Hawke's Bay Vehicle Exchange Limited v Stu MacDonald Motors Limited HC Napier CIV 2007-441-052

[2007] NZHC 1740

IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY

CIV 2007-441-052

BETWEEN  HAWKE'S BAY VEHICLE EXCHANGE LIMITED

Appellant

AND  STU MACDONALD MOTORS LIMITED Respondent

Hearing:         21 May 2007

Appearances: C Walker for the appellant

J Olphert for the respondent

Judgment:      21 May 2007

(ORAL) JUDGMENT OF STEVENS J

Solicitors/Counsel:

C Walker, PO Box 609, Napier

J Olphert, PO Box 99, Rotorua

HAWKE'S BAY VEHICLE EXCHANGE LTD V STU MACDONALD MOTORS LTD HC NAP CIV 2007-

441-052  21 May 2007

Introduction

[1]      This is an appeal from a reserved decision of Judge G A Rea in the District Court dated 7 December 2006.  The case related to a dispute between the parties over a car yard located at 6 West Quay, Ahuriri, Napier (the yard).

[2]      The proceedings were commenced in September 2004 by Stu MacDonald Motors Ltd (the respondent), claiming that Hawke’s Bay Vehicle Exchange Ltd (the appellant)  breached  the  licence  to  occupy  granted  to  the  respondent  when  it terminated the licence some four months before it was due to expire in November

2004, causing damage to the respondent.  The appellant claimed that there had been breach of the licence to occupy by the respondent which gave rise to a right to terminate.  The appellant further counterclaimed for the failure by the respondent to pay some expenses associated with the licence.

[3]      The breach contended for by the appellant arose on the basis that there was an implied term in the licence that the parties share the yard space equally.  But the Judge held that there was no such implied term and hence no breach by the respondent.    The  termination  by  the  appellant  was  held  to  be  unlawful.    The appellant appealed on the basis that the decision was erroneous in various respects, both factually and legally in relation to the alleged implied term.

Factual background

[4]      The parties were two independent companies in the business of selling used cars.   On 1 March 2003, they entered into a contractual arrangement agreeing to share the expenses in relation to the yard where the appellant had hitherto  been operating its business on its own (the agreement).   The agreement was signed by Mr Peter Jordan and Mr Stu MacDonald on behalf of the parties.   They were each directors  and  shareholders  in  their  respective  companies.     The  terms  of  the agreement were commendably simple and stated as follows:

This agreement is between Stu MacDonald and Peter Jordan.   Both parties agree to half share all expenses of the yard at 6 West Quay, Ahuriri this [sic]

includes lease, phone and power until the expiry date on the current lease in

November 2004.

[5]      There  was  some  debate  in  the  District  Court  as  to  whether  the  second appellant and the second respondent entered into the agreement personally.  But the Judge found that this was not the case, and that they had acted as agents for the appellant and respondent respectively.  This finding was not challenged on appeal.

[6]      Following the signing of the agreement, the respondent moved his business to the yard.   The two businesses, while similar in nature, were operated somewhat differently.  The appellant sold cars on behalf of other people and had a small valet business which operated from the yard.  The respondent owned the used cars it sold to the public.

[7]      The agreement worked well from the beginning of the agreement in March

2003 until around March/April 2004.  Disagreements then arose between the parties resulting from a desire on the part of the appellant to increase the number of cars that it had on the yard for sale.  This meant that there was a situation in which there were more cars on the yard for sale than the yard could realistically handle.   Around March 2004  Mr  Jordan,  for  the  appellant,  asked  Mr  MacDonald  to  reduce  the respondent’s stock so that it did not occupy more than 50 percent of the physical area of the yard.  This caused friction between the parties and various arguments on both sides arose regarding the physical space each was entitled to in the yard.  There was also some abusive behaviour.

[8]      In terms of the stock numbers of the parties, the numbers of vehicles that the respondent had on the yard between March 2003 and July 2004 varied from a low of

49 to a high of 74.  This was a monthly average of just on 61 vehicles.  There was no evidence about the number of vehicles that the appellant had on the yard at any one time.  The only information available in that regard was that at the start of the licence arrangement in March 2003 the appellant had between 20 and 30 vehicles on the yard.

[9]      Apparently,  in  about  mid  March  2004,  Mr  MacDonald  was  looking  at securing another site in Hastings.  He intended to move there when the arrangement

with the appellant came to an end in November 2004.  He did not communicate this intention to the appellant.

