I Appellant AND O

[2001] NZCA 463

S35A MATRIMONIAL PROPERTY ACT 1976 RESTRICTS PUBLICATION OF THIS JUDGMENT

IN THE COURT OF APPEAL OF NEW ZEALAND  CA135/01

BETWEEN      I

Appellant

AND                O

Respondent

Hearing:  15 October 2001

Coram:Gault J Robertson J Salmon J

Appearances:             P J Dale and R J Collis for Appellant

A F Grant and B L Sellars for Respondent

Judgment:                 5 December 2001

JUDGMENTS OF THE COURT

Judgments

Paras No

Gault J  [1] – [22]

Robertson and Salmon JJ  [23] – [47]

GAULT J

[1]        This appeal arises in a dispute between the parties in respect of the division  of property following the end of their marriage in accordance with the terms of a pre- nuptial agreement entered into by them on 9 December 1989.

[2]        The parties married on 11 March 1990 and separated in 1997. Both had been previously married and resolved in the new marriage to protect their separate property. They bought a house shortly before the marriage. It was obviously a substantial dwelling in a desirable location as evidenced by the purchase price of

$1.9 million. This was provided by the husband to the extent of $1.325 million, by the wife to the extent of $190,000 with the balance of $385.000 being raised by mortgage. The property was duly registered as tenants in common in unequal shares reflecting the respective contributions of 86.46 percent and 12.54  percent.  The house purchase plainly was at the forefront of the consideration of the parties at the time they executed the pre-nuptial agreement. What they apparently did not  envisage was that a substantial sum would be expended on improving the property (approximately $1.6 million) of which, according to the trial Judge, some $21,273 was contributed by the wife from her separate property and $1,389,235 was provided by the husband out of his separate property.

[3]        The essential dispute is one of contract interpretation as it affects the entitlements of the respective parties to the proceeds of the sale of the house property. The critical provisions are clause 3(d), (e) and (h) of the contract which read:

(d)Any separate property used to improve any property shall be a loan from the party entitled to such separate property and shall be payable out of such property by the party entitled to it upon demand in writing.

(e)Any separate property used to improve any matrimonial property shall be a loan from the party entitled to such separate property and shall be repayable out of such matrimonial property to the party entitled to it upon demand in writing.

…

(h)Notwithstanding anything hereinbefore contained any increase  in value of the home referred to in clause 7 [sic] (but not the net equity contributed by the parties to the home of

$1,515,000.00) shall be matrimonial property and shall be divided equally between the parties.

[4]        The competing contentions are that the wife says that she is entitled to share equally in the net value of the property less only the initial net equity contribution of the parties, whereas the husband says that any additional contributions made towards improvements to the property are to be repaid to the respective contributors before the increase in value is divided equally. The outcome depends upon whether the expression “any increase in value” in clause 3(h) includes increase in value resulting from improvements by the application of separate property.

[5]        The provisions of the agreement must be construed in their full context which, because the agreement was expressly for the purpose of contracting out of the application of the Matrimonial Property Act 1976, necessarily includes the terms of that Act.

[6]        The fifth recital and clauses 2, 3 and 5(1) – (8) of the agreement read as follows:

They desire that:

-           their furniture and household effects part of which were and will be directly or indirectly produced by their joint and several efforts before and during their marriage should be shared equally;

-           all their other property which was not produced in that way should not be shared as matrimonial property but should be retained by the existing owner; and

…

SEPARATE PROPERTY

2(1) SUBJECT to Clauses 3 and 4 the following and no other shall always in the future be in the separate property of the party in question:

(a)The property of Tony in Schedule A and the property of Susan in Schedule B and all other property owned by either at the date of this agreement; and

(b)Property declared by the Act to be separate property except for property gifted to or settled upon one party by the other party which property shall be matrimonial property; and

(c)Property acquired from a third party by gift, succession or survivorship or as beneficiary under a trust; and

(d)Any form of property into which the foregoing property or proceeds thereof may pass except for property gifted to or settled upon one party by the other;

(e)Notwithstanding anything contained in the Matrimonial Property Act 1976 and subject only to the provisions of Clause 3 any increase in value and any income or gains arising from the separate property of either Tony or Susan shall be their separate property.

