Musuku v Drive Holdings Limited HC Auckland CIV 2006-404-5045

[2007] NZHC 1667

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2006-404-005045

BETWEEN  JAWAHAR BHASKAR MUSUKU Appellant

AND  DRIVE HOLDINGS LIMITED Respondent

Hearing:         19 February 2007

Appearances: G Thwaite for Appellant

M Gilbert/G R Kayes for Respondent

Judgment:      26 February 2007 at 4.00 p.m.

JUDGMENT OF VENNING J

This judgment was delivered by me on 26 February 2007 at 4.00 p.m., pursuant to Rule 540(4) of the

High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:           Gregory J Thwaite, PO Box 2062, Shortland Street, Auckland

Gilbert Walker, PO Box 1595, Shortland Street, Auckland

MUSUKU V DRIVE HOLDINGS LIMITED HC AK CIV 2006-404-005045  26 February 2007

Introduction

[1]      Mr Musuku (the appellant) appeals against the entry of summary judgment against him in the District Court on 24 July 2006.   Judge Sharp entered summary judgment on the basis the appellant was liable as a guarantor of Mission Bay Pharmacy Limited (Mission Bay).  In an earlier decision of the High Court, Mission Bay had been held liable to the respondent pursuant to the terms of a lease under which Mission Bay was the lessee and the respondent the lessor.

Background

[2]      By deed of lease (the lease) dated 28 September 1989 the then lessor leased premises at  71 Tamaki Drive,  Mission Bay,  Auckland  to  the then tenant.   The respondent subsequently became owner of the freehold.  By deed of assignment of lease dated 18 October 1996 (the assignment) the leasehold interest was assigned to Mission Bay.  In the assignment, the appellant guaranteed the obligations of Mission Bay under the lease as follows:

1.In consideration of the Landlord consenting to the Assignment of Lease at the request of the Guarantor the Guarantor guarantees to the Landlord:

1.1 The due and punctual payment to the Landlord by the Assignee of all future rent and other moneys provided for in the Lease; and

1.2 The observance and  performance by  the  Assignee  of  all  the

Assignor’s covenants in the Lease;

and  the  Guarantor  indemnifies  the  Landlord  against  any  actions,  costs, claims, demands, damages or losses suffered by the Landlord as a result of the Lease being lawfully disclaimed by any liquidator or receiver or arising through default being made by the Assignee in payment of rent or in observance or performance of the covenants, conditions and provisions in the Lease from the Date of Assignment or otherwise howsoever.

2.The Guarantor agrees that no indulgence granting of time waiver or forebearance to sue or any other thing whereby the Guarantor would be released as a  surety in any  way releases  the Guarantor  from liability hereunder.

[3]      By virtue of deeds of renewal, made before the assignment, the lease had a final expiry date of 30 April 2005.

[4]      There were a number of disputes between Mission Bay and the respondent during the course of the lease.  The appellant represented Mission Bay as its director and dealt with the representatives of the respondent in relation to the disputes.  The parties were unable to resolve their differences.  On 12 January 2005 the respondent notified Mission Bay that it required it to vacate the premises when the lease terminated on 30 April 2005.  Mission Bay then advised the respondent that it did not intend to deliver up vacant possession of the premises on 30 April 2005.   It alleged that the parties had entered a binding agreement to enter a new lease pursuant to which Mission Bay was entitled to occupy the premises until 30 September 2011.

[5]      The respondent issued summary judgment proceedings against Mission Bay in this Court seeking an order Mission Bay deliver up vacant  possession of the premises.  It also sought judgment for $31,417.96 for moneys owed in respect of the rent and operating expenses outstanding under the lease, together with interest on that amount and costs assessed on a solicitor client basis.

[6]      In  a  judgment  delivered  on  27  May  2005  this  Court  entered  summary judgment against Mission Bay for the moneys claimed.   It also required Mission Bay, among other orders, to deliver up vacant possession of the premises to the respondent.

[7]      Under  the  directorship  of  the  appellant  there  then  followed  a  series  of challenges to that judgment and the execution of that judgment by Mission Bay. Mission Bay appealed  the  judgment  to  the  Court  of Appeal.    That  appeal was dismissed on 29 June 2006.   Mission Bay then filed an application for leave to appeal to the Supreme Court but subsequently abandoned that application.

