Murray v Baxter
[2019] NZHC 2444
•26 September 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV2019-404-000653
[2019] NZHC 2444
BETWEEN EMMA MARY MURRAY, WAYNE
DEREK ANDERSON and FOUR S TRUST
LIMITED as trustees of the Four S Trust and CRAIG ROBERT WILLIAM BRYDON, DARELLE JANISE BRYDON andJEFFREY HOLLIS STRATTON as trustees of the Craig and Daniella Brydon Family Trust and S.A.S. TRUSTEE COMPANY
LIMITED and TRUSTS LIMITED, all
former shareholders of JLE HOLDINGS LIMITED
Plaintiffs/Applicants
AND
ANTHONY CHANNON BAXTER
First Defendant/First Respondent
WILLY LEFERINK
Second Defendant/Second Respondent
Hearing: 19 August 2019 Appearances:
C A Murphy for Plaintiffs
D J Ballantyne for Defendants
Judgment
26 September 2019
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
Solicitors:
Powle & Hudson Limited, Auckland Canterbury Legal, Christchurch
MURRAY v BAXTER [2019] NZHC 2444 [26 September 2019]
Introduction
[1] The plaintiffs seek summary judgment against the defendants in the sum of USD 713,428.36 plus interest and costs. They say that the defendants are in breach of their obligations as guarantors under a contract, described as a “Variation of Agreement” (the Variation), requiring them to guarantee all the obligations of the purchasers of a company shareholding.
[2] The defendants say that they have a defence by way of set-off to the claim on the basis of a working capital adjustment (yet to be determined) that will likely affect the purchase price of the shares that is the subject of the guarantee.
[3] In determining the question of whether the plaintiff has established that the defendants have no defence, the critical issue for determination is whether the plaintiffs have established that the defendants cannot, as a matter of contractual interpretation, raise a set-off as a defence.
Relevant legal principles
[4]Rule 12.2(1) of the High Court Rules 2016 provides:
The court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no defence to a cause of action in the statement of claim or to a particular part of any such cause of action.
[5]The principles are summarised in Krukziener v Hanover Finance Ltd:1
[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3. The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at
341. In the end the court’s assessment of the evidence is a matter of judgment.
1 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307.
The Court may take a robust and realistic approach where the facts warrant it:
Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).
[6] In Gardner v Gardner, Associate Judge Osborne summarised the general principles of summary judgment.2 These include:
(a)Common sense, flexibility and a sense of justice.
(b)In determining whether there is a genuine and relevant conflict of facts, the Court is entitled to examine and reject spurious defences or plainly contrived factual conflicts. It is not required to accept uncritically every statement put before it, however equivocal, imprecise, inconsistent with undisputed contemporary documents or other statements, or inherently improbable.
(c)In assessing a defence, the Court will look for appropriate particulars and a reasonable level of detailed substantiation. The defendant is under an obligation to lay a proper foundation for the defence in the affidavits filed in support of the Notice of Opposition.
(d)In weighing these matters, the Court will take a robust approach and enter judgment, even where there may be differences on certain factual matters, if the lack of a tenable defence is plain on the material before the Court.
(e)The need for judicial caution in summary judgment applications has to be balanced with the appropriateness of a robust and realistic judicial attitude when that is called for by the particular facts of the case.
Factual background
[7] The plaintiffs, in their capacity as trustees of several independent trusts, are the former owners of an electrical services business (the sellers) operated by a company called JLE Holdings Ltd (JLE).
2 Gardner v Gardner [2015] NZHC 2018 at [20].
[8]In about mid-2017, the sellers decided to sell their shareholding in JLE.
[9] In September 2017, Zeecol Finance (the buyer) bought the shares in JLE. The sale of the shares required USD 1,000,000 in vendor finance which was recorded in a sale and purchase agreement (the SPA). The parties to the SPA were Zeecol, the parties listed as shareholders in the schedule (seller) and Mr William Farry Mook, as Covenantor. At the time the SPA was signed on 22 September 2017, the defendants were not a party to it.
[10] Clause 7.1 of the SPA provides for a working capital adjustment that has the potential to require a payment from the buyer to the sellers or a payment from the sellers to the buyer.
[11]Clause 13.18 of the SPA reads:
No right of set-off
Unless this Agreement expressly provides otherwise, a party has no right of set-off, withholding or deduction from or against a payment due to another party.
[12] In December 2017, the buyer indicated that it required further financial assistance of $220,000 from the sellers. The further lending was recorded in an agreement (the loan agreement).
[13] Clause 7 of the loan agreement expressly provided that the buyer was required to make all payments under the agreement without set-off, counterclaim or deduction.
[14] The first defendant, Mr Baxter, guaranteed the buyer’s obligations under the loan agreement.
