Planet Kids Limited v Auckland Council HC Auckland CIV-2011-404-1741

[2011] NZHC 1799

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-1741

BETWEEN  PLANET KIDS LIMITED Plaintiff

ANDAUCKLAND COUNCIL Defendant

Hearing:         18 August 2011

Appearances: K W Berman for Plaintiff

L A O'Gorman and D T Broadmore for Defendant

Judgment:      16 December 2011 at 5:00 PM

JUDGMENT OF PETERS J

This judgment was delivered by Justice Peters on 16 December 2011 at 5:00 pm pursuant to rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date: ........................................

Counsel:            K Berman, Barrister, P O Box 105358, Auckland 1143 email:  [email protected]

Solicitors:           Buddle Findlay, P O Box1433, Shortland Street, Auckland 1140

email: [email protected] ; [email protected]

PLANET KIDS LIMITED V AUCKLAND COUNCIL HC AK CIV-2011-404-1741 16 December 2011

[1]      The issue in this proceeding is whether an agreement between the parties dated 3 June 2010 (“agreement”) was frustrated by the termination in October 2010 of a lease held by the plaintiff.

[2]      The plaintiff’s case is that the agreement was not frustrated.   The plaintiff seeks payment of the sum it contends is due to it under the agreement and applies for summary judgment on its claim.  For its part, the defendant seeks an order striking out the plaintiff’s proceeding[1]  or, alternatively, summary judgment on its defence that the agreement was frustrated by the termination of the plaintiff’s lease and that, as a result, the defendant is not required to pay the sum claimed by the plaintiff.

[1] High Court Rules, r 15.1.

[3]      The legal principles that apply to an application for summary judgment by the  plaintiff are different from  those that  apply to  the  application  made by the defendant.  Here, the plaintiff must establish that the defendant has no defence to its claim.  The following passage from the Court of Appeal’s judgment in Krukziener v

Hanover Finance Ltd[2] sets out the position:

[2] Krukziener v Hanover Finance Ltd [2008] NZCA 187, (2008) 19 PRNZ 162 at [26].

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 at 3 (CA). 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 at 341 (PC). 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 Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).

[4]      To succeed on its application, the defendant must establish that the plaintiff’s claim cannot succeed because the defendant has an unassailable legal answer to that claim.   Accordingly, the principles applying to the defendant’s application for summary judgment are similar to those which govern applications to strike out.

Facts

[5]      There is  no  dispute between  the parties as  to  the relevant  facts.   At  all material  times,  the  plaintiff  was  the  lessee  of  land  and  buildings  (“premises”) situated at Rankin Avenue, New Lynn, Auckland.  The land which formed part of the leased premises was/is contained and described in what was formerly certificate of title  98D/832  (North  Auckland  Registry)  (“land”).    The  plaintiff  conducted  a childcare business (“business”) on the premises.  Subject to the exercise of rights to renew, the plaintiff ’s lease (“lease”) ran until December 2016.

[6]      In 2004 Waitakere City Council, the defendant’s predecessor, acquired the reversion in the land.   References below to “the defendant” in respect of events before 1 October 2010 are references to Waitakere City Council.

[7]      It is clear from the evidence that, not long after the defendant acquired the reversion, the plaintiff came to understand that the defendant wished to extend a nearby road and to form a new intersection (“works”). These works, or at least a part of them, could only occur if the plaintiff surrendered its lease.

[8]      As a local authority, the defendant had power under the Public Works Act

1981 (“the Act”) to acquire the plaintiff’s leasehold interest (“leasehold interest”) by agreement or to take the leasehold interest in accordance with the Act.  In either case the defendant would be required to compensate the plaintiff.   The amount of that compensation could be determined by agreement or in accordance with the relevant provisions of the Act.

[9]      The parties had some discussions regarding the terms on which the defendant might acquire the leasehold interest, but these did not lead to agreement. As a result, in February 2010 the Council initiated steps to take the leasehold interest under the Act.  This action led to further discussions between the parties and, as I have said, they entered into the agreement in June 2010.

