USAR Napier Ltd v Herbert
[2021] NZHC 2638
•5 October 2021
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
I TE KŌTI MATUA O AOTEAROA AHURIRI ROHE
CIV-2021-441-8
[2021] NZHC 2638
BETWEEN USAR NAPIER LIMITED
Plaintiff
AND
MALCOLM ANDREW HERBERT
First Defendant
AND
ANTHONY JAMES HERBERT
Second Defendant
AND
ANTHONY JAMES HERBERT and
STEPHEN PETER LUNN, as trustees of the THACKERAY TRUST
Third Defendants
AND
ANTHONY JAMES HERBERT and
STEPHEN PETER LUNN, as trustees of the CHARLES STREET TRUST
Fourth Defendants
Hearing: 20 September 2021 Appearances:
S M Lowery and J C Suyker for Plaintiff J K Mahuta-Coyle for Defendants
Judgment:
5 October 2021
JUDGMENT OF ASSOCIATE JUDGE LESTER
USAR NAPIER LIMITED v HERBERT [2021] NZHC 2638 [5 October 2021]
[1] The plaintiff hotelier, USAR Napier Ltd, seeks summary judgment for amounts payable under an agreement that settled its rights under an agreement to lease a building at Munroe Street, Napier, which the defendants were converting into a hotel (the Hotel). The third defendant owns the Munroe Street building; the first defendant, Malcolm Herbert (Malcolm), undertook the conversion; the second defendant, Anthony Herbert (Anthony), is Malcolm’s brother and a trustee of the third and fourth defendant, the latter of which is the Charles Street Trust (the Trust), which agreed as part of the settlement to provide a mortgage. While the settlement agreement (the Agreement) is silent as to what the mortgage was to relate to, in context it can only have been security for the amounts payable under the Agreement and the defendants do not suggest otherwise. Mr Lunn, a trustee of the third and fourth defendant, is a solicitor who acted for Malcolm and Anthony.
[2] It is not necessary to go into detail of the plaintiff’s claimed agreement to lease with the third defendant. On 4 December 2020, the plaintiff applied for an interim injunction to prevent the Hotel being leased to another operator, Swiss-Belhotel. On the morning the application was due to be heard (10 December 2020), the parties met with counsel and the Agreement – recorded in a handwritten document – was reached and signed by all parties.
[3] Under the Agreement, the defendants bought out the plaintiff’s rights (if any) under its agreement to lease. The deposit the plaintiff had paid was to be immediately returned, which occurred as it had been held in trust. The following further payments (totalling $510,000) are the subject of this application:
(a) $115,000 by 17 December 2020 (cl 2(b)); (b) $145,000 by 24 March 2021 (cl 2(c)); and
(c) $250,000 plus interest at 8.25 per cent from 10 December 2020 in equal monthly payments commencing 5 April 2021 and ending 5 December 2021 (cl 2(d)).
[4] The plaintiff relies on the written obligation to pay which has not been honoured. The proceedings were issued on 12 February 2021, before the instalment obligations referred to in [3](c) were due to commence. An amended application for summary judgment was filed at the end of June 2021 seeking judgment for the instalments that had fallen due by the date of hearing.
[5] The application for summary judgment also seeks orders for specific performance by the defendants of the obligations created by the Agreement as follows:
(a)that the fourth defendants grant the mortgage in favour of the plaintiff referred to at [1];
(b)that Malcolm and Anthony provide personal guarantees in relation to the $510,000; and
(c)that the company incorporated to run the Hotel provide a General Security Agreement (GSA) to secure the amounts due.
First defence: failure to discontinue
[6]The defendants’ notice of opposition raises three main grounds.
[7] The first ground of opposition is that the plaintiff was expressly obliged by cl 10 of the Agreement to promptly discontinue the injunction proceedings upon receiving back its deposit, but that it has failed to do so.
[8] At the hearing, Mr Mahuta-Coyle, counsel for the defendants, did not press this point, saying that if the Court gets to the point of considering the residual discretion, the failure to discontinue would be a relevant factor. The plaintiff says it was excused from filing the discontinuance because of the defendants’ failure to pay any of the
$510,000, or to take any steps to perform their obligations under the Agreement. Further, the plaintiff asserts the defendants acquiesced in the non-filing of the notice of discontinuance and, even if the plaintiff is in breach by not discontinuing, such caused the defendants no loss as nothing has happened in the injunction proceedings.
