]     Wensley did not duly make the rental payments required in December 2008 and January 2009.

[26]     Eventually, Mr Kheong was to receive only three payments on account of rent as follows:

10 February 2009  $12,023.43

23 February 2009  $24,046.86

9 June 2009  $12,046.86

[27]     When  Mr  Kheong  contacted  Mr  Wensley  as  to  the  delays  in  the  rental payments, Mr Wensley advised that the delays were due to administrative issues and that there would be no ongoing difficulties in relation to payments under the lease.

[28]     In the event, at no point before 23 February 2009 was Wensley up to date with lease payments and from March it was constantly behind, with the last payment being made (substantially in arrears) on 9 June 2009.

Wensley’s insolvency

[29]     On 22 June 2009 there were developments in relation to Wensley.

[30]     On 22 June 2009, Mr Kheong received a letter from insolvency specialists, Meltzer Mason Heath (“MMH”).   MMH said that they had “for some time” been advising the shareholders of Wensley Developments Limited and its associated companies on matters arising from the effect of the “credit crunch”.   They noted default by Wensley and its associated companies on loan covenants as a primary impact of the credit crunch. As a result of the requirements of the Wensley financier, Wensley sought Mr Kheong’s agreement to a deferral of the guaranteed rental payments for one year until 31 May 2010 at which time Wensley would recommence payment of the rental guarantee.  If all the guaranteed rental recipients did not agree to the proposed deferral, MMH indicated that the only course for Wensley was

liquidation.  No further payment would then be received by Mr Kheong as unsecured creditors would not receive any distribution.

[31]     On the same date (22 June 2009) there appeared in the Straits Times in Singapore an article relating to the financial woes of the Wensley Group.  The article quoted newspaper sources as stating that Wensley Developments Limited was some NZ$23,000,000.00  out  of  pocket  after  buyers  had  reneged  on  payments  for apartments in Queenstown.

[32]     Mr  Kheong  immediately  expressed  his  shock  to  Ms Anderson  as  to  the receipt of the MMH letter and asked Ms Anderson to ensure that Mr Kheong’s rental payments continued.   In a meeting with Mr Kheong in Singapore the following week, Mr Wensley advised Mr Kheong that the MMH letter had been mistakenly provided to Mr Kheong and that there would be no further difficulties in relation to the monthly payments to Mr Kheong.   Mr Kheong recorded this in an email to Mr Wensley and Ms Anderson on 7 July 2009.  He noted that rental was still three months in arrears.

[33]     As it turned out, no further rental payments were made.

[34]     Without further notice to Mr Kheong, Wensley was placed in liquidation on

21 July 2009 by special resolution of its shareholders.  The liquidators proposed to dispense with a meeting of creditors as it was unlikely there would be a distribution to creditors.  Mr Kheong received no further payments from the liquidator in relation to the lease of his unit.  The shortfall of monthly rental amounted to $213,729.17, excluding GST.

The Dominion demand

[35]     The two-year term of the loan expired on 25 November 2010.

[36]     On 26 November 2010 Dominion served a notice of demand on Mr Kheong requiring payment forthwith of $475,000 plus interest (calculated at 19.9 per cent per annum pursuant to the terms of the loan agreement).

[37]     Mr Kheong did not make the payment demanded.

[38]     On 7 June 2011 Dominion commenced this proceeding.

The issues

[39]     In opposition Mr Kheong asserts:

(a)       The assignment was invalid.

(b)      The notice of assignment was invalid.

(c)       The demand for payment of the loan was invalid.

(d)      He was induced to enter into the loan agreement by misrepresentation. (e)     An application filed by Mr Kheong for leave (pursuant to r 4.4 High

Court Rules) to issue a third party notice against Mr Wensley should be granted instead.

Misrepresentations or false representations

Introduction

[40]     Mr  Kheong’s  notice  of  opposition  refers  to  misrepresentations  made  by Wensley.  The notice of opposition does not specify reliance on the provisions of the Fair Trading Act 1986.  Such reliance was expressly conveyed through the written synopsis of submissions filed for Mr Kheong on 14 February 2012, some six weeks before the hearing. At the hearing argument proceeded on that basis.

