James Developments Ltd v Mana Property Trustee Ltd

[2009] NZCA 483

IN THE COURT OF APPEAL OF NEW ZEALAND

CA 241/2009
[2009] NZCA 483

BETWEENJAMES DEVELOPMENTS LTD

Appellant

ANDMANA PROPERTY TRUSTEE LTD

Respondent

Hearing:15 September 2009

Court:Hammond, Harrison and Miller JJ

Counsel:C S Withnall QC and R Ahdar for Appellant

J McCartney SC for Respondent

Judgment:19 October 2009 at 2.15 pm

JUDGMENT OF THE COURT

ATHE APPEAL IS ALLOWED.  THE SUMMARY JUDGMENT ENTERED IN THE HIGH COURT IS SET ASIDE.

BCounsel may file memoranda as to costs in accordance with the timetable in paragraph [39].

____________________________________________________________________

REASONS OF THE COURT

(Given by Miller J)

Introduction

[1]        The purchaser under an agreement for sale and purchase of land appeals against a summary judgment granted in the High Court.  The issue is whether a stipulation that the area of the property sold “must not be less than” a certain size was essential, such that any shortfall permitted the purchaser to cancel.

The narrative

[2]        The property is situated at 11 McNulty Road, Cromwell, and forms part of an industrial subdivision undertaken by the Central Otago District Council (CODC).  Mana Property Trustee Ltd (Mana) agreed to purchase part of the subdivision – lots 5 and 11 - from the CODC.  Under an agreement for sale and purchase dated 15 October 2007 Mana agreed to onsell lot 11 to James Developments Ltd (James).  The agreed sale price was $4.5 m plus GST.  James paid the deposit of $450,000.

[3]        The sale required a further subdivision under which lot 11 would become approximately 4.7161 ha.  The property was accordingly described as:

Lot 11 as shown on the attached plan coloured blue (dimensions not necessarily to scale) being part of a subdivision of Lot 3 RC060431 Otago District containing 4.7161 Ha more or less

[4]        The agreement was in the standard REINZ-ADLS form (8ed).  There were a number of special conditions.  Clause 15.2 provided that the special conditions prevailed over the general conditions in the event of conflict:

If there is a conflict between the general terms of sale of this agreement and these further terms of sale, these further terms of sale will prevail.

[5]        One of the special conditions was cl 16.1, which assigned to Mana responsibility for securing the CODC’s approval of the subdivision and for having the title issued.  It provided, so far as relevant:

16.         SUBDIVISION

16.1The vendor is purchasing from the CODC the vendor’s land.  The CODC has obtained subdivision Resource Consent for its proposed subdivision of lot 3 RC060431 (“proposed subdivision”) into lots including the vendor’s land.  The vendor has agreed with the CODC that the CODC will alter the boundaries between lot 5 and lot 11 of the proposed subdivision to enable lot 11 to become approximately 4.7161 Ha at the CODC’s or the vendor’s cost:

16.1.1as soon as practicably possible after signature of this agreement by both parties, require the CODC to vary the resource consents to the proposed subdivision to accommodate increase to the size of lot 5 to not less than 7.481 m²;  and

16.1.2immediately give all information and do all things which the territorial authority reasonably needs to be able to vary the resource consents.

16.2As soon as the territorial authority has varied the resource consents, the vendor will at the vendor’s cost:

16.2.1ensure the implementation of the varied resource consents to carry out all requirements and complying with all conditions which the territorial authority has imposed in the resource consents;

16.2.2ensure the preparation of a survey plan according to the resource consents;

16.2.3ensure LINZ of Survey and Land Information approve the survey plan;

16.2.4ensure the approved survey plan is lodged in LINZ;  and

16.2.5the approved survey plan is deposited in LINZ and LILNZ issues a separate certificate of title for the property.

[6]        Settlement was to occur five working days after the vendor notified the purchaser in writing that a search copy of the new title was available, or on 30 June 2008, whichever was the sooner.

[7]        Clause 18, another special condition, recognised that the area of the property was subject to adjustment on final survey.  It established a mechanism for adjustments to the price, and a minimum area:

18.         PURCHASE PRICE

18.1The area of the property shown on the plan attached to this agreement is approximate only and is subject to adjustment on final survey.  All measurements are subject to the final check by the CODC’s surveyor and/or LINZ and any variation which may be found to be necessary upon such check or which the above may require.

18.2The parties agree that the purchase price shown on the front page of this agreement is calculated at the rate of $95.42 per square metre (plus GST).  If the final area of the property shown on the approved survey plan is greater or lesser than 4.7161 Ha the parties will adjust the purchase price proportionately.

18.3The parties acknowledge that the final area of the property as shown on the approved survey plan must not be less than 4.7150 Ha.

