Stewart v Eversons International Limited (in liq)
[2024] NZCA 602
•18 November 2024 at 11 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA536/2023 |
| BETWEEN | EVAN KERRY STEWART |
| AND AND | EVERSONS INTERNATIONAL LIMITED (IN LIQ) |
| Hearing: | 3 October 2024 |
Court: | Collins, Brewer and Osborne JJ |
Counsel: | R A Hearn and C J Lange for Appellant |
Judgment: | 18 November 2024 at 11 am |
JUDGMENT OF THE COURT
AThe appeal is allowed.
BThe judgment entered on 22 December 2022 is set aside with effect from 22 December 2022.
CThe costs order made in the High Court is quashed and matters of costs and disbursements relating to the proceedings in the High Court are remitted to that Court for determination.
DThe respondents must pay the appellant costs for a standard appeal on a band A basis with usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Osborne J)
A judgment obtained on admission
The appellant, Evan Stewart, provided to the respondents an admission of claim (the admission) pursuant to the terms of a Settlement Deed (Settlement Deed). The respondents subsequently obtained a judgment (the December 2022 judgment) pursuant to the admission under r 15.16 of the High Court Rules 2016 (the HC Rules).[1]
[1]Eversons International Ltd (in liq) v Stewart [2022] NZHC 3616 [December 2022 judgment].
Mr Stewart’s subsequent application for an order under r 15.16(5) of the HC Rules setting aside the 2022 judgment was dismissed (the August 2023 judgment).[2]
[2]Eversons International Ltd (in liq) v Stewart [2023] NZHC 2325 [August 2023 judgment].
Mr Stewart appeals the August 2023 judgment. He asserts preconditions to the respondents’ filing or using the admission had not been satisfied when the respondents filed the admission and sought judgment.
Extension of time
Mr Stewart filed his notice of appeal in time but served it late. This Court granted him an extension of time to appeal.[3] That led the Court to set out the general background. In the following segment of this judgment, we substantially reproduce that background, with some additional details.
The admission and the litigation over it
Mr Stewart/the company
[3]Eversons International Ltd (in liq) v Stewart [2024] NZCA 104.
Mr Stewart was the sole shareholder and director of the first respondent, Eversons International Ltd (Eversons). It imported and sold synthetic “legal high” products. Its business was very profitable until the law was changed in May 2014 to ban the sale of such products. The business was lost. Mr Stewart placed the company into liquidation in April 2018 by a special resolution as shareholder, following a demand by the Commissioner of Inland Revenue (the CIR) for the payment of tax arrears.
A liquidator was appointed. On 30 January 2020, the liquidator resigned and the first named second respondent, Elizabeth Keene (together with Vivian Fatupaito), was appointed as a liquidator. On 11 March 2022, Ms Fatupaito resigned and the second named second respondent, Luke Norman, was appointed as a liquidator in her stead.
The liquidators investigated Eversons’ affairs and reconstructed its accounts. They identified payments in excess of $2 million they considered had been made to or for the benefit of Mr Stewart which had not been debited to his shareholder current account.
Proceeding CIV-2020-409-192
The liquidators filed proceeding CIV-2020-409-192 against Mr Stewart seeking to recover $2,074,876 said to be owing in respect of his overdrawn current account, as well as the unpaid tax owing by Eversons to the CIR, alleging breach by Mr Stewart of various of his duties as a director of Eversons.
The liquidators sought summary judgment in respect of Mr Stewart’s liability in relation to the overdrawn current account. Their claim for summary judgment was dismissed by Associate Judge Paulsen in December 2020.[4] The Judge was not satisfied that there was no arguable defence to the claim. He also expressed the view that there might be a potential limitation defence.[5]
[4]Eversons International Ltd (in liq) v Stewart [2020] NZHC 3188.
[5]At [41] and [63].
Mr Stewart had filed a statement of defence to the liquidators’ statement of claim. An amended statement of claim was then filed by the liquidators and Mr Stewart filed a statement of defence to this amended pleading as well.
