Gulf Harbour Town Centre Limited v Hook HC Auckland CP 343-Sd99
[2001] NZHC 570
•28 June 2001
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY CP.343-SD99
BETWEEN GULF HARBOUR TOWN CENTRE LIMITED
Plaintiff
AND C.R. HOOK
First Defendant
J.E.C. SELLICK
Second Defendant
CP.344-SD99
BETWEEN GULF HARBOUR DEVELOPMENT LIMITED
Plaintiff
AND C.R. HOOK
First Defendant
J.E.C. SELLICK
Second Defendant
Hearing: 20-24 November and 12 December 2000
Counsel: J Long and JR Wadham for Plaintiffs
R Ferguson and PR Cogswell for Defendants
Judgment: 28 June 2001
JUDGMENT OF RODNEY HANSEN J
TABLE OF CONTENTS
Para No
1 Introduction [1] - [2]
2 Parties [3]
3 Background facts [4] - [27]
4 Mortgage claim [28]
[a] First affirmative defence - assignment [29] - [32]
[b] Second affirmative defence - waiver/estoppel [33] - [48]
[c] Third affirmative defence - Fair Trading Act [49] - [52]
[d] Fourth affirmative defence -January 1999 deed [53] - [60]
[e] Conclusion [61]
5 Lease claim [62] - [63]
[a] First defence: wrongful set off [64] - [68]
[i] Effect of wrongful set-off [69] - [76]
[ii] Causation [77] - [81]
[iii] Contractual exclusion [82] - [85]
[iv] Conclusion [86]
[b] Second defence: mitigation [87] - [91]
6 Result [92] - [94]
1 Introduction
[1] These two proceedings, heard together by consent, arise out of an ill-fated investment by two businessmen, Christopher Hook and John Sellick, in the Gulf Harbour development at Whangaparaoa, north of Auckland. They guaranteed the obligations of companies which leased premises and purchased a property from the developer, Gulf Harbour Development Limited. They opened a restaurant and a bar and took over management of a motel. The ventures were unsuccessful and the companies went into liquidation. Messrs Hook and Sellick now face claims under their guarantees.
[2] The plaintiffs settled their claims against Mr Sellick before trial. At the beginning of the hearing he formally admitted liability on Mr Hook’s cross-claim for 50% of the amount of any judgment obtained by the plaintiffs against Mr Hook.
2 Parties
[3] A number of associated companies were involved in the development and operation of Gulf Harbour. It is convenient to refer to them collectively simply as Gulf Harbour whenever it is unnecessary to identify the particular company in the group. The role of individual companies will become clear as the narrative proceeds. Generally, their names are descriptive of their functions - Gulf Harbour Holdings Limited is the holding company, Gulf Harbour Development Limited carried out the development, Gulf Harbour Town Centre Limited owned the buildings in the town centre and Gulf Harbour Hotel Holdings Limited owned accommodation facilities.
3 Background facts
[4] In 1996 Mr Hook became attracted to the business opportunities offered by the Gulf Harbour development. It was an ambitious scheme incorporating a marina, retail centre, motel, retirement village, residential housing and a golf course. Mr Hook is an accountant by profession and active in business. At the time his business interests included several bars which operated under the name “Judder Bar”. He saw Gulf Harbour as a promising location for another Judder Bar, particularly as there were expectations that some of the challengers for the 1999/2000 America’s Cup would be accommodated at the marina.
[5] Mr Sellick agreed to join Mr Hook in the venture. Their plans expanded to include a restaurant to be called “Nautilus” which would operate from premises adjacent to those of the Judder Bar. They formed two companies, Nautilus (Gulf Harbour) Limited (“Nautilus”) and Judder Bar (Gulf Harbour) Limited (“Judder Bar”) in which they had equal shareholdings.
[6] Agreements to lease between Gulf Harbour Development and both Nautilus and Judder Bar were entered into on 21 October 1996. The leases were for a period of six years beginning in December 1996. Both leases contained a rental holiday period and a further period during which 50% of the rental would be payable. The reduced rental would cease when a 36-room lodge and conference centre to be known as Gulf Harbour Lodge was leased and retail shops in the town centre leased to 70% of the total area.
[7] Gulf Harbour invited Mr Hook to take the lease of the lodge. It had had difficulty attracting an operator but recognised the importance for the overall development of having the premises occupied. Although Messrs Hook and Sellick realised they were getting outside their field of expertise, they were persuaded to enter into the lease by the offer of favourable terms and the likely synergies with their restaurant and bar businesses. They formed another company to take the lease and operate the Lodge, Gulf Harbour Lodge Limited (“Gulf Harbour Lodge”).
[8] On 11 February 1997 the lease for the lodge was entered into. It was for a term of ten years with a right of renewal for a further ten years. There was no minimum rent for the first two years; rental was set at 35% of turnover. The fit-out of the premises was effectively funded by Gulf Harbour with the lessee having the right to purchase the fittings at book value after three years of operation. There were no personal guarantees by the shareholders of Gulf Harbour Lodge.
[9] The cost of fitting out the lodge exceeded estimates by $300,000. Gulf Harbour proposed to the defendants that they notionally assist with funding by purchasing an apartment in the Gulf Harbour residential development. They accepted the proposition as the apartment would provide necessary staff accommodation. The apartment was purchased by Gulf Harbour Lodge for $425,000. The price included membership of the Gulf Harbour Country Club valued at $25,000. The purchase was funded by a loan from the ASB of $300,000 secured by a first mortgage over the apartment. Gulf Harbour Development agreed to leave the balance of $125,000 on second mortgage, interest-free for twelve months. Messrs Hook and Sellick were personal convenantors of the mortgage.
[10] According to Mr Hook, it was envisaged that the apartment would be sold within twelve months in order to clear the second mortgage. Unfortunately, the apartments in the development did not attract the expected price levels on the open market. The defendants were unable to sell the apartment within the planned twelve-month period. However, Gulf Harbour agreed to extend the mortgage for an indeterminate period on an interest-free basis.
[11] In addition to these investments, with which the proceedings are directly concerned, Mr Hook also purchased residential land at Gulf Harbour on which he built a house and took up residence. With another partner, Mr Higgins, he purchased an undeveloped commercial site at the town centre which had the necessary consents for the construction of a petrol station. He also joined with other parties to establish a commercial charter boat business from the Gulf Harbour marina.
[12] The Judder Bar and Nautilus businesses commenced trading in December 1996 and the lodge early in 1997. Gulf Harbour Lodge never traded profitably. Occupancy rates and conference business did not reach expected levels. The Nautilus restaurant and Judder Bar businesses achieved positive cash flows but struggled to produce trading surpluses and required a greater injection of shareholders funds than expected. Their cash surpluses were used to fund the operations of Gulf Harbour Lodge.
