Dumasia v Ikon Building Co-operation Ltd
[2021] NZCA 292
•2 July 2021 at 10 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA149/2020 [2021] NZCA 292 |
| BETWEEN | POURUSHASP ROHINTON DUMASIA |
| DAVID HILLIAM Second Appellant | |
| AND | IKON BUILDING CO-OPERATION LIMITED |
| Hearing: | 25 February 2021 |
Court: | Cooper, Mallon and Wylie JJ |
Counsel: | D W Grove for Appellants |
Judgment: | 2 July 2021 at 10 am |
JUDGMENT OF THE COURT
AThe appeal is allowed.
BThe summary judgment entered by the High Court is set aside.
CThe respondent must pay the appellants costs calculated for a standard appeal on a band A basis, together with usual disbursements.
DAny issue as to costs in the High Court is to be dealt with at an appropriate time by that Court, having regard to the terms of this judgment.
____________________________________________________________________
REASONS OF THE COURT
(Given by Cooper J)
This is an appeal against summary judgment entered by Lang J in favour of the respondent, Ikon Building Co-operation Ltd (Ikon), which had commenced a proceeding against the appellants in their capacity as guarantors of a loan advanced to SKKY Holdings 2015 Ltd (SKKY).[1]
Background
[1]Ikon Building Co-operation Ltd v Dumasia [2020] NZHC 223 [High Court judgment].
We can set out the background facts based on the summary given by the Judge. The dispute arose out of a loan facility obtained by SKKY from a company called New Zealand Mortgages and Securities Ltd (NZMS). The purpose of the facility was to enable SKKY to meet the cost of developing residential units on a property in Stanmore Bay.
The loan arrangements were set out in a term loan agreement (the loan agreement) dated 21 September 2016, which provided that SKKY was entitled to draw down a maximum sum of $4.473 million. The loan was to be repaid on demand, but in the absence of demand on 23 September 2017, 12 months after the date of the first advance.
The appellants signed the loan agreement as directors of SKKY and as guarantors of SKKY’s obligations under the agreement. Contemporaneously, the appellants executed two separate deeds of guarantee and indemnity with NZMS under which they guaranteed SKKY’s obligations under the loan agreement. The loan was also secured by a mortgage registered against the Stanmore Bay land.
On 9 June 2017 NZMS entered into a sale and purchase agreement with Bolter Management Group Ltd (Bolter) under which NZMS agreed to sell Bolter its contractual rights under the loan agreement and the guarantees executed by the appellants. Pursuant to this agreement NZMS assigned its rights to Bolter. Settlement occurred on 13 June 2017. However, one week earlier, on 6 June 2017, Bolter and Ikon executed a deed under which Bolter agreed to hold the rights and obligations it was to purchase from NZMS as a bare trustee for Ikon.
Bolter called up the loan shortly after settlement. It subsequently sold the property in February 2018, exercising its power of sale as mortgagee. It applied the sale proceeds in reduction of the amount then owing under the loan agreement. On 13 March 2019, Bolter formally assigned its rights under the loan agreement and guarantees to Ikon. This enabled Ikon to enforce its rights against the appellants as guarantors of SKKY’s obligations under the loan agreement.
Ikon then commenced a proceeding seeking summary judgment against the appellants for the sum of $1,131,629.48 (exclusive of GST), the balance outstanding under the loan agreement, plus costs and interest.
The defence in the High Court
In order to explain the defence raised in the High Court it is necessary to set out some further facts.
The main contractor engaged by SKKY to carry out the development advised SKKY that there were defects in concreting work it had carried out under the construction contract. This led the contractor to abandon the contract. It refunded the last progress payment that SKKY had made (in the sum of $107,159.55) and returned a bond in the sum of $150,000 that SKKY had paid. When this happened, SKKY notified NZMS. In an affidavit sworn on 28 August 2017, Mr Dumasia explained that following a discussion with Mr James Kellow, one of the directors of NZMS, they had reached agreement for the return of the progress payment so that it could be drawn down at a later date.
