Monaghan v Mineral Park Limited
[2021] NZHC 1407
•15 June 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV2020-404-1316
CIV-2019-404-1333 [2021] NZHC 1407
BETWEEN COLIN JOHN MONAGHAN and MARIA TE RANGIMARIA BROWN
Plaintiffs
AND
MINERAL PARK LIMITED
First Defendant
AND
ERIC YIN CHIC LIU and DAISY FANGYUE LIU
Second Defendants
Hearing: 21 April 2021 Appearances:
MC Josephson for the Plaintiff B Murray for the Defendants
Judgment:
15 June 2021
JUDGMENT OF FITZGERALD J
This judgment was delivered by me on 15 June 2021 at 3.00pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: T M Bates & Co, Auckland
Vallant Hooker & Partners, Auckland
To: M Josephson, Auckland
MONAGHAN v MINERAL PARK LIMITED [2021] NZHC 1407 [15 June 2021]
Introduction
[1] In February 2015, Mineral Park Limited (Mineral Park) leased Mr Monaghan and Ms Brown a motel (known as the Mineral Park Motel) and a lodge (known as the Parakai Springs Lodge).1 Eric and Daisy Liu are the directors and shareholders of Mineral Park and at the time of the lease, were the registered owners of the properties on which the Motel and Lodge are located.
[2] The (one page) lease was not in a standard form, though it envisaged the later execution of a more formal document. For whatever reason, that formal document was never executed. There is no dispute, however, that the less formal and non- standard lease document operated as a binding lease between the parties.
[3] The lease was for a period of six years, renewable at the option of Mineral Park. Unsurprisingly, it contained provisions concerning the rent to be paid, the amount of which escalated over time. It also contained a provision that so long as Mr Monaghan and Ms Brown were paying the rent and other outgoings on time, and were not otherwise in default of the lease, they would have a first right of refusal to purchase either the Lodge or the Motel if they were to be sold separately or jointly.
[4] In late 2018, the Lius sold the Lodge to a third party (with vacant possession), with settlement taking place on 25 October 2018. There is a dispute as to whether Mr Monaghan and Ms Brown were given the opportunity to exercise their right of first refusal before the Lodge was sold.
[5] Following the sale of the Lodge, the lease of the Motel continued. By early 2019, the monthly rent payable was $10,541.66 inclusive of GST. Invoices for the rent due for March to June 2019 went unpaid.
[6] On 5 June 2019, Mineral Park gave notice of cancellation of the lease. Mr Monaghan and Ms Brown nevertheless remained in possession.
1 For ease of reference, I will refer to each in this judgment as “the Motel” and “the Lodge”.
[7] In July 2019, Mineral Park and the Lius applied to this Court for summary judgment (CIV-2019-404-1333) and sought:
(a)an order for vacant possession of the Motel; and
(b)judgment in the sum of $33,011.26, being the unpaid rent up to cancellation of the lease.
[8] Neither Mr Monaghan nor Ms Brown participated in the proceedings. On 19 September 2019, at a formal proof hearing, Muir J made an order for vacant possession of the Motel and entered summary judgment in favour of Mineral Park and the Lius for the unpaid rent. Muir J also awarded costs and disbursements to Mineral Park and the Lius in an amount of $8,489.20.
[9] On being served with a copy of Muir J’s judgment, Mr Monaghan and Ms Brown made arrangements to vacate the Motel premises.
[10] Neither the substantive judgment sum nor the costs award made by Muir J have been paid by Mr Monaghan or Ms Brown.
[11] In separate developments, in August 2020, Mr Monaghan and Ms Brown commenced proceedings against Mineral Park and the Lius (CIV-2020-404-1316) claiming $2.8 million in damages for breach of the lease (and other related claims). The essence of Mr Monaghan and Ms Brown’s claims are that in breach of the lease:
(a)Mineral Park and the Lius wrongfully sold the Lodge to a third party with vacant possession; and
(b)Mineral Park and the Lius failed to give Mr Monaghan and Ms Brown the opportunity to exercise their right of first refusal to purchase the Lodge.
[12] Counsel for Mr Monaghan and Ms Brown, Mr Josephson, describes these claims as “effectively a counterclaim [to Mineral Park and the Lius’ claims for unpaid
rent] arising from the same lease”. I will therefore refer to these claims as the “counterclaim proceedings”.
[13] Against that background, there are two interlocutory applications before the Court:
(a)first, an application by Mr Monaghan and Ms Brown to set aside Muir J’s judgment of 19 September 2019; and
(b)second, an application by Mineral Park and the Lius for security for costs in the counterclaim proceedings.
[14] Following the conclusion of the hearing, and the matter having been raised in oral argument, the parties filed a joint memorandum consenting to the application to set aside Muir J’s judgment being determined as an application for a stay of enforcement of that judgment (if the Court were of the view that that was the more appropriate vehicle through which to deal with the issue).
[15] Before turning to the applications themselves, it is necessary first to set out in some more detail the factual background to the lease, its termination and the basis for Mr Monaghan and Ms Brown’s claims.
Factual background – more detail
The lease
[16] As noted, by a lease agreement dated 5 February 2015, Mineral Park leased Mr Monaghan and Ms Brown the Motel and the Lodge for six years. The (one page) lease is headed as follows:
6 year lease of Mineral Park Motel (MPM) and Parakai Springs Lodge (PSL) as accommodation business between Mineral Park Limited (the lessor) and Colin Monaghan [with Maria Brown added in handwriting] (the lessee).