The trial of the proceeding was due to commence on 29 August 2022.[6] However, in early August 2022, the matter settled, and a “Settlement Deed” was entered into between the parties. The terms of the Settlement Deed were summarised by Churchman J in the August 2023 judgment as follows:[7]
The relevant provisions of the Settlement Deed provided:
(a)the Company, liquidators and Mr Stewart agreed to settle all outstanding matters among them on the terms set out in the Settlement Deed;
(b)Mr Stewart agreed to pay the settlement sum of $1,000,000 to the liquidators by instalments;
(c) Mr Stewart was to procure the owners of a property situated [in] … Burnside, Christchurch (the Property) to pay the Liquidators an amount not exceeding $300,000 from the net proceeds of sale of the Property, after deduction of amounts payable to the mortgagee and the reasonable costs of sale and settlement;
(d) if the sale of the Property had not settled by 1 November 2022, then Mr Stewart was to pay $100,000 to the Liquidators as part of the settlement sum;
(e) Mr Stewart was to complete an admission of claim and acknowledgement of debt in the sum of $2,000,000 in the Liquidators’ proceeding. The admission was not to be filed unless there was a default under the Settlement Deed and a default notice served and not complied with;
(f) Mr Stewart agreed that he would not bring any claim against the Company or any claim against the Liquidators, their staff or agents, in respect of any matter arising in relation to the Company and its liquidation;
(g) the Liquidators’ proceeding was to be adjourned and, provided Mr Stewart complied with his obligations under the Settlement Deed, the proceeding would be discontinued.
[6]This is the date referred to by both Mander J in Eversons International Ltd (in liq) v Stewart CIV‑2020‑409‑192, 27 February 2023 (Minute of Mander J), and Nation J in the December 2022 judgment, above n 1, but we note the Settlement Deed refers to 9 August 2022.
[7]August 2023 judgment, above n 2, at [14].
The admission (in the sum of $2,000,000) was signed by Mr Stewart. The proceeding was then adjourned to a nominal date so the remaining settlement terms could be implemented. There was some delay and, following a joint request from the parties, the proceeding was further adjourned, this time to 12 December 2022.
On 9 December 2022, the liquidators filed a memorandum asserting that the Settlement Deed had not been complied with by Mr Stewart. They sought judgment pursuant to the admission in the sum of $1,720,000 (representing the $2,000,000 recorded in the admission, less $280,000 which had been paid by Mr Stewart). The Settlement Deed was attached to the memorandum. So was a notice of default the liquidators had sent to Mr Stewart on 28 November 2022 (the second default notice).
The memorandum was placed before Nation J and it was called in the duty judge list on 12 December 2022. Counsel for the liquidators then asked that judgment be entered on the admission pursuant to r 15.16(1) of the HC Rules. Mr Stewart, through his then counsel, opposed the entry of judgment. Counsel asserted Mr Stewart was not in default under the Settlement Deed. He was not however in a position to make submissions on the issue, and sought an adjournment so Mr Stewart could provide evidence he was not in default.
December 2022 judgment
Nation J reserved his judgment. It was issued on 22 December 2022.[8] The Judge did not expressly deal with the application for the adjournment. Rather he referred to the Settlement Deed, noting it permitted the respondents to file the admission if Mr Stewart defaulted under the Settlement Deed. The Judge did not discuss the default alleged by the liquidators. Rather, he recorded that a notice of default had been served and that Mr Stewart had been given five working days to remedy the default. He discussed r 15.16 of the HC Rules and relevant authorities. He then entered judgment for the respondents in the sum of $1,720,000 under r 15.16(1).[9] The Judge noted Mr Stewart could protest the sealing of the judgment by filing an application under r 15.16(5). The Judge directed that if Mr Stewart wished to do so, he should file an application, together with a supporting affidavit, by 27 January 2023.[10] He further directed the proceeding to be called in the duty judge list on 13 February 2023 to deal with any application filed.[11]
Litigation progress in 2023
[8]December 2022 judgment, above n 1.
[9]At [43] and [48].
[10]At [50].
[11]At [51].
On 27 January 2023, Mr Stewart filed an affidavit but not an application. The proceeding was called before Dunningham J on 13 February 2023. She was prepared to treat the affidavit as if it were an application, but only if a formal application was filed within seven days and Mr Stewart paid the next instalment of $80,000 due under the Settlement Deed (which he said he had complied with and which he wanted to keep on foot).[12]
[12]Eversons International Ltd (in liq) v Stewart CIV-2020-409-192, 13 February 2023 (Minute of Dunningham J).
Mr Stewart made a further payment of $80,000 and he filed a formal application under r 15.16(5) of the HC Rules. He also informed the Court he was filing charges against the liquidators in the District Court by way of a private prosecution. He wanted to adjourn his application under r 15.16(5) while those charges proceeded.
On 20 February 2023, the proceeding came before Dunningham J again. Mr Stewart was directed to, inter alia, provide the liquidators’ counsel with copies of the District Court charges.[13] Mr Stewart did not comply with this direction.