[8]        The general conditions of sale included cl 5.4, which provided that except as expressly set forth in the agreement, errors or misdescriptions would not annul the sale:

Except as otherwise expressly set out in this agreement, no error, omission or misdescription of the property or the title shall annul the sale but compensation, if demanded in writing before settlement but not otherwise, shall be made or given as the case may require.

[9]        Mr Graeme Skeates, who is not only Mana’s solicitor but also its director and shareholder, has deposed that he inserted cl 18.3 into the agreement of his own volition and arbitrarily chose the minimum area.  It appears that James planned a further subdivision, but it is common ground that there are no density constraints that required a minimum area of 4.7150 ha to accommodate the number of lots planned.  Nor does the evidence point to any particular use that James had in mind for the land.

[10]       Mana proceeded with the subdivisional work.  CODC gave conditional subdivision consent on 19 December 2007.  Copies of the application and the resource consent were forwarded to James’ solicitors on 4 February 2008; the application described the subject land area as 9.6676 ha, being all the land comprised in certificate of title 323598 (being the aggregate of lots 5 and 11), and further stated that, as a result of the subdivision, lot 11 would be reduced in area to 4.7 ha.  That advice met with no complaint. 

[11]Mana deposited a plan for lot 11 at 4.6990 ha on 15 October 2008.  Certificate of title 430267 was issued on the same day; it also described the land area as 4.6990 ha.  Mana’s solicitor sent a copy of the title to James’ solicitor on 21 October 2008 and called for settlement on 28 October.  James’ solicitor responded promptly, advising among other things that “the certificate of title fails to comply with cl 18.3” and proposed that settlement be deferred until 14 November so the parties could meet in an attempt to resolve this issue.  (We note in passing that no point has been taken about failure to settle on 30 June 2008, the last date provided for in the agreement.)

[12]By letter dated 27 October, Mr Skeates acknowledged that “title is 60 m² short of the size mentioned in clause 18.3” but stated that he understood “there is no major consequence to the deficiency in area”, which could be addressed by monetary compensation under cl 5.4.  The reference to 60 m² appears to be an error, because the settlement statement enclosed with the letter provided for a reduction of $16,316.82 (being an area of 171 m² at $95.42 m²) in the purchase price.  In a letter of 31 October, Mr Skeates further characterised the difference as “trivial … being around 1/3 of 1% of the total area” and suggested that James would have to establish that a difference of “0.003%” (it is actually 0.363%) made a material difference to its rights.

[13]James gave notice of cancellation of the agreement on 3 November for breach of cl 18.3.  The next day Mana advised James that CODC was prepared to adjust the boundaries for the new property to increase lot 11 to 4.715 ha.  A new title was issued on 19 November for a lot containing 4.7155 ha.

[14]Proceedings were filed in December 2008 and the High Court hearing was held in March 2009, with judgment on 8 April.  Mana obtained a decree of specific performance.

[15]On 28 May James obtained a stay pending this appeal.  It was granted on terms that James pay costs and disbursements of $13,700, that it pay to Mr Skeates $821,214.80, and that it obtain a fixture in this Court in the week of 20 July.  None of these conditions was met.  James’ shareholder resolved to place the company into liquidation on 6 July, and the appeal has been prosecuted by the shareholder-appointed liquidators, Messrs Paul Jenkins and Iain Nellies of Dunedin.  Mana has since abandoned its quest for specific performance and had the decree discharged, so the appeal is now concerned with the question whether James was entitled to cancel.

[16]Before the hearing of the appeal, Mana moved for orders staying or adjourning the appeal and increasing the amount of security, on grounds inter alia that it is the major creditor of the company and wishes to have the liquidators replaced because they are conducting the liquidation unfairly.  That application was refused by minute of 8 September.

The High Court judgment

[17]       Associate Judge Osborne carefully outlined the facts and the approach to interpretation.  He found that cl 18 prevailed over cl 5.4.  The word “must” was not dispositive, and the structure of cl 18 did suggest at least some measure of importance in the stipulated minimum.  However, the vendor had inserted cl 18.3.  Nor did the extrinsic evidence establish that the promise was of such importance to the purchaser that it would not have entered into the contract unless assured of strict performance; on the contrary, there were no relevant density provisions and the purchaser pointed to no particular features of the land that objectively might explain cl 18.3 as being essential.  When the contract was looked at in its relevant setting, a minor variation from that stipulated in cl 18.3 did not go to its root or heart.  Accordingly, the Associate Judge held that James had no arguable defence.

The appeal

[18]Section 7(4) of the Contractual Remedies Act 1979 provides:

7           Cancellation of contract

(4)         Where subsection (3)(a) or subsection (3)(b) or subsection (3)(c) of this section applies, a party may exercise the right to cancel if, and only if,—

(a)The parties have expressly or impliedly agreed that the truth of the representation or, as the case may require, the performance of the [term] is essential to him;  or

(b)The effect of the misrepresentation or breach is, or, in the case of an anticipated breach, will be,—

(i)Substantially to reduce the benefit of the contract to the cancelling party;  or

(ii)Substantially to increase the burden of the cancelling party under the contract;  or

(iii)In relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for.

