Morning Star Enterprises Limited v SaiteysMcMahon Property Limited

[2008] NZCA 44

IN THE COURT OF APPEAL OF NEW ZEALAND

CA673/07
[2008] NZCA 44

BETWEENMORNING STAR ENTERPRISES LIMITED

Applicant

ANDSAITEYSMCMAHON PROPERTY LIMITED

Respondent

Hearing:18 February 2008

Court:Chambers, O'Regan and Arnold JJ

Counsel:T J Herbert for Applicant

M T Davies for Respondent

Judgment:4 March 2008 at 11 am

JUDGMENT OF THE COURT

A        The application for leave to appeal is dismissed.

BWe award to the respondent costs and disbursements calculated in accordance with cl 6.1 of the underwrite deed.

REASONS OF THE COURT

(Given by O’Regan J)

[1]       Morning Star Enterprises Limited seeks leave to appeal to this Court against a decision of Venning J, in which he dismissed an appeal from a decision of the District Court: HC AK CIV 2007-404-003760 17 October 2007.  In the District Court, Judge Beattie had granted summary judgment to SaiteysMcMahon Property Limited (SPL) against Kingdon Development Limited and Morning Star for amounts due to SPL under an “underwrite deed” between Kingdon as principal debtor, Morning Star as guarantor and SPL: DC AK CIV 2007-004-0403 1 June 2007.  After the entry of summary judgment in the District Court, Kingdon went into voluntary liquidation.  The liquidators did not participate in the High Court appeal, so only Morning Star pursued that appeal.

[2]       After the delivery of the High Court decision, Morning Star sought leave from the High Court to appeal to this Court, but Venning J refused leave: HC AK CIV 2007-404-003760 15 November 2007.

Issues

[3]       The application for leave is made under s 67 of the Judicature Act 1908.  Applying the conventional approach to applications of this kind, as described in Waller v Hider [1998] 1 NZLR 412 at 413 (CA), we must resolve two issues. These are:

(a)Does the proposed appeal raise some question of law or fact capable of bona fide and serious argument?

(b)If so, is the case one which involves some interest, public or private, of sufficient importance to outweigh the cost and delay of a further appeal?

[4]       Morning Star identifies three legal issues which it says are capable of bona fide and serious argument, and are of sufficient importance to justify a second appeal.  These are:

(a)       Issue estoppel;

(b)Set-off and counterclaim;

(c)The meaning of “best endeavours”.

[5]       We will consider each of those in turn.  Before doing so, we briefly outline the factual background.

Factual background

[6]       In August 2005, SPL purchased a commercial building in Auckland from Kingdon.  Some of the building was untenanted, and the agreement for sale and purchase provided that Kingdon would enter into a “rental underwrite deed” in relation to that space.  That deed, which describes itself as an “underwrite deed”, was entered into on 9 August 2006.  In effect, Kingdon agreed to pay rent for the untenanted space while it remained vacant, and Kingdon and SPL agreed to co-operate and use their best endeavours to procure a lease of the space.  The “underwrite” was to continue for a two year period.  Morning Star guaranteed Kingdon’s obligations, and agreed that it was jointly and severally liable with Kingdon for all amounts payable under the underwrite deed.  Kingdon and Morning Star are sister companies: both are wholly owned by Mr A S Morgenstern and he is the sole director of both.

[7]       Kingdon initially complied with its obligations under the underwrite deed, but subsequently defaulted in making payments as they became due.  SPL sought summary judgment against it and Morning Star in the District Court for outstanding amounts of approximately $108,000.  Both Kingdon and Morning Star alleged that SPL was in breach of cl 4.1 of the underwrite deed which provided as follows:

[Kingdon] and [SPL] agree to co-operate and use their best endeavours to procure, as soon as possible, a lease of the untenanted space (at the cost in all respects of [Kingdon])…

[8]       Judge Beattie found that the steps that had been taken by SPL satisfied the requirements of cl 4.1 and entered summary judgment against both Kingdon and Morning Star.  The decision was upheld on appeal by Venning J.

[9]       We now turn to the issues which Morning Star wishes to pursue in this Court if leave to appeal is granted.

Issue Estoppel

[10]     Morning Star wished to renew in the High Court the argument that SPL had failed to comply with the requirements of cl 4.1 of the underwrite deed.  Venning J found that Morning Star was not able to pursue this argument because the cl 4.1 obligation was owed to Kingdon, not Morning Star, and the point had been determined against Kingdon in the District Court.  He found that the obiter comments in this Court in McLean v Bank of New Zealand (1996) 9 PRNZ 473 at 479 – 480 were applicable. 

[11]     We accept that the High Court decision was based on an extension of the obiter comments made by this Court in McLean, and that there may be a case for a second appeal to this Court which could affect the interests of other guarantors in similar situations.  However, notwithstanding his decision that issue estoppel applied, Venning J did, in fact, consider Morning Star’s argument that SPL had failed to comply with the cl 4.1 obligation, and rejected it.  Given the concurrent findings of the District Court and High Court on this essentially factual question, we see no real prospect that, even if this Court were to differ from the decision of Venning J on the issue estoppel point, the outcome would be affected.

