Hornsby v Haines

[2018] NZHC 416

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2016-404-3126 [2018] NZHC 416

BETWEEN  EDWARD THOMAS HORNSBY Appellant

ANDRODNEY DAVID HAINES Respondent

Hearing:                   14 November 2017

with supplementary submissions 20, 21 and 24 November 2017

Appearances:           S P Bryers for Appellant

R C Mark for Respondent

Judgment:                15 March 2018

JUDGMENT OF PALMER J

This judgment is delivered by me on 15 March 2018 at 11.30 am pursuant to r 11.5 of the High Court Rules 2016.

..................................................... Registrar / Deputy Registrar

Counsel/Solicitors:

S P Bryers, Barrister, Auckland

Richard Allen Law Associates Ltd, Auckland

Richard Mark, Kerikeri

HORNSBY v HAINES [2018] NZHC 416 [15 March 2018]

Summary

[1]      Mr  Edward  Hornsby  and  Mr  Rodney  (Tucker)  Haines  entered  several agreements in relation to property at Riverhead, Auckland.  They now disagree about what was agreed. Mr Hornsby appeals from a District Court decision which held him personally liable for outstanding debt under two agreements. He says he entered them under economic duress because Mr Haines had him by the short and curlies after illegitimately issuing a notice under the Property Law Act 2007 (PLA). He also claims he is not personally liable and the amount awarded to Mr Haines by the District Court is incorrect.  Mr Haines opposes the appeal.

[2]      I do not accept Mr Hornsby entered the agreements under duress.  Mr Haines was entitled to issue the PLA notice. It is not wise to assume legal obligations will not need to be discharged.  Mr Haines’ grasp on Mr Hornsby’s short and curlies was not illegitimate. Mr Hornsby was personally liable under the agreements. But the District Court erred in the amount awarded to Mr Haines, which I adjust.

What happened?

2003 Haines lease to Hornsby’s ABRC

[3]      Mr Haines owned a commercial property at Duke Street, Riverhead, near

Auckland.  He used it to store houses pending sale and delivery.  On 1 September

2003, he leased the property to Amalgamated Buildings Removals and Contracting

Ltd (ABRC) which was owned by Mr Hornsby.

2004 Haines sale to Hornsby’s Okura with lease-back to Haines’ HHH

[4]      In May 2004, Mr Haines entered into an agreement with another company owned by Mr Hornsby, Okura Developments Ltd (Okura), to sell the Duke Street property.  At that time, the property was valued at $850,000.  The shareholding of Okura was not before the District Court or the High Court hearing. After the hearing, however, Mr Bryers for Mr Hornsby by memorandum of counsel advised 99 of 100 shares in Okura Develoopments Ltd are owned by Hornsby Earthmovers Ltd and the other share by Mr Hornsby. Mr Mark, for Mr Haines, consented to this evidence being produced.

[5]      Mr Haines agreed to sell the Duke Street property, for $820,000, to Okura which would lease part of it back to a company owned by Mr Haines, Haines House Haulage Ltd (HHH) for $28,329.50 a year.

[6]      The parties agree the sale price was $30,000 below market price. Mr Hornsby says part of the deal was that Mr Haines might purchase shares in Okura, which would allow Mr Haines to acquire $500,000 of some $40 million of accumulated tax losses of in Okura.  He says the $30,000 was the non-refundable price of Mr Haines’ option to purchase shares in Okura, calculated at $500,000 at 6 cents in the dollar. Mr Haines says it was a loan from Mr Haines to Mr Hornsby personally and there was no formal option.  Nothing was recorded in writing at the time about the $30,000 loan or share option.

2004 Haines loan or option to Hornsby’s Okura

[7]      Okura’s purchase of the property for $820,000 was funded entirely by two loans secured by mortgages, of $510,000 from Rice Craig Solicitors and $310,000 from Mr Haines. Mr Hornsby guaranteed the loan from Mr Haines. That loan required Okura to repay Mr Haines $100,000 on or before 31 July 2004 and the balance on 5

May 2009, with an ordinary interest rate of 10 per cent per year and a penalty rate of

14 per cent per year.  Mr Haines and Mr Hornsby both guaranteed the loan from Rice

Craig Solicitors.