[8]      Pending the hearing of the appeal Mission Bay filed an application for stay of execution which was dismissed by this Court.  Mission Bay then filed an application to set aside a statutory demand the respondent had issued in reliance on the judgment debt.  That was also dismissed.  Mission Bay then filed an application for a stay or

adjournment of the liquidation proceedings the respondent had commenced.  Mission Bay also filed an application to the Court of Appeal for a stay of execution of the High Court judgment and an order restraining the respondent from continuing with liquidation  proceedings.    None  of the  applications  were  successful.    Ultimately Mission Bay was placed into liquidation.

[9]      In  the  meantime  the  respondent  issued  summary  judgment  proceedings against the appellant in the District Court.  The summary judgment application came on for hearing in the District Court before Judge Sharp on 8 March 2006, after the judgment of Cooper J in the High Court against Mission Bay, but before the decision of the Court of Appeal.  Judge Sharp reserved her decision after argument pending the outcome of the Court of Appeal decision.  When the appeal was dismissed Judge Sharp issued her judgment finding that in addition to the moneys for which judgment had been entered in the High Court against Mission Bay the respondent was entitled to the additional costs it sought against the appellant as guarantor, those costs being:

•   interest;

•   further unpaid rent and operating expenses until the conclusion of the lease;

•   costs paid to a security firm;

•   costs paid to an investigation consultancy;

•    loss of rental and other moneys as a consequence of Mission Bay’s failure to vacate.

Judge Sharp then gave a credit for the rental payments made by Mission Bay after 30

April 2005.  In total the judgment was entered for $70,083.73 against the appellant including costs on a solicitor client basis.

The appellant’s case

[10]     The  essence  of the  appellant’s  case  as  advanced  by  Mr  Thwaite  is  that Mission Bay has a counterclaim against the respondent for breach of lease provisions by the  respondent  and  until  that  counterclaim  is  heard  on  its  merits,  either  by arbitration or in Court proceedings, the Court should not have entered judgment against the appellant in his capacity as guarantor of Mission Bay’s obligations to the respondent.

[11]     On a number  of occasions during  the  course of submission  Mr  Thwaite criticised  the  respondent’s  actions  in  pursuing  first  Mission  Bay  and  then  the appellant as leading to “procedural confusion”.   He suggested the respondent had engaged in tactics to deny the appellant a fair opportunity to argue the liability issue personally.    I  reject  that  submission.    To  the  extent  that  there  has  been  any procedural   confusion   and   wasted   costs   in   these   various   proceedings,   the responsibility for that lies squarely at the feet of the appellant.

[12]     In support of the appeal Mr Thwaite made seven points.

•   First that the District Court Judge had applied the wrong test to the application for summary judgment.

•   Second, that the District  Court  Judge  was wrong  to  find  that  issue  estoppel applied in this case.

•   Third, that the guarantee did not preclude a right of set-off or counterclaim or a right to review the rent.

•   Fourth, fifth and sixth, that there was no sufficient evidence of the amount due under the guarantee;  that there were disputed factual matters which precluded summary  judgment;    or that  the  relevant  legal  principles  were  not  properly identified and applied in entering summary judgment.

•   The final appeal point advanced was that in circumstances of this case the Judge erred by not exercising the discretion available to her not to  enter summary judgment against the appellant.

The respondent’s case

[13]     For the respondent, Mr Gilbert submitted that the Judge did not apply an incorrect test, that issue estoppel did apply in the circumstances of this case, that there was no basis for set-off or counterclaim and that there was no basis upon which to challenge the exercise of the Court’s discretion in this case.

Decision - The test applied by the Judge to the application for summary judgment

[14]     Although in the course of her judgment the District Court Judge recited the principles of summary judgment applications as:

On the balance of probabilities the plaintiff must prove that the defendant has no arguable defence although the defendant has the burden of providing evidence of a defence.  ….

[15]     The proper test is, as noted in Pemberton v Chappel [1987] 1 NZLR 1, that the plaintiff must satisfy the Court that a defendant has no defence:

That notion has been expressed in a variety of ways, as for example, no bona fide defence, no reasonable ground of defence, no fairly arguable defence.

