Mana v Fleming
[2007] NZCA 324
•30 July 2007
IN THE COURT OF APPEAL OF NEW ZEALAND
CA246/06
[2007] NZCA 324BETWEENTANIA NATALIA MANA AND ROBYN ANNE JURY
Appellants
ANDWILLIAM ALEXANDER FLEMING AND CAROL ANN FLEMING
Respondents
Hearing:17 May 2007
Court:Arnold, Gendall and Harrison JJ
Counsel:R M Bell and T L M Field for Appellants
W Akel and N M Alley for Respondents
Judgment:30 July 2007 at 11 am
JUDGMENT OF THE COURT
AThe appeal is allowed. The appellants are entitled to judgment for interest as set out in [75].
BThe respondents’ cross-appeal is dismissed.
CThe respondents must pay to the appellants costs in the sum of $6,000 plus usual disbursements. We certify for second counsel.
____________________________________________________________________
REASONS OF THE COURT
(Given by Harrison J)
Table of Contents
Para No.
Background [4]
High Court [13]
Cross-Appeal [26](1) Failure to do all that was reasonably necessary
(a) Legal Test [27]
(b) Factual Challenge [38](2) Mitigation on Resale [41]
Appeal [48](1) Contractual Interest
(a) Damages [51]
(b) Effect of Settlement Notice [68](2) Judicature Act Interest [71]
Result
[1] Tania Mana and Robyn Jury, as trustees of the Tania Mana Family Trust, entered into an agreement on 2 October 2004 to sell the trust’s property in Northland to William and Carol Fleming. The agreement was conditional on the Flemings doing all things which may reasonably be necessary to sell their residential property on terms and conditions acceptable to them on or before 31 December 2004. The Flemings failed to satisfy this condition and on 3 April 2005 the trust cancelled the agreement by reselling its property to a third party for a lesser amount with settlement deferred for eight months until 9 December 2005.
[2] The trust sued the Flemings for the shortfall on resale together with interest on the full amount of the purchase price at the contractual rate of 14% until settlement of the resale contract. In a reserved decision delivered in the High Court at Whangarei on 17 October 2006 Williams J found that the Flemings had breached their contractual obligation to do all things which may reasonably be necessary to enable the sale of their property. He entered judgment for the trust for the loss or shortfall on resale together with contractual interest on that amount until 9 December 2005: CIV 2005-488-347.
[3] The trust appeals against Williams J’s decision not to award them (1) contractual interest on the full amount of the sale price to the Flemings for the relevant period, and (2) interest under s 87 of the Judicature Act 1908 on the judgment sum. The Flemings cross-appeal on liability. We shall determine the cross-appeal first after narrating the relevant background and summarising the High Court judgment.
Background
[4] The trust’s property contained 17.84 hectares at Tangihua Road, Maungakaramea, about 15 km off State Highway 1 just south of Whangarei. The trustees decided to sell in mid 2004.
[5] Mr and Mrs Fleming then owned and lived in a residential property at Beachlands, south-east of Auckland. They were looking for a property in Northland to be near their children and grandchildren who lived in the area. They were introduced to the trust’s property through a real estate agent in September 2004.
[6] The parties signed an agreement for sale and purchase of the trust’s property on 2 October 2004 for $860,000 plus GST. The agreement used was the Real Estate Institute of New Zealand – Auckland District Law Society (REI-ADLS) standard form agreement, 7th Edition. The deposit of $86,000 was not payable until the agreement was made unconditional. Settlement was scheduled for 21 January 2005.
[7] Clause 15 of the agreement provided:
This Agreement is subject to and conditional upon the Purchasers entering into an unconditional Agreement for the sale of their property at 33 Pohutukawa Road, Beachlands, Auckland on terms and conditions acceptable to the Purchasers on or before Friday 31 December 2004. If such sale does not eventuate, then this Agreement shall be voidable at the option of either party and all monies paid by the Purchasers shall be returned to the Purchasers in full forthwith and neither party shall have any right or claim against the other.
[8] Clause 17 provided:
If, before this Agreement becomes unconditional, the Vendor obtains a written offer for the purchase of the property on terms no less favourable to the Vendor than the terms of this Agreement, the Vendor may give the Purchasers five (5) working days notice in writing advising him of such offer and may at any time after the expiry of such notice and before the said condition is satisfied or waived by the Purchaser by further notice in writing to the Purchaser, cancel this agreement.
[9] Clause 8.7(2) of the agreement required the parties for whose benefit special conditions were inserted to “… do all things which may reasonably be necessary to enable the condition to be fulfilled by the date of fulfilment”. The Flemings acknowledge that cl 15 was a special condition included for their benefit. Time for its fulfilment was of the essence: cl 8.7(3).
[10] The Flemings did not obtain an unconditional agreement for sale and purchase of their Beachlands property by 31 December 2004. They did not seek an extension of time to enable compliance. On 3 February 2005 the trust’s solicitors gave a notice requiring settlement within 12 working days. The Flemings replied immediately to advise that they would not be proceeding given that they had not sold their own property.
[11] The trust had listed the property for sale in late November 2004 with Barfoot & Thompson, even though its conditional agreement with the Flemings was still on foot. It was then asking $849,000 plus GST. The agent received few inquiries and by mid February 2005 the trust had reduced the asking price to $750,000 plus GST. The reduction elicited interest from five separate groups. One made an offer on 24 March to purchase for $650,000 plus GST, increased later to $700,000.
