Le Fleming v Awataieri Holdings Limited HC Dunedin CIV 2009-412-848
[2010] NZHC 336
•19 March 2010
IN THE HIGH COURT OF NEW ZEALAND
DUNEDIN REGISTRY
CIV 2009-412-000848
BETWEEN H V & D M LE FLEMING
Appellants
ANDAWATAIERI HOLDINGS LIMITED Respondent
CIV 2009-412-000904
AND BETWEEN AWATAIERI HOLDINGS LIMITED Appellant
ANDH V & D M LE FLEMING Respondents
Hearing: 10 March 2010
Counsel: D MacLaurin for Mr & Mrs Le Fleming
J Farrow and L Jensen for Awataieri Holdings Limited
Judgment: 19 March 2010
JUDGMENT OF FOGARTY J
[1] Mr and Mrs Le Fleming, as trustees, were sharemilkers on a farm owned by
“Main Farm”, a subsidiary of Big Sky Dairy Limited. As is commonplace in the industry, from time to time they took their stock off the farm for grazing. The stock
were always taken to land owned by the respondent, Awataieri Holdings Limited.
LE FLEMING V AWATAIERI HOLDINGS LIMITED HC DUN CIV 2009-412-000848 19 March 2010
[2] These proceedings were commenced by Awataieri suing Mr and Mrs Le Fleming for unpaid grazing fees of $55,049 in respect of invoices sent between September 2005 and June 2006, together with interest calculated at the statutory rate of 8.4% from the 20th of the month after the date of the invoices. In the second cause of action they sought a further $7,800 for rent in respect of workers’ accommodation.
[3] In respect of the grazing claim, Judge K J Phillips entered judgment for the plaintiff on 5 June 2009 in respect of the grazing costs, and later, having recalled the original judgment amended it to include an award of interest at the rate of 8.4%, but calculated from the date of commencement of the proceedings rather than from submission of the invoices.
[4] Mr and Mrs Le Fleming appeal against the entry of judgment. Awataieri appeals against the interest award, as being insufficient. Mr and Mrs Le Fleming say they should have had the right to go to trial to test the proposition that they are entitled to an equitable set-off of sums owing to them by Big Sky, for expenses they had incurred on Big Sky’s account against sums owed by them for grazing to Awataieri. They found an entitlement to set-off on the proposition that at all material times they were effectively required to use Awataieri’s land for off-grazing because Awataieri was a company controlled by a Mr Humphries who was, at all material times, in substantial control of Big Sky, and, also on a prior history of set-off.
[5] Between July and August 2005 Mr and Mrs Le Fleming paid all grazing costs directly to Awataieri.
[6] In September 2005 Mr and Mrs Le Fleming were in dispute with Big Sky over the latter’s termination of the sharemilking agreement. The Le Flemings say they had no choice but to continue to say on Main Farm. Between September and November 2005 Mr and Mrs Le Fleming did not pay the plaintiff’s grazing invoices. In December there was an arbitration between Mr and Mrs Le Fleming and Big Sky and Main Farm. The arbitrator ordered Big Sky to pay the defendants a considerable sum of money, being withheld milk cheques in the order of $150,000 plus
$120,155.55 of Big Sky expenses paid by Mr and Mrs Le Fleming. They say they incurred these costs as Big Sky had no credit. On any view of it the liability of Big Sky vastly exceeded Mr and Mrs Le Fleming’s liability to Awataieri. On 12 March
2007 Big Sky was placed in receivership. Mr and Mrs Le Fleming have received the milk cheque monies but the judgment for the expenses is outstanding. These proceedings were initiated after the receivership. It may be that if Big Sky had not gone into receivership the debt owed to Awataieri would have been settled. The Court does not know if there is any prospect of a payment to unsecured creditors. Mr Humphries says the receivers are negotiating to sell land.
[7] Mr Humphries disputes that he is the owner of Awataieri, or at any material time controlled Big Sky. He disputed that he was pulling the strings[1] of both companies, as is contended by the Le Flemings. However, he says:
[1] The phrase comes I think from “he pulled the strings” in Lord Denning MR’s judgment in Wallersteiner v Moir [1974] 3 All ER 217 at 238, cited by Associate Judge Osborne in Bill Miller Logging Limited v B T Wood Limited HC Nelson CIV 2009-442-213, 22 July 2009, at para [20].
