Steel & Tube Holdings Limited v Norkett HC Wellington CIV-2010-485-1893
[2010] NZHC 2382
•10 December 2010
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2010-485-1893
BETWEEN STEEL & TUBE HOLDINGS LIMITED Plaintiff
ANDGAIL LOUISE NORKETT First Defendant
ANDTREVOR ROBERT NORKETT Second Defendant
Hearing: 26 November 2010
Appearances: J. Langford - Counsel for Plaintiff
No appearance for First Defendant
T.R. Norkett - Second Defendant in person (assisted by D. Crombie his accountant).
Judgment: 10 December 2010 at 2.30 pm
JUDGMENT OF ASSOCIATE JUDGE D.I. GENDALL
This judgment is delivered by Associate Judge Gendall on 10 December 2010 at 2.30 pm under r 11.5 of the High Court Rules.
Solicitors: Hesketh Henry, Lawyers, Private Bag 92093, Auckland
STEEL & TUBE HOLDINGS LIMITED V GL NORKETT AND ANOR HC WN CIV-2010-485-1893 10
December 2010
Introduction
[1] Before the Court is an application by the plaintiff for summary judgment against the first defendant and the second defendant.
[2] The first defendant has apparently been adjudicated bankrupt and the plaintiff has abandoned its summary judgment application against her.
[3] The only application which proceeded before me was the summary judgment application against the second defendant.
[4] That application seeks summary judgment for the sum of $311,678.94 under a guarantee executed by the second defendant in favour of the plaintiff for goods and services supplied under the plaintiff’s normal terms and conditions of trade to Life Safety Services (2001) Limited (in liquidation).
[5] The application is opposed by the second defendant. In his opposition and his affidavit evidence provided to the Court the second defendant effectively raises a single defence. This defence is, that the guarantee is invalid because the second defendant lacked capacity when he signed the guarantee or alternatively that he was induced to sign the guarantee on which the plaintiff relies as a result of economic duress.
Background Facts
[6] On 6 April 2010 the second defendant signed the written guarantee in favour of the plaintiff for payment of the trading debts incurred by Life Safety Services (2001) Limited. This requirement for a personal guarantee it seems was in accordance with the standard terms of trade between the plaintiff and Life Safety Services (2001) Limited as its customer.
[7] Under the guarantee, the second defendant unconditionally and irrevocably guaranteed the plaintiff the due and punctual payment of all sums at that time or in the future due to the plaintiff by the company Life Safety Services (2001) Limited.
[8] The sole shareholders of Life Safety Services (2001) Limited were the first defendant and the second defendant. The second defendant was the sole director of the company.
[9] Life Safety Services (2001) Limited had been incorporated to operate a business installing and servicing fire protection systems in commercial buildings. The company apparently traded successfully in the Wellington area for a number of years but encountered financial difficulty some time during 2009/2010 and was placed into liquidation on 28 June 2010 by a special resolution of the shareholders.
[10] At that point, Life Safety Services (2001) Limited had substantial indebtedness to the plaintiff. On 27 July 2010 written demands were sent by the plaintiff to the first and second defendants pursuant to their guarantees demanding payment of the sum of $311,678.94. This represented the amount outstanding from Life Safety Services (2001) Limited which was now in liquidation to the plaintiff under its terms of trade.
[11] Despite these demand letters, both the first defendant and the second defendant have failed to pay this amount and the plaintiff is now seeking summary judgment against the second defendant for this sum.
Counsel’s Arguments and My Decision
[12] As I have noted the application before me is one for summary judgment whereby pursuant to r 12.2 High Court Rules the plaintiff is required to show that the defendant has no defence to the claim made against him – Pemberton v Chappell (1987) 1 NZLR 1.
[13] Recently, the Court of Appeal in Krukziener v Hanover Finance Ltd [2008] NZCA 187; [2010] NZAR 307 has set out the accepted principles to be applied in summary judgment applications in some detail:
[26]The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1
NZLR 1; (1986) 1 PRNZ 183 (CA), at p 3; p 185. The Court must be left
without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Yong v Letchumanan [1980] AC 331; [1979] 3 WLR
373 (PC), at p 341; p 381. In the end the Court's assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ
84 (CA).
[14] In the present case, the second defendant does not dispute in any way that he entered into the 6 April 2010 guarantee in question in favour of the plaintiff. Nor does he contest that the sum of $311,678.94 owing to the plaintiff by his company Life Safety Services (2001) Limited (in liquidation) is covered by the guarantee if it is found to be valid.