[8]        Mr Hornsby says there was never any intention for Okura to make the early repayment, as he and Okura could not have raised the necessary funds.  He says Mr Haines suggested Okura default on this payment to provide Mr Haines with a reason to purchase the shareholding in Okura without arousing suspicion.1  Mr Hornsby says this was all part of a ruse to demonstrate the eventual default was genuine, leading to the share acquisition and utilisation of tax losses.

[9]      Mr Haines says Mr Hornsby advised him the funds for the $100,000 repayment were to come from the imminent sale of an East Coast Bays property.  He says Mr

Hornsby talked about  Mr Haines receiving payment in shares but the idea was

1      Affidavit of Edward Thomas Hornsby [Hornsby Affidavit], 6 June 2015 at [14]–[15].

abandoned after advice from Mr Haines’ accountant and he, Mr Haines, never agreed to do so.2   He says Mr Hornsby received less than expected for the East Coast Bays property and Mr Haines withheld his consent from an attempt by Okura to increase the first mortgage by $45,000.

[10]     From July 2004 to June 2008, the interest owing by Okura to Mr Haines under that loan was off-set against the rent owing by Mr Haines to Okura under the lease to HHH.  This resulted in a discrepancy of $2,650.50 a year in favour of Mr Haines which, it was agreed, would have to be accounted for at the appropriate time.

June 2008 PLA and July 2008 compromise

[11]     On 5 June 2008, Mr Haines served a PLA notice on Okura as mortgagor and Mr Hornsby as guarantor, saying Okura had defaulted on the $100,000 repayment due in July 2004 together with 14 per cent penalty interest.

[12]     Mr Hornsby and Okura’s lawyers wrote to Mr Haines’ lawyers advising the PLA notice was invalid. They said there had been no default because the mortgage to Mr Haines was part of a mechanism instigated by Mr Haines to obtain access to the tax losses in Okura.  In particular, they said the $100,000 repayment requirement was “merely a device to trigger the share purchase by Mr Haines without arousing IRD suspicion” as a joint venture with Mr Hornsby.3   The letter threatened to apply for an injunction unless the PLA notice was withdrawn on 27 June 2008. Mr Haines says he served the PLA notice in order to bring matters to a head and help get his money back.4

[13]     On 3 July 2008, Mr Haines and Mr Hornsby came to an agreement recorded as being between them (with “(Okura)” being after Mr Hornsby’s name at the top) in a one-page document. It was drafted by Mr Haines but, according to the office manager for the Haines Group of Companies who typed the document, with input from both

Mr Haines and Mr Hornsby.5  The agreement recorded:

2 Affidavit of Rodney David Haines [Haines Affidavit], 7 June 2015, at [13].

3      Letter from Michael Battersby to Murdoch Price dated 18 June 2008.

4      NOE at 23/26–27 and 24/12.

5 Affidavit of Kathleen Ann Niblet, 4 June 2015, at [3].

(a)       the PLA notice would be withdrawn;

(b)a total shortfall of $25,286.21, between rent (and other payments, including $8,205 “owed for Cambridge drive and works” and interest and other credits due, “will mean that Haines will retain the shares that he has in Okura Developments and if he is able to satisfactory trade that company then Hornsby will not be required to pay the difference between those two figures”;

(c)      but if Mr Haines “is unable to trade that company then the $25,286.21 is to be paid to Haines within 12 months and this amount does not bear any interest”; and

(d)the second mortgage would be paid “on or before” the end of July 2008 and Mr Haines provided a personal guarantee to Rice Craig until that guarantee was replaced.

[14]     The attached schedule regarding the shortfall identified as interest due:

Paid $30k at time of settlement for Okura shares. 10%pa interest from 5.5.04 plus

August 2008 further agreement

[15]     The second mortgage was not repaid by the end of July 2008.  On 14 August

2008, Mr Hornsby and Mr Haines signed another agreement drafted by Mr Haines (with their names, and that of Okura, at the top of the page) which was expressed to be “[f]urther to the agreement dated 3 July 2008”. It provided Mr Hornsby would pay Mr Haines the $25,286.21 on or before 5 May 2009 and:

1.Tucker  [Hornsby]  will  pay  $280,000  in  reduction  of  the  existing mortgage due to RDH [Haines].

