Governors Limited v Anderson
[2005] NZCA 208
•16 August 2005
IN THE COURT OF APPEAL OF NEW ZEALAND
CA94/04
BETWEENGOVERNORS LIMITED
First AppellantANDSTEPHEN KEVIN CHAMBERLAIN
Second Appellant
ANDGEORGE ALBERT ANDERSON AND MARGARET ADAIR ANDERSON
First RespondentANDTHOMAS MACKINON ANDERSON
Second Respondent
Hearing:15 June 2005
Court:William Young, O'Regan and Robertson JJ
Counsel:D G Dewar and J C Moore for First and Second Appellants
N Levy for First and Second Respondents
Judgment:16 August 2005
JUDGMENT OF THE COURT
A The appeal is allowed.
B The orders for damages in favour of the appellants in the High Court are vacated and instead an order is made for damages in a total sum of $121,572 with interest at 7% from 5 October 2000 on $16,572 and from 18 June 2001 on $105,000.
CThe award on the unchallenged counterclaim by the respondents remains.
D The cross appeal is dismissed.
E Costs to the appellants of $6,000 plus usual disbursements.
REASONS
(Given by Robertson J)
[1] This is an appeal from a quantum decision delivered by Ellen France J in the High Court at Wellington on 21 April 2004 and a cross-appeal as to costs.
[2] The dispute between the parties has occupied a substantial amount of judicial time. During 1999 the second appellant (Mr Chamberlain) the second respondent (Mr Anderson) and another decided to develop part of a building in Lower Hutt owned by the first respondents, who are the father and sister of Mr Anderson, into a nightclub/gaming centre/bar.
[3] Before long the arrangement between the three men started to show cracks. Eventually Mr Chamberlain, through his company, purchased the interest of the others so that the enterprise was undertaken by his company, the first appellant (Governors).
[4] A business eventually opened in renovated premises in March 2000. On 5 October 2000 the landlords (the first respondents) re-entered the premises and secured possession. Mr Anderson then ran the business. There was an initial application for interim relief heard by Durie J in October 2000 and as a result the appellants regained entry to the premises having been kept out for 14 days.
[5] In June 2001 there was a further entry and a locking out of the appellants by the first respondents. This persisted for many months until an application came before Wild J on 6 December 2001. He made orders which again permitted the appellants back into occupation.
[6] There was a liability hearing before Ellen France J in July 2003. In a reserved judgment of the 22 September 2003 she concluded:
[108] The re-entry in October 2000 and in June 2001 were both unlawful.
[109] The plaintiff submits that liability against all defendants follows. The defendants were represented by the same counsel and made no arguments about liability. However, they should have the opportunity to address that question in the course of the damages hearing.
[7] The respondents accepted that, on the basis of the findings against them, they were liable to Governors and there was a hearing on 24 and 25 November 2003 on the question of quantum before the same Judge. In a reserved decision of 21 April 2004 she concluded:
[93] In the result, the plaintiff (Governors) is entitled to an award of damages of $44,231.42 together with interest at the rate of 7 percent from the first re-entry (on the sum of $13,121.90) and from the date of the second re-entry on the balance of $31,109.52 until date of payment.
[94] The defendants are entitled on their counterclaim to an award of $15,901.00 together with interest at the rate of 7 percent from 29 April 2002 (the date of Mr Rohloff’s letter of demand to the plaintiff) to the date of payment.
[95] The plaintiff is entitled to costs on both the liability hearing on a 2B basis and on a 2A basis for the quantum hearing together with reasonable disbursements as determined by the Registrar.
[8] Finally, in a supplementary costs judgment of 7 May 2004, the Judge concluded that an allowance for second counsel was not appropriate and certification accordingly was refused.
The appeal and cross appeal
[9] The appeal challenges the awards of damages made by Ellen France J in respect of both the first and second re-entries.
[10] The cross appeal related solely to the fact that in the judgment of 21 April 2004 Ellen France J allowed costs against the respondents on the High Court scale. It was contended that, apart from those aspects of the case which were in the High Court because of the interim relief sought, as the net recovery of the appellants was about $37,000, costs on a District Court scale should have been awarded.
