Madagascar (no.3) 2013 Limited v Paulsen
[2016] NZHC 553
•4 April 2016
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2015-409-000745 [2016] NZHC 553
IN THE MATTER of Breach of Contract BETWEEN
MADAGASCAR (NO. 3) 2013 LIMITED Plaintiff
AND
BRENT EWEN PAULSEN First Defendant
CHRISTINE MARY PAULSEN Second Defendant
Hearing: 7 March 2016 Appearances:
D Hughes for Plaintiff
J W A Johnson and G Carter for DefendantsJudgment:
4 April 2016
JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
Introduction
[1] On 22 May 2013 the plaintiff, Madagascar (No.3) 2013 Limited (Madagascar
3) entered into an agreement to sell its business to the first defendant, Brent Paulsen. On the same day two related companies, Madagascar (No.1) 2013 Limited and Madagascar (No.2) 2013 Limited, entered a separate agreement with Mr Paulsen to sell their respective businesses. All three Madagascar companies used the trading name International Cargo Express, with each company, under independent governance, conducting a separate part of the business of one trading entity.
[2] Mr Paulsen subsequently nominated International Cargo Express 2013
Limited, a company of which he is the sole director, as the purchaser under both agreements. In this judgment I refer to this company as “New ICE”. On 26 July
2013 Madagascar 3 and New ICE signed a term loan agreement by which
MADAGASCAR (NO. 3) 2013 LTD v PAULSEN [2016] NZHC 553 [4 April 2016]
Madagascar 3 advanced to New ICE the sum of $200,000. It is common ground that this represented part of the purchase price under the agreements for purchase of the International Cargo Express businesses. The advance was expressed to be interest- free if no default was made, and was for a term expiring one year later, on 26 July
2014. A penalty rate of 10 per cent was specified if the principal sum was not repaid on due date. The first and second defendants (Mr Paulsen and Mrs Paulsen) are guarantors of the obligations of New ICE under the agreement and are deemed to be a principal party to the contract.
[3] On the same day Madagascar 3, New ICE and Mr and Mrs Paulsen also entered a deed of guarantee by which Mr and Mrs Paulsen guaranteed the obligations of New ICE to Madagascar 3 (the deed of guarantee).1
[4] New ICE did not repay the advance on the due date. In this proceeding Madagascar 3 seeks judgment in the sum of $200,000 together with interest at the default rate of 10 per cent per annum specified in the term loan agreement.
[5] Madagascar seeks summary judgment against Mr and Mrs Paulsen under their guarantees.
Summary judgment
[6] Under r 12.2 of the High Court Rules the Court may give judgment against a defendant on a summary basis if a plaintiff satisfies the Court that the defendant does not have a defence to a cause of action in the statement of claim on which a plaintiff relies. The onus of establishing this position rests on the plaintiff.2 The classic exposition of this principle is in Auckett v Falvey:3
On a summary judgment application, the onus is on the plaintiff to show that there is no defence. On the present facts, the plaintiffs are able to pass an evidential onus to the defendants by exhibiting the contract which on its face, entitles them to the remedy they now seek. The defendants are then in a position of having to demonstrate a tenable defence. However, the overall position concerning onus on the application is that at the end of the day the
1 In the deed of guarantee the lender is described as International Cargo Express (Auckland) Limited which is the former name of Madagascar 3.
2 Pemberton v Chappell [1987] 1 NZLR 1 (CA).
3 Auckett v Falvey HC Wellington CP296/86, 20 August 1986 at 2.
question is whether the plaintiffs have satisfied the Court as to the absence of a defence.
[7] Evidence on applications for summary judgment is given by way of affidavit. It is necessary, therefore, to keep in mind the approach the Court is to take to evidence given in this way, summarised in Pemberton v Chappell:4
Where the defence raises questions of fact upon which the outcome of the case may turn it will not often be right to enter summary judgment. There may however be cases in which the Court can be confident – that is say, satisfied – that the defendant’s statements as to matters of fact are baseless. The need to scrutinise affidavits, to see that they pass the threshold of credibility, is referred to Eng Mee Yong v Lethchumanan [1980] AC 331, 341 and in the judgment of Greig J in Attorney-General v Rakiura Holdings Ltd (Wellington CP23/86, 8 April 1986).
[8] In Attorney-General v Rakiura Holdings Ltd the Court said:5
In a matter such as this it would not be normal for a Judge to attempt to resolve any conflicts in evidence contained in affidavits or to assess the credibility or plausibility of averments in them. On the other hand, in the words of Lord Diplock in Eng Mee Yong v Lethchumanan [1980] AC 331, at
341 E the Judge is not bound:
to accept uncritically, as raising a dispute of fact which calls for further investigation, every statement on an affidavit however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself it may be.