[13] Disputes arose between the parties in late 1997 and continued into 1998. One of the issues was whether the 70% leasing level of the ground floor retail area of the town centre had been achieved. That would make Judder Bar and Nautilus liable to pay full rent. By 31 March 1998 Gulf Harbour was claiming that the Hook and Sellick companies owed some $280,000 including the $125,000 debt on the apartment. Mr Hook’s problems were exacerbated by the illness of Mr Sellick and his unwillingness to match Mr Hook’s cash injections into the company.
[14] The trading difficulties of the lodge, disputes associated with all three leases and accumulating indebtedness led to a comprehensive settlement being reached in August 1998 which was recorded in a deed of settlement dated 21 August 1998 (“the August deed”). I will refer to the terms in more detail later in this judgment. The key element was Gulf Harbour Lodge’s agreement to surrender the lease of the Lodge on 31 March 1999 and transfer the assets to Gulf Harbour, in consideration of which Gulf Harbour would pay Gulf Harbour Lodge $400,000 in cash, write off debts of $83,000 and, provided there were no breaches of the deed or of the leases, on 31 March Gulf Harbour would write-off the $125,000 debt owed on the apartment purchase.
[15] On 11 October 1998, Mr Hook wrote to Gulf Harbour requesting that the settlement date provided for in the August deed be brought forward to 1 January 1999. He suggested this would have commercial advantages for both parties. He also referred to the difficulties he was having in keeping the terms of the settlement confidential and the consequent adverse effect on operating efficiency. Soon afterwards, differences arose between the parties as to the payment of rent and operating expenses. These affected all three leases. On 9 November 1998, Mr Hook paid the rent for the lodge for October but advised that the forward booking schedule indicated that Gulf Harbour Lodge would not be able to pay rent for December 1998 and January 1999. Mr Hook again raised the suggestion of bringing forward the handover date to 1 January 1999.
[16] Mr Hook says that in response to this letter he was telephoned by a senior executive of Gulf Harbour, who suggested that the date for handover be brought forward to 1 December 1998. Mr Hook says that no other aspect of the August deed of settlement was discussed. He agreed with the suggestion and the parties proceeded immediately to make arrangements to hand over the lodge on 1 December. There is doubt as to who this conversation was with and precisely what was said. It is clear, however, that agreement was reached to bring the date for handover forward. A letter from Gulf Harbour to Mr Hook, dated 17 November 1998, records agreement on much of the detail required to effect a handover of the Lodge on 1 December 1998.
[17] The changeover duly took place on 1 December 1998. It was accompanied by a detailed accounting between the parties to adjust for such matters as advance accommodation deposits made to Gulf Harbour Lodge, arrears of rent, liabilities taken over as part of the handover and chattels which were subject to hire purchase. It resulted in a net indebtedness by Gulf Harbour Lodge of $120,000. This debt, referred to as the handover debt, was agreed to be payable to Gulf Harbour by 31 March 1999.
[18] As part of the handover arrangements, it was agreed that Nautilus and Judder Bar would continue to provide food and beverage services to the lodge. It was agreed that payment for these services would be made within seven days of supply. Gulf Harbour failed to make regular payments. Indebtedness increased. In late January a payment of $43,003.67 was made but indebtedness increased again, reaching $52,230.96 in late February. Gulf Harbour purported to set-off this debt against the handover debt of $120,000. The defendant claims that set-off to have been unlawful in that the two debts did not have common parties. The handover debt was owed by Gulf Harbour Lodge to Gulf Harbour Town Centre. The debt for food and beverage supplies was due to Nautilus and Judder Bar by Gulf Harbour Hotel Holdings which was the company in the Gulf Harbour group which assumed responsibility for running Gulf Harbour Lodge from 1 December 1998. This allegedly wrongful set-off is one of the grounds on which Mr Hook resists liability for his guarantee of the leases.
[19] Following the handover on 1 December Mr Hook claimed that in terms of the August settlement, the debt owed by Gulf Harbour Lodge of $125,000 should be discharged and a release of the second mortgage handed over. Gulf Harbour declined to do this. The parties had discussions. A settlement of remaining differences seemed possible by introducing further property transactions. Gulf Harbour was interested in purchasing the petrol station site back. It did not wish to pay the full purchase price in cash, proposing instead the transfer of residential land at Gulf Harbour as consideration. On 22 January 1999 agreements were signed for the purchase by Gulf Harbour of the petrol station site and the sale of the residential land.
[20] The petrol station site was owned by a company in which Mr Hook and a Mr Higgins were partners. The agreements had been signed on behalf of the company by Mr Hook. On 29 January 1999 Gulf Harbour was advised by the solicitors for Mr Higgins that the company did not regard itself as bound by any agreement until both directors had signed it. Attempts to keep the two property deals alive were unsuccessful and in February Gulf Harbour advised that it no longer regarded itself as bound by the agreements.
[21] At about the same time as the property agreements were being entered into, a further deed of settlement was prepared which sought to dispose of the other matters in dispute between the parties. It confirmed that the lease of the lodge had terminated on 1 December 1998, recorded arrangements for the payment of the handover debt of $120,000 and of debts for food and beverage due to Nautilus and Judder Bar and provided that Gulf Harbour Town Centre would purchase the apartment for $400,000 and deliver a discharge of the second mortgage. The deed of settlement was submitted by Gulf Harbour on 28 January. The covering letter concluded with the following:
“Please note that the offer contained in this settlement deed expires at 2.00 p.m. on Friday, 29 January 1999.”
[22] Messrs Hook and Sellick and their companies signed the deed and returned it within the time stipulated. However, Gulf Harbour decided against executing it because, after submitting the offer, they received advice that Mr Higgins did not regard himself as bound by the agreement to sell the petrol station site. Although the land transactions were not incorporated in the settlement agreement, Gulf Harbour regarded the two transactions as commercially interdependent and therefore was not prepared to execute the deed.
[23] A state of crisis persisted through February and into April. Trading conditions were difficult. Nautilus and Judder Bar were having difficulty meeting their commitments, exacerbated by Gulf Harbour continuing to assert the set-off. With the cooperation of Gulf Harbour, Mr Hook attempted to sell the Nautilus and Judder Bar businesses. These attempts were unsuccessful and in April 1999 Mr Hook decided that the only commercially responsible course open to him was to place the three companies - Gulf Harbour Lodge, Judder Bar and Nautilus - into liquidation. In his view, the refusal of Gulf Harbour to release the $52,000 owed to Judder Bar and Nautilus had caused a cash flow crisis for those companies which required the injection of further working capital if they were to continue trading. Mr Hook was not prepared to invest further capital given the deterioration in his business relationship with Gulf Harbour. He said that Gulf Harbour personnel had made it clear that they wanted to get rid of him. He was also concerned about continuing to trade whilst the companies were insolvent. The three companies were placed in liquidation on 28 April 1999.
