Watson & Son Limited v Whitehead
[2016] NZCA 241
•2 June 2016 at 11.30 am
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA750/2014 [2016] NZCA 241 |
| BETWEEN | WATSON & SON LIMITED DENIS ERIC WATSON AND MERYL JOY WATSON AS TRUSTEES OF THE SALEM CHARITABLE TRUST |
| AND | JOHN EDWARD WHITEHEAD, ROSALENE MARIE WHITEHEAD AND EDWARD IVAN WHITEHEAD AS TRUSTEES OF THE J AND R WHITEHEAD TRUST SHILOH CHARITABLE TRUST |
| Hearing: | 9 and 10 March 2016 |
Court: | Kós, Keane and Dobson JJ |
Counsel: | K P Sullivan for Appellants |
Judgment: | 2 June 2016 at 11.30 am |
JUDGMENT OF THE COURT
A The appeal is allowed in part. The amounts payable for rent of hives are to be the subject of equitable set-off against amounts owing for purchases of honey on each due date, with interest calculated on the net balance outstanding.
B The order for indemnity costs on the respondents’ claims for payment of outstanding amounts for honey sold to the appellants is overruled, and replaced with an order in favour of the respondents for costs on a 2B basis.
CRemaining aspects of the appeal are dismissed.
DThe cross-appeal is dismissed.
ECosts are ordered in favour of the appellants at two-thirds of costs for a standard appeal on a band A basis together with usual disbursements, with no order for costs on the cross-appeal.
____________________________________________________________________
REASONS OF THE COURT
(Given by Dobson J)
Table of Contents
Para No
Introduction............................................................................................................. [1]
The parties................................................................................................................ [4]
The sequence of transactions.................................................................................. [6]
Claims and counterclaims..................................................................................... [36]
High Court outcomes............................................................................................ [42]
Liability................................................................................................................ [42]
Quantum.............................................................................................................. [51]
Costs.................................................................................................................... [54]
The Whiteheads’ cross-appeal.............................................................................. [56]
JRWT’s rental payment direct to Shiloh.............................................................. [56]
The Watsons’ appeal.............................................................................................. [85]
Off-setting liabilities before or after charging interest?..................................... [85]
Did the 18 per cent contractual provision merge with the judgment?.............. [107]
Damages for hives acquired in unusable condition.......................................... [109]
Rental for hire of hives payable for the full year?............................................. [119]
Appeal from costs judgment.............................................................................. [127]
Costs on the appeal.............................................................................................. [144]
Result.................................................................................................................... [145]
Introduction
This appeal and cross-appeal arise out of a sequence of contracts between two bee-keeping entities, involving the sale and lease back of significant numbers of beehives, the entitlement to sites at which the hives were located, and the sale and purchase of various grades of Manuka honey.
The disputes were the subject of an 11 day hearing before Wylie J in the High Court at Whangarei, following which Wylie J issued an interim judgment on 27 November 2014 addressing liability.[1] A final judgment dealing with quantum was issued on 17 April 2015.[2] A third judgment dealing with costs was issued on 20 July 2015.[3]
[1]Watson v Whitehead [2014] NZHC 2992.
[2]Watson v Whitehead [2015] NZHC 739.
[3]Watson v Whitehead [2015] NZHC 1679.
Both sides, by their counsel, were emphatic that the Judge had done a marvellous job in bringing order to the chaos of the breakdown of the complicated arrangements between the parties. However, admiration for the quality of the judgments did not stop both sides pressing for alterations to the result on discrete points in order to achieve a final outcome more advantageous to them.
The parties
The first appellant, Watson & Son Ltd (WSL), carries on business as a producer and supplier of Manuka honey. It is operated by members of the Denis and Meryl Watson family. Mr and Mrs Watson are also the trustees of the Salem Charitable Trust (Salem) that, although styled as such, is not recognised as a charitable trust. Salem was a party to some of the relevant contracts with the respondent entities but assigned its rights and obligations under those contracts to WSL. For the most part, it is sufficient to refer to the various Watson interests as “the Watsons”. Where any need exists to distinguish between them, they will be referred to separately as WSL and Salem. The Watsons are based in the Wairarapa, with their operations extending around the North Island, including Northland.
The first respondents are the trustees of a trading trust, the J and R Whitehead Trust (JRWT), which is used by the Whitehead family to operate their bee-keeping business. The Whiteheads have also formed the Shiloh Charitable Trust (Shiloh), the trustees of which comprise members of their family.[4] Although the distinction between the two Whitehead entities needs to be made in somewhat wider circumstances than for the Watsons, for the most part it is sufficient to refer to their interests simply as “the Whiteheads”. The Whiteheads are based in Kerikeri, with their bee-keeping business spread, for the most part, around Northland.
The sequence of transactions
[4]Mr and Mrs Whitehead retired as trustees in February 2010, leaving their solicitor as the trustee. Nothing turns on the identity of the trustees. Shiloh appears to have operated in accordance with Mr Whitehead’s wishes.
After settling Shiloh in 2006, the Whiteheads sought to provide it with a source of income to make charitable distributions. In May 2008, JRWT sold 3,000 beehives to Shiloh at $1,300 plus GST per hive. Shiloh completed an acknowledgement of debt for the purchase price, which was to be paid over 25 years without any interest commitment. JRWT leased the hives back from Shiloh at a rental of $200 per hive per year. That transaction was scrutinised by the Inland Revenue Department (IRD), which took the view that it constituted a tax avoidance arrangement because the price paid for the hives was perceived to be too high.
To justify the terms agreed between the Whitehead entities, Mr Whitehead approached Mr Watson with a view to completing a transaction with an independent party on similar terms to demonstrate their commerciality.
In 2009, Messrs Watson and Whitehead reached an initial agreement for Salem to purchase 500 hives from JRWT at a purchase price of $1,350 per hive. Any honey which had not been removed from the hives prior to 30 November 2009 belonged to the purchaser. JRWT was to extract the honey and sell it as agent for Salem. Salem was to pay JRWT a fee of $100 per hive for these services. Having extracted the honey on behalf of Salem, JRWT then sold it to WSL. The amounts paid for the honey by WSL were credited against the purchase price for the hives payable by Salem. That initial arrangement worked amicably, including an agreement to reduce it from 500 to 400 hives. In the spring of 2012, those first 400 hives were relocated by WSL from Northland to the Wairarapa.
The success with that initial agreement between JRWT and Salem encouraged the parties to negotiate further. Four agreements for sale and purchase were concluded on 11 October 2010 between Shiloh as vendor of the 3,000 hives it had acquired from JRWT in 2008, and Salem as purchaser (the 2010 sale agreements). Each hive was sold at a price of $1,350 plus GST. In each agreement, possession was granted to Salem on 15 October 2010, but there were staggered settlement dates of 1 March 2011 for the first agreement (400 hives), 15 March 2011 for the second (700 hives), 15 September 2011 for the third (900 hives) and 5 October 2011 for the fourth agreement (1,000 hives).
The 2010 sale agreements included a provision (cl 4.2) that the hives were to be leased to JRWT until March 2011, and that rent received by Salem was to be paid immediately to Shiloh in reduction of the purchase price. That provision assumed prominence in the arguments, and we return to it later in this judgment.[5]
[5]See [59]–[71] below.
Salem and JRWT completed a lease on 11 October 2010 in respect of all 3,000 hives that Salem was purchasing from Shiloh (the first hire agreement). That hire agreement also extended to the 400 hives that Salem had initially purchased from JRWT. The hives were to be rented for five months from 15 October 2010 to March 2011. The total rental was $917,000 plus GST. That amount was payable in cash, or in the equivalent value of honey.
The sequence of payments between the parties created circular and interdependent cash flows. To introduce cash from outside the circular flows between the parties, WSL had to sell honey. WSL depended on the hives as managed by JRWT, generating the honey in order to earn the revenue received from third parties. To pay the Whiteheads for the hives being purchased, the Watsons needed the rental being paid by JRWT. JRWT needed the proceeds of honey sales to meet its rental obligations under the first hire agreement. The circularity of these money flows is reflected in the diagram attached to the judgment as “A”, a version of which we discussed with counsel during the hearing.
The second of the 2010 sale agreements was settled on 31 March 2011. The Judge’s analysis of the cash flows, which was not disputed, was that solicitors acting for the Whiteheads transferred $1,086,750 to the solicitors acting for the Watsons. This represented the rental payable on all of the hives until that time, plus an additional sum for honey boxes and trays that had been supplied by the Watsons. The whole of that amount was paid the same day by the Watsons’ solicitors to Shiloh’s solicitors to settle the purchase of the 700 hives that were the subject of the second agreement. Within a few months of settlement, the 700 hives were also transported to the Wairarapa.
However, the first, third and fourth 2010 sale agreements that were due for settlement in March, September and October 2011 did not settle. Negotiations between the parties in October and November 2011 resulted in three principal and two ancillary agreements, all of which were dated 29 November 2011. These are the agreements at the heart of the dispute. No issue was taken with the summary of these agreements provided by the Judge, and it is adequate for the issues on the appeal to précis his summary.
