Kaitaia Timber Co Ltd v Alternative Enterprises Ltd
[2012] NZHC 2497
•9 October 2012
IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY
CIV-2012-488-303 [2012] NZHC 2497
BETWEEN KAITAIA TIMBER COMPANY LIMITED Plaintiff
ANDALTERNATIVE ENTERPRISES LIMITED
First Defendant
ANDJOHN LESLIE WILSON HARRISON AND JANICE ELIZABETH HARRISON Second Defendants
Hearing: 24 September 2012
Appearances: K I Bond for Plaintiff
W W Peters for Defendants
Judgment: 9 October 2012
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 9 October 2012 at 11:00am
pursuant to Rule 11.5 of the High Court Rules.
...................................
Registrar/Deputy Registrar
Solicitors:
Harkness Henry (K I Bond/T M Braun), Private Bag 3077 Hamilton 3240, for Plaintiff
Email: [email protected] / [email protected]
Wayne Peters Lawyers (W W Peters) P O Box 5053 Whangarei 5053 for Defendants
Email: [email protected]
KAITAIA TIMBER COMPANY LIMITED V ALTERNATIVE ENTERPRISES LIMITED HC WHA CIV-2012-
488-303 [9 October 2012]
[1] In 2008 Kaitaia Timber Company Ltd sold its sawmill property at
155 Pukepoto Road, Kaitaia, to Alternative Enterprises Ltd for $700,000. Settlement of the purchase took place in February 2009, but under the agreement Kaitaia Timber Company Ltd left money in. It claims $484,601.14 as the outstanding balance of the purchase price payable by Alternative Enterprises Ltd and its directors, John and Janice Harrison. It applies for summary judgment.
[2] In opposition, Alternative Enterprises Ltd says that Kaitaia Timber Company Ltd induced it to enter into the agreement on misrepresentations as to the condition of the property, the environmental profile for the property and the sawmill’s business prospects. It alleges breaches of warranties under the agreement for sale and purchase. It also says that Kaitaia Timber Company Ltd did not transfer plant and equipment which were to be supplied under the agreement. It says that these matters give it claims for damages against Kaitaia Timber Company Ltd, which can be raised in defence of the claim for the purchase price by way of equitable set-off. It also alleges that a notice under s 119 of the Property Law Act 2007 was defective. The Harrisons say that they are not personally liable for the purchase price.
[3] The questions in the case are:
(a) Are Mr and Mrs Harrison personally liable?
(b) Are the defendants able to claim misrepresentation?
(c) Does Alternative Enterprises Ltd have a claim for breach of warranty under general condition 6.1(1) of the agreement for sale and purchase?
(d)Does Alternative Enterprises Ltd have a claim for breach of warranty under general condition 6.2(6) of the agreement for sale and purchase?
(e) Did Kaitaia Timber Company Ltd supply all the plant and equipment under the agreement for sale and purchase?
(f) Did Kaitaia Timber Company Ltd comply with the Property Law Act
2007 in selling a Southland property as mortgagee? (g) Can the defendants claim a damage campaign? and
(h) If Alternative Enterprises Ltd has damages claims against Kaitaia
Timber Company Ltd, can they be raised in defence by way of equitable set-off?
Facts
[4] Kaitaia Timber Company Ltd had used the site in Pukepoto Road for a sawmill, including for timber treatment, since the 1940s. Operations at the sawmill had stopped in about 2005. The site was not in use at the date of the agreement. Thieves and vandals had caused damage to the premises.
[5] The agreement for sale and purchase, dated 5 December 2008, uses the form approved by the Real Estate Institute of New Zealand and the Auckland District Law Society. The parties to the agreement are the Kaitaia Timber Company Ltd and Alternative Enterprises Ltd. Mr and Mrs Harrison are not named as parties. The purchase price is $700,000. The settlement date was one calendar month after the agreement was binding on both parties, or earlier at the option of the purchaser.
[6] Special condition 15 is a due diligence provision. It provided that the agreement is conditional upon the purchaser being entirely satisfied that the purchase of the property and the timber milling plant and equipment included with it is a suitable commercial investment at the agreed purchase price following the purchaser undertaking due and diligent inspection and investigation of the property and business, including (but not limited to) an investigation of:
(a) Environmental resource management licensing and zoning matters;
(b)The overall financial suitability of the purchaser’s proposed investment in the business property including the purchaser’s ability to obtain finance to complete the purchase of the property;
(c) All legal and title issues relating to the property and any registered encumbrances or memorials;
(d) A registered valuer’s report on the property; and
(e) The buildings and improvements on the property.
The due diligence provision was inserted for the sole benefit of the purchaser. The purchaser could waive it by giving written notice to the vendor. Satisfaction of the due diligence condition was at the sole and absolute discretion of the purchaser if the purchaser was not satisfied with any aspect of the property or the purchase. The purchaser was not obliged to state any reasons for the purchaser’s lack of satisfaction. The condition was to be satisfied on the 15th working day after the agreement was signed by both parties.
[7] The sale price of $700,000 plus GST was to be paid by:
(a) A deposit of $100,000 plus GST upon the agreement becoming unconditional;
(b)A further payment of $250,000 exclusive of GST, on the first anniversary of possession date (the first instalment); and
(c) A final payment of $350,000 exclusive of GST on the second anniversary of the possession date (the second instalment).
Under condition 19 as security for payment of the balance of the purchase price, the purchaser was to provide the vendor with a registered first mortgage security over the land. No interest was payable, except in case of default. But on default interest was payable at 14 per cent per annum from the date of default. Performance of the mortgage was to be guaranteed by Mr and Mrs Harrison.
[8] Condition 20 says:
The purchaser acknowledges that it makes the purchase of land, plant and fittings entirely reliant upon its own judgment and in particular acknowledges that the plant and fittings have not been operated for some three years and that much electrical wiring has recently been stolen from the site with possible damage to electrical equipment. The purchaser has no interest in any insurance recovery which the vendor may make in respect of such theft.
[9] The agreement contains a list of plant and equipment called “Basic asset schedule. 9 September 2008.”
[10] Mr and Mrs Harrison signed the agreement as directors of Alternative
Enterprises Ltd, but not in their personal capacities.
[11] The solicitors acting for Alternative Enterprises Ltd on the purchase calculated the date for satisfying the due diligence condition to be 8 January 2009. The correspondence between the conveyancing lawyers shows agreed extensions, first to 19 January 2009, to 2 February 2009, to 5 February 2009, and finally to
13 February 2009. On 11 February 2009 the lawyers for Alternative Enterprises Ltd advised that Alternative Enterprises Ltd declared the contract unconditional, subject to resolving some questions about payment of GST and terms of mortgage security. Those matters were resolved. Title was transferred and the purchaser went into possession on 23 February 2009. Alternative Enterprises Ltd gave a registered mortgage over the property to secure payment of $675,000. Mr and Mrs Harrison are parties to that mortgage as covenantors. They have signed the mortgage both as directors of Alternative Enterprises Ltd and as guarantors. Alternative Enterprises Ltd also paid the initial part of the purchase price, $100,000 plus GST on
23 February 2009.
[12] Under the agreement for sale and purchase and under the mortgage, the first instalment of $250,000 plus GST was payable on 23 February 2010, but Alternative Enterprises Ltd did not pay. On 1 July 2010 it paid $100,000 to Kaitaia Timber Company Ltd, leaving $150,000 plus GST and accrued interest owing on the overdue payment.
