Herbert v Duncan

[2013] NZHC 565

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2013-409-558 [2013] NZHC 565

BETWEEN  JOHN HERBERT

LOUISE ANNETTE CLEM Plaintiffs

ANDRICHARD PETER DUNCAN WENDY ANN RUSCOE Defendants

Hearing:         20 March 2013

Appearances: G Hair for the Plaintiffs

S Dwight for the Defendants

Judgment:      20 March 2013

ORAL JUDGMENT OF FOGARTY J

[1]      This is an application by the plaintiff’s for an interim injunction to prevent the defendants, by themselves or their agents, cancelling an agreement for sale and purchase between the plaintiffs as purchasers and the defendants as vendors, dated

23 November 2012, in reliance upon the settlement notice issued by the defendants, dated 5 March 2003, and/or the decision of Mr Lindsay Lloyd, dated 25 February

2013, pending further order of the Court.

[2]      The application was filed on 18 March 2013, and is being heard today, as the settlement notice expires tomorrow afternoon at 5.00 pm.

[3]      The agreement for sale and purchase is of a rural property and is for the value of $725,000.  After the agreement became unconditional the property was damaged by fire.   The property is of approximately five hectares, and contained various improvements, including: a dwelling, a garage, a utility shed, a small shed, a fowl

house, four loose boxes, extensive lawns, gardening and landscaping, boundary and

HERBERT & Anor V DUNCAN & Anor HC CHCH CIV-2013-409-558 [20 March 2013]

internal fencing, pumps and a water tank, a spa pool, a single row of established pinus radiata shelterbelt trees along the full length of the western boundary and two- thirds of the length of the eastern boundary, plus established native plantings along the extended section with the dwelling, and two main internal shelterbelts, including a double fence, a pinus radiata shelterbelt adjacent to the rear paddock, and a poplar tree shelter belt to the north of the extended section.  There is a dispute as to whether or not there was an underground irrigation system, and there was also a dressage arena.

[4]      The agreement became unconditional on 21 December 2012.  On 11 January

2013, the property was significantly damaged by fire.   Damage caused by the fire included  destruction  of  the  boundary  shelterbelts  and  most  of  the  internal shelterbelts, loss of outbuildings, damage to the dressage area, loss of fencing, loss of water supply services, loss of the spa bath, loss of landscaped areas around the dwelling and loss of pasture.   Part of the damage was covered by the defendants’ insurance policies.   However, the defendants’ policy was limited to the sum of

$2,500 in respect of items that did not form part of the buildings and structures on the property.  Therefore, the internal and boundary shelterbelt trees, landscaping, irrigation (if there was some), pasture and dressage arena areas were not covered by the defendants’ insurance.  The defendants obtained quotes to reinsure the uninsured damage, which totalled $267,490.54.   This is made up of reinstatement of the dressage arena, $62,100; felling and removal of the boundary and internal shelterbelt trees, $59,512.50; replacement of the shelterbelt trees, $122,125.50; supply and level topsoil over triangle paddock ready for grass seeding, $9,631.25; and replacement of the disputed irrigation, $14,121.29.

[5]      The contract was entered into relying on the 9th  Edition 2012 of the Real Estate of New Zealand and Auckland District Law Society Agreement.   There are two relevant clauses which were engaged by the events that I have just described. They are clause 4, “Risk and insurance”, and clause 7, “Claims for compensation”. These two clauses are set out in full:

4.0      Risk and insurance

4.1    The property and chattels shall remain at the risk of the vendor until possession is given and taken.

4.2    If, prior to the giving and taking of possession, the property is destroyed or damaged, and such destruction or damage has not been made good by the settlement date, then the following provisions shall apply:

(1)     If the destruction or damage has been sufficient to render the property untenantable and it is untenantable on the settlement date the purchaser may:

(a)     complete the purchase at the purchase price, less a sum equal to any insurance moneys received or receivable by or on behalf of the vendor in respect of such destruction or damage, provided that no reduction shall be made to the purchase price if the vendor’s  insurance  company  has  agreed  to reinstate for the benefit of the purchaser to the extent of the vendor’s insurance cover; or

(b)     cancel  this  agreement  by  serving  notice  on  the vendor in which case the vendor shall return to the purchaser immediately the deposit and any other moneys paid by the purchaser, and neither party shall have any right or claim against the other arising from this agreement or its cancellation.

(2)     If the property is not untenantable on the settlement date the purchaser shall complete the purchase at the purchase price less a sum equal to the amount of the diminution in value of the property which, to the extent that the destruction or damage to the property can be made good shall be deemed to be equivalent to the reasonable cost of reinstatement or repair.

