Kim v Lee
[2015] NZHC 3237
•15 December 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-1378 [2015] NZHC 3237
BETWEEN SUNG HYUK KIM
Plaintiff
AND
HYUNG SOO LEE Defendant
Hearing: 30 November and 1, 2 and 4 December 2015 Counsel:
J Strauss for plaintiff
SA Keall and T Sung for defendantJudgment:
15 December 2015
JUDGMENT OF FAIRE J
This judgment was delivered by me on 15 December 2015 at 5:00 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Northern Legal, Auckland
Edwards Clark Dickie, Auckland
Kim v Lee [2015] NZHC 3237 [15 December 2015]
Introduction
[1] The plaintiff sues the defendant based on an alleged contract. He now claims
$91,157 plus interest on a sum of $111,157 from 1 June 2013 to 19 August 2013 and interest on $91,157 from 20 August 2013 to the date of judgment. In addition, he seeks costs based on Category 2 Band B and costs in relation to a caveat judgment given in his favour, together with disbursements as fixed by the Registrar.
[2] The plaintiff pleaded two claims in his statement of claim, but now only pursues the second claim. He pleads that he entered into an oral contract with the defendant and David Hong, which was later reduced to writing on 27 March 2013. The alleged terms will be discussed later. Mr Strauss advised that the claim for an order that a mortgage be registered over the defendant’s interest in land in favour of the plaintiff is now longer pursued.
[3] I note at the outset that there have been considerable difficulties in this case arising from problems with translation between Korean and English, and the differences in cultural understanding of certain legal concepts. These issues have affected the attitudes of the parties to the responsibilities they have undertaken. Due to the nature of the cultural and language differences in this case, it is not possible to put the parties’ claims into distinct boxes. This judgment is an attempt to work through the difficult issues and apply New Zealand law to the circumstances of the case.
Background
[4] This proceeding concerns members of the Korean Society of Auckland Inc. That Society was established in Auckland in 1992.
[5] The Society is now incorporated under the Incorporated Societies Act 1908. As such, its rules are registered under the Incorporated Societies Act. The objects of the Society are set out in its rules and are as follows:
3. OBJECTS
3.01 The Association shall have the following objects:
(a) To cultivate friendship, unity and good will among Korean people and their families who live in Auckland, New Zealand,
(b) To promote and encourage the development and welfare of the Korean community in Auckland,
(c) To promote the appreciation, understanding and practice of
Korean culture,
(d) To promote friendly relations between Korea and New
Zealand,
(e) To support the settlement in New Zealand of people who migrate from Korea,
(f) To raise and employ funds for the purpose in accordance with these objects,
(g) To acquire and dispose of any rights in property where appropriate in furtherance of these objects,
(h) To organise and promote activities which will assist in the achievement of these objects, and
(i) To do all such things as shall be conducive or incidental to the achievement of any of these objects.
(j) To maintain political neutrality and not to belong to any political party.
(k) To support members in need as the Association thinks necessary and reasonable.
[6] Those rules cover the usual matters set out in the rules of incorporate societies, including rules relating to the holding of general meetings, the election of its officers, and that its affairs shall be conducted by an executive committee. The powers of that committee are set out in the rules and include the power to appoint a special purpose committee and its chair person. The executive committee does not have the power to borrow, which is reserved for approval at a general meeting by a two-thirds majority of members present at the meeting.
[7] A committee was formed in August 2012 for the purpose of locating and buying a suitable property for the Society in Auckland. The then president of the Society, Mr Hong, and the defendant were appointed the co-chairs of this committee. The plaintiff was also a member.
[8] On 16 November 2012, a sale and purchase contract was signed by John Jang, or nominee, as purchaser in respect of a property at 5 Argus Place, Glenfield, Auckland. The papers produced to the court do not contain the nomination which followed. However, it is common ground that the Society was nominated as purchaser. The consideration set forth in the contract was $1,500,000. The day fixed for settlement was 29 March 2013. This was Good Friday and a non-work day. The contract was actually settled on 28 March 2013 because of this position.
[9] At the time of execution of the contract the Society had $150,000, which was applied in payment of the deposit required by the contract. A formal resolution by the committee agreeing to purchase was recorded on 19 November 2012.
[10] The executive committee of the Society approved a resolution to obtain a loan of $600,000 from the Kookmin Bank of Korea. Mr Hong, and probably the others members of the committee formed to locate and buy the property, was aware that it was possible to obtain a grant towards such a purchase from the Overseas Korean Foundation (later referred to as OKF) for $150,000. Later correspondence confirmed that in order to obtain this grant, the Society must contribute from its own resources, ie not from lending, the sum of $750,000 towards the purchase.
