Raptorial Holdings Limited (in Receivership) v Taipa Resort Management Limited (in Receivership)

IN THE COURT OF APPEAL OF NEW ZEALAND

CA 295/99

BETWEEN	RAPTORIAL HOLDINGS LIMITED (IN RECEIVERSHIP)
First Appellant

AND	TAIPA RESORT MANAGEMENT LIMITED (IN RECEIVERSHIP)
Second Appellant
AND	NEVILLE MCCLUTCHIE BAKER
Third Appellant

AND	CEDRIC GEORGE GRANTHAM
Fourth Appellant
AND	NIGEL BRUCE SMITH
Fifth Appellant

AND	JENNIFER MARGARET SMITH
Sixth Appellant

AND	ELDERS PASTORAL HOLDINGS LIMITED
First Respondent

AND	ELDERS RURAL FINANCE NZ LIMITED
Second Respondent

Hearing:	30 August 2000
Coram:	Thomas J Goddard J Panckhurst J
Appearances:	R A Dobson QC and G Manktelow for Appellants P R Heath QC and K J Crossland for Respondents
Judgment:	8 November 2000

JUDGMENT OF THE COURT DELIVERED BY PANCKHURST J

Introduction

Two principal issues were raised in this appeal against entry of summary judgment : whether the lenders (Elders) were in breach of an “underwriting agreement” which formed part of the loan terms by not activating such agreement and realising a substantial sum from sales before seeking recovery of the outstanding loan from the borrower and guarantors, and whether, in any event, the loan terms were oppressive in terms of s9 of the Credit Contracts Act 1981.
On 17 November 1999 in the High Court at Auckland Elders obtained summary judgment for $4,258,283 together with interest and costs. The appellants contend that on the basis of either of their principal arguments the case was unsuited for summary judgment and should have gone to trial.

The Background

In 1995 Raptorial Holdings Limited (Raptorial) purchased a complex which comprised an hotel (de Serville Hotel), motels, and a camping ground at Taipa Bay in Northland. The shares in Raptorial were held by the third, fourth, fifth and sixth appellants. The plan was to expand the existing hotel into a restaurant, bar and conference facility to be leased to Taipa Resort Management Limited, upgrade the motel units for sale as serviced apartments, and subdivide for sale the camping ground into 28 residential sections.
Raptorial borrowed $800,000 from Halliwells Security Limited, a solicitor’s nominee company, secured by first mortgage and, by December 1997, in excess of $2.2 million from Dorchester Finance Limited (Dorchester). By about early December 1997 refurbishment work was largely complete and approval to subdivide the camping ground had been obtained, but that work was still to commence. However, problems had arisen between Raptorial and Dorchester, which culminated in an approach to Elders to become a “joint venture funder” to enable Dorchester to be repaid.
Raptorial retained a finance broker, Mr Adrian Green of Auckland, to prepare the finance proposal. He occupied an office situated in the same building as Elders’ offices. Immediately prior to Christmas 1997 loan terms were settled between Elders and Raptorial. In essence a little over $4 million was to be advanced in three tranches, an immediate advance to enable repayment to be made to Dorchester, followed by two lesser instalments as required for development purposes. We shall return to the detail of the loan terms, shortly.
By about May 1998 Raptorial’s financial position was precarious. A number of creditors were pressing for payment of their debts. The company was unable to pay its debts as they fell due. Matters did not improve and, indeed, deteriorated to the point that a number of statutory demands for payment were made.
On 10 August 1998 Elders served written demand on Raptorial and its guarantors for repayment of its debt. By then Elders had advanced almost $2.4 million, but the demand was for $4.2 million inclusive of interest and other charges. On 12 August 1998 Elders appointed receivers of both Raptorial and Taipa Resort Management Limited pursuant to debentures which formed part of its security.
Subsequently, in mid 1999 Elders sought summary judgment against the present six appellants (the two companies in receivership and four guarantors). That application was opposed. The grounds of opposition were three-fold : that for various reasons the demand for payment made in August 1998 was invalid, that in breach of contract Elders had not activated “underwrite agreements” whereby apartments to a value of $2.38 million would have been sold in reduction of the debt, and that the loan agreement was in any event oppressive in terms of the Credit Contracts Act 1981.
The matter was heard on 4 November 1999 and on 17 November Randerson J delivered a judgment in which he concluded that Elders had demonstrated there was no arguable defence to the claim and hence judgment was entered against all defendants in the sum of $4.25 million, plus interest since issue, and costs. In the High Court the main basis of opposition was a challenge to the demand for payment. This aspect occupied much the greater part of the judgment under appeal, whereas the breach of contract and oppression aspects were dealt with quite briefly. On appeal there was no challenge to the validity of the demand, rather the appellants relied upon the contractual and oppression points, the former bolstered by arguments predicated upon a variation of the loan contract or upon an estoppel. Before we turn to these it is necessary to analyse the loan transaction in greater detail.