[17] Clause 1 of the lease then sets out the rental schedule plus outgoings for the six years from 1 February 2015 to 1 February 2020.
[18]The remainder of the lease’s terms are as follows:
2nd. The transitional period as a prerequisite of the lease starts on 1/02/2015 until two months rental deposit and lease guarantor as approved by the lessor are provided by the lessee and before its due date of 30/09/2015.
3rd. The lease of PSL is tied to the MPM lease unless MPM or PSL is sold or the business nature is materially changed, subject to the provisions of clause 4 hereof.
4th. While the lessee is paying rents and all outgoings on time, and is otherwise not in default of the lease to be executed by the lessor and the lessee he has the first right of refusal to purchase if the properties are to be sold separately or jointly. The terms of settlement are to include as an essential term payment of the purchase price not more than one month after notice in writing of the purchase price has been given by the lessor to lessee. The lessee will be required to pay the agreed rental up to the time of settlement.
5th. The lessor is to have exclusive and free use and access to the office and meeting rooms at PSL until the end of the lease unless this term is varied in writing by the parties.
6th. If the lessee fails to pay rents or outgoings on time, or is otherwise in breach of the lease the lessor may in accordance with the law and the terms of the lease terminate the lease.
7th. An extension to the lease may be renegotiated at the lessor’s sole discretion three months before the end of the lease on 31/01/2021.
[19] I interpolate to observe that there may be an issue as to precisely what it was that Mineral Park leased to Mr Monaghan and Ms Brown, given Mineral Park was not the owner of the underlying land on which the Motel and Lodge were located. For present purposes however, I note that in their statement of claim on which they sought (and were granted) summary judgment, Mineral Park and the Lius pleaded that:
By lease agreement in writing dated 5 February 2015, [Mineral Park] as landlord leased the land [being the land on which the Motel and Lodge were located] to the defendants for the purposes of a business.
[20] This would appear to suggest that, at least on Mineral Park and the Lius’ case, the Lius had leased the land to Mineral Park, who in turn (sub) leased it to Mr Monaghan and Ms Brown.
The sale of the Lodge
[21] Mr Liu says in his affidavit in support of the application for security for costs that from February 2015, he and his wife had either or both of the Lodge and the Motel on the market for sale, both being advertised in newspapers and on the internet from time to time.
[22] Mr Monaghan says that he recalls four real estate agents coming to the properties during the time he and Ms Brown were there, and that he was aware that the Lius were interested in selling the Lodge. He says, however, that he thought any sale would be subject to the lease.
[23] In this context, the possible sale of the Lodge was raised in an email from Mr Monaghan to Mr Liu dated 5 September 2017, in which Mr Monaghan said:
I still think [the Motel] is a goldmine waiting to be discovered … with some input from both you and us. The Lodge, apart from maintenance is complete and is of a very high standard. Maybe sell the Lodge first and see what we can do with this place. We can find good quality second-hand furniture and fittings for here, paint and timber stain will be the biggest cost and we can take this place down a difference path rather than the same dead end street we’re on at the moment.
(emphasis added)
[24] In the event, on 25 April 2018, the Lius entered into an unconditional agreement with a third party for sale and purchase of the Lodge. The settlement date was shown on the front page of the agreement to be 25 October 2018, and was notated as “Vacant Possession”. Somewhat curiously, given this reference to vacant possession, clause 21 of the further terms of sale stated:
See attached lease agreement for the property – Parakai Springs Lodge. Tenants details are Colin Monaghan and Maria Brown. The current is
$125,000 plus GST plus outgoings. As from 1-2-2017, the lease should be
$140,000 plus GST plus outgoings.
[25] Clause 3.1 of the standard terms and conditions provided that “unless particulars of a tenancy are included in this agreement, the property is sold with vacant possession and the vendor shall so yield the property on the settlement date”. There is accordingly an inconsistency in the agreement itself, given the stipulation on the
front page of the document that as at settlement date, the Lodge would be conveyed with vacant possession.
[26] In the event, the purchaser did not take the property subject to the lease. Mr Liu says in his affidavit that he and his wife were advised by the real estate agent that the purchaser had inspected the property and was of the opinion that it did not want to keep Mr Monaghan and Ms Brown with the Lodge business. It appears, therefore, that in practice, the Lius and the purchaser proceeded on the basis that whether the sale of the Lodge was subject to the lease was at the purchaser’s option.
[27] Mr Liu goes on to say that on 21 September 2018, he had a meeting with Mr Monaghan about the sale and told him that it was to settle on 25 October 2018. Mr Liu says that he told Mr Monaghan that they had an unconditional offer to buy the Lodge and that the purchaser did not want to keep him and Ms Brown with the business. Mr Liu says he told Mr Monaghan that the purchase price was $3.6 million plus GST.
[28] Mr Liu conveyed essentially the same information to Mr Monaghan by a follow-up email on 23 September 2018, stating:
As discussed at our meeting last Friday, please be informed we have an unconditional offer for the property of Parakai Springs Lodge. The settlement date is on 25 October 2018. Let me know as soon as possible if you will pay
$3.6 million plus GST if any for the same property before that date.