[11] The committee set about seeking donations for the purpose of paying the balance to settle the contract. At this stage, it must be recorded that in addition to the deposit, the Society had to find another $750,000 because the anticipated grant from OKF would probably not be available as at the date of settlement.
[12] The plaintiff spoke with Mr Hong on 19 March 2013 and expressed his concern as to the Society’s ability to settle the purchase of the property. There is a dispute as to what was said at the time and as to what the shortfall was. However, what followed was that Mr Hong set up a meeting of himself, the plaintiff and the defendant on 20 March 2013 to discuss the question. The plaintiff’s assertion is that at that meeting various options were discussed, including the plaintiff ’s offer to provide the shortfall funds on a two-month basis without interest and thereafter at bank rate interest. The plaintiff alleges that there was agreement between the three at the time, that they would share equally the responsibility for making up any shortfall
to enable the contract to settle. The position was later confirmed by a document signed by the plaintiff, defendant and Mr Hong. The precise terms will be discussed later.
[13] The defendant maintains that he had a clear understanding, right from the time of his commencement of service on the committee formed to locate and buy the property, that control of the property, including the financing of it, would be kept separate from the general business and affairs of the Society and that, ultimately, the property would be handed over to a charitable trust. At the meeting on 20 March
2013 the parties, according to the plaintiff, agreed in principle and agreed to meet again on 27 March 2013.
[14] In the meantime, the plaintiff made two payments to the Society of the exact shortfall that he had calculated. The payments were made, firstly on 25 March 2013 in the sum of $290,000 and, second, on 26 March 2013 in the sum of $133,000, so that the total payment was $423,000.
[15] The parties met on 27 March 2013, where they each signed a document which provided as follows:1
The Korean Society of Auckland Incorporated purchased a building (5 Argus Place, Glenfield) for Korean Community (Cultural) Centre. The contract amount was NZ$1,500,000. As a stopgap measure, Sung Hyuk KIM invested NZ$423,000 which was the shortage excluding a loan of NZ$600,000 from Kookmin Bank, pre-invested amount and fund-raising amount from NZ$1,500,000.
Sung Hyuk KIM shall receive this investment in the first place by continuous fund-raising for Korean Community (Cultural) Centre and there is no interest on the investment for 2 months. (When it exceeds 2 months, David HONG, Henry Soo LEE and Sung Hyuk KIM shall bear the interest jointly.
After 2 months, all fund-raising amount shall be calculated exactly. A debt on the shortage shall be a joint debt of David HONG, Henry Soo LEE and Sung Hyuk KIM. And each of them shall have a responsibility to pay back the debt of 1/n.2 Sung Hyuk KIM can establish a fixed collateral on the property of David HONG and Henry Soo LEE.
When Korean Community (Cultural) Centre of this contract is failed unavoidably in organizing committee, Sung Hyuk KIM can accept as an
1 This is the agreed translation.
2 Here “n” represents the number of people who shall bear the responsibility to pay back the debt.
In the present case, “n” is 3.
original contract amount. On acceptance, the result shall be followed by holding a public hearing of Korean residents in relation to the collected fund-raising amount.
David HONG/Signed/ Henry Soo LEE/Signed/ Sung Hyuk KIM/Signed/
27 March 2013/Signed/
[16] It is significant that that document recorded the shortfall at that time as being
$423,000. The Society’s documents then record that the plaintiff made a donation to
the Society of $10,000 on 27 March 2013 and a donation of $20,000 on 28 March
2013.
[17] There was produced to the court the Society’s solicitor’s statement on the completion of the settlement of the purchase which is dated 28 March 2013, together with the settlement statement of the vendor’s solicitors in that transaction, also dated
28 March 2013 for the reasons set out in [8].
[18] It is common ground at the time of settlement that the Society had applied towards the purchase $477,000 from its own resources, ie donations.
[19] The annual accounts of the Society to 31 March 2013 recorded the advance made by the plaintiff as due and owing to him at that date as $393,000, thus reflecting the $30,000 donation referred to in [16].
[20] On 26 April 2013 Mr Hong made an announcement to Korean residents. The portion of that announcement which was translated and provided to the court contained the following:
At this point, it is difficult for the organizing committee of 3 persons to additionally donate the shortage amount of Korean residents, which is over
$110,000, under this difficult economic situation. And it can cause misunderstanding in relation to the election. The true meaning of donation
can be faded under the atmosphere in which the truth is twisted. I have to say these frankly to all of Korean residents. If the shortage amount of Korean residents cannot be filled within my term of service, it has to be
transferred to the 12th Committee of Korean Society of Auckland Incorporate unavoidably.