The Loan Terms

The loan agreement was dated 24 December 1997. Raptorial was the borrower, while Taipa Resort Management Limited and the four shareholders and directors of Raptorial were joint and several guarantors.
The total amount of the loan was $4.25 million, comprised of an initial advance of $2.35 million on 24 December, with a further lump sum of $1.35 million and instalments of $550,000, to follow.
The term was expressed to be on demand, but in the absence of demand was 18 months from 24 December 1997. Clause 5 of the general conditions widely defined events of default which entitled Elders to call up the loan. Relevantly these included “any material adverse change in the financial condition of the borrower ...” and “inability to pay any debts as they fall due”.
The interest rate was 15% per annum compounded monthly with a default rate of 22%. Elders was entitled to a facility fee of $100,000 payable by deduction from the first tranch. Of importance with reference to the oppression argument, was an “exit fee” of $1.5 million which was due and payable at the maturity date, upon earlier repayment, or when Elders made demand for repayment.
The securities clause provided for Elders to take a second mortgage over the land which comprised the complex (leaving Halliwells Securities Limited first mortgage for $800,000 in place), first ranking debentures over the assets and undertakings of Raptorial and Taipa Resort Management Limited, and unlimited joint and several guarantees from Taipa Resort and the four individual guarantors. With reference to the guarantors, general condition 4 provided that they were principal debtors and waived any defences which might be available to a mere guarantor or surety.
The extensive special conditions section of the loan agreement included in clause 12 what were termed “conditions precedent” to the initial, second and third advances. In general terms these conditions stipulated various arrangements to be put in place before the first draw-down and defined progress milestones for the redevelopment which were to be reached before the further draw-downs were made. One aspect of the conditions precedent to the initial advance concerned the underwriting agreements.
We record clause 12(e) and (f) in full:
(e)All unsold units are subject to an underwriting agreement by parties acceptable to Elders. Should the underwritten units not be otherwise sold, settlement of these units by the underwriter is to take place no later than 30 June 1998. The price for the units are shown in Schedule “A” hereto.
(f)In the event a unit is sold to a party other than the underwriter, the borrower shall pay to the underwriter a $10,000 fee per unit which is to be deducted from the sale proceeds of the unit on its settlement. All underwrite fees incurred are to be deducted from the exit fee payable to Elders.
Should the sale and purchase agreement for a unit not be an unconditional agreement as at 19 December 1997, that unit must also be underwritten.
Schedule “A” to the loan agreement was headed “Underwrite Prices” and listed 17 one bedroom, two bedroom, and studio units at various prices ranging from $85,000 to $175,000. These were the apartments to be sold by the underwriter no later than 30 June 1998 unless they had been “otherwise sold” by Raptorial on the open market. It was common ground that the underwrite prices for the various apartments in schedule “A” were two-thirds of actual market value according to a valuation report which was in existence. This point of agreement aside, the parties and their counsel were totally at odds concerning the commercial purpose and effect of this portion of the loan agreement. Clause 12(e) –(f) spawned the breach of contract argument and the associated variation and estoppel arguments, raised on behalf of the appellants.