[29]Mr Monaghan replied a few days later on 27 September 2018, stating:
Not too sure what to make of all this, my biggest question is why were we not told about the sale earlier, your real estate lady told us the sale was made on April 25th, you were given a deposit and settlement date is October 25th, you told me you weren’t sure of the sale, it looks like a done deal to me. Is the sale subject to the lease?
We made a lot of money for you in the short time we had Palm Springs, despite me warning you, you through [sic] us out in favour of Ric and we all know that cost you a fortune, I have paid you well in excess of $900k busting our guts with the motels especially Mineral Park which was never completed by Ric and now you plan on shafting us again.
Believe me when I say we have the utmost respect for you and Daisy and we do not want to end this on a sour note but we believe we are entitled to some sort of compensation.
Our solicitor will be in touch.
[30]Mr Liu replied on 29 September 2018, stating:
I reflect that we agree to vacate [the Lodge] is to the relief of us both. We can all get more peace and health back as well as reduce the financial pressure we both face.
[31] In his affidavit, Mr Liu says that his reference to “we agree to vacate PSL” was because he understood Mr Monaghan and Ms Brown had agreed to the termination of the lease and in that event, they would be entitled to a refund of part of the bond held pursuant to the lease (hence the reference to reducing the financial pressure both sides faced).
[32] Mr Monaghan, on the other hand, says that he had not agreed at that time to vacate the premises, and that Mr Liu’s comment to that effect in his email “[was] wishful thinking on [Mr Liu’s] part”. Conflicts of evidence such as this cannot, of course, be resolved on the present applications and will need to await trial.
[33] Mr Liu says that during this period, neither Mr Monaghan nor Ms Brown made any further communications with either him or his wife, in writing or orally, about exercising the right of first refusal. Mr Liu says that the bond amount for the Lodge was ultimately paid to Mr Monaghan and Ms Brown on 9 November 2018.
[34] As to the exercise of the right of first refusal, Mr Monaghan says in his affidavit that he didn’t have enough money to buy the Lodge, but knew a woman called Isabel Li who was interested. It appears that Ms Li had been interested in the Lodge for some time, as Mr Liu says that in early April 2018, a real estate agent who said he represented Ms Li had called at the Lius’ home and presented a verbal offer by Ms Li to buy the Lodge. Mr Liu says he did not accept that offer, and the agent returned later in April 2018 with a written offer by Ms Li. Mr Liu says that he and his wife did not accept that offer either.
[35] Turning back to September/October 2018, it appears that, once it became apparent that the Lodge was to be sold, Mr Monaghan, Ms Brown and Ms Li had some discussions about whether she might fund the purchase of the Lodge. I do not say
anything further on this topic, however, as Mr Josephson advised the Court shortly before the hearing that certain communications between those three parties, and Ms Li’s lawyers (McVeagh Fleming), were subject to confidentiality and/or privilege and ought not to have been included as exhibits to Mr Monaghan’s affidavit. Nevertheless, Mr Monaghan does not suggest that there was any communicated offer made to the Lius in relation to the Lodge (though he says that he did try to get hold of Mr Liu at this time).
[36] The Lodge was accordingly sold to the third party with vacant possession, with settlement taking place on 25 October 2018. Mr Monaghan says the following about the position after the sale:
After the sale of PSL, we no longer had we had been promised under the lease. The business was not viable anymore. PSL and MPM are two quite different animals. PSL is a beautiful place, brand new, modern rooms, nice layout whereas MPM is from the 1970s. The place is old, rooms and furnishings are run down, original carpet laid straight on top of concrete floors. The two motels worked well together, but once PSL had been sold we were on a hiding to nothing. There was no way we could make enough money.
(emphasis added)
[37] There is no explanation or detail of how it is said that the Motel was only viable if operated together with the Lodge (particularly given the description of them being “two quite different animals”).
[38] Mr Monaghan goes on to describe how Mineral Park and the Lius’ accountant came to see him and Ms Brown on 2 November 2018 with a document he wanted them to sign. The document stated that the lessee (Mr Monaghan and Ms Brown) were agreeable to the lessor (Mineral Park) selling the Lodge and that the lessee would vacate the Lodge by 25 October 2018. (I interpolate to note that this document is dated
16 October 2018 but was only received by Mr Monaghan and Ms Brown on 2 November 2018.) The agreement also stated that a cheque for the sum of $23,846 (being the Lodge share of the bond) was to be considered full and final settlement, and that both parties agreed there were no further claims due or payable by the lessor to the lessee. Mr Monaghan says that he refused to sign the document (and there is no suggestion Ms Brown signed it either).
Failure to pay the Motel rent
[39] As noted, Muir J’s judgment concerned unpaid Motel rent for the months of March, April and May 2019.
[40] Email correspondence between Mr Monaghan and Mineral Park’s accountant (Mr Liew) and Mr Liu in and around April to June 2019 has been put before the Court. In relation to the March 2019 rental, Mr Monaghan said in an email dated 18 April 2019 that he was “trying [his] damned hardest” to pull together the funds for the rental payment, and was hoping to be in a position to pay the balance the following week.
