Heartland Bank Limited v Mahoney
[2021] NZHC 1363
•10 June 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-2253
[2021] NZHC 1363
IN THE MATTER OF an application for summary judgment BETWEEN
HEARTLAND BANK LIMITED
Plaintiff
AND
BRIAN TIMOTHY MAHONEY
First Defendant
SABICH ORGANIC GARDENS LIMITED
Second DefendantESPRESSOTEC INTERNATIONAL LIMITED
Third Defendant
MEDIA HELICOPTERS LIMITED
Fourth DefendantEARTHQUIP HOLDINGS LIMITED
Fifth DefendantJUDITH ANNE SABICH and BRIAN TIMOTHY MAHONEY
Sixth Defendants
Hearing: 20 May 2021 Appearances:
C R Vinnell for the Plaintiff
R B Hucker and A Moana-Howard for the Defendants
Judgment:
10 June 2021
JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Anthony Harper (Crispin R Vinnell), Christchurch, for the Plaintiff
Hucker & Associates (Rob B Hucker/Ashleigh Moana-Howard), Auckland, for the Defendants
HEARTLAND BANK LIMITED v MAHONEY [2021] NZHC 1363 [10 June 2021]
This judgment was delivered by me on 10 June 2021 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
………………………….
Registrar/Deputy Registrar
[1] Heartland Bank Ltd sues for $857,750.84 plus interest as the amounts due to it under four loan agreements. It has applied for summary judgment. In opposition, the defendants, the borrowers and guarantors, contest Heartland’s calculations, especially for default interest. They also say that the agreements were varied, with time given to them to sell down assets and they would not be charged penalty interest. The variation argument is also put as a matter of equitable estoppel, the oppressive exercise of power under the Credit Contracts and Consumer Finance Act 2003 and misleading or deceptive conduct under the Fair Trading Act 1986.
[2] The principles on plaintiffs’ applications for summary judgment are not in dispute.1 The main questions are:
(a)Has Heartland calculated its claims correctly?
(b)Did the parties enter into a variation?
(c)What is the effect of terms in the agreements requiring any variation to be in writing and signed?
(d)Are the other defences arguable?
[3] Heartland has shown that the parties did not agree that it would not charge default interest. While a term requiring any variation to be in writing and signed may not prevent parties from orally varying an agreement, it is part of the circumstances against which a claim of an oral variation is assessed. It is relevant as part of the evidence. In this case it counts against the defendants’ variation. Because Heartland
1 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26]–[27].
did not say that it would not charge default interest, the other defences fall away. Heartland’s claims are generally correct, but there are minor tweaks.
Background
[4] In December 2013 Marac Finance Ltd, Heartland Bank Ltd (formerly Heartland Building Society) and PGG Wrightson Finance Ltd amalgamated to form Heartland Bank Ltd. Marac Finance Ltd’s business included financing the purchase of plant and equipment for the contracting industry. The loans in this case go back before the amalgamation. Marac was the original lender under the loans, but all rights and powers under the loan agreements have vested in Heartland. For the most part I will refer to the lender as “Heartland”.
[5] Mr Brian Mahoney has a background in earthmoving contracting and related civil works. He used Marac for finance to buy plant and machinery. Later he wound down his contracting business but has a separate landfill operation in Albany.
[6] Sabich Organic Gardens Ltd, Espressotec International Ltd, Media Helicopters Ltd, Earthquip Holdings Ltd (the second to fifth defendants) are all related companies. Mr Mahoney is director of all of them. Sabich Organic Gardens Ltd is a holding company for plant and equipment used by the other companies. Mr Mahoney and Judith Sabich, the sixth defendants, are sued as trustees of the Albany Heights Trust. Mr Mahoney speaks for all the defendants.
[7] Mr Mahoney says that the global financial crisis overwhelmed the property industry and his contracting business came to a halt. He exited from the industry. There were substantial debts to Marac under loans for plant and machinery. He arranged with Marac’s head of credit to sell down the equipment and apply the proceeds of sale to reducing indebtedness. While the loans were in default, Marac did not charge penalty interest. Once all the assets were sold, the debt was extinguished. He says that these arrangements were all done by word of mouth, without being reduced to writing. That is background to the defence in this case.
[8] Mr Mahoney got back into earthmoving in late 2010. He established a new company, Fixed Cost Civil Ltd (now in liquidation). In 2011 and 2012, Marac provided finance under eight loans or facilities:
(a)Loan to Espressotec International Ltd of August 2011 with an initial advance of $81,461.49 to refinance existing debt.
(b)A Onemax facility with Sabich Organic Gardens Limited with initial advances of $166,750 in March 2012 to buy a Hino tipper truck.
