MONTGOMERIE v MONTGOMERIE [2020] NZCA 3

MONTGOMERIE v MONTGOMERIE [2020] NZCA 3 [28 January 2020]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA245/2019[2020] NZCA 3BETWEEN ANDREW LAURIE MONTGOMERIEFirst AppellantMIA BELLA TRUSTEE LIMITEDSecond AppellantAND JAMES LESTER MONTGOMERIERespondentHearing: 12 November 2019Court: Goddard, Brewer and Gendall JJCounsel: W G C Templeton for First and Second AppellantsD J Neutze and A J Woodhouse for RespondentJudgment: 28 January 2020 at 4.00 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The first appellant must pay the respondent indemnity costs in accordancewith cl 6 of the 2011 agreement.C The second appellant must pay the respondent costs for a standard appealon a band A basis and usual disbursements.____________________________________________________________________REASONS OF THE COURT(Given by Brewer J)Introduction[1] The respondent (James) is the brother of the first appellant (Andrew).Andrew, a property developer, fell into financial difficulty as a result of the globalfinancial crisis of 2008. James gave Andrew a loan to help him. Andrew has failed torepay the loan. Over the years, there were negotiations which resulted in varied orfurther agreements as to how the loan would be repaid. But it was not repaid (althoughAndrew did reduce it by $200,000 in March 2017).1[2] Eventually James ran out of patience. In October 2018 his solicitors demandedthat Andrew pay the outstanding amount of USD 865,123.72 plus interest.Andrew asked for an extension to May 2019.[3] James issued proceedings claiming the USD 865,123.72 plus interest as wellas costs on a solicitor-client basis. He applied for summary judgment on his claim.Andrew defended the claim on the basis that the latest agreement between him andJames, on his interpretation, means he does not yet have to repay the loan and, besides,the doctrine of frustration applies.[4] On 8 May 2019, Associate Judge Smith found that Andrew has no defence toJames's claim and entered summary judgment against him.2[5] Andrew now appeals Associate Judge Smith's decision. His case, broadly, isthat his interpretation of his latest agreement with James is the correct one; so, he hasno immediate obligation to repay the loan and thus Associate Judge Smith erred inentering summary judgment for James.3 He also says the latest agreement is frustratedin whole or in part, with the result that he is not required to make any further paymentsunder it.1 All references to dollar amounts are New Zealand dollars unless otherwise specified.2 Montgomerie v Montgomerie [2019] NZHC 989.3 The second appellant is so connected with Andrew's interests that we do not need to discuss itsposition separately. It did not file separate submissions.The agreement[6] The agreement in question is dated 9 March 2017. It is intituled:Agreement to renegotiate and repay debt from refinance of mortgagedproperty and from sale of that and other properties[7] Having recited the history of the various agreements between the brothers,the agreement provides that James can require immediate payment of all outstandingmonies "in the event that the Capped Debt is not repaid in accordance with clauses2–5 below or if there is any material breach of the following clauses 2–4."[8] Clause 2.1 requires Andrew to pay James $200,000 on or before 28 March2017 (which he did).[9] Clause 2.2 requires Andrew to pay James the net proceeds of sale of a propertyat Neil Avenue and one at Hunterville Road. Andrew undertook to continue to marketfor sale the properties, but there is no time limit specified.[10] Clause 2.3 requires payment:42.3 of the net proceeds of sale (up to an amount required to repaythe Capped Debt in full) from settlement of the Units being developedby Alberton Lane Limited at Alberton Lane, Mt Albert, Auckland,which Andrew anticipates will be completed/settled by 30 April 2018,but with such payment of full net proceeds to (sic) made to James nolater than 15 October [2018] (time being of the essence) [11] The capped debt was a concession by James. Clause 3 provides:3. James agrees that in consideration for Andrew procuringthe assistance of Foy & Halse and committing his related entities tothe payments promised in 2.2 and 2.3 above and strictly on the basisthat James receives the payments referred to in 2.1 and 2.3 above (andin 2.2, if the Hunterville Road and/or Neil Avenue properties are soldbefore Alberton Lane), James (and Andrew) agrees that the amount to(sic) repaid by Andrew will be "capped" as at 15 February 2017 atNZ$1 million (the "Capped Debt") 4 The agreement refers to payment by 15 October 2016, but it was common ground before us thatthis was an error and the date should be read as 15 October 2018.