[24] In May 1999 the liquidator received a cash offer of $310,000 for the apartment owned by Gulf Harbour Lodge. It was conditional on the release of Gulf Harbour’s second mortgage. Gulf Harbour were not prepared to release the second mortgage unless the covenantors signed an acknowledgement of their liability as covenantors. The covenantors were not prepared to meet that condition and the sale fell through. Subsequently, the apartment sold following mortgagee sale proceedings by ASB Bank Limited, the first mortgagee. That resulted in a shortfall for the ASB of $80,000. Gulf Harbour Lodge had insufficient funds to meet either the loan of $125,000 or the handover debt of $120,000. Gulf Harbour Development seeks to recover the second mortgage debt of $125,000 from Messrs Hook and Sellick under their personal covenants.
[25] Initially it was the liquidator’s intention to continue trading Nautilus and Judder Bar and sell the business as going concerns. He disclaimed the leases. On 17 May 1999 he entered into an agreement with Lewis Driver for the sale of both businesses conditional on agreement being reached between the purchaser and Gulf Harbour on lease terms. A lease agreement was entered into providing for annual rent for both premises of $50,000 including operating expenses.
[26] In February 2000 Barry McNamara bought the Nautilus and Judder Bar businesses from Mr Driver. The annual rental agreed was $50,000 for the period 1 April 2000 at 31 December 2000, increasing to $75,000 for the period 1 January 2001 to 31 March 2002.
[27] Gulf Harbour Town Centre’s losses, as a result of the disclaimer of the leases, totalled $224,624.69. This comprises rent for the balance on the terms of the leases to December 2002, less actual and anticipated receipts under the Driver and McNamara leases, plus interest. Gulf Harbour Town Centre seeks to recover this sum from Messrs Hook and Sellick pursuant to their personal guarantees.
4 Mortgage claim
[28] Mr Hook pleads four affirmative defences to the claim against him under the personal covenant in the mortgage:
[a] The plaintiff (Gulf Harbour Development) is not entitled to recover, having assigned the debt to Gulf Harbour Town Centre.
[b] The debt was extinguished by the August settlement as amended by the agreement to bring forward the date of handover to 1 December 1998. Alternatively, the plaintiff waived the breaches or is estopped from relying on the breaches which would have entitled it to recover the debt.
[c] Breach by the plaintiff of the Fair Trading Act 1986.
[d] There was a binding settlement reached in January 1999 which extinguished the debt.
[a] First affirmative defence - assignment
[29] This defence is based on a contention that the claim has been brought by the wrong Gulf Harbour company. It is accepted that the plaintiff, Gulf Harbour Development, was the mortgagee but it is asserted that Gulf Harbour Development assigned its rights under the mortgage to Gulf Harbour Town Centre and that Gulf Harbour Town Centre should have been the plaintiff. This argument derives from the settlement of August 1998 and the claimed settlement of January 1999. Both deeds were drafted on the basis that Gulf Harbour Town Centre was the mortgagee. Clause 3.1(c) of the August deed records that Gulf Harbour Town Centre will:
“Write off debts in the sum of $125,000 (plus GST, if any) owing by GHLL to GHTCL in relation to GHLL’s purchase of apartment A, 1.2, Aquagate Development, Gulf Harbour Marine Village (“Apartment”).”
And by cl 3.3(b) of the deed Gulf Harbour Town Centre assumed the obligation to deliver an executed discharge of “Gulf Harbour Town Centre’s second mortgage”. The January deed of settlement similarly provided that Gulf Harbour Town Centre would deliver to Lodge an executed discharge of Gulf Harbour Town Centre’s second mortgage.
[30] The defendants invite me to infer from this that the mortgage and debt were assigned to Gulf Harbour Town Centre and the plaintiff has no standing to bring the claim.
[31] I accept that these circumstances could suggest that Gulf Harbour Development had ceased to own the land. But it is neither the only, nor the most likely, explanation for what happened and, in the absence of other evidence, I see no reason to draw that inference. A more likely explanation for what happened is that those responsible for the drafting and checking of the deeds on behalf of Gulf Harbour interests simply overlooked that Gulf Harbour Development should have been a party. Mr Goh was unable to state categorically whether or not an assignment had taken place but pointed out that, as both Gulf Harbour Development and Gulf Harbour Town Centre are wholly owned subsidiaries of the holding company, an assignment either way would have been a mere formality.
[32] There are indications in correspondence preceding the August deed that the omission of Gulf Harbour Development and the assumption that Gulf Harbour Town Centre would perform the relevant obligations was due to an oversight. This supports what I regard as the proper inference to draw: that Gulf Harbour Development is the right party to the proceeding while Gulf Harbour Town Centre was the wrong party to the deeds. It is convenient to mention at this point, however, that for the purpose of the remaining grounds of defence, neither party sought to make anything of Gulf Harbour Development not being a party to the deeds.
[b] Second affirmative defence - waiver/estoppel
[33] The second ground of defence is that as a result of its agreement to bring forward the surrender date of the lodge lease to 1 December 1998 and to effect a handover at that time, Gulf Harbour lost its right under the August deed to decline to write off the $125,000 debt and discharge the mortgage if Gulf Harbour Lodge was in breach of any of its obligations under the deed or the lease. This was pleaded and argued on the basis of waiver or estoppel.
[34] It is necessary at this point to set out in full the relevant clauses of the August deed. After providing in cl 1 for the agreement of the parties to the surrender of the lease on 31 March 1999, cl 3 provided as follows:
“3 Payments and Settlement
3.1 In consideration of GHLL entering into this deed (and, in particular, GHLL’s agreement to surrender the existing term of the Agreement and Lease on 31 March 1999 in accordance with clause 1.1, and to transfer to GHTCL ownership of all assets and goodwill relating to the business of ‘Gulf Harbour Lodge’ in accordance with clauses 3.3(c) and (d)), GHTCL will, in accordance with the provisions of this deed:
(a) pay GHLL in cash the sum of $400,000 (plus GST, if any);
(b) write off debts in the sum of $83,000 owing by GHLL to GHTCL, such debts being set out in schedule 1 to this deed;
(c) write off debts in the sum of $125,000 (plus GST, if any) owing by GHLL to GHTCL in relation to GHLL’s purchase of apartment A1.2, Aquagate Development, Gulf Harbour Marine Village (“Apartment”).
3.2 GHTCL will perform its obligations under clauses 3.1(a) and (b) on the date that GHTCL receives from GHLL all of the following:
(a) Executed and binding copies of this deed.
(b) Executed and binding copies of the Deed of Surrender.
(c) Executed and binding transfer of GHLL’s corporate membership in Gulf Harbour Country Club, assiging GHLL’s interest in that membership to GHTCL, together with the relevant membership certificate held by GHLL.
3.3 On 31 March 1999, if GHLL is not in breach of any of the terms and conditions contained in this deed or the Agreement and Lease (as amended by the Deed of Surrender):
(a) GHTCL will perform its obligations under clause 3.1(c).
(b) GHTCL will deliver to GHLL an executed discharge of GHTCL’s second mortgage over the relevant certificate of title relating to the Apartment.
