Strategic Finance Limited v Henderson HC Auckland CIV 2009-409-1731

[2010] NZHC 922

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2009-409-001731

BETWEEN  STRATEGIC FINANCE LIMITED Plaintiff

ANDDAVID HENDERSON Defendant

Hearing:         12 May 2010

Appearances: B M Russell for Plaintiff

A J Forbes QC & K W Clay for Defendant

Judgment:      11 June 2010

JUDGMENT OF ASSOCIATE JUDGE DOHERTY

on application for leave to be heard

Introduction

[1]      Mr Henderson is a friend of Mr Alan Duff.   Duff’s company, Alan Duff Productions Limited, owned land and improvements in Hawke’s Bay (the property). There were significant borrowings secured by way of a number of mortgages over it. Strategic was a lender and a mortgagee.  Duff and his company were in default under one of the mortgages.  Duff was friendly with a senior executive of Strategic.  Duff requested Henderson to assist him in refinancing through Strategic to Duff and/or his company.   Ultimately, Strategic bought in at a mortgagee auction and nominated Henderson’s company Cleaver Factors Limited as the purchaser.  The purchase was funded by an advance to Cleaver for a little over $2m.  As well as a first registered mortgage over the property and a general security deed granted by Cleaver in favour of Strategic, Duff and Henderson severally entered into an all obligations unlimited guarantee  for  all  monies  owing  under  the  arrangement  between  Strategic  and

Cleaver.  Following default by Cleaver, Strategic exercised its power as mortgagee

STRATEGIC FINANCE LIMITED V HENDERSON HC CHCH CIV-2009-409-001731  11 June 2010

to sell the property.   The amount realised was insufficient to repay the mortgage advance in full, and thus Strategic sues Henderson for the balance owing under it.  It seeks summary judgment for $2,650,147.79 plus interest and costs.

Proceedings to date

[2]      When an application for summary judgment was first called on 21 September

2009, Henderson had taken no steps.   He was aware of the proceedings and was negotiating with Strategic.   The Associate Judge noted “the parties were in discussion” and adjourned the matter until 5 October 2009.  On that date, the file was noted “discussions as to settlement” and there was a further adjournment until 2

November 2009.  The matter was further adjourned on that date.  On 14 November the  Court  was  advised  that  settlement  discussions  had  not  been  successful  and counsel sought leave to be heard on behalf of Henderson.  The Court made directions granting leave for a formal application to be filed together with a draft notice of opposition “in essentially final form that will be filed by [Henderson] if leave is granted together with any affidavit that will be proposed to be filed in opposition”.

[3]      The intended dates for hearing the application were not available, and a further minute dated 15 February 2010 directed Henderson was to file “any further evidence he seeks to rely on by Friday 19 February 2010 and that filing and service is without prejudice to [Strategic’s] right to argue the evidence should not be adduced.”

[4]      There  is  a  draft  of  a  notice  of  opposition  to  application  for  summary judgment dated 23 December 2009 on the file; I am uncertain as to the date it was filed.   On 22 December 2009, in accordance with the direction, affidavits of Henderson and Duff were filed.   Henderson’s affidavit was later amended and re- filed on 20 January 2010.  On 12 and 15 February 2010 respectively Strategic filed affidavits of Mr Somerfield and Mr Finnigan in reply to the affidavits of Henderson and Duff.  On 19 February 2010 a further affidavit of Henderson, effectively in reply to the reply affidavits of Somerfield and Finnigan, was filed.  A further affidavit of Mr Angus in opposition was filed by Henderson on 1 March 2010.

The Notice(s) of Opposition

[5]      The thrust of the draft notice of opposition dated 23 December 2009 is:

i)Strategic had induced Henderson into a belief that there was a mutual understanding between them that Strategic would not enforce its rights under the guarantee.

ii)Henderson  relied  on  that  inducement  and  mutual understanding when he signed the guarantee.

iii)As a consequence, it is unfair and unconscionable for Strategic to deny the inducement and the mutual understanding under which Henderson signed the guarantee, and therefore Strategic is estopped from enforcing it.

iv)In the alternative, because of the inducement and oppressive action by Strategic, Henderson is entitled to reopen the guarantee under the Credit Contracts and Consumer Finance Act 2003.

[6]      At 5.20 p.m. the day before the hearing of the application (12 May 2010), Henderson purported to file an amended draft notice of opposition to the application for summary judgment, which added alternative defences relating to deficiencies in the pleadings specifically relating to the failure of Strategic to plead:

i)        the steps it took to recover the outstanding balance on the loan;

ii)       the process of sale;

iii)      compliance with the statutory notice regime under the Property

Law Act 2007;

iv)if there was any defect in the statutory notice process, it did not result in any prejudice to the defendant

and further pleadings that Strategic misrepresented the position to Henderson and breached the Fair Trading Act 1986 and/or the Contractual Remedies Act 1979.