2.The balance of that existing mortgage of $30k will be due for payment at the end of the term of the existing mortgage and will bear interest until the date it is repaid in full.

3.Okura.  Tucker [Hornsby] is to confirm within one calendar month from signing this agreement that he is able to pass over all documentation in respect to the company Okura.  If Tucker [Hornsby]

is unable to do so or if RDH [Haines] does not wish to proceed with that purchase the $30k which has already been paid to Tucker [Hornsby] will become due to be paid on or before 5 May 2009 and this amount will bear interest up until the date of repayment.

4.The parties agree that the amount of $280,000 in reduction of the mortgage to be paid forthwith.

5.The amounts as set out on the attached sheet being rent and interest are to be further calculated to the date that those amounts are paid by the parties to each other.

[16]     It is common ground that, at some time in late 2008 or early 2009 Mr Haines elected not to exercise the share purchase option.

Repayment by Okura of loan from Haines

[17]     In December 2008, Okura repaid $280,000 to Mr Haines.  Mr Haines agreed to discharge the second mortgage.  In March 2009, Okura repaid the remaining

$30,000 (a different $30,000 to that disputed above) plus interest to Mr Haines.

2011 District Court judgment

[18]     In 2011, Mr Haines sought judgment against Mr Hornsby and Okura in the

District Court in relation to three distinct debts:

(a)      $38,697.20 which Mr Haines claimed was short-paid under the second mortgage, plus interest;

(b)$21,465.53 which Mr Haines claimed to be the shortfall of interest (and other costs) owed to him by Mr Hornsby and Okura less the rent (and other costs) owed by HHH, plus interest; and

(c)      $30,000 plus interest (totalling $38,967.20) which Mr Haines claimed he had lent on the sale of Duke Street which was repayable because he decided not to exercise his option to purchase shares in Okura.

[19]     Mr Hornsby did not file a defence in time and Mr Haines was successful in obtaining judgment by default on 3 November 2011.  Mr Hornsby then applied to set aside the judgment. On 19 October 2012, the District Court dismissed the application

but varied the judgment by removing the first claimed debt as Mr Haines accepted it had already been paid.6

Appeals

[20]     Mr Hornsby appealed.   On 20 September 2013, Katz J in the High Court allowed the appeal on the basis Mr Hornsby may have substantial defences.7     In particular she considered, while it was “far from clear”, it was “reasonably arguable” Mr Hornsby signed the 3 July 2008 agreement solely on behalf of Okura and “at least” arguable he signed the 14 August 2008 agreement solely on behalf of Okura.8

[21]     Judge B A Gibson in the District Court heard the matter again and, on 4 August

2016, allowed Mr Haines’ claim, finding:9

(a)      The $30,000 difference between the agreed value and purchase price was part of the price of Mr Haines purchasing shares in Okura from Mr Hornsby.10   If Mr Haines did not proceed, as he did not, the principal and interest were a debt repayable to him.11

(b)The $25,286.21 and interest was not agreed as a result of illegitimate pressure in serving the PLA Notice.12   It was not obtained by duress, enforcement was not prevented by estoppel and Mr Haines was personally liable.13

[22]     Mr Hornsby now appeals again.   The High Court extended the time for appealing on the basis that, although the facts are “very messy” and the duress

argument did not appear strong, it merited reconsideration.14

6      Haines v Hornsby DC Waitakere CIV-2011-090-001292, 19 October 2012.

7      Hornsby v Haines [2013] NZHC 2477.

8      At [29]–[30].

9      Haines v Hornsby [2016] NZDC 13624.

10     At [22]–[25].

11 At [25].

12 At [32].

13 At [33].

14     Hornsby v Haines [2017] NZHC 1347 at [35]–[43].

Issue 1: Was there economic duress?