[9] It might be said it is hypocritical for the defendants to now complain of a failure by the plaintiff to perform the Agreement in late 2020 when the defendants were in breach almost from the outset. The substantive defence now relied on was not raised until the notice of opposition was filed on 22 June 2021. In late 2020 and into the New Year of 2021, the defendants did not rely on the absence of a discontinuance to justify their non-payment. Indeed the defendants sought to renegotiate the payment terms, saying they were “committed to trying to honour the spirit of the settlement.”. The plaintiff declined to revisit the payment terms in the absence of some comfort that payment would be forthcoming.
[10] Ultimately, I accept the plaintiff’s submission that even if it has breached this obligation (and technically it probably has), such caused the defendants no loss. As to whether the defendants have acquiesced in the failure to discontinue, such is debatable. The high point of that argument is that the defendants did not seek to have the injunction proceedings brought on, or complain about the failure to discontinue when the injunction proceeding was reviewed in March 2021. However, inaction is generally not a sound foundation for acquiescence.
[11] I am satisfied that such breach as arguably occurred does not disentitle the plaintiff from relief. The defendants do not claim that their failure to meet the payments when they fell due was linked to the failure to discontinue. Had the defendants made the first payment due from their own funds on 17 December 2020, the position might be different, but the fact is that, other than returning the plaintiff’s deposit, the defendants have failed to perform any of the obligations under the Agreement yet they have taken all the benefits under it.
Second defence: pre-contractual misrepresentation by plaintiff
[12] The plaintiff was going to operate the Hotel under the Hilton brand. The defendants assert that at the time of the Agreement the Hotel was already linked to Hilton even though it was some way off opening, the idea being to attract future reservations.
[13]The notice of opposition says:
In negotiating and in concluding the settlement agreement between the parties on 10 December 2020 the applicant, by its agent Mr Udai Sarin, represented to the respondents that it would ensure all marketing of the hotel under the Hilton brand would be promptly cancelled and withdrawn from various advertising platforms (“the representations”).
[14] The defendants say these representations were significant to them because of the arrangements they were making with Swiss-Belhotel. Indeed, the defendants go so far as to say that, but for the representations, they would not have entered into the Agreement.
[15] The defendants say that, in breach of the representations, the plaintiff failed to attend to the withdrawal of the marketing of the Hotel under the Hilton brand until about May 2021. They say this failure inhibited the promotion of the Hotel under the Swiss-Belhotel brand, which prevented the new operator accepting advance bookings prior to the Hotel’s anticipated opening at the start of July 2021.
Plaintiff ’s response
[16] The plaintiff denies making any such representation. It says it did not have control over the Hilton organisation and so would not have made a commitment on its behalf. Had such a representation been made and had it been essential, one would expect it to be in the Agreement. Nor was the failure by Hilton to withdraw its promotion raised until the filing of the notice of opposition. The fact the first payment from the defendants’ funds was due a week after the Agreement is inconsistent with the idea that payments were conditional on the advertising being withdrawn.
[17] In a late affidavit, the defendants’ then counsel who was instructed on the injunction and who attended the settlement meeting, gave evidence that supported the defendants’ claim.
[18] Mr Lowery, counsel for the plaintiff, responsibly acknowledged that the late affidavit meant the Court was not in a position to resolve the disputed evidence as to what happened at the settlement meeting. However, what is clear is that unless, and until the Hotel is operating, no loss can accrue to the defendants. Malcolm, in his
affidavit of July 2021, explains the basis of the claimed loss of benefit to the defendants. The argument is as follows.
[19] The delay in the taking down of Hilton advertising prevented advance bookings being made by Swiss-Belhotel and caused it to suffer a loss of turnover. Under Swiss-Belhotel’s agreement to manage the Hotel, it is entitled to a management fee from the income generated, with the defendants receiving the balance of the income.1 Malcolm says that the plaintiff was guilty of deliberately “strangling forward bookings”. Thus, he says the defendants have suffered loss.
[20] An affidavit filed on behalf of Swiss-Belhotel says that during the month of June 2021 when it says it first had an unimpeded ability to take advance bookings, approximately $40,000 worth of gross turnover was advance-booked through the international online platforms. Payment for these bookings is only received upon completion of the guests’ stay.
[21]The affidavit on behalf of Swiss-Belhotel continues:
On one view, this would indicate that, for the six-[month] period December 2020 to May 2021, a total of $240,000 in gross turnover had been unavailable to the Hotel from the online platforms (at $40,000 a month).
[22] Indeed, Swiss-Belhotel suggests $240,000 is a conservative estimate and that the loss of turnover could have been as high as $600,000 for that six-month period.
[23] However, the sting is in the tail. The same affidavit on behalf of Swiss-Belhotel concludes:
At present, the Hotel is not yet open. My comments above assume the Hotel would have been able to open and accommodate the booked stays, and therefore receive payment for the online bookings.