2(2)SUBJECT to Clauses 3, 4 and 5 the use to which the property   is put or its amalgamation with other property in co-ownership shall not change property which at any time the separate property of Tony or Susan into matrimonial property.

3ANY separate property (including such property as is separate property by virtue of the provisions of Clause 2) which is used for the acquisition or improvement of any matrimonial property shall be separate property notwithstanding the provisions of the Act. In order to give effect to that wish Tony and Susan agree that the following provisions shall apply to ensure that whatever happens to separate property it (or its equivalent) remains as separate property:

(a)If the whole of the property is purchased using the separate property of one party then such property shall be the separate property of that party.

(b)If the whole of the property is purchased using the separate property of both parties then such property shall be the separate property of each party in proportion to the respective value that the separate property applied to the purchase bears to the total cost of the purchase.

(c)If the property is purchased only in part from the separate property of one party then such property shall be the separate property of that party only in proportion to the value that the separate property applied to the purchase bears to the total purchase price.

(d)Any separate property used to improve any property shall be a loan from the party entitled to such separate property and shall be payable out of such property by the party entitled to it upon demand in writing.

(e)Any separate property used to improve any matrimonial property shall be a loan from the party entitled to such separate property and shall be repayable out of such matrimonial property to the party entitled to it upon demand in writing.

(f)Any separate property of one party used to improve the separate property of the other party shall be a loan to the party whose property is so improved and such loan shall be repayable upon demand in writing.

(g)Notwithstanding anything hereinbefore contained any separate property applied towards any living expenses, household furniture, or household appliances effects or equipment, and resulting in the acquisition of other property, shall be matrimonial property and shall be divided equally between the parties.

(h)Notwithstanding anything hereinbefore contained any increase in value of the home referred to in clause 7 [sic] (but not the net equity contributed by the parties to the home of $1,515,000.00) shall be matrimonial property and shall be divided equally between the parties.

4SUBJECT to Clause 3 hereof if any item of separate property becomes so intermingled with matrimonial property as to  make the separate identification of that separate property impracticable the former owner of the intermingled separate property shall have a charge on the whole of the intermingled property to secure payment of a sum in compensation for the loss of the former separate property and subject to Clause 3 hereof the sum shall be calculated having regard to the last

known value of the separate property. The balance of the intermingled property shall be divided between the parties as matrimonial property and shall be divided equally between the parties.

THE HOME

5(1) The home situated at 17 Hanene Street, St.Heliers (hereinafter referred to as “the home”) has been purchased by the parties for $1,900,000.00 subject to a mortgage to National Australia Bank (N.Z.) Limited securing the sum of $385,000.00.

5(2) Susan and Tony shall together assume sole responsibility for repayment of the mortgage.

5(3) The parties agree that the home will be owned as to 87.46% by Tony and 12.54% by Susan, being the proportions of their separate property which are to be contributed to the home.

5(4)Susan will contribute the sum of $200,000 to the purchase   price of the home by repaying that sum to Tony from the proceeds of sale of her property at 24 Rawhiti Road, One Tree Hill.

5(5) IF either party so requests in writing, the home shall be immediately placed on the market for sale at such price as  shall be agreed upon between the parties and after the deduction of any real estate agent’s commission and legal expenses and disbursements in respect thereof the net proceeds then remaining shall be paid or applied in the manner following:

(a)The mortgage shall be repaid by Susan and Tony equally from the proceeds of sale.

(b)By division of the sum of $1,515,000.00 as to 12.54% to Susan and 87.46% to Tony.

(c)By division of the balance equally between Susan and Tony.

5(6) Should any dispute or difference  arise  between  the  parties about the sale price of the home, the same shall be determined by a single arbitrator to be agreed upon by the parties. Failing such agreement any dispute or difference shall be determined by two arbitrators (and in the case of their disagreeing, by their umpire) one of such arbitrators to be appointed by each of the

parties.    Such arbitration shall be conducted in accordance with the provisions of the Arbitration Act 1908.

