The Gama Foundation v Fletcher Steel Limited

[2022] NZCA 314

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

 CA625/2021
 [2022] NZCA 314

BETWEEN	THE GAMA FOUNDATION Appellant
AND	FLETCHER STEEL LIMITED Respondent

Court:	Courtney and Dobson JJ
Counsel:	A J Forbes QC for Appellant W R Potter and J M Phillips for Respondent
Judgment: (On the papers)	13 July 2022 at 3.30 pm

JUDGMENT OF THE COURT

AThe application is granted in part.

BSpecial leave to appeal is granted on the questions set out at [8].

CThe appellant is entitled to costs on a standard application, on a band A basis with usual disbursements.

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REASONS OF THE COURT

(Given by Courtney J)

Introduction

1. The Gama Foundation (Gama) and Fletcher Steel Limited (Fletcher) were, respectively, landlord and tenant of an industrial property in Christchurch.  The lease ran from 1 September 2006 for a period of 10 years.  Fletcher was obliged to repair and maintain the premises and yield them up in good condition at the expiry of the lease.  It failed to do that.  The premises were left in a damaged state.  Gama was facing a loss of rental of approximately $100,000 per month.  On engineering advice, it undertook repair work itself and then sought reimbursement from Fletcher together with interest.  Fletchers disputed the extent of its liability.

2. The dispute was the subject of an arbitration before Mr Kennedy-Grant QC in 2019.[1]  Mr Kennedy-Grant found that Fletcher had breached its obligations under the lease and awarded Gama $327,959.10 for repair costs in respect of about half the items claimed, disallowing the remainder.  He also refused Gama’s claim of interest at contractual rates.

   [1]The dispute as arbitrated included other complaints of breach by Fletcher but they are not relevant to the present application.

3. Gama applied for leave to appeal parts of the award.  Osborne J declined that application.[2]  Osborne J also declined Gama’s application for leave to appeal to this Court.[3]  Gama now applies under sch 2, cl 5(6) of the Arbitration Act 1996 for special leave to appeal directly to this Court. 

   [2]The Gama Foundation v Fletcher Steel Ltd [2021] NZHC 633 [first leave judgment].

   [3]The Gama Foundation v Fletcher Steel Ltd [2021] NZHC 2514 [second leave judgment].

4. In Downer Construction (New Zealand) Ltd v Silverfield Developments Ltd this Court addressed the criteria for special leave under cl 5(6):[4] 

   Obviously that should not be a second bite at the same cherry.  This Court will be very mindful of why the High Court declined leave, and will grant special leave only if the High Court Judge’s decision was plainly wrong or if the test set out above was not applied or was misapplied.  We would hesitate to say that the test under subclause (6) is different from the test under subclause (5).  It is simpler to say the test is the same, but this Court will exercise its powers sparingly and mindful of why the High Court declined leave.

The test referred to is that set out in Cooper v Symes: [5]

(a)The appeal must raise some question of law … capable of bona fide and serious argument in a case involving some interest, public or private, of sufficient importance to outweigh the cost and delay of the further appeal.

(b)Upon a second appeal, the Court of Appeal is not engaged in the general correction of error.  Its primary function is then to clarify the law and to determine whether it has been properly construed and applied by the Court below.

(c)Not every alleged error of law is of such importance either generally or to the parties as to justify further pursuit of litigation which has already been twice considered and ruled upon by a court.

[4]Downer Construction (New Zealand) Ltd v Silverfield Developments Ltd [2007] NZCA 355, [2008] NZLR 591 at [35].

[5]Cooper v Symes (No 2) (2001) 15 PRNZ 166 (HC) at [12].

1. Gama identifies the following questions of law that it would wish to advance, if granted special leave to appeal:

   (a)Did the arbitrator err in his interpretation of the scope and effect of the rule in Joyner v Weeks?[6]  In particular, where a landlord has effected repairs to a property based on professional engineering and construction advice after termination or expiry of a lease, in respect of items damaged or inadequately maintained by the tenant in breach of lease covenants to maintain and repair, does that rule:

   (i)Limit losses claimable by a landlord to the hypothetical notional reasonable costs of such repairs, notwithstanding the landlord’s actual reasonable repair costs were higher?

   (ii)Limit claimable repair costs to the minimum repairs required to address the tenant’s breaches of the lease, notwithstanding that a range of reasonable repair options are available and that the minimum possible cost may only have been identified with the benefit of hindsight.