Law of economic duress

[23]     A contract procured by duress can be voided by the coerced party, though the courts do not find duress lightly.  The parties agree the test for economic duress was confirmed by the Court of Appeal in McIntyre v Nemesis DBK Ltd:15

(a)       First, there must be exertion of illegitimate pressure on a victim.16

Pressure (and even threats) commonly exerted in commercial dealings does not, in itself, amount to duress; the pressure has to be illegitimate.17     A threat to breach a contract will generally be illegitimate, though a warning of non-performance as a matter of commercial reality may not be.18

(b)Second, the illegitimate pressure must have compelled or coerced the victim to enter the contract.19   Such a victim’s intentional submission arises from the realisation there is no other practical alternative.20  That will depend on all the relevant circumstances, including the characteristics of the victim, the relation of the parties, the availability of professional advice to the victim and whether the victim protested, was independently advised or took steps to avoid the contract after entering it.21

(c)      If there was duress, affirmation of the contract by the victim may negate his or her right to avoid it.22

15     McIntyre v Nemesis DBK Ltd [2009] NZCA 329, [2010] 1 NZLR 463.

16     At [20], [63].

17 At [26].

18     At [31]–[32].

19     At [20]

20 At [66].

21     At [67]–[68].

22 At [25].

Submissions

[24]     Mr Bryers, for Mr Hornsby, submits two components of the payments required under the agreements were obtained under duress: the $30,000 and interest; and the

$8,205 payment that was a lower credit for work done by Mr Hornsby’s company than it should have been.  He submits neither sum was properly owing and Mr Haines had no right to issue a PLA notice.  He submits Judge Gibson failed to take into account the evidence of Mr Hornsby,23 accepted by Mr Haines in cross-examination,24 that the

$100,000 repayment requirement was part of an arrangement to create a default so as to provide Mr Haines with the opportunity acquire shares in Okura.  He points to Mr Hornsby’s evidence that Mr Haines and his accountant assured him the principal reduction clause would not be used for any other purpose.25   He submits that created a waiver or estoppel preventing Mr Haines from requiring payment so the issue of the PLA notice was not legitimate.  Mr Bryers submits Mr Hornsby had signed under duress. He points to Mr Hornsby’s evidence that he told Mr Battersby that Mr Haines had him by the short and curlies and the threat caused by the PLA notice coerced Mr Hornsby into signing the July and August 2008 agreements.  He submits Mr Hornsby did not affirm the agreements.

[25]     Mr Mark, for Mr Haines, submits Mr Hornsby was not subject to economic duress:

(a)      There was no illegitimate pressure because: the PLA notice related to a legitimate debt; there was no promise not to enforce the $100,000 repayment and no such  promise was relied upon; Mr Haines was advised he could not legally use the tax losses;

(b)There was no compulsion on Mr Hornsby because: he had a valid legal alternative, of selling the property to pay the debt; there is no evidence Mr Hornsby protested before, during or immediately after signing the

agreements; he had independent legal and accounting advice; and Mr

23     Hornsby Brief at [14]–[16].

24     NOE at 18/21–19/26.

25     Hornsby Brief at [16], referring to Letter of Keith Goodall to RD Haines, 2 June 2005.

Hornsby  did  not   attempt  to  avoid  the  agreements  until  legal proceedings were issued.

(c)      Mr Hornsby affirmed the agreements because: after failing to adhere to the July agreement he entered the August agreement which clarified it; he performed obligations under the agreements.

(d)Even if there was duress, he submits Mr Hornsby’s $30,000 liability arose independently of the July and August 2008 agreements.

Decision on economic duress

[26]     I do not consider the pressure exerted on Mr Hornsby to sign the agreements was illegitimate.

[27]     Mr Bryers’ argument, that the parties did not intend the $100,000 repayment requirement to be enforced because they envisaged default providing Mr Haines with an opportunity to acquire tax losses through shares, is unattractive. It is no basis for estoppel arguments in equity or arguments of illegitimate pressure at common law.  It appears to ask the Court to give some recognition to a device intended to avoid legal tax obligations, contrary to the only written records of the agreement.   Mr Haines appears to have accepted advice that pursuit of such a device would be unlawful and did not proceed with it. He was entitled to insist on his legal rights and to do so through issuing a PLA notice.