[10]     I discuss the agreement below, but note here that it provided for the defendant to pay a sum to the plaintiff in full and final settlement of any claim the plaintiff

might have for compensation under the Act.  Upon execution of the agreement the defendant was to pay a deposit of 10 per cent of the agreed sum, which the defendant did.  The defendant was to pay the balance of the agreed sum on the settlement date, which the agreement provided would be on 20 December 2010 or earlier if agreed.

[11]     On 2 October 2010, a fire destroyed the building that housed the plaintiff’s business and which formed part of the premises.  The fire was started deliberately but the culprit has not been identified.

[12]     It is common ground that the lease terminated with immediate effect as a result  of  the  destruction  or  damage  that  the  fire  caused  to  the  premises.[3]

Accordingly, after the fire, the plaintiff ceased to have any estate or interest in the land and the defendant, in its capacity as owner of the reversion, held the fee simple. The defendant then advised the plaintiff that it considered the agreement had been frustrated by the termination of the lease.  The defendant sought repayment of the sum(s) which it had paid to the plaintiff, the plaintiff issued proceedings in March

2011 and the various interlocutory applications to which I have referred followed.

Doctrine of frustration

[3] Deed of Lease dated 17 December 1998, cl 40.1.

[13]     It is common ground that, if the agreement was frustrated by the termination of the lease, the agreement terminated as at the date of that fire, and thereafter the parties were discharged from further performance of their contractual obligations.

[14]     A finding that the agreement was frustrated would mean the plaintiff’s claim fails because the defendant would have been discharged from its obligation to pay the plaintiff the sum that was otherwise due on the settlement date.  There might also need to be some adjustment between the parties insofar as concerns performance of the agreement prior to the date of the fire, for instance the defendant’s payment of the deposit.[4]

[4] Frustrated Contracts Act 1944.

[15]     The   parties   referred   me   to   several   statements   that   encapsulate   the circumstances in which the doctrine of frustration applies.  There is no real dispute

as to what the defendant must establish if it is to succeed.   The dispute turns on whether the doctrine operates in the present case.

[16]     The  defendant  referred  me  to  the  following  extract  as  summarising  the position:[5]

[5] Laws of New Zealand Doctrine of Frustration (online ed) at [366] (footnotes omitted).

366. Introduction. The doctrine of frustration concerns situations where due to unforeseen contingencies occurring after the parties have reached agreement, performance becomes either impossible or only possible in a radically different way from that originally contemplated.

In such cases, if the contract is silent as to what is to happen and if the parties have not themselves been responsible for the frustrating event, the law may excuse the parties from further performance under the doctrine of subsequent impossibility or, as it is more commonly called, the doctrine of frustration.

As a general rule, the doctrine operates to discharge the contract where: (1)  it appears from the nature of the contract and the surrounding

circumstances that the parties have contracted on the basis that some fundamental thing or state of things will continue to exist,

or that some particular person will continue to be available, or

that some future event which forms the basis of the contract will take place; and

(2)  an event in relation to this underlying basis of the contract renders performance impossible or only possible in a very different  way  from  that  contemplated,  but  without  default  of either party.

It is not sufficient to show that a change of circumstances has deprived a party of some benefit that they expected to get from the contract, or that performance will cause hardship or inconvenience. There must be a failure of something which was at the very heart of the contract. To invoke the doctrine, it must be possible to say that there is something which fundamentally alters the nature of the contractual relationship between the parties, rendering that relationship different in character, purpose, and effect from what was contemplated by the parties when it was entered into.