The respective positions of the parties
[9] The case for Madagascar 3 is based on the documents to which I have referred. It says that New ICE is in default of its obligations under the term loan agreement as it has not repaid the sum of $200,000 which was due on 26 July 2014. As a result, Madagascar 3 has made a demand on Mr and Mrs Paulsen under their guarantee, and Mr and Mrs Paulsen have failed to pay. Although New ICE and Mr and Mrs Paulsen maintain they have claims against Madagascar 3 arising from the purchases, Madagascar 3 says a clause in the guarantee prevents them from raising a set-off or counterclaim against liability as guarantors.
[10] Mr and Mrs Paulsen say that the term loan agreement and guarantee were cancelled on 8 August 2014. They say there are substantial factual disputes arising
4 Pemberton v Chappell, above n 1, at 4.
5 Attorney-General v Rakiura Holdings Ltd (1986) 1 PRNZ 12 (HC).
out of the sale of the International Cargo Express business by the three Madagascar entities to New ICE, making this claim inappropriate for the entry of summary judgment. These claims against the Madagascar companies put in issue the validity of the entire contractual arrangements made between all the parties with the result that the clause in the deed of guarantee preventing set-offs cannot operate. They say, further, that the term loan agreement does not contain a clause preventing a set-off of any sum owing by Madagascar 3 against the sum owing by New ICE, and although there is a “no set-off” clause in the deed of guarantee, it does not apply. Finally they say it is not just in all the circumstances for judgment to be entered when there are extant disputes requiring resolution.
[11] Madagascar 3’s response to this is that the disputes raised by New ICE and Mr and Mrs Paulsen relate to transactions which are separate and unrelated to the term loan agreement, they do not have any impact on Mr and Mrs Paulsen’s obligations under their guarantee, and the terms of the guarantee preclude any set-off by way of counterclaim or otherwise. It notes that despite the sale contracts having been settled in 2013 and this proceeding having been issued in November 2015, neither New ICE nor Mr and Mrs Paulsen have issued proceedings formally raising the disputes which they now contend have caused them losses which they wish to set-off against the sum claimed by Madagascar 3. This reflects adversely on the bona fides of the claims now made by New ICE and Mr and Mrs Paulsen.
Issues
[12] Mr and Mrs Paulsen and New ICE maintain that the financial state of the businesses of the three vendor companies were so misrepresented to them that they have remedies available to them under the Contractual Remedies Act 1979, under the Fair Trading Act 1986 for misleading and deceptive conduct and by way of equitable rescission. Under the former they maintain that there are grounds for the Court to validate their cancellation and under the Fair Trading Act they will seek and will be entitled to an order under s 43(3)(a) declaring all the contracts entered as constituent parts of the overall transaction to be void.
[13] Mr Hughes for Madagascar 3 accepts that New ICE and Mr and Mrs Paulsen have raised issues relating to the purchase transactions of sufficient significance to make a claim against them under the term loan and the guarantee unsuitable for resolution on a summary basis, save for one fact. There is a clause in the deed of guarantee which he maintains prevents any liability which Madagascar 3 may be found to have to Mr and Mrs Paulsen being set-off against the liability they have to Madagascar 3 under that deed. It is not, therefore, necessary to consider the validity or otherwise of the disputes Mr and Mrs Paulsen (and New ICE) have in relation to the purchase contracts or the losses all of them maintain they have suffered as a result. Rather, the attention of the Court is directed to whether any set-off is available to Mr and Mrs Paulsen given the terms of the documents which they signed. The first issue for determination is whether the terms of the guarantee prevent Mr and Mrs Paulsen from raising their claims by way of a set-off against their liability.
[14] The term loan agreement between Madagascar 3 and New ICE, to which Mr and Mrs Paulsen are also parties as covenantors, does not contain a no set-off clause. The deed of guarantee does. The second issue is whether the guarantee, which is wider in its ambit than the term loan agreement for this reason, can as a matter of law place on Mr and Mrs Paulsen an obligation wider than the obligation on New ICE under the term loan agreement.
The term loan agreement and the deed of guarantee
[15] I have referred to the term loan agreement earlier in this judgment.6 The agreement does not contain a clause preventing New ICE as the borrower or Mr and Mrs Paulsen as the guarantors from raising against their liability a claim that Madagascar 3 is indebted to them, as they now maintain. Thus if Madagascar 3 were suing Mr and Mrs Paulsen on their covenant, as principal parties to the term loan agreement, there is no clause preventing them setting off against their liability valid
claims they may have against Madagascar 3.
