LHL Leasing Solutions Limited v Pinto Limited

[2018] NZHC 1387

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2013-404-5240

[2018] NZHC 1387

BETWEEN

LHL LEASING SOLUTIONS LIMITED

Plaintiff

AND

PINTO LIMITED

Defendant

Hearing:	23, 24, 26 April 2018
Appearances:	G Denholm for Plaintiff R J M Sim for Defendant
Judgment:	12 June 2018

JUDGMENT OF JAGOSE J

This judgment is delivered by me on 12 June 2018 at 4.30pm pursuant to r 11.5 of the High Court Rules.

.....................................................

Registrar / Deputy Registrar

Solicitors/Counsel:

Foy & Halse (G W Halse) Epsom, Auckland

Gallaway Cook Allan Lawyer (RJM Sim/DP Robinson), Dunedin Greg Denholm, Barrister, Auckland

LHL LEASING SOLUTIONS LTD v PINTO LTD [2018] NZHC 1387 [12 June 2018]

Introduction

[1]    The plaintiff (“Leasing Solutions”) seeks to recover $607,015.98 from the defendant (“Pinto”) in liquidated damages – calculated by reference to “the average monthly rent during the term of this Agreement” – for Pinto’s alleged failure to deliver up leased equipment to Leasing Solutions on the lease’s expiry on 20 December 2010.

[2]    Leasing Solutions’ claim also to recover alleged unpaid rent, and Pinto’s counterclaim/affirmative defence for the same amount in damages for Leasing Solutions’ alleged breach of ‘good repair’ obligations, were earlier struck out. Associate Judge Bell held delays in Leasing Solutions’ prosecution of the case meant a “fair hearing” on those issues was no longer possible.1 But the Judge held “there are better prospects of a fair hearing” on a claim for failure to return equipment, either as liquidated damages, or for “actual losses from the non-return of the equipment”.2 Only the former liquidated damages claim was pursued.

[3]    Pinto’s counsel, Diccon Sim, argued the effect of Associate Judge Bell’s judgment was also to render determination of the “average monthly rent” ‘unfair’, meaning Leasing Solutions could not succeed. He sought leave to make oral application to strike out the balance of Pinto’s case.3 I required such application to be made in writing, if it was to be pursued. The strike out issue was not advanced further.

[4]The issues for determination in this proceeding are thus:

(a)was Pinto in breach of an obligation to deliver up equipment to Leasing Solutions on expiry of the lease?

(b)if so, is the “average monthly rent during the term of the Agreement” capable of being determined, both in law and in fact? and

(c)if so, is the liquidated damages provision enforceable as a matter of law?

1      LHL Leasing Solutions Ltd v Pinto Ltd [2017] NZHC 1050 at [49], [50], and [54].

2 At [51].

3      Leave was necessary because this was as an application for “the same or a similar order” after the failure of the first application: HCR 7.52.

Background

[5]    Associate Judge Bell’s judgment outlines a complicated preface to the essential facts before me.

[6]    For present purposes, it is enough to say Leasing Solutions and Pinto were both party to a document titled Novation of Lease and Guarantee and dated 9 August 2006 (the “novation agreement”). Under the novation agreement, Leasing Solutions and Pinto respectively took the place of the original hirer and lessee to a Master Lease Agreement executed by the original lessee on 16 November 2005 (the “lease”). The novation agreement described the lease as an agreement between owner, hirer, and lessee for the hirer’s lease of “juice dispenser units” to the lessee. As Associate Judge Bell noted, at least in respect of the original hirer and lessee (for no owner is identified in the lease), the lease is unusual in a number of respects.4

[7]    Pinto acquired a fruit juice manufacturing and distribution business from the original lessee. Under the lease, the business had leased plant for supply to retailers of its juices. The lease provided for a 60-month term from an unspecified “Commencement Date”, at a rent of “$9,059.94 including GST”, with a ‘billing period’ “Monthly as and from the Commencement Date”.

[8]    “Equipment”, the subject of the lease, was defined as “the equipment described in this Agreement”, and the lease’s particulars included “GOODS: Please Refer to Schedule 4 (Pinto Master Equipment Register)”, but there was no other description or any schedule. It appears common ground the ‘equipment’ was that acquired by Leasing Solutions from (and for lease back to) the former lessee (also called Pinto, and the reference to “Pinto Master Equipment Register” is a reference to the former lessee, rather than to the defendant). A bill of sale dated 16 November 2005 from the former lessee records the sale to Leasing Solutions of 286 items:

4      LHL Leasing Solutions Ltd v Pinto Ltd, above n 1, at [7].

ITEM DESCRIPTION	QTY	PRICE	TOTAL
Sale Single Bowl Dispensers	177	1,141.83	202,103.91
Sale [Twin] Bowl Dispensers	33	1,797.27	59,309.91
Sale [Triple] Bowl Dispensers	10	2,381.36	23,813.60
Sale [Four] Bowl Dispensers	1	1,222.23	1,222.23
Sale Fridges Single Door	39	1,039.53	40,541.67
Sale Fridge Counter Top	5	933.18	4,665.90
Sale Leased Equipment	21	668.09524	14,030.00
TOTAL NZD		345,687.22
GST 12.5%		43,210.90
TOTAL INC. GST		388,898.12

The reference to “Sale Leased Equipment” Mr Raki explained to be to “parts, they were like the doors, the internal mechanisms”, cannibalised from other equipment for maintenance purposes.