[12] Clause 4 is also significant:4. James, and Andrew, agree and acknowledge that, if contrary toAndrew's estimate James is not repaid in full through payment toJames from the proceeds of the Alberton Lane Development (or hasotherwise paid the Capped Debt), but provided James has, by15 October 2018 (time being of the essence) received the paymentreferred to in clause 2.1 (or from clause 5) plus a substantial paymentfrom the proceeds of the Alberton Lane Development (and is satisfiedon reasonable grounds that Andrew has accounted to him fully forthe full net proceeds of those sales), then James and Andrew willnegotiate in good faith for the payment by Andrew of the balance ofthe Capped Debt, either through the sale of the Hunterville Roadand/or Neil Ave properties, if not sold prior, or otherwise.The High Court decision[13] Associate Judge Smith held there were two issues for him to decide:5(1) Have the defendants breached their obligations under the March 2017Agreement, so that the plaintiff became entitled to demand paymentof the Total Debt,7 minus the $200,000 paid on 28 March 2017, plusfurther interest to the date of judgment?(2) Is it reasonably arguable for the defendants that the "events offrustration" referred to at paragraph [47] of this judgment made itimpossible for the defendants to perform, or otherwise frustrated,the March 2017 Agreement, so that the defendants were dischargedfrom further performance of the March 2017 Agreement?7 As at 15 February 2017, US$921,264.31, plus agreed costs of NZ$4,750 and further costsof NZ$12,119.09, all as defined in cl I of the Background section of the March 2017Agreement.[14] On the first issue the Associate Judge decided that reading the agreement incontext provides a clear conclusion that Andrew had an obligation to pay Jamesthe capped amount by 15 October 2018, time being of the essence.6 This obligationwas subject only to cl 4.7[15] Associate Judge Smith summarised his view of the agreement:[70] In my view the essential purpose of the March 2017 Agreement wasto define a particular set of circumstances in which the plaintiff would beprepared to accept in full satisfaction a sum that was much lower than the debtthat was owed to him. Part of that definition was full payment of the capped5 Montgomerie v Montgomerie, above n 2, at [52].6 At [65]–[77].7 At [73]–[74] and [77].debt by 15 October 2018, but how that would be achieved was the defendants'concern, not the plaintiff's. The defendants would lose the benefit of havingthe debt capped at the lower amount if it was not paid by 15 October 2018.[16] On the second issue, frustration, the Associate Judge reviewed the law and held(in broad summary) that the agreement defined particular circumstances in whichthe debt Andrew owed James could be capped at a much lower figure and repaid atthat figure.8 The cut-off date for paying the capped sum was 15 October 2018.Although the agreement imposed obligations on Andrew to apply three potentialsources of money towards payment of the debt, including the net proceeds of sale ofthe Alberton Lane development, completion of that development was not a principalpurpose of the agreement.9 Accordingly, the inability of Andrew to completethe Alberton Lane development in time to apply the proceeds to the capped debt wasnot a basis for frustration of the agreement.10[17] Associate Judge Smith found for James on both issues and entered summaryjudgment accordingly.11The appealThe first issue: was Andrew in breach of the agreement?[18] Mr Templeton for Andrew submits the Associate Judge erred in three ways:(a) The Associate Judge was wrong to hold that the principal purpose ofthe agreement was to "define particular circumstances in which the debt would be capped at the significantly lower figure ofNZ$1 million".12 In Mr Templeton's submission the agreement'sprincipal purpose was the satisfaction of the capped debt by clearly8 At [95].9 At [95].10 At [97]–[98].11 At [100].12 At [95].defined property sales and raised finance. The vast majority ofthe capped debt was to come from the Alberton Lane development.13(b) The Associate Judge was in error when he held:14[65] In my view, the Background section of the March 2017Agreement, and in particular cl H, provides the key to the essentialquestion, which is whether the plaintiff could demand payment ofthe full debt in circumstances where none of the townhouses had beensold before 15 October 2018.