SB Properties Ltd (in liq) v Holdgate
[2009] NZCA 327
•24 July 2009
For a Court ready (fee required) version please follow this link
IN THE COURT OF APPEAL OF NEW ZEALAND
CA453/2008
[2009] NZCA 327BETWEENSB PROPERTIES LIMITED (IN LIQUIDATION)
Appellant
ANDANDREW NICHOLAS HOLDGATE
First RespondentANDTHE OFFICIAL ASSIGNEE
Second Respondent
Hearing:19 May 2009
Court:Baragwanath, Hugh Williams and Winkelmann JJ
Counsel:R B Hucker and L F A Yaqub for Appellant
P L Rice for First Respondent
G S Caro for Second Respondent
Judgment:24 July 2009 at 3pm
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellant is ordered to pay the first respondent costs for a standard appeal on a band A basis and usual disbursements
____________________________________________________________________
REASONS OF THE COURT
(Given by Baragwanath J)
[1] The primary issue on this appeal concerns the effect of an assignment by a building contractor, JR Construction Ltd (JRC), to its contracts manager, Mr Holdgate, of “all its rights, title and interest” in a contract to perform site works on premises at Mt Wellington, Auckland for SB Properties Ltd (SBP). Both companies are now in liquidation and Mr Holdgate is bankrupt.
[2] SBP claims that the combined effect of the assignment and s 11 of the Contractual Remedies Act 1979 (CRA) was to impose JRC’s obligations on Mr Holdgate, so that it can recover from him damages for breach of JRC’s obligations.
[3] In the High Court Courtney J gave judgment in favour of Mr Holdgate: (Holdgate v Blocassa Ltd HC AK CIV-2005-404-002693 4 July 2008). SBP now appeals to this Court.
Context
[4] SBP claimed JRC had refused to complete its work. SBP gave notice purporting to terminate the contract.
[5] Having been called on to meet guarantees of JRC’s debts, Mr Holdgate took the assignment from JRC. No notice of the assignment was given to SBP. SBP claimed that it was obliged to engage a substitute contractor to complete the contracts and to perform necessary remedial work at a cost $130,195 greater than JRC’s price.
[6] Learning of the assignment, SBP claimed that sum from JRC as damages. Because JRC was in liquidation, SBP contended that s 11 of the CRA entitled it to sue Mr Holdgate as assignee from JRC and filed proof of debt in his bankruptcy for the $130,195.
[7] The proof was accepted by the Official Assignee, but Mr Holdgate’s application to the High Court under s 89(5) of the Insolvency Act 1967 for an order reversing that decision was successful.
[8] As well as appealing against the High Court’s decision, SBP seeks an order remitting to the High Court a further issue which counsel agree was argued but not determined in that Court, namely whether the notice to terminate the contract was effective. Mr Holdgate asks this Court to determine that issue.
[9] While the termination issue logically precedes the s 11 point, because only the latter issue was determined by the High Court it is convenient to deal with it first.
Further facts
[10] On 21 December 2004, SBP and JRC entered into two contracts for a total price of $351,000 plus GST. Each conferred a specific right on SBP to assign. There was no prohibition of assignment by JRC, which was placed in liquidation on 21 September 2005. Mr Holdgate was adjudicated bankrupt on 7 December 2005. SBP was placed in liquidation by directors’ resolution on 31 July 2007.
[11] Payments (net of GST) of $248,524 were made by SBP to JRC up until the date of alleged termination (6 April 2005). At that point, SBP had the balance of the $351,000 ($102,421) available to pay for completion. While back-dated to 21 December 2004, the assignment was executed in May or June 2005 and in any event after the alleged date of termination. SBP claims that it should be construed as taking effect at the earlier date.
[12] SBP contends that the assignment made payable to Mr Holdgate the full contract sum ($351,000 plus GST) which as at 21 December 2004 was to become payable to JRC. That, it submitted, was the amount of Mr Holdgate’s potential liability under s 11(2) of the CRA ([15] below).
[13] Alternatively, if the date of the assignment was after the date of termination of the contract, SBP claims that the assignment made payable to Mr Holdgate the balance of the contract price remaining unpaid. So, it submitted, the amount of Mr Holdgate’s potential liability under s 11(2) of the CRA was $102,421 plus GST ([11] above).