[9]Relevant provisions in the lease include:

2. Rent: The Lessee must pay the  rent  (including  GST)  by  the  instalments set out in this Agreement. The lessee should upon demand by the Hirer pay all taxes, levies, and charges (including GST) which may be imposed now or in the future up on the Hirer as a result of the leasing, service or maintenance of the Equipment. So far as is permitted by law, the Lessee must pay rent and otherwise comply with this Agreement even if the Equipment is not in working order or is partially or totally defective or damaged, provided however that the Hirer has employed best endeavours to recrify all defects.

…

6.Use of Equipment: The Hirer must: At it’s  [sic] own expense keep  and maintain the Equipment in good order and repair and in first class condition for equipment of its description.

…

10. Liquidation Damages: If the Lessee fails to deliver up the Equipment to the Hirer on expiration or termination of this Agreement, the Lessee must pay to the Hirer by way of liquidated damages a monthly rent equal to the average rent during the term of this Agreement.

…

19.Return of Equipment: The Lessee must return the Equipment to the Hirer immediately. (1) the initial period as set out the in the Lease Agreement expires, (2) any further period of this Agreement expires,

or (3) the Hirer otherwise becomes entitled to possession. The Equipment must be returned to the Hirer in the same condition it was in when the Lessee first took delivery of the Equipment (reasonable wear and tear excepted). If at the time of equipment return any equipment including software (including but not limited to any manuals, certificates of registration and other documentation) are damaged or missing, at the election of the hirer, either (a) repair or replace such damaged or missing equipment or software of (b) pay he hirer the reasonable fair market value of such damaged or missing equipment of software, within five (5) working days of return.

20.Upgrade of Equipment: If the Lessee notifies the Hirer that it wishes to upgrade the Equipment, the Hirer will give consideration to financing the upgrade provided. (1) The Lessee is not in default under this Agreement and (2) the Hirer is satisfied with the financial performance and position of the Lessee.

…

26 Waiver: The Hirer may waive its rights in respect of any breach or repudiation by the Lessee but no waiver of any on breach or act of repudiation affects the Hirer’s rights in respect of any further, other, continuing or recurring breach or act of repudiation.

…

30 Set-off: The  Lessee  agrees that  any surplus arising from a  dealing under any of the Related Agreements is subject to a right of set-off to satisfy any loss, shortfall or cost which is suffered by the Hirer or any company related to the Hirer under any of the Related Agreements.

…

Under cross-examination, Mr Raki explained his gross profit on the performed lease would have been less than $10,000 a year; the potential for profit came from leasing new equipment into Pinto as the old equipment became obsolete for retail use, and deploying the old equipment elsewhere, perhaps in the Pacific Islands.

[10]   Leasing Solutions had an undated service contract with Harold Leaupepe, by which Mr Leaupepe was to “maintain, repair and service” the equipment “for a term of five years commencing from 20 December 2005”.5 Mr Leaupepe, trading as LHL Food and Beverage Technology Source, was the original hirer under the lease. The evidence was, when he was unable to raise funds to acquire the former lessee’s equipment for lease back to it, Leasing Solutions made the acquisition.

5      The service contract’s opening line is, “This Agreement is made the       day of        2006”.

[11]   The acquisition was made in terms of the REINZ/ADLS standard form Agreement for sale and purchase of a business, under which the ‘business’ was described as “Plant and equipment for sale of juice”. It included as a special condition the lease back for a period of 60 months from 20 December 2005, but at a monthly rental of $9,059.54 “plus GST” – that is $10,418.47, compared to $9,059.94 under the lease. After the former lessee sold its actual business to Pinto (including the lease as a material contract), the novation agreement sought to establish the plaintiff and defendant respectively as Hirer and Lessee under the lease.

[12]   Mr Leaupepe explained in evidence the equipment subject to the lease was seven to ten years old when acquired by the former lessee. He audited the equipment, to find “some of the equipment in the asset register could not be physically located”. The audit does not reliably trace the equipment acquired by Leasing Solutions. For example, while the sale records only one four-bowl dispenser, the audit identifies two; similarly, sale of 33 twin-bowl dispensers, but audit of 34. It is therefore unclear whether the lesser numbers of audited single (167) and triple (5) bowl dispensers from those sold (respectively, 177 and 10) can be taken to identify any were ‘missing’. In November 2006, Mr Leaupepe reported to Pinto 112 dispensers were “Active”, but 96 were “In-Active”. The audit identified the whereabouts of the active dispensers at retailer customers’ premises across New Zealand, and the inactive dispensers predominantly at Mr Leaupepe’s warehouse (although some are annotated “Loan Waiouru Army Base”).