[24] The last affidavit on behalf of the plaintiff dated 26 August 2021 confirms the Hotel has still not yet opened. Counsel confirm that as at 20 September 2021 – the date of hearing – the Hotel is yet to open.
1 Which entity is in fact entitled to the income from the Hotel was not the subject of submissions – because of the view I take of the defence, this issue is not relevant.
[25] In an internet update issued by Swiss-Belhotel on 19 August 2021, it advised that the Hotel would open soon, “but we have had delays through problems with the supply chains”.
[26] Given the Hotel has been unable to operate from December 2020, I consider the defendants’ calculation of loss based on income that the Hotel would have generated in the first six months of 2021 is flawed. The issue is not whether bookings could be made on internet booking sites, but whether those bookings could be turned into income (and ultimately into profit). There is no suggestion the plaintiff was responsible for the Hotel not opening earlier than it did – indeed Swiss-Belhotel attributes the delay to “supply chains”. Mr Mahuta-Coyle advised the Hotel was at the moment awaiting an independent fire safety review.
[27] Mr Lowery made a further compelling point about the quantum of the defendants’ alleged set-off being that the only loss claimed was a lack of revenue, not a lack of profit. He submitted that the defendants have chosen not to provide evidence as to their costs so that their loss of profit could not be assessed. This evidence could only come from the defendants and their decision not to provide a loss of profits figure would have been an independent barrier to a set-off being raised. I accept this submission.
[28] Mr Mahuta-Coyle developed a slightly different submission at the hearing. He submitted that the Court can be certain as to the nature of the misrepresentation relied on and the type of damage/loss asserted. He says the defendants cannot give a final figure as to their loss as they do not know how many bookings Hilton took for the period after the Hotel will open before it was removed from the internet booking sites. In other words, the defendants are unable to tell the Court what percentage of bookings were taken by Hilton for dates after the opening date. There may well have been forward bookings for after the eventual opening date which were lost to the new operator. Theoretically, it may be the case that such advance bookings exist. However, that is not the basis on which the defendants have approached loss. I say that as the tenor of the defendants’ evidence is that once Hilton was removed from the internet booking sites, the Hotel received $40,000 worth of bookings for the first month. Further, the Swiss-Belhotel affidavit approaches loss on the basis of an assumed
average occupancy rate of 80 per cent, not on actual forward bookings lost. In any event, if the Hotel enjoys full occupancy then no loss will occur. Mr Mahuta-Coyle’s alternative approach to loss is, in my view, too speculative and suffers from a focus on a loss of revenue rather than a loss of profit.
[29] As Mr Mahuta-Coyle only developed this approach to loss in his oral submissions, the plaintiff filed a brief affidavit after the hearing addressing this point. Mr Mahuta-Coyle objected to this affidavit being read on the basis it was late and contains hearsay. Given the view I have reached on the defendants’ claimed set-off, I decline to read the late affidavit.
[30] I do not accept there is a reasonably arguable set-off in respect of the alleged pre-contractual misrepresentation when the alleged delay in removing the Hilton branding had no consequences to the defendants in terms of loss of profit. Any claim Hilton’s inaction/delay had a continuing effect after the Hotel actually opened is speculative and unquantified.
[31] Mr Mahuta-Coyle, in submissions filed after the hearing, submitted the effect of the breach relied on entitled the defendants to either seek damages or cancellation. As to exactly when the right to cancel arose, he said such cannot be pinpointed at the moment. He submitted the situation is far from straightforward and thus not suitable for summary judgment. The submission is that the timing of the accrual of the defendants’ right to cancellation is an intensely factual issue which will require findings as to the nature of the representation the defendants allege and rely on. The issues include what a reasonable time would have been for Hilton to have removed its marketing from the internet booking sites.
[32] I am satisfied the issue of cancellation is a red herring. This is because the defendants at no time sought to cancel the Agreement. Section 41 of the Contract and Commercial Law Act 2017 provides that cancellation does not take effect before notice of it is given to the other party. No notice of cancellation has been given in this case. The notice of opposition does not rely on cancellation. I am satisfied the issue of cancellation is irrelevant to this proceeding when the defendants have not purported to cancel.
Third defence: remedies expressly limited
[33]The notice of opposition refers to cl 10 of the Agreement which provides:
Promptly after [the] defendants make the payment under [cl] 2(a), USAR shall file a notice of discontinuance of its proceedings against Thackeray Trust & Malcolm Herbert, with no issue as to costs. The parties agree that USAR shall be entitled to bring the same claim at a later date, should defendants breach this agreement.
[34] The defendants say the effect of the above clause is to limit the plaintiff’s remedy in the event of a material breach to the resumption of the injunction proceedings.
