Fletcher v Hull
[2012] NZHC 859
•1 May 2012
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
CIV 2009-488-762 [2012] NZHC 859
BETWEEN PAUL LESLIE FLETCHER AND MAUREEN ELIZABETH FLETCHER AS TRUSTEES OF THE PL AND ME FLETCHER FAMILY TRUST
Plaintiffs
ANDPETER ABE HULL AND BEVERLY ANNE HULL
Defendants
Hearing: 23 April 2012
Appearances: P J Magee for plaintiffs
G P Curry and D J G Cox for defendants
Judgment: 1 May 2012
JUDGMENT OF GILBERT J
This judgment was delivered by me on 1 May 2012 at 4.00 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date: ………………….
Counsel: G P Curry, Auckland: [email protected]
Solicitors: Thomson Wilson, Whangarei: [email protected]
Rennie Cox, Auckland: [email protected]
FLETCHER V HULL HC WHA CIV 2009-488-762 [1 May 2012]
Introduction
[1] The defendants, Mr and Mrs Hull, apply for security for costs pursuant to r 5.45 of the High Court Rules and for an order that the substantive proceeding be stayed until security is given.
[2] There is no dispute that the threshold question in r 5.45 is satisfied. The plaintiffs, Mr and Mrs Fletcher, acknowledge that if their claim fails, they will be unable to meet any award of costs in favour of the Hulls.
[3] The claim is set to be heard in this Court commencing on 21 May 2012. Mr and Mrs Fletcher have filed and served their briefs and the matter is ready to proceed from their point of view. Ten days have been allocated for the trial although counsel are agreed that it should conclude well within that time.
[4] Mr and Mrs Hull acknowledge that their application for security comes at a very late stage but they say that they made the application as soon as it became apparent that the Fletchers would not be able to pay costs. The Hulls assert that they will be insolvent at the end of a two week trial and an order for security is needed to protect their position.
[5] The interests of the Fletchers must also be considered. They assert that any order for security will prevent them from proceeding with their claim. The Fletchers contend that the Hulls are responsible for their financial predicament. They point out that the Hulls breached the contract; liability is not in issue, only quantum.
[6] The issue is whether the discretion to make an order should be exercised in the particular circumstances of this case, including those summarised above.
Background
[7] Mr and Mrs Fletcher are the owners of a 146 hectare property in Massey Road, Waipu. In February 2006, the Whangarei District Council gave consent for the property to be subdivided into 36 lifestyle blocks in a three-stage subdivision.
[8] In October 2007 Mr and Mrs Hull unconditionally agreed to purchase the Massey Road property from Mr and Mrs Fletcher for $5 million plus GST. A deposit of $500,000 was paid.
[9] Mr and Mrs Hull intended to nominate Falls Road Properties Limited (Falls Road) to take title to the property under the agreement. Mr Hull is the sole director and shareholder of Falls Road.
[10] After the agreement was signed, and in anticipation that it would be nominated to settle the purchase, Falls Road claimed an input credit amounting to
$625,000 from the Inland Revenue Department in respect of the purchase price. It paid this sum to Mr and Mrs Fletcher.
[11] The settlement date under the agreement was 31 August 2007. Mr and Mrs Hull could not raise the necessary finance and were unable to settle. Following service of a settlement notice, Mr and Mrs Fletcher cancelled the agreement on
2 October 2007.
[12] Following cancellation of the agreement, the GST payments had to be unwound. Mr and Mrs Fletcher were entitled to a refund of the GST they had paid to the IRD. Falls Road was obliged to refund the GST it had claimed and it was entitled to receive this money from Mr and Mrs Fletcher.
[13] The Fletchers refused to pay the money to Falls Road because of the losses they had sustained on the transaction. Falls Road sued and obtained judgment against Mr and Mrs Fletcher for approximately $854,000 in September 2011. The judgment included damages to compensate for the borrowing costs incurred by Falls Road to fund the payment it had to make to the IRD. [1]
[1] Falls Road Properties Ltd v Fletcher & Anor Whangarei HC CIV-2010-488-000504, 30 September
2011.
[14] Falls Road registered a charging order in respect of this judgment over another property owned by Mr and Mrs Fletcher in Marlborough. A sale order was made in December 2011 and the property is due to be auctioned on 17 May 2012.
ASB Bank Limited holds a first registered mortgage over the Marlborough property.