[41] Similarly, in email exchanges in early June 2019, in which Mr Liu had said that “unfortunately the Motel business cannot earn enough to pay the rent”, Mr Monaghan responded:
I think it can and I want the chance to prove it, bookings are coming and I have a meeting with WINZ lined up which should work in our favour … I can make this work Eric, this old place has potential and it doesn’t get the credit it should. We are not too far in the hole that we can’t get out. We have been battling for a long time now and I am not ready to give up, me and my family have nowhere to go.
(emphasis added)
[42] There matters appear to have largely rested, with Mineral Park/the Lius eventually issuing proceedings in early July 2019 for the unpaid rent and for vacant possession of the Motel.
[43] Mr Monaghan says that he and Ms Brown did not participate in those proceedings because he was “getting very upset, and angry about the situation” and felt “defeated”. He says:
Eric had broken our agreement and then walked away like it never happened, and it felt like a betrayal. He didn’t want anything to do with us. We had a right to live in [the Motel] under the lease, and with [the Lodge] we would have not got behind on the rent. By the time we were served with legal papers, [the Lodge] was well gone. [The Motel] never made enough money consistently to cover the rent and the bills. I didn’t particularly have the money to pay a lawyer. Besides, it didn’t seem like there was any way that we would get [the Lodge] back. And going to see McVeagh Fleming in October 2018 had not got us very far.
(emphasis added)
Events after Muir J delivers judgment
[44] Following delivery of Muir J’s judgment, the proceedings was transferred to the District Court.2 After various timetabling delays, on 27 July 2020, counsel for Mineral Park and the Lius, Mr Barry, advised Mr Josephson that:
Our clients do not wish to proceed with incurring further cost in this proceeding, particularly since there is little prospect of recovery from the defendants even for the existing judgment.
As you have not gone on the record, we would propose filing a memorandum to that effect, rather than a discontinuance, and there would be no issues of costs arising.
[45] Mr Josephson responded on 29 July 2020, noting that it would be “disingenuous” of him not to advise that Mr Monaghan and Ms Brown were shortly to commence High Court proceedings seeking damages for breach of the lease (that is, the counterclaim proceedings). Mr Murray accordingly advised that his clients’ District Court proceedings would likely continue, but would be transferred to the High Court to be joined with the counterclaim proceedings.
[46] As noted, Mr Monaghan and Ms Brown’s counterclaim proceedings were filed in August 2020. Presumably as a defensive mechanism, Mineral Park/the Lius then issued a bankruptcy notice against Mr Monaghan in October 2020 (based on Muir J’s summary judgment), which was served in November 2021. Mr Monaghan and Ms Brown’s application to set aside the summary judgment was filed shortly thereafter, in December 2020.
[47]I turn now to the two applications.
Application to set aside Muir J’s judgment
[48] As a preliminary point, Mr Josephson confirmed that the application does not seek to set aside Muir J’s order granting vacant possession of the Motel, that order
2 For the purpose of Mineral Park/the Lius pursuing further claims for unpaid rent up to the date of vacation of the Motel, and unpaid outgoings.
having been complied with some time ago. Rather the application is directed solely to the entry of summary judgment for unpaid rent.
[49]The application to set aside is advanced on two grounds:
(a)first, Muir J’s judgment was irregularly obtained; and/or
(b)second, in all the circumstances, the Court should exercise its discretion to set aside the judgment.
Was the judgment irregularly obtained?
[50] Mr Monaghan and Ms Brown say that the judgment was irregularly obtained because the affidavits put before the Court and upon which Muir J gave judgment did not set out the grounds for the plaintiffs’ belief that there was no defence to the claim, and in particular, that the affidavits omitted to address (or address in any substance):
(a)the sale of the Lodge;
(b)the effect this had on the Motel’s income; and
(c)that Mr Monaghan and Ms Brown had a right of first refusal to purchase the Lodge.
[51] Mr Monaghan and Ms Brown say that they had a substantial ground of defence available which ought to have been raised in the plaintiffs’ affidavits.
[52] I am satisfied that there is nothing in this point, or at least that there is nothing which warrants setting aside Muir J’s judgment.
[53] Prior to the point at which Muir J entered summary judgment in Mineral Park and the Lius’ favour, no clear dispute or claim had been raised by Mr Monaghan or Ms Brown in relation to either the sale of the Lodge, the exercise of the right of first refusal or the suggested impact the sale of the Lodge had on the Motel rent due for the period from March 2019.
[54] In relation to the outstanding rent, the communications from Mr Monaghan referred to at [40] and [41] above do not suggest that the sale of the Lodge was the reason why the Motel rent was outstanding.
[55] While I accept that in September 2018, Mr Monaghan had expressed a general level of concern and disappointment about the sale of the Lodge (including that it looked like “a done deal” and our “solicitor will be in touch”), there was no allegation at that time that there had been a failure to give Mr Monaghan and Ms Brown the opportunity to exercise their first right of refusal. I also accept that Mr Monaghan had queried in September 2018 whether the sale of the Lodge was subject to the lease. But between September 2018 and September 2019, when judgment was delivered by Muir J, there was no suggestion by Mr Monaghan or Ms Brown that they had a claim arising out of the sale of the Lodge. As noted, the first communication of a claim occurred in late July 2020 (see [45] above).
[56] For these reasons, there was nothing which ought to have put Mineral Park or the Lius on notice in July 2019 that Mr Monaghan and Ms Brown had claims arising out of these events which needed to be addressed in the affidavit materials.
Should the judgment be set aside?
