OHL Ltd v Johns

[2019] NZHC 594

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2018-404-2377

[2019] NZHC 594

BETWEEN

OHL LIMITED

Plaintiff

AND

LLOYD DAVID JOHNS, TREVOR

RAKENA WI KAITAIA, MARAMA FAYE OTI and FAENZA RURUHI KINGI

WAIAUA as responsible trustees of the PERIA CHARITABLE TRUST

Defendants

Hearing:	18 March 2019
Appearances:	N Gedye QC for the Plaintiff R C Mark for the Defendants
Judgment:	27 March 2019

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

This judgment was delivered by me on 27 March 2019 at 3.30 p.m. pursuant to r 11.5 of the High Court Rules 2016.

Registrar/Deputy Registrar

……………………………………

Solicitors / Counsel:

Mr N Gedye QC, Barrister, Auckland

Mr B McKinnon (plaintiff’s instructing solicitor) Mr R C Mark, Solicitor, Kerikeri

OHL LTD v JOHNS [2019] NZHC 594 [27 March 2019]

Introduction

[1]    The defendants are the trustees of an Ahu Whenua Trust that owns pinus radiata forestry lands in Te Tai Tokerau/Northland. The plaintiff, OHL Ltd, an administration company, claims to be the grantee of forestry rights over the land. The plaintiff says it has succeeded to a 62 per cent of the interests in the forestry right as a result of an amalgamation of companies under s 225 of the Companies Act 1993 (the 1993 Act).

[2]    In 2017 the defendants granted “competing forestry rights” over the same lands and trees to third parties. The plaintiff sues for breach of contract and breach of fiduciary duty contending that the defendants have repudiated and purported to terminate the plaintiff’s contract with the defendants. The sale of the trees and the rights to proceeds from them has deprived the plaintiff, it is claimed, of all its interests in the forestry rights.

[3]    The plaintiff seeks summary judgment as to liability on the first cause of action, namely breach of contract. The plaintiff claims that the outcome of the application, and of any subsequent damages award, may dictate whether the plaintiff needs to pursue the second cause of action (breach of fiduciary duty).

[4]    The defendants say that the forestry right cannot pass to the plaintiff, pursuant to s 225 of the 1993 Act, because:

(a)It is both an express and implied term of the forestry right that it cannot pass to any party without the defendants first having given their prior written consent. The defendants did not give their consent for the assignment of the forestry rights.

(b)It is an implied term of the forestry right that there is a duty of honest performance. The plaintiff breached a duty of honest performance in failing to notify the defendants of the amalgamation and that the plaintiff is now the grantee of the forestry right and failing to carry out the contractual obligations of the grantee.

[5]    One of the principal concerns of the defendants is the association of Mr Mark Hotchin with OHL Ltd. The defendants say they would never have agreed to OHL Ltd holding the forestry right given this association. The grantee has unrestricted access to the defendants’ whenua (land) and it is essential that the relationship between the parties, an ongoing one, is based on mutual confidence.

[6]    If the forestry right has vested in the plaintiff, by way of an amalgamation pursuant to s 225 of the 1993 Act, then the defendants say they have a defence to the plaintiff’s claim by virtue of an equitable set-off arising from the plaintiff’s breaches of the forestry right.1

[7]    By way of relief, the plaintiff seeks judgment on liability pursuant to r 12.3 of the High Court Rules 2016 and on terms similar to the relief granted by McGechan J in Roberts’ Family Investments Ltd v Total Fitness Centre (Wellington) Ltd.2 In that case, his Honour granted judgment for the plaintiff on the question of liability but in view of the doubts which existed as to the precise basis of liability; the judgment was not a determination of the plaintiff’s formulation of contractual liability as pleaded in the amended statement of claim. It was held that the precise terms of the contract which underlay judgment for liability were to be determined in the course of the trial on quantum.

[8]    The critical issue I must determine is whether the plaintiff has established that the defendants have no defence to the claim of breach of contract. That turns on the question of whether the plaintiff has established that there is no credible or tenable defence of equitable set-off.

Relevant legal principles

[9]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.

1 As noted at [18] below, the equitable set-off has become the primary ground of opposition.

2      Roberts’ Family Investments Ltd v Total Fitness Centre (Wellington) Ltd [1989] 1 NZLR 15 (HC).

[10]The principles are summarised in Krukziener v Hanover Finance Ltd:3

[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. The court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corporation Ltd v Patel (1987) 1 PRNZ 84 (CA).

