MGH Trah Ltd v Fox Mortimer Trustee Co Ltd

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

CA164/2020
[2021] NZCA 59

BETWEEN	MGH TRAH LIMITED, LIONEL JOHN HART AND JUDEE LOUISE HART AS TRUSTEES OF THE ANDRE AND JOSHUA HART TRUST Appellants
AND	FOX MORTIMER TRUSTEE COMPANY LIMITED Respondent

Hearing:	2 December 2020
Court:	Goddard, Lang and Hinton JJ
Counsel:	A R B Barker QC and A Lenard for Appellants M A Keil for Respondent
Judgment:	11 March 2021 at 11.00 am

JUDGMENT OF THE COURT

AThe appeal is dismissed.
BThe appellants must pay the respondent costs for a standard appeal on a band A basis, with usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Goddard J)

Introduction

This appeal raises a short point about the construction of an agreement for sale and purchase of a residential property (the ASP) entered into by the appellants (the vendors) and the respondent (the purchaser). It concerns payment of interest for a proportion of the purchase price that the purchaser paid to a stakeholder, rather than to the vendor, in accordance with the mechanism set out in the ASP for dealing with disputed claims to compensation and equitable set-off made by a purchaser before settlement is due to take place.
The vendors were ultimately held to be entitled to receive the withheld amount, and (as a result) were also entitled to the interest earned on that amount. But the vendors say that under the ASP they are entitled to default interest at 14 per cent per annum on the withheld amount. In the High Court they made an unsuccessful claim for interest on that basis.[1] They now appeal to this Court.
[1]Fox Mortimer Trustee Co Ltd v MGH Trah Ltd [2020] NZHC 321 [High Court judgment].
We consider that the High Court was right to conclude that default interest was not payable by the purchaser to the vendors in these circumstances. Our reasons (which differ from those of the High Court Judge) are set out below. It follows that the appeal should be dismissed.

Background

The ASP was entered into on 29 March 2018. The purchaser agreed to purchase a substantial residential property in Coatesville. The property was Lot 2 in a four-lot subdivision that had been developed by the vendors. The purchase price was $5,600,000. Settlement was to take place 12 months after the date of agreement. That date was subsequently extended by agreement to 18 April 2019.
The vendors retained ownership of two lots in the subdivision, including Lot 1. The ASP included cl 21, a further term of sale negotiated by the parties, which read:
The vendor warrants that any future dwelling to be constructed on the proposed LOT 1 (as per the attached plan) will only be single level and will be positioned on the land so as to minimise any impairment to the view of the dwelling situated on LOT 2.
The relevant plan identified a 400 square metre area marked “X” where a single level home could be built on Lot 1, in a natural bowl where it would have little effect on views from Lot 2.
After the ASP had been entered into, the vendors decided to subdivide Lot 1, and to build a two-level dwelling on one of the sections created by that subdivision (at a location other than X). When the purchaser discovered the vendors’ plan to subdivide Lot 1 and build a further dwelling, the purchaser issued proceedings in the High Court claiming that cl 21 of the ASP precluded the vendor from proceeding with that plan. The purchaser sought a permanent injunction restraining the vendors from proceeding with subdivision of Lot 1 or construction on Lot 1 other than at location X. In the alternative, the purchaser claimed damages for breach of that clause.
The purchaser applied for an interim injunction. On 20 February 2019 the vendors gave an undertaking in relation to construction work on Lot 1, pending hearing of the injunction application. The interim injunction application was set down for hearing on 2 May 2019. It was then resolved (without the need for a hearing) by consent orders which restricted construction on Lot 1 pending a substantive trial, or further order of the court.
On 16 April 2019, two days before settlement was due to occur, the purchaser gave the vendors notice of a claim for compensation and an equitable set-off in relation to the loss they claimed they would suffer if two substantial dwellings were built on Lot 1. They provided a “pre-estimate” of that claim of $1,680,000. They advised that they intended to withhold this amount on settlement.
The vendors did not consent to the purchaser’s claim for compensation. In these circumstances the ASP provided (in cl 8.4, set out at [22] below) for an “interim amount” to be deducted on settlement and held by a stakeholder. The parties did not agree on an interim amount to be withheld. The ASP provided that in the absence of agreement, the interim amount would be determined by an independent property lawyer. Mr Nolan was appointed to perform that role and to act as the stakeholder.
Settlement proceeded on 18 April 2019 on the basis that $1,680,000 would be deducted from the purchase price on settlement and held by Mr Nolan as stakeholder, pending a determination by him as to the interim amount to be withheld.
On 7 May 2019, after receiving submissions from the parties, Mr Nolan directed that $1,120,000 should be held as the interim amount. He paid the difference between that sum and the $1,680,000 he had initially received to the vendors.
The result was that from 7 May 2019 through to trial:
(a)Court orders were in place preventing any construction work on Lot 1 that would be inconsistent with the interpretation of cl 21 contended for by the purchaser.
(b)The sum of $1,120,000 was held by Mr Nolan as stakeholder pursuant to cl 8.4 of the ASP. The balance of the purchase price was received by the vendors.