The Underwriting Agreements

In the High Court it was argued that special condition 12(e) required Elders to secure the purchasers to the underwriting agreements and to activate such agreements in reduction of its debt before recovery from the borrower or guarantors was sought. Accordingly, if such was not done, Elders was in breach of the loan agreement. Alternatively, it was argued that if the agreement itself did not bear this interpretation, its terms were subsequently varied to like effect. Randerson J did not accept these submissions. He considered that since performance of the condition precedents lay with Raptorial it was inconsistent for there to be an obligation upon Elders to secure the take-out purchasers. As to the variation argument he observed that “it may be arguable that by their conduct Elders impliedly agreed to a variation of the obligation to arrange the underwriting agreements”, but he saw clause 4 of the general conditions as the “short answer to this question”. It provided that any “variation of security or other dealings by Elders with the borrower shall (not) release the guarantor from any obligations ...” (clause 4.1(d)). Finally, the Judge considered that even if it was Elders’ obligation to secure the take-out purchasers, there was no obligation upon it to activate the underwriting agreements. Their activation was but one of the security options available to Elders and accordingly China and South Sea Bank v Tan [1991] AC 536 (PC) applied.
Mr Dobson (who did not appear in the High Court) challenged these conclusions. His forceful argument may be summarised in these propositions : special condition 12(e) conveyed that Elders was both required to secure take-out purchasers and to activate the underwriting agreements, if the clause was ambiguous the subsequent conduct of the parties was consistent with this interpretation, alternatively (if clause 12(e) did not so obligate Elders) the subsequent conduct of the parties effected a variation of the contract to like effect, and in either event Elders were in breach of their obligations and thereby failed to recoup $2.38 million to the detriment of the borrower and the guarantors.
Counsel also argued that China and Southsea Bank was distinguishable because Elders was contractually obliged to activate the underwriting agreements, they being not just one aspect of their security armoury but rather an integral part of the arrangement, by which the borrower and guarantors had the comfort of knowing that repayment of $2.38 million of the advance was assured, albeit they thereby lost the opportunity to sell the units to better advantage.
The estoppel argument was not raised in the High Court, but Mr Dobson contended it was available (should the contractual arguments not find favour), since it emerged from the same evidence as was relied upon for the variation of contract aspect. He characterised the point as estoppel by convention in reliance upon National Westminster Finance NZ Ltd v National Bank of NZ Ltd [1996] 1 NZLR 548 (CA). In relation to all grounds of opposition, whether contractual or equitable, he submitted it was plain that the inter-relationship between Elders’ claim and the defendant’s claim for $2.35 million was such as to give rise to a set-off in this summary judgment context : Grant v NZMC Limited [1989] 1 NZLR 8 (CA).
Before we turn to a consideration of these arguments, and those of Mr Heath in reply, it is necessary to record aspects of the affidavit evidence relevant to the underwriting agreements issue. Although special condition 12(e), couched as a condition precedent to the initial advance, required that “all unsold units are (to be) subject to an underwriting agreement by parties acceptable to Elders” it was common ground that such agreements were not in place by 24 December 1997, the date of the first advance. Indeed, the issue was not addressed until early February 1998 when Elders wrote to Raptorial’s solicitor, Mr Preston Bulfin of Hawera, seeking the underwrite agreements for the unsold apartments. The following day Mr Bulfin provided 15 such agreements which had been executed on behalf of Raptorial. Significantly the agreements were blank with reference to who the purchasers were at the various prices stipulated in schedule “A”.
Upon receipt of these, Elders sought a further seven agreements, since at that point there were at least 22 apartments which remained unsold. In late February there was correspondence between Mr Bulfin and Elders concerning the individual prices for certain of these apartments. On 10 March representatives of Raptorial and Elders met and Mr Bulfin then made delivery of nine agreements for unsold apartments. Again, these were executed by Raptorial but were blank as to the identity of the purchaser. At the meeting there was discussion concerning whether Elders may be prepared to postpone the date for activation of the underwriting agreements from 30 June to 31 December 1998. An agreement to that effect did not eventuate and, of course, any such proposal was overtaken by the demand for payment and the receiverships in August.
Against this background the absence of demur on Elders’ part upon the provision of agreements which were executed but blank as to purchaser, was central to Mr Dobson’s submissions. Such conduct he argued was consistent with the interpretation of special condition 12(e) for which he contended, or alternatively was conduct which supported the variation of contract or estoppel contentions.
Importantly, in our view, Mr Dobson did not shrink from acceptance of the proposition that the appellants must demonstrate the arguable existence of a double obligation upon Elders:
(a)to procure the purchaser or purchasers to the underwriting agreements, and
(b)to activate such agreements before seeking recovery from Raptorial and the guarantors.
As to the first point, we are satisfied it is fairly arguable that the obligation to secure purchasers to the underwriting agreements rested upon Elders. On first reading the reference in clause 12(e) to “purchasing parties acceptable to Elders” suggests otherwise. However, clauses 12(e) and (f) must be read together and in their entirety. The latter required that if Raptorial sold an apartment to a third party a fee of $10,000 was payable to the underwriter. Moreover, all such fees gave rise to a deduction against the exit fee payable to Elders. This provision strongly suggests that it was for Elders to procure the underwriters and that it was anticipated they would be associated entities. Hence where any such entity received a $10,000 underwrite fee Elders was bound to reduce its exit fee by a like amount.
From a commercial perspective it was sensible that Elders was to secure the underwriting purchasers, given the reduced prices, rather than Raptorial. If these matters were not enough, there remains the subsequent conduct of the parties: Attorney-General v Dreux Holdings Ltd (1996) 7 TCLR 617 (CA) and Valentines Properties Ltd v Hunter Corp Ltd [2000] 3 NZLR 16 (CA). Here the evidence is stark, in that on separate occasions Raptorial provided numbers of executed agreements which were blank as to the purchaser and these were apparently received by Elders without comment, let alone protest. If indeed it was Raptorial’s obligation to secure the underwriting purchasers, Elders’ course of conduct was, we think, quite extraordinary.
But even accepting that it is distinctly arguable that Elders were to secure the agreement purchasers, the separate and cumulative requirement that they were obliged to activate such agreements must also be confronted. The essence of Mr Dobson’s argument on the point was expressed in this way:
... recourse to the underwriting agreements was an implied provision in the contract. The underwriting agreements were not merely one among a series of alternatives to which Elders could resort in the process of pursuing repayment, but rather, were the means by which resort to the securities would be pre-empted.