Damages in respect of the first eviction
[11] During this first 14 day period in October 2000, the respondents not only locked the appellants out but Mr Anderson actually ran the existing business. The appellants’ stock, plant, equipment, staff and other resources such as electricity were used and Mr Anderson kept and banked the money which was received.
[12] It became clear in the course of the hearing that there was very little between the parties in respect of this head. The Judge’s approach of calculating lost revenue, deducting costs saved and then adding rent paid by Governors during the period of the eviction was accepted. No challenge was made to the Judge’s finding that the revenue for a 30 day period prior to the eviction had been $32,414. The appellants were held out of the premises for half a month so the revenue loss was reasonably calculated at $16,207. The Judge found the only demonstrated cost saving was wages. She considered the wages figures for the previous month. In her calculation she took into account the total wage figure for the month. Although counsel before us agreed it was appropriate to have regard to that as a starting point, both sides accepted that for a whole month the wages figure was $6,920, and therefore the relevant figure should have been half of that ($3,460). The rent figures were not in dispute. So the only adjustment we would make to the Judge’s damages award for the first eviction is the correction of her arithmetical error. Correcting the Judge’s arithmetic figure would produce a figure of $16,572.
[13] The only other point in relation to the cross-appeal with which we must deal is the contention made by Ms Levy for the respondents that an allowance for stock is required.
[14] There were a number of unsatisfactory aspects of the evidence in this part of the case with a lack of documents on many issues. It is clear that it was the respondents’ duty to provide this material and to the extent that there were any adverse inferences to be drawn they would be against the respondents who failed to provide material which they had or ought to have had.
[15] Such an absence of documentation seriously undermined a submission of the respondents that the turnover figure should have been reduced by an allowance for the amount of the revenue derived from the trading which was spent on replenishing stocks. Ms Levy submitted that the stock was greater at the end of the period than at the beginning. In the absence of proper documentation which would either substantiate that or undermine it, the Court was entitled to put such assertion to one side and assess damages on the basis of gross receipts that would have been received by Governors if the eviction had not taken place, less the costs that were avoided by Governors because they were met by the landlord for the two weeks during which they were evicted.
[16] The appeal is accordingly allowed in relation to the first eviction to the extent of making the arithmetical correction to which we have referred. We therefore increase the damages in respect of this eviction to $16,572.
The Judge’s conclusion as to failure to mitigate in relation to the second eviction
[17] Ellen France J found that the appellants had failed to mitigate their potential loss by not taking further litigation steps when the respondents unlawfully entered the premises in June 2001, and by delaying the initiation of the Court action which led to the decision of Wild J in December 2001. She took the view that she ought to award damages in relation to the second eviction for a period of one month only.
[18] The High Court adopted the reasoning in Hawkes Bay Protein Limited v Davidson [2003] 1 NZLR 536 at 546-547 where Gendall J held:
[A plaintiff] must take all reasonable steps to mitigate the loss consequent upon a defendant’s wrong … a plaintiff cannot recover avoidable loss … Where a plaintiff does take reasonable steps to mitigate a loss consequent upon a defendant’s wrong, there can be recovery for any loss incurred in so doing … he may well be required to take the step of pursuing litigation against the wrongdoer, based upon the same wrong, which would achieve for him a remedy that alleviates the wrong and reduces the damages liability of the wrongdoer.
[19] We are not satisfied that this decision establishes any general principle of liability or that there is ample authority for this view as Gendall J suggested. The English decisions to which he referred Rosenthal v Alderton and Sons Ltd [1946] 1 KB 374 and Sachs v Miklos [1948] 2 KB 23 do not support any universal proposition of law but are confined to their own peculiar factual circumstances.
