Marcus Julian Friedlander v Karl David Rusher &

IN THE COURT OF APPEAL OF NEW ZEALAND

CA11/02

BETWEEN	MARCUS JULIAN FRIEDLANDER
Appellant

AND	KARL DAVID RUSHER AND EVE ZEALANDIA BELL
Respondents

Hearing:	16 July 2002
Coram:	Keith J Fisher J Salmon J
Appearances:	R J Asher QC and H P Holland for Appellant TJS Allan for Respondents
Judgment:	8 August 2002

JUDGMENT OF THE COURT DELIVERED BY SALMON J

This is an appeal against the entry of summary judgment by Master Gambrill in the High Court.
The appellant has also filed two applications for leave to adduce further evidence. In accordance with this Court’s usual practice the applications will be considered in the context of the substantive appeal. Accordingly, further reference will be made to them later in this judgment.

Background

In July 1999 interdependent agreements for sale and purchase were entered into:
For the sale by the respondent, Karl Rusher to TB and KB Holdings Ltd or nominee of the Devonport cinema complex for $1,750,000.
For the sale by TB and KB Holdings Ltd to Karl Rusher or nominee of a residential property at Clifton Road, Whitford for $1,350,000.

Each agreement had a settlement date of 30 August 1999. Settlement did not take place.

On 30 October 1999 two further agreements for sale and purchase were entered into:
The sale by the KD Rusher Family Trust to Tim Bartells or nominee of the Devonport cinema complex for $1,263,017 for settlement on 29 February 2000.
The sale by TB and KB Holdings Ltd to KD Rusher Family Trust of Clifton Road, Whitford for $853,642, for settlement on 8 December 1999.

These two agreements were not expressed as being interdependent.

The Court’s understanding is that the company TB and KB Holdings Ltd was controlled by Mr Bartells.
The property at Clifton Road was subject to two mortgages. The first was for an amount in excess of $800,000. The second, which was to Bridgecorp Finance Ltd, was for $291,000. When the time came to settle the sale of Clifton Road the proceeds of sale were only sufficient to discharge the first mortgage. The vendor was not in a position to pay off the second mortgage. Accordingly, the parties agreed that the cinema complex would be provided as security for the amount owing to Bridgecorp.
The Clifton Road purchase was settled on 9 December 1999. On the same day a term loan contract was signed recording the debt of $291,000 owed by TB and KB Holdings Ltd to Bridgecorp Finance Ltd. The contract was for a period of a minimum of three months and a maximum of six months. Because the cinema complex was being provided as security for the amount owing under the term loan contract, Bridgecorp required the respondents (who were still the legal owners) to guarantee performance of the contract. Bridgecorp also required Mr Bartells to provide a “man of substance” as a guarantor. Mr Bartells persuaded the appellant, who had become involved in Mr Bartells’ business interests from about mid 1999, to adopt that role.
The respondents required Mr Bartells and Mr Friedlander to indemnify them against all their liability as guarantors under the term loan contract. A deed of indemnity to that effect was also signed on 9 December 1999.
Mr Bartells was unable to settle the purchase of the cinema complex. He was adjudicated bankrupt on 19 April 2000. In May 2000 Mr Rusher as trustee of the KD Rusher Family Trust, TB and KB Holdings Ltd and Mr Bartells entered into a deed of cancellation of agreement. That deed recorded Mr Bartells’ inability to complete settlement of the cinema agreement. It referred to the use of the cinema as security for the Bridgecorp loan. The parties then agreed that:
1.        The first cinema agreement and the second cinema agreement are hereby cancelled and of no further effect.
2.        TB and KB and Bartells remain liable for the Bridgecorp debt and will keep Rusher indemnified in that regard as recorded in existing documentation between the parties.
3.        Except for the debt referred to in clause 2 herein this deed is in full and final settlement of all matters between the parties relating to all four agreements recited in this agreement except for any covenants, warranties or liabilities arising from the Whitford agreement which did not merge on settlement.
The four agreements are those referred to in paragraphs [3] and [4] of this judgment.
Mr Friedlander says that he had no knowledge of negotiations between Bartells and Rusher and was not aware of the deed of cancellation.
In March 2001 Bridgecorp served a default notice on the respondents claiming a total, including arrears of interest, of $397,759.31. On 5 April demand was made on the appellant to perform his obligation to indemnify the respondents. There was no response to that letter. Proceedings seeking summary judgment were issued on 14 May 2001.
In June 2001 the respondents sold the Devonport property for $1,860,000. They have paid the amount due to Bridgecorp. The respondents say that unlike the earlier agreements which involved just the land and buildings this last agreement also included the cinema business operated from the site.

