Holdaway v Ellwood
[2019] NZHC 792
•11 April 2019
IN THE HIGH COURT OF NEW ZEALAND BLENHEIM REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WAIHARAKEKE ROHE
CIV 2018-406-36
[2019] NZHC 792
UNDER the District Court Act 2016 BETWEEN
CORY IVAN HOLDAWAY and KIM MARIE HOLDAWAY
Appellants
AND
DAVID ROSS ELLWOOD
Respondent
Hearing: 4 April 2019 via AVL Counsel:
D J Clark for Appellants
B A Fletcher and J S Marshall for Respondent
Judgment:
11 April 2019
JUDGMENT OF MALLON J
Introduction
[1] The Holdaways (the appellants) purchased a rural property from Mr Ellwood (the respondent). Under the agreement for sale and purchase Mr Ellwood warranted that he was not registered for GST when in fact he was so registered. The Holdaways brought a summary judgment application against Mr Ellwood for breach of warranty. They claimed damages for the GST input credit they would have been entitled to if Mr Ellwood was not registered for GST. They also claimed fees charged by their accountants following the Inland Revenue’s advice rejecting their GST input credit.
[2] The District Court declined to grant summary judgment.1 The Holdaways appeal from that decision.
1 Holdaway v Ellwood [2018] NZDC 18487.
HOLDAWAY v ELLWOOD [2019] NZHC 792 [11 April 2019]
Factual background
[3] On 20 December 2017, Mr Ellwood and the Holdaways entered into an agreement for the sale and purchase of Mr Ellwood’s 8-hectare rural property on Waihopai Valley Road, southwest of Blenheim (the Agreement).2
[4] The purchase price, stated on the front page, was “$335,000 inclusive of GST (if any)”. Also, on the front page, Mr Ellwood, as vendor, recorded that he was not registered under the Goods and Services Tax Act 1985 (the GST Act) in respect of the transaction and would not be so registered at settlement. Clause 15.1 of the Agreement provided that the vendor warranted that this statement was “correct at the date of the agreement”.
[5] Schedule 2 of the Agreement provided that it “must be completed if the vendor has stated on the front page that the vendor is registered under the GST Act”. As Mr Ellwood had stated he was not registered for GST, the Holdaways were not required to complete Schedule 2.
[6] However, they did partially complete Schedule 2 by answering questions 3 and 4 in that schedule. Question 3 asked if “[t]he purchaser is registered under the GST Act and/or will be so registered at settlement”. The Holdaways answered “no” to this question. Question 4 asked if “[t]he purchaser intends at settlement to use the property for making taxable supplies”. The Holdaways also answered “no” to this question. Schedule 2 went on to direct the purchaser to answer question 7 if they had answered “no” to either question 3 or question 4. The Holdaways did not answer question 7 or any other question in Schedule 2.
[7] Clause 15.2 of the Agreement provided that “the purchaser warrants that any particulars stated by the purchaser in Schedule 2 are correct at the date of this agreement”. Clause 15.5 provided:
If any of the particulars stated by the purchaser in Schedule 2 should alter between the date of this agreement and settlement, the purchaser shall notify
2 The Agreement was recorded on the sixth version of the 9th edition (2012) of the Real Estate Institute of New Zealand and Auckland District Law Society “Agreement for Sale and Purchase of Real Estate” standard form contract.
the vendor of the altered particulars and of any other relevant particulars in Schedule 2 which may not have been completed by the purchaser as soon as practicable and in any event no later than two working days before settlement. The purchaser warrants that any altered or added particulars will be correct as at the date of the purchaser’s notification. If the GST treatment of the supply under this agreement should be altered as a result of the altered or added particulars, the vendor shall prepare and deliver to the purchaser or the purchaser’s lawyer an amended settlement statement, if the vendor has already tendered a settlement statement, and a credit note or debit note, as the case may be, if the vendor has already issued a tax invoice.
[8]Under the GST Act:
(a)If Mr Ellwood was registered for GST and the Holdaways were not registered for GST, Mr Ellwood would be responsible for accounting for the GST amount on the purchase price, $42,835.39, to the Inland Revenue Department (IRD). At settlement he would have been required to provide a GST invoice for the purchase price at settlement.