[15] Between December 2017 and August 2018, the buyer made principal and interest payments of $804,522.76 to the sellers. After that, the buyer began to default on its payment obligations.
[16] On 2 August 2017, the sellers and the buyer agreed that the balance of USD 730,000 owing under the finance arrangements would be repaid in instalments
with interest accruing at 10 per cent per annum and the default interest rate of 15 per cent per annum.
[17] On 11 August 2018, the sellers and the buyer recorded their agreement in a variation to the SPA and the loan agreement (the Variation). Both defendants are parties to the Variation; they are described in the Variation as the covenantors.
[18] The background section to the Variation expressly refers to both the SPA and the loan agreement of 8 December 2017. It also records that the purpose of the capital repayment schedule was to repay the loans. The loans are defined by reference to the SPA and the 8 December 2017 loan agreement.
[19]Clause 1.6 of the Variation provided:
The “Working Capital Adjustment” defined in the SPA remains owing (and shall be paid in accordance with the requirements of the SPA once finally determined).
[20]Clause 1.8 of the Variation reads:
The Parties acknowledge and confirm that they are and continue to be bound by the terms of the SPA which will remain in full force and effect except as varied by this Variation of Agreement.
[21]Clause 3.1 of the Variation reads:
In consideration of the Seller agreeing to enter into this Variation of Agreement, the Covenantors [the defendants] unconditionally and irrevocably guarantee by way of continuing obligation to the Sellers as primary obligor, and not merely as surety, the due performance by the Buyer of all of its obligations under this Agreement.
[22] The buyer repaid USD 30,000 under the Variation and then ceased all repayments.
[23] Despite demand, the buyer and the defendants have failed or refused to repay the USD 713,428.36 plus interest at the default rate and costs.
[24] In March 2019, both defendants were removed as directors of JLE by Zeecol’s funder, TCA Global Credit Master Fund LP. In addition to being removed as directors,
JLE was directed to immediately cease taking any directions from them. Since that time, neither defendant has had any access to the records of JLE, including steps taken pursuant to the working capital adjustment process and work on construction projects that might impact on that adjustment.
Analysis and decision
[25] Pursuant to the guarantee in the SPA, the guarantors (described as the Covenantors) guaranteed the payment by the buyer, Zeecol, of the purchase price (cls 2.1 and 14). The SPA also makes clear that the working capital adjustment may have an impact on the purchase price (cl 4.1), requiring the purchase price to be adjusted either up or down (cl 7).
[26] Against that background, the defendants contend that the purchase price could be wrong and that they have a genuinely arguable set-off defence relating to the question of the purchase price. They submit that judgment cannot be entered against them until such time as the working capital adjustment has been determined and thus the purchase price precisely calculated, which may depend upon work carried out by JLE for the University of Canterbury and the Grey Base Hospital.
[27] However, the jurisprudence, including the leading New Zealand decision of Grant v NZMC Ltd, makes it clear that a right of equitable set-off may be contractually excluded expressly or by clear implication.3 As noted above, the critical issue is whether the contractual provisions in this case exclude such a defence — despite the fact that the claim based on the working capital adjustment is, arguably, interdependent with the plaintiffs’ claim and might, absent contractual exclusion, call into question or impeach the plaintiffs’ demands.
[28] If I should determine that there is no arguable set-off because it has been excluded by the contractual provisions, then a second issue arises: namely, whether the Court should, as a matter of discretion, dismiss or adjourn the summary judgment application or grant a stay of execution on the grounds of injustice, as contended by the defendants in the alternative.
3 Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 13.
Issue one — Have the contractual provisions excluded a right of set-off?
[29] I accept the submissions of the plaintiff that ultimately this is a straightforward debt recovery case. In my view, the working capital adjustment is irrelevant to the determination of the obligations of the defendants as guarantors. Construing the terms of the Variation in the context of the SPA and loan agreement, the defendants have, by clear implication, contractually agreed to exclude any right of set-off. The defendants were not party to the SPA at the time it was signed, but nothing turns on that.
[30] I reject the defendants’ submissions that the Variation is an agreement in the nature of accord and satisfaction and that it does not contractually preclude a set-off or counterclaim. I accept that the working capital adjustment is a compromise of some of the arrangements contained in the SPA. but critically, and by clear implication, the inability to raise a set-off defence has continued, as a matter of contractual obligation, under the Variation. As parties to the Variation, the defendants are bound by it. The clear purpose of the Variation was to ensure prompt payment by the buyer and defendants of the undisputed amount of $730,000 by way of instalments and to continue, as the SPA provided, to keep the working capital adjustment distinct from the obligation to pay the undisputed sum.