[17]     To give two examples of the early application of the doctrine, in Taylor v Caldwell[6] the Court held that performance of a contract to hire gardens and a music hall for the giving of concerts had become impossible because the hall had been destroyed by fire.  In Krell v Henry,[7] the Court held that a contract to hire rooms to

watch a coronation parade was frustrated by cancellation of the parade.  The Court

held that the parties were discharged from their obligations because the substance of the contract, which the Court was able to ascertain from the terms of the contract and/or by inference from surrounding circumstances, assumed a particular state of affairs, namely that the parade would take place on the date originally announced.

[6] Taylor v Caldwell (1863) 3 B & s 826.

[7] Krell v Henry [1903] 2 KB 740

[18]     Counsel  for  each  party  referred  me  to  the  following  passage  in  Dysart Timbers Ltd v Nielsen[8]  as being a statement as to the circumstances in which the doctrine  operates.    Dysart  Timbers  itself  was  concerned  with  a  different  issue, namely the  circumstances  in  which  an  offer  is  assumed  to  have  lapsed,  but  in considering that issue Tipping and Wilson JJ said:[9]

[8] Dysart Timbers Ltd v Nielsen [2009] NZSC 43, [2009] 3 NZLR 160 (footnotes omitted).

[9] Ibid at [30].

[30]    There is some similarity between the approach just outlined and that taken at common law to the question of frustration of contracts. The point is addressed  in  ch 1  of  Treitel’s  Frustration  and  Force  Majeure. The  author speaks  of  the  tension  which  exists  between  the  principle  of  sanctity  of contract and what he then describes as a counter-principle:

“On the other hand, the principle of sanctity of contract, like many legal principles, is not considered to express an absolute value. It is qualified by a counter-principle that parties who enter into contracts often do so on the basis of certain shared, but unexpressed assumptions ... [The] effect [of the counter-principle] is that contractual obligations may be discharged by supervening events where these have brought about a change of circumstances so significant as to destroy a basic assumption which the parties had made when they entered into the contract.”

Submissions

[19]     The defendant submits that the termination of the plaintiff’s lease prior to the settlement date brought about a change of circumstance that was sufficiently significant to destroy a basic assumption that the parties made when they entered into the agreement.  The defendant submits that basic assumption was that at the date of settlement the plaintiff would have an estate or interest in the land, which the defendant would acquire and in return for which it would pay to the plaintiff the sum that the parties had agreed.  The defendant submits that it should not be required to perform the agreement and to pay the plaintiff the agreed sum, if in fact it is not to

acquire such interest in the land under the agreement.

[20]     The plaintiff’s case is that the purpose of the agreement was to compromise the  plaintiff’s  claim  for  compensation  under  the Act  and,  accordingly,  was  no different from any other settlement agreement. The plaintiff further contends that the agreement imposed mutual obligations that remained capable of performance regardless of the fire.  The plaintiff’s case is that those mutual obligations were in lieu of the uncertainty as to future events that otherwise would have existed, namely when the defendant might acquire the plaintiff ’s interest in the land and the amount of compensation to be paid.  The plaintiff also makes the point that, regardless of the fire, the defendant has achieved the result that it sought, namely to secure vacant possession of the land and the ability to carry out the works.

Discussion

[21]     I accept the defendant’s submission that the parties’ basic assumption when they entered into the agreement was that the plaintiff would have an estate or interest in the land at the date of settlement, and that such assumption was destroyed by the termination of the lease.  I also therefore accept the defendant’s submission that the effect  of  the  termination  of  the  lease  was  to  frustrate  the  agreement  and  that thereafter both parties were discharged from performance of their obligations under the agreement.

[22]     In my view, the assumption for which the defendant contends is apparent from the surrounding circumstances and from the contents of the agreement.

[23]     First, I take into account the matters referred to in paragraphs [7] to [9]

above.

[24]     Secondly,  I  consider  that  the  basic  assumption  for  which  the  defendant contends is apparent from the recitals the parties included in the agreement.