[13] In November 2010 Kaitaia Timber Company Ltd entered into a written term loan agreement with Alternative Enterprises Ltd, guaranteed by Mr and Mrs Harrison, for payment of the sum of $181,250, being the amount payable in February
2010 plus accrued interest and GST. The principal sum plus interest was payable on
23 February 2011. That date coincided with the date for payment of the second instalment under the agreement for sale and purchase. The Harrisons gave a mortgage over a property they owned in Southland to secure payment under the guarantee.
[14] On 23 February 2011 Alternative Enterprises Ltd and Mr and Mrs Harrison did not pay either the sums owing under the term loan of November 2010, or the second instalment, of $350,000, payable under the agreement for sale and purchase.
[15] In June 2011, Kaitaia Timber Company Ltd served notices under s 119 and
122 of the Property Law Act on Alternative Enterprises Ltd and the Harrisons. An affidavit of service was filed after the hearing. The nature of the defendants’ challenge to the notices did not become apparent until the hearing. I had questions of my own. The defendants do not suggest that the affidavit of service is incorrect. The affidavit was necessary to clarify matters I had raised. I give leave to file and serve the affidavit.
[16] The notice under s 119 of the Property Law Act, addressed to Alternative Enterprises Ltd, was for the mortgage over the sawmill property in Pukepoto Road. The defaults identified in the notice are defaults in the first instalment (the amount payable on 23 February 2010 plus interest, including liabilities under the loan agreement of 26 November 2010) and in the second instalment. The total amount demanded was $628,058.67. The notice under s 122 of the Property Law Act addressed to Alternative Enterprises Ltd was also for the Kaitaia property.
[17] The notice under s 119 of the Property Law Act addressed to the Harrisons was for the Southland property. The defaults identified in the notice are the same as the defaults in the s 119 notice given to Alternative Enterprises Ltd. The total amount demanded was also $628,058.67. The notice under s 122 of the Property Law Act addressed to the Harrisons was also for the Southland property.
[18] Kaitaia Timber Company Ltd says that the defaults under the notices were not remedied. It exercised its power of sale over the Southland property. The net sale proceeds were $223,573.41. It calculates the amount outstanding at 4 May 2012 at $484,601.14. It says that interest accrues on that sum at $174.80 per day.
[19] Subject to the particular questions to be considered further in this decision, the plaintiff has established a prima facie case that Alternative Enterprises Ltd is liable for the amounts claimed in the statement of claim. If Alternative Enterprises Ltd had not opposed the application for summary judgment, the evidence for Kaitaia Timber Company Ltd is enough to show that it is entitled to judgment. The enquiry now is whether Kaitaia Timber Company Ltd has established that it is entitled to judgment, in the light of the matters raised by Alternative Enterprises Ltd and Mr and Mrs Harrison.
Are Mr and Mrs Harrison personally liable?
[20] Mr and Mrs Harrison say that they cannot be personally liable, because they did not assume any personal liability in the agreement for sale and purchase. Condition 19 of the agreement for sale and purchase provided for a mortgage to be given and for performance of that mortgage to be guaranteed by them. They point out that they signed the agreement for sale and purchase only as directors of Alternative Enterprises Ltd and not in their personal capacity. Under s 27 of the Property Law Act 2007 they cannot be liable under a guarantee, unless it is in
writing and they have signed it as parties in execution of the agreement.1
[21] That argument is sound as far as it goes. However, it overlooks the mortgage given over the Pukepoto Road property, which they guaranteed, their guarantee of the term loan and the mortgage given over their Southland property in support of that guarantee. The Kaitaia mortgage uses the Auckland District Law Society form of registrable memorandum of mortgage. Condition 29 contains covenants by covenantors, including a covenant to pay all the obligations secured by the mortgage. Mr and Mrs Harrison signed that mortgage both as directors of Alternative
Enterprises Ltd and also in their own capacity as guarantors. By signing the
1 Northcott v Davidson [2012] NZHC 1639.
mortgage as guarantors, they bound themselves under condition 29 of the mortgage. Kaitaia Timber Company Ltd is entitled to look to them under their guarantee of the liabilities of Alternative Enterprises Ltd under the mortgage.
[22] Clause 13 of the term loan contains covenants as to payment by covenantors. Mr and Mrs Harrison signed the term loan both as directors of Alternative Enterprises Ltd and as covenantors/guarantors.2
[23] They also signed the Southland mortgage which contains personal covenants, on which they can be sued. Therefore, Mr and Mrs Harrison are personally liable for the debts secured over the Kaitaia and Southland properties.
Are the defendants able to claim misrepresentation?
[24] The Harrisons say that Mr Tanner, a director of Kaitaia Timber Company Ltd, made a variety of representations regarding the environmental profile of the sawmill and the business prospects of running the sawmill.3 The representations are said to include:
(a) That all legislative and regulatory requirements had been met;
(b)That there were no outstanding issues regarding the environmental profile of the sawmill which could affect the running of the sawmill or “impart” liability onto its owners;
(c) That there was no reason to believe that further investigation into the environmental profile of the sawmill was justified;
(d)That there was no reason to doubt that the sawmill could be operated to full productive capacity within a reasonable time after Alternative Enterprises Ltd took possession of the sawmill;
(e) That any issues with vandalism and/or theft were rare but, where they did occur, it was the result of the sawmill being vacant for an extended period of time; and
(f) That there was no reason to be concerned regarding the safety and/or security of the sawmill.
[25] However, the evidence in support of these allegations is sparse. Mr Harrison’s affidavit of 26 June 2012 says:
When the first defendant agreed to buy the mill from the plaintiff it was on the understanding that the mill was capable of being easily restored to working order. I had inspected the mill on several occasions, and the clear understanding that I formed was that the mill was capable of being operational, without a great deal of further capital being required. I refer to the agreement exhibited in Mr Tanner’s affidavit. I note that the agreement had a due diligence clause. That clause was inserted against the background of representations being made by Mr Tanner that the mill was in working order, and that other than some rewiring being required, the mill was capable of being reinstated to working order condition.
[26] The only representations described in that affidavit are that the mill was in working order and that, other than sundry wiring being required, the mill was capable of being reinstated to working order conditions. Mrs Harrison says that she has read her husband’s affidavit and agrees with its contents but does not add more evidence. Mr Harrison swore a further affidavit on 16 July 2012 but the second affidavit does not say anything about pre-contractual representations.
[27] Mr Harrison’s statement in his affidavit of 26 June 2012 is a generalised assertion, rather than specific evidence describing statements made by Mr Tanner. There is no evidence as to what Mr Tanner actually said, whether he made statements in writing or orally and where, when and to whom he made them. The misrepresentation allegation is too vague to be capable of any meaningful response.
[28] Kaitaia Timber Company Ltd responded that beside that objection, the misrepresentation claims were not capable of serious argument because of the due diligence provision in the agreement for sale and purchase and because of condition 20.