[19]Mr Withnall QC rested his case squarely on s 7(4)(a), arguing that the parties had expressly or impliedly agreed that the truth of the representation or performance of the stipulation was essential to the purchaser.  He disclaimed reliance on s 7(4)(b), which permits cancellation where the effect of a misrepresentation or breach is substantially to reduce the benefit of the contract to the cancelling party.

[20]Mr Withnall submitted that cl 18.3 is both a special condition which prevails over the general conditions, including cl 5.4, and a code dealing with variations in area.  It contemplates variations from the 4.7161 ha contracted for, and quantifies compensation payable to vendor or purchaser, but it limits by express agreement the extent of any deficiency in area on the final survey.  The imperative “must” is synonymous with the expression “it is essential that”, and must be given effect.  The Associate Judge ascribed to the clause a meaning that is inconsistent with its plain purpose of insisting that the area not be less than 4.7150 ha.  In reading that conclusion, he erred by taking into account the parties’ negotiations, and specifically the fact that Mr Skeates inserted cl 18 into the draft agreement.  He further erred by founding his judgment in part on the question whether the deficiency is substantial, for James did not invoke s 7(4)(b).

[21]Ms McCartney SC supported the High Court judgment.  The Associate Judge was right to look to the commercial purpose and significance of the term when considering implied essentiality.  When that is done, it is plain that cl 18.3 does not go to the heart of the contract.  Because there were no relevant density provisions, the purchaser did not risk losing a lot for subdivision through a small reduction in the overall area transferred.  Further, cl 18.3 serves a purpose, by limiting the agreed regime for adjustment of price in cl 18.2.  That allows James to claim damages under cl 5.4 for breach of cl 18.3.

[22]In the alternative, Ms McCartney argued that performance of cl 18.3 required substantial compliance only and a de minimis variation in the area provided was acceptable.  Also in the alternative, cl 18.3 specified no date by which the area was to be provided and so allowed Mana a reasonable time in which to do so.

[23]We record that Ms McCartney advised us that if the appeal is allowed, the pleadings will be amended to add further causes of action.  These are no doubt material to the question what is to become of the deposit, which does not presently concern us.

Approach to construction

[24]The question is whether the parties agreed that performance of cl 18.3 was essential to the purchaser.  That is a question of construction which is answered objectively, and not by reference to the parties’ subjective intentions.  In Wholesale Distributors Ltd v Gibbons Holdings Ltd [2008] 1 NZLR 277 (SC), Tipping J held (at [56]):

Questions of interpretation concern the objective meaning of the parties’ words rather than their subjective intentions. The law generally presumes that the objective meaning of their words reflects those intentions. The parties are not allowed, on an interpretation issue, to tell the court what they intended the words to mean or what they thought the words meant. Interpretation difficulties arise when the parties have used words of uncertain meaning and they assert competing meanings for those words. In this situation the traditional view has been that the court must ascertain what meaning the words bear, taking into account the document as a whole and all relevant circumstances that would have been apparent to the parties at the time they contracted. The traditional phrase “matrix of facts” means all the objectively relevant surrounding circumstances.

[25]The ordinary meaning of words used in a contract prevails unless the context shows that another meaning was intended: Melanesian Mission Trust Board v Australian Mutual Provident Society [1997] 1 NZLR 391 at 394-395 (PC); and Pyne Gould Guinness Ltd v Montgomery Watson (NZ) Ltd [2001] NZAR 789 at [29] (CA).

[26]Except in an action for rectification, evidence of the parties’ negotiations is not ordinarily admissible: Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 913 (HL) (per Lord Hoffman). As it was put in Canterbury Golf International Ltd v Yoshimoto [2004] 1 NZLR 1 at [28] (PC), “[a]ll a Court can do is to decide what the final contract means.”

Essentiality of minimum area

[27]When cl 18 is read as a whole, it can be seen that the parties agreed to an area of 4.7161 ha more or less, with an unders and overs mechanism in cl 18.2 to reflect minor adjustments on final survey.  That mechanism allowed the vendor to deliver less than the agreed area on payment of compensation.  But cl 18.3 limited that mechanism by ensuring that the area transferred must not be less than the specified minimum.

[28]We accept Ms McCartney’s submission that “must” does not always connote essentiality.  Where essentiality is said to be implied rather than express, as in this case, it is determined by construction of the contract as a whole.  The commercial context may be taken into account when interpreting the contract to determine the parties’ intention. 