5(7)THE amounts received by the parties under the provisions contained in clause 5.(1) shall be their separate property.

5(8)PENDING the sale of the home and notwithstanding any rule of law to the contrary, the parties agree that.

-           the interest of them both in the home shall be that of tenants in common in the above mentioned unequal shares,

-           where applicable the rule relating to survivorship shall not apply between the parties and the interest of them both in the home shall be unequal,

-           the provisions contained in this clause shall extend to bind the parties and their respective executors and administrators as if they were registered as tenants in common in unequal shares on the title to the home.

[7]        It is to be noted first that there is an inconsistency between clauses 3(h) and 5(3). This suggests rather that clause 5 was intended to reflect the position at the  time of purchase whereas clause 3 was directed to the future. The assumption of equal responsibility for the mortgage (clauses 5(2) and 5(5)(a)) was consistent with equal interests in the home beyond the level of their initial contributions, but again it is not easy to reconcile with the stated shares in the property.

[8]        Clauses 3(d) and (e) preserve the separate property status of property used to improve any property or matrimonial property as a loan payable out of the improved property. The issue is whether, in relation to improvements to the home, the operation of those paragraphs is excluded by the introductory words in clause 3(h) “Notwithstanding anything hereinbefore contained”.

[9]        Laurenson J in his judgment delivered in the High Court at Auckland on     12 December 2000 concluded that clauses 3(d), (e) and (f) were not inconsistent with clause 3(h), could operate compatibly with that clause and so were not excluded by the opening words of clause 3(h). His essential reasoning is contained in the following paragraphs:

Clauses 3(d), (e) and (f) are directly relevant. The important point to note is in none of these three clauses does the agreement purport to preserve expenditure from separate property as separate property. Rather, in each case, expenditure is preserved as a loan.

This is, in my view, a quite vital distinction because, by recognising it as such, these three clauses do not run counter to cl.3(h). If they purported to preserve the expenditure as separate property, then clearly they would run counter to cl.3(h) which provides the increase is matrimonial property. This being the case, any earlier clause which purported to run counter to this, would be negated by the opening words in cl.3(h).

The result is, in my view, clear. Clause 3(h) provides any increase in value of the home is matrimonial property. Clause 3(e) which is most relevant to the particular case, says expenditure from separate  property used to improve matrimonial property shall be a loan repayable out of the matrimonial property. The two clauses are, therefore, quite compatible.

[10]      If clause 3(h) were entirely independent it might convey that nothing previously mentioned in the agreement should prevent the entire value of the home beyond the initial equity contributions having the status of matrimonial property to be divided equally. That was the argument for the appellant and that interpretation is preferred by the other members of the Court. I take a different view and consider that, in context, clause 3(h) is to be construed as it was by Laurenson J.

[11]      I take the view that the interpretation of all of the subparagraphs of clause 3 is governed by the introductory words of that clause. That contains the over-arching object or purpose of the provisions The first sentence reads:

ANY separate property (including such property as is separate property by virtue of the provisions of Clause 2) which is used for the acquisition or improvement of any matrimonial property shall be separate property notwithstanding the provisions of the Act.

[12]      It is to be noted that this refers to “any separate property” and to “any matrimonial property”. It refers specifically to use for improvement of matrimonial property and is to be achieved notwithstanding the provisions of the Act thus precluding recourse to the Act in aid of any interpretation inconsistent with the stated objective. The introductory words of the clause then go on:

In order to give effect to that wish Tony and Susan agree that the following provisions shall apply to ensure that whatever happens to separate property it (or its equivalent) remains as separate property.

[13]      The following provisions therefore are to be construed to ensure that whatever happens separate property used for the improvement of any matrimonial property remains as separate property. I am satisfied that para (h), which is one of  the “following provisions”, can be construed to ensure that.

[14]      Paragraph (h) is directed to the status of any increase in value of the home above the initial equity contributions. It seems to be common ground, and in any event in my view it would be implied, that the increase in value is intended to be the increase in net value. Value is realised only after repayment of borrowing. Clause 5(5) recognises that.