A meeting was arranged to take place on 1 May 2017. Both of the appellants attended the meeting, at which Mr Kellow represented NZMS. Also present were Mr Tony Scragg, a quantity surveyor, and Mr Carl Eckhart of Kensway Property Ltd, which was the project manager.
Mr Dumasia said in his affidavit that he explained at the meeting that there would be further costs related to remedial works. There would also be additional costs and possible delays because of the need to obtain a new contractor. He claimed Mr Kellow agreed that NZMS would fund the remedial works on the condition that the bond was returned together with the retention and payment claims. Mr Dumasia continued:
He specifically said that given there were three blocks of the development being two blocks of two units and one block of six units, settle these separately to obtain repayment of the borrowings when they settled. There were no concerns raised at all about the potential delay. It was Mr Kellow who raised the staged development. There was no suggestion that penalty interest would be incurred. There was no suggestion that the continued funding would not be available to complete the development.
According to Mr Dumasia, Mr Kellow recommended a builder who could do the remedial works and assist in completing the development. Quotes were obtained and referred to quantity surveyors involved in the project who said that the rates were above market value. However, Mr Dumasia continued to look for a replacement contractor and he and Mr Hilliam each advanced the sum of $100,000 so the works could proceed. It was Mr Dumasia’s evidence that Mr Kellow said that NZMS would fund the remedial works and provide ongoing funding provided that the bond, and retention and repayment of earlier claims, were paid to it.
Mr Dumasia advised Mr Kellow by an email dated 4 May 2017 that a quote had been received from a contractor to start remedial work on the cracked concrete. He asked whether it would be possible to start the work or whether it was necessary to wait for the outcome of an insurance claim. He also noted that the contractor was able to start work on 9 May 2017 and the work would be completed by 18 May 2017, weather permitting. Mr Kellow responded on 5 May 2017. He said that the remedial work could commence because it could be funded from the bond when it was returned.
On 21 May 2017, Mr Dumasia wrote to Mr Kellow advising that the bond of $150,000 had been received and that he had transferred $80,000 to NZMS. That was all that he could pay in one day because of his internet banking limit. The balance of $70,000 was transferred the following day.
However, on 14 June 2017, Mr Kellow wrote to Mr Dumasia stating that NZMS had sold the loan to Bolter. Mr Kellow asserted that NZMS needed to exit the loan because SKKY was in default, placing NZMS at risk of affecting its own bank facility. Mr Kellow advised that NZMS would have no further involvement in the development. This came as a “complete surprise” to Mr Dumasia. Although some works had been carried out by then, Bolter refused to release any funds to pay the contractors. Requests for progress claims were rejected and the works came to an end. According to Mr Dumasia, sufficient funds were left in the facility to continue with the development, but Bolter refused to provide any further funding and instead commenced charging penalty interest at the rate of 25.95 per cent.
On 16 June 2017 Bolter issued notices of default, which were served on SKKY, Mr Dumasia and Mr Hilliam on 19 June 2017. The notices alleged SKKY was in default because the development of the property was approximately 16 weeks behind schedule and the construction contract with the main contractor had been cancelled.
On 21 June 2017, a report was provided by the quantity surveyor which indicated that the costs to complete the development had increased, such that there was insufficient funding left in the loan facility to complete the development. A further $672,000 was required. The report estimated the revised date of completion to be at the end of January 2018, four months after the loan was due to be repaid.
On 14 August 2017, Bolter served a notice under s 119 of the Property Law Act 2007 (PLA) on SKKY, Mr Dumasia and Mr Hilliam. A further PLA notice was served on 29 September 2017 after the term specified by the loan agreement had expired. When the notice was not complied with, Bolter exercised its power of sale under the mortgage.
When the main contractor abandoned the building contract, SKKY had already entered into agreements to sell nine of the 10 units in the development. The appellants argued in the High Court that had Bolter continued to fund the development as NZMS promised, SKKY would have sold all of the units and completion of the development would have resulted in a substantial profit. This would have enabled the loan facility to be repaid.
The appellants resisted the application for summary judgment, alleging that they had an arguable defence to Ikon’s claim based principally on the following propositions:
(a)The parties agreed to vary the loan agreement at the meeting on 1 May 2017 so as to require NZMS to provide funding to enable the development to be completed.