(c)A first term loan to Sabich Organic Gardens Ltd in 2012 for $80,500 for a McCormack tractor and Hooper side discs.
(d)A second term loan to Sabich Organic Gardens Ltd in March 2012 for
$172,500 for a Kenworth truck.
(e)A loan for a Hitachi excavator in February 2012 for $147,100.
(f)A loan for a Hino flat deck truck in February 2012 for $40,753.13.
(g)A loan for a Doosan excavator in February 2012 for $208,150.
(h)A Onemax facility with Sabich Organic Gardens Ltd in August 2011 for an initial advance of $172,496.14 but later increased.
[9] Heartland Bank Ltd says that the last four loans have been repaid but the first four loans are still outstanding. It claims:
(a)Espressotec loan: $158,150.86
(b)Sabich Onemax facility: $287,747.85
(c)First Sabich term loan: $145,486.70
(d)Second Sabich term loan: $252,594.55
[10] Espressotec is the borrower under the first loan. Sabich Organic Gardens Ltd is the borrower under the other three. If they were not the borrower, all other defendants guaranteed the loans. Fixed Cost Civil Ltd also guaranteed the loans but went into liquidation in March 2016.
[11] The loans were all for four years from drawdown. They were table loans requiring payments of monthly instalments comprising both interest and principal, with the interest reducing over time. By 2016, the loans ought to have been repaid, but the loans had been in default for some time. The last payments under each loan were made in July 2013. The defendants did pay Heartland after July 2013 but those payments went to other debts. Heartland allocated the payments, not the defendants.
[12] Heartland had security for its loans under the Personal Property Securities Act 1999, but it has not exercised any rights or powers under those securities. The loan agreements allow Heartland to accelerate by giving notice if there is a default, but Heartland Bank did not accelerate any of the loans. Some of the instalments which the defendants missed fell due more than six years before the start of this proceeding. That is, before 18 November 2014. The defendants, however, did not raise any limitation defence. It was accepted that other payments made by the defendants could be taken as part-payments under s 47 of the Limitation Act 2010 and that communications between the parties could be taken as written acknowledgments of indebtedness.
[13] The guarantees in each loan agreement provide that the guarantors are required to pay under the guarantee upon written demand by the lender. The agreements also provide how notices are to be given. Heartland’s evidence showed that its lawyers had sent written demands to the defendants’ lawyers. At the hearing, I wondered whether that complied with the agreements. The defendant guarantors had not taken the point in their notice of opposition. But once I raised it, Mr Hucker took it up.
[14] In response, Mr Vinnell said that there had been a course of correspondence between the parties which allowed Heartland to treat Mr Hucker as the defendants’ agent to receive any such notices. That would require more evidence. It would not be
right to take the point against Heartland when it had not been raised in the notice of opposition and Heartland did not have the opportunity to give evidence in response.
Has Heartland correctly calculated its claims?
[15] The loan to Espressotec International Ltd uses one set of loan terms and conditions. The other agreements used another set of loan terms and conditions. Both sets of terms provide that statements by Heartland are conclusive as to interest rates and amounts due. Clause 15.9 of the Espressotec loan agreement says:
15.9Any statement or certificate setting out the rate of interest applicable or the amount of any moneys due signed by an officer or solicitor of the Lender shall, unless it is manifestly wrong, be conclusive as to the interest rate or the amount due.
And in the other loan agreements cl 19.4 says:
19.4 A certificate by Heartland of any amount payable under this Agreement is, in the absence of manifest error, conclusive evidence for all purposes, including for any proceedings.
[16] The affidavit of Heartland’s asset manager in support of the summary judgment application states the amounts due and the interest rates charged on the loans, without providing any supporting accounting evidence. A second affidavit annexed copies of ledgers for each loan giving running totals from the start of the loan. There are entries for instalments payable, payments, and charges for penalty interest where payments have been missed. That evidence counts as a certificate or statement under these clauses.
[17] There is a question as to the interest rates charged. Under each loan, the interest rate was 9.75 per cent per annum. There is also a default interest rate of an extra 10 percent per annum.2 The loan agreements provide that Heartland Bank may alter the interest rate and the default rate. Clause 3.3 of the Espressotec loan says:
3.3The Interest Rate and/or the Default Rate may be altered by the Lender at any time. The altered rates shall be determined by the Lender and notified to the Borrower.
2 For each loan agreement, sch 1, cls 4 and 5. The parties and Heartland’s records also use “penalty interest”. The terms are interchangeable here.