[15]      Borrowings for the purpose of effecting improvements to a property may lead to equivalent, greater or lesser increase in value of the property, but in any event would require repayment before the net increase in value were realised. Such borrowings, whatever the source, are quite separate from any increase in value of the property. Whether or not there are borrowings and whatever their source cannot impact upon the categorisation of any increase in the value of the property as matrimonial property.

[16]      Paragraph (h) operates independently of such borrowing. The fact and property status of such loans, where they are provided for in the agreement as in paras (d) and (e) of clause 3, therefore do not impact upon the operation of (h) which has the same operation notwithstanding anything in those earlier paragraphs.

[17]      The opening words of clause 3(h), “Notwithstanding anything hereinbefore contained” refer to the prior sub-paragraphs of clause 3. Since the sub-paragraph is subsidiary to the introductory words of the clause, its opening words are not to be construed as excluding these opening words. They are therefore to be taken as relating to paras (a) to (g). In fact it is para (b) that would operate inconsistently  with para (h) and therefore is overridden to the extent of any “increase in value” of the home.

[18]      If para (h) is to have the effect contended for by the appellant so that the husband’s separate property used in the improvements to the house results in loss of its separate property status and the equal sharing of the consequent increase in the value of the home, the clause will not be fulfilling its clearly stated purpose set out in the introductory sentences of clause 3 “ … to ensure that whatever happens to separate property it (or its equivalent) remains as separate property”.

[19]      I find nothing in clause 5(5) of the agreement inconsistent with the construction I prefer. Plainly that clause would not operate to require division of the balance of the proceeds of sale before any further borrowing against the property is discharged. In fact, there were further mortgage monies raised and there was no  issue about the repayment of the second mortgage before division of the balance. There is no reason why the same should not apply in respect of loans payable out of the property pursuant to paras (d) and (e) of clause 3.

[20]      Accordingly, I reach the same conclusion as the Judge on the interpretation of the pre-nuptial contract.

[21]      The Judge went on to consider, at considerable length, extensive evidence directed to the source of the monies used in the improvements of the home. He was satisfied that all of the monies contributed by the husband were sourced in his separate property except for the sum of $454,467. The Judge’s findings were disputed on appeal and we were carefully taken through the evidence. It was the submission on behalf of the wife that the Judge was wrong to treat the amount he did as deriving from separate property of the husband because the evidence did not exclude at least some of the monies being derived by the husband as earnings during the course of the marriage. Because of the view reached by the other members of the Court on the correct construction of the pre-nuptial agreement, the exercise  of tracing the contributions to the improvements no longer is material. Accordingly, I content myself with recording that on the evidence and argument presented to us, I was satisfied that the Judge was correct in the classification and calculation of the monies contributed by the husband except for the sum of $171,956. In relation to  that the evidence did not support the view that this was capital sourced from separate property. Rather it appears to represent an increase in the value of shares of one of

the husband’s companies resulting from his personal exertions during the course of the marriage. I would have increased the amount the Judge found not proved to have been sourced in the husband’s separate property by that amount.

[22]      I would allow the appeal only to the extent of reducing the amount found by the Judge to have been contributed to the improvements to the home from the husband’s separate property by the sum of $171,956.

ROBERTSON AND SALMON JJ (DELIVERED BY SALMON J)

[23]      As described in the judgment of Gault J the parties to these proceedings entered into a pre nuptial agreement designed to protect their separate property. The relevant parts of the agreement are set out by Gault J, and we do not need to repeat what is contained in that judgment.

[24]      We, however, differ from the trial Judge and Gault J in the interpretation to be placed upon the agreement which is crucial to the resolution of this appeal.

[25]      Section 21 of the Matrimonial Property Act 1976 permits parties to contract out of the provisions of that Act. Much of the argument before us emphasised the intentions of the parties at the time of entering into the contract and their subsequent perceptions or intentions. None of that evidence is initially relevant. If there is ambiguity the factual matrix can be considered to assist. But the starting point for  the inquiry is to give unambiguous words their plain and ordinary meaning.