[13]   In January 2007, by email copied to Leasing Solutions’ Lindsay Raki, Mr Leaupepe advised Pinto:

I have met with Lindsay Raki of LHL Leasing Solutions concerning the replacement of equipment not fit for purpose for new equipment.

It has been agreed by LHL Leasing Solutions and LHL Food & Beverage Technology Source that this responsibility should be assigned to LHL F&B. We currently have our lawyers drawing up the agreements and should be signed off by both parties next week when the documents are ready.

We will have to meet this week, if possible to go through what equipment needs to be up graded [sic]?

I look forward to your response.

Under cross-examination, Mr Leaupepe said no final agreement was reached with Leasing Solutions giving him authority to replace Leasing Solutions’ unfit for purpose equipment. Also under cross-examination, Mr Sutherland said Pinto took from that letter “Mr Leaupepe had authority or responsibility had been assigned to him regarding the replacement of equipment not fit for purpose”.

[14]   In May 2007, Mr Leaupepe advised Pinto it had 240 units on lease from Leasing Solutions. These comprised 148 one-bowl dispensers, 37 two-bowl dispensers, 5 three-bowl dispensers, 2 four-bowl dispensers, 37 single-door fridges, and 11 countertop fridges. Mr Leaupepe also identified a number of missing dispensers and fridges (later located at retailer customer premises), but attributes those to equipment leased by Pinto from another hirer, “Alleasing”. Again, this count cannot reliably trace to either the earlier audit or the original acquisition.

[15]   Later in May 2007, Mr Leaupepe advised Pinto it had been overpaying its monthly rent at $10,192.28, instead of the lease’s $9,059.95. He also explained a lesser rental still was payable for 48 months (presumably from 20 December 2006), by reason of an exchange of 32 dispensers (from Leasing Solutions) for 15 fridges (from Alleasing). On the latter, under cross-examination, Mr Leaupepe said the exchange “was a proposal … which needed to be submitted to Mr Raki for final authorisation”, and “never eventuated”.

[16]   On 21 August 2007, Pinto’s Hamish Sutherland wrote to Mr Leaupepe about a variety of issues with its leased equipment. Mr Sutherland noted reductions in the rent payable to Leasing Solutions, including to offset Leasing Solutions’ charges for servicing the equipment (which was Leasing Solutions’ obligation at its expense under the lease), and sought Mr Leaupepe’s proposal to maintain Pinto’s overall lease expenditure at a total cost of $15,500 per month. Mr Leaupepe responded with such a proposal the following day, in which new equipment came from Alleasing.6 At about the same time, Mr Leaupepe ceased being paid by Leasing Solutions, resulting in Mr Leaupepe threatening to cease servicing the equipment subject to the lease.

6      Mr Leaupepe’s letter included a calculation setting monies payable by Pinto to Mr Leaupepe off against monies payable to Pinto, resulting in a net payment of $8,391.43 including GST from Mr Leaupepe to Pinto. In response to questions from me, Mr Leaupepe could not adequately explain the basis for payments to Pinto.

[17]   By letter of 8 January 2008 to both Mr Raki and Mr Leaupepe, Mr Sutherland sought to confirm the changes in arrangements with Leasing Solutions. From Pinto’s perspective:

(a)Pinto (and the former lessee) had in error been paying monthly rent (including GST) of $10,192.28, rather than the lease’s $9,059.94, since 20 December 2005;

(b)a stocktake identified less equipment was available for lease, some having been cannibalised or lost and others swapped for fridges, resulting in a reduced monthly rental to Leasing Solutions of $8,272.90 (including GST);

(c)approximately half the original Leasing Solutions’ equipment had been exchanged for Alleasing equipment, meaning Leasing Solutions’ monthly rental further reduced to $5,244.84 (including GST); and

(d)thus, at December 2007 “Pinto has overpaid its obligations to … Leasing Solutions by $38,741.39”. Mr Sutherland proposed ceasing paying rent to Leasing Solutions for some seven months, and thereafter paying the monthly rental at $5,244.84 (including GST) for the balance of the lease’s term, subject to further stocktakes.

[18]Mr Raki responded to Mr Sutherland on 15 January 2008, saying:

(a)the monthly rent was correctly set at the $10,192.28 figure sourced in the Agreement for sale and purchase;

(b)new stock would be required during the term of the lease, but was to be acquired under a new rental agreement; and

(c)regardless of current equipment’s availability or replacement, the monthly rent was still required to be paid for the duration of the lease.

Mr Raki sought recovery of unpaid rental. As between solicitors, Leasing Solutions denied Mr Leaupepe was its agent.

[19]   Mr Leaupepe’s servicing standoff continued through 2008 and into 2009, resulting in Mr Leaupepe only servicing Pinto’s equipment leased from Alleasing. In April 2008, Leasing Solutions’ solicitors contended it had not known of Mr Leaupepe’s actions until their receipt of correspondence from Pinto’s solicitors in February 2008, and reasserted Mr Raki’s claim for Pinto’s payment of the full monthly rental, noting Pinto had “made no payments under the Lease for some months now”.