[41]     It is clear that Wensley was in trade for the purposes of the Fair Trading Act. It  may  be  arguable  that  Mr  Wensley  was  also  in  trade  having  regard  to  his directorship of Wensley and his direct involvement in marketing and negotiation.  I treat it as at least arguable that both Wensley and Mr Wensley were in trade.  The more  difficult  issues  arise  in  relation  to  the  substance  and  quality  of  the

representation and whether, even if misrepresentations were made, there is a bar to

Mr Kheong’s raising this matter against Dominion.

The packaging of a scheme

[42]     Mr Kheong’s case is that Wensley packaged a scheme whereby the units at The Beacon, such as that purchased by Mr Kheong, were marketed and sold as investments.   For Mr Kheong, the purchase was to be achievable on an entirely financed basis (first, from his Singaporean bank and, secondly, from vendor finance). The “guaranteed” nine per cent per annum return on investment for the first two years was calculated to cover Mr Kheong’s bank borrowings for the two-year period when the vendor finance had a nil interest rate.  There was a mutual anticipation of a significant increase in the value of the unit and Mr Kheong would have an ability either to sell for profit or refinance within or at the expiry of the two-year lease period.

[43]     All these matters, deposed to by Mr Kheong,  are at least arguable.   No evidence at all was given by Ms Anderson or Mr Wensley.

[44]     I discount one particular set of allegations which appear in Mr Kheong’s draft pleading against Mr Wensley.   It is recorded that Mr Wensley represented to Mr Kheong during negotiations leading to the sale and purchase agreement that Wensley was solvent and would be able to pay the monthly rental under the lease.   Those allegations,  appearing  only  in  a  draft  pleading,  do  not  appear  in  Mr  Kheong’s affidavit evidence.  I therefore put them to one side.

[45]     What one is left with is a situation in which, at least arguably, both vendor and purchaser understood that the investment Mr Kheong was making would work for him only if Wensley was in a position to and did make the lease payments for the two years, so as to cover Mr Kheong’s bank interest.

[46]     Mr Kheong’s case is that there was, at least arguably, through Wensley’s putting the investment package to Mr Kheong and negotiating its conclusion, an implied representation that from Wensley’s knowledge the assumptions within the

financing package (including Wensley’s meeting lease payments for two years) were

achievable.

[47]     This is not, as Mr Bayley submitted, an argument that turns on proving that an expectation created or promise given by Wensley was subsequently broken or not achieved.  Rather, it is a consideration as to whether a party was misled as to what was at the time of the contract reasonably achievable or not.  Put another way, was Wensley implying something about its current financial circumstances which was misleading or deceptive or likely to mislead or deceive?

Wensley’s financial circumstances

[48]     The Court has no evidence from anyone formerly in the Wensley organisation as to the state of its finances at relevant times during the negotiation and at the date of the contract.  What is clear is that no assumption can be made as to Wensley’s solvency.

[49]     Such evidence as is before the Court (provided by Mr Kheong) raises serious

questions as to the state of Wensley’s finances in 2008.

[50]     The  fact  that  Wensley  failed  to  make  its  first  two  rental  payments  in December 2008 and in January 2008 suggests financial difficulties by that time at the latest.  How far before that period problems had existed is information not within the control or possession of Mr Kheong.

[51]     The record of the insolvency advisor, Mr Melzer, that he had been advising the shareholders of the Wensley group “for some time” when he wrote his letter in June 2009 suggests previously existing difficulties to the point that an insolvency specialist had to be brought in.  The fact that the problems were stated to have arisen from the effects of the “credit crunch” and that the evidence dates the credit crunch to have been impacting by the first quarter of 2008 points at  least arguably to Wensley’s financial difficulties, if not insolvency issues, having existed from a point during 2008.

[52]     This was not a situation where people were negotiating discrete contracts at arm’s length in relation to a loan, a lease or a property purchase.  The reason the lease was negotiated was as a means to effecting a scheme whereby Mr Kheong would purchase a unit as an investment.   It was negotiated to provide what the parties had expressly described in the agreement for sale and purchase as the “9% per annum guaranteed rental for 2 years”.