High Court judgment

The High Court proceedings were heard in February 2020. Downs J held that cl 21 precluded subdivision of Lot 1, and prevented a house being built other than at location X.[2] The Judge granted the declaration sought by the purchaser that cl 21 was a restrictive covenant over Lot 1, which could be registered against its title.[3] The Judge also granted a permanent injunction restraining the vendors from building on Lot 1 other than in accordance with cl 21.[4]
[2]High Court judgment, above n 1, at [45] and [54].
[3]At [78].
[4]At [80].
The Judge went on to hold that as a result of the interim and final orders made, cl 21 had not been breached in a manner that caused any loss to the purchaser. So no compensation was payable by the vendors to the purchaser, and no question of equitable set-off against the purchase price arose. It followed that the balance of the purchase price, which was held by the stakeholder, should be paid to the vendors.[5]
[5]At [63] and [84].
The vendors had filed a counterclaim seeking default interest under cl 3.12 of the ASP on the amount withheld on settlement and paid to the stakeholder. The Judge rejected that claim. He summarised the argument before him on that issue, and his resolution of it, as follows:
[74]     Mr Barker emphasises that by settlement, the [vendors] had undertaken not to build any home on Lot 1 pending trial. Consequently, the plaintiff was wrong not to pay [them], and in full.
[75]     Mr Bigio acknowledges the principles identified by Mr Barker but argues the [purchaser] should not be liable for interest as the [vendors] … acted unreasonably. Fault on this analysis lies with the [vendors], not the [purchaser].
[76]     I agree with Mr Bigio. The [purchaser] reasonably apprehended [the vendors were] intending to subdivide Lot 1 even though clause 21 prevented that. Indeed, despite the clause, [the vendors] had been planning to do just that. The [purchaser] settled on time while identifying possible loss if two homes were constructed. The [purchaser] was not required to make an election between injunctive relief and damages. Expressed positively, the [purchaser] was entitled to reserve its position on remedy. Mr Nolan considered a large sum should be withheld given totality of circumstance. The mix vindicates the [purchaser].
(Footnote omitted.)