(c) GHTCL may, if it so elects, purchase the name ‘Gulf Harbour Lodge’ and the goodwill of GHLL for the sum of $1, to the intent that GHTCL will have sole and exclusive use of the name ‘Gulf Harbour Lodge’, in which case GHLL will henceforth refrain from using the name ‘Gulf Harbour’ in all its future dealings.
(d) GHTCL will take transfer and ownership of all assets relating to the business of ‘Gulf Harbour Lodge’ other than stock, consumables, items set out in the asset list and other assets used by GHLL but owned by GHTCL (as set out in the asset list attached as schedule 2 to this deed).
(e) GHTCL shall purchase at cost the stock held by GHLL which is used in operating the business of ‘Gulf Harbour Lodge’ provided that the total value of the stock shall not exceed $15,000.
3.4 If, at any time on or prior to 31 March 1999, GHLL is in breach of any of the terms and conditions contained in this deed or the Agreement and Lease (as amended by the Deed of Surrender), and such default remains unremedied for a period of 14 days from the date that such default occurred:
(a) GHTCL shall be entitled to terminate the Agreement and Lease by giving written notice to GHLL, in which case the Agreement and Lease shall expire on the date of such notice (‘Early Termination Date’) without compensation being payable to GHLL.
(b) GHTCL shall remain entitled to exercise all its rights under clauses 3.3(c) and (d).”
[35] It is to be noted that by subclause 3.2, the obligations in cl 3.3(a) and (b) would be performed once the formalities of execution had been completed, whereas the write off of the $125,000 debt provided in cl 3.1(c) would, pursuant to cl 3.3(a), not occur until 31 March 1999 and then only if Lodge is not in breach of the deed or the lease. The further obligations of Gulf Harbour Town Centre set out in subparagraph (b)-(e) of cl 3.3 are also subject to Gulf Harbour Lodge not being in breach at 31 March 1999. In addition, cl 3.4 provided the means by which Gulf Harbour Town Centre could terminate both the deed and the lease before 31 March 1999 for breaches by Gulf Harbour Lodge.
[36] In the circumstances earlier recited, Gulf Harbour and Mr Hook agreed that the surrender of the lease should be brought forward to 1 December 1998. Gulf Harbour felt that it had little option but to agree to the proposal. Gulf Harbour Lodge was in arrears of rent for July and August and, according to Gulf Harbour, November, and had informed Gulf Harbour of continuing financial problems.
[37] Mr Long submitted that Gulf Harbour Lodge also breached the August deed by surrendering the deed of lease early, failing to account for advance bookings on handover and failing to ensure that assets which passed on handover were unencumbered. I have considerable reservations about these additional claimed breaches of the deed, but it is sufficient for present purposes that, as at 1 December 1998, in one respect at least, Gulf Harbour Lodge was in breach for the purpose of cl 3.3.
[38] For Mr Hook it was submitted that the agreement to bring forward surrender of the lease, together with the making of the necessary arrangements for the handover of the lodge, including the purchase of stock, amounted to a promise or representation that Gulf Harbour Town Centre would waive any breach of the deed or of the lease. Any breaches having been waived, Gulf Harbour Town Centre would be obliged to perform its obligations in cl 3.3 of the deed including the discharge of the mortgage.
[39] The promise or representation is said to be inferred in particular from the agreement of Gulf Harbour Town Centre to acquire the assets and purchase the stock of Gulf Harbour Lodge. That was said to be consistent only with a waiver of any breaches by Gulf Harbour Lodge and to amount to a representation by Gulf Harbour Town Centre that it would perform all of its obligations under cl 3.3. Mr Ferguson submitted that Mr Hook acted in reliance on the representation by handing over the business early, selling stock at cost and not undertaking the financial restructuring which would have permitted the businesses to continue trading until 31 March. By the time Mr Hook realised that Gulf Harbour did not intend to perform its obligations under cl 3.3(a) and (b), it was too late to do anything to retrieve the position.
[40] The defence contended that it mattered little whether the defence was characterised as promissory estoppel or waiver. The elements are the same - a promise or representation and the alteration by the promisee of his position in reliance on the promise: Connor v Pukerau Store Limited [1981] 1 NZLR 384 and see the discussion in Burrows Finn & Todd, Law of Contract in New Zealand (1997) para 4.7.1. I was referred also to a passage from the judgment of Denning LJ in Charles Rickards Limited v Oppenheim [1950] 1 KB 616 at 623 which underlines the absence of any practical distinction between waiver and estoppel for present purposes:
“If the defendant, as he did, led the plaintiffs to believe that he would not insist on the stipulation as to time, and that, if they carried out the work, he would accept it, and they did it, he could not afterwards set up the stipulation as to the time against them. Whether it be called waiver or forbearance on his part, or an agreed variation or substitute of performance, does not matter. It is a kind of estoppel. By his conduct he evinced an intention to affect their legal relations. He made, in effect, a promise not to insist on his strict legal rights. That promise was intended to be acted on, and was in fact acted on. He cannot afterwards go back on it.”
[41] In my view, the defendants have made out this limb of their defence. I consider that the agreement to bring forward the date of surrender of the lease constituted a variation of the August deed and also of the Deed of Surrender of Lease by, in each case, substituting 1 December 1998 for the date 31 March 1999. Although driven by Gulf Harbour Lodge’s financial problems, the change was for the benefit of both parties and does not fail for want of consideration or constitute a waiver by Gulf Harbour rather than an agreed variation. The parties simply agreed in November to perform on 1 December 1998 those obligations which they had by the deeds agreed to perform on 31 March 1999.
[42] It was not, however, the agreement to bring forward the surrender date which constituted the representation that any breaches would be waived. That arose out of the arrangements which Gulf Harbour and Mr Hook made to facilitate the changeover. Gulf Harbour agreed with Mr Hook on arrangements which objectively one would not expect it to make if it was intending to rely on the breaches. In particular, it agreed to purchase Gulf Harbour Lodge’s assets, something it was obliged to do under cl 3.3 of the August deed only if Gulf Harbour Lodge had not been in breach.
[43] Clause 3.4 of the deed provided a mechanism for early termination should Gulf Harbour Lodge Limited be in breach. Gulf Harbour Town Centre could have invoked that procedure. Had it done so, by cl 3.4(b) it would have remained entitled to exercise its rights under cl 3.3(c) and (d) although, significantly, not under subclause (e). It would not have had the right to purchase stock at cost if it had invoked the cl 3.4 procedure. It may be presumed that Gulf Harbour considered the possibility of exercising its rights under cl 3.4 but saw that an agreement to bring forward the handover date would have the advantage of facilitating a smooth and cooperative transition. Regardless, the implementation by Gulf Harbour of subclauses (c)-(e) of cl 3.3 amounted to a clear representation that it would not rely on breaches by Gulf Harbour Lodge to avoid performing its obligations under subclauses (a) and (b).