[12] On 3 April the trust entered into a conditional contract to resell the property to a Ms Holt for $770,000 plus GST. She paid a deposit of $75,000 but the balance was not due until possession date on 9 December 2005. The deferred settlement was agreed to accommodate a condition requiring the purchaser of Ms Holt’s property to obtain Overseas Investment Commission (OIC) approval. The Holt contract became unconditional, even though her purchaser did not obtain OIC consent, and settled in accordance with its terms on 9 December.
High Court
[13] A critical distinction must be borne in mind from the outset when evaluating the evidence and the Judge’s findings. The contractual breach alleged by the trust’s statement of claim was the Flemings’ failure to do all things which might reasonably have been necessary to enable fulfilment of cl 15 by its due date. The trust’s carefully drawn pleading did not assert an independent or consequential breach by the Flemings in failing to enter into an unconditional agreement for sale of their property on terms and conditions which were acceptable to them. A good deal of the evidence and of counsel’s argument at trial did not appear to recognise the difference.
[14] Williams J comprehensively analysed the relevant evidence, but given the distinction we have emphasised in the nature of the trust’s claim we are able to confine our review to those facts which are directly relevant to his finding that the Flemings failed to do all things reasonably necessary to enable the sale of their property. The material facts are as follows:
(1)The Flemings had moved to Beachlands in 2001 where Mr Fleming acquired a lawn mowing business. He developed it to the point where in October 2004 he was mowing about 167 lawns. The Flemings were worried that the value of the business would be prejudiced if customers learned of their intention to leave Beachlands. So they resolved not to advertise their property widely or through conventional means;
(2)Immediately after signing the contract with the trust the Flemings took advice from a friend and neighbour, Mr Ian Vincent, a former real estate salesman who had lived at Beachlands for some years, about the steps they should take. He advised them to continue with previous renovation work and in particular, as Williams J found (at [54]), to construct “a carport, finish the deck, plant some trees, finish the drains and install some pot plants…”. He also advised some internal changes to the home. The Flemings did undertake work on the property and spent about $7,000 - $8,000 in the process. The Flemings also asked Mr Vincent to advise any of his contacts that the property was on the market. He did advise four or five people but the property was out of their price range;
(3)In early October the Flemings also contacted a local real estate salesman, Mr Geoff Murray, who was then employed with LJ Hooker. They asked him to sell the property and discussed marketing strategies. However, Mr Fleming imposed the limitation, as Williams J found (at [57]), that Mr Murray was “… not to advertise [the property] in any media, not to put signs outside nor put photographs in his office window or organise open homes”. This type of listing is known in the real estate business as silent or covert, or in colloquial terms as a “sleevy”. The Flemings never engaged LJ Hooker to list their property for sale;
(4)On or about 12 October 2004 the Flemings learned that owners of a nearby property, Mr and Mrs Keon, intended to auction their property on 22 November with the expectation of a price of about $2.1 million. This news gave the Flemings confidence that their property was worth $1.4 million – 1.5 million. They hoped the Keons’ real estate agent, a Ms Rudling, would refer any unsuccessful prospective buyers to them. Again the Flemings did not engage Ms Rudling’s agency to list their property for sale;
(5)On the second and third weekends in October 2004 Mr Fleming arranged for two “For Sale” signs to be placed on the roadside in front of the house. Only a few people viewed or called about the property;
(6)On 19 October 2004 the Flemings advertised part of their lawn mowing business, 35 contracts, for sale in the local newspaper. On 22 October 2004 they received adverse calls from 11 of their 167 customers expressing concern at the prospect of sale. This reaction confirmed their intention not to allow signs to be erected on their property, not to allow it to be advertised whether discreetly or in any way in which it could be identified, and not to list it on the internet or to allow an open home;
(7)On 23 October the Flemings spoke with Mrs Fleming’s sister, Ms Sheryl Shaw, formerly a real estate agent in Orewa. Ms Shaw had a database of former customers and gave particulars of the Flemings’ property to a former colleague at Bayleys;
(8)In late October 2004 Mr Fleming’s twin brother, Mr John Fleming, offered to buy their property unconditionally for $1.3 million. While initially considering this offer favourably, the Flemings decided to await the result of the Keon sale before committing themselves. At that stage the Flemings thought their property may yield somewhere in the region of $1.4 million - $1.5 million, and advised Mr Murray accordingly;
(9)In early November Mrs Fleming spoke to a Ms Lynette Syme, another local real estate agent, and requested her to assist in selling their property on the same limited conditions as Mr Murray; that is, there was to be no physical advertising, brochures, newspaper advertisements or anything of that nature. Again the Flemings did not engage Ms Syme’s agency to list the property for sale;
(10)In mid November a local businessman, Mr Howard Sneddon, verbally offered to purchase the Flemings’ property for $1.25 million. A month later he increased this offer to $1.4 million but only on condition that the Flemings left in $150,000 on a 12 month settlement. His offer was rejected;
(11)On or about 24 November the Flemings learned that the Keons had sold their property for $1.5 million, well below their anticipated price in the region of $2.1 million, after it was passed in at auction. At around this time they had a cursory discussion with the Keons’ agent, Ms Rudling. Subsequently in December only two couples visited the property. One was a local couple and the other friends of a neighbour. Neither was referred by the Keons or their agent;
(12)By mid November the Flemings knew that they were not going to be able to procure an unconditional agreement before 31 December. On 6 December the Flemings’ daughter was hospitalised with a back operation and Mrs Fleming spent some time in Whangarei caring for her granddaughters.