Relevant provisions of the ASP

The ASP was entered into on the Ninth Edition of the Real Estate Institute of New Zealand Inc/Auckland District Law Society Inc (REINZ/ADLS) standard form agreement, which was issued in November 2017.
As noted above, the purchase price under the ASP was $5,600,000. A deposit of 10 per cent of the purchase price was payable by instalments. The ASP provided for the balance of purchase price “to be paid or satisfied as follows: (1) By payment in cleared funds on the settlement date”.
Clause 3.8 set out the parties’ obligations on settlement. As relevant, it read:
3.8 On the settlement date:
(1)The balance of the purchase price, interest and other moneys, if any, shall be paid by the purchaser in cleared funds or otherwise satisfied as provided in this agreement (credit being given for any amount payable by the vendor under subclause 3.12 or 3.14);
(2)the vendor’s lawyer shall immediately thereafter:
(a) release or procure the release of the transfer instrument and the other instruments mentioned in subclause 3.7(1) so that the purchaser’s lawyer can then submit them for registration;
(b)pay to the purchaser’s lawyer the LINZ registration fees on all of the instruments mentioned in subclause 3.7(1), unless these fees will be invoiced to the vendor’s lawyer by LINZ directly; and
(c)deliver to the purchaser’s lawyer any other documents that the vendor must provide to the purchaser on settlement in terms of this agreement.
The vendors’ claim for default interest was made under cl 3.12:
Purchaser Default: Late Settlement
3.12 If any portion of the purchase price is not paid upon the due date for payment, then, provided that the vendor provides reasonable evidence of the vendor’s ability to perform any obligation the vendor is obliged to perform on that date in consideration for such payment:
(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. For the purposes of this subclause, a payment made on a day other than a working day or after the termination of a working day shall be deemed to be made on the next following working day and interest shall be computed accordingly; and
(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 on settlement for incomings in respect of the property which are payable and received 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 incomings in lieu of receiving interest from the purchaser pursuant to subclause 3.12(1).
The interest rate for late settlement at the relevant time was 14 per cent per annum.
Clause 8.0 of the ASP established a mechanism for addressing claims for compensation and equitable set-off by a purchaser prior to settlement. Because it is central to the issue before us, we set it out in full:
8.0 Claims for compensation
8.1 If the purchaser claims a right to compensation either under subclause 6.4 or for an equitable set-off:
(1) the purchaser must serve notice of the claim on the vendor on or before the last working day prior to settlement; and
(2) the notice must:
(a) in the case of a claim for compensation under subclause 6.4, state the particular error, omission, or misdescription of the property or title in respect of which compensation is claimed;
(b) in the case of a claim to an equitable set-off, state the particular matters in respect of which compensation is claimed;
(c) comprise a genuine pre-estimate of the loss suffered by the purchaser; and
(d) be particularised and quantified to the extent reasonably possible as at the date of the notice.
8.2 For the purposes of subclause 8.1(1), “settlement” means the date for settlement fixed by this agreement unless, by reason of the conduct or omission of the vendor, the purchaser is unable to give notice by that date, in which case notice may be given on or before the last working day prior to the date for settlement fixed by a valid settlement notice served by either party pursuant to subclause 11.1.
8.3 If the amount of compensation is agreed, it shall be deducted on settlement.
8.4 If the amount of compensation is disputed:
(1) an interim amount shall be deducted on settlement and paid by the purchaser to a stakeholder until the amount of the compensation is determined;
(2) the interim amount must be a reasonable sum having regard to all of the circumstances;
(3) if the parties cannot agree on the interim amount, the interim amount shall be determined by an experienced property lawyer appointed by the parties. The appointee’s costs shall be met equally by the parties. If the parties cannot agree on the appointee, the appointment shall be made on the application of either party by the president for the time being of the New Zealand Law Society;
(4) the stakeholder shall lodge the interim amount on interest-bearing call deposit with a bank registered under the Reserve Bank of New Zealand Act 1989 in the joint names of the vendor and the purchaser;
(5) the interest earned on the interim amount net of any withholding tax and any bank or legal administration fees and commission charges shall follow the destination of the interim amount;
(6) the amount of compensation determined to be payable shall not be limited by the interim amount; and
(7) if the parties cannot agree on a stakeholder, the interim amount shall be paid to a stakeholder nominated on the application of either party by the president for the time being of the New Zealand Law Society.
8.5 The procedures prescribed in subclauses 8.1 to 8.4 shall not prevent either party taking proceedings for the specific performance of the contract.

