McRae v Kale HC Gisborne CP6/01

[2002] NZHC 239

IN THE HIGH COURT OF NEW ZEALAND
GISBORNE REGISTRY CP6/01

BETWEEN ALISON MARIE McRAE, RODERICK JAMES McRAE and DANIEL HAMISH McRAE
Plaintiffs

AND ARTHUR THOMAS KALE
Defendant

Hearing: 28 February 2002

Counsel: M D Branch and B J Lomas for the Plaintiffs
N Weatherhead for the Defendant

Judgment: 20 March 2002

RESERVED JUDGMENT OF PATERSON J

Solicitors:
Harkness Henry & Co, Private Bag 3077, Hamilton
Wilson Barber & Co, P O Box 109, Gisborne

[1] The plaintiffs, the trustees of the O A and A M McRae Family Trust (the Trustees) seek summary judgment on liability. Specifically, the Trustees seek an order that a rock lobster quota lease terminates on 31 March 2008, or when all debts are paid in full, or a satisfactory settlement is agreed to by both parties, whichever is the earlier. A second declaration is then sought, namely, that the lease was in fact terminated on 27 March 1998.

Background

[2] The lease dated 1 February 1993 was between the late Mr O A McRae, as lessor, and the defendant, Mr Kale, as lessee. The formal document was a two page typed document with several handwritten amendments. It leased 12.736 tonnes of guaranteed minimum transferable term quota for rock lobster.

[3] The clause containing the termination date of the lease states:

“For the within consideration the Lessor hereby agrees to lease the quota to the Lessee for the period commencing on the 1st April 1993 and terminating on 31 March 2008 or when all debts are paid in full or satisfactory settlement agree to by both parties.” (The portion emphasised was handwritten while the remainder of the clause was typed.)

[4] There was no further reference in the lease to the term “when all debts are paid.” However, there were further agreements entered into on 1 February 1993. Under one agreement, O A McRae Fishing Co Ltd (the company) sold to Mr Kale as a going concern for the price of $28,450 (GST exclusive) a fishing business comprising two fishing vessels, two tractors, two trailers and miscellaneous fishing equipment. The total price was to be paid by 10 February 1993 and the inference from the evidence is that it was paid about that time.

[5] Although copies of the agreements were not produced, I accept that it was part of the arrangement between Mr McRae and Mr Kale that two houses also be transferred to Mr Kale or entities controlled by him. A house at Esplanade Road, Akitio, was transferred by the company to No. 1 Live Lobster Co Ltd (the Lobster Company) and a house at Coast Road, Akitio Beach, was transferred by Mr McRae to the Lobster Company. There is no suggestion that the Lobster Company did not at that time pay for the houses.

[6] One of Mr McRae’s sons, Roderick McRae (Roddy), entered into a lease agreement with Mr Kale for the lease of one of the fishing vessels and associated equipment. Mr Kale sub-leased to him part of the quota leased from Mr McRae. In September 1995, Roddy entered into a purchase agreement with one of Mr Kale’s companies under which he purchased the fishing boat and associated equipment for $19,000. The purchase price was to be secured by an instrument by way of security over the vessel and gear. At about the same time, Roddy entered into an agreement to purchase from the Lobster Company for $65,300, the house property at Esplanade Road, Akitio. The purchase of the house property was financed by a bank loan. Roddy, however, still owed the Lobster Company money on the purchase of the vessel. A written agreement entered into in March 1996 between Roddy, the Lobster Company and Mr Kale recorded that as at 31 March 1996, Roddy owed Mr Kale $19,600 being the balance owing on the original loan. The agreement said:

“Arthur Kale will deduct from this amount $8000 being payment for 140 rock lobster pots. The balance $11,600 plus interest, will be repaid by Roddy McRae at the rate of $3 per kilo on the four tonne packed on behalf.”

It was Roddy’s evidence that by 31 March 1997, all his debt obligations to Mr Kale and his associated companies had been settled.

[7] A second fishing vessel and associated equipment sold by the company to Mr Kale, together with the house property at Coast Road, Akitio Beach, were sold to Richard Campbell (Richard) in 1993. A written agreement between Sandhill Nominees (Sandhill), a company owned and controlled by Mr Kale, and Richard evidenced that the house, vessel and gear were to be leased at an annual lease fee of $16,335. Sandhill agreed to sell the house, vessel and gear to Richard during the term of the lease at a total price of $121,000. Throughout the term of the lease Sandhill agreed to make available to Richard each year 4.4245 tonnes of crayfish quota. Richard’s evidence was that he, Roddy and another employee of the company were each to lease 4.245 tonnes of quota but in fact, Richard sub-leased a lesser amount of the quota.