(b)If Mr Ellwood was not registered for GST and the Holdaways were registered for GST, the Holdaways would be entitled to claim an input tax credit from the IRD for the GST component of the purchase price ($42,835.39).
(c)If both parties to the transaction were registered for GST, the transaction would be GST zero rated, which would mean that Mr Ellwood would not be required to account to the IRD for the GST component of the purchase price and the Holdaways could not claim an input tax credit for that component.
[9] On 1 February 2017, one week prior to settlement, the Holdaways registered under the GST Act. They did so on the advice of their accountants. They failed to advise Mr Ellwood of this as required by cl 15.5.
[10] Settlement occurred on 7 February 2018. Consistent with his warranty that he was not registered for GST, Mr Ellwood did not provide a GST invoice for the purchase price at settlement.
[11] Relying on Mr Ellwood’s warranty that he was not registered for GST, the Holdaways lodged their claim for an input tax credit sometime in April 2018. On 27 April 2018, the IRD telephoned the Holdaways’ accountants advising that their claim was declined because Mr Ellwood was registered under the GST Act. This position was confirmed by IRD in a letter dated 21 May 2018.
[12] The Holdaways made demand of Mr Ellwood for the input credit they were denied ($42,835.39). This culminated in the summary judgment proceedings before the District Court. The proceedings claimed that Mr Ellwood had breached his contractual warranty. They claimed damages in the amount of the input credit declined ($42,835.39), accountancy fees in responding to the breach ($4,513.75), interest and costs.
The District Court decision
[13] In the District Court the Holdaways relied primarily on the Court of Appeal decision in Ling v YL NZ Investments Ltd.3 The appellant in that case was the vendor of real estate for a price inclusive of GST and warranted that she was not registered under the GST Act and would not be so at the date of settlement. The purchasers said they were registered and that they intended to make a claim for an input tax refund of around $365,000. After settlement, the IRD advised the purchaser that the supply was a zero-rated transaction under the Act because the vendor was deemed to be registered when the sale of the property took place.
[14] The High Court granted summary judgment in the purchaser’s favour, holding that the vendor had breached her warranty. The purchaser’s loss was the amount of the input credit it would have been entitled to if the vendor’s GST position was as warranted, professional accounting fees incurred in dealing with the GST position, interest and costs.4 The Court of Appeal upheld the High Court’s decision, stating that the warranty’s purpose was to avoid confusion about the GST position and its impact on the purchase price.5
3 Ling v YL NZ Investment Ltd [2018] NZCA 133.
4 YL NZ Investment Ltd v Ling [2017] NZHC 1793 at [44].
5 Ling v YL NZ Investment Ltd, above n 3, at [34]-[35].
[15] Mr Ellwood accepted that he had (inadvertently) breached the warranty as to his GST registration status. He disputed he was liable for the losses claimed relying on the rule in Hadley v Baxendale that the recoverable losses are those that fairly and reasonably may be considered as either arising naturally or within the reasonable contemplation of both parties as the probable result of the breach, at the time the contract was made.6 Mr Ellwood submitted he was entitled to rely on the Holdaways’ warranty under the Agreement that they were not registered for GST and would not be so at the date of settlement. He said that he could not have reasonably foreseen that the Holdaways would breach their own warranty as to their GST registration status and make a claim for input tax credits.
[16] The District Court Judge accepted Mr Ellwood’s position. He dismissed the Holdaways’ summary judgment application and determined as follows:7
[42] The defendant has clearly breached the warranty he gave when he warranted that he was not GST registered. However, the plaintiffs have also breached the warranty that they have given when they stated in schedule 2 that they were not registered for GST under the Act (or intended to be so registered at settlement).
[43] Whilst the plaintiffs were not required to fill out schedule 2, given the defendant’s warranty that he was not GST registered, and given that the plaintiffs still gave a warranty, that assumes some significance when considering whether the damages claimed were reasonably foreseeable.