[15] Before analysing the evidence, Williams J identified three factors which were of relevance to the inquiry (at [106] and [109]):
(1)In signing the contract on its particular terms the Flemings gave themselves a maximum of 90 days within which to obtain an acceptable unconditional agreement for sale of their property;
(2)Given that the Flemings intended to move away from Beachlands, they would always have had to deal with their 167 mowing contracts in some way and at some time, bearing in mind that the most they could have received from the sale of the business as a whole was about $47,600; and
(3)There was no evidence that the Flemings ever consulted their solicitor prior to 31 December on the steps they should be taking to ensure compliance with their legal obligations.
[16] Williams J subdivided the relevant events into three distinct chronological stages. The first was from 2 October 2004, when the contract was signed, to about 23 October, following publication of the Flemings’ advertisement in the local newspaper advising sale of 35 of the lawn mowing contracts. The Judge found (at [110]) that in this stage the Flemings “… undertook what could be regarded as fairly commonplace actions preliminary to sale…”. They made “For Sale” signs and placed them on the curb side, producing telephone calls and visits but no offers; they offered Mr Murray sale of the property on a silent listing; they spoke to acquaintances who may have been able to assist including a developer and Ms Shaw; and they learned the Keons’ property was to be auctioned. Williams J was satisfied that the Flemings were not in breach during this period (at [113]).
[17] The second period ran from about 23 October to 24 November 2004 when the Flemings learned the result of the Keon auction. Williams J found (at [119]) that from the commencement of this phase, about 20 days into the 90 day time allowed for satisfying clause 15, the Flemings:
… must have known that they were entirely reliant for prospective buyers on persons from Mr Murray’s database or persons who chanced to contact Mr Murray or Mrs Syme …
[18] Williams J concluded (at [125]):
… Mr and Mrs Fleming over-reacted to the response to their 22 October advertisement and that factor significantly affected their approach to the marketing of 33 Pohutukawa Road. Having started covertly, their determination not to have the availability of the property for sale publicly known significantly stiffened after 22 October and, even though their approaches to Mr Murray were producing increasingly little, if any, result, they do not appear ever to have considered altering their stance to the marketing of their home during period 2.
[19] The Judge also found (at [131]):
But what the results of the Keon auction must also have made unmistakenly plain to Mr and Mrs Fleming was, first, that because there had only been one bidder there was no chance of any “excess” unsatisfied prospective purchasers being referred to them, and, secondly, that the market had significantly failed to meet Mr and Mrs Keon’s price aspirations and was therefore most unlikely to meet theirs, which had heightened over the preceding month or so….
[20] The third period followed 24 November 2004. The Judge found (at [132]) that the Flemings “did nothing to change their previous stance to the marketing and advertising of the property”. In particular, they did not attempt to accelerate the prospect of obtaining an unconditional contract for selling their home or alter any instructions for marketing the property “even though, by that time, inquiries via the agents had completely dried up …” (at [133]).
[21] The Judge acknowledged expert evidence that covert marketing can be an effective tool, and that depending on the circumstances it may be appropriate to rely on the possibility of chance referrals from agents and friends. However, he concluded (at [137] - [139]) that this low-key approach was not appropriate where a party was under a contractual imperative to act within a certain time, and (at [141]) that covert marketing was insufficient where it relied entirely on prospective buyers happening to travel to Beachlands.
[22] The Judge identified several fallacies in the Flemings’ approach in the second and third periods:
[141] The first [fallacy] is that [the Flemings’] approach was entirely dependent on prospective buyers happening to travel to Beachlands as opposed to scanning real estate advertisements or searching the internet and who happened to be looking for a clifftop property in the area, happening to make an inquiry of one or other of the two agents who happened to know the property was available, happening to have at least $1.3m and probably up to $1.4 or $1.5m for such a purchase and, of course, happening to like 33 Pohutukawa Road sufficiently to offer to buy it. Anything less was not going to produce a purchaser.
[142] The other fallacy is that, as the evidence shows and is common knowledge, vendors who wish to sell their property overwhelmingly do so through conventional means by giving listings to real estate agents so that all sales personnel in the agency know the property is available, allow open homes to occur, and permit advertising and marketing by as many of the means discussed in the evidence as seems appropriate to the vendors and the agent, even if it comes at some cost to the vendor.
[143] That particularly applies to the internet. That medium has been embraced by real estate agents because, first, it enables prospective buyers to tour properties without the necessity of arranging a visit and, secondly, because it potentially makes every person in the world with access to a computer a prospective purchaser.
[144] By utilising those means, the pool of prospective buyers widens by degrees of magnitude from a single agent in a single agency in the particular location, to every person who has access to media such as the Herald and the “Property Press” and, indeed, beyond that through the internet to anyone anywhere who may have some interest in buying a clifftop property in Beachlands.
[23] Accordingly Williams J concluded (at [146]):
… it has been demonstrated that Mr and Mrs Fleming, judging their actions objectively, failed in their legal obligations to take all reasonable steps to try to obtain an unconditional contract for the sale of 33 Pohutukawa Road on terms acceptable to them by 31 December 2004… Accordingly they are liable to the Mana Trust…
[24] Williams J briefly considered and dismissed the Flemings’ affirmative defence of failure by the trust to take all reasonable steps to mitigate their loss by obtaining the best price on resale to Ms Holt (at [150] - [151]).
[25] It is appropriate to consider the Flemings’ cross-appeal against the Judge’s findings on liability at this juncture, and to defer a review of his separate conclusions on damages and interest, which are the subject of the trust’s appeal.