(3)     In the case of a property zoned for rural purposes under an operative District Plan, damage to the property shall be deemed to have rendered the property untenantable where the diminution in value exceeds an amount equal to 20% of the purchase price.

(4)     If the amount of the diminution in value is disputed, the parties shall follow the same procedure as that set out in subclause 7.4 for when an amount of compensation is disputed.

4.3    The purchaser shall not be required to take over any insurance policies held by the vendor.

7.0     Claims for compensation

7.1    If the purchaser claims a right to compensation either under subclause 5.4 or for an equitable set-off:

(1)     The  purchaser  must  serve  notice  of  the  claim  on  the vendor before settlement; and

(2)     The notice must:

(a)    in the case of a claim for compensation under subclause 5.4 state the particular error, omission or misdescription of the property or title in respect of which compensation is claimed;

(b)     in the case of a claim to an equitable set-off, state the particular matters in respect of which compensation is claimed;

(c)     comprise   a   genuine   pre-estimate   of   the   loss suffered by the purchaser; and

(d)   be particularised and quantified to the extent reasonably possible as at the date of the notice.

7.2    For the purposes of subclause 7.1(1), “settlement” means the date for settlement fixed by this agreement unless, by reason of the conduct or omission of the vendor, the purchaser is unable to give notice by that date, in which case notice may be given by the date for settlement fixed by a valid settlement notice served by either party pursuant to clause 10.1.

7.3    If the amount of compensation is disputed:

(1)     An interim amount shall be deducted on settlement and paid by the purchaser to a stakeholder until the amount of the compensation is determined.

(2)     The interim amount must be a reasonable sum having regard to all of the circumstances.

(3)    If the parties cannot agree on the interim amount, the interim amount shall be determined by an experienced property  lawyer  appointed  by  the  parties.     The appointee’s costs shall be met equally by the parties.  If the  parties  cannot  agree  on  the  appointee,  the appointment shall be made on the application of either party  by  the   president  for   the   time   being  of   the New Zealand Law Society.

(4)     The  stakeholder  shall  lodge  the  interim  amount  on interest-bearing call deposit with a bank registered under the Reserve Bank of New Zealand Act 1989 in the joint names of the vendor and the purchaser.

(5)    The interest earned on the interim amount net of any withholding tax and any bank or legal administration fees and commission charges shall follow the destination of the interim amount.

(6)     The amount of compensation determined to be payable shall not be limited by the interim amount.

(7)     If the parties cannot agree on a stakeholder, the interim amount shall be paid to a stakeholder nominated on the application of either party by the president for the time being of the New Zealand Law Society.

7.5    The procedures prescribed in subclauses 7.1 and 7.4 shall not prevent either party taking proceedings for the specific performance of the contract.

[6]      Because the parties were unable to agree on the sum, relying on clause 4.4, the parties followed the procedure set out in clause 7.4(3), and an experienced Christchurch property lawyer, Mr Lindsay Lloyd, was appointed by the parties to determine the interim amount to be placed on an interest bearing call deposit.  As will be seen above, by clause 7.4(1), this interim amount is to be deducted on settlement and paid by the purchaser to a stakeholder until the amount of compensation is determined.

[7]      Mr Lloyd received submissions, and issued his decision on 25 February 2013, determining that the interim amount to be held was the sum of $87,500.

[8]      It can be seen immediately that this is a much lower sum than that being pursued by the vendors.   In respect of particularly the trees and shelterbelt,   Mr Lloyd, in paragraph 26 of his decision said this:

In my view, the new words added to clause 4.2(2) deal with such items as a door which is damaged, which does not have to be replaced with a new door, but perhaps replaced with a second-hand door of similar quality, or in some situations a new window for an old one.  The concept of their being a complete reinstatement is not what the drafters would have had in mind; otherwise it makes the vendors the insurers of the purchasers for all items not covered by insurance.  In reality, it is not possible to reinstate or repair the trees and the shelterbelt.

(Emphasis added.)

[9]      The  plaintiff  purchasers  disagree  with  the  decision  of  Mr  Lloyd.    They disagree with his interpretation of clause 4.2(2).  They are, however, faced with the

predicament that the settlement notice expires at 5.00 pm tomorrow.  This settlement notice effectively gives notice that the defendants may thereafter cancel the agreement.  The plaintiffs are concerned that as a consequence of a cancellation their remedies may be limited to damages only, and they have lost the right to obtain specific performance of the contract.  Hence this application for interim relief.

[10]     The principles to be applied for granting interim relief are well-known and separate out firstly into two broad questions, which are:

(a)       Is there a serious question to be tried?