[15] As I have noted, the only defence effectively advanced by the second defendant here is a challenge to the guarantee on the basis that first, he lacked capacity to sign the guarantee at the time it was executed or secondly and alternatively, that he was induced to sign the guarantee as a result of economic duress.
[16] I now turn to consider the principles to be applied by this Court in considering those two defences.
Incapacity of a Guarantor
[17] Contractual incapacity of a guarantor is generally relevant in determining whether a contract should be set aside as an unconscionable bargain. In Contractors Bonding Ltd v Snee [1992] 2 NZLR 157, the Court of Appeal found that Mrs Snee, who had signed a guarantee, was under a special disability at the time of entering into this contract due to impairment of her mental capacity resulting in a defective understanding of her affairs and of the transactions. However, there was no equitable fraud, as the lender could not have been expected to be aware of her incapacity.
[18] The Court of Appeal referred to the following passage in Nichols v Jessup
[1986] 1 NZLR 226 at 235 as a summary of the applicable principles:
The equitable jurisdiction to set aside unconscionable bargains is not a paternal jurisdiction protecting or assisting those who repent of foolish undertakings. It is a jurisdiction protecting those under a disadvantage from those who take advantage of that fact; equity looks to the conduct of the stronger party. But, at least in its antipodean statement, a party may be regarded as unconscientious not only when he knew at the time the bargain was entered into that the other suffered from a material disability or disadvantage and of its effect on that other, but also when he ought to have known of that circumstance; when a reasonable man would have adverted to the possibility of its existence. This is, practically, to import the archetype of the common law. It is not new for it was ever the case about constructive notice in equity. If the circumstances are such as fairly to lead a reasonable man to believe that another is under some serious disadvantage affecting his ability to protect himself he is bound to make inquiry and will be taken to know whatever such inquiry would have disclosed.
[19] In Gustav & Co Ltd v Macfield Ltd CA168/05, 24 May 2007, the Court of Appeal set out the following principles as being relevant to a claim of unconscionability (the decision was appealed, but the Supreme Court did not dispute this summary of principles):
[30]We do not propose to analyse these authorities in detail. Rather, we derive the following principles from them. The principles stated are not exhaustive, but are sufficient for the purposes of this case.
1.Equity will intervene to relieve a party from the rigours of the common law in respect of an unconscionable bargain.
2. This equitable jurisdiction is not intended to relieve parties from “hard” bargains or to save the foolish from their foolishness. Rather, the jurisdiction operates to protect those who enter into bargains when they are under a significant disability or disadvantage from exploitation.
3. A qualifying disability or disadvantage does not arise simply from an inequality of bargaining power. Rather, it is a condition or characteristic which significantly diminishes a party’s ability to assess his or her best interests. It is an open-ended concept. Characteristics that are likely to constitute a qualifying disability or disadvantage are ignorance, lack of education, illness, age, mental or physical infirmity, stress or anxiety, but other characteristics may also qualify depending upon the circumstances of the case.
4. If one party is under a qualifying disability or disadvantage (the weaker party), the focus shifts to the conduct of the other party (the stronger party). The essential question is whether in the particular circumstances it is unconscionable to permit the stronger party to take the benefit of the bargain.
5. Before a finding of unconscionability will be made, the stronger party must know of the weaker party’s disability or disadvantage and must “take advantage of” that disability or disadvantage.
6. The requisite knowledge may be that of the principal or an agent, and may be actual or constructive. Factors associated with the substance of a transaction (for example, a marked imbalance in consideration) or the way in which a transaction was concluded (for example, the failure of one party to receive independent advice in relation to a significant transaction) may lead to a finding that the stronger party had constructive knowledge. So, in the particular circumstances the stronger party may be put on enquiry, and in the absence of such enquiry, may be treated as if he or she knew of the disability or disadvantage.
7.“Taking advantage of” (or victimisation) in this context encompasses both the active extraction and the passive acceptance of a benefit. Accordingly, as Tipping J said in Bowkett at 457, an unconscionable victimisation will occur where there are:
… circumstances which are either known or which ought to be known to the stronger party in which he has an obligation in equity to say to the weaker party: no, I cannot in all good conscience accept the benefit of this transaction in these circumstances either at all or unless you have full independent advice.
8. If these conditions are met, the burden falls on the stronger party to show that the transaction was a fair and reasonable one and should therefore be upheld.