Vendors’ submissions on appeal

The vendors’ primary argument was that the High Court judgment established that no compensation was ever payable by the vendors to the purchaser. It followed that the whole of the purchase price should have been paid on the settlement date. Under cl 3.12, default interest was payable on the portion of the purchase price that should have been, but was not, paid to the vendors on the due date for payment: namely the amount paid to, and held by, the stakeholder. The obligation to pay interest turned on the construction of the relevant provisions in the ASP: the reasonableness or otherwise of each party’s actions was not relevant. The Judge had erred in determining entitlement to interest under cl 3.12 by reference to whether one or other party had acted reasonably.
Expanding on this approach, Mr Barker QC for the vendors submitted that:
(a)The deductions that can be made on settlement are expressly set out in cl 3.8. The amount withheld in this case was not a deduction contemplated by cl 3.8.
(b)Clause 3.12(1) provided that if “any” portion of the purchase price is not paid on settlement, the purchaser is liable for default interest on late settlement.
(c)Nothing in cl 8.0 affects the obligation to pay interest under cl 3.12(1). It does not purport to do so expressly, nor is there any reason to read in such a restriction in relation to compensation claims.
(d)All the compensation procedure under cl 8.0 does is allow for settlement of the property transfer to proceed in a way that protects the positions of the parties. But there is nothing to suggest that the clause alters the underlying obligations of the parties in terms of settlement, or in respect of other claims that might be brought.
(e)Where the drafters of the ASP intended to displace the obligation to pay interest under cl 3.12(1), they did so expressly, as in cl 3.12(2)(b). The absence of any similar provision in cl 8.0 points against displacement of the obligation to pay interest under cl 3.12(1) in circumstances where cl 8.0 applies.
Mr Barker submitted that where an amount has been withheld under cl 8.0, and a vendor considers (rightly) that it should not have been withheld, the vendor’s claim for payment of the balance of the purchase price is a claim under cl 3.8 of the ASP to the effect that on the date of settlement, the purchaser was required to pay the settlement price and failed to do so. If that claim succeeds, an entitlement to interest under cl 3.12 necessarily follows.
Mr Barker referred us to two authorities which, in his submission, supported the approach he contended for.
In Pacific Basin Education Foundation Ltd v Richina Ltd, the purchaser, on the eve of settlement, raised issues in respect of the property being purchased and made a claim for an equitable set-off.[6] The parties agreed that the amount of $550,000 would be paid to a stakeholder in accordance with the compensation provisions in cl 7 of an earlier edition of the REINZ/ADLS standard form agreement, which were in essentially the same terms as cl 8.0 of the ASP in this case. The vendor subsequently issued proceedings to recover the amount held in the stakeholder account. The Court ordered payment of the amount held by the stakeholder, together with default interest under cl 3.12:
[96] Although the point was not directly taken in the notice of opposition, and not developed in Miss Hadlee’s written synopsis, Miss Hadlee submitted that the interest rate for late settlement no longer applies because (through the stakeholding arrangement) the parties have introduced a substituted interest rate. I took her to refer to such interest as accrued on the sum held on deposit through the stakeholding account. Having regard to current interest rates, I take judicial notice of the fact that the rate which will be recovered through an interest-bearing deposit will be substantially below 15 per cent per annum.
[97] It is not arguable that the setting up of the stakeholding pursuant to clause 7 of the … contract extinguished [the vendor’s] entitlement to interest at the full measure of 15 per cent per annum for the period during which [the vendor] was not paid the full purchase price. There is nothing in the wording of the standard provisions of the contract to preclude a vendor claiming the balance of the late settlement interest rate where the interest on any stakeholding under clause 7 falls short of that rate.
[6]Pacific Basin Education Foundation Ltd v Richina Ltd [2016] NZHC 2193, (2016) 19 NZCPR 390.
In Arranmore Developments Ltd v Zeeland Developments Ltd (No 2), the vendor sought specific performance of an agreement for sale and purchase of land.[7] The purchasers alleged various misrepresentations giving rise to a right to cancel. Those claims were rejected. However, the Court held that they had an arguable claim for damages for the misrepresentations. It ordered specific performance of the sale and purchase agreements, but with an amount that represented the value of the misrepresentation claims to be secured pending determination of the validity or otherwise of those claims. The Court held that the amount secured should include an allowance for default interest under the agreement:
[34] If the plaintiff establishes that there is no equitable set-off, the plaintiff is entitled to the benefit of all the contractual provisions giving it a remedy when the purchaser has defaulted in paying the full purchase price on settlement. That includes the right to interest under the agreements for sale and purchase. Accordingly, the appropriate interim arrangement is that the amount that should be secured is the sum of $26,500, plus interest on that sum at 15% per cent from 22 May 2009 to 2 July 2010.
[7]Arranmore Developments Ltd v Zeeland Developments Ltd (No 2) (2010) 11 NZCPR 825 (HC).