[21] The rules of the Society provide for the election of a president at a special general meeting held every two years, three weeks before the annual general meeting. The plaintiff was elected the president at such a special general meeting on
11 May 2013.
[22] The annual general meeting followed on 31 May 2013. There is controversy concerning this annual general meeting. The plaintiff says that he discovered, following a return from overseas, that a number of members of the Society questioned the quorum at the 31 May 2013 annual general meeting. That had consequences which I will refer to later.
[23] The defendant asserts that the separation of management and ownership of the new premises was something which he regarded as essential. I was advised that there are separate proceedings before the High Court dealing with whether the annual general meeting of 31 May 2013 had a sufficient quorum. The consequence is that if it did, then a change to the Society’s rules would have confirmed the separation of management and ownership of the new premises. Because of the issue about quorum, the rule change has not been implemented and has not been registered with the Registrar of Incorporated Societies.
[24] The next event of some significance is that the Society paid the plaintiff
$60,000 on 20 August 2013. The approval resolution was signed by the plaintiff, Mr Hong and three other persons. The effect of this payment was to reduced the amount owing to the plaintiff referred to in [19] to $333,000. It explains why, in his statement of claim, the plaintiff made a claim for one-third of this sum, namely
$111,000 from the defendant. For reasons which I will later explain, that claim has been reduced.
[25] On 8 November 2013, the defendant wrote a letter in which he declared the March agreement with the plaintiff “is invalid as of date, 8th November 2013”. He recorded the reason for that as follows:
The reason is:
As mentioned above, the administration of the Community House and the
Korean Society of Auckland was agreed to run separately, but Kim Sunghyuk refused the agreed separation in his writing on KoreaPost Discussion Room, saying he would not separate these two which breached the conditions of the agreement, that is to separate the Community House and Korean Society of Auckland.
I declare that the agreement is invalid under the reason of his breach of the condition as of the date 8th November 2013.
[26] Mr Hong said that he met, in late November 2013, with the head of the OKF in Melbourne. He said he raised his concern about the negative atmosphere caused by the disputes between the 12th Korean Society president and the Board of Directors and how it was seriously influencing fund-raising activities. He said he told the head that the chance of reaching the $750,000 this year was bleak and asked whether it was possible for the Auckland Korean Society to have more time to raise money. He then said that he was told by the head of the OKF that the Auckland Korean Society could continue the fund-raising activity in the next year.
[27] I was concerned about this statement because, on its face, it infringes s 17 of the Evidence Act 2006 and, in particular, may be contrary to a letter received from the Society from the Korean Consulate on 9 December 2013. I will refer to that shortly.
[28] The next development occurred with a meeting of the executive committee on 11 November 2013. It resolved that the annual general meeting of 31 May 2013 had not been properly constituted and therefore no valid business could have been conducted at the meeting. It further resolved to call a special general meeting on
29 November 2013. That special general meeting was duly called. It received a further and different alteration to the rules, which it then adopted. As I have mentioned, the circumstances surrounding the first rule change and the declaration that the meeting which passed it was invalid are the subject of another High Court proceeding. That seemed to be the reasons why two groups in this Society are clearly in dispute.
[29] That then takes matters to the position where the Society received a letter from the Korean Consulate in Auckland on 9 December 2013. Mr Kim regarded the
letter received from the Korean Consulate as meaning that the Society had to provide proof by 16 December 2013 that $750,000 had been raised by it by its fundraising. That is, no doubt, because the document referred to “documents evidencing completion of fundraising activities for the purpose of raising the amount prepaid and all documents evidencing the change of the amounts status from uncollected amount to donation amount”.
[30] The plaintiff said that at the time of receipt of the letter, the Society was still
$123,471 short of raising the required $750,000. His evidence is that there was no way of meeting the target of $750,000 by 16 December 2013. As a result, he said that because Mr Hong, Mr Lee and he had agreed to share the shortfall, he, on the basis of that agreement, formally donated the shortfall to the Society on behalf of the three persons, that is, himself, Mr Hong and the defendant. On 16 December 2013 he then issued a public statement explaining what he had done. The documents then reveal that he has a tax credit claim for one-third of that sum, which was claimed in two parts: one in his own name as to the sum of $26,157 and the other in his wife’s name of $15,000. The importance of this position is that he is looking to the defendant for a one-third share of $123,471, namely $41,157 which he says is part of the shortfall.
[31] On 18 December 2013, the plaintiff lodged a caveat against the defendant’s property. The plaintiff then received a notice, on 1 March 2014, from the Registrar General of Land. As a result he made application that his caveat not lapse. That application was heard by Associate Judge Christiansen on 16 May and his judgment was delivered on 23 May 2014. The caveat was sustained, but on condition that this proceeding be issued. This proceeding then followed.
[32] A further development occurred with the payment by the Society to the plaintiff of $59,529 on 24 April 2015. It is common ground that this figure also needs to be taken into account.
