South Canterbury Finance Ltd v Huka Ltd HC Auckland CIV 2010-404-4947

[2010] NZHC 2153

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-004947

BETWEEN  SOUTH CANTERBURY FINANCE LTD Plaintiff

ANDHUKA LTD First Defendant

ANDARUNDEL PARK LTD (IN RECEIVERSHIP)

Second Defendant

ANDVICTORIA THREE TRUSTEE LTD Third Defendant

ANDQC GROUP LTD Fourth Defendant

ANDJOHN ROBERT WILLIAMS Fifth Defendant

Hearing:         8 November 2010

Appearances: TJG Allen for Plaintiff

W A McCartney for Defendants

Judgment:      30 November 2010 at 4:30 pm

JUDGMENT OF ASSOCIATE JUDGE BELL

This judgment was delivered by me on 30 November 2010 at 4:30 pm pursuant to Rule 11.5 of the High Court Rules. Registrar/Deputy Registrar

Date: ………………….

Solicitors:

Grove Darlow, PO Box 2882, Auckland

Carson Fox Legal, PO Box 37403, Auckland

SOUTH CANTERBURY FINANCE LTD V HUKA LTD AND ORS HC AK CIV-2010-404-004947  30

November 2010

[1]      In  this  proceeding,  the  plaintiff  sues  for  $9,106,288.05,  plus  interest  at

24% p.a. compounded monthly and costs on a solicitor/client basis for sums said to be payable under loan agreements.  It has applied for summary judgment.

[2]      South Canterbury Finance Ltd is a financier. It is now in receivership. The first defendant, Huka Ltd, is a trustee of Huka Trust.  Huka Ltd has been undertaking a property development at 10 Huka Road, Highbury, North Shore, Auckland.  It is sued as the borrower.   The other defendants are sued as guarantors of the loan agreements.  The fifth defendant, John Robert Williams, is a director of all the other defendants.

[3]      The plaintiff’s evidence is that Auckland Finance Ltd entered into a written agreement on 26 July 2007 as lender with the first defendant as borrower and all the defendants as guarantors.  It was a revolving credit contract providing for advances of up to $7,310,000.  The loans were repayable on the expiry date, 12 months from the first drawdown date.   Auckland Finance Ltd and all the defendants are also parties to a deed of guarantee and indemnity of 26 July 2007, under which all defendants guaranteed payment by Huka Ltd.

[4]      On 1 October 2008 Auckland Finance Ltd, South Canterbury Finance Ltd and other finance companies amalgamated under Part XIII of the Companies Act

1993 to become South Canterbury Finance Ltd. In this proceeding South Canterbury Finance Ltd is entitled to enforce the rights of Auckland Finance Ltd under the agreements of July 2007.

[5]      The plaintiff put in evidence a letter of 20 November 2008 signed by all the defendants varying the loan agreement of 26 July 2007.  Amongst other things, this letter recorded that the balance outstanding under the loan at 31 October 2008 was

$6,742,483.29 and that there would be further drawdowns of $500,000.  The varied loan expired and was repayable on 30 November 2009.

[6]      On 18 February 2010, the plaintiff entered into a further loan agreement with Huka Ltd as borrower and all the defendants as guarantors providing for further loans amounting to $2,335,000 to be made.   The parties also entered into a fresh cross-guarantee deed under which the defendants guaranteed payment under the loan agreement of 18 February 2010.

[7]      The plaintiff’s evidence is that at 31 January 2010, the amounts advanced under the existing loan, plus unpaid interest, amounted to $8,528,743.28.

[8]      The amounts drawn down under the agreement of 18 February 2010 were:

23 February 2010  $  66,000

24 March 2010  $114,000
23 April 2010  $100,000
31 May 2010  $114,500
Total  $394,500

=======

[9]      The plaintiff had also financed a development by Arundel Park Ltd, the second defendant, in Paratai Drive, Auckland.  Some of the evidence refers to this, but the plaintiff does not make any claim in this proceeding about those loans.  The plaintiff reserves its rights on the financing of the Arundel development at Paratai Drive.

[10]     The  plaintiff  had  security for  its  loans.    As  well  as  the  guarantees,  the securities included a first debenture over the property at 10 Huka Road owned by Huka Ltd, and a first ranking general security agreement over the assets and undertakings of Huka Ltd.