[29] A due diligence clause may not, by itself, give a representor a defence to a claim of contractual misrepresentation. Redgrave v Hurd4 is authority that it is no defence to a claim for contractual misrepresentation that the person to whom the representation had been made had the means of discovering that it might, with due diligence, have discovered that it was untrue. The fact that the parties have expressly provided in their contract for the representee to have the opportunity to exercise
reasonable diligence does not make any difference. The recent decision of Wylie J in Singh v Rutherford5 (a claim for breach of warranty rather than for misrepresentation) shows that a due diligence clause will not relieve a vendor from breach of warranty. That applies equally in the case of an alleged pre-contractual misrepresentation.
[30] However, condition 20 does protect Kaitaia Timber Company Ltd. Its submission was that this was an entire agreement clause. I would rather term it an “own judgment” clause. An entire agreement clause states that the terms contained in a particular document or set of documents constitute the entire agreement. It protects the parties against claims that there are other terms, either on other documents or not recorded in writing. However, an entire agreement clause does not necessarily exclude claims as to pre-contractual misrepresentations. Clause 20 does not state that the terms recorded in the agreement for sale and purchase are the only terms of the contract. Instead, the purchaser acknowledges that it has bought the land, plant and fittings, entirely reliant upon its own judgment.
[31] That acknowledgment means that it did not rely on the judgment or representations of others. Condition 20 stands in the way of claims that statements made by Kaitaia Timber Company Ltd or its directors induced it to enter into the contract. Condition 20 purports to prevent the court from enquiring whether Alternative Enterprises Ltd in fact relied on representations by Kaitaia Timber Company Ltd. As such, it comes within s 4(1) of the Contractual Remedies Act
1979:
(1) If a contract, or any other document, contains a provision purporting to preclude a Court from inquiring into or determining the question—
(a) Whether a statement, promise, or undertaking was made or given, either in words or by conduct, in connection with or in the course of negotiations leading to the making of the contract; or
(b) Whether, if it was so made or given, it constituted a representation or a term of the contract; or
(c) Whether, if it was a representation, it was relied on—
the Court shall not, in any proceedings in relation to the contract, be precluded by that provision from inquiring into and determining any such question unless the Court considers that it is fair and reasonable that the provision should be conclusive between the parties, having regard to all the circumstances of the case, including the subject- matter and value of the transaction, the respective bargaining strengths of the parties, and the question whether any party was represented or advised by a solicitor at the time of the negotiations or at any other relevant time.
(Emphasis added)
[32] Kaitaia Timber Company Ltd has to establish under the proviso to that section that it is fair and reasonable that the provision should be conclusive between the parties, having regard to all the circumstances of the case.
[33] In this case the relevant factors are:
(a) The transaction was for the sale and purchase of industrial premises; (b) The premises had been used for timber treatment and timber milling.
In particular a history of use for timber treatment would ordinarily trigger a concern as to ground contamination issues;
(c) Alternative Enterprises Ltd had adequate bargaining strength. It was able to negotiate a reduction in the price from $900,000 to $700,000 on account of possible damage to electrical equipment. It also persuaded the vendor to leave in the bulk of the purchase price, negotiated for a due diligence condition, and was able to obtain extensions of time to satisfy that condition;
(d)Throughout lawyers represented and advised Alternative Enterprises Ltd. Drafts of the agreement for sale and purchase were exchanged before a final version was agreed. There is no suggestion that Alternative Enterprises Ltd did not receive competent legal advice; and
(e) In a commercial transaction such as this, it is important that the parties have certainty. Where the vendor had agreed to leave money in, it was important for it to be assured that claims for payment made downstream should not be delayed by allegations of misrepresentation.
[34] The defendants do not point to any factors counting against the condition being conclusive. Kaitaia Timber Company Ltd has shown that condition 20 should be conclusive. This is in line with decisions such as Herbison v Papakura Video Ltd,6 Brownlie v Shotover Mining Ltd7 and PAE (NZ) Ltd v Brosnahan.8
[35] In the end, the defendants did not persist with the assertions of misrepresentation, but instead placed more reliance on the allegations of breach of contract. I find that Alternative Enterprises Ltd does not have a case for a claim of contractual misrepresentation under the Contractual Remedies Act 1979, because under condition 20 it has acknowledged that it is not entitled to claim reliance on any pre-contractual representations.
[36] Alternative Enterprises Ltd did not rely on the Fair Trading Act. I presume that any claim under the Fair Trading Act 1986 would be statute-barred under s 43(4A) (5). By the time Alternative Enterprises Ltd filed a notice of opposition, more than three years since settlement had passed. After settlement, if not earlier, Alternative Enterprises Ltd had the opportunity to find out whether it was the victim
of deceptive or misleading conduct on the part of Kaitaia Timber Company Ltd.
6 Herbison v Papakura Video Ltd [1987] 2 NZLR 527 at 540-541.
7 Brownlie v Shotover Mining Ltd CA181/87, 21 February 1992 at 33: “It would be a matter of concern if commercial people acting in good faith could not, in entering into a transaction such as this, achieve certainty by written contract excluding liability for prior statements by one of them if that is what they wished to do.”
8 PAE (NZ) Ltd v Brosnahan (2009) 10 TCLR 626.
That opportunity was available before 17 May 2009, that is, more than three years before the start of this proceeding.
Does Alternative Enterprises Ltd have a claim for breach of warranty under general condition 6.1(1) of the agreement for sale and purchase?
[37] The defendants’ arguments as to breach of warranty took the place of arguments as to contractual misrepresentation. If a misrepresentation inducing a contract is later embodied in writing as a term of the contract, the representation loses any independent force. It is merged in the term. Only the term can be relied upon as a ground for a claim.9
[38] Alternative Enterprises Ltd relies on the following warranty:
6.1 The vendor warrants and undertakes that at the date of this agreement the vendor has not:
(i) Received any notice or demand and has no knowledge of any requisition or outstanding requirement:
a.From any local or government authority or other statutory body; or
b. Under the Resource Management Act 1991; or c. From any tenant of the property; or
d. From any other party; or
...
which directly or indirectly affects the property and which has not been disclosed in writing to the purchaser.
[39] While the notice of opposition does not expressly refer to breaches of warranty, the statement of defence does allege breach of condition 6.1. It is not specific as to how Kaitaia Timber Company Ltd is alleged to have breached the
warranty.
9 Pennsylvania Shipping Co v Compagnie Nationale de Navigation [1936] 2 All ER 1167 (EWHC) and see John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (4th ed, LexisNexis, Wellington, 2012) at [11.2.5].
[40] In paragraph 15 of his affidavit of 26 June 2012, Mr Harrison says that he has learned that while Kaitaia Timber Company Ltd operated the mill, it was responsible for discharges of offensive material to the ground in a manner which breached the statutory regulations. He says that the material will need to be moved because it offends the relevant regulations. Alternative Enterprises Ltd is trying to quantify the cost of rectifying the consequential environmental damage caused by Kaitaia Timber Company Ltd.
[41] Understandably, Mr Tanner notes that Mr Harrison has not explained what the alleged offensive material is, or what the alleged statutory regulations are, or how they were breached. He says that without that information, he cannot respond in any detail.
[42] Mr Harrison provided more information in his affidavit of 16 July 2012. The defendants’ advisors have obtained information from the Northland Regional Council as to discharge permits it had granted to Kaitaia Timber Company Ltd and as to monitoring reports. The defendants have put in evidence copies of documents obtained from the Northland Regional Council: the resource consents granted on
16 July 2002, a staff report made for consideration of the application for resource consent, and correspondence between the council and Kaitaia Timber Company Ltd between September 2002 and October 2009. Much of the council’s correspondence reports on environmental monitoring of the site. Correspondence from the company addresses issues raised by the council.
