Johnstone v Johnstone
[2015] NZHC 2047
•28 August 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-493 [2015] NZHC 2047
BETWEEN CAMPBELL GRAHAM JOHNSTONE
Appellant
AND
JOANNE MARGARET JOHNSTONE Respondent
Hearing: 5 August 2015 Counsel:
R D Butler for Appellant
A R Gilchrist for RespondentJudgment:
28 August 2015
JUDGMENT OF THE HON JUSTICE KÓS
[1] Following separation a husband and wife agree terms for child support payable by the husband, a banker. But the husband later loses his job at the bank. Eventually, after an exchange of emails, he reduces the payments he is making.
[2] Does the email exchange preclude the wife later claiming arrears? Judge
Harrison thought not. The husband appeals that decision.
Background
[3] Mr and Mrs Johnstone were married in January 1994. They have three children, born in 1996, 1998 and 1999. The Johnstones separated in April 2006. The marriage was dissolved in August 2009.
Agreements are entered
[4] After separation they entered three formal agreements. That was in
September 2007. The agreements were drafted by legal advisers. The first related to division of matrimonial property. It need not concern us. The second related to
JOHNSTONE v JOHNSTONE [2015] NZHC 2047 [28 August 2015]
spousal maintenance for Mrs Johnstone. It required payment of $1,700 per month for four years. Mr Johnstone’s obligation to pay would cease if Mrs Johnstone “experiences a significant positive change in her financial circumstances by way of inheritance or windfall” or if she ceased to be the principal provider of the day-to- day care of the children.
[5] The third agreement is the one we are directly concerned with. It is a voluntary child support agreement (the agreement). Clause 1 provides Mr Johnston is to pay $1,200 per calendar month per child until each attains the age of 20 years (or sooner if the child becomes financially independent). He is also liable under cl 5 to pay the children’s invoiced educational expenses, the cost of agreed extracurricular activity and certain other expenses.
[6] The liability to pay child support was subject to an exception in cl 8:
The parties acknowledge and accept the right of each of them to utilise the provisions of the Child Support Act 1991 and in particular to thereby suspend the operation of this Agreement PROVIDED HOWEVER that both the mother and father record in this Agreement their mutual wish to abide by the terms of this Agreement AND MUTUALLY UNDERTAKE to notify the other in the event that either of them wishes to implement the provisions of the Child Support Act 1991 in place of this Agreement.
It was common ground before me that cl 8 was intended to be available in the event
of a significant adverse event affecting Mr Johnstone’s ability to pay.
[7] As it happens, exactly that occurred.
Redundancy, recovery – and the payments made
[8] When the agreement was signed in 2007, Mr Johnstone was employed by a merchant bank. He received an annual salary package of approximately $250,000. But in March 2009 he was made redundant in the aftermath of the global financial crisis. He received his final pay and redundancy payment in June 2009. He was unemployed until he joined a small portfolio management concern in March 2010. His annual salary there was just $30,000.
[9] The agreement required Mr Johnstone to pay $3,600 per month under cl 1, together with the direct costs provided for under cl 5. This he did until 1 October
2010. In other words, for about 18 months, despite redundancy and then severely diminished income, he continued to make full payment. But starting October 2010
Mr Johnstone reduced his cl 1 payments to $2,800, then to $1,800, and then to $800 per month from December 2010. In May 2011 he increased them again to $836 per month.
[10] In September 2011 Mr Johnstone obtained an improved employment package at a merchant bank. His base salary rose from $30,000 to $65,000. His actual income appears closer to $90,000.1
[11] From 1 October 2011 payments made by Mr Johnstone increased from $836 per month to $1,141 per month. They continued at that rate until 1 September 2013 when a payment of $600 was made instead. At that point Mrs Johnstone applied for statutory child support under the Child Support Act 1991.2
[12] In addition to child support payments under the agreement, Mr Johnstone made payments for cl 5 direct costs (principally school fees).3 The latter totalled
$242,504 in the four years 2010–2013. Payments for cl 1 child support came to another $98,858. A total of $341,362. During this period his total taxable income (based on his tax returns) was $456,738. His evidence was that his net income after tax was $333,545. Thus Mr Johnstone spent essentially the whole of his available income on support of the children in those four years.
Communicating change
[13] The relevant communications between the parties which might have varied or qualified their contractual obligations and entitlements fall into three periods: (1) August–September 2010, (2) April–May 2011 and (3) September–October 2011. I
will consider each period in turn.
