Kung v Fitton
[2016] NZHC 2775
•21 November 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-1358 [2016] NZHC 2775
UNDER the District Courts Act 1947 BETWEEN
ALLAN KUNG Appellant
AND
DAVID ARTHUR FITTON Respondent
Hearing: 12 October 2016 Counsel:
G J Thwaite for Appellant
D W Grove for RespondentJudgment:
21 November 2016
JUDGMENT OF BREWER J
This judgment was delivered by me on 21 November 2016 at 11:00 am pursuant to Rule 11.5 High Court Rules.
Registrar/Deputy Registrar
Solicitors: Gregory J Thwaite (Auckland) for Appellant
Foy & Halse (Auckland) for Respondent
KUNG v FITTON [2016] NZHC 2775 [21 November 2016]
Introduction
[1] Mr Kung appeals a decision of Judge GM Harrison in the District Court at Auckland delivered on 13 May 2016.1 He appeals also a subsequent decision of Judge Harrison as to costs delivered on 5 July 2016.2 In support of his appeal, Mr Kung wants me to consider further evidence, an affidavit from Jiling Cao.
[2] Mr Kung claimed against Mr Fitton pursuant to a deed of guarantee and indemnity. In brief, Mr Fitton guaranteed Mr Kung’s obligations under a term loan agreement and mortgage with ASB Bank. Mr Kung made payments of $69,200 which he wanted Mr Fitton to refund to him. Mr Fitton accepted that he was liable to Mr Kung under the deed of indemnity and guarantee. He accepted that Mr Kung had paid $69,200. The only point of dispute was whether Mr Kung had received benefits which could be set off against the amount claimed.
[3] The case when it came before Judge Harrison should, therefore, have been a simple one. All that was at issue was whether Mr Kung had received monies which should be set-off against his claim for $69,200.
[4] I do not overlook here that Mr Kung, no doubt inspired by his lawyers, also made numerous other claims for reimbursement of costs he alleged arose from Mr Fitton’s failure to indemnify him promptly.
[5] However, the case as it unfolded became anything other than simple:
(a) Mr Fitton never responded to Mr Kung’s third or fourth amended
statements of claim.
(b)Judge Harrison discovered an apparent knockout defence which was neither pleaded on behalf of Mr Fitton nor argued on his behalf.
(c) Mr Kung was the only witness who gave evidence in his case. His brief of evidence was short and conclusionary and simply made
1 Kung v Wichman & Ors [2016] NZDC 8241.
2 Kung v Wichman & Ors DC Auckland CIV-2012-404-4214, 5 July 2016.
claims as to monies spent. He referred to financial documents attached to his brief of evidence, but he did not explain them and they are incomprehensible.
(d)No evidence was called by Mr Fitton. Instead, counsel relied on his cross-examination of Mr Kung. That cross-examination centred on an affidavit of an accountant, Ms Gardien. The affidavit was in the agreed bundle of documents but was not otherwise before the Judge as evidence. Nevertheless, the Judge accepted it as evidence and relied upon it.
(e) No objection was taken by counsel for Mr Kung to the use of the affidavit in cross-examination. Objection was raised to the admission of the affidavit as evidence only after the close of Mr Kung’s case.
The District Court decision
[6] Judge Harrison set out the factual narrative:
Background
[2] Mr Fitton is a property investor and, over the years, he has attempted to assist families and individuals with rent to buy property schemes.
[3] He met the plaintiff, Mr Kung, in 2007 and they became friendly. Mr Kung raised with Mr Fitton the former’s interest in becoming involved in a property investment. Mr Fitton introduced Mr Kung to the first defendant, Elijaah Wichman, who was then working at the steel industry in South Auckland.
[4] A joint venture was agreed whereby Messrs Kung and Wichman purchased from a trust, of which Mr Fitton and his solicitor, Mr Halse, were the trustees, a property at 37 Index Place, Manurewa. It was proposed that the full amount of the purchase price would be borrowed, and that Mr Wichman would live in the property paying all outgoings.
[5] An agreement for the purchase was executed on 9 October 2008 for the purchase price of $475,000.
[6] Special term 15 of that agreement provided:
It is agreed between the vendor and purchaser that contemporaneously with settlement occurring the vendor will provide the purchaser with a credit of $15,000 (FIFTEEN THOUSAND DOLLARS) (GST inclusive) to enable the purchaser to purchase whiteware for the
dwelling and to carry out landscaping to improve the appearance of the grounds. For the absence of doubt in the event that this agreement is cancelled for any reason the vendor’s obligations under this clause will terminate.
[7] It is common ground that the bank loaned $475,000 to Messrs Kung and Wichman, taking as security a first mortgage over the subject property and also a first mortgage over Mr Kung’s property at 4 Frances Place, Hunua, Auckland.
The property sharing agreement
[8] A property sharing agreement was executed on 8 October 2008 between the three individuals. The agreement recorded:
(a) The agreement to purchase for $475,000;
(b) That the property was to be beneficially owned by Messrs Wichman and Kung as tenants in common in equal shares;
(c) That the purchase price would be the sum of $475,000 secured, as already stated, by first mortgages over the subject property and that owned by Mr Kung;
(d) In consideration of Mr Kung allowing his property to be used as security for the advance, Mr Fitton agreed to pay him $20,000, and to guarantee certain obligations of Mr Wichman “upon the terms and conditions contained in this agreement”.
[9] The agreement went on to record a guarantee by Mr Wichman to pay all outgoings on the property and his right to possession of it, subject to him meeting the outgoings.