(b)NZMS and Bolter breached the varied loan agreement by failing to provide the promised funding.
(c)Ikon was estopped from relying on the strict terms of the loan agreement because of the variation to the agreement agreed on 1 May 2017.
(d)Bolter did not have the power to serve a valid notice of default on 19 June 2017 because SKKY was arguably not in default under the loan agreement when the notice was issued.
High Court judgment
The Judge considered that the crucial question was whether the loan agreement had been varied at the meeting on 1 May 2017. He noted that the appellants relied largely on Mr Dumasia’s evidence, supported by email correspondence between him and Mr Kellow in the days following the meeting.[2] That correspondence included the following:
[2]At [25].
(a)Mr Dumasia’s email to Mr Kellow on 4 May 2017 which read as follows:
Hi James
Just wanted to advise that we have received the quote from the contractor to start the remedials for the cracked grade on slab floors for Units 4 to 7 which are in the critical path.
Should Tony approve (currently reviewing the quote) the same are we able to start the work or wait till we get the insurance outcome.
The contractor is able to start the work from 9th May and will be done by the 18th of May subject to weather. The main materials for these works are on site already.
Kindly advise us if we are able to start these works.
(b)A further email sent by Mr Dumasia to Mr Kellow on 5 May 2017:
Hi James
Just to advise we are awaiting your confirmation to start the remedial works (pending insurance claims) as per my email yesterday and our phone conversation.
We have not yet had confirmation from the insurers, the last we were advised to Carl (Kensway) that the assessor has sent all the paperwork to AMP for a decision.
Tony advised that since this was not in the budget where would the funds come from, I advised we should use the contingency funds or DD 8 funds to get this very critical work underway without any further delays.
The contractors ready to go and has [organised] all the necessary resources to start from 9th May [2017].
We await your confirmation.
(c)Mr Kellow’s reply of 5 May 2017:
Sorry for delay. Just back in office now. Start remedials as can fund from Bond when gets back.
The appellants claimed that those emails demonstrated the parties were proceeding on the basis of the varied agreement shortly after the meeting on 1 May 2017. This was said to be supported by the fact that SKKY paid the bond and retentions to NZMS immediately after they were refunded.
The Judge noted that Mr Kellow did not file an affidavit in opposition to the summary judgment application.[3] However, Ikon relied on an affidavit he made in an earlier proceeding, in which injunctive relief was claimed by the appellants.[4] The Judge quoted the following from that affidavit:[5]
[3]At [30].
[4]In a minute dated 4 September 2017, Muir J granted an interim injunction restraining Bolter from taking steps to enforce the loan agreement, general security, mortgage or guarantees pending further order of the Court. The interim injunction was set aside in a judgment dated 27 October 2017: SKKY Holdings 2015 Ltd v Bolter Management Group Ltd [2017] NZHC 2641.
[5]High Court judgment, above n 1, at [30].
6.The cancellation of the building contract was an event of default under the Loan. At the meeting on 1 May 2017 the borrowers discussed their intention to undertake some remediation work. I do not accept that I made any commitment to pay for it but I would have accepted that it was possible that NZMS would consider funding it – no commitment was given. The Plaintiffs had insurance that it was anticipated would cover the remedial work. This is referred to in the email of 5 May 2017 which is Dumasia Affidavit exhibit ‘O’.
7.The remediation work that was discussed was completed before the Loan was sold. The only communication in relation to the remediation works after 1 May 2017 were in emails [on] 3, 4, 5 and 13 May 2017[6] (Dumasia Affidavit exhibits ‘O’ and ‘Q’[)]. While the emails of 4 and 5 May ask that we approve the work commencing they do not suggest we have agreed to pay for it but rather ask where the funds would come from. The 13 May 2017 email records that I have suggested that the clients (ie the Plaintiffs) pay them. I understand that this is what happened. There was no formal request for payment from the Quantity Surveyor in relation to the remediation works. The informal request by email on 13 June 2017 Dumasia Affidavit Exhibit ‘Q’ was not made in accordance with the Loan Agreement and I had previously advised that the borrowers should pay it themselves or provide further security.