Cross-appeal
[26] Mr Akel, who did not appear for the Flemings at trial, submits that the Judge erred in two respects in finding that Mr and Mrs Fleming failed to do all reasonably necessary things to enable a sale of their property. First, he argues that the Judge applied the wrong legal test. Second, he argues that, even if the Judge applied the correct test, there was insufficient evidence to support his finding of breach. Mr Akel submits separately that the Judge erred in dismissing the Flemings’ defence that the trust failed to take reasonable steps to mitigate its loss on resale of the property to Ms Holt.
(1) Failure to do all that was reasonably necessary
(a) Legal Test
[27] Mr Akel submits that while, on its face, cl 8.7(2) imports an objective test, its words must be read in the context of the contract as a whole, driven particularly by the provisions of cls 15 and 17 (see [7] and [8] above). He says the subjective nature of those latter two special conditions must relate back to and colour the interpretation to be given to cl 8.7(2), so that it also allows performance to be measured by a subjective criterion. He submits that it was for the Flemings alone to determine whether or not the terms and conditions of any offer were acceptable provided they acted honestly and in good faith: see North Shore Demolitions Ltd v McKay [1978] 1 NZLR 454 (HC).
[28] Mr Akel makes the point that Williams J did not identify or articulate the appropriate test after summarising the competing submissions (at [99] - [104]); and that he confined himself to a statement that he was applying the authorities to the facts (at [105]). Nevertheless Mr Akel accepts that on analysis the Judge adopted an essentially objective test (at [146]).
[29] The meaning of cl 8.7(2) has not previously been the subject of detailed judicial consideration in this context. This clause was newly inserted in the seventh edition of the REI-ADLS standard form agreement for sale and purchase of land in 1999: Bennion, Brown, Thomas, Toomey New Zealand Land Law (2005) at 1072. However, in the absence of a provision such as cl 8.7(2), where a conditional contract for the sale of land contained a condition that was for the benefit of a particular party (e.g. a “subject to finance” condition), the courts would generally imply a term to the effect that that party was obliged to take reasonable steps to fulfil the condition. Accordingly, the party could not rely on non-fulfilment of the condition to avoid the contract unless he or she had taken reasonable steps to fulfil it: see the discussion in Burrows, Finn and Todd Law of Contract in New Zealand (3ed 2007) at [8.2.5]. The effect of cl 8.7(2) is to make explicit what had previously been implicit.
[30] The relevant part of cl 8.7(2), by way of repetition, requires the party for whose benefit special conditions are inserted to “… do all things which may reasonably be necessary to enable the condition to be fulfilled by the date of fulfilment”. Clause 15 was a condition included in this contract for the purchaser’s benefit. The starting point in determining the meaning of cl 8.7(2) in this context is the obligation to “do all things”. It imposes an affirmative duty on the purchaser to act or take positive steps. They are the things “reasonably necessary” to enable fulfilment of the particular condition, where time is expressly of the essence, by its due date.
[31] We agree with Mr Bell for the trust that the use of the word “all” is important. It places a burden on purchasers to “do all things”, which is commensurate with the benefit they acquire through inclusion of a special condition. As a consequence, the purchasers will be in breach if there is something which was reasonably necessary but which was not done even though other necessary things were done. A thing is “necessary” in this context if it is required to bring about the stipulated result within the agreed period. Williams J emphasised the importance of the time constraint imposed on the purchasers by cl 15 (at [106] and [138]).
[32] The word “reasonably” introduces a qualitative or relative measure of what is necessary; its effect is to modify the obligation by reference to what is reasonable in the circumstances: see Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 92 per Mason J (discussing a “best endeavours” provision). The necessary things must be rational or in accord with reason, eliminating things which it would be unreasonable to require to be done in the circumstances. The purchaser is not required to go beyond the bounds of reason. He or she is required to do all that can be reasonably done to achieve the contractual object but no more: Hospital Products at 64-65 per Gibbs CJ.
[33] The word “reasonably” must import an objective standard, and performance is to be measured by applying that standard to the relevant facts and circumstances. Adoption of an objective standard is consistent with principle. The Court is the arbiter of what is reasonably necessary in any case, viewed from the purchaser’s perspective. Anything less than an objective standard would allow a subjective assessment according to the values of the party whose conduct is at issue. That would deprive the word “reasonably” of any meaning and convert the contract into an option to purchase. If authority is needed for the criterion of objectivity, it is found in Modick R C Ltd v Mahoney [1992] 1 NZLR 150 (CA) (fixing ‘reasonable rent’ for commercial premises on a rent review); and Wellington City Council v Body Corporate 51702 (Wellington) [2002] 3 NZLR 486 (CA) at [17] (when discussing the difference between an obligation to negotiate in good faith and an obligation to negotiate reasonably).
[34] It is sufficient for the vendor to prove that the purchasers failed to do all things which may be reasonably necessary to satisfy the condition in order to establish a material breach of the agreement. The vendor does not have to go further and establish that the proper performance of cl 8.7(2) would have enabled the purchasers to enter into an acceptable agreement as provided by the special condition, cl 15. Proof of a causal connection is unnecessary in order to prove an actionable breach.