(b)      Where does the balance of convenience lie?

[11]     Sir Robin Cooke, as he then was, has also observed that there is an ultimate third question of whether or not a Court should intervene to grant an interim injunction.[1]    It needs to be kept in mind that the remedy of injunction is granted when the common law Court is concerned that damages may not be an adequate remedy.  That concern also underlines the grant of an interim injunction.  In the foregoing analysis, I do follow these three steps.  I begin first with whether there is a

serious question to be tried.

[1] Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129, at 142, Cooke J.

[12]     The  plaintiffs  contend  that  Mr  Lloyd’s  reasoning  and  decision  fails  to recognise that the property and chattels remain at the risk of the vendor until possession is given and taken, this is clause 4.1.  His decision fails to apply the requirement that diminution in value of the property, to the extent that destruction or damage to the property can be made good, shall be deemed to be equivalent to the reasonable cost of reinstatement or repair.  As a result, they argue that Mr Lloyd’s decision is in breach of clause 4.2(2), and therefore is not a reasonable sum, so is in breach of clause 7.4(2).  Therefore, the defendants as vendors should not be able to take advantage of those aforesaid errors of law.  Accordingly the Court should intervene and not allow clause 7 to take its course.  They argue, therefore, that the

settlement notice issued by the defendants is invalid.

[13]     Ms Dwight for the defendants argues that this is a contract where the parties have anticipated that there may be a dispute as to the liability that follows property being destroyed or damaged while the property remains at the risk of the vendor until possession is given and taken.  That it provides for a means of identifying an appropriate interim amount to be set aside by the procedure in clause 7.  That procedure has been followed, and that should be respected.  It would be defeating the whole structure and scheme of these provisions of the Agreement for Sale and Purchase for the Court to intervene by way of interim injunction.   Allied to that, Ms Dwight also argues that the construction that Mr Lloyd placed on clause 4.2(2) is sound.   She also argues that he being an expert, not an arbitrator, his decisions cannot be set aside by a Court, even if he had misconstrued 4.2(2).

[14]     In oral exchanges, I discussed with parties the possibility of resolving this matter by agreeing to separate out the construction of clause 4.2(2), and have an urgent hearing on the same. Arising from that, Mr Hair for the plaintiffs volunteered to go down that route, and even to have a hearing in the next few days on it, postponing settlement by only a few days.  Ms Dwight was not in a position to agree to that without instructions, but essentially felt that such a proceeding may well be unfair, as she would need time to assemble supporting material to be used in argument, defending the construction of this clause.

[15]     We also identified, in oral exchanges, that that might not be the end of the matter unless the parties agreed in advance that the decision of the High Court would be binding on them.  Each side would have right to appeal by right to the Court of Appeal and on leave to the Supreme Court.  A delay, therefore, of some years would be a consequence potentially of an interim injunction.

[16]     Another  option  examined  was  refusing  an  interim  injunction  now,  but revisiting the matter, should the vendor then endeavour to remove the caveat which is lodged against the property. At this stage, there has been no attempt by the vendor to remove the caveat.   I am keeping in mind all of these options as I go on to examine these issues.

[17]     In summary, I think there is some doubt as to the meaning of clause 4.2(2). For that reason, there is a serious argument that reinstatement might include reinstating a shelterbelt and the other uninsured improvements.  There is, however, an argument the other way, that proper weight should be given to the phrases in this clause “can be made good”, “reasonable cost of reinstatement or repair”, and the very heading of the clause “Risk and Insurance”, and the opening, clause 4.1:

The  property  and  chattels  shall  remain  at  the  risk  of  the  vendor  until possession is given and taken.

[18]     As Mr Lloyd pointed out, under common law, because the equitable title of the property passes to the purchaser once the property becomes unconditional, risk was at that time treated as passing to the purchaser.  By this agreement, that common law presumption is reversed, and the practical consequence is that purchasers buying such properties rely on the vendor maintaining the vendors' insurance policy until settlement.     Under  the  previous  editions  of  this  standard  form  contract,  the diminution in value was just that.  As Mr Lloyd observed, it is commonplace that diminution  in  value  following  damage  is  not  necessarily  equal  to  the  cost  of repairing  the  damage.    The  term  reinstatement  is  commonly  used  in  insurance policies of that sort.  It might also be generally observed that in valuable properties it is typical for the property owner to have a reinstatement-type policy, rather than an indemnity-type policy.   One does not normally talk about re-planting a shelterbelt destroyed by fire as making it good, or making the property good.