[18]Clause 3.4 of the other agreements says:
3.4Heartland may change:
(a)the Annual Interest Rate;
(b)the Default Interest Rate;
(c)any Term Payment(s) due; or
(d)any fee or charge payable by you, at any time. Notice to you of any such change will be made within 5 business days of the change taking effect by letter or email to you at the address specified in the Commercial Terms or in the case of a change to the Annual Interest Rate, the Default Interest Rate or a fee or charge, by advertisement on Heartland’s website, in newspapers, and at Heartland’s places of business.
[19] Even though all the agreements have an interest rate of 9.75 per cent, Heartland says that the interest rates for the loan agreements are now:
(a)Espressotec loan – 10.5 per cent per annum
(b)Onemax facility – 10.25 per cent per annum
(c)First Sabich Organic Gardens Ltd loan agreement – 10.25 per cent per annum
(d)Second Sabich Organic Gardens Ltd loan agreement – 9.75 per cent per annum
[20] In its amended statement of claim, Heartland has charged default interest at the rates 20.5 per cent, 20.25 per cent, 20.25 per cent, 19.75 per cent respectively. There is, however, no evidence that Heartland exercised the powers under the agreements to alter the interest rates or the default interest rates. In the absence of any evidence that Heartland changed the interest rates and notified the defendants, there is arguably a manifest error in charging interest and default interest at rates higher than those stated in the loan agreements. Accordingly, for this summary judgment application, I will treat the interest rate for all agreements as 9.75 per cent per annum and the default interest rate as 19.75 per cent per annum.
[21]The amount claimed for the second Sabich Organic Gardens term loan is
$252,594.55 as at 22 October 2019. A transaction summary includes charges for legal expenses totalling $9,576.09. The loan agreements provide that Heartland may recover the costs of enforcing the loans from the borrowers and guarantors.3 Mr Vinnell accepted that the legal expenses would need to be separately proved. There is no evidence proving these legal expenses at this stage. As those expenses have yet to be proved, judgment cannot be given for them sums yet. Most of the legal expenses were incurred after October 2019, but there is a charge of $322.50 entered on 19 December 2018. For this part of the case that should be deducted from the loan balance, as it has still to be proved. Accordingly, the balance for this loan is
$252,272.05.
[22] The defendants challenged the way that Heartland had charged interest when there were defaults. They did not however plead this in the notice of opposition to the summary judgment application. In their written synopsis filed before the hearing, the defendants submitted that Heartland had charged interest on a compounding basis, contrary to the terms of the loan agreement, and referred to certain contract terms. But in the hearing, that changed. It was submitted that following default, Heartland charged interest on the entire principal of the loan, rather than on the missed payment. Mr Vinnell was able to deal with these shifting points.
[23]The Espressotec loan includes:
3.6 If the Borrower does not make any payment (including a payment of interest) on or before its due payment date, interest on the amount unpaid shall be paid by the Borrower at the Default Rate both before and after judgment for the period from the due payment date until the actual date of payment. Default interest will accrue daily, and will be compounded monthly.
[24] That provides that default interest will be charged on unpaid instalments (even if those instalments have an interest component) and there is express provision for compounding. The clause does not however provide that default interest may be charged on the entire amount of the loan.
3 Clause 10.1 of the Espressotec loan and cl 11.2 of the other loans.
[25]For the other loans the terms are:
3.1Payment
(a)You will repay the Loan, together with Interest calculated at the Annual Interest Rate, by payment of the Term Payments on each Payment Date commencing on the First Payment Date and ending on the Final Payment Date and otherwise according to the Schedule of Payments set out in the Commercial Terms.
(b) Interest accrues daily but is payable in arrears on each payment date.
…
3.3Consequences of failure to pay on Payment Dates:
(a)If you fail to make any payment according to clauses 3.1 and 3.2, you will pay Interest at the Default Interest Rate on the amount due and unpaid.
(b)If, at any time, Heartland declares all or part of the Loan to be due and payable in accordance with clause 9.2, you will pay interest at the Default Interest Rate on the total amount declared due and unpaid.
(c)Default Interest will accrue daily, both before and after Judgment for the period from the due date for payment until the actual date of payment.
Again, these provisions allow for default interest to be charged on missed instalments. Default interest is not charged on the entire amount of the loan, unless Heartland has accelerated (under cl 9.2). There is no express provision for compound interest.
[26] Mr Vinnell submitted that it was implicit compound interest could be charged under this provision. He cited Alington Group Architects v Attorney-General, where the provisions considered by the Court of Appeal are different. The Court said:4
The question whether the interest payable under cl 4.15 is to be simple or compound interest is to be approached without reference to any predisposition the Courts may have demonstrated in favour of simple interest as against compound interest. It is purely one of contractual interpretation. The agreement is to be interpreted so as to give effect to the meaning intended by the parties. Hence, any such “presumption” in favour of simple interest is out of place in determining the meaning of the words in issue.