The first of the November 2011 agreements was a deed of arrangement between Shiloh and Salem (the DoA). It was entered into on the premise that the first, third and fourth 2010 sale agreements had not been settled, but that satisfactory arrangements had been made, at least contingently, for that to occur. The DoA provided that the third 2010 sale agreement would be the next to be settled. Salem would pay $200,000 on 30 November 2011 and then monthly instalments of $150,000 on the 20th day of each month from and including December 2011 to June 2012. A final payment of $147,250 would be paid on 25 July 2012. Title to the 900 hives transacted under the third 2010 sale agreement was to pass to Salem on payment of the final instalment.
If that third agreement settled, then the parties would settle the first and fourth agreements. The total amount payable under them was $2,173,500 (inclusive of GST). Salem was to pay the first $600,000 on 30 July 2012. There was to be a loan back from Shiloh to Salem, evidenced by an exchange of funds between the respective solicitors for the balance of $1,573,500, which would also occur on settlement on 30 July 2012. Shiloh took security over the 1,400 hives that were the subject of the first and fourth agreements. Salem was to pay interest on the outstanding components of the sale prices under the first, third and fourth agreements at four per cent, calculated on a daily basis.
The second principal agreement concluded on 29 November 2011 was for JRWT to hire from Salem the 2,300 hives that were being purchased under the first, third and fourth 2010 sale agreements (the second hire agreement). This agreement was on terms that Salem either owned the hives or had a possessory interest in them. The hives were defined to include the sites at which they were all positioned.
The price agreed for sale of the hives included the long-term entitlement to place the hives in the locations where they been sited by the Whiteheads. As the dispute developed, the Watsons argued that in fact the Whiteheads could not provide long-term entitlements for all the sites, and that the documentation for such entitlements was inadequate. That dispute is not relevant on the appeal or cross‑appeal.
The second hire agreement was to commence from 1 April 2011 (that is, backdated by eight months) and was for an initial term of one year and four months. Rental was $300 per hive per annum, resulting in an annual rental of $690,000 (plus GST), or $57,500 per month. Rental for the months of April to December 2011 was to be paid in one lump sum on 30 July 2012. Rental for the months of January to July 2012 was to be paid on the last day of each month. JRWT was to pay Salem interest on a monthly basis from the end of each month to 30 July 2012 at six per cent per annum on the delayed rent payments.
JRWT could renew the lease for a further five one-year terms, commencing from 1 August 2012, with the rental for each year to be reviewed by agreement. On any such renewal, rental would be paid monthly in arrears on the last day of each month. The second hire agreement confirmed that all honey produced from the hives would be the property of JRWT as the lessee, and that Salem would purchase up to 50 tonnes of medical grade Manuka honey per year from JRWT.[6] JRWT also granted Salem a right of first refusal to purchase all non-medical grade Manuka honey. The second hire agreement contained an acknowledgement by JRWT that Salem’s rights to grant the lease were subject to the prior rights of Shiloh.
[6]The references to medical and non-medical grade Manuka honey were shorthand substitutes used by counsel for somewhat more technical descriptions used by the parties.
The third principal agreement, concluded between JRWT and WSL on 29 November 2011, was for the sale and purchase of honey (the honey agreement). It acknowledged JRWT’s prior delivery of supplies of honey to WSL, by reference to individual invoices. It recorded WSL’s wish to purchase further quantities of medical grade Manuka honey from JRWT and quantified the total sum that would be due once all the honey was delivered at $1,980,610. WSL was to pay $173,691.82 on execution of the agreement, and the same amount again on 5 December 2011. There were to be nine further consecutive payments of that amount on the 20th of each month commencing from 20 January 2012, and in addition a single payment of $70,000 on 10 January 2012. If there was any default on these payments, WSL was to pay JRWT interest on any overdue sum at the rate of 18 per cent per annum, calculated on a daily basis until the date of actual payment. On any default, WSL was also to pay JRWT’s costs of enforcing payment, including solicitor/client costs. WSL’s obligations were personally guaranteed by Mr Watson.
By the two ancillary agreements of 29 November 2011, Salem’s interests in both the DoA and the second hire agreement were the subject of assignments to WSL. Both Salem and WSL were to remain liable to perform Salem’s obligations and WSL indemnified Salem against any liabilities it might incur as a result of WSL’s default. The assignments were completed with the consent of JRWT, so that both Salem and WSL remained liable to JRWT.
WSL’s payments for honey were at a nil balance in mid October 2011, but by 31 October 2011 WSL owed JRWT approximately $1.4 million for honey purchases. The state of that account fluctuated from a high of approximately $1.63 million as at 30 December 2011 to a low of $945,000 in May 2012. As at 31 July 2012, WSL owed JRWT approximately $1.289 million for honey supplied.
JRWT made timely payments on its rental obligations for the hives between January and April 2012, but delayed paying rental for May, June and July 2012 until the end of July 2012. That left outstanding the lump sum of $595,125 for rental for the earlier period of April to December 2011, which the parties had agreed was to be paid on 30 July 2012. That payment was not made.
On the third 2010 sale agreement, WSL paid Shiloh $812,500, although some of the payments were late. The remainder of the consideration payable under that third agreement was funded by payments from JRWT to WSL for the rent of hives. WSL was due to pay $600,000 in respect of the first and fourth 2010 sale agreements on 30 July 2012 but failed to do so. The loan and security documentation, which was to have been completed for $1,573,500 being the balance of the purchase price under those agreements, was also not completed.
The history of delayed performance of payment obligations on both sides makes it difficult to clearly attribute responsibility for the arrangements breaking down because of any particular failure by either party to make timely payments under the interdependent payment arrangements.
In December 2012, lawyers for the parties exchanged views on the legal position maintained for each side in the circumstances that pertained. First, on 5 December 2012, the Watsons’ solicitor, Mr Bale, wrote to the Whiteheads’ solicitor, Mr Hockly. That letter:
(a)Recorded rental in arrears under the second hire agreement. The amount to bring rentals up to date as at December 2012 was $925,750. No notice of intention to renew the second hire agreement had been received since expiry of the first rental period in July 2012 and WSL gave notice that the second hire agreement had come to an end.
(b)Recorded that the Whiteheads were refusing to release 900 hives that had been purchased by the Watsons. The Watsons contended that the Whiteheads had retained the benefit of harvesting honey from the 900 hives after they had been owned by the Watsons, estimating the market value of that honey at $675,000.
(c)Raised concerns that some of the sites used for the hives were neither owned nor legally controlled by the Whiteheads. The Watsons warned that they would demand repayment of part of the purchase price from Shiloh and, if necessary, sue Shiloh for breach of contract.
(d)Raised a concern that JRWT had sold non-medical grade Manuka honey to third parties in breach of the Watsons’ right of first refusal over all such honey.
Mr Hockly replied for the Whiteheads on 19 December 2012. Their position was:
(a)JRWT was exercising its right to renew the second hire agreement for a further one year period. He acknowledged that JRWT had not made rental payments and proposed the rental should reduce to $150 per hive.
(b)JRWT wanted to pay outstanding rental prior to Christmas and suggested that the transactions set out in the DoA should still proceed.
(c)The reason for non-payment of rental by JRWT was because the Watsons had failed to pay for honey supplied to them.
On 7 January 2013, Mr Bale replied for the Watsons. He disputed that JRWT could renew the second hire agreement, citing the absence of timely notice of renewal and the Watsons’ notice that the agreement would not be renewed. Mr Bale asserted there was no right of set-off between the various payment obligations.
Thereafter, the parties exchanged positions in without prejudice correspondence.
In late March 2013, the Whiteheads undertook an internal transaction by short-circuiting money flows that arguably would otherwise have gone to, and come back from, Watson entities. Shiloh (as the vendor entitled to instalments on the purchase price of hives sold to Salem) demanded from JRWT payment of the rent that it would otherwise have paid to Salem for hire of the hives. Shiloh presented JRWT with an invoice for $966,000 dated 22 March 2013. JRWT made a first payment of $644,000 on that day and paid the balance of $322,000 on 9 April 2013.
On 28 March 2013, Mr Whitehead wrote to Mr Watson advising, among other things, that JRWT no longer wished to rent the hives from WSL, and asking Mr Watson to uplift the 900 hives sold pursuant to the third 2010 sale agreement. Mr Whitehead offered to pay the rental due on the 900 hives up to 31 March 2013.
On 4 April 2013, Mr Whitehead wrote again to Mr Watson advising that from 1 April 2013 JRWT would charge $25 per month per hive for managing the 900 hives until they were picked up. He requested an invoice for the rental due for those hives up to 31 March 2013 and also requested payment of the outstanding debt owing in respect of the honey supplied.