[7]      As to these last-minute amendments, Henderson’s counsel accepted those relating to the statutory notice and subsequent sale were pleading points relying upon the recent decision of the High Court in Westpac New Zealand Limited v Cooper (HC Auckland CIV-2009-409-000990, 29 January 2010, Duffy J).

Preliminary objectives by Strategic

[8]      Strategic objected to a good deal of this procedure, in particular:

i)The affidavit of Henderson filed on 19 February 2010 should not be read.

ii)The  amended  draft  notice  of  opposition  should  not  be admitted.

iii)The late submissions of counsel for Henderson should not be allowed (an objection not really pursued).

[9]      Additionally, if the affidavit of Henderson referred to above is admitted, the Court   should   rule   as   inadmissible   the   transcript   of   a   particular   telephone conversation between Henderson and Somerfield on 14 December 2009, as should any reference to it in the affidavit itself, on the grounds that the conversation was privileged; being a “without prejudice” negotiation for settlement purposes.

Second affidavit of Henderson 19 February 2010

[10]     The plaintiff complains that this is an affidavit in reply to the reply affidavits of Strategic (Somerfield and Finnigan) and ordinarily would not be able to be filed without leave.

[11]     Henderson says that the reply affidavits of Somerfield and Finnigan raise issues and evidence which were not contained in the original affidavit of Somerfield and Mr McKay in support of the application, and thus Henderson has not had an opportunity to respond to them.

[12]     There  is  some  force  in  the  submission  of  counsel  for  Strategic  that  the affidavit  is  an  attempt  to  patch  up  gaps  between  the  assertions  in  Henderson’s original affidavit and the contemporaneous documentation filed in Somerfield’s affidavit in reply.

[13]     The  evidence  filed  in  support  of  the  application  for  summary  judgment confined itself to the salient facts to support the statement of claim, namely that Henderson guaranteed (to Strategic) the obligations of a company controlled by Henderson and as there is now a shortfall under the primary transaction, Henderson should pay.  The proposed defence raised the oppressive conduct allegation.  Only when this was done did Strategic feel compelled to drill down and bring evidence in support of an opposing view.  That understandably raised factual issues which the original evidence did not.  From Strategic’s point of view, this evidence reinforced its thrust that this is purely and simply a guarantee entered into by a commercially savvy guarantor on an arms-length basis.

[14]     I remind myself that this is an application for leave to be heard, rather than the hearing of the application for summary judgment itself.  The Court of Appeal has cautioned  against  the difficulties  of  preliminary points  being argued  in  such  an interlocutory stage: see Lindale Financial Services Limited v Colonial Mutual Life Assurance Society Limited (1998) 12 PRNZ 320.

[15]     I take into account also that after the date of filing of the Somerfield affidavit in reply, the Court gave leave (and by doing so an implication that such evidence would be helpful) for Henderson to file such an affidavit, but reserving the rights of Strategic to object.

[16]     In that limited context at least, it is in the interests of justice that I consider the information in that affidavit should be available for the consideration of this application.

Amended notice of opposition filed 11 May 2010

[17]     Strategic complains this is an ambush and a blatant attempt to take it by surprise.  Strategic was therefore caught short on argument.

[18]     Strategic  is  correct,  at  least  to  the  extent  that  it  is  taken  by  surprise. Henderson’s counsel candidly admitted that the amendment results from their becoming aware of the recent judgment in Westpac.  Henderson’s counsel are of the view that Westpac points to a fatal pleading deficiency in the statement of claim, and that deficiency might well be a “king hit” for the purpose of summary judgment.

[19]     I  granted  leave  for  Strategic  to  make  later  written  submissions  on  the proposal à propos of the amended draft notice.

[20]     It is in the interest of justice that, should there be at law an arguable defence on the pleadings, then it should be admitted.  It would be unjust to do otherwise.

Privilege/admissibility of “without prejudice” negotiation

[21]     Strategic  objects  to  the  inclusion  in  Henderson’s  evidence  of  both  the transcript of a recorded telephone conversation between Henderson and Somerfield on 14 December 2009 and specific reference to it in Henderson’s affidavit.

[22]     Both parties accept that the conversation was held in an attempt to settle this proceeding.    It  is  also  common  ground  that  ordinarily such  a  conversation  and negotiation would have been conducted “without prejudice” and attract privilege.