I accept that on some occasions money owed by the Le Flemings to Awataieri was set off against money owed to the Le Flemings by Big Sky. However, the two contracts (the sharemilking contract with Big Sky and the grazing contract with Awataieri) were not in any way dependent on each other. They were two separate and stand alone contracts.
The arrangement to set-off the occasional grazing invoice against costs incurred on behalf of Big Sky was an internal arrangement between Big Sky and Awataieri.
At that point in time my interest controlled two-thirds of the Big Sky companies and in some instances it was advantageous from a financial accounting and cashflow point of view to allow a set-off to happen.
There was, however, no agreement with the Le Flemings that this would take place and Mr Le Fleming does not say that such an agreement was made. It was a matter for me to decide.
Le Flemings were still liable to make payment to Awataieri. Whether this was done by way of set-off from monies owed to (sic) Big Sky or by direct payment was a financial accounting decision taken by the Big Sky/Awataieri companies.
[8] As to the facts Judge Phillips said:
[8] It is clear on the undisputed evidence –
·THAT the plaintiff, Big Sky and its related companies are different and separate legal entities.
·THAT the defendants and Big Sky on occasions set off moneys owed by one to the other. This did not occur in respect of all debts
as between the defendants and Big Sky. There was never a set off directly between the plaintiff and the defendants.
·THAT the plaintiff and Big Sky would on occasions set off moneys owed by one to the other.
·THAT the defendant accepts that its stock was grazed on the plaintiff’s land from time to time.
·THAT the defendant did make payments for such grazing directly to the plaintiff.
·THAT Big Sky is in receivership and owes the defendants an arbitration award for a sum in excess of $120,151.55.
[9] I note immediately that these propositions do not summarise the acknowledgments by Mr Humphries that I have just set out verbatim. Mr Humphries is in fact describing an arrangement whereby the Le Flemings were released from a contractual obligation to Awataieri by reason of money owed to them by Big Sky being diverted to Awataieri, by agency of his personal control of the cash disbursements of Big Sky. In his affidavit, as quoted, Mr Humphries’ position was that it was for him to decide whether or not he would deduct from the debt owed by Big Sky monies owed by the Le Flemings to make payment to Awataieri. For this step to have occurred Awataieri had to, at the very least, acquiesce, if not agree, to the actions of Mr Humphries. Either way it benefitted from this action.
[10] The practice described by Mr Humphries cannot be described as a set-off between Mr and Mrs Le Fleming and Big Sky of monies owed by one to the other. At best, it might be able to be split into two propositions: that it is both a set-off between Mr and Mrs Le Fleming and Big Sky; and, simultaneously between Awataieri and Big Sky. The Le Flemings do not appear to have objected. Rather they contend such “set-off” or “squaring” was commonplace.
[11] From the chronology of facts it seems that in 2005 the Le Flemings stopped paying for the grazing to Awataieri at a time when Big Sky had “taken” the milk
cheques and while the Le Flemings had incurred a large number of costs on behalf of Big Sky. There is a dispute of fact as to whether Mr Humpries had control of Big Sky at that time. He points out there was another director, in the later part of 2005.
[12] Judge Phillips rejected the proposition that there was an arguable set-off. He was impressed by the separate legal personality of Awataieri, the Big Sky company entities and the separate sharemilking agreements and grazing agreements. He noted Mr Humphries’ involvement in both Awataieri and Big Sky but emphasised that he was not the contracting party.
[13] Judge Phillips rejected the availability of equitable set-off by following the
Court of Appeal in Hamilton Ice Arena Ltd v Perry Developments Ltd [2002]
1 NZLR 309. He said:
[19] The authority of Hamilton Ice Arena Limited v Perry Developments Limited (2002) 1 NZLR 309 Court of Appeal would appear to be fatal to the defendant’s position on claiming set off. I refer particularly to Tipping J. where he said:
“The need for identity of parties is also consistent with the proposition that the cross-claim is regarded in equity as fully or pro tanto extinguishing the plaintiff’s right to judgment on the claim. The concept of extinguishment is difficult if the cross-claim is made by a different party.
While we would not wish to rule out the possibility that in some unusual circumstances it might be appropriate to allow equitable set off where there is no identity of parties, any such circumstance would have to be consistent with the extinguishment rationale.
In this case, we are of the view that the lack of identity of parties is
in the circumstances fatal to Hamilton Ice’s claim to set off … .