[13]Eversons International Ltd (in liq) v Stewart CIV-2020-409-192, 20 February 2023 (Minute of Dunningham J).
On 27 February 2023, Mr Stewart was again directed by the Court, this time by Mander J, to provide the following by 13 March 2023:
(a)details of the charges which Mr Stewart said he had filed in the District Court; and
(b)copies of the settlement statement for the sale of a property situated in Burnside, Christchurch (the Property), and other documents showing how the proceeds of sale had been paid or dispersed.[14]
[14]Minute of Mander J, above n 6, at [6].
Mr Stewart reiterated he wanted his r 15.16(5) application to be adjourned, while the charges proceeded in the District Court.
Mr Stewart did not comply with Mander J’s directions. He also failed to make two further instalment payments due under the Settlement Deed, each of $80,000.
When the proceeding was before Dunningham and Mander JJ, there was some uncertainty as to whether Mr Stewart’s private prosecution in the District Court had been accepted for filing. Both Judges made it clear that if the documents had not been accepted for filing, they could have no relevance to proceeding CIV‑2020‑409‑192. In the event, on 20 April 2023, the Registrar of the District Court was directed by Judge Mabey not to accept any of the charging documents for filing.[15] In so far as we are aware, this decision has not been appealed.
[15]Stewart v KPMG Partners [2023] NZDC 7435.
This development notwithstanding, by application dated 12 May 2023, Mr Stewart applied in the High Court to stay proceeding CIV-2020-409-192. The application was made on the basis that the private prosecution had been filed in the District Court.
Proceeding CIV-2023-409-225
On 12 May 2023, Mr Stewart filed a statement of claim against Ms Keene and KPMG Partners in the High Court. It was allocated number CIV‑2023‑409‑225. Mr Stewart had drafted the statement of claim himself. It was in narrative form. He alleged Ms Keene had falsely attempted to bring claims that had been dismissed by Associate Judge Paulsen. It was claimed that Ms Keene had falsely alleged that Mr Stewart had overdrawn his current account and had falsified records “to bring investments out of statute bar”. Judgment in the sum of $11,055,858.14 was sought, together with interest.
Ms Keene and KPMG Partners applied to strike out the statement of claim.
August 2023 judgment
Both Mr Stewart’s application under r 15.16(5) of the HC Rules in proceeding CIV-2020-409-192 and Ms Keene’s and KPMG Partners’ application to strike out the statement of claim in proceeding CIV-2023-409-225 came before Churchman J in early August 2023.
The Judge discussed the relevant background, in part as set out above. Although it does not seem to have been before him, the Judge referred to Mr Stewart’s application to stay proceeding CIV-2020-409-192. He commented that this application was “self-drafted”, that there were no supporting affidavits, and it made little sense.[16] He also observed it listed KPMG Partners as a party, notwithstanding that KPMG Partners were not a party to proceeding CIV-2020-409-192.[17] Under a heading “[t]he submissions on the stay application”, the Judge summarised Mr Stewart’s submissions and those advanced by the liquidators. The Judge went on to comment that Mr Stewart’s claims of fraud, false accounting and the like in proceeding CIV-2023-409-225 were misconceived and appeared to be based on a misunderstanding of what Associate Judge Paulsen had decided on the summary judgment application.[18] The Judge commented that the reconstruction of the current account balance by the liquidators was an entirely conventional accounting practice.[19]
[16]August 2023 judgment, above n 2, at [25].
[17]At [26].
[18]At [36].
[19]At [37].
The Judge then returned to Mr Stewart’s r 15.16(5) application. He observed that an application under r 15.16(5) is not a “merits review of the decision in question” (presumably the December 2022 judgment) and “Mr Stewart’s liability in terms of the [Settlement Deed] ha[d] been conclusively determined by that decision”.[20] The Judge observed that Mr Stewart had not been able to identify any duty or obligation on the part of the respondents not to enter judgment on the admission. Nor had Mr Stewart been able to point to any information that supported the conclusion the respondents, in entering judgment, had acted fraudulently, unconscionably, or with reckless disregard of his rights.[21] The Judge also recorded Mr Stewart was legally represented at the time he entered into the Settlement Deed and at the hearing before Nation J.[22] He considered the allegations of fraud and the like made by Mr Stewart, made at a time where he was not legally represented, were wholly misconceived.[23] He dismissed Mr Stewart’s application under r 15.16(5) to set aside the December 2022 judgment.[24]
[20]At [38].
