Herron v Wallace
[2016] NZHC 1129
•27 May 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2013-404-1806 [2016] NZHC 1129
BETWEEN STUART WALTON HERRON
Plaintiff
AND
WAYNE ANDREW WALLACE First Defendant
SHADES OF AUTUMN LIMITED Second Defendant
BELMONT LIFESTYLE VILLAGE LIMITED
Third Defendant
Hearing: 25 to 28 May 2015 and 4 to 8 April 2016 Counsel:
CT Patterson and RA Dellow for plaintiff
DA Towle for defendants at the 25 to 28 May 2015 hearing
JE Hodder QC for defendants at the 4 to 8 April 2016 hearingJudgment:
27 May 2016
JUDGMENT OF FAIRE J
This judgment was delivered by me on 27 May 2016 at 4:45 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Skeates Law, Auckland (G Skeates) Bruce Dell Law, Auckland
Herron v Wallace [2016] NZHC 1129 [27 May 2016]
Contents
The Claim ...............................................................................................................[1] Background Facts ...................................................................................................[4]
The October 2005 Documents [26]
The Herron – Bryers Settlement [32]
Previous Proceedings [39] Procedural History ...............................................................................................[41] Outline of Issues ..................................................................................................[55]
Assignment/Apartments .......................................................................................[56] The Parties’ Positions [59] The Queenstown Apartment [62] Was there an absolute assignment? [67]
$1.037 Million......................................................................................................[92] Wallace Thesis [94] Herron Thesis [94]
SH9 Agreement ..................................................................................................[109] Amount Owing...................................................................................................[129] Oppression Defence ...........................................................................................[138]
Credit Contract and Consumer Finance Act 2003 (“CCCFA”) [140]
Contents of the Sidmouth Settlement Deed [154] Inducement by Oppressive Means [160] Enforcement [164]
Conclusion..........................................................................................................[167]
The Claim
[1] The plaintiff, Mr Stuart Herron sues the first defendant, Mr Wayne Wallace. He alleges:
(a) That the first defendant owes the sum of $2,555,537.50, being the unpaid balance due pursuant to a deed referred to as the “Sidmouth Settlement Deed” dated 20 October 2005, plus interest of $2,157,852 as at 6 August 2014 and thereafter at the rate of $1,050.22 per day, plus costs on a solicitor/client basis;
(b)That the first defendant owes the sum of $600,000 being the amount due under a deed of acknowledgement of debt dated 20 October 2005 (“SH9”),1 plus interest at the rate of 20 per cent per annum since
20 September 2011 totalling $345,208.50 as at 6 August 2014, and thereafter at the rate of $328.76 per day, plus costs on a solicitor/client basis.
[2] The plaintiff sues the second and third defendants, who the plaintiff alleges have guaranteed the above debts. The claim against the second defendant did not proceed for reasons which I set out below.
[3] I note at the outset that this case serves as a warning on the dangers of poor drafting. Mr Herron, Mr Wallace and their associated entities amassed copious legal documents regulating their affairs. These documents, and in particular the agreements relied on in this proceeding, were frequently poorly drafted, lacking consistency and coherence both internally and with other agreements. The difficulty involved in untangling the morass of documents, conflicting narratives, and other evidence has made what should have been a simple exercise onerous for both the parties and the Court.
Background Facts
[4] Mr Herron and Mr Wallace met in early 2003. At that time, Mr Wallace was involved in a property development, in Sidmouth Street, Mairangi Bay (“the Sidmouth Development”). Mr Wallace was carrying out the property development through his company Georgian Properties Ltd (“Georgian”). He had secured first mortgage funding from Lombard Finance and Investment Ltd (“Lombard”). Mr Wallace advised Mr Herron that the cost to complete the development was more than Lombard was willing to lend him. What he needed, therefore, was second
mortgage finance to complete the development.
1 The document was given the identifier SH9 during the summary judgment proceeding. I adopt the identifier here as to refer to it as the deed of acknowledgment of debt would be unhelpful given the number of deeds of acknowledgment of debt in existence between the parties.
[5] Mr Herron agreed to provide Georgian with that funding after the two had discussed the matter and agreed certain terms and conditions. Mr Herron and Mr Wallace entered into a series of agreements, including a shareholders’ agreement and a loan agreement. Pursuant to those agreements, Mr Herron provided development funding through a company which he incorporated for this purpose, Sidmouth Street Development Ltd (“Sidmouth”), by way of an interest free loan of
$250,000 to Georgian Properties Ltd in return for acquiring a 50 per cent shareholding in Georgian. As already recorded, the majority of the development funds for the Sidmouth Development came from Lombard. These agreements, in simple terms, provided that at the conclusion of the development and after repaying Lombard and money advanced by Mr Herron’s interests, the net profit from the Sidmouth Development would be split equally between the plaintiff and the first defendant.
[6] In 2003, Mr Herron was working with Mark Bryers of the Blue Chip group of companies, then called “Blue Sky”. Over the period 2003 to 2006 Mr Herron, Mr Wallace and entities associated with and controlled by them were involved in a series of transactions involving proposed developments by companies in the Blue Chip group. Mr Wallace and Mr Herron’s role was to identify opportunities to acquire land upon which apartments could be built. They were not paid a consultancy fee but, instead, would receive rights in the development. They identified a site which was suitable for development at Turner and Waverley Streets, near Queen Street in Central Auckland (“the Turner and Waverley Development”). In August 2003, Georgian entered into an agreement for sale and purchase for a portion of the land. On 11 December 2003, it nominated Rockfort Ltd (“Rockfort”), a Bryers company, as the purchaser of the property.
[7] Also in December 2003, Georgian nominated SLA Properties Ltd (“SLAP”), another Bryers company, as purchaser of a property on the corner of Brisbane Street and Frankton Road in Queenstown (“the Queenstown Development”). That, again, was a site that Mr Herron and Mr Wallace considered had development potential.
[8] The original arrangement with Rockfort was that Mr Herron and Mr Wallace, or their interests, were to become 50 per cent shareholders. The property would then be developed as a joint venture.
[9] By 2004, it became clear to Mr Herron and Mr Wallace that it was going to be difficult to fund both the Turner and Waverley Development and the Queenstown Development. They decided to effectively cash out their beneficial shareholdings in return for unconditional agreements to acquire apartments in the developments if and when it was completed by the Bryers interests.
[10] In 2004, the plaintiff, first defendant, Mr Bryers, Rockfort and Lombard entered into an undated deed of agreement. That provided that in consideration for the development services provided by Mr Herron and Mr Wallace, Mr Bryers, Rockfort, and Lombard (the funder of SLAP’s Queenstown Development) would transfer certain, as yet un-built, units in Turner and Waverley Development and Queenstown Development. Mr Wallace and Mr Herron were each to receive three apartments in the Turner and Waverley Development and half-shares in an apartment in the Queenstown Development. In addition, Rockfort and Lombard would pay
$10,000 plus GST per month in cash to Mr Herron and Mr Wallace until the completion of the developments, together with an upfront payment of $200,000 plus GST and a payment of $100,000 plus GST by 28 February 2005 or 2006.2
[11] The agreement set the time for transfer as 10 working days after practical completion of the units. The price for the units was deemed to have been paid to reflect the value of the development services previously provided.
[12] Mr Herron and Mr Wallace were also to acquire apartments in another development referred to as the Sexton Development arising from a similar arrangement.
[13] Reverting back to 2003, Mr Wallace negotiated the purchase of a site at
Coronation Street, Belmont, Auckland which was to be developed into a retirement village. Georgian entered into a sale and purchase agreement for that property. By
2 It is impossible to tell from the copy of the document produced whether the date is 2005 or 2006.
November 2003, Mr Wallace decided to proceed with the development through a new entity solely controlled by him which was Belmont Lifestyle Village Ltd (“Belmont”). That company was incorporated on 21 August 2003.
[14] Mr Wallace used funds drawn from Georgian’s facility for the Sidmouth Development to pay, on behalf of Belmont, the deposit for the Coronation Street site. It was paid in two instalments of $75,000 each on 16 June and 5 August 2003. Lombard acquiesced in that arrangement; however, Mr Herron had no knowledge of it. Mr Wallace also applied funds from Georgian’s facility with Lombard to settle a relationship property claim with a former partner. These matters were in breach of the agreement made in respect of the Sidmouth Development.
[15] Mr Wallace then obtained a new and separate facility from Lombard to
support Belmont’s development at Coronation Street (“the Belmont Facility”). On
20 April 2004, $268,695 was repaid to Georgian from the Belmont Facility. Mr Wallace asserts that the repayment was to address the breaches caused by the payments to his former partner and for the Belmont deposit.
[16] Mr Herron did not become aware of the diversion of funds until 2005. He was very angry. He considered that Mr Wallace had betrayed him and had done the wrong thing by him and his family. He threatened to report Mr Wallace for criminal offences and indicated that he met a senior investigator at the Serious Fraud Office to discuss a formal complaint against Mr Wallace. A facsimile, apparently sent on
9 October 2005 from Mr Herron to Mr Wallace, outlines allegations of a significant loss having been incurred by Mr Herron as a result of the Mr Wallace’s actions. There has, however, been no precise quantification of this loss.
[17] At the same time Mr Wallace received advice from Lombard that Belmont was in default with its loan. Belmont was no longer a viable proposition for Lombard to be involved with as a lender. It had made a decision to sell the property at the earliest convenience and then to recover any shortfall by way of recourse against Mr Wallace’s personal guarantee.
[18] Lombard advised that they were prepared to forebear from legal action if Mr Wallace was able to provide further security. Lombard referred to its knowledge of the four apartments due to Mr Wallace from Mr Bryers, in the Turner and Waverley, and Queenstown Developments. Lombard proposed that Mr Wallace assign those rights to it to cover any potential residual liabilities of Belmont.
