Tea Custodians (Pacific) Limited v Reeves Middleton Young

[2012] NZHC 2737

IN THE HIGH COURT OF NEW ZEALAND NEW PLYMOUTH REGISTRY

CIV-2009-443-337 [2012] NZHC 2737

BETWEEN  TEA CUSTODIANS (PACIFIC) LIMITED Plaintiff

ANDREEVES MIDDLETON YOUNG Defendant

Hearing:         On the papers

Counsel:         P L Rice for plaintiff

I D Matheson for defendant

Judgment:      18 October 2012

JUDGMENT OF LANG J [on costs]

This judgment was delivered by me 18 October 2012, at 4 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

TEA CUSTODIANS (PACIFIC) LIMITED V REEVES MIDDLETON YOUNG HC NWP CIV-2009-443-337 [18 October 2012]

[1]      The  plaintiff,  TEA Custodians  (Pacific)  Limited  (“TEA”),  is  a  financier engaged primarily in lending to the residential sector.  Reeves Middleton Young is a firm of solicitors in New Plymouth.

[2]      On  21  July  2009,  TEA  commenced  this  proceeding  seeking  summary judgment against Reeves Middleton Young.   TEA based its claim on an alleged breach of an undertaking Reeves Middleton Young had given to TEA on 29 March

2006.    Reeves  Middleton Young had  given the undertaking when  it  obtained  a discharge  of  mortgage  from  TEA  on  behalf  of  clients  who  were  selling  their property, and required the discharge of mortgage for that purpose.

[3]      Reeves Middleton Young did not oppose the plaintiff’s claim, but entered an appearance in relation to the issue of costs.  The proceeding was settled prior to first call, when the firm’s clients refinanced their property and repaid the money owing under the mortgage.  The only issue that remains outstanding is that of costs.  I have now been asked to resolve that issue.

[4]      TEA contends that the breach of the undertaking entitles it to an award of costs on an indemnity basis.   It therefore seeks an order that Reeves Middleton Young reimburse it the sum of $23,504.38 in respect of the legal costs it has incurred in relation to this proceeding.

[5]      Reeves Middleton Young resists any award of costs being made against it.  It denies breaching the undertaking, and contends that TEA issued the proceeding unnecessarily.  It therefore seeks an order for costs in its favour.

[6]      In order to understand these submissions, it is necessary to set out the events giving rise to the proceeding.

The events giving rise to the proceeding

[7]      Reeves Middleton Young acted as solicitors for the trustees of the R & K Van

Dillen Family Trust (“the Trust”).  In 2004, the Trust obtained a loan in the sum of

$299,000 from TEA.  The loan was secured by way of a mortgage registered against

a residential property owned by the Trust and situated at 115 Liardet Street, New Plymouth.  The Auckland firm of Sanderson Weir acted for TEA in relation to this transaction, including the preparation of mortgage documentation and appropriate undertakings.

[8]      On 9 March 2006, Reeves Middleton Young wrote to Sanderson Weir in the following terms:

RMR TRUST (R & K VAN DILLEN FAMILY TRUST)

Our abovenamed client trust is selling its property at 115 Liardet Street, New

Plymouth on 7 April 2006.

Could you please forward a Settlement Statement as at that date together with a discharge of Mortgage No. 6255968.2.

We undertake to hold the above on your behalf until we are in a position to repay the mortgage.

Please forward the document to the attention of Mr Reeves. Yours faithfully

REEVES MIDDLETON YOUNG

[Signed] Partner

(Emphasis added)

The letter was signed by one of Reeves Middleton Young’s principals.

[9]     Sanderson Weir advised Reeves Middleton Young of TEA’s settlement requirements in a letter sent by facsimile at 12.57 pm on 29 March 2006.  The letter concluded:

If you require the discharge of mortgage prior to settlement then we are required to hold an undertaking from you in the form of that enclosed.

[10]     The undertaking enclosed with the letter was as follows:

To:      TEA Custodians (Pacific) Limited

TEA CUSTODIANS (PACIFIC) LIMITED – RONALD HERMANUS VAN DILLEN AND JOHN CAMERON MIDDLETON AS TRUSTEES FOR  R  &  K  VAN  DILLEN  FAMILY  TRUST  (JOHN  CAMERON

MIDDLETON AS LIMITED LIABILITY TRUSTEE) AND RONALD HERMANUS VAN DILLEN – REPAYMENT OF MORTGAGE OVER PROPERTY AT 115 LIARDET STREET, NEW PLYMOUTH 4601

In consideration of you providing us with the Discharge of Mortgage TEA Custodians  (Pacific)  Limited  6255968.2,  we  undertake  personally  to protect you on settlement and to hold the discharge on your behalf and not to deal with it until we are in a position to pay to your solicitor immediately after settlement the settlement amount notified to us by you for the proposed day of settlement.