[21]At [38].
[22]At [39].
[23]At [40].
[24]At [41].
The Judge also granted Ms Keene’s and KPMG Partners’ strike out application in respect of proceeding CIV-2023-409-225.[25]
The alleged breaches of the Settlement Deed
The relevant clauses
[25]At [65].
The full wording of the admission precondition in the Settlement Deed is as follows:
The Liquidators undertake that the Admission and Acknowledgement of Debt will not be filed or used against Mr Stewart in any way unless there has been a default under this Settlement Deed and a default notice has been served and not complied with.
In relation to a default notice, the Settlement Deed provides:
… The Default Notice must permit the defaulting party the period of 5 Working Days … from the date of service to remedy the default. If the default is remedied within the Default Notice period then no default will be deemed to have occurred under this Settlement Date.
Mr Stewart’s conduct
Mr Stewart paid the first required instalment of $100,000 on 29 August 2022 (four days late).
The sale of the Property was delayed and Mr Stewart did not pay the required $100,000 instalment due on 1 November 2022. The liquidators issued a default notice in relation to that payment (the first default notice). The parties in the following days agreed to vary the terms of the Settlement Deed (the variation) to now require from Mr Stewart:
(a)payment of the 1 November 2022 instalment ($100,000) by 25 November 2022;
(b)payment of a further $80,000 initially due on 8 November 2022 by 25 November 2022;
(c)payment of a $5,026.23 costs award by 25 November 2022; and
(d)provision of an irrevocable authority from the Property owners and a solicitors’ undertaking as to payment of $185,026.63 from proceeds of the sale of the Property.
Mr Stewart provided the irrevocable authority on 10 November 2022. When he did not meet the other requirements of the variation by 25 November 2022, the liquidators on 28 November 2022 issued a further default notice on 28 November 2022 (the second default notice). That notice required Mr Stewart to:
(a)pay the sums of $100,000 and $80,000 due on 25 November 2022; and
(b)provide a statement of flow of funds of the sale proceeds of the Property (flow of funds statement) to enable the liquidators to determine the amount payable from the sale of the Property pursuant to cl 1(b) of the Settlement Deed.
The $300,000 provision in the Settlement Deed did not refer to a flow of funds statement.
On the following day, 29 November 2022, the agreed solicitors’ undertaking was provided to the liquidators and the sale of the Property settled. On the same day, the three sums covered by the variation ($100,000, $80,000, and $5,026.63) were paid to the liquidators.
Mr Stewart did not comply with the requirement of the second default notice for a flow of funds statement. Through his solicitor he asserted defaults under the Settlement Deed had now been remedied and the provision of a flow of funds statement was not an obligation of the Settlement Deed. The liquidators could therefore not impose it as a further condition.
On 7 December 2022, the liquidators issued a third default notice (third default notice). By that notice, the liquidators required “[p]ayment of $300,000 or a settlement statement [(settlement statement)] from the sale of the Property showing the net proceeds”.
As noted, the liquidators on 9 December 2022 filed a memorandum in the High Court seeking judgment under the admission for $1,720,000 on the basis there had been non‑compliance with the second default notice.
Entry of judgment on an admission — the regulatory regime
Under r 15.16(3) of the HC Rules
Rule 15.16(3) of the HC Rules identifies when the recipient of an admission is entitled to seal judgment:
(3)When an admission is filed and served under subclause (1), a party on whom the admission is served may seal judgment on the cause of action admitted, without prejudice to that party’s right (if any) to proceed on any other cause of action.
The situation where the parties have contractually agreed as to the circumstances in which an admission will be used is addressed in the HC Rules by r 15.16(5), which provides:
(5)Any judgment entered on an admission filed and served under subclause (1) may, upon application, be set aside by the court if—
(a)the plaintiff, being under a duty or obligation to the defendant not to enter judgment on the admission, acted contrary to that duty or obligation in entering judgment; or
(b)the plaintiff, in entering judgment, acted fraudulently, unconscionably, or in wilful or reckless disregard of the defendant’s rights.
In short, the Court’s initial entry of judgment upon the admission (as ordered in this case through the December 2022 judgment) can be undone if the defendant establishes the respondents acted contrary to a duty or obligation not to enter judgment in the particular circumstances.