Mr Barker submitted that this approach is also supported by academic commentators, in particular, Dr McMorland. He referred us to two extracts from Dr McMorland’s text, Sale of Land, that were referred to by the Judge:[8]
Where settlement is delayed because of a dispute between the parties over the sum to be set aside in trust to await the quantification of a compensation claim to satisfy the requirements of the Court of Appeal in Lingens v Martin, or an equitable set-off, it would seem that, for the purposes of the late settlement provisions, it should be the party who ultimately proves to have been acting unreasonably, and thus unwilling to settle in accordance with the contract, who ought to be in default causing late settlement.
…
The penalty interest provisions are compensatory and only incidentally a sanction for enforcement. They are not a remedy for default. Thus, where the parties agree to postpone the purchaser’s obligation to settle while a dispute as to the purchaser’s obligation to complete under the contract is resolved, the arrangement may well be construed merely as a suspension of the remedies for default, and not as releasing the purchaser from the obligation to pay interest if it is eventually found that the purchaser must complete. To find otherwise would be to transfer the financial risk of the purchaser’s default, as it was found to be, to the vendor.
[8]High Court judgment, above n 1, at [73], quoting D W McMorland Sale of Land (3rd ed, Cathcart Trust, Auckland, 2011) at [11.17(b)] and [11.19(a)].
Mr Barker submitted that the High Court had misunderstood, and incorrectly applied, the first of these passages. In this passage Dr McMorland is addressing the situation that may arise between the date of settlement and the actual settlement, and whether a party could be in default in the situation. The issue in the present case concerns the situation after settlement, where a claim for compensation has been made. The passage is not suggesting there is a requirement for “reasonableness” by the parties in the period after settlement in order to determine whether a party has been in default, and whether the purchaser is required to pay post-settlement default interest.
In any event, Mr Barker submitted, neither cls 3.8 nor 3.12 refers to the concept of default. The obligation to pay interest on late settlement depends only on whether the purchase price was paid.
Mr Barker submitted that the second passage set out at [29] above is not a reference to the compensation provisions themselves, but to the underlying commercial logic of the transaction. The point Dr McMorland is making is that if a party advances a claim that later proves not to be established, it must be unlikely that the parties would have agreed to release that party from all the consequences of their asserted position being wrong.
Mr Barker also referred us to a New Zealand Law Society seminar presented by Dr McMorland on the REINZ/ADLS sale and purchase agreement, where the issue of interest on an interim amount paid to a stakeholder was more directly addressed. After referring to the difficulties of equitable set-off in respect of claims for misrepresentation, he said:[9]
These issues may involve: (i) evidence and proof of the facts; (ii) compliance with the legal requirements to establish the cause of action; and (iii) proof of the quantum of loss. For example, misrepresentations obviously precede the making of the contract and are frequently oral, made perhaps by the vendor’s real estate agent. A vendor may well deny such a misrepresentation was made. That would likely be only the first evidential problem.
If the parties are unable to agree on the resolution of these matters, there are various means available for the determination of such disputes: mediation, arbitration, or court proceedings. The parties then have either to agree on one of the first two, or one of them must take the initiative to commence proceedings.
In such cases, probably the only advantage of acting under cl 7 instead of commencing proceedings after settlement in full may be that the interim amount is held by the stakeholder, presumably earning interest, which will pay, or contribute to the payment of the damages payable by the vendor in the event of a successful claim by the purchaser, or complete payment of the settlement moneys in the event that is needed.
However, a claim under cl 7 carries a risk. It might be found that the claim does not come within cl 5.4 or the right to equitable set-off, in which case the purchaser had no right to withhold settlement in full. In that event, the interest rate payable on the bank deposit of the interim amount will undoubtedly be a great deal less than the late settlement interest rate under the ASP.
[9]Don McMorland and Julian Smith “ADLS Sale & Purchase Agreement” (paper presented to New Zealand Law Society, May 2016) at 78 (emphasis added).
Mr Barker also submitted that if, contrary to his primary argument, the reasonableness of the parties’ actions is relevant, the purchaser acted “entirely unreasonably, and indeed oppressively, in the actions that they took”. The claim for compensation was made at a very late stage. It was a claim for loss that had not yet been suffered and that would not be suffered if they obtained the injunction they sought. There was no basis on which they could claim an equitable set-off at the date of settlement, when they had the benefit of an interim injunction which protected their position.