[14] There was as well a cross-claim by Mr Holdgate. SBP’s project manager had certified as payable to JRC the February No 4 claim for $10,613 plus GST, but that has never been paid. Although bankrupt, on 15 August 2007 without leave of the Official Assignee, Mr Holdgate purported to file a proof of debt in SBP’s liquidation for $62,150 said to be due on that claim plus additional interest of $33,043. The claim was rejected by the Official Assignee and there has been no appeal from that decision. So the cross-claim may be disregarded.
Section 11 of the CRA
[15] Section 11 of the CRA relevantly provides (with added emphasis):
11 Assignees
(1) Subject to this section, if a contract, or the benefit or burden of a contract, is assigned, the remedies of damages and cancellation shall, except to the extent that it is otherwise provided in the assigned contract, be enforceable by or against the assignee.
(2) Except to the extent that it is otherwise agreed by the assignee or provided in the assigned contract, the assignee shall not be liable in damages, whether by way of set-off, counterclaim, or otherwise, in a sum exceeding the value of the performance of the assigned contract to which he is entitled by virtue of the assignment.
(3) Unless it is otherwise agreed between the assignor and the assignee, the assignee shall be entitled to be indemnified by the assignor against any loss suffered by the assignee and arising out of—
(a) Any term of the assigned contract that was not disclosed to him before or at the time of the assignment; or
(b) Any misrepresentation that was not so disclosed.
…
The High Court judgment
[16] Courtney J reasoned:
[23] Historically, the position has always been that a contracting party cannot relieve himself of his contractual obligations by assigning the burden of the contract; that can only be done with the consent of all three parties and involves a release of the original obligor. It was argued in this case that s 11(1) alters that position, with the effect that with the assignment of a contract the assignee takes the burden as well as the benefit and may become personally liable for the assignor’s obligations under it.
[24] The authors of The Law of Contract in New Zealand [Burrows, Finn & Todd (3ed 2007)] consider that s 11 has not created a new means by which the burden of a contract could be assigned and therefore goes no further than the common law:
These provisions [s 11(1)-(3)] appear to be drafted on the assumption that the burden of the contract is freely assignable. However, in view of the wording of subs (1) “if…the burden of a contract is assigned” – it is apparent that the section does not create any power to assign liabilities but operates only when an assignment of the burden has been made. Exceptionally this may be provided for by statute, but cannot be achieved at law or in equity. So in this respect it appears that the section is without effect.
[25] I agree with this view. …
She held that as a matter of law Mr Holdgate is not liable for JRC’s contractual obligations.
Discussion
Section 11(1)
[17] Neither counsel supported the application to the present case of the passage cited from Burrows, Finn & Todd (at [17.3]). Mr Rice accepted that the clear language of s 11(1) does pass a burden which accompanies an assigned benefit: what the text calls the “exceptional” case. At [17.2.1] the authors quote the following passage from the judgment of Lord Collins MR in Tolhurst v Associated Portland Cement Manufacturers (1900) Ltd [1902] 2 KB 660 at 668 (CA):
It is, I think, quite clear that neither at law nor in equity could the burden of a contract be shifted off the shoulders of a contractor [here JRC] on to those of another [Mr Holdgate] without the consent of the contractee [SBP]. A debtor cannot relieve himself of his liability to his creditor by assigning the burden of the obligation to somebody else; this can only be brought about by the consent of all three, and involves the release of the original debtor.
They argue that that remains the law.
[18] We agree that a simple burden cannot be shifted off the assignor’s shoulders without the consent of the other contracting party other than by novation, by which the non-assigning party consents to the release of the assignor and the substitution of the assignor by the assignee. We take that to be what Burrows, Finn and Todd mean in the passage cited by the Judge at [24] of her judgment.
[19] This case, however, is concerned with a different point: whether s 11(1) adds to a continuing liability on the assignor a new liability on the assignee to the non-assigning party (albeit within the limits of subs (2)). While the common law held to the contrary (see Rhone v Stephens [1994] 2 AC 310 (HL)), we are satisfied that the answer is yes.