On 11 April 2013, Mr Hockly wrote to Mr Bale, recording that Shiloh was cancelling the first and fourth 2010 sale agreements, without prejudice to any claims for interest or damages. The ground relied on for cancellation was the Watsons’ failure to settle the agreements. The next day, in his capacity as a trustee of Shiloh, Mr Hockly wrote to Mr and Mrs Whitehead in their capacity as trustees of JRWT, demanding that JRWT pay rental for the remaining 1,400 hives that had been the subject of the first and fourth 2010 sale agreements at a rate of $300 per hive. He made that demand on the premise that the Watsons’ rights under the hire agreement for the 1,400 hives had been assigned to Shiloh with effect from 1 April 2011.
There were further exchanges about the management of the 900 hives and their removal by the Watsons in April and May 2013. Mr Watson wished to inspect the hives before uplifting them, and Mr Whitehead issued an invoice for managing the hives in April and early May 2013. Those hives were uplifted by the Watsons in mid May 2013.
Claims and counterclaims
Initially, the Watsons sought an injunction to prevent JRWT selling non‑medical grade Manuka honey to third parties in breach of the Watsons’ right of first refusal. The Whiteheads counterclaimed for unpaid amounts for honey supplied, initially seeking summary judgment. The Watsons amended their claims to make much broader allegations. The Judge found the pleadings prolix and difficult to follow and we can only agree. The Watsons alleged that the prices they agreed to pay for honey were at least $5 per kilogram higher than the market price for Manuka honey of its rating. Also, that the price of $1,350 plus GST per hive was at least $1,000 per hive more than the value of the hives being sold. Despite Mr Bale’s December 2012 letter giving notice that the second hire agreement had come to an end, the Watsons pleaded that agreement had been renewed in or about July 2012, in support of their claim for unpaid rent for the 1,400 hives to July 2013.
The Watsons claimed that the Whiteheads had refused to deliver up the 900 hives that were the subject of the third 2010 sale agreement and that the Whiteheads had wrongfully used those hives and taken honey from them in December 2012 and January 2013. The Watsons complained that at least 20 per cent of the 900 hives were in unusable condition once the Watsons took possession of them and that the Whiteheads had wrongfully repudiated the second hire agreement by failing to pay rental and then purporting to cancel the agreement or refusing to renew it.
The Watsons claimed that their completion of the purchase of hives covered by the first to fourth 2010 sale agreements was contingent on the Whiteheads paying rental on all 2,300 hives, or on such hives as the Whiteheads continued to have in their possession. In this event, a $600,000 payment due from the Watsons in July 2012 and their loan repayments could be offset against the rentals they expected to receive for the hives. The Watsons also claimed that the JRWT payment to Shiloh of approximately $900,000 diverting rentals payable to the Watsons was in breach of contractual obligations. The Watsons also alleged that when matters were being unwound, Shiloh had repudiated the DoA and sold hives back to JRWT at $450 plus GST per hive.
The Whiteheads’ counterclaim alleged that the Watsons had failed to meet their obligations under the DoA. The Watsons had failed to pay the instalment of $600,000 due for hives that were the subject of the first and fourth 2010 sale agreements on 30 July 2012 and had also failed to pay other outstanding instalments and interest. The Whiteheads claimed the Watsons had failed to document the required security for the balance outstanding, and that $897,250 was still owed pursuant to the DoA. The Whiteheads sought damages for breach of the first and fourth 2010 sale agreements and outstanding interest. As an alternative, the Whiteheads’ counterclaim sought an accounting for the amounts due under the DoA and any other related agreements.
The Whiteheads alleged that it was the Watsons who had breached the second hire agreement by cancelling it, and that the Whiteheads were thereby deprived of their entitlement to derive honey from the hives. The Whiteheads also claimed unpaid amounts for the sale of honey. This was quantified at $690,694.04, together with accrued interest at the rate of 18 per cent per annum. Additional sales of non‑medical grade Manuka honey remained unpaid to the extent of $495,912.75. The Whiteheads claimed interest on that sum at five per cent per annum pursuant to the Judicature Act 1908.
All the counterclaims were also pursued against Mr Watson in his personal capacity on the basis of his personal guarantees.
High Court outcomes
Liability
On the Watsons’ liability for the purchases of honey, the Judge found that WSL was liable for amounts outstanding for honey supplied by JRWT pursuant to the honey agreement, plus interest at the contractual rate of 18 per cent from the respective dates of default. In addition, liability was made out for WSL to pay for the non-medical grade honey that had been supplied, together with interest at five per cent pursuant to the Judicature Act.
The Judge found that the first and fourth 2010 sale agreements had been cancelled by the Whiteheads on 11 April 2013, but that Shiloh had not suffered any loss as a consequence of the Watsons’ breach of those agreements. Shiloh had sold the hives at less than the contract price of $1,350 per hive but had not taken any steps to mitigate this notional loss when it concluded a less than arm’s length sale to JRWT.
The Watsons remained liable to pay some $2,700 in interest on amounts that were paid late under the third 2010 sale agreement that had eventually settled.
On the Whiteheads’ liabilities under the second hire agreement, the Judge found that JRWT had not discharged its liability to pay rental to the Watsons by paying Shiloh directly. The second hire agreement had remained on foot and Shiloh was not entitled to demand that the rental be paid directly to it by JRWT. The Whiteheads were liable to pay the Watsons the unpaid rental for hives from April to December 2011, being $517,500 plus GST, together with interest at the contractual rate of six per cent per annum until 30 July 2012, and at the Judicature Act rate of five per cent after that. The Judge also found that an interest liability accrued to the extent that rental payments for the hives were made late in the January to July 2012 period.
The Judge assessed liability for rentals from the date of renewal on 1 August 2012 separately for two groups of hives. For the 1,400 hives that were the subject of the first and fourth 2010 sale agreements, the Whiteheads were liable to pay rental from 1 August 2012 until those agreements were cancelled on 11 April 2013. Because the 2010 sale agreements in respect of those hives were cancelled on 11 April 2013, the Watsons had no right to possession thereafter to enable them to rent the hives to JRWT. The Judge attributed the same rate of rent as had applied during the initial term that ended on 31 July 2012, and the Whiteheads were also liable for Judicature Act interest at five per cent per annum.
For the 900 hives that were the subject of the third 2010 sale agreement that did settle, the Whiteheads were liable to pay rental at the same rate until cancellation, plus interest. Cancellation was found to have occurred on 31 March 2013 when the Whiteheads indicated their unequivocal intention to cancel the second hire agreement.[7] The Judge found that the Watsons repudiated this agreement first by asserting that it was at an end on 5 December 2012.
[7]Watson v Whitehead, above n 1, at [226]–[229].
The Judge found Shiloh liable to pay for the restoration of 180 of the 900 hives, which were uplifted by the Watsons in poor condition. The Watsons’ claim for lost profits from those hives was dismissed.
Numerous other claims and counterclaims were determined, but they are not relevant to the issues raised by the appeal and cross-appeal.
In his liability judgment, the Judge directed that the parties’ expert accountants were to confer, and prepare final calculations in accordance with that interim judgment. That process took longer than the Judge had contemplated and a number of minutes from the Judge and memoranda from counsel were required before the Judge was able to determine final issues of quantum. He did so in a judgment issued on 17 April 2015.
Quantum
The Judge found that the Watsons could set off money owing to JRWT for honey supplied against amounts owing by JRWT to the Watsons for rental. An equitable set-off was recognised because the claim and counterclaim were closely related. The Judge found that the set-off should occur after the calculation of interest owing on all overdue sums from their respective due dates. The Judge rejected the argument for the Watsons that the set-off ought to be applied prior to calculating interest and determining the net sum owing from time to time.[8]
[8]The Judge’s reasoning for this finding is quoted at [89] below.
As to the respective contractual interest rates, the Judge held that the 18 per cent interest payable by the Watsons on late payments for the purchase of honey did not merge in the High Court quantum judgment. Accordingly, post‑judgment interest continued to run on that debt at 18 per cent until the date of actual payment. The Judge held that it was not unconscionable to enforce that higher interest rate.
The Judge quantified the damages for hives returned to the Watsons in poor condition at $13,140. That represented an estimate of labour and materials to restore the hives to good condition. The Watsons’ claim for lost production or profits whilst the hives were being repaired had not been pleaded and, in the absence of evidence on the topic, the Judge held it was not open to the Watsons to pursue it.
Costs
The Judge dealt with costs issues in a third judgment delivered on 20 July 2015. The Judge ordered costs on an indemnity basis in favour of the Whiteheads on their claim for monies owing under the honey agreement, because there was a specific provision to that effect in that contract. However, costs were only awarded up to the date of a Calderbank offer made by the Watsons to the Whiteheads in June 2014. On the Watsons’ judgment for rentals owing by JRWT, costs were awarded to the Watsons on a 2B basis, reduced by 50 per cent because of the Watsons’ conduct in the proceedings.
The Watsons had claimed, as disbursements, substantial fees for a forensic accountant, Mr Vance, and a valuer, Mr Gross. The Judge found that Mr Vance’s full invoice was unreasonable and allowed only 25 per cent of it. Mr Gross’s fee was not recoverable because it related to an aspect of the Watsons’ claim that had failed.
The Whiteheads’ cross-appeal
JRWT’s rental payment direct to Shiloh
At the hearing, we invited Mr Black to address the issues in the Whiteheads’ cross-appeal first. They include the issue that has the greatest impact of those raised on appeal and cross-appeal. Accordingly, the cross-appeal is appropriately considered first.