4 Alington Group Architects v Attorney-General [1998] 2 NZLR 183 (CA) at 189–190.
Bearing that in mind, I cannot read cl 3.3 as requiring anything other than simple interest on unpaid instalments. If Heartland had intended that default interest on unpaid instalments be added each month to the amounts unpaid so that default interest could be charged on default interest, I would expect the terms to say so expressly.
[27] All the same, Mr Vinnell demonstrated from the loan ledgers that default interest was not charged on the entire principal of the loan but only on instalments, and there was no compounding. The ledgers show that default interest is relatively small when the defendants first defaulted but increased over time as the number of defaults increased, with interest being charged on all the missed instalments.
[28] His example came from the second Sabich term loan. On 5 August 2012 default interest of $62.18 was added to the principal, because the instalment due on 5 July 2012 of $3,695.53 was missed. Then on 5 September 2012, default interest of
$490.88 was charged, as the $29,141.06 due on 5 August 2012 was missed. That calculation does not involve any compounding, but simply reflects interest on those instalments due for 31 days at the default interest rate of 19.75 per cent (during a leap year).
[29] The terms, under which certificates by Heartland solicitors stating the amounts due are conclusive unless manifestly wrong, mean that it is not necessary to check each calculation in all 73 pages of loan ledgers in evidence. I cannot see any manifest error in the way that interest in default has been calculated and charged. The challenge to the calculation of default interest is unsuccessful.
Did Heartland agree not to charge default interest?
[30] The defendants object to the claim for default interest. They say that they had an agreement with Heartland Bank that it would not be charged. According to their notice of opposition to the application for summary judgment, around 30 July 2012 the defendants (represented by Mr Mahoney) and Heartland (represented by Mr Sean McMillan), agreed to vary the loan agreements:
(a)Mr Mahoney’s companies would continue to operate and earn income from existing contracts;
(b)Mr Mahoney would sell a helicopter owned by Sabich Organic Gardens Ltd, and apply the sale proceeds to reduce debt;
(c)Heartland would not charge default interest on the loans and interest would be charged at 9.75 per cent per annum;
(d)Heartland would apply funds from the sale of any assets towards loan principal;
(e)All payments to Heartland would be less any GST component;
(f)Where third parties made any payments to Heartland and there was a GST component, Heartland would pay the GST component to Mr Mahoney’s companies;
(g)Following the sale of the helicopter, Sabich Organic Gardens Ltd would pay Marac $10,000 a month and this would be applied first to interest until the debt was reduced and after that the payments would be applied to both interest and principal; and
(h)Mr Mahoney would continue to sell down assets over which Heartland had security to obtain the best possible price.
The notice also pleaded that it was implicit in that agreement that Heartland would not take any steps under the securities to enforce the agreement except in terms of the agreement pleaded above. The sell-down of assets has not yet been completed. These arrangements are enforceable as a variation of the loan agreements; Heartland is liable for misleading and deceptive conduct under the Fair Trading Act 1996; and the claim for penalty interest is an oppressive exercise of power under s 118 of the Credit Contracts and Consumer Finance Act 2003. In addition, during the hearing Mr Hucker submitted that Heartland was estopped from claiming default interest.
[31] The question is whether Heartland has shown that the defence is not reasonably arguable. These limits to its evidence need to be noted:
(a)There has not been discovery. It is not clear that all of Heartland’s records have been disclosed.
(b)Two people have given evidence for Heartland. One, Mr Gillies, is currently an asset manager but did not work for Marac or Heartland Bank when the loans were taken out and the borrowers went into default. He did not work for Heartland when Mr Mahoney says that it was agreed that default interest would not be charged. He has produced records to prove Heartland’s case, including copies of correspondence, but there are obviously limits to what he can say about matters in which he was not involved.
(c)The other deponent, Mr Sean McMillan, was an asset manager from September 2012 until October 2019, but he no longer works for Heartland. His affidavit is part of Heartland’s reply evidence. As sometimes happens with evidence given by former employees, there are weaknesses. In some parts, instead of specifically refuting evidence by Mr Mahoney, he does not recall. Some of his evidence relies on standard practice instead of saying what actually happened.
[32] Mr Mahoney’s evidence for the agreement is that by July 2012 he was having difficulty making payments under the loans. He wrote to Heartland about the difficulties. He has attached to his affidavit a copy of a letter under Fixed Cost Civil Ltd letterhead to Marac Finance Ltd, addressed to Mr Richard Jones. After giving background information explaining why arrears has arisen, the concluding part of the letter has the heading “What we need from Heartland to be able to get through this”. The letter proposes that GST be capitalised into the loan, there would be a 60-day holiday for payments for August and September 2012, and interest only for October and December, with full payments resuming in January 2013. Mr Mahoney has sold his boat and has put his house and helicopter up for sale. These are expected to
produce $387,000 net for distribution. The letter does not say anything about default interest not being charged.