[23]     Henderson says that this is a case which is an exception to that rule because the common law exception that a without prejudice protection must not be used for the purpose of misleading the Court inures, notwithstanding the Evidence Act 2006 (relying on New Zealand Institute of Chartered Accountants v Clarke High Court

Auckland CRI-2008-404-000083, 4 March 2009, Keane J as referred to in Cross on

Evidence ZVA 57.9).

[24]     Henderson  also  relies  upon  the  observations  in  Cedenca  Foods  v  State Insurance [1986] 3 NZLR 205 that privilege does not extend to facts and statements which are independent of the settlement negotiations even though those are made in the course of such negotiations.

[25]     For the purposes of argument, I am prepared to accept the observations of this Court in New Zealand Institute of Chartered Accountants as that is the most favourable to Henderson.

[26]     However, I fail to see that there is an exception to the general rule in this case.

[27]     A thrust of Henderson’s case is that it was not intended by either Strategic or himself that his guarantee be called upon.  He seeks to lead statements made in the conversation  which  go  to  that  issue,  and  in  particular,  statements  made  by Somerfield which might go to evidence which would support Henderson’s view.  In particular, interchanges such as:

Henderson:      OK, and I mean, as you observed the other day you don’t know why I gave a personal guarantee.  I don’t know why I gave a personal guarantee.

Somerfield:     No.

And later:

Henderson:     Yeah, exactly.  So I mean, what advantage was there to me? Somerfield:    Well I'm not sure. That’s why I guess I'm a little bemused as

to why you provided a guarantee.

[28]     I am not of the view that the inclusion of this will add to the sum total of the evidence in support of the defendant, even in its most favourable interpretation to him.  In my view, it is not evidence of an acceptance by Strategic that it could not call upon the guarantee in contradiction or contra-distinction to its stance in the pleadings.  I agree with counsel for Strategic that it is not misleading the Court at all

and what is said in that transcript is entirely consistent with Strategic’s case – that Henderson signed the guarantee and should be accountable pursuant to it.   It may well have been that Somerfield was incredulous as to why Henderson did sign the guarantee, but that does not detract from the stance and the evidential thrust of Strategic.

[29]     There is nothing that takes this statement outside the general exclusion rule. Both the transcript and any reference to the contents of it are inadmissible.

This application

[30]     Chappel Carriers Limited v Chappel Properties Limited (1997) 11 PRNZ

366 is cited in support of the proposition that, by analogy, with applications to set aside judgments  (referring to  Russell  v Cox [1983] NZLR 654 at 659), similar considerations apply where leave to oppose an application for summary judgment is sought. Those include:

i)        a substantial ground of defence exists;

ii)       the delay is reasonably explained;

iii)      the plaintiff will not suffer irreparable injury.

[31]     The question arises as to what a “substantial ground of defence” means. Does it mean a reasonably arguable defence – that is, is the threshold higher or lower than that for summary judgment (recognising that the onus is reversed and is on Henderson rather than Strategic as the applicant for summary judgment)?  Russell v Cox referred extensively to judgments of the House of Lords in Evans v Bartlam [1937] AC 473. The latter case (which considered similar provisions to the setting aside rules) in discussing the exercise of the discretion referred to evidence which might show “no possible defence to the action” or “set up some serious defence” (Lord Russell of Killowen); or, “prima facie defence” (Lord Atkin).

[32]     The fundamental test is justice.  As was said in Russell (at 659):

The test against which an application to set aside a judgment should be considered is whether it is just in all the circumstances to set aside the judgment, and the several factors mentioned in the judgments discussed should be taken, not as rules of law, but as no more than tests by which the justice of the case is to be measured, in the context of procedural rules whose overall purpose is to secure the just disposal of litigation.

[33]     Whilst the subsidiary tests from Russell assume importance, I am of the view that the ultimate test against which an application for leave is measured, is the same; namely, whether it is just in all the circumstances to allow the respondent to the summary judgment application to defend it.

[34]     Both counsel in this case submitted that the threshold in determining whether or not there was a substantial defence was lower than that required for summary judgment.

[35]     In Equiticorp Finance Group v Cheah [1989] 3 NZLR 1, in considering the concept of miscarriage of justice in an application to set aside a summary judgment, the Court of Appeal said that the common way for a defendant to show an actual or possible miscarriage of justice is to show an “actual or arguable defence”. Similarly, in McLean v Bank of New Zealand (1996) 9 PRNZ 473 the Court of Appeal offered some guidance that where an application to set aside summary judgment is to be determined against the applicant, it will usually require a decision on the substance of the dispute between the parties.  Even where there are exceptionally long delays where there is “merit in a proposed defence” or if it “appeared that a truly arguable defence existed”, then relief ought not to be denied on grounds of delay.