[19] Mr Wallace indicated that he was willing to assign the apartment purchase contracts to Lombard. That led to Lombard instructing its solicitors, Buddle Findlay, to begin drafting assignment and security agreements for Mr Wallace’s apartments which, at that time, were held by his company Shades of Autumn Ltd (“SAL”).
[20] In June 2005, Mr Herron incorporated Central Auckland Properties Ltd (“CAPL”). He nominated that company as the entity which would receive his apartments from Rockfort and SLAP when those developments were completed. Lombard indicated a desire to obtain Mr Herron’s un-built apartments as further security for the Belmont Facility. Lombard instructed its solicitors to create documents which created security over the un-built apartments.
[21] A series of settlement deeds for the un-built apartments were then executed. Those involving the Herron interests were executed by Mr Herron, his company CAPL, Rockfort and Mr Bryers. Similarly, those associated with Mr Wallace were executed by Mr Wallace, his company SAL, Rockfort and Mr Bryers. Each deed is dated 22 August 2005. A separate deed was executed for each of the apartments to be transferred to the interests of Mr Herron and Mr Wallace.
[22] The deeds were in substantially similar terms providing for the Herron or Wallace interest, as appropriate, agreeing to release any rights they may have had to shares in Rockfort held in trust for them, or their nominees, released Lombard from any obligations it had relating to the applicable apartment, and committed Rockfort and SLAP to transfer the applicable apartment to the nominated interest of either Mr Herron or Mr Wallace, as appropriate, within 10 working days of completion.
[23] Finally, Mr Bryers guaranteed the performance of the vendor entities, that is, Rockfort and SLAP, on each deed. Each deed was accompanied by a sale and
purchase contract for the applicable un-built apartment. CAPL was the purchaser of the three Herron apartments. SAL was the purchaser of the three Wallace apartments.
[24] The agreements were on the standard ADLS form. They were modified by a number of additional terms. The additional terms contained the following:
(a) The purchase price was deemed to be paid; and
(b)The vendor would pay compensation to the purchaser if the vendor cancelled the agreement or, did not proceed with the development.
[25] On 9 September 2005, Mr Wallace, Mr Herron, SAL, CAPL, Rockfort, SLAP and Mark Bryers entered into a deed of consideration and settlement in relation to Apartment 403 at the corner of Frankton Road and Brisbane Street, Queenstown. The deed followed substantially the same form as the deed previously referred to. It provided for a purchase price for Apartment 403 of $1.55 million, with a debt back to Rockfort, SLAP and Mr Bryers of $200,000.
The October 2005 Documents
[26] In, or just prior to, October 2005, the parties to this proceeding entered into a number of agreements. These agreements were a ‘wash-up’ of the issues between Mr Herron and Mr Wallace. In particular, the parties wished to settle the alleged damages claim that Mr Herron had against Mr Wallace over misuse of the Georgian funds, and the use of the apartments belonging to Mr Herron and his interests as security for the Belmont Facility. Those documents were:
(a) The Sidmouth Settlement Deed dated 20 October 2005;
(b)An admission of claim under which Mr Wallace admitted liability to Mr Herron in the sum of $3,160,950, plus interest and solicitor/client costs;
(c) A Deed of Acknowledgement of Debt between Mr Herron and Mr Wallace, in which Mr Wallace acknowledged his indebtedness to Mr Herron in the sum of $3,160,950, plus interest at 15 per cent per annum if demanded; and
(d) The second Deed of Acknowledgement of Debt also dated 20 October
2005 between the plaintiff and the first defendant, Belmont and SAL
(“SH9”).
[27] The evidence shows that Mr Wallace signed the documents on 20 October
2005. They were then sent by his lawyers, Fortune Manning, to Mr Herron’s lawyer,
Mr Hucker, for Mr Herron to sign.
[28] To provide an outline of the arrangements, the Sidmouth Settlement Deed is the contract on which Mr Herron bases most of his claim. It has not been made clear who drafted the agreement. The Sidmouth Settlement Deed contains an acknowledgment by Mr Wallace that he is indebted to Mr Herron in the amount of
$3,160,950 and outlines circumstances in which Mr Wallace is entitled to a reduction or ‘credit’ towards the total sum. The Sidmouth Settlement Deed provides that all amounts owing under the contract become due within three years and six months of the agreement being executed. The Sidmouth Settlement Deed and SH9 will be discussed in more detail below.
[29] A further development occurred with the execution of the Lombard Revolving Advances Facility Agreement which is dated 28 October 2005. That document records Lombard as the lender and Belmont as the borrower. There are four guarantors of the facility namely, Mr Wallace, SAL, Georgian and CAPL. The facility was for $13,683,000. Its purpose was the development of the property at Coronation Street.
[30] The lender had two concerns. First, it was concerned to see that the Sidmouth Street dispute had been resolved. Second, it needed confirmation that there was sufficient security available to meet its security ratio percentage, which was 80 per cent. That last matter was the reason why Mr Herron, on behalf of his
company CAPL, agreed to the use of his interests in four apartments as security, being the apartments referred to in cl 11 of the Sidmouth Settlement Deed; that is one apartment at Waverley Street, Auckland, two apartments at Turner Street, Auckland and the Queenstown property.
[31] The Sidmouth Settlement Deed and the agreements relating to the Belmont Facility were held in escrow until all the documents had been signed and Lombard had agreed to the arrangements. What is clear is that Mr Wallace had signed each of the documents he was required to sign before they were sent to Mr Herron.
The Herron – Bryers Settlement
[32] On or about 25 September 2006, Mr Bryers advised Mr Herron that he was about to publicly announce that he was unable to develop the Queenstown Development or the Turner and Waverley Development.
[33] On 24 October 2006, CAPL and Phoenix Project Management Ltd (a company associated with Mr Herron) commenced proceedings in the High Court against Rockfort and Mr Bryers (“the CAPL v Rockfort Proceeding”). The plaintiffs alleged that Rockfort’s cancellation or failure to proceed with the development of the Queenstown and Turner and Waverley Developments entitled CAPL to compensation under the applicable sale and purchase agreements. It sought damages against Rockfort and Mr Bryers for the unbuilt apartments in the amounts of:
(a) $466,940 as compensation for the failure to deliver Apartment 1102 in the 18 Turner St development;
(b)$504,680 as compensation for the failure to deliver Apartment 1107 in the 17-19 Waverley St development;
(c) $477,430 as compensation for the failure to deliver Apartment 1201 in the 18 Turner St development; and
(d)$800,000 being a half share of the $1.6 million purchase for Apartment 401 on the corner of Frankton Rd and Brisbane St, Queenstown.
[34] CAPL also sought damages for unpaid management fees which it alleged Mr Bryers and Rockfort had improperly paid to Mr Wallace. The unpaid management fees, plus interest claimed totalled $77,500.
[35] It is significant that on 14 September 2006 the fee simple title in respect of the Turner and Waverley Development was transferred by Monrad Ltd to Turn and Wave Ltd; a company owned and controlled by a party unconnected this proceeding.3
[36] On 13 December 2006, counsel in the CAPL v Rockfort proceeding filed a joint memorandum with the High Court advising that the parties were engaged in constructive settlement negotiations and anticipated a formal settlement agreement being prepared and executed within seven days. They sought an adjournment of the mention call of the proceeding.
[37] On 20 December 2006, Mr Herron and Mr Bryers entered into a heads of agreement which appears to discharge all of Rockfort, SLAP and Mr Bryers’ contractual obligations to CAPL and Mr Herron regarding the CAPL apartment agreements. It appears that that contract was declared unconditional. It was then followed by counsel for the parties in the CAPL v Rockfort proceeding signing a notice of discontinuance, which was dated 16 February 2007.
[38] The settlement agreement which was produced provided specifically in cl 20.1 that it replaced all prior agreements between the parties relating to the matters it dealt with. Mr Wallace’s case is that this agreement was a valid compromise of CAPL’s and Mr Herron’s rights under the apartment contracts. It was supported by a payment of a sum of money in exchange for a discontinuance of the proceeding in its
entirety. It therefore seems that CAPL and Mr Herron could no longer enforce the
3 Turn and Wave Limited changed its name to Turner and Waverlry Limited and then later, Bianco
Limited.
apartment contracts against Rockfort or the guarantee against Mr Bryers. The rights that they had under the agreements had been abrogated or extinguished and replaced with the rights under the December 2006 agreement. As an added consequence, there was no longer any prospect of CAPL being exposed to Lombard in the event of a Belmont default because CAPL’s guarantee to Lombard was expressly limited to the value “on sale” of the apartments.
Previous Proceedings
[39] In December 2006, Mr Herron applied for summary judgment against Mr Wallace on the grounds that he had breached the Sidmouth Settlement Deed by collecting Mr Herron’s half share of management fees from Mr Bryers and failing to account for those fees. Mr Wallace opposed the application. In his affidavit opposing summary judgment Mr Wallace stated:
Pursuant to the Agreement, I acknowledged that I was indebted to Mr Herron in the sum of $3,160,950 which was payable in accordance with the Agreement. I executed an Admission of Claim in the amount of $3,160,950 reduced by $600,000 being a credit I was entitled to for a payment made by Lombard pursuant to the Agreement. Pursuant to the Agreement however, that amount only becomes immediately due and owing if I (and/or Shades of Autumn Limited, my company) breach the Agreement (otherwise such sum is not due and owing for 3½ years from the date of execution of the Agreement, being April 2009).
[40] In April 2007, Mr Herron and Mr Wallace entered into a settlement agreement under which there was a payment of $300,000 which, inter alia, “… satisfie[d] the alleged specific breach referred to in the High Court proceedings …”
Procedural History
[41] Mr Towle, counsel for the defendants at the first hearing, sought leave to add a further brief of evidence from Michael Howard Reeves. Mr Patterson did not oppose. I granted leave accordingly.