[11]     On 11 May 2010, the plaintiff made demand of the defendants under the loan agreement  of  18  February  2010.    The  notice  alleged  that  the  defendants  had defaulted under the term loan agreement of 11 February 2010 by:

a)        Abandoning the property, the subject of the securities;

b)Refusing to allow its quantity surveyor access to records to enable the quantity surveyor to review and prepare progress certificates; and

c)        Causing  sub-contractors  to  cease  work  on  the  construction  of  the property, the subject of the securities.

[12]     Amongst other things, the notice demanded payment of $9,106,288.05, plus interest and costs.  The defendants did not pay and this proceeding followed.

[13]     There are problems with the plaintiff’s statement of claim.  It pleads only the agreement of 18 February 2010 and does not refer to the earlier loan agreements.

While  there  is  a  pleading  that  the  loan  is  guaranteed  by  the  second  to  fifth defendants, the particular contract of guarantee is not identified.  The statement of claim seeks repayment of $9,106,288.05 as being entirely payable under only the agreement of 18 February 2010.  The statement of claim repeats the defaults alleged in the demand of 11 May 2010, but does not link these alleged defaults to any particular contractual terms.

[14]     The loan agreement of 18 February 2010 does not apply to moneys lent under the earlier agreements of 2007 and 2008.  It provides only for further advances to be made and for repayment of those advances.  That loan agreement could only be used to claim payment of funds advanced under it and interest payable on those moneys lent.  As only $394,500 had been lent under that agreement, under the pleading the plaintiff could claim at best only $394,500 plus interest and costs.

[15]     The money lent under the agreement of 18 February 2010 was repayable on the expiry date, 31 March 2011, unless it became repayable earlier under other provisions in the agreement.  The plaintiff referred to the default provisions of the loan as allowing it to call up the loan before the expiry date.  However, there is no evidence that the plaintiff had served a notice under s 119 of the Property Law Act on the first defendant so as to allow it to call up the loan before the expiry date.  The notice was required because the plaintiff’s security includes a mortgage over the property at Huka Road.  Section 119(1) of the Property Law Act says:

No amounts secured by a mortgage over land are payable by any person under an acceleration clause, and no mortgagee or receiver may exercise a power specified in subsection (2), by reason of a default, unless—

(a)a notice complying with section 120 has been served (whether by the mortgagee or receiver) on the person who, at the date of the service of the notice, is the current mortgagor; and

(b)       on the expiry of the period specified in the notice, the default has not been remedied.

[16]     Without any evidence of such a notice, the plaintiff has not shown a right to call up any money payable under the loan before the expiry date.

[17]     The  plaintiff   applied   orally  to   amend   its   pleadings.     After   a  brief adjournment, an amended statement of claim was tendered.  The amended statement

of claim refers to all the loan agreements and both deeds of guarantee.  It gives more detailed pleading where this had been lacking in the original statement of claim.

[18]     The defendants objected to the plaintiff being allowed to amend its claim, but did not identify any specific prejudice they would suffer if the plaintiff were allowed to amend.   The Court of Appeal stated the approach to amendments in Cegami Investments Ltd v AMP Financial Corporation (NZ) Ltd [1990] 2 NZLR 308 at 314:

There is no justification for holding the summary judgment rules suspect and needing  to  be  strictly  confined  because  they  are  thought  to  deprive defendants of the privilege of a full trial.  They are aimed at cases in which the plaintiff can establish there is no genuine defence, and they should be approached and applied in a way that will most effectively enable the Court to reach a conclusion on that question.  With this in mind, we see no good reason why the ordinary provisions about amendment should not apply to such  proceedings  if  the  justice  of  the  case  requires  it  and  there  is  no prejudice to the defendant.  It would be a matter for regret if these salutary rules became hedged with restrictive interpretations narrowing the ordinary scope of amendment, regardless of the merits of the application and the position of the parties.

[19]     Following that approach,  I see no  good reason for refusing leave to  the plaintiff to amend its pleading.   A disciplinary or punitive approach is not called for. It would be inefficient to refuse the amendment and dismiss the application for summary judgment.  That is only likely to result in more proceedings for the parties with added time and expense.   The defendants will not suffer any prejudice.   The amendment is not against the interests of justice.