[20] It is unnecessary for us to enter the labyrinth of what was a controversial area of the judge-made law. It is discussed in Tolhurst The Assignment of Contractual Rights (2006) and Kirby “Assignments and Transfers of Contractual Duties: Integrating Theory and Practice” (2000) 31 VUWLR 317.
[21] To the extent that Burrows Finn & Todd might support an argument that the common law continues to govern this case, we do not consider that it can resist the imperative language of s 11(1). We prefer to say that the facts fall within what they describe as the statutory exception.
[22] Certainly, as Lord Reid has said (Birmingham Corporationv West Midland Baptist (Trust) Association (Inc) [1970] AC 874 at 898 (HL)):
…the mere fact that an enactment shows that Parliament must have thought that the law was one thing does not preclude the courts from deciding that the law was in fact something different.
But the courts will rarely determine that Parliament has misunderstood the law rather than altered it. Rather, as Burrows & Carter Statute Law in New Zealand (4ed 2009) show at 539, the courts are tending to develop the common law in accordance with the principles legislated by Parliament. Its elected legitimacy makes it a proper source of guidance as to public policy.
[23] Burrows Finn & Todd, in a passage immediately following that quoted by Courtney J, offer a helpful analysis that is consistent with our approach (at [17.3]):
To the extent that s 11 is concerned with the assignment of the benefit of a contract it confirms that the assignee may invoke the remedies provided in the 1979 Act. It appears, moreover, that the assignee may be liable for any breach of contract by the assignor. …
If the assignee becomes liable for the assignor’s breach in this way then, subject to any agreement or provision in the contract to the contrary, the assignee’s obligations are limited by subs (2) to “the value of the performance of the assigned contract to which he is entitled by virtue of the agreement”. The word “is” in this context has no temporal significance. So a purchaser of property could still claim damages from an assignee up to the value the assignee derived from the assigned contract, notwithstanding that the purchaser had paid all money due under the contract and performance of the contract had no present value. The assignee’s liability was limited to the amount due by the purchasers at the time the agreement was assigned to the assignee [Gray v UDC Finance Ltd [2003] 3 NZLR 192 (HC)]. Probably the “value” of the contract in this context is to be determined by the Court on an objective basis. Any excess has to be recovered from the assignor who, as has already been seen, remains fully liable on the assigned contract.
[24] The authors then go on to discuss Gibbston Valley Estate Ltd v Owen (1999) 4 NZ ConvC 193,024 (CA), where Henry and Blanchard JJ found it unnecessary to express a concluded view upon the meaning and effect of s 11(1). They were inclined to consider that, where the benefit of a contract is assigned, the other party to the contract has a remedy in damages against the assignee if there is breach of the assignor’s obligations, subject to the subs (2) limitation of liability. They did not deal in terms with the topic of burden. Tipping J did, contemplating assignment of the contract as a whole (which must carry such benefits and burdens as arise), assignment of the benefit (and its accompanying burdens) and assignment of the burden.
[25] Although Burrows Finn & Todd seek (at the end of [17.3]) to limit Tipping J’s judgment to conventional methods of transferring obligations, by delegation or vicarious performance, we agree with Tipping J’s approach, which is not expressed to contain those limits.
[26] In our opinion, to the extent that the rules of the common law did not impose a burden on the assignee, that cannot withstand the pressure placed upon it by the emphatic language of s 11(1): the common law must yield. A contract and its benefit together with its burden may now be assigned. By subs (1) SBP’s rights against JRC are enforceable both against JRC and, subject to the limits of subs (2), Mr Holdgate. Mr Holdgate also has the rights against JRC which are conferred by subs (3) but were not the subject of argument on this appeal.
Section 11(2)
[27] For Mr Holdgate, Mr Rice does not challenge Mr Hucker’s argument that s 11(1) has the effect we have just stated. His argument, which we accept, advances the following analysis.
[28] Mr Holdgate is protected by the terms of subs (2) in the following way:
… the assignee [Mr Holdgate] shall not be liable in damages, whether by way of set-off, counterclaim, or otherwise, in a sum exceeding the value of the performance of the assigned contract to which he [Mr Holdgate] is entitled by virtue of the assignment.
