Hawkins Construction Ltd v Chan
[2000] NZCA 80
•12 June 2000
| IN THE COURT OF APPEAL OF NEW ZEALAND | CA190/99 |
| BETWEEN | HAWKINS CONSTRUCTION LIMITED |
| Appellant |
| AND | KWOK CHOR CHAN |
| First Respondent |
| AND | RICHARD CHUNG IP YEUNG |
| Second Respondent |
| Hearing: | 1 June 2000 |
| Coram: | Gault J |
| Doogue J | |
| Appearances: | P Mills for Appellant |
| A P Molloy QC for Respondents | |
| Judgment: | 12 June 2000 |
| JUDGMENT OF THE COURT DELIVERED BY ROBERTSON J |
This is an appeal against a judgment delivered in the High Court at Auckland on 7 July 1999 striking out the appellant’s statement of claim against the respondents on the basis that the appellant’s claim did not disclose any tenable cause of action.
That appeal was initiated on the bases that the Judge :
[a]Wrongly applied the provisions of s 29 of the Goods and Services Tax Act 1985 (the Act); and
[b]Wrongly applied the provisions of r 265 of the High Court Rules.
The appellant is in business as a construction company in Auckland and is a registered person in terms of the Act. The three statements of claim which have been filed allege that the first respondent is resident in New Zealand but the second respondent is a resident of Hong Kong.
The respondents are said to have purchased 24.1622 hectares of land in Pakuranga being the land in Certificate of Title 202/31 North Auckland Registry (the land) in November 1993 from Neil Construction Limited. They subsequently formed and registered the Golden Harvest Partnership for GST purposes. In March 1994 the formed Golden Harvest Investments and Trading Limited which was also registered for GST as property developers and the land was transferred to it. In March 1996 the land was re-transferred to the respondents.
On 22 May 1997 the appellant and the respondents entered into a written agreement for the sale and purchase of the land. The consideration was expressed as “$6.135 million plus GST (if any).”
It is the argument of the respondents that Mr Chan has been assessed for and paid GST in respect of this transaction so they were entitled to reimbursement of that sum from the appellant.
Prior to the parties entering into the contract in May 1997 the appellant had sought and been given advice by the Inland Revenue Department (IRD) that no GST would be payable. Not surprisingly therefore it has at least been curious as to why GST was later levied.
The issue of the payment of GST was in dispute between the parties when settlement of the contract should have been effected. There was a referral of the matter to Nigel Smith & Associates, taxation specialists, as to whether GST was payable and enquiries were made of the IRD.
Eventually the appellant paid the claimed sum of $766,875 under protest and without prejudice to its obligation to pay this sum and interest which had accrued for late settlement.
As against that background the appellant sought in the proceedings filed in the High Court declaratory relief and a mandatory injunction that pursuant to the provisions of s 8 of the Goods and Services Tax Act 1985 it should not have been required to pay GST because GST was not lawfully due and payable by the first and second respondents for the following reasons :
[a]At the time of entering into the Hawkins contract the first and second respondents were not registered persons in terms of the Act.
[b]At the time of entering into the Hawkins contract, the first and second respondents were not persons deemed to be registered persons in terms of the Act.
[c]At no time material to this proceeding were the company, the partnership or the second respondent engaged in a taxable activity.
[d]If at any time prior to this proceeding the company, the partnership or the second respondent were engaged in a taxable activity material to this proceeding that taxable activity ceased on or about March 1996.
[e]Any liability on the part of the respondents to pay the Goods and Services Tax to the IRD arises other than (sic) the supply to the appellant under the agreement for sale and purchase of the land.
[f]The second respondent is not resident in New Zealand and the (sic) proviso (b) to section 8(2) applies to the supply by the second respondent to the appellant.
[g]The partnership has not returned (sic) any GST on the supply of the land to the appellant.
[h]The partnership has not been assessed by the IRD for the supply of the land under the Hawkins agreement.
By way of an alternative cause of action it sought damages for breach of contract in respect of the insistence on the paying of the GST together with an interest component for late settlement of $53,747.74 on the basis that the GST was never lawfully due and payable.
The third cause of action alleged deceit as the payment of the GST and the interest came about by reason of representations which were false.
Fourthly, it is alleged that the respondents and their professional advisers had conspired to improperly use a document, namely, a tax invoice under GST number 61304843 dated 6 October 1997, to extract a payment from the appellant which the respondents knew was not related to the sale and purchase of the land in question.
There was an initial strike out application heard by Fisher J on 14 April 1999.
He considered the provisions of s 29 of the Act, which it was argued were a bar to any right by the appellant to challenge the question as to whether GST was payable on the transaction.
That section provides :
[Except in proceedings under Part V111A of the Tax Administration Act 1994], no assessment made by the Commissioner shall be disputed in any Court or in any proceedings either on the ground that the person so assessed is not a registered person or on any other grounds; and, except as aforesaid, every such assessment and all the particulars thereof shall be conclusively deemed and taken to be correct, and the liability of the person so assessed shall be determined accordingly.