…  On this the plaintiff is to satisfy the Court; he has the persuasive burden. Satisfaction here indicates that the Court is confident, sure, convinced, is persuaded to the point of belief, is left without any real doubt or uncertainty.

p 3

[16]     But, as Mr Gilbert observed, in a number of passages throughout the course of the  judgment,  the  Judge  in  fact  referred  to  the  correct  test  namely  that  the appellant had no arguable defence.  By way of example the Judge referred at para 3.7 of the judgment to quantum issues:

The Statement of Claim attached a schedule.  Summary Judgment was given in the High Court and upheld by the Court of Appeal.  There is appropriate affidavit evidence by [respondent] as to further rental, losses and interest.

There is no contest of evidence between the parties as to these matters, nor can the Court see an arguable defence in this area open to [the appellant].

(emphasis added)

[17]     When the judgment  is read as a whole it  is apparent that the Judge was satisfied there was no arguable defence to the claim for summary judgment  and applied that test to her consideration of the issue before her.

[18]     In any event, even if the Judge had applied the wrong test, the result would be the same if the correct test had been applied and was applied by this Court on appeal: r 718A(1)(a).  For the reasons that follow, this Court is satisfied there is no arguable defence to the respondent’s claim for summary judgment.

Issue estoppel

[19]     The  second  point  Mr  Thwaite  took  on  behalf  of  the  appellant  was  to challenge the Judge’s finding that issue estoppel applied in relation to the decision of Cooper J.  Mr Thwaite submitted first that the Judge was wrong to raise the matter of issue estoppel herself when it had not been raised by the parties in pleading and second, that as a matter of law issue estoppel did not apply.

[20]     Although not raised by the parties in pleading, it was open for the Judge to raise the issue with counsel during the hearing as she did and to deal with the matter in her judgment after having raised it and hearing from counsel.

[21]     On the facts of this case there is authority to support the Judge’s finding that issue estoppel applied, at least on the issues of the termination date of the lease of 30

April 2005 and the liability of Mission Bay for the sums that  Cooper J entered judgment against that company for.  The extent of issue estoppel against a guarantor was considered by the Court of Appeal in McLean v Bank of New Zealand (1996) 9

PRNZ 473.  Albeit obiter, in that case the Court of Appeal observed:

But, assuming to the contrary that the [the respondent] could claim against her [the appellant] under the mortgage as a secondary party liable for her husband's [Misson Bay’s] debt (as a guarantor of his liability as a guarantor of Tamaki Corp),  is  she to be permitted to contest  his  [Mission  Bay’s]

liability when he [it] can no longer do so? Her [the appellant’s] liability is derivative from his [its], in the sense that she [the appellant] is not liable unless he [Mission Bay] is. Whether or not someone subject to a derivative or dependent secondary obligation of this kind is viewed as a privy because of the contractual nexus or mutuality of interest with the person guaranteed, or whether it is simply seen as an abuse that a creditor be put to proof of a debtor's liability a second time, Mrs McLean [the appellant] should not be permitted  now to  raise  a  question  about  [Mission  Bay’s]  her  husband's liability.

[22]     In my judgment the insertion of appellant for Mrs McLean and Mission Bay for Mr McLean shows that similar reasoning is directly applicable in the present case.  While obiter, the comments are directly applicable and I adopt the reasoning of the Court of Appeal.

[23]     There  is also  direct  authority on point  in the unreported  decision  of the Supreme Court of New South Wales Perpetual Nominees Ltd v Aus Constructions Pty Ltd, 20 October 2005, NSWSC 1199.  An issue estoppel was held against a party in the position of the appellant  in this case.   The plaintiff applied  for summary judgment against two guarantors, having earlier obtained judgment against the principal debtors, which were companies owned and controlled by the guarantors. Johnson J held that issue estoppel applied on the basis that:

The parties to the [earlier] judicial decision … although not identical in the sense that the Third and Fourth Defendants were not actual parties to those proceedings, were, in my view, privies.  The Third and Fourth Defendants [guarantors] were the controllers of the First and Second Defendants.  Austin J so held, and it is apparent from His Honour’s decision that those persons were the heads and hands of those corporations.

