Plus Construction Company Limited v JL Trustee Nominee Limited
[2023] NZHC 1986
•28 July 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-2305
[2023] NZHC 1986
BETWEEN PLUS CONSTRUCTION COMPANY LIMITED
PlaintiffAND
JL TRUSTEE NOMINEE LIMITED
First Defendant
SUN HEE LEE
Second DefendantJUNHO LEE
Third Defendant
Hearing: 26 June 2023 Appearances:
G K Holm-Hansen and J D van Riele for the Plaintiff J P Nolen for the Defendants
Judgment:
28 July 2023
JUDGMENT OF ASSOCIATE JUDGE C B TAYLOR
Application for Summary Judgment
This judgment was delivered by me on 28 July 20223 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
…………………………. Registrar/Deputy Registrar
Solicitors:
Hesketh Henry, Auckland, for the plaintiff
K3 Legal Limited, Auckland, for the Defendants
PLUS CONSTRUCTION COMPANY LIMITED v JL TRUSTEE NOMINEE LIMITED [2023] NZHC 1986 [28
July 2023]
TABLE OF CONTENTS
Paragraph
Introduction [1]
Background [2]
PCCL’s application for summary judgment [9]
JL Trustee, Ms Lee and Mr Lee’s opposition [11]
Legal principles [12]
Analysis [15]
JL Trustee submissions [17]
Is there a joint venture arrangement?
Breach of the joint venture arrangements, set-off and counterclaim by JL Trustee [25]
PCCL’s submissions [29]
Is there a joint venture arrangement? [29]Breach of the joint venture arrangements, set-off and counterclaim by JL Trustee [33]
Conclusions in relation to the joint venture arrangement, and JL Trustee’s set-off
and counterclaim [39]
Is there a joint venture arrangement? [39]
Breach of the joint venture arrangements, set-off and counterclaim by JL Trustee [41]
JL Trustee’s submissions [46]
Interference in contractual relations [46]
Knowing receipt [49]
PCCL’s submissions [52]
Interference in contractual relations and knowing receipt [52]
Conclusions in respect of interference in contractual relations and knowing receipt [56]
JL Trustee’s submissions [59]
Oppressive contract [59]
PCCL’s submissions [63]
Oppressive contract [63]
Conclusion in respect of oppressive contract [66]
JL Trustee’s submissions [68]
Is PCCL’s entitlement to repayment subordinate to the interests of other parties
and is it prevented from enforcing the Loan Agreement? [68]
PCCL’s submissions [72]
Is PCCL being prevented from enforcing its rights against the defendants? [72]
Conclusion in relation to PCCL being prevented from enforcing its rights against
the defendants [74]
Result [77]
Orders [78]
Introduction
[1] Plus Construction Co Limited (PCCL) seeks summary judgment against JL Trustee Nominee Limited (JL Trustee), Sun Hee Lee (Ms Lee) and Junho (Bruce) Lee (Mr Lee) for amounts owing under a loan agreement entered into with JL Trustee and guaranteed by Ms Lee and Mr Lee.
Background
[2] PCCL, and its wholly owned subsidiary Plus Pacific United Limited (PPUL), and JL Trustee, and its wholly owned subsidiaries Western Properties Limited (Western) and Wadier Henderson Limited (Wadier), are involved in two property developments. The first is of the Pacific Plus Tower on Buscomb Avenue, Henderson (the Buscomb Development) and the second is of the Sero Tower on Great North Road, Henderson (the Sero Development).
[3] The Buscomb Development was led by Western with PPUL as the head contractor for construction, until termination of the contract part way through construction.
[4] The Buscomb Development involved the following written contractual arrangements:
(a)PCCL provided initial finance of up to $3,600,000 through a loan agreement on 25 June 2019 (the Initial Loan Agreement).
(b)Western entered a construction contract with PPUL on 12 August 2019 (the Construction Contract). Western subsequently cancelled this contract on 16 May 2022. The Construction Contract required PPUL to post a bond of 5 per cent of the contract price ($23,800,000). The bond was in fact posted by PCCL.
(c)Western obtained finance from Arena Alceon NZ Credit Partners LLC (Arena) under a facility agreement for $28,200,000 (the Arena Loan Agreement). This agreement required the Initial Loan Agreement to be restructured through a new lending arrangement with PCCL.
(d)The Initial Loan Agreement was restructured in three 17 December 2019 documents:
(i)A loan agreement for up to $3,905,487 between PCCL as lender, JL Trustee as borrower, and Western, Ms Lee and Mr Lee as guarantors (the Loan Agreement). The Loan Agreement included an interest term of 35% per annum which would be payable up to a maximum of $2,800,000 and also contained a right to information clause in favour of PCCL.
(ii)A deed between PCCL, PPUL, JL Trustee, Western, Ms Lee and Mr Lee recording the restructuring and determining the distribution of profits from sale of the development’s units (the Restructuring Deed). The Restructuring Deed recognised the Arena Loan Agreement and provided priority for unit sale proceeds to go first to cover direct sale costs, then the Arena Loan Agreement, and finally the Loan Agreement.
(iii)A profit sharing agreement between Western and PPUL under which PPUL would be paid a post-completion fee of $2,800,000 less any interest payable to PCCL under the Loan Agreement (the Profit Sharing Agreement).
(e)A costs overrun guarantee was executed under which PCCL, PPUL and Mr Na Senior each guaranteed Western’s obligations for any cost overruns on the Buscomb Development up to a maximum of
$1,000,000 plus interest (the Western Overruns Guarantee). The Western Overruns Guarantee also provided that PCCL was precluded from taking any steps to recover against Western or any others
guaranteeing Arena’s Loan until the guarantee’s written discharge by Arena.
[5] The Sero Development was led by Wadier with PPUL initially as the head contractor for construction, until termination of the contract prior to construction beginning.
[6] The Sero Development involved the following written contractual arrangements:
(a)Wadier obtained finance from Quaestor Advisors LLC (Quaestor) under a facility agreement for $48,605,000 (Quaestor Loan Agreement). This agreement provided Quaestor a first ranked mortgage over the Sero Development land and a second ranked mortgage over the Buscomb Development land.
(b)PCCL entered a deed of priority of securities with JL Trustee and Quaestor (the Deed of Priority of Securities).
(c)PCCL, PPUL and Mr Na Senior provided a costs overrun guarantee to Quaestor that it would ensure all cost overruns would be paid by Wadier up to a maximum of $1,000,000 plus interest (the Wadier Overruns Guarantee). The Wadier Overruns Guarantee also provided that PCCL was precluded from taking any steps to recover against Wadier or any others guaranteeing Quaestor’s Loan until the guarantee’s written discharge by Quaestor.
(d)The Deed of Priority of Securities was signed under which PCCL confirmed its general security agreement over the Buscomb Development was subordinate to Quaestor’s security interest; and agreed that PCCL’s secured lending to JL Trustee was subordinate to, and subject to, the prior full payment of Quaestor’s secured lending to JL Trustee.
(e)Wadier as principal and PPUL signed a construction contract in October 2021 (Sero Construction Contract).
(f)A subscription agreement (the Subscription Agreement) was signed, under which PPUL agreed the first $1,700,000 of their payment claims under the Sero Construction Contract would be converted into shares in Wadier; an Arena associated entity (WTL Investor LLC) would commit equity of $1,100,000 to Wadier; and another JL Trustee subsidiary (Leehan Land Holdings Limited) would commit equity of
$2,500,000, of which $1,782,088 was to be payable from the proceeds of the Buscomb Development.
[7] In an attempt to obtain repayment in relation to the Buscomb Development Loan Agreement, PCCL issued a demand for repayment on 9 May 2022 (the Demand) and subsequently a notice of default on 8 November 2022 (the Notice of Default), to which no payment has been forthcoming. Consequently, they seek summary judgment for $7,226,764.18 arising from the Loan Agreement.