[20]     The plaintiff accepts that it faces difficulties without evidence of a notice under s 119 of the Property Law Act.  It accepts that its right to accelerate under the February 2010 agreement is contestable.   Instead, it no longer seeks summary judgment for the sums payable under the February 2010 agreement, and confines its claim to sums payable under the agreement of 2007, as varied by the agreement of November 2008.   It therefore seeks judgment for the sum of $8,528,743.28, plus interest.   It says that acceleration does not arise, because these loans had already fallen due.

[21]     Accordingly, the plaintiff’s claim is considered as arising solely under the loan agreement of July 2007 and the variation of November 2008 – from now on the loan agreement of July 2007.

[22]     The defendants say that they have three defences to the plaintiff’s claim based on breach of contract, misrepresentation and estoppel.

[23]     On breach of contract, they say that in December 2009, the plaintiff and the defendants entered into an agreement under which Huka Ltd would subdivide the land it was developing into five lots.  On one lot, four townhouses would be built and sold with all the proceeds going to the plaintiff.  The remaining four lots would be sold at a total price of $2.85 million, and the proceeds paid to the plaintiff.  The plaintiff would continue funding the project until the lots were sold, and would pay

all the drawdowns on the 20th  of each month, time being of the essence.  They say

that it was a term of the agreement that on completion of all these matters the defendants would be discharged from all liability to the plaintiff.  They say that they complied with their obligations under this contract, but the plaintiff breached its obligations  by failing  to  pay drawdowns  on  time,  discontinuing  funding  of  the project and bringing the present proceeding against the defendants.

[24]    On misrepresentation, they say that they were induced to enter into the December 2009 contract by misrepresentation by the plaintiff that the plaintiff was solvent, was financially able to fund the Huka and Paratai projects to completion, and was financially able to pay all drawdowns on the 20th of each month, time being of the essence.  These representations were untrue.  They say that they have always been ready, willing and able to perform the December 2009 contract, they affirm the contract and they claim performance of that contract by the plaintiff so that they can be discharged from liability.

[25]     The plea of  estoppel is  in the alternative to  the claim in  contract.   The defendant says that representations by the plaintiff in December 2009 created an expectation on the part of the defendants that their liability to the plaintiff would be discharged  if  they  carried  out  the  development.     The  defendants  claim  they reasonably  relied  on  this  expectation,  they  will  suffer  serious  detriment  if  that

expectation is defeated and it would be unconscionable for the plaintiff to depart from the expectation.

[26]     Mr Williams, the fifth defendant, says that the Huka Road site was a difficult one and had geotechnical problems.   In October 2009, he proposed a plan for the plaintiff and Huka Ltd both to exit the Huka site.  In general, the plan is along the lines described in paragraph [23] above. Mr Williams said this proposed was much quicker and easier than developing the entire site.   He says that the plaintiff was willing to accept his proposal provided that he could complete the subdivision and the four houses and sell them at reasonable prices.

[27]     In particular, Mr Williams refers to a meeting with Ian Thompson, a manager with the plaintiff, in December 2009.  He says there was a firm agreement that the plaintiff would provide a further $2.335 million of funding to Huka Ltd.  Huka and he would do everything they reasonably could to achieve the five lot subdivision, construction of the four townhouses and sale of all the lots.  Mr Thompson tabled figures for the four bare lots of $2.85 million in total, with the four bare lots to be sold for no less than that.  The townhouses were to be sold for whatever could be achieved. The plaintiff would accept the proceeds of sale in full settlement of what was owed under the loan agreements and all the guarantees would be discharged. The documentation was to follow.   He says that at the meeting he stressed to Ian Thompson the importance to him that the plaintiff was solvent and financially able to fund the Huka and Paratai developments to completion, and that all drawdowns

would be paid on the 20th of each month.  He says that Mr Thompson gave him the

assurances he sought.

[28]     Mr Thompson does not agree with everything that Mr Williams says, but in a summary judgment application, I cannot resolve this conflict in the evidence.  What Mr Williams says cannot be dismissed as implausible.   Instead I assume that   he may be believed in a defended hearing.