[10]     On 18 June 2004, the appellant’s legal advisors sent the respondent a letter purporting to terminate the licence to occupy the yard as of 18 July 2004.  This was on the basis that the appellant considered that the agreement had been breached by the respondent using an excessive amount of space in the yard.  By mid July 2004, the yard had not been vacated.  So the appellant, rather unwisely, chose to engage in self help by moving all of the respondent’s vehicles, some office equipment and papers to a nearby site.   A filing cabinet  was damaged  during  the  move.    The appellant then changed the locks and hired security for the yard which had been cleared of the respondent’s stock.

[11]     The respondent made unsuccessful efforts to move back to the yard, to the point where Police became involved in negotiations.  Eventually the respondent had to move to an alternative premises.  On 29 July 2004 the respondent began trading from an address in Pandora Road, Napier.

District Court judgment

[12]     Judge Rea outlined the factual background to the agreement signed between the parties and then went on to consider the argument put forward by the appellant that there was an implied term of the agreement that each party was entitled to an equal share  of the  yard  space.    The  Judge  referred  to  the  five  point  test  from BP Refinery (Westernport) Pty Ltd v The Shire of Hastings (1977) 180 CLR 266 (PC) at 283. He also considered, at [22]:

…that the best way of determining whether there was an implied term as to equal space on the yard is best judged in the light of the way the agreement was actually carried out by the parties.

[13]     The Judge found at [23], that the way in which the parties carried out the agreement  suggested that there was no  implied term as to  a 50/50 share  of the physical space.   The respondent had operated with the same relatively consistent inventory of vehicles throughout 2003 and during the early part of 2004 when the

parties  were  working  together  harmoniously.     Problems  only  arose  when  the appellant decided to increase the number of vehicles it had on the yard.  The Judge said at [24]:

The reality of the situation is that the [respondent] made no changes to the way it operated its business but the [appellant] either did or intended to do so by increasing the number of vehicles it brought on to the yard.   To justify that change in business practice after over a year the [appellant] asks the Court to imply a term into the contract as if it had been there from the beginning that there was to be equal sharing of space on the yard.  There is no evidence that such a term was agreed to between the parties and the [respondent] continued operating its business in exactly the same way from the beginning of the agreement until its eviction.   The allegation that the [respondent] breached the agreement is not based on any change of conduct or business operation by the [respondent] but on the fact that the [appellant] wished to change the way it was conducting its business by increasing the stock on the yard to a level where it says the yard would have been over- crowded.

[14]     The Judge found that there was no such implied term as that contended for by the appellant on the basis that there was no  basis upon which to found  it.   He concluded at [25] that the agreement arose out of an agreement to share expenses only and continued on amicably for over a year and “…only came to grief when the [appellant] changed the way it wanted to conduct the business…”.  As a result the Judge found that the appellant had unlawfully terminated the respondent’s licence to occupy the premises and held it liable for any damages flowing from that. There was no question on the appeal relating to the findings on damages or the way in which the Judge dealt with that aspect.

Powers on appeal

[15]     This is a general appeal from a decision of the District Court.  Section 75 of the District Courts Act 1957 provides that all appeals must be by way of rehearing. This  also  accords  with  r  718  of  the  High  Court  Rules.    The  meaning  of  the expression appeals must be by way of rehearing has been discussed in McGechan on Procedure at HR718.01:

The expression “appeal by way of rehearing” has a technical meaning.   It does not mean that the court starts with a clean slate.  It does, however, have to come to its own conclusion, based on the material presented before the decision-maker, and any further evidence which has been admitted.

[16]     The question of the scope of an appeal by way of rehearing was discussed in some detail by the Court of Appeal in Rae v International Insurance Brokers (Nelson Marlborough) Ltd [1998] 3 NZLR 190 (CA), where Tipping J (for the majority) said (at p 198):

Any tendency or wish to engage in a genera factual retrial must be firmly resisted.   This Court will not reverse a factual finding unless compelling grounds are shown for doing so.

[17]     Rae has subsequently been approved on a number of occasions:   see for example Stemson v AMP General Insurance (NZ) Ltd [2007] 1 NZLR 289 (PC) and Urbani v Gillions & Sons (2004) 17 PRNZ 112 (SC).   Rae involved an appeal against a finding of the High Court regarding whether a particular conversation had taken place. Tipping J concluded at 198 that while appellants often wish to treat appeals as retrials of fact, the Court will not reverse a factual finding unless compelling grounds to do so are shown.