[8] There is an allegation by JL Trustee that both developments were part of a joint venture between PCCL and JL Trustee or their associated subsidiaries (the alleged Joint Venture). JL Trustee asks the Court to see the Loan Agreement as part of the broader Joint Venture context and associated contracts. PCCL disputes that such a Joint Venture exists and asks that the Court disregard other contractual material as extraneous in favour of a strict application of PCCL’s rights under the Loan Agreement.
PCCL’s application for summary judgment
[9]PCCL seeks orders:1
(a) That summary judgment be entered against each of the defendants on the plaintiff's claim set out in the statement of claim;
(b) Directing that the costs of and incidental to this application be fixed and paid to the plaintiff by each of the defendants on a solicitor/client basis.
1 Interlocutory application on notice for summary judgment dated 9 December 2022 at [1].
[10]The grounds on which the orders are sought are:2
(a) PCCL, as lender, is party to a loan agreement dated 17 December 2019 with JL Trustee Nominee Limited (JL Trustee), as borrower (Loan Agreement).
(b) Sun Hee Lee, Junho Lee, and Western Properties Limited (WPL), a subsidiary of JL Trustee, executed the Loan Agreement as guarantors.
(c) The Loan Amount was expressed as being $3,905,487.
(d) The Loan is an on-demand loan.
(e) No amendment to the Loan Agreement is effective unless recorded in writing and signed by the parties to the Loan Agreement.
(f) On 9 May 2022 PCCL made demand under the Loan Agreement for full and immediate repayment, together with interest against each of defendants (Demand).
(g) The Demand remains wholly unsatisfied. Each defendant is in default under the Loan Agreement from 9 May 2022 entitling PCCL to default interest from 9 May 2022 until the date of payment.
(h) On 8 November 2022 PCCL issued a further notice of default under the Loan Agreement, together with demand for full and immediate repayment, together with interest against each of the defendants (Further Demand).
(i) The Further Demand remains wholly unsatisfied. Each defendant is in further default under the Loan Agreement from 8 November 2022 entitling PCCL to default interest from 8 November 2022 until the date of payment.
(j) Despite demands, the defendants have failed and/or refused to repay the Loan Amount or any interest accrued.
(k) The defendants have no defence to the plaintiff's claim.
(l) As appearing in the statement of claim and in the affidavit of Yona Na filed herein.
JL Trustee, Ms Lee and Mr Lee’s opposition
[11] JL Trustee, Ms Lee and Mr Lee oppose the application on the following grounds:3
(a) The defendants have a defence to PCC’s claim:
2 At [2].
3 Notice of opposition to interlocutory application for summary judgment dated 8 March 2023 at [1]–[3].
(i) By way of set-off and counterclaim for breach by PCC of the joint venture arrangement entered into with JLT, utilising their respective wholly owned subsidiaries, Plus Pacific United Limited (Plus Pacific), Western Properties Limited (Western), Wadier Henderson Limited (Wadier),
(ii)In the alternative, a set-off and counterclaim for the losses caused by:
A.PCC’s interference in the contractual relations of Western and Plus Pacific.
B.PCC’s knowing receipt and unlawful misapplication of funds diverted by PPUL.
(iii)The loan agreement dated 17 December 2019 under which PCC claim that JLT as borrower, and Ms Lee and Mr Lee, as guarantors (Loan Agreement), is an oppressive credit contract pursuant to Part 5 of the Credit Contracts and Consumer Finance Act 2003 and need to be reopened by the Court to determine if any amount is due to PCC.
(iv)By virtue of a Restructure Deed and Deed of Priority of Securities, repayment of funds under the Loan Agreement is subordinate in priority to repayment of funds loaned to Western and Wadier by two third parties. By virtue of two Cost Overruns Guarantees entered into by PCC with those third parties, PCC is prevented from taking steps to recover or exercise or enforce rights of indebtedness of Western to PCC, or the indebtedness of another person, including JLT, Ms Lee, and Mr Lee to PCC, until the guarantees have been discharged in writing.
Set-off — breach of JV Agreement
(b) JLT and PCC are parties to a joint venture arrangement (JV Agreement) utilising their respective wholly owned subsidiaries, to undertake two residential developments at:
(i) 1 Buscomb Avenue, Henderson, Auckland known as Plus Pacific Tower (Buscomb Development).
(ii)429 Great North Road, Henderson, Auckland known as Sero Tower (Sero Development)
(together the Developments)
(c) Plus Pacific was contracted to be the head contractor for both Developments. Western was the principal and developer of the Buscomb Development and Wadier is the principal and developer of the Sero Development.
(d) The JV Agreement initially only contemplated the Buscomb Development, which at the time, in or around August 2019, included a commitment by PCC to:
(i) Provide finance to Western.
(ii)Engage in the design development process.
(iii)Fulfil other requirements asked of Plus Pacific including maintaining full financial support to meet its obligations as a construction trading entity.
(iv)Purchase the penthouse apartment of the Buscomb Development to assist with achieving pre-sales to secure development funding.
(e) Implicit in the JV Agreement, the parties agreed:
(i) They owed each other fiduciary duties.
(ii)Not to put themselves in a position of conflict between their own interests and those of the JV or their JV partners.
(iii)No to use their position to gain unauthorised profit or advantage for themselves at the expense of the JV and their JV partner.
(f) As part of the JV Agreement, PCC agreed to a repayment of the finance previously provided to Western in the sum of $2,820,487 and for those funds, plus a further advance of $1,085,000, to be made to JLT (PCC Loan). This refinance also allowed Western to enter into a new development loan with Arena Alceon NZ Credit Partners, LLC (Arena). This financing restructure was recorded in a loan agreement dated 17 December 2019 (Loan Agreement) and a Deed Relating to Restructure of Loan and Related Matters also dated 17 December 2019 (Restructure Deed).
(g) Pursuant to the JV Agreement, PCC also provided a cost overruns guarantee to Arena, guaranteeing it would ensure all costs overruns on the Buscomb development would be met and paid by Western, up to a maximum of $1,000,000 plus interest (Western Overruns Guarantee). The guarantee also included a non-compete clause that precluded PCC from taking any steps to recover against Western or another person indebted to PCC until the guarantee is discharged in writing.
(h) During 2020, through a course of conduct evidenced in writing, JLT and PCC agreed to expand the JV Agreement to include the Sero Development. In particular:
(i) PCC agreed that at least $1,700,000 (plus GST) deferrals of the PCC Loan funds advanced to JLT for the Buscomb Development under the Loan Agreement would be used towards funding the Sero Development.
(ii)PCC entered into a Deed of Priority of Securities dated on or about October 2021 with JLT and Quaestor Advisors, LLC (Quaestor) to enable Quaestor to provide project funding for the Sero Development and be the first ranking security holder (Priority Deed).
(iii)PCC entered into a second cost overruns guarantee (Wadier Overruns Guarantee), this time with Quaestor, on essentially the same terms as the Western Overruns Guarantee
(i) In reliance on the JV Agreement, Western and JLT invested approximately
$939,468.73 into the Sero Development.
(j) In breach of the JV Agreement, in September 2021, the same month as construction of the Buscomb Development was due to be completed by Plus Pacific, PCC directed Plus Pacific to divert funds paid by Western for the Buscomb Development to PCC in Korea totalling approximately
$1.7 million (Fund Diversion). This Fund Diversion ultimately resulted in Plus Pacific:
(i) Being insolvent and having insufficient funds to meet its commitment to subcontractors and therefore to complete construction of the Buscomb Development.
(ii)Failing to hold retentions as required by the Construction Contacts Act 2002.
(iii)Failing to comply with a statutory demand issued by its head sub- contractor.
(iv)Allowing its contractors bond for the Buscomb Development, which was backed by PCC’s financial position, to lapse.
(k) On 16 May 2022, Western terminated the construction contract with Plus Pacific for the Buscomb Development and took over construction. Practical completion was achieved on 19 October 2022.