Mr Stewart represented himself on his application to set aside the December 2022 judgment. In doing so, he did himself no favours as he adopted a scattergun approach to his grounds of application, reflected in the Judge’s summary of Mr Stewart’s submissions.[26]
[29]Mr Stewart does not challenge the terms of the Settlement Deed. Instead, he advances the proposition that he is entitled to disregard it:
Because I was worn down by this litigation, I was given and took bad advice from my previous counsel to capitulate and acquiesce on the pretence that I put this issue behind me and move on.
[30] In his written submissions in support of the stay application, Mr Stewart repeated the allegations contained in the statement of claim in the CIV‑2023‑409‑225 proceedings … alleging Ms Keene had “used false accounting, fabricated evidence, and (made) false statements for the purposes of extortion by fraud.”
[31] Mr Stewart also claims that he was not in default of his obligations under the [Settlement] Deed. Specifically, in relation to the proceeds of the sale of the Property, he says that there was no surplus therefore he had no obligation to procure the payment of anything.
[32] In oral submissions, Mr Stewart said he had applied for a stay while the criminal charges he said he had filed in the District Court were pending. He did not explain why he had not complied with the direction of Dunningham J to provide details of the District Court charges and copies of the [s]ettlement [s]tatement for the sale of the Property or other documents showing how the proceeds of sale were paid or disbursed.
[26]At [29]–[32].
It is clear from the August 2023 judgment that Mr Stewart did not identify in his submissions in the High Court the issue now identified as the proper focus of this appeal — whether Mr Stewart’s “failure to provide a flow of funds statement” amounted to an unremedied default of the terms of the Settlement Deed, permitting the liquidators to enter judgment on the admission.
Significantly, the submissions presented for the liquidators in opposition to the setting aside application appear to have identified alleged breaches not through Mr Stewart’s failure to provide a flow of funds statement. They instead alleged breaches involving subsequent non-payment of instalments as reflected in this passage of the August 2023 judgment:
[34] Any claim that Mr Stewart was not in breach of his payment obligations under the [Settlement] Deed was untenable. There was no dispute that he had failed to pay the two instalments of $80,000 due on 1 May 2023 and 1 August 2023.
The liquidators’ submissions also relied on Mr Stewart’s failure to comply with the High Court’s 27 February 2023 directions (above at [19(b)])which required Mr Stewart to provide information as to the sale proceeds:
[35] In relation to the breach of the obligation to pay a sum not exceeding $300,000 from the net sale proceeds of the Property, counsel pointed to the fact of Mr Stewart’s failure to comply with the Court’s direction to provide details of what the sale proceeds were and where they went.
We observe that none of the alleged breaches referred to in those summarised submissions could have amounted to an unremedied default of the nature which entitled the liquidators under the Settlement Deed to file or use the admission. Instalments required under the Settlement Deed in May and August 2023 were no longer due as a matter of law — through the entry of judgment in December 2022 all obligations under the Settlement Deed had merged in the judgment.[27] The asserted breach of an obligation to pay funds from the net sale proceeds of the Property was not a matter covered by the second default notice which instead relied relevantly on the failure to provide a flow of funds statement. Mr Stewart’s subsequent failure to comply with the High Court’s direction to provide sale proceeds details may well have provided the liquidators with other remedies, but the failure to comply with court directions did not of itself constitute a default in complying with the terms of the Settlement Deed. It is those default notice requirements, on which this appeal has properly focused, which we now consider.
Submissions
[27]Patrick Keane Spencer Bower and Handley: Res Judicata (6th ed, LexisNexis, London, 2024) at 280.
For Mr Stewart, Mr Hearn submitted the legal position adopted by Mr Stewart’s solicitors in response to the second default notice was correct:
(a)Mr Stewart had remedied within the required five working days the payment defaults identified in the second default notice; and
(b)Mr Stewart had no obligation to provide a flow of funds statement as the provision of such a statement was not an obligation under the Settlement Deed.
Mr Hearn submitted the December 2022 judgment ought to have been set aside pursuant to r 15.16(5)(a) of the HC Rules because the preconditions to the liquidators’ filing or using the admission had not been satisfied. The liquidators therefore had a duty or obligation to Mr Stewart not to enter judgment on the admission.
Mr Hearn, while recognising Mr Stewart’s arguments presented to Churchman J were probably far from clear, submitted the August 2023 judgment was in error in not accepting Mr Stewart’s complaint that he was not in breach of the Settlement Deed.
Mr Hearn submitted the correct outcome in the August 2023 judgment should have been the setting aside of the judgment entered on the admission, given there had been a clear breach of the liquidators’ duty not to enter judgment.