[42] Mr Towle sought leave to file a first amended statement of defence, the effect of which was to add an affirmative defence by the second defendant in the form of paragraphs 25 to 29 of the amended statement of defence. Mr Patterson did not oppose the amendment. As a result of the amendment he advised that the plaintiff no
longer sought judgment against the second defendant. Both counsel confirmed to me that no issue arose as to costs arising out of the amendment and the abandonment of the application for judgment against the second defendant. I proceed on the basis that the cause of action against the second defendant is struck out.
[43] At the end of evidence and in the course of his final submissions, Mr Towle sought leave to amend paragraph 18 of the amended statement of defence. He made an oral application to amend the statement of defence by deleting the then paragraph
18 and replacing it with:
They admit that the sale of the Queenstown property never settled. Save as expressly admitted, they deny paragraph 23 of the second amended statement of claim.
[44] I declined the amendment as it did not comply with r 5.48 of the High Court Rules. It was evasive. Mr Towle sought leave to file a formal application and one which would comply with the High Court Rules. He sought time to do this. I made appropriate directions. This development, unfortunately, has led to a lengthy gap between the first hearing of this case, followed by a change of counsel for the defendants, then the second hearing.
[45] At a conference on 16 June 2015, I was advised that issues relating to amendments had been resolved and could now proceed on an unopposed basis. This included amendments both to the statement of claim and the statement of defence. A timetable was set for the filing of the amended proceedings and an adjourned date of hearing for the trial itself was fixed for 28 October 2015. It was recognised that additional briefs of evidence would be required from Mr Herron and that there would be briefs from the defendants in answer also to be served.
[46] The case took a new and significant development in September 2015. The defendants appointed new counsel. Advice was given of yet a further application to amend the statement of defence and, in particular, to include an affirmative defence. I gave directions for the disposal of that application with provision for a fixture on
2 October 2015 in the hope that the trial date that had been set for 28 October 2015 could be maintained. Unfortunately, the fixture date that I had allocated could not be utilised because of my involvement in a criminal trial. Accordingly, the trial date of
28 October was used for argument in relation to the amendment application. That meant that the trial itself had to be adjourned.
[47] When the matter came before me on 28 October for the purpose of dealing with the application to amend the statement of defence, an issue arose as to whether there should be evidence placed before the Court which supported the affirmative defence raised in the proposed amended statement of defence. Counsel, who had then been instructed for the defendants, advised that such evidence was available. At that stage, counsel for the plaintiff indicated his instructions were to continue opposition to the application to amend but, from a practical and pragmatic point of view, he would not oppose time being allowed for the evidence supporting the affirmative defence to be placed before the Court so that the Court could rule on the amendment.
[48] The amendment application could not be completed on 28 October 2015. Accordingly, the hearing was adjourned until 18 November and directions for that evidence to be filed in affidavit form were given. Prior to the hearing on
18 November, counsel for the plaintiff advised that the plaintiff no longer opposed the defendants’ application to amend. Directions were made for the filing of the amended pleadings and dealing with ancillary matters. In addition, the resumed substantive trial date was fixed for 4 April 2016 and directions were given for the service of evidence in relation to the new affirmative defence of oppression and the implied term issue, which had been raised by the fourth amended statement of claim. In particular, the directions specified that the hearing on 4 April 2016 would commence with the plaintiff presenting evidence on the implied term and oppression issue, followed by the defendants’ evidence on those two topics, followed in turn by closing submissions from the defendants and then the plaintiff.
[49] At the resumed hearing, which commenced on 4 April 2016, Mr Patterson announced that the plaintiff discontinued the implied term causes of action covered in the fourth amended statement of claim. As a result, I struck out those provisions and reserved costs. Mr Patterson further announced that as a consequence Mr Herron would not be recalled to give the evidence in the supplementary brief which had been served. The result was that the plaintiff’s additional evidence was
confined to expert witnesses, who the plaintiff called, principally directed at the oppression defence.
[50] The defence had been supplied with Mr Herron’s brief and anticipated that he would be called. That did cause a complication because the defence had anticipated putting certain documents to Mr Herron. That could not occur in view of the fact that he was not going to be called.
[51] I gave directions for the experts to assemble again and to complete a report for the purposes of r 9.44. Following that, I also discussed with counsel a process by which the experts would be examined using a hot tub format.
[52] In the course of the new hearing Mr Patterson signalled an intention to object to the evidence to be led on behalf of the defendants. Both counsel conferred and advised me that they were content that I provisionally hear the evidence, but reserved the objection on the basis that it be determined on the papers. The case proceeded on that basis and I gave directions for the filing and service of submissions in support and opposition. The effect was to allow counsel time after the conclusion of the formal hearing to complete their respective memoranda on the objection.
[53] I have issued a separate judgment on the evidence issue, in which I allowed the plaintiff’s objection to admissibility in relation to one sentence in the first defendant’s brief of evidence but dismissed all other objections.4
[54] I have set out this background because it does serve to explain an unusual circumstance in this case whereby issues have been raised by the defence which could well have been dealt with by the plaintiff, had the plaintiff availed himself of the opportunity to give evidence, but determined not to do so.
Outline of Issues
[55] The issues that I am required to decide in this case are:
4 Herron v Wallace [2016] NZHC 1127.
(a) What sum is owing from the portion of the debt relating to the value of the apartments?
(b) What sum is owing from the remaining portion of the debt? (c) Is there anything owing under the SH9 agreement?
(d) Is there interest owing?
(e) Should the contracts be reopened under the Credit Contract and
Consumer Finance Act 2003?
Assignment/Apartments
[56] All parties to the case agree that the sum described as debt in the Sidmouth
Settlement Deed was comprised of two parts:
(a) $2,123,950 being the value given to the apartments; and
(b) $1,037,000 being the remainder.
[57] The $2,123,950 was a nominal value given to CAPL’s interests in the four apartments; three in the Turner and Waverley Development and CAPL’s half share in the Queenstown apartment. A key issue in this case is whether or not Mr Herron is able to enforce the portion of the debt which relates to the value of the CAPL apartments.
[58] The relevant clauses provide:
6.Issues have arisen between Wayne Wallace and Stuart Herron in respect of which Wayne admits that Stuart would be entitled to claim damages as a result of his conduct with Lombard in securing earlier advances from Lombard. The parties have agreed to settle the foreshadowed proceedings claiming such damages on the following basis:
(a) Wayne Wallace acknowledges that he is indebted to Stuart Herron in the amount of $3,160,950 (being $1,037,000 plus the value of the Turner and Waverley Street Apartments and Herron’s half share of the Queenstown Apartment detailed in
clause 11 of this Agreement which are agreed to have a value of $2,123,950) which shall be payable in full without deduction as required by this Agreement provided that upon fulfilment of the obligations pursuant to clause 11 of this Agreement the total outstanding amount due to Stuart Herron shall be reduced by $2,123,950. In the event the Agreement for the Sale and Purchase for the Queenstown property referred to in clause 11(c) does not become unconditional the total outstanding amount due to Stuart Herron by Wayne Wallace shall reduce by $1,448,950 instead of $2,123,950 referred to in this clause upon the fulfilment of the obligations under clause 11(a) and (b) only of this Agreement.
…
9.1All amounts due from Wayne Wallace to Stuart Herron shall become due and owing, within three years and six months of this Agreement being executed by Wayne Wallace and/or Stuart Herron.
9.2Stuart Herron and Central Auckland Properties Limited shall grant an option to Wayne Wallace and/or nominee to purchase Stuart Herron and/or Central Auckland Properties Limited’s interests in the properties listed at clause 11(a) – (c) below (for the period Stuart Herron and/or Central Auckland Properties Limited hold an interest) for the purchase price of all amounts due from Wayne Wallace to Stuart Herron under this Agreement plus all penalty interest or costs owing (“Purchase Price”) and any payments made shall by Wayne Wallace shall be [sic] credited against the amounts due by Wayne Wallace to Stuart Herron pursuant to this Deed and the debt outstanding by Wayne Wallace under this Agreement shall be reduced by the net sale proceeds received by Stuart Herron or Central Auckland Properties Limited on a sale of its interest in any of the properties listed at clause 11(a) – (c) below to any person or entity other than Wayne Wallace or his nominee. Nothing in this clause shall prevent Stuart Herron and Central Auckland Properties Limited from selling the properties listed at clauses 11(a) to (c) of this Agreement at any time after the expiration of 3.5 years from the date of this agreement.
…
11. Subject to clause 9.1 of this Agreement and as a condition of this Agreement, Wayne Wallace will also procure the release of any security interest and/or mortgages secured against the properties listed below:
(a) Apartment 1107 at 17 – 19 Waverley Street, Auckland being an apartment in a proposed subdivision of all that land comprised in Certificate of Title NA 1949/81 and NZ
508/163
(b) Apartments 1201 and 1102 at 18 Turner Street, Auckland being an apartment in a proposed subdivision of the land comprised in Certificate of Title 32D/971; and
(c) Apartment 403 as shown on the draft unit title plan attached to an Agreement for Sale and Purchase attached as Schedule C being an apartment in a proposed subdivision of Certificate of Title OT 234501, Otago Registry.
Wayne Wallace is to procure the release of such security interests and/or mortgagees and encumbrances at the same time he becomes liable to make payment of all amounts due from Wayne Wallace to Stuart Herron in accordance with clause 9.1 of this Agreement. In the event the releases are obtained the total indebtedness of Wayne Wallace to Stuart Herron shall be reduced by the sums set out in clause 6(a) of this Agreement to reflect the release of the securities over the properties owned by Central Auckland Properties Limited.
The Parties’ Positions
[59] The plaintiff submits that no releases have been obtained and therefore, the entire sum given for the value of the apartments is still owing. The plaintiff submits that it is irrelevant whether the CAPL apartments were or were not constructed, whether Lombard registered any interest, or took steps to enforce the securities. The plaintiff also submits, pursuant to cl 6(a), that as the sale and purchase agreement for the Queenstown apartment did not become unconditional, the defendants are not entitled to the credit for the value of that apartment.