[20]   In late 2008, Pinto sought to transfer equipment held at Mr Leaupepe’s warehouse to Pinto’s own storage facility. Mr Leaupepe responded he was “happy to facilitate” transfer of anything other than Leasing Solutions’ equipment, in relation to which he referred Pinto to Mr Raki. In late 2010, Mr Leaupepe in turn sought to recover from Pinto’s storage facility fridges and dispensers he identified as being his own.

[21]   By letter of 17 November 2010, through solicitors, Leasing Solutions wrote to Pinto in the following terms, headed “WITHOUT PREJUDICE”:

We refer to ongoing correspondence in this matter.

Since our correspondence earlier this year, we note your client has still not paid any of the rental payments due under the terms of the Agreement to Lease.

The Agreement of Lease was for a term of five years and is due to expire on the 20th of December 2010. There was no provision for any renewal and this letter is to confirm that on the 20th of December 2010 following the expiration of the Lease, all rights, title and ownership in the equipment will revert to our client as the owner.

At this time it is our client’s intention to collect all the equipment currently leased; could you ensure that your client notifies all the owners of premises where the equipment is currently held that after the 21st of December 2010, our client’s company will be making arrangements to uplift the equipment.

Our client will appoint an authorised agent to undertake this work and as soon as our client has finalised these details we will advise you so that you can in turn advise the parties where the equipment is currently held of the authorised persons.

Of course, the termination of the Lease and return of the equipment to our client is entirely without prejudice to our client’s right to pursue your clients for all unpaid rental and outstanding costs and expenses incurred to the expiration of the Lease. We understand that some of the machines and equipment may no longer by at the address of the premises agreed to at the commencement of the Lease. No equipment was to be moved from the

premises agreed at the commencement of the Lease without the express written consent of our client If this has happened then our client regards this as a further breach of the terms of the Lease Agreements.

Of course, if your client wishes to renegotiate a new Lease Agreement for the remaining Equipment, our client would be prepared to discuss this with your client. However, it would be a condition that all outstanding matters under the terms of the existing Lease, including payment of arrears, are resolved before any new agreement takes place.

A further alternative would be that our client may be prepared to discuss selling the equipment back to your client if it was interested in purchasing the equipment back.

Given that there are a number of options open to both sides in dealing with this matter, the matter may best be progressed by way of a meeting between our clients and their advisers to go through the issues and determine whether some common ground can be reached.

We would be grateful if you could raise this with your client to see whether they are interested in any such discussions.

We look forward to hearing from you.

[22]   In evidence, the letter’s author, Christopher Lynch, explained the letter was written “during a period when we were trying to mediate the non-payment of rental and outstanding costs and expenses incurred to the expiration of the lease”. He added:

I was exploring the possibility of negotiating a new Lease Agreement as well as resolving those outstanding matters of the arrears under the existing lease. A further alternative for discussion was for the Plaintiff to sell the equipment back to the Defendant. A number of options were open to try to progress matters between the parties to reach a common ground.

Under cross-examination, Mr Lynch agreed his use of the words “At this time” at the beginning of the letter’s fourth paragraph meant on the lease’s expiry on 20 December 2010, but that was “without prejudice to our client’s right to pursue [Pinto] for all the unpaid costs”. He agreed there was no qualification to the fourth paragraph’s request Pinto write to its retailer customers. He accepted he had no personal knowledge or involvement in Leasing Solution’s dealings with Pinto.

[23]   Pinto’s Gary Dixon and Mr Sutherland met “on a ‘without prejudice’ basis” with Mr Raki on 14 December 2010. The men discussed the parties’ respective reliance on the lease and the Agreement for sale and purchase as specifying the

monthly rental due, and Mr Leaupepe’s role as Leasing Solutions “service agent”. Pinto’s subsequent internal note of the meeting went on to record:

As for recovering the plant during the last week before Christmas, [Mr Raki] confirmed he had a copy of the latest stocktake [Mr Leaupepe] had prepared, which was also the best information [Mr Sutherland] could supply. We assured [Mr Raki] that we had no objection to his uplifting all of the [Leasing Solutions’] equipment from any of Pinto’s customers, and we were also prepared to assist/arrange the recovery of his share of the plant which is presently in [Pinto’s storage facility].

The note concluded by noting Mr Raki’s intention to recover some $300,000 “through legal avenues”.

[24]   In his evidence in chief, Mr Raki acknowledged he had said at the meeting he could “organise the picking up, if I knew where they were and all the rest, of the equipment, but there’s a cost involved”, and “[w]hen we talked about costs that’s when things kind of died off”. But in his evidence in chief, Mr Leaupepe said he understood “Mr Raki was going to have the machines picked up” and “required Pinto to provide information of where the equipment was and an updated asset register”. In December 2010, Mr Leaupepe provided both Mr Sutherland and Mr Raki his last asset register, dating from the end of 2008. The register identifies the location of the equipment, which Pinto used to address letters to its retailer customers.