Mr Hearn submitted in that event the High Court costs award should also be quashed and matters of costs in the High Court remitted to that Court to be determined.
Submissions for the respondents
For the respondents, Mr Murray submitted Mr Stewart was in breach of his obligations under the Settlement Deed; the liquidators were not under a duty or obligation not to enter judgment on the admission; and (alternatively in the event such an obligation did exist) the judgment should not be set aside.
Mr Murray submitted Mr Stewart was in breach of the Settlement Deed because:
(a)he failed to procure the Property owners to pay the liquidators an amount not exceeding $300,000 from the net proceeds of sale of the Property (after deduction of identified sums);
(b)Mr Stewart did not provide a flow of funds statement to prove no funds were available for the payment to be made; and
(c)Mr Stewart has not provided the “necessary evidence” to enable determination of the amount to be paid from the proceeds of sale.
Mr Murray submits it cannot be correct that Mr Stewart is heard to say no breach has been established when that is due to his own failure to provide evidence as to the flow of funds.
Mr Murray submitted the liquidators’ requirement through the second default notice for a flow of funds statement was “reasonably required to determine whether an amount [was] payable” following the sale of the Property. He submitted such requirement was recognised by the High Court’s 27 February 2023 directions (above at [19]) requiring Mr Stewart to provide sale proceeds details.
Mr Murray submitted that because Mr Stewart failed to provide relevant documents, the Court should draw an adverse inference that surplus sale proceeds were available and were required to be paid in terms of the Settlement Deed.
Mr Murray further submitted, even if Mr Stewart’s failure to provide a flow of funds statement pursuant to the second default notice did not entitle the liquidators to enter judgment, the liquidators were entitled to enter judgment under the third default notice. That was because Mr Stewart had failed to meet either of the demands in the third default notice (payment of up to $300,000 or provision of a settlement statement).
Finally, Mr Murray addressed the possibility this Court might find judgment should not have been entered on the basis it was. He submitted, notwithstanding this, the December 2022 judgment should not be set aside because Mr Stewart should not be heard to say, on the one hand, he was not obliged to make payments because of the judgment when on the other hand the very purpose of the r 15.16(5) application was to have the judgment set aside.
Mr Murray referred to Mr Stewart’s subsequent “failure” to make instalment payments of over $700,000 that would represent the “unpaid instalment payments due”. He submitted that means, if the December 2022 judgment were set aside, the liquidators would be entitled to immediately seek a fresh judgment for those sums. Mr Murray submitted setting aside the December 2022 judgment would therefore serve no purpose unless Mr Stewart can demonstrate an ability to comply with his obligations under the Settlement Deed.
An implied term?
As counsel had not in their written submissions addressed the possibility the High Court might appropriately have implied a term into the Settlement Deed, we invited oral submissions in that regard. To be material, the implied term would have obliged Mr Stewart to provide on request either or both the “flow of funds statement” referred to in the second default notice or the “settlement statement” referred to in the third default notice.
Mr Hearn submitted such terms would not meet at least two requirements for implication of a term.[28] In particular, Mr Hearn submitted the proposed terms are not so obvious that they “go without saying” and they are not necessary to make the contract work (or to give it “business efficacy”).
[28]Implicitly referring to the tests identified by the Privy Council in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 16 ALR 363 (PC) at 376.
Mr Murray submitted the proposed terms (above at [61]) should be implied, and were already “implicit” within the express obligation on Mr Stewart to procure payment from the Property owners under the $300,000 provision. Mr Murray submitted the need for the proposed terms is “commonsense” and the terms are so obvious they must be implied. He submitted the obligation in relation to the $300,000 provision would otherwise be unenforceable.
Analysis
The terms of the Settlement Deed
We begin with express terms of the Settlement Deed, and more particularly, what are not express terms of the Settlement Deed.
The parties in a detailed payment regime did not expressly agree in terms of the $300,000 provision that Mr Stewart was obliged to provide either a “settlement statement” or a “flow of funds statement”.
The parties did expressly provide for a payment by Mr Stewart himself ($100,000) as a part payment of the settlement sum in the event the sale of the Property was not settled by 1 November 2022. They further provided that Mr Stewart would top up any sum less than $100,000 paid by the Property owners from any settlement prior to 1 November 2022 and for the payment of the outstanding balance of the $1,000,000 settlement sum in minimum quarterly amounts (beginning on 8 November 2022 and concluding on 1 February 2025).