[43] The resource consent allows the discharge and diversion of stormwater to a tributary of the Tangonge Stream and to ground. It also gives consent to discharge timber treatment chemicals to ground. These are consents to make discharges that would otherwise breach s 15(1)(a), (b) and (d) of the Resource Management Act.
[44] Conditions for the stormwater discharges set limits on the concentration of contaminants at two points, one downstream of the confluence of the Tangonge drain and the Landcorp drain, and the second on the Landcorp drain upstream of the confluence. There is also a condition to protect water quality in the Landcorp drain which corresponds with s 107(1)(c)(d)(e) and (f) of the Resource Management Act,
but there is no other condition as to water quality for storm water discharges at any other point.
[45] The consent for the discharge of timber treatment chemicals to ground specifies the only chemicals that may be used on site, and contains conditions directed at collecting and containing chemicals in a continuous drip-pad area. There is also a condition requiring an approved code of practice for the safe use of timber preservatives and antisapstain chemicals to be complied with. The company was required to complete work to put these protections in place by a given time. The company was also required to prepare a spill contingency plan.
[46] There are general conditions requiring the company to notify the council of any spill of timber treatment chemicals or fuels at the site, and to notify the council of any disposal of hazardous chemicals from the site. The company is required to monitor the exercise of the consents in accordance with a monitoring programme set out in a schedule, and to forward the results of monitoring to the council.
[47] The schedule setting out the monitoring programme specifies a number of sampling sites from which water samples are to be collected. The samples are to be analysed for a number of matters. The monitoring programme in the schedule does not set any standards for any of the matters for which the samples are to be tested.
[48] The consent also contains an advice notice directed at the concentration of the metals in any soil samples. Another note advises that the capping of a wood- waste heap is likely to be made a condition of any consent associated with the closure of the site.
[49] The more significant features that appear in the correspondence between the council and the company are:
(a) The council required the company to provide a spill contingency plan.
This was not completed in time, but in March 2003 the council recorded receiving it, and that the plan met consent requirements.
(b)Sampling for compliance with storm water discharge conditions at compliance sites (4737 and 5589) showed general compliance with consent conditions. In later years the council accepted that results in excess of consent limits were explained by higher copper levels found in the Tangonge Stream, upstream of the confluence with the Landcorp drain.
(c) The council issued an abatement notice under s 322 of the Resource Management Act, because contaminated wood waste had been taken from the site and dumped on a rural property at Ngataki without resource consent having been obtained. The council required the wood waste to be returned on site and capped. The company was required to obtain a resource consent. The company obtained the resource consent. The council’s letter of 24 July 2007 records that the sawdust pile had been capped in accordance with the consent.
(d)A recurring issue was that boron levels were said to exceed consent limits at monitoring site 1396. Site 1396 is a drain adjacent to the wood waste heap. In a letter of 17 February 2005, a council officer advised paying careful attention to the management of the boric treatment plant as the result was “less than pleasing”. However, a letter of 8 October 2009 noted that boron levels were well within the limits at the downstream compliance site. The October 2009 sampling showed that levels were greatly reduced from earlier sampling in November 2006.
[50] Mr Harrison says that the continued and purposeful breaches of the consent showed not only that Kaitaia Timber Company Ltd breached its warranties and undertakings in the agreement but also that it knew that the sawmill was not complying with consents yet it represented that the sawmill was of a certain environmental state. He says that Mr Tanner of Kaitaia Timber Company Ltd was aware that the Harrisons were very conscious about the impact of milling on the environment, particularly the surrounding water. He says that if they had known that
the mill had such a history of contamination, they would have felt differently about purchasing the mill.
[51] On the other hand, Mr Tanner refers to the due diligence clause, which gave the Harrisons the opportunity to investigate these matters. He says that he told the Harrisons that they should contact Mr Gwilyn, the plaintiff’s environmental consultant, to get information relating to the mill’s consent.
[52] That part of Mr Tanner’s response does not directly answer the claim of breach of condition 6.1. The mere fact that under due diligence provisions a purchaser may be able to go and find out information himself, does not relieve the vendor from providing the information required under clause 6.1 if that information has to be handed over.10 Instead the question is whether Kaitaia Timber Company Ltd was required to make that information available under condition 6.1.
[53] What has to be disclosed under 6.1 is a notice, a demand, and knowledge of any outstanding requisition and of any requirement. Demands, requisitions and requirements are directive – some action must be taken or avoided. An obligation to comply with a duty imposed in a general way by statute, regulation or by-law does not count.11 For this case I assume that the obligation not to discharge stormwater or timber treatment chemicals except in accordance with the conditions of the discharge permits is more than an obligation to comply generally with s 15 of the Resource Management Act. Compliance with the particular conditions of the discharge
permits was required.
[54] The evidence does not point to any relevant breach of resource consent conditions. While the council had expressed concern at high boron readings for samples taken at site 1396, that was not one of the sites to be used for monitoring compliance with consent conditions. Other matters raised in correspondence had been satisfied or were no longer relevant. There is no evidence of outstanding
breaches of consent conditions at the date of the agreement for sale and purchase.
10 See Singh v Rutherford, above n 5.
11 Gallagher v Young [1981] 1 NZLR 734; Willis v Castelein [1993] 3 NZLR 103 at 110-111.
[55] That deals with demands, requisitions and requirements, but it still leaves notices. Potentially, “notices” could have a much wider scope. They might not be limited to directive communications. The defendants relied on the information set out in correspondence from the council as matters that Kaitaia Timber Company Ltd ought to have passed on under condition 6.1. They can only get home on that if “notice” is held to cover communications that convey information, even if they are not directive.
[56] However, there are factors that count against “notice” in 6.1 referring to communications that only convey information:
(a) In general, under an agreement for sale and purchase a vendor is not required to disclose all information known to him that may be relevant to the purchaser’s decision whether to buy, for how much and on what terms. It is not a contract requiring utmost good faith.12 That idea is normally referred to as caveat emptor. The risk the purchaser assumes is that the property may be subject to some defect and it is up to him to find out about it. The vendor is entitled not to say anything about the property. 6.1 is an exception to that general principle, but it is to
be considered against the background that otherwise the purchaser assumes a risk.
(b)In New Zealand it has been standard practice for some time now for the vendor to give a warranty as to government or local authority requisitions and requirements. For example, in Niven v Robertson Industries Ltd the warranty was: 13
The Vendor warrants he has not received nor has he any notice of any requisition or outstanding requirement imposed by any local or government authority in respect of the property which he has not disclosed to the purchaser.
12 Spooner v Eustace [1963] NZLR 913.
13 Niven v Robertson Industries Ltd (1984) 2 NZCPR 212 at 213. The ADLS form of agreement for sale and purchase in Gallagher v Young [1981] 1 NZLR 734 had the same warranty.
On these terms, the warranty is confined to directive communications received by the vendor. Since then, the warranty has been extended to apply also to directives under the Resource Management Act, from tenants and from other parties. But that does not mean that the nature of the communications to be disclosed has changed. The traditional purpose of the warranty has been to ensure that the vendor discloses to the purchaser directives which are still outstanding. It would be a marked change to expand the matters to be disclosed to information, as well as directives.