Purchaser’s submissions on appeal

Miss Keil, for the purchaser, submitted that the purchaser had paid the amount required to settle in full on the settlement date: it had been paid either to the vendors or to the stakeholder as required by cl 8.0 of the ASP. No portion of the purchase price remained unpaid. So no default interest for late settlement was payable.
Miss Keil submitted that the interim amount held by the stakeholder secured the legitimate interests of both parties. It would be inappropriate for late settlement interest to be payable, in addition to the interest earned by the stakeholder on the deposit.
Miss Keil said that the correctness of this approach was supported by the Tenth Edition of the REINZ/ADLS agreement issued in 2019, which provides that apart from the net interest earned on the interim amount, no interest is payable by either party to the other in respect of the claim for compensation once the amount of the claim has been determined. She submitted that this represented a rejection of the approach adopted by the High Court in Pacific Basin Education Foundation Ltd v Richina Ltd.

Discussion

The issue raised by this appeal turns on the interpretation of the ASP, and in particular the interplay between cls 3.8, 3.12 and 8.0. Those provisions need to be read together in a manner that is consistent with their text and their commercial purpose. In particular, they need to be read in a way that ensures that cl 8.0 achieves the purpose for which it was inserted in the standard form agreement for sale and purchase.
Clause 8.0 was designed to fill a gap in earlier editions of the standard form sale and purchase agreement that was identified by the Supreme Court in Property Ventures Investments Ltd v Regalwood Holdings Ltd.[10] Blanchard, McGrath and Wilson JJ discussed in some detail the ability of a purchaser to make a deduction of an estimated amount of compensation at the time of settlement:
[74] … From the perspective of a vendor, it is undesirable if a purchaser, perhaps short of funds to settle in full, has the opportunity of manufacturing or inflating a claim for breach of warranty and thereby seeking to settle on a basis which would leave the vendor as an unsecured creditor or perhaps to force the vendor to postpone the settlement pending resolution of the purchaser’s claim. On the other hand, it is also undesirable that a purchaser with a valid claim to a set-off should have to pay in full and thus be left in the position of an unsecured creditor of an impecunious vendor. We have already adverted to the difficulties for a purchaser required to settle in full in circumstances like the present where its borrowing capacity and/or insurance may be affected by the vendor’s breach. The balance of these considerations, coupled with the fact that the practical result in Lingens upholding the right to a deduction appears to be broadly supported by commentators, provides support for a reading of cl 6.5 which does not remove any remedy available to the purchaser exercisable on or before settlement. That approach also avoids any inconsistency with the operation of cl 5.4 if and when a warranty under cl 6 also implicitly misdescribes the property.
[75] The potential difficulty and delay for a vendor can be mitigated if the vendor brings the matter to a head by suing for specific performance, asking the court to resolve the question of the disputed amount of the purchaser’s claimed deduction. If necessary, the court should be able to give the proceeding urgency and to devise interim orders intended to protect the legitimate positions of both parties while settlement proceeds. As Lord Eldon said in Wood v Griffıth, the court “will arrange the equities between the parties”. It should also not be beyond the wit of the drafters of standard-form real estate contracts to devise a mechanism which will enable speedy resolution of bona fide and reasonable purchasers’ claims for equitable compensation or set-off and protect each of the contracting parties whilst doubt about the correct position remains.
(Footnotes omitted.)
[10]Property Ventures Investments Ltd v Regalwood Holdings Ltd [2010] NZSC 47, [2010] 3 NZLR 231.
It appears that cl 8.0 in the Ninth Edition of the REINZ/ADLS standard form (like its precursor in the Eighth Edition) was intended to respond to the Supreme Court Judges’ suggestion that an appropriate mechanism should be capable of being devised to “enable speedy resolution of bona fide and reasonable purchasers’ claims for equitable compensation or set-off and protect each of the contracting parties whilst doubt about the correct position remains”. The purpose of cl 8.0 is to ensure that settlement can proceed on the due date despite an unresolved dispute about equitable compensation or set-off, on a basis that protects each party’s reasonable interests pending resolution of that dispute.
In the present case, the purchaser gave notice prior to settlement claiming compensation and an equitable set-off, as contemplated by cl 8.1. The purchaser’s right to compensation and to an equitable set-off was disputed. The amount of any compensation was also disputed. It is common ground that in these circumstances cl 8.4 applied. Clause 8.4(1) required an interim amount to be deducted on settlement and paid by the purchaser to a stakeholder until the amount of any compensation was determined. The parties could not agree on the interim amount, so it was determined by Mr Nolan under cl 8.4(3).