[66] Clause H first recorded the first defendant's offer to settle forthe capped amount, by making or procuring payments to the plaintifffrom three named sources. The clause then recorded the plaintiff'swillingness to accept the capped amount in full settlement, providedpayment was made "by the above means". However, if payment wasnot made "by the above means", the plaintiff would become entitledto enforce payment of the original debt, plus interest and costs.Mr Templeton submits that cl H was merely to provide informationabout the background and purpose of the agreement, rather than to forma part of it. He notes that cl J follows it and refers to "the followingagreement", which he says clearly excludes cl H itself from constitutingpart of the agreement. He says there would be conflicts with other partsof the agreement if cl H were to have a legal effect.15(c) The Associate Judge erred in holding that the date of 15 October 2018was a deadline for the payment of the capped debt. Mr Templetonsubmits that date related only to the receipt of "sale proceeds" fromthe Alberton Lane development. However, even for that purposethe date was not a deadline. It was to be extended if by that datepart-payment had been made, namely the $200,000 plus a substantialpayment of the sale proceeds from the Alberton Lane development.13 Mr Templeton points to particular clauses which he says support this reading, such as cl 2, whichuses "and" to refer to the three proposed property sales as sources of funds, which Mr Templetonsays indicates that they were all intended to be used in satisfaction of the debt, as opposed tomoney from other sources.14 Montgomerie v Montgomerie, above n 2.15 For instance, Mr Templeton submits that the way the clause is phrased seems to suggest thatmonies for repayment of the debt were intended only to come from the proceeds of two ofthe properties and could not come from the sale of the Hunterville Road property or any othermeans.Mr Templeton submits there was no deadline for payment of the cappeddebt and this was evidenced by the express provision for ongoing "goodfaith" negotiations and the fact there was no date for payment fromsome of the other identified sources of repayment. He also submitsthat, contrary to the Associate Judge's finding,16 the inherentsubjectivity of the term "substantial" as it appears in cl 4 demonstratesa lack of certainty in the contract, undercutting any confidence ina definitive cut-off date.[19] Mr Templeton made lengthy submissions on how the law of contract appliesto the interpretation of the agreement. In his written submissions he traversed at lengththe history of the dealings between the brothers leading up to the making ofthe agreement. In our view, all that is needed is to consider the plain meaning ofthe terms of the agreement.[20] We find James agreed to accept a lesser amount than he was owed (the cappeddebt) from Andrew so long as it was paid by 15 October 2018, with time being ofthe essence. Three sources of money were identified, and the net proceeds of thosesources were to be applied in reduction or repayment of the capped debt. If by15 October 2018 the capped debt was not repaid but it had been reduced, first bythe $200,000 and second by a substantial payment from the proceedings ofthe Alberton Lane development, then a good faith negotiation for the payment ofthe balance could take place.[21] Clauses 2 and 3 are clear. Clause 2.3 refers to the net proceeds of sale fromthe Alberton Lane development "which Andrew anticipates will be completed/settledby 30 April 2018, but with such payment of full net proceeds to (sic) made to Jamesno later than 15 October [2018] (time being of the essence)."[22] Clause 3 provides:James agrees that strictly on the basis that James receives the paymentsreferred to in 2.1 and 2.3 above the amount to (sic) repaid by Andrew willbe "capped" as at 15 February 2017 at NZ$1million 16 Montgomerie v Montgomerie, above n 2, at [74].[23] Clause 4 never became operative because no payment other than the $200,000was made. However, it reiterates that 15 October 2018 (time being of the essence)was the deadline for "the payment referred to in clause 2.1 (or from clause 5) plus asubstantial payment from the proceeds of the Alberton Lane Development".[24] Clause 1(d) makes it clear that if the capped debt is not repaid pursuant tothe agreement then James is entitled to demand the immediate repayment of the totaldebt.