If the liquidators’ reliance on an unremedied default were to succeed or fail on the express terms of the Settlement Deed, it must fail. That is because:
(a)pursuant to the second default notice, Mr Stewart remedied within time the stipulated payment defaults and was under no obligation to remedy the demand for a flow of funds statement; and
(b)in terms of the third default notice, Mr Stewart was under no obligation to provide a settlement statement and the liquidators had not established that a demanded sum of up to $300,000 was due and owing.
We therefore turn to consider whether the High Court, if it had been invited to do so, should have implied terms into the contract relating to a settlement statement and/or a flow of funds statement. In considering this, we recognise the liquidator did not oppose the setting aside of the 7 December 2022 judgment by reference to such implied terms — rather, as reflected in the relevant part of the August 2023 judgment (above at [45]),the liquidators’ asserted Mr Stewart had clearly breached his payment obligations (identifying particularly the payments due in May and August 2023). They submitted the relevant failure in relation to the $300,000 provision was “Mr Stewart’s failure to comply with the court’s direction to provide details…”,[29] rather than a failure to comply with a term (express or implied) of the Settlement Deed.
[29]August 2023 judgment, above n 2, at [35].
Turning to the implication of terms into the Settlement Deed, we adopt the six “principal points” governing implication identified by Winkelmann CJ and Ellen France J in Bathurst Resources Ltd v L&M Coal Holdings Ltd:[30]
(a)The legal test for the implication of a term is a standard of strict necessity, a high hurdle to overcome.
(b) The starting point is the words of the contract. If a contract does not provide for an eventuality, the usual inference is that no contractual provision was made for it.
(c) While the task of implication only begins when the court finds that the text of the contract does not provide for the eventuality, the implication of a term is nevertheless part of the construction of the written contract as a whole. An unexpressed term can only be implied if the court finds that the term would spell out what the contract, read against the relevant background, must be understood to mean.
(d) As with the task of interpreting a contract, the inquiry for the court when considering the implication of a term is an objective inquiry – it is the understanding of the notional reasonable person with all of the background knowledge reasonably available to the parties at the time of contract that is the focus of this assessment. The court is tasked with the role of constructing the understanding of that reasonable person.
(e) Thus, the implication of a term does not depend upon proof of the parties’ actual intentions, nor does it require the court to speculate on how the actual parties would have wanted the contract to regulate the eventuality if confronted with it prior to contracting.
(f) The BP Refinery conditions are a useful tool to test whether the proposed implied term is strictly necessary to spell out what the contract, read against the relevant background, must be understood to mean. Whilst conditions (4) [it must be capable of clear expression] and (5) [it must not contradict any express term of the contract] must always be met before a term will be implied, conditions (1)–(3) [it must be reasonable and equitable; it must be necessary to give business efficacy to the contract; and it must be so obvious it goes without saying] can be viewed as analytical tools which overlap and are not cumulative. The business efficacy and the ‘so obvious that “it goes without saying’” conditions are both ways, useful in their own right, of testing whether the implication of a term is strictly necessary to give effect to what the contract, objectively interpreted by the court, must be understood to mean.
[30]Bathurst Resources Ltd v L&M Coal Holdings Ltd [2021] NZSC 85, [2021] NZLR 696 at [116] (footnotes omitted, emphasis in original).
We are not satisfied the proposed implied terms meet the high hurdle standard of strict necessity identified in Bathurst Resources. We reach this conclusion for the following reasons:
(a)The parties themselves did not provide for Mr Stewart’s provision of either a settlement statement or a statement of flow of funds. The starting point inference is therefore that no contractual provision was made for such a requirement.
(b)Mr Stewart was not himself an owner of the Property to be sold, the legal owners being his father and sister. Consequently, it could not be assumed he would himself have access to or control over the information involved. While he was by the Settlement Deed committing himself to procuring payment by the Owners (and thereby accepting the risk he could not do so and would thereby be in default), the proposed implied terms would require Mr Stewart to accept a different, additional risk (that the owners might not upon request supply details in relation to the settlement of the Property sale). He was evidently not asked to accept that risk.
(c)“The business efficacy” and the “so obvious that ‘it goes without saying’” conditions, as useful ways of testing strict necessity, do not themselves require the implication of a term. The structure of the instalment regime under the Settlement Deed was such that full settlement of the $1,000,000 settlement sum was to be achieved by a series of instalments to be completed by 1 February 2025. Specific provisions were made to cover a situation in which the amount paid by the Property owners to the liquidators was less than $100,000, with later instalments proportionately adjusted. The provisions for the satisfaction of the $1,000,000 settlement sum did not become unworkable through Mr Stewart either failing to obtain settlement details from the owners or refusing (if he had them) to pass them on to the liquidators. To the extent the maximum $300,000 net proceeds figure was not paid by the owners to the liquidator (which was already referred by the parties as distinctly possible) it was to be made up through later instalments, with the final instalment due by 1 February 2025. We do not consider it is “so obvious” that “it goes without saying” that Mr Stewart was committing himself to procuring from the owners the settlement details and passing them on to the liquidators.