8.I did not consider the discussion regarding the remediation as part of an agreement re the contractors bond being returned to us. In my view we were entitled to the bond as we had an assignment over the construction contract.
9.The meeting on 1 May 2017 was a ‘big picture’ discussion. I was gathering information and do not accept that I made any representations, agreements or commitments. Mr Dumasia said that the cost to complete would be unchanged with a new builder. He said that there would be no cost overruns. I was aware that Skky was obliged to pay any cost overruns in any event. However we did not discuss the obligations of clients to meet cost over-runs because at this time clients advised cost to complete was intact.
10.During the meeting Mr Dumasia undertook to provide documentation from the Quantity Surveyor confirming cost to complete was intact and project could still be completed within sunset date period of the presales. We discussed delay and thought a staged council completion would speed up settlements/debt repayment to mitigate any delays on last few units. I accept that I suggested a staged development but this was to speed up the project not delay it. Some of the units were more complete than others.
11.No information was provided from the Quantity Surveyor over subsequent weeks and the clients appeared unable to fund the cost over-runs that were becoming apparent.
12.After the meeting on 1 May 2017 the Quantity Surveyor was unable to certify any payments because he did not have the required information regarding cost to complete. No drawdown requests were received from Tony between 1 May and 14 June when we sold the Loan. The last drawdown request that was received prior to the sale was in April 2017. Annexed … is the letter and cost to complete certificate from the Quantity Surveyor. This drawdown request is annexed …
13.The need for the ‘cost to complete’ information was made clear in Tony’s email of 25 May 2017 a copy of which is annexed …
14.I never made any commitment to fund the cost overruns as seems to be alleged in Dumasia Affidavit paragraph 28. The Plaintiff was obliged to fund any increase in costs under the Loan Agreement.
[6]This email was not contained in the evidence filed in support of either application.
The Judge observed that this evidence conflicted with that given by Mr Dumasia in material respects.[7] But, to the extent those differences involved an assessment of the credibility of Mr Dumasia and Mr Kellow, he accepted it was impossible to resolve them on an application for summary judgment. He proceeded however to make findings on the basis that he considered a number of considerations supported Mr Kellow’s version of events.
[7]High Court judgment, above n 1, at [31].
The first consideration was that the original loan arrangements were “carefully recorded in a detailed loan agreement and supporting securities”.[8] Each of the documents contained a provision requiring any subsequent amendment to be recorded in writing that had not been done following the meeting on 1 May 2017. The Judge found that if the parties had intended the original loan arrangement to be varied, they would have recorded the variation in writing as the loan agreement and securities required.
[8]At [32].
The second significant point relied on by the Judge was that Mr Dumasia was challenging Mr Kellow’s evidence that Mr Dumasia told him the project could be completed within the original budget.[9] Mr Dumasia said he did not know how much the remedial work would cost and this meant he would not have said the project could be completed within the existing budget. Although this was an issue that could not be reconciled on the application for summary judgment, Mr Dumasia’s evidence meant that at the time of the meeting on 1 May 2017 he did not know what the work was likely to cost. The Judge thought it highly unlikely that a commercial financier such as NZMS would commit to an increased funding arrangement when it did not know how much the project would cost to complete.[10] Further, the existing loan agreement required the borrower to fund any cost overrun.
[9]At [33].
[10]At [34].
In addition, the Judge thought that the emails on which the appellants relied did not establish an agreement to vary the terms of the original loan.[11] They were in fact consistent with the proposition that both parties were proceeding on the basis of the existing funding arrangement. In that respect, by 1 May 2017 SKKY had drawn down approximately only $2.4 million of the $ 4.473 million that NZMS had agreed to advance. It could have sought to draw down further funds under the existing contractual arrangements, provided that it gave NZMS drawdown notices containing relevant information. Further drawdown notices were not provided after 1 May 2017 and there was no evidence that SKKY ever sought further funding from NZMS before the loan was transferred to Bolter.
[11]At [35].