[33] Heartland denies receiving that letter, but because there has not been discovery to date, its assertion cannot be conclusive. A search of its computer records may disclose the letter. The defendants have forestalled any objection that this letter is a recent fabrication with evidence from a Mr Chapple, a computer forensic consultant, who has examined Mr Mahoney’s computer and established that the document was last modified on 22 August 2012. All the same, it is not evidence tending to show an agreement that default interest would not be charged.
[34] Mr Mahoney says that there was a meeting with Mr McMillan around 30 July 2012 where variations were agreed. The variations were in the terms pleaded in the notice of opposition. Mr Mahoney says that he confirmed that in a letter of 30 July 2012 to Marac. This letter was sent under the letterhead, Sabich Organic Gardens Ltd. After introductory words, the letter says:
As discussed moving forward from here
Fixed Cost Civil will continue to operate and derive income from its existing contracts
I will sell the helicopter to reduce the debt to Marac
I will also issue a proceeding against Manson to recover the unpaid moneys
Marac will allow me to keep the current equipment to be able to complete existing work and try and find new work to trade out of the current situation
Marac will not impose penalty interest on the loan and it will remain at the rate of 9.75%
Any sales of assets Marac will appropriate those funds to Principal All payments to Marac will be less the GST component
Any payments paid to Marac the gst will be paid back to Sabich
In addition to this Sabich will pay to Marac once the Helicopter is sold the sum of 10,000 per month which will be applied to interest initially until the debt is reduced where it can then be applied to principal and interest
If we are unable to trade out of the current situation Sabich will sell all remaining plant and equipment as per the terms above and all asset sales shall be applied to principal reduction
The computer forensic consultant has found that the document was created on 30 July 2012.
[35] Heartland denies receiving this letter. Again, that denial is subject to the qualification that there has not been discovery so far and there is no evidence of a reasonable search for documents under r 8.14 of the High Court Rules 2016.
[36] Mr Mahoney says that whenever he said to Mr McMillan that default interest was being charged, Mr McMillan brushed it aside by saying that it will all be cleared up in the “wash-up”. Mr Mahoney also relies on three Heartland documents as supporting his claim that default interest would not be charged:
(a)A report by Mr McMillan, a periodic review dated 6 June 2019, records the current debt at $915,000 whereas Mr Mahoney says that the ledgers show the debt at that date was $1,183,000. The difference must be default interest which has been written off.
(b)In November 2018 Heartland claimed in the liquidation of Fixed Cost Civil Ltd for $321,549.83 after taking into account its securities.5 Mr Mahoney says that that is consistent with default interest having been written off.
(c)On 27 May 2016, on a Sabich Organic Gardens Ltd Onemax facility,
$81,480.71 was written off as “settlement arrears adjustment” to clear the outstanding balance under that loan after a payment of $126,500 from the sale of equipment. For Mr Mahoney it was submitted that that was consistent with default interest having been written off.
[37] Heartland relies on two emails Mr McMillan sent Mr Mahoney in October 2012. An email of 5 October 2012 advises Mr Mahoney that the accounts were being transferred to Heartland’s Asset Management Unit and Mr McMillan would be looking after them. Amongst other things, Mr McMillan said:
Please be aware that Heartland hasn’t at this stage agreed to the proposed restructure that you’d previously discussed with Richard Jones. All the accounts are still sitting in arrears, due to the missed instalments and the unpaid GST balloons. Penalty interest is being charged. We reserve our
5 Under the Companies Act 1993, s 305(1)(b).
position regarding the arrears, and accept the $12k without prejudice to that position.
I’ll contact you Monday to arrange a time to meet as early as possible next week to discuss your current cashflow situation and your wider group position. If you could ensure you are in a position to provide me with background detail and/or an update regarding the following: …
I’m sure there will be other matters that come up in the course of our discussion.
After I have completed my initial assessment of your group, we should then be in a position to decide what we are or aren’t prepared to do regarding the current level of arrears.
[38] An email by Mr McMillan to Mr Mahoney of 12 October 2012 refers to a meeting between the two men earlier that week. It listed information for review Mr McMillan required Mr Mahoney to provide and went on:
As discussed at the meeting you need to put a proposal to us regarding repayment of the arrears, both instalment and GST, via capital reductions from the proceeds received on sale of the helicopter and receipt of funds from Mansons, Amstar and the IRD. You need to commit funds from these sources to HBS, but your proposal should also incorporate the short term working capital requirements of the group.