[10] In the event of default, Mr Fitton became entitled to possession of the property and responsible to pay all outgoings and liabilities in respect of it. Mr Wichman was to transfer his interest in the property to Mr Fitton for no consideration and it was to be placed immediately upon the open market for sale.
[11] The net proceeds of sale, after deduction of all costs, were to be divided equally between Mr Fitton and Mr Kung.
[12] Clause 6(e) of the property sharing agreement provides:
Dave will indemnify Allan against any loss Allan might suffer as a result of Elijaah defaulting on the mortgage payments or breaching any of the terms and conditions of the mortgage and/or term loan agreement …
And the clause went on to provide that the indemnity did not release Mr Wichman from his primary obligations pursuant to the mortgage and term loan agreement.
[13] The agreement then provided for a sale of the property after the expiry of two years, whereby Mr Wichman would buy out Mr Kung’s share or the property would be placed on the open market, and included other
typical obligations it is not necessary to quote, except to note that in the event of a dispute reference was to be had to mediation.
[14] There was a subsequent variation of the principal agreement signed by the parties but not dated which made different provisions for the sale of the property after the two year period but by reason of the default of Mr Wichman, to which I shall refer, that amendment had no effect.
The guarantee
[15] A further document described as “deed of guarantee and indemnity” was entered into between Mr Fitton and Mr Kung. While it is signed by both, it is not properly dated although “October 2008” is specified in the dating line. It is reasonable to assume it was signed at or about the same time as the property sharing agreement and probably a day or two later because the first recital refers to the agreement of 9 October 2008 to purchase the property at 37 Index Place.
[16] This document records the purchase agreement, the loan from the ASB Bank, the mortgages over the two properties, and then by D of the recital, the following appears:
David has undertaken to guarantee certain payments in respect of these transactions.
[17] Clauses 5 and 6 are the crucial ones. They provide:
(5) In the event of Elijaah’s default in any mortgage payments or breaches of any of the terms and conditions of the ASB mortgage and/or term loan agreement in favour of the Bank, David agrees to remedy any such default or breaches and will make all payments pursuant to the mortgage and pay all outgoings and liabilities, including any arrears of rates, insurances in respect of the Index Place property, until such time as the said property is sold.
(6) David will indemnify Allan against any loss Allan might suffer as a result of Elijaah defaulting on the mortgage payments or breaching any of the terms and conditions of the mortgage and/or term loan agreement.
[18] On 6 November 2008, and critically, without the knowledge of Mr Fitton, Mr Kung and Mr Wichman arranged with the ASB Bank for a further advance of $20,200 within the existing loan agreement. Mr Kung acknowledged in cross-examination that he entered into this further agreement at the behest of Mr Wichman and that Mr Fitton had not known of it and became angry when he learned of it much later.
[7] Judge Harrison then gave his view of the legal effect of this further loan:
[19] This further commitment by Mr Wichman as principal debtor and Mr Kung as creditor probably discharged the guarantee given by Mr Fitton. I refer to “The Modern Contract of Guarantee” O’Donovan, English Edn, paras 7-01 to 7-03 and, in particular, to the following statement appearing in
7-03:
If the variation of the principal contract could prejudice the guarantor, he or she will be absolutely discharged whether or not the variation has in fact resulted in prejudice and whether or not it is likely to do so. The guarantor will remain liable only where the alteration to the principal contract is obviously “unsubstantial”, with no possible prejudice to the guarantor resulting, or where the alteration is “inevitably” for the benefit of the guarantor.
[20] Clearly, it cannot be said that there was no possible prejudice to the guarantor because, without his knowledge, the creditor and principal had committed him to the possibility of liability for a further $20,200. Furthermore it could not be said that the alteration was inevitably for the benefit of the guarantor. To the contrary, it was clearly to his disadvantage.
[8] In his analysis of the foregoing, the Judge put to one side his view that the subsequent alteration of the loan commitment that Mr Fitton guaranteed operated to discharge Mr Fitton from his guarantee. The Judge’s decision is set out as follows:
[25] It is common ground that Mr Kung expended $69,200 in respect of loan repayments and other outgoings on the property but that was offset by the payment he received on the surplus available from the Easiway purchase, and the payment, described as a “buffer” payment on the original purchase of $15,000, later reduced to $13,871.72.
[26] As definite amounts of loss suffered by Mr Kung were made clear to
Mr Fitton, he paid them. There were three payments in all totalling
$29,556.86 which it is common ground was paid. If that amount is deducted from the funds paid by Mr Kung of $69,200 and the other credits referred to
are taken into account, a nil balance owing to Mr Kung is reached.
[27] A great deal of evidence was devoted to requests by both sides for full information on amounts that might be owing and for materials such as bank statements to support calculations.
[28] On 6 August 2013 an accountant, Sonja Gardien, completed an affidavit comprising 115 pages including exhibits, on behalf of Mr Fitton. Her assessment was that, subject to yet further documentation being provided, there could be a balance outstanding of $1,400.05.
[29] Before the trial, Ms Gardien succumbed to cancer and required urgent treatment, meaning she could not attend and give evidence. No application was made to the Court for an adjournment, but Mr Grove enquired of Mr Thwaite whether the plaintiff would agree to an adjournment, that request being declined. After the close of the plaintiff’s case, and the cross examination of Mr Kung on the conclusions of Ms Gardien, Mr Thwaite objected to the affidavit of Ms Gardien being admitted in evidence, because she was not available for cross-examination.
[30] Mr Grove sought its introduction pursuant to s 18 Evidence Act
2006, which provides that a hearsay statement is admissible if the circumstances relating to it provide reasonable assurance that the statement is reliable, and the maker of the statement is unavailable as a witness.