…
[45] In the current case, not only did the plaintiffs warrant they were not GST registered, and would not be so registered at settlement, they also failed as required by clause 15.5 of the agreement to notify the defendant of any changes to their intention. Whilst no penalties flow from the fact that the plaintiffs failed to give notice under clause 15.5, the significance of their warranty is that on the face of the agreement, the defendant had no expectation that the GST regime applied, moreover, nor did he have any notice of the plaintiffs’ intention to make the agreement subject to the that regime.
[46] In my view, the facts of the current case are distinguishable from the facts of Ling, as the claiming of a second-hand goods input tax credit was to be expected in the circumstances of that case. However, on the facts of the current case, the claiming of a second-hand goods input tax by the plaintiffs was not only inconsistent with the terms of the agreement, and the plaintiffs’ own warranty, it was not signalled to the defendant, and it was also not what would necessarily be expected or anticipated in the ordinary course of business. It could reasonably be argued to the contrary that the claiming of
6 Hadley v Baxendale (1854) 9 Exch 341 at 355 per Baron Alderson.
7 Holdaway v Ellwood, above n 1.
the second-hand goods input tax by the plaintiffs, and the defendant’s purported liability for the same, is dependent upon the whim of the plaintiffs.
[47] Accordingly, whilst there has clearly been a breach of warranty on both sides, in the circumstances of this case, there is a fairly arguable case that the damages claimed were not reasonably foreseeable, and in those circumstances the application for summary judgment must fail as the defendant has a defence to the claim.
My assessment
[17] When a contract is breached by one party to a contract the other party is entitled to be compensated for that breach. The usual measure of compensation is the amount in money terms that restores the party to the position they would have been in if the breach had not occurred.8 The usual rule is that damages are assessed at the time the breach occurred.9
[18] Focussing first on Mr Ellwood’s breach, he breached his contractual warranty on the date he signed the Agreement. At that time he warranted he was not registered for GST when in fact he was. Putting to one side for the moment whether the Holdaways also breached the Agreement, they were entitled to be put in the position that would have been in if the breach of warranty had not occurred. That is, as was the case in Ling, they would have been entitled to claim an input tax credit for the GST component of the sale price if they became GST registered before settlement under the Agreement.
[19] For Mr Ellwood it is submitted that the Holdaways are not entitled to claim damages because their loss was too remote. He says it was too remote because the Holdaways had warranted that they were not registered for GST at the time they signed the Agreement and would not be so registered at the time of settlement.
[20] However, the Agreement expressly provided for the possibility that the purchaser’s GST position might change. Pursuant to cl 15.5 of the Agreement, the Holdaways’ obligation, if they did become GST registered, was to notify the vendor
8 See, for example: Stirling v Poulgrain [1980] 2 NZLR 402 at 419; and Bloxham v Robinson (1996) 7 TCLR 122 at 133. Generally, see the discussion of J Finn, S Todd and M Barber Burrows, Finn and Todd on the Law of Contract in New Zealand (6th ed, LexisNexis, Wellington, 2018) at [21.2.2].
9 See, for example, Stirling v Poulgrain, above at 420.
of any altered particulars in Schedule 2 as soon as practicable and no later than two working days before settlement. Further, the Agreement contained a warning that GST treatment depended on the GST information supplied by the parties and this “could change before settlement if that information changes”.
[21] The Holdaways were purchasing rural land which had been used for stock. There was no house on the property. The chattels included a water tank, a pump shed, gates, electric fencing, troughs and cattle yards. It was to be anticipated in the ordinary course of things that they could well become registered for GST once they had advice about this. In these circumstances it was foreseeable at the time the Agreement was entered into that, if Mr Ellwood’s warranty was breached, the Holdaways would be denied an input credit for the GST component of the purchase price if they became registered for GST prior to settlement. That is a loss that arises naturally from the breach of the contract.
[22] Does the position alter because of any breach of the Agreement by the Holdaways? As the respondent accepts, the Judge was wrong to find that the Holdaways had also breached a warranty. This is because their warranty was that the position stated in Schedule 2 was “correct at the date of this agreement”. At the date of the Agreement it was correct that the Holdaways were not registered for GST and would not be registered for GST at settlement. It was also correct that they did not intend at settlement to use the property for making taxable supplies. Therefore, at the date of the Agreement, Mr Ellwood was in breach of his warranty but the Holdaways were not.