Set-off and counterclaim

[12]     Morning Star argued that, if SPL had failed to comply with the cl 4.1 obligation, then it was entitled to have any counterclaim by Kingdon for breach of that obligation brought to account in determining its liability under the guarantee.  Venning J found that there was no right of set-off available to Kingdon because it had covenanted to pay the amounts owing under the underwrite deed without set-off, and thus any claim it had for a breach of the cl 4.1 obligation would be a counterclaim.  Morning Star seeks to argue in this Court that it would be unjust to allow SPL to have judgment against Morning Star without bringing Kingdon’s counterclaim to account, because Morning Star would be estopped from arguing that counterclaim if it pursued it in a separate proceeding.  It suggested that there was a bona fide question for consideration by this Court, namely whether a principal debtor’s counterclaim is an equitable set-off available to a guarantor, and thus a defence to a summary judgment application against it.

[13]     We do not see this point as justifying a second appeal, essentially for the same reasons as we rejected the issue estoppel point.  Even if this Court were to take a different view of this issue from that taken in the High Court, the outcome of the case would be unaffected because of the clear finding that no breach of cl 4.1 occurred.  Again, therefore, this point would be largely academic in the context of the present case. 

Best endeavours

[14]     The third point which Morning Star wishes to raise on appeal is the scope of the best endeavours obligation under cl 4.1.  Judge Beattie found on the facts that SPL had fulfilled its best endeavours obligation.  He did so after undertaking a careful analysis of the evidence of the steps that had been taken by SPL to obtain a tenant for the untenanted space.  Venning J upheld that finding after a detailed consideration of the affidavit evidence before the District Court.  It was essentially a factual issue, and despite Morning Star’s attempts to extract from the point a legal issue, we are satisfied that there is no substance in its contention that the concurrent findings of the District Court and High Court were wrong on this aspect of the case.

[15]     Morning Star also wishes to argue that Venning J did not have proper regard to SPL’s obligation to co-operate with Kingdon, as cl 4.1 of the underwrite deed required.  Even if that were so, it does not raise any issue of general principle justifying a second appeal.

Public and private interests

[16]     Morning Star argued that there was a considerable private interest in the appeal, because SPL is seeking to place Morning Star into liquidation for non-payment of the amounts owing under the underwrite deed.  We were informed by counsel that the High Court has set a fixture for the hearing of the application to put Morning Star into liquidation for early July.  Counsel for Morning Star suggested that this would allow an appeal to this Court to be heard before that fixture took place.  Thus, he argued, an appeal would not cause any significant delay in the enforcement of the obligation against Morning Star.

[17]     Counsel for SPL said that the High Court fixture had been set on the basis that leave to appeal might be granted, and that if leave were refused, an earlier fixture may be obtained.  Even if that were not so, we are not satisfied that there is any proper basis for a second appeal in this case.  The amount for which summary judgment was entered in the District Court was $108,000.  That has obviously increased with the passing of time, but nevertheless it is not an enormous sum.  We think there is much merit in the contention made by Mr Davies on behalf of SPL that a second appeal in these circumstances may lead to the cost of litigation being out of proportion to the amount at issue between the parties.

[18]     We note that, in his leave decision, Venning J also saw a further appeal as being essentially futile, because even if the points of law which Morning Star wished to pursue were decided in its favour, the essential finding that SPL had not breached cl 4.1 would mean that Morning Star would still lose the appeal.  As this Court noted in Waller v Hider, this Court’s resources should not be wasted, and the parties should not be put to additional expense, in circumstances where there is no realistic hope of any benefit.

Result

[19]     For the above reasons we decline leave to appeal. 

Costs

[20]     SPL sought costs in this Court.  It argued that costs should be awarded on a solicitor/client basis, relying on cl 6.1 of the underwrite deed.  Venning J ordered costs on that basis in relation to the High Court leave application, though costs in relation to the High Court appeal from the District Court decision were awarded on a category 2B basis.  We were told this was because of an oversight by counsel.

[21]     Counsel for SPL, Mr Davies, relied on cl 6.1(b) and (d) of the underwrite deed.  Those paragraphs provide:

(b)[Morning Star] shall indemnify and keep indemnified [SPL] from and against all losses, and expenses, which [SPL] may suffer or incur as a result of any failure by [Kingdon] to comply with any obligation imposed on [Kingdon] under this deed.

…

(d)On any failure by [Kingdon] to comply with any obligation imposed on [Kingdon] under this deed [Morning Star] shall on demand by [SPL] pay all Income all other money to be paid by [Kingdon] under this deed and shall reimburse [SPL] for all losses and expenses sustained or incurred by [SPL] by reason or as a result of any such failure by [Kingdon] in paying the Income or other money payable by [Kingdon] under this deed or in complying with the obligations imposed on [Kingdon] under this deed, without the necessity of any prior demand having been made on [Kingdon].

[22]     In our view, the costs which have been incurred by SPL in its attempt to enforce payments of the amounts owing by Kingdon and Morning Star under the underwrite deed are, in terms of cl 6.1(d), expenses sustained or incurred by SPL by reason of, or as a result of, Kingdon’s failure to pay SPL the money owed under the underwrite deed.  In those circumstances we are satisfied that it is appropriate to direct that Morning Star reimburse SPL for the actual costs incurred by SPL in relation to the present application.  In the event of a dispute on quantum, we direct such dispute to be resolved by the Registrar of the High Court at Auckland on a taxation basis: see High Court Rules rr 54 – 59.

Solicitors:
Lee Salmon Long, Auckland for Applicant
Meredith Connell, Auckland for Respondent