   (iii)Oust the normal rules relating to calculation of contractual damages, in particular the ability to claim costs reasonably incurred in mitigation of loss?

   (iv)Place the onus of proof on the landlord to show that the repairs it carried out to remedy the tenant’s breach of such covenants were no more than the bare minimum required under the lease?

   (b)Are damages payable by a tenant for breaches of lease covenants to repair or maintain the leased premises “moneys payable under the lease” for the purposes of cl 5.1 of the lease that was the subject of the arbitration?

   (c)Is interest only payable under cl 14.1 of the lease when the repairs which are the subject of the repair notice have been effected by the landlord during the term of the lease?

   [6]Joyner v Weeks [1891] 2 QB 31 (CA).

2. Fletcher opposes the application on the ground that none of the questions raised are capable of bona fide and serious argument.

Issue 1:  the rule in Joyner v Weeks

1. We consider that the case raises issues relating to the rule in Joyner v Weeks of general importance that warrant a second appeal. It is unnecessary to canvas the reasons.

2. However, the questions framed by Gama could be simplified as follows:

   (a)Did the arbitrator err in finding that the rule in Joyner v Weeks precludes recovery of costs reasonably incurred in mitigation?

   (b)If yes, which party bears the onus of proving the reasonableness of the costs incurred in mitigation?

   (c)In all the circumstances, did the arbitrator err, when considering the reasonable and proper amount required to put the premises into the state of repair in which they ought to have been left, in failing to have regard to the prevailing circumstances at the time the lessor undertook the repair work?

Issue 2:  interest under cl 5.1 and cl 14.1

1. Gama had sought interest at contractual rates on the costs incurred for repairs, relying on cls 5.1 (which allowed interest on moneys “payable under the lease”) and 14.1 (which allowed interest on repair costs following a failure by the tenant to appear following the issue of the repair notice).  The arbitrator disallowed both claims.

Clause 5.1

1. The issue on the claim under cl 5.1 was whether the interest Gama sought was monies payable “under” the lease.  The arbitrator and the Judge both concluded that cl 5.1 did not apply.  That conclusion relied on authorities to the effect that damages for breach of a lease and interest on such damages are not amounts payable under the lease itself.[7] 

   [7]Irvine v Shaw [1992] ANZ CnvR 83 (NZHC); Puhinui Farms Ltd v IH Wedding & Sons Ltd, HC Auckland, CIV-2006-404-771, 15 February 2008.

2. Gama wishes to argue that these decisions are incorrect and should not be adopted.  The argument to be advanced is that a contract is just as much a source of the secondary obligation to pay damages for breach as it is the source of the primary obligations.[8]  We agree with the Judge that this is not an arguable point and does not warrant leave being granted to appeal against the award.

Clause 14.1

[8]Relying on Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 at 848.

1. Clause 14.1 provides that, in the event of default by the tenant, the landlord can issue a notice requiring certain repairs to be undertaken and if the tenant fails to comply with the notice, the landlord can enter the premises and undertake the works.  It can then claim interest on the costs incurred in undertaking the works.  The arbitrator held that Gama could not claim under cl 14.1 because none of the work was done pursuant to the procedure specified under cl 14.1.

2. Gama wishes to argue that the arbitrator wrongly interpreted cl 14.1 as having a temporal limitation that the repair work be done during the term of the lease.  It interprets the clause as creating a right to default interest whenever the lessor has had to incur repair costs because the tenant has failed to comply with a repair notice.

3. The arbitrator’s interpretation of cl 14.1 was based on the plain meaning of the text. Gama did not offer any authority for the alternative interpretation. We do not consider that this point is reasonably arguable.

4. Gama also wishes to argue that, even on the arbitrator’s own interpretation, some of the work claimed for had been done during the term of the lease. We accept that the arbitrator found that “very little” repair work had been undertaken before Fletcher had vacated the premises.  But, while the arbitrator acknowledged that fact he was satisfied that none of the work was done pursuant to the procedure specified in cl 14.1.  The fact that a small amount of work was done during the term of the lease does not overcome this finding. We do not think that is a reasonably arguable point.

Result

1. The application is granted in part.

2. Special leave is granted to appeal the award on the questions set out at [8] above.

3. Gama is entitled to costs for a standard application on a band A basis, with usual disbursements.

Solicitors:
Corcoran French, Christchurch for Appellant
Meredith Connell, Auckland for Respondent