The Judge found that Shiloh was not entitled to make the demand for JRWT to pay Shiloh directly the $966,000 that comprised the amount owing by JRWT to the Watsons under the second hire agreement for 1,400 hives. The interim judgment provided the following reasons for that finding:[9]
[9]Watson v Whitehead, above n 1.
[202] First, Shiloh had no entitlement to the rental for the 1400 hives the subject of the first and fourth agreements as at 22 March 2013.
(a)While Salem had purported to cancel the second agreement for the hire of hives by letter from its solicitor dated 5 December 2012, that cancellation was not accepted by JRWT and it was ineffective. The second agreement for the hire of hives was a lease of personal property, and subject to the provisions of the Property Law Act 2007. There is no evidence that Salem/WSL complied with the provisions of s 245 of the Property Law Act by serving on JRWT a notice of its intention to cancel the agreement.
(b)Although it was denied by Mr Bale in his letter sent on behalf of Salem/WSL on 5 December 2012, it was pleaded by the plaintiffs in their second amended statement of claim that the second agreement for the hire of hives was renewed as from July 2012. Both Mr Watson and Mr Whitehead gave evidence to this effect and I accept their evidence. It follows that the agreement was on foot, until such time as it was validly cancelled.
(c)On 28 March 2013, when Mr Whitehead wrote to Mr Watson advising that JRWT no longer wished to lease any of the hives from WSL, and asking WSL to uplift the 900 hives which Salem had purchased. Mr Whitehead’s letter did not, however, expressly use the word “cancellation”, and as I note below, it was equivocal. It did not, in my view, cancel the second agreement for the hire of hives. Rather, the agreement only came to an end on 11 April 2013 when Shiloh cancelled the first and fourth agreements. It was those agreements which gave Salem/WSL the possessory rights which were accepted by the parties and which permitted the hire of the hives to JRWT.
[203] Secondly, by letter dated 12 April 2013 sent to JRWT, Shiloh claimed that, pursuant to the deed of arrangement, Mr Watson’s rights under the lease of the hives with JRWT for the 1,400 hives the subject of the first and fourth agreements had been assigned to Shiloh with effect as from 1 April 2011. Mr Black relied on this to support Shiloh’s appropriation of the rental from JRWT. The argument advanced does not follow from the documentation. There was nothing in the deed of arrangement to the effect claimed. Clause 12.1 in the second agreement for the hire of hives read as follows:
The lessee acknowledges that the lessor’s rights to grant this lease is subject to the prior rights of the Shiloh Charitable Trust.
That clause, however, did not give Shiloh the right to demand rental as from 1 April 2011. It was simply an acknowledgement by JRWT that Salem’s rights to enter into the second agreement for the hire of hives were subject to the prior rights of Shiloh.
There were a number of strands to the Whiteheads’ arguments challenging this finding. Most of these arguments depended to a greater or lesser extent on the proposition that a provision in the 2010 sale agreements continued to apply to the sale transactions after the terms for the sales were renegotiated in the DoA.
Each of the four 2010 sale agreements included the following provision:
4. Honey
4.1Prior to the date of this Agreement the Vendor shall have the right to remove any honey from the Hives. Any honey not removed from the Hives prior to that date shall belong to the Purchaser or party leasing the hives.
4.2Prior to settlement date Hives and Sites will be leased to J&R Whitehead Trust from 15th October 2010 to March 2011. Any lease [sic] or honey in lieu of rental received by the Purchaser for Hives and Sites will be paid to vendor immediately towards the amount payable under clause 6.1.
It is common ground that the reference to “lease” in cl 4.2 was a reference to rental, so that the effect of the provision was that any rental paid by JRWT to Salem, or the price attributed to honey transferred in lieu of rental, was immediately to be paid to Shiloh in reduction of the purchase price for the hives. The period specified for the anticipated lease to JRWT in cl 4.2 was from 15 October 2010 to March 2011 in each of the four agreements, notwithstanding that they had staggered settlement dates of 1 and 15 March, 15 September and 5 October 2011. Counsel indicated that hives are unproductive between March and October, so the staggered settlement dates may have more to do with the Watsons managing their cash flow than accounting for the production from hives in the respective periods until they were paid for.
Apart from the Watsons’ obligation under the 2010 sale agreements to account for rental received from JRWT immediately in reduction of the purchase price, there were no other provisions in those agreements for payment of the purchase price over time. The lapse between granting possession and the dates for settlement of the purchases ranged approximately from six months to 12 months.
The DoA completed on 29 November 2011 occurred in circumstances where the first, third and fourth 2010 sale agreements had not settled. The total sale price for those three agreements was $3,105,000 plus GST. The renegotiated arrangements for settlement were substantially more complicated. Time payment arrangements under the third 2010 sale agreement were to extend monthly until the end of July 2012. If the Watsons failed to pay any of the instalments on the due dates, the Whiteheads were entitled to cancel the third 2010 sale agreement, in which event there would be a transfer of the number of hives that had been paid for up to that date at $1,350 per hive.
Only if that third 2010 sale agreement settled were the parties to proceed with the first and fourth 2010 sale agreements, which would involve a first payment of $600,000 on 30 July 2012 and then vendor financing of $1,573,500 that was to be repayable in 24 monthly instalments. There were also commitments to pay interest and provision for a specific security agreement over the 1,400 hives that were to be sold under the first and fourth 2010 sale agreements.
These payment arrangements were substantially different from the simpler and shorter term commitments made under the 2010 sale agreements. There was no cross-reference to arrangements for the Watsons to rent the hives back to JRWT. Nor was there any suggestion in the terms of the DoA that the Watsons’ payment obligations were tied to receipt of rental for the hives from JRWT. The terms of cl 4.2 of the 2010 sale agreements related only to arrangements up to March 2011.
Mr Black argued that the November 2011 DoA did not supersede the 2010 sale agreements. Rather, the DoA recorded amended terms for the completion of those agreements. The provisions in the 2010 sale agreements were not rendered redundant, but rather were implicitly confirmed as remaining in force by the terms of the DoA.
The recitals in the DoA included:
Notwithstanding settlement of the First, Third and Fourth Agreements not having been made, the parties have agreed that it is in their mutual interests to negotiate a satisfactory arrangement to settle the expectations of each party.
The operative provisions of the deed then included the following:
1.Payment of the sale price under the Third Agreement will be made by nine instalments as follows:
…
2.On the condition that Salem settles the Third Agreement pursuant to clause 1, the parties will proceed to settle the First Agreement and the Fourth Agreement as set out below. …
On Mr Black’s argument, the renewed commitment to completing the 2010 sale agreements confirmed the continued application of all of their provisions, or at least provisions that included cl 4.2.
However, the one critical component of the 2010 sale agreements that was varied by the terms of the DoA was the timing and manner of payments for the hives. It was a topic that was explicitly revisited, and varied. There are sufficient differences between the original deal and the renegotiated one to reasonably expect that any renewal of the obligation for the Watsons to account to Shiloh immediately for any rent received from JRWT would have been referred to explicitly.
Mr Black did not subject his submission (that cl 4.2 of the 2010 sale agreements should be implied into the DoA) to any variant of the test for implication of a contractual term.[10] We are satisfied that could not be made out. Certainly, it was not necessary to give commercial efficacy to the renegotiated transaction for the Watsons’ previous commitment to immediately account to Shiloh for all rental payments to apply. Delayed payments were to incur interest. Nor could the Whiteheads claim that implication of the previous commitment to apply rental payments in deduction of the outstanding purchase price was “so obvious as to go without saying”. To the contrary, the DoA made relatively more complicated provisions for time payment of the purchase price, over a longer period of time and without having any necessary relationship to the timing of the Watsons’ receipt of rent from JRWT. The terms of cl 4.2 of the October 2010 agreement are inconsistent with the November 2011 time payment arrangements because cl 4.2 contemplated advancing parts of the purchaser’s obligations, whereas the DoA addressed in detail the extent of deferment of the payment obligations.
[10]Adopting, for example, the five point test from BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 282–283, as modified by Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 2 All ER 1127 at [26]–[27].
It follows that once the Watsons’ payment obligations for the purchase of hives were governed by the DoA, they were not required to account immediately to Shiloh for any rent received from JRWT. Therefore all the arguments for the Whiteheads that depended on the continuing application of cl 4.2 of the 2010 sale agreements must fail.
One of the arguments for the Whiteheads that depended on the application of cl 4.2 of the 2010 sale agreements relied on the provisions in ss 50(5) and 51(3) of the Property Law Act 2007 (the Act). Arguably, when the Watsons were in default of payment obligations under the 2010 sale agreements, Shiloh had an equitable interest in any amounts that JRWT would pay for renting the hives. The relevant provisions are as follows:
50 How thing in action assigned
…
(5)A legal or equitable thing in action is to be treated as having been assigned in equity (whether the assignment is oral or in writing) if—
(a) the assignee has given valuable consideration for the assignment; or
(b) the assignment is complete.