1 Mr Johnstone’s declared tax records shows his taxable income was $204,400 in the 2010 tax year; $68,900 in 2011; $93,600 in 2012 and $89,800 in 2013.
2 Herein, “the Act”.
3 The further $1,700 per month spousal maintenance obligation (see [4] above) ended in August
2011.
(1) August–October 2010
[14] Mr Johnstone’s evidence was that:
In or around September 2010, in the course of a number of emails and discussions, the plaintiff and I agreed to vary the monthly child support payments to reflect my changed financial circumstances. The discussions and emails also dealt with the care arrangements which we had with respect to our children.
[15] Few of these emails were actually in evidence. Generalised claims about their contents do not assist very much. Mr Johnstone accepted that there was no express confirmation in writing from Mrs Johnstone either accepting the reduction or waiving her legal rights.
[16] Mrs Johnstone denied agreeing to reduced payments. She had taken part- time employment. She said she continued to plead with Mr Johnstone to pay the full monthly amount. The partial email traffic in evidence before the Court includes an email on 11 August 2010 from Mrs Johnstone:
I therefore urge you to reconsider and continue to honour the obligations under our contract.
(2) April–May 2011
[17] Mr Johnstone’s child support payments continued at a rate of $800 per month. On 1 May 2011 Mr Johnstone increased payments to $836 per month. What preceded that was a series of email exchanges.
[18] On 10 April 2011 Mrs Johnstone said:
I would like us to consider an agreement which will work reasonably for us, not an agreement by law. You keep referring to what the guidelines are by law.
Mrs Johnstone acknowledged in evidence that “the guidelines” was a reference to the regime under the Act. In other words, Mr Johnstone was considering invoking cl 8 of the agreement. He would have been entitled to do that given his adversely altered circumstances.
[19] Mrs Johnstone was looking for a proposal in terms of payments, direct costs
and shared costs. Mr Johnstone responded with a “draft scenario”. Then, on
27 April 2011, noting that the Consumer Price Index increase for the year was 4.5 per cent, he said:4
As per the terms of our agreement I have adjusted the two monthly payments accordingly and the next payment will be:
Children: $836.54
Spousal: $308.48
Total: $1,145.02
[20] The following day, 28 April 2011, Mrs Johnstone replied:
Thanks for the adjustment. Regarding my budget and going forward we need to chat about options face to face please. I think I will leave the arrangement as it is for now though I do need an additional $15k p.a. to live and am not sure where that will come from. Any ideas?
[21] From 1 May 2011 Mr Johnstone paid $836 per month.
[22] The discussion continued between the parties in succeeding emails over May
2011. Mrs Johnstone sought further financial support. She noted that she could not keep eating into capital. In an email dated 18 May 2011 she said:
I don’t want to involve a lawyer and would appreciate it if we could resolve
outstanding matters between ourselves please.
(3) September–October 2011
[23] After Mr Johnstone’s economic circumstances improved in September 2011, he wrote Mrs Johnstone an email dated 29 September 2011. In it he said:
Therefore I have used the IRD website to calculate the payment for the children’s care. The revised monthly amount payable to you is $1,141.15. The net change to you is a monthly reduction of $3.87.
Two days later, on 1 October 2011, Mrs Johnstone replied “Thanks Cam”.
4 Clause 6 of the agreement provided for Consumer Price Index adjustment to the cl 1 payments on or about 1 April each year.
Pleadings
[24] Mrs Johnstone filed a claim for breach of the agreement in the District Court at Auckland in February 2014. It claimed arrears of $93,067 for the period
1 October 2010 to 1 October 2013. Interest of $15,996 was also claimed.
[25] In his defence, Mr Johnstone pleaded that he was not in breach of the agreement. Rather, the agreement had been varied in or about October 2010 to reduce the child support payments. And again varied in or about October 2011 to increase the payment again.
[26] In the alternative, Mr Johnstone pleaded that Mrs Johnstone had represented that she would accept the reduced monthly payment in October 2010 and that he relied on that representation to his detriment. The detriment identified was that he did not formally apply to have his child support payments assessed under the Act, as was his right under cl 8 of the agreement.
Judgment appealed
[27] In a succinct but thoughtful judgment, Judge Harrison found in favour of Mrs Johnstone. He agreed with her counsel that this was a simple claim based on breach of a voluntary child support agreement.