[20] Ellen France J suggested that one means of mitigating the appellants’ loss in the circumstances of this case was via injunctive relief. However, it is to be remembered that there had been previous litigation resulting in the interim relief granted by Durie J in October of 2000. The operative part of that order provided:
THIS COURT ORDERS by way of Interlocutory Injunction pending further order of the Court that the Defendants be restrained from preventing the Plaintiff from taking possession of and enjoying the premises described in paragraph 3 of the Statement of Claim and a further Order by way of Interlocutory Injunction requiring the Defendants to deliver up possession of the said premises to the Plaintiff pending further Order of the Court.
[21] Although it may be argued that the relief should have been granted only in respect of the past, the order was in an all encompassing form. On a perhaps literal interpretation of the order, the respondents were in breach when they re-entered in the circumstances they did in June 2001. It was in this case equally open to the respondents to seek to have the interim relief varied or set aside if they considered that there were new grounds of complaint. That the respondents were prepared to act as they did, without seeking clarification from the High Court as to their right to do so, provides an inauspicious context for evaluation of their failure to mitigate argument.
[22] The uncontroverted evidence is that, immediately after being put out of the premises in June, the appellants endeavoured to negotiate some way forward. Thereafter they were in an invidious position. They could not carry on their business from another place. The respondents totally held the whip hand.
[23] We are of the view that the Judge in the High Court was in error in determining that the respondents were not liable for any damages arising after the expiry of one month from the time of the second re-entry on 18 June 2001. The issue of a failure to mitigate is a question of fact and degree in the total circumstances of each case. We do not accept that there can be an arbitrary drawing of a line in the circumstances which exist in this case.
[24] If the reasoning of the High Court Judge was correct, that would essentially mean that a party which sued for damages would be penalised for choosing that remedy rather than seeking an injunctive remedy. There is no reason in principle why that should be the case.
[25] If Governors had simply sat on its hands in response to the second eviction, there would have come a time when it would have lost its entitlement to possession under the lease. This loss of entitlement could most easily be analysed as resulting from a de facto acceptance by Governors of the repudiation by the respondents of the lease. On the facts it could not fairly be said that Governors had accepted the repudiation and, in any event, the respondents never argued such a case at trial or in front of us. Further, even if Governors had accepted repudiation of the lease it could still have sued for damages without being subject to any argument that it had failed to mitigate its loss.
Proper assessment of damages in respect of the second eviction
General
[26] Given that the Judge assessed damages on a basis which we have found to be incorrect, we must start afresh in terms of calculation of damages for the second eviction.
[27] We identify the measure of damages which is appropriate as being what is required to compensate Governors for being out of the business during the period of the second eviction, and for any ongoing losses associated with breaches of the lease which occurred during this period.
[28] A tenant as a matter of law is entitled to losses which result as a natural consequence of the wrongful act of a landlord in evicting it from premises. The Judge found that the accounting witness called by the appellants, although honest and qualified, had put the case on “its very highest” on a theoretical best case scenario.
[29] In the High Court the Judge had been urged to look at a number of factors that were significant in the proper assessment of damage. These were not restricted to the actual operating profit. We were also urged to accept that Governors had not only lost profit from bar trading but had also suffered loss of profits from gaming machines, losses from the building of a staircase to the landlord's premises which encroached on the leased premises and lost benefits from a suspensory loan from a brewery.
Gaming machines
[30] When the appellants’ enterprise was commenced it was anticipated that there would be up to 18 gaming machines in the premises. As a result of unlawful conduct by an employee of the appellants before the first eviction, the right to operate the machines was withdrawn by the trust which owned the machines. Although Mr Chamberlain clearly had an overwhelming desire to alter this position, nothing changed in the period from October 2000 when Governors gained re-entry into the premises until the second eviction in June 2001.
[31] It was suggested before us that these machines were capable of providing a return in the order of $3,500 per week from the machines’ owners to offset the costs of their being on the premises. But that required a minimum throughput. The evidence is clear and unequivocal that such a minimum was never achieved. A stream of income from gaming machines was not a realistic possibility to be taken into account. Although there was always a desire by Mr Chamberlain to reinstate their operational position, this did not occur during eight months when, if it was a reasonable practicality, it could have been achieved.
[32] Accordingly, and contrary to the argument of Governors, we are of the view that theoretical profitability associated with the gaming machines ought not to be brought into account in the damages assessment exercise.