[31] I admitted the affidavit in evidence on the basis that the plaintiff had declined to agree to an adjournment, knowing that to do so would result in the witness being unavailable for cross-examination, and that in any event Mr Kung had agreed under cross-examination with the conclusions Ms Gardien had reached.
[32] It was put to Mr Kung in cross-examination by Mr Grove whether he could disagree with Ms Gardien’s assessment and conclusions and he indicated that he could not. No other accounting evidence was called on behalf of Mr Kung and, on the basis of responses received in cross- examination, Mr Grove elected on behalf of the second defendant not to call evidence.
[33] It is axiomatic that the plaintiff has the burden of proving his claim. I am of the view that he has failed to do so and, indeed, has gone so far as to accept the accounting evidence called on behalf of Mr Fitton. His claim must therefore fail because of his inability to discharge the burden of proof. This must be so regardless of my earlier assessment of the effect of the alteration to the terms of the guarantee.
[9] The Judge did not consider the other claims made by Mr Kung other than the claim advanced for costs in the High Court of obtaining an order for sale of the property. The Judge’s view was that this did not fall within the property sharing agreement or the deed of guarantee.
Basis of appeal
[10] Appeals from the civil jurisdiction of the District Court are by way of rehearing.3 That means I have to consider the evidence which was before the Judge, consider the judgment and come to my own view of the merits.
Issues
[11] The issues I have to decide are:
(a) What effect does the failure by Mr Fitton to file a further statement of defence answering the third and fourth amended statements of claim have on the ability of Mr Kung to seek judgment and the ability of
Mr Fitton to oppose that?
3 High Court Rules, r 20.18.
(b)Was the Judge correct to hold that Mr Kung had failed to discharge his onus of proof?
(c) Did Mr Fitton claim the buffer and the surplus as funds available for set-off in his pleading?
(d)Regardless, were the buffer and the surplus able, as a matter of law, to be offset against Mr Kung’s claim by the Judge?
(e) Did the deed of guarantee and indemnity require Mr Fitton to indemnify Mr Kung for mortgage obligations incurred in respect of the sum Mr Kung and Mr Wichman borrowed without Mr Fitton’s knowledge?
(f) Was the Judge right to hold that the amounts available as set-off when applied to the $69,200 claimed by Mr Kung resulted in a nil balance (this will involve accepting in evidence the further affidavit which Mr Kung wishes to put forward from Jiling Cao)?
(g)Was the Judge right to accept the affidavit of Ms Gardien as evidence in the trial?
(h) If Ms Gardien’s affidavit was properly admitted, were its contents
sufficient to dispose of Mr Kung’s claim?
(i)Should the Judge have considered the other heads of claim which are set out in the third amended statement of claim?
(j)Was the Judge right to conclude that, in cross-examination, Mr Kung accepted Ms Gardien’s conclusions to the extent that Mr Kung was unable to discharge his onus of proof?
(k) Was the Judge right to dismiss the claim for costs?
(l)Was the Judge able to take account of the apparent availability of the defence of discharge of guarantee due to the later and unadvised loan?
(m)Was the Judge correct in his later costs judgment where increased costs were awarded?
Discussion
What effect does the failure by Mr Fitton to file a further statement of defence answering the fourth amended statement of claim have on the ability of Mr Kung to seek judgment and the ability of Mr Fitton to oppose that?
[12] District Court Rule 7.69 provides that if an amended pleading introduces a fresh cause of action, the other party must file and serve that party’s defence to it within 10 working days after the day on which the amended pleading is actually served on the other party.4 If, on the other hand, the amended pleading does not introduce a fresh cause of action, the other party “may”, within five working days, file and serve an amended defence to the amended statement of claim.5
[13] In this case, the amended statement of claim did not introduce fresh causes of action making it optional for Mr Fitton to file and serve an amended defence. At the hearing before me, Mr Grove expressed the view that the case had progressed to the point that its outcome turned on accounting reconciliations and it was unnecessary to respond to the further statements of claim.
[14] If an existing statement of defence sufficiently answers the allegations in the amended statement of claim then it is unnecessary to file an amended defence.6 But in failing to file and serve an amended defence, the defendant risks the operation of District Court Rule 5.50(3) which provides that “an allegation not denied is treated as being admitted”.
[15] By deciding not to file an amended statement of defence Mr Fitton must be taken as admitting any facts alleged in the amended statement of claim that are not
4 District Court Rules, r 7.69(6).
5 District Court Rules, r 7.69(7).
6 See Crawford v Ryland (No 2) (1900) 18 NZLR 714 (SC) at 716.
sufficiently answered by the existing statement of defence. However, I have been unable to identify any facts alleged in the amended statement of claim that are material to the outcome of the case and which differ from what was alleged in the second amended statement of claim. Even the sums claimed in each iteration are identical.
[16] I conclude that the failure by Mr Fitton to file a further statement of defence answering the fourth amended statement of claim does not affect the ability of Mr Kung to seek judgment or the ability of Mr Fitton to oppose that.
Was the Judge correct to hold that Mr Kung had failed to discharge his onus of proof?
[17] Mr Thwaite submits that the Court incorrectly held7 that Mr Kung had not discharged his onus of proof. He submits, citing Cross on Evidence, that the burden of proof was on Mr Fitton as his defence involved pleading matters of “confession and avoidance”.8 I accept that submission and refine it with the following analysis.