(l) Plus Pacific’s failure to deliver the construction of the Buscomb Development and PCC’s failure to honour the terms of the JV Agreement to maintain full financial support of Plus Pacific meet its obligations as a construction trading entity and not to put itself in a position of conflict with the JV and with JLT as its JV partner have caused loss to the JV and to JLT in respect of the Buscomb Development totalling $8,002,310.
(m) PCC’s breach of the JV Agreement has also resulted in the JV parties being unable to advance the Sero Development. This has placed JLT in breach of its facility agreement with Quaestor and demand has been made by Quaestor on 12 December 2022 for repayment of $8,387,628.67 plus accrued interest and costs.
(n) JLT has a legal and equitable set-off and counter-claims against PCC for the losses caused by PCC for its breach of the JV Agreement.
(o) Ms Lee and Mr Lee, in their capacity as guarantors of JLT, have all the same defences available to them as JLT does as the primary borrower.
Set-off — interference in contractual relations
(p) The deliberate Fund Diversion (pleaded above) was an interference by PCC in the contractual relations of Western and Plus Pacific by unlawful means.
(q) PCC acted in concert with Plus Pacific to breach the construction contract and caused loss to Western and JLT as pleaded above.
Set-off – knowing receipt
(r) Choongyoon Na (Mr Na) is a director of both PCC and Plus Pacific.
(s) Mr Na owes fiduciary duties to Plus Pacific to act in good faith and in the best interest of Plus Pacific.
(t) The deliberate Fund Diversion (pleaded above) was a breach of Mr Na’s fiduciary duties.
(u) PCC received the funds from PPUL with knowledge, through Mr Na’s position as a director of both entities, of the breach of fiduciary duty.
(v) A constructive trust therefore exists over the funds received by PCC, which should have been applied for the completion of the construction contract. By having failed to apply those funds to the completion of the Buscomb Development, PCC caused loss to JLT and Western.
Oppressive credit terms
(w) The rate of interest payable under the Loan Agreement was agreed on the basis that a profit would be realised by both JL T/Western and PCC/Plus Pacific from the Buscomb Development. Due to the actions of PCC and Plus Pacific, no profit was realised from the property development by JL Trustees.
(x) The level of interest provided for in the Loan Agreement, amongst other things, is accordingly oppressive, making the Loan Agreement an oppressive credit contract pursuant to Part 5 of the Credit Contracts and Consumer Finance Act 2003.
(y) The Loan Agreement needs to be reopened by the Court to determine if any amount is due to PCC or whether the Loan Agreement should be set aside.
PCC prevented from recovery action
(z) The repayment of the PCC Loan is subordinate in priority to repayment of funds:
(i) Loaned by Arena to Western.
(ii)Loaned to Wadier by Quaestor in accordance with of the Priority Deed
(aa) The Western Overruns Guarantee prevents PCC from taking steps to recover or exercise or enforce rights of indebtedness of Western to PCC, or the indebtedness of “another person” to PCC, until such time as the obligations of PCC under the Western Overruns Guarantee have been discharged in writing by [Arena].
(bb) The Wadier Overruns Guarantee prevents PCC from taking steps to recover or exercise or enforce rights of indebtedness of Wadier to PCC, or the indebtedness of “another person” to PCC, until such time as the obligations of PCC under the Wadier Overruns Guarantee have been discharged in writing by Quaestor.
(cc) JLT, Ms Lee, and Mr Lee are each “another person” for the purposes of the Western Overruns Guarantee and the Wadier Overruns Guarantee.
(dd) PCC has not been discharged in writing from:
(i) the Western Overruns Guarantee by Arena.
(ii)the Wadier Overruns Guarantee by Quaestor.
(ee) The further grounds appearing in the affidavit of Junho (Bruce) Lee sworn 8 March 2023 and the further affidavits to be filed in support of this notice of opposition.
Legal principles
[12]Rule 12.2(1) of the High Court Rules 2016 provides:
12.2 Judgment when there is no defence or when no cause of action can succeed
(1)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.
[13] The relevant principles governing a summary judgment application are well established:4
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. 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. 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. 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.
4 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR 307 at [26] (citations omitted).
[14]The wording of r 12.2 “may give judgment” indicates a residual discretion.
Having regard to the various authorities, the position appears to be as follows:5
(a)The discretion implied by the use of the word “may” is to be restrictively applied. In a great majority of cases, once the court is satisfied the defendant has no defence, there is no room for the exercise of discretion.
(b)The residual discretion may be invoked to avoid oppression or injustice to the defendant where:
(i)The proceeding involves the actions or possible liability of a third party which is not before the court;
(ii)The proceedings are such that the opportunity should be given to allow discovery or other interlocutory applications to be concluded;
(iii)The circumstances of the case disclose very unusual features, the presence of which leads the court to conclude that the entry of summary judgment would be oppressive or unjust; or
(iv)The combination of complex issues of fact and law justify the dismissal of the application for summary judgment, either as a matter of discretion or because the court cannot be satisfied that the defendant has no defence.
(c)Even where the court is not satisfied that a defence has been made out, in exceptional circumstances the application may be adjourned to allow for other processes to be followed.
Analysis
[15] The JL Trustee raises four defences to PCCL’s application for summary judgment:
(a)a right of set-off and counterclaim for an alleged breach of a joint venture agreement between PCCL and JL Trustee and their respective related parties;
(b)a right of set-off and counterclaim for alleged interference by PCCL in the contractual relations between Western and PPUL and arising from
5 Andrew Beck and others (eds) McGechan on Procedure (online ed, Thomson Reuters) at [HR12.2.11].
knowing receipt by PCCL of funds from PPUL, in circumstances where such funds should not have been paid by PPUL;
(c)the Loan Agreement is “oppressive” pursuant to the Credit Contracts and Consumer Finance Act 2003 and ought to be reopened; and
(d)PCCL’s entitlement to repayment is subordinate to the interests of other parties, and it is prevented from enforcing the Loan Agreement.
[16] The approach taken in this judgment is to consider each of the four defences put forward by JL Trustee in turn to determine if any of the defences justify declining PCCL’s application for summary judgment.
JL Trustee submissions
Is there a joint venture arrangement?
[17] Mr Nolen, for JL Trustee, advances the argument that the true arrangement between PCCL and JL Trustee and their respective related companies was a joint venture arrangement. Mr Nolen submits it is possible for joint venture agreements to exist without any contractual basis and relies on the decision of Chirnside v Fay where the Court said:6
General observations on joint ventures
[91] Before leaving this aspect of the case it may be helpful if we make the following general remarks. The essence of a joint venture which is not yet contractual is that it is an arrangement or understanding between two or more parties that they will work together towards achieving a common objective. It is fallacious to think that there can be no joint venture unless and until all the necessary details have been contractually agreed. A joint venture will come into being once the parties have proceeded to the point where, pursuant to their arrangement or understanding, they are depending on each other to make progress towards the common objective. Each party is then proceeding on the basis that he or she is acting in the interests of all or both parties involved in the arrangement or understanding. A relationship of trust and confidence thereby arises; each party is entitled to expect from the others loyalty to the joint cause, loose as the formalities of the joint venture may still be. This in essence is the position which was reached between Messrs Chirnside and Fay. Neither of them was thereafter entitled to act solely in his own interests.
6 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [91].
[18] Mr Nolen also relies on Commercial Factors Ltd v Scenic Hotels Group Ltd as authority for the proposition that a joint venture agreement can come into existence without a formal contract, and refers to the Court of Appeal’s statement:7
[73] In our view, there was an operating joint venture between Factors and Scenic. Broadly, it proceeded on the basis that Factors provided the hotel… Scenic provided the hotel management services and Pacific was used as the vehicle by which the hotel traded. …
[19] Mr Nolen submits that in the present instance the relationship between PCCL and JL Trustee (and their wholly-owned subsidiary companies) extended beyond that of simply lender and borrower. He submits that in all the circumstances when viewed objectively, it is clear that the relationship was a joint venture and the parties had a common objective to make the Buscomb Development a success so that all parties would make a return on their investment.