Duress
[20] The principles relating to duress (and, in particular, economic duress) were recently summarised by Associate Judge Bell in APN New Zealand Ltd v Scott HC Auckland CIV-2009-404-8544, 1 July 2010, where the defendant argued that he was induced to sign the guarantee on which the plaintiffs relied as a result of economic duress. The question was whether the pressure applied by the plaintiffs in that case was legitimate. Associate Judge Bell noted:
[35] In McIntyre v Nemesis DBK Ltd [2009] NZCA 329, [2010] 1 NZLR 463 at
[20], the Court of Appeal said:
Duress involves two fundamental elements, as identified by Lord Scarman in Universe Tankships Inc of Monrovia v International Transport Workers Federation [1983] 1 AC 366 at 400. First, there must be the exertion of illegitimate pressure on a victim. Secondly, the imposition of that pressure must have compelled the victim to enter the contract. These were the elements endorsed by the Privy Council in Attorney-General for England and Wales v R [2004] 2 NZLR 577 at [15], and by this Court in Haines v Carter [2001] 2 NZLR 167 at [108] and [112].
[36] In Dimskal Shipping Co. S.A. v I.T.F.[1992] 2 AC 152 (HL) at 165, Lord Goff said that under economic duress the pressure must constitute a significant cause inducing the party to enter into the relevant contract. This has sometimes been termed a “but for” test – Huyton v Cremer [1999] 1
Lloyd’s Rep 620 at 636 per Mance J.
[38]In cases of economic duress, it is not necessary to show that the contracting party’s will is overborne, so that there is an absence of consent. Instead it is accepted that the contracting party has consented to enter into the contract, but has done so under coercion. See Lord Scarman in Universe Tankships at 400, cited by the Court of Appeal in McIntyre at [66]:
The classic case of duress is, however, not the lack of will to submit but the victim’s intentional submission arising from the realisation that there is no other practical choice open to him.
[41] But to establish that the defence is arguable, there is another limb of the defence –
that the pressure exerted was illegitimate.
[21] Associate Judge Bell then went on to determine the meaning of “illegitimate”. The Court of Appeal in McIntyre v Nemesis DBK Ltd [2010] 1 NZLR 463 emphasised that “the fact that one party to a contract has exerted pressure on the other does not, on its own, amount to duress” (at [26]). He noted that the bounds of legitimate pressure are still being established case by case, and went on to find that, in the case before him, the refusal by the plaintiff to do further work for the customer unless the defendant signed the guarantee, did not constitute illegitimate or unlawful pressure.
[22] Turning now to consider the first aspect of the second defendant’s defence based upon incapacity in signing the guarantee, the evidence before the Court advanced for the second defendant takes three forms:
(a) The affidavit from the second defendant himself filed 2 November
2010 which attaches a signed letter stating in part:
I was recovering from a severe mental illness up to December 2009. and
During this time, my presence and injury was hidden from everyone but my family and one work colleague who covered for me.
and
I sincerely believe that the company (Life Safety Services (2001) Limited) went into liquidation for a number of reasons well beyond my control relating to financial distress and these were not normal to business conditions.
and
I firmly believe that this demand should be declared null and void,
as at the time I signed it, I was not a fit and capable person to make prudent business decisions ....
(b)A submission from Mr David Crombie the second defendant’s chartered accountant to the Court at the hearing on 26 November 2010 that:
I think Trevor Norkett was unfit and unwell at the time he signed the guarantee in favour of the plaintiff.
Significantly, in the detailed affidavit Mr Crombie swore and filed in this proceeding on 15 November 2010, he does not appear to refer in the body of that affidavit to the second defendant’s health or mental condition.
(c) The further affidavit of the second defendant sworn and filed on 15
November 2010, which attached (but did not exhibit) a letter from Dr George Matthew, a consultant psychiatrist in Lower Hutt. In this further affidavit, the second defendant deposed:
(3) I ended up in a mental hospital in Christchurch in December 2008, came back with the intention of stepping away from the company, due to the position I was in I was sucked into the same role again, David (Crombie) and I could see the company was in a lot of trouble, thinking about it now we should have pulled the pin back at the start.
[23] And in the 9 November 2011 letter from the consultant psychiatrist Dr George Matthew which was not exhibited to the affidavit but merely attached, Dr Matthew states without more:
This is to certify that Mr Norkett Trevor (sic) is getting psychiatric treatment from our service. Mr Norkett had undergone inpatient treatment at Ashburn Hall, Dunedin. He suffers from anxiety and depression and takes his medication.
[24] As I have noted above the guarantee in question was signed by the second defendant on 6 April 2010. There seems to be no argument that at that time the second defendant was receiving medication and treatment for anxiety and depression.
It appears, however, that he had long since come out of Ashburn Hall, and in his own words outlined in the 2 November 2010 affidavit, the second defendant confirms:
I was recovering from a severe mental illness up to December 2009.