Fisher J concluded :
Mr Molloy, for the defendants, submits that there is sufficient before the Court to establish that a relevant assessment was indeed made by the Commissioner and that this is sufficient to warrant striking out the Hawkins proceedings. I was initially attracted to that view. On the fact of it, the effect of cl 13 of the agreement for sale and purchase was that pursuant to the contract Hawkins was obliged to pay “any GST which is payable in respect of the supply made under this agreement” and that this meant any sums in respect of which the vendors could demonstrate a legally enforceable obligation to pay the $766,875 demanded of Hawkins. Mr Molloy was able to point to a number of documents on the file which appeared to indicate that, rightly or wrongly, the Commissioner had made the appropriate assessments. So long as it is clear that this is indeed incontrovertible evidence that the $766,875 was payable by the vendors in respect of the sale of this particular land under this particular agreement of 22 May 1997, I would have thought that it would be difficult for Hawkins to escape the barrier against collateral attack represented by s 29 of the Act.
However, on traversing the evidence and documents upon which Mr Molloy was bound to rely, I am not convinced that the defendants can surmount the very high threshold required at a strike-out stage of the proceedings. The actual assessment document itself is not before the Court. Instead, we have the more indirect sources such as the statement of account between the Commissioner and one of the defendants, the goods and services tax return of one of the defendants, some correspondence by accountants and some general background evidence from some of the persons involved. It seems to me that that leaves open a number of untidy gaps in the chain. For example, there remains at least the theoretical possibility that such assessment as the Commissioner may have made could have related not to the Chan Yeung/Hawkins sale of this land but some earlier sale within the Chan Yeung camp. I say that because Hawkins has pleaded that there have been other transactions within that camp which included a possible sale from individuals to a company, Golden Harvest Limited, and then again from that company back to Mr Chan and/or Mr Yeung again within the taxable period in question.
Another untidy gap is that, whereas the vendors under the agreement were both Mr Chan and Mr Yeung, the GST assessment, as far as one can gather from the Inland Revenue statement of account, seems to be confined to Mr Chan alone. That in turn might lead to questions whether the assessment necessarily relates to the supply under the agreement of 22 May 1997 or, if it does, to what extent the full sum required under the assessment relates to that particular supply.
Bearing those matters in mind, combined with a general aura of possible confusion in the history of property dealings involving Mr Chan and Mr Yeung, I think it would be premature for the Court to invoke s 29 and strike out the proceedings.
In what appears to us to be a somewhat unusual and misguided course of action there was then a further strike out application accompanied by further evidence which was designed to overcome the deficiencies noted by Fisher J. A subsequent hearing before Williams J in June 1999 led to a reserved judgment of 7 July 1999 where the proceedings were struck out principally on the basis that s 29 of the Act prevented the appellant from challenging the assessment of GST for the first respondent and therefore the appellant’s claim did not disclose a tenable cause of action. That was thoroughly understandable given the confused state of the appellant’s pleadings and argument.
In that hearing the appellant had pleaded and Ms Mills had argued that the respondents had not produced any evidence to categorically prove the appellant’s pleadings to be incorrect because :
[a]There was no partnership between the respondents involving the land.
[b]In February 1994 the respondents registered a partnership for GST and deregistered for GST in June 1994 filing nil returns.
[c]The respondents never carried on a taxable liability.
[d]The land was not acquired by the respondents in the course of a taxable activity.
[e]In March 1994, the land was acquired by Golden Harvest Investments and Trading Limited (the Company) a company owned by the respondents. The company registered for GST in March 1994 and obtained the GST refund on the purchase price of the land.
[f]The company carried on a taxable activity from September 1994 to September 1995.
[g]At some time in March 1996 the company transferred the land back to the respondents in satisfaction of their current accounts. The company was liable to pay GST on the transfer by 30 April 1996. The company failed to pay the GST due.
[h]The company filed a nil return for GST in March 1996 and deregistered for GST.
[i]Neither the respondents nor the company carried on a taxable activity from September 1995 to October 1997.
On the basis of those assertions and allegations the appellant submitted that the sale of the land by the respondents in May 1997 to the appellant was not a taxable supply and accordingly GST was not payable under the agreement.
In the course of the hearing of the appeal it became apparent that the real question between the parties was a serious dispute about the facts.
There is no dispute as to the principles applicable to striking out. This Court has previously held :
The discretion is one to be sparingly exercised. Striking out is justified only if, on the material before the Court and in the present state of evolution of the common law, the case as pleaded is so clearly untenable that the plaintiff cannot possibly succeed. If disputed questions of fact arise, the case must go to trial. (Attorney-General v Equiticorp Industries Group Ltd [1996] 1 NZLR 528 at 533).
This was an affirmation of the principles which had been re-stated by this Court in R v Lucas & Sons (Nelson Mail) Ltd v O’Brien [1978] 2 NZLR 289 and repeated in Takaro Properties Ltd v Rowling [1978] 2 NZLR 314, and summarised in South Pacific Manufacturing Co Ltd v New Zealand Security Consultants & Investigations Ltd [1992] 2 NZLR 282.