We further undertake that if settlement is not confirmed to your solicitor by

3.00pm on the date of settlement we will pay you the amount of interest requested by you for the period from the settlement date to the date of

payment.  For this purpose we confirm that the date of payment means the actual day on which payment is made provided we pay and confirm payment

to your solicitor prior to 3.00pm on that day, otherwise the date of payment means the following business day.

(Emphasis added)

[11]     Reeves Middleton Young returned the undertaking, signed by a partner of the firm, by facsimile transmission at 1.50 pm the same day.

[12]     On 6 April 2006, a legal executive employed by Reeves Middleton Young sent an email to Sanderson Weir confirming that settlement of the sale of 115 Liardet Street was due to take place the following day.  The email also advised Sanderson Weir that Reeves Middleton Young had not yet received the discharge of the mortgage, and sought confirmation that the mortgage would be in that night’s DX mail.

[13]     Sanderson  Weir  replied  by  email  approximately  two  hours  later.    They advised that the discharge of mortgage was being forwarded by overnight DX mail. Sanderson Weir sent Reeves Middleton Young a copy of the discharge instrument by facsimile a short time later, together with repayment instructions.

[14]     Thereafter, Sanderson Weir heard nothing further from Reeves Middleton Young.   On Tuesday 4 July 2006, however, Sanderson Weir sent an email to Jane Chen of Pioneer Mortgage Services Pty Ltd (“Pioneer”) enquiring whether or not the Van Dillen loan had been repaid.  TEA describes Pioneer is its mortgage servicing agent.  Ms Chen provided the following cryptic response:

7/4/06 - changed to substitution instead.

[15]     For some unexplained reason, TEA and its solicitors took no further steps to investigate the position further for nearly three years.  On 2 March 2009, however, Sanderson Weir wrote to Reeves Middleton Young advising that the loan had not been repaid, and seeking advice as to what had occurred in April 2006.  TEA and Sanderson Weir then learned that the discharge of mortgage had been registered, and the Liardet Street property had been transferred to a third party.   No replacement security had been provided.  The Trust had continued, however, to meet payments due under the loan agreement with TEA.

[16]     There followed an exchange of correspondence in which Sanderson Weir sought to persuade Reeves Middleton Young to honour the undertaking it had given on 29 March 2006.  TEA also sought to protect itself by lodging a caveat against the title to a property the Trust had purchased in Vivian Street, New Plymouth at around the same time it had sold the Liardet Street property.   It based the caveat on an “agreement to mortgage” dated 7 April 2006.

[17]     Reeves Middleton Young maintained that the arrangement between TEA and the Trust had been varied on or about 7 April 2006 in a manner that absolved Reeves Middleton Young from complying with the undertaking it had given on 29 March

2006.  Reeves Middleton Young said that it was released from complying with that undertaking as a result of discussions between itself, Mr Van Dillen and Pioneer on 7

April 2006.   Reeves Middleton Young provided details of these discussions in the following passage from a letter that it sent to Sanderson Weir on 11 March 2009:

R & K VAN DILLEN FAMILY TRUST

Your letter of the 2nd of March 2009 is referred to as is the writer’s telephone discussion with Mr Fletcher on Tuesday.   Mr Van Dillen in early 2006 entered into an Agreement for the sale of his property at 115 Liardet Street, New Plymouth.  We understand that there had been a number of telephone discussions with Mr Van Dillen and representatives of Pioneer Mortgage Services about the transfer of mortgage to a new property at 155 Vivian Street, New Plymouth.  We hold correspondence from Pioneer and notes of various telephone discussions confirming the arrangements that had been entered into between Mr Van Dillen and Pioneer, the essence of which was that Pioneer agreed to a transfer of the mortgage to the new property.  We have a number of file notes and copies of faxes and other correspondence

between us and Pioneer in particular someone by the name of Sive and

Rakesh.

One of our letters of the 7th  of April 2006 addressed to Pioneer attention

Rakesh is attached.

Because of the time delays we advised Pioneer that they need to get some securities down to us as soon as possible and we would see that if they were executed in fact we went a step further than that we obtained a written undertaking from Mr Van Dillen that he would execute those documents and a copy of that undertaking is enclosed.  Pioneer was advised of this.

Obviously the securities were not sent to us in spite of various reminders from Mr Van Dillen.  Mr Van Dillen is perfectly happy to sign the securities and we understand continues to pay the mortgage interest and principal as required accept [sic] we believe that a few months ago he experienced some financial problems and these are being resolved with Pioneer.