[26]      In view of the importance of the interpretation of the contract in this case, we summarise the principles enumerated by Lord Hoffman in Investors’ Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 All ER 98 at 114.

1.  Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

2.That background is commonly referred to as the “matrix of fact”.

3.  The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent.

4.  The meaning which a document would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of the document is what the parties using those words against the relevant background would reasonably have been understood to mean.

5.  The “rule” that the words should be given their “natural and ordinary meaning” reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes particularly in formal documents.

[27]      However, as Lord Diplock said in Antaios Cia Naviera SA v Salen Rederierna AB, The Antaios [1985] AC 191 at 201:

… if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business common sense, it must made to yield to business common sense.

[28]      This Court has, on numerous occasions, expressed views similar to those in the above two decisions.

[29]      In this case the contract was prepared by the respondent’s solicitors and was reviewed for the purpose of giving independent advice to the appellant by a solicitor instructed for that purpose. There is nothing in the background to the preparation of the contract which would suggest that the parties used language intended to convey anything other than its ordinary meaning. It is not contested that the purpose of the agreement was to preserve separate property. There can also be no doubt that it was the intention of the parties that in relation to the matrimonial home, there would be a shared responsibility for the mortgage and a shared benefit from any increase in value of that home.

[30]      There is no evidence relevant to construction or otherwise forming the background to entering into the contract that would suggest an intention to depart from the formula contained in clause 5 of the contract as to the distribution of the proceeds of sale of the matrimonial home.

[31]      There is evidence from the respondent as to discussions of the parties after purchase and after the agreement had been signed relating to the consequences of the expenditure of money on improvements, but that evidence is not admissible in ascertaining the intention of the parties at the time they entered into the contract.

[32]      This is one of those cases, therefore, where it is not necessary to go beyond the terms of the document itself in order to ascertain the intention of the parties.

[33]      Reading the agreement as a whole we consider that it leads inescapably to the conclusion that these parties decided that their matrimonial home was to be treated  as an exception to the separate property regime which otherwise applied. Clause  3(h) when read with clause 5 creates this result. Clause 3(h) begins with the words, “Notwithstanding anything hereinbefore contained…”. That is a clear indication that the clause is providing an exception from that which precedes it. Clause 3 is carefully drafted. The draftsperson has obviously considered the various ways in which separate property could be used to improve or could become intermingled with, separate property of the other or with matrimonial property.

[34]      The various instances when this can occur have each been provided for. But then the clause ends with two sub-clauses, each of which provides an exception to the regime which will otherwise apply.

[35]      We have given anxious consideration to the view contained in the judgment in the High Court and the judgment of Gault J. Gault J takes the view that the interpretation of all of the sub-paragraphs of clause 3 are governed by the introductory words of that clause. In our view, the appropriate way to look at clause 3 is to recognise that the preamble sets out the objective of the agreement, which is to preserve separate property, that the sub-clauses up to (f) provide the mechanism

by which that is to be done, and sub-clauses (g) and (h) provide exceptions to the objective. That interpretation is confirmed when one considers clause 5.

[36]      Clause 5 is specific in its provisions. It provides a discrete regime for the matrimonial home. There is a particularity about actual contributions which has not previously appeared in the agreement, apart from recital I. Sub-clause (1) identifies the initial contributions and sub-clause (2), the responsibility for repayment of the mortgage. Sub-clause (3) confirms the importance of the actual money spent. It expresses as percentages the agreed contributions. In sub-clause 5 the parties declare precisely what is to happen if there is a written request for the property to be disposed of. It does so in a manner completely consistent with our interpretation of clause 3 (h). If it had been intended that money used for improvements to the home would be treated as loans, one would have expected that to have been spelt out in clause 5.

[37]      Indeed, because clause 3 directs attention to future separate property arising from contributions to property, there is no reason why, if the precise figures were not fundamental, they needed to be mentioned in clause 5 at all. Setting out the particularity of the figures as has been done in clause 5 would be superfluous and redundant if the generality of the provisions in clause 3 were to apply in respect of the house property.