[20] Mr Nolen submits that, while the relationships were not formally documented as a joint venture, the circumstances demonstrated the parties undertook to work together towards achieving the common objectives of the profitable completion of the Buscomb Development and the Sero Development, utilising their respective subsidiaries, and they were dependent on each other to make progress towards those common objectives. Mr Nolen submits that the parties’ common objective is reflected in formal documents such as:
(a)the Profit Sharing Agreement which enabled the parties to share the profits of the Buscomb Development, but also spread the risk;
(b)the Western Overruns Guarantee and the Wadier Overruns Guarantee, which demonstrated PCCL and PPUL’s financial commitment to the Buscomb Development and Sero Development in guaranteeing potential cost overruns on the developments beyond the loan facilities from Arena and Quaestor;
(c)assurances provided on behalf of PCCL that they were committed to partnering with Western to achieve the success of the Buscomb
7 Commercial Factors Ltd v Scenic Hotels Group Ltd [2022] NZCA 300.
Development, including maintaining full support to PPUL financially and through effective management; and
(d)the underwrite of the purchase of the penthouse apartment in the Buscomb Development by PCCL, to satisfy the requirements of Arena as part of its financing that a certain level of pre-sales were achieved.
[21] Mr Nolen submits that Mr Lee’s evidence is that he was always looking for a joint venture partner to progress the Buscomb Development as he needed funding as well as a head contractor and Mr Na Senior was keen to provide both. Mr Nolen submits they had a common objective and needed to work together co-operatively and in good faith to achieve that objective, and nothing in the formal documents is inconsistent with Mr Lee’s understanding of the joint venture arrangement.
[22] Mr Nolen then refers to the expert evidence of Mr Currie, who he submits is a highly experienced property development and financial adviser and who, in his opinion, confirms that the circumstances reflect a joint venture. Mr Nolen points to the issues noted by Mr Currie:
(a)The funding and construction components of the Loan Agreement, together with the underwrite of the purchase of the penthouse apartment, the success fee arrangement and the Western Overruns Guarantee, more accurately reflect a level of equity participation or joint venture between the parties, rather than distinct, stand-alone, arm’s length transactions.
(b)It’s not uncommon for joint venture partners to structure a risk and profit sharing arrangement by way of loans.
[23] Mr Nolen also relies on the evidence of Mr Christopher Stevens who was engaged as a financial consultant to Western and Wadier in relation to the two developments. Mr Nolen submits that Mr Stevens expresses a similar view that the arrangements between Western and PPUL were not typical of a second tier lender and borrower relationship, but rather there was a special relationship between the parties
in the nature of a joint venture, and points to the following factors underpinning this view:
(a)PPUL had been specifically incorporated to undertake the Buscomb Development, with the company effectively being run and operated as one and the same with PCCL;
(b)Mr Na Senior and PCCL working with the intention of taking a construction margin as well as a share of the development profits;
(c)PCCL not taking a second mortgage over the Buscomb Development property which was highly unusual in the context of the independent lending arrangements; and
(d)Mr Na Senior’s son being required to purchase the penthouse apartment in the Buscomb Development.
[24] Mr Nolen submits that the joint venture initially only contemplated the Buscomb Development but in 2020/2021 was expanded to include the Sero Development. He submits that in reliance on Mr Na Senior’s commitment to expand the joint venture, Mr Lee incurred significant time and cost to advance the Sero Development by essentially replicating the Buscomb Development model. He submits that the formal documents entered into between the parties are again consistent with them having broader joint venture obligations.
Breach of the joint venture arrangements, set-off and counterclaim by JL Trustee
[25] Mr Nolen submits, having set out the basis on which JL Trustee alleges the joint venture arrangements between the parties existed, that the most important fiduciary obligation owed by a party to a joint venture is the obligation of loyalty. Neither party is permitted to place himself or herself in a conflict of interest with the joint venture. For this proposition he relies on the decision in Commercial Factors Ltd v Scenic Hotels Group Ltd.8
8 Above n 7.
[26] Mr Nolen submits that the breach of the joint venture obligations by PCCL and its subsidiaries, which give rise to counterclaims by JL Trustee, were as follows:
(a)In September 2021, PCCL directed PPUL to commit the diversion of funds to Korea (the Fund Diversion) and, in doing so, PCCL (and PPUL) placed itself in the position of conflict of interest with the joint venture. He submits the Fund Diversion ultimately resulted in PPUL:
(i)being insolvent and having insufficient funds to meet its obligations to sub-contractors;
(ii)being unable to complete the Buscomb Development;
(iii)failing to hold the retentions as required by the Construction Contracts Act 2002; and
(iv)failing to comply with the statutory demand issued by its head contractor.
(b)In addition, PCCL and PPUL allowed the contractor performance bond for the Buscomb Development to lapse and not be renewed in breach of the Construction Contract.
[27] Mr Nolen submits that the Fund Diversion and the failure to maintain the performance bond were clear breaches of the overriding obligations of loyalty owed to the joint venture. As a consequence of the Fund Diversion, insufficient cash was available to complete Buscomb Development at a time when PCCL and PPUL had no entitlement to those funds, resulting in PCCL putting itself in conflict with the common goal of the joint venture to make a return on all parties’ investment. Mr Nolen submits the PCCL’s failure to honour the terms of the joint venture, including to maintain full financial support for PPUL, caused substantial loss to the joint venture and to JL Trustee and that those losses have been estimated by JL Trustee to total in excess of $15m, being:
(a)$8,002,310 in respect of increased financing costs for the Buscomb Development;
(b)$3,096,178 for other construction costs for the Buscomb Development; and
(c)$4,439,478 in respect of the Sero Development by way of costs funded by JL Trustee for the development, which was unable to progress.
[28] Accordingly, Mr Nolen submits that JL Trustee has a right to set-off and counterclaim against PCCL for the losses caused by PCCL as a result of its breach of the joint venture agreement.
PCCL’s submissions
Is there a joint venture arrangement?
[29] Mr Holm-Hansen for PCCL, on the other hand, submits that no joint venture existed, that the joint venture arrangement has been manufactured by JL Trustee and Mr Lee after the fact and that it is without foundation. He submits the alleged joint venture lacks particularisation as to:
(a)who was party to the alleged joint venture, when was it concluded, and what was its scope; and
(b)what obligations were imposed by the alleged joint venture, or what the mutual profits and risks were said to be.
[30] Mr Holm-Hansen criticises the reliance by JL Trustee on the evidence of Mr Stevens and Mr Currie, who he submits were not party to any arrangements, and otherwise rely on oblique references in documents that PCCL was not a party to. He submits that none of the documents to which PCCL was a party describe any relationship as a joint venture, let alone a fiduciary one, and given the voluminous legally drafted documents in relation to the arrangements, if the parties had contemplated such obligations they could have been expected to have recorded that.
[31] Mr Holm-Hansen submits the relationship between PCCL and JL Trustee is that of lender and borrower, and the express purposes of the Loan Agreements was to provide financing for the Buscomb Development and no wider. He makes the following points:
(a)The Loan Agreement and the Construction Contract were independent and were separated in time. The Construction Contract has no reference to a joint venture; and there is no reference to a joint venture agreement in the Loan Agreement.
(b)There is no corroborative evidence of Mr Lee’s assertions as to the existence of the joint venture.
[32] Mr Holm-Hansen then sought to criticise the evidence relied on by Mr Lee as to the existence of the joint venture agreement, submitting that evidence was Mr Lee’s subjective belief and cannot be used to change the stated meaning of the documents. He points to the following:
(a)The document at page 533 of the bundle of pleadings (“BOP”) which refers to the “Plus Group as an investor” occurred after the Loan Agreement, being dated in 2020 and does not relate to the Buscomb Development.
