Muollo v Hunt HC Wellington CP No 252/00

[2001] NZHC 849

IN THE HIGH COURT OF NEW ZEALAND
WELLINGTON REGISTRY CP No 252/00

BETWEEN RAFFAELE MUOLLO of Wellington, Company Director AND JOSEPHINE MUOLLO his wife
Plaintiffs

AND PETER MICHAEL HUNT of Wellington, Company Director
Defendant

Date of Hearing: 2 August 2001

Counsel: J Porter for Plaintiffs
J S Kos and J L Beatson for Defendant

Judgment Date: 12 September 2001

JUDGMENT OF MASTER J C A THOMSON

Solicitors:
Sievwrights, Wellington for Plaintiffs
Russell McVeagh, Wellington for Defendant

Application

[1] This is an application by the plaintiffs for summary judgment. The plaintiffs seek an order for specific performance, and interest for late settlement.

Background Facts

[2] The defendant contracted with the plaintiff to purchase the plaintiffs’ hotel, known as Hotel Raffaele, for $11m, with the intention of developing the property into a retirement village. The agreement was dated 13 August 1999. The defendant in terms of the agreement was not purchasing the hotel as a going concern, those clauses in the printed agreement having been deleted. The agreement was conditional on the defendant conducting a feasibility study and obtaining finance. The defendant made the agreement unconditional on 15 September 1999.

[3] For reasons I discuss further, settlement was never effected. On 3 May 2000 the plaintiff issued a settlement notice requiring settlement within 12 days, to which the defendant replied by letter outlining his difficulties in obtaining finance. On 21 June 2000 the parties, after negotiations, signed a variation of the agreement. The purchase price was reduced. Clause 10 of the variation agreement provided:

“10. If the purchaser does not comply with the terms of this variation (time being strictly of the essence) then the variation shall be void and of no effect between the parties and the terms of the original agreement and settlement notice will apply, save that the vendor shall be entitled to retain the deposit of $1,275,000.00 on account of the purchase price under the original agreement.”

[4] The defendant again failed to settle, so the original agreement for sale and purchase was reactivated. In the end the defendant purported to cancel the agreement pursuant to s 7 of the Contractual Remedies Act 1979. However he did not do so until 16 February 2001 and only after the plaintiffs had issued summary judgment proceedings. The plaintiffs now seek summary judgment against the defendant for failing to settle pursuant to the original agreement for sale and purchase.

Defendant’s Argument

[5] The defendant raises a number of defences, firstly, a defence based on false pre-contractual representations made by the plaintiffs that induced him to enter the contract, and which substantially altered the benefit and burden of the contract, thus justifying cancellation.

[6] The defendant claims that the plaintiffs represented that the profitability of the hotel exceeded $1m per annum, and that this representation was an integral part of the pre-contractual negotiations. He says only when he finally received financial information from the plaintiff, and which he claims had been withheld (despite repeated requests for it by the defendant) did it became clear to him that the hotel’s profitability was substantially less than had been represented. This, he says, affected the defendant’s ability to obtain suitable finance. The defendant also says that he always intended to continue the hotel business while the retirement village was being developed.

[7] Other representations, the defendant says, that the plaintiffs falsely made, included the existence of other offers to purchase the hotel, which reassured the defendant that the amount of his offer was realistic; a representation by the plaintiffs’ land agent concerning the success of a similar Karori development, which also reassured the defendant; and a representation as to the defendant’s personal obligations with regard to the contract, the defendant claiming that the plaintiffs’ land agent told him that he would not be personally liable under the contract because he had singed ‘as agent’. This representation similarly induced the defendant, so he says, to enter into the contract. Such claim is supported by the defendant’s legal adviser who has deposed to the defendant’s consistent business practice of operating each business in his group via a company, rather than personally.