[31] Clause 13.18 of the SPA expressly excludes a right of set-off. Pursuant to cl 1.8 of the Variation, both defendants acknowledged that they are, and continue to be, bound by the terms of the SPA, which remain in full force and effect, except as varied by the Variation. The Variation contained no amendment to cl 13.18, and the defendants are, in my view, bound by it. In guaranteeing the due performance by the buyer, Zeecol, of all of its obligations under the Variation (cl 3.1), the defendants cannot as a matter of contractual interpretation, invoke the set-off defence for which they contend. It is not available to them as a matter of law.
[32] I accept that the working capital adjustment is expressly referred to in the Variation and, as expressly stated, “remains owing”. However, the Variation, as was the position under the SPA, continues to treat the working capital adjustment as an entirely separate matter which cannot be brought to bear to defer any obligations to make payment under the Variation.
[33] The strict obligations on the defendants, as guarantors, and their inability to raise a right of set-off, is reinforced by further provisions in the SPA and Variation — and it is clear that the SPA, the loan agreement and the Variation are to be read together. The subject matter of the Variation is the sellers’ loans, which are expressly defined by reference to the SPA and the loan agreement. The defendants, are primary obligors, and not merely sureties, required to guarantee the due performance by the buyer of all of its obligations (cl 14 of the SPA). Under cl 14.2 of the SPA, the guarantor’s obligations will not be discharged, released or otherwise affected by any release, compromise, forbearance or other indulgence granted by the seller. Those strict obligations are repeated at cl 12 of the loan agreement and again at cl 3.1 of the Variation. In my view, the due performance of all obligations includes the obligation to make the payments secured by the Variation (namely, the sum of USD 730,000) without regard at all to the working capital adjustment.
[34] The defendants’ submission that the plaintiffs are only alleging a breach of the Variation, and not the SPA, is not an accurate description of the plaintiffs claim and, in any event, does not assist them. I accept that the essence of the plaintiffs’ claim is based on the Variation, but the Variation expressly states the defendant’s obligations as guarantors under that Variation are to be construed in light of obligations also arising under the SPA.
[35] There is clear support for the position of the plaintiff in the UK Court of Appeal case of Continental Illinois National Bank & Trust Co of Chicago v Papanicolaou, where there was a default on a bank loan agreement, guaranteed by the defendant.4 The Court held that the commercial purpose of the transactions at issue was that upon default by the borrower, that the bank should be paid quickly and that the natural meaning of the words both in the loan agreement and the guarantees was that all set- offs and counterclaims were excluded. The Court stated:5
Indeed the present cases make it the more necessary that the Court should not interfere, for here the parties have specifically provided both in the loan agreement and the guarantees that payment should be made free of any set off or counterclaim. It would defeat the whole commercial purpose of the transaction, would be out of touch with business realities and would keep the
4 Continental Illinois National Bank & Trust Co of Chicago v Papanicolaou [1986] 2 Lloyd’s Rep 441 (CA).
5 At 445.
bank waiting for a payment, which both the borrowers and the guarantors intended that it should have, whilst protracted proceedings on the alleged counterclaims were litigated. We do not doubt that the Court has a discretion to grant a stay but it should in our view be “rarely if ever” exercised … Guarantees such as these are the equivalent of letters of credit and only in exceptional circumstances should the Court exercise its power to stay execution.
[36] I accept that, in Continental Illinois, the exclusion of the right to a set-off was contained both in the loan agreement and the guarantees themselves, but, in my view, that case cannot properly be distinguished on that basis, as the defendants seek to do. As reasoned above, as a matter of clear implication, the prohibition against raising a set-off (expressly set out in the SPA) forms part of the obligations of the guarantors under the Variation. This is apparent from the express words of cl 1.8 of the Variation.
[37] The defendants submit that disputes over interpretation of written contracts can be unsuitable for summary judgment where “the background evidence is sparse”.6 However, the documentation in this case is clear and unambiguous and, in my view, there is no basis for concluding that further evidence at trial might affect the conclusion I have reached.
[38] The defendants further submit, on the basis of correspondence between Mr Russell Cobarrubia and Mr Palmer, on behalf of the seller, that agreement had been reached on a working capital adjustment as set out in a completion statement referred to in the correspondence. They contend that this has effectively overtaken and replaced the SPA (including cl 6.6), so that any exclusion of any right of set-off could no longer apply. In my view, the bare email correspondence before the Court provides only a tenuous basis for such a claim but, in any event, even if it is a binding agreement of some sort, I find that it does not, and cannot, affect the obligations of the defendants under the Variation. The correspondence cannot credibly be interpreted as a complete substitute or replacement of the obligations arising under the Variation. The working capital adjustment remains a separate matter, which, as the plaintiff accepts, should run its course. The immediate obligations of the defendants to guarantee the capital payments under the Variation without a right of set-off remain in force.