[57] Pursuant to r 12.14, summary judgment obtained by default may be set aside if it appears to the Court that there has been, or may have been, a miscarriage of justice.
[58] The same inquiry is required when determining an application pursuant to r 15.10 to set aside a judgment obtained by default. In that case, relevant factors will include:3
(a)whether the defendant’s failure to appear was excusable;
(b)whether there is a substantial ground of defence; and/or
3 Andrew Beck (ed) McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HR15.10.03(2)].
(c)whether irreparable injury to the party that obtained the judgment would result if judgment were set aside.
[59] There is no suggestion by Mr Monaghan and Ms Brown that their failure to appear on the summary judgment hearing was excusable. Indeed, Mr Monaghan says that no steps were taken on the summary judgment application given he was feeling angry and upset at the time, and there seemed to be no prospect of getting the Lodge back in any event.
[60] Mr Josephson submits, however, that Mr Monaghan and Ms Brown had (and have) a substantial ground of defence pursuant to the lease, namely:
(a)the first alleged breach of the lease, by selling the Lodge without that sale being subject to the lease; and
(b)the second alleged breach of the lease, by not giving Mr Monaghan and Ms Brown the first right of refusal when the Lodge was sold.
[61] Mr Josephson submits that on principles arising from authorities such as Noble Investments Ltd v Keenan, Mineral Park was itself in breach of the lease, and thus was not “ready and willing” to perform its side of the contract, and accordingly its cancellation of the lease was invalid.4
[62] I do not consider these principles, at least insofar as they might impugn Mineral Park’s cancellation of the lease, to be directly relevant to whether the summary judgment ought to be set aside. This is because the rent claimed and ordered by way of summary judgment did not rely on a valid cancellation of the lease. Rather, the judgment sum related only to the rent which was due and owing up to the point of the (purported) cancellation. Accordingly, that rent would have been due and payable by Mr Monaghan and Ms Brown irrespective of cancellation.
4 Noble Investments Ltd v Keenan [2006] NZAR 594, (2005) 6 NZCPR 433; see also Ingram v Patcroft Properties Ltd [2011] NZSC 49, [2011] 3 NZLR 433 at [40].
[63] Of more potential relevance is Mr Josephson’s submission that the sale of the Lodge without accommodating the continuation of the lease resulted in Mr Monaghan and Ms Brown’s inability to pay the rent on the Motel; the point being that the jewel in the crown was (wrongfully) sold, with Mr Monaghan and Ms Brown being left to “box on” with the Motel. Mr Josephson points to the fact that prior to March 2019, there is no suggestion of any default, or at least serious default, in payment of the Motel’s rent. Again, Mr Josephson points to authorities such as Noble Investments for the proposition that a party would be benefitting from its own wrong in circumstances where “the other party’s breach is a direct result of breach committed by the party seeking to cancel the contract.”5
[64] Again, I am not persuaded that these matters give rise to a substantial defence to the claim for unpaid rent, at least to the extent warranting the summary judgment being set aside. I note Mr Monaghan’s own view expressed in his email of 5 September 2017, suggesting that Mr Liu sell the Lodge first, with Mr Monaghan and Ms Brown continuing with the Motel. On its face at least, this does not appear to suggest or envisage any direct “harm” to the running of the Motel from the Lodge being sold, or to proceed on the basis that Mr Monaghan and Ms Brown would, following the suggested sale, continue to lease and run the Lodge. In addition, some of the emails from Mr Monaghan referred to earlier in this judgment suggest that the Motel had always been in financial strife and a poor performing business, even when operated in conjunction with the Lodge.6 Further, the suggested reliance on the continued lease of the Lodge in the context of the Motel’s financial performance will likely need to be the subject of expert evidence. Moreover, I again note that in none of the communications in early 2019 about the unpaid Motel rent was it suggested that it was the sale of the Lodge that was causing the inability to pay.
[65] There remains the issue, however, of whether Mr Monaghan and Ms Brown could, if they had participated in the summary judgment proceedings, have raised a counterclaim to the claim for unpaid rent, namely the damages now sought in their separate counterclaim proceedings.
5 Noble Investments Ltd v Keenan [2006] NZAR 594, (2005) 6 NZCPR 433 at [47].
6 See those emails referred to at [23], [41] and [43] above.
[66] Commentary to the summary judgment rules suggests that in light of r 12.12, the existence of a counterclaim, rather than a defence, may be relevant to an application to set aside a judgment given by way of the summary judgment procedure.7 This is because r 12.12 provides that, if it appears to the Court on an application for summary judgment that the defendant has a counterclaim “that ought to be tried”, the Court may:
(a)give judgment for the amount that appears to be just on any terms it thinks just; or
(b)dismiss the application and give directions under r 12.12(1).
[67]In this context, the authors of McGechan on Procedure state that:8
The issue of staying execution of a summary judgment arises most frequently in connection with counterclaims. Where a counterclaim amounts to a set-off, this will provide a defence to the summary judgment application. In cases where the defendant has a counterclaim which cannot be classified as a set- off, the question arises as to whether the Court should stay execution of the summary judgment pending resolution of the counterclaim. The defendant should therefore apply for a stay at the time of filing the counterclaim.