As noted below the accounts are currently still in arrears, with penalties being charged. As indicated at the meeting if all the required P&I payments are received in November/December and are an acceptable capital reduction/arrears repayment proposal is provided to us now then we would potentially look to restructure the accounts in January 2013. Given the arrears are currently $200k + we would expect to have received a significant repayment from the sources mentioned above prior to January in order for us to view any potential restructure in a favourable light.
We reserve our rights in relation to the current arrears position.
[39] On 25 October 2012, Mr Mahoney emailed Mr McMillan in reply saying “To answer your questions below” and giving an update on his business and steps to collect payments from customers. The email concludes with a request for a breakdown of the current position with Marac, including total loan value (principal), GST arrears and loan arrears. His email says nothing about Heartland charging default interest and that that was contrary to any agreement made in July that year. He does not contest Mr McMillan’s assertion that Heartland can enforce its rights under the loan agreements.
[40] In none of his correspondence does Mr Mahoney refer to any arrangement that Heartland would not charge default interest. On 7 January 2013 a Heartland asset manager (not Mr McMillan) emailed Mr Mahoney chasing up payment of $37,000 of arrears due by the end of December 2012. Mr Mahoney’s response does not take issue with the demand, even though his letter created in August 2012 in [32] above had proposed interest only payments in December.
[41] Mr Mahoney’s letter of 30 November 2013 to Mr McMillan under Fixed Cost Civil Ltd letterhead reports on the current situation and concludes with a request that the payments to Heartland be reduced to $250,000 per annum. A cashflow forecast was attached showing that the defendants could not break even if they had to pay
$420,000 annually to Heartland. The letter says nothing about default interest.
[42] In May 2014, the defendants’ accountant asked Heartland to provide loan statements. These were provided, all showing that default interest was charged. There was no written response from the accountant or Mr Mahoney taking issue with the default interest.
[43] On 24 July 2015, Mr Mahoney wrote to Mr McMillan under Earthquip Holdings Ltd’s letterhead with a “strategy statement”, explaining his decision to move out of earthmoving and to focus on the landfill operations. This would involve selling plant and equipment. There was also a request to Heartland to refinance two pieces of equipment for landfill operations. The letter says nothing about default interest being written off.
[44]Mr Mahoney says that part of the agreement was that Sabich would pay Marac
$10,000 a month after the sale of a helicopter. The helicopter was sold for $130,000 in April 2013. While Mr Mahoney did make payments after that date, payments of
$10,000 a month did not start until September 2015. According to Mr Mahoney’s records of his payments, between September 2015 and October 2019 he paid
$268,168.87. That was less than $10,000 a month.
[45] Heartland’s ledgers record payments falling due, default interest, missed payments and running totals, all reflecting the original terms of the loans.
Mr McMillan says that if there had been any variation, it would have been documented, approved by management and set up on the bank’s computer system.
[46] Mr McMillan’s written reports do not make any express reference to default interest having been waived or any other terms alleged by Mr Mahoney.
[47] The evidence also shows requests by Mr McMillan to Mr Mahoney to put forward proposals for a restructuring. Heartland was apparently hoping that Mr Mahoney would offer security over land owned by one of the defendants, but that was never forthcoming.
[48] Heartland also points out that the defendants did not raise any question of default interest having been waived until the notice of opposition to the summary judgment application was filed.
[49] In a plaintiff’s summary judgment application, the plausibility of a defendant’s evidence is assessed under the approach in Eng Mee Yong v Letchumanan:6
Although in the normal way it is not appropriate for a judge to attempt to resolve conflicts of evidence on affidavit, this does not mean that he is bound to accept uncritically, as raising a dispute of fact which calls for further investigation, every statement on an affidavit, however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself it may be.
[50] I am satisfied to the summary judgment standard that there was not an agreement in 2012 as alleged by Mr Mahoney. Mr McMillan’s emails of 5 and 12 October 2012 count strongly against any such agreement. They show that Heartland was applying the original terms of the loan agreements, including charging default interest. Those emails are inconsistent with the parties having varied the loan agreements. Mr Mahoney replied to the second email, giving the information requested, but not taking issue with Heartland’s position that default interest was being charged. If there really had been an agreement not to charge default interest, Mr Mahoney would surely have said so.
6 Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 341.
[51] From then on, Heartland consistently held the defendants to the terms of the loan agreements. While it gave the defendants time to put plant and equipment into a saleable condition and to pay as and when they could, its conduct throughout is consistent with it not relaxing the terms of the loan agreements. Its willingness to entertain a restructuring proposal and its requests for further information and proposals from Mr Mahoney are consistent with the original terms of the loan agreements continuing to apply in the meantime.