In support of this thesis he submitted that the underwriting commitment carried mutual benefits. From Elders’ perspective it was a “clean means” of achieving part repayment without the corrosive market effects which enforcement of its mortgage and debenture securities would entail. While entities associated with Elders assumed the underwriting risk, the discounted prices left positive value for the underwriters in each apartment they acquired.

From the perspective of Raptorial, its obligation was to commit to the agreements at the outset whereby, even in the absence of default, Elders could activate the acquisition of the apartments at discounted prices. But at the same time Raptorial and its guarantors gained the assurance that if prompt sales of the units did not eventuate on the open market, $2.38 million of the Elders’ debt would be repaid by virtue of the underwritten sales.
Mr Heath argued that Elders was not required to secure the purchasers to the underwriting agreements and that it followed that activation of the agreements was not something within the control of Elders. For the reasons already given we are satisfied that it is well arguable that Elders were to secure the purchasers. In light of that conclusion (in a summary judgment context) can Elders nonetheless demonstrate that it is beyond argument there was no obligation upon it to activate, or to ensure the activation of, the underwriting agreements as a first step towards recovery of its debt? As to this Mr Heath submitted the loan agreement did not require or contemplate resort to the underwrite agreements as a first priority, and nor was there room to imply a term to that effect.
With reference to the latter point he drew attention to special condition 12(a) whereby the terms of the contract were expressly limited to those contained in the security documents and in the letter of offer, aside from terms implied by law. Hence there was no scope, he submitted, for implication of a contractual term.
Returning to the express terms of the loan agreement, attention was drawn to general condition 7.1:
Time is of the essence of this Agreement but no failure or delay by Elders to exercise any right under this Agreement or the Security, shall operate as a waiver of that right, nor shall any single or partial exercise by Elders of any right preclude any other or further exercise of that right or of any other rights. Elders’ rights expressed in this agreement and the security are cumulative and do not exclude any rights provided by law.