As noted by this Court in Electricity Corp v Geotherm Energy [1992] 2 NZLR 641, adopting the comments of the Court in CED Distributors (1988) Ltd v Computer Logic Ltd (CA 345/90 and 5/91,26 July 1991) :
There will be occasions when brief affidavit evidence may assist a proper understanding of a pleading, may exhibit a pleaded document or may deal with factual material that is undisputed. This is appropriate. But the Court on an application to strike out a pleading for failure to disclose a cause of action will not attempt to resolve genuinely disputed issues of fact or consider evidence inconsistent with the pleading.
In the instant case it is clear that there is a major factual dispute about the relevance or validity of a return which was made by the first respondent on 28 October 1997 and accompanied by a cheque dated 29 October 1997 for GST.
There is no argument but that the IRD received the return, entered the details of the return into its computer system which ran an “audit check” and accepted the return as filed.
On the pleadings and the voluminous amount of evidence which has now been received it is clear that there are issues raised as to what was encompassed within the return of 28 October 1997, the position of the second respondent and other matters pertinent to the core issue of whether the certificates which are relied upon and the assessment which was made, do in fact relate to GST arising from the transaction between the parties.
It is important to note that even in the additional evidence which has been filed, although the Court has responses from the IRD before it there is no evidence as to the information which led to the advice being given. There is no explanation as to why two IRD numbers are referred to in the documentation. A fax dated 3 October 1997 which led to the advice of Nigel Smith & Associates of 6 October has not been placed in evidence.
Thus the respondents in support of their application to strike out are relying not just on the pleading and on uncontentious evidence but not on evidence that is disputed. This is not a practice permitted by or supported by the rules or the cases. It is a practice that is to be deprecated.
Much of the attention in the Court below was directed to whether s 29 of the Act has any application in contractual disputes between the taxpayer and third parties to which the IRD is not a party.
Ms Mills submitted that the purpose of the Act is to govern the relationship between the taxpayer and the IRD and s 29 operates as a bar only between the IRD and the taxpayer assessed. She submits that there is no authority to support the proposition that the IRD’s decision binds third parties.
We do not agree. It is important to consider this matter within its factual context. The parties were free to enter into any bargain they saw fit in respect of the sale and purchase of the subject land. All terms including the consideration were a matter for them to arrive at in such manner as they determined provided it was lawful.
The consideration was defined by the formula noted above. Each of the parties was represented by professional advisers. They are deemed to be aware of the provisions of s 29. The parties, in the formula which they adopted, accordingly accepted that if an assessment was lawfully and properly made it would affect and increase the price which was due and payable. This is not a case of the IRD extending its ambit of authority to other than the taxpayer with which it is dealing. The parties chose to incorporate the formula in their contract. That is not the IRD extending the influence of the provisions of s 29. It was merely the vehicle these parties indicated that they would use to determine the consideration. The Commissioner made a ruling which was conclusive and binding on the first respondent. If such ruling was applicable to the transaction in issue then the respondents and the appellant have agreed it would have consequences for them. S. 29 would then provide a bar to the appellants assertions.
The second point raised on appeal is encapsulated in the question, is the fact that a GST assessment (even if valid) is susceptible to alteration or reversal under s 27(2) of the Act affect the use by the respondents of s 29 to bar the appellants from bringing the proceedings.
The appellant submits that the IRD has the power to alter an assessment which it has established was made in error. Therefore it was submitted that a person in the position of this appellant should not be debarred or prevented from challenging it.
For the reasons outlined above we are of the view that this argument is misconceived. The appellant chose to enter into a commercial arrangement where a particular formula was used for the determination of the consideration. That does not give the non taxpayer rights greater than those which the taxpayer will have. If there was a reassessment, and as a result no GST was payable in respect of that transaction, then that has consequences under the formula in the contract. The appellant however accepted that its obligations were determined by or reflected in the assessment made independently of it. In these circumstances we are satisfied that the appellant has no rights to initiate or pursue action and that the bar applies equally to it as it does to the respondent in respect of a relevant assessment.
However, there remains unresolved the issue in this case as to whether the assessment does in all the circumstances relate to the subject transaction. That is a factual issue which is not beyond question on the basis of the pleadings and is not resolved on the available evidence. That is a matter for trial.
In those circumstances although we are satisfied that if it is established that there has been a proper assessment of GST in respect of the subject transaction the appellant will be precluded from challenging it, until that has been proved it cannot be said that the appellant’s case is untenable.
We should make it clear that we are of the view that on this issue there is no room for further strike out action. There is clearly a need for focus and attention to the pleadings in other respects which may be the subject of further interlocutory action. We would anticipate that with a professional concentration upon the true matters in issue there should be no difficulty in the parties resolving between themselves the factual issues in dispute.
The appeal is accordingly allowed. The order for strike out is quashed. The matter is remitted to the High Court for determination if that is necessary.
The appellant is entitled to costs which we set at $3000 together with disbursements, including the reasonable travel and accommodation expenses of counsel, as fixed by the Registrar.
Solicitors
Fraser Powrie, Auckland
Loo & Koo, Newmarket, Auckland 1001
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