[35] By contrast, cl 15 entitles the purchasers to exercise a judgment on whether or not to accept an agreement which is produced by the enabling process. Arguably the decision on whether or not to exercise this right is subject only to a duty to act honestly and in good faith: see Moller J in North Shore Demolitions at 459 ‑ 460. Subsequent authority suggests, however, that even where a special condition reserves a right of judgment (“a building report satisfactory to the purchaser…”), the decision must be fair and reasonable according to an objective standard (see Lerner v Schiehallion Nominees Ltd [2003] 2 NZLR 671 at [29] ‑ [38] (HC)), although this will depend on the precise wording of the special condition (see B S Developments No. 12 Limited v P B & S F Properties Limited (2006) 7 NZCPR 603 at [34] ‑ [35] (CA)).
[36] The right arising under cl 15 does not arise for consideration in this case and we are not required to determine the standard by which it must be exercised. As noted earlier, the trust does not allege that the Flemings acted dishonestly or in bad faith in rejecting the two offers made in October and November 2004. The trust’s case is that the Flemings failed to do all things which were reasonably necessary to enable entry into an agreement for sale on terms and conditions which might have been acceptable.
[37] In our view Mr Akel’s argument conflates the meanings of two discrete provisions which serve complementary but distinct contractual purposes and must fail.
(b) Factual Challenge
[38] Mr Akel submits alternatively that if Williams J applied the correct test he erred in finding that the Flemings breached cl 8.7(2). He says that the Judge’s approach was unduly prescriptive and influenced by hindsight. He submits that the effect of the Judge’s factual analysis was to impose an obligation on the Flemings to sell their property openly through a real estate agency when no form of sale was stipulated in the agreement and the purchasers had a discretion as to how they sold their property so as to achieve terms and conditions acceptable to them. He says there is no one correct way or procedure to sell a home.
[39] Mr Akel carefully reviewed all the relevant evidence and the Judge’s findings. It is not surprising, given his primary submission in support of a subjective legal test, that Mr Akel’s submissions focus more on events relating to the Flemings’ cl 15 rights than on the sufficiency of their actions taken in performance of their cl 8.7(2) obligations. His analysis proceeds primarily from the Flemings’ perspective, rather than by adopting an objective approach. He takes issue with the Judge’s construction of many of the facts.
[40] We are not satisfied that Williams J erred in any respect in his findings that the Flemings breached cl 8.7(2). Contrary to Mr Akel’s submission, the Judge was not prescribing the steps which must always be taken by a purchaser subject to this obligation. His approach was the classical adoption of the objective test applied to the circumstances of this case. He confined himself to a conclusion based on the material facts that for at least the last two of the three month sale condition period the Flemings failed to do a number of things which were reasonably necessary to enable the sale of their property. In our judgment his findings of breach are properly based on the evidence, and we dismiss this ground of appeal.
(2) Mitigation on Resale
[41] Mr Akel’s written synopsis advanced a detailed submission that the trust failed in its duty to mitigate loss when on-selling the property in April 2005 to Ms Holt for $770,000 with settlement delayed until December 2005. However, in oral argument Mr Akel acknowledged that the authorities give the reselling vendor what he described as “a fair amount of leeway”. This concession was proper. The nature and extent of the trust’s duty was to take such steps as were reasonable in the circumstances. As Somers J said in Sullivan v Darkin [1986] 1 NZLR 214 at 223 (CA):
[The vendor] must take such steps as are reasonable in the circumstances including those in which [the vendor] is placed by the purchaser’s default, to obtain a proper price. In assessing what is reasonable the conduct of the vendor is not to be weighed in nice scales….
[42] Williams J dealt with the Flemings’ defence of failure to mitigate briefly. He was satisfied (at [151]) that the resale was bona fide and was the maximum offer received and thus obtainable for the property in April 2005. Accordingly, the price of $770,000 was proper and reasonable in the circumstances. Mr Akel has not pointed to anything which would justify disturbing this conclusion. It is supported by the Judge’s careful survey of the evidence relating to cancellation and resale (at [37] - [46]).
[43] Within this submission, Mr Akel separately challenges the good faith of the length of the period for settlement of the trust’s sale to Ms Holt, from 3 April 2005 to 9 December 2005. Its duration is directly relevant to the Flemings’ exposure for contractual interest, as we shall discuss in more detail later.
[44] Williams J dealt briefly with this submission also (at [153]):
There may have been force in that, particularly when no evidence was called to support Ms Mana’s statement that the delayed settlement date was required so Ms Holt’s purchaser could obtain Overseas Investment Commission approval, were it not for the fact that cl 9.4(3)(a) expressly provides for interest to run to the “settlement of such resale”.
[45] In the circumstances we have considered this point afresh. Ms Mana said the delayed settlement date was required so that Ms Holt’s purchaser could obtain OIC approval and was “longer than we wanted”. In cross-examination Ms Mana confirmed that the extended settlement was “the only way that [Ms Holt] was prepared to make that offer”. Ultimately Ms Holt was unable to sell her property before 9 December 2005 but she obtained bridging finance to enable settlement on that date.
[46] The trustees’ conduct is not to be weighed in nice scales. The Flemings’ failure to settle on 21 January 2005 placed them in a difficult position. By early April only two genuine prospective purchasers had emerged; of them, Ms Holt’s offer was higher by $70,000. An important term of the offer, which would normally be reflected in the price, was deferment of settlement to enable Ms Holt’s purchaser to secure statutory authority to buy her property.
[47] The trust was faced with two alternatives; either acceptance of Ms Holt’s offer on its existing terms and conditions or rejection in the hope of attracting a better offer over the ensuing months. If the trust followed the latter course, and Ms Holt lost interest, it faced the real risk of being unable to secure a further offer at or near $770,000 plus GST. It did not enjoy the benefit of unlimited time in what was a small market. Also, as Mr Bell points out, a later sale, even if secured, would have inevitably resulted in a settlement date some time after May or June 2005. We are not satisfied that the trust failed to mitigate its loss by entering into a contract of resale on terms which allowed for a settlement deferred by eight months.