[68] Neither party addressed me on whether the counterclaim in this case would operate as a set-off, and thus a defence, to the summary judgment. Rather, as already noted, the parties proceed on the basis that Mr Monaghan and Ms Brown’s claims operate by way of counterclaim. This raises the question of whether the application to set aside is better viewed through the lens of an application to stay enforcement of the summary judgment.
[69] I am satisfied it is appropriate to consider the application to set aside through that lens. As noted, the parties consented to this approach.
[70] An application for a stay is made pursuant to r 17.29. The test again boils down to whether there would be a substantial miscarriage of justice if the plaintiffs’
7 Andrew Beck (ed) McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HR12.14.03].
8 Andrew Beck (ed) McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HR12.12.02].
judgment was executed before the counterclaim was heard. A balancing exercise is required.9 A miscarriage of justice is unlikely to result where a party is required to pay another an amount that is owing to it and the paying party “is free to pursue its claim against the other party in the normal way”.10 Factors that will be relevant to the balancing exercise include:11
(a)the apparent strength or weakness of the claim or counterclaim;
(b)any explanation as to why the counterclaim was not raised as an answer to the claim on which the judgment is based;
(c)the ability of the applicant for the stay to meet the judgment that is being enforced; and
(d)the potential bankruptcy or liquidation of a party seeking to pursue an apparently strong claim.
[71]I address each in turn.
[72] It is obviously difficult at this juncture to provide any firm views on the apparent strength or weakness of the counterclaim. It is sufficient to record, however, that I do not consider the counterclaim to be entirely without merit; it is not in the “completely hopeless” category.
[73] First, in terms of the sale of the Lodge not being subject to the lease, there is an obvious conflict in the terms of sale to the third party, with the front page of the agreement stipulating vacant possession, yet later sections of the agreement making reference to the lease. Nevertheless, in light of the purchaser’s indication that it did not wish to continue with Mr Monaghan and Ms Brown’s involvement in the Lodge, it is evident that the purchaser did not consider themselves bound by the lease. There
9 Enright v Gold Metal Exports Ltd (1989) 3 PRNZ 243 (HC) at 246.
10 Econotek Construction Ltd v Kale HC Gisborne CP8/87, 7 January 1988 at 8.
11 Andrew Beck (ed) McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HR17.29.02(6)].
is also no suggestion that the Lius considered themselves bound to sell the Lodge subject to the lease.
[74] Whether the sale of the Lodge without accommodating the lease amounted to a breach of the lease will turn on the proper interpretation of the lease’s terms.
[75] Mr Murray submits that cl 3 of the lease envisages that the lease of the Lodge or the Motel would terminate upon the sale of the relevant property. I do not consider that to be a clear interpretation of the clause. The clause is not elegantly drafted, but suggests that the lease of the Lodge will be “tied” to the lease of the Motel unless the Lodge or the Motel are sold. It is not entirely clear what the concept of the two leases being “tied” together means, though presumably it is to the effect that while the two properties remain in the ownership of Mineral Park/the Lius, the lease of each property will continue to “run” together. What cl 3 arguably does not do, however, is to provide that the lease of the Lodge will terminate upon the Lodge being sold. Rather, it is arguable that it provides that the lease will continue, but simply “untethered” from the lease of the Motel.
[76] I should emphasise that these are preliminary views only. The proper interpretation of the lease will need to be considered in the context of the evidence and factual matrix as advanced at trial, and after full argument by counsel. These comments simply reflect my view that, as matters presently stand, this aspect of Mr Monaghan and Ms Brown’s claim is not completely without merit.
[77] The merits of the claim that the lease was breached because of a failure to give Mr Monaghan and Ms Brown the opportunity to exercise their first right of refusal are, in my view, less apparent.
[78] Clause 4 of the lease envisages written notice of the purchase price being given by the lessor to the lessee, with an essential term of any exercise of the right of first refusal being the payment of the purchase price within one month. As noted, by email to Mr Monaghan dated 23 September 2018, Mr Liu stated that:
As discussed at our meeting last Friday, please be informed we have an unconditional offer for the property of Parakai Springs Lodge. The settlement
date is on 25 October 2018. Let me know as soon as possible if you will pay
$3.6 million plus GST if any for the same property before that date.
[79] There is no evidence before the Court that Mr Monaghan and Ms Brown communicated to Mineral Park/the Lius their intention to exercise the right of first refusal, or to put in place arrangements to enter into a sale and purchase agreement. It is said that the offer set out in Mr Liu’s email was “disingenuous”, as there was already an unconditional agreement in place to sell the Lodge to a third party. How the fact the offer might have been “disingenuous” translates to the validity or otherwise of that offer will need to be explored at trial. Nevertheless, the email, at least on its face, provided Mr Monaghan and Ms Brown with an opportunity to exercise their right of first refusal. On the materials presently before the Court, there is no evidence they took steps to do so, and were in a position to have paid the purchase price in the required timeframe.12
[80] There also appear to be some issues with the damages claimed by Mr Monaghan and Ms Brown, in that at first blush at least, they seem somewhat speculative and inflated. For example:
(a)The damages claimed are based on alleged loss of income from the Motel, but do not appear to reflect the costs involved in earning that income.
(b)The damages claimed relate to alleged losses in relation to the Motel as a result of the alleged breaches of the lease arising from the sale of the Lodge. As noted earlier, such claims will no doubt need to be supported by accounting and financial expert evidence, including on the relationship between the Lodge’s operation and the Motel’s financial performance.