[11]   In Gardner v Gardner, Associate Judge Osborne summarised the general principles of summary judgment.4 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 determine and reject spurious defences or plainly contrived factual conflict. 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 when there may be differences on certain factual matters if the lack of a tenable defence is plain on the material before the Court.

3      Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307.

4      Gardner v Gardner [2015] NZHC 2018 at [20].

(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

[12]The relevant chronology is as follows:

Date	Event
30 July 1996	Forestry right granted by trustees of the Peria Charitable Trust in favour of FNA J/V No 2 Ltd.
2001	FNA J/V No 2 Ltd transferred its interest in the forestry right to Northland Forestry Investments Ltd.
September 2002	The Peria Charitable Trust constituted as an Ahu Whenua Trust by order of the Māori Land Court under Te Ture Whenua Māori Land Act 1993.
25 June 2004	Northland Forestry Investments Ltd sold its interest in the forestry right to Far North Forests Ltd.
28 February 2005	Deed of Transfer and Variation of forestry right in favour of Far North Forests Ltd. Far North Forests Ltd became entitled to a 62 per cent interest in the forestry right.
31 May 2010	Far North Forests Ltd amalgamated with several other companies to become OHL Ltd, the plaintiff.
December 2016	Defendant trustees offered to purchase OHL’s interest in the forestry right for $100,000.
20 January 2017	Trustees withdraw the offer to purchase OHL’s interest in the forestry right “while we consider the [professional] advice”.
3 April 2017	Defendant trustees sold and granted Pango New Zealand Ltd forestry rights effective from 3 April 2017.
29 May 2017	Forestry Right in favour of Aubade NZ Ltd and forestry right in favour of Pango New Zealand Ltd registered on titles 71050, 50335, NZ105B/265 and 502830 (“the competing forestry rights”).
2018	60 per cent of trees harvested.
March 2019	Balance of trees to be harvested.

[13]   The parties agree that the defendants have disposed of all the interests in the 1996 forestry right.

[14]   The forestry right is a contract which provides the grantee the sole and exclusive right to plant, maintain and harvest pine trees on the defendants’ land. In return for this, the grantee agrees to a series of obligations designed to ensure the maximum return for both parties to the contract. The forestry right obligates its holder to carry out contractually mandated forestry work at its expense, and to share the proceeds of the forest harvest with the grantor (the defendants).

[15]   Clause 1 of the forestry right defines “outgoings” as “all rates, taxes (including land tax if any) and other assessments including all charges payable in respect of the land”. Clause 6.5 requires the grantee to pay all district council general rates. The defendants say that no grantee of the forestry right has ever met the obligation to pay rates.

[16]   The grantee’s obligations under the forestry right commence at clause 3 and continue through clauses 4 to 8. Clause 4.7 provides for the grantee to maintain and manage the trees. Clause 5.6 provides that the grantee shall construct, maintain, repair or replace all fences that may be required to protect the woodlot from animal damage. Clause 5.9 provides that the grantee shall construct or improve existing or additional tracks, roads, culverts and bridges required or necessary for the purposes of planting, maintaining or harvesting the woodlot.

[17]Clauses 3 and 6.7 of the forestry right read:

3.GRANTEES OBLIGATIONS

3.1It shall be the responsibility of the grantees (and the grantees hereby covenant) with the Grantor to do the following …

…

6.7 Not to assign or mortgage its interest in this Agreement without first obtaining the written consent of the Grantor (that consent not to be arbitrarily or unreasonably withheld in the case of a responsible, solvent and suitable dispose which has satisfied the Grantor of its ability to exercise the Forestry right and observe and perform the covenants of the Grantee in terms of this Transfer).

Analysis and decision

[18]   In their notice of opposition and written submissions, the defendants’ claim for a set-off was advanced as an alternative defence (that is, alternative to the primary defence that the forestry right had not passed to the plaintiff). However, at the hearing the set-off claim was put forward as the primary submission.

[19]   I will first address the issue of the set-off then turn to address the “alternative” defence. The alternative defence turns on the issue of whether there was an express or implied term in the forestry right that it would not pass to the plaintiff without the prior written consent of the defendants.