The burden of establishing that a term should be implied into a contract rests upon the party asserting the implied term. The respondents have not satisfied that burden.
Breach?
Mr Stewart was accordingly not in breach of the terms of the Settlement Deed by failing to provide a flow of funds statement in response to the second default notice, on which the respondents relied in the High Court. To the extent the respondents now seek to alternatively rely on a breach of the stipulated demands in the third default notice that remained unremedied, Mr Stewart’s failure to provide a settlement statement does not represent a breach of a term of the Settlement Deed. As the liquidators have not established there was any particular sum remaining by way of the “net proceeds of settlement”, they have also not established there was a default in relation to any payment under the $300,000 provision.
There is a further fundamental flaw in the respondents’ belated reliance on the third default notice. The notice was issued on 7 December 2022. The respondents applied for entry of judgment on 9 December 2022. As at that date, two working days after the third default notice was issued, the required period of five working days for compliance had not expired. The liquidators were accordingly not entitled to file or use the admission at that point. They cannot rely on the fact Mr Stewart did not comply with the third default notice in the subsequent three working days to regularise their premature use of the admission. Were they to rely on a failure by Mr Stewart to remedy defaults identified in the third default notice they needed to commence a fresh entry of judgment process based on that even after the event required five-day period expired. That difficulty explains why in all the High Court proceedings the liquidators relied on the second default notice alone.
As the liquidators were therefore under a duty or obligation to Mr Stewart not to enter judgment on the admission (whether pursuant to the second default notice or the third default notice), the High Court had power to set aside the December 2022 judgment. The conclusion reached in the August 2023 judgment that an application under r 15.16(5) of the HC Rules was not available, on the grounds the liquidators were not under a duty or obligation to Mr Stewart not to enter judgment on the admission was in error.
Should the judgment be set aside?
It would be in very limited circumstances (if ever) that a court, satisfied under r 15.16(5) of the HC Rules that a plaintiff was under a duty or obligation to the defendant not to enter judgment on an admission but had done so, would find it appropriate to refuse to set aside the judgment so entered. By setting aside the judgment, the Court leaves the plaintiff with its right to properly meet the requirements of the duty or obligation it is subject to before proceeding once again to seek judgment.
Mr Murray’s alternative submissions in support of this Court refusing to set aside the August 2023 judgment rest substantially on the incorrect proposition that, with the passage of time since the August 2023 judgment was issued, Mr Stewart has failed to pay a substantial number of instalments as they have fallen due. The assumption underlying Mr Murray’s submission is incorrect because (as we have noted) by reason of the December 2022 judgment remaining in force (above at [47]), the Settlement Deed for the time being has remained merged in that judgment.
Contrary to Mr Murray’s submission, there is a benefit to Mr Stewart in obtaining an order that the December 2022 judgment be set aside. He will not have been in default in relation to any instalment obligation that would otherwise have accrued in the meantime. That has meaningful consequences for him at least in terms of any liability he otherwise would have incurred in relation to interest on outstanding sums.[31]
Effective date of setting aside
[31]In terms of the Settlement Deed, interest accrued at five per cent per annum on any outstanding sum.
The December 2022 judgment should appropriately be set aside from the date it was issued (22 December 2022) and not with effect from today’s date. For this Court not to order the setting aside in that way would be to render Mr Stewart in breach of the instalment payment terms of the Settlement Deed as if the Settlement Deed was of continuing effect during that period, when the liquidators had by their actions elected to have the obligations under the Settlement Deed replaced by a judgment for the much larger sum identified under Mr Stewart’s admission.
Result
The appeal is allowed.
The judgment entered on 22 December 2022 is set aside with effect from 22 December 2022.
The costs order made in the High Court is quashed and matters of costs and disbursements relating to the proceedings in the High Court are remitted to that Court for determination.
The respondents must pay the appellant costs for a standard appeal on a band A basis with usual disbursements.
Solicitors:
Corcoran French, Christchurch for Appellant
Martelli McKegg, Auckland for First and Second Respondents
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