[18] Part of Mr Fitton’s defence relied on proving various cross-claims as being available for set-off. The onus of proof on matters raised in a set-off defence rests with the defendant.9 The other part of Mr Fitton’s defence involved proving that he had already made various payments towards remedying Mr Kung’s loss. That situation is analogous to what occurred in Mawson v Public Trustee.10 In that case, the Court was concerned with a claim for payment due under a contract. The liable party claimed he had paid the whole of the amount payable under the contract. Justice Turner held that the plaintiff, by proving the contract, discharged the onus of proof initially lying upon him, and it was thereafter for the defendant to prove
payment.11
7 At [33].
8 Cross on Evidence (online looseleaf ed, LexisNexis) at [2.32].
9 Fraser v Tirohanga Group Ltd HC Hamilton CIV-2004-419-1846, 4 May 2006 at [7].
10 Mawson v Public Trustee [1956] NZLR 247 (SC).
11 At 251.
[19] I conclude, therefore, that the burden of proof shifted to Mr Fitton once he accepted that he was liable under the guarantee and that Mr Kung had expended
$69,200 to remedy Mr Wichman’s defaults.
Did Mr Fitton claim the buffer and the surplus as funds available for set-off in his pleading?
[20] In relation to the “buffer”, Mr Fitton pleaded as follows:
6.He admits paragraphs 7 to 10 of the Amended Statement of Claim but says further that as part of the Agreement for Sale and Purchase the Plaintiff and First Defendant were provided a credit of
$15,000.00 so that the net amount received on the sale was
$460,000.0 together with a rates apportionment of $1,228.78 so the sum of $13,771.2212 should have been deposited into the joint ASB bank account of the Plaintiff and First Defendant to be used as a buffer and to support any shortfall in income to cover them through the first two years of the mortgage.
…
14.2.There should have been sufficient buffer from the credit provided at settlement being a net $13,771.2213 to support any shortfall.
[21] Further, Mr Fitton pleads at paragraph [25] of the statement of defence that
$13,871.22 must be deducted from the payments made by Mr Kung because that amount was “apparently retained by the Plaintiff and/or the First Defendant and not lodged to the account out of the initial mortgage proceeds of $475,000.00”. The statement of defence contains a table in which the $13,871.22 is deducted from the
$66,872.02 that Mr Fitton accepted, at that point, Mr Kung had paid. The statement
of defence describes this payment as a “benefit”.
[22] Mr Fitton made similar pleadings in relation to the surplus. In the table referred to above, $16,514.61 is characterised as a “benefit” received by Mr Kung and is deducted from the amount Mr Fitton accepted Mr Kung had paid.
[23] It is clear then that Mr Fitton did, at least impliedly, claim the buffer and the surplus as funds available for set-off in his pleading.
12 That figure should be $13,871.22.
13 Ibid.
Regardless, were the buffer and the surplus able, as a matter of law, to be offset against Mr Kung’s claim by the Judge?
[24] I deal with the “buffer” separately from the “surplus” because they involve
different legal analyses.
[25] Clause 15 of the sale and purchase agreement is the clause alleged to give rise to the so-called “buffer”:
It is agreed between the vendor and purchaser that contemporaneously with the settlement occurring the vendor will provide the purchaser with a credit of $15,000 (FIFTEEN THOUSAND DOLLARS) (GST inclusive) to enable the purchaser to purchase whiteware for the dwelling and to carry out landscaping to improve the appearance of the grounds. For the absence of doubt in the event that this agreement is cancelled for any reason the vendor’s obligations under this clause will terminate.
[26] Mr Grove’s submission at the hearing before me was that a set-off was available because Mr Kung and Mr Wichman were contractually obliged to apply the
$13,871.22 towards mortgage obligations and expenses associated with the property and failed to do so. He submitted that Mr Fitton was entitled to take proceedings against Mr Kung and Mr Wichman to recover the sum because they had not dispersed it in accordance with the contractual agreement between them.
[27] Mr Thwaite, on the other hand, observes that the clause refers only to “purchasing whiteware” and “carrying out landscaping” and does not refer to mortgage obligations and general costs expenses associated with the property. Mr Thwaite’s submission was that the plain language of the clause could not be interpreted in the way contended for by Mr Fitton. Mr Thwaite also argued that no evidence was produced to show that all four parties to the agreement for sale and purchase shared the interpretation offered by Mr Fitton. Mr Thwaite further submitted that because the $13,971.22 served to reduce the purchase price it was never Mr Fitton’s money to advance in the first place.
[28] I do not accept Mr Thwaite’s submission that because the clause caused, in effect, a reduction in the purchase price, the money was never Mr Fitton’s in the first place. Clause 15 provided that contemporaneously with the settlement occurring the vendor would provide the purchaser with a credit. Although in practical terms that
transfer never happened, the legal position is that contemporaneously with receiving the purchase price, Mr Fitton and Mr Halse advanced Mr Kung and Mr Wichman the so-called credit.
[29] Further, it does not matter for present purposes whether the money was to be spent improving the property or to be applied towards mortgage obligations and other expenses associated with the property. The money was advanced for a purpose for which it was not ultimately applied. It is clear under the clause that Mr Kung and Mr Wichman were not permitted to use the money for their own purposes. Mr Kung admitted as much in cross-examination.14
[30] Mr Thwaite also submitted that, even if Mr Fitton had a claim to the
$13,871.22, Mr Kung’s liability should be capped at 50 per cent because he and Mr Wichman were tenants in common in equal shares. I do not agree. Clause 15 imposed joint obligations on Mr Kung and Mr Wichman to apply the funds towards a particular purpose. As a result, they are jointly liable for the misapplication of funds. That joint liability has no conceptual relationship with the beneficial ownership of the property.