[25] It is correct that cl H is not an operative part of the agreement. Clause H is oneof the recitals preceding the main text. But it is well settled that recitals can be usedto assist with the interpretation of an agreement.17 The Associate Judge did not err intaking cl H into account. It records Andrew's offer to settle for the capped amount bymaking or procuring payments to James from the three named sources. James waswilling to accept the capped amount in full settlement provided payment was made"by the above means". But if such payment was not made, James would becomeentitled to enforce payment of the original debt, plus interest and costs.[26] There is nothing in cl H which is inconsistent with the relevant operative partsof the agreement. Andrew was obliged to account for the net proceeds of the threesources of money in reduction or full repayment of the capped debt. But that had tobe by 15 October 2018.[27] If Mr Templeton is right, then the date of 15 October 2018 means nothing.The agreement would be essentially open-ended. The plain meaning of the agreementrefutes that submission.18[28] It follows we agree with the analysis of Associate Judge Smith.17 See Mackenzie v Duke of Devonshire [1896] AC 400 (HL) at 407 per Lord Watson; cited in Moorv Marston [2015] NZCA 421, [2015] NZFLR 863 at [36].18 For the record, we note Mr Templeton's submission that common sense should only justify aparticular reading of a contract when that is required to give effect to the parties' intentions whencontracting and that common sense should not be used as an excuse to override the plain meaningof a clear agreement. We do not consider that is at risk in this case. The reading the AssociateJudge took, which we uphold, is based on a conventional interpretation of the written agreementitself.The second issue: frustration[29] Andrew argues that the doctrine of frustration applies to relieve him from anyobligation to complete the sale of the Alberton Lane development and apply the netproceeds to reduce the debt by 15 October 2018. In the High Court, and in his writtensubmissions in this Court, Mr Templeton argued that the agreement was frustrated.19In his oral submissions Mr Templeton advanced a modified version of this argument,contending that it is only the obligation to make a payment out of the proceeds of saleof the units that was frustrated, with the balance of the agreement remainingenforceable. In particular the agreement by James to cap the debt remainedenforceable although the obligation to make a payment in reduction of the debt out ofa sale of the Alberton Lane development by 15 October 2018 was frustrated, andtherefore unenforceable.Is it arguable that the agreement was frustrated in whole or in part?[30] In Planet Kids Ltd v Auckland Council the Supreme Court identified threesalient features of the doctrine of frustration:20(a) For fundamental policy reasons related to the sanctity of contract,the threshold for frustration is high.(b) It does not depend on application or election by the parties but occursautomatically by operation of law to discharge the contract "forthwith,without more and automatically."(c) The doctrine of frustration operates to bring the contract to an end atthe time of the frustrating event. The contract is not deemed invalidfrom the outset and so at common law there was usually no relief forpart performance occurring prior to the supervening event.The Frustrated Contracts Act now allows some restitutionary relief.19 This was on the basis that the agreement's principal purpose was specifically to do with the use offunds from the defined property sales and raised finance to put towards the debt. Our findings onthe first issue render such an argument untenable.20 Planet Kids Ltd v Auckland Council [2013] NZSC 147, [2014] 1 NZLR 149 at [48] perGlazebrook J (citations omitted). The reference to the Frustrated Contracts Act should now beread as a reference to ss 60–69 of the Contract and Commercial Law Act 2017.[31] In National Carriers Ltd v Panalpina (Northern) Ltd Lord Simon summarisedthe circumstances in which a contract is frustrated:21Frustration of a contract takes place when there supervenes an event (withoutdefault of either party and for which the contract makes no sufficientprovision) which so significantly changes the nature (not merely the expenseor onerousness) of the outstanding contractual rights and/or obligations fromwhat the parties could reasonably have contemplated at the time of itsexecution that it would be unjust to hold them to the literal sense of itsstipulations in the new circumstances; in such case the law declares bothparties to be discharged from further performance.