(b)The documents at page 545 onwards of the BOP all relate to the Sero Development, not the Buscomb Development, and that any reference to a “venture” in these documents is to the venture between Western and NZ Build Group, not to a joint venture between the parties.
(c)Mr Currie’s affidavit does not cover the joint venture agreement being in place, but only deals with the interest rate on the loan. Mr Holm- Hansen submits that paragraphs [29] and [30] of the affidavit are weak support for the allegation of the joint venture agreement.
Breach of the joint venture arrangements; set-off and counterclaim by JL Trustee
[33] Mr Holm-Hansen submits that as there is no joint venture there is no obligation of loyalty imposed on PCCL and, therefore, there can be no breach of such an obligation by PCCL giving rise to a counterclaim by JL Trustee. He submits that even if there is a joint venture agreement and an obligation of loyalty, there is no breach by PCCL. He submits that the alleged Fund Diversion was the payment of dividends and management fees by PPUL to its ultimate parent company, which is a normal course of events for subsidiary and parent companies.
[34] Finally in relation to this defence, Mr Holm-Hansen submits that even if JL Trustee does have a counterclaim, that does not prevent summary judgment being given. He points to r 12.12(2) of the High Court Rules, which provides:
12.12 Disposal of application
…
(2)If it appears to the court on an application for summary judgment under r 12.2 that the defendant has a counterclaim that ought to be tried, the court—
(a)may give judgment for the amount that appears just, on the terms it thinks just; or
…
[35] Mr Holm-Hansen relies on the decision in Roberts’ Family Investments Ltd v Total Fitness Centre (Wellington) Ltd where the Court summarised the position as follows:9
As to set-off, whether modern equitable set-off or classical set-off… it is of course a defence. That is all it is: it is a shield not a sword. As a matter of logic, it would seem to follow that where the plaintiff does not satisfy the Court that there is no defence of set-off, summary judgment cannot be given. Such cases cause little difficulty where the situation is one of equitable set- off, where ex hypothesi there is some factual overlap between the plaintiff’s claim and the defendant’s asserted set-off. That very factual nexus makes it appropriate that both claim and set-off should go on as one to trial. However, where the set-off is of the classical character under the Statutes of Set-Off, raising facts which may bear no relationship to the facts on which the plaintiff’s claim is based, the matter is more troublesome.
9 Roberts’ Family Investments Ltd v Total Fitness Centre (Wellington) Ltd [1989] 1 NZLR 15 (HC) at 20.
[36]And in relation to a counterclaim, the Court went on to say:10
As to counterclaim, it is not in itself a defence, although the rules provide for offsetting judgments. Without more, therefore, the existence of a mere counterclaim does not foreclose summary judgment. This is where R 142(2) comes in. Rather than give an immediately enforceable judgment to the plaintiff on the plaintiff ‘s claim, perhaps allowing that plaintiff to bankrupt the defendant before the latter’s counterclaim can be brought to judgment and offset, the Court may and commonly does grant the plaintiff summary judgment accompanied by a stay of execution of such judgment pending resolution of the counterclaim, or occasionally dismisses the summary judgment application, directing trial of both claim and counterclaim.
[37]Where the defendant asserts both a set-off and a counterclaim, the Court said:11
The difficult problem arises where matters put up by the defendant amount both to a set-off defence and to a counterclaim. With the defendant, rise of equitable set-off in recent years and recognition that misrepresentations under the Contractual Remedies Act 1979 may give rise to equitable set-off (see eg Pemberton v Chappell per Somers J at p 4) as well as counterclaim, such is a common occurrence. The tendency at first instance has been to treat matters where overlapping facts give rise to equitable set-off on the one hand and counterclaim on the other as justifying refusal of summary judgment with an order for trial on both sides. The like tendency has been to treat matters where there is no significant factual overlap, but merely an unrelated set-off or counterclaim (and generally it is put as both) as an appropriate case for summary judgment on the claim accompanied by a stay of execution, and an order for trial on the set-off/counterclaim. The theoretically possible situation where a classical set-off under the Statutes of Set-off is raised but is not accompanied by a counterclaim in the same terms awaits resolution: see Pemberton v Chappell per Casey J at p 6. Such will not often arise in modern pleading.
[38] Mr Holm-Hansen also relies on the decision in Oceania Furniture Ltd v Debonair Products Ltd for the proposition that the Court should exercise its discretion to grant summary judgment to PCCL and, if necessary, grant a stay of execution of the judgment to allow JL Trustee to pursue any counterclaim it has against PCCL.12 While accepting that the latter is a course open to the Court, Mr Holm-Hansen draws a distinction between this case and Oceania in that, in the Oceania decision the allegations arose out of a specific contractual document, whereas in the present case the counterclaim arises from the disputed joint venture and it is unclear which parties
10 At 20–21.
11 At 21.
12 Oceania Furniture Ltd v Debonair Products Ltd HC Wellington CIV-2008-485-1701, 3 December 2008.
may have a counterclaim. He therefore submits it is not an appropriate case for the Court to exercise its discretion to grant a stay of the execution.
Conclusions in relation to the joint venture arrangement, JL Trustee’s set-off and counterclaim
Is there a joint venture arrangement?
[39] I am of the view that JL Trustee has established an arguable position that a joint venture arrangement existed between PCCL and its subsidiary companies on the one hand, and JL Trustee and its subsidiary companies on the other. The exact scope of the joint venture will need to be elucidated at trial by evidence, including whether the joint venture which started off relating to the Buscomb Development, was extended to the Sero Development as alleged by JL Trustee.
[40]The reasons for my view are as follows:
(a)I accept Mr Nolen’s submission that a joint venture agreement can exist without any contractual basis, as set out in the decisions of Chirnside v Fay13 and Commercial Factors Ltd v Scenic Hotels Group Ltd.14 Applying the principles set out in these decisions, JL Trustee has an arguable case that, although not documented, a joint venture arrangement was established between PCCL and JL Trustee (and their respective subsidiaries), with the common objective of the profitable completion of the Buscomb Development and potentially of the Sero Development, with each party using their respective subsidiaries in relation to different roles in respect of the developments.
(b)The documentation is not inconsistent with the proposition that the agreement between the parties went beyond that of a stand-alone borrower/lender relationship and I do not accept Mr Holm-Hansen’s submission that the arrangement was contained within the “four walls” of the Loan Agreement. In particular, PCCL and PPUL entered into
13 Above n 6.
14 Above n 7.
documents which arguably go beyond what would be expected of a stand-alone lender-borrower arrangement, including:
(i)the Profit Sharing Agreement, which enabled the parties to share in the profits of the Buscomb Development, and spread the risk;
(ii)the Western Overruns Guarantee and the Wadier Overruns Guarantee, which demonstrated PCCL and PPUL’s financial commitment to the Buscomb Development and Sero Developments, by guaranteeing the payment by Western and Wadier respectively of potential cost overruns beyond the respective loan facilities from Arena and Quaestor; and
(iii)the underwrite of the purchase of the penthouse in the Buscomb Development by PCCL to satisfy the requirement of Arena as part of its financing requiring a certain level of pre-sales to be achieved.
(c)I do not place significant weight on the evidence of Mr Currie who was not involved in the transactions, in contrast to that of Mr Stevens who was engaged as a financial consultant to Western and Wadier. He deposes in his evidence that the following elements of the arrangement were not typical of a second-tier lender and borrower relationship:
(i)PPUL was specifically incorporated to undertake the Buscomb Development with the company effectively being run and operated as one and the same with PCCL;
(ii)Mr Na Senior and PCCL working with the intention of taking a construction margin as well as a share of the development profit;
(iii)PCCL not taking a second mortgage over the Buscomb Development property which is highly unusual in the context of independent lending arrangements; and
(iv)Mr Na’s son being required to purchase the penthouse apartment in the Buscomb Development complex.