The claim and the notice of opposition

The statement of claim was brief. It pleaded the term loan contract, the indemnity, the notice received by the respondents from Bridgecorp, the demand upon the appellant and his failure to respond. The appellant’s amended notice of opposition raised three defences. The first was a defence of equitable set off. That defence referred to an arrangement with Mr Bartells whereby the appellant would become a 50 per cent owner of the cinema complex and claimed that the respondents held the cinema complex on trust as to a 50 per cent interest for the appellant. In his second defence the appellant claimed that because he had not received the 50 per cent registered interest in the cinema complex the respondents could not rely upon the indemnity agreement. The third defence pleaded common or unilateral mistake under the Contractual Mistakes Act 1977.

The hearing before the Master

The Master did not consider that any of the defences were established in law. She rejected too, an argument that the deed of cancellation operated to discharge the appellant from his indemnity. She gave judgment for the plaintiff.

The arguments in this Court

We have not addressed the arguments presented in the High Court in any detail because a rather different approach was taken in oral submissions in this Court. Mr Asher put forward three principal arguments:
The effect of the deed of cancellation was to give to the respondents an amount in excess of that owing under the Bridgecorp loan so that no loss was suffered by the respondents. They therefore had no entitlement to claim pursuant to the deed of indemnity.
The respondents, as creditors, had by the deed of cancellation altered the nature of the obligations undertaken in the deed of indemnity with the consequence that the appellant’s obligation was discharged.
It was an implied term of the indemnity that the property arrangements between Mr Bartells and the respondents would not be altered. He submitted that such a term was necessary in order to give the contract business efficacy.
Finally, Mr Asher argued that this was an appropriate case for discovery before liability was determined and that there was a risk of injustice if that did not occur.