Set-off

[20]   The defendants say that there was a contractual arrangement (the forestry right) where the defendants provided the land and the plaintiff was obliged to incur the cost of production for the benefit of both parties. What happened was that the defendants provided the land and the plaintiff simply failed to carry out its contractual obligation. The defendants say that the plaintiff has, contrary to its obligations under the forestry right, failed since 2004 to maintain or cultivate the trees. The details of the set-off are set out in the affidavit of Mr Johns and in the draft statement of defence and counterclaim (not yet filed). It is alleged the plaintiff, as grantee, has not paid the following costs that were due and payable under the forestry right:

(a)rates of $80,000;

(b)fencing costs of $66,000;

(c)roading, bridges and culvert expenses of $180,000; and

(d)woodlot maintenance, annual woodlot payment, fire breaks and erosion control for a figure yet to be quantified.

[21]   The defendants say that their set-off arises out of the same contractual matrix as the plaintiff’s claim for breach of the forestry right and is entirely interdependent

with the plaintiff’s claim, which at this stage is unliquidated. The defendants submit that they have an arguable claim to a set-off which exceeds the amount of any loss that the plaintiff might be able to establish for breach of the forestry right. If the set-off is established by judgment it will pro tanto extinguish the plaintiff’s claim.

[22]   The defendants rely upon the Court of Appeal decision in Grant v NZMC Ltd5 where it was held that a defendant may set-off a cross-claim which so affects the plaintiff’s claim for summary judgment that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are, in effect, interdependent; judgment on one cannot fairly be given without regard to the other; the defendant’s claim calls into question or impeaches the plaintiff’s demand. It is neither necessary, nor decisive, that the claim and cross-claim arise out of the same contract.

[23]In that case, Somers J held:6

The effect of the distinction between set-off and counterclaim is well understood. A counterclaim is a cross-action which may have no connection at all with the subject-matter of the claim, see eg Stumore v Campbell & Co [1892] 1 QB 314, and is not confined to money claims. It is not of itself a defence to the claim although under RR 534 and 535 of the High Court Rules, where claim and counterclaim arise out of the same matter (McPhee v Wright, Stephenson & Co (1901) 19 NZLR 321), one judgment only is given in favour of the party who on a balance is entitled to recover. Set-off affords a defence to an action wholly or in part depending upon the amount and is by its very nature limited to money claims. When a set-off is established by judgment it will pro tanto extinguish the plaintiff's claim: Briscoe v Hill (1842) 10 M & W 735, 738; Re Hiram Maxim Lamp Company [1903] 1 Ch 70, 74. While the difference between the effect of set-off and counterclaim is clear enough it is suggested that the test for deciding whether a cross-claim is one or the other is uncertain.

[24]   I find that OHL Ltd has not established that the defendants have no defence based on the claimed equitable set-off. That defence is, in my view, arguable and the plaintiff has not established that it lacks credibility or sufficient detail. I accept that the draft pleading is yet to be filed, but the evidence of Mr Johns and the draft pleading lead me to the conclusion that the defendants have met the obligation of laying the proper evidential foundation for the defence it now asserts.

5      Grant v NZMC Ltd [1989] 1 NZLR 8 (CA).

6      At 11.

[25]   It is clear from the affidavit of Mr Johns that the defendants have evidence to support the contention that the grantee, apart from planting the forest, has spent no money maintaining or culling the trees since then. I accept that, under the forestry right, OHL Ltd can only be liable for breaches of the right since late 2004 and that the issue of limitation may present a hurdle for the defendants. However, Mr Johns has provided some detail of costs and expenses, including rates, that Far North Forests Ltd and OHL Ltd have not paid since 2005, and it is clearly arguable that an equitable set- off is a true defence unaffected by either the Limitation Act 2010 or the former Limitation Act 1950.7 On that basis, the equitable set-off would extend to losses prior to 2013.

[26]   No affidavit evidence in reply was filed by either Mr Hotchin of OHL Ltd addressing the issue of unpaid rates. Ultimately, of course, the plaintiff carries the burden of establishing there is no defence. I acknowledge that there are disputed matters of fact including, for example, whether it was necessary to spend money on fences to protect mature trees from damage caused by animals, but those are matters for determination at trial.