[53]     Mr Kheong deposes that he told Mr Wensley that guaranteed rental payments were an essential aspect of the deal for him as they would enable Mr Kheong to meet the interest payments on Mr Kheong’s bank loan which would be needed for the purchase.   Wensley incorporated into the sale and purchase agreement the special condition relating to the lease agreement with a reference to “a 9% per annum guaranteed rental for 2 years”.  In later documents the parties continued to refer to “the guaranteed rental”.

[54]     Given that it may be inferred, at least arguably, that Mr Wensley (and thereby Wensley) already appreciated by that time that Wensley’s financial circumstances were such as to make lease payments doubtful, then Mr Kheong has an arguable case that the conduct of Mr Wensley and of Wensley was deceptive.

[55]     It is at least arguable that in such circumstances it was misleading conduct for Wensley to offer to take a lease of the unit (so as to create the cash-flow for the servicing of Mr Kheong’s finance) when Wensley’s financial circumstances were arguably such as to create real uncertainty about that cash-flow.

[56]     I remind myself that the threshold under s 9 Fair Trading Act is met not only when conduct is misleading or deceptive but is also met when the conduct is likely to mislead or deceive.  Putting it in the terms expressed by the Supreme Court in Red Eagle Corporation Ltd v Ellis, I find that it is at least arguable that Wensley’s conduct in putting the package to Mr Kheong and negotiating it in detail with him had  the  capacity  to  mislead  Mr  Kheong  as  to  the  reliability  of  the  financial

components of the package.1

1      Red Eagle Corporation Ltd v Ellis [2010] 2 NZLR 492 (SC), per Blanchard J delivering the judgment of the Court at [28].

The relevance of Mr Kheong’s skills and conduct

[57]     Mr Kheong is a lawyer.

[58]     For Dominion, Mr Bayley submitted that Mr Kheong did not stipulate for the contractual protection which could have been afforded by provisions expressing interdependence of the various agreements or by a personal guarantee of the Wensley lease obligations by one or more of the Wensley directors.

[59]     If particular conduct is found to have been arguably misrepresentative or misleading or deceptive, then it is not strictly necessary to examine whether the innocent party could have better protected himself or herself from the consequences of the misleading conduct.   The law already, at the arguable level, can provide a satisfactory remedy.

[60]     For this reason I do not further examine submissions made by Mr Cooper as to interdependence.

[61]     I also do not need in a summary judgment context to further examine whether Mr Kheong’s sophisticated professional or business experience might ultimately be considered to make it less likely that he was misled – that degree of assessment can only take place properly at trial.

Exclusion of set-offs and other cross-claims under the terms of the loan contract

The contractual no set-off provisions

[62]     Given  that  there  is  an  arguable  case  of  misrepresentation  or  deceptive conduct, is Mr Kheong precluded from pursuing any set-off or cross-claim by the express provisions of the loan agreement?

[63]     Clause 6 of the loan agreement, which deals with Mr Kheong’s obligation to

pay interest, contains two express provisions as to set-off or deduction.

[64]     Clause 6.1 (the second so-numbered clause) provides:

All sums payable by the Borrower to the Lender under this Agreement must be paid on the due date for payment and be free and clear of any restriction, stipulation or condition and without any set-off or deduction whatsoever (other than as required by law).

[65]     Clause 6.5 provides:

The Borrower shall not be entitled to set-off or reduce any obligation (of any type and on any account whatsoever) that it has to the Lender, against any sum payable by the Lender to the Borrower under this Agreement.

[66]     The  loan  agreement  also  contains  a  “top-up”  provision  to  cover  the possibility that Mr Kheong is required by law to make a deduction or a withholding. Clause 6.3 provides:

If the Borrower is required by law to make any deduction or withholding from any sum payable to the Lender the amount due from the Borrower shall be increased to the extent necessary to ensure that, after making that deduction or withholding, the Lender receives on the relevant due date a net sum equal to the amount which it would have received had there been no such deduction or withholding.