[25]Mr Sutherland then drafted the following letter:

Pinto Ltd used to supply a full range of juice and concentrates. The Pinto Manufacturing operation was sold to VnC Cocktails some 12 months ago and at that time the operation was scaled back considerably. To support the sale of the juice products, in a number of cases Pinto provided equipment to dispense the range of juice and concentrates that it sold. The equipment was not owned by Pinto – rather leased from a company called LHL Leasing Solutions (LHL).

The lease arrangements between Pinto/Zeagold Foods and LHL concluded on 20th December 2010.

Mr Lindsay Raki is a principal of LHL who are the owners of the equipment. LHL (or their agents) will be in contact with you to either renegotiate a lease directly with you for the continued use of the equipment or will want the equipment returned so they can deploy it elsewhere.

Pinto/Zeagold Foods will not be continuing to provide the dispensing or refrigeration equipment to sell its range of juice product as it has done to this point. The scale and economics of the business do not warrant us continuing to operate as we have to this point.

Before finalising and sending the letter to Pinto’s retailer customers on 23 December 2010, Mr Sutherland read the draft letter over the telephone to Mr Raki, who asked for a copy.7 In his evidence in chief, Mr Raki said “it’s a bit premature that he’s saying I was doing all these things when we never came to that agreement”. On 30 December 2010, Pinto transferred 5 one-bowl dispensers and 1 one-door fridge from its storage facility to Leasing Solutions.

[26]   Correspondence continued between the parties’ solicitors, much of it not in evidence. On 1 April 2011, with reference to unevidenced correspondence in January and February, Leasing Solutions’ solicitors formally required return of all equipment described in a list of juice dispensers and their locations, arising from an earlier audit conducted by Mr Leaupepe. On 12 May 2011, with reference to unevidenced correspondence of the previous month, Leasing Solutions’ solicitors again demanded the equipment’s return, and payment of unpaid rent, and indicated the likely issuance of proceedings otherwise, including for the cost of the equipment’s replacement.

[27]   On 19 May 2011, Pinto’s solicitors responded, saying its arrangements with its retailer customers for Mr Raki’s attention had been established with his authority. Their “previously stated position in relation to rental arrears remains” (but was not in evidence). They identified Pinto’s overpayments of rental in the amount of $27,165.78, particularised in an unevidenced calculation, and additional costs of $95,000 “in respect of alternative equipment” as recorded in unevidenced February 2010 correspondence. Finally, they advised Pinto’s preparedness to mediate any dispute, but otherwise its intention to counterclaim for the equipment’s lack of availability and serviceability, and the rental overpayments.

[28]   In October 2011, Leasing Solutions’ solicitors replied with a formal demand for payment of $528,033.48, comprising outstanding rental payments plus interest and the depreciated value of the unreturned equipment. This proceeding ultimately was issued, by which Leasing Solutions seeks $607,015.68 in liquidated damages. Mr Sim put to Mr Raki in cross-examination the amount was essentially 67 months of rental

7      The phrasing of the first paragraph of Pinto’s letter led Mr Raki to complain in evidence Pinto had sold Leasing Solutions’ equipment to VnC Cocktails. That was not the position. Mr Raki’s complaint was born of his misapprehension, which was addressed in evidence.

calculated at $9,059.94 (ie, $607,015.98). Mr Raki explained the sum was 93% of that monthly rent calculated over for the six years of the limitation period. The reduction was on account of the 21 “Sale Leased Items” Leasing Solutions acquired from the former lessee, which were written off for scrap and cannibalisation, constituting 7 per cent of the original acquisition.

Evidentiary issues

—witness veracity

[29]   In cross-examining Mr Raki, Mr Sim sought his comment on two passages in the District Court’s January 2013 reasons for convicting Mr Raki on 11 charges of theft. Those charges arose out of his conduct in 2006-2008 in transferring some

$300,000 of grant money due to his accountancy practice clients into his own account. The passages were:

I find the defendant to be, at least, an unreliable witness and, at worst, a dishonest one. On these charges, it is difficult to avoid the conclusion that he has, after the event and only when faced with criminal proceedings, concocted an explanation around some documents and records in the hope those will add some credibility to his account that he can rely on. …

…

In short, the defendant is a dishonest witness who has in part woven an account that might accord with some legitimate documentation he can produce, and then created documents after the event to fill in the gaps and back up his story. I have rejected his evidence on every material point … .

Mr Raki acknowledged that was the judge’s judgement: “I appealed it, the conviction. I wasn’t successful”.

[30]   Mr Sim explained he relied on s 37(3)(a) of the Evidence Act 2006, which refers to “lack of veracity on the part of a person when under a legal obligation to tell the truth (for example, in an earlier proceeding …)”. However, s 37(1) prohibits a party from offering evidence about a person’s veracity “unless the evidence is substantially helpful in assessing that person’s veracity”.  In making that decision     s 37(3) permits a Judge to consider “among any other matters, whether the proposed evidence tends to show” s 37(3)(a)’s lack of veracity (emphasis added).