It seems to us that the purchaser’s obligation under cl 3.8(1) must be read in a manner that is consistent with the provisions of cl 8.0, in particular, the requirement in cl 8.4(1) that the interim amount “shall be deducted on settlement and paid … to a stakeholder”. The argument that the purchaser has failed to comply with cl 3.8(1) in circumstances where part of the purchase price is paid to a stakeholder in accordance with cl 8.4(1) would defeat the purpose of the cl 8.0 regime. By paying the interim amount to the stakeholder, the purchaser must be taken to have met their obligations under cl 3.8(1) regardless of the underlying merits of the claim to compensation. Otherwise it would remain open to the vendor to argue that the disputed claim was unfounded and that they were excused from settling by transferring the property “immediately” after payment in accordance with cl 3.8(1), as required by cl 3.8(2). That would result in the very stalemate at the time of settlement that cl 8.0 is designed to avoid.
The approach contended for by Mr Barker would also have the unsatisfactory consequence that compliance by the purchaser with cl 8.4(1) would amount to a breach of cl 3.8(1) in cases where it is subsequently determined that the claim to an equitable set-off was not made out (in part or in full). On his approach, the ASP would impose inconsistent obligations on the purchaser in such cases: an obligation under cl 3.8(1) to pay the full price to the vendor on settlement date, and an obligation under cl 8.4(1) to pay the interim amount to the stakeholder on settlement date pending resolution of the dispute. That makes no sense commercially, or as a matter of contract law. The obligation to pay the interim amount to the stakeholder on the settlement date under cl 8.4(1) must displace any obligation to pay the same amount to the vendor on the same date under cl 3.8(1), even in cases where the claim to an equitable set-off is not ultimately made out. Put another way, if paying the interim amount to the stakeholder under cl 8.4(1) on the date of settlement is consistent with the purchaser’s obligations under the ASP, as it plainly is, it cannot be the case that after the claim for compensation has been determined the purchaser’s conduct on the settlement date may be retrospectively reclassified as a breach of cl 3.8(1), and thus a breach of the ASP. That would be absurd.
It follows that the reference in cl 3.8(1) to the balance of the purchase price being “paid by the purchaser in cleared funds or otherwise satisfied as provided in this agreement” must be read as extending to payment by the purchaser in cleared funds to a stakeholder under cl 8.4(1). If on the settlement date the purchaser pays the interim amount to the stakeholder and the balance of the purchase price to the vendor, the purchaser’s obligation under cl 3.8(1) is satisfied and the vendor must “immediately thereafter” take steps to transfer the title to the property under cl 3.8(2).
It also follows that in those circumstances, the interim amount has been paid by the purchaser on the due date for payment for the purposes of cl 3.12, albeit to the stakeholder rather than to the vendor.
Thus cl 8.0 must be read as:
(a)providing for payment of the interim amount to the stakeholder rather than the vendor on the settlement date; and
(b)deferring the due date for payment of the interim amount to the vendor until the claim for compensation has been resolved.
We agree with Mr Barker’s submission that a claim by the vendor to be paid the whole or part of any interim amount withheld under cl 8.0 is a claim for payment of the purchase price under the ASP. But we doubt it is helpful to describe it as a claim for payment under cl 3.8, which has as its primary focus the parties’ obligations at the time of settlement. Clause 8.0 defers the obligation to pay the vendor on the settlement date. But it does not discharge the underlying obligation of the purchaser to pay the purchase price to the vendor under the ASP. Because the obligation to pay on the settlement date has been deferred pursuant to cl 8.0, the purchaser is not in default under cl 3.8(1) in respect of the interim amount paid to the stakeholder on settlement, and interest on that amount is not payable under cl 3.12. But the vendor remains able to sue for payment of the amount withheld following settlement, and if the purchaser wishes to oppose that claim, they will need to make out an entitlement to compensation which they are entitled to set off against the obligation to pay the purchase price.