[33] The appellants additionally argued that the respondents had derogated from what they attained under their lease by installing gambling machines in their own premises upstairs. They contended that by entering into a lease for premises which they knew would include gaming machines carried with it an implicit obligation not to install competing gaming machines in another part of the landlord’s premises. In the absence of a covenant to the effect in the lease, there is no basis for implying it as a term.
[34] Gaming machine potential was further complicated because as a result of a change in the law it was not possible to have gaming machines operating in more than one place within a building. That, however, can not be held as a matter upon which the respondent should account. We are satisfied that an award of damages should not include any factor which relates to what could only be an illusory hope of having gaming machines on the premises.
[35] We are satisfied that Ellen France J was right to decide the gaming machines were not something which could properly be put into the equation.
Stairwell
[36] There was the critical issue that, during the time that the respondents were in possession after the second eviction, they constructed in the demised premises a large stairwell with access to the first floor. This took up part of the dance floor in the demised premises, and was accessed from what had been the major front entrance. Not only did the stairwell interfere with the area of the building which the appellants were entitled to occupy, it had the effect of siphoning people upstairs to a competing activity.
[37] The appellants also argued that there was a particular entitlement for what counsel described as “derogation from the grant”. The Court was referred to several cases which deal with the principle that a landlord may not do, or permit to be done, things which are inconsistent with the grant of a lease, and substantially interferes with the right granted. In Tram Lease Ltd v Croad [2003] 2 NZLR 461 at 469, this Court stated “It is a principle which embodies common honesty and fair dealing; “…a grantor having given a thing with one hand is not to take away the means of enjoying it with the other.” – citing Birmingham, Dudley and District Banking Co v Ross (1888) 38 Ch D 295 at 313.
[38] The appellants were denied the use of that part of the premises and the front door. The appellants argued that this had a significant influence on the loss sustained as a result of the loss of gaming machines but that is unhelpful in light of our conclusion about the machines. Accordingly we focus on the effect of the stairwell on the appellants’ enjoyment of the premises demised to it in the lease. The case was put to us on derogation from grant principles but we did not decide it on that basis. In our view those principles are somewhat over-elaborate for this sort of situation given that the respondents were in breach of their promise to make the whole of the demised premises available to Governors.
The Brewery suspensory loan
[39] This matter was specifically raised in the initial proceedings and recorded by Ellen France J as:
(a)The plaintiff in part funded the development with a rebateable loan from New Zealand Breweries.
(b)The defendants’ actions caused the plaintiff to default on its loan obligations.
(c)The defendants’ actions caused the plaintiff to default on obligations to its creditors. Damages in the sum of $23,333 being the rebateable loan to New Zealand Breweries are sought. (A claim for $26,427.26 being the sum due for stock and goods supplied to the plaintiff by New Zealand Breweries together with costs and interest is not pursued.)
[40] In her quantum judgment, the Judge specifically referred to this in [58], but did not specifically return to it again in her reasoning.
[41] Before us, the appellants now contend that the sum of $27,985.01, being the value of the suspensory loan which was rebateable subject to continuity of trade was a benefit which was lost to the appellants.
[42] We are not satisfied that there is evidence to support that contention. Without in any way condoning the position of the landlord in unlawfully evicting, the evidence was that from December 2001, the appellants continued to trade for a further two years. Consequently we are not satisfied that the evidence establishes that the business interruption totally lost the benefit of the supply of trade finance on advantageous terms. There undoubtedly was a postponement of the arrangement, but this was one of the factors in the calculation of general damages to be awarded in respect of the period of interference. It does not constitute, in and of itself, a permanent denial of the value of those business benefits which had been achieved.