…
51 Further consequences of assignment of thing in action
(1) This section applies to a thing in action assigned in accordance with section 50(1) or in equity.
…
(3) The debt owing by a debtor who has actual notice of the assignment is payable to the assignee.
…
The definition of a debt in s 48 of the Act includes an obligation to pay money.
Mr Black’s propositions were that under s 50(5) the Watsons’ entitlement to receive the rents comprised a thing in action that was assigned to Shiloh in equity because of Shiloh’s rights under cl 4.2 of the 2010 sale agreements, and because Shiloh had provided consideration for the assignment by permitting the Watsons to have possession of the hives before paying for them. He further argued that, under s 51(3) JRWT (as the debtor obliged under the thing in action assigned in equity to Shiloh) was on notice of that assignment and therefore JRWT’s obligations were to be discharged in favour of Shiloh. This argument depended on cl 4.2 of the 2010 sale agreements continuing to apply. Absent that premise, there is nothing in it.
The Whiteheads separately argued that the Watsons’ entitlement to have possession of the hives, so as to be in a position to rent them to the Whiteheads, depended on the Watsons’ continued performance of their obligations under the 2010 sale agreements. They argued that the Watsons had repudiated the first and fourth 2010 sale agreements from 30 July 2012. Accordingly, once the Watsons had repudiated the contracts pursuant to which they were acquiring the hives, they could no longer grant possession of those hives to JRWT and therefore had no legal basis for demanding the rent for them.
Mr Black’s analysis equated repudiatory breaches of the 2010 sale agreements with their cancellation. That clearly did not occur. The Whiteheads made repeated attempts to force the Watsons to perform. For instance, Mr Hockly wrote on behalf of the Whiteheads on 19 December 2012, exploring alternative terms on which settlement of the Watsons’ obligations under the 2010 sale agreements might occur. A similar attempt was made in his letter of 11 January 2013 and in a further exchange on 8 February 2013 the Whiteheads’ attitude was explained by Mr Hockly as follows:
Our client trustees are determined to have this matter settled. Our client’s instructions are if the matter is not settled this week, then we are to apply to the Court for certain orders. This may be specific performance or our client may cancel the contract and sue for damages.
Notice of cancellation was given in Mr Hockly’s letter of 11 April 2013, which relied on the Watsons’ failure to settle the first and fourth 2010 sale agreements, and to pay interest. In reliance on those breaches, Shiloh cancelled those agreements “…without prejudice to any claim of [sic] interest for damages”. Until that point, the Watsons remained purchasers in possession of the hives, despite being in breach of their obligations to pay for them.
Mr Black supported his argument that the Judge was wrong to hold that the second hire agreement remained on foot until 11 April 2013 by analogy with two Supreme Court decisions involving resolution of rights and obligations where more than one party has committed breaches of a contract.
In Ingram v Patcroft Properties Ltd, in the course of a dispute with the lessor over breaches of the lessor’s obligations, the lessee had failed to pay part of the rent and expenses due under the lease.[11] The lessor had re-entered and distrained on the lessee’s chattels one day earlier than allowed by the lease. The Supreme Court found that the lessor’s premature re-entry and the changing of the locks constituted a repudiatory breach of the lease. As long as the lessor’s stance was unchanged, that was a continuing breach that the lessee could accept and which would justify cancellation of the lease. The lessor’s on-going breach prevented it from claiming a right to cancel for non-payment of rent.[12]
[11]Ingram v Patcroft Properties Ltd [2011] NZSC 49, [2011] 3 NZLR 433.
[12]At [24] and [29].
In Kumar v Station Properties Ltd, a dispute arose between the liquidator of the developer of an apartment building and parties who had executed agreements to purchase apartments in the development, once they were completed.[13] The purchasers had refused to settle because of breaches of the contract by the developer, and were sued for damages by the liquidator. At issue was whether the purchasers were obliged to settle. Mr Black cited the following observation:
[94] … A party who is in breach of an essential term of a contract is not entitled to enforce its rights under the contract[14] (assuming the other party has not affirmed the contract despite the breach). This is particularly so where the obligations of the parties are mutually dependent and concurrent, as in contracts for the sale of land. …
[13]Kumar v Station Properties Ltd [2015] NZSC 34, [2016] 1 NZLR 99.
[14]See Ingram v Patcroft Properties Ltd, above n 11, at [41]. See also John Burrows, Jeremy Finn and Stephen Todd The Law of Contract in New Zealand (4th ed, LexisNexis, Wellington, 2012) at 708–709.
The contractual situation in those cases is distinguishable from the present. Mr Bale’s 5 December 2012 letter gave notice for the Watsons that the second hire agreement had come to an end. JRWT was in breach of its obligations to pay rent for the hives and notice of renewal of the hire agreement beyond its expiry on 30 July 2012 had not been received. However, the Watsons’ assertion of the position was not accepted by the Whiteheads. The Watsons’ conduct in the months after that notice was given was consistent with the second hire agreement still being on foot. There had not been any repudiatory breach by the Watsons of the second hire agreement prior to 22 March 2013. Apart from their rejected assertion that the agreement was at an end, they had not done anything to deprive JRWT of possession of the hives, nor had the Watsons lost their rights to have possession and grant it to JRWT.
The analogy Mr Black invited would only be apt if there had been some repudiatory breach of the second hire agreement by the Watsons and, inconsistently with that, they were claiming that the Whiteheads were still liable for the rent. That was not the case. The Watsons’ breach of obligations to make timely payment of instalments for the purchase of the hives from Shiloh cannot amount to a breach of the Watsons’ obligations to provide possession of the hives to JRWT as the hirer of them, at least until Shiloh relied on the Watsons’ breaches of the 2010 sale agreements to cancel those contracts. Mr Black’s analysis would require the Watsons’ alleged repudiation of the 2010 sale agreements by non-payment at or after 31 July 2012 to have been accepted so that they were cancelled from that time. That had not happened and those contracts ran on until April 2013.
Accordingly, we agree with the Judge that the first and fourth 2010 sale agreements were still on foot on 22 March 2013. So, too, was the second hire agreement entered into in November 2011. We agree with the Judge’s findings in this regard from [202] of his judgment, cited at [57] above. It follows that Shiloh was not in a position to assert an entitlement to rental for the hives on the basis that it was the party entitled to possession of them for the purposes of hiring them to JRWT.
We also agree with the Judge that this analysis is not affected by the provision in cl 12.1 of the second hire agreement. That provision was set out in [203] of the judgment also cited at [57] above. It required JRWT to acknowledge that the Watsons’ rights to rent the hives to JRWT was “… subject to the prior rights of [Shiloh]”. That obliged JRWT as the lessee of the hives to recognise that if the Watsons breached their contractual arrangements with Shiloh as the vendor of the hives, and Shiloh responded so as to terminate the Watsons’ entitlement to possession of the hives, then JRWT had to accept Shiloh’s entitlement to disrupt the lease arrangement in whatever circumstances that occurred. Shiloh did not do so until 11 April 2013.
It follows that the Judge was correct to hold JRWT liable for unpaid rent for the hives, without deduction for the amount purportedly paid in March and April 2013 by JRWT to Shiloh on account of that rental liability.
The Watsons’ appeal
Off-setting liabilities before or after charging interest?
The Judge held that the Watsons were liable for all amounts for honey supplied to them by JRWT, and for which they had not paid. On the other hand, JRWT was held liable to the Watsons for all unpaid rent for the hives until cancellation of the second hire agreement. The parties had taken different approaches to the availability and timing of set-off between their respective liabilities. However, there is no challenge on appeal to the Judge’s finding that the liabilities respectively for rent of the hives and for honey supplied were appropriately the subject of an equitable set-off.
In the second judgment, the Judge addressed the manner in which each party as a creditor was entitled to charge interest on overdue sums owed to it. The point is significant because the parties had contracted that the Watsons would pay interest at 18 per cent per annum accruing on a daily basis on overdue sums for all medical grade honey supplied pursuant to the honey agreement. On the other side, the parties had agreed that JRWT would pay interest at five per cent per annum, calculated on a daily basis, on all overdue rental payments for the hives.
The Judge resolved this issue in favour of the Whiteheads, ruling in his second judgment that the interest obligation for each party as a debtor for the period of any default was to be calculated first, from the dates of respective defaults. A set‑off of the gross amounts owed to the debtor by the other party was only to occur as at the date of his judgment.
The Judge quantified these outcomes so that the Watsons had to pay $690,694.10 for honey supplied pursuant to the honey agreement, together with interest at 18 per cent from the dates on which each payment was due until his second judgment totalling $349,512.30. Separately, the Judge quantified the Watsons’ liability for non-medical grade honey supplied outside the terms of the honey agreement at $495,912.75, together with interest calculated at five per cent amounting to $72,512.26. In contrast, the total of the various interest components on the Whiteheads’ outstanding rental payments was $171,779.42, calculated in each case at five per cent per annum.