…

[18]     The undertaking that Reeves Middleton Young sent to Pioneer on 7 April

2006 was as follows:

We refer to your telephone conversation with Sheree this morning.

The trustees of R & K Van Dillen Family Trust are today selling their property at 115 Liardet Street, New Plymouth and on purchasing a property at 155 Vivian Street, New Plymouth.

Accordingly, we understand a swap of security needs to be actioned.

We therefore undertake to complete new security documentation over the Trust’s new property at 155 Vivian Street, New Plymouth once we receive the same.

Please forward the documentation to the attention of Mr Reeves. Thank you. Yours faithfully  Yours faithfully

REEVES MIDDLETON YOUNG      REEVES MIDDLETON YOUNG

[Signed]  [Signed]

Partner  St Leger Manning Reeves

Consultant

[19]     Reeves Middleton Young considers that the new arrangement overrode, or effectively released it from, the undertaking given to TEA on 29 March 2006.  In its place, Reeves Middleton Young became subject to the new undertaking that it gave to Pioneer on 7 April 2006.

Decision

[20]     Not surprisingly, the dispute has given rise to strong feelings on both sides. Each purports to claim the moral and ethical high ground.   For present purposes, however, it is important to remember that the issues of ethics and morality are irrelevant. The issue that the Court is required to decide is a legal issue.

[21]    There is no dispute that Reeves Middleton Young gave an unequivocal undertaking to TEA on 29 March 2006.  The undertaking was “personally to protect [TEA] on settlement and to hold the discharge on [TEA’s] behalf and not to deal with it until [Reeves Middleton Young] was in a position to pay to [TEA’s] solicitor immediately after settlement, the settlement amount notified to [Reeves Middleton Young] by [TEA] for the proposed day of settlement”.

[22]     There is no dispute, either, that an undertaking by a solicitor will be enforced on application to the Court.[1]   In addition, r 14.6(4) of the High Court Rules permits the Court to make an award of indemnity costs against a party who breaches an undertaking given to another party.

[1] See for example Gill & McAsey v Wainui Timber Co Ltd [1992] 1 NZLR 1 (CA) at 4; Lawyers and

Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008, r 10.3.

[23]     TEA  bases  its  claim  for  indemnity  costs  on  its  assertion  that  Reeves Middleton Young breached the undertaking it had given to TEA on 29 March 2006. A key issue is therefore whether the undertaking still remained in force as at 7 April

2006, when Reeves Middleton Young handed the discharge of mortgage over to the purchaser of the Liardet Street property.

Did the undertaking that Reeves Middleton Young gave TEA on 29 March 2006 remain in force as at 7 April 2006?

[24]     The undertaking that Reeves Middleton Young gave on 29 March 2006 was addressed to TEA.  As a result, only TEA or its duly authorised agent could vary the terms  of  the  undertaking,  or  release  Reeves  Middleton  Young  from  it.    As  a

consequence, the issue is whether any arrangement that the Trust may have reached

with Pioneer on 7 April 2006 had the effect of releasing Reeves Middleton Young from complying with the undertaking the firm had given to TEA on 29 March 2006. Determination of this issue depends on whether Pioneer had the ability to bind TEA in respect of such an arrangement.

[25]     It is appropriate at the outset to say that an opposed application for costs is hardly an appropriate forum for resolution of such a complex and fact-dependent issue.   The evidence is necessarily incomplete, and issues of credibility cannot be determined.  The most that can be decided is whether facts have been established to an arguable standard.

[26]     Given that TEA seeks indemnity costs, it must bear the onus of establishing that the undertaking remained in force as at 7 April 2006.   If Reeves Middleton Young can show that it was arguably released from the undertaking as a result of the arrangement that the Trust reached with Pioneer, TEA will not be entitled to an award of indemnity costs.

[27]     TEA’s position is that Pioneer never had any authority to act on its behalf, and therefore could not bind TEA in relation to the issue of whether or not the mortgage over the Liardet Street property was to be replaced by a new mortgage over the Vivian Street property.   In a letter that Sanderson Weir sent to Reeves Middleton  Young  by  facsimile  on  17 April  2009,  they  described  Pioneer  as  a “mortgage servicing manager for TEA.”  They described its role as being “merely to report to TEA on the feasibility of a possible transaction”.