[8] In September 1995, Richard entered into a sale and purchase agreement to purchase the fishing vessel and gear at a price of $32,000. The original price for house, vessel and gear had increased because extra gear was purchased. In February 1998, Richard and his partner entered into an agreement to purchase the Coast Road property for $125,000. Richard’s evidence was that he paid a deposit of $30,000 and raised the balance of $95,000 from his bank. Richard’s position is that when he settled the purchase of the property, he cleared all debts owed by him to Mr Kale or his company. He had previously paid off the amount due on the vessel purchase.

[9] The evidence on behalf of the Trustees is that prior to the above arrangements being entered into, Mr McRae and Mr Kale had a close personal and business relationship. This involved the commercial fishing of rock lobster. Mr McRae at that time lived at Akitio Beach. He eventually tired of crayfishing and became involved in the trawling business. In 1991, he moved to Coromandel and purchased both a mussel farm and a motel. The evidence given on behalf of the Trustees, much of it hearsay, was that Mr McRae wanted to secure a future in the fishing industry for Roddy and Richard and to provide an income for himself and Mrs McRae. This was the reason for the various agreements referred to above. They included a lease of the crayfish quota to Mr Kale, the purchase by Mr Kale or his nominee of a number of fishing assets owned by the company, and the leasing with a right to purchase by Mr Kale and his companies of the assets to Roddy and Richard. It is stated that the idea behind Mr McRae’s business agreements with Mr Kale was for each of Roddy and Richard to receive by way of lease and then ultimately purchase a fishing vessel, accompanying fishing gear, tractor and trailer, and a house.

[10] A half interest in the crayfish quota was subsequently transferred by Mr McRae to his wife and at a later date, Mr and Mrs McRae transferred the quota to the Trustees, who are currently the lessors under the crayfish quota lease.

Parties’ Positions

[11] It is the Trustees’ position that “all debts” referred to in the lease termination clause is a reference to the debts due by Roddy and Richard to Mr Kale and his associated companies. They allege that these debts have now been repaid in full and consequently, the lease has terminated.

[12] Mr Kale takes a different view and refuses to accept the lease has been terminated. He exports live rock lobster to markets in Asia and has a substantial capital investment in the lobster industry. This investment includes various depots for the storage of lobsters. He has an export processing plant at Mangere. Mr Kale stated in an affidavit that it was necessary to get a commitment of continuity of supply from sufficient fishermen in each location to ensure that the depot and associated plant which he developed was viable. He developed a depot at Akitio where the principal fisherman was Mr McRae and for about ten years prior to 1993, Mr Kale’s companies purchased the majority of the lobster landed at Akitio Beach. Mr Kale alleges that prior to building the depot at Akitio Beach, he obtained a commitment from Mr McRae to the effect that he would make his quota available to be processed in the depot. That pledge is claimed to be the foundation of the depot investment.

[13] Mr Kale states that Mr McRae did not want to sell his quota as he saw it as an investment for his family. He did, however, wish to cash up his houses, vessels and gear in Akitio so he could finance the other investments he wanted to make. Mr Kale states that he told Mr McRae that if he was not going to sell his quota, Mr Kale would require a long term lease before he would consider purchasing his vessels, tractors, trailers, fishing gear, houses etc. It was agreed that a term of 15 years was appropriate. Mr Kale’s evidence is that he told Mr McRae that it may take Roddy and Richard more than 15 years to pay for the vessels, gear, houses etc. and that was why the handwritten amendment was made to the termination provision in the lease at the time it was signed. Mr Kale says this was seen as extending the lease, not shortening it.

[14] Mr Kale does not accept that Richard has paid the amount due in full. He challenges the contention that Richard paid the deposit of $30,000 on the house property. While there is a solicitor’s settlement statement which suggests the deposit was paid, Mr Kale’s evidence is that the bank providing the first mortgage advance to Richard was not prepared to lend if Richard did not have an equity in the property. Therefore, Mr Kale said he would not insist on payment and it was agreed Richard would work for Mr Kale in Gisborne and work the debt off. Mr Kale alleges that the debt has not been fully discharged although what the outstanding debt is said to be was not particularised in his evidence. It was also alleged by Mr Kale that Richard “never paid in full the lease fee specified in [the lease].”