6 E & E Developments Ltd v Housing New Zealand Ltd [2012] NZCA 7 at [20]–[21].
[39] For all these reasons, I find that the plaintiffs have established that the defendants have no right of set-off and have also established that the defendants have no defence to the claim.
Issue two — Should summary judgment be refused as a matter of discretion and/or should a stay of execution be granted?
[40] The Court has a residual discretion under r 12.2 to refuse summary judgment to avoid oppression or injustice to the defendant, although that discretion is to be restrictively applied.7 Under r 12.2, the Court may, if it appears that the defendant has a counterclaim that ought to be tried, issue a stay of execution of a summary judgment.8
[41] The defendants contend that to enter summary judgment now would result in the possibility of injustice. They say that they do not have access to records that would enable them to properly plead a defence to the claims by way of counterclaim and set- off. It is claimed that the actions, rights and liabilities of third parties (here, Zeecol) are clearly at issue, and those third parties are not before the Court. The defendants should therefore be given the opportunity to make application for discovery and other interlocutory matters, to ensure that all questions or issues arising from or connected to the subject matter of the proceedings, being the purchase of shares in JLE by Zeecol from the plaintiff sellers, are before the Court for determination.
[42] I accept that the defendants are in a difficult position, having been denied access to records of relevance. While I have concluded that they do not at law have a set-off defence, they may have a counterclaim based on the working capital adjustment. The evidence is sparse because of the defendants’ lack of access to relevant documents, but I accept that there may be an adjustment of the purchase price that has been guaranteed in accordance with the working capital adjustment (yet to be completed) such that there is an arguable counterclaim. Having said that, the merits of any counterclaim and the extent to which any adjustment might have a significant effect on the net liability position of the defendants is far from clear. I would also note
7 Environmental Protections Authority v Chatham Rock Phosphate Ltd [2016] NZHC 2079.
8 Roberts’ Family Investments Ltd v Total Fitness Centre (Wellington) Ltd [1989] 1 NZLR 15 (HC).
that the concept of an adjustment in the scheme of the contracts at issue seems to contemplate some adjustment of purchase price but not a significant change.
[43] The critical issue here is whether it would be a miscarriage of justice to allow execution of the plaintiffs’ judgment. The onus is on the defendants to establish both the likelihood and the substantial nature of any miscarriage of justice and to show that it is probable rather than possible.9
[44] I find that the defendants have not discharged that onus. There is no evidence before the Court of the defendants’ financial position and, in any event, as noted in Continental Illinois, the mere existence of a counterclaim which is likely to succeed is not of itself a sufficient ground for saying that the court must exercise its discretion in favour of a stay. There are, again, many similarities with the Continental Illinois case, where it was held that a stay would defeat the whole commercial purpose of the transaction, would be out of touch with business realities and would keep the plaintiffs waiting for a payment, which was expressly guaranteed, whilst protracted proceedings on the alleged counterclaims were litigated. Similar factors apply here.
[45] I accept, in principle, the defendants’ submission that it is possible that the defendants would have grounds to apply to set aside any bankruptcy notices under r 24.10 of the High Court Rules on the basis that they might have a counterclaim that was not determined in the proceedings in which judgment was obtained. However, in my view, that is a matter which I cannot address at this stage; there is an absence of a proper evidential foundation to make that assessment, including the question of whether bankruptcy notices will ever be issued.
[46] Even if r 12.2 should be interpreted as conferring a wider and possibly more flexible discretion than the threshold of a miscarriage of justice, there is no basis in my view for granting a stay of execution or for concluding that as a matter of discretion summary judgment should be refused.10 The threshold has not been made out.
9 New Zealand Apple & Pear Marketing Board v Wallis (1990) 4 PRNZ 713 (HC).
10 Sim’s Court Practice (NZ) (online ed, LexisNexis) at [HCR12.12.5].
Result
[47]I make the following orders:
(a)The plaintiffs’ application for summary judgment dated 12 April 2019 is granted. The plaintiffs are to have judgment against the defendants in the sum of USD 713,428.36.
(b)Interest on the sum of USD 713,428.36 is to run from 1 March 2019 until the date of payment at the contractual rate of 15 per cent per annum.
[48] I also award costs to the plaintiffs, on a solicitor/client basis11 (and on the basis of its contractual entitlement) but subject to the Court’s approval of those costs in the manner below:
(a)The plaintiff is to file and serve a memorandum within 14 days with a detailed calculation of the solicitor/client costs. (This is to include relevant hourly rates and a sufficient narration to understand the work carried out).
(b)The defendants may file and serve submissions within a further 14 days addressing the plaintiffs’ memorandum on costs.
Associate Judge P J Andrew
11 See generally Black v ASB Bank Ltd [2012] NZCA 384 at [69]–[109].
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