[67]     In other words, even where the law requires Mr Kheong to make a deduction or withholding, the parties have agreed that Mr Kheong will then top up his interest payment so that it is no less than what it would have been without the deduction or withholding.

Application of the no set-off provision

[68]     Clauses such as cl 6.1 and 6.5 in the loan agreement are appropriately seen as traditional no set-off interest payment clauses designed to deal with the principles recognised by the Court of Appeal in Grant v NZMC Ltd.2   The clauses in this case are similar in combined effect to that in such cases as Browns Real Estate Ltd v Grand Lakes Properties Ltd.3    In that case, tenants raised a counterclaim in response to a statutory demand.  The High Court found, and the Court of Appeal confirmed,

that the appellant was in breach of the provision of the clause in the lease which

2      Grant v NZMC Ltd [1989] 1 NZLR 8 (CA).

3      Browns Real Estate Ltd v Grand Lakes Properties Ltd HC Invercargill,

CIV-2009-425-000670, 10 March 2010, affirmed by the Court of Appeal (2010) 20 PRNZ 141.

prohibited the withholding of rent (and any other payments due under the lease) on any account.

[69]     Accordingly, by the express terms of the loan agreement the parties agreed that Mr Kheong would not set off against interest or other payments due to the lender under the agreement any other sums payable whatsoever.

Interdependence of contracts – impact on the no set-off provisions

[70]     To meet the possibility that the Court would find that the loan agreement’s no set-off clauses were clear in their meaning, Mr Cooper developed a submission that the suite of contracts relating to the purchase, loan and lease were all inter-related with one another and were inextricably intertwined so as to be interdependent.

[71]     The interdependence submission was developed to support two propositions. First, it was suggested that the clauses excluding set-off under the loan agreement became inapplicable through the interdependence of the three contracts.  Secondly, it was  suggested  that  the existence of rights,  arising under the other contracts,  to damages which may not be recovered because of the financial circumstances of Wensley and those associated with it, must bring into play the residual discretion of the Court in a summary judgment case.  I will deal with each of those submissions in turn.

[72]     There was obviously a close inter-relationship between the three contracts (sale and purchase; loan; lease).   The agreement for sale and purchase expressly required the vendor to enter into a two-year lease agreement with a guaranteed rental.  Wensley’s commitment to the lease was therefore a term of the agreement for sale and purchase.  The commitment that Wensley entered into in the loan agreement was  not  an  express  term  of  the  agreement  for  sale  and  purchase.    Rather  the agreement for sale and purchase was conditional on finance suitable to Mr Kheong. The commitment of Wensley to  a loan came about after the sale and  purchase agreement, as a means of assisting Mr Kheong to purchase the property.   By the terms  of  the  loan  agreement,  Mr  Kheong  could  not  obtain  the  loan  without completing the purchase.

[73]     Thus, although not truly interdependent from the outset, as the contracts came into existence there was a true measure of interdependence between them in the sense that the parties were entitled to the benefits of one only if all contracts were executed.  In the sense of the contractual obligations under each contract coming into existence, there was arguable interdependence between the contracts.

[74]     From that basis, however, Mr Cooper sought to develop a submission that the no set-off provision under the loan contract is in some way inapplicable because there are rights to damages arising through misrepresentation relating to the whole package.  Mr Cooper put the submission in this way.  The rental payments under the lease agreement were intended to go towards Mr Kheong’s liability to his bank for the first two years.  Set-off therefore would not have applied as against the loan for that period as no payment was required to be made towards the loan during the first two years.   Mr Cooper noted that the fact that Wensley’s pre-contractual representations were misrepresentations only became apparent after the loan agreement was executed.

[75]     These complexities arising out of the relationship between the three contracts do not alter the meaning of the express provisions within the loan contract.   The clauses in the loan agreement preclude the asserting of a set-off or counterclaim to justify non-payment of interest.4

Interdependence of contracts – the residual discretion on summary judgment application

Submissions for Mr Kheong

[76]     Mr Cooper’s second submission flowing out of the interdependence of the

three contracts invoked the jurisdiction under r 12.2(1) High Court Rules.   That provision gives the High Court a discretion to refuse summary judgment.