[44] In other respects the terms on which Gulf Harbour proposed to implement the early changeover would have encouraged Mr Hook to believe that it was Gulf Harbour’s intention to honour the provisions of cls 3.1(c) and 3.3(a) and (b). Paragraphs 11 and 12 of its letter of 17 November 1998, which set out proposed arrangements for the handover, stated:
“11. GH will not be paying further charges in respect to forward bookings. It is considered that the price paid to purchase back the lease reflects the future income potential, including forward bookings that are currently on record.
12. As with point 11, GH considers that the client database built up for conferences and meetings is part of the business and therefore has been purchased by GH. Accordingly, this should pass over to GH on take over for no further consideration.”
[45] In my view, these passages convey clearly that Gulf Harbour intended to write off the $125,000 debt. The reference in paragraph 11 to the “price paid” and in paragraph 12 to “consideration” can only be understood as referring to the consideration set out in cl 3.1 of the deed of which only cl 3.1(c) remained unperformed.
[46] Mr Long submitted that there were other breaches of the deed of settlement which could not be the subject of waiver or estoppel. He referred in particular to Gulf Harbour Lodge’s failure to account for advance booking deposits on or after the handover of the Lodge in breach of cl 4.2 of the deed and its failure to pay $55,000 in hire purchase payments in respect of equipment which was to pass to Gulf Harbour unencumbered on handover in breach of cls 3.3(d) and 4.3(c).
[47] In my view, there was no breach of the deed in relation to the advance deposits. There was no obligation to account for that sum by 1 December and after that date it became part of the handover debt due to Gulf Harbour. The evidence does not establish that the assets the subject of hire purchase agreements were encumbered after the August deed was entered into. But, even if they were, I consider the terms of the representations made by Gulf Harbour were apt to cover that breach as well.
[48] I am satisfied that Mr Hook acted in reliance on the representation of Gulf Harbour. He agreed to the handover and the associated arrangements believing that Gulf Harbour Town Centre would honour its remaining obligations under the August deed, notwithstanding the breach. It may be that his options were limited but there was at least a reasonable possibility of his finding another and more advantageous exit from his difficulties. I conclude that Gulf Harbour are unable to rely on the breaches by Gulf Harbour Lodge of the August deed to avoid the obligation to discharge the $125,000 debt.
[c] Third affirmative defence - Fair Trading Act
[49] The third ground of defence is that Gulf Harbour was in breach of s 9 of the Fair Trading Act 1986 in failing to disclose that it did not intend to release the mortgage. Mr Ferguson relied on evidence given by Mr Goh in cross-examination that, from Gulf Harbour’s point of view, the agreement to bring forward the surrender date “was intended to be without prejudice and without compromising our right to the second mortgage claim”.
[50] My findings in relation to the waiver/estoppel defence dispose of that contention. I am of the view that at least by 17 November when Gulf Harbour wrote to Mr Hook setting out proposed arrangements for the handover, its intention was to write off the debt and discharge the mortgage. The likely explanation for its failure to do so was its realisation following the handover that adjustments and apportionments had given rise to a substantial debt due by Gulf Harbour Lodge which it was not in a position to pay immediately. I do not think there was any prior act which could be characterised as misleading or deceptive.
[51] Whether or not this is the case, I would not be prepared to apply the Fair Trading Act to the circumstances in this case. I respectfully endorse the comments of Elias J (as she then was) in Des Forges v Wright [1996] 2 NZLR 758 at 764 to which Mr Long referred me:
“Some caution is perhaps proper in cases of commercial dealings between parties at arms length. Section 9 is not to be turned into a general warranty by the vendor of the expectations of the purchaser . . . The question is not whether there has been ‘unfair practice’ but whether in all the circumstances, which will include the dealings between the parties and the responsibility assumed by the person whose conduct is complained of . . . the type of conduct in question (whether an omission or a positive representation) is misleading or deceptive”
[52] In my view, the conduct of Gulf Harbour in relation to the surrender of the lease was not misleading nor deceptive. The parties had become embroiled in another of the negotiations which had become a recurring feature of their relationship. They were looking to bring one aspect of their business relationship to an end whilst seeking to preserve others. The principal players were experienced men of business who could be assumed to know where both their legal rights and commercial advantage lay. To introduce s 9 into such a relationship would be, as Thomas J said in Fletcher Construction (NZ) and South Pacific Limited v Cable Street Properties Limited (CA.271/98, 9 September 1998), to permit the Court “to act as a nursemaid to those engaged in commerce”.
[d] Fourth affirmative defence - January 1999 deed
[53] For the defence it was submitted that the further settlement deed signed by the defendants in January 1999 was a binding agreement, the terms of which extinguished the debt and obliged Gulf Harbour to discharge the mortgage. It is not in dispute that if the deed is binding on the parties it will be effective for that purpose. The sole issue I have to consider is whether the parties became bound.
[54] The deed of settlement was sent by Peggy Lim, group legal counsel of Gulf Harbour Management Limited to Gulf Harbour Lodge under cover of a letter of 28 January 1999. The letter concluded:
“Please note that the offer contained in this settlement deed expires at 2 p.m. on Friday 29 January 1999.”
The proposed settlement had been the subject of negotiations. The letter referred to recent meetings and a telephone discussion that afternoon concerning a draft of the settlement deed which had been given to Mr Hook on 26 January. The letter made it clear that Gulf Harbour was not prepared to negotiate further on outstanding issues. A fresh copy of the settlement deed complete with schedules was enclosed. The letter concluded with the statement already quoted.
[55] The deed was signed and returned within the time stipulated. It is not in question that the steps taken by Mr Hook and his companies constituted acceptance. The issue is whether or not there was an offer capable of acceptance in the first place.
[56] Mr Long, for Gulf Harbour, referred me to a passage from Chitty on Contracts (28th ed, 1999) at para 2-002 which defines an offer as:
“The offer is an expression of willingness to contract made with the intention (actual or apparent) that it is to become binding on the person making it as soon as it is accepted by the person to whom it is addressed.”
He submitted that for two reasons it was not Gulf Harbour’s intention to be bound by the deed on signature and return by the recipients. First, the agreement was in the form of a settlement deed which was to be signed on behalf of Gulf Harbour Town Centre by two directors. The letter was not signed by two or even one director but by Gulf Harbour’s legal counsel who, it was submitted, did not in the circumstances have authority to make an offer on behalf of the company. Secondly, there was reliance on cl 2.2 of the deed which provides:
“The parties will perform their respective obligations under cls 2.1(b) and (c) on the date that they receive from each other all of the following:
[a] Executed and binding copies of this deed.
[b] Executed and binding transfer of GHLL’s title in the Apartment comprised in certificate of title: 107A/947.”
It was submitted that this provision constituted “a clear and objective expression of intention” that the deed was not to be effective until signed by both parties.