[25] The three line letter from Dr George Matthew, the consultant psychiatrist noted at para [23] above was provided by the second defendant to this Court in response to a direction made in a Minute I issued on 8 November 2010 that:
The second defendant was to have to 15 November 2010 to file and serve a further affidavit with his signalled psychiatrist’s report.
[26] The letter from Dr Matthew, although helpful, could hardly be described as a “psychiatrist report”. And neither does this letter assert that the second defendant was under severe disability or lacked capacity when he signed the guarantee in April
2010.
[27] And importantly here, the authorities appear to establish that not only must the second defendant have been under some form of disability or incapacity when the guarantee was signed to constitute it unconscionable to enforce it at the time, but the creditor party (in this case the plaintiff) must also have known that the guarantor suffered from a material disability or ought to have known of that circumstance when a reasonable person would have adverted to the possibility of its existence – Nicholls v Jessop [1986] 1 NZLR 226 at 235.
[28] In the present case, even if it could be established that the second defendant’s anxiety and depression condition at the time he signed the guarantee was such that he must be considered to lack capacity, there is no evidence of any kind before the Court to suggest that the plaintiff either knew or ought to have known of this.
[29] And, in any event in my view there is nothing before the Court here which comes near to establishing incapacity on the part of the second defendant when he signed the guarantee in April 2010. Clearly from the evidence he had professional and family assistance at the time and he has outlined in his evidence what I consider to be cogent and carefully thought-out commercial reasons why the guarantee was signed at that point.
[30] I reject any suggestion of incapacity here such that the guarantee should be set-aside as an unconscionable bargain.
[31] Turning now to the second argument raised by the second defendant, that of duress, again in my view there is nothing before the Court which comes near to establishing that the second defendant was induced to sign the guarantee on which the plaintiff relies as a result of economic duress or illegitimate pressure.
[32] Factors which I considered to be relevant on this legitimacy or duress question are:
(a)In his evidence, the second defendant has outlined reasons why he signed the guarantee in April 2010. Those reasons seem to me to be entirely rational and to be based upon sound commercial judgment.
(b)Although the second defendant states that he did not like being requested to sign the guarantee and did not wish to do so, he was aware that those sound commercial considerations required the guarantee to be signed to enable his company Life Safety Services (2001) Limited to continue trading so that a going concern sale could hopefully be achieved.
(c)On the evidence advanced by both the second defendant and Mr Crombie, it was clear at the time that the second defendant was adamant that his company would continue trading. This was first, to complete contracts including a large Inland Revenue Department commercial building contract in Wellington at the time, secondly to maintain continued employment for staff and thirdly to pursue a going concern sale to hopefully secure ongoing employment for those staff and indeed the second defendant himself. As it turns out, this was actually what occurred. The second defendant has since operated as Chief Executive of the new company which has purchased the business).
(d) Generally, it is accepted that so long as a supplier such as the plaintiff here does not breach its terms of trade contract, the law recognises and upholds its right to refuse to provide further supply when product supplied in the past has not been paid for. That is a normal and important commercial protection and it is clearly not an abuse of that right to request security for payment for past and ongoing supplies by way of guarantee or otherwise as a condition for further supplies. This was recognised in the APN New Zealand Limited case.
(e)The second defendant does not dispute here the sum claimed from him by the plaintiff. No submission was made before me that any dispute ever existed as to the amount claimed, and it could not be said that pressure was applied by the plaintiff to obtain payment for something that was not in fact due in this case.
(f)Whilst I have little doubt that the second defendant may have felt he was pushed into a corner by the plaintiff to provide the guarantee in April 2010, he did so as Managing Director of the company and as one of the only two sole shareholders his wife being the other. Sound commercial reasons were acknowledged for the provision of the guarantee to enable the company to continue trading.
[33] Under all these circumstances I am satisfied that any pressure that may have been applied by the plaintiff on the second defendant to have the guarantee signed in April 2010 was legitimate and lawful.
[34] For these reasons, I find that the second defendant has been quite unable to show that he has an arguable defence to the plaintiff’s claim against him. And, it follows in my judgment that the plaintiff has clearly satisfied the onus upon it to establish here that the second defendant has no defence to its claim against him.
Conclusion
[35] The plaintiff’s application against the second defendant succeeds.
[36] I now make the following orders:
(a)The plaintiff is entitled to judgment against the second defendant for the sum of $311,678.94.
(b)As I see no reason why costs should not follow the event in the normal way, the second defendant is to pay the plaintiff’s costs and disbursements on its successful summary judgment application on a solicitor/client basis pursuant to clause 7 of the guarantee document.
(c) Leave is reserved for any party to apply further in the event that additional directions may be required.
‘Associate Judge D.I. Gendall’
0