[18]     In Rae, Thomas J further clarified the situation regarding retrials of fact in the course of a separate and more detailed, though concurring, judgment.   At 199, he stated that the trial Judge, here the District Court Judge, possesses numerous advantages in determining matters of fact:   seeing witnesses first hand to get an impression of reliability or credibility; an ability to gain an impression of the probabilities inherent in the circumstances traversed in evidence.  In short Thomas J concluded that there has been “too great a willingness to explore a trial Judge’s findings of fact and too little regard to the advantages which that Judge enjoyed in the area of fact finding”.

Grounds of appeal

[19]     The notice of appeal filed on 25 January 2007 outlined five broad grounds of appeal.   But when the matter came on for hearing Mr Walker, for the appellant, focussed particularly on two aspects.  These were that the Judge:

a)       erred in law in applying the test for an implied term: he referred only to the conduct of the parties rather than the BP Refinery five point test; and

b)       erred in finding that there was no implied term to share the physical space in the yard.

[20]     The appeal really  boils  down  to  two  issues.    First,  what  were the  facts regarding  the  circumstances  in  which  the  parties  entered  into  the  agreement regarding the use of the yard space?  Second, was there was an implied term in the context of that agreement as to the shared usage of the physical space in the yard?

Submissions for the appellant

[21]     Mr Walker filed careful written submissions dealing with the facts and the findings of Judge Rea.   He referred to the law on the  implication of terms and accepted that the test as expressed in the BP Refinery case is the correct one for implying a term into a contract.

[22]     Mr Walker correctly noted that the Judge did not articulate how and on what precise basis he applied the test in the BP Refinery case.  Mr Walker submitted it was the second part of the test, business efficacy, which was the key point on appeal.  It was apparent that the Judge had looked at how the agreement was carried out, rather than the issue of entitlement to use of the physical yard space.  Mr Walker submitted that an analysis of the subsequent conduct did not necessarily answer that question. But  he  did  not  contend  that  the  Court  was  not  entitled  to  consider  subsequent conduct.

[23]     Mr Walker advanced two propositions.   First, that if there was no implied term such as that contended for, then the agreement would be unworkable.  Second, given that there must be such an implied term, the circumstances demonstrate that it must have been to an equal entitlement to share the physical yard space.

[24]     As to the indicia of equal entitlement, Mr Walker referred to four factors. The first of these was the evidence of what was to be shared.   He referred to the evidence at pages 11 and 12 regarding what Mr MacDonald spoke of as being the “whole package”.  Included in this was the physical yard space, the office, the shed and an employee at the yard.   But Mr Walker said that these latter aspects of the office, the shed and the employee were minor and did not offset the unequal usage of the yard space by the respondent which in fact occurred right from the outset.  He submitted that all Mr MacDonald and the respondent had was an entitlement to an equal share of the physical yard space, even though he in fact was allowed to use more in the early stages.

[25]     Second, Mr Walker referred to the manner in which the costs were split. These were on an even basis and included the matters set out in the written costs sharing arrangement.   Third, he said that  no  commission was payable  by either company to the other on any basis when vehicles from the respective companies were sold off the yard.   Fourth, he mentioned the fact that each of the principals Mr Jordan and Mr  MacDonald took alternate weekends working at  the yard  on roster.   To support the above indicia of an equal entitlement to the physical yard space, Mr Walker referred to various passages in the notes of evidence at pages 11,

59 and 64.

Submissions of the respondent

[26]     Mr  Olphert,  for  the  respondent,  filed  helpful  written  submissions.    He submitted that the decision of the District Court Judge was correct factually and legally, and that the appeal should be dismissed.  The submission then canvassed the factual findings, noting that the appellant did not challenge the findings regarding the stock levels nor had it provided any evidence of its own on this point.  In response to the challenges to the Judge’s findings of consistency in the stock levels, Mr Olphert submitted that this finding was open to the Judge and he emphasised that the Judge had the opportunity of seeing and assessing the witnesses and the evidence.

[27]     Mr Olphert accepted that the law was correctly set out in the five point test in the BP Refinery case.  He also cited the case of The Power Co Ltd v Gore District

Council [1997] 1 NZLR 537 (CA). That case was referred to because the Court held at 551-552 that words should not be grafted on to an agreement in the absence of meeting the well established implication principles. That was particularly so where an agreement could be interpreted to mean what it says.