[19]     I have had only the benefit of reading the papers briefly, yesterday afternoon, and hearing most of the morning in argument.  But I have formed some views as to the strength of the argument, which I am going to discuss in a moment, after I introduce the topic of the balance of convenience.  But I conclude this analysis by saying that, although I have acknowledged there are competing arguments, I think there is still a serious issue to be tried as to whether clause 4.2(2) has been correctly interpreted by Mr Lloyd.   Within that context, there are issues as to some of the items.

[20]     Turning to the topic of status quo and balance of convenience.  This is, of

course, very contextual.  The topic is sometimes called “status quo and balance of

convenience” because it reminds the Court that the grant of an interim injunction is an interference in the private ordering of property rights, which have been reordered, by a contract in this case, and that the Court hesitates to grant an injunction unless it is satisfied that the injunction really is needed.  In that sense, the third step, discussed by Cooke J as he then was, is perhaps teasing out an underlying concern which informs examination of the convenience of the parties.

[21]     I turn then to the plaintiffs’ reasons for seeking an interim injunction.  The plaintiffs are concerned that if they do not settle by 5.00 pm tomorrow afternoon, the next step will be that the defendants will cancel the contract.  That will leave the plaintiffs with, at best, only a claim for damages.  That concern seems to be reflected by the passage in D W McMorland’s Sale of Land, paragraph 12.64, where the learned author says:

On cancellation of the contract, specific performance is no longer available to the purchaser and beneficial title to the land reverts to the vendor.

No authority is cited for that proposition.

[22]     In the course of oral argument, I explored possible lines of argument whereby the remedy of specific performance could be granted on the basis that the settlement of contract was itself a breach of contract, referring back s 7(3) of the Contractual Remedies Act.   However, I also have in mind that the reality of not granting an interim injunction is that a considerable amount of time is likely to pass and, in the nature of things, the pressure would come on the defendants, who now live in Australia, to do something with this property.

[23]     I think the practical consequence is there is a very high risk that if the interim injunction is not granted, the defendants may cancel the contract, either immediately, or after a short period of time in which they try to explore a settlement.   But if a settlement is not reached in the long run, Professor McMorland’s observation will prove to be correct in fact.  On the other hand, if the plaintiffs are forced to settle tomorrow by refusal of interim injunction, the plaintiffs will face the choice of paying over what they consider to be money that should have been withheld, put into

an account pending the cost of doing the work to try to make good the damage caused by the fire.

[24]     From the defendants’ point of view, if an interim injunction is imposed, as I

have already identified, this places them in a very difficult position in the long run.

[25]     I have  already noted,  I have explored  ways  of trying to  minimise  these adverse consequences simultaneously on both parties by way of an urgent hearing. But I am satisfied that is simply not possible unless both parties volunteer to submit to a binding ruling of the High Court.  As I said in the course of the oral argument, I do not think that this Court should, and possibly cannot, pressure either party into agreeing to that step.

[26]    Faced with these two predicaments, I have found it difficult to judge the predominance of the balance of convenience.   I then move to the third step in the argument, an overall evaluation of whether or not it is just to grant the interim injunction.  In this context, I take into account that I think that although there is a serious argument, on the submissions I have received so far, I think the defendants have the better of the two arguments.  Secondly, I am impressed by the submission, made with some urgency by Ms Dwight, that I should respect the structure of the contract which, indeed, anticipates a dispute as to the application of clause 4 of the contract, and provides for an interim assessment of what money should be set aside by a very experienced property lawyer.

[27]     I have also taken account, although there is no particular evidence of it, that I am dealing with a rural property of some quality, but not a property that could be said to be unique.  In a sense, any property is unique in its particularity.  But there are classes of property.   There are rural properties around Christchurch of 10 acres or so which do provide riding facilities.  I do think this falls into a class of properties, and I take judicial notice of that, so that the remedy for damages needs also to be set alongside the opportunity, if the contract is cancelled, for the plaintiffs to go out into the marketplace and look for another rural property of similar quality.  Let me stress again, I do accept that the plaintiffs might well take the view that this is the one they

love and that none of the others will match up to it.  But, rather than applying a fine test of what is unique, I am just talking broadly in terms of property classifications.

[28]     I am also particularly concerned that the interim injunction would impose long term significant disruption to the lives of the defendant vendors, who have gone through the process contemplated by the Act, and have a reasonable expectation that they can get a settlement and, to that extent, get on with their lives.

[29]     For these reasons, I have decided to refuse the interim injunction.

[30]     Having heard counsel, there will be costs for the defendants on a 2B basis.  I assume counsel will be able to settle the quantum.  If you cannot settle those costs, I will fix it on receipt of submissions, exchanged in draft in advance, and limited to no more than three pages each.

Solicitors: Lindsay Lloyd