[31]   There is no assertion Mr Raki ‘concocted an explanation around some documents and records’ in the present case. Neither is there any allegation here he has ‘woven an account that might accord with some legitimate documentation he can produce, and then created documents after the event to fill in the gaps and back up his story’. Without such a comparative contended context for Mr Raki’s evidence here, I do not find the evidence of the District Court Judge’s reasons to be substantially helpful in assessing Mr Raki’s veracity. The evidence was prohibited from being given without a Judge’s prior decision it was substantially helpful in assessing Mr Raki’s veracity. No prior decision was obtained. The evidence should not have been offered. I disregard it.

—objections to common bundle documents

[32]   Both Pinto and Leasing Solutions objected to the admissibility of documents included in the common bundle. High Court Rule 9.5(2) requires such objections to “be determined by the court at the hearing or at any prior time that the court directs”.

[33]   Pinto objected to five documents to be produced by Leasing Solutions, on the basis “the documents are not the subject of any evidence in the Plaintiff’s briefs” and thus could not be confirmed to meet the inferences in r 9.5(1)(a)-(f). However, two of the five documents were not received into evidence at all,8 a third was produced appropriately by Mr Raki, and the other two were put to him in cross-examination. On that basis, none of Pinto’s objections remain to be determined.

[34] Leasing Solutions objects to two documents, one produced by its own witnesses, and the other to be produced by Pinto. The two documents were Leasing Solutions’ solicitors’ “without prejudice” letter referred to at [21] above, and Pinto’s internal note of the subsequent “without prejudice” meeting referred to at [23] above. Although Leasing Solution’s counsel, Greg Denholm, addressed substantial argument to the meaning of ‘without prejudice’ communications, he accepted that was not determinative of their admissibility. Rather he meant the whole of those dealings was to be understood as inchoate without comprehensive agreement, and in particular not undermining Pinto’s obligation to deliver up the equipment on the lease’s expiry.

8      HCR 9.5(4) and (5).

[35]   ‘Without prejudice’ communications – ie, those confidential communications made in connection with an attempt to settle a dispute – simply confer on the parties to the dispute a privilege against the communications’ disclosure, by which a person with the privilege “may require” the communication “not be disclosed in a proceeding”.9 Absent such requirements for non-disclosure, no objection to the documents’ admissibility is available as Leasing Solutions seeks to raise under r 9.5.

[36]   In the end Leasing Solutions has no objection to maintain, not least because it disclosed the initial communication, Pinto taking no issue with that disclosure. That affects the propriety of Pinto’s unilateral disclosure of its internal note of the subsequent “without prejudice” meeting, which Leasing Solutions could arguably have required not be disclosed, except for Leasing Solutions’ disclosure of the earlier correspondence. I address the impact of the ‘without prejudice’ labels at [53] to [55] below.

Pinto’s obligation to deliver up

[37]   Leasing Solutions’ claim for liquidated damages is made under clause 10 of the lease, which provides:

Liquidated Damages: If the Lessee fails to deliver up the Equipment to the Hirer on expiration or termination of this Agreement, the Lessee must pay to the Hirer by way of liquidated damages a monthly rent equal to the average monthly rent during the term of this Agreement.

—has Pinto any obligation to deliver up the Equipment to Leasing Solutions?

[38]In context, clause 10’s ‘failure’ is a reference to clause 19’s obligation:

The Lessee must return the Equipment to the Hirer immediately. (1) the initial period as set out in the Lease Agreement expires, (2) any further period of this Agreement expires, or (3) the Hirer otherwise become entitled to possession.

…

Clause 10’s “expiry” is explicit in clause 19’s (1) and (2). Clause 10’s “termination” is encompassed by clause 19’s (3).

[39]There is some difficulty in finding clause 19 to be Pinto’s obligation here:

9      Evidence Act 2006, ss 53(3) and 57(1).

(a)first, the lease does not set out any “initial period” or “further period”, but instead identifies, “TERM: 60 months from the Commencement Date”. No Commencement Date is defined or specified, although clause 1 (titled “Commencement”) states in part, “The Agreement is effective immediately both the Lessee and an Authorised Officer of the Hirer sign it”. That is reinforced by the note under the lease’s uncompleted particular 5, “Date of Agreement”: “The date to be inserted here is the date on which this Master Agreement is executed by the Hirer”. The box for signature of the Hirer’s “Authorised Officer” is empty;

(b)although the recitals to the novation agreement assert Mr Leaupepe (under his trading name) entered the lease as Hirer (which the lease identifies as Mr Leaupepe’s trading name), the lease is not signed by him (or on his behalf), and its clause 1 expressly provides, “This Agreement is not binding on the Hirer until it is signed by a Duly Authorised Officer of the Hirer” and further, “This Agreement is effective immediately both the Lessee and an Authorised Officer of the hirer sign it”;