[60] The defendants deny that none of the releases have been obtained. The defendants plead that Mr Wallace did everything that was required in the circumstances to procure a release of the securities as required in terms of cl 11 of the Sidmouth Settlement Deed by virtue of the following:
(a) None of the CAPL properties were ever constructed and neither
Rockfort nor SLAP ever acquired title to the properties.
(b) Lombard did not register either by way of caveat, charge or otherwise any security interest it may have had over the CAPL properties.
(c) Lombard did not take any steps to enforce any of the securities over the CAPL properties.
(d) Belmont fully repaid the Lombard loan on or about 4 November 2007.
(e) All security interests that Lombard had or may have had in respect of the CAPL properties were extinguished as a consequences of:
(i) repayment of the Lombard loan; and
(ii)the failure by Rockfort and SLAP to proceed with the apartment developments comprising, in part, the CAPL properties.
[61] In summary, the defendants’ case is that long before Mr Wallace was required to ‘release’ the securities, the contracts were worthless and this was clear to all parties.
The Queenstown Apartment
[62] The fourth apartment referred to in cl 11 is that referred to in cl 11(c), Apartment 403. It is the subject of a sale and purchase contract, undated, which describes the Vendor as SLAP and the purchasers as SAL and CAPL. It is in respect of “a development to be constructed on the corner of Franklin Road and Brisbane Street, Queenstown, New Zealand”. It relates to Apartment 403. The price is recorded as $1,550,000. It contains a similar cancellation provision providing that the vendor will pay compensation to the purchaser in the sum of $1,550,000 if the development does not proceed. Again, it is common ground that this contract did not become unconditional.
[63] The interest of the plaintiff’s company, CAPL, is a net $675,000 when the terms of a deed of consideration and settlement are taken into account. That deed recorded that Mr Wallace, his company SAL, Mr Herron and Mr Herron’s company, CAPL, acknowledge that they must pay that portion of the sale price which exceeds
$1.35 million to either Rockfort, SLAP or Mr Bryers.
[64] The four apartments referred to in cl 11, therefore, have a total consideration in their respective contracts of $2,123,950 which is the figure referred to in cl 6(a) of the Sidmouth Settlement Deed.
[65] The Queenstown property differs from the others in that it was under a conditional contract. That would seem to explain the reference to this property in cl
6(a) of the Sidmouth Settlement Deed. Clause 6(a) states that should the sale and purchase agreement for the apartment in the Queenstown Development not become unconditional, Mr Wallace is not entitled to deduct the value of that apartment from the total sum owing.
[66] The fact that the Queenstown Development was never completed, and that the sale and purchase agreement never became unconditional is agreed by all parties. Given the clear wording of the clause, I find that the defendant is unable to receive a credit for the value of the Queenstown Apartment, being $675,000.
Was there an absolute assignment?
[67] Having determined that no credit is available to the defendants for the value of the Queenstown apartment, I now consider the position in relation to the other three apartments.
[68] Determining the nature and effect of the right that passed to Lombard is crucial in order to determine whether Mr Wallace had done everything necessary to procure the release of the security as required by cl 11 which provides:
Wayne Wallace is to procure the release of such security interests and/or mortgages and encumbrances at the same time he becomes liable to make payment of all amounts due from Wayne Wallace to Stuart Herron in accordance with clause 9.1 of this Agreement
[69] Also relevant to this point is cl 9.2 which provides:
Stuart Herron and Central Auckland Properties Limited shall grant an option to Wayne Wallace and/or nominee to purchase Stuart Herron and/or Central Auckland Properties Limited’s interest in the properties listed at clause 11(a)
– (c) below (for the period Stuart Herron and/or Central Auckland Properties
Limited hold an interest) for the purchase price of all amounts due from Wayne Wallace to Stuart Herron under this Agreement plus all penalty interest or costs owing (“Purchase Price”) and any payments made shall by Wayne Wallace shall be [sic] credited against the amounts due by Wayne Wallace to Stuart Herron pursuant to this Deed and the debt outstanding by Wayne Wallace under this Agreement shall be reduced by the net sale proceeds received by Stuart Herron or Central Auckland Properties Limited on a sale of its interest in any of the properties listed at clause 11(a) – (c) below to any person or entity other than Wayne Wallace or his nominee.
Nothing in this clause shall prevent Stuart Herron and Central Auckland Properties Limited from selling the properties listed at clauses 11(a) to (c) of this Agreement at any time after the expiration of 3.5 years from the date of this Agreement.
[70] An absolute assignment can be distinguished from a conditional assignment and from an assignment by way of a charge. Some authorities consider that an assignment and a charge are distinct concepts, others that an assignment by way of charge is a limited type of assignment.5
[71] The conventional approach to determining whether there has been an absolute assignment is by considering the nature of the instrument itself. In Hughes v Pump House Hotel Company Ltd Matthew LJ, in the context of determining in whose name the action should be brought, stated:6
In every case of this kind, all the terms of the instrument must be considered; and, whatever may be the phraseology adopted in some particular part of it, if, on consideration of the whole instrument, it is clear that the intention was to give a charge only, then the action must be in the name of the assignor; while, on the other hand, if it is clear from the instrument as a whole that the intention was to pass all the rights of the assignor in the debt or chose in action to the assignee, then the case will come within s. 25, and the action must be brought in the name of the assignee.
[72] In Otway v Head, Master Lang (as he then was) considered that the fact that the assignment instrument purported to be an “assignment by way of security of leases” was not determinative but did suggest that the purpose of the assignment was to provide security rather than an absolute assignment.7 However, an assignment may be absolute even if it is by way of mortgage or security.8 The test is whether the
‘assignment’ unconditionally transfers all the rights of the assignor to the assignee.9
[73] The plaintiff’s case is that CAPL’s rights in the sale and purchase agreements were transferred to Lombard by absolute assignment. I note that the instruments in
favour of Lombard which must have been signed by Mr Herron were not produced
5 Compare AG Guest and Ying Khai Liew Guest on the Law of Assignment (2nd ed, Sweet & Maxwell, London, 2015) at [1–89] with John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (5th ed, LexisNexis, Wellington, 2016) at 634.
6 Hughes v Pump House Hotel Company Ltd [1902] 2 KB 190 (CA) at 193.
7 Otway v Head (2004) 5 NZ ConvC 193,987 (HC) at [17].
8 Commercial Factors Ltd v Maxwell Printing Ltd [1994] 1 NZLR 724 (HC) at 732.
9 Hughes v Pump House Hotel Company Ltd at 194; Commercial Factors Ltd v Maxwell Printing
Ltd at 732.
in evidence. No reason for this was given. Only one notice of assignment to vendor has been produced. It is addressed to the vendor of the particular sale and purchase contract and it is stated to be from SAL and CAPL. After referring to the agreement it provides:
We give you notice that by an Assignment by Way of Security (“the Assignment”) dated 12 October 2005 and granted by way of security in respect of advances made or to be made to Belmont Lifestyle Village Limited by Lombard Finance and Investments Limited (“the Assignee”) we have irrevocably and unconditionally assigned by way of security all of our right, title, and interest in the Agreement to the Assignee. We have also appointed the Assignee and any of its directors or managers severally to be our lawful attorney in connection with all matters arising out of or in connection with the Agreement.
The Assignee is entitled to, and may in the future exercise all or any of the powers, and perform all or any of the obligations, of Shades of Autumn Limited and Central Auckland Properties Limited under or in relation to the Agreement as if it were Shades of Autumn Limited and Central Auckland Properties Limited.
Despite the Assignment, the Assignee does not have any obligation or liability to you under the Agreements. We shall at all times remain responsible for the performance of all our obligations under the Agreements and for any failure to comply with our obligations under the Agreements.
[74] The loan made pursuant to the Lombard Revolving Advances Facility Agreement was repaid on or about 4 November 2007. A statement confirming repayment and that a nil balance was due was issued on 5 November 2007.
[75] Mr Reeves, who was formerly the chief executive officer and principal shareholder of Lombard Group Ltd whose subsidiary was Lombard Finance and Investment Ltd (now in receivership and in liquidation), gave evidence that no separate documents were signed, nor were any steps taken, to release the securities over the CAPL apartment contracts once Belmont had repaid the loan. His view was that once the loan was repaid nothing was, or needed to be done from Lombard’s perspective to release its security interests.
[76] The defendants’ case is that the assignment was conditional and was by way of a charge only and that it did not prevent CAPL and Mr Herron from continuing to deal with the CAPL apartments for the duration of the assignment. The defendants submit that the assignment must have been conditional as the documents do not
show any intention to effect an absolute assignment of CAPL’s legal rights under, or title to, the sale and purchase agreements to Lombard. In particular, the defendants point to cl 9.2 which granted Mr Wallace an option to purchase the apartments from Mr Herron/CAPL.
[77] Mr Herron maintained in cross examination that he had no knowledge of the outcome of the Turner and Waverley Development and was not able to exercise his rights under the guarantee by Mr Bryers because his rights had never been reassigned by him. Evidence provided to the Court shows that this was not the case. As set out above, Mr Herron and Phoenix Project Management Ltd issued proceedings against Mr Bryers and Rockfort on the basis of the guarantee.
[78] On 20 October 2006, Mr Herron signed an affidavit in support of an interlocutory application for summary judgment against Rockfort and Mr Bryers. In the affidavit, Mr Herron states:
46.On or about 25 September 2006 Mark Bryers told me that he was publically announcing that he was unable to develop Apartments
401, 1102, 1107, and 1201. Therefore, Mark Bryers’ notification to
me constituted a cancellation and/or failure to development [sic] Apartments 401, 1102, 1107 and 1201 in accordance with clause 35 of the further terms of sale for each respective sale and purchase agreements for Apartments 401, 1102, 1107 and 1201.
This was also effectively repeated in the Statement of Claim which then further pleaded that:
As at 16 October 2006 the first and second defendants are liable to the first and second plaintiffs in the sum of $2,557,175.00 in respect of clause 35 of the further terms of sale of the Apartment 401, 1102, 1107 and 1201 DoCs and S&Ps and the DoA and the invoices (1, 3, 4, 5, 6, 7, 8, 9, and 10).