[23] As noted, the Holdaways were entitled to change their position and become registered for GST before settlement. If they did, their obligation under cl 15.5 was to notify the vendor of any altered particulars in Schedule 2 as soon as practicable and no later than two working days before settlement. If such notification is given, the purchaser warrants that the altered particulars are correct. Additionally, s 78F(1) of the GST Act requires a purchaser to advise the vendor at or before settlement if the purchaser will be registered for GST, is acquiring the land intending to use it for making taxable supplies, and does not intend to use the land as a principal place of
residence. Section 78F(3) provides that the vendor may rely on the information in determining the tax treatment of the supply.
[24] The Holdaways breached the contractual requirement to give notice of the changed particulars. That breach occurred when the Holdaways failed to give the notice between the date of becoming registered and two working days before settlement. They did not breach the warranty that the altered particulars were correct because they provided no altered particulars. The Holdaways also breached the s 78F statutory requirement.
[25] What is the consequence of the Holdaways’ breach? Whether or not the Holdaways gave notice that they were now registered for GST as they were required to, the transaction was to be zero rated under the GST Act. Because of the Holdaways’ breach, Mr Ellwood did not realise at settlement that he was not required to file a GST return for the GST component of the sale. But it is not suggested that this led to any loss for Mr Ellwood. The Holdaways’ breach, later in time than Mr Ellwood’s breach of warranty, does not alter the Holdaways’ expectation losses arising from Mr Ellwood’s breach.
[26]Put another way, the net position is as follows:
(a)At the time Mr Ellwood entered the Agreement he would have been liable to account for the GST component of the purchase price (because he was registered for GST even though he inadvertently said he was not), unless the purchasers became registered for GST between the date of the Agreement and settlement;
(b)Once the Holdaways registered for GST the Agreement, Mr Ellwood did not need to account for the GST component of the purchase price because the transaction was zero rated. Mr Ellwood was not worse off because the Holdaways failed to give notice that they had registered for GST.
(c)When the Holdaways entered the Agreement to purchase the property for $335,000 inclusive of GST with a warranty from Mr Ellwood that he was not registered for GST, it was reasonably in contemplation at that time that if they registered for GST, as they were entitled to under the Agreement, then they would be able to claim an input credit for the GST component of that price.
(d)Mr Ellwood’s breach of warranty meant the Holdaways did not receive the input credit they anticipated. The Holdaways were therefore worse off than they expected to be under the Agreement.
(e)Nothing the Holdaways did afterwards altered the parties expected bargain under the contract. The notice requirement under the contract and statute have a different purpose. They are for the benefit of the tax base (enabling the efficient functioning of the GST system).10
[27] I therefore conclude that the Holdaways were entitled to damages in the amount of the input credit they would have received if Mr Ellwood’s warranty had been correct. They were entitled to summary judgment for that sum.
[28] The next issue is whether they were also entitled to the accounting fees. In Ling the purchaser claimed accountant’s expenses of $5,314. In the High Court summary judgment was granted for this amount. The Associate Judge said he was satisfied the purchaser had acted reasonably in engaging professionals and that the charges were reasonably incurred in dealing with the problem presented by Ms Ling’s breach of warranty. This was not at issue on the appeal.
[29] In the present case, the Holdaways submitted to the District Court that it was entirely foreseeable that if Mr Ellwood breached the warranty as to GST status, involvement of the purchasers’ accountants would be necessary. The Holdaways accepted for the purposes of the summary judgment that there could be issues with quantum. On appeal they now withdraw that concession relying on Ling.
10 Y&P NZ Ltd v Wang [2017] NZCA 280 at [22] and [25].
[30] I accept that engaging an accountant when the expected GST input credit was rejected was a reasonably foreseeable consequence of the breach. I do not accept that Ling provides a complete answer to the quantum issue. The anticipated input credit in that case was considerably larger and the rejection of it more complicated because the vendor was not in fact registered for GST but was deemed to be.
