Melmerley Investments Limited v McGarry Ca141/01

[2001] NZCA 398

IN THE COURT OF APPEAL OF NEW ZEALAND  CA141/01

BETWEENMELMERLEY INVESTMENTS LIMITED

Appellant

AND                WILLIAM DIGBY JOHN MCGARRY Respondent

Hearing:  31 October 2001

Coram:  Blanchard J Ellis J Gendall J

Appearances:             R J Asher QC for Appellant

W A McCartney for Respondent

Judgment:                 6 November 2001

JUDGMENT OF THE COURT DELIVERED BY BLANCHARD J

[1]      Mr   Seavill   (acting   through   his   company,   the   appellant,   Melmerley Investments Limited) and Mr McGarry, the respondent, entered into an unwritten joint venture agreement in late 1991 for the development of four residential units on a site in Barrack Road, Mt Wellington, Auckland.   It is common ground that the original joint venture terms were as follows:

•    Melmerley would use an option held by Mr McGarry to purchase the Barrack Road land.

•    Mr  McGarry  would  supervise  the  building  of  the  four  town houses.

•    Melmerley   would   fund   the   land   purchase,   subdivision   and construction costs.

•    Mr McGarry would not be liable for any losses.

•    Mr McGarry would be paid $1,500 at the start of the construction.

•    They   would   share   any   profit   under   $80,000   two-thirds   to

Melmerley and one-third to Mr McGarry.

•    They would share any profit over $80,000 equally between them.

[2]      The building work was carried out under contract with Melmerley by a subsidiary of Cashmore Bros Ltd, Mr McGarry’s employer.

[3]      Unfortunately, the cost of the development substantially exceeded budget and the property market also declined.   Unfortunately too, Melmerley was not able to provide all the necessary funding.   It is now accepted, as a result of lower Court findings not challenged on appeal, that the parties agreed to vary the joint venture arrangements.  This variation involved Mr McGarry purchasing the best of the sites (Unit 2), which was then only partly developed, for $35,000 and making a payment to Cashmores of $50,000 in reduction of overdue debt from Melmerley.  The total sum of $85,000 was the originally budgeted per unit cost of the development.

[4]      The joint venture continued.   Cashmores completed Unit 2 along with the other three units in accordance with their contract with Melmerley.   Mr McGarry took title to Unit 2 on the basis, it has been found, that he would account to the joint venture for any surplus arising on its resale when all the units had been sold.

[5]      In August 1993, Unit 2 was sold by Mr McGarry for $113,500.  There was a “profit” or surplus for which Mr McGarry would thus have to account when the other three units were sold.   As Unit 2 was the best of the units and the price achieved for it only slightly exceeded the actual average per unit costs of the development,  it  had  become  clear  to  the  parties  that  there  was  likely  to  be  a significant overall loss.  The only way this might possibly be avoided was for the remaining three units to be held for a lengthy period - up to five years was mentioned

- in the hope that the property market would rise.

[6]      The  relationship  between  Mr  Seavill  and  Mr  McGarry  had  deteriorated. They met on 8 November 1993 to discuss the position.   Both men came to the

meeting with written notes of how they saw the situation concerning the Unit 2 surplus.   Mr Seavill’s notes recorded an expenditure by Mr McGarry on that unit of

$91,267.81.   He was asserting that Mr McGarry had to account for $19,000 and brought  to  the  meeting  a  form  of  Deed  of  Acknowledgement  of  Debt  for Mr McGarry to sign.  It provided for payment on demand of that sum with interest in the meantime at 7.5% pa from 30 September 1993.

[7]      For his part, Mr McGarry had calculated the amount due to the joint venture at $13,500.  In view of an argument which has been made, shortly to be mentioned, it is worth noting that this was a rounding up of a precise calculation of $13,149.53.

[8]      Discussions took place.   Mr McGarry said, among other things, that his purchases for Unit 2 had included a dishwasher on which he had expended $1000. (Again, this would seem to have been an approximate sum, not an exact figure.)