[33] The disputes between members of the Society have led to an investigation by
Internal Affairs. I do not record matters pertaining to that in this judgment. Suffice
to say, on 6 May 2015, the Department advised the closure of its investigation into the Society.
[34] Finally, it is perhaps appropriate to record that the plaintiff was elected for a further term as president at a special general meeting on 9 May 2015.
[35] The plaintiff’s calculation of the shortfall and the share which he claims must
be paid by the defendant is as follows:
(i) $423,000 paid by 26 March 2013 $423,000 (ii) Plaintiff’s donation acknowledged to 28 March 2013 $30,000 (iii) Paid to plaintiff by Society $60,000 (iv) Paid to plaintiff by Society $59,529 (v) Shortfall $273,471
Based on the above, the plaintiff says the defendant is liable for one-third of the shortfall, namely $91,157. For the reasons set out in [28], his donation of one-third of the $123,471 should not be taken into account because it is simply a case of him meeting his one-third share of the shortfall which existed in December 2013.
[36] The defendant’s position is that the document signed on 27 March 2013 was not a contract because there was no consideration. In the alternative, if the document was a contract, the defendant submits that it is not enforceable against him. This is because, he submits, the funds advanced by the plaintiff to the Society were a loan which the Society is liable to repay. Second, the defendant submits that this loan was ultra vires the Society’s rules. Lastly, the defendant submits he was entitled to cancel the agreement on the grounds that the plaintiff breached two essential terms. The defendant submits the plaintiff never calculated the fund-raising amount after two months, as stipulated in the agreement; and the plaintiff failed to transfer the ownership of the Society’s building to a charitable trust.
[37] In his final submissions Mr Keall advanced the following matters:
(a) There was no evidence that the shortfall had been calculated after two months. That meant, he submitted, there was no evidence on which a breach of a condition to pay one-third could be based;
(b)Whether there is any evidence from which the Court can infer that the contract and in particular, the promise to pay one-third of the shortfall was based on any practical consideration;
(c) Is the contract enforceable, if a contract is found to exist? In particular, was the contract made in breach of the Society’s rules relating to borrowing. The defendant acknowledges that if the contract is simply an indemnity it may be enforceable. On the other hand, if it is a guarantee it will not be enforceable because the loan has not been approved as required by rule 23 of the Society’s rules;
(d)If there is a contract, is the defendant is entitled to cancel the contract in reliance on s 7 of the Contractual Remedies Act 1979? The defendant contends that the plaintiff has breached two essential terms, namely:
(i) has not calculated the shortfall after two months; and
(ii)there has been no transfer of the property to an independent charitable trust to be managed by a board of directors of the subject property;
(e) So far as quantum is concerned, there are two issues which affect the outcome if liability is proven. The first is, whether there can be any liability on the part of the defendant in respect of the $123,471 sum, because that has effectively been donated to the Society by the plaintiff and, second, the only reason the $150,000 payment has not been paid by the OKF is because of a dispute created by the plaintiff himself.
Discussion
[38] The underlying issue in this case is whether the arrangements which the parties entered into, including the written document of 27 March 2013, satisfy the prerequisites for the formation of a contract. In short, have the parties reached agreement on the terms essential to the contract or manifest by the parties as essential to their bargain?
[39] The pre-requisites to the formation of a contract are:3
(a) an intention to be bound at the time when the bargain is said to have been agreed; and
(b) an agreement, express or found by implication, on every term which
(i) was legally essential to the formation of such a bargain; or
(ii)was regarded by the parties themselves as essential to their particular bargain.
[40] These questions are to be determined objectively. The Court may look at the words of the agreement, the background facts, including the parties’ written and oral statements and negotiations, and the parties’ subsequent conduct towards each other.4
[41] If the Court can be satisfied that the parties had an intention to contract, the court will do its best to give effect to their intention and, if possible, uphold the contract despite omissions or ambiguities.5
[42] I am satisfied that the document of 27 March 2013 was a contract and that it is enforceable against the defendant and Mr Hong. I am satisfied that the parties to
the contract intended to be bound by it for the following reasons.
3 Electricity Corporation of New Zealand Ltd v Fletcher Challenge Energy Ltd [2002] NZLR 433 (CA) at [53].
4 At [54] and [56].
5 At [58].
[43] The key phrase in the 27 March agreement is in paragraph three:
A debt on the shortage shall be a joint debt of David Hong, Henry Soo Lee and Sung Hyuk Kim. And each of them shall have a responsibility to pay back the debt of 1/n.
[44] The shortage to which the agreement refers is the amount needed to meet the
$750,000 balance of the purchase price.