[32] Associate Judge Smith was right to find it was not arguable that the agreementwas frustrated as a result of the difficulties encountered by Andrew in completingthe Alberton Lane development.22 Applying the standard for frustration set out above,the possibility that the units would not be sold and no proceeds would be paid to Jamesin reduction of the debt owed to him was contemplated by the agreement.The agreement expressly provided that if payment of the proceeds of sale of the unitsdid not occur by 15 October 2018, time being of the essence, the cap on the amountpayable would no longer apply and the full debt would be payable. The partiescontemplated the possibility of non-payment, for whatever reason, and made provisionfor that scenario.[33] Nor did the difficulties encountered in completing the Alberton Lanedevelopment significantly change the nature of the parties' contractual rights orobligations from what the parties could reasonably have contemplated at the timethe agreement was entered into. The agreement to cap the debt was dependent onthe fact of repayment, not on the reasons for any failure to make that payment.[34] Nor is it arguable that it is unjust to hold the parties to the agreement as wehave interpreted it. To the contrary, it would be unjust to deny James the ability to callup the full debt and bring recovery proceedings in circumstances where no paymenthad been received in substantial reduction of the debt by 15 October 2018.21 National Carriers Ltd v Panalpina (Northern) Ltd [1981] AC 675 (HL) at 700; cited in Planet KidsLtd v Auckland Council, above n 20, at [53].22 Montgomerie v Montgomerie, above n 2, at [97].[35] The argument that the agreement was frustrated in part fails for the samereasons. There is no provision or group of provisions in the agreement in respect ofwhich the test for frustration is arguably met. The partial frustration argument alsofaces the further insurmountable hurdle identified in Burrows, Finn and Todd onthe Law of Contract in New Zealand that:23 frustration operates in an all-or-nothing fashion. If the contract is notfrustrated it remains on foot, and both parties remain liable for itsnon-performance. If it is frustrated it falls completely and neither party cancontinue with performance. Generally, there is no such thing as selectivefrustration whereby individual terms are severed; the contract stands or fallsas a whole.[36] The authors of Burrows, Finn and Todd record in a footnote that there are some"anomalous exceptions" to the all-or-nothing effect of frustration.24 At common law,where a contract contains severable parts, each of which provides for one party'sperformance and the other party's corresponding payment for that performance, it maybe possible for one of those stand-alone parts to be frustrated although the balance ofthe contract remains valid and enforceable.25 The New Zealand legislation appears tolimit the operation of that common law principle to cases where a severable part hasbeen performed before the frustrating event occurs. Section 68 of the Contract andCommercial Law Act 2017 provides:68 Court must treat performed part of contract that can be properlysevered as separate contract(1) This section applies if—(a) the court considers that a part of a contract to which thissubpart applies can properly be severed from the remainder ofthe contract; and(b) that part of the contract was—(i) wholly performed before the time of discharge; or(ii) wholly performed before the time of discharge exceptfor the payment, in respect of that part of the contract,of money that is or can be ascertained underthe contract.23 Jeremy Finn, Stephen Todd and Matthew Barber (eds) Burrows, Finn and Todd on the Law ofContract in New Zealand (6th ed, LexisNexis, Wellington, 2018) at 810 (citations omitted).24 At 810, n 154; citing Law Commission Contract Statutes Review (NZLC R25, 1993) 281–282.25 See Guenter Treitel Frustration and Force Majeure (3rd ed, Sweet & Maxwell Ltd, London, 2014)at [15–032].(2) The court must treat—(a) the part of the contract described in subsection (1) as if it—(i) were a separate contract; and(ii) had not been frustrated; and(b) sections 60 to 66 as applying only to the remainder ofthe contract.