[36]     It appears from these cases that where there is a risk of miscarriage of justice, there is a lower threshold.

[37]     The argument may be one of semantics, but in my view something less than the summary judgment threshold of a reasonably arguable defence is the threshold.  I think something akin to a prima facie case is the appropriate standard: or put another way, is there sufficient evidence to show there is a reasonable possibility of the defence succeeding?

[38]     I agree with Strategic that a robust approach to the affidavit evidence similar to  that  applicable  for  summary judgment  applications  is  appropriate  (see  Bilbie Dymock Corporation Limited v Patel (1987) 1 PRNZ 84).

Is there a reasonable possibility of the defence succeeding?

[39]     The defences postulated in the amended notice of opposition are:

i)An equitable defence of estoppel on the grounds that the inducement (by Strategic) and the mutual understanding (between Strategic and Henderson) was relied on by Henderson; therefore Strategic is estopped from enforcing the guarantee.

ii)Reopening of the guarantee under the CCCF Act because the inducement to enter the guarantee was oppressive and the exercise by Strategic of its rights under it oppressive.

iii)      The pleading point arising from Westpac referred to above.

iv)      Breaches of the Fair Trading Act and/or Contractual Remedies

Act. [40] Strategic says:

i)Strategic and Henderson entered into this arrangement for the benefit of Duff for the purpose of avoiding the first mortgagee sale and to provide finance to finish the improvements to the property.

ii)Henderson is an experienced man of commerce and an experienced property developer.

iii) iv)	The guarantee is unequivocal. Henderson entered into the guarantee with full knowledge of
its import and was separately advised by his own solicitors.
v)	Henderson understood the transaction and was not induced by
any     representation     of     Strategic,     and    confirmed     his indebtedness (and that he had no defence to any claim under
the guarantee) by executing a deed of acknowledgement of debt for the full amount after the proceeding was issued.
vi)	If  there  was  any  benefit  for  Strategic,  that  does  not  alter Henderson’s liability under the guarantee.
[41]	Henderson	accepts   he   signed   the   guarantee,   but   on   the   basis   and

understanding  (of  both  himself  and  Strategic)  that  he  would  have  no  personal liability under  it  as  he  was  merely  a  conduit  to  assist  Duff  and  also  Strategic (enabling Strategic to realise an increased value at a later sale once the property’s improvements had been completed).  Henderson says it was never intended that the guarantee be called upon.

[42]     In relation to the reopening of the guarantee under the CCCF Act, Henderson relies on the recent decision of the Court of Appeal in Bartle v GE Custodians Limited [2010] NZCA 174. In that case there is extensive commentary on both the equitable doctrine of unconscionability and the remedies (s 120 CCCF Act) to reopen a credit contract where oppression is evident. In Bartle the Court referred to its own decision in Gustav & Co Limited v Macfield Limited [2007] NZCA 205, from which the Supreme Court accepted the Court of Appeal’s summary of the principles (Gustav & Co Limited v Macfield Limited [2008] 2 NZLR 735). At [167], Arnold J summarised the position as follows:

As  will  be  apparent, then,  the key to  unconscionability at  equity is the presence of victimisation – that is, one party having taken advantage of a vulnerable party (ie, suffering from some disability or disadvantage) “unconscientiously”. The stronger party must have actual or constructive knowledge that the weaker party is unable to look after its own interests and

is acting to its detriment. In those circumstances, equity will intervene to restrain the stronger party from exercising its rights at law.

[43]    It would be hard to see that Henderson was ever in such a position of “victimisation”.   There is no issue that he is a seasoned commercial campaigner. Strategic knew that he was able to look after himself, and indeed he had mortgage brokers and his own solicitors acting for him.

[44]     As   the   Court   of   Appeal   said   in   Gustav   at   [30],   the   doctrine   of unconscionability 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.

[45]     Henderson was not in that category, and I cannot see how the equitable doctrine provides him with a defence.