[31] As to the legal basis of liability, Mr Fitton could issue proceedings for breach of contract, or, alternatively, on the basis that the advance was impressed with a trust in his favour.15 I conclude, therefore, that the Judge was right to find the $13,871.22 available for set-off as Mr Kung and Mr Wichman were jointly liable for the misapplication of the advanced funds.
[32] I turn now to the surplus. Mr Thwaite submitted that the surplus was not available for set-off because it belonged to Mr Kung and Mr Wichman. His argument was that Mr Kung and Mr Wichman owned the property in equal shares and were entitled to share in the net proceeds from sale once the mortgage and other
debts had been repaid.
14 Case on Appeal, Volume 1 at 311.
15 See the speech of Lord Millet Twinsectra Ltd v Yardley [2002] 2 AC 164 (HL) cited with approval by the majority in Zhong v Wang (2006) 7 NZCPR 488 at [80]. For a helpful overview of the legal principles relevant to money advanced for a specific purpose see Robert Chambers “Restrictions on the Use of Money” in William Swadling (ed) The Quistclose Trust: Critical Essays (Hart Publishing, Oxford and Portland, Oregon, 2004) 77.
[33] At the hearing before me, Mr Grove analysed things differently. He relied on a variation to the property sharing agreement whereby cl 7 of the original agreement was deleted and replaced with a new clause. The agreement was affirmed in all other respects. The previous clause specified what was to happen two years after Mr Kung and Mr Wichman purchased the property. Mr Wichman was either to purchase Mr Kung’s share of the property or place the property on the open market for sale. If the property was sold, Mr Kung and Mr Wichman would share in the profits because, pursuant to the agreement, they owned the property in equal shares. However, the effect of the new clause was that, after the two-year period, Mr Wichman would either take sole ownership of the property or, if it was sold, become entitled to the entire net proceeds of sale. According to Mr Grove, a set-off was available because Mr Kung was never entitled to the surplus, having no beneficial interest in the property by the time it was sold. His argument was the loss claimed by Mr Kung must be reduced to take account of the sum he received from the sale of the property.
[34] I find myself in disagreement with both approaches. Mr Grove’s argument
must fail because, as the Judge observed, the variation was ineffectual.16
Mr Wichman defaulted on his obligations within two years of settlement and therefore cl 7 was never engaged. Instead, cl 6 of the agreement became operative. Under that clause, Mr Fitton became entitled to Mr Wichman’s interest in the property and the property was to be placed immediately on the open market. The net proceeds of sale following repayment of all mortgages and charges, real estate agent’s commission and legal costs and disbursements were to be divided equally
between Mr Kung and Mr Fitton.17 It follows, therefore, that Mr Thwaite’s approach
is also incorrect. It was Mr Fitton and not Mr Wichman who was entitled to share in the net proceeds.
[35] The correct approach is that under the agreement Mr Kung was entitled to half of the proceeds of sale and was also indemnified by Mr Fitton for any loss he
might suffer as a result of Mr Wichman’s defaults. Accordingly, the Judge was
16 There is a further difficulty with Mr Grove’s submission in that if Mr Kung had no legal claim to the money he would remain liable to Mr Wichman for that amount. Accordingly, without legal title to the surplus, his indemnified loss could not be reduced to take into account the surplus.
17 Clause 6.1(c).
wrong to allow a set-off to the full extent of the surplus. Mr Fitton is entitled to have
Mr Kung’s claim set-off by only half that amount.
Did the deed of guarantee and indemnity require Mr Fitton to indemnify Mr Kung for mortgage obligations incurred in respect of the sum Mr Kung and Mr Wichman borrowed without Mr Fitton’s knowledge?
[36] The relevant clause of the property sharing agreement provides as follows:
(e) Dave [Fitton] will indemnify Alan [Kung] against any loss Alan might suffer as a result of Elijaah [Wichman] defaulting on the mortgage payments or breaching any of the terms and conditions of the mortgage and/or term loan agreement …
[37] The deed of indemnity and guarantee is to similar effect:
5.In the event of Elijaah’s default in any mortgage payments or breaches of any of the terms and conditions of the ASB mortgage and/or Term Loan Agreement in favour of the Bank, David agrees to remedy any such default or breaches and will make all payments pursuant to the mortgage and pay out outgoings and liabilities, including any arrears of rates, insurance in respect of the Index Place property, until such time the said property is sold.
6.David will indemnify Allan against any loss Allan might suffer as a result of Elijaah defaulting on the mortgage payments or breaching any of the terms of conditions of the mortgage and/or Term Loan Agreement.
[38] In submitting that Mr Fitton was liable for the further loan, Mr Thwaite relies on the terms of the mortgage as specified in ASB Bank’s standard terms of mortgage. “Indebtedness” is defined to include an obligation (whether present or future, actual or contingent, secured or unsecured, joint or several, as principal, surety or otherwise) relating to the payment of money. “Secured indebtedness” means “all indebtedness of the Mortgagor to the Bank”. As Mr Wichman and Mr Kung were mortgagors, the terms of the mortgage cover the further loan.
[39] Accordingly, Mr Thwaite submits that the terms of the guarantee and indemnity are clear: in the event of Mr Wichman’s default “in any mortgage payments or breaches of any of the terms and conditions of the ASB mortgage”, Mr Fitton “must remedy any such default or breach”.