(c) Both the vendor and third parties may hold information about a property. But only third parties may impose legal requirements to take some action in relation to a property. The warranty serves a useful purpose in requiring disclosure of directives from third parties. On the other hand, it would be anomalous to hold that the warranty requires the vendor to disclose information about the property he has received from third parties, when there is no obligation on the vendor to disclose information he has obtained for himself.
(d)The context supports “notice” being directive. The accompanying words, “demand”, “requisition” and “outstanding requirement” are also directive. The context does not suggest that notice should be more than directive.
(e) The warranty 6.3 also helps. That warranty applies at settlement.
There “notice” is directive, as the warranty provides that it can be paid
or complied with:
6.3 The vendor warrants and undertakes that at settlement:
...
(2) Any notice or demand received by the vendor, which directly or indirectly affects the property,
(a) from any local or government authority or other statutory body; or
(b) under the Resource Management Act 1991; or
(c) from any tenant of the property; or
(d) from any other party –
has been delivered forthwith by the vendor to either the purchaser or the purchaser’s solicitor, unless the vendor has paid or complied with such notice or demand. If the vendor fails to so deliver or pay the notice or demand, the vendor shall be liable for any penalty incurred.
(emphasis added)
[57] By reason of these factors, a notice is not required to be disclosed under
6.1(1) if it is not directive and does no more than convey information. The letters in evidence are not notices under the warranty. Kaitaia Timber Company Ltd has shown that Alternative Enterprises Ltd does not have a claim for breach of warranty
6.1(1).
Does Alternative Enterprises Ltd have a claim for breach of warranty under general condition 6.2(6)?
[58] Kaitaia Timber Company Ltd alleges breach of warranty 6.2(6):
6.2The vendor warrants and undertakes that at the giving and taking of possession:
...
(6) where under the Building Act any building on the property sold requires a compliance certificate:
(a) the vendor has fully complied with any requirements specified in any compliance schedule issued by a territorial authority under the Building Act in respect of the building;
(b) The building has a current building warrant of fitness; and
(c) The vendor is not aware of any reason that the vendor has not disclosed in writing to the purchaser, which would prevent a building warrant of fitness from being supplied to the territorial authority when the building warrant of fitness is next due.
[59] Alternative Enterprises Ltd says that the buildings on the site do not have current warrants of fitness under the Building Act 2004.
[60] The way it has gone about trying to prove this is not satisfactory. A staff solicitor employed by the defendants’ lawyers, says that she was present when Mr Peters made telephone calls to the Far North District Council on 13 July 2012 and 16 July 2012. The 16 July 2012 telephone call concerned warrants of fitness under the Building Act. She does not say whether the conversation was on speakerphone. She says that in that telephone call a council officer (said to be responsible for monitoring warrants of fitness) said that no warrants of fitness had been issued for the property in this case. Mr Peters is counsel. He could not give evidence as to the telephone call he made because, as counsel, he should not give evidence. The court should not have to assess the credibility of counsel or the reliability of counsel on matters of fact. It is inappropriate to side-step that rule by someone else deposing as to hearing counsel in a telephone conversation, because the court is again presented with the problem of having to assess the reliability on
factual matters and credibility of counsel.14
[61] Be that as it may, Kaitaia Timber Company Ltd did not contest that no building warrant of fitness had been issued under the Building Act 2004. Its case was that it had not been shown that any buildings required a warrant of fitness.
[62] Under s 108 of the Building Act 2004, an owner of a building must supply the territorial authority with a building warrant of fitness if a compliance schedule has been issued for that building. Section 100 sets out the requirements for a compliance schedule:
100 Requirement for compliance schedule
(1) A building not used wholly as a single household unit—
(a) requires a compliance schedule if—
(i) it has a specified system; or
(ii) it has a cable car attached to it or servicing it; and
14 The other conversation she referred to, on 13 July 2012, was said to be about territorial resource consents and the absence of a certificate of compliance. The absence of a certificate of compliance under s 139 of the Resource Management Act does not go to show any breach of any of the warranty provisions of the agreement for sale and purchase.
(b) requires the schedule for all specified systems it has and any cable car it has attached to it or servicing it.
(2) A building used wholly as a single household unit—
(a) requires a compliance schedule only if it has a cable car attached to it or servicing it; and
(b) requires the schedule only for the cable car. (3) Before 31 March 2008,—
(a) a building not used wholly as a single household unit—
(i) requires a compliance schedule only if it has a specified system other than a cable car; and
(ii) does not require a compliance schedule for any cable car attached to it or servicing it; and
(b) a building used wholly as a single household unit does not require a compliance schedule.
(4) The requirement in subsections (1) and (2) that a building have a compliance schedule if it has a cable car attached to it or servicing it is satisfied, in the case of a cable car that is attached to or services more than 1 building, if any of the buildings in question have a compliance schedule for the cable car.
(5) Except to the extent that it provides, subsection (4) does not relieve an owner of any of the obligations under sections 105 to
110.
[63] It is common ground that there is no cable-car attached to or servicing any building on the site under s 100(1)(a)(ii).
[64] Under s 7 “specified system” is defined:
specified system —
(a) means a system or feature that—
(i) is contained in, or attached to, a building; and
(ii) contributes to the proper functioning of the building (for example, an automatic sprinkler system); and
(iii) is declared by the Governor-General, by Order in Council, to be a specified system for the purposes of this Act; and
(b) includes a cable car
[65] The relevant Order in Council is Schedule 1 to the Building (Specified Systems, Change of Use, and Earthquake-prone Buildings) Regulations 2005. The schedule sets out 15 specified systems, which includes items such as automatic systems for fire suppression, emergency lighting systems, escape route pressurisation systems, smoke control systems and mechanical ventilation or air-conditioning systems.
[66] The defendants have not given any evidence that any of the buildings on site have any of the systems set out in the schedule to the Regulations. In the absence of any evidence that the buildings have any of the specified systems under the Regulation, there is nothing to show that a compliance schedule for any building was required or that an annual warrant of fitness for any building was required. There is at least an evidential burden on the defendants to show that there is a live issue as to the absence of required warrants of fitness. In the absence of any evidence from the defendants supporting their claim, Kaitaia Timber Company Ltd has shown that Alternative Enterprises Ltd does not have a claim for a breach of warranty 6.2(6).
Did Kaitaia Timber Company Ltd supply all plant and equipment under the agreement for sale and purchase?
[67] The notice of opposition says that the plaintiff did not provide “the
plant/equipment as represented as part of the transaction. In his affidavit of 26 June
2012, Mr Harrison says:
A lot of the plant and equipment that we thought was present as part of the transaction was not present on site. This only became apparent some time after settlement took place as there was a particular room in the mill which was locked at the time we took possession and we did not receive any keys for several weeks, possibly months, later. It was only when we were able to access that particular room and only then did we discover that there were significant items of plant/equipment not present as provided for in the agreement.