Plaintiff’s Arguments

[8] The plaintiffs point out that the misrepresentation defence was only first raised by the defendant on 16 April 2001, some 18 months after the defendant had confirmed the contract as unconditional, and only after the plaintiffs had issued proceedings. No written mention of misrepresentation was made prior to this, although the defendant does claim that the issue was ventilated orally with the plaintiffs’ agent in late October or early November 2000.

[9] With regard to the profitability representation, the plaintiffs say it is true, and in any case was not relied on by the defendant because the hotel was not purchased as a going concern. The plaintiffs say it is a contrived defence for the defendant to now say that he was going to run the hotel, as a hotel, given that it was agreed that the plaintiffs would close the hotel prior to settlement. The plaintiffs also say that even if there was a misrepresentation, the defendant is reduced to raising this as a counterclaim, and it is not a bar to summary judgment.

[10] The plaintiffs also say that they had earlier entered into another conditional contract to purchase the hotel. The purchasers in that contract had relied on a valuation which had been made by the present defendant’s valuers and which had valued the hotel at $11 million. As to the alleged representation made by the land agent as to the financial performance of the Karori property, the plaintiffs say that could not amount to a representation entitling the defendant to cancel the contract, and that anyway if the defendant believes that he has a cause of action against the land agent he is entitled to pursue it. Lastly the plaintiffs say it is inconceivable that an experienced and legally represented businessman such as the defendant could have believed that he would not be personally liable for this contract if he signed as agent. If he did not want to be personally liable the plaintiffs argue, he had ample time to ascertain what the true position was and to extricate himself from the contract before he went unconditional.

[11] Finally, the plaintiffs argue that the defendant’s own conduct prevented cancellation because he affirmed the contract, namely by confirming the conditional contract, agreeing to the variation of that contract, lodging a caveat against the property, attempting to arrange finance for 18 months, and only cancelling after proceedings had been issued by the plaintiffs.

Discussion

[12] According to established summary judgment principles, the plaintiff must satisfy the Court that a defendant has no defence to the claim. In Pemberton v Chappell [1987] 1 NZLR 1, Somers J explained the concept of “no defence” as the “absence of any real question to be tried”. Where the defence pleaded raises questions of fact on which the outcome of the case may turn it will not often be right to enter summary judgment.

[13] As to cancellation the relevant statutory provisions are ss 6 and 7 of the Contractual Remedies Act 1979. Under s 6, if a party to a contract has been induced to enter into it by a misrepresentation, essentially a misstatement of past or present facts, that party in entitled to damages as if the representation was a term of the contract that had been broken. Section 7 allows a party to a contract to cancel if s 6 has been satisfied, and:

“The parties have expressly or impliedly agreed that the truth of the representation or, as the case may require, the performance of the stipulation is essential to him; or

The effect of the misrepresentation or breach is, or, in the case of an anticipated breach, will be,-

(i) Substantially to reduce the benefit of the contract to the cancelling party; or

(ii) Substantially to increase the burden of the cancelling party under the contract; or

(iii) In relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for.”

[14] In my view, as a matter of statutory interpretation, it appears that if the defendant had to rely on s 6 alone to rebut the plaintiffs’ allegation of no available defence, this could not act as a bar to summary judgment because, technically, it would not provide a defence to the plaintiffs’ request for specific performance since s 6 only entitles a defendant to damages. However, if the defendant could show that s 7 was arguably satisfied so that there was a question to be tried as to whether the contract had been validly cancelled, then summary judgment would be unavailable because the Court would not order specific performance of a legitimately terminated contract.

Conclusion

[15] I consider it is unnecessary in order to decide this summary judgment application to embark on an extensive examination of the relative merits of the allegations made by the parties because there are two immediate reasons why summary judgment should not be granted in this case. First, I consider on the affidavits there are fundamental factual disputes that raise the question as to whether summary judgment is appropriate to resolve this dispute. With regard to the “profitability representation”, for example, there is disagreement as to whether the representation was true or not. This is essentially because of a dispute over the nature and extent of the representation, and in particular whether depreciation was, and is, required to be taken into account in assessing the annual profit of the hotel.