[40] A deed of guarantee and indemnity is a contract. It must be interpreted as such. The modern approach to contractual interpretation requires the Court to ascertain the objective meaning of the contract in light of its factual matrix.18 The aim is to identify the intended relationship between the parties as shown by the evidence. Approached in this light, Mr Thwaite’s submission cannot be sustained. That is because, in my clear view, the intended relationship of the parties was that Mr Fitton would provide a guarantee and indemnity for the mortgage obligations arising out of the original loan for $475,000. The contract refers specifically to the
loan being for that amount. Further, the conduct of the parties demonstrates that Mr Fitton never contemplated the taking out of a further loan. Finally, Mr Thwaite’s argument is somewhat parasitic on the broad terms of a standard form ASB mortgage contract. That agreement does not provide any evidence of the parties’ objective intentions in entering the deed of guarantee and indemnity. Indeed, the weight of evidence is that the parties limited their mutual obligations to the $475,000 loan.
[41] I conclude that the deed of guarantee and indemnity did not require Mr Fitton to indemnify Mr Kung for mortgage obligations incurred in respect of the sum Mr Kung and Mr Wichman borrowed without Mr Fitton’s knowledge.
Was the Judge right to hold that the amounts available as set-off when applied to the
$69,200 claimed by Mr Kung resulted in a nil balance?
[42] In reaching a nil balance, the Judge reasoned as follows:
[25] It is common ground that Mr Kung expended $69,200 in respect of loan repayments and other outgoings on the property but that was offset by the payment he received on the surplus available from the Easiway purchase, and the payment, described as a “buffer” payment on the original purchase of $15,000, later reduced to $13,871.72.
[26] As definite amounts of loss suffered by Mr Kung were made clear to
Mr Fitton, he paid them. There were three payments in all totalling
$29,556.86 which it is common ground was paid. If that amount is deducted from the funds paid by Mr Kung of $69,200 and the other credits referred to are taken into account, a nil balance owing to Mr Kung is reached.
18 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444; Firm PI 1 Ltd v
Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432.
[43] It is clear that the Judge made an arithmetical error.19 It appears the Judge
deducted the following sums from Mr Kung’s claim to $69,200.64: (a) The “buffer” payment of $13,871.72;
(b) The “surplus” from sale being $16,514.61;
(c) The three payments totalling $29,556.86.
[44] The resulting figure given the Judge’s findings should have been $9,257.45.
Was the Judge right to accept the affidavit of Ms Gardien as evidence in the trial?
[45] Mr Grove sought the admission of the affidavit pursuant to s 18 of the Evidence Act 2006, which provides that a hearsay statement is admissible if the circumstances relating to it provide reasonable assurance that the statement is reliable, and the maker of the statement is unavailable as a witness. In considering whether to admit the affidavit as evidence, the Judge did not expressly address reliability. Instead, the Judge decided to admit it on the basis that Mr Kung had declined to agree to an adjournment, knowing that to do so would result in Ms Gardien being unavailable for cross-examination, and that, in any event, Mr Kung had agreed under cross-examination with the conclusions Ms Gardien had
reached.20
[46] I summarise the contents of the affidavit because they are relevant to the resolution of this issue. In her affidavit, Ms Gardien analysed a number of bank statements prepared for the joint account opened by Mr Kung and Mr Wichman.21
Ms Gardien analysed the payments incurred in respect of the mortgage, the further and unadvised loan, and other various deposits and outgoings. Ms Gardien concluded that the balance due to Mr Kung lay somewhere between $1,400.05 and
$4,648.80. In reaching these figures, Ms Gardien considered the surplus, the buffer
and a number of mortgage payments to be available for set-off. Additionally,
19 I will look at Jiling Cao’s affidavit on this point, although it is a statement of the obvious.
20 At [32].
21 Ms Gardien stated that she had access to “bank statements … for the period 16 April 2009 to
16 January 2013 with the exception of statement 43”.
Ms Gardien appears to have considered a number of miscellaneous expenses outlined in “Annexure D” to her affidavit as being available for set-off.22 But elsewhere in her affidavit, Ms Gardien states, in relation to the expenses listed in Annexure D, that she was “unable to determine who has had the benefit of those payments and to whom they should be credited” and that “the Court would need to determine who has had the benefit of those payments”.23
[47] Ms Gardien’s affidavit was out of date by the time it was relied on in the District Court. That is because Ms Gardien calculated Mr Kung’s total expenditure to be $66,872.02 rather than the $69,200.64 ultimately accepted by Mr Fitton. Ms Gardien also totalled Mr Fitton’s payments in respect of the mortgage as
$24,593.10. That figure was ultimately assessed to be $29,556.86.
[48] I turn now to admissibility. It appears from the notes of evidence that Ms Gardien’s affidavit was included in the common bundle. Pursuant to District Court Rule 9.5(1) each document contained in the common bundle is, unless the Court otherwise directs, to be considered admissible. Under District Court Rule
9.5(4) a document in the common bundle is automatically received into evidence, subject to the resolution of any objection to admissibility, when a witness refers to it in evidence or when counsel refer to it in submissions. Under District Court Rule
9.5(2) if a party objects to the admissibility of a document included in the common bundle, the objection must, if practicable, be recorded in the common bundle and must be determined by the Court at the hearing or any prior time that the Court directs.
[49] District Court Rule 9.64 is also relevant. Pursuant to that Rule a party desiring to cross-examine a person who has sworn an affidavit on behalf of an opposite party may serve on that opposite party a notice in writing requiring the production of that person for cross-examination before the Court at trial. The notice must be served not less than three working days before the day fixed for the trial. Under District Court Rule 9.64(3), if the deponent does not come forward the affidavit will not be read without special leave.
[50] As the foregoing makes apparent, the Rules contemplate documents incorporated into a common bundle being admitted into evidence regardless of whether they contain hearsay statements, provided that neither party has objected to this course of action prior to trial. The Rules also contemplate written notice being given by a party wishing to cross-examine a deponent.