[29] Under the previous law, a party to a contract (SBP) had no right to bring an action for damages against an assignee (Mr Holdgate) for breach of an obligation by an assignor (JRC). Faced with a claim by the assignee (Mr Holdgate), SBP could at most set off or counterclaim for a sum representing the loss suffered as a result of the assignor’s (JRC’s) non-performance: Young v Kitchin (1878) 3 Ex D 127. If SBP’s set-off exceeded the debt owing to Mr Holdgate, it could not recover the surplus from him.
[30] Section 11(1) improved SBP’s position by granting an independent cause of action against Mr Holdgate. Even if, for example, SBP did not discover JRC’s breach or misrepresentation until after Mr Holdgate was paid, it would be entitled to sue him under s 11(1). This represents a change from the common law position.
[31] In other respects the common law remains unaltered. In particular, Mr Holdgate is not to be made liable for any amount beyond the benefit he has received.
[32] SBP must look to JRC (the assignor) for any surplus that it counterclaims above what has been paid to Mr Holdgate.
[33] The Contracts and Commercial Law Reform Committee set out the reasoning behind s 11(2) in its report Misrepresentation and Breach of Contract (1967):
The problem therefore seems to us to amount to this: who, as between obligor and assignee should bear the risk of insolvency or disappearance of the misrepresenting assignor? We believe the assignee should do this. However, we could not expose an assignee to claims for damages of unlimited amount in a situation of which he may have been unaware. In the ordinary case, the assignee is not a guarantor of the assignor’s obligations. In protecting the obligor’s rights to set up as against an assignee the real bargain made with the assignor, we must not enlarge those rights by providing the obligor with another prospective defendant merely by reason of the assignment. Hence we suggest a limitation upon the assignee’s liability.
[34] The limit imposed by the CRA is “the value of the performance of the assigned contract to which he is entitled by virtue of the assignment”: s 11(2). The precise meaning of these words is unclear. The late Professor Richard Sutton (“Contractual Remedies Act 1979” [1980] NZ Recent Law 19 at 25) used the example of a property owner (the assignor) contracting with a builder (the non-assigning party) to install an ornamental garden on the assignors’s property. The assignor then sells the property to the assignee and assigns to the assignee the benefit and burden of the contract with the non-assigning party. Professor Sutton suggested that the extent of the assignee’s liability to the non-assigning party under s 11(2) could be:
(a)What the assignee was prepared to pay the assignor for the assignment [ie what the assignee did pay]; or
(b)The objective value of what the assignee actually receives, or is entitled to receive, under the assigned contract [ie the market value of the consideration promised or delivered]; or
(c)The amount by which the assignee is enriched by the non-assigning party’s performance of the contract [ie the net increase in the assignee’s assets following the assignment].
[35] (a), (b) and (c) may give the same result, but they may not. Professor Sutton did not offer a preference. We do not think the answer can be (a). While the payment may be some evidence of the value, the assignee may have paid more or less than the value of the assignment. (b) is the market cost of what the assignee would have to pay the non-assigning party to have the work completed. It may well exceed (c), the objective value of performance to the assignee (cf Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344 (HL)). We are satisfied that (c), the value to the assignee, must be the correct test. It does justice to the assignee, who is not liable for more than he receives, and provides a suitable limitation upon the extent of the assignee’s liability. (c) also has the support of Dawson and McLauchlan The Contractual Remedies Act 1979 (1981) at 195-196.
[36] In the only reported decision to have directly considered these words, Gray v UDC Finance (see [23] above), Wild J appears also to have favoured possibility (c): ie the amount by which the assignee benefits from performance of the contract. In that case an apartment builder gave to a financier, UDC, an assignment of sale and purchase agreements as security for a payment guarantee. The plaintiff purchasers settled the agreements by paying the purchase price directly to the builder. It was conceded that UDC effectively received the benefit of those payments because its liability under the payment guarantee was correspondingly reduced. After the builder went into liquidation the purchasers claimed damages from UDC under s 11(1) of the CRA for losses suffered as a result of misrepresentations by the builder.