[37] In this case it is not arguable that the obligation to make a payment in reductionof the debt out of the proceeds of sale of the Alberton Lane development by 15 October2018 is, or is included in, a severable part of the agreement. Rather, the promise tomake such a payment was inextricably linked to the other provisions of the agreementand in particular to James's agreement to cap the debt owing to him. Nor is it possibleto identify any distinct part of the contract that has been wholly performed beforethe time of the alleged frustrating event to which s 68 could apply. The argument thatthe agreement was partially frustrated has no prospect of success.Effect of frustration[38] The argument that the agreement was frustrated could not in any event providethe basis for an arguable defence to James's claim for payment of the debt.If the agreement was frustrated, the result would be that neither party was required toperform it further. It would be prospectively unenforceable. So James's agreement tocap the debt would cease to be enforceable, and the full debt would remain payableunder the 2011 agreement.[39] Andrew's new argument that the agreement was partially frustrated appears tohave been advanced to meet the difficulty that frustration of the agreement in itsentirety would not assist him, as the underlying debt would remain payable. But forthe reasons explained above, the partial frustration argument is misconceived.Summary[40] We therefore agree with the Associate Judge that the appellants do not haveany arguable defence based on the doctrine of frustration.Decision[41] The appeal is dismissed.Costs[42] But for one point the parties are agreed that costs should be awarded againstthe unsuccessful party or parties on a Standard Appeal Band A basis with nocertification for second counsel.[43] The reserved point, and it must now be determined, is whether Andrew, ifunsuccessful, is liable to pay indemnity costs.26[44] The predecessor agreement to the 2017 agreement (the subject of thisjudgment) was entered into in 2011. It provides relevantly at cl 6: If either party takes steps to enforce the performance of the other party'sobligations under this agreement the party in default must bear the nondefaulting party's costs (including legal costs on a full indemnity basis).[45] Clause 6 of the 2017 agreement provides:6. The parties agree that it is intended that:6.1 provided the repayment terms for the Capped Debt are adhered to byAndrew (and Mia Bella) then this agreement supersedes and replacesthe 2011 Loan Agreement (and 2016 variations); and6.2 in the event that there is any default of repayment of the Capped Debtunder this agreement the parties will revert to the terms of the LoanAgreement (and variations of the same) and James will be entitled toimmediately call up commence proceedings to recover the Total Debtowing; and6.3 where there is any conflict between the terms of this agreement andthose of the Loan Agreement (together with the two variations) thenthe terms of this agreement will prevail.[46] Mr Templeton submits that cl 6 of the 2011 agreement is not operative becauseAndrew is not in default under the 2011 agreement. The 2011 agreement is notthe subject of the present proceedings. James has not sought to enforce Andrew'sobligations under the 2011 agreement.26 We permitted Mr Templeton to file submissions on the issue post hearing.[47] We disagree. The statement of claim pleads the 2011 agreement including,specifically, cl 6. It pleads further that:16.1 the debt owed by the Defendants, pursuant to the 2011 LoanAgreement (absent the Capped Debt Arrangement) was as at15 February 2017 agreed to be US$921,264.31 (the "Total Debt"),plus agreed costs of NZ$4,750 (the "Agreed Costs") plus further costsinvoiced to March 2017 of NZ$12,119.09 (the "Further Costs")(Background I and clause 1(a)).[48] The claim is for the Total Debt.[49] The prayer for relief includes:(c) Costs on a solicitor and own client basis in accordance with the termsof the 2011 Loan Agreement (as varied) and the 2017 Agreement;details of such costs to be provided at or closer to hearing.[50] In our view, the 2017 agreement did not replace the 2011 agreement;it provided an alternative and contingent means by which Andrew could discharge hisobligations to James under the 2011 agreement.[51] Andrew did not comply with the 2017 agreement. The parties reverted tothe 2011 agreement. James's claim is for the enforcement of the 2011 agreement.[52] We find Andrew is liable to pay James indemnity costs in accordance with cl 6of the 2011 agreement.27Costs summary[53] Costs are to be paid as follows:(a) The first appellant must pay the respondent indemnity costs inaccordance with cl 6 of the 2011 agreement.27 We note that Mr Templeton suggested that the "bear" in cl 6 of the 2011 agreement does not mean"pay". In context, we have no doubt "bear" means "pay".(b) The second appellant must pay the respondent costs for a standardappeal on a band A basis and usual disbursements. Second counsel isnot certified for.Solicitors:Foy & Halse, Auckland for First and Second AppellantsWoodhouse Law, Auckland for Respondent