Appeal
[48] The trust’s appeal is limited to two small but financially significant aspects of Williams J’s judgment. The Judge understood that the parties’ dispute on damages was confined to whether contractual interest was payable on the resale shortfall (as opposed to the full amount of the purchase price) and whether it should run for the entire period of the delayed settlement from 21 January to 9 December 2005 or only up until the date on which the contract for resale was executed (at [152]). He found for the trust on this latter point (at [153]), but limited his award of contractual interest to the amount of the shortfall without giving reasons. He did not award Judicature Act interest on the judgment sum or give reasons for not doing so.
[49] The Judge held, in the “result” section of his judgment (at [157]):
a)The difference between the net sale price from the plaintiffs to the defendants of $860,000 after dealing with whatever would have been charged for GST on that figure and the sum of $777,000 less GST of $28,009 paid to the plaintiffs by their resale purchaser; and
b)The sum of $382 paid by the plaintiffs to Barfoot & Thompson for advertising; and
c)Interest on the net figure calculated in terms of para (a) at the contractual rate for late settlement, 14% per annum, from the date for settlement in accordance with the settlement notice of 3 February 2005 down to the date of settlement of the plaintiffs’ sale to Ms Holt. The date for settlement in accordance with the settlement notice should be taken as the commencement date for the calculation of interest since, by issuing the settlement notice on 3 February 2005, the plaintiffs must be taken to have waived strict compliance with the settlement date set by the contract.
…
[50] On the trust’s behalf, Mr Bell submits that the Judge erred, first, in limiting his award of contractual interest to the shortfall suffered by the trust on resale rather than allowing it on the full amount of the purchase price and in fixing the commencement date for liability as late February 2005 and, second, in failing to award Judicature Act interest on the damages.
(1) Contractual Interest
(a) Damages
[51] The agreement relevantly provided in cl 3.9:
If the Vendor is not in default and if any portion of the purchase price is not paid upon the due date for settlement:
(1)The purchaser shall pay to the vendor interest at the interest rate for late settlement on the portion of the purchase price so unpaid for the period from the due date for payment until payment (‘the default period’); but nevertheless this stipulation is without prejudice to any of the vendor’s rights or remedies including any right to claim for additional expenses and damages…
(2)The vendor is not obliged to give the purchaser possession of the property or to pay the purchaser any amount for remaining in possession, unless this agreement relates to a tenanted property, in which case the vendor must elect either to:
(a)account to the purchaser for rents received in respect of the property during the default period, in which event the purchaser shall be responsible for the outgoings relating to the property during the default period; or
(b)retain such rents in lieu of receiving interest from the purchaser pursuant to subclause 3.9(1).
[Emphasis added.]
[52] The agreement further provided in cl 9:
9.1(1) If the sale is not settled on the settlement date either party may at any time thereafter serve on the other party notice (‘a settlement notice’) to settle in accordance with this clause …
9.4If the Purchaser does not comply with the terms of the settlement notice served by the Vendor then:
(1) without prejudice to any other rights or remedies available to the Vendor at law or equity the Vendor may …
(b)cancel this Agreement by notice and pursue either or both of the following remedies, namely (i) forfeit and retain for the Vendor’s own benefit the deposit paid by the Purchaser, but not exceeding the normal 10% of the purchase price; and/or (ii) sue the Purchaser for damages.
(2)Where the Vendor is entitled to cancel this Agreement the entry by the Vendor into a conditional or unconditional Agreement for the resale of the property or any part thereof shall take effect as a cancellation of this Agreement by the Vendor if this Agreement has not previously been cancelled and such resale shall be deemed to have occurred after cancellation.
(3)The damages claimable by the Vendor under sub-clause 9.4(1)(b)(ii) shall include all damages claimable at common law or in equity and shall also include (but shall not be limited to) any loss incurred by the Vendor on any bona fide resale contracted within one year from the date by which the Purchaser should have settled in compliance with the settlement notice. The amount of that loss may include:
(a)interest on the unpaid portion of the purchase price at the interest rate for late settlement [14%] from the settlement date to the settlement of such resale; and
(b)all costs and expenses reasonably incurred in any resale or attempted resale; and
(c)all outgoings (other than interest) on or maintenance inspections in respect of the property from the settlement date to the settlement of such resale …
[Emphasis added.]
[53] Mr Akel does not dispute the Flemings’ liability for the losses suffered by the trust on resale. They are the consequences of the Flemings’ failure to comply with the terms of the trust’s settlement notice issued on 3 February 2005. However, he submits that the Judge was correct to limit liability for contractual interest to the shortfall, rather than award it on the full amount of the purchase price.
[54] Like cl 8.7(2), the conjoint meaning of cls 3.9(1) and 9.4(3) has not previously fallen for judicial consideration. The latter provision was introduced into the third edition of the REINZ – ADLS standard form agreement for sale and purchase of land in 1987 as cl 8.4: see Blanchard A Handbook on Agreements for Sale and Purchase of Land (4ed 1988) at [1122] onwards. The clause differs from its predecessors in these material respects:
(1)The phrase “may include”, where referring to the right to claim interest, is not limited to the date of cancellation but extends to the date of settlement. Compare Plowman v Dillon [1985] 2 NZLR 312 at 335 (HC);
(2)Interest is now expressly payable “on the unpaid portion of the purchase price” where previously there was no reference to the amount; and
(3)The vendor is entitled to retain “any surplus money arising from a resale”, whereas previously it was bound to give credit for any deposit or other moneys paid on account of the purchase price.