4      See Browns Real Estate Ltd v Grand Lakes Properties Ltd (2001) 20 PRNZ 141 (CA) at [14].

Discussion of the residual discretion

[77]     In Bromley Industries Ltd v Martin and Judith Fitzsimons Ltd,5 the Court of Appeal allowed a plaintiff’s appeal and entered summary judgment.  The contract in Bromley  Industries  contained  an  unambiguous  no  set-off  clause.   The  Court  of Appeal found that it would not be unjust or oppressive to enter summary judgment. The judgment of the Court, delivered by Venning J, explains that outcome thus:

[64]... The principle of the [Dominion Breweries Ltd v Countrywide Banking Corporation Ltd]6 case was that once the Court accepted that the parties had contracted out of the right of set-off, to then use the residual discretion to defeat the application for summary judgment because of the potential claim for set-off would be to frustrate entirely the commercial purpose of the contractual bargain the parties had made. That is precisely the position in this case.

[65]  Generally the exercise of the residual discretion not to allow summary judgment will only be invoked in limited cases, such as to avoid oppression or injustice, or where the proceeding involves the actions or possible liability of a third party not before the Court, or if the proceedings are of a particular nature that opportunity should be given to allow discovery, or where the circumstances of the case disclose very unusual features which support a conclusion that the  entry of summary judgment would be oppressive or unjust.

[66] In circumstances where the set-off is excluded by an express contractual provision in an agreement between commercial parties, it cannot be said to be an injustice to give effect to the bargain the parties have made. There was, for example, no evidence before the Associate Judge and there is none before us to suggest that in the event MFL and Lagoon are required to pay they will not be able to pursue their unliquidated claims for damages against Bromley. Further, it can hardly be said to be an injustice to require MFL and Lagoon to pay Bromley for product which they have received and have had the benefit of.

[67] There is a difference between whether the entry of a summary judgment may be unjust and whether the subsequent execution of the judgment may lead to a miscarriage of justice. The High Court Rules provide for the latter situation in r 17.29. An application under that rule is the appropriate way to have the Court consider the effect of execution of the judgment on parties in the respondents’ position.

[68] The Associate Judge was clearly influenced by an assessment of the impact on the respondents of the termination of the distribution agreements but he failed to give effect to the commercial purpose of the bargain the parties had made.

5      Bromley Industries Ltd v Martin and Judith Fitzsimons Ltd [2009] NZCA 382.

6      Dominion Breweries Ltd v Countrywide Banking Corporation Ltd CA314/91,

8 August 1992.

[69] For those reasons the Associate Judge was plainly wrong to exercise his discretion against entry of summary judgment in this case.7

[78]     A number  of  features  of  the  present  case  might  suggest  that  the  same conclusion as prevailed in Bromley Industries should prevail in this case.

[79]     The  no  set-off  clauses  in  this  case  are  unambiguous.  They  were  clearly intended to ensure that the repayment of principal and interest occurred without deduction.  Their commercial purpose would be frustrated if in some way a set-off argument prevails.

[80]     Furthermore, under this loan agreement there was both the general right at common law to assign the lender’s interest and an express provision authorising the lender to assign all its rights and obligations.  When a person otherwise independent of the underlying contract may purchase the lender’s rights, including in relation to no set-off, considerations of commercial justice are again in favour of enforcing the strict terms of the loan agreement.

[81]     On the other hand, this case has, as Mr Cooper submitted, a number of unusual  features  of  the  nature  referred  to  by  the  Court  of Appeal  in  Bromley Industries v Martin and Judith Fitzsimons Ltd.8

[82]     Whereas the contractual bargain between the parties will often lie in a single contract (in the case of Bromley Industries in a distribution agreement) it was a combination of three contracts in this case which led to the making of the loan, which is the subject of the agreement on which Dominion sues.  Having regard to the interdependence  issues  in  this  case,  it  is  arguable  that  the  contractual  bargain involved both the “guaranteed rental for 2 years” (as referred to in the agreement for sale and purchase) and a loan which was the subject matter of the loan agreement.