[79] Mr Herron and Mr Bryers, along with their respective companies, entered into a settlement agreement to resolve the dispute and discontinue the proceedings. The settlement contract was declared unconditional. The proceedings were discontinued by CAPL and Phoenix Project Management Ltd on or about
16 February 2007.
[80] The defendants submit that the settlement agreement was a valid compromise of CAPL’s and Mr Herron’s rights under the apartment contracts. They point to the fact that a binding agreement involving payment of a settlement sum in exchange for the notice of discontinuance, plus the forbearance to sue which provided the appropriate consideration, created a position where the plaintiff and CAPL could no longer enforce the apartment contracts against Rockfort or the guarantee against Mr Bryers. Any rights that existed had been extinguished and replaced with the rights under the settlement agreement.
[81] Two specific consequences arise from the settlement involving Mr Herron
and his company’s interests, namely:
(a) There was no prospect of Lombard ever exercising its rights to call on the agreements for security as the vendor’s performance had been discharged or ended by the compromise; and
(b)There was no longer any prospect of CAPL’s potential liability to Lombard in the event of a default by the principal borrower (Belmont). The reason for that is because CAPL’s guarantee to Lombard was expressly limited to the value of the apartments on sale.
[82] The defendants say that well before Mr Wallace was obliged to procure the release of any Lombard interests in the CAPL apartment contracts, those contracts had no value as a result of the settlement entered into between Mr Herron and Mr Bryers.
[83] What is apparent is that Mr Herron proceeded on the basis that the assignment did not bar him from dealing with the apartment contracts. The defendants say that the assignment was conditional and was by way of charge only. In particular, they say it did not preclude Mr Herron or CAPL from dealing with the apartment contracts.
[84] I was not provided with the actual assignments, which the documents suggest were made on 12 October 2005. What is apparent, however, is that Lombard
proceeded on the basis that it had no rights to the contracts once the loan had been repaid. Mr Herron obviously proceeded on the basis that he was able to honour the contracts and did so and settled his and CAPL’s entitlements under the contracts so that the interests with the vendors were discharged by accord and satisfaction.
[85] Perhaps not surprisingly as this has developed, other relevant documents on this question were not provided to me. I mention in passing the fact that the CAPL apartment agreements had provision for assignment by the CAPL interests in the property prior to settlement and that provision required a deed of covenant to be given by CAPL in favour of the vendor. There is no evidence that such deeds were given.
[86] Perhaps of some significance also, nothing has been put before the Court to suggest Mr Herron’s position in the 2006 proceeding was met by the proposition that it no longer had any interest in the contracts by virtue of an assignment to Lombard.
[87] I should add that Mr Wallace, in the evidence given this year, claimed that he had contacted the plaintiff in November 2007 to tell him that Lombard had been fully repaid. While the plaintiff denies that this occurred, he does not dispute that the Belmont Facility was in fact repaid.
[88] It is a well established principle that when determining the nature of an assignment, the primary consideration will be the nature of the instrument itself considered against the commercial background.10 The construction of the assignment is used to determine the intentions of the parties. As an analysis of the instrument is not available in this case, I have considered the documents which are available to the Court, the parties’ subsequent conduct, and the practical realities of the situation.
[89] Overall, Mr Herron’s position that he was barred from dealing with the apartments because of the absolute nature of the assignment is entirely undermined by the evidence. The Sidmouth Settlement Deed does not demonstrate an intention of an absolute assignment, Mr Herron and CAPL retained rights in the apartments.
In particular, I note that the Sidmouth Settlement Deed granted Mr Wallace an option
10 Bexhill UK Ltd v Razzaq [2012] EWCA Civ 1376 (CA) at [43].
to purchase the apartment from Mr Herron/CAPL. Accordingly, I find that there was no absolute assignment.
[90] Given that the apartments were not assigned to Lombard by way of absolute assignments, there can be no presumption that a formal reassignment was required to “procure the release of the securities” as required by the Sidmouth Settlement Deed. All parties to the contracts operated on the basis that once the loan was repaid, the securities were automatically discharged. Mr Herron’s evidence at trial that he does not know what happened to the apartments because they were never reassigned to him is contradicted by his own actions. I find that Mr Wallace did procure the release of the securities by repaying the Belmont Facility to Lombard. Accordingly he is entitled to the corresponding credit.
[91] The portion of the debt relating to the apartments is reduced from $2,123,950 to $675,000 to recognise that Mr Wallace is entitled to a credit for the value of the Turner and Waverley Apartments but not for the value of the Queenstown Apartment.
$1.037 Million
[92] As set out above, both parties to the dispute agree that the total sum of
$3,160,950 was made up of two parts:
(a) $2,123,950 being the value given to the apartments; and
(b) $1,037,000 being the remainder.
[93] The clauses of the Sidmouth Settlement Deed relevant to the $1,037,000 provide:
6 …
(c) Wayne Wallace shall be entitled to deduct from the debts set out in clauses 6(a) and (b) above an amount of $5,412.50 (being one half of the actual solicitor-client costs incurred by Wayne Wallace with Fortune Manning being the costs incurred in drafting and documenting a settlement with Wayne, Wallace, Stuart Herron and Mark Bryers) and one
half of any Lombard costs to the extent charged by Lombard in relation to the drafting and execution of the Deed attached to this Agreement as Schedule A, and the agreements for sale and purchase and deeds of consideration and settlement in relation to the Turner and Waverley Street and Queenstown Apartments.
(d) Wayne Wallace shall be entitled to a credit of one half of the amount of payments made to creditors of Walter Construction Limited to the extent that such payments are able to be reduced to below $300,000 and shall pay to Stuart Herron one half of all amounts in excess of $300,000 of payments made to current creditors of Walter Construction Limited.
(e) Wayne Wallace shall be entitled to a credit of $600,000 to be deducted from the amount owing by Wayne Wallace to Stuart Herron in terms of clause 6(a) of this Agreement upon and the payment by Lombard of $600,000 pursuant to that Agreement. [sic]
7.In partial satisfaction of the monies acknowledged by Wayne Wallace to be due to Stuart Herron and/or in payment of damages or as security for outstanding debt and in consideration of Stuart Herron forbearing from pursuing damages claims he has against Wayne Wallace in relation to Wayne Wallace’s conduct with Lombard it is agreed by Wayne Wallace and/or Shades of Autumn Limited that
…
(b) On receipt, Wayne Wallace shall pay to Stuart Herron
$175,000 from the Sexton Apartment’s project (being
Wayne’s 50% share of the deposit and Wayne’s 50% share ofthe payments due to him from the Sexton Apartment’s project as distinct from the 50% share of Stuart Herron) which shall be deducted from the amount owing to Stuart Herron by Wayne Wallace under clause 6(a).
(c) Wayne transfers his interest in the Sexton Apartment (which the parties agree has a value of $125,000) to Stuart Herron or his nominee and this amount is deducted from the amount owing to Stuart Herron by Wayne Wallace under clause 6(a).
[94] The Sidmouth Settlement Deed states explicitly that the sum of $2,123,950 is the value assigned to the apartments. However, no corresponding reason is given for the makeup of the remainder. Mr Herron and Mr Wallace have conflicting views of how the amount was reached. I set out the “Wallace Thesis” and “Herron Thesis” below.
Wallace Thesis
$
Fee to CAPL and settlement of damages claim 600,000.00
Mr Wallace’s half share of top-up payment for Queenstown apartment 100,000.00
Mr Wallace’s share in first Sexton apartment 175,000.00
Mr Wallace’s share in second Sexton apartment 125,000.00
Fortune Manning’s cost 5,412.50Half of Lombard’s legal costs 31,587.50
Herron Thesis
$1,037,000.00
=========
$
Unpaid loans 695,000.00 Penalty interest on unpaid loans 42,000.00 Walter Construction 300,000.00
$1,037,000.00
==========
[95] Mr Herron recognises that Mr Wallace was able to obtain a credit for the Sexton apartments, Fortune Manning’s costs and half of Lombard’s legal costs. However, he denies that these sums were used to calculate the amount of the debt owed.
[96] As set out above, Mr Herron maintains that the majority of the sum is made up of unpaid loans made by Sidmouth to Georgian. In support of this proposition, Mr Herron produced at trial two term loan contracts, dated 8 March 2005 and
9 September 2005. Both term loan contracts are on the ADLS second edition standard form.
[97] The 8 March 2005 Agreement states that the principal sum is $500,000 to be repaid in one lump sum payable six months from the date of the Agreement being executed. Additional clauses have been hand written into the Agreement. Clause 10 provides that the loan is to be used to repay an existing loan of $400,000 made pursuant to an agreement dated 7 March 2003 and subsequent advances. Clause 12 provides that “there shall be payable on execution of this Agreement a fee of
$100,000 to the Lender by the Borrower for arranging this rollover loan.” The
Agreement provides that the ordinary interest rate is 18 per cent per annum and the penalty interest rate is 38 per cent per annum.
[98] The 9 September 2005 Agreement states that the principal sum is $695,000 to be repaid in one lump sum payable six months from the date of the Agreement being executed. Again, additional clauses have been written into the Agreement. Clause 10 provides that the loan is to be used to repay the 8 March loan together with “… accrued interest at the default interest rate accrued pursuant to that Agreement which sum is $95,000 ($190,000 per annum)”. Clause 12 again provides for a $100,000 fee.
[99] It seems that the $95,000 interest said to be accrued is based on simple interest at the penalty rate. It is not clear why the penalty rate would apply.
[100] At the May 2015 trial, Mr Wallace stated that while it looked like his signature on the loan agreements, he had never seen either of the two term loan agreements before the trial. He stated that no money had ever been advanced to Georgian by Sidmouth beyond the initial interest free loan of $250,000 and that he would have been aware of any further advances as he controlled Georgian’s finances and did the banking for the company.