[9]      Mr McGarry also pointed out that Mr Seavill’s figures contained the wrong sale price ($115,500 instead of $113,500).  Mr Seavill accepted the validity of these two points.   The judgment in the District Court at Auckland records that the men agreed that the figure payable by Mr McGarry should be $16,000, as follows:

Sale proceeds of Unit 2: Less:   Commission	$4,500	$113,500
Dishwasher	$1,000
Paid by Mr McGarry for land, building costs etc	$92,000	$97,500
$16,000

[10]     The  figure  of  $19,000  in  the  draft  deed  was  amended  to  $16,000. Handwritten alterations were made reflecting agreement, first, that demand would not be made until 30 September 1995 (i.e. just over two years later) and in any event only on 60 days notice; and, secondly, that repayment would be made from the proceeds of sale of a Wellington property.  It seems that the intention was that if the Wellington property sold before 30 September 1995, the proceeds would be applied in or towards the covenanted payment.  But nothing turns on that question.

[11]     The District Court Judge found that at the same meeting the parties orally agreed upon the immediate termination of the joint venture.   He was of the clear conclusion that the joint venture agreement was mutually terminated on 8 November

1993.  It is accepted that if this termination is binding on Mr McGarry, who denies that it is, then from that time onwards the other three units became the exclusive property of the appellant, for better or for worse.

[12]    Mr McGarry contends, however, that he received no consideration from Melmerley in exchange for the arrangement terminating the joint venture.  He ceased making interest payments pursuant to the deed and, several years afterwards when the three units had risen substantially in value, he not only resisted Melmerley’s claim for the $16,000, but also claimed that he was entitled to share in the profits resulting from that rise in value.  The three units are still owned by Melmerley.

[13]     In the District Court, Mr McGarry’s case was primarily that he entered into the arrangements of 8 November 1993 under duress.   Callander DCJ rejected that allegation.   Nor did the Judge accept the alternative argument that there was no consideration for the agreement to terminate the joint venture:

The facts are against Mr McGarry on this point.   There was consideration: there were still remaining obligations to be performed by him: he had to account for the profit he made on the sale of Unit 2; he had to account for either the rent or holding costs.  Furthermore, providing the deed to Mr McGarry did confer valuable benefits upon him: it settled the questions between them over the profit made on Unit 2, resolved the rental/holding cost disagreement, gave him two years to pay the agreed sum outstanding.

There was clearly valuable consideration flowing from both sides sufficient to provide a binding release and properly terminate the agreement between them.

[14]     There was an appeal to the High Court only upon the issue of consideration. In a judgment delivered on 19 October 2000, Cartwright J allowed the appeal.  She recorded, and it is not in dispute, that the parties initially intended that any “profit” made by Mr McGarry on the sale of Unit 2 would be taken into account after all other sales were completed.  Prior to the meeting on 8 November 1993, Mr Seavill had come to his figure of $19,000 by rounding the sum “without consultation with

McGarry  in  a  way  which  advantaged  McGarry  by  $732.19”.    At  the  meeting Mr McGarry had pointed out two mistakes on Mr Seavill’s part (the sale price and the expenditure on the dishwasher) and the two men had agreed that the amount for which Mr McGarry was to account was $16,000 and that he would be allowed until

30 November 1995 to pay this amount.

[15]     The  Judge  took  the  view  that  the  obligation  to  account  arose  under  “a subsidiary agreement” and not as a variation of the joint venture itself.   However Mr McCartney, for the respondent, did not feel able in this Court to support that view and conceded that the obligation arose under a variation of the original joint venture.

[16]     But Cartwright J said that, even if she was wrong about that, the agreement on  terminating  the  joint  venture  was  not  binding  because  it  did  not  release Mr McGarry from the obligation to account for the “profit” on Unit 2.

[17]     The Judge then considered whether the parties’ arrangement amounted to a valid accord and satisfaction.   There were three possible forms of consideration. The first was the rounding in Mr McGarry’s favour of $732.19.  But, the Judge said, Mr McGarry was “oblivious” of this and the issue was not discussed during the course of the meeting.  For there to be an agreement that he would pay less than the correct amount in return for the discharge of the joint venture, there must, the Judge said, be at least an understanding on his part that this occurred.  A meeting of minds was required and this had not happened.