Accordingly, decisions of the High Court considering predecessor versions of the analogous provision, which were cited in argument on appeal, are of limited assistance: see Holt v Tew [1984] 1 NZLR 570 (HC); Callander v Murphy [1986] 1 NZLR 202 (HC).
[55] Clause 9.4(3), when read in conjunction with cls 3.9(1) and (2), constitutes the parties’ agreement on the nature and extent of a purchaser’s liability for the financial consequences of breaching the agreement for sale and purchase, and meets some of the problems discussed in earlier authorities. It is designed as a stand-alone code in substitution for statutory rights: s 5 Contractual Remedies Act 1979. Its purpose is to provide the vendor with a range of remedies following cancellation for a purchaser’s breach and to identify how damages are to be assessed following a resale: Hoskins v Rule [1952] NZLR 827 at 832 (HC) (discussing an earlier and narrower version of the damages provision).
[56] To that extent, cl 9.4(3) overcomes issues about foreseeability and remoteness of loss, and whether or not interest is recoverable as a head of special damage. Its wording recognises a modern commercial reality. The vendor of a residential property may suffer a significant capital loss while deprived of its funds by a purchaser’s default for an extended period when the market moves. The purchaser’s default may force the vendor into a static or holding position while the market for a substitute property in which it intends to buy, or a related area of investment opportunity, moves upwards.
[57] Clause 3.9(1) provides a useful starting point for determining the extent of the trust’s right of recovery following the purchaser’s cancellation. The terms of the clause are mandatory. It renders a defaulting purchaser liable to pay contractual interest for the period of any default until actual settlement. So, for example, if the Flemings’ contract had remained extant but they failed to settle until 9 December 2005, the date of settlement of the Holt contract, they would have been liable to pay contract interest on the full amount of the purchase price, $860,000, throughout the default period. The vendor’s right of recovery is unaffected by possession. (However, if the property is leased, the vendor must account to the purchaser for rents or retain them in lieu of its right to interest: cl 3.9(2). This provision excludes a right of double recovery through retaining both the benefit of income from a leased property together with contractual interest. The trust’s property was not of that nature.)
[58] Why, then, should there be a distinction in principle in the amount recoverable in the same circumstances because the trust settled with Ms Holt instead of with the Flemings? The agreement expressly recognised the trust’s right to sue for damages on resale to Ms Holt: cl 9.4(1)(b)(ii). They are defined as “all damages claimable at common law or in equity”: cl 9.4(3). They shall include “any loss incurred by the vendor …” on a contract of resale. Mr Akel accepts that the shortfall or deficiency on resale to Ms Holt falls into this category.
[59] The agreement goes further, however, and provides that the amount of the loss on resale “may include” three specific items – interest, costs on resale and outgoings (excluding interest): cl 9.4(3)(a). This case is concerned with the first. The phrase “may include” is permissive, reserving a right to, not imposing an obligation on, the vendor to claim interest. The succeeding terms of the clause are materially the same as the contractual interest obligation imposed on a defaulting purchaser who does not cancel but settles late, except for substituting the word “may” for “shall”.
[60] In our judgment cl 9.4(3)(a) expressly affirms a vendor’s right to recover contractual interest from a defaulting purchaser on the unpaid amount of the purchase price following cancellation. The loss of interest suffered by the vendor is a recognised head of special damage which is the same in type or character whether arising from late settlement or cancellation leading to resale. Both losses are legally attributable to and consequential upon the purchaser’s default. (Cancellation is irrelevant in this contractual context. Ordinarily the right to interest ceases on cancellation: s 8(3) Contractual Remedies Act 1979; however, by this agreement it extends the period to actual settlement.)
[61] Also, as cls 3.9(1) and 9.4(3)(a) confirm when read in conjunction, the purpose of payment of contractual interest is to compensate the vendor for loss of the use of the full amount of the purchase price from due date until receipt. The right in both cases expressly applies synonymously to “the portion of the purchase price so unpaid” or “the unpaid portion of the purchase price”. The right is not limited to the amount of the shortfall; this is a part only of “the unpaid portion of the purchase price” – here that is the full amount – of which the vendor is deprived throughout the default period. The shortfall is a conceptually different loss with different financial consequences for the vendor which does not crystallise until settlement of the resale to another party.
[62] This agreement provided for settlement of the purchase price on 21 January 2005. The parties agreed that the Flemings would pay interest at 14% on any monies owing for the period of default. That was their method of compensating the trust for the loss caused by any delay in receipt of all monies on due date. The Flemings would have been liable for contractual interest on $860,000 if they had delayed settlement until 9 December 2005. They must be liable for the same loss suffered by the trust in settling with a third party on that date where their breach caused the cancellation and resale.
[63] Mr Akel submits that, even though on first reading cl 9.4(3) appears to allow this result, on closer analysis it does not allow a vendor to “make a handsome windfall” at the defaulting purchaser’s expense. He says that the vendor is entitled to compensation which is just and fair in the circumstances; and that the drafters of the clause would not have intended a vendor like the trust to be entitled to contractual interest where, in a case such as this, the agreement for resale provided for a delayed settlement of eight months. He says this consequence would not have been in the parties’ contemplation at the relevant time.