[14] In subsequent reasoning Judge Phillips relied both on the need for identity of parties and rejected the presence of some unusual circumstances. In particular, he held that because the sharemilking agreement was between different parties than the grazing agreement the two agreements could not be said to be independent and there was not therefore “the required link between the two agreements”.
[15] As to the word “link” he was relying on a headnote of the report of the earlier decision of the Court of Appeal in Grant v NZMC Ltd [1989] 1 NZLR 8 as follows:
A defendant may set-off a cross-claim which so affects the plaintiff's claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant's claim calls into question or impeaches the plaintiff's demand. It is neither necessary, nor decisive, that claim and cross- claim arise out of the same contract.
[16] He also relies on the Court of Appeal in Hamilton Ice using the same concept
of “link” in paragraphs [40] and [41] of that judgment.
[40] While in this case the Speirs brothers' claim for wages and Perry's claim for rent can be seen as related in a general way in that they both arose out of a series of transactions which the parties entered into at the same time, and in their mutual interests, there is not in our judgment such interdependence between the claims that it can fairly be said the existence of the wages claim should be regarded as impeaching the claim for rent. While,
as was said in Grant, the fact that the claims arise out of different contracts
is not decisive, if that is so there must be such a link between the different contracts as to justify their effectively being treated as one. In Grant's case that was so because the contract represented by the lease was induced by the contract concerning supply of business to the company which was going to take the lease.
[41] The two contracts here – the lease and the refurbishment contract – concerned different premises in different cities. One involved rent, the other wages. They really have no practical or conceptual linkage at all. The fact that the money due to the Speirs brothers was intended by them to be used to discharge Hamilton Ice's obligations under the lease is by no means sufficient for equitable set-off. In almost all cases of money cross-claims one party can say to the other, if you had paid me I would have been able to pay you. If that were a sufficient justification for set-off, the difference between set-off and counterclaim would be blurred almost to the point of extinction. An issue such as the present is in the end one which turns on a combination of analysis and impression. The trial Judge came to the view that the claims were not sufficiently linked. We cannot say he was wrong; indeed we agree with his conclusion. This ground of appeal must therefore fail.
[17] The Court of Appeal in these paragraphs was applying a standard of sufficiently close connection between the two claims taken from Hill and Redman’s
‘The Law of Landlord and Tenant’ (1988). The Court of Appeal said:
[39] Hill and Redman's somewhat wider formulation is of course consistent with what was said by this Court in Grant. It is therefore appropriate to adopt that approach which allows a set-off even if the cross- claim does not arise out of the relationship of landlord and tenant, provided there is a “sufficiently close connection” between the two claims – essentially the classic requirement for equitable set-off.
[18] It is true that the facts and reasoning of Hamilton Ice can be put forward as a powerful authority in support of Judge Phillips’ judgment. Hamilton Ice was the tenant of an ice rink owned by Perry Developments Ltd. They owed their landlord rent. But their landlord owed Speirs brothers, Hamilton Ice’s shareholders, a sum of money for renovation work that the shareholders had done on the rink. Speirs brothers, the shareholders, were guarantors of the rent.
[19] There were a complicated set of contracts between the Speirs brothers and Perry Developments. Speirs brothers had a bowling centre at a property in Hamilton which they had closed down. A set of contracts were entered into whereby Perry Developments would buy the Speirs’ property in Hamilton to be developed as an ice skating arena and secondly, a property in Tamaki in Auckland, to be developed as a ten-pin bowling centre. Speirs brothers would bring their bowling plant and equipment to Auckland, refurbish it and establish the new bowling centre and manage it for some time. Perry Developments would also lend money to the Speirs brothers’ company, Hamilton Ice, to established the ice skating rink on the land they had purchased from the Speirs brothers in Hamilton. The relationship between the parties did not go as expected at the time the various contracts were entered into.
[20] The criteria of “link”, and “sufficiently close connection” are standards. Their application turns on a “combination of analysis and impression” per Tipping J in Hamilton Ice: [41]. There the Court of Appeal regarded as a material fact that the arrears on the lease were in respect of the Hamilton premises and the refurbishment contract was in respect of the Auckland premises, there being no practical or conceptual linkage between these debts.