[28]     Mr Hornsby’s account has the air of belated regret. It is not assisted by the legal advice he had at the time that the PLA notice was invalid. But if Mr Hornsby’s account of events is correct, he entered into legal obligations hoping Mr Haines would not do so.  That was the risk he took in entering the agreements, which made him liable for the $30,000 and interest and the $8,205. It is not wise to assume legal obligations will not need to be discharged.  Mr Haines’ grasp on Mr Hornsby’s short and curlies was not illegitimate.

[29]     Furthermore, Mr Hornsby could have paid the debt by selling the property. He received independent advice.  I am satisfied he affirmed the agreement in that he did

not protest, he entered the August agreement which clarified and affirmed the July agreement, he performed obligations, and he did not take steps to avoid the agreements until the application to set aside the judgment by default was made.   Mr Bryers’ argument that Mr Hornsby did not affirm the agreement, as the payments made under the August  agreement  were  made  by Okura  not  Mr  Hornsby personally,  is  not sufficient to refute this evidence.   Indeed, Mr Hornsby subsequently extended his personal liability in relation to that same mortgage by giving Mr Haines a personal guarantee in December 2008.  Mr Hornsby behaved consistently with the agreement and there is no evidence of protest.

Issue 2: Is Mr Hornsby personally liable?

Law of personal liability

[30]     The parties agree a party will be personally liable under a contract if it has, objectively, manifested an intention to be bound by it.  It is assumed that an entity which signs and executes a written document intends to be bound by it.  Where it is clear an agent is acting as intermediary the agent is not a party to a contract, though that can be excluded by the parties expressly or by inference from the contract and surrounding circumstances.26   The authors of Burrows, Finn and Todd on the Law of Contract say:27

The tenor of the decisions is that if a person signs a contract in his or her own name without any qualification, something very strong indeed on the face of the contract is needed to exclude personal liability; but if the person’s signature is qualified by such expressions as “on account of”, “for and on behalf of” or “as agent”, his or her personal liability is certainly negatived.  It is relevant to take into account both the description of the parties in the body of the contract and the signature of the agent.  If in both places the agent is referred  to  as  agent,  it  is  almost  impossible  to  regard  him or  her  as  a contracting party; but if in neither place is there any mention of the agency, it is almost impossible to deny that he or she is a contracting party. If described as agent in one part of the contract only, whether in the body or in the signature, it is presumed that he or she is not a contracting party, but the presumption may be rebutted from the context. And sometimes a person may sign a contract in a dual capacity, as agent and also in a personal capacity.

26     Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand (6th ed, LexisNexis NZ Ltd, Wellington, 2018) at [16.3.1].

27     At [16.3.1] (footnotes omitted).

Submissions

[31]     Mr Byers submits, correctly construed, the July and August 2008 agreements did not make Mr Hornsby personally liable.  He makes a different argument than was put to Judge Gibson.    He submits  an  objective assessment  of the terms  of the agreement, against the background of the circumstances, is that:

(a)      Mr Hornsby signed on behalf of himself, Okura and ABRC because the July agreement referred to Okura, the August agreement apparently named Okura as a party and the schedules refer to liabilities involving Okura, ABRC and Mr Hornsby.

(b)The agreements were not intended to, and did not, vary the pre-existing liabilities of any of those parties but to settle quantum issues.   Mr Hornsby had no personal liability for the $30,000 concession because there was no agreement in place about that.  The agreements did not affect that position because the person or entity liable to pay that amount was not identified and any liability would be a liability of Okura which would otherwise have paid an increased purchase price.