[51] The situation in this case was that it became clear before trial that Ms Gardien would be unable to attend and give evidence because she required urgent cancer treatment. Mr Grove did not apply to the Court for an adjournment. Instead, he enquired of Mr Thwaite as to whether the plaintiff would agree to an adjournment. Mr Thwaite said he would not. Mr Thwaite did not, however, object to the admission of the affidavit as evidence until after Mr Kung had been cross- examined extensively in relation it. In the circumstances, it was clearly practicable to object to the admissibility of the affidavit before the trial began on the basis that Ms Gardien was not going to be able to be cross-examined. By delaying the objection Mr Thwaite fell into District Court Rule 9.5(2).
[52] However, s 5(2) of the Evidence Act provides that if there is any inconsistency between rules of court made under any enactment with the concurrence of two or more members of the Rules Committee and the Evidence Act, the provisions of the Evidence Act prevail. Accordingly, notwithstanding any procedural improprieties, I consider the issue to fall for consideration under the Evidence Act. Pursuant to s 4 of the Evidence Act, Ms Gardien’s unavailability at trial rendered her affidavit hearsay. That is because a hearsay statement means a
statement that “was made by a person other than a witness”.24 Ms Gardien did not
fall within the definition of a “witness” under the Evidence Act because she was not
able to be cross-examined.25
[53] Having regard to the reliability limb in s 18(1) of the Evidence Act, I have come to the conclusion that the affidavit could only have been admitted for a very limited purpose. First, Ms Gardien did not have access to all of the bank statements. As a result, and as Ms Gardien acknowledged, her conclusions required confirmation
through further bank statements. Second, as I have said, Ms Gardien’s figures were out of date by the time the evidence was admitted. Third, Ms Gardien’s conclusions depend on legal questions regarding the availability of set-off. In those circumstances, the affidavit could only have been admitted for the very limited purpose of stating that various payments had been made by Mr Fitton. It is clear that the Judge admitted the evidence for a much wider purpose than that. By finding that Mr Kung had agreed under cross-examination with Ms Gardien’s conclusions, the Judge indirectly relied on the affidavit to decide the case. He was wrong to do so.
If Ms Gardien’s affidavit was properly admitted, were its contents sufficient to
dispose of Mr Kung’s claim?
[54] Ms Gardien concluded:
5.3.It is therefore my opinion that the balance due to Mr Kung varies between $1,400.05 and $4,648.80. It is not possible to be more precise without access to all of the earlier bank statements. The final figures could change depending upon the following:
5.3.1. Who has had the benefit of the payments made in Annexure
D.
5.3.2.Mr Kung being able to prove that he has made payments in excess of $66,872.01.
5.3.3.Whether anyone should be responsible to pay interest and/or costs.
[55] Ms Gardien’s conclusions depend on various sums, including the “buffer” and the “surplus”, being available for set-off. Ms Gardien’s conclusions therefore depended on legal questions falling outside her sphere of expertise. Further, her conclusions are imprecise given the uncertainty she was working with. For reasons which largely overlap with those given in [54] above, I am of the view that the contents of the affidavit were not sufficient to dispose of Mr Kung’s claim and certainly insufficient to support the nil balance reached by the Judge.
Should the Judge have considered the other heads of claim which are set out in the third amended statement of claim?
[56] There are various heads of claim that do not appear to have been considered by the Judge.
[57] The first is Mr Kung’s claim for Judgment for the sum of $11,772.73 being the sum that Mr Kung claims he should have acquired upon the sale of the property. In the statement of claim, Mr Thwaite states that if Mr Fitton or Mr Wichman had paid all financial charges, rates, insurance and other necessary outgoings, the amount due to Mr Kung upon sale would have been $11,772.73. That claim was not substantiated by evidence which may explain why the Judge did not consider it. Because that claim was additional to the claim for $69,200 the onus of proof rested with Mr Kung as the plaintiff. That onus could not have been discharged without substantiating evidence. Like the Judge, without that evidence, I am unable to determine the issue on appeal.
[58] Second, the Judge does not appear to have expressly considered the claims made by Mr Kung for further sums expended in obtaining the sale of the property. Given the Judge’s conclusion in respect of the claim advanced for costs in the High Court of obtaining an order for sale of the property, it is likely he did not consider these sums to fall within the property sharing agreement or the deed of guarantee.
Whether the Judge was right to do so is a matter I consider later in this Judgment.26
[59] The remaining heads of claim not considered by the Judge relate to claims for interest accruing in respect of Mr Kung’s various other claims. Plainly, these claims did not fall for consideration once the Judge reached the view that a nil balance was owing to Mr Kung.
Was the Judge right to conclude that, in cross-examination, Mr Kung accepted Ms Gardien’s conclusions to the extent that Mr Kung was unable to discharge his onus of proof?
[60] The first point to make is that, on my analysis, the onus was on Mr Fitton to prove the facts underlying his defence. Framed in this way, the question becomes whether, because Mr Kung accepted Ms Gardien’s conclusions, Mr Fitton discharged his onus of proof.
[61] The relevant exchange was the following one:27
26 At [64].
27 Case on Appeal, Volume 1 at 311.
Q. So just, Mr Kung, taking you to page 21 and 22, that is Mr Fitton’s reconciliation as to what was owed to you, do you disagree with the figures in that reconciliation, and if so what ones?
A. I can’t pinpoint which ones, I can disagree with — I can’t really give you the exact one which on, because all I can is they all could be correct though, so I can’t say which one is which.