[57] Mr Long relied on Carruthers v Whitaker [1975] 2 NZLR 667 (CA) and Concorde Enterprises Limited v Anthony Motors (Hutt) Limited [1981] 2 NZLR 385 (CA) as establishing that in circumstances such as the present, parties do not intend to be bound until execution of the formal document. In those cases, the Court of Appeal held that, as a general rule, where parties have negotiated by reference to a formal document which it was intended each would sign, the usual inference is that a binding contract will not come into existence until each has signed the formal document. In Concorde Enterprises Cooke J said, after referring to Carruthers v Whitaker:
“This case is in the different field of commercial contracts, where there is not by law the same need for signed writing as evidence, but in our opinion the natural inference is the same in the absence of factors to the contrary.
Unless that inference is displaced the result is that, even although all the terms to be included in the document have been agreed, there is no contract and each party has a locus poenitentiae until at least execution on both sides. It may be that exchange or delivery of executed documents is also necessary, but that need not now be decided.” (at 389.)
[58] In my view, the inference is displaced in this case. The considerations which persuade me that it is and which are distinguishing features of this case are fourfold.
[a] First, the offer comprised the formal document itself. It was expressly referred to in the letter as an “offer”. This is not a case where the parties contemplated the preparation of a further document once they had reached agreement. If agreement was to be reached, it was on the basis of the document enclosed with the letter which was in all respects ready for execution.
[b] Secondly, the deadline imposed by Gulf Harbour for acceptance of the offer tells against the inference that the creation of a binding contract could take place at any time after that. An offer on “take it or leave it” terms is a frequently used commercial device intended to put pressure on the offeree. It would be contrary to normal commercial practice and expectations for the offeror in such circumstances to be able to treat a signed acceptance as in effect an offer which it was at liberty to accept or reject as and when it chose.
[c] Thirdly, the document was presented for acceptance without conditions as to execution by Gulf Harbour. The company had prepared the deed and was presenting it as its final position. Having regard to the course of dealings between the parties, I consider that the Hook interests would be entitled to regard execution by the Gulf Harbour directors as a mere formality. And, although Gulf Harbour’s legal counsel did not have authority to sign the deed, she clearly had at least apparent authority to make an offer on behalf of the company.
[d] Fourthly, and contrary to Mr Long’s argument, the provisions of cl 2.2 of the Deed are consistent with this analysis. That clause provides that performance of their obligations by the parties (the payment of sums due, the settlement of the apartment sale and delivery of the discharge of mortgage) shall not take place until executed documents are exchanged. It does not say that the parties will not be bound until executed documents are exchanged. The contract is therefore in the second of the three classes identified by the High Court of Australia in Masters v Cameron (1954) 91 CLR 353 at 360 (quoted in the first instance judgment of Whitaker v Carruthers [1975] 1 NZLR 372 at 377) as one in which:
“. . . the parties have completely agreed upon all terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document.”
[59] Mr Long submitted that I could have regard to the subsequent conduct of the parties as indicating that neither considered a settlement agreement to have been concluded. I was not referred to any authority to support this proposition, although Burrows Finn & Todd (supra) at 6.2.1(c) notes that in Busst v Bouma (High Court, Hamilton, CP 6/93, 20 June 1996) Hammond J said that subsequent conduct could be examined to establish whether or not a contract existed. I would not exclude the possibility of reference to the subsequent conduct of the parties to determine whether a contract has come into existence. But I think exceptional circumstances would be required. And even if the parties’ views of the legal consequences of their actions could be relevant (which I doubt), they could never be determinative.
[60] In this case I see no reason why the later attitude of the parties should have any bearing on the issue of whether or not a contract came into existence. Their opinion on a legal issue can carry no weight. And in each case, it was conditioned by purely commercial considerations. Gulf Harbour had good reason for wanting to treat the settlement as at an end when Mr Hook could not secure Mr Higgins’ agreement to the sale of the petrol station land. Mr Hook did not demur but that could hardly be seen as a considered view having regard to the pressure he was under.
[e] Conclusion
[61] In my opinion, the conduct of Gulf Harbour in November 1998 gave rise to a waiver or estoppel which prevents it from relying on breaches by the Hook interests to avoid its obligation to write off the debt and deliver a discharge of the mortgage. Regardless of that, however, I am also of the view that the deed executed by Hook interests in January 1999 created a binding contract which obliged Gulf Harbour to forgive the debt and deliver a discharge of the mortgage.
5 Lease claim
[62] Gulf Harbour Town Centre seeks to recover from the defendants, as guarantors of the leases of Nautilus and Judder Bar, its losses arising out of the default of those companies and the disclaimer of the leases by the liquidator. The losses comprise the difference between the rental payable under the leases and the rent received following the re-letting of the premises.
[63] Two affirmative defences are raised:
[a] Gulf Harbour Town Centre caused the liquidation of Nautilus and Judder Bar through the wrongful set-off of debts owed to Judder Bar and Nautilus.
[b] Gulf Harbour Town Centre failed to mitigate its losses.
[a] First defence: wrongful set off
[64] As earlier mentioned, adjustments associated with the early termination of the lease produced a debt of $120,000 payable by Gulf Harbour Lodge to Gulf Harbour Town Centre. The parties called this the handover debt. Gulf Harbour Town Centre purported to set-off this debt against a debt of $52,000 which became payable by another Gulf Harbour company, Gulf Harbour Hotel Holdings to Nautilus and Judder Bar for food and beverage supplied after Gulf Harbour took over management of the Lodge. Diagrammatically the set-off was explained in the following way by counsel for Mr Hook:
[65] The handover debt was initially agreed not to be payable until 31 March 1999. The January 1999 deed of settlement provided that it would be paid on receipt of executed copies of the deed and the transfer of the apartments. As these documents were never handed over, the January settlement did not affect the due date for payment.
[66] In Grant v NZMC Limited [1989] 1 NZLR 8, 12-13 the Court of Appeal stated the principle on which cross-claims may be set-off in the following terms:
“The principle is, we think, clear. The defendant may set-off a cross-claim which so affects the plaintiff’s claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant’s claim calls into question or impeaches the plaintiff’s demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract.”
[67] The formulation in Grant derived from what Somers J in that case described as the “locus classicus about equitable set-off”, Rawson v Samuel (1841) Cr & Ph 161. I was asked to consider whether the test derived from Rawson may have been widened somewhat by Bank of Boston Connecticut v European Grain and Shipping Limited [1989] 1 AC 1056 where the House of Lords stated that an equitable set-off may occur if there is a cross-claim “flowing out of and inseparably connected with the dealings and transactions which also give rise to the claim”. It is unnecessary for me to consider that issue, interesting though it is. It is sufficient to refer to the extended discussion of the topic in Derham, Set Off (2nd ed) 1996 para 1.7.2.
[68] I am satisfied that the requisite degree of interdependence between the claims did not exist in this case. The debtors and creditors were all separate entities. It is true that the beneficial ownership of Gulf Harbour Hotel Holdings and Gulf Harbour Town Centre on the one hand and Nautilus, Judder Bar and Gulf Harbour Lodge on the other were the same. The companies in each group were also financially interlinked. It must also be acknowledged that in a broad sense the debts arose out of the agreement for early termination. But I do not regard these features as giving rise to the necessary degree of independence or closeness. The handover debt was in the nature of a one-off special purpose loan which was agreed not to be payable until three months after it arose. The debts due to Nautilus and Judder Bar arose in the course of continuing trade and in the context of an understanding that prompt payment would be made. There is no basis on which it could be said that the handover debt somehow called into question or impeached the debts for food and beverage. I accept the submission of Mr Cogswell that there was no expectation that the debts would be treated as related and no unconscionability in treating them separately.