[29]     Some of what Mr Williams says did lead to a binding agreement. That was the new loan agreement of February 2010 for drawdowns of up to $2,350,000 to be made. The drawdowns from February to May 2010 totalling $394,500 followed.

[30]     The evidence also shows that the parties worked on a written agreement covering other matters in the December 2009 discussion not addressed in the February 2010 loan agreement and guarantee.  The defendants’ lawyers submitted an outline draft in February 2010.  Later in early May 2010 the plaintiff’s lawyers sent a more extensive draft.   The parties did not get to a full written and signed agreement. One point of difference was that the defendants were wary of accepting milestones proposed by the plaintiff.

[31]     Other differences grew.  Mr Williams’ evidence has complaints about delay in drawdowns and changes in the plaintiff’s management.   He suggests that the plaintiff no longer had funds for the development.   On its side, the plaintiff was concerned to keep an eye on the development and arranged for the appointment of its own quantity surveyor to check the costs to completion.  It complains of a lack of co- operation by Huka Ltd.   While there were discussions and communications aimed at finding a way forward, the plaintiff allowed no more drawdowns after May 2010 and began this proceeding in July 2010.

[32]     The discussion in December 2009 Mr Williams refers to in his affidavit did not result in an immediate binding agreement.   The plaintiff referred to the three potential positions that might arise, described in Masters v Cameron (1954) 91 CLR

353 at 360:

Where parties who have been in negotiation reach agreement upon terms of a contractual nature and also agree that the matter of their negotiation shall be dealt with by a formal contract, the case may belong to any of three classes. It may be one in which the parties have reached finality in arranging all the terms of their bargain and intend to be immediately bound to the performance of those terms, but at the same time propose to have the terms restated in a form which will be fuller or more precise but not different in effect. Or, secondly, it may be a case in which the parties have completely agreed upon all the terms of their bargain and intend no departure from or addition to that which their agreed terms express or imply, but nevertheless have made performance of one or more of the terms conditional upon the execution of a formal document. Or, thirdly, the case may be one in which the intention of the parties is not to make a concluded bargain at all, unless and until they execute a formal contract.

[33]     The discussions in December 2009 fall in the third class.   Mr Williams’ statement that documentation was to follow points to that.   His description of the discussions shows at best a concept for an agreement, but does not contain enough

detail  to  make  the  matters  discussed  legally  enforceable.    As  an  example,  the proposal that the defendants would later be released from liability was to depend on certain conditions being satisfied, but the detail of those conditions was not clearly and adequately set out.   Time for completing the development, mechanisms for deciding on time and prices for sale and the like were not addressed and could not be implied.   There was only a general proposal.

[34]     As the plaintiff and the defendants did not enter into an enforceable contract in the terms alleged by the defendants, the defendants cannot oppose the plaintiffs’ claim on the grounds of a contract made in December 2009.

[35]     From at least December 2009, and perhaps earlier than that, the parties did discuss ways forward, although their discussions did not lead to a concluded agreement.  During that time the parties entered into the further loan agreement of February 2010.  Drawdowns were made up to the end of May 2010.  The phase of discussion and negotiation ran at least until the end of May 2010.  Until May 2010 the plaintiff took no steps to enforce the loan that had already fallen due under the extended July 2007 agreement.

[36]    The defendants rely on the discussion of December 2009, and the later negotiations and drawdowns under the February 2010 loan agreement, to argue for an equitable estoppel preventing the plaintiff from enforcing its rights under the loan agreement and guarantee of July 2007. They cite the elements of estoppel set out in Andrew Butler (ed) Equity and Trusts in New Zealand (2nd ed, Brookers, Wellington,

2009) at [19.2]:

a)       A belief or expectation has been created or encouraged through some action, representation, or omission to act by the party against whom the estoppels is alleged;

b)The belief or expectation has been relied on by the party alleging the estoppel;

c)        Detriment will be suffered if their belief or expectation is departed from; and

d)It would be unconscionable for the party against whom the estoppel is alleged to depart from the belief or expectation.

[37]     They say that it is now unconscionable for the plaintiff to enforce its rights to require repayment of the loan that has fallen due, given the assurances alleged in December 2009.  Presumably the detriment lay in wasted expenditure and effort in drawing more funds under the February 2010, and continuing work on the Huka site.