[62] Ms Gardien’s account reconciliation proceeded on the basis that the “buffer” and the “surplus” were available for set-off. At the time the figures were put to Mr Kung it had not been determined whether those amounts were available to be set- off against Mr Fitton’s liability. Further, Mr Kung’s response was not unequivocal. Accordingly, the Judge was wrong to conclude that, in cross-examination, Mr Kung accepted Ms Gardien’s conclusions to the extent that Mr Kung’s claim failed in its entirety.
Was the Judge right to dismiss the claim for costs?
[63] In relation to this issue, the Judge said:
[34] One further matter requires comment and that is a claim advanced by Mr Kung for his costs in the High Court of obtaining an order for sale of the property and possibly in other respects, he having at one point obtained judgment by default against Mr Fitton which was subsequently set aside. My view of that aspect of his claim is that it is not an item guaranteed by either the property sharing agreement or the deed of guarantee. The extent of the obligation under each document, even assuming they are valid, does not extend to recovering those costs. Any such costs would have to be an item specified in the documents of guarantee before they might be recovered, and there is simply no reference to them.
[64] In my view, the Judge was correct to find that the property sharing agreement and the deed of guarantee did not extend to the costs of obtaining an order for sale of the property. The property sharing agreement and the deed of guarantee only indemnified Mr Fitton for money expended to remedy Mr Wichman’s defaults. Clause 5 in the deed of guarantee and indemnity provides:
IN the event of Elijaah’s default in any mortgage payments or breaches of any of the terms and conditions of the ASB Mortgage and/or Term Loan Agreement in favour of the Bank, David agrees to remedy any such default or breaches and will make all payments pursuant to the mortgage and pay out outgoings and liabilities, including any arrears of rates, insurances in respect of the Index Place property, until such time the said property is sold.
[My emphasis]
[65] That clause makes it clear that the indemnity only extended to payments made until the point of sale and not beyond then. That is confirmed by the cl 6.1. In the event that Mr Wichman defaulted on the mortgage, cl 6.1 required Mr Fitton to immediately take possession of the property and to procure, using his power of attorney if necessary, the transfer of Mr Wichman’s interest in the property to Mr Fitton. The property was to be “immediately placed upon the open market for sale”. Given the scheme of the agreement, I am satisfied that the indemnity did not extend to Mr Kung’s costs in the High Court of obtaining an order for sale of the property. It follows that the further sums Mr Kung claims to have expended in obtaining the sale of the property are not covered by the indemnity. I am reinforced in this conclusion by the principle that ambiguity in a deed of indemnity is to be
construed in favour of the indemnifier.28
Was the Judge able to take account of the apparent availability of the defence of discharge of guarantee due to the later and unadvised loan?
[66] Given my finding that the deed of guarantee and indemnity did not extend to the later and unadvised loan, the defence referred to by the Judge does not arise. The deed of guarantee did not extend to the later loan and therefore that loan did not prejudice Mr Fitton’s obligations as guarantor.
Was the Judge correct in his later costs judgment where increased costs were awarded?
[67] Because of the errors identified to this point, the Judge’s costs judgment cannot be safety upheld. A central plank in the Judge’s decision to award increased costs was a Calderbank offer that was advantageous to Mr Kung given the end result of the litigation. I intend to remit this aspect of the case to the District Court. The outcome could be different.
So where to from here?
[68] Regrettably, on the evidence before me, I am unable to come to a final decision as to the sum owing to Mr Kung. That is because, given the deficient nature
of Mr Kung’s evidence, the case depends on the accuracy of Ms Gardien’s affidavit.
28 See Smith v South Wales Switchgear Ltd [1978] 1 All E.R. 18.
As I have explained, that affidavit is not sufficiently accurate to calculate a final figure. In particular, Ms Gardien, in reaching her conclusions, considered a number of miscellaneous expenses to be available for set-off but conceded that she was “unable to determine who has had the benefit of those payments and to whom they should be credited”. Moreover, given my conclusion that the guarantee did not extent to the further and unadvised loan, it is necessary to calculate the proportion of mortgage obligations that accrued in relation to that further loan. It is also necessary to calculate, with substantiating evidence, the amount that Mr Kung would have been entitled to upon the sale of the property had Mr Fitton or Mr Wichman paid all financial charges, rates, insurance and other necessary outgoings.
[69] As a result, I am left with little option but to remit the case to the District Court so that the final quantum can be determined. The decision as to whether to award interest on any amount finally determined to be owing to Mr Kung will be at the discretion of the District Court.
[70] I repeat my findings relevant to the determination of quantum:
(a) Mr Fitton is entitled to a set-off in the amount of $13,871.22 being the amount for which Mr Kung and Mr Wichman were jointly liable in respect of the misapplication of the so-called “buffer”.
(b)Mr Fitton is entitled to a set-off in the amount of $8,257.31, being half of the “surplus” which Mr Fitton was entitled to pursuant to the property sharing agreement.
(c) Mr Fitton is entitled to a set-off in the amount of $29,556.86 being payments Mr Kung accepts Mr Fitton paid him under the guarantee.
(d)The contract of guarantee and indemnity did not extend to the further and unadvised loan for $20,200.
Decision
[71] I allow Mr Kung’s appeal in part. I remit the matter to the District Court for
determination as to quantum.
[72] Judge Harrison’s costs judgment of 5 July 2016 is quashed. I remit that matter to the District Court for re-determination in the light of this Judgment and the result of the substantive proceeding.
[73] If the parties cannot agree costs on this appeal, they may file memoranda.
The appellant’s memorandum must be filed by 16 December 2016 and the
respondent’s memorandum by 1 February 2017.
Brewer J
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