[52] Its willingness to give Mr Mahoney time does not count against it. Both loan agreements have non-waiver clauses. The Espressotec loan clause 15.1 says:
15.1 … no failure or delay by the Lender to exercise any right under this Agreement or any Relevant Document shall operate as a waiver of that right, nor shall any single or partial exercise by the Lender of any right preclude any other or further exercise of that right or any other right…
And the other loan agreements provide:
18.1 … However, no failure to exercise, and no delay in exercising, a right of Heartland under a Relevant Document will operate as a waiver of that right, nor will a single or partial exercise of a right preclude another or further exercise of that right, or the exercise of another right.
[53] As to the matters Mr Mahoney relies on, the debt amounts stated by Mr McMillan in his internal reports, the amount claimed in the liquidation Fixed Cost Civil and the write-off of the Onemax facility loan, whether taken individually or together, are not enough to suggest an arguable case that Heartland had agreed not to charge default interest. These were internal to Heartland or were communications with a third party (the liquidators of Fixed Cost Civil Ltd), not with Mr Mahoney. The late claim of an agreement not to charge default interest (only when sued) suggests that the variation is at best wishful thinking on the part of the defendants. On the facts, the defence is not seriously arguable.
What is the effect of clauses in the agreements requiring any variation to be in writing and signed?
[54] Heartland also relies on terms requiring any variation to be in writing and signed. The Espressotec loan provides:
15.1 … No waiver by the Lender of its rights under a Relevant Document will be effective unless it is in writing signed by the Lender….
The other loans say:
18.1… No waiver by Heartland of its rights under a Relevant Document is effective unless it is in writing signed by Heartland.
…
19.1Other than unilateral amendments made by Heartland according to this Agreement, no amendment to this Agreement is effective unless it is in writing signed by all the parties.
[55] There are varying views as to the effectiveness of such provisions. On one view, parties may orally agree to dispense with a provision requiring that any variation be written. Cardozo J stated this approach in Beatty v Guggenheim Exploration Co:7
Those who make a contract, may unmake it. The clause which forbids a change, may be changed like any other. The prohibition of oral waiver, may itself be waived. ‘Every such agreement is ended by the new one which contradicts it’: Westchester Fire Insurance Co Ltd v Earl (1876) 33 Mich. 143,
153. What is excluded by one act, is restored by another. You may put it out by the door; it is back through the window. Whenever two men contract, no limitation self-imposed can destroy their power to contract again.
[56] That is the approach in Australia: GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd.8 There, the judge recorded American commentator, David Snyder:9
The question for the court is not whether to honour the parties’ original agreement, but rather which of their agreements should be effective. To say that contract law should enforce the parties’ agreement, therefore, does not resolve the issue. The question is whether to enforce the first agreement or
7 Beatty v Guggenheim Exploration Co (1919) 225 NY 380 at 387–388.
8 GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50, 128 FCR 1.
9 David Snyder “The Law of Contract and the Concept of Change: Public and Private Attempts to Regulate Modification, Waiver and Estoppel” (1999) Wis L Rev 607 at 640, as cited in GEC Marconi Systems Pty Ltd v BHP Information Technology Pty Ltd [2003] FCA 50, 128 FCR 1 at [220].
the second. The common law of courts addressing [no oral modification] issues chose the second. This choice makes a fair amount of sense; the later agreement probably reflects what the parties want better than their earlier agreement does.
[57] On the other hand, in England the Supreme Court held in MWB Business Exchange Centres Ltd v Rock Advertising Ltd that such clauses are effective. Lord Sumption, giving the majority judgment, said:10
There are at least three reasons for including such clauses. The first is that it prevents attempts to undermine written agreements by informal means, a possibility which is open to abuse, for example in raising defences to summary judgment. Secondly, in circumstances where oral discussions can easily give rise to misunderstandings and crossed purposes, it avoids disputes not just about whether a variation was intended but also about its exact terms. Thirdly, a measure of formality in recording variations makes it easier for corporations to police internal rules restricting the authority to agree to them. These are all legitimate commercial reasons for agreeing a clause like clause 7.6. I make these points because the law of contract does not normally obstruct the legitimate intentions of businessmen, except for overriding reasons of public policy.
[58] In New Zealand there are earlier decisions where such clauses have been applied, but none of them consider the competing arguments.11 On the other hand, in Savvy Vineyards 3552 Ltd v Karaka Estate Ltd,12 the majority in our Supreme Court made this obiter comment about a “no amendment unless in writing” clause:
… we do not accept that such a clause deprives the parties to a contract of the ability to vary it otherwise than in writing, albeit that it may be of distinct evidential significance.