[45] The evidence from the plaintiff and the defendant provide a matrix of facts that shows how the intention to be bound was formed. The evidence indicates that the parties were under three main pressures to find $750,000 at the time the
27 March 2013 agreement was signed:
(a) The responsibility, as senior members of the special committee charged with the task of purchasing a property for the Society, to find
$750,000 for the balance of the purchase price.
(b)The responsibility to obtain the $150,000 grant from the OKF. This would only be possible if the Society could contribute $750,000 to the purchase from its own funds.
(c) A failure to find the balance of the purchase price would undoubtedly have left the plaintiff, the defendant and Mr Hong red-faced and in the uncomfortable position of having to explain to the Society and its members as to what went wrong. Failure to raise sufficient funds would leave the Society vulnerable to legal liability as the nominee of the purchaser in the sale and purchase agreement. It would also mean the loss of the $150,000 deposit made from the Society’s funds. In such an event the plaintiff, the defendant and Mr Hong would have been likely to lose their standing in the Korean community and suffered embarrassment and possibly loss of reputation.
[46] The presence of these real pressures explains why the plaintiff would have offered to provide his own retirement funds to contribute towards the $750,000 balance. It also explains why the defendant and Mr Hong would sign an agreement
purporting to assume responsibility for one third of the amount needed to make up
$750,000.
[47] Of relevance is also the plaintiff’s evidence. The plaintiff’s evidence, which I accept, is that at the time the agreement was made, first orally on 20 March 2013, and then in writing on 27 March, the parties to it never intended to take steps against the Society to recover the advance or to recover interest. Rather, the parties agreed that as the senior members of the committee they should assume responsibility for the shortfall. There is also an additional difficulty and tension between the meaning of the term “loan” in English and its meaning in Korean as it was used in this case to describe the advance made by the plaintiff to the Society. Significantly, the Society’s accounts listed the advance of $423,000 as a loan, and its repayments were recorded as a deduction of the Society’s debt to the plaintiff.
[48] I next consider facts that arose after the document was signed that support the finding that the parties intended to create legal relations.
[49] The defendant’s letter of 8 November 2013 is highly relevant. In that letter the defendant declared the agreement invalid on the basis that the plaintiff breached a condition of the agreement. The letter clearly shows that the defendant regarded himself as being subject to an agreement which he believed he could cancel for breach of contract.
[50] Taking all of this evidence into account, in my view, the defendant’s submission that the Society, and not he, was liable to repay the loan must be rejected. The plaintiff’s evidence that the parties to the agreement intended to assume responsibility for one third of the shortfall each fits into the stressful situation of the parties described above and the defendant’s evident belief that he was party to an agreement that he believed the plaintiff did not uphold. The proper conclusion from the above facts is that the parties intended to be bound by the agreement signed on
27 March 2013.
[51] Having established the intention of the parties, it is useful at this point to
address the defendant’s submission that the agreement cannot exist because there
was no consideration. Specifically, the defendant submits that no consideration passed from the plaintiff.
[52] That submission can be addressed briefly. In Antons v Trawling Co Ltd v Smith Baragwanath J signalled that consideration is no longer of dominating importance when considering whether a binding contract has been entered into:6
[93] … the law will seek to give effect to freely accepted reciprocal undertakings. The importance of consideration is as a valuable signal that the parties intend to be bound by their agreement, rather than an end in itself.
…
[53] His Honour’s comments must be viewed in the wider context of that case, which concerned consideration in agreements to a variation. That is distinguishable from the present case, as the facts deal with the formation of an agreement and not a variation to an existing agreement. The comments of the Court of Appeal in Fuel Espresso Ltd v Hsieh, which concerned consideration in restraint of trade clauses in employment contracts, are directly applicable to this case:7
[18] What we are dealing with here is the initial (and only) agreement of the parties. The traditional definition of consideration requires that there be “something of value” which must be given, and that consideration is either some detriment to the promisee or some benefit to the promisor. But the law does not enquire into the adequacy of the consideration, nor, as the Judge seems to have thought, does it require an extra “premium” for a restraint of trade clause. It is also a very well settled principle of contract law that even mutual promises can be consideration for each other. As Treitel (9ed) Contract at 66 puts it:
A person who makes a commercial promise expects to have to perform it … correspondingly, one who receives such a promise expects it to be kept. These expectations can properly be called a detriment and a benefit and they satisfy the requirement of consideration in the case of mutual promises.
[54] The agreement was an exchange of promises. The plaintiff promised to advance funds to the Society to fund the balance of the purchase price, and the
defendant and Mr Hong promised to reimburse the plaintiff two-thirds of that
6 Antons v Trawling Co Ltd v Smith [2003] 2 NZLR 23 (CA).
7 Fuel Espresso Ltd v Hsieh [2007] NZCA 58, [2007] 2 NZLR 651.
amount. These promises were beneficial and detrimental to the respective parties. Accordingly, the agreement signed on 27 March 2013 was a valid contract that had sufficient consideration.