The Judge also thought it was significant that SKKY negotiated with Bolter to obtain loan finance during June and July 2017. He referred to a letter sent by Bolter’s solicitors on 18 July 2017 setting out the terms on which Bolter would lend SKKY a total sum of $4.73 million to enable it to repay its existing debt and to fund the completion of the development. The terms were rejected because Mr Dumasia considered they would affect the viability of the development project and were more onerous than had been agreed with NZMS. The terms proposed included interest at a rate of 28 per cent, default interest of 43 per cent, an establishment fee of five per cent of the principal, a “line fee” of 0.25 per cent per month of the principal and a management fee of $5,000 per month.[12] The Judge thought SKKY would not have negotiated with Bolter at all if it genuinely believed Bolter had an existing contractual commitment to provide the funding necessary to complete the project.[13]
[12]The equivalent terms of the original loan agreement were an interest rate of 10.95 per cent per annum, a default rate of 25.95 per cent, a lender fee of $150,000, a brokerage fee of $50,000 and a line fee of 0.25 per month of the available facility.
[13]High Court judgment, above n 1, at [36].
The final matter to which the Judge referred in relation to the variation argument was the fact that SKKY would need to establish that it provided valuable consideration for any variation of the loan agreement.[14] SKKY relied on the fact that it paid NZMS the monies it received back from the contractor. However, the Judge agreed with Ikon’s proposition that under the loan agreement, SKKY had assigned its rights under the construction contract to NZMS. It followed that NZMS was already the legal owner of the funds it received from SKKY, and SKKY could not rely on those payments as valuable consideration for any variation of the loan agreement.
[14]At [37].
Consequently, the Judge was satisfied that the original contractual arrangement was never varied.[15]
[15]At [38].
For the same reasons the Judge also held that the defence based on estoppel must fail.[16] If NZMS never represented that it would depart from the existing contractual arrangements, SKKY and the guarantors had no reason to believe that NZMS would act otherwise than in accordance with those arrangements.
[16]At [41].
The Judge addressed a further argument that had been raised by Mr Grove at the hearing based on the validity of the default notice issued by Bolter on 16 June 2017.[17] The Judge considered that Mr Grove’s argument in this respect faced an insuperable hurdle, as the notice was not issued under or for the purposes of s 119 of the PLA. Nor did Bolter rely on that default notice for any of its subsequent actions.[18] The Judge thought it likely that Bolter served the default notice on SKKY and the guarantors only as a “precautionary measure”, and that even if the grounds in the notice were invalid, SKKY and the appellants could not be said to have suffered consequential loss or damage.[19] The sale of the Stanmore Bay property was based on the PLA notice dated 29 September 2017, which SKKY did not challenge.[20]
[17]At [42].
[18]At [45].
[19]At [45].
[20]At [46].
This was further complicated by the “no set-off” clauses in the loan agreement and guarantees.[21] The Judge agreed with Ikon’s submission that the clearly worded clauses in those agreements required SKKY and the appellants to pay the outstanding amount in full. While SKKY and the appellants remained free to pursue a claim against Ikon for breach of the loan agreement, any amount payable by Ikon could not be set off against the amount owing by SKKY and the appellants under that agreement.[22]
[21]At [48].
[22]At [57].
As the Judge was not satisfied that any of the proposed defences were arguable, he entered summary judgment in favour of Ikon in the sum of $1,468,933.35, inclusive of costs and interest.[23]
The appeal
[23]At [58].
Mr Grove’s argument on appeal has had a very different emphasis from that advanced in the High Court. He did not seek to pursue the argument that the loan agreement was varied at the meeting on 1 May 2017. Rather, his focus was on the default notice issued on 16 June 2017 only two days after Bolter had purchased the loan from NZMS. Mr Grove noted that at trial the appellants would seek to argue that SKKY was not in breach of the loan agreement at the date the default notice was issued.