[28]    TEA also relies upon information that Sanderson Weir gave to Reeves Middleton Young in the letter it sent on 6 April 2007 advising Reeves Middleton Young of TEA’s settlement requirements. The letter concluded by stating:

Contact details

If you have any queries regarding the content of these instructions, please contact:

The Mortgage Servicer, Jane Chen of Pioneer Mortgage Services, phone [phone] if the question relates to the financial details of the loan repayment; or

Gillian Rigby on 09 306 7466 if the question relates to any other aspect of the security documents or the settlement procedure.

[29]     TEA submits that this information made it clear that Pioneer had very limited authority,  and  that  it  certainly  did  not  have  the  authority  to  consent  to  any substitution of securities.

[30]     Not  surprisingly,  the  evidence  does  not  permit  me  to  draw  any  firm conclusions regarding the precise role that Pioneer played in critical events.  Reeves Middleton Young criticises TEA in this context for not adducing evidence from Pioneer’s personnel regarding their recollection of what occurred when the Liardet Street property was sold on 7 April 2006.

[31]     There  is,  however,  some  evidence  to  support  Reeves  Middleton Young’s assertion that TEA authorised Pioneer to act on its behalf in relation to the issue of the substitution of securities.  This comes from a letter that Reeves Middleton Young sent to Sanderson Weir on 29 April 2009.   In that letter Reeves Middleton Young said:

Dear Partners

R & K VAN DILLEN FAMILY TRUST – TEA CUSTODIANS (PACIFIC) LIMITED

We refer to the previous correspondence.

We  have  now  had  the  benefit  of  the  recollection  of  Manning  Reeves’ secretary at the time of the sale of 115 Liardet Street/purchase of 155 Vivian Street, a woman with 17 years experience as a senior conveyancing/commercial legal secretary.

She advises that as settlement of the sale and purchase approached she contacted a Michelle Scott at TEA Custodians (Pacific) Limited regarding the swap of securities, who directed her to speak to Rakesh at Pioneer Mortgages.

Numerous telephone calls were made to Rakesh, and the answer was that the matter was with the documents team and the documents would be sent as soon as possible.

On the day of settlement, 7 April 2006, the new security documentation had still not been received, so she again telephoned Rakesh.  Rakesh requested that we fax an undertaking from our client stating that he would sign the new security documentation once we had received and prepared the same, and that once this undertaking was done, the Liardet Street sale proceeds could

be used to complete the purchase of the Vivian Street property.  That is the undertaking which was provided with our fax to Rakesh of 7 April 2006, a copy of which you have already been provided.

Settlement proceeded, and thereafter numerous telephone calls were made to Rakesh by Mr Reeves’ secretary, asking for the replacement security documents.  Eventually, on 10 May 2006, we reported to our client that TEA Custodians (Pacific) Limited had still not provided the replacement security documents, but that once we had received the documentation, we would be in touch with him.

The file on the purchase was closed in early August 2006, but before closing the file, the secretary yet again telephoned Rakesh, and also spoke to a Siva, from Pioneer Mortgages, again requesting the new security documentation. On 7 August we wrote to our client advising that the security documentation had still not been received.

…

(Emphasis added)

[32]     I am conscious that the secretary who provided the information contained in this letter has not sworn an affidavit.  To that extent, the evidence must obviously be hearsay.  If what she says is correct, however, it provides a basis for the proposition that TEA, through Ms Scott, authorised Reeves Middleton Young and the Trust to deal directly with Pioneer regarding the proposed substitution of securities. Importantly for present purposes, TEA has not adduced evidence to contradict the version of events set out in the letter.

[33]     If events occurred as described in this letter, it must be arguable that Pioneer was in a position to bind TEA as at 7 April 2006.   It would also have been in a position  to  release  Reeves  Middleton  Young  from  the  terms  of  the  earlier undertaking.   The fact that Reeves Middleton Young subsequently sent Pioneer a new undertaking suggests that this is, in fact, what occurred.   TEA is  also not assisted by the fact that Sanderson Weir failed to investigate the cryptic response that it received from Pioneer on 6 July 2006 after Sanderson Weir sought advice as to whether the Van Dillen loan had been settled on 7 April 2006.

[34]     These factors persuade me that it is arguable that the undertaking given on 29

March 2006 was no longer in force as at 7 April 2006.  It had arguably been replaced by the new undertaking that Reeves Middleton Young provided to Pioneer on 7 April

2006.

[35]     It follows that I am not prepared to award indemnity costs on the basis that

Reeves Middleton Young breached the terms of the undertaking it gave on 29 March

2006.

[36]     This is not the end of the matter.   Reeves Middleton Young contends that TEA should also be denied costs because it issued the present proceeding unnecessarily.

Did TEA issue the proceeding unnecessarily?