6 At [2] above.
[16] The deed of guarantee is in different terms. New ICE is the borrower, and Mr and Mrs Paulsen are the guarantors. The guarantee is expressed in the following terms. First, in clause 2.1, the guarantors “unconditionally and irrevocably guarantee to the lender that the borrower will pay the Guaranteed Moneys and comply with all the guaranteed obligations”.
[17] Secondly, the guarantee provides in clause 3.1:
The Guarantor will be liable as principal debtor (and not merely a surety) with the Borrower for payment of the Guaranteed Moneys and the Borrower’s compliance with the Guaranteed Obligations. The Guarantor’s liability does not affect the obligations of the Borrower to the Lender.
[18] Further, the guarantee provides in clause 4.1:
The Guarantor will pay the Lender on demand:
(a) the Guaranteed Moneys if the Borrower fails to pay them when they fall due; and
(b) all Costs …
And further in clause 4.2:
If the Borrower fails to comply with any of the Guaranteed Obligations for any reason, the Guarantor will perform those obligations on demand, and indemnifies the Lender for any loss suffered by, and any Cost incurred by, the Lender directly or indirectly resulting from the Borrower’s non- performance of any Guaranteed Obligation. This indemnity is a continuing, separate and independent obligation, and applies whether or not the Guarantor or the Lender knew or ought to have known about any fact or circumstance which gives rise to a claim under it.
[19] Clause 18 of the deed provides:
18. Guarantor’s liability
18.1 The Guarantor guarantees all, and not any particular part, of the
Guaranteed Moneys and the Guaranteed Obligations.
18.2 The Guarantor’s liability under this Guarantee is unlimited.
[20] The term “Guaranteed Moneys” is defined in clause 1.4. To the extent relevant, this definition provides:
a. The Guaranteed Moneys include all present and future monies owing by the Borrower to the Lender in respect of:
i. loans, credits or other financial services to, or for the benefit of, or made at the request of, the Borrower …
[21] Clause 5.1 provides:
5.1Each payment by the Guarantor to the Lender under this Guarantee is to be made:
a. free of any restriction or condition; and
b. free and clear of and (except to the extent required by law) without any deduction or withholding for or on account of tax or on any other account, whether by way of set-off, counterclaim or otherwise.
[22] Finally, under the heading “Exclusion of legislation”, the deed provides:
20.1 All legislation which, directly or indirectly:
(a) lessens, varies or otherwise affects in favour of the Guarantor an obligation of the Guarantor under this guarantee, or
(b) delays or otherwise prevents or prejudicially affects the exercise
of any of the Lender’s rights,
is, to the fullest extent permitted by law, deemed to be negative and excluded in its application to this guarantee.
First issue: do the terms of the guarantee prevent Mr and Mrs Paulsen from raising their claims against Madagascar 3 by way of a set-off against their liability?
[23] Mr Hughes relies on the stipulation in clause 5.1 of the guarantee that each payment by the guarantor to the lender is to be made free and clear of any deduction whether by way of set-off, counterclaim or otherwise, except to the extent required by law. Without any admission of liability, he acknowledges that New ICE has made claims against Madagascar 3, which include claims for unliquidated damages and that as a result it can set up a defence based on equitable set-off, based on Grant v
NZMC.7 He says that to succeed in defending Madagascar 3’s claim for payment of
the advance of $200,000, New ICE would need to establish an equitable set-off and to avoid liability as guarantors Mr and Mrs Paulsen would need to show that they too are entitled to rely on an equitable set-off. For the purposes of this application, Mr Hughes expressly accepted mutuality, that is, that all the agreements should be
regarded as one. This, however, would not prevent Mr and Mrs Paulsen being liable
7 Grant v NZMC [1989] 1 NZLR 8 (CA).
under the guarantee because of clause 5.1. Mr Hughes candidly accepts that but for this “no set-off” clause he cannot succeed in obtaining summary judgment against Mr and Mrs Paulsen. However, Mr Hughes argues that the no set-off clause is binding and therefore liability under the guarantee is established irrespective of whether Mr and Mrs Paulsen have any claim against Madagascar 3 which they seek to set off.
[24] Mr Hughes relies on eight cases in support of this argument.
[25] The first is Koroniadis v Bank of New Zealand.8 In this case the Bank sought to recover moneys from a guarantor, but the guarantor alleged that the Bank had breached its contract with him by failing to provide bank statements to the principal debtor. The guarantee contained a clause with the following term:
You must pay us without any set-off or counterclaim and without any deduction or withholding.