[28] The estoppel defence failed because the Judge found no “unequivocal representation by Mrs Johnstone that she would not insist on compliance with the agreement”. The 11 August 2010 email was contrary to that proposition.5 The Judge saw nothing in the email correspondence which would have led Mr Johnstone to the understanding that he was not obliged to honour the terms of the agreement. Rather, the correspondence simply presented his own unilateral decisions to vary child
support payments according to his changing employment situation.
[29] The alternative defence of variation of agreement also failed. The argument in the District Court had focused, contrary to the pleadings, on a variation on or
about 1 October 2011. That position was maintained on appeal before me. The
5 See [16] above.
emails of 29 September 2011 and 1 October 2011 I have quoted already.6 The Judge found Mrs Johnstone’s brief reply did not amount to acceptance of any variation to the agreement. Mr Johnstone’s preceding email was simply one of a series of emails unilaterally altering the amount being paid.
[30] In a separate costs judgment the Judge awarded costs in favour of
Mrs Johnstone on a category 2, band B basis.
Issues
[31] The issues arising on this appeal are three:
(a) Did the Judge err in finding no estoppel?
(b) Did the Judge err in finding no variation of contract? (c) Did the Judge err in his discretion in fixing costs?
Issue 1: Did the Judge err in finding no estoppel?
[32] The relevant pleading is set out at [25]. It is a pleading of equitable estoppel. It is better addressed before the variation defence because it arises, if at all, earlier in time.
[33] The Judge set the bar for equitable estoppel at an “unequivocal representation by Mrs Johnstone that she would not insist on compliance with the agreement”. In my view that overstates the requirement.
[34] As far back as 1877 Lord Cairns said:7
… it is the first principle upon which all Courts of Equity proceed, that if parties who have entered into definite and distinct terms involving certain legal results – certain penalties or legal forfeiture – afterwards by their own act or with their own consent enter upon a course of negotiation which has the effect of leading one of the parties to suppose that the strict rights arising under the contract will not be enforced, or will be kept in suspense, or held in abeyance, the person who otherwise might have enforced those rights will
6 At [23] above.
7 Hughes v Metropolitan Railway Co (1877) 2 AC 439 (HL) at 448.
not be allowed to enforce them where it would be inequitable having regard to the dealings which have thus taken place between the parties.
[35] Nearly a century later, Lord Denning put it similarly:8
Estoppel … comes to this: when a man, by his words or conduct, has led another to believe in a particular state of affairs, he will not be allowed to go back on it when it would be unjust or inequitable for him to do so.
[36] Similar formulations have been expressed by the Court of Appeal of this country.9 The proper focus is on the existence of a belief or expectation that has been created or encouraged through “some action, or representation, or omission to act” by the party against whom the estoppel is alleged.10 On this approach an unequivocal representation is not a pre-condition for equitable estoppel. But if an express representation is the basis of the alleged estoppel, then it should be clear and unequivocal.11
[37] Party A asserting an equitable estoppel against party B must establish two further requirements. First, that A relied reasonably, and detrimentally, on the conduct or words of B creating the estoppel. Secondly, that it would be unconscionable to permit B now to backtrack given B’s own conduct or words. Significant (albeit not essential) to the second will be B’s appreciation of the first. These points reflect Brennan J’s observation in Waltons Stores (Interstate) Ltd v
Maher.12
The unconscionable conduct which it is the object of equity to prevent is the failure of a party, who has induced the adoption of the assumption or expectation and who knew or intended that it would be relied on, to fulfil the assumption or expectation or otherwise to avoid the detriment which that failure would occasion. The object of the equity is not to compel the party bound to fulfil the assumption or expectation; it is to avoid the detriment which, if the assumption or expectation goes unfulfilled, will be suffered by the party who has been induced to act or to abstain from acting thereon.
8 Moorgate Mercantile Co Ltd v Twitchings [1976] QB 225 (CA) at 241–242.
9 Burbery Mortgage Finance & Savings Ltd (in rec) v Hindsbank Holdings Ltd [1989] 1 NZLR
356 (CA) at 359 per Cooke P and 365 per McMullin J, cf Richardson J at 361; Gold Star Insurance Co Ltd v Gaunt [1998] 3 NZLR 80 (CA) at 86; National Westminster Finance NZ v National Bank of NZ Ltd [1996] 1 NZLR 548 (CA) at 549; Wilson Parking NZ Ltd v Fanshawe
136 Ltd [2014] NZCA 407, [2014] 3 NZLR 567 at [44].
10 Andrew Butler Equity and Trusts in New Zealand (2nd ed, Thomson Reuters, Wellington, 2009)
at [19.2.1], referring to Gold Star Insurance Co Ltd v Gaunt, above n 9, at 86.