Counsel submitted that even if Elders were to secure the underwrite purchasers, clause 7.1 still made resort to the agreements but a “right under this Agreement” which Elders could exercise, or not, as it saw fit. Here, the underwrite agreements were never perfected by the securement of purchasers before 30 June 1998, but such “failure or delay” by Elders was of no moment. Its various security rights were “cumulative” and could be exercised at its discretion. In particular, the partial or non-exercise of a right did not preclude the exercise of another right. Accordingly, there was no obligation upon Elders’ to have recourse to special condition 12(e), nor any breach on account of its election not to do so.

We are satisfied that this argument must be correct. In our view general condition 7.1 is conclusive of the point that Elders’ right to seek recovery of its total debt cannot be impugned on account of its failure to exercise another right available to it under the loan agreement. Pursuant to special condition 12(e) - (f) Elders secured the opportunity to recoup part of its debt, at a defined time, should it elect to do so. But we see no basis upon which the availability of this means of partial recovery must be elevated to the first rank, rather than remaining one security option amongst equals. To the contrary, general condition 7.1 is determinative that the lender’s various rights are discrete and exercisable at its discretion.
We consider that the apparent commercial purpose of special condition 12(e) – (f) was probably captured in Mr Dobson’s submission that acquisitions by the underwriter(s) represented a “clean means” by which Elders may after about six months recoup part of its advance without recourse to its securities. Assuming that such purchases were made by associated entities of Elders, it would have acquired a significant number of the serviced apartments and, thereby, would have diminished the worth of its mortgage security. But provided Raptorial remained in good heart and the resort development was progressing as envisaged, acquisition of the underwritten apartments may have been commercially advantageous. By contrast if Raptorial’s position was precarious and the loan was unlikely to run its full term, then acquisition of the apartments would hardly have been commercially attractive. This analysis, we think, places special condition 12(e) – (f) in perspective.

Variation or Estoppel

These aspects we can deal with quite briefly. The focus of these arguments was upon the subsequent conduct of the parties in February – March 1998 when Raptorial, upon being required to do so, prepared and provided executed underwrite agreements at the prices stipulated in schedule “A”. As we have already noted, these were accepted by Elders, albeit the agreements were blank as to the purchasing entity or entities. We agree that this evidence is of considerable significance, assuming special condition 12(e) - (f) is ambiguous, to determining upon whom responsibility lay to secure and arrange the underwrite purchasers.
However, we do not accept that the relevant conduct whether by a variation or an estoppel could result in an obligation upon Elders to exercise that right in priority to any other of its security rights. Put shortly, Elders’ acceptance of the agreements in the form in which they were presented and without demur, was at most subsequent conduct relevant to interpretation of the contract, in particular as to who had the responsibility to secure the purchasers. Such conduct could not give rise to a variation, or an estoppel, whereby Elders was obliged to exercise this right in priority to others, given the loan terms to which we have just referred.

Oppression

In concluding there was no arguable defence in terms of the Credit Contracts Act Randerson J described the guarantors as “experienced developers who had the benefit at all times of independent advice”, expressed the view he was “satisfied that the exit fee was proposed by (Raptorial) through a Mr Green, a merchant banker employed by (Raptorial) to develop the finance proposal,” and noted that there was no evidence that the exit fee was out of line with the market for this type of finance.
Mr Dobson argued that the statutory defence demanded further consideration and could not be effectively dismissed out of hand. Oppression was asserted both in the guise of a term of the credit contract which was oppressive (the exit fee) and by the exercise of a power conferred by the contract in an oppressive manner, namely “ignoring (the appellants’) consistent understanding that repayment would be effected by triggering the underwriting agreements ...”. The Judge’s conclusions that the guarantors were experienced in business and that Raptorial through its agent Mr Green had proposed the exit fee, were challenged. Likewise, the significance attached to the absence of evidence that the exit fee was excessive in market terms, was questioned.
We shall examine the oppressive conduct argument first. The concept of oppression is defined in s9 of the Act:
9. Meaning of “oppressive” - In this Act the term “oppressive” means oppressive, harsh, unjustly burdensome, unconscionable, or in contravention of reasonable standards of commercial practice.