The Court found that any claim that Mr Koroniadis may have against the Bank in relation to the bank statements would be a set-off or counterclaim which he was precluded from raising as a defence to the claim under the guarantee.
[26] In Strategic Finance Ltd (in Rec and in Liq) v Moss, Strategic sought summary judgment to enforce a personal guarantee given by Mr Moss in respect of indebtedness of Moss Auckland Trust Limited.9 The advance to that company was a vendor advance under an agreement for sale and purchase. Mr Moss maintained that Strategic had not disclosed to him certain relevant facts and on that basis maintained he had a valid counterclaim which should be tested at trial. The indebtedness of Mr Moss was supported by a deed of guarantee. The guarantee provided that the guarantor must pay all money payable by it under the deed “free and clear of and (except to the extent required by law) without any deduction or withholding for or on
account of tax or otherwise, whether by way of set-off, counterclaim or otherwise
…”.
8 Koroniadis v Bank of New Zealand [2015] NZCA 337.
9 Strategic Finance Ltd (in Rec and in Liq) v Moss [2012] NZHC 3032.
[27] Except for the use of the phrase “or otherwise”, in place of the phrase “or on any other account”, the wording of the no set-off clause in Strategic is the same as the clause now before the Court.
[28] Mr Moss sought a remedy under s 6 of the Contractual Remedies Act, and also alleged breaches of s 9 of the Fair Trading Act which he maintained would entitle him to treat the agreements he had entered with Strategic as void ab initio. The Court found, however, that the no set-off clause prevented Mr Moss from raising his intended causes of action as a defence to his liability under the guarantee.
[29] In Matrix Custodian Ltd v Cotton, the Court also applied a no set-off clause in material identical terms to the clause in issue.10 Again, the Court found that this clause would prevent the claims being set-off against the sum claimed under the guarantee.
[30] In Zheng Li Trustee Ltd v Henderson, the Court was again faced with a no set-off clause in materially identical terms to the present.11 After referring to the decision in Grant v NZMC Ltd, the Court said:
[55] A right of equitable set-off may be contractually excluded, expressly or by clear implication. Although the lease in Grant contained an obligation on the Grants to pay the rent “free and clear of exchange or any deduction whatsoever”, the Court considered that the word “deduction” did not in its natural sense embrace a set-off, and it was not clear that it was agreed that a set-off of the kind claimed by the Grants could not be made.
[56] In this case set-off is expressly excluded by cl 1.1 of the Victoria Street lease, so Mr Henderson cannot rely on Grant to justify non-payment of the rent because 3C may have had an (unquantified) cross-claim for damages for breach of the plaintiffs’ obligations to repair.
[31] In similar vein Mr Hughes also cited Sure Developments Ltd v North Shore
Taverns Ltd,12 FM Custodians Ltd v Johnson,13 DFC NZ Ltd v Lockwood Buildings
Ltd,14 and United Trustbank Ltd v Dohil.15
10 Matrix Custodian Ltd v Cotton HC Auckland CIV-2009-404-1067, 3 March 2010 per Associate
Judge Doogue.
11 Zheng Li Trustee Ltd v Henderson [2015] NZHC 1723.
12 Sure Developments Ltd v North Shore Taverns Ltd & Anor HC Auckland CIV-2005-404-3924,
23 March 2006 per Associate Judge Abbott.
13 FM Custodians Ltd v Johnson [2012] NZHC 2666.
14 DFC NZ Ltd (in statutory management) v Lockwood Buildings Ltd HC Hamilton CP95/91,
20 August 1991 per Doogue J.
[32] The argument advanced by Mr Johnson does not challenge the principle on which these cases are decided. He argues that in deciding whether or not clause 5.1 of the deed of guarantee prevents Mr and Mrs Paulsen raising against Madagascar 3 their claims that all the transactions should be set aside, the Court should look first at the underlying source of the liability which Mr and Mrs Paulsen have guaranteed. That liability arises under the term loan agreement, and that agreement provided for an advance which was, by its nature, a deferral of payment of part of the purchase price under the agreements for sale and purchase. His argument from that point is that if those agreements are found to have been validly cancelled under the Contractual Mistakes Act, or are declared to be void ab initio under the Fair Trading Act, or are rescinded by the Court under the equitable doctrine of rescission, liability for payment of the balance of the purchase price is expunged, and the liability of New ICE under the term loan agreement, and Mr and Mrs Paulsen under their guarantee, fall away.