[37] The main argument concerned UDC’s attempt to strike out the claim on the basis that the word “is”, in the phrase “the value of the performance of the assigned contract to which he is entitled”, meant the present value of the purchaser’s obligations (which UDC maintained was nil, as the purchasers had paid all sums due by them). Wild J rejected that argument. He took the view at [20] that “is” has no temporal significance and was better understood as meaning “was” or “has been”.
[38] The point of present relevance is the Judge’s decision that s 11(2) limited UDC’s liability to the amount due by the plaintiffs under their agreements for sale and purchase at the time of the assignment.
[39] The judgment noted s 18(1) of the Hire Purchase Act 1971 and s 46(1) of the Consumer Guarantees Act 1993, each of which limits liability of the assignee to the amount owing by the purchaser or consumer under the agreement or contract at the date of the assignment. The formula of limitation of liability to any amount owed in those cases could not be used in s 11(2) because of the much broader range of liabilities to which it applies. But the concept in those other cases of amount due is a pointer to the correctness of Mr Rice’s argument on s 11(1).
[40] In the present case Mr Holdgate did not derive any value from the assignment. All payments during the course of the contract were paid to JRC. The contract was assigned to Mr Holdgate following its termination. At that time there was an undisputed sum of $10,613.60 plus GST owing, but this sum has never been paid (see [14] above). Accordingly, the value of the performance of the assigned contract to Mr Holdgate has been nil.
[41] To interpret s 11(2) as allowing an independent cause of action in damages against an assignee beyond the value of the benefits actually received by him would extend the statutory cause of action further beyond the boundaries of the common law than we regard as possibly being intended by Parliament. We prefer the view, consistent with the objective of s 11 in granting SBP the remedies of damages and cancellation against Mr Holdgate (as opposed to being confined to a right of set-off), that the value of the performance of the assigned contract refers to the amount the assignee is personally enriched by performance of the contract: Sutton at 25.
[42] It follows that SBP’s proof of debt should not have been admitted and the Judge was correct in allowing the appeal.
[43] This argument is unaffected by when the assignment took place. SBP’s contention that the assignment took effect on the date shown on the face of the Deed of Assignment (21 December 2004) cannot be accepted. It is inconsistent with the unchallenged evidence that the Deed was executed in May or June and backdated. It is notable that all subsequent payments were paid to JRC rather than the respondent.
[44] But even if the Deed had taken effect in December 2004, it does not follow that the value of the benefit assigned at that time was the contract price of $351,000 plus GST. Mr Holdgate was not assigned a debt of $351,000 (or any sum) but simply a right to call for progress payments to be paid to him personally upon completion of the work by JRC. If the work was not done, or the work was done badly giving rise to a counterclaim for damages, the right might have no value at all. Similarly, if Mr Holdgate did not notify SBP of the assignment and call for payments to be made to himself, the value of the performance of the assigned contract was nil as far as he was concerned.
[45] We add that we have not heard argument as to the applicability of s 4 of the Contracts (Privity) Act 1982, recently discussed in Laidlaw v Parsonage [2009] NZCA 291. But the specificity of the wording of s 11(2) on assignment, when contrasted with the generality of s 4, means that s 11(2) must prevail.
Termination
[46] We find it unnecessary to remit this issue to the High Court. Again we accept Mr Rice’s argument, on which the following analysis is based.
[47] The damages claim has no proper foundation as the contract was invalidly terminated. Clause 31 of the construction contract deals with termination. It provides:
The Principal is entitled to notify the Contractor in writing requiring the Contractor to correct any of the following:
(a) a failure to begin The Works or a failure to continue with The Works regularly and diligently for reasons which do not justify an extension of time;
(b) A failure to comply with a notice from the Principal requiring the Contractor to correct defective work;
(c) A repeated or deliberate failure to carry out obligations within the terms of the contract.
In addition to any other rights available to him, The Principal is entitled to end the contract by giving the Contractor written notice if the Contractor fails to correct the identified deficiency or deficiencies within 5 working days, to the satisfaction of the Principal. …
(Emphasis added)
[48] Where a period of notice must be given before a particular act may be performed, both the day on which the notice was served and the day specified by the notice as being the first day on which the act may be performed must be excluded in determining whether the requisite period of notice was given: Wallace McLean Bawden & Partners Nominees Ltd v Fish [1980] 1 NZLR 540 at 542 (CA).
