MORNING STAR ENTERPRISES LIMITED V SAITEYSMCMAHON PROPERTY LIMITED HC AK CIV 2007-404-003760

MORNING STAR ENTERPRISES LIMITED V SAITEYSMCMAHON PROPERTY LIMITED HC AK CIV 2007-404-003760 15 November 2007IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV 2007-404-003760BETWEEN MORNING STAR ENTERPRISES LIMITED Applicant AND SAITEYSMCMAHON PROPERTY LIMITED Respondent Hearing: 15 November 2007 Appearances: Mr T Herbert for Applicant Mr M T Davies and Ms G H Anderson for Respondent Judgment: 15 November 2007ORAL JUDGMENT OF VENNING JSolicitors: Lee Salmon Long, Auckland Meredith Connell, AucklandApplication for leave[1] Morning Star Enterprises Limited guaranteed Kingdon Development Limited's obligations to SaiteysMcMahon Property Limited under a rental underwrite agreement. When Kingdon failed to pay the rental due pursuant to that agreement SaiteysMcMahon made demand and then sought summary judgment against both Kingdon and Morning Star. Judge Beattie in the District Court entered judgment for SaiteysMcMahon against both Kingdon and Morning Star on 1 June 2007. Both appealed to this