[33] Mr Johnson says this is not within the terms of clause 5.1. That clause refers to a deduction from the payments to be made by Mr and Mrs Paulsen as guarantors, whether by way of set-off, counterclaim or otherwise. Their claim, however, is not to a deduction from a payment which is due, rather it is for a remedy by one or other of the three means referred to, the effect of which is that New ICE no longer has any liability to Madagascar 3, nor Mr and Mrs Paulsen as guarantors of that former liability.
[34] Mr Johnson cites two cases in support of this proposition; neither is a decision of a New Zealand court. The point does not appear to have been decided in this country.
[35] The first is St George Bank Ltd v Field, a decision of the Supreme Court of New South Wales.16 The Bank sued Mr Field under his deed of guarantee of the liability of a company which was in default of the terms of a commercial bill facility. The deed of guarantee provided that Guaranteed Moneys must be paid in full without
any deduction, and further provided that the guarantor waived all rights of set-off, or
15 United Trustbank Ltd v Dohil [2011] EWHC 3302 (QB), [2012] 2 All ER (Comm) 765.
16 St George Bank Ltd v Field [2007] NSWSC 902.
counterclaim in relation to payment of guaranteed money. The guarantee also provided that the guarantor’s liabilities, and the Bank’s rights, were not affected by a number of other factors including the granting of time, laches, acts, omissions, mistakes or any other event which might at law or in equity have the effect of breaching or discharging the guarantor’s liability.
[36] Having noted these provisions, the Court turned to examine the issues which would be raised by Mr Field if given an opportunity to do so.17 The issues raised by Mr Field in the document he had filed related to the conduct of the Bank the effect of which, if proved, would be to discharge the guarantee or relieve Mr Field of liability under it, or possibly make it unjust for the Bank to seek to enforce the guarantee. Of these, the Court said:
[17] … On the face of things, they are all rights that Mr Field has bargained away by the clauses of the guarantee to which I have referred. It is clear that the courts will give effect to such a bargain: see Mason CJ in The Commonwealth of Australia v Verwayen [1990] 170 CLR 394 at 407. In the particular context of a guarantee, see the decision of Brennan J in Buckeridge v Mercantile Credits Ltd [1981] 147 CLR 654 at 675. To the extent that Mr Field wishes to raise those issues, they are issues that are foreclosed by the terms to which I have referred.
[37] The Court went on to say, however:
[18] There is an important distinction to be drawn between a defence that impeaches the guarantee itself, and a defence that impeaches the exercise of rights under the guarantee. Clauses of the kind to which I have referred may not prevent a defence being raised to liability under a guarantee where it is said (for example) that the taking of the guarantee was itself affected by some vitiating circumstance. But no such issue is raised in this case. There is no challenge to the validity of the guarantee. The allegations that I have summarised seek to attack the exercise of rights under it. In my view that is the kind of exercise prohibited by the terms of the guarantee which terms as I have said, are to be enforced according to their wording.
[38] As I have said, Mr Johnson says the claims of New ICE and Mr and Mrs
Paulsen impeach the agreements for sale and purchase and therefore the term loan for part of the purchase price, and therefore necessarily the deed of guarantee.
17 Mr Field had failed to comply with the requirements of a Practice Note in presenting his
response to the Bank’s claim.
[39] The second case is Westpac Banking Corporation v Helicopters Brisbane Pty Ltd, a decision of the Queensland Supreme Court.18 In this case Westpac sued the third defendant, Mr Groves, as guarantor of a debt under a commercial loan agreement between Westpac and Helicopters Brisbane. Mr Groves relied on a representation he maintained had been made to him by a Westpac employee, generally to the effect that he need not pay the amount of the arrears outstanding on
the loan despite receiving a notice of arrears. He maintained that as a consequence of this conversation he was entitled either to an award of compensation under s 82 of the Trade Practices Act 1974, or under s 87 of that Act varying or partially rescinding the guarantee. The Court found that it was open to Mr Groves to argue that although the no set-off clause in the guarantee would have the effect of preventing him from setting off his claim against any liability he may have to the Bank, it could not work to prevent him from seeking certain types of relief under the Trade Practices Act. The argument that Mr Groves presented sought to impeach the validity of the guarantee, or at least its continuing operation. The Judge found that the case was not one where summary judgment could be entered for the Bank, in this circumstance.
[40] In reaching this conclusion, Martin J traversed and applied the decision in Bank of Western Australia Ltd v O’Brien, a case in which McDougall J, who was also the Judge in St George Bank Ltd v Field, applied the same principle.19
McDougall J noted that it had also been applied in Daewoo Australia Pty Ltd v Porter Crane Imports Pty Ltd,20 and by Holmes J in Capital Finance Australia Ltd v Air Star Aviation Pty Ltd (2004).21 In the latter case, her Honour concluded that a no set-off clause would not preclude a guarantor from relying on matters which went to the invalidity or complete discharge of the guarantee.