(c)Aspects of the damages claimed appear to be based on the “loss of a chance” to earn profit from running the Motel until 2033, but appear to be based on a scenario of 100 per cent certainty of Mr Monaghan and
12 For example, there is no evidence from Ms Li as to her ability to have put Mr Monaghan and Ms Brown in funds to exercise the right of first refusal.
Ms Brown running the Motel until that date, and securing (in full) the suggested income (profit?) over that time. This is also against the backdrop of the lease providing that any extension may be renegotiated “at the lessor’s sole discretion”.
[81] Again, these are preliminary observations only, but are made to highlight that the damages claims themselves may need some work and attention to tie them more closely to the alleged breaches, and will no doubt require expert evidence to support them.
[82] As to whether there is any explanation for why the counterclaim was not raised as an answer to the summary judgment claim, as noted earlier, there is no real explanation for why Mr Monaghan and Ms Brown did not participate in the summary judgment proceedings. Reading between the lines, this may have stemmed from the fact they had a general level of dissatisfaction as to how their relationship with Mineral Park and the Lius had ended, but they had not at that point engaged with a lawyer on whether a legal claim might be available.
[83] Mr Monaghan and Ms Brown’s ability to meet the summary judgment, and the potential bankruptcy or liquidation of a party seeking to pursue an apparently strong claim, are related points in this case. As discussed later in this judgment, there seems to be no doubt that Mr Monaghan and Ms Brown are impecunious. Without access to funds which might be secured from successfully prosecuting their counterclaim proceedings, it seems unlikely that they will be able to meet the summary judgment against them. That much is clear from Mineral Park and the Lius’ own views when they (initially) decided not to pursue the District Court proceedings (see [44] above). As a result, there is a real possibility (particularly given the issue of a bankruptcy notice against Mr Monaghan) that one or both of them would be the subject of bankruptcy proceedings in the absence of a stay. That may well result in the counterclaim proceedings not being heard. Mr Murray responsibly accepted that that was a realistic outcome.
[84] Standing back and considering all relevant matters, I have concluded that it is appropriate to grant a stay of execution of the summary judgment for the unpaid rent,
but on conditions relating to the prompt and efficient prosecution of the counterclaim proceedings. Mineral Park and the Lius should not be out of pocket of funds to which they are entitled under Muir J’s judgment for any longer than is necessary to enable the counterclaim to be ventilated. As also discussed later in this judgment, I have also concluded that it is appropriate for some security for costs to be provided in the counterclaim proceedings.
[85] There will accordingly be a stay of enforcement of that aspect of Muir J’s judgment dated 19 September 2019 which relates to the unpaid rent on the Motel, but on the following conditions:
(a)Mr Monaghan and Ms Brown are to pay the security for costs ordered at [103] below within 20 working days of this judgment; and
(b)Mr Monaghan and Ms Brown are to pursue their counterclaim proceedings with all reasonable diligence, including by requesting at the next case management conference that a hearing date for the claims be set down.
[86]I turn now to the application for security for costs.
Application for security for costs
Legal principles
[87]These are not in dispute and may be briefly stated.
[88] First, the Court must consider a threshold issue, namely whether an applicant for security for costs has satisfied the Court that the plaintiffs will be unable to pay costs if unsuccessful in their claims.13 If that threshold is met, the issue becomes the exercise of discretion pursuant to r 5.45(2). Factors relevant to the exercise of the discretion include:
13 High Court Rules 2016, r 5.45(1).
(a)the balancing of two competing interests, being a defendant’s interest in being protected from a barren costs order and a plaintiff’s right of access to the court;
(b)the merits and prospects of success of the claim;
(c)whether the plaintiff’s impecuniosity results from the actions of the defendants; and
(d)delay and any other relevant factors.
[89] In the context of the present proceedings, Mr Josephson refers in particular to the Court of Appeal’s note of caution in A S McLachlan Ltd v MEL Network Ltd that:14
[15] The rule itself contemplates an order for security where the plaintiff will be unable to meet an adverse award of costs. That must be taken as contemplating also that n order for substantial security may, in effect, prevent the plaintiff from pursuing the claim. An order having that effect should be made only after careful consideration an in which the claim has little chance of success. Access to the courts for a genuine plaintiff is not lightly to be denied.
[16] Of course the interests of defendants must also be weighed. They must be protected against being drawn into protracted litigation, particularly where it is over-complicated and unnecessarily protracted.
Should security be ordered in this case?
[90] Mr Josephson accepts that the threshold test is met, in that there is a real risk that Mr Monaghan and Ms Brown will be unable to pay an award of costs in the event their claims are unsuccessful. The determination of the application accordingly turns on the exercise of the residual discretion.
[91] For the following reasons, I am satisfied that security for costs ought to be ordered, at least for the initial phases of these proceedings.
[92] First, for the reasons outlined earlier, while I consider aspects of Mr Monaghan and Ms Brown’s claims to have some merit, other aspects, at least on the materials
14 A S McLachlan Ltd v MEL Network Ltd (2002) 16 PRNZ 747 (CA).
presently before the Court, appear to lack merit, including the quantum of the damages sought.