[101] In the April 2016 trial, Mr Wallace stated that it was his signature on the term loan agreements but that he signed them blank and that he signed both documents on the same day. His evidence was that Mr Herron had approached him on a building site and asked him to sign the documents, he did so because he was under pressure on the building site, and he trusted Mr Herron and they signed a lot of documents between them. Mr Wallace maintained that neither Mr Herron nor Sidmouth ever advanced any funds to Georgian beyond the initial interest free loan of $250,000.
[102] It is not necessary for me to determine whether there was in fact a debt of
$695,000 which was then brought forward to the Sidmouth Settlement Deed. Under the Sidmouth Settlement Deed there is a debt of $3,160,950 and the defendants’ claim that this was not a ‘debt’ is contradicted by the express terms and nature of the contract itself. I proceed on the basis that there was a debt and that this debt is
reduced by the amount of the credits that the defendants are entitled to under the contract.
[103] The defendants submit that $100,000 of the debt relates to a top-up payment that was to be owing in relation to the Queenstown Apartment. In short Mr Wallace’s claim seems to be that if the Queenstown property had been taken over and he received a half interest before transferring the same to the plaintiff, he would have had to pay $100,000. But as it was not settled he did not have to pay it and is, therefore, entitled to a credit. The reasoning for this credit seems doubtful. No evidence has been provided to support the assertion that this sum formed part of the debt or that Mr Wallace should be entitled to a corresponding credit. More specifically, the ‘top-up’ payment is not referred to anywhere in the Sidmouth Settlement Deed. I do not consider that the defendants have established an entitlement to a credit of $100,000 on this basis.
[104] All parties are in agreement that the defendants are entitled to a deduction of
$5,412.50 for Fortune Manning’s costs and for the $600,000 paid by Lombard from
Belmont’s facility.
[105] The defendants also claim that they are entitled to a discount of $31,587.50 for half of Lombard’s legal costs under cl 6(c). The defendants have not explained how they have reached the sum of $31,587.50 claimed, nor has any evidence been provided which supports a claim for that sum. In evidence, Mr Wallace was not sure how the figure was reached, stating that the number had been calculated by his lawyers. Clause 6(c) entitles the first defendant to a discount for half of any costs related to drafting the Deed of Settlement attached to the Sidmouth Settlement Deed as Schedule A and the agreements for sale and purchase and deeds of consideration in relation to the apartments. The invoices supplied in evidence show that there is an available credit of $15,055.57.
[106] The contract also provides for credits of $125,000 and $175,000 in relation to the Sexton Apartments pursuant to cl 7(b) and (c). The Sexton Apartments were another development where Mr Herron and Mr Wallace had assisted the developers and had rights in prospective apartments in lieu of a consultancy fee. Mr Wallace
admits that he never received the $175,000 referred to in cl 7(b) and accordingly never paid it to Mr Herron. Mr Herron submits that this means that there is no entitlement to a credit for that amount. The defendants submit they are entitled to relief on the face of the Sidmouth Settlement Deed. In my view, this is not the case. The provision reads that “[o]n receipt, Wayne Wallace shall pay to Stuart Herron
$175,000 from the Sexton Apartment’s project … which shall be deducted from the amount owing to Stuart Herron by Wayne Wallace under cl 6(a).” Under the provision Mr Wallace’s entitlement to a credit arises from the payment of $175,000. As no payment was made, Mr Wallace is not entitled to the corresponding credit.
[107] Mr Herron submits that Mr Wallace has not shown that his interest in the Sexton Apartment was transferred to Mr Herron and that he is not entitled to that credit. The provision reads:
In partial satisfaction of the monies … due … it is agreed by Wayne Wallace and/or Shades of Autumn Limited that … Wayne transfers his interest in the Sexton Apartment (which the parties agree has a value of $125,000) to Stuart Herron or his nominee and this amount is deducted from the amount owing
… .
No further action is required under the clause to entitle Mr Wallace to a credit for
$125,000. The parties agreed that the interest was transferred to Mr Herron and that
Mr Wallace was entitled to a credit for that amount.
[108] To summarise, from the sum of $1,037,000 the defendants are entitled to credits of:
(a) $600,000 for the payment made by Lombard; (b) $125,000 relating to the Sexton Apartments; (c) $5,412.50 for Fortune Manning’s fees; and
(d) $15,055.57 for half of Buddle Findlay’s fees.
This leaves a debt owing of $291,531.93 from the sum of $1,037,000.
SH9 Agreement
[109] Mr Herron’s claim is based on two documents. Mr Herron claims that he is owed a sum of approximately $2,555,537.50 pursuant to the Sidmouth Settlement Deed and a separate and independent debt of $600,000 pursuant to SH9. It is undisputed that a payment of $600,000 was made on 3 or 4 November 2005.11
[110] Mr Herron claims that the payment made on 3 or 4 November 2005 of
$600,000 was a part payment of the Sidmouth Settlement Debt and was unrelated to the debt under SH9. The only similarity between the two sums, he claims, is that they are both for $600,000.
[111] Mr Wallace claims that there was only ever one amount of $600,000 owing, and that the $600,000 set out in SH9 is the same debt as the $600,000 set out in the Sidmouth Settlement Deed. Mr Wallace submits that SH9 is merely a restatement of the $600,000 owing under the Sidmouth Settlement Deed. Therefore, Mr Wallace claims, the $600,000 has been paid and there is no further amount owing under SH9.
[112] The parties to SH9 are Mr Herron, Mr Wallace, Belmont and SAL. The Deed states:
BACKGROUND
A. The parties, Shades of Autumn Limited (“SAL”), Central Auckland Properties Limited (“CAPL”) and Belmont have entered into certain arrangements regarding borrowings of Belmont from Lombard Finance and Investments Limited, including a deed between SAL, CAPL, Belmont, the Creditor and the Debtor.
…
C. As part of the arrangements detailed at A above, the Debtor acknowledges a debt to the Creditor in the amount of $600,000 due and payable on the terms and conditions set out in this deed.
[113] SH9 provides that the debt is payable by Mr Wallace to Mr Herron within
5 years and 11 months of the date of the deed. It also states that:
3. At the expiration of two years from the date of execution of this
Agreement subject to clause 2 and in partial satisfaction of the rest
11 Refer to [104].
the Debtor will direct Belmont to pay the Creditor 25% of the operating surplus of Belmont, after taxation and before directors fees (per the audited accounts of Belmont), and such payments shall reduce the Debt accordingly.
[114] Mr Herron submits that the debt created by SH9 was a fee for the provision of the Turner and Waverley Apartments and Queenstown Apartment as security, he does not explain why CAPL, the entity supplying the security is not a party to SH9.
[115] The evidence suggests that SH9 was signed by Mr Wallace at the same time as the Sidmouth Settlement Deed and both documents were sent to by Mr Wallace’s lawyers to Mr Herron’s lawyer by urgent courier on 20 October 2005 and were to be held in escrow pending confirmation and execution of the arrangements with Lombard.
[116] Also relevant to this issue is a Deed of Acknowledgement of Receipt and Release and Consent to Assignment dated 1 November 2005 and prepared on Fortune Manning’s, Mr Wallace’s then lawyers’ letterhead. The Deed was initially headed as being between Sidmouth, Mr Herron, Georgian, Belmont and Mr Wallace. Throughout the document, Mr Herron has crossed out his name and initialled beside each deletion. Originally, every mention of Sidmouth except for the final mention, also included reference to Herron.
[117] The substance of the deed provides:
1.Sidmouth acknowledges that the $600,000 to be received from Lombard (drawn down from the facility Belmont has received from Lombard), is a payment made on behalf of Georgian.
2. Sidmouth hereby acknowledges and confirms that:
(a) The payment of $600,000 by Georgian is consideration for: (i) Sidmouth releasing Georgian from certain liabilities
to Sidmouth; and
(ii) Sidmouth releasing any interest it has in the properties at 8-10 Sidmouth Street (historic certificate of title 48B/1024, North Auckland registry), including Unit 1C of the development of this property; and
(iii) Sidmouth releasing Wallace from any personal guarantees to Sidmouth in relation to Georgian’s liabilities to Sidmouth; and
(b) On receipt of the $600,000 paid on behalf of Georgian this deed evidences the full and final settlement and discharge of all past, present or future claims Sidmouth have and might have had against Wallace in relation to obligations of Georgian to Sidmouth; and
(c) Sidmouth consent to the Assignment of the Deed of Subordination and Priority and shall immediately sign any documents necessary to effect the assignment.
[118] Although the document is dated 1 November 2005, the payment was not made to Sidmouth until 4 November 2005. The document was held in escrow until this time. Despite the letterhead, Mr Wallace was under the impression that the document had been prepared by Mr Hucker, Mr Herron’s lawyer, which seems unlikely. The only signature on the document is Mr Herron’s.
[119] The issue in regard to SH9 is whether it created a separate and stand alone debt of $600,000 as claimed by Mr Herron or is simply a restatement of one aspect of the debt set out in the Sidmouth Settlement Deed. Unfortunately, the evidence is not at all clear.
[120] Mr Herron’s contention that SH9 is ‘stand alone’ is not supported by SH9 itself. The background to the agreement references the agreements entered into between the parties and provides “[a]s part of the arrangements detailed at A above, the Debtor acknowledges a debt to the Creditor in the amount of $600,000 due and payable on the terms and conditions set out in this deed.” This indicates that SH9 does not create any debt but simply provides conditions for the repayment of a debt of $600,000 set out in ‘other arrangements’, the Sidmouth Settlement Deed. This supports Mr Wallace’s position that the SH9 $600,000 is the same as the Sidmouth Settlement Deed $600,000.
[121] The difficulty for Mr Wallace is that although SH9 seems to refer to the Sidmouth Settlement Deed, its provisions are very distinct. The Sidmouth Settlement Deed refers to the $600,000 being paid pursuant to the Lombard Agreement. The
Sidmouth Settlement Deed does not in any way refer to the payment arrangements set out in SH9. There are also differences in the due date and the parties.