Breach of the joint venture arrangements; set-off and counterclaim by JL Trustee
[41] In relation to the argument that PCCL owed a duty of loyalty in respect of the joint venture agreement and had breached that obligation, I am of the view that JL Trustee has established an arguable breach and an arguable basis for a set-off and counterclaim in respect of the amount sought by PCCL under the summary judgment application. Given my conclusion that there is an arguable case that the joint venture agreement was formed, at least in respect of the Buscomb Development, it is arguable that PCCL was under an obligation not to place itself in a position of conflict with the interests of the joint venture. In my view, JL Trustee has established an arguable case as to breaches of that obligation by PCCL and its related companies in that:
(a)the Fund Diversion by PCCL/PPUL of funds to the ultimate parent company in Korea, arguably causing PPUL’s inability to pay its sub- contractors and resulting in delays in completion of the Buscomb Development and extra costs incurred by JL Trustee;
(b)failure by PCCL to maintain support for PPUL and to effectively manage it toward achieving the common objective of profitable completion of the Buscomb Development; and
(c)failure to maintain the bond as required under the Construction Contract, resulting in there being no funds available to JL Trustee to meet the obligations to sub-contractors which PPUL had failed to meet.
[42] The amounts of any set-off and counterclaim by JL Trustee will evidently need to be quantified by evidence at trial.
[43] As to Mr Holm-Hansen’s proposition that if JL Trustee has a potential counterclaim, then the Court should adopt the solution in the Roberts’ Family
Investments15 and the Oceania Furniture16 decisions of granting summary judgment to the plaintiff and potentially ordering stay of execution of that judgment to allow the defendants’ counterclaim to be heard, I am of the view that this is not an appropriate solution in the present instance. The set-off and counterclaim of JL Trustee are inextricably entwined with the alleged arrangements between the parties being that of a joint venture, rather than a simple lender and borrower relationship under the Loan Agreement, and accordingly all the issues should go to trial at one time.
[44] Accordingly, I am of the view that PCCL’s application for summary judgment should be dismissed on the basis that JL Trustee has an arguable defence to the claim.
[45] While the finding at [44] is dispositive of the application, I continue on to consider the other three defences raised by JL Trustee.
JL Trustee’s submissions
Interference in contractual relations
[46] Mr Nolen refers the requirements for establishing the tort of interference with contractual relations as summarised by this Court in Fletcher Development Construction Ltd v New Zealand Labourers IUOW in the following terms:17
(a)the interference must be in the execution of a contract;
(b)the interference must be deliberate, in the sense that the person responsible must know of the contract or turn a blind eye to it and intend to interfere with it;
(c)the interference includes preventing or hindering one party from performing his contract, even though there may not be a breach;
15 Roberts’ Family Investments Ltd v Total Fitness Centre (Wellington) Ltd, above n 9.
16 Oceania Furniture Ltd v Debonair Products Ltd, above n 12.
17 Fletcher Development Construction Ltd v New Zealand Labourers IUOW (1989) 2 NZELC 96,677 (LC).
(d)the interference must be direct, in that the expression “direct interference” means direct persuasion applied by a third party to the contract-breaker with knowledge of the contract and with the intention of bringing about its breach; and
(e)as an alternative to (d), indirect interference is only unlawful if unlawful means are used.
[47] Mr Nolen further submits that a plaintiff trying to establish a claim under this tort need not necessarily be a party to the contract interfered with. He relies on New Zealand Jet Boat River Racing Organisation (Inc) v New Zealand Seamen’s Union IUOW where the Court said:18
Where a threat is in issue, the tort is intimidation, but where the threat has already been carried out, some other tort may be involved instead or as well. I am not satisfied to the degree required that on the present state of the law there is a firm rule confining the availability of remedies for such a tort to cases where the plaintiff is a party to the contract broken, or even a party to a contract with one of the other parties whose contract has been broken as a result of inducement by the defendant.
[48]In applying these principles, Mr Nolen submits as follows:
(a)The deliberate Fund Diversion was an interference by PCCL in the contractual relationship between Western and PPUL, and PCCL acted in concert with PPUL to prevent or hinder PPUL’s performance of the Construction Contract. He submits it cannot be disputed that PCCL was aware of the contract and the Fund Diversion can only have been undertaken with the intention of bringing about a breach of the Construction Contract, given that the foreseeable result of this was that PPUL would be left with insufficient funds to pay its subcontractors and complete the delivery of the Buscomb Development.
(b)In the alternative, the Fund Diversion was otherwise an indirect interference by unlawful means, given the funds were paid by Western
18 New Zealand Jet Boat River Racing Organisation (Inc) v New Zealand Seamen’s Union IUOW
[1990] ERNZ Sel Cas 612 (LC) at 640.
to PPUL in accordance with the Construction Contract and instead of being applied to the Buscomb Development were diverted and applied for the benefit of PCCL’s interest in South Korea. The Fund Diversion and the interference by PCCL caused loss to Western as set out in [27].
(c)While JL Trustee was not a party to the Construction Contract, it has suffered loss as a result of PCCL’s interference and PPUL’s non- performance of the contract. The loss of profit from the Buscomb Development meant that JL Trustee was unable to meet its obligations under the Loan Agreement and, as in the Jet Boat River Racing Organisation decision, a foreseeable and necessary consequence of PCCL’s actions.19
Knowing receipt
[49] Mr Nolen submits that the claim in knowing receipt concerns property in which a party has an interest that is now in the hands of a third party. Liability arises because the party’s proprietary interest in the property that is received by the third party, takes priority over the third party’s own proprietary interest in the property received.
[50] He submits that the requirements to establish a constructive trust on the basis of knowing receipt, arising from the decision in Equiticorp Industries Group Ltd (in Statutory Management) v Attorney-General, are as follows:20
(a)disposal of money in breach of a fiduciary duty or on some other unauthorised basis;
(b)the beneficial receipt by a third party of that money; and
(c)knowledge (actual constructive) by the third party that payment over to it was in consequence of the breach of fiduciary duty or other unauthorised act.
19 Above n 18.
20 Equiticorp Industries Group Ltd (In Statutory Management) v Attorney-General [1996] 3 NZLR 586 (HC).
[51]Mr Nolen, in applying these principles to the present case, submits:
(a)Mr Na Senior was a director of both PCCL and PPUL at all material times and owed fiduciary duties to PPUL to act in good faith and in PPUL’s best interests. The Fund Diversion constituted a disposal of money in breach of his fiduciary duties to PPUL, as it meant that PPUL was unable to comply with its contractual obligations to complete the Buscomb Development.
(b)The Fund Diversion was unauthorised in the sense that PCCL should only have been entitled to funds from the Buscomb Development when it was completed from either:
(i)any margin PPUL was able to realise through its Construction Contract after paying all its sub-contractors and complying with its warranty obligations; or
(ii)repayment under the Loan Agreement after Arena was repaid.
(c)The money was received by PCCL in South Korea when it had no entitlement to funds at that time and those funds should have been retained by PPUL to complete the Buscomb Development, or, if PPUL was unable or unwilling to complete its obligations, the funds should have been returned to Western.
(d)PCCL received the funds from PPUL with knowledge, through Mr Na Senior’s position as director of both entities, of the breach of fiduciary duty. PCCL also had knowledge through the Restructuring Deed and its involvement in posting a performance bond, that it had no entitlement to the funds from the Buscomb Development until it had been completed, and Arena had been repaid. By receiving those funds before the development was completed, PCCL was effectively jumping the queue of the agreed priorities.
(e)A constructive trust therefore exists over the funds received by PCCL under the Fund Diversion which should have been applied for the completion of the Construction Contract and, by failing to apply those funds to the completion of the Buscomb Development, PCCL has caused loss to JL Trustee and Western.