Mr Grove noted that the statement of claim relied on the main contractor’s cancellation of the contract with SKKY as an event of default under cl 11(k) of the loan agreement, which provides:
11.1 Events of Default
If any of the following occurs, whether or not within the control of the Borrower or any Guarantor:
…
(k)Material Adverse Change or Effect: an event or series of events occurs which, in the reasonable opinion of the Lender, may have a material adverse effect on the Borrower or any Guarantor or any of their related companies;
…
then:
(A)the security interests granted under the Security Documents will become immediately enforceable (without notice to or the consent of the Borrower or any Guarantor), and
(B)the Outstanding Amount will (if not already so) be due and payable immediately (subject to any legal requirement for the Lender to issue a notice to the Borrower pursuant to section 119 of the PLA, in which case the Outstanding Amount will become due and payable immediately upon expiry of that notice).
Mr Grove submitted that this clause required an objective assessment by reference to the “reasonable opinion” of the lender. He argued that discovery from both NZMS and Bolter will be required to give the appropriate context to Bolter’s acquisition of the loan and its virtually immediate service of a default notice. That context would be relevant to the appellants’ claim that SKKY was not in breach of the loan agreement at the date the notice was issued. Bolter’s assessment of whether the events were reasonably considered a “Material Adverse Change or Effect” should be tested in cross‑examination of witnesses for NZMS and Bolter.
Mr Grove submitted that the default notice had come “out of the blue”. There was no suggestion prior to the loan being sold to Bolter that the progress of the development was not satisfactory to NZMS, or that default interest would be charged. In particular, at the 1 May 2017 meeting, by which point NZMS was aware that the main contractor had left the site, there was no suggestion that NZMS considered SKKY to be in default or took issue with the delays. In fact, it was Mr Kellow who suggested an alternative builder and that the development be completed in stages. NZMS had agreed that the remedial works could be funded through the bond. Accordingly, as far as the appellants were concerned, the contractor could be replaced, and the development completed, within the funding available. Practical issues in relation to the remedial works and replacing the builder were being addressed.
The effect of the default notice, Mr Grove said, was to repudiate the loan agreement. By its conduct, Bolter had clearly indicated that further funding would not be forthcoming. Without such funding, the development could not be completed. Accordingly, Mr Grove submitted the Judge was wrong to characterise the first default notice as a mere “precautionary measure”. Rather, it was the catalyst for the development stalling, and SKKY falling into default in September 2017. While the updated quantity surveyor’s report indicated that the development costs had increased and there would be substantial delays, that report was not issued until 21 June 2017; five days after the default notice. Mr Grove pointed out that the default notice did not rely on increased costs, and in any event the appellants could have provided the necessary funding were it not forthcoming from Bolter.
While Mr Grove submitted that the no set-off clause in the loan agreement was “arguably valid”, he said that Bolter should not be permitted to benefit from the clause by relying on its own breach in failing to provide the required funding.
In response, Mr Lenihan, counsel for Ikon, submitted that following the main contractor withdrawing from the development SKKY never submitted a compliant drawdown request under the loan agreement. A number of matters had to be certified by the quantity surveyor for further funds to be released. These included the fact the estimated cost to complete would not exceed the available facility and that there had been no material variations to the development. Mr Lenihan submitted the onus was on SKKY to get the development into a position where a valid drawdown request could be made. It was unable to do so. There could have been no breach of the loan agreement by NZMS and Bolter not providing further funding.
Mr Lenihan contended that Mr Grove’s reliance on the 16 June 2017 default notice was misplaced. As the property where the development was taking place had been sold, all the appellants could plead was set-off based on damages available for breach of the loan agreement, and such a claim was precluded by the no set-off clause. Further, Mr Lenihan submitted the default notice was not relied on to exercise the power of sale. Accordingly, even if the notice was defective, the Judge was right to find that the appellants did not sustain any loss or damage as a result.
In any event, Mr Lenihan claimed the default notice was valid. He pointed to the fact that substantial remedial works were required, the cost of which were uncertain. He also noted that the agreements for sale and purchase of the units in the development had sunset clauses. In those circumstances, he submitted expert evidence as to whether there had been a “material” adverse effect on the lender was not required. He argued that these factors taken in combination were clearly sufficient to engage the adverse circumstances clause.
Mr Lenihan submitted that, taken individually and together, these points showed that the appellants could not succeed at a full trial.