[68] Mr Harrison does not list the plant and equipment which he says was not made available on settlement. The agreement for sale and purchase contains a
written asset schedule, which lists larger items of plant and equipment. Alternative Enterprises Ltd makes the point that it is headed “Basic Asset Schedule” and that it is consistent with that schedule that there may be other items not included. The agreement does not provide for the supply of other items of plant and equipment not included within that schedule. Kaitaia Timber Company Ltd cannot relevantly reply to Mr Harrison’s generalised assertion, because he has not identified what items, if any, ought to have been made over under the agreement but which were not. Mr Tanner says that one item which can still be handed over is an Armstrong air swage, which is at Tairua. He says that the Harrisons could collect that themselves but have never done so or requested it. He says that it is still available to be collected.
[69] Mr Tanner also says that the Harrisons said that before the agreement was signed they wanted to inspect the site to ensure that no equipment had been removed. They also advised that once the agreement had been signed and the deposit paid, they wanted to move onto the site to have full access to protect the site from damage by vandals or theft. He says that the Harrisons have had access to the site with his consent from as early as 3 October 2008. He also refers to the extensions of time to fulfil the due diligence condition. He says that the Harrisons had keys to the sawmill well before settlement so that they could carry out their inspections under the due diligence conditions. He says that the Harrisons conducted a final inspection of the sawmill on the day of takeover, to ensure that the plant and equipment were present. Those statements were made in a reply affidavit.
[70] The defendants have not identified a particular provision of the contract (other than the Basic asset schedule) which is said to give them the right to plant and equipment. They have not identified any particular items of plant and equipment which they say they ought to have received but which they did not. Their complaint that they did not receive all plant and equipment has been raised only in this proceeding, more than three years after the date of settlement. It is not good enough for them to say that they did not receive all the plant and equipment if they cannot say what is missing. Kaitaia Timber Company Ltd has shown that Alternative Enterprises Ltd does not have a claim for plant and equipment not transferred.
Did Kaitaia Timber Company Ltd comply with the Property Law Act in selling the Southland property?
[71] The Harrisons say that they have a claim based on losses suffered from the mortgagee sale of their Southland property, because the Property Law Act notices were defective. The notice of opposition simply alleges that the Property Law Act notices were defective, but does not say in which way. The statement of defence pleads that the notices were defective because they were not served under the Property Law Act. It also pleads that Kaitaia Timber Company Ltd was not entitled to enforce the term loan agreement because the Harrisons entered into it without proper legal advice. The Harrisons have not given any evidence on the issue.
[72] Mr Peters accepts that the Harrisons had been served with notices under the Property Law Act. The affidavit of service filed after the hearing puts the matter beyond dispute.
[73] That the term loan agreement was executed without proper legal advice does not go to the validity of the agreement. The defendants did not require independent legal advice before they entered into the term loan agreement. There are only a limited number of agreements where the absence of legal advice deprives an agreement of legal effect. The best known examples are agreements under Part 6 of the Property (Relationships) Act. 1976. The term loan agreement is not one of the
exceptions.15 Proper legal advice may also protect an agreement when there is a
complaint of undue influence or unconscionable bargain. But those issues are not raised here. The term loan agreement is valid, even if Mr and Mrs Harrison did not have legal advice before they signed it. In any event there is no evidence that the Harrisons did not have legal advice before they signed the term loan.
[74] Even so, the term loan is not pivotal to Kaitaia Timber Company Limited’s
claim. It is entitled to sue Alternative Enterprises Ltd under the agreement for sale and purchase and on the personal covenant given in the mortgage over the Kaitaia
15 McCaw v McCaw HC Napier CIV-2010-441-342, 7 September 2010 at [32] per Associate Judge Gendall and Austin v Southland Building Society [2012] NZCA 337. These are guarantee cases, but the principle applies generally.
property. It is entitled to sue the Harrisons on their guarantee of the Kaitaia mortgage.
[75] The challenge to the notices under the Property Law Act went to the notices served on Mr and Mrs Harrison. They received notices under s 119 of the Property Law Act as mortgagors of the Southland property. They received notices under s 122 of the Property Law Act as guarantors. The s 122 notices referred to the Southland mortgage, but the mortgage which they had guaranteed was the mortgage over the Kaitaia property.
[76] The objection to the notices under s 119 of the Property Law Act was that the defaults claimed were the failures to pay sums due under both the term loan and the second instalment of the sums payable under the mortgage of the Kaitaia property. It was submitted that the only defaults that could be the subject of the notice were defaults under the term loan. The term loan was only for the first instalment. The term loan and the mortgage given as security did not apply to payment of the second instalment. The overstatement of the default and the overstatement of the amount demanded in the notice went to the validity of the notice.
[77] Certain provisions of the term loan support this argument. Clause 15 says:
15.1The parties acknowledge that the purpose of this agreement is to record the borrowing from the lender of the balance of the first instalment (plus GST on the entire first instalment) as owed by the borrower to the lender under the sale and purchase agreement signed between the parties on 5 November 2008 in respect of the property and business at Pukepoto Road, Kaitaia (“the Agreement”) as at the interest commencement date.
15.2The parties acknowledge that the terms of this agreement do not affect the rights of the parties under the Agreement up until the interest commencement date or after term expiry date. Any amounts outstanding on or becoming due and payable on the term expiry date as per the Agreement including without limitation the payment noted at clause 15.3, the interest accrued in respect of such amounts up to the interest commencement date and any GST on the purchase price not contemplated by this agreement due under the Agreement must be paid on the term expiry date in addition to any monies due under this agreement on that date.
15.3The borrower acknowledges that a further payment of $350,000 plus GST is due to be paid under the Agreement on the term expiry date and that the provisions do not affect that obligation.
[78] These provisions say that the obligations of Alternative Enterprises Ltd to pay under the agreement for sale and purchase are not affected. That is consistent with the purpose of the term loan agreement as applying only to the payment of the balance of the first instalment. In the light of these provisions, it is claimed that the security given in support of the term loan cannot apply to further payments to be made under the agreement for sale and purchase because they are to be unaffected.
[79] In answer, Kaitaia Timber Company Ltd says that the term loan agreement of
26 November 2010 provided for a “no obligations” mortgage.16 It also refers to clause 3(a) of the term loan:
3 Covenant to pay and to comply with obligations
(a) Pay and comply: You must:
...
(ii) comply with all of the obligations contained in every agreement between us; ...
[80] There is also support for that submission in this provision in the term loan:
Security
All monies that you owe us under this agreement and under any other agreement that you enter into with us will be secured to us by the security set out in the Annexure Schedule.
(Emphasis added)
[81] Under these provisions, the mortgage given as security for the Harrisons’ guarantee of the term loan is also security for payments under all other agreements between Kaitaia Timber Company Ltd and Alternative Enterprises Ltd, including the agreement for sale and purchase and the Kaitaia mortgage. In the term loan, the Harrisons guaranteed performance by Alternative Enterprises Ltd, including performance of clause 3(a). The Southland mortgage was not put in evidence. Because Kaitaia Timber Company Ltd could not have anticipated the particular
argument raised for the first time in the hearing, it is not to be criticised for that.
16 Table C of the Annexure Schedule.
Mr Bond advised that it was an all obligations mortgage in the ADLS form (2007/2008). He sought leave to file a further affidavit attaching a copy of the mortgage. Mr Peters did not require the mortgage to be put in evidence. For good order I grant leave.