[41] Further support for this proposition is lent by Bank of Western Australia Ltd v El-Khoury.22 Responding to an argument by the defendant that an agreement alleged to have been reached with the plaintiff bank had, by some means, extinguished or
altered the operation of the guarantee, Slattery J directed the defendants to
18 Westpac Banking Corporation v Helicopters Brisbane Pty Ltd (2012) QSC 263.
19 Bank of Western Australia Ltd v O’Brien [2012] NSWSC 456.
20 Daewoo Australia Pty Ltd v Porter Crane Imports Pty Ltd [2000] QSC 950 per White J.
21 Capital Finance Australia Ltd v Air Star Aviation Pty Ltd [2003] QSC 151, [2004] 1 Qd R 122.
22 Bank of Western Australia Ltd v El-Khoury [2013] NSWSC 157.
particularise their claim by a further amended pleading, as he could not be sure whether they had made a claim which impeached or vitiated the guarantee. His Honour indicated that if this had arisen from misleading or deceptive conduct in contravention of the Australian Securities and Investments Commission Act 2001, then certain decisions of the Queensland Supreme Court would, as his Honour put it, suggest that the point is at least arguable and is not apt for summary judgment.
[42] Thus there is a line of authority in Australia supporting the argument presented by Mr Johnson. Mr Johnson says that as the remedies which would be sought by the guarantors in Strategic Finance Ltd v Moss also went to the validity of the guarantee, that case was wrongly decided and should not be followed.
[43] In contrast, the preponderance of authority in England favours the proposition that even where there is an allegation of fraud by a defendant, a no set-off clause will be applied.23 Dicta in two cases, however, support the defendants’ argument. In Deutsche Bank (Suisse) SA v Khan, Hamblen J found that the no set-off clause in that case did not prevent the debtor from contesting whether the sums claimed were actually due. He said the clause “only comes into play if the sums are either admitted or, if contested, have been proven to be due”.24 In Peak Hotels & Resorts Ltd v Tarek Investments Ltd, Barling J considered argument from counsel on whether a no set-off clause (clause 9.1) could continue to apply if the agreement of which it formed part had been rescinded.25 He found:26
In the absence of authority to that effect, I do not see how clause 9.1 of the loan agreement could remain operative in the event that the whole contract is held to be rescinded.
This is consistent with Westpac Banking Corporation v Helicopters Brisbane Pty
Ltd.27
23 Skipskredittforeningen v Emperor Navigation [1997] 2 BCLC 398 (QB) at 415; Deutsche Bank AG v Unitech Global Ltd [2013] EWHC 2793 (Comm), [2014] 2 All ER (Comm) 260 and Deutsche Bank (Suisse) SA v Khan [2013] EWHC 482 (Comm), [2013] All ER (D) 195 (Mar).
24 At [329].
25 Peak Hotels & Resorts Ltd v Tarek Investments Ltd [2015] EWHC 1997 (Ch).
26 At [148].
27 Westpac Banking Corporation v Helicopters Brisbane Pty Ltd, above at n 18.
[44] One of the difficulties facing this Court on this application is that Mr and Mrs Paulsen have not issued proceedings against Madagascar 3, so I do not have the benefit of full particulars of the claim which they propound. As noted, Slattery J in Bank of Western Australia v El-Khoury, required the defendants to particularise their claim by amended pleadings as he could not be sure whether they had made a claim
which impeached or vitiated the guarantee.28 On the application before me I am
presented with the fact that Mr and Mrs Paulsen have purported to cancel all the agreements they entered with the Madagascar companies, including but not limited to the guarantee on which this claim is brought and their contention that this cancellation will be validated by the court, or that the agreements will be declared to be void under the Fair Trading Act, or will be rescinded in equity. I am asked to accept that contention at face value and then find it to be an arguable defence to Madagascar 3’s claim on its guarantee, on the basis that the no set-off clause does not apply in this circumstance. I have some sympathy for the approach taken by Slattery J, for self-evident reasons. However, I note, too, that his Honour did indicate that if the defendants’ contentions were of misleading or deceptive conduct, then there was authority to support the proposition that the no set-off clause would
not apply, at least sufficient to prevent summary judgment being entered.29
[45] The closest the evidence before the Court comes to setting out the defendants’ claims is a letter from their solicitor to Madagascar’s solicitor dated 8 August 2014 in which, apart from purporting to cancel both the loan agreement and the guarantee, Mr and Mrs Paulsen’s solicitors set out in considerable detail – 65 numbered clauses
– the position as they saw it. Whilst this is not in any sense a pleading before this Court, it is a detailed statement of the basis upon which they were cancelling the agreements, and the remedies that they intended to seek. It sets out Mr and Mrs Paulsen’s position without equivocation and supports the contention of Mr Johnson that the misrepresentations that were made arguably give them grounds for remedies by one of their stated avenues all of which will be directed at the initial validity of
the entire transaction.