Then follows s10, ss(1) and (2) of which relevantly provide:

10. Re-opening of credit contracts - (1) Where, in any proceedings (whether or not instituted pursuant to this Act), the Court considers that –
(a)A credit contract, or any term thereof, is oppressive; or
(b)A party under a credit contract has exercised, or intends to exercise, a right or power conferred by the contract in an oppressive manner; or
(c)A party under a credit contract has induced another party to enter into the contract by oppressive means –

the Court may re-open the contract.
(2) Where a party under a credit contract refuses to agree to the early termination of the contract, or to vary or waive any term of the contract, or imposes conditions on such agreement he shall, for the purposes of this Act, be deemed to be exercising a right or power under the contract.

The gist of Mr Dobson’s argument concerning oppressive conduct was that:
... the harm knowingly inflicted on the appellants by ignoring their consistent understanding that repayment would be effected by triggering the underwriting agreements, and instead resorting to the securities on terms that left large personal exposure for the guarantors (was) oppressive.

This argument was based on the parties having a common understanding that the underwriting agreements would be first settled, bringing in $2.38m, before other means of recovery were pursued.

In terms of the statute the appellants rely on s10(1)(b), that Elders has exercised a right or power conferred by the contract in an oppressive manner. That is, has sought recovery from Raptorial and its guarantors, directly, as principal debtors. But the demand for payment and subsequent recovery action is unexceptional, save for the contention that Elders were obliged to ensure that special condition 12(e) was utilised or triggered before proceeding with recovery by other means. So analysed, it is apparent that this aspect of the oppression argument is predicated on the assumption that activation of the underwriting agreements was an obligation which rested upon Elders. That proposition we have already concluded is not arguably open.
In this context Mr Dobson also relied upon Prudential Building & Investment Society of Canterbury v Hankins [1997] 1 NZLR 114 a decision of Hammond J. In that case the complaint was that the lender turned a blind eye to the borrower’s belief that an advance was only temporary in nature and was to be superseded by a larger advance over different securities. It was therefore a case where the credit contract was reopened pursuant to s10(1)(c), that is on the basis the borrower was induced to enter into the contract by oppressive means.
Here, the evidence for the appellants of inducement was in Mr Grantham’s first affidavit in opposition (made on behalf of all defendants). He said:
13. As I have said, the underwrite agreements were important to us in that they provided a safety net or level of comfort in the event that anticipated sales were not achieved. We would not have proceeded with the Elders’ transaction without the underwrite agreements as a fall-back position.

Subsequently in the same affidavit he described his understanding that Elders would call upon the underwriters, not may do so, in the event the apartments were not sold by June 1998. Mr Grantham’s affidavits on behalf of Elders do not touch on this point, save for an observation that the appellants originally sought the end of December and Elders the end of April 1998 as the operative purchase date, before 30 June 1998 was agreed upon.

We are satisfied that no fairly arguable defence is available on this ground. The evidence concerning the date for activation of the underwriting agreements, particularly that relevant to March 1998 when the appellants sought postponement of the date to December 1998 (para 23), does not sit easily with the present contention that the agreements were of comfort to the borrower and the guarantors. Moreover, the very brief evidence by which it is asserted that but for the underwriting agreements the appellants would not have entered into the loan agreement does not, in our view, meet the threshold of demonstrating a question of fact fit for trial : Pemberton v Chappell [1987] 1 NZLR 1 (CA). The final and fatal factor is that the notice of opposition did not raise oppressive conduct (as opposed to an oppressive term) as a ground of defence in any event.
The more substantial argument is whether the exit fee of $1.5m was in itself an oppressive term of the contract : s10(1)(a). The essential contention was that the early demand for payment made in August 1998 exacted an effective finance rate of about 80%, inclusive of the facility and exit fees. Over the full eighteen month term Elders’ return would still have been of the order of 40%.
Section 11 of the Act provides:

11. Guidelines for re-opening credit contracts – (1) No credit contract or term of a credit contract, or act performed pursuant to or in relation to a credit contract, shall be considered to be oppressive if the contract, term, or act would not have been considered oppressive at the time at which, and in the circumstances in which, it was made or performed.
(2) In deciding whether paragraphs (a) to (c) of section 10(1) of this Act apply in respect of a credit contract and whether to re-open the contract under that section, the Court shall have regard to –
(a)All the circumstances relating to the making of the contract, the exercise of the right or power conferred by the contract, or the inducement to enter the contract, as the case may be; and
(b)Such of the following matters as are applicable (if any):
(i)   Whether the finance rate for the contract, or any amount payable by the debtor under the contract (whether or not on default by the debtor), is oppressive;
(ii)     Where a debtor is in default under the contract, whether the time given to the debtor by or pursuant to the contract to remedy the default is oppressive having regard to the likelihood of loss to the creditor:
(iii)   Where the creditor has required, as a condition of early repayment of the credit outstanding under the contract, that the debtor pay interest for a period subsequent to the date of repayment, whether the amount of interest is oppressive having regard to the expenses of the creditor and the likelihood that the amount repaid can be reinvested on similar terms:
(iv)   Where the creditor has refused to release part of any security relating to the contract or has agreed to such a release subject to conditions, whether the refusal is, or the conditions are, oppressive having regard to the amount of the credit and the extent of the security that would remain after the release; and

(c) Such other matters as the Court thinks fit.

In this case the appellants essentially rely upon s11(2)(b)(i), that the finance rate, or any amount payable by the debtor under the contract, is oppressive.

With regard to the circumstances in which the advance was made, Mr Dobson relied upon uncontradicted evidence that Raptorial was desperate to refinance, that Elders was therefore a lender of last resort, and that it was “simplistic” to suggest that Raptorial had proposed the $1.5m exit fee since the obvious inference was Mr Green included it in the proposal in expectation of Elders’ requirements. Further, characterisation of the guarantors as “experienced developers” was misplaced since only one, Mr Grantham, answered this description, and the issue of independent legal advice was complicated by the circumstance that Mr Bulfin’s firm held an $800,000 first mortgage which raised the possibility of “a degree of pressure” to ensure the development was refinanced.
In our view it is not possible to assess matters of this kind from affidavit evidence in a summary judgment context. Judgments are required concerning the part played by Mr Green, his relationship with Elders, the business acumen of the guarantors, and the nature of the legal advice tendered in December 1997.
But Mr Heath relied upon the recent judgment of this Court in Greenbank New Zealand Limited v Haas [2000] 3 NZLR 341 (CA) as a decision fatal to this ground of defence. At paras 24 and 25 Tipping J in delivering the judgment of the Court said:
To determine whether a contract or term is 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 (ie. in contravention of) such standards is, by definition, oppressive. It is therefore important, unless the oppressive aspect is beyond rational dispute, for the Court to be properly informed how the contract or term measures up against reasonable standards of commercial practice.
[25] That will usually, indeed almost always, necessitate the calling of evidence on the point, as is contemplated by s13. There would be difficulties and dangers in expecting Judges and Masters to take an intuitive or impressionistic approach to the question. What to one Judge might seem unjustly burdensome might not necessarily seem so to another. The commercial experience of judicial officers may differ markedly. Save in the plainest of cases, Judges cannot be expected to take some form of judicial notice of what is or is not in accordance with reasonable standards of commercial practice.”

In the result the Court allowed the appeal and entered summary judgment against the respondent guarantors.

We turn to the evidence in this case. Mr Grantham on behalf of the guarantors deposed in his first affidavit:
The exit fee of $1.5m was extraordinarily onus and none of us had heard of or experienced such a requirement previously. I very much doubt that Elders would have previously negotiated or received such a fee. However, by mid December 1997 our position was desperate and we felt that we had little choice but to go along with the requirement for the exit fee in order to preserve the Christmas business.

In Mr Dobson’s submission, this evidence, coupled with the credibility issues identified earlier, indicated the existence of a fairly arguable ground of defence. He resisted the contention that better evidence of standards of commercial practice was required.