[122] Under the Sidmouth Settlement Deed all amounts become due and owing within three years and six months of the agreement being executed. Whereas, under SH9, the $600,000 does not become due and owing until five years and 11 months after execution of the agreement, with part payment being made from the operating surplus of Belmont after two years.
[123] Under the Sidmouth Settlement Deed, Lombard is to pay $600,000 to Sidmouth and Herron who are each to execute the Deed of Settlement in favour of Lombard. In contrast, Sidmouth is not a party to the SH9, and Mr Herron is the only creditor.
[124] It is also not clear which position the Deed of Acknowledgement of Receipt and Release and Consent to Assignment supports, or why Mr Herron deleted his name from it. It appears possible that Mr Herron deleted his name to make it clear that the $600,000 was made in payment of the sum owing under the Sidmouth Settlement Deed rather than SH9 which was due to him personally. However, the Lombard Agreement stated that payment was to be made to Sidmouth and Mr Herron and that they were both to acknowledge receipt.
[125] Other evidence supporting Mr Wallace’s position is evidence given by Mr Reeves who was chief executive officer of Lombard. Mr Reeves gave evidence in the May trial that he questioned Mr Herron as to the extent of Mr Wallace’s debt to Mr Herron. He gave the following evidence:
In particular, I needed to be absolutely satisfied that the arrangements that Herron, Wallace and Lombard were proposing to make were in full settlement of all matters between them. I specifically asked whether there were any other issues other than the refinance and the $600,000 payment that were left unresolved. Mr Herron told me specifically that the payment of
$600,000 proposed was a final one and that there were no further payments due. Certainly, there was no discussion whatsoever of any separate or additional payment of $600,000 as I understand Mr Herron now alleges.
[126] Mr Herron’s position to this evidence is that the conversation never happened. However, I can see no advantage that Mr Reeves would gain from
misleading the Court. Additionally, Mr Herron did not demand 25 per cent of Belmont’s operating profit or request to see its accounts, nor did Mr Patterson mention the $600,000 sum in his 2012 demand to Mr Wallace.
[127] Mr Wallace was aware, at least by 2007, that Mr Herron asserted that there was still a $600,000 debt outstanding. Mr Wallace maintains that he confronted Mr Herron about this in person. This is denied by Mr Herron.
[128] Overall, the evidence surrounding the SH9 is a morass of conflicting reports and documents. The pivotal fact is that the SH9 is an acknowledgement of debt. It does not purport to create any debt; it refers to debt created in other arrangements. The plaintiff has not provided evidence which can prove, on the balance of probabilities, that despite this, the intention was to create a separate and independent debt.
Amount Owing
[129] To summarise the outcome up until this point, there is no debt owing under the SH9 agreement. Having regard to the findings recorded in [91] and [108] above, the amount owing under the Sidmouth Settlement Deed is $966,531.93.
[130] The plaintiff submits that interest is also payable on the outstanding sum and was payable at a rate of 5 per cent per annum between 21 April 2008 to 20 April
2009 and at a rate of 15 per cent per annum from that point on.
[131] The Sidmouth Settlement Deed provides as to interest:
9.4Upon the issue of title and transfer of the Turner, Waverley Street and Queenstown properties (more particularly described in clauses
11(a), (b) and (c)) of this Agreement or 2.5 years whichever is the later of the two events Wayne shall pay interest at the rate of 5% per
annum if demanded on all moneys due to Stuart Herron. Nothing in this clause shall enable Wayne to defer the payments to be made in
terms of clause 9.1 of this Agreement. Wayne agrees to pay interest in the event of Wayne failing to fulfil the obligations set out in clause 9.1 and/or in the event he is in breach of any obligations set
out in this Deed at the rate of 15% per annum if demanded on all money outstanding at any time to Stuart Herron and such amounts
shall be secured by all securities granted by Wayne Wallace.
[132] In relation to the five per cent interest rate, this interest was payable from the date that the title to the apartments was issued and the transfer occurred or 2.5 years from the date of execution, whichever was later. As it happened, no title to the apartments was ever issued and, therefore, no interest was payable at this rate. This is an unusual result, but nonetheless, the clause is quite clear and there has been no evidence from the parties as to why such an interpretation would be contrary to the intention of the parties.
[133] In relation to the 15 per cent interest rate, Mr Wallace agreed that interest would begin to accrue at this rate if he failed to repay the debt when it fell due on
20 April 2009, or if he otherwise breached the agreement and Mr Herron demanded the interest to be paid. Mr Herron has not made such a demand as to interest. The first demand made by Mr Herron after the debt fell due was on 30 May 2012. This letter of demand stated that Mr Wallace owed Mr Herron a debt of $3,160,950. No mention was made of interest.
[134] The only evidence of a demand for penalty interest before the Court is from July 2006, when Mr Hucker, on behalf of Mr Herron and CAPL, sent a notice of default to Mr Wallace, SAL and Belmont notifying them that it was considered that they were in default of the Agreement and the penalty interest rate was to be applied. The alleged breach related to the payment of fees from Rockfort which Mr Herron alleged that Mr Wallace had not accounted for. In December 2006, Mr Herron applied for summary judgment. This dispute was settled in 2007.
[135] Under the Sidmouth Settlement Deed, interest has not begun to accrue at the rate of five per cent as the apartments have not been transferred. Additionally, interest has not begun to accrue at the default interest rate, as no demand was made by the plaintiff.
[136] Accordingly, no interest is owing on the debt.
[137] I have considered s 87 of the Judicature Act 1908, although it was not pleaded. However, I do not consider, given the facts of this case, that it is appropriate
to apply that section. Additionally, I approve the statement made in McGechan on this point in relation to r 5.26 and s 87(c) of the Judicature Act which reads:12
… it was held in Riches v Westminster Bank Ltd [1943] 2 All ER 725 that a claim for interest under the then English equivalent of s 87 of the Judicature Act 1908 did not need to be pleaded. Paragraph (c) appears to overrule that authority.
Oppression Defence
[138] The defendants have raised an affirmative defence of oppression and submit that the Court should reopen the contract(s) under the Credit Contract and Consumer Finance Act 2003 (“the CCCFA”) and bar Mr Herron from recovery. The defendants advance the defence on the grounds that it is oppressive, unconscionable and burdensome, and in breach of reasonable standards of commercial practice for the plaintiff to seek to recover the sums claimed:
(a) without taking into account the deductions to which the plaintiff is properly allowed;
(b)as a large part of that sum is comprised of the value of the secured apartments, and the security was never called on by Lombard or any other person;
(c) as this would render the terms of the contracts significantly more onerous on the defendants than what could have been achieved from comparable financiers at the time;
(d)as the defendants were not given any opportunity to remedy the alleged defaults and were not notified of the ongoing accumulation of interest until receiving the statement of claim on or about 9 April
2016;
(e) as exercise of the right to repayment under the contract is contrary to the express condition on which the defendant entered into the
contract;
12 Andrew Beck and others McGechan on Procedure (looseleaf ed, Brookers) at [5.26.09].
(f) as the defendants told the plaintiff in 2007 that the Lombard loan had been repaid and the apartments have never been built; and
(g)as the plaintiff induced the defendants to enter into the contract by oppressive means.
[139] Mr Herron admits that the contracts are credit contracts under the CCCFA but denies that the contracts are oppressive, that the defendants were induced into the contracts by Mr Herron’s oppressive conduct or that the plaintiff has acted in an oppressive manner in enforcing the contracts.
Credit Contract and Consumer Finance Act 2003 (“CCCFA”)
[140] The CCCFA has the primary purpose of protecting the interest of consumers in connection with credit contracts, consumer leases, and buy-back transactions of land.13 To achieve this purpose the CCCFA, inter alia, requires creditors under consumer credit contracts to be responsible lenders.14
[141] All parties involved agree that the Sidmouth Settlement Deed and SH9 are credit contracts within the meaning of, and subject to, the CCCFA.
[142] Section 120 of the CCCFA, which applies to all credit contracts,15 provides:
The Court may reopen a credit contract, a consumer lease, or a buy-back transaction if, in any proceedings (whether or not brought under this Act), it consider that—
(a) the contract, lease, or transaction is oppressive; or
(b) a party has exercised, or intends to exercise, a right or power conferred by the contract, lease, or transaction in an oppressive manner; or
(c) a party has induced another party to enter into the contract, lease, or transaction by oppressive means.
[143] In effect, the defendants have called on all three subsections of s 120.
13 Section 3(1).
14 Section 3(3)(a).
15 Section 117.
[144] Oppressive is defined as meaning “oppressive, harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice.”16 A credit contract is not oppressive if the credit contract “…would not have been considered oppressive at the time, and in the circumstances, that it was made or performed.”17 This means that in determining whether a credit contract is oppressive the Court must look to the circumstances at the time when the contract was made, rather than to subsequent events.
[145] Section 124 came into force in 2015, and therefore does not apply to these proceedings. However, as it sets out considerations that the Court must have regard to when determining whether to reopen a credit contract, it is a useful reference point.
[146] There has been much judicial comment on what constitutes oppression under the CCCFA and its predecessor, the Credit Contracts Act 1981. The Court of Appeal in Greenbank New Zealand Ltd v Haas said of the definition of oppression set out above:18
[t]he various words which together form the definition of the term “oppressive” all contain different shades of meaning but they all contain the underlying idea that the transaction or some term of it is in contravention of reasonable standards of commercial practice.”