PCCL’s submissions
Interference in contractual relations and knowing receipt
[52] Mr Holm-Hansen submits that none of the defendants have standing to bring any of the asserted counterclaims, and the counterclaims have no basis. He submits:
(a)the Construction Contract alleged to have been interfered with was between Western and PPUL. None of the defendants were a party to the Construction Contract and had no standing to bring such a claim;
(b)the claim advanced on the basis of knowing receipt must fail as none of the defendants can claim to have been in a position of constructive trustee; and
(c)to the extent the defendants allege Mr Na Senior breached his duties as a director of PPUL, they have no standing for such a claim as it only could be brought by a liquidator.
[53] As to the counterclaims asserted by JL Trustee, Mr Holm-Hansen submits these are vague and speculative, and JL Trustee has not pleaded:
(a)what the breach of the Construction Contract is or how the Fund Diversion breached any contractual obligations;
(b)how PCCL is said to have induced such a breach; or
(c)how that gives rise to any remedy available to the defendants.
[54] Mr Holm-Hansen submits that any claim for breach of the Construction Contract rests with Western and not with JL Trustee or the other defendants. He submits no claims have been advanced by Western for breach of the Construction Contract.
[55] With respect to the knowing receipt by PCCL of funds from PPUL under the Fund Diversion, Mr Holm-Hansen submits that JL Trustee has no proprietary interest in the funds paid by Western to PPUL and has no standing to bring the claim. If the funds were misapplied then they should be returned to Western.
Conclusions in respect of interference in contractual relations and knowing receipt
[56] I am of the view that JL Trustee has an arguable position that PCCL is liable for interference with contractual relations and knowing receipt of funds. The reasons for this view follow:
(a)It is arguable that Mr Na Senior, as a director of both the parent company PCCL and the subsidiary PPUL, was aware of the Construction Contract between PPUL and Western.
(b)The Fund Diversion of $1.7 million, if not a direct interference with the intention of bringing about this breach, was arguably indirect interference by unlawful means, given the funds had been paid by Western to PPUL in accordance with the Construction Contract for the purposes of being applied to the Buscomb Development and were diverted and applied for the benefit of PPCL’s interest in South Korea.
(c)Given funds were paid by Western to PPUL for a specific purpose of the Buscomb Development, there is arguably a constructive trust over the funds when transferred to PPCL’s interest in South Korea, and accordingly an arguable case of knowing receipt by PCCL of the funds as the result of an unauthorised act.
(d)JL Trustee has an arguable case that PCCL had knowledge through the execution of the Restructuring Deed and its involvement in the posting of the performance bond, that it had no entitlement to any funds from the Buscomb Development until it had been completed and Arena had been repaid.
[57] As to the submission by Mr Nolen that Mr Na Senior was in breach of his director’s duties to PPUL and PCCL, I accept Mr Holm-Hansen’s submission that the defendants have no standing to bring a claim for such breach. However, this claim does not need to be established by JL Trustee to succeed in establishing an arguable position against PCCL in respect of interfering with contractual relations and knowing receipt.
[58] Accordingly, in my view JL Trustee has an arguable set-off and counterclaim against PCCL for interfering with contractual relations and for knowing receipt of the funds involved in the Fund Diversion transaction. This is a further ground for declining PCCL’s application for summary judgment.
JL Trustee’s submissions
Oppressive contract
[59] The third defence put forward by JL Trustee is that the Loan Agreement, when viewed in context of all the background circumstances, renders the contract oppressive and it should be re-opened under the Consumer Contracts and Consumer Finance Act 2003 (CCCFA).
[60] Mr Nolen points to the definition of “oppressive” in s 118 of the CCCFA as “harsh, unjustly burdensome, unconscionable, or in breach of reasonable standards of commercial practice”. He acknowledges that it requires something more than unfairness or disadvantage but it has been recognised that at some point unfair conduct may become oppressive in contravention of reasonable standards of commercial
practice. He refers to the decision in Greenbank New Zealand Ltd v Hass in which the Court of Appeal stated:21
In a sense [the phrase “reasonable standards of commercial practice”] gives the underlying commercial rationale for the earlier words or phrases… To determine whether a contract or terms are oppressive within any of the words or phrases in the definition, it is necessary to have some basis of comparison. In the context the comparator can only be what would be expected or acceptable in terms of reasonable standards of commercial practice. Something which is in accordance with such reasonable standards could hardly be held to be oppressive. Conversely, something which is not in accordance with (ie in contravention of) such standards is, by definition, oppressive.
[61] Mr Nolen also refers to GE Custodians v Bartle, for the proposition that the underlying idea behind the definition of “oppressive” is that the transaction or some term of it is in contravention of reasonable standards of commercial practice.22 Mr Nolen also refers to the number of matters the Court must have regard to in deciding whether to re-open a credit contract as set out in s 124 of the CCCFA.
[62] Applying these legal principles to the present case, Mr Nolen submits that the interest rate under the Loan Agreement, considered in the context of the background circumstances, renders the contract oppressive and liable to be re-opened under the CCCFA. In support of this position, Mr Nolen makes the following submissions:
(a)The rate of interest payable under the Loan Agreement, viewed in context, was agreed on the basis that a profit would be realised by JL Trustee/Western and PCCL/PPUL from the Buscomb Development and the Loan Agreement was part of the wider joint venture arrangement as a means to share risk and profit of the Buscomb Development. He submits this is reflected in the terms of the Profit Sharing Agreement which effectively offsets the ordinary interest payable under the Loan Agreement against the profit share that JL Trustee would otherwise receive on completion of the project. The actions of PCCL and PPUL in delaying, and ultimately failing to complete, the Buscomb Development and orchestrating the Fund
21 Greenbank New Zealand Ltd v Hass [2000] 3 NZLR 341 (CA) at [24].
22 GE Custodians v Bartle [2010] NZSC 146, [2011] 2 NZLR 31 at [46].
Diversion meant that no profit was able to be realised from the project and, in effect, PPCL seeks to retain the benefit of the inflated interested rate where its own actions contributed to the loss of profit being suffered by JL Trustee.
(b)It is unconscionable for PCCL to avail itself of the uncapped 40 per cent per annum default interest rate as PCCL caused the default by preventing JL Trustee from realising a return on its investment in the Buscomb Development from which to repay the Loan Agreement.
(c)Mr Currie’s unchallenged expert opinion is that an interest rate of 35 per cent is extremely high given the circumstances giving rise to the lending at the time and he considers it to be well outside reasonable standards of commercial practice.
(d)The decisions cited by PCCL (discussed below at [65]) in each case involved an independent third party lender that had no involvement in the transactions underlying the lending. He submits in contrast that PCCL had the ability to, and did, materially influence the successful completion of the Buscomb Development for which the lending was provided.
PCCL’s submissions
Oppressive contract
[63] Mr Holm-Hansen, on the other hand, submits the Loan Agreement is not oppressive, and none of the guidelines in s 124 of the CCCFA fall in JL Trustee’s favour. He submits that JL Trustee and the other guarantor defendants, in signing the Loan Agreement, confirmed that:
(a)they were able to negotiate the provisions of the Loan Agreement;
(b)there was no material inequality in the bargaining power between the parties; and
(c)they had consulted, or had the opportunity to consult, independent legal advisers.
[64] Mr Holm-Hansen makes the following further submissions in relation to whether the Loan Agreement could be considered oppressive and re-opened under the CCCFA:
(a)The defendants are not vulnerable consumers and the defendants have considerable experience in property and accounting matters, and had experienced advisers throughout. They negotiated and sought advice on the Initial Loan Agreement and the Loan Agreement, specifically addressing the interest rate.
(b)Mr Lee acknowledges he faced significant difficulties in finding funding for the Buscomb Development, PCCL was in the position of a second-ranking lender, and PCCL’s costs of providing credit was not out of all proportion to the cost of JL Trustee seeking credit from Arena.
(c)The defendants went into the transaction with their eyes wide open, and their position now is simply an argument of circumstances: that the interest rate was not oppressive if the development realised a profit, but was oppressive if a profit was not realised or not realised to a satisfactory level. The defendants were prepared to realise all the respective benefits of the transaction but with the benefit of experience and hindsight, now appear to be unwilling to shoulder any of the risk.