Mr L J Church, Elders’ finance manager, in an affidavit in reply stated:
12. THE lending transaction that Raptorial proposed to Elders is outside the criteria of a trading bank or bank owned finance company. Loans of this type are a niche market and one, of a number, in which Elders operates. I am aware of four other companies in Auckland operating within this market. This type of financing is sometimes described as “mezzanine financing”.
13. WITHIN mezzanine financing, the provision of an exit fee is not uncommon. Speaking specifically from Elders’ experience, Elders has undertaken many transactions in the past two to three years which have included an exit and/or facility fees of a similar magnitude or proportion to that offered by Raptorial to Elders.
We are not persuaded that Elders has met the onus of demonstrating there is no fairly arguable defence with reference to an oppressive term: s10(1)(a). Where such is alleged and the Court is asked to reopen the contract, it is necessary to look at all the relevant circumstances (s11(2)(a)). We have already identified significant factual issues unsuited for resolution in the present context, concerning the role of Mr Green, the origin of the exit fee term, and the business acumen of the guarantors, which bear directly upon the question of oppression.
Moreover, the magnitude of the exit fee in this case is a striking feature, and is of course the very cornerstone of the oppression argument. It must be borne in mind that the fee was payable regardless whether the credit contract ran its full term of eighteen months or whether Elders demanded repayment after a short period, as eventuated. Hence, under the contract Elders was always in the position to exact a finance rate of 80% or higher. This feature, in our view, may ultimately justify the conclusion that this is one of those plain cases spoken of in the Haas decision, where a particular term of a credit contract simply speaks for itself. But in any event there is evidence in the affidavit of Mr Grantham which, if accepted, may warrant a conclusion that the exit fee term was oppressive. No doubt the present summary judgment affidavits will not be the last word when this issue is substantively tested.
It is important to note that the observations from Haas set out earlier were made against the background of the particular circumstances of that case. In subsequent paragraphs Tipping J noted that Mr Haas’s evidence contained no direct challenge to the amount of the fee. He also referred to the genesis of the credit transaction and observed that “the venture had elements of profit sharing”, and said there was “no suggestion of Greenbank taking advantage of difficulties” which afflicted the borrower (para 27). At another point he characterised the claim that the fee was oppressive as based on simple assertion.
The present, we think, is a rather different case. Mr Grantham’s affidavit evidence, although brief, does raise various elements relevant to oppression. Equally the evidence of Mr Church in reply is not greatly persuasive. The circumstance that the lending transaction with Raptorial was outside the criteria for many lenders does not render the Credit Contracts Act any less relevant. Most importantly the assertion that the exit fee was comparable to that in “many transactions in the past two or three years” undertaken by Elders does not carry significant weight, when the details of such transactions are not given. In any event, as we noted earlier, the required judgment as to oppression, or not, is intrinsically one where all the circumstances of the particular case are necessarily determinative.
Nor do we consider that the Court’s decision in Haas was intended to make comparative evidence mandatory in all circumstances or to displace, as distinct from assist, the judgement which the Court must exercise under s11. Obviously, standards of commercial practice are likely to be relevant but they must, as Tipping J states, be “reasonable” and if, irrespective of the evidence, those standards are not regarded as reasonable by the Judge, they may be rejected as a valid basis for determining whether the transaction in issue is oppressive. All the circumstances relating to the making of the contract, the exercise of the right or power conferred by the contract and any inducement to enter into the contract in terms of s11(2)(a) must be considered. Evidence of commercial practice must then be pertinent to those particular circumstances, the particular contract and any inducement. The question whether the finance rate or any amount payable by the debtor under the contract as specified in s11(2)(b)(i) is oppressive remains open for the trial, but any evidence adduced to show commercial practice, if it is to be helpful, will need to be relevant and specific to the matters contained in para 2(a).

We are satisfied that the defence raised in terms of the Credit Contracts Act is one which cannot be rejected in a summary judgment context. It follows that the case should proceed to hearing.

Conclusion

For the reasons given the appeal is allowed. The entry of summary judgment is set aside and the case is remitted to the High Court for hearing. The appellants are awarded costs in this Court in the sum of $5000 plus disbursements to be fixed if necessary by the Registrar.

Solicitors:
Guy & Toby Manktelow, Wellington, for Appellants
Stace Hammond Grace & Partners, Hamilton, for Respondents

[2000] NZCA 315

8 November 2000