[29]Mr Withnall did not dispute that the absence of any density constraint affecting the minimum area of lot 11 was admissible as part of the context.  He submitted, however, that Mr Skeates’ evidence to the effect that he put cl 18.3 into the contract and selected the minimum area arbitrarily is inadmissible evidence of negotiations.  We agree.  The Associate Judge accordingly erred by relying on Mr Skeates’ evidence that it was he who inserted cl 18.3 and selected the minimum area.

[30]We consider that in concluding performance was not essential to the purchaser the Associate Judge also placed too much emphasis on the absence of density constraints or any commercial significance in a discrepancy of just 0.363%.  Those matters may be taken into account as part of the context, but the question posed by s 7(4)(a) is whether as a matter of construction the parties agreed that performance of the stipulation was essential such that any departure from it conferred a right to cancel.  If they did, it does not matter that the breach was commercially unimportant.

[31]In particular, the parties may confer upon the purchaser a right to cancel for breach of a minimum area clause in a contract that permits adjustment on final survey, whether or not the minimum area is needed for some specific purpose such as further subdivision.  The purpose of the minimum area clause in this case was to deny the vendor the option, on payment of compensation, of reducing the area transferred.  Any further reduction was at the option of the purchaser, in that its agreement was necessary.  We accept Ms McCartney’s submission that breach of the minimum area would sound in damages, and not merely compensation at the rate agreed upon for minor adjustments.  However, that would defeat the purpose of the clause by allowing the vendor to reduce the area on payment of money, while the purchaser would not find it easy to prove that damages should exceed the agreed rate. 

[32]Ms McCartney’s inability to identify at what point the purchaser would be entitled to cancel illustrates the uncertainty that would arise if cl 18.3 was not construed according to its plain meaning.  The combination of the right to adjust the area within agreed limits on payment of compensation and the imperative language of the minimum area clause – “must not be less than” – satisfies us that performance was essential to the purchaser.  That conclusion may be thought illiberal where there is no evidence of any commercial need for strict performance, but it is necessary to give effect to the agreed assignment of rights.

[33]       We agree with the Associate Judge that cl 5.4 does not affect the construction of cl 18.3, but for different reasons.  Its language suggests that misdescriptions of the property or title are not impliedly essential, for it provides for compensation where there was such a misdescription, the agreement confers no express right to cancel, and compensation is demanded in writing before settlement: Holmes v Booth (1993) 2 NZ ConvC 191,633 at 191,649 (CA) (per Tipping J).  But this Court has held that “misdescription” in cl 5.4 refers to misdescriptions about the state or quality of the property when the agreement was made, and that in order to fall within cl 5.4 a misdescription must relate to titles and boundaries: Property Ventures Investments Ltd v Regalwood Holdings Ltd [2009] 1 NZLR 481 at [13]-[14] (CA). It is not suggested that there was any such misdescription in this case, so cl 5.4 does not preclude cancellation.

Substantial performance of essential term

[34]       We reject Ms McCartney’s alternative submission that even if the term was essential, the discrepancy was not shown to be “commercially material”.  The legislative policy evident in s 7(4)(a) is that the autonomy of the contracting parties should be respected.  The statutory language recognises that the parties may agree that any breach, however immaterial, permits the affected party to cancel:  Dawson and McLauchlan The Contractual Remedies Act 1979 (1981) at 110-111.

[35]       We accept that there may be room for argument in some cases about what strict performance requires, but this is not such a case.  The agreement provided for compensation on a per-metre basis and prescribed that the area must not be less than 4.7150 ha, while the area actually provided was 171 m² less than the minimum.

Time for performance

[36]Ms McCartney further argued that as the contract did not specify a time by which the area of 4.7150 ha was to be provided, Mana might do so within a reasonable time.  It complied by 19 November, when a new title was issued.

[37]It is true that the contract did not fix a date by which the title must issue.  It provided, however, that settlement would occur five working days after the vendor notified the purchaser that the title had issued.  That was done on 21 October 2008, so fixing the settlement date of 28 October, and a settlement statement was issued.  At settlement date, the final area as shown on the approved survey plan was less than the agreed minimum.  For these reasons we are satisfied that cl 18.3 was breached before James cancelled on 3 November.

Decision

[38]The appeal is allowed, and the summary judgment granted in the High Court is set aside.

Costs

[39]Neither counsel dealt with costs in their submissions.  Ms McCartney did indicate that she wishes to be heard on costs having regard to James’ failure to comply with the stay it obtained.  Accordingly, counsel may file memoranda as to costs.  Mr Withnall’s should be filed within 14 days after delivery of this judgment; Ms McCartney’s within 14 days thereafter; and Mr Withnall will have seven days for any reply.  We will then deal with costs on the papers.

Solicitors:

La Hood Van Aart, Dunedin for Appellant

Graeme Skeates Law, Auckland for Respondent