11 Wilson Parking NZ Ltd v Fanshawe 136 Ltd, above n 9, at [44].
12 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387 (HCA) at 423.
[38] How are those principles to be applied in this case?
(1) October 2010 estoppel?
[39] Mr Johnstone’s estoppel pleading is that the plaintiff represented in or around October 2010 that she would accept a reduced monthly payment and that he relied on that representation to his detriment.13
[40] The evidence is simply inadequate to sustain an allegation that an estoppel arose in October 2010.
[41] I agree with Judge Harrison’s observation that the available correspondence cannot be taken beyond advice of unilateral decisions to vary child support payments. A fundamental probative obstacle is that most of the emails around that time are simply not in evidence. There is nothing evident on Ms Johnstone’s part, at that time, to make unconscionable her later resort to her strict contractual rights. Furthermore, no detrimental reliance by Mr Johnstone is apparent on the evidence.
(2) April 2011 estoppel?
[42] Mr Johnstone’s position is perhaps stronger in the April 2011 exchanges. I
have set out the evidence already.14
[43] Mr Johnstone had now raised the prospect of invoking cl 8 of the agreement. That is reflected in Mrs Johnstone’s reference to “guidelines” in her 10 April 2011 email.15 On 27 April 2011 Mr Johnstone increased the amount payable. Mrs Johnstone indicated that further discussion would be needed in her email of
28 April 2011.
[44] Mrs Johnstone acknowledged the existence of an “arrangement”, which she is content to “leave … as it is for now”. She did not refer to the preservation of any entitlement to arrears under the original agreement. Nor did Mr Johnstone attempt to
elicit such a concession.
13 See [26] above.
14 At [17] to [22] above.
15 See [18] above.
[45] Mr Johnstone did not, after these exchanges, invoke cl 8. It is accepted that his altered circumstances entitled him to take that step. Nor did Mr Johnstone make clear that, as a consequence of the “arrangement,” he was not invoking cl 8.
[46] Non-invocation of cl 8 was detrimental to Mr Johnstone. Mrs Johnstone accepted in cross-examination that had he done so, he would have been entitled to pay considerably less than what he was bound to pay, or in fact did pay. I sought clarification of this point post-hearing. The parties are disagreed whether the statutory regime would have caused payments to rise or fall. But I accept Mr Butler’s submission that the clear balance of the evidence adduced at trial was that they would have fallen – as they later did when Mrs Johnstone herself invoked cl 8.
[47] It is clear Mrs Johnstone was not satisfied with the “arrangement”. But she accepted it should be left “as it is for now”. Perhaps that was because Mr Johnstone’s adverse economic circumstances meant no more money was available realistically. Perhaps it was because it was a fait accompli, and she had neither the resources nor the energy to contest it. It is not clear.
[48] Do those words, or that forebearance on her part, mean it is unconscionable for her to claim arrears she otherwise would be entitled to? If Mr Johnstone had made clear that as a consequence of the “arrangement” he would not now invoke cl 8, it likely would be unconscionable for Mrs Johnstone to bide her time and then claim the difference. But short of such indication from him (or, of course, a clear contractual variation, supported by consideration) I do not consider Mrs Johnstone would be acting unconscionably in claiming arrears. Mr Johnstone was making the running here. He was declaring what he would pay. Essentially unilaterally. Ms Johnstone’s response was one of forebearance but I am unable to identify conduct on her part that, in context, makes it unconscionable to resort to her original rights.
[49] If Mr Johnstone wanted to alter his contractual obligations, in a situation where cl 8 of the agreement gave him a unilateral right to do so, then it was for him to make his position exactly clear. Either by invoking the clause, or making it clear
he was not doing so as a consequence of Mrs Johnstone’s forebearance, or by reaching a collateral agreement to vary the original obligation. The consequences then would, or should, have been apparent to each party.
[50] So turning to the second of those options, what did Mr Johnstone say? Did he evince any reliance on Mrs Johnstone’s conduct in not invoking cl 8, whether expressly or as a matter of unstated fact?
[51] There is nothing in the emails themselves to suggest he did. Plainly he was considering invoking cl 8. He could have done this at any time. Earlier he had advised what he could and would pay. In August 2011 he did so again. His evidence-in-chief is silent on this point. Under cross-examination he explained why he did not invoke cl 8:
Q But she never agreed to what you were paying her, did she?