[46]     The matter is not as clear-cut under Part 5 of the CCCF Act.  Bartle  gave extensive consideration to this defence, but the import to the present case is encapsulated in the judgment of Arnold J at [177]:

In my view, the scope of oppression under the CCCF Act is broader than the equitable doctrine of unconscionability. The equitable doctrine will apply to a transaction where a stronger party who has knowledge, actual or constructive, of a weaker party’s special disability or disadvantage, unconscientiously takes advantage of it. Constructive knowledge may arise as a result of factors or circumstances that put the stronger party on inquiry. But a contract or conduct may be treated as oppressive under the CCCF Act even though the party whose conduct is said to be oppressive may be (subjectively) blameless because the party is simply following a common industry practice. This is inherent in the notion that the reasonable standards of commercial practice, as assessed by the court, are the touchstone for the assessment of oppression.

and again by Hammond J at [56]:

The three strands I have identified - abuse of power, unequal bargaining positions coupled with hard terms, and departure from standards acceptable to the community - may well cover most of the cases which are likely to advance through our courts. But again it cannot be emphasised too strongly that the s 118 definition is not a bounded one: in terms of formal logic, it is not an intrinsic definition. Oppression is defined as including oppression, which leaves the expression quite untrammelled. The term goes beyond the

existing concepts in our jurisprudence. The legislation itself also makes it plain that all of the circumstances of the particular transaction are relevant: oppression is the trigger for curial investigation and, perhaps, intervention.

[47]     It may be that the matters raised in the evidence of Henderson could be sufficient to carry the day in that there was an agreement or understanding whereby both parties accepted that Henderson would not be pursued for any shortfall under the guarantee.  That is a matter which will require closer analysis in the context of the summary judgment application, but for present purposes I am of the view that such an argument might have a reasonable possibility of succeeding either as an estoppel or as unconscionable conduct under Part 5.   In other words, it is not so clear-cut that one could say these defences are not available and might succeed.  If the Court were to accept that Strategic latched on to Henderson as a means to avoid or minimise a loss and entered into the arrangement on the understanding that he was being used only as a mechanism to enable Strategic to buy in at the first mortgagee sale to minimise its loss, then he may have a defence.   There is a direct conflict between Henderson and Finnigan on this issue and in particular what transpired at a meeting between the two in December 2007.  On the one hand Finnigan says there was no agreement not to pursue any guarantee and the contemporaneous documents reflect the true arrangement.   On the other Henderson says there was such an agreement and he was not concerned about the form of documentation because he had the comfort of the arrangement that he would not be personally liable.  It would be inappropriate to decide this one way or the other at this preliminary stage and on the available evidence.

Other defences

[48]     For the purpose of this application I need not go further.

Delay

[49]     Henderson says in respect of the delay in filing an opposition that he was under extreme pressure from other creditors at about this time, and that he was fighting fires on many fronts.  He did not take any advice in connection with this

matter because he was negotiating with Strategic representatives on a settlement arrangement.

[50]     I agree with counsel for Strategic that this is insufficient explanation.   The fact that he was being pursued by other creditors may be a reason for inaction, but not a sufficient excuse or explanation for failing to take any steps.  It is also likely, given pressure from other creditors, that Henderson was well aware of Court procedures and that steps would be taken.  Indeed, in his affidavit he says that his solicitors and counsel were “heavily committed, at times appearing several times a week in the High Court in connection with such matters”.

Injury to the plaintiff

[51]     It could hardly be said that further delay could seriously prejudice Strategic’s ability to enforce a judgment just because Henderson is the subject of other summary judgment applications.   It is clear from Henderson’s affidavit that he is already in straitened circumstances.   There is no evidence that he would have the ability to satisfy this judgment now, as opposed to later.

Exercise of discretion

[52]     On balance, given my conclusion on the possibility of a reasonable defence, it is in the interests of justice to grant the application.   Leave is granted to the defendant to file a Notice of Opposition and supporting affidavits in accordance with the timetable below.

Costs

[53]     Although I have granted the application and normally r14.2(a) would apply, if Henderson had taken the appropriate steps this application would not have been necessary.   In the circumstances, Strategic’s opposition was an appropriate and proportionate one.  It is just that I exercise my discretion pursuant to r14.1 to award costs to Strategic on a schedule 2B basis together with disbursements (if any) as set by the Registrar.

Timetable

[54]     The summary judgment application is adjourned for argument (one day) on

29 July 2010 at 10am.  I make the following orders:

i)Henderson is to file and serve a notice of opposition (in the form of the draft submitted in the course of this application) within five working days of the date of this judgment.

ii)Subject to my decision on the issue of admissibility ([22]- [30]), the affidavits of the parties filed in relation to this application shall be read as if they were affidavits in support or reply to the notice of opposition to summary judgment.

iii)Counsel  are  to  file  synopses  of  argument  together  with  a casebook of any additional authorities (over and above those that have been submitted for the purpose of this application) by 4pm, 22 July 2010.

Solicitors:
Bell Gully, Auckland
AJ Forbes QC, Christchurch