[93] Second, as presently framed, the counterclaim proceedings have the potential to be over-complicated. There are six causes of action arising out of the same facts. The first cause of action, breach of the lease, appears to cover the key allegations made. Further, given the nature and quantum of the losses alleged to have been suffered, the determination and quantification of damages is likely to be complex, and there is no doubt both sides will need to call expert accounting and/or similar expert evidence.
[94] Third, I am not satisfied that the suggested link between Mineral Park’s/the Lius’ actions and Mr Monaghan/Ms Brown’s impecuniosity is sufficiently clear or strong to weigh against an order for security for costs. Rather, the picture to be gleaned from the materials overall is that Mr Monaghan and Ms Brown experienced financial difficulty throughout the operation of the lease. Further, other than the assertion in Mr Monaghan’s evidence that the Motel could not run successfully without the Lodge, there is no evidence or clarity around precisely how the Lodge’s business “propped up” or enabled the continued running of the Motel at a profit.
[95] Fourth, Mr Monaghan and Ms Brown have commenced High Court proceedings in which they seek millions of dollars in damages. Unfortunately, no High Court proceeding is particularly cheap to fund, and I do not expect the counterclaim proceedings will be an exception. Despite their accepted impecuniosity, however, it is not clear how Mr Monaghan and Ms Brown propose to fund the counterclaim proceedings through to a hearing. They have instructed counsel and are not funded by legal aid. I am not aware of what arrangements might be in place between them and their lawyers, but at the very least, not insignificant disbursements will be payable from time to time, including filing fees, hearing fees, copying costs, expert witness fees and the like. Neither Mr Monaghan nor Ms Brown filed any evidence addressing their respective financial positions, or how they propose to fund
the proceedings. My observation at the hearing that it appeared they might have a funder sitting behind them was not disputed by counsel.15
[96] If Mr Monaghan and Ms Brown are not in a position to pay even a modest amount by way of security for costs, it is doubtful they are in a position to fund the proceedings themselves. Conversely, if Mr Monaghan and Ms Brown are able to fund and prosecute the counterclaim proceedings through to a hearing, there ought to be the ability to pay a modest amount of security for costs.
[97] In these circumstances, I am not satisfied that an order that Mr Monaghan and Ms Brown pay a modest amount by way of security for costs will itself have the consequence of stifling their pursuit of the counterclaim proceedings. In the balancing exercise required, I also take into account that aspects of their claims do not appear particularly strong, and that the proceedings, have the potential to be over-complicated and lengthy. Balanced against these factors is that Mineral Park/the Lius already have a judgment in their favour for the unpaid rent on the Motel.
[98] Being satisfied that security for costs ought to be paid, the next question is the quantum of security. Mineral Park/the Lius seek security for costs through to and including inspection of documents by way of discovery. They calculate scale 2B costs to that point as $17,000.
[99] I consider such an approach appropriate, rather than making a larger order that would extend through to a substantive hearing. Taking a cautious approach at this stage, given Mr Monaghan and Ms Brown’s impecuniosity, I make an order that Mr Monaghan and Ms Brown are to pay security for costs in the sum of $15,000. Whether Mineral Park/the Lius seek any further security would need to be the subject of a future application and argument.
15 In this context, I note those authorities which suggest that the existence of a funder, and the terms of funding, ought to be disclosed when litigation is commenced (including on the basis that the existence of a funder will likely be relevant to security for costs and costs awards generally). See Waterhouse v Contractors Bonding Ltd [2013] NZSC 89, [2014] 1 NZLR 91 at [67] and Shanghai Neuhof Trade Co Ltd v Zespri International Ltd [2020] NZHC 987 at [23].
[100] The counterclaim proceedings will accordingly be stayed pending payment of the security. As noted, enforcement of the rental aspect of Muir J’s judgment is also stayed, but on the condition of payment of the security. It is therefore appropriate that there is a date by which payment of the security is to be made. I make a further order that if the security is not paid within 20 working days of the date of this judgment, the stay of enforcement of Muir J’s judgment will lapse.
[101] It is important that the counterclaim proceedings are now progressed without further delay. Subject to payment of the security, the counterclaim proceedings (CIV- 2020-404-1316) are to be listed for a case management conference before an Associate Judge at the earliest opportunity. I am not aware if there have been any formal orders joining Mineral Park/the Lius’ proceedings (CIV-2019-404-1333) to the counterclaim proceedings. I expect that could be dealt with by consent.
Result
[102] Enforcement of the rental aspect of Muir J’s judgment dated 19 September 2019 (including the costs award) is stayed, on those conditions set out at [85] above.
[103] Mr Monaghan and Ms Brown are to pay $15,000 by way of security for costs in the counterclaim proceedings (CIV-2020-404-1316). Such sum is to be paid to the Registrar of the High Court at Auckland within 20 working days of the date of this judgment.
[104] The counterclaim proceedings (CIV-2020-404-1316) are stayed pending payment of the security for costs.
[105] Should security for costs not be paid in accordance with [103] above, the stay of enforcement of Muir J’s judgment will lapse.
Costs
[106] As both parties have had a measure of success on the applications, I consider it appropriate that costs on the applications are to lie where they fall. If, despite this indication, any party seeks costs, it may file and serve a memorandum within
15 working days of this judgment, with any memorandum in response to be filed and served within a further five working days. No memorandum is to be longer than three pages in length.
Fitzgerald J
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