[38]     Estoppel addresses detriment rather than enforcing promises. See for example

Krukziener v Hanover Finance (2008) 19 PRNZ 162 at [38]:

Following the decisions of the High Court of Australia in Waltons Stores (Inter State) Ltd v Maher (1988) 164 CLR 287 and The Commonwealth of Australia v Verwayen (1990) 170 CLR 394, promissory estoppel is no longer confined to promises affecting pre-existing rights. However, the departure from a voluntary promise is not unconscionable in itself, even if a detriment results. Rather, equity responds to the defendant creating or encouraging an assumption in the plaintiff, and its knowledge that the plaintiff relied on the assumption to its detriment. The plaintiff must have been led to believe that the promise would affect or result in legal relations; thus a promise made in negotiations that are subject to contract will not lead to an estoppel: Waltons Stores at 406 and 422. Lastly, equity does not intervene to satisfy the promise, but to avoid the detriment. These requirements and the current authorities, as the High Court recognised, are seen as necessary to preserve the law of contract as the principal mechanism for the enforcement of promise.

[39]     The plaintiff had a short effective response to the estoppel argument.   It referred to clause 15.9 of the loan agreement of July 2007:

No failure or delay by the Lender in exercising, or single or partial exercise, of any right, power, discretion, remedy or privilege in connection with this Agreement or the Security Documents shall operate as a waiver of that right, power, discretion or remedy.  No course of dealing between the Borrower or Guarantor and the Lender shall operate as a waiver of any right, power, discretion, remedy or privilege of the Lender.

[40]     Under  the  first  sentence,  delay  by  the  plaintiff  in  enforcing  the  loan agreement does not stand in the way of it now enforcing the loan agreement of July

2007.  Under the second sentence a course of dealing between the parties does not

prevent enforcement of the loan.   The provision leaves open the possibility that a single transaction, not amounting to a course of dealing, may amount to a waiver.  In this case the negotiations, February loan agreement and later drawdowns are a course of dealing and more than a single transaction.  The plaintiff is entitled to rely on 15.9 to counter the defendants’ estoppel argument.  Whatever expectations may have been aroused by the discussion of December 2009 and the later negotiations and advances they  did  not  take  away  the  plaintiff’s  right,  protected  under  15.9,  to  enforce repayment of the July 2007 loan agreement.

[41]     The plaintiff made demand on 11 May 2010 for $9,106,288.05.  The demand alleged breach of the February 2010 agreement.  It cannot be read as a demand for funds that had fallen due under the July 2007 agreement.  Later in May 2010, Huka Ltd received the last drawdown. While the plaintiff was still prepared to advance more funds, the defendants may have believed that the plaintiff would not take further steps.   The defendants’ lawyer sought assurance on the point.   A string of emails between the parties’ lawyers from 31 May 2010 to 9 June 2010 was put in evidence.   Emails from the plaintiff’s lawyers of 4 June and 9 June 2010 made it clear that the demand would not be withdrawn.  Whatever the defects in the demand, the defendants knew that the plaintiff was keeping alive its rights to enforce its agreements.  This proceeding can hardly have come as a surprise to the defendants.

[42]     The defendants’ submissions did not focus on the misrepresentation ground. The alleged misrepresentations took place in the December 2009 discussion.  That was after the July 2007 loan had fallen due.  Allegations of misrepresentation might be considered as forming part of the estoppel, already dealt with above.  The alleged misrepresentations do not give a stand alone defence to the plaintiff’s right to be repaid under the 2007 agreement.

[43]     The plaintiff has established that the defendants do not have any arguable defence to its claim for repayment of moneys lent under the 2007 agreement.  It is entitled to solicitor-client costs.

[44]     I make these orders:

a)       The plaintiff recovers judgment against all the defendants for the sum of $8,528,743.28, plus interest at 24% per annum compounded monthly from 31 January 2010 to the date of judgment;

b)The plaintiff is entitled to costs on a solicitor-client basis.  It is to file a memorandum setting out the costs sought.  The defendants may file a memorandum in response within 3 working days of service;

c)       If the plaintiff wishes to pursue its claim for the balance of the sums claimed in the statement of claim, it is to file a memorandum advising accordingly.  The Registrar is arrange a telephone case management

conference for further directions to be given.

R M Bell

Associate Judge