[16] The second reason (which follows from the first) is that the plaintiffs cannot in my view show to the required standard of proof that the defendant has no arguable defence. For example, staying with the “profitability representation”, the parties obviously disagree as to whether the defendant was “induced” to enter the contract by a misrepresentation, and whether the truth of that misrepresentation was essential to the defendant. In that regard the issue is whether or not it was understood by the parties that the hotel was to be continued as a going concern. The plaintiffs say it was not, and point, inter alia, to the removal of the going concern provisions in the sale and purchase agreement. The defendant on the other hand claims that it was always his intention that the hotel be operated as a hotel during the conversion period to a rest home. He has filed a number of affidavits from himself and others in support of that contention.

[17] The fact that the agreement for sale and purchase shows that the hotel was not sold as a going concern would suggest that the defendant was not induced into the contract by any representation concerning the annual profit, and thus such representation did not substantially affect the benefit or burden to the defendant of the contract. If, however, the defendant can substantiate his claim that he always intended to run the hotel as a hotel while the retirement village got off the ground, then it seems to me very arguable that the representations allegedly made by the plaintiff as to profitability could be said to be crucial to the defendant in two respects. First, in obtaining finance for the purchase, and second, in establishing what would be a fair price for the hotel. I think it is arguable that establishing such matters might well be held to satisfy the s 7 requirements so as to entitle cancellation. In this context while the plaintiffs may be correct in saying that the defendant’s own developers valued the hotel at around $11m, it has to be said that such valuation it appears was based, at least in part, on the figures given to the defendant by the plaintiffs and which the defendant claims were misrepresented.

[18] Similar considerations apply to the alleged misrepresentation that other parties were looking to buy the hotel for at or over $11m. If the misrepresentations as to the alleged valuation of the hotel are made out, it must I think be arguable that such induced the defendant to confirm the contract at the price he did, even before he had obtained finance, and that this substantially affected the benefit or burden of it to the defendant.

[19] From the affidavits then, I have concluded there are real disputes of fact shown, and it is impossible to tell from them where the truth lies. It certainly can not be said, to use the words of Lord Diplock in Eng Me Yong v Letchumanan [1980] AC 331, 341, that the defendant’s claims are ‘inherently improbable’. In that regard Ms Smart’s affidavit of 9 July reinforces that view, because the tenor of her affidavit is that it was known that the defendant did indeed intend to operate the hotel as such while it was being converted to a retirement village and that the plaintiffs’ daughter had been offered a position as manager of the hotel, for that period.

[20] If the misrepresentations (if that was what they were) satisfy the requirements of s 7, and justified the cancellation of the contract, then clearly they raise a bar to granting summary judgment for specific performance of the contract. Whether the defendant can make out his defences will no doubt be hotly contested at trial, but I think it would be wrong for the Court to attempt to decide the matter at this stage, when much will depend on the Court’s assessment of the credibility of the witnesses, especially where the existence and nature of the misrepresentations are strongly disputed.

[21] I have come to a similar conclusion as to the plaintiffs’ claim that the defendant affirmed the contract. As to that, if the defendant was still labouring under the alleged misrepresentations, because the plaintiffs had not disclosed historical financial data reflecting the hotel’s true position, then the confirming of the conditional contract, and even entering into a variation of it, may not constitute affirmation. The defendant says that it was only when disclosure was finally made by the plaintiffs of the historical financial data that the representations he relied on were identified as being untrue, and such data was not supplied until late July 2000. The variation itself was signed on 21 June 2000, the month before. Further, the defendant’s actions in lodging a caveat on 17 July 2000 may simply be explained as being an attempt to protect his interests, and the protracted attempts to obtain finance may also be explained by the plaintiff’s delay in supplying the required figures to the defendant.

[22] The result is that summary judgment is refused. Costs reserved.