28 Bank of Western Australia v El-Khoury, above n 22.
29 At [69].
[46] Whilst the letter also outlines the basis on which there are said to be monetary consequences for New ICE, it is clear that the fundamental relief sought by New ICE, and also by Mr and Mrs Paulsen, is primarily directed at the validity of the transactions, with monetary consequences following from cancellation or voidance or rescission of the agreements in their entirety, as the case may be.
[47] Clause 5.1 provides that every payment by Mr and Mrs Paulsen is to be made free and clear of, and without any deduction or withholding, whether by way of set- off, counterclaim or otherwise. The primary relief sought is not relief to which set- off applies. Set-off affords a defence to an action wholly or in part (depending on
the amount) and is by its very nature limited to money claims.30 Further, Mr and
Mrs Paulsen do not contend that they have the right to make a deduction from payments which they would otherwise be required to make under the guarantee. Their claim is quite different, and strikes at the heart of their liability under the guarantee for the reasons I have given. Arguably it is within the meaning of the word counterclaim. In my opinion, however, based on the authorities which I have summarised, it is arguable that clause 5.1 does not prevent Mr and Mrs Paulsen’s counterclaim being brought.
[48] Clause 7.1 of the guarantee was not the subject of argument prior to my reserving my decision, but appeared to me to have relevance not apparently identified by counsel with the result that I sought further submissions in relation to this clause.
[49] Clause 7.1 provides, to the extent relevant:
7.1The Guarantor’s liability and the rights of the Lender under this Guarantee will not be released, discharged, reduced or affected by anything whatsoever which (but for this clause) might release, discharge, reduce or affect the liability of, or otherwise provide a defence to, the Guarantor (whether or not known to the Guarantor or the Lender) including by:
…
(f) the illegality, invalidity or unenforceability of or a defect in any of the Finance Documents or any Security or Guarantee given to, or any deed made with, the Lender by the Borrower, a Guarantor or any other person; or
30 Grant v NZMC Ltd, above n 7, at 11.
…
(j) Any other thing whatsoever other than a release of the obligations of that guarantor under this deed by the lender.
[50] Mr Hughes refers first to the definition of finance document, in clause 1.3 of the guarantee:
“Finance Documents” means all loan agreements, Securities, guarantees and other documents or agreements in relation to any of the Guaranteed Moneys and:
a. entered into between the Borrower and/or the Guarantor and the Lender, or
b. given by the Borrower and/or the Guarantor to the Lender, or
c. entered into between a third party or parties and the Lender, or d. given by a third party or parties to the Lender;
including without limitation the term loan agreement entered into between the parties on or about the date of this Guarantee.
[51] Mr Hughes submits that the term loan agreement and the agreement for sale and purchase from which it stemmed are within the definition of finance document and therefore even if either or both of these agreements was cancelled under the Contractual Remedies Act, as Mr and Mrs Paulsen contend, liability under the guarantee is not affected. This clause explicitly preserves the liability of the guarantor under the guarantee in the event that either of the other agreements becomes void or otherwise unenforceable. He says that this is consistent with the no set-off clause, 5.1, and is also consistent with other clauses of the deed including clause 9.1 by which Mr and Mrs Paulsen waived all legal, equitable, statutory or other rights as sureties, so far as is necessary to give effect to the terms of the guarantee, and clause 11.1 which provides that the terms of the guarantee are in addition to and independent of all other finance documents. The position of Madagascar 3 is that clause 7.1(f) makes it clear that it was intended that the guarantee would remain effective whatever the circumstances, and thus it is not affected in any way by the defendants’ alleged counterclaim and/or set-off, and remains enforceable.