Having characterised the key agreements as separate, not interdependent but interrelated, the Judge held:[15]
[22] … it is appropriate to allow an equitable set-off, where the identity of the parties to the agreements which result in a monetary award is the same. There is a relationship between JRWT’s claims and WSL’s claims. However, before allowing any set-off, the liability of each of the parties under each of the inter-related agreements has to be first calculated. It is not appropriate, as Mr Sullivan suggests, to apply a set-off prior to calculating interest and determining the total sum owing. To do so would be to ignore the separate contracts, the different interest rates, the fact that the subject matter of each of the agreements was different, and the fact that none of the agreements were conditional on one or more of the other agreements being performed. In my view the appropriate course is to calculate the monies including interest owing under each agreement, and then to allow a set-off between the liable parties where their identity is the same.
[15]Watson v Whitehead, above n 2.
For the Watsons, Mr Sullivan challenged this sequence of calculating interest obligations. He argued that interest ought only to be payable when the set-off in respect of principal sums has occurred at any given payment date. Mr Sullivan pointed out that the Judge had not cited any authority for adopting the methodology he did, and that it was inconsistent with authority that the Court ought to prefer.
The consequences of adding 18 per cent interest on the amounts owed by the Watsons, before setting off JRWT’s liabilities for unpaid rent, have become more stark with the passage of time. That is because there is a 13 per cent difference in the Whiteheads’ favour between the interest charge on the gross amount owing to them, and the interest cost payable by them on the outstanding rent owed to the Watsons. As Mr Sullivan demonstrated, continued application of the 18 per cent interest charge on the gross indebtedness gave the Whiteheads a perverse incentive to delay a final resolution.
Mr Sullivan urged that equitable set-off should be applied as analysed in Derham on the Law of Set-Off:[16]
The availability of an equitable set-off operates in equity to impeach the title to a demand. It affects the conscience of a creditor, so as to impugn the creditor’s right to assert that any moneys are owing by the debtor to the extent of the debtor’s cross-claim. … it is unconscionable for the creditor, even before judgment, to assert that moneys are due to it from the debtor, or to proceed on the basis that the debtor has defaulted in payment, if and to the extent that circumstances exist which support an equitable set-off. …
[16]Rory Derham Derham on the Law of Set-Off (4th ed, Oxford University Press, New York, 2010) at [4.30] (footnotes omitted).
Mr Sullivan cited authority that adopted Derham’s approach. In Gilsan v Optus (No 3), the Equity Division of the Commercial List of the Supreme Court of New South Wales considered the manner of applying equitable set-off in similar circumstances to the present.[17] Each party provided services to the other, for which accounts ought to have been presented from month to month. The transactions were complicated by the charges of one party being presented in a foreign currency. McDougall J ruled that the amounts should be set-off against each other at the end of each month. The Judge observed:
[58] … The doctrine of equitable set-off can then have its effect, with only the balance after set-off remaining as owing, and carrying interest. Any other approach — and, in particular, the approach for which Optus contends — would not be to do equity, but to deny it.
[17]Gilsan v Optus (No 3) [2005] NSWSC 518.
Optus had contended that interest ought to accrue on each claim until judgment, with the gross amounts only being set off at the time of judgment.[18]
[18]At [39].
A consistent approach is reflected in the English decision in Connaught Restaurants Ltd v Indoor Leisure Ltd.[19] In a landlord/tenant dispute, the tenant had ceased paying rent after flooding of the premises had caused it loss and damage. The tenant’s obligation was to pay rent “without any deduction”, but the Court held that was insufficient to exclude the right to an equitable set-off.[20] The question of when interest is calculated was not addressed directly in the judgment, but the Court noted that the effect of an equitable set-off would be that interest would apply to the net sum owed.[21]
[19]Connaught Restaurants Ltd v Indoor Leisure Ltd [1994] 1 WLR 501 (CA).
[20]At 510.
[21]At 503.
In terms of the approach to equitable set-off in New Zealand, Mr Sullivan cited two interlocutory judgments from Associate Judges. They arose in the context of permitting amendments to pleadings, and addressing matters ancillary to orders for specific performance where equitable set-off was treated as applying from time to time, as the parties’ obligations to each other became due and payable.[22]
[22]Lawrence Riverside Ltd v C P Holdings Ltd HC Auckland CIV-2006-404-4739, 13 December 2010 and Arranmore Developments Ltd v Zeeland Developments Ltd (No 2) (2011) 11 NZCPR 825 (HC).
Mr Black supported the Judge’s method of applying set-off. He argued that an overall assessment of the equities of the opposing parties’ positions justified the imposition of interest at the higher rate on the gross extent of the Watsons’ debt to JRWT for honey, before applying set-off. Mr Black argued that the fact there were different legal entities participating in each of the contracts for each side supported the requirement that the contractual interest rate for sale of the honey should apply before offsetting any liabilities owed by a Whitehead entity to a Watson entity.
Mr Black argued that the Watsons had, at the time, denied that any set-off existed, and also that they had untenably disputed JRWT’s ownership of the honey supplied to the Watsons. Further, the Watsons had made claims that they paid “over the market price” for the honey and disputed its quality when those criticisms were not made out. As the Judge had noted in his costs judgment, the quality of the honey supplied “… was an issue which continued to cast a long shadow over the hearing”.[23]
[23]Watson v Whitehead, above n 3, at [25].
Certainly, after Mr Bale purported to cancel all the agreements on behalf of the Watsons in his 5 December 2012 letter, it was followed up on 7 January 2013 with the assertion that there was no right of set-off between the contracts. However, Mr Black’s criticism of this stance was advanced on the premise that cl 4.2 of the 2010 sale agreements still continued to apply so as to entitle JRWT to divert rental payments directly to Shiloh.
Mr Black also emphasised the point made by the Judge that the parties recognised that delay in payment for the honey had far more serious consequences in terms of interest cost than delay in payments for the purchase, and the hire, of the hives. The parties should be taken to have consciously committed to 18 per cent on the former, and only five per cent on the latter, commitments.
Many of Mr Black’s arguments for charging interest before applying a set-off amounted to criticisms of the Watsons’ conduct in the proceedings. However, we are satisfied that there is not sufficient in the particular circumstances of dealings between these parties to justify an exception to what we consider to be the appropriate approach. Obstructive conduct by a party in the course of litigation, including the taking of untenable points, is more appropriately addressed when dealing with costs. The Judge did have regard to that as a factor counting against the Watsons on his costs assessments, and we respect that approach. It should not spill over into an assessment of the appropriate mode of applying an equitable set-off.
Mr Black’s point about the different legal entities participating in the various contracts on each side cannot alter the appropriate mode of applying an equitable set‑off. For the Whiteheads, it was JRWT that incurred the rental liability and was the vendor entitled to payment for the honey. For the Watsons, assignments of Salem’s contractual position meant that Salem and WSL were both interested in the rights and obligations under the relevant contracts.
We are satisfied that Derham’s rationale for setting off prior to calculating interest obligations is well-founded as a matter of equity, and in logic. We agree with the way in which equitable set-off was applied in the English and Australian authorities that we have reviewed. Where the arrangements contemplated reciprocal cash flows between rental payments for the use of hives and payment for honey that they produced, reasonable business people would net off the account between two such parties, before adding an interest charge to compensate the party that was out of pocket by the net difference.
On the classic equitable approach as described by Derham, it ought to offend the Whiteheads’ conscience to charge interest on the gross amount overdue for honey purchased by the Watsons, when the Whiteheads were in default on their obligation to pay rent for the hives. The alternative approach of charging interest on gross amounts owed creates a perverse incentive for one party to delay resolution because it is advantaged by being entitled to a disparate rate of interest, when equity should urge prompt resolutions.
We accordingly allow this aspect of the appeal. The evidence on the financial consequences of this is not entirely clear. We confirm that the Watsons are liable for the cost of all honey purchases, with the invoices attracting interest respectively at 18 per cent and five per cent, depending on the category of honey involved, but only after a monthly set-off of the Whiteheads’ rental obligations for the hives. If there are any periods in which the Whiteheads’ outstanding rental obligations exceed the amount owed by the Watsons for honey, then the Whiteheads are liable for interest on the net sum outstanding at five per cent per annum. The Whiteheads’ rental liabilities cease on the date of termination of the lease in respect of the various groups of hives.[24] The contractual interest rates apply until payment is finally made.
[24]31 March 2013 for 900 hives and 11 April 2013 for 1,400 hives: see [119] and [126] below.
Mr Sullivan referred to a series of schedules prepared by Mr Vance. Mr Black criticised Mr Vance’s calculations, but we took that to relate to the assumptions Mr Vance made, rather than the accuracy of the arithmetic calculations.[25] We provisionally accept the accounting that can be distilled from Appendix 4-ii to Mr Vance’s brief of evidence, subject to the debit for the Whiteheads’ rental obligations ceasing from the dates of cancellation of the leases. We reserve leave to the parties to apply for further directions if the arithmetic cannot be agreed once the respective liabilities are recalculated as we have directed.
Did the 18 per cent contractual provision merge with the judgment?