This reading of the ASP will generally achieve a commercially reasonable and practically workable balance between the interests of the parties. Where the interim amount has been paid to a stakeholder, the purchaser does not obtain a windfall as a result of claiming compensation. They are required to come up with the full purchase price. But they are not exposed to the risk involved in settling in full, and pursuing a monetary claim against a vendor who may not have the means to meet that claim. The vendor’s interests are also protected: they can settle without being exposed to the risk of pursuing a claim for the balance of the purchase price against a purchaser who may not have the means to pay that amount. And a measure of protection for the interests of both parties in relation to the time value of money is provided by the requirement that the interim amount be held on interest-bearing call deposit, with entitlement to the interest earned following the destination of the interim amount.
A vendor who considers that the cl 8.0 mechanism is not adequate to protect their interests in relation to timely payment of the purchase price can bring proceedings seeking specific performance: the right to do so is expressly preserved by cl 8.5. If the court is not satisfied that the purchaser’s claim to make a deduction from the purchase price is made in good faith and is reasonably arguable, the court can direct settlement on the basis that the purchase price is paid in full. If the court is satisfied that the purchaser’s claim is made in good faith and is reasonably arguable, the court can direct performance of the agreement on terms that are designed to preserve the position of the parties. The terms settled by the court to “arrange the equities between the parties” may in some cases differ from those set out in cl 8.0 of the ASP. But that is not the approach that was adopted by the vendors in this case. The parties proceeded under the cl 8.0 regime.
We do not consider that the authorities referred to by Mr Barker provide any support for a different approach. In Pacific Basin Education Foundation Ltd v Richina Ltd the question of interest for late settlement does not appear to have been argued by counsel in any detail.[11] In particular, the parties do not appear to have drawn the Judge’s attention to the practical and theoretical difficulties identified at [42]–[43] above that result from the approach contended for by the vendor in that case. We respectfully disagree with the Judge’s view in that case, reached without the benefit of full argument, that the provisions in the agreement in issue in that case did not preclude a vendor claiming the balance of the late settlement interest rate where the interest earned by the stakeholder falls short of the default interest rate.
[11]Pacific Basin Education Foundation Ltd v Richina Ltd, above n 6.
Nor are we assisted by the decision in Arranmore Developments Ltd v Zeeland Developments Ltd (No 2).[12] That was a claim for specific performance, brought under a different form of the standard REINZ/ADLS agreement that did not include the cl 8.0 mechanism. The passage that Mr Barker referred us to was concerned with the terms on which specific performance would be awarded. In that context, the court can determine the appropriate approach in all the circumstances of the case, which as noted above may differ from the cl 8.0 mechanism.
[12]Arranmore Developments Ltd v Zeeland Developments Ltd (No 2), above n 7.
For the sake of completeness, we record that we accept Mr Barker’s submission that it is not necessary for the court to determine whether one or other of the parties acted reasonably, in this context. That is not the test under the relevant provisions of the ASP. The first passage from Dr McMorland’s text set out at [29] above is, as Mr Barker said, concerned with a different issue that may arise between the date of settlement provided for in an agreement for sale and purchase, and the date on which settlement actually occurs. That is not the issue in this case. Nor, in our view, is the second passage set out at [29] above relevant to the issue before us. That passage is concerned with the circumstances in which there is a dispute as to whether the purchaser is obliged to settle. If a purchaser claims to be entitled to decline to settle, and fails to make out that argument, then the purchaser is in default. The normal consequences in relation to default interest follow. But that was not the case here. The purchaser made payment in full as contemplated by the ASP, on the agreed settlement date.

As noted above, the Tenth Edition of the REINZ/ADLS standard form expressly provides that no interest is payable on an interim amount withheld under the provision corresponding to cl 8.0 of the ASP, apart from the net interest earned on the stakeholder deposit. We do not consider that any inference about the interpretation of the ASP can safely be drawn from the changes made in the Tenth Edition, as Miss Keil invited us to do. But the need for clarification of how the mechanism works is illustrated by this litigation, and the substance of those changes is unsurprising in light of the purpose of the cl 8.0 mechanism identified at [40] above.
For the reasons set out above we agree with the result reached in the High Court, albeit for different reasons. The appeal must be dismissed. Costs should follow the event in the usual way.

Result

The appeal is dismissed.
The appellants must pay costs to the respondent for a standard appeal on a band A basis, with usual disbursements.

Solicitors:
Malloy Goodwin Harford, Auckland for Appellants
Lane Neave, Christchurch for Respondent

[2021] NZCA 59

11 March 2021 at 11.00 am