Profitability
[43] The respondents argued that the chance of making profits had to be viewed in a realistic light, and regard had to be had to contingencies such as the fickle nature of the trade, the company’s lack of capital, and its parlous financial situation. The respondents submitted:
The appellant was operating an insolvent, under-capitalised and heavily defaulting business at the time of the first re-entry in October 2000. The Appellant had paid nothing to the landlord for outgoings, it had suffered a $29,000 loss for its first six month period of trading, it had creditors from the set up phase pressing for payment, and the only source of cash was the continued goodwill of family and friends. By the time of the second re-entry in June 2001 the situation was much much worse. No GST or PAYE returns had been filed for at least six months, and there was no money available to meet these obligations in any event. Trade creditors continued to press for payment, and cheques to them continued to bounce. Meeting perceived rental obligations was a constant struggle, and still no outgoings had been paid to the landlord.
[44] The profitability or otherwise of the business was accordingly argued as being “very relevant” to the question of the appropriate sum of damages to restore the appellants to the position it would have been in had the second breach not occurred.
[45] Partly to counter this approach it was argued by the appellant that the Court should have regard to those cases which have decided that where there has been a wrongful eviction, consideration should be had not only to the loss which has been incurred but to the benefit which had been obtained by a landlord in that situation. We accept that the Privy Council in Inverugie Investments Limited v Hackett [1995] 3 All ER 841, and Cash Handling Systems Limited v Augustus Terrace Developments Limited [1996] 3 NZ Conv Cases 192,398, envisaged such an approach. However on the available evidence there was no basis from which to conclude that there had been any real or substantial benefit of that sort accruing to the respondents.
Damages to be awarded
[46] The Judge concluded that as the industry involved was a fickle one, the appellants had liquidity problems and that the accounting evidence was to say the least deserving of careful scrutiny, the loss was nowhere near as high as that which had been claimed. As a result of a late amendment the total claim had been raised to nearly $800,000 which was seen as “greatly exaggerated”.
[47] The Judge’s assessment of damage in respect of the second eviction reflected her view on mitigation of damages, which meant that she limited the period under consideration for which loss of profits could be claimed to one month.
[48] In respect of this period, she concluded:
[50] It follows from the earlier analysis that I am not satisfied there would have been any significant loss of profits for the exclusion from the business for a one month period. Again, any damages should be relatively nominal. A figure of $25,000 reflects the previous two months’ sales figures and a figure of $5,000 should be added for loss of goodwill. In addition, the plaintiff paid its rent for June 2001 and so is entitled to a credit for rental over the period of re-entry in June. I understand the figure for rental for this period is $1,109.52.
[51] Given the difficulties the business was experiencing independently of any actions by the defendants, and given my findings on mitigation, I do not consider the claim for loss of the value of the business of $200,000 has been made out except to the limited extent I have earlier accepted there has been a loss of goodwill.
[52] Accordingly, under this head the plaintiff is entitled to an award of $31,109.52 together with interest.
[49] We have already found that this limited approach is in error, so it is necessary to consider an assessment of damages which is not curtailed in this way. We have given consideration to whether sending the case back for further consideration in the High Court, but have concluded that would not be in the interests of the parties.
[50] As Lord Keith of Kinkel noted in delivering the advice of the Privy Council in Tai Hing Mill v Kamsing Factory [1979] AC 91 at 106:
… the ends of justice would best be served if they were to fix a new figure of damages as best they can upon the available evidence.
This was the approach of this Court in Walsh v Kerr [1989] 1 NZLR 490 and we adopt it now.
[51] The principal evidence with regard to damages came from Mr Chamberlain as to daily takings and expenses and Mr McGregor as to his evaluation of the figures.
[52] A fair appraisal is made more difficult because the second eviction took place in June (one of the lowest trading months) but continued for most of the rest of the year when trading could reasonably be anticipated to be much higher. There is also strength in the argument that the June 2001 figures still were in fact depressed because of the interference in the one month eviction the previous year as shown in Mr McGregor’s spreadsheet material around that time.
[53] Mr McGregor’s optimistic calculations, in our judgment, took insufficient account of the economic reality of what was occurring and which has been emphasised by Ms Levy before us.
[54] It is not clear why the Judge, in the assessment which she undertook for the one month to which she restricted herself, operated from the figure of $25,000 “reflecting the previous two months’ sales figures”. The relevant loss on an ongoing basis was loss of profit, not revenue.