[55] I turn now to the defendant’s submissions that the defendant is entitled to cancel the contract under s 7 of the Contractual Remedies Act 1979. The defendant contends that the plaintiff breached two terms of the contract, which the defendant submits were essential to him:
(a) “After 2 months, all fund raising amount shall be calculated exactly”.
The defendant submits that the contract required the plaintiff to make a statement of some kind to the defendant specifying what donations have been received, so as to enable the defendant to calculate his liability to the plaintiff. The defendant submits that because the plaintiff never took such a step, the defendant never became liable, and was entitled to regard the term as breached.
(b)The plaintiff failed to separate the management and ownership of the new premises.
[56] Section 7 provides:
7 Cancellation of contract
(1) Except as otherwise expressly provided in this Act, this section shall have effect in place of the rules of the common law and of equity governing the circumstances in which a party to a contract may rescind it, or treat it as discharged, for misrepresentation or repudiation or breach.
(2) Subject to this Act, a party to a contract may cancel it if, by words or conduct, another party repudiates the contract by making it clear that he does not intend to perform his obligations under it or, as the case may be, to complete such performance.
(3) Subject to this Act, but without prejudice to subsection (2) of this section, a party to a contract may cancel it if—
(a) He has been induced to enter into it by a misrepresentation, whether innocent or fraudulent, made by or on behalf of another party to that contract; or
(b) A [term] in the contract is broken by another party to that contract; or
(c) It is clear that a [term] in the contract will be broken by another party to that contract.
(4) Where subsection (3)(a) or subsection (3)(b) or subsection (3)(c) of this section applies, a party may exercise the right to cancel if, and only if,—
(a) The parties have expressly or impliedly agreed that the truth of the representation or, as the case may require, the performance of the [term] is essential to him; or
(b) The effect of the misrepresentation or breach is, or, in the case of an anticipated breach, will be,—
(i) Substantially to reduce the benefit of the contract to the cancelling party; or
(ii) Substantially to increase the burden of the cancelling party under the contract; or
(iii) In relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for.
(5) A party shall not be entitled to cancel the contract if, with full knowledge of the repudiation or misrepresentation or breach, he has affirmed the contract.
(6) A party who has substantially the same interest under the contract as the party whose act constitutes the repudiation, misrepresentation, or breach may cancel the contract only with the leave of the Court.
(7) The Court may, in its discretion, on application made for the purpose, grant leave under subsection (6) of this section, subject to such terms and conditions as the Court thinks fit, if it is satisfied that the granting of such leave is in the interests of justice.
[57] In Mana Property Trustee Ltd v James Developments Ltd the Supreme Court discussed the approach to assessing the essentiality of a contractual term:8
[25] In the end, the preferable approach is to ask whether, unless the term in question was agreed at the time of contracting to be essential, the cancelling party would more probably than not have declined to enter into the contract. That question must be answered by an objective contextual appraisal which disregards what a party may unilaterally have said about its intention in that regard.
8 Mana Property Trustee Ltd v James Developments Ltd [2010] NZSC 90, [2010] 3 NZLR 805.
[58] In relation to the first alleged breach, prima facie the contract required a calculation of the amounts raised to meet the balance for the purchase to be made by
27 May 2013. The contract does not specify who was to perform the calculation. As the contract was drafted by the plaintiff, the doctrine of contra preferentum requires the text to be read in favour of the defendant and Mr Hong. I therefore take the position that the contract required the plaintiff to inform the other parties to the contract of the status of the fundraising by 27 May 2013. The question in this case however is whether it was essential to the defendant that he was informed about the state of affairs by the plaintiff and not by any other person or means.
[59] In my view, there is nothing in the contract or in the surrounding evidence to support the view that this was essential to the defendant. It is important that like the plaintiff, the defendant was also a senior member of the committee responsible for the purchase of the property. By virtue of his role he is likely to have been aware, or had readily available ways to know, that the annual accounts of the Society to
31 March 2013 recorded a loan of $393,000 due and owing to the plaintiff. Similarly, it was evident from Mr Hong’s announcement to the Society’s members that the shortage was over $110,000. Thus, although the plaintiff did not perform a calculation of the shortage by 27 May 2013, the defendant had other readily available means of performing this calculation himself. I do not consider that the language or surrounding context of the contract supports a finding that the contract barred the defendant from obtaining the required information from sources other than the plaintiff.
[60] In respect of the second alleged breach, it is sufficient to say that no breach could have occurred as the separation of ownership and management of the property was never under the sole control of the plaintiff but were always subject to a vote at a general meeting of the Society under its rules.