[32]     Mr Mark submits Mr Hornsby signed the agreements in a personal capacity because: he had always been a guarantor of the second mortgage which Mr Haines wanted to continue to bind; Mr Haines evidence that the $30,000 was a debt of Mr Hornsby’s was preferable to Mr Hornsby’s denials; the August agreement confirmed the existence of the Hornsby personal loan; there was no reference in either agreement to Mr Hornsby signing in his capacity as director; and in December 2008 Mr Hornsby requested a discharge of the second mortgage on the understanding he would personally continue to stand by the agreements and Mr Haines relied on that promise.

Decision on personal liability

[33]     Mr Hornsby signed the July and August agreements.  It is not clear he was acting as an intermediary or as agent for Okura.  He signed the contract in his name without qualifications.  Both agreements dealt with matters for which he was named as responsible (as “Tucker”) and was responsible.  Mr Hornsby’s personal guarantee

of the second mortgage must have been relevant to the agreement. The indications to the contrary are:

(a)       The heading of the July agreement had “Okura” in brackets after Mr

Hornsby’s name in the heading.

(b)      The heading of the August agreement named “Okura Developments

Ltd” as well as Mr Hornsby and Mr Haines.

(c)       Clause 3 of the August agreement started with “Okura” in bold.

[34]     These indications are insufficient to mean Mr Hornsby’s personal liability is “certainly negatived”.  It may be that he bound Okura as well as himself, as Okura obligations are also at issue in the agreements. But it is plain from the wording of the agreement that Mr Hornsby was signing at least in a dual capacity.

[35]     I do not agree that the agreements did not vary pre-existing liabilities.  Rather, it was a rebalancing of liabilities and responsibilities. The existing liabilities involved Mr Hornsby personally.   He was a guarantor for Okura’s mortgage to Mr Haines. There is nothing to suggest either party considered the agreements would discharge this. There is sufficient evidence the $30,000 and interest was owed to Mr Haines by Mr Hornsby, not Okura. I agree with Judge Gibson there is evidence the parties agreed the $30,000 would be part of the purchase price for the shares if the plaintiff elected to proceed.28   That the $30,000 historically resulted in a deduction from the purchase price paid by Okura does not prevent it from being a debt owed by Mr Hornsby.

Issue 3: For what amount was Mr Hornsby liable?

[36]     Judge Gibson allowed the claim for $25,286.21 plus interest from the date of commencement of proceedings. Mr Byers submits this was in error as $9,000 paid by Okura  should  have  been  offset  against  the  total,  leaving  the  amount  owing  at

$16,286.21.

28 At [25].

[37]     Mr Mark agrees the correct amount is $25,286.21 less the $9,000 paid by Mr Hornsby to Mr Haines between 9 June and 13 October 2009.  But he submits interest of 10 per cent should run from 5 May 2009, the date referred to in the agreements, until the date of judgment and, thereafter, at the statutory rate.

[38]     The amount awarded by Judge Gibson did not give credit for the payments made by Mr Hornsby.  The appellant is entitled to a $9,000 reduction of the principal owing for that reason, as set out in the accounts prepared by the respondent.

[39]     As to interest, the July agreement specified interest would not be payable on the $25,286.21 but it was to be paid within 12 months.   The August agreement suggested  no  interest  had  been  charged  because  it  had  been  envisaged  that  the

$25,286.21 would be paid in instalments, not in one amount at the end of 12 months. It specified it was to be paid by 5 May 2009.  After that date, implicitly, interest was due but a rate was not specified. The respondents, in their accounts, calculated interest at 14 per cent, presumably under the penalty interest rate in the original mortgage agreement.  The interest rate referred to in the July agreement regarding the $30,000 was 10 per cent.

[40]     Mr Mark submits interest of 10 per cent, presumably in line with the rest of the

August agreement, should run from 5 May 2009.   I agree.   I allow the claim for

$16,286.21 plus 10 per cent interest on the sum outstanding from 5 May 2009 until the date of judgment, with interest at the statutorily prescribed amount from the date of judgment.

Result

[41]     I decline the appeal except by varying the sum of $25,286.21 owed by Mr Hornsby to Mr Haines to $16,286.21 and awarding interest at 10 per cent per annum from 5 May 2009 to the date of judgment.  I award costs on a 2B basis to Mr Haines.

………………………….

Palmer J