(d)Mr Currie’s evidence did not assist as he only looks at the headline interest rate rather than the Loan Agreement as a whole, or at the totality of the guidelines set out in the CCCFA. Mr Currie overlooks the fact that the cap on the interest rate was agreed, and while referencing the Arena loan, does not look at the total cost of lending charged by Arena
– the total repayment amount being 136 per cent of the principal Arena loan.
[65] Mr Holm-Hansen also refers to a number of authorities which support the view that the Loan Agreement was not oppressive. He submits that multiple cases have held that an interest rate higher than 35 per cent is not oppressive in the circumstances of the credit contract as a whole and cites:
(a)Greenbank New Zealand Ltd v Hass,23 which he submits had an effective interest rate of 200 per cent that was not considered to be oppressive in the context of the borrower’s experience, lack of other funds and means (including security) to take on a speculative development, high risk to the lender, and the presence of legal advice;
(b)Powell v K2 Investment Group Ltd,24 where an effective interest rate of 15 per cent per month was not held to be oppressive, with the Court placing weight on various factors including that it was not a consumer credit contract, it was arranged between commercial parties, and the parties were legally advised throughout with the lawyer conducting the negotiation.
(c)Mega Capital Group Ltd v Pearlfisher Capital Ltd,25 where the Court determined, without requiring an ordinary defended hearing, that it was not reasonably arguable that the relevant contracts were oppressive and should be re-opened, having regard to:
(i)the borrower being a sophisticated commercial party in the business of property development, as opposed to a vulnerable customer;
(ii)the borrower having received professional and legal advice in negotiating the contracts;
(iii)there being a reasonable explanation for the structure of the fees;
23 Above n 21.
24 Powell v K2 Investment Group Ltd [2021] NZHC 2253 at [176]–[178].
25 Mega Capital Group Ltd v Pearlfisher Capital Ltd [2023] NZHC 749.
(iv)the fees not being excessive in the context; and
(v)the fees having been discussed and negotiated specifically.
Conclusion in respect of oppressive contract
[66] In my view it is not possible to reach a view as to whether the Loan Agreement is an oppressive contract and should be re-opened under the provisions of the CCCFA. This is because, until it is clarified at trial whether the Loan Agreement formed part of a larger joint venture arrangement, and if so what the final terms of that joint venture arrangement were, it cannot be assessed as to whether the Loan Agreement, in the context of the larger arrangement, is oppressive.
[67] Accordingly, I do not express any view on whether the Loan Agreement is oppressive for the purposes of the CCCFA.
JL Trustee’s submissions
Is PCCL’s entitlement to repayment subordinate to the interests of other parties and is it prevented from enforcing the Loan Agreement?
[68] Mr Nolen submits that the suite of agreements executed in relation to the Buscomb Development and the Sero Development provided that repayment of the Loan Agreement was subordinate in priority to:
(a)repayment of the Arena Loan (under the Restructuring Deed); and
(b)repayment of the Quaestor Loan (under the Deed of Priority Securities).
[69] He submits that the Quaestor Loan has not been repaid in full and, pursuant to a demand issued on Western as at December 2022, the amount of $8,387,628.67 was outstanding.
[70]Mr Nolen submits that:
(a)under the Western Overruns Guarantee, PCCL is prevented from taking steps to recover or enforce rights of indebtedness of Western to PCCL or the indebtedness of “another person” to PCCL until such time as the obligations of PCCL under the Western Overruns Guarantee have been discharged in writing by Arena;
(b)the Wadier Overruns Guarantee similarly prevents PCCL from taking steps to recover, or exercise or enforce rights of indebtedness of Wadier to PCCL, or the indebtedness of “another person” to PCCL until such time as the obligations of PCCL under the Wadier Overruns Guarantee have been discharged in writing by Quaestor;
(c)JL Trustee as borrower, and Mr Lee and Ms Lee in their capacities as guarantors of the Loan Agreement, are logically each “another person” for the purposes of the Western Overruns Guarantee and the Wadier Overruns Guarantee;
(d)the Overruns Guarantees have clearly been drafted broadly to prevent PCCL from receiving any funds in priority to Arena or Quaestor, or in priority to any party that might be in a position to ensure Arena and Quaestor are repaid; and
(e)PCCL has not been discharged in writing from its obligations as guarantor by either Arena or Quaestor.
[71] As to the issue that the defendants are not party to the Overruns Guarantees, Mr Nolen submits that the Overruns Guarantees purport to confer a benefit on the defendants, the benefit being that their liability to PCCL will not crystallise until Arena and Quaestor have been repaid. Pursuant to s 12 of the Contract and Commercial Law Act 2017, PCCL is under an obligation, enforceable by the defendants (each as “another person”) to perform the promise not to take steps to recover from the defendants until such time as Arena and Quaestor have both discharged PCCL in writing under the Overruns Guarantees. Accordingly, Mr Nolen submits that the Overruns Guarantees preclude PCCL from taking steps to enforce the indebtedness
under the Loan Agreement and the defendants are entitled to rely on that promise as a defence.
PCCL’s submissions
PCCL being prevented from enforcing its rights against the defendants
[72] Mr Holm-Hansen submits that PCCL is entitled to enforce the Loan Agreement against the defendants. He submits that the borrower under the Overruns Guarantees was Western, the Western Overruns Guarantee did not alter the obligations of the defendants under the Loan Agreement, and the defendants have no ability to rely on its content by virtue of cl 19.10 of the Loan Agreement (being the clause requiring any amendments to the Loan Agreement to be in writing, signed by the parties).
[73] Mr Holm-Hansen submits that the Arena loan has been repaid in full and there is no need to request a discharge once the loan has been repaid. He submits that PCCL sought a written discharge from Arena on 14 April 2023 and as the loan has been repaid in full there is no basis for Arena to withhold a discharge to the extent that one is necessary.
Conclusion in relation to PCCL being prevented from enforcing its rights against the defendants
[74] In my view, JL Trustee has an arguable position that until the cost Overruns Guarantees are discharged in writing by Arena and Quaestor respectively, PCCL is prevented from taking steps to recover or accept money from JL Trustee or the other guarantor defendants. Mr Holm-Hansen may be right that Arena (at least) has no grounds to withhold a written discharge of their obligations under the Western Overruns Guarantee, as the loan has been repaid in full, but there is a reasonable argument that until the written discharge is given by Arena, PCCL is not released from its obligation not to take steps to obtain money from JL Trustee or the guarantor defendants. As to the Quaestor Loan, it has not been repaid in full and therefore it is arguable no discharge is available to PCCL from Quaestor at present.
[75] Also, in my view, JL Trustee has a reasonable argument that the reference in the Overruns Guarantees to “another person” does capture JL Trustee and the
defendant guarantors based on the premise that the documents were drafted broadly to ensure that PCCL, as guarantor under the Overruns Guarantees, did not receive money from any of the other parties who may be liable to pay Arena or Quaestor respectively in relation to repayment of their loans, until the loans were repaid and a written discharge given.
[76] Accordingly, in my view, this is a further ground for declining PCCL’s application for summary judgment.
Result
[77] As a result of the conclusions I have reached at [39], [44], [58], [66], [74], [75] and [76], I am of the view that PCCL’s application for summary judgment should be declined.
Orders
[78]I make the following orders:
(a)PCCL’s application for summary judgment is dismissed.
(b)Counsel are directed to endeavour to agree costs within 20 working days of the date of this judgment. Failing agreement being reached within the 20 working day period, counsel for JL Trustee shall file a memorandum as to costs (not exceeding 5 pages) within 10 working days of expiry of the 20 working day period, and counsel for PCCL shall file a memorandum in reply (not exceeding 5 pages) within five working days of receipt of counsel for JL Trustee’s memorandum. A decision as to costs will be made on the papers.
…………………………….. Associate Judge Taylor
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