[61] The contract therefore has not been cancelled and remains in force.
[62] The next issue that needs to be addressed is whether the contract is enforceable against the defendant, and if so, on what basis.
[63] The defendant submits that the loan advanced by the plaintiff was ultra vires the rules of the Society. Rule 23 of the applicable rules required any borrowing or “raising money” to be approved by a two-third majority vote of members at an annual general meeting.9 No such vote was held. The defendant submits this means that the loan by the plaintiff is unenforceable, and by extension, the contract of
27 March 2013 is also unenforceable. The defendant draws an analogy to guarantee cases where the guarantee was found unenforceable on account of the principal obligations being found unenforceable, but does not cite any authorities in support.
[64] The plaintiff on the other hand submits that the contract is tantamount to an indemnity. The plaintiff submits that it is irrelevant what label the parties attached to the agreement, as it is the Court’s task to determine its true nature.
[65] I first address the question of the validity of the loan. Due to the lack of evidence about the Society’s rules in 2013, I am unable to find with certainty that the Society could have or did approve the loan from the plaintiff around the time the
27 March 2013 agreement was entered into. However, the Society has clearly treated the money advanced by the plaintiff as a loan. It recorded it as such in its annual records to 31 March 2013; it reduced its liability to take into account the plaintiff’s
$30,000 donation; it approved resolutions to pay the plaintiff $60,000 and $59,529 and recorded the loan as reduced by the same amounts.
[66] I have raised the issue of estoppel with counsel for the plaintiff. Counsel expressly disavowed estoppel as an available cause of action.
[67] Contracts of guarantee are governed by s 27 of the Property Law Act 2007:
27 Contracts of guarantee must be in writing
(1) This section applies to contracts of guarantee coming into operation on or after 1 January 2008.
(2) A contract of guarantee must be—
9 The rules submitted in evidence are the 2015 version of the rules. Evidently, the rules have been altered since 2013. In the 2015 version rule 23 governs the date at which the rules become effective and rule 20 concerns the ability of the Society to borrow. The rules that were in force in
2013 were not submitted in evidence.
(a) in writing; and
(b) signed by the guarantor.
(3) Subsection (2) does not require the consideration for a contract of guarantee to be in writing or to appear by necessary implication from a writing.
(4) In this section, contract of guarantee means a contract under which a person agrees to answer to another person for the debt, default, or liability of a third person.
[68] The primary consideration is whether the parties had a clear intention to create a contract of guarantee; it does not matter if the formal terms of a contract of guarantee have not been used.10 In a contract of guarantee, the guarantor must agree
to discharge liability only if the principal debtor fails to do so.11 In other words, the
question must be whether the person in question intended to assume sole responsibility for the debt or whether they intended to assume liability only in the event of non-payment by a third party.12
[69] Indemnity contracts, on the other hand, serve a different purpose. In Nathan Finance Ltd v Martin Simmons Air Conditioning Services Ltd13 Wylie J cited Yeoman Credit v Latter the United Kingdom Court of Appeal stated the difference between indemnity and guarantee:14
An indemnity contract is a contract by one party to keep the other harmless against loss, but a contract of guarantee is a contract to answer for the debt, default of miscarriage of another who is to be primarily liable to the promise.
[70] His Honour then briefly discussed other important differences:
It is a matter of construction of the contract in question. The distinction is of importance for a variety of reasons, e.g. that a guarantee comes within the provisions of the Contracts Enforcement Act 1956 and must be in writing whereas that is not so in the case of an indemnity; if the debt of the principal debtor proves to be irrecoverable for illegality or is otherwise unenforceable the liability of the guarantor is no greater than that of the principal debtor whereas the indemnifier remains liable as a principal and independent
10 Burrows, Finn and Todd Law of Contract in New Zealand (4th ed, Lexis Nexis, Wellington,
2012) at [9.3.1].
11 At [9.3.1].
12 At [9.3.1].
13 Nathan Finance Ltd v Martin Simmons Air Conditioning Services Ltd HC Auckland A1019/85,
17 December 1986.
14 Yeoman Credit v Latter [1961] 1 WLR 828 at 831.
contracting party; the guarantor is released by variation of the principal debtor's contract whereas the indemnifier is not.
[71] In my view, the agreement signed by the parties on 27 March is an indemnity, not a guarantee. The evidence of the plaintiff is that neither he, nor the defendant or Mr Hong intended to call up the loan from the Society. The factual context is that the parties to the agreement sought to ensure the balance required for the purchase of the property was raised. The aim of the agreement was to keep the Society harmless against the possibility of legal liability if the purchase failed to settle and against the loss of the deposit, if settlement failed to occur. Additionally, the agreement only requires the defendant and Mr Hong to repay the plaintiff two thirds of the sum loaned to the Society. One would think that if it were a guarantee, the plaintiff would have required Mr Hong and the defendant to be jointly liable for the total amount of the loan. The apportionment of a third each is therefore another factor in support of the view that the aim of the agreement was to prevent financial loss of the Society and to protect the personal reputation of the parties. The apportionment also indicates that the plaintiff was willing to potentially part with a third of the amount for these purposes. It follows that I find that the contract is enforceable against the defendant and Mr Hong.