Consideration

The rules applicable to the entry of summary judgment are well known. There is an evidentiary burden on the plaintiff to show that there is no defence to the claim. Before judgment is given the Court must be satisfied that there is no defence. However, as this Court said in Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 at 85:
… the need for judicial caution has to be balanced, when considering a summary judgment application, with the appropriateness of a robust and realistic judicial attitude when that is called for by the particular facts of the case. In the end it can only be a matter of judgment on the particular facts.
And in SH Lock (NZ) Ltd v Oremland (unreported, High Court, Auckland Registry, CP.641/86, 19 August 1986) Wylie J. said:
Clearly the onus of showing there is no defence lies with the plaintiff, but the discharge of that onus is not in my view to be frustrated by a defendant raising hypothetical possibilities in vague terms unsupported by any positive assertions or corroborative documentation.
The question then is whether we are satisfied that there is an arguable defence to the respondents’ claim. The starting point is to consider the documents upon which the plaintiff relies, that is to say the term loan and the deed of indemnity. On the face of it the provisions of those documents are clear and straightforward. The Bridgecorp loan was guaranteed by the appellant, the respondents and Mr Bartells. The appellant and Mr Bartells indemnified the respondents against any liability that they might incur pursuant to their guarantee given to Bridgecorp. A demand was made by Bridgecorp on the respondents. The respondents have satisfied that demand. Without more, there is a clear case for judgment against the appellant.
We turn then to consider whether any of the matters argued on behalf of the appellant raise an arguable defence.
The first argument was that the deed of cancellation constituted payment by Mr Bartells to the respondents of the amount owing to Bridgecorp. Mr Asher argued that if Mr Bartells had given the respondents a cheque for the amount due to Bridgecorp the respondents would not then be entitled to claim on the indemnity after having paid the Bridgecorp loan. He submitted that the effect of the deed of cancellation was to confirm a situation whereby the respondents obtained the Clifton Road property at a price $500,000 less than its true value. He referred to the Quotable Value New Zealand valuation exhibited in evidence which showed the capital value of the Clifton Road property as being $1,379,000 and contrasted that with the actual sale price of $853,642.
Mr Asher submitted that by agreeing to the cancellation of the cinema purchase the respondents had gained an advantage of $500,000. He submitted that the meaning of the indemnity document was that if the respondents suffered a loss as a result of the Bridgecorp demand then Mr Bartells and Mr Friedlander were required to indemnify them. He said they had not suffered a loss so there should be no indemnity. He submitted that the “swap” transaction was at the heart of the need for the indemnity and that equitable principles should apply.
In our view the appellant faces several difficulties in relation to this submission. First, the deed of cancellation itself expressly preserves Mr Bartells’ liability pursuant to the indemnity. Secondly, the October agreements were not contractually interdependent. Most importantly, there is no legal nexus between the agreement for the sale of the Clifton Road property and the obligations under the term loan agreement and the deed of indemnity. In our view there is no appropriate foundation for the existence of a claim in equity by the appellant against the respondents. The respondents had no knowledge of the arrangements between Mr Bartells and Mr Friedlander. So far as they were concerned the guarantee which they gave was for Mr Bartells’ benefit pending his settlement of the cinema purchase. When he failed to settle they had the rights of a vendor in such a situation. There is no evidence to suggest that the respondents had any knowledge of any equitable interest by the appellant in the cinema. There is no arguable defence under that head.
The second argument was that the arrangements between the creditor and the principal debtor had been varied with the consequence that the indemnity was discharged. There is no doubt that there is a well established principle that a guarantor, (quite apart from the fact that these were indemnities in the strict sense) is released from the guarantee by any variation agreed on by the debtor and the creditor without the consent of the guarantor, unless without inquiry, it is apparent that the variation is unsubstantial or cannot be otherwise than beneficial to the guarantor.
This principle is discussed in O’Donovan & Phillips, The Modern Contract of Guarantee (3^rd ed) at page 342. There it is noted that the examples of application of the principle all show that the variation was made in relation to the contract which was guaranteed. The authors say:
It is not sufficient if another contract albeit a contract which is related to the guaranteed contract is varied.
The obligation is described in Moschi v Lep Air Services Ltd [1973] AC 331 at 348 in this way:
It follows from the legal nature of the obligation of the guarantor to which a contract of guarantee gives rise that it is … an obligation to see to it that another person, … does something; …
Thus, the guarantor’s obligation to Bridgecorp was to see that TB and KB Holdings Ltd paid the amount which it owed to Bridgecorp. There was no variation of TB and KB Holdings’ obligation to Bridgecorp. In turn, Bartells and Friedlander’s obligation under the deed of indemnity was in relation to any liability of the respondents to Bridgecorp pursuant to their guarantee. There was no variation to the contract between Bridgecorp and the guarantors.
We do not accept the argument that the deed of cancellation altered the nature of the obligations undertaken in the deed of indemnity. Indeed, as already observed the deed of cancellation specifically preserved rights and obligations under the deed of indemnity. However, the issue is more fundamental than that. We accept that the principle only applies where the variation is to the contract which was guaranteed, or in this case, the contract to which the indemnity related. There was no variation to that contract. There is no arguable defence in that respect.
The third defence argued by Mr Asher is a variation of the second. He argued that it was an implied term of the indemnity that the property arrangements between Mr Bartells and the respondents would not be altered. Mr Asher referred to the decision of this Court in Vickery v Waitaki International Limited [1992] 2 NZLR 58 at 64:
It has been said that there are varieties of implications in contracts, that they are categories or shades in a continuous spectrum: see Liverpool City Council v Irwin [1977] AC 239, 253-254 per Lord Wilberforce. Discussions of the subject are legion, and it may be doubted whether tabulated legalism will ever produce an exhaustive or a rigidly discrete classification. But three broad classes are obviously terms implied by rules of law in certain kinds of contract (eg sale of goods), terms deduced by implication or interpretation from the express terms of the contract, and terms held to be implied to give business efficacy to the contract - which is a short way of referring to the kind of case under consideration in the Devonport and BP (Westernport) cases cited earlier.
Mr Asher submitted that the implied term in this case can be seen as meeting at least the last two tests. It arises from the express terms of the contract and should be implied to give it business efficacy. He noted that the deed of indemnity referred specifically to the guarantee and the term loan contract and that the term loan contract in turn referred to the security over the cinema building. He submitted that the effect of the deed of cancellation was to change the equitable ownership of the security without reference to the appellant.
The flaw in this argument is that the application of the deed of indemnity is not affected by any change of ownership of the cinema building. The building continues to supply the security. More importantly, the quite separate guarantee obligations are unaffected.
We do not accept that the term argued for may be deduced by implication or interpretation from the express terms or that it is necessary to give business efficacy to the contract of indemnity.
For the sake of completeness we record that other issues were raised in the written synopsis of argument although not developed in oral submissions. It was argued that the deed of indemnity was in fact a guarantee. We do not accept that that was so. It was in our view clearly an indemnity, but in any case we do not see the point as having any practical significance.
It was argued that the appellant had a right of set off in relation to his equitable interest in the Devonport cinema or the proceeds of sale. This submission was allied with one to the effect that the legal firm of Davenports who acted for Mr Bartells and perhaps for the appellant should be joined as a third party. Neither of these submissions are developed in the written synopsis to the point where they present an arguable defence. In particular the respondents deny any knowledge of any arrangement between the appellant and Mr Bartells. The appellant does not say that any such arrangement existed. There is no basis for any set off against them.
As to the argument that Davenports should be joined as a third party, we take the view that at least in the vast majority of cases it would not be an appropriate exercise of discretion to deny summary judgment to a plaintiff otherwise entitled on the basis that the defendant had a claim against a third party. That would defeat the very purpose of the summary judgment procedure which is to provide a simple and speedy remedy in cases where there is no arguable defence. We reject that submission.
This leaves for consideration the submission that this is an appropriate case for discovery. The absence of any arguable defence makes that submission untenable.

Conclusion

In the course of this judgment we have taken into account the evidence in respect of which leave was sought. It does not, however, affect the conclusion we have reached. The appellant has failed to establish the existence of an arguable defence. The appeal is, therefore, dismissed. The respondent is entitled to costs of $5,000 together with disbursements, including accommodation and travelling expenses, to be fixed, if necessary by the Registrar.

Solicitors
Knight Coldicutt, Auckland for Appellant
Grove Darlow & Partners, Auckland for Respondents

[2002] NZCA 195

8 August 2002