[31] That said, the accountants’ invoice has a full narration of the work undertaken. All of it was directly connected with dealing with the IRD about the claim or advising the Holdaways what to do about it. A total of 13.7 hours work was involved at an hourly charge out rate of $286.50 (GST exclusive). As in Ling, I consider the Holdaways acted reasonably in engaging professionals and that the charges were reasonably incurred in dealing with the problem presented by Mr Ellwood’s breach of warranty. I therefore consider they are entitled to summary judgment for the $3,925 (GST exclusive) accounting expenses they incurred.11
Security for costs
[32] An issue arose after the appeal to this Court was filed as to whether the appeal was deemed to be abandoned for failure to pay security for costs within the required time.
[33] Section 126(1) of the District Court Act 2016 provides that an appellant may be required under the High Court Rules 2016 to give security for costs. Section 126(3) provides that “[i]f security is not given within the time required by the High Court Rules 2016, the appeal is abandoned”.
[34]Rule 20.13 of the High Court Rules provides:
…
(2) The Judge must fix security for costs at the case management conference relating to the appeal, unless the Judge considers that in the interests of justice no security is required.
…
11 Because the Holdaways were registered under the GST Act when the accountants’ expenses were incurred, the damages for accounting fees is exclusive of GST. See New Zealand Venue and Event Management Ltd v Worldwide NZ LLC [2016] NZCA 282 at [13]-[14].
(4)Security must be paid to the Registrar at the registry of the court no later than 10 working days after the case management conference, unless the Judge otherwise directs.
…
[35] In this case the appellant filed a memorandum for the case management conference which was scheduled to take place on 10 December 2018. In that memorandum the appellant addressed the matters in Schedule 6 as required for an appeal. This included that security be assessed in the sum of $1,115 and that sum be paid within ten working days after the conference.
[36] The respondent also filed a memorandum for the conference. This memorandum advised the Court that the respondent agreed with the appellant’s memorandum (save for one timetable amendment which the appellant consented to) and sought that appearances at the case management conference be vacated.
[37] The Judge scheduled to hear the case management conference duly vacated appearances and issued a minute. The minute stated:12
[1] This matter was to be considered at a telephone conference this afternoon. However, given counsel’s helpful memoranda agreeing the position, the teleconference is vacated.
[2]By consent, the following directions are made:
(a)the appellants are to file and serve a common bundle within 30 working days;
(b)the appellants are to file and serve submissions and a chronology within 35 working days;
(c)the respondent is to file and serve submissions no later than
40 working days from the date of this Minute and, if necessary, a separate chronology;
(d)the appellant is to prepare a bundle of authorities to be filed with the Court on or before the hearing date.
[38] It can be seen that, despite the requirement to set security at the case management conference and the parties agreement to the appropriate security order to be made, the Judge did not in fact make any order as to security.
12 Holdaway v Ellwood HC Blenheim CIV-2018-406-36, 10 December 2018, Minute of Thomas J.
[39] The Holdaways’ counsel, Mr Clark, then overlooked paying security for costs as had been agreed in the memorandum. Mr Ellwood’s counsel brought this to Mr Clark’s attention on 25 January 2019, by which time ten working days from the case management conference had passed. Having been alerted to the issue, Mr Clark arranged for the security to be paid that same day. Mr Ellwood’s position is that this was too late and the appeal is deemed abandoned pursuant to s 126(1) of the District Court Act.
[40] I consider s 126(1) of the District Court Act does not apply because no security order was made. The Judge did not make directions in accordance with the memoranda as is the usual practice. Instead she made specific timetable directions and made no directions as to the other matters in the memoranda. That the Judge may have overlooked the requirement to fix security for costs at the case management conference, does not alter the fact that she did not make an order. In the absence of an order, the 10 working days timeframe in which to pay security had not begun to run. That timeframe is necessarily contingent on an order having been made.
[41] The result was that security was to be dealt with by consent and was not subject to a time required by the High Court Rules. The appeal was therefore not abandoned.
Result
[42]The appeal is allowed. The Holdaways are entitled to summary judgment for
$46,760.39 (the input credit denied and the accounting expenses exclusive of GST), plus interest and costs. It is agreed that costs are to be calculated on a category 2B basis.
Mallon J
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