[82] It is common practice for a creditor to take an all-obligations mortgage as security for a particular loan. The mortgage is independent of the loan agreement for which it is given as security. It can be enforced independently. Inconsistency between provisions in a loan agreement and the supporting mortgage are not necessarily fatal.
[83] Rather than find that provisions in a contract are inconsistent, the courts prefer to give effect to any reasonable construction which harmonises the provisions.17 In this case it is possible to reconcile clause 15 of the loan agreement with other provisions. Clause 15 is intended to save Kaitaia Timber Company Ltd’s other rights under the agreement for sale and purchase. That is not inconsistent with a mortgage given under the term loan agreement also securing payments under the
agreement for sale and purchase.
[84] Accordingly Kaitaia Timber Company Limited was entitled to use as defaults in the notice under s 119 of the Property Law Act the failure to pay the second instalment, because that was an obligation secured under the mortgage. The notice was not defective.
[85] If the notice were defective for alleging defaults under the Kaitaia mortgage, I would have held that the notice was arguably invalid. While there is authority that a notice under s 119 is not invalid simply for overstating the sums due,18 in this case the overstatement would have been almost double the actual default and went to matters that were not actual defaults.
[86] Even if the notice were invalid, that does not stand in the way of Kaitaia
Timber Company Ltd’s claim in this case. It is still entitled to sue Alternative
17 Kim Lewison The Interpretation of Contracts (5th ed, Sweet & Maxwell, London, 2011) at 506.
18 Campbell v Commercial Banking Co of Sydney (1879) 2 NSWLR 375 (PC), Clyde Properties
Ltd v Tasker [1970] NZLR 754.
Enterprises Ltd under the agreement for sale and purchase and under its Kaitaia mortgage. It is entitled to sue the Harrisons under their guarantee of the Kaitaia mortgage.
[87] The notices under s 122 of the Property Law Act have mistakes in that they refer to the incorrect mortgages. The notice served on the Harrisons ought to have referred to the Kaitaia mortgage instead of the Southland mortgage and the notice served on Alternative Enterprises Ltd ought to have referred to the Southland mortgage instead of the Kaitaia mortgage. Section 122 applies if a mortgagee proposes to sell land after default by the mortgagor and proposes to recover any deficiency from a former mortgagor or a guarantor. In this case Kaitaia Timber Company Limited is suing the Harrisons as mortgagors of the Southland property and as guarantors of the Kaitaia mortgage. Any irregularity in the s 122 notice they received is irrelevant, because Kaitaia Timber Company Limited has not sold the Kaitaia property as mortgagee. As for Alternative Enterprises Ltd, it can be sued under the agreement for sale and purchase and the Kaitaia mortgage, independently of the mortgage over the Southland property.
[88] Under s 122(5) a guarantor is released from liability if he or she has been prejudiced by a failure to serve a notice under the section. The defendants have not advanced any argument as to prejudice. I do not see how they could. The Harrisons are directors of Alternative Enterprises Ltd. All notices under s 119 and s 122 for all defendants were served at the same time and place. All the defendants must have been aware that Kaitaia Timber Company Limited would invoke powers under both its mortgages unless defaults were remedied. All defendants were mortgagors under one or other of the mortgages. The slips in the s 122 notices were minor and could not have misled them.
[89] I accordingly conclude that the defendants do not have any defence based on non-compliance with the Property Law Act, nor do they have an arguable claim against Kaitaia Timber Company Limited for non-compliance.
[90] In his affidavit of 26 June 2012, Mr Harrison says:
12.In addition to the absence of equipment/plant, there also appeared to be a campaign to damage the mill. We were not aware that prior to the purchase from the first defendant of a “damage” campaign against the mill had taken place for some time. This was never made known to us by Mr Tanner at the time we bought the mill.
13.Essentially, the mill had been the victim of a campaign of destruction for some years. This is alluded to in the agreement for sale and purchase at clause 20. At no stage did Mr Tanner alert us to the mill being subject to a campaign of vandalism. Had we known that, the first defendant would never have purchased the mill in the first place.
[91] In his affidavit of 16 July 2012 Mr Harrison refers to –
48.... this mill that we cannot operate, which has been plagued by theft and vandalism, and which is non-compliant.
[92] There is no evidence to link Kaitaia Timber Company Ltd or its directors and shareholders with any acts of vandalism. In paragraph 20 of the agreement for sale and purchase of December 2008, Alternative Enterprises Ltd acknowledged that the plant and fittings had not been operated for some three years and that much electrical wiring had recently been stolen from the site, with possible damage to electrical equipment. Mr Tanner explains that these factors led to a negotiated reduction in the sale price.
[93] Mr Harrison complains that Mr Tanner ought to have alerted him to the mill being subjected to vandalism. As to that, Alternative Enterprises Ltd and the Harrisons cannot complain of misrepresentation, for the reasons given above at paragraphs [24]-[36]. An agreement for sale and purchase of land is not a contract that requires disclosure on the part of a vendor. The defendants can have no claim for non-disclosure. The defendants do not identify any relevant term of the agreement for sale and purchase which is breached on account of the alleged vandalism. Instead, the due diligence clause gave the Harrisons the opportunity to inspect the property and to assess the state of repair of the premises. The allegations of vandalism and of damage do not add to their defences.
[94] So far, Kaitaia Timber Company Ltd has shown that none of the matters raised by the defendants are arguable. In case I am wrong, I consider whether the defendants’ claims can give them a defence by way of set-off. The discussion is hypothetical, because it assumes that the defendants’ claims are arguable.
[95] The Harrisons’ argument that they were not personally liable under the agreement for sale and purchase raised a potential defence. The other matters alleged potential claims for unliquidated damages. There was no submission that those potential claims by themselves discharged Alternative Enterprises Ltd and the Harrisons from liability from contract terms for payment under the agreement for sale and purchase and under mortgages. There was no evidence of a cancellation of contract and it was not argued that any contract had been cancelled so as to release Alternative Enterprises Ltd and the Harrisons from further payment. Given the interpretation of s 8(3) of the Contractual Remedies Act 1979 in decisions such as
Garratt v Ikeda,19 any such argument would not have succeeded because the
obligations to pay had already accrued.
[96] The defence arguments as to claims for unliquidated damages might be the subject of counterclaims, but a counterclaim is not a defence to an application for summary judgment.20 It is simply a cross claim brought in the same proceeding. To avoid judgment going against it, Alternative Enterprises Ltd’s claims for unliquidated damages must be capable of being raised as matters for equitable set off. Similarly, as guarantors, the Harrisons can raise any defence that the debtor could invoke. To be able to raise the claims for unliquidated damages in defence of Kaitaia Timber Company Ltd’s claim against them, the Harrisons have to be able to
plead equitable set-off.
[97] The ruling New Zealand authority on equitable set-off is the Court of
Appeal’s decision in Grant v NZMC Ltd.21 It is not enough that a defendant asserts a
19 Garratt v Ikeda [2002] 1 NZLR 577 (CA).
20 Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 5-6.
21 Grant v NZMC Ltd [1989] 1 NZLR 8.
claim for unliquidated damages against a plaintiff. Something more is required. In
Grant v NZMC Ltd the Court of Appeal said:22
The principle is, we think, clear. The defendant may set off a cross-claim which so affects the plaintiff’s claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on the one cannot fairly be given without regard to the other; the defendant’s claim calls into question or impeaches the plaintiff’s demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract.