[i] Effect of wrongful set-off
[69] For Mr Hook it was said that the wrongful set-off by Gulf Harbour Town Centre (through Gulf Harbour Hotel Holdings) prevented Nautilus and Judder Bar from discharging their obligations under their leases. This was said to give rise to an estoppel which prevented Gulf Harbour Town Centre recovering from Mr Hook or otherwise discharged him from liability under his guarantee.
[70] The judgment of Robert Goff LJ in Bank of India v Trans Continental Commodity Merchants Limited [1983] 2 Lloyds Rep 298 at 301-2 was adopted by counsel for both parties as a correct statement of the applicable law. He began by citing the following passage from the judgment at first instance:
“But as a matter of principle, I cannot accept Mr Murray’s submission that a surety is discharged if a creditor acts towards a principal debtor in a manner which is irregular and prejudicial to the interests of the surety. Leaving aside what may be the special case of fidelity guarantees, I consider the true principle to be that while a surety is discharged if a creditor acts in bad faith towards him or is guilty of concealment amounting to misrepresentation or causes or connives at the default by the principal debtor in respect of which the guarantee is given or varies the terms of the contract between him and the principal debtor in a way which could prejudice the interests of the surety, other conduct on the part of the creditor, not having these features, even if irregular, and even if prejudicial to the interests of a surety in a general sense, does not discharge the surety.”
His Lordship then went on to say:
“With that statement of principle I find myself in agreement, subject to the comment that I would perhaps have preferred to state it the other way round, that is to say that there is no general principle that ‘irregular’ conduct on the part of the creditor, even if prejudicial to the interests of the surety, discharges the surety, though there are particular circumstances in which the surety may be discharged, of which the instances specified by the learned Judge provides certainly the most significant, and possibly the only, examples. I say that simply because I do not wish to be thought to be shutting the door upon any further development of the law in this field by rigidly confining the circumstances in which a surety may be discharged to the specified instances, though I freely recognise that I am unaware at present of any others.”
These passages from the judgment were cited with approval in Westpac Securities v Dickie [1991] 1 NZLR 657 at 663-665.
[71] For Mr Hook it was submitted that Gulf Harbour actively connived to bring about the downfall of Nautilus and Judder Bar. This was said to be shown by Gulf Harbour’s continuing to withhold payments notwithstanding Mr Hook’s advice that his companies were being imperilled by this action. There was also reliance on comments by a former Gulf Harbour executive, Mr Hitchcock, who was reported to have said that he wanted to get rid of Mr Hook and to his having expressed indifference about the illegality of the set-off.
[72] In my view, the evidence overall does not establish bad faith or connivance on the part of Gulf Harbour. The decision to set-off the debts must be seen in context. Soon after Gulf Harbour first asserted a set-off, the parties embarked on settlement negotiations which produced the January deed of settlement. That was regarded by the parties as a live prospect until some time later when the proposed sale of the service station land was stymied by the refusal of Mr Higgins to sign the sale and purchase agreement. After that, on 17 February 1999, Gulf Harbour formally demanded payment of the handover debt. As a result of this, on 26 February, the parties met and, without prejudice to their respective rights and remedies, agreed:
[a] Gulf Harbour would not pursue recovery of the handover debt until 25 March 1999.
[b] The Hook interests would “diligently pursue the sale of the Nautilus and Judder Bar businesses”.
[c] Gulf Harbour would claim a set-off of the food and beverage debt which was at that point fixed at $52,230.96.
[d] Gulf Harbour would thereafter pay Nautilus and Judder Bar for food and beverage on a weekly basis until 25 March.
[e] The rent obligations of Nautilus and Judder Bar would be deferred until 25 March.
[73] On 31 March a further interim agreement was reached in which Gulf Harbour again agreed to defer recovery action and rental payments and to continue paying food and beverage accounts. This was also expressed to be for the purpose of allowing time for the sale of the Nautilus and Judder Bar businesses.
[74] Gulf Harbour’s continuing attempts to assist Mr Hook to address the financial difficulties of his companies are at odds with an intention to harm Nautilus and Judder Bar or to bring about their default under the leases. It is difficult to see why, in any event, it should seek to do so. The failure of the companies inevitably would be to Gulf Harbour’s detriment. It would result (as eventually occurred) in non-payment of the handover debt which was not covered by a personal guarantee. Gulf Harbour was also concerned about the wider ramifications of the failure of two key businesses in its centre. It would generate adverse publicity and affect business confidence at Gulf Harbour.
[75] Over the period January-March the parties were in more or less continuous dialogue. For some time the January settlement and the sale of the service station promised Mr Hook the cash and the time he needed to dispose of his businesses. After that fell through, the interim arrangements gave him more time, although it ultimately proved insufficient. His fellow shareholder was not prepared to inject further cash and, in the end, neither was he.
[76] I do not overlook the reported comment of Mr Hitchcock that he wanted to “get rid of Mr Hook” and his claimed indifference to the illegality of the set-off. This was strictly inadmissible hearsay evidence but, even assuming that the report was reliable, I see it more as an expression of the frustration felt by Gulf Harbour regarding Mr Hook’s recurring failure to deliver on his promises than as indicating an intention to bring the companies to their knees by fair means or foul. That, as I have said, is inconsistent with the way officers of Gulf Harbour conducted themselves overall and would have been antithetical to its interests.
[ii] Causation
[77] Even if it could be said, contrary to my interpretation of the evidence, that Gulf Harbour had acted for the purpose of bringing about the downfall of the Hook companies, I am not persuaded that the wrongful exercise of the set-off either caused or contributed to their failure, or, to use the words of the British Columbia Court of Appeal in Bank of Montreal v Wilder (1983) 149 DRL (3d) 193 at 228, that it was even “a material detrimental effect”. In my view, the companies would have gone into liquidation even if Gulf Harbour had paid the $52,000 debt.
[78] Both companies recorded significant trading losses from the beginning. Trading conditions deteriorated over the period. The turnover and gross profit of both companies for the year ended 31 March 1999 were down on the previous financial year. The figures for February/March 1999 were worse than those for the equivalent period in 1998. At 31 March 1999 the liabilities of the two companies exceeded assets by approximately $174,000, excluding depreciation for the year ended 31 March 1999. If depreciation is added, the figure totalled $250,000. Substituting the liquidator’s estimate of the value of assets for their book value, the combined deficit increases to $405,000.