[25]Mr Black criticised Mr Vance’s analysis for assuming that the honey produced by the hives leased to the Whiteheads belonged, during a part of the time, to the Watsons. Unless Mr Sullivan misdescribed the components of Mr Vance’s Appendix 4-ii, that error is not present.
The Judge found that the 18 per cent per annum payable on the late payments for honey purchases did not merge with his quantum judgment in April 2015. If it did so, it would thereafter decrease to the Judicature Act 1908 rate of five per cent per annum. That finding was challenged by the Watsons.
However, as Mr Sullivan acknowledged, this ruling loses its relevance if, as we have held, set-off is to occur at the periodic dates of indebtedness prior to interest being charged on the net balance owing by the Watsons for honey purchased. If it were necessary, we would have upheld the Judge’s approach on this point. The continued application of the contractual interest rate is a matter of construing the relevant contractual provision. Mr Sullivan cited decisions where the charges for interest were expressed in different terms. Here the obligation ran on until the date of actual payment and we are satisfied the Judge was entitled to adopt the approach that he did.
Damages for hives acquired in unusable condition
The Watsons appealed from the Judge’s rejection of a claim for loss of production or lost profits in respect of some 20 per cent of the 900 hives they purchased and relocated to the Wairarapa. It is not now contested that some hives were returned in poor condition.
The pleading of loss in respect of this head of damage was as follows:
$72,450 — 20% of the 900 hives delivered up were not able to be used and were worthless, such that if the hives were found to be worth $1350 (which is denied) there were $243,000 plus GST in hiveware which was of no value and if the hives are found to be worth $350 the losses from the hives uplifted are $63,000 plus GST.
This item was then included in a global prayer for relief seeking damages in the sum of approximately $5.7 million, or such other sum as was to be determined after an inquiry into the damages caused by the Whiteheads’ breaches. The Whiteheads had sought further particulars of this head of damage, but those provided still did not make reference to a claim for lost production.
In his interim judgment, the Judge found that approximately 180, or 20 per cent, of the hives were in poor condition and required work to restore them to good condition and repopulate them. That resulted in the loss of a year’s production from those hives. That finding was followed by this:[26]
[267] Unfortunately for the plaintiffs, that is not the way that the claim was pleaded by them. They sought damages on the basis that the hives supplied were worthless, and could not be used at all. There was no direct evidence led before me as to the cost of repairing the hives, or the lost production which resulted. Estimating lost profits is always a complex task.[27] I am satisfied that there was real damage and that the law requires that I do my best to arrive at a figure by way of damages.[28]
[26]Watson v Whitehead, above n 1.
[27]Ware v Johnson [1984] 2 NZLR 518 (HC) at 542.
[28]Walsh v Kerr [1989] 1 NZLR 490 (CA) at 494; Newbrook v Marshall [2002] 2 NZLR 606 (CA) at 614.
In the quantum judgment, the Judge dealt with this aspect of the Watsons’ claim in the following terms:[29]
[28] … Damages were not sought for lost production from the 180 hives said in the pleadings to be unusable. The issue of lost production only arose because the evidence at trial did not support the assertion that the hives were unusable. Rather it suggested that they had to be put back into good condition before they could be used. There was no evidence specific to the lost production now sought by WSL. The issue was not put to Mr Whitehead. He could not reasonably have anticipated that it might be raised from the pleadings or evidence pre-circulated. It is simply too late for the plaintiffs to now seek to change the focus of this part of their case. I decline to allow a claim for lost production.
[29]Watson v Whitehead, above n 2.
The Judge undertook his own calculations of the likely costs incurred in restoring 180 hives to good condition, quantifying that at $13,140. That was the extent of the award in favour of the Watsons for this head of damage.
Mr Sullivan submitted that the Judge erred in not supplementing the damages for cost of repair with an award for the loss of production from those hives in the 2013/14 season. He suggested this head of damage might be characterised as lost profits, lost production or diminution in value of an income-earning chattel. Mr Sullivan drew threads from a number of sources in the evidence to support the proposition that if the hives had been in usable condition during the 2013/14 season, they would have yielded an average of 28 kilograms of Manuka honey, saleable at $30 per kilogram. Mr Sullivan pointed to evidence that treated that volume and price as conservative. Given the scale of the Watsons’ operations, he argued that there would not have been material extra costs in siting, managing and extracting the honey from the hives. If costs of management and extraction had to be deducted, he invited comparison with the range of costs in the 2009 to 2011 seasons of $3.60 to $4.13 per kilogram of honey extracted.
Mr Black was critical of the inadequacies in the evidence to support such a claim. He argued that the Judge had been generous in finding that 20 per cent of the 900 hives taken to the Wairarapa were in poor condition. The most specific evidence on that was from Mr Daniel Watson, who had been responsible for restoring the hives. He acknowledged in cross-examination that his estimate was that 10 or 15 per cent of those hives required restoration. Mr Black also criticised the Watsons’ delay in attending to maintenance on these hives. He suggested that despite being relocated to the Wairarapa in May 2013, they were not checked until August that year. If attended to promptly, they could have been restored to usable condition for the season starting later in that spring.
The Whiteheads’ response to this aspect of the appeal was therefore that there was no justification for increasing the level of damages the Judge had found to be made out.
In this litigation the Judge had to deal with the mess of a failed commercial relationship that had been reflected in a series of interrelated contracts. We uphold his insistence on this aspect of the Watsons’ case being confined to heads of damage that had been adequately pleaded. We accept the Judge’s characterisation that a claim for loss of production only arose because the Watsons had been unable to prove that 20 per cent of the hives were “unusable”. There is a legitimate concern that the strands of evidence Mr Sullivan now relies on for a claim for lost production might have been tested in different ways had the Whiteheads been on notice that the Watsons were claiming lost production for a season from those hives. This aspect of the appeal therefore fails.
Rental for hire of hives payable for the full year?
The Judge found that JRWT’s liability to pay rent for the hives terminated on the dates on which he held the second hire agreement had come to an end in respect of various groups of the hives. Accordingly, although the second hire agreement was treated as being renewed for a year from 1 August 2012, the rental liability for the 900 hives terminated on 31 March 2013 and that for the 1,400 hives terminated on 11 April 2013. The Judge directed that the rental was to be apportioned on a per diem basis to those dates. We have summarised the Judge’s rationale for these findings at [46] and [47] above.
The Watsons challenged the ruling on termination of the rental obligation on the basis that the Judge had failed to take account of the annual cycle of productivity of the hives. Although rental obligations were spread evenly throughout the year, JRWT had enjoyed all of the productivity of those hives for the 12 monthly cycle to the end of July 2013, before each component of the second hire agreement was terminated. Arguably therefore the rental obligation ought to continue for the full year.
Mr Sullivan argued that the Court ought to have considered its powers under s 9(2)(b) of the Contractual Remedies Act 1979 to grant relief. That section provides:
9 Power of court to grant relief
(1) When a contract is cancelled by any party, the court, in any proceedings or on application made for the purpose, may from time to time if it is just and practicable to do so, make an order or orders granting relief under this section.
(2) An order under this section may—
…
(b) subject to section 6, direct any party to the proceedings to pay to any other such party such sum as the court thinks just:
…
Arguably, termination in early April of an annual rental arrangement that was to run until the end of July left JRWT with the full year’s value of the rental arrangement, creating a windfall, if it was able to avoid approximately one third of its rental obligation.
The contractual context for this finding included that Shiloh had cancelled the first and fourth 2010 sale agreements for 1,400 hives on 11 April 2013. The Judge found that Shiloh had not sustained any loss following the Watsons’ breach because there was an alternative market for the hives at the same price.[30] Following those cancellations, the second hire agreement was frustrated because the Watsons had lost the possessory right to rent the hives to JRWT. Part of the context therefore is that the Watsons’ own breach of their obligations to purchase these hives took the hives out of their possession for the purposes of renting them to JRWT. We agree with the Judge that the Watsons’ entitlement to charge rent for the hives must end at the time the Whiteheads accepted the Watsons’ repudiation of the 2010 sale agreements in respect of these hives.
[30]Somewhat ironically, this followed from the Judge’s acceptance of the Whiteheads’ opposition to the Watsons’ argument that the sale of the hives had been arranged at inflated prices to give credibility to the Whiteheads’ arguments with the IRD.
Mr Sullivan’s argument on appeal that the Judge should have applied s 9(2)(b) of the Contractual Remedies Act did not distinguish between the Watsons’ claim for rental for a full year on the 1,400 hives, and for the 900 hives that the Watsons did acquire. However, the Watsons’ pleading had drawn that distinction. Whilst rental for the 1,400 hives had been claimed to July 2013, the rent claimed for the 900 hives was only for the period to March 2013.
It is not open to the Watsons to attempt to apply the s 9(2)(b) argument to the 900 hives, given the relevant limit on the relief that was sought.