[35] I do not accept that is a tenable construction of cl 10 of the Agreement. That interpretation would convert what, on the face of the Agreement, are specific obligations to pay on set dates into an option to the defendants to pay, as the only consequence the defendants would then face for non-payment is the risk the plaintiff would resume the injunction proceedings. The Agreement provides for penalty interest and the provision of security, both of which would be redundant if the obligation to pay were not intended to be enforceable.
[36] On the defendants’ case, the plaintiff was obliged to discontinue immediately on receiving the deposit, to bear its own costs to that point and then have to start afresh if the defendants decided they did not want to pay what they agreed to pay to obtain the discontinuance. In the context of a settlement meeting on the morning of an injunction hearing, particularly with there being a competing operator in the wings, I consider this interpretation is commercially untenable.
[37] All cl 10 does is prevent the plaintiff’s rights under the agreement to lease merging in the Agreement. The clause gave the plaintiff the option to reissue the proceeding to enforce its agreement to lease, not an obligation to do so.
Decision and the nature of the remedies sought
[38] The plaintiff’s claim is in damages rather than in debt. The plaintiff seeks an order that Malcolm and Anthony are required to give guarantees. Equity treats as done
that which ought to be done. Having committed unequivocally to give guarantees, Malcolm and Anthony are treated as having given them.2 The defendants do not submit that the form of the relief sought by the plaintiff, that is damages as opposed to debt, is of any significance. In my view, the claim against Malcolm and Anthony is more appropriately in debt pursuant to the guarantees they committed to but failed to give.
[39] Accordingly, there is judgment against the first and second defendant as follows:
(a)in the sum of $115,000 due 17 December 2020;
(b)in the sum of $145,000 due 24 March 2021;
(c)for such of the monthly instalments of the $250,000 payable from 5 April 2021 as have accrued to the date of judgment;
(d)judgment as to liability in respect of the balance of the instalments payable in respect of the $250,000; and
(e)interest at the default rate in relation to (a), (b) and (c) above to be included in the calculation of quantum;
[40] With Malcolm and Anthony referred to as guarantors, the third defendant was intended to be the principal debtor. There is judgment against the third defendant in the same terms as in the preceding paragraphs.
[41] The plaintiff is to prepare a schedule of the amounts it calculates are due under the above Order for approval by the defendants. Leave is reserved to apply should any disagreement arise.
[42] The application for the fourth defendant to grant a second mortgage in favour of the plaintiff relates to the payment obligations already referred, that is, the mortgage
2 Regan v Brougham [2019] NZCA 401 [2020] 2 NZLR 299 at [30].
over 290 Poraiti Rd, Napier. Mr Mahuta-Coyle did not submit that if the Agreement was otherwise enforceable the fourth defendants were not bound by this obligation.
[43] I enter judgment as to liability against the fourth defendants in respect of this part of the claim. The form of mortgage sought to be registered has not been tabled. The plaintiff is to seek to agree the form of mortgage with the defendant failing which leave is reserved to apply further as to the form of mortgage to be granted by the fourth defendants.
[44] I decline to make an order that the company incorporated to operate the Hotel business be required to give a GSA to secure the amounts due as it is not a party to the proceeding. Mr Lowery submitted I should approach this issue on the basis that the defendant signatories to the Agreement had agreed to procure the granting of a GSA. Clause 8 of the Agreement has the appearance of a pre-incorporation contract. Without the company being joined as a party or full submission on that point I decline the application for summary judgment in respect of this aspect of the claim.
The residual discretion
[45] Mr Mahuta-Coyle submitted this was an appropriate case for judgment to be declined under the residual discretion and it was in this context that the defendants relied on the plaintiff’s failure to discontinue the injunction proceedings.
[46] Discretionary factors, however, do not favour the defendants. On 10 December 2020, the defendants committed to making the first instalment of payments from their own funds seven days later. It would appear the defendants did not have the ability to pay when they signed the Agreement. It was claimed that non-payment was due to circumstances beyond their control but when called upon to explain what those circumstances were, there was no response. This was the resolution of a commercial dispute where the substantive ground for non-payment was not raised until about six months after the first payment was due. The defendants retain the benefit of having avoided the injunction hearing and are working towards opening the Hotel with the rival operator. I decline to exercise the residual discretion to refuse judgment.
Costs
[47] I see no reason why costs should not follow the event on a 2B basis plus disbursements as fixed by the Registrar. That will be the costs order unless either counsel file costs submissions – not more than five pages – within five working days of the release of this judgment.
Associate Judge Lester
Solicitors:
Anthony Harper, Christchurch
Copy to counsel: S M Lowery, Barrister, Auckland
Lawson Robinson, Napier
Copy to counsel: J K Mahuta-Coyle, Barrister, Wellington
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