Decision
The Judge correctly summarised the relevant principles to be applied in dealing with applications for summary judgment by a plaintiff, as set out by this Court in Westpac Banking Corp v M M Kembla New Zealand Ltd and Krukziener v Hanover Finance Ltd.[24] These principles required Ikon to satisfy the Court that the appellants had no arguable defence to its claim, meaning that there is no real question to be tried. In addition, it is not generally possible to determine disputed issues of fact based on affidavit evidence alone, especially where issues of credibility arise. This does not mean that a court must accept every factual assertion made in opposition to an application for summary judgment.[25] The court is entitled to take a robust and realistic approach where the facts require it.
[24]Westpac Banking Corp v M M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA); and Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307.
[25]Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 4 per Somers J, citing Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 341; and Attorney-General v Rakiura Holdings Ltd (1986) 1 PRNZ 12 (HC) at 14.
An appeal against the grant of summary judgment is by way of rehearing.[26] An appellate court should enter judgment in accordance with its own opinion, including on matters of fact and degree requiring a value judgement.[27]
[26]Court of Appeal (Civil) Rules 2005, r 47; and McKay v Sandman [2018] NZCA 103, [2018] NZAR 707 at [31].
[27]Austin Nichols & Co Inc v Stichting Lodestar [2007] NZSC 103, [2008] 2 NZLR 141 at [16].
In the circumstances that arose, we are unable to agree with the Judge’s characterisation of the default notice issued on 16 June 2017 as a “precautionary measure”.[28] The notice demanded repayment of the outstanding loan amount and informed the appellants that default interest was being charged. It asserted delays in the construction timetable and cancellation of the building contractor as events of default; matters previously not treated as such by NZMS.
[28]High Court judgment, above n 1, at [45].
As we have noted, on 20 April 2017 NZMS was informed by the quantity surveyor of the need for remedial works and the fact this would cause delays. The following week NZMS became aware that the main contractor had ceased works on the site. In the emails that followed no concerns were expressed about the fact the project was delayed or might face increased costs, or that the builder had abandoned the construction contract. According to Mr Dumasia’s evidence, Mr Kellow raised no suggestion that the loan agreement had been breached at the 1 May 2017 meeting and in fact suggested an alternative builder to complete the development. After that meeting, the emails exchanged included reaching agreement that the remedial work should proceed without waiting for insurance issues to be determined and Mr Kellow accepted that the remedial work could be funded out of the returned bond.
In our view, that evidence is consistent with the position that at the relevant time, there had been no “Material Adverse Change or Effect” in the opinion of the lender under cl 11.1(k) of the loan agreement. Although it became apparent in the quantity surveyor’s report of 21 June 2017 that the project faced increased costs, this was not a reason that had been relied on for SKKY’s default. We do not accept Mr Lenihan’s submission that there was a clear breach of cl 11.1(k) and that no evidence of whether that was in fact the case is required. Based on the information provided, it is arguable that NZMS (and therefore Bolter, standing in its shoes) did not view the delays and frustration of the building contract as material adverse changes under cl 11.1(k) at any time until immediately before 16 June 2017. In fact, on the facts adduced to this point it would be difficult to sustain a proposition that NZMS would have had the view that there were events of default at any earlier date. That being the case, the default notice of 16 June 2017 would have been wrongfully issued, and arguably would have amounted to a repudiatory breach.
In our view, the notice could reasonably have been received by SKKY as a signal that further funding under the loan agreement would not be forthcoming unless the parties could reach an alternative arrangement.
As matters transpired there were discussions between the parties in June and July 2017 with a view to reaching an agreement on the terms of further funding being provided. The Judge found it significant that SKKY negotiated with Bolter to obtain loan finance during that period. He considered that SKKY would not have negotiated with Bolter to obtain loan finance if it genuinely believed Bolter was already contractually committed to provide the funding necessary to complete the project.[29] We have not been persuaded that this point is as significant as the Judge considered it was. Negotiating with Bolter in June and July 2017 could hardly have been avoided given that Bolter had served the default notice. And it may well have presented as a practical alternative given the particulars of the notice, alleging breach of the original loan agreement. Indeed, if it had been possible to reach agreement on reasonable terms, litigation and attendant cost might have been avoided. However, the terms offered by Bolter were such that SKKY could not accept them.