In any event, we consider the Judge was correct in deciding that the Whiteheads did cancel the second hire agreement in respect of the 900 hives as at 31 March 2013. Mr Bale’s 5 December 2012 letter made demand for the outstanding rent to be brought up to date, and a reconciliation statement was attached for that purpose. In asserting that the second hire agreement had come to an end, there was no suggestion of reservation of rights to claim rental for the balance of the period to July 2013. Accordingly, the Watsons, as the party entitled to possession of those hives, repudiated the contract for their hire in December 2012 without reserving any claim to rental payable beyond the date of termination of the second hire agreement. Although their conduct thereafter was somewhat equivocal, it remained open for the Whiteheads to accept that repudiation and subsequently cancel the contract, consistently with Mr Bale’s notice. This aspect of the appeal is dismissed.
Appeal from costs judgment
In his judgment dealing with quantum, the Judge observed that both parties had had a measure of success, and invited counsel to reach agreement as to costs. That did not occur, and the Judge received lengthy memoranda, leading to a third judgment determining costs.[31]
[31]Watson v Whitehead, above n 3.
At the outset of the proceedings, the Watsons had sought an injunction to prevent the Whiteheads selling non-medical grade Manuka honey to any other party in breach of their right of first refusal, and the Whiteheads had sought summary judgment for their unpaid invoices for the supply of honey. The Judge declined to order costs on the interim injunction application to either party. He granted the Watsons $1,990 in costs for their opposition to the summary judgment application that was eventually abandoned. Those costs orders are not challenged.
In seeking costs on their successful claim for the outstanding honey invoices, the Whiteheads claimed indemnity costs in reliance on a provision in the terms of the agreement for sale of medical grade Manuka honey. That provided:
The purchaser [the Watsons] will also pay the vendor any costs on enforcing payment of this debt including solicitor/client costs.
The Watsons resisted any costs liability on the judgment against them for the unpaid honey invoices from the date of their Calderbank offer made to the Whiteheads some two months before trial. The offer was to pay the Whiteheads $250,000, together with costs on a 2B basis incurred on the substantive aspects of the proceedings up until that date. That offer was to be in full and final settlement of all issues, with the Watsons abandoning their claim to a right of first refusal to purchase honey from the hives in question, and their entitlement to be paid the outstanding rent. The Whiteheads did not respond to the offer.
The Judge held that the Whiteheads were entitled to recover, on a solicitor/client basis, all indemnity costs reasonably incurred in pursuing their claim for payment of the outstanding invoices for medical grade honey, up to the date of the Calderbank offer on 17 June 2014. He found the Whiteheads were also entitled to recover costs on a 2B basis from the date they had abandoned their summary judgment application up to the date of the Calderbank offer on the costs of pursuing unpaid invoices for the additional (non-medical grade) honey supplied.
The Watsons claimed that they should be entitled to full costs for steps taken after their Calderbank offer, on the basis that, in terms of the net outcome of the claims and counterclaims, the Whiteheads had succeeded for an amount less than the offer the Watsons had made.[32] Despite the presumptive position under the High Court Rules, the Judge was not prepared to apply the rule on Calderbank offers “in its full rigour”.[33] On the Watsons’ claim for outstanding rental found to be payable by the Whiteheads, the Judge quantified costs in the Watsons’ favour in the sum of $32,424.50. This constituted 50 per cent of the costs the Watsons would have been entitled to on their claims, calculated on a 2B basis. That reduction reflected the fact that steps taken related to everything in issue and not simply the claims on which the Watsons had succeeded for outstanding rental, and because of the Watsons’ conduct during the proceedings. This counted against them, notwithstanding their Calderbank offer.
[32]The Watsons contended the amount owed as at 20 June 2014 was $210,657, whereas the Whiteheads calculated the figure to 17 June 2014 at $211,159.07.
[33]High Court Rules, r 14.11.
The Judge disallowed substantial portions of disbursements that had been incurred in respect of experts’ costs.[34] He allowed 25 per cent of specified invoices for Mr Lane, an accountant called for the Whiteheads. He also allowed 25 per cent of invoices presented by Mr Vance for work up to, and at, trial, amounting to $11,256.49. He disallowed the Watsons’ claim for fees incurred with Mr Gross, who gave bee-keeping evidence in relation to values of hive and hive sites, on the ground that his evidence related to a part of their claims that failed.
[34]The Judge entirely disallowed invoices for professional witnesses called on factual matters.
Mr Black submitted that the Judge’s analysis reflected the exercise of numerous aspects of judicial discretion, and ought not to be revisited. However, Mr Sullivan argued that the Judge erred in allowing indemnity costs when the circumstances of the Whiteheads’ pursuit of the unpaid honey invoices fell outside what was contemplated in the usual circumstances arising where costs are incurred in enforcing payment of a debt. The Watsons also argued that greater regard ought to have been given to the timing and content of their Calderbank offer.
Mr Sullivan argued that, on any view, the Whiteheads could not be treated as blameless creditors who had to resort to enforcement proceedings to recover a debt owing to them. He cited the fact that they had abandoned their application for summary judgment due to the nature and extent of claims pursued against them. He also argued that the nature of equitable set-off as a substantive defence meant that it was wrong for the Whiteheads to simply assert that they were entitled to enforce the honey debt without regard to the offsetting rental liabilities they owed.
We accept that analysis. Given our finding that amounts owing to and owed by each of the parties were to be offset at the periodic due dates, the Whiteheads cannot claim an entitlement to enforce the debt reflected in the overdue honey invoices on terms that ignore their own off-setting liabilities. The position they asserted on enforcement of the honey debt has not been sustained.
Notwithstanding the requirement for the Whiteheads to set off the periodic extent of their indebtedness to the Watsons for rent, they are entitled to an award of costs for pursuing their counterclaim for the unpaid invoices for honey. The core of that claim has been vindicated. We substitute for the indemnity costs order in their favour costs on a 2B basis for steps in the proceeding between abandoning their summary judgment application and receipt of the Calderbank offer.
We are mindful that the Judge separately ordered costs in favour of the Whiteheads for the steps taken to recover the unpaid invoices for additional (non‑medical grade) honey supplied, granted on a 2B basis from the date the summary judgment application was abandoned until the date of the Calderbank letter. That order remains, and should be taken into account so that in calculating costs for this substitute order in respect of the medical grade Manuka honey, there is to be no duplication.
The reduction in the judgment in favour of the Whiteheads also warrants reconsideration of the relevance of the Watsons’ Calderbank offer. In proportionate terms, the gap between the modest extent of the Whiteheads’ success and the better outcome they could have achieved by accepting the offer is now relatively substantial. Therefore the case for granting the Watsons a measure of costs for steps after the issue of their Calderbank letter is materially stronger.
We do not find the extent of this change decisive. The Judge had a clear view of the manner in which the litigation had been conducted, and we respect the reasons he cited for exercising his discretion not to have the Calderbank letter dictate the outcome as to costs of trial. The extent of the difference in outcome procured on appeal is insufficient to reverse that.
Mr Sullivan also challenged the Judge’s disallowance of 75 per cent of Mr Vance’s invoices, and the refusal to order reimbursement of any of Mr Gross’s fees.
As to Mr Vance’s costs, Mr Sullivan argued that the extent of assistance provided to the Court justified a larger proportion of the costs incurred. Mr Sullivan acknowledged that Mr Vance did an analysis to quantify honey arguably owned by Salem but not accounted for by JRWT, which proposition was rejected by the Judge. We are not persuaded that there is any basis for criticism of the Judge’s reduction in the recoverable extent of that disbursement.
As to Mr Gross, Mr Sullivan characterised him as providing evidence that was useful on the value of hives and hive sites. The Judge’s disallowance of that disbursement was because this evidence supported a claim on behalf of the Watsons that did not succeed. That is a sound basis for rejection and we are not prepared to interfere. There is accordingly no alteration to the extent of disbursements allowed.
Costs on the appeal
One component of the appeal has succeeded, and the cross-appeal has failed. As was the case in the High Court, a substantial portion of the arguments pursued on behalf of the Watsons have been unsuccessful. The appropriate outcome is to grant costs on the appeal in favour of the Watsons as to two-thirds of band A costs for a single standard appeal, together with usual disbursements. There will be no order as to costs on the cross-appeal.
Result
The appeal is allowed in part. The amounts payable for rent of hives are to be the subject of equitable set-off against amounts owing for purchases of honey on each due date, with interest calculated on the net balance outstanding.
The order for indemnity costs on the respondents’ claims for payment of outstanding amounts for honey sold to the appellants is overruled, and replaced with an order in favour of the respondents for costs on a 2B basis. Remaining aspects of the appeal are dismissed.
The cross-appeal is dismissed.
Costs are ordered in favour of the appellants at two-thirds of costs for a standard appeal on a band A basis together with usual disbursements, with no order for costs on the cross-appeal.
Solicitors:
WCM Legal, Wellington for Appellants
Gaze Burt, Auckland for Respondents
“A”
JRWT Shiloh
Previous sale of hives. Consideration outstanding.
Sale of hives on deferred purchase at $1,350 per hive. Shiloh retains title until fully paid. Salem has right to possession.
Rental payments at
times and in amounts
to match Salem purchase instalments
to Shiloh.
Sale and purchase of honey.
Salem/WSL (per assignment)
Third party honey purchases.
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