[15] It is apparent from the above summary of the affidavit evidence that it is common ground that the basic arrangement entered into between Mr McRae and Mr Kale was to provide Roddy and Richard with their own fishing businesses. There is, however, a difference of opinion on two vital matters. First, the Trustees’ position is that the lease was to terminate once both Roddy and Richard had paid to the Kale interests all money due to them. On the other hand, Mr Kale’s position is that the lease was for a minimum term of 15 years. Secondly, there is a dispute as to whether the moneys due by Richard have been paid in full. No issue arises with Roddy’s indebtedness which has been repaid. An unsatisfactory feature of the evidence of both parties is that it contains hearsay evidence without specifying the grounds of the belief upon which the evidence is based, and also is replete with unacceptable submissions.

The issues

[16] Against the above background, the Trustees seek summary judgment. There are, in effect, three issues to be resolved, namely:

(a) On a proper construction of the lease, does it terminate on the earlier or the latter of:

(i) 31 March 2008; or

(ii) When all debts are paid in full; or

(iii) When satisfactory settlement is agreed to by both parties?

(b) What are “all debts”?

(c) When (if ever) were all debts paid in full?

The termination date

[17] The Trustees’ position is that the natural and ordinary meaning of the termination clause is that the lease terminates on the earlier of the three alternative dates contained in the clause. This is said to be the natural and instinctive conclusion which arises from reading the clause and is said to be the only interpretation which makes commercial sense. There is logic in the submission made on behalf of the Trustees, namely, that if it is the latter of the three dates, the lease may never expire because the parties may never reach satisfactory settlement. Mr Branch, on behalf of the Trustees, urged that this Court take a robust approach in interpreting the clause. It was further submitted the interpretation placed on the clause by Mr Kale flouts commercial common sense and that subsequent actions which appear to show that the Trustees at one stage interpreted the lease differently from their present interpretation, are either equivocal or cannot be an aid to the construction of the termination clause.

[18] Mr Kale contends that the 15 year period was a minimum term and that such a term was necessary to allow him to expend the required capital to set up depots on the basis of a guaranteed supply of lobster. If the Trustees’ interpretation is the correct one, the leases could have been terminated within a month by a competitor buying the businesses from Roddy and Richard allowing them to pay off “all debts”. This, it was submitted, was clearly not the intention of the parties. A further aid to construction relied upon by Mr Weatherhead for Mr Kale was the reference in the rental payment clause of the lease to “whichever is the earliest” after the inclusion of two possible dates for payment of the lease fee. It was submitted that the insertion of these words in that clause suggested the parties would have included them in the termination clause if that had been their intention. Finally, Mr Kale relies heavily on post contractual events, both as an aid to interpretation and as a suggestion that there has been an estoppel.

[19] A difficulty in this matter is that both parties have adduced evidence of negotiations and declarations of subjective intent. Even if such evidence was acceptable and reliable it cannot be an aid to the interpretation of the lease. This Court must interpret the meaning of the clause by considering what the parties using the words in the clause against the relevant background would reasonably have been understood to mean. There is, in my view, a difficulty in interpreting this clause at the summary judgment level. The Court has to be satisfied either, that the plain and natural meaning of the words can be interpreted without recourse to further extrinsic evidence, or alternatively, that the Court has before it all relevant admissible evidence of the background circumstances.

[20] Both parties put forward commercial considerations to justify their interpretation. The Trustees’ position is that the lease was part of an arrangement to finance Roddy and Richard into their own businesses and was to terminate once they had repaid Mr Kale the financial assistance he was providing. Mr Kale’s position is that he was prepared to assist Mr McRae in setting up Roddy and Richard but only in a way which made commercial sense to him. His evidence is that he was not prepared to take the lease of the lobster quota unless he had continuity of supply for a reasonable period to justify his own capital input into the lobster industry. I do not find either scenario completely contrary to commercial common sense although there are inconsistencies in Mr Kale’s evidence.