I am satisfied that the Third and Fourth Defendants would be caught by the doctrine of issue estoppel in raising this defence.

[24]     Again, I adopt that reasoning as applicable.  The appellant in this case is the sole director and principal shareholder of Mission Bay.  He, and only he, dealt with the  respondent  on  behalf  of  Mission  Bay  during  the  matters  in  dispute.    The appellant swore the affidavit in opposition to the respondent’s application for summary judgment against Mission Bay.  He controlled the company throughout the course of the proceedings.   The position  is even stronger  in terms of the  issue estoppel arising in those circumstances than was the case before the Court of Appeal in McLean v Bank of New Zealand where the Court accepted Mrs McLean may not

have known of the additional guarantee given by her husband.   The appellant was very well aware of the defences available to Mission Bay.

[25]     It would be against the interests of justice to have the appellant  in these separate proceedings effectively raise and challenge the findings made by Cooper J, (and confirmed by the Court of Appeal) on the issue of the termination date of the lease and calculation of the quantum.

[26]     Mr Thwaite referred to a number of decisions that confirmed a guarantor has a separate interest from that of a principal debtor:   Nelson Fisheries Ltd v Boese [1975] 2 NZLR 233; Trotter v Avonmore Holdings Limited (CA162/04, 1 August

2005).  Certainly the appellant has a separate interest in his capacity as guarantor to that of the principal debtor, Mission Bay.  The appellant could have argued that even though Mission Bay was bound, there were other grounds personal and individual to him as guarantor that he could raise in support of his opposition to summary judgment.  But that can not detract from the principle that the plaintiff, the guarantor, is subject to an issue estoppel as to the issue of the termination of the lease at 30

April 2005 and that Mission Bay is liable for the quantum judgment entered by Cooper J.  The appellant did not apparently raise other grounds personal to him as a guarantor in defence before Judge Sharp and did not put forward any arguable basis for relief on those grounds in this appeal.

[27]     I conclude that the Judge was right to hold issue estoppel applied to the extent the judgment findings as to termination of the lease as at 30 April 2005 and by Mission Bay to the respondent in the proceedings before Cooper J.

[28]     In any event, even if the District Court Judge and this Court are wrong on that point, it does not affect the appellant’s position.   The short point is that the respondent did not rely upon issue estoppel in bringing its application for summary judgment.  The respondent put before the District Court sufficient evidence for the Court to conclude that the lease had terminated on 30 April 2005 and to confirm both the amount claimed by the respondent in the earlier proceedings and the additional claim post judgment was due by Mission Bay, and by the appellant as guarantor. The affidavit of Mr Porter sworn and filed on behalf of the respondent set out all that

was necessary to provide jurisdiction for the Judge to enter summary judgment even without regard to the matter of issue estoppel.

[29]     For completeness I record that even if I found in favour of the appellant’s arguments on issue estoppel I would still have found that the Judge was correct to enter summary judgment on the basis that there was sufficient proof of the respondent’s claim and no arguable defence raised in answer.

Set-off

[30]     Mr Thwaite then argued that the guarantee did not preclude a right of set-off or counterclaim or right to review the rent.  He submitted that Mission Bay may have a counterclaim against the respondent arising out of the respondent’s obligations under the lease by the respondent.  Mr Thwaite submitted that the appellant ought to be given the opportunity to have those matters argued.

[31]     A  number  of  points  arise  from  the  submission.     First,  the  right  of counterclaim, such as it is, rests with Mission Bay not the appellant, at least until the appellant  may pay out his obligations under  the  lease as guarantor and become subrogated to those rights.   At present Mission Bay has taken no steps to enforce those rights during the entire set-off proceedings.  Mission Bay is now in liquidation. It will be for the liquidator to determine whether it wishes to take steps on behalf of Mission Bay.