[28] Mr Olphert submitted that the sharing of the space on the yard was not at the heart of the agreement between the parties because there was nothing in the agreement that specified the sharing of space in the yard. He said that this was not an issue at the time of the signing of the agreement regarding costs sharing and did not become an issue until the agreement had been in operation for about one year, or nearly two-thirds of its intended existence. He relied on the finding of Judge Rea to this effect at [22].

[29]     Mr Olphert submitted that because there was no objection by the appellant to that occupation of well over half the physical yard space for about a year 50/50 sharing was not an issue.  It would have been open, he submitted, to the appellant to require that the respondent pay more than half the expenses should the 50/50 sharing have been so central to the parties.

[30] Mr Olphert also responded to a submission that a number of the respondent’s vehicles steadily increased by noting that this submission was inconsistent with the unchallenged finding of the Judge at [7]. He accepted that the monthly average for the respondent’s vehicles on the yard was 61.

[31]     Mr Olphert referred to the evidence of Mr Jordan, at page 64:

Q:  So we’ve confirmed that when Mr MacDonald came to you he said he had a whole lot more cars than you did that’s what you said?

A:  Yes.

Q:  You determined that that would benefit both of you? A:  Yes.

Q:  And on that basis you entered into this agreement.  You’ve said that no specific numbers were discussed?

A:  No.

[32]     Next Mr Olpert responded to the four key indicia of even entitlement referred to by Mr Walker.  In relation to the evidence of the whole package, he stressed the importance of the shed, the office and the employee to the overall operation of the two businesses and contended that a rather broader view of the “whole package” should be taken than that suggested by the appellant.

[33]     In relation to the costs sharing point, he submitted that one must look at what happened on day one.  The costs split was really only part of the agreement.  Various other aspects were worked out by mutual agreement by the parties or left to be resolved in the future on a mutually acceptable basis.

[34]     As  to  the  submission  that   no   commission  was   payable   either   way, Mr Olphert’s response was that this was a manifestation of the separate businesses of the parties and was not part of the agreement.

[35]     Finally, with respect to the sharing of roster duties on an alternate weekends, this was more for the convenience of the principals of the two businesses.  It was not part of the original agreement.

Legal principle applicable to implied terms

[36]    The legal principles on implied terms may be succinctly stated.   When construing a contract, a term of condition not expressly stated may under certain circumstances be implied, if it is clear from the nature of the transaction or from something actually found in the document, that the parties must have intended that such a term or condition be part of the agreement.  The implication of a term is to be based on the presumed intention of the parties and upon reason.  Such a term must be necessary in order to give the transaction the business efficacy that the parties must have intended it to have and to prevent a failure of consideration that was not within the contemplation of the parties.

[37]     The question whether an implication ought or not to be made will depend on the  particular  facts.    In that  context  it  is  appropriate  that  the  facts  include  the surrounding circumstances or what Lord Wilberforce called the factual matrix in

which the contract was made:  see Reardon Smith Line Ltd v Yngvar Hansen-Tangen [1976] 1 WLR 989, 997. This approach was endorsed by the Court of Appeal in Devonport Borough Council v Robbins [1979] 1 NZLR 1 (CA) at 20.

[38]     In determining whether a term is to be implied, if there is reasonable doubt whether the parties did intend to enter into such a contract as was sought to be enforced, the Court  should consider the document itself and all the surrounding circumstances.   Where the document is silent, the Court ought to be careful about implying a term.   It is not enough to say that it would be reasonable to make a particular  implication:    see  Halsbury’s  Laws  of  England  (4ed  1998)  Vol  9(1) para 783.

[39]     The classical test is set out in the BP Refinery case at 283 as follows:

In [their Lordships’] view, for a term to be implied, the following conditions (which  may  overlap)  must  be satisfied:    (1)  It  must  be  reasonable  and equitable; (2) It must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) It must be so obvious that “it goes without saying”; (4) It must be capable of clear expression; (5) It must not contradict any express term of the contract.

[40]    BP Refinery has been applied in New Zealand:   see Vickery v Waitaki International Ltd [1992] 2 NZLR 58 (CA) and Rod Milner Motors Ltd v Attorney- General [1999] 2 NZLR 568 (CA).