ABut she too had the option to invoke the clause and she didn’t and the reason she didn’t is we discussed it and in the bundle, are emails where I reference how much I would be paying her if we were using the IRD calculator, therefore we were both stuck between a rock and a hard place. Neither one of us wanted to invoke necessarily clause 8 as the first option because of the material detriment to the children.
Q But she never said she wouldn’t invoke clause 8 did she?
A No, because we were looking for a reasonable way forward.
…
AI could, but I am a fair and reasonable person and I was looking after the best interests of my children, to the point where, as you can see from the calculations on the spreadsheet, I was paying out considerably more than my annual net income and under the IRD child support assessment, they don’t ask you to do that.
…
ANo that’s right, all issues were never resolved, as you rightly point out and I freely acknowledge, but we were, it was a work in progress and by Mrs Johnstone’s request and acknowledgement and by my own, we wanted to do it without reverting, invoking clause 8, because that would have been detrimental, more so to the children and for each of us, so we were trying to find middle ground and we continued to work in that manner.
Asked further about that in re-examination:
Q… asked some questions in relation to that. You were asked in effect, why you didn’t reduce, or invoke clause 8, and reduce the payments under clause 8 of the agreement, why didn’t you do that?
ABecause the situation – if I had invoked clause 8, Mrs Johnstone would have been financially disadvantaged to a considerably greater quantum than she is contesting today.
[52] The essence of these answers is that cl 8 was not invoked simply in the interests of the children. There is no suggestion at all that the consensus arrived at, if it was such, caused Mr Johnstone to stay his hand.
[53] I conclude that Mr Johnstone has not established, on the balance of probabilities that he relied on the “arrangement” recorded in the emails of 27-28
April 2011 in not invoking cl 8 of the agreement. Nor has he also established that it would be unconscionable for Mrs Johnstone to now recover the differences between contractual entitlement and actual payment, up to 30 September 2013. His was the obligation to pay. Mrs Johnstone’s conduct amounted to acquiescence in his unilateral departure from obligation. Her forebearance does not estop her from claiming the arrears when he did not choose to invoke cl 8.
[54] The Judge applied too strict a test for equitable estoppel. But even applying the correct test, Mrs Johnstone is not estopped from the recovery of arrears in respect of the payment period 1 October 2010 to 30 September 2013.
Issue 2: Did the Judge err in finding no variation of contract?
[55] Mr Johnstone pleads a formal variation of contract as a result of the two emails dated 29 September and 1 October 2011.16 The Judge did not find Mrs Johnstone’s brief reply to amount to a variation of the agreement.
[56] I agree with the Judge.
[57] The increase in child support payment on 1 October 2011 reflected
Mr Johnstone’s improved economic circumstances. I cannot regard the email
16 See [25] above.
exchange as a variation of the rights provided in cl 1 of the agreement. The arrangement is altogether too uncertain.
[58] First, in cross-examination Mr Johnstone was asked:
Q So let me get this clear, you’re effectively saying that that 1 October
2011 email was her agreeing to receive whatever you may or may not deposit into her account on a monthly basis, going forward? You’re saying that’s what she agreed to?
A (Inaudible 15:06:12)
Q You’re saying that’s what she agreed to?
A Effectively, yeah.
[59] Secondly, I asked Mr Butler what the position would have been had Mr Johnstone’s circumstances then improved dramatically again. His answer was that in those circumstances the improved payment “could be further increased”. That merely reinforces the imprecision of the suggested variation.
Issue 3: Did the Judge err in his discretion in fixing costs?
[60] The costs aspect to the appeal may be dealt with briefly. The short point advanced initially by Mr Butler was that the Judge erred in categorising the proceedings on a category 2 basis.
[61] Very fairly, however, Mr Butler identified a joint memorandum signed on
3 September 2014 (at a time when he was not counsel) recording that the proceeding should be categorised on a category 2 basis.
[62] In these circumstances the costs appeal must fall away.
Conclusions
[63] The reduced child support payments made by Mr Johnstone from 1 October
2010 to 30 September 2013 were unilateral in nature and made in circumstances which do not render it unconscionable for Mrs Johnstone to later enforce her right to the difference between the amounts paid and the strict requirements of cl 1 of the agreement.
[64] At no point in their mutual dealings did the parties formally vary the agreement.
Result
[65] Appeal dismissed.
[66] Brief memoranda as to costs may be submitted if the parties cannot agree. By the appellant within 20 working days, and by the respondent within a further ten.
Stephen Kós J
Solicitors:
Glaister Ennor, Auckland for Appellant
Richard Wood, Auckland for Respondent
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