[79] The companies could have been put into a solvent state only by shareholders capitalising their advances and injecting a further $10,000 into Judder Bar. In my view, the financial and prospects of both companies at 31 March 1999 made this a commercially unrealistic option. The decision to liquidate was inevitable and largely unaffected by the refusal to pay the handover debt. The Judder Bar component of the debt was only $7,000. I accept the evidence of Mr Hussey, an accountant called by the plaintiff, that it had little material effect on the company’s overall position. The Nautilus component of the debt was material to the financial position of the company but, in my view, was not critical to the decision to liquidate.
[80] The fax messages sent by Mr Hook to his accountant, Mr Welham, during the early months of 1999 confirmed that he was well aware of the nature and causes of the dilemma he faced. On 19 February he wrote:
“However, even if we do receive the cash from Gulf Harbour I am not sure that we satisfy the solvency test.”
A week or so later he wrote:
“I do not think there is anything we can do in the short-term to reverse the current sales trend, and without a significant rent concession I don’t see how we can survive.”
Shortly before placing the companies in liquidation, he wrote:
“While I take this action with much reluctance, I believe we have no alternative, without an immediate and substantial cash injection.
While the withholding of funds by Gulf Harbour is an important factor, perhaps of more significance is the weak trading results and the trend we have been experiencing over past 2/3 months.”
[81] Without the support of his fellow shareholder, Mr Hook was faced with the stark choice of liquidating and thereby capping his losses or injecting further funds and risking greater losses. He made the commercially pragmatic decision to end the uphill struggle.
[iii] Contractual exclusion
[82] On behalf of the plaintiff, Mr Long submitted that the terms of the guarantee of the lease, in any event, deprived the guarantors of the equitable protection which otherwise may have been available as a result of the wrongful set-off. The Fourth Schedule to the leases in each case included the following terms:
“1.1 . . .
(e) The liability of the Guarantor under this guarantee and indemnity shall not be affected by the granting of time or by any other indulgence to the Lessee, or by the compounding, compromise, release, abandonment, waiver, variation or extension of any of the rights of the Lessor against the Lessee, or by any neglect or omission to enforce such rights, or by any other thing which under the law relating to sureties would, or might, but for this provision, release the Guarantor in whole or in part from any obligation under this guarantee and indemnity.
(f) Notwithstanding that as between the Guarantor and the Lessee the Guarantor may be a surety only, nevertheless as between the Guarantor and the Lessor the Guarantor shall be deemed to be a principal debtor jointly and severally with the Lessee.
(g) To the fullest extent permitted by law, the Guarantor waives such of the rights of the Guarantor as surety or indemnifier (legal, equitable, statutory or otherwise) which may at any time be inconsistent with any of the provisions of this guarantee and indemnity.
. . .”
[83] In a line of cases beginning with Bank of New Zealand v Baker [1926] NZLR 462 (CA), the Court of Appeal has held that where a guarantee provides that the relationship as between guarantor and creditor is to be deemed that of creditor and principal debtor and that the creditor may grant time or other indulgence without affecting the security, the effect is to deprive the guarantor of the equitable protection normally available: Gilmer and Gilmer v Ross [1932] NZLR 507 (CA), Orme v De Boyette [1981] 1 NZLR 576 (CA), Coffey v DFC Financial Services Limited (1991) 5 NZCLC 67,403 (CA). In each case the question is one of construction to determine whether the right of the surety to treat the guarantee as discharged has been effectively excluded: Pogoni v R and WH Symington & Co (NZ) Limited [1991] 1 NZLR 82, 85.
[84] The terms of the guarantees are clear and unambiguous. In my view, they establish between Gulf Harbour and the guarantors a relationship of lessor and principal obligator and are effective to exclude any right Mr Hook might otherwise have had to treat the guarantee as discharged.
[85] For Mr Hook it was submitted that the terms of the guarantee should not be construed so as to permit the creditor to contract out of liability for fraud - Burrows Finn and Todd, Law of Contract in New Zealand 1997 at para 6.5.1(d) citing Pearson and Son Limited v Dublin Corporation [1907] AC 351. I would not disagree with that general proposition but, even on the defendants’ interpretation of events, I do not think Gulf Harbour’s conduct could be characterised as fraudulent. After taking legal advice, it took what it believed to be legitimate measures to protect its interests. I have found no hint of deception or malice or any conduct which would deprive it of the protection conferred by the express terms of the contracts.
[iv] Conclusion
[86] Gulf Harbour had no right to set-off the handover debt against the food and beverage debts but in doing so it did not act in bad faith or connive at the default of Nautilus and Judder Bar. The set-off was not a material contributing cause of the failure of Nautilus and Judder Bar. In any event, the terms of the guarantees deprived Messrs Hook and Sellick of equitable protection.
[b] Second defence: mitigation
[87] It was submitted that Gulf Harbour failed to take reasonable steps to mitigate its losses. It was said that the terms on which the premises were leased to Mr Driver - $50,000 per annum for rental and operating expenses - were unreasonably low. It was approximately half of the rentals payable under the Hook/Sellick leases.
[88] The defence case in this respect rested primarily on the evidence of Mr Waldron, the Chief Executive Officer of the Restaurant Association of New Zealand. He gave evidence that occupancy costs in the restaurant and hospitality industry as a percentage of overall turnover were 6% on average. At 3.4% it was said that the occupancy costs under the Driver lease were substantially less than the average and suggested a failure on the part of Gulf Harbour to achieve a reasonable rental.
[89] I found the evidence of Mr Seagar, a valuer called by the plaintiff, to be more relevant and helpful on this issue. He compared the rentals payable under the Gulf Harbour leases with those prevailing for restaurants and bars in Downtown Auckland. He found that the rental levels negotiated with Messrs Hook and Sellick were not dissimilar to those payable in Downtown Auckland. That suggested to him that the rental levels were “full” given the developing nature of the Gulf Harbour area at the time but not out of line with the market.
[90] By the time the Driver and McNamara leases were negotiated, trading conditions in Gulf Harbour had deteriorated. This was reflected in the residential property market in the area and in rental levels which in 1999 dropped significantly from those being achieved over the period 1996-1998. As Mr Seagar also pointed out, the failure of the Nautilus and Judder Bar businesses would have further depressed the rental levels which could be obtained for their premises.
[91] I am satisfied that in the circumstances the terms on which the premises were leased to both Driver and McNamara were reasonable. The defendant has failed to discharge the onus on him of proving that Gulf Harbour failed to take reasonable steps to mitigate its loss.
6 Result
[92] The debt of $125,000 due by Gulf Harbour Lodge having been extinguished as a result of the handover arrangements made on November 1998 and/or by the January 1999 deed of settlement, the claim against Mr Hook on his personal convenant fails. There will be judgment for him on the claim by Gulf Harbour Development under CP.344-SD99.
[93] There is judgment for Gulf Harbour Town Centre against Mr Hook under CP.343-SD99 for the damages proved of $224,624.69. There will be judgment for Mr Hook against Mr Sellick on his cross-claim for half that amount.
[94] Costs are reserved. If the parties are unable to agree, I will consider memoranda filed within twenty-eight days.
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