[21] The ultimate issue is unconscionability. In Hamilton Ice at paragraph [4] Tipping J for the Court says:
[4] Equity would intervene only if the defendant in the suit at law could show some cross-claim for a sum of money which, in the eyes of equity, undermined the right of the plaintiff in the suit at law to enforce his legal claim either at all, or to the extent of the cross-claim. Equity always acknowledged the defendant's right to counterclaim but took the view that in some circumstances such right was not sufficient to do justice. The Courts of equity would not readily interfere with the proceedings at law and confined themselves to cases where the claim at law and the defendant's cross-claim were so closely interrelated that it would be unconscionable for the
plaintiff to seek judgment at law without bringing the defendant's cross- claim to account.
(Emphasis added)
[22] Hamilton Ice was clearly following the reasoning in Grant v NZMC Ltd delivered by Somers J, and the “link” is a standard deployed to assess whether it would be unjust to allow the plaintiff’s claim without set-off:
… Equity would restrain an action or execution of judgment at law or allow
a set-off where it would be inequitable or unconscionable to allow the plaintiff to proceed without bringing to account some claim by the defendant which was sufficiently linked to that made by the plaintiff.
(at 11) (Emphasis added)
The principle is, we think, clear. The defendant may set-off a cross- claim which so affects the plaintiff's claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard
to the other; the defendant's claim calls into question or impeaches the plaintiff's demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract.
(at 12-13) (Emphasis added)
[23] I am not persuaded that a Court can decide reliably in a summary judgment process that the facts of Hamilton Ice are a close analogy with the facts here. Here the unconscionability can be argued on two alternative bases:
1. A prior history of agreed set-off or “squaring”, according to the
Le Flemings, (absent in Hamilton Ice);
2.Alternatively, building upon Mr Humphries’ account, of past unilateral conduct, by Mr Humphries, when his interest controlled Big Sky, of short-paying the Le Flemings when it suited Big Sky and Awataieri. Such an argument would not be based upon mutuality of agreements, as in Hamilton Ice.
Either way, past advantage, mutual or unilateral, can make subsequent conduct unconscionable.
[24] There may be material differences on the facts between the linkage of the contracts in Hamilton Ice and here. In Hamilton Ice the two separate contracts were separated both geographically and by different businesses. Here both contracts pertain to the same business of extracting milk fat from one herd of cattle.
[25] There are other facts being advanced by Mr and Mrs Le Fleming in support
of their argument. They say the history of set-offs covers the period further back than 2005 and was a common place practice that went both ways. Second, they say that while the text of the sharemilking agreement required the off-grazing property to
be agreed, in fact, it was always a requirement that they use the Awataieri property. Both these propositions are disputed by Mr Humphries. He disputes also that he controls Awataieri, arguing that he holds the shares on behalf of a trust, but at this stage the record does not disclose who the beneficiaries of the trust are. Further, he disputes that he controlled Big Sky at the material times pointing out that although
he was the sole director at one point there was another director, Mr Nicholas, appointed during 2005.
[26] There may be other facts further distinguishing the case from Hamilton Ice. The Court does not know if Big Sky deliberately withheld the milk cheques and did not pay the expenses at the time when Awataieri was owed money by the Le Flemings. If there was such a decision by Big Sky not to pay the Le Flemings and if it was made by Mr Humphries, it may well be that Awataieri, which had enjoyed the advantage of prior decisions of Mr Humphries to use money owed by Big Sky to the Le Flemings to pay it, should now have to accept the consequences of Mr Humphries shutting off the cashflow to the Le Flemings, post June 2005. Such analysis may not depend upon “lifting the corporate veil”.
[27] Equity looks to a much broader range of facts than the common law. Defences of equitable set-off are not naturally suitable to disposal by summary judgment. I am left with the conclusion that there are more relevant material facts that need to be taken into account, than the set Judge Phillips relied upon. These other facts focus on the history of “set-off”, the origins of the dispute with Big Sky, and the control of Mr Humphries. Some of these facts are disputed. The set-off history is only sketched. It needs particulars. The Court needs to know whether
there is any prospect of Big Sky (including Main Farm) paying in whole or in part its unsecured creditors. There needs to be a trial to identify, and, where in issue, resolve
all relevant facts.
[28] The summary judgment is set aside. It is therefore not necessary for me to resolve the cross-appeal on interest.
[29] Mr and Mrs Le Fleming are entitled to costs to be calculated on a 2B basis, in this Court, and a like order in respect of the District Court proceedings. If the parties cannot agree on costs I will receive submissions limited to five pages each, drafts to be exchanged in advance.
Solicitors:
gca Lawyers, Christchurch
Dyer Whitechurch, Auckland (Agents: Webb Farry, Dunedin)
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