(c)while the recitals to the novation agreement record Mr Leaupepe to have assigned his interest in the lease to Leasing Solutions (of which there is no separate evidence), and the parties to have agreed the lease “shall be novated”, the operative part of the novation agreement relevantly only provides for Pinto to assume the former lessee’s obligations under the lease; and

(d)clause 1 continues to explain, if the Equipment is delivered before the Hirer signs, the delivery is provisional, meaning the former lessee was bound by its “obligations as to insurance, care and use of the Equipment and otherwise (except as to payment of rent) under this Agreement”, as “a tenant at will of the Equipment”. Those obligations “bind the Lessee as soon as the Lessee executes this Agreement”.

[40]   In terms of clause 19, then, there is no triggering ‘expiry’, or entitled Hirer, obliging Pinto’s return of the equipment to Leasing Solutions.

—has Pinto any obligation to pay liquidated damages under the lease?

[41]   Even if clause 10 can be regarded as imposing a freestanding obligation on Pinto to deliver up the Equipment on the lease’s expiry or termination, there is another problem with any such failure giving rise to an obligation to pay liquidated damages.

[42]   Argument before me assumed the whole of the lease was binding on the parties (subject to argument about determination of rent, and enforceability of liquidated damages). By minute of 30 April 2018, I sought the parties’ comment on whether:

The materiality of clause 1 of the [lease] may be there can be no claim for liquidated damages under clause 10 of the [lease], which contends for a lessee in default’s obligation to pay “a monthly rent equal to the average monthly rent during the term of this Agreement”.

[43]   For Leasing Solutions, Mr Denholm contended the parties had agreed to the terms of the lease, which was “confirmed by the [novation agreement]”. The pleadings and evidence made it “clear the parties intended to be bound by the terms and conditions contained in the [lease]”.

[44]   Mr Sim primarily argued clause 1 of the lease “does not provide for the [lease] as a whole to bind the Lessee, but identifies specific obligations which are to apply”. On a ‘ejusdem generis’ basis, Mr Sim submitted clause 1’s “and otherwise” was only effective “to capture, at most, primary contractual obligations and not secondary obligations – such as the Liquidated Damages provision”. He claims a “contra proferentem” construction of the lease.

[45]   Mr Sim acknowledged the parties had “proceeded, in practice, on the basis that the [lease] was binding in all respects as between them”, but sought now also to argue the lease had never come into effect as between Mr Leaupepe and the former lessee. In reply, Mr Denholm emphasised Mr Sim’s submissions at trial accepted the lease was the operative document.

[46]   Leasing Solutions’ amended claim relevantly only asserted Pinto “agreed to assume the obligations of [the former lessee] in terms of the [lease] and [novation agreement]”, and the defence only admits Pinto “agreed to assume the liabilities of the former [lessee] under [the lease]”. Pinto’s evidence accepts no larger obligation. Pinto’s submissions at trial are to be comprehended as responding to Leasing Solutions’ argument, which assumed a particular construction of the lease.

[47]   Whatever obligation Pinto has accepted is to be found by construing the lease. That is because, under the novation agreement, “[t]he [former lessee] wishes to be released from, and [Pinto] is willing to assume, all of the [former lessee’s] rights and obligations under the [lease]”, and “the [lease] shall be novated”. That is the nature of a novation agreement: the novated party steps into the shoes of the novating party. Without more (of which there is nothing here), parties to a novation agreement are not to be taken as if original parties to the novated agreement. Rather, a new agreement is established, the terms of which stand to be construed from the terms of the novation agreement.10

[48]   Given the absence of signature by the Hirer, the former lessee’s obligations were only as a ‘tenant at will’. Clause 1 specifies those obligations are “as to insurance, care and use of the Equipment and otherwise (except as to payment of rent) under [the lease]”. (Instead, clause 1 obliges payment instead of “a daily rent equal to the amount obtained by dividing the amount of the first rent instalment specified in this Agreement by the number of days in the first rent period”.) On the lease’s novation, those became Pinto’s obligations.

[49]   Clause 1’s bracketed words are effective to exclude any obligation on Pinto to pay clause 10’s liquidated damages, which are defined as “a monthly rent equal to the average monthly rent during the Term of this Agreement”.

[50]   If I am wrong in that, I turn to consider whether liquidated damages are payable under clause 10 in the present circumstances.

10     Hela Pharma AB v Hela Pharma Australasia Ltd Court of Appeal, 17/2/2005, CA165/03, CA206/03, McGrath J, Glazebrook J, Hammond J at [56].

—did Pinto fail to return the equipment to Leasing Solutions?

[51]   Mr Sim emphasised in submissions clause 10 of the lease’s ‘delivery up’ encompasses alternative arrangements to physical return. A definition of ‘delivery’ explains delivery is a transfer of possession, where delivery may be actual or constructive.11 But clause 10’s negative reference to “fails to deliver up the Equipment to the Hirer on expiration or termination of this Agreement” (emphasis added) is reference to the positive obligation in clause 19, for return of the Equipment.