[27]   I reject Mr Gedye’s submission that the set-off is in substance a counterclaim and is not so directly connected to the plaintiff’s claim as to potentially impeach it and represent a defence to it. The claims of the plaintiff and the proposed equitable set- off are based on the same contract, namely the forestry right, and both are directly connected with the fundamental obligations of the parties under the right. In my view, it is arguable the link between the two claims is such that they are interdependent and that judgment on one cannot fairly be given without the other.   Furthermore, as     Mr Mark submitted, the set-off is a money claim and here both the claim and the set- off are unliquidated. This is not a case where an unliquidated cross-claim is set-off against the liquidated demand.

[28]   In circumstances where the set-off, if established, will pro tanto extinguish the plaintiff’s claim, it would be unjust to allow the plaintiff to have judgment, albeit restricted to liability, without bringing the cross-claim to account. It may be, as

7      Henriksens Rederi A/S v THZ Rolimpex [1974] QB 233; and Robert Fisher The Laws of New Zealand Set-Off and Counterclaim (online ed) at [31], n 5.

Mr Mark submitted, that there will be no liability at all once the defendants’ set-off is taken into account.

[29]   I acknowledge that the relief sought by the plaintiff is an attempt to try and prevent unnecessary costs and expense in litigating issues that are unnecessary and have no prospect of success. However, the plaintiff has not established the high threshold in r 12.3 of the High Court Rules 2016, and I do not see how I could credibly make orders similar to those of McGechan J in Roberts’ Family Investments Ltd v Total Fitness Centre (Wellington) Ltd where, in this case, there is an arguable case that the defendant may have no liability at all. Although OHL Ltd is seeking a declaration on liability, ultimately its claim is a money claim eligible for the defence of set-off. On this basis, the summary judgment application must fail.

Express or implied term of prior written consent

[30]   The question of whether there was an express and/or implied term of the forestry right that it could not pass to any party without the defendants first having given their prior written consent is to be answered by addressing the legal effect of amalgamation under ss 219 and 225 of the 1993 Act.

[31]   Two or more companies may amalgamate by a process pursuant to Part 13 of the 1993 Act. The effect of an amalgamation is provided for in ss 219 and 225. Those sections provide:

219     Amalgamations

(1) Except as provided in subsection (2), 2 or more companies may amalgamate, and continue as 1 company, which may be one of the amalgamating companies, or may be a new company.

…

225     Effect of certificate of amalgamation

On the date shown in a certificate of amalgamation,—

(a)the amalgamation is effective; and

(b)if it is the same as a name of one of the amalgamating companies, the amalgamated company has the name specified in the amalgamation proposal; and

(c)the Registrar must remove the amalgamating companies, other than the amalgamated company, from the New Zealand register; and

(d)the amalgamated company succeeds to all the property, rights, powers, and privileges of each of the amalgamating companies; and

(e)the amalgamated company succeeds to all the liabilities and obligations of each of the amalgamating companies; and

…

[32]   The law relating to company amalgamations is settled.8 In Carter Holt Harvey Ltd v McKernan, the Court considered the effect of an amalgamation on personal guarantees. It held that when companies amalgamate, the benefits and burdens of the contracts of the merging companies continue in force for all purposes.9

Continuance is of the corporate entities, not of the undertakings and operations of those entities. They merge into one corporation which is to be regarded as their equivalent or, more loosely, their successor. Section 209G speaks of the amalgamated company succeeding to all the property, rights, etc and all the liabilities and obligations of each of the amalgamating companies. In a short form amalgamation involving a parent (under s 209D(1)), the entity “succeeds” to property and liabilities which have been its property and liabilities beforehand, as well as succeeding to those of the other entities. But, as the parent continues and is not deemed to be dissolved, it is clear that “succeeds”, a word used in Canadian case law though not in the legislation in that country to which we have been referred, is not to be read as requiring that there be a predecessor and a successor. The merged entity succeeds to the assets and liabilities because that is where they are to be recognised as being or remaining as a result of the continuance of all parties to the amalgamation.

…

We discern in the legislation a Parliamentary intent that the benefits and burdens of the contracts of all merging companies are to continue in force for all purposes. The amalgamated company is to enjoy all advantages previously conferred on any of the amalgamating companies and to have their liabilities. It is not to be treated as a different entity or as a new party to the contractual arrangements. It is not the equivalent of an assignee. Accordingly, in the case of a guarantee, neither amalgamation of the creditor nor of the debtor will discharge the guarantor in respect of post-amalgamation advances, any more than it would discharge pre-amalgamation advances. The amalgamated company simply stands in the shoes of the amalgamating company.