[38]      Applying the approach to interpretation enunciated in Air New Zealand v Nippon Credit [1997] 1 NZLR 218 and bearing in mind that all words and parts of an agreement must be given meaning, the plain and unambiguous words of clause 5 cannot be ignored. As we have said, they are an amplification of what was heralded in clause 3(h) as providing a regime for the matrimonial home different to that which applied in respect of all other assets. We do not accept the argument on behalf of the husband that the purpose of clause 3(h) was limited to neutralising the generality of clauses 2(1)(e) and 3(b). There is no justification for reading down the words with which clause 3(h) commences, namely “Notwithstanding anything hereinbefore contained…”.

[39]      It is clear that the contributions deemed to be loans referred to in sub-clause (c), (d) and (e) of clause 3, are in a different category to the mortgage referred to in clause 5. If it had been intended that money used for improvements to the home was to be treated as loans one would expect, given the specificity with which clause 5 is drawn, that there would be specific reference in that clause. The absence of such reference is further confirmation that the clause 3 regime was not to apply to the home.

[40]      The house at the time of purchase is described in the evidence. It was a “shabby, run-down bungalow” on an extremely valuable site. It must always have been in the contemplation of the parties that the value of the site justified, and indeed, required improvements to the house. The respondent says that those improvements went far beyond anything contemplated by the parties at the time of their agreement, but nevertheless, the strong likelihood that some improvements must have been contemplated supports the view that clause 5 was drafted with that in mind.

[41]      The consequence is that after deduction of real estate commission, legal expenses, the mortgage and the initial contributions, the balance of the value of the home is to be divided equally. Accordingly, the appeal is allowed in that respect.

[42]      The appellant’s claim to share in the proceeds of sale in the manner which we have held to be appropriate was raised by the appellant in her defence and counterclaim to the respondent’s proceeding in the High Court.  In his defence to  that counterclaim the respondent sought rectification of the pre-nuptial agreement. Laurenson J considered whether it would be desirable to rule on the rectification issue, but concluded that to do so would require him to consider the issue of rectification in circumstances where he could not see the need for it to  arise.  Counsel for the respondent submitted, therefore, that in the event of the appeal being allowed, it would be necessary to refer the proceeding back to the trial Judge in order that findings of fact can be made in relation to the rectification remedy.

[43]      For the appellant, Mr Dale, submitted that this Court should resolve the issue of rectification because the hurdles in the way of rectification were insurmountable.

Before rectification can be granted there must be “convincing proof” of a continuing common intention. In Thomas Bates & Son Ltd v Wyndhams (Lingerie) Limited [1981] 1 All ER 1077 it was said at 1090:

The standard of proof required in an action of rectification to establish the common intention of the parties is, in my view, the civil standard of balance of probability. But as the alleged common intention ex hypothesi contradicts the written instrument, convincing proof is required in order to counteract the cogent evidence of the parties’ intention displayed by the instrument itself. It is not, I think, the standard of proof which is high, so differing from the normal civil standard, but the evidential requirement needed to counteract the inherent probability that the written agreement truly represents the parties’ intention because it is a document signed by the parties.

That comment was cited with approval by Tipping J in Westland Savings Bank v Hancock [1987] 2 NZLR 21 at 26.

[44]      In this case the convincing proof just does not exist. Indeed, there is no evidence to suggest that when the parties entered into their matrimonial agreement they intended it to have any meaning other than that expressed in the words used.

[45]      The only other defence raised in the defence to the counterclaim relied upon the agreement being set aside pursuant to relief sought in the counterclaim itself.  The agreement has not been set aside, so that no relief is available to the respondent in that regard.

[46]      Accordingly, we allow the appeal and declare the interests of the parties to be in conformity with this judgment.

[47]      Laurenson J made no order for costs in the High Court. We see no reason to depart from that finding. In this Court the appellant is entitled to costs in the sum of

$5,000 together with disbursements to be fixed by the Registrar.

Solicitors

Grove Darlow & Partners, Auckland, for Appellant Russell McVeagh, Wellington, for Respondent