[25]     The  recitals  record  the  plaintiff’s  status  as  lessee  of  the  premises,  the defendant’s intention to undertake a public work encompassing the land forming part of the premises, the defendant’s need for possession and demolition of the premises (more accurately, possession of the land and demolition of the building which the

plaintiff occupied), and the parties’ agreement as the basis of payment of compensation under the Act.

[26]     Thirdly,  I  consider  that  the  assumption  to  which  the  defendant  refers  is apparent from the terms of the agreement.

[27]     Clause 1 of the agreement reads as follows:

1.The Council will pay to the Lessee in full and final settlement of any claim for compensation that the Lessee may have under PWA 1981 and arising directly or indirectly out of the undertaking of the works by the Council and the closure of the Lessee’s Business, and the Lessee will accept payment on that basis, the following amounts:

a)For the goodwill of the business, pursuant to s68(1)(b) PWA, together with all of the Lessee’s chattels and plant on the premises with the exception of those chattels or plant listed in Appendix B, the sum of $538,000.00  plus GST; and

b)A sum sufficient to reimburse the reasonable valuation, accountancy and legal fees incurred by the Lessee relating to the negotiation and settlement of this agreement, pursuant to s66(1)(a)(ii) PWA.

[28]     The references in clause 1 to the claim for compensation that the plaintiff might have and why, and to ss 66(1)(a)(ii) and 68(1)(b) of the Act, are important. That is because there is no dispute that a claim for compensation under those provisions requires that the defendant is acquiring or taking an interest in land.  If there were no acquisition or taking, there could be no claim for compensation under these provisions.

[29]     The agreement also provided that, pending settlement, the plaintiff would continue to pay the rent due under the lease and that the plaintiff’s business would remain at the plaintiff’s sole risk.   However, as counsel did not address the significance of this latter provision in any great detail, I put it aside for present purposes.

[30]     On settlement, the defendant was to pay the balance of the sum due, being the remaining 90 per cent of the agreed amount.   In return, the plaintiff was to give vacant possession of the premises and to deliver a validly executed surrender of the

lease.  The plaintiff would have been unable to comply with this latter provision on the settlement date, the lease having already terminated.  The plaintiff was also to deliver  an  executed  restraint  of  trade  covenant,  that  being  required  under  s

68(1)(b)(ii)  of the Act  if  compensation  is  to  be paid  for loss  of  goodwill  of a business.

[31]     Counsel for the plaintiff submitted that the requirement that the plaintiff deliver a surrender of lease on settlement was a “machinery” provision only, and not a matter fundamental to the agreement.  I do not accept that submission.  The need to have the plaintiff surrender its lease was what drove the agreement.

[32]     Counsel for the plaintiff emphasised clause 9 of the agreement.  In clause 9, the plaintiff acknowledges that the defendant is not purchasing the business but merely compensating the plaintiff for its closure.   It is not clear to me how this provision assists the plaintiff.   In my view, any such compensation assumed that the closure was brought about by surrender of the lease pursuant to the terms of the agreement and not otherwise.

[33]     For these reasons, I accept the defendant’s submission that the agreement was frustrated when the plaintiff ceased to have an interest in the land, and the that parties thereafter were discharged from performance of their obligations under the agreement.

Result

[34]     There is no doubt that the plaintiff’s position is most unfortunate.   That, however, is the regrettable consequence of the terms of the lease.

[35]     I dismiss the plaintiff’s application for summary judgment.  For the moment, I will  delay making  an  order  entering  summary  judgment  for  the  defendant  or striking out the plaintiff’s claim.   It may be that different consequences follow depending on which of those orders is made and there may also need to be some relief under the Frustrated Contracts Act 1944.  I ask that the defendant file and serve a memorandum no later than 10 February 2012, setting out how it considers matters

ought to proceed, and on the matter of costs if necessary.  The plaintiff’s response should be filed and served no later than 24 February 2012.  It may be the parties are able to agree all matters between them, in which case a consent memorandum should be filed at the earliest opportunity.

..................................................................

PETERS J