[49] The right to terminate is therefore dependent on there being a period of five working days between, and exclusive of, the date on which the principal gives written notice of the contractor’s failure and the day following the date on which the principal gives written notice of termination. No such period occurred in this case.
[50] The only written notice given under cl 31 was a fax dated 17 March 2005 requiring JRC to resume work on site “by close of business on Thursday, 24th March 2005 being the required five working days from today…”. That notice was invalid and ineffective because the work could not be resumed owing to SBP’s failure to arrange for holding down bolts to be supplied and installed.
[51] This omission was rectified but no further notice was sent under cl 31. At most, a letter was faxed on 31 March 2005 to JRC’s counsel at the time requesting confirmation that it would now arrange the final concrete pour. Even if this letter amounted to a further notice pursuant to cl 31, JRC had 5 working days commencing on 30 March to provide that confirmation before the appellant became entitled to terminate, ie by the end of Wednesday 6 April 2005. Thus, the earliest SBP was entitled to terminate the contract was on Thursday 7 April 2005.
[52] Without waiting for that period to expire, SBP terminated the contract by fax to JRC on Wednesday 6 April. The purported termination was therefore premature and invalid and the appellant acted unlawfully in evicting JRC from the site and engaging a new contractor. Such conduct was repudiatory of SBP’s obligations under of the contract. The termination did not occur until JRC accepted SBP’s repudiation by treating the contract as at an end. Accordingly, there is no basis for SBP’s claim in damages.
Approach to review
[53] It is desirable that we resolve a difference of opinion as to the role of the Court in proceedings under s 89(5) of the Insolvency Act. Mr Rice adopted the submissions of Mr Caro for the Official Assignee, who appeared to assist the Court. We are indebted for his submissions, which we largely adopt.
[54] Section 89(5) provides:
The Court may, if it thinks that a proof has been improperly admitted, on the application of the Assignee or the bankrupt or any creditor, after notice to the creditor who made the proof, expunge the proof or reduce its amount.
[55] In Re Kentwood Constructions Ltd [1960] 1 WLR 646 at 647 (Ch) Buckley J stated:
It was argued on behalf of the liquidator that the question before the registrar was simply whether the liquidator was right or wrong, on the evidence available to him at the date when he rejected the proof, in rejecting the proof.
Similar arguments have been advanced in New Zealand. The judgment continued at 647-648:
I do not think that is really the function of the court on an appeal from a rejection of a proof. When application is made to the court to reverse a decision of a liquidator in rejecting a proof, evidence is filed which is very commonly much fuller than the evidence available to the liquidator at the time when he decides to reject the proof; and the court is bound to decide the rights of the claimant in the light of the evidence which is before the court, and not merely to express a view as to whether the liquidator was right or wrong in rejecting the proof when he rejected it. It is, perhaps, significant that the Companies (Winding-Up) Rules, 1949, provide by rule 108 that if a creditor or contributory is dissatisfied with the decision of the liquidator in respect of a proof, the court may, on the application of the creditor or contributory, reverse or vary the decision. It is not merely the function of the court to say that a decision is right or wrong; it may vary it in any way it thinks necessary in the light of the evidence before the court. The court must approach the question de novo and determine to what extent the claimants ought to be allowed to rank as a proving creditor.
[56] That decision was implicitly approved by the English Court of Appeal in Re Trepca Mines Ltd [1960] 1 WLR 1273 and has been followed in New Zealand in Saunders v The Liquidator of Woodware Products Ltd (In Liquidation) (1982) 1 NZCLC 98,341 (HC) and Winstone (Northland) Ltd v Watson (1988) 4 NZCLC 64,175 (HC).
[57] We endorse its application in New Zealand.
Decision
[58] The appeal is dismissed.
[59] The appellant is ordered to pay the first respondent costs for a standard appeal on a band A basis and usual disbursements. The Official Assignee’s position was sufficiently similar to that of the first respondent for there to be one set of costs only.
Solicitors:
Hucker & Associates, Auckland, for Appellant
Hornabrook McDonald, Auckland, for First Respondent
Ministry for Economic Development, Wellington, for Second Respondent
7