[83]     Dominion did not come into the picture on or after the settlement of the sale to Mr Kheong.   Dominion was a financier of Wensley in relation to The Beacon

development and in due course took the assignment of the Kheong loan agreement as

7      See also Browns Real Estate Ltd v Grand Lakes Properties Ltd, above n 4, in which the

Court of Appeal referred to [66] as quoted.

8      Bromley Industries v Martin and Judith Fitzsimons Ltd, above n 5, at [65].

part consideration for the discharge of its mortgage over the unit.   As Wensley’s secured financier, there is the real possibility that Dominion must have had some knowledge of such financial issues as Wensley had in mid to late 2008.

[84]     The variation in the dating and non-dating of documents surrounding the loan prior to the settlement of the purchase suggests that Dominion may well have been privy to the documentation prior to the settlement of the purchase.  That would be likely given Wensley’s need to ensure that it had the co-operation of Dominion (as its secured  financier)  before  committing  to  finalised  contractual  arrangements  with Mr Kheong.

[85]     The  agreement  for  purchase  was  not  settled  until  25  November  2008. Whereas  the  loan  agreement  is  undated,  the  deed  of  assignment  is  dated  20

November  2008.     The  deed  of  lease  is  dated  24  November  2008,  and  the management agreement which forms part of it is dated 19 November 2008.  There is no evidence before the Court as to which of these documents were provided by Wensley to Dominion for the purposes of obtaining the release of the mortgage over Mr Kheong’s unit.

[86]     Mr  Pearce,  the  contractor  who  provided  Dominion’s  evidence  in  this proceeding, deposed in a reply affidavit that he had read Mr Kheong’s affidavit.  He then said:

I have perused Dominion Finance’s file in relation to this matter and from what  I  can  see,  at  no  stage  was  Dominion  Finance  involved  in  the discussions between Wensley Developments the Beacon Limited ... or the defendant as regards the Sale and Purchase Agreement dated 6 June 2008 or the Deed of Lease.

[87]     The Dominion file is not in evidence.  While Mr Pearce deposes that “from what he can see” Dominion was not involved in the discussions between Wensley and Mr Kheong, he does not state that Dominion had not received copies of the documents.   Given the circumstances it is likely that Dominion had received such documents.  It is possible that Dominion had knowledge of the inter-relationship of the three contracts.  It is also possible that Dominion, as Wensley’s financier, may have had knowledge of the schemes which Wensley (and associated companies) had

embarked upon in order to sell units within their various developments.  If there is the possibility (which I find) that by mid- to late 2008 Wensley was not in a position of knowing it could carry out its lease obligations, including the “guaranteed rental” as referred to in the sale and purchase agreement, then it is also possible that Dominion was aware of that position when taking its assignment of the loan agreement.

[88]     I find it arguable, in terms of the observations of the Court of Appeal in Bromley Industries,9  that these proceedings have a particular nature (involving the assignment of the loan agreement to Dominion) that calls for the opportunity to be given to Mr Kheong to undertake discovery of Dominion’s documents. As the Court of Appeal indicates in Bromley Industries,10  that in turn is a factor promoting the exercise of the residual discretion in favour of the defendant.

[89]    There is the additional feature of this case, involving three inter-related contracts, that Mr Kheong seeks leave to issue a third party claim against the director of  Wensley  who  is  alleged  to  have  made  misrepresentations  or  engaged  in misleading or deceptive conduct.  This was expressly the sixth ground of opposition. Mr Wensley is not before the Court.   Mr Kheong has arguable claims of misrepresentation and misleading conduct against Mr Wensley. With the relationship between  the  three  contracts,  the  proceeding  arguably  involves  the  actions  and possible liability of Mr Wensley (again adopting the terminology of the Court of

Appeal in Bromley Industries11).