[98] Under that test, is it fair to give Kaitaia Timber Company Ltd judgment against Alternative Enterprises Ltd, without regard to the claims for unliquidated damages by Alternative Enterprises Ltd? In a summary judgment application, the question is whether the plaintiff has shown that it is not reasonably arguable that the damages claims could impeach its cause of action.
[99] I put the claims by Alternative Enterprises Ltd into two groups:
(a) Those arising before the term loan agreement of November 2010, and
(b) Those arising afterwards.
[100] The only claim arising afterwards is the alleged non-compliance with the
Property Law Act on the sale of the Southland property. All the others arose before.
[101] For the first group, factors that might count in favour of allowing equitable set-off are the non-merger provision in the agreement for sale and purchase,23 and the absence of any “no set-off and no deduction” provisions in the agreement for sale and purchase.
[102] There are factors going the other way:
1 Under the agreement for sale and purchase Alternative Enterprises Ltd took possession and title on the date of settlement, and has had the use of
22 Ibid at 12-13.
23 Condition 10.
the property ever since. On the other hand Kaitaia Timber Company Ltd allowed payment of the greater part of the purchase price to be deferred. As it obtained a deferral of payment of the purchase price, it is not just to allow the purchaser to put off payment beyond the last payment date while it raises complaints as to the quality of the premises.
2 Alternative Enterprises Ltd delayed in raising these complaints. The complaints were raised only in this proceeding. Even if Alternative Enterprises Ltd did not use all the opportunities available during the due diligence phase before settlement, it has had ample opportunity to investigate the site and raise any complaints as to the environmental effects of past operations, compliance with building legislation, damage caused by vandals and thieves and the absence of plant and equipment. Its failure to raise these matters until the present proceeding suggests that the claims are being run simply as a delaying tactic.
3 The claims are ill-defined and there is no evidence of losses sustained on account of alleged breaches of contract. The vagueness of the allegations is more consistent with putting off payment than with pursuing genuine claims. Given that concern, it is not just to allow such claims to be used as a defence to a claim for payment.
4 There is the acknowledgement in clause 15.3 of the term loan agreement of 26 November 2010, repeated for convenience:
The borrower acknowledges that a further payment of $350,000 plus GST is due to be paid under the agreement on the term expiry date and that the provisions of this agreement do not affect that obligation.
That acknowledgment was given as a part of the term loan agreement, under which Kaitaia Timber Company Ltd agreed to accept a deferred payment of the second instalment of the purchase price for the Pukepoto Road property. At the date of the agreement, 26 November 2010, Alternative Enterprises Ltd had been in possession of the premises since
23 February 2009, 1 year 9 months. By then, if not earlier, Alternative
Enterprises Ltd had had ample time in which to investigate whether it had any claims against Kaitaia Timber Company Ltd under the agreement for sale and purchase. Having acknowledged in November
2010 that it was required to pay $350,000 plus GST in February 2011, it would not be equitable to allow it now to contend that it ought not to be required to pay that sum.
[103] For the court to hold that a defendant’s claim calls into question or impeaches a plaintiff’s demand means that the claims are inter-dependent on grounds of fairness. However in this case, there is no unfairness in allowing Kaitaia Timber Company Ltd to maintain its claim for the outstanding balance payable for the purchase of the property while leaving any claim by Alternative Enterprises Ltd that had arisen before the term loan agreement to be run as a counterclaim rather than as a defence. Accordingly, Alternative Enterprises Ltd and the Harrisons could not raise the claims in the first group as defences by way of equitable set-off to the claim by Kaitaia Timber Company Ltd for the outstanding balance of the purchase price.
[104] The only claim in the second group is the Harrisons’ claim for losses arising out of the sale of the Southland property. Where a mortgagee has sold a property under a mortgage without complying with the Property Law Act, the mortgagor may have a claim for damages.24 When a creditor pursues mortgagors on personal covenants, after having attempted to realise its securities but its realisation of those securities has miscarried, the mortgagor’s claim against the mortgagee is inter- dependent with the mortgagee’s claim against the mortgagors. The mortgagor can properly say that the amount of the mortgagee’s claim should be reduced on account
of the failure to realise securities in accordance with the Property Law Act. As the Court of Appeal held in Grant v NZMC Ltd, judgment on one cannot fairly be given without regard to the other.
[105] At the time of the term loan agreement the parties could not have contemplated that Kaitaia Timber Company Ltd would sell the Southland property without complying with the Property Law Act. The Harrisons did not give the
acknowledgement in clause 15.3 on the basis that the property would be so sold.
24 Marriott v Dowd Thomason Strachan & Moultrie (1993) ANZ ConvR 520 (HC).
There is no injustice in not applying clause 15.3 when considering whether the claim in the second group can be an equitable set-off.
[106] The sale of the Southland property was completed in March 2012. The events giving rise to the claim are fresh.
[107] If the Harrisons had an arguable claim for damages against Kaitaia Timber Company Ltd for the unlawful exercise of the power of sale in the Southland mortgage, I would have held that it was capable of impeaching the claim for payment of the balance of the purchase price so as to give a defence of equitable set- off.
Outcome
[108] For the defendants it was submitted that the Harrisons had been naive and slow on the uptake on the problems they had met when they bought the mill property. The problems had overwhelmed them. I gather that they have not made significant commercial use of the property. Even so, Kaitaia Timber Company Ltd has shown that Alternative Enterprises Ltd does not have a defence to its claim for payment of the outstanding balance under the agreement for sale and purchase, under its personal covenants under the mortgage of 23 February 2009 and under the term loan contract of 26 November 2010. It has also shown that the Harrisons do not have a defence to its claims for payment under their guarantee of the Kaitaia mortgage, their guarantee of the term loan and their personal covenants in the Southland mortgage. It is entitled to judgment.
[109] It provided a calculation of quantum claimed, calculated up to 24 September
2012. That totalled $523,145.06. The calculation includes a claim for solicitor/client costs up to 30 August 2012 on this proceeding amounting to
$13,547.46.25 Kaitaia Timber Company Ltd says that it will incur further costs
associated with the hearing. The plaintiff may file a memorandum with appropriate supporting information setting out the further costs claimed.
25 Clause 27 of the Kaitaia mortgage and clause 12 of the term loan agreement allow for recovery of solicitor-client costs on enforcement.
[110] I give judgment as follows:
(a) Leave is granted to file and serve the affidavit of service of the notices under the Property Law Act;
(b)Kaitaia Timber Company Ltd is directed to file and serve an affidavit exhibiting a copy of the Southland mortgage. The judgment is not to be sealed until the affidavit has been filed and served;
(c) Kaitaia Timber Company Ltd recovers judgment against all defendants in the sum of $523,145.06, inclusive of interest to
24 September 2012 and solicitor-client costs up to 30 August 2012. It also recovers interest at a daily rate of $174.80 from 24 September
2012 until the date of judgment.
(d)Kaitaia Timber Company Ltd is to file and serve a memorandum with appropriate supporting information setting out the further costs it claims. The case will be called in the summary judgment list on
29 October 2012 to fix costs, unless the parties sooner agree (in that case a joint memorandum may be filed);
(e) Any other outstanding issues can be addressed on 29 October 2012.
................................................
R M Bell
Associate Judge
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