[64] With respect to Mr Akel, this submission depends for its success on resorting to a subjective view of what is fair and reasonable, rather than relying on the relevant contractual terms. The intention of the parties is to be derived from their agreement. And the express limitation on a right of recovery of contractual interest to a period of one year answers his foreseeability argument.
[65] Alternatively, Mr Akel submits that Williams J was correct to limit interest to the amount of the shortfall. He emphasises the discretionary nature of a claim for interest, relying on Hunt v Hyde [1976] 2 NZLR 453 (SC). In the concluding paragraph of his judgment in Hunt at 461, Casey J declined a successful vendor’s claim for interest on the due date of settlement on the ground that:
… The [vendor] had the farm over this period and should not get interest as well. Having rescinded the contract, he is not able to rely on its terms to recover the interest. Like the price, the interest was payable upon settlement, which never took place.
[66] The agreement in Hunt did not contain equivalents of cls 3.9 and 9. Apart from this brief concluding passage, Casey J did not subject the interest clause to careful analysis (its terms are not recited in the judgment). The Judge apparently relied upon rescission as disentitling the vendor to recover interest. In contrast, in this case the agreement provides that cancellation does not affect the entitlement to recover interest. Furthermore, Casey J exercised his discretion because the vendor retained the benefit of a commercial asset, earning income, over the default period. There is no evidence that the trust enjoyed a similar benefit.
[67] It is plain that Williams J was satisfied the trust was entitled to contractual interest for almost all of the period until 9 December 2005. We infer that, to that extent, he agreed with our analysis. However, as noted, he did not give reasons for restricting liability to the shortfall on the sale price. In the absence of reasons, we infer that the Judge’s conclusion was inadvertent. There is no principled basis for not awarding interest on the full amount of the purchase price. The appeal on this point must succeed.
(b)Effect of Settlement Notice
[68] Settlement of the Flemings’ contract was due on 21 January 2005. The Flemings were in default of their contractual obligations in failing to settle on that date. Williams J, however, held that liability for interest should not run until 21 February 2005. That was the date for settlement calculated in the trust’s notice dated 3 February 2005. He held that the trust must be taken to have waived strict compliance with the contractual settlement date by issuing the settlement notice.
[69] We agree with Mr Bell that the trust’s act could not amount to a waiver. A vendor is only entitled to issue a settlement notice if there has been a default by the purchaser. Axiomatically the notice must be issued after the agreed date for performance. It does not mean that rights arising from the purchaser’s failure to settle have been waived. It is instead an agreed remedial step following default.
[70] Mr Akel’s argument for waiver on the ground that the settlement notice did not reserve rights or seek payment of interest for late settlement is unsustainable. So, too, is his submission that “the settlement date” referred to in cl 9.4(3)(a) must be the date nominated in the settlement notice. This provision does not affect the vendor’s right to contractual interest “from the settlement date” nominated in the contract. The Flemings’ liability to settle remained continuous from 21 January 2005.
(2)Judicature Act Interest
[71] The trust sought Judicature Act interest on its claim for damages but the Judge made no award. Its claim was quantified as (1) loss on resale in the sum of $110,000, being the original net sale price of $860,000 less the net resale price of $749,000; (2) interest of $106,215, being the contractual interest payable on $860,000 from 21 January 2005 to 9 December 2005; and (3) Judicature Act interest on the combined figure of $217,597 from 9 December 2005. Before us Mr Bell accepted that the trust is not entitled to Judicature Act interest on its claim for outstanding contractual interest.
[72] We are satisfied that, at the end of a long judgment, Williams J overlooked this part of the trust’s claim. The purpose of the statutory power to grant interest is to “enable proper compensation to be given to the plaintiff” for being deprived of its right to a debt or damages through the relevant period: Day v Mead [1987] 2 NZLR 443 at 463 per Somers J (CA). Generally that period runs from the date of the cause of action down to judgment. As Mr Bell points out, Williams J did not find the trust was guilty of disentitling conduct.
[73] In support of the judgment on this point, Mr Akel submits that it can be assumed that the Judge was fully aware of his discretion to make an order if he thought fit. He says that the Judge was “troubled by the lengthy delayed settlement date” and would also have been “troubled by the accumulation of interest for a further 10 months from 9 December 2005 to 17 October 2006”; that he “simply decided that it would not be just to make a further interest payment which in part would be an award of interest upon interest”; and that he adopted “a broad brush approach to interest”.
[74] With respect, this reconstruction is not what Williams J found. He did not address the trust’s claim for Judicature Act interest and we repeat our inference that his omission was an oversight. The position may have been otherwise if the Judge had given reasons for rejecting the claim. Looking at the issue afresh, we are satisfied that the trust is entitled to interest at the statutory rate on the full amount of its claim from 9 December 2005.
Result
[75] The appeal against the judgment is allowed. The appellants, as trustees of the Tania Mana Family Trust, are entitled to judgment for interest:
(1)at the rate of 14% on the sum of $860,000 from 21 January 2004 to 9 December 2005; and
(2)at the rate of 7.5% on the amount of the capital shortfall suffered on resale of their property to Ms Holt (we understand counsel will be able to agree on the figure but if not we reserve leave to apply for further directions) from 9 December 2005 to the date of this decision.
[76] The Flemings’ cross-appeal is dismissed.
[77] The trust is entitled to costs, which we fix at $6,000 together with usual disbursements. We certify for second counsel.
Solicitors:
Webb Ross, Whangarei, for Appellants
Simpson Grierson, Auckland, for Respondents
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