[90]     Finally, there is the position of Wensley itself.   The reports of Mr Melzer establish that any judgment which Mr Kheong pursues and obtains against Wensley will be worthless.  The Court of Appeal in Bromley Industries12 found that it would not be an injustice to the defendant to pay Bromley (pursuant to the no set-off clause) and to later pursue Bromley for unliquidated damages.  That finding turned on the lack of evidence to suggest that such later action would be worthless.  In the

present case the party receiving repayment of the loan (Dominion) is not the same

9      Ibid.

10     Ibid..

11     Ibid.

12 Ibid, at [66].

party as is primarily liable under the other contracts (that party being Wensley).  But Mr Kheong has an arguable case that the three contracts were interdependent.  That, combined with uncertainties relating to the knowledge of Dominion at the time the various  contracts  were  entered  into,  leaves  open  the  possibility,  (if  summary judgment is granted), that Dominion will have received from Mr Kheong the full value of repayment while neither Wensley (now in liquidation) or Dominion (also in liquidation) has the means to meet a later judgment arising through the related contracts.

[91]     Dominion is arguably, in relation to any damages claim by Mr Kheong, in no better position than his assignor.   By s 11(1) Contractual Remedies Act 1979 the remedy of damages is enforceable (to the limits contained in s11(2)) against an assignee.   Mr Bayley did not suggest that Dominion would not be caught by this provision – his fundamental proposition was that there was no arguable damages claim at all.

[92]     I observe the distinction drawn by the Court of Appeal in Bromley Industries between whether the entry of a summary judgment may be unjust and whether the subsequent execution of the judgment may lead to a miscarriage of justice.13    By reason of the arguable inter-relationship of the contracts and Dominion’s role and knowledge of the documentation and financing arrangements, the issues raised by Mr Kheong go to the heart of the justice of summary judgment and do not merely inform the justice of subsequent execution.  In a sense, Dominion chose to substitute Mr Kheong as  debtor  for its  existing debtor, Wensley.    In  doing so,  Dominion appears to have relied on Wensley to negotiate and put together the package with Mr

Kheong that brought that about.  Mr Kheong has arguable causes of action.  There are aspects of discovery which may lead to a strengthening (or weakening) of Mr Kheong’s position. These are matters properly to be examined at a trial.

Conclusion

[93]     For these reasons, I find that this is a case in which the residual discretion should be exercised to refuse summary judgment.

13 Ibid, at [67].

Issues concerning the assignment

[94]     For  Mr  Kheong,  Mr  Cooper  made  a  number  of  submissions  as  to  the assignment of the loan agreement and the demand made pursuant to it.  Several of the submissions flowed from the fact that there had been a certain sloppiness in relation to the dating of the agreements.  The arguments for Mr Kheong were largely technical in nature and may well not ultimately detract from the substance of what was clearly intended to be and documented as an absolute assignment of all right, title and interest.

[95]     Having regard to the conclusion which I have already reached as to refusal of the summary judgment application it is unnecessary that I seek to determine a matter which may yet require determination at a trial.  I therefore do not do so.

Conclusion

[96]     The plaintiff’s  summary judgment  application  must  be dismissed.   Costs should be reserved in accordance with the approach of the Court of Appeal in NZI v Philpott.14

[97]     As the conclusion which I have reached involves a determination as to the appropriateness of Mr Kheong’s joinder of Mr Wensley, there will be directions in that regard pursuant to r 4.4 High Court Rules.

Orders

[98]     I order:

(a)       The plaintiff’s summary judgment application is dismissed.

(b)      The costs of the plaintiff ’s application are reserved.

14     NZI Bank Ltd v Philpott [1990] 2 NZLR 403 at 405-407.

(c)      In accordance with r 12.13 High Court Rules, the defendant shall within ten working days after the date of this judgment file and serve his statement of defence.

(d)Pursuant to r 4.4 High Court Rules, the defendant shall within 20 working days after the date of this judgment issue any third party notice against Greg Ross Keown Wensley.

(e)      The proceeding is adjourned to a case management conference by telephone (Associate Judge Osborne) at 12.30 pm, 17 September

2012,  with  leave  to  counsel  to  request  an  earlier  conference  if

appropriate.

Associate Judge Osborne

Solicitors:
Rhodes & Co – Email: [email protected]

Anderson Lloyd – Email: [email protected]