[33]   Elders New Zealand Ltd v PGG Wrightson Ltd concerned the question of whether an amalgamation under Part 15 of the 1993 Act involved a transfer, sale, lease

8      Carter Holt Harvey Ltd v McKernan [1998] 3 NZLR 403 (CA); and Elders New Zealand Ltd v PGG Wrightson Ltd [2008] NZSC 104, [2009] 1 NZLR 577.

9      Carter Holt Harvey Ltd v McKernan [1998] 3 NZLR 403 (CA) at 411.

or other disposition of the amalgamating company’s assets to the amalgamating company. The issue was whether the amalgamation infringed upon certain rights of pre-emption. The Court held that there was no transfer or disposition of property by virtue of the amalgamation and therefore the appellant’s rights of pre-emption did not arise. The Court held:10

In the end we are satisfied that the principal contextual indicator of the meaning of “amalgamation” throughout the 1993 Act, which is a statute that has a purpose of providing legislative machinery that facilitates mergers, lies in s 219 itself. It introduced to the law concerning amalgamations concepts of fusion and continuance imported from North America. …

[34]   I accept the submission of Mr Gedye QC, for the plaintiff, that in applying these principles, and by virtue of the amalgamation on 31 May 2010, OHL Ltd succeeded to the forestry right without the need for anything more; no transfer from Far North Forests Ltd was necessary nor approval from the defendant trustees or from any other entity.

[35]   I find that there is no basis in law for submitting, as the defendants do, that the forestry right ceased to exist upon amalgamation because the prior written consent of the defendants was not obtained. There is no basis in law for concluding that such a term, whether express or implied, was contained in the forestry right. OHL Ltd was not an assignee in terms of clause 6.7 of the forestry right and OHL Ltd simply stands in the shoes of the amalgamating company Far North Forests Ltd. That is the clear legal effect of ss 219 and 225 of the 1993 Act.

Implied duty of honest performance

[36]   The defendants contend that the forestry right created a relational contract between the holder of the forestry right and the defendants. It is said that the forestry right was not a one-off transaction with no ongoing relational component; it is a contract which is based on mutual confidence. Against that background the defendants contend that the plaintiff breached a duty of honest performance in failing to notify them of the amalgamation and that the plaintiff has now the guarantee of the forestry right.

10     Elders New Zealand Ltd v PGG Wrightson Ltd [2008] NZSC 104, [2009] 1 NZLR 577 at [36].

[37]   The defendants accept that the law in relation to its defence of breach of an implied term of honest performance is unsettled.11

[38]   I find that it is not necessary for me to express a view on whether there is an arguable obligation of good faith and honest dealings of the kind asserted here. In my view, the legal effect of amalgamation under s 225 of the 1993 Act means that the defendants’ claim in relation to the duty of honest performance is, in this case, untenable. Parliament has made it very clear that an amalgamated company enjoys all the advantages previously conferred on any of the amalgamating companies and is not to be treated as a different entity or as a new party to the contractual arrangements. As the Court of Appeal held in Carter Holt Harvey, it is not the equivalent of an assignee. In those circumstances the claim that there was a breach of a duty of honest performance or good faith in the plaintiff’s failure to notify the defendants of the amalgamation is unsustainable. It cannot be a lack of good faith to fail to give notice when the amalgamation took place in the manner expressly contemplated by the statute.

[39]   I thus conclude that neither of the alternative defences advanced by the defendants constitutes an arguable defence for the purposes of this summary judgment proceeding. However, the application for summary judgment must fail, as indicated above, because of the arguable defence of equitable set-off.

Result

[40]   The plaintiff’s application for summary judgment pursuant to r 12.3 of the High Court Rules 2016 is dismissed.

[41]Costs are reserved.

[42]   I direct that the defendants are to file, within 14 days, an amended statement of defence providing particulars of the equitable set-off and at the same time to provide the relevant initial disclosure in relation to that set-off.

11     See Culverden Retirement Village Ltd v Hill HC Auckland CIV-2008-404-5281, 25 November 2008 at [34].

[43]The proceedings are to be the subject of a case management conference on

Thursday, 23 May 2019 at 4:00 pm.

Associate Judge P J Andrew