[59] Two first instance decisions considered the arguments and took an approach in line with the comment in Savvy Vineyards: Beneficial Finance Ltd v Brown13 and Conqueror International Ltd v Mach’s Gladiator Ltd.14 They were decided before the United Kingdom Supreme Court decision in Rock Advertising. Since that decision, there have been passing references to Rock Advertising in L & M Cole Holdings Ltd v
10 MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24, [2019] AC 119 at [12].
11 Air New Zealand Ltd v Nippon Credit Bank Ltd [1997] 1 NZLR 218 (CA) at 227; Stevens v ASB Bank Ltd [2012] NZCA 611; and MacFarlane v Independent Real Estate Ltd [2016] NZHC 404.
12 Savvy Vineyards 3552 Ltd v Karaka Estate Ltd [2014] NZSC 121, [2015] 1 NZLR 281 at [112] — the minority (Elias CJ and McGrath J) did not address the issue.
13 Beneficial Finance Ltd v Brown [2017] NZHC 964.
14 Conqueror International Ltd v Mach’s Gladiator Ltd [2018] NZHC 265, [2019] NZCCLR 7 at [47].
Bathurst Resources Ltd,15 Gloria Jean’s Coffees International Pty Ltd v Daboco Ltd16 and Ecolibrium Biologicals Ltd v Biotelliga Holdings Ltd,17 but these do not give clear pointers whether Rock Advertising is now good law in New Zealand.
[60] An article, “Contractual Interpretation”,18 records criticism of Rock Advertising and suggests that the decision may not necessarily be followed in New Zealand. The authors are Winkelmann CJ, E France and Glazebrook JJ, who together would make a majority in the Supreme Court. While the comments are extra- judicial, they show that our final court of appeal may not follow Rock Advertising. It is therefore arguable for Mr Mahoney that until an appellate court holds otherwise, under New Zealand contract law an agreement may be varied orally, even if the agreement says that it may only be varied in writing. For summary judgment, it is safer to take the approach that a “no oral variation” clause may not be effective – at least until an appellate court rules otherwise. Even so, the cases still recognise that such a provision is relevant as evidence. It makes it harder to prove the oral variation.19
[61] In this case the terms requiring variations to be in writing and signed give another reason for rejecting the variation defence. Mr Mahoney was dealing with Mr McMillan, a new asset manager, in an organisation where changes in personnel could be expected. Any businessman would make sure that any arrangements to vary loan agreements were recorded to make it clear what was agreed and to leave a record for others in Heartland. The failure to produce any document signed by Heartland varying the loan agreements counts against the defendants’ variation.
The other defences
[62] The variation argument was also dressed up in other legal costumes: estoppel, misleading conduct under the Fair Trading Act and oppressiveness under the Credit Contracts and Consumer Finance Act. The arguments for those defences all relied on
15 L & M Cole Holdings Ltd v Bathurst Resources Ltd [2018] NZHC 2127 at [182].
16 Gloria Jean’s Coffees International Pty Ltd v Daboco Ltd [2020] NZHC 29, [2020] 2 NZLR 488.
17 Ecolibrium Biologicals Ltd v Biotelliga Holdings Ltd [2019] NZHC 2628.
18 Helen Winkelmann, Susan Glazebrook and Ellen France “Contractual Interpretation” (2020) 51 VUWLR 463 at 506–510.
19 See especially Beneficial Finance Ltd v Brown [2017] NZHC 964.
Heartland having agreed to the variation of the loan agreements in 2012. The agreement was said to be the representation upon which the estoppel was founded. It was also alleged to be misleading and deceptive conduct – the deception being to agree not to charge default interest while intending to charge it anyway. It was said to be oppressive to ask for default interest when Heartland had agreed not to. But as I am satisfied that there never was any such agreement, there was likewise no representation to give rise to equitable estoppel; there was no misleading or deceptive conduct; and it was not oppressive to require payment of the default interest when Heartland had never agreed to waive it. Accordingly, these defences do not stand in the way of summary judgment.
Outcome
[63]Heartland recovers judgment plaintiff against all the defendants:
(a)On the Espressotec loan $158,150.86 On the Sabich Onemax facility $287,747.85
On the first Sabich loan $145,486.70
On the second Sabich loan $252,272.05
Total $843,657.46
(b)Interest will run on all amounts at the default interest rate of 19.75 per cent from 20 October 2020 until paid.
(c)Heartland will recover costs against the defendants on a solicitor-client basis.
(i)The plaintiff is to file and serve evidence in support of its claim for costs by 18 June 2021;
(ii)The defendants are to file and serve any response by 2 July 2021;
(iii)I will decide costs on the papers, unless I see reason for hearing in court.
[64] To the extent that Heartland Bank Ltd has not obtained all the relief it sought, it may continue the proceeding. If so, it should request a case management conference.
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Associate Judge R M Bell
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