[18]     Secondly, there was the fact that the agreement resulted in the reduction of the sum calculated by Mr Seavill.   But the Judge considered that this was not a compromise of disputed claims, merely a reconciliation of calculations of the profit made on the sale of Unit 2.  She said that the adjustment from $19,000 to $16,000 “does not amount to the satisfaction which the accord requires”.

[19]     Thirdly, the Judge considered whether there had been a forbearance to sue sufficient to provide the necessary consideration.   She said that Mr McGarry had been under no obligation under the joint venture agreement to pay the $16,000 at the

time the deed was signed.  She accepted that a promise not to pursue a claim which was in truth without legal basis could, in some circumstances, amount to good consideration (Couch v Branch Investments 1969 Ltd [1980] 2 NZLR 314). But, Cartwright J said, although the claim forgone need not exist in law, it is necessary for the claimant honestly to believe in its existence. She took the view that Melmerley did not have such a belief at the time it entered into the deed and therefore its forbearance to sue did not amount to good consideration to support the parties’ accord and satisfaction. She also rejected an argument that there was consideration arising from a concessionary interest rate fixed in the deed, saying there was no evidence upon which that could be determined.

[20]     Leave to appeal to this Court under s67 of the Judicature Act 1908 was refused by another High Court Judge but subsequently granted upon application to this Court.   The only issue for us to determine is whether Melmerley gave consideration to Mr McGarry in exchange for his agreement to terminate the joint venture, leaving Melmerley with the exclusive right to any profits from the units.  As we have indicated, it is now common ground that the arrangements about Unit 2 were a variation of the joint venture so that both the agreement recorded in the deed concerning the repayment of the $16,000 and the termination of the joint venture were part and parcel of the same transaction on 8 November 1993.   The issue is therefore whether Melmerley was giving any consideration to Mr McGarry when the terms of the deed were settled or, if that were not so, whether Mr McGarry received any other form of consideration arising from the arrangements made on that date.

[21]     We are in no doubt that the Judge erred in finding that no consideration was given by Melmerley.  In determining whether a binding contract exists, a Court is concerned only with the presence of consideration and does not make an assessment of the comparative value of the acts or promises of the parties towards one another. The existence of consideration is determined by an objective examination of the agreement.    The  necessary  consideration  may  be  nominal  only.    Hobhouse  J remarked in Vantage Navigation Corporation v Suhail and Saud Bahwan Building Materials LLC (The “Alev”) [1989] 1 Lloyd’s LR 139, 147:

Ultimately the question of consideration is a formality as is the use of a seal or the agreement to give a peppercorn.  Now that there is a

properly developed doctrine of the avoidance of contracts on the grounds of economic duress, there is no warrant for the Court to fail to recognize the existence of some consideration even though it may be insignificant and even though there may have been no mutual bargain in any realistic use of that phrase.

[22]     The first matter possibly providing value to Mr McGarry was Mr Seavill’s favourable rounding up (from $91,267.31 to $92,000) of the expenditure on Unit 2 which had to be taken into account in calculating the surplus derived from that unit. Cartwright J said this was not discussed and that Mr McGarry was oblivious of it when he reached agreement with Melmerley on 8 November 1993.  The trial Judge made no such finding and our own consideration of the evidence leads us to doubt Cartwright J’s assessment.  It is clear that Mr Seavill tabled his notes at the meeting in which the $91,267.31 figure appears.  There was a discussion about what expenses he had taken into account, as is apparent from Mr McGarry’s insistence that he should be given a credit of $1,000 for the dishwasher.  He must have looked through Mr Seavill’s list of expenditure in order to detect that it omitted the cost of the dishwasher.  Furthermore, it was unlikely that the total of the various sums would have come exactly to the round figure of $92,000.  The probability is therefore that Mr McGarry appreciated that there had been a rounding up.  After all, he had done the same in setting out his own figures to arrive at $13,500 as the amount he said he had to account for.

[23]     But even if Mr McGarry had been oblivious of the rounding up, it does not seem to us that he can deny that he was benefited to that extent.  As Mr Asher QC, for the appellant, submitted, whilst a meeting of minds is required for the formation of an accord, there is no such requirement in relation to the consideration (the satisfaction) which is to be given.