This comment was approved by the Supreme Court.19
[147] The defendant refers the Court to Raptorial v Pastoral Holdings Ltd as authority for the proposition that a contract may still be found to be oppressive, despite the possibly oppressed party being legally represented.20 In that case, Randerson J had held that there was no arguable defence of oppression and awarded summary judgment. On appeal, the Court of Appeal held that Elders had not met the onus of demonstrating that there was no fairly arguable defence that an exit fee of
$1.5 million was excessive. Although it is possible that a contract may be oppressive
when a party is legally represented, the position and expertise of the parties is still
16 Section 118.
17 Section 123.
18 Greenbank New Zealand Ltd v Haas [2000] 3 NZLR 341 (CA) at [24].
19 GE Custodians v Bartle [2010] NZSC 146, [2011] 2 NZLR 31 at [46].
20 Raptorial Holdings Ltd (in rec) v Elders Pastoral Holdings Ltd [2001] 1 NZLR 178 (CA).
relevant. In Italia Holdings (Properties) Ltd v Lonsdale Holdings (Auckland) Ltd the applicant had been required to purchase property at what was claimed to be an inflated price, in order to obtain finance from the respondent. Vautier J stated:21
In the present case there are the following factors which in my view are of considerable importance in relation to this aspect of the case. The first is one to which I have already adverted, that is the fact that the plaintiff is described as a property developer and was clearly, on the evidence, involved in extensive property dealings. It obviously had the expertise available to it, therefore, to enable an individual opinion to be arrived at as to the market value and potential of the sections in question. I refer particularly to the matters of potentialities because a property developer, of course, may have particular reasons for wishing to acquire a particular piece of real estate and be prepared to pay much more for it than its market value in order to secure it, or may have special knowledge as to the likelihood of an increase in value of property in the future.
[148] This has now been incorporated into the legislation through s 124, which mandates the consideration of the particular characteristics of the debtor and whether the debtor was able to obtain independent advice.
[149] There has also been judicial comment on the evidence required to show oppressiveness. In Greenbank New Zealand Limited v Hass Tipping J stated that proving that a contract is oppressive:22
…will usually, indeed almost always, necessitate the calling of evidence on the point… There would be difficulties and dangers in expecting Judges and Masters to take an intuitive or impressionistic approach to the question. What to one Judge might seem unjustly burdensome might not necessarily seem so to another… Of course, if there is a conflict of evidence, the familiar judicial role of deciding which evidence should be preferred will come into play, but that is a different issue. There is another reason why it is important for there to be evidence if what is regarded as acceptable or unacceptable in the market place. While the Act serves a valuable protective purpose, that purpose must be harmonised with the need to allow business people, especially when, as here, they are in receipt of competent legal advice, to be free to decide what contracts they should enter into and upon what terms. It is in such circumstances important for commercial stability not to have credit contracts reopened too readily. That should happen only when there is clear evidence, or the conclusion is otherwise irresistible, that the contract or term is oppressive within the proper meaning of that term.
21 Italia Holdings (Properties) Ltd v Lonsdale Holdings (Auckland) Ltd [1984] 2 NZLR 1 (HC) at
[17].
22 At [25].
[150] This point was later expanded on by the Court of Appeal in Raptorial
Holdings Ltd (in rec) v Elders Pastoral Holdings Ltd, Panckhurst J stated:23
[We do not] consider that the Court’s decision in Haas was intended to make comparative evidence mandatory in all circumstances or to displace, as distinct from assist, the judgement which the Court must exercise under s 11. Obviously, standards of commercial practice are likely to be relevant but they must, as Tipping J states, be “reasonable” and if, irrespective of the evidence, those standards are not regarded as reasonable by the Judge, they may be rejected as a valid basis for determining whether the transaction in issue is oppressive.
[151] In summary, evidence of commercial practice will be helpful in assisting the Court in determining whether a contract is oppressive. However, the judge must, in the end, determine whether the contract is in breach of reasonable commercial standards or is oppressive on other grounds.
[152] I note that s 125 limits the bringing of proceedings for the reopening of a credit contract to one year after the due date for performance of the last obligation required to be performed under the contract. However, although this limitation has passed, the section only limits the bringing of proceedings for the purpose of reopening rather than an application for reopening as defence to proceedings brought by another.
[153] The defendants have, in essence advanced three arguments of oppression. The first under s 120(a), is that the contract is oppressive. The second, under s 120(b) is that Mr Herron has exercised his right to enforcement in an oppressive manner. The third under s 120(c) is that the defendants were induced to enter into the contract by Mr Herron’s oppressive conduct. In each case, the onus is on the defendants to satisfy the Court that there has been oppression and that the contract should be reopened. Each argument will be considered in turn.
Contents of the Sidmouth Settlement Deed
[154] The defendants submit that the contents of the Sidmouth Settlement Deed are oppressive as a large portion of the debt is comprised of the value of the apartments
which were never called on as security and the terms of the contract are significantly
23 At 56.
more onerous than could have been obtained from comparable financiers at the time. The issue with this argument is that, as stated above, whether a contract complies with reasonable commercial standards requires evidence as to what the commercial standards are for the particular type of contract in question. In this case, the parties are at odds over what the purpose of the contract was. It is not at all clear what the sums in the Sidmouth Settlement Deed, particularly the $1,037,000 comprised of. Neither the plaintiff, nor the defendants have been able to provide an answer which is entirely supported by logic or evidence.
[155] For example, the plaintiff argues that the $1,037,000 is comprised of
$695,000 of debt plus $42,000 of interest. Counsel for the plaintiff submits that the
$42,000 is approximately 1.6 months of interest on the $695,000 at 38 per cent interest. However, that appears to overstate the position, as calculating 1.6 months of interest results in $35,213.34 of interest, in which case $42,000 seems a strange
‘approximation’. Additionally, the plaintiff does not submit that any portion of the sum is for damages suffered by the plaintiff, despite express references in the contract to the purpose of the contract being “… to settle the foreshadowed proceedings”. On the other side of the argument, the defendants submit that
$300,000 of the debt is made up of sums relating to the Sexton apartments. However, while there is clearly a credit available to the defendants for paying or transferring rights in the Sexton development, the defendants have not submitted any reason why this would comprise part of the headline sum. There does not appear to be an independent reason why the first defendant owed those amounts or rights to the plaintiff.
[156] The defendants submit that the contract must be oppressive as the plaintiff now claims for a core debt of over $2 million when the only sum actually advanced was $250,000. The defendants submit that these terms are far more onerous than could have been obtained from a comparable financier at the time. The experts for the plaintiff and defendants disagreed on this point. However, I find that the defendants’ argument is an oversimplification of the contractual arrangements. In considering the oppressive nature of the contract itself (as distinct from the plaintiff’s exercise of powers under the contract), the Court must consider the circumstances at the time that the contract was entered into. While the advances made by Mr Herron
are limited in comparison to the debt, Mr Wallace received a number of other benefits under the contract. Under the contract, the plaintiff gave up any right to profit from the Sidmouth development and any right to sue Mr Wallace for damages. Mr Wallace also got the right to purchase the CAPL apartments from the plaintiff for the agreed value if he wished.
[157] The difficulty for the Court, and for the defendants, is that it is difficult, if not impossible, to determine the value that Mr Herron obtained under the contract. For example, Mr Herron agreed to forego any profit in the Sidmouth Development which he would have been otherwise entitled to. Mr Herron maintained in evidence that the profit was expected to be in the vicinity of $750,000. As it eventuated, the Sidmouth Development did not produce a profit at all, but it has not been shown that the parties knew that this would be the case at the time that the agreement was executed.
[158] It is not possible to compare the contract against the terms offered by other financiers at the time, as the contract was not solely a loan contract. The defendants could not have obtained the benefits that they obtained under the Sidmouth Settlement Deed from any other financier, as only Mr Herron and his associated entities were in the position to offer those benefits.
[159] Accordingly, the defendants are not able to prove to the requisite standard that the terms of the Sidmouth Settlement Deed are oppressive under the CCCFA.
Inducement by Oppressive Means
[160] The defendants next argue that Mr Herron induced Mr Wallace to enter into the contract by oppressive means. The defendants submit that Mr Herron had far greater bargaining power. This was because of Mr Wallace’s misuse of Georgian facility funds as a result of which Mr Herron had a potential claim against Mr Wallace or Belmont. The defendants also submit that Mr Wallace was not able to look elsewhere for financing because of this alleged breach.
[161] In order for this claim to succeed, it must be shown that there was oppressive conduct, and that but for this conduct, the defendants would not have entered into the contract.
[162] The conduct pointed to by the defendants as being oppressive is that Mr Herron required the arrangements to be documented as a ‘debt’ for his own personal tax purposes and advised Mr Wallace that he would not be liable to pay the plaintiff any sums beyond the $600,000 fee.
[163] This conduct is denied by Mr Herron and is not supported by any contemporaneous documents. Mr Wallace received legal advice and signed numerous documents recognising and agreeing that a debt was owing. Although the fact that a party has received legal advice does not prevent a claim of oppression being successful, in this case, I find that it is highly relevant. Mr Wallace’s lawyers were very involved in the proceedings and even drafted some of the documents. This fact, along with the lack of evidence supporting Mr Wallace’s recounting of events, and his acknowledgement of the debt owing means that I am unable to find that there was oppressive conduct.
Enforcement
[164] The defendants’ defence under this heading is advanced on the basis that Mr Herron failed to accurately account for deductions, and failed to notify Mr Wallace that he was considered to be in default and that interest was accruing on the default amount.
[165] There is no validity to the first point. Whether Mr Herron has acted oppressively in attempting to recover the total amount without accounting for deductions became irrelevant because Mr Wallace is entitled to the credits and so is not liable to pay those amounts.
[166] In relation to the second point, Mr Herron’s failure to notify the defendants that interest was accruing at the default rate had the effect that interest did not accrue. Therefore, his failure to do so was not oppressive.
Conclusion
[167] Judgment is entered against the first and third defendants in the sum of
$966,531.93.
[168] I reserve costs. Although the plaintiff has been partially successful, there has been a significant reduction in the amount of the claim. The parties are encouraged to agree as to costs. In the event that agreement cannot be reached, memoranda in support, opposition, and reply are to be filed and served at 14 day intervals and on
receipt the file shall be referred to me for decision on costs.
JA Faire J
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