[72] I now consider the last matter raised by the defendant. The defendant argues that the Society raised sufficient funds from donations to qualify for the OKF grant, and if it is granted, the debt owed by the Society to the plaintiff is the value of the grant. Accordingly, the defendant submits that his liability to the plaintiff is one third of $150,000, subject to the grant being made by the OKF. In the event that the grant is made, the defendant submits that the indebtedness to the plaintiff is extinguished.
[73] The defendant’s argument essentially questions his liability in respect of the
$123,471 donation made by the plaintiff on 16 December 2013. For the defendant’s submission to succeed, it would have to be shown that the payment was a voluntary donation by the plaintiff and was not, as the plaintiff announced at the time, a donation made jointly by the plaintiff, the defendant and Mr Hong.
[74] The $123,471 donation was not a new payment made by the plaintiff to the
Society. Rather, the plaintiff sought to reduce the Society’s liability to him and
reclassified $123,471 of the original $423,000 advance he made in March 2013 as a donation to the Society. The reclassification was necessary to meet the OKF’s requirement that half of the purchase price came from fundraising and donations by members of the Society. The $123,471 was therefore part of the funds advanced under the 27 March 2013 contract.
[75] The plaintiff’s decision to reclassify part of his advance as a donation should be viewed in its wider context. The plaintiff, the defendant and Mr Hong felt responsible for ensuring the purchase of the property was settled. When the
27 March 2013 contract was signed, they had in mind only the need to raise funds to pay the balance of the purchase price. It is only after the possibility of receiving a grant from the OKF became known that the need to raise funds from sources other than loans became a priority.
[76] As discussed above, at the time the contract was signed, the parties never intended to enforce the loan against the Society. Implicit in the contract is their agreement to take upon themselves the obligation to pay back the plaintiff whatever amount the Society could not pay him. In essence, the defendant and Mr Hong agreed to pay back two thirds of the Society’s debt to the plaintiff. They would in fact make a donation to the Society of one third of $123,471 shortfall each. As the
$123,471 donation was in fact carved out of the initial advance of $423,000, it was still subject to the contract in which the defendant and Mr Hong assumed responsibility for two thirds of the Society’s debt to the plaintiff. Thus, the plaintiff’s announcement that he together with the defendant and Mr Hong made a donation to the Society had no effect on the amount of their liability under the contract.
[77] Accordingly, the $123,471 donation is part of the remaining $273,471 owed by the Society to the plaintiff. The defendant is liable for one third, being $91,157.
[78] There was no opposition to the quantum of the interest claimed. A calculation based on the matters set out in [1] will form part of the judgment.
[79] A further development occurred on the working day following the trial, i.e.
7 December 2015. On that day the Society received $150,000 from the OKF. The
Society has not yet paid that sum to the plaintiff but is expected to pay it in the near future. At conference with counsel held on 15 December 2015, I advised that I intended to deal with the matter by entering judgment for part of the claim with leave for the plaintiff to apply for an additional $50,000 if the Society does not pay
$150,000 to the plaintiff on or before 1 February 2016. In that way, the parties will have a final answer to this.
Caveat
[80] Mr Strauss acknowledged there was no need for the caveat to continue beyond the day when judgment is pronounced. Accordingly, I will order that the caveat be removed from the defendant’s title. I reserve leave to apply if further orders are required to implement this position.
Judgment and Orders
[81] I enter judgment against the defendant as follows: (a) Judgment for the sum of $41,157;
(b)Judgment for interest at the rate of 4.5 per cent per annum on the sum of $111,157 from 1 June 2013 to 19 August 2013 and on the sum of
$91,157 from 20 August 2013 to 7 December 2015.
(c) The caveat registered against the defendant’s title shall be removed.
(d)In the event that the Korean Society of Auckland has not paid the plaintiff $150,000 on or before 1 February 2016, judgment for
$50,000 shall be entered against the defendant.
(e) Leave is reserved to apply for any order necessary to implement the removal of the caveat and the entering of the judgment against the defendant if the plaintiff is not paid $150,000 by the Korean Society of Auckland on or before 1 February 2016.
(f) The defendant shall pay the plaintiff ’s costs on this proceeding and
the caveat proceeding on a Category 2 Band B basis and disbursements as fixed by the Registrar.
JA Faire J
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