[52] As said at [40] above, the contractual trigger for obliging Pinto’s return of the Equipment has yet to be pulled, as there has been (and can be) no qualifying ‘expiry’. The lease never took effect, because the Hirer did not sign it. Leasing Solutions, even if to be taken as the Hirer, can only otherwise become “entitled to possession” if the tenancy was terminated by one or other party, of which unilateral action there is no evidence. Rather Leasing Solutions and Pinto appear to have agreed a mutual end to the arrangements between them, at the time the lease contemplated its expiry on 20 December 2010.

[53] That mutual end is evidenced in part by the correspondence and meeting record to which Leasing Solutions took objection. As I explained at [34] above, Mr Denholm’s objection was really the ‘without prejudice’ label meant nothing the subject of the correspondence or meeting could be taken as definitive without the parties’ subsequent agreement. That is an enlargement on the usual meaning of ‘without prejudice’, which is to signal statements so made do not affect (do not waive, or compromise) enforcement of the parties’ contended legal rights. Hence the public policy consideration such statements may not subsequently be used against their maker(s) in a civil proceeding. And the label’s consequence may depend on the parties’ express or implied agreement as to its application.12

[54]   In the present case, at least in relation to the ‘without prejudice’ letter, the letter is explicit:

11     The definition of “delivery” in Peter Spiller Butterworths New Zealand Law Dictionary (7th ed, LexisNexis NZ Ltd, Wellington 2011).

12     Oceanbulk Shipping and Trading SA v TMT Asia Ltd [2010] UKSC 44, [2011] 1 AC 662 at [19]-

[35] cited in Sheppard Industries Ltd v Specialized Bicycle Components Inc [2011] NZCA 346, [2011] 3 NZLR 620 at [22].

… the termination of the Lease and return of the equipment to our client is entirely without prejudice to our client’s right to pursue your clients for all unpaid rental and outstanding costs and expenses incurred to the expiration of the Lease.

By “return of the equipment”, Leasing Solutions’ solicitors meant the letter’s prior direction Pinto notify “all the owners of premises where the equipment is currently held that after the 21st of December 2010, our client’s company will be making arrangements to uplift the equipment”. Those arrangements were affirmed in the subsequent ‘without prejudice’ meeting, without any indication they were contingent on the parties reaching some accommodation on the issues in dispute between them. Subsequently, Pinto acted on the arrangements, including with reference to Leasing Solutions’ Mr Raki, by writing to its retailer customers and returning the equipment in its possession. It effectively accepted Leasing Solutions’ limited purpose proposal.

[55]   In context, I do not construe the references to ‘without prejudice’ to prevent these documents’ admission into evidence. I rely on the documents to establish, even if Pinto had any obligation to return the equipment to Leasing Solutions, the obligation was compromised and met by Pinto’s arrangements with those in possession of the equipment. And without the obligation, the arrangements comprised the mutual ending of the tenancy, “without prejudice” to Leasing Solutions’ entitlement to proceed against Pinto for unpaid rent (if any), and outstanding costs and expenses.

[56]   Thus, in terms of clause 10, Pinto has not ‘failed’ to deliver up the equipment. No liquidated damages are payable in any event.

Liquidated damages

[57]   Given my findings at [40], [49], and [56] above, I need not to decide the remaining issues identified at [4](b) and [4](c) above. Had I been required to decide them, I would have held:

(a)Associate Judge Bell’s striking out of Leasing Solutions’ rent claim (on grounds “a fair hearing on the claim for rent is no longer possible”) means “the average monthly rent during the term of this Agreement” could not now be determined to establish “the monthly rent” comprising liquidated damages; but

(b)Pinto’s obligation to pay liquidated damages in the amount of such ‘monthly rent’ – protecting a legitimate performance interest, being return of the leased equipment on expiry or termination of the lease – is not out of all proportion to that interest, and cannot in any event be said to be “so unconscionable or oppressive that [its] nature is penal rather than compensatory”.13

Result

[58]Leasing Solutions’ claim is dismissed.

Costs

[59]   In my preliminary view, Leasing Solutions should be liable to pay 2B costs and disbursements to Pinto.

[60]   If that is not accepted by the parties, and they cannot otherwise agree on costs, costs are reserved for determination on short memoranda of no more than five pages

– annexing a single-page table setting out any contended allowable steps, time allocation, and daily recovery rate – to be filed and served on the other by:

(a)Pinto within ten working days of the date of this judgment;

(b)Leasing Solutions within five working days of service of Pinto’s memorandum; and

(c)Pinto strictly in reply within five working days of service of Leasing Solutions’ memorandum.

—Jagose J

13     AMEV-UDC Finance Ltd v Austin (1986) 162 CLR 170 at 193-94 cited with approval in Amaltal Corp Ltd v Maruha (NZ) Corp Ltd [2004] 2 NZLR 614 (CA) at [57].