[37]     This submission is based on the fact that, as at 2 July 2009, TEA’s solicitors knew that the Trust was actively endeavouring to refinance the advance from TEA and had very good prospects of being able to do so.   As a consequence, Reeves Middleton Young contends that TEA acted unnecessarily and precipitately in issuing the present proceeding on 21 July 2009.

[38]     The  evidence  establishes  that  an  email  exchange  occurred  between  Mr Ansley of Reeves Middleton Young and Messrs Flaws and Fletcher of Sanderson Weir on 2 July 2009.  During this exchange Mr Ansley advised Mr Flaws that the Trust was seeking alternative finance, and had excellent prospects of being able to obtain it.   Mr Flaws responded to the effect that a refinance would be “a good alternative”, and that Reeves Middleton Young should keep Sanderson Weir closely informed of progress.  Mr Flaws also advised Mr Ansley, however, that Sanderson Weir had instructed a barrister to prepare proceedings.   Later in the afternoon, Mr Fletcher sent Mr Ansley an indicative repayment statement showing that the amount required to repay the TEA loan was $504,008.44.

[39]     Mr Ansley accepts that he did not have any further contact with Sanderson Weir after 2 July, but says there was little point in contacting Sanderson Weir again until the Trust was in a position to repay the loan in full.  The issue, therefore, is whether TEA acted unnecessarily or precipitately in issuing this proceeding approximately three weeks after the exchange on 2 July 2009.

[40]     Several points are relevant in this context.  First, Mr Flaws did not give Mr Ansley any assurance on 2 July 2009 that TEA would refrain from taking action whilst the Trust obtained alternative finance.  To the contrary, he told Mr Ansley that a barrister had been instructed to issue proceedings.

[41]     Secondly,  TEA  was  undoubtedly  in  a  very  difficult  position  once  it discovered the true position in July 2009.  By that stage it knew that the advance to the Trust, then amounting to approximately $500,000, was unsecured.   That had occurred, in its view, because Reeves Middleton Young had handed over a discharge of the mortgage over the Liardet Street property to the purchasers of that property without then ensuring that the TEA loan was repaid.

[42]     Reeves Middleton Young contends that this problem arose because Pioneer had failed, despite repeated requests, to provide it with mortgage documentation in relation to the Vivian Street property.  It points out that the Trust had always been prepared  to  execute new mortgage  documentation,  and  that  Mr Van  Dillen  had provided Pioneer with an irrevocable undertaking to that effect.   For that reason Reeves Middleton Young argues that the problem arose as a direct result of inaction by TEA’s own agent.

[43]     This argument has some force, but a major cause of the problem was also the fact  that  Reeves  Middleton  Young  failed  to  keep  Sanderson  Weir  in  the  loop regarding the discussions between the Trust and Pioneer on or about 7 April 2006. Reeves Middleton Young knew that it was subject to the undertaking it had given to TEA on 29 March 2006.  It also knew that Sanderson Weir was acting for TEA in relation to the repayment of the mortgage.   Common sense suggests that it would therefore have been prudent for Reeves Middleton Young to ensure that Sanderson Weir was kept abreast of the developments that occurred on 7 April 2006.   Had Reeves Middleton Young taken that step, it is highly likely that all of the later difficulties would have been avoided.

[44]     The problem that TEA faced in July 2009 meant that it was obliged to act quickly to protect itself.   Sanderson Weir was also entitled to expect Reeves Middleton Young to keep it informed of progress regarding the proposed refinancing

in the days and weeks that followed the email exchange on 2 July 2009.   TEA cannot, in my view, be criticised for instructing its barrister to file the proceeding when it had not heard anything further from Reeves Middleton Young for nearly three weeks.

[45]     For  those  reasons  I  do  not  accept  that  TEA  acted  unnecessarily  or precipitately when it filed the present proceeding on 2 July 2009.

What order should the Court make?

[46]     Having dealt  with these arguments, it is necessary to decide whether  an award of costs should be made in favour of either party.

[47]     The general principle is that the unsuccessful party should be required to pay costs to the party who succeeds.[2]     I take the view that TEA was the successful party in this proceeding, because Reeves Middleton Young did not oppose its claim and TEA ultimately obtained payment of the amount of its claim in full.

[2] High Court Rules, r 14.2(a).

[48]     In those circumstances the usual principles should apply, and TEA should receive an award of costs in its favour.

Result

[49]     TEA is entitled to an award of costs calculated on a Category 2B basis, together with disbursements as fixed by the Registrar.

Lang J

Solicitors:

Sanderson Weir, Auckland

Reeves Middleton Young, New Plymouth
Counsel:

P Rice, Auckland