[24]     The second matter is that there was at the meeting a process of reconciling the  figures  of  $19,000  and  $13,500  respectively  put  forward  by  each  side. Mr McCartney, for the respondent, submitted to us that there really was no dispute and therefore no element of compromise; Mr Seavill simply accepted the figure of

$16,000 which he knew was all Mr McGarry was legally obliged to account for. Counsel referred to Hillyer J’s dictum in HBF Dalgety Ltd v Morton [1987] 1 NZLR

411, 412 that there must be a genuine dispute and that it is not sufficient for the debtor to be reluctant to pay.

[25]     Again, this was not a subject touched on by the District Court Judge.  Our own view is that there was an element of compromise.   The parties settled the accounts between them by a process of discussing the figures.  In this respect also we consider that Melmerley gave consideration to Mr McGarry.

[26]     But it is the third matter which appears to us most indisputably to provide consideration for Mr McGarry’s agreement to terminate the joint venture.  He may have  had  no  ongoing  obligations  to  perform  in  relation  to  the  development. Mr Seavill agreed in evidence that was so.  But he did have, prior to 8 November

1993, an obligation to pay over whatever surplus had been derived from Unit 2 and was exposed to a demand to do so whenever the other three units were sold, if and to the extent needed to discharge the debts of the joint venture and to “balance the books” as between the joint venturers.

[27]     The parties were of the same view at that time, namely that there was little immediate prospect of quitting the other three units except at an overall loss, or at best breakeven (which would have required payment from Mr McGarry of the Unit 2 surplus).   Mr McGarry’s understanding of the financial position is clear from his evidence:

You don’t disagree with him [Mr Seavill] do you when he says that in late 93 the property market was still terrible?…. it was that is correct So if in fact the units had been sold on the day of your meeting the development would of suffered a loss over all?…. that’s correct if they had of been sold on that day, they may have broken even but it would of been marginal.

And I’m correct aren’t I Mr McGarry that you agreed with Mr Seavill that he did not have to sell the units to establish to your satisfaction that there was a loss?…. I pointed out to him at that meeting that we would have to hold them and he actually raised the point of having to hold them for five years, he said the development has been a failure I will probably have to hold them for five years now.

[28]     Although Mr Seavill was contemplating holding the units until the property market recovered, he had the right to make a decision, in good faith, to proceed to

realise the assets of the joint venture by selling the three units.   If this occurred, Mr McGarry was exposed to possible liability.   Demand for Mr McGarry’s debt could be made as soon as the sales had taken place.  Instead, under the arrangement negotiated  on  8  November,  Mr  McGarry  obtained  the  certainty  that,  unless  he elected to sell the Wellington property, no demand could be made on him for two years even if the three units were sold by Melmerley.  In the place of an uncertain (floating) date of repayment, he bargained for and got a fixed date.  That constituted consideration passing from Melmerley.

[29]     The High Court Judge appears to have been of the view that Mr Seavill did not genuinely believe that he had the right to demand payment as at 8 November

1993.  (There was no such finding by the trial Judge.)  But it does not appear that he ever made such a demand.   What he sought was Mr McGarry’s signature on a document which would give him the right to make such a demand and which would also settle the amount to be accounted for.  It does not even appear that Mr Seavill was  intending  to  make  an  immediate  demand,  for  the  draft  deed  provided  for monthly payments of interest.   (We mention this point only because we were informed by Mr Asher that the Judge’s statement that Melmerley did not have an honest belief in what it was contending has caused Mr Seavill some concern.)  But even if, contrary to the view we have formed, that might have been so, the result of the negotiation was that Mr McGarry obtained an advantage by getting a fixed date for payment.

[30]     For these reasons we have concluded that the appeal must be allowed and the orders of the District Court, including its costs order, restored.  The respondent must pay costs in this Court of $3,500 together with the appellant’s reasonable disbursements, including travel and accommodation costs of counsel, to be fixed if necessary by the Registrar.  The costs in the High Court are to be fixed by that Court.

Solicitors:

Morgan Coakle, Auckland for Appellants

Palmer & Associates, Newmarket, for Respondent