[52] As I understand Mr Johnson’s first argument, he says that clause 7.1(f) cannot
be interpreted so as to amount to an agreement contracting out of the Fair Trading
Act, or equitable rescission, as this cannot be done. At most, it might prevent Mr and Mrs Paulsen avoiding liability despite a valid cancellation under the Contractual Remedies Act. Secondly, he says this clause cannot be interpreted so widely as to prevent a party from relying on the voidability of an agreement as a result of a misrepresentation. Thirdly, Mr Johnson says that if New ICE was induced to enter the sale and purchase agreement due to misrepresentations made by Madagascar 3, then all of the agreements giving effect to that transaction were also entered as a result of those misrepresentations. He says that the defendants’ argument is that all the agreements entered between all the parties are void as a consequence of the misrepresentations, and therefore both clauses 5.1 and 7.1(f) of the guarantee are void and cannot be enforced.
[53] Finally Mr Johnson says that Mr and Mrs Paulsen as guarantors can never be liable for more than the principal debt, so clause 7.1(f) cannot be interpreted in a way that leaves them responsible for a debt that no longer exists. If the plaintiff’s submissions are accepted, the result is that the guarantee could be enforced even if the borrower, New ICE, is found not to owe a debt and the agreements including the guarantee are found to be void. That is not a position which can be established by way of summary judgment.
[54] In my opinion the position in relation to clause 7.1 is the same in principle as the position in relation to clause 5.1. Arguably, the agreement for sale and purchase, the loan contract and the guarantee have been validly cancelled, or are void, or will be rescinded. If that were established at trial, Madagascar 3 would not be able to claim against Mr and Mrs Paulsen under the guarantee. The Court is not asked on this application to adjudicate on the validity of that cancellation – or on their contention that the document should be declared void under the Fair Trading Act. Nor should it enforce the guarantee when the claims of Mr and Mrs Paulsen challenge the validity of the entire transaction.
[55] For these reasons I am satisfied that Mr and Mrs Paulsen have demonstrated a tenable defence to this application, and Madagascar 3 has not satisfied the Court they do not have an arguable defence.
[56] It does not appear that the argument presented and authorities referred to by Mr Johnson were considered by the Court in Strategic Finance Ltd v Moss. For the reasons given, my conclusion respectfully differs from that of the learned Judge on facts which appear to be materially very similar.
Second issue: can the guarantee place on Mr and Mrs Paulsen an obligation wider than the obligation on New ICE under the term loan agreement?
[57] In view of the decision I have made in relation to the first issue, this issue need be discussed only briefly.
[58] As noted earlier,31 the term loan agreement does not contain a no set-off clause, but the guarantee does. Mr Johnson argues that the guarantee applies to “Guaranteed Moneys” as defined in it, and those moneys are the sums owing under the term loan agreement. Any sum owing under the term loan agreement is subject to a set-off of any sums ordered against Madagascar 3 by way of damages.
[59] As Mr Johnson says, the guarantee entered by Mr and Mrs Paulsen guarantees “the Guaranteed Moneys” which include all present and future moneys owing by New ICE to Madagascar 3. The moneys owing by New ICE to Madagascar 3 are the subject of the term loan agreement which was drawn up to separately record the advance being made to New ICE to assist it in funding its purchase of the businesses of the old ICE companies. The term loan agreement does not contain a clause prohibiting New ICE from setting off against the sum it borrowed any sums which might be found to be owing by Madagascar 3 to New ICE. The evidence in this case is that New ICE has claims against Madagascar 3 on a number of bases which are described in detail in the letter from its solicitors sent on 8 August 2014. The sums claimed well exceed the amount of the advance. On the face of it New ICE is entitled to set off those sums against its indebtedness for the advance of $200,000.
[60] Thus the Guaranteed Moneys will be established from a starting-point of the initial debt under the term loan agreement, but adjusted for such sum as may
31 At [14] above.
ultimately be set off against it. Whilst those claims remain extant, the quantum of the Guaranteed Moneys is not established.
[61] Although clause 7.1 provides that the liability of Mr and Mrs Paulsen, and the rights of Madagascar 3 under the guarantee are not released, discharged, reduced or affected by a number of factors, that liability and those rights relate only to the Guaranteed Moneys which, by definition, are all present and future moneys owing by New ICE to Madagascar 3 in respect of the advance of $200,000. If no sum is owing in respect of that advance because New ICE has a valid set-off in a greater sum, the guarantee does not apply.
[62] Had it been necessary to decide this issue I would have found that Madagascar 3 has not established that Mr and Mrs Paulsen do not have an arguable defence to its claim on this basis.
Outcome
[63] The application for summary judgment is dismissed.
[64] In accordance with the principle in NZI Bank Ltd v Philpott, costs are reserved.32
J G Matthews
Associate Judge
Solicitors:
Anthony Harper, Auckland. Wynn Williams, Christchurch.
32 NZI Bank Ltd v Philpott [1990] 2 NZLR 403 (CA).
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