[41]     One final legal principle concerns the question of the creation of a new contract.   The Court has no discretion in this regard.   Where a turn of events has occurred which was not contemplated by the parties to the contract, the Court is not entitled to qualify the contract for the purpose of doing what seems just and reasonable.  It is necessary to ensure that all of the ingredients of the five point test in the BP Refinery case have been met.  As Burrows, Finn and Todd Law of Contract in New Zealand (3ed 2007) put it at 6.3.3(b), the test from BP Refinery:

…imposes a stringent standard and makes it apparent that terms  will be implied only in the clearest cases:  the devise is not an invitation to the Court to rewrite contracts.

[42]     In Tasman Pulp & Paper Co Ltd v Newspaper Publishers of New Zealand Inc

[1983] NZLR 600 (CA) at 608 the Court of Appeal (per Cooke and McMullin JJ)

rejected two alleged implied terms on the basis that to do so savoured of making a contract for the parties.

Discussion

[43]     Applying  the  principles  discussed  above,  it  is  important  in  this  case  to consider the factual matrix at the time of the agreement between the parties was concluded in March 2003.  The matrix included the following aspects:

a)        The short term nature of the agreement being from 1 March 2003 to

November 2004.

b)       There is no provision in the agreement and no oral discussion between the  parties  at  the time  they  entered  into  the  agreement  as  to  the physical space to be occupied by the respondent.

c)       The  respondent  moved  around  60  vehicles  onto  the  yard.     The appellant had been 20 and 30 vehicles on the yard at that time.  There was no evidence of any objection by the appellant to the fact that there was an imbalance of physical space occupied by the respondent.

[44]     It is therefore likely that, as at March 2003, the appellant had no requirement for more physical space than that required to accommodate up to 30 vehicles.  If the appellant had needed more space, undoubtedly Mr Jordan would have said so and the agreement would have referred to this point.

[45]     Another  factor  is  that  there  is  no  doubt  that  the  appellant  obtained  a significant commercial benefit  by having the respondent  cover 50 percent of all expenses  including  lease,  telephone  and  power.     There  is  evidence  of  such commercial benefit in the evidence at pages 58 and 64.  Mr Jordan accepted that this was the case and that at the time when the agreement was entered into his business was occupying around 20-25 percent of the physical space.  He gained much from the agreement.

[46]     Also a factor in the factual matrix is that the businesses of the appellant and the respondent were each different  in nature.   This was confirmed at [4] of the Judge’s decision.  Neither party could have known in March 2003 how each business would develop.  There were undoubtedly uncertainties as to how the two businesses would operate in the future.  Neither Mr Jordan nor Mr MacDonald could in March

2003 have predicted with any accuracy how their respective businesses would fare going forward.

[47]     Given these various factors, and particularly the short term nature of the agreement, it  is unsurprising that the agreement  was silent  as to the amount  of physical space to be taken up by the respondent.  Rather, it seems that the parties left that issue to subsequent agreement on the basis that they would endeavour to agree, if they could, on a mutually acceptable basis how the circumstances would be met if and when the issue arose in the future.   An alternative would be that the parties would review the agreement when it terminated in November 2004.

Disposal

[48]     In  light  of  the   matters  discussed  above  and   all  of  the   background circumstances, I consider that there is no  basis for implying a term of the type contended for by the appellant.  In particular, such a term is not necessary to give business efficacy to the arrangements.   The agreement worked perfectly well until March/April 2004.  It was only when the appellant sought to increase the number of vehicles that he wished to sell from the yard that an issue arose.

[49]     I also consider that the implied term contended for was not capable of clear expression.  It is not enough that the term contended for was reasonable in all the circumstances.  The party seeking to establish an implied term must go further and meet  all of the  requirements  of the  test  in  the  BP  Refinery  case.    In  the  new circumstances which lay ahead for both parties, it was clear that there were a multitude of circumstances which might or might not arise once the two businesses began operating from the yard.   To have predicted all possibilities and spelled out how such an implied term was to be articulated was bordering on the impossible.

[50]     Accordingly, I conclude that there was no basis upon which an implied term arose in the context of the agreement between the parties.   In this respect, I agree with the conclusions of the Judge, but for reasons somewhat different to those which he expressed.  It follows that the appeal must be dismissed.

[51]     There will be costs to the respondent on a 2B basis as agreed between the parties.

Stevens J