[29]At [36].
We do not accept Mr Lenihan’s submission that Bolter could not have been in breach of the loan agreement by failing to provide funding as no drawdown request was submitted by SKKY. It is arguable, in our view, that no drawdown request was submitted because SKKY had been led to believe, by issuance of the default notice, that such a request would not be granted. In any event, we consider the argument that the loan agreement had been repudiated by the issue of the notice is one that the appellants should be allowed to advance.
We note Mr Lenihan’s further submission that as the cost to complete and timeframe for the development had substantially increased, SKKY would have been unable to submit a valid drawdown request. While that argument presents difficulties for the appellants, in the summary judgment context we think it would be inappropriate to assess whether funding would have been provided, and the development completed, if the 16 June 2017 default notice had not been issued. We also note Mr Dumasia’s position that the increased costs could have been funded by the appellants. Whether SKKY could have obtained further funding from Bolter is an issue that will need to be addressed in the High Court, with the benefit of full discovery and cross‑examination of the witnesses for NZMS, Bolter and the appellants.
We accept Mr Lenihan’s point that Bolter did not rely on the terms of the 16 June 2017 notice for the sale of the property; a subsequent notice was served on 29 September 2017 requiring repayment of the balance owing at 23 September 2017 as required under the loan agreement. The present point however is not the power of sale that was eventually exercised. Mr Grove accepted that by September 2017 SKKY had fallen into default. The issue is whether the 16 June 2017 default notice was wrongfully issued and had the effect that the development could not be completed.
That leaves for consideration the no set-off clause. That clause provides:
8.2 Payments to be Free and Clear
Each payment to the Lender … is to be made, to the maximum extent permitted by law, free of any restriction and without any deduction or withholding in respect of any taxes, duties, set-off, counterclaim or otherwise. …
As this Court held in Grant v NZMC Ltd and Bromley Industries Ltd v Martin and Judith Fitzsimons Ltd such a clause may operate to extinguish a party’s right to rely on a set-off or counterclaim.[30] However, without full argument on the issue and in the context of summary judgment, we are not prepared to exclude the possibility that if the default notice of 16 June 2017 was wrongfully issued and caused funding and subsequently progress on the development to cease, the no set-off clause would be ineffective to shield Ikon from the consequences of the breach by Bolter.[31] That is a matter that should be addressed at trial with the benefit of full argument.
[30]Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 13; and Bromley Industries Ltd v Martin and Judith Fitzsimons Ltd [2009] NZCA 382, (2009) 19 PRNZ 850 at [51]–[52] and [66].
[31]See Ingram v Patcroft Properties Ltd [2011] NZSC 49, [2011] 3 NZLR 433 at [30]; and Hirst v Vousden CA25/02, 20 June 2002 at [27], as confirmed in Hirst v Vousden [2004] UKPC 24, (2004) 6 NZCPR 135 at [16].
For the reasons set out, we are not satisfied that the appellants do not have any arguable defence. We are accordingly of the view that it was not appropriate to grant summary judgment. The assessment of the evidence, the effect of the default notice dated 16 June 2017 and the implications of the no set-off clause will be matters for determination by the High Court at trial.
As we have noted, Mr Grove did not pursue the submission that there was a variation of the loan agreement at the meeting on 1 May 2017. In that event we have not found it necessary to deal with the Judge’s reasons for rejecting the appellants’ submissions based on the alleged variation, although we note that these arguments face difficulties for the reasons the Judge gave.
For these reasons we have concluded that the appeal should be allowed, and the judgment of the High Court set aside.
Result
The appeal is allowed.
The summary judgment entered by the High Court is set aside.
The respondent must pay the appellants costs calculated for a standard appeal on a band A basis, together with usual disbursements.
Any issue as to costs in the High Court is to be dealt with at an appropriate time by that Court, having regard to the terms of this judgment.
Solicitors:
Foy & Halse, Auckland for Appellants
Doug Cowan, Auckland for Respondent
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