[21] There is force in the submission made on behalf of the Trustees, namely, that their interpretation accords to the natural and ordinary meaning of the words. To interpret the clause as contended on behalf of Mr Kale would mean that the lease may never terminate. This cannot have been the parties’ intentions. Further, many of the matters upon which Mr Kale relies are, in my view, not of great significance. The fact that the lease which had been prepared earlier contained a clause which included the words “whichever is the earliest” is not a strong indicator to the interpretation of words added at the time of signing by the parties themselves. Further, while accepting that post-contractual conduct may be an aid to the interpretation of the contract (Attorney-General v Dreux Holdings Ltd (1996) 7 TCLR 617 (CA) and Valentines Properties Ltd v Huntco Corporation Ltd [2000] 3 NZLR 16 (CA)), many of the matters relied upon by Mr Kale are equivocal and of little assistance to him. These include the form approved by the Director-General of Agriculture and Fisheries known as QMS 8. That form was not, in my view, a variation of the operative lease.

[22] A possible interpretation, which Mr Weatherhead did not contend for, is that the words “or satisfactory settlement agree to by both parties” is an alternative to “when all debts are paid in full” and not to “the 31st March 2008.”

[23] There are two difficulties in determining the correct construction on the evidence currently before the Court. First, the evidence on both sides is in many respects unsatisfactory. It includes evidence of negotiations and subjective intent. Much of it is hearsay. Some of it is self serving. Secondly, I am not satisfied that all relevant evidence is before the Court or that relevant evidence before the Court should be accepted without being subject to cross-examination. Both parties make assertions which, if correct, may assist in the interpretation of the clause but these assertions need to be backed up by independent credible evidence. While the Court cannot take into account evidence of negotiations and subjective intent, it can and should take into account the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract. The meaning of the termination clause is what the parties using the words they used against the relevant background would reasonably have been understood to mean - see Boatpark Ltd v Hutchinson [1999] 2 NZLR 74.

[24] There was one post-contractual matter which may possibly have relevance to the correct interpretation to the termination clause. A further agreement was negotiated in early 1998 and executed on 6 April 1998. It was between a company controlled by Mr Kale, as vendor, and the company as purchaser. The agreement on behalf of the company was signed by two directors who are also two of the Trustees (Mrs McRae and Daniel McRae). The purpose of the transaction was to acquire another fishing vessel from the Kale interests and although the purchaser was the company, the intent was that the new vessel was to be utilised as part of Roddy’s business. All three Trustees must have been aware of the terms of the agreement and in it, they warranted that they had authority on behalf of the Trustees as owner of the crayfish quota to give a release to the vendor (the Kale company). The vendor agreed to sublease and the company to take on sublease six tonnes of the rock lobster quota which was part of the quota leased by Mr McRae on 1 February 1993. The release given by the Trustees as owner of the quota was to release the vendor from any obligation to pay lease fees on that portion of the quota. The sale agreement recited that the lease expired on 31 March 2008. The actions of the company entering into this arrangement are somewhat in conflict with the Trustees’ allegation that the lease had already terminated. On behalf of Mr Kale, it was submitted that the entering into of this arrangement by the company amounted to an estoppel. On the evidence before the Court, I would have not found there to be an estoppel because there is not sufficient credible evidence of Mr Kale changing his position relying upon any representation given in 1998. Arguably, it may be post-contractual conduct which may be an aid to the correct construction of the contract.

[25] Finally, although not pleaded, there may be rectification issues involved in this case. If the correct interpretation is that alleged by the Trustees, and if Mr Kale’s evidence were ultimately to be accepted, he would be entitled to have the contract rectified.

[26] For the above reasons I am not satisfied that this is an appropriate case for summary judgment. On the evidence before me, I am unable to reject Mr Kale’s defences as being spurious. The factual background which would reasonably have been available to the parties is relevant to the interpretation. It should be brought before the Court in an acceptable manner.

The other issues

[27] If I had found for the Trustees on the termination clause issue, I would have also determined that “all debts” meant the debts owing by Roddy and Richard to Mr Kale and his associated companies for the purchase of the fishing business and homes. Roddy’s debt has been repaid but it would not have been possible, in view of the matters raised by Mr Kale in his affidavit, to determine whether Richard’s debt had been repaid completely.

Result

[28] The application for summary judgment is dismissed.

Costs

[29] In accordance with usual practice in summary judgment applications, costs will be reserved.

Future of Proceedings

[30] The substantive matter should be brought to an early hearing. It is possible that time could be found to hear the matter in the fortnight beginning 29 April. Counsel are asked to liaise to see whether they can agree to a timetable to bring the matter to a hearing during that period. They are also asked to liaise with the Registrar to arrange any pretrial conference which may be required.