[32]     More fundamentally, with respect Mr Thwaite confused the concepts of set- off and counterclaim.  Whilst in the course of submission he acknowledged the claim by Mission Bay was one of counterclaim, he suggested that should prevent the entry of summary judgment and could be raised as a defence.  However the law is clear.  A set-of may operate as a defence but a counterclaim does not:  Grant & Anor v New Zealand Motor Corporation (NZMC) Ltd [1989] 1 NZLR 8; Pemberton v Chappell [1987] 1 NZLR 1 (per Casey J). Even if Mission Bay has a counterclaim against the respondent that is not a defence to the respondent’s application for summary judgment against Mission Bay and a  fortiori  is  not  a  defence  against  the respondent’s application for summary judgment against the appellant as guarantor.

[33]     Then during the course of submission Mr Thwaite noted that in Grant v NZMC the Court had accepted the Grants had an arguable set-off against NZMC as guarantors which would prevent the entry of summary judgment against them. However, I understood Mr Thwaite to concede that there was a distinction between the position of the Grants in that case and the appellant in the present case.  In the case of the Grants, the argument was made that they would not have incurred their liability as guarantors under the lease were it not for the misrepresentation of NZMC which induced them, as directors, to have their company enter the lease and also to have them guarantee the lease.  The obligation that NZMC sought to enforce against the Grants, namely the guarantee of rent  under the lease,  would  not  have  been incurred were it not for that misrepresentation.

[34]     In the present case the claim by Mission Bay is of a different nature.  It is that during the course of the lease, there being no complaint as to the circumstances surrounding the assignment and the entry into the guarantee by the appellant, the respondent acted in such a way that Mission Bay has a claim against the appellant. Such claim does not extinguish the rental due by Mission Bay (and guaranteed by the appellant).   At most, if made out, it amounts to a counterclaim.   It is quite different and distinct to the situation of set-off that existed in Grant v NZMC.

[35]     In short at best the claim by Mission Bay is a counterclaim available to Mission Bay, which does not amount to a defence.  There is no set-off available to the appellant against the respondent in the present case.

Evidence of the amount due/disputed factual matters/relevant legal principles

[36]     Mr Thwaite dealt with points 4, 5 and 6 together.   He accepted they were general points challenging the entry of summary judgment.  It follows from what I have said above that I do not accept the submission there was insufficient evidence of the amount due under the guarantee.   The affidavits sworn in support of the application for summary judgment properly referred to relevant matters of quantum. The appellant did not raise any arguable defence or credible dispute as to his liability in the District Court.  The application of relevant legal principles would inevitably have led to entry of summary judgment in this case.

[37]     Finally  Mr  Thwaite  submitted  that  the  Court  should  have  exercised  its discretion not to enter summary judgment.

[38]     Undoubtedly the wording of r 152 of the District Court Rules provides the Court  with  a  general  jurisdiction  whether  to  enter  summary  judgment  where otherwise an applicant for summary judgment makes out its case.  Where there is a counterclaim then r 163(2) expressly permits dismissal of the summary judgment application.

[39]     The exercise of the discretion not to enter summary judgment when the claim is otherwise made out is of a residual kind and generally only applies where the ground for refusal would provide a defence at a substantive hearing:   European Asian Bank AG v Punjab and Sind Bank [1983] 1 WLR 642, 654; Pemberton v Chappell (supra) and Inner City Properties Ltd v Mercury Energy Ltd (1998) 13

PRNZ 73 (CA).

[40]     In the present case the appellant can not point to any compelling reason for the exercise of the discretion in his favour.   As noted the counterclaim is not a counterclaim by the appellant.  The counterclaim is not in any event accepted by the respondent.    It  remains  a  vague  and  unquantified  claim.    There  is  nothing  in Mr Thwaite’s submissions to support the proposition that the Judge acted on a wrong principle or exercised her discretion incorrectly in entering summary judgment rather than exercising the discretion to decline to enter summary judgment even though she found the claim proved.

Conclusion and result

[41]     The points on appeal raised by Mr Thwaite on behalf of the appellant have no substance.  The appeal must be and is dismissed.

[42]     If counsel are unable to agree costs, I invite counsel for the respondent to file a memorandum in support of costs on the appeal. by 7 March 2007.  The appellant may file and serve a memorandum in response by 14 March 2007.

[43]     I will then deal with the issue of costs on the basis of those memoranda.

Venning J