[55] We have reached the view that the only reliable standard is the unchallenged approach which was applied to the 2000 eviction. On a corrected arithmetic calculation (and without regard to a goodwill factor) this was a net loss for a month of $14,572.00. In our view that is the best measure in the circumstances for the almost five and a half months of the second eviction.
[56] The risks associated with the continuation of this business enterprise, in light of its operating history since opening, need to be given some weight. The increasing uncertainties in relation to profitability can be reflected by taking a discounting factor of 10% in each month. When that is rounded off, and there is recognition given for the rent paid of $1,109.52 for a time when the appellants were not in occupation, an appropriate figure for the loss sustained in the period from 18 June until early December is $65,000.
[57] As was the case in 2000, there is an additional factor to be taken into account because of the effect on goodwill. Also arising on this occasion (although not on the first) is the ongoing effect of the re-positioned staircase on the premises.
[58] This later part of the exercise involves more than just calculating what percentage of the total floor space had been removed from the lease, although this was a consideration. The construction of the stairwell in the midst of the leased premises with its ongoing effect of diverting customers away from the appellant’s business and consequently reducing the goodwill. We are satisfied that these two factors in concert justify an additional sum of $40,000.
[59] We have made these assessments, notwithstanding the problems which the business had always experienced and continued to experience possibly because of lack of capitalisation. Nevertheless the historical reality is that the appellant’s continued to operate the venture for a further two years.
[60] Accordingly we find that the award made in respect of the second eviction of $31,009.52 was inappropriate and insufficient. In its place we award the total sum of $105,000.
Cross-appeal
[61] The final issue was the cross appeal about the scale of costs awarded in the High Court. This is essentially a discretionary matter. We are not persuaded that there is validity in the respondents’ argument that because only a net sum of $37,000 was recovered by the appellants that is presumptive if not conclusive material that the case should have been in the District Court.
[62] The dispute arose because of the first unlawful eviction. It was proper for the proceeding between the parties over that aspect of the case to be in the High Court. Before consequential issues were resolved, there was the second unlawful eviction. Again the High Court was undoubtedly the place for that to be determined. Ms Levy does not argue it was inappropriate for High Court costs to be awarded in respect of those two aspects. She submitted that the rest of the issues should have been severed off and dealt with in the District Court.
[63] We are not persuaded that is the case. The primary liability issue was whether or not those two evictions had been unlawful. It was not appropriate for the District Court to make those determinations. Both parties introduced much material that was of peripheral value only. This greatly lengthened the time that the matter took to hear.
[64] We are not satisfied that it can be said that this was a case in respect of which the discretion exercised was wrong in principle or plainly wrong. That is the point the respondents must reach before an appellate Court will intervene. That cannot be the case. The cross appeal is accordingly refused.
[65] It is instructive to note that although the net recovery in the High Court was under $40,000, the costs to which the appellants were entitled were in the vicinity of $58,000. In our judgment that is not necessarily an indication that the matter should have been in the District Court. It is equally a clear demonstration that these parties should at a very early stage have sat down and worked through the problems which existed and reached a sensible commercial resolution.
[66] When people get into litigation mode often proportionality and good sense go out the window with the inevitable consequences that the parties who are unsuccessful find themselves paying a substantial costs award. Such a risk can be ameliorated by Calderbank letters and other mechanisms which ensure that any party who is acting unreasonably and capriciously will suffer in costs through not having reached a realistic settlement. No such steps were taken in this case and the costs consequences are the corollary.
Conclusion
[67] The appeal is allowed. The total costs ordered in favour of the appellants are increased to $121,572 with interest at 7% from 5 October 2000 on $16,572 and from 18 June 2001 on $105,000. The counterclaim remains as it was in the High Court having not been under challenge before us. The costs award in the High Court remains. The appellants are entitled to costs in this Court of $6,000 together with usual disbursements.
Solicitors:
Thomas Dewar Sziranyi Letts, Wellington for Appellants
Sladden Cochrane & Co., Wellington for Respondents
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