Mr Magee informed me from the Bar that this mortgage provided collateral security for the purchase of another property which is in the process of being refinanced. The partners of Thomson Wilson, the Fletchers’ solicitors, hold a second mortgage over the Marlborough property securing legal fees in relation to the present proceeding. I have no information as to the amount secured by this mortgage but was informed that it is “substantial”.
[15] Falls Road also applied for an order adjudicating Mr and Mrs Fletcher bankrupt. Peters J made an order pursuant to s 38 of the Insolvency Act 2006 halting those applications in view of the present proceeding. [2] Peters J considered that the present claim had “substance” and, given the proximity to trial, it would not be appropriate to allow Falls Road’s application for adjudication to proceed.
[2] Falls Road Properties Ltd v Fletcher [2012] NZHC 698.
[16] Despite efforts to do so, Mr and Mrs Fletcher have not resold the Massey Road property although they have sold one of the subdivided sections. The demand for property such as the Massey Road property peaked in 2007 but collapsed following the global financial crisis in 2008.
[17] After the agreement was entered into with Mr and Mrs Hull, and in anticipation it would settle, the Fletchers agreed to purchase two lots in Rewa Rewa Road, Whangarei from Provan Holdings Limited (Provan). The purchase price for Lot 1 was $3.1 million plus GST and the agreed settlement date was 31 July 2007. The purchase price for Lot 2 was $1.5 million plus GST with settlement due on
31 August 2007, the same settlement date as the sale to the Hulls of the Massey Road property.
[18] As at 31 August 2007, Mr and Mrs Fletcher had total borrowings from the Southland Building Society (SBS) of approximately $4.238 million.[3] Mr and Mrs Fletcher claimed that the proceeds of the sale of the Massey Road property and
[3] Paragraph 23 of Mr Fletcher’s affidavit sworn 16 November 2009 attached as Exhibit D to his
affidavit sworn 23 February 2012.
another property they owned in Ahuroa Road, Waipu, which was also due to settle on
31 August 2007,[4] would have enabled them to fund the purchase of Lot 2 at Rewa
Rewa Road and reduce the SBS loans to approximately $187,000.[5]
[4] As a result of the purchaser’s default, the sale of the Ahuroa Road property did not settle until
24 October 2007.
[5] Paragraph 65 of Mr Fletcher’s affidavit, 16 November 2009.
[19] Mr and Mrs Fletcher funded the purchase of Lot 2 in Rewa Rewa Road with the proceeds of sale of Ahuroa Road but they were unable to fund the purchase of Lot 1. Due to the mounting financial pressure, Mr and Mrs Fletcher listed both Rewa Rewa Road lots for sale. Lot 2 was eventually sold in May 2009[6] for
$730,000 plus GST which was $770,000 plus GST less than the purchase price. Provan resold Lot 1 in June 2009 for $1,025,000, $575,000 below the price the Fletchers had agreed to pay. Provan has not yet issued any proceedings to recover the losses it sustained as a result of the Fletchers’ failure to settle the purchase of Lot
1.
The claim
[6] Paragraph 113 of Mr Fletcher’s affidavit, 16 November 2009.
[20] Mr and Mrs Fletcher commenced the present proceeding by way of an application for summary judgment in November 2009. Mr and Mrs Hull admit that they defaulted on their obligations under the purchase agreement. The only issue in the proceeding concerns the damages, if any, recoverable.
[21] In their second amended statement of claim dated 29 September 2010, Mr and Mrs Fletcher claim damages of approximately $4.87 million, after deduction of the $500,000 deposit. The claimed losses are broadly made up as follows:
(a) $2.3 million is claimed as the difference between the market value of the Massey Road property and the contract price.[7]
[7] This is based on a valuation assessing the market value of the property at $2.7 million plus GST in May 2009.
(b) $1.25 million is claimed for interest on borrowings from SBS from
25 October 2007 to 21 September 2010.[8]
[8] Interest is calculated only to 21 September 2010 because the Second Amended Statement of Claim was filed on 29 September 2010.
(c) $360,000 is claimed for costs incurred in preparing the Massey Road property for sale.
(d)$1.39 million is claimed for losses in relation to the Rewa Rewa Road property.
(e) The balance of approximately $70,000 is made up of legal fees, holding costs and default interest.
The defence
[22] Mr and Mrs Hull admit that they breached their obligations in failing to settle the agreement for sale and purchase. However, they contend that any losses sustained by Mr and Mrs Fletcher, over and above the $500,000 forfeited as the deposit, are irrecoverable as being too remote or the result of Mr and Mrs Fletcher’s failure to take reasonable steps to mitigate their loss.
[23] Mr and Mrs Hull contend that the prospect of the Fletchers purchasing Rewa Rewa Road or any alternative property was not in contemplation at the time the Massey Road agreement was entered into and the losses in respect of those agreements are too remote to be recoverable.
[24] The Hulls argue that it was not prudent or reasonable for the Fletchers to cancel the Massey Road agreement without any alternative buyer lined up. They claim that the Fletchers ought to have accepted alternative proposals advanced by the Hulls at the time.
[25] The Hulls also say that the Fletchers advertised the Massey Road property for a price higher than the purchase price, seeking to profit from a higher price while retaining the deposit of $500,000 paid by the Hulls. The Hulls do not consider that they should be held responsible for losses incurred in the Fletchers’ failed pursuit of greater profit.
Legal principles
[26] The legal principles applicable to an application pursuant to r 5.45 of the
High Court Rules are well settled and do not need to be repeated here.
[27] Factors that can be relevant to the exercise of the discretion include whether an order will prevent a plaintiff from proceeding with its claim, the merits of the case, whether the plaintiffs’ impecuniosity has been caused by the defendants’ wrongdoing and whether there has been any delay in bringing the application for security.[9]
Submissions
[9] A S McLachlan v MEL Network Ltd (2002) 16 PRNZ 747 (CA).
[28] Mr Curry, for the Hulls, submitted that the losses claimed by the Fletchers are too remote and would have been avoided had reasonable steps been taken by the Fletchers to mitigate their loss. He submitted that any claim over and above the
$500,000 that has been forfeited will face these significant hurdles.
[29] Mr Curry acknowledged the possibility that the making of an order for security for costs could prevent the Fletchers from continuing with their claim.
[30] Mr Curry acknowledged that delay can be an important factor and that this application was brought at a very late stage. However, he submitted that the application was brought as soon as the Hulls discovered that the Fletchers were in grave financial difficulty and unlikely to be able to pay costs if their claim fails.
[31] Mr Curry calculated that 2B costs for the proceeding would be $100,580. He proposed that security should be directed for at least $40,000.
[32] Mr Magee, for the Fletchers, acknowledged that the threshold test under r 5.45 was satisfied but he submitted that the discretion to make an order for security for costs should not be exercised in this case. He submitted that the Fletchers took
reasonable steps to mitigate their loss, having been left in a very difficult financial
position as a result of the Hulls’ default. He submitted that the Fletchers’ present
inability to meet an award of costs is the result of this default.
[33] Mr Magee submitted that the Court should not entertain the application for security for costs at such a late stage of the proceeding, especially given that the Fletchers’ financial position ought to have been apparent to the Hulls from discovery. Finally, Mr Magee submitted that any order for security would be likely to prevent the Fletchers from pursuing their claim.
Discussion
[34] As I have noted, there is no contest between the parties in this case that the threshold test under r 5.45 is satisfied. Mr and Mrs Fletcher candidly acknowledge that they are unlikely to be able meet any award of costs in favour of Mr and Mrs Hull. I therefore have a discretion to make an order requiring Mr and Mrs Fletcher to provide security for costs and stay the proceeding until such security is given.
[35] In this particular case, the factors most relevant to the exercise of the discretion are, as counsel submitted, the merits of the claim, whether the Fletchers’ impecuniosity was caused by the Hulls’ default, whether an order is likely to prevent the Fletchers from proceeding with their claim and delay. I now address each of these issues.
Merits
[36] The Hulls breached their contract with the Fletchers by failing to settle the purchase of the Massey Road property. The usual measure of loss is the difference between the contract price and the value of the property at the date of the breach. Although damages are normally assessed at the date of the breach, the Court can assess damages at a later date if this is necessary to compensate the innocent party. This is obviously going to be an important issue for the trial judge to determine in this case. I am not in a position to express any view on the date that should be
chosen in this case for the assessment of damages. The answer will depend on a careful consideration of all of the relevant facts.
[37] The Fletchers had a duty to mitigate their loss. It may be that they did all they reasonably could to resell the Massey Road property. They may have been “caught” by the sudden decline in the market. I am not able to assess whether they took reasonable steps to mitigate their loss in the context of the present application.
[38] The Fletchers contend that, prior to the agreement being entered into, they told the Hulls that they wanted to purchase commercial property with the proceeds of sale. This is disputed by the Hulls. Again, I cannot make any assessment on this application as to which version is correct.
[39] I accept Mr Curry’s submission that the Fletchers will face real hurdles in respect of some aspects of their claim. However, I am not able to accept his submission that the Fletchers “do not have a reasonable prospect of success above the deposit”. I consider that they do.
Is the Fletchers’ impecuniosity caused by the Hulls’ breach?
[40] The Fletchers had very substantial borrowings which left them vulnerable to any default by the Hulls. Rather than reducing their borrowings, the Fletchers have been required to pay very substantial sums in interest to SBS. Unfortunately, the downturn in the property market seems to have contributed to the Fletchers’ inability to resell the Massey Road property. On the other hand, the loss in value of the Rewa Rewa Road properties is likely to have been caused by this same downturn and may have been suffered irrespective of the Hulls’ default.
[41] These are all matters that the trial judge will have to consider if the matter proceeds. For present purposes, I accept that the Fletchers’ current dire financial situation has, in part, been caused by the Hulls’ default.
Will an order for security prevent the Fletchers from pursuing their claim?
[42] In their notice of opposition to the present application, Mr and Mrs Fletcher say that “the current application if successful will prevent the plaintiffs having a genuine access to the Courts”.[10] This assertion is not supported by any direct evidence in these terms. The Fletchers did not provide any affidavit in support of their opposition and have chosen to rely on the affidavits filed by them in the Falls Road bankruptcy proceeding which exhibited Mr Fletcher’s affidavit in support of
the application for summary judgment in this proceeding sworn on 16 November
2009.
[10] Paragraph 3(a) of the Notice of Opposition dated 18 January 2012.
[43] There is, however, no dispute that the Fletchers will be unable to meet any award of costs if they fail in their claim. Falls Road has an unsatisfied judgment for approximately $854,000. The Fletchers are not able to meet that judgment. They only succeeded in having the bankruptcy proceedings initiated by Falls Road halted by persuading Peters J that the present proceeding has substance and should be able to proceed before any final determination of the bankruptcy application is made.
[44] The present claim is the only prospect that the Fletchers have of avoiding bankruptcy. It appears that they have not been able to meet the legal costs involved. This is why there is a substantial mortgage over the Marlborough property in favour of the partners of Thomson Wilson. I expect that the partners of Thomson Wilson would have much preferred SBS to fund the litigation. I infer from the fact that Thomson Wilson is currently funding the legal costs that SBS is not prepared to do so.
[45] I am not able to say, on the evidence before me, that any order for security for costs will definitely prevent the claim from proceeding. However, there must be a real risk that this will be the result, as the Fletchers have claimed in their notice of
opposition.
[46] The Court of Appeal has cautioned against making an order having the effect of preventing a claim from proceeding. Gault P, giving judgment for the Court in A S McLachlan v MEL Network Ltd stated at [15]:
The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that an order for substantial security may, in effect, prevent the plaintiff from pursuing the claim. An order having that effect should be made only after careful consideration and in a case in which the claim has little chance of success. Access to the courts for a genuine plaintiff is not lightly to be denied.
Delay
[47] The present application was made at a very late stage in the proceeding. In their Statement of Claim, the Fletchers pleaded that they were reliant on the sale proceeds from the Massey Road property to settle the purchase of the Rewa Rewa Road properties. They pleaded the amount of their indebtedness to SBS. The Hulls also knew from the pleading how much money was lost on resale of the Rewa Rewa Road properties and of the Fletchers’ inability to on sell the Massey Road property. The Hulls should have realised that there was likely to be an issue as to the Fletchers’ ability to pay costs if the Fletchers lost their claim.
Decision
[48] The Fletchers face difficulties with some aspects of their claim but they have reasonable prospects of succeeding, at least in part. I am concerned that the Fletchers may be denied access to justice if an order for security for costs is made. It does not seem fair that the Fletchers should be denied the opportunity of pursuing their claim. If they are unable to pursue their claim, they will both be adjudicated bankrupt.
[49] Although the Hulls are exposed on costs, they are the ones who breached the contract. They may well be partly responsible for the Fletchers’ current inability to pay costs. The Hulls have delayed bringing the present application until the eve of trial. I am not satisfied that the delay has been adequately explained.
[50] Taking all of these matters into account, I am not prepared to exercise my discretion to make an order for security for costs.
Result
[51] The application for security for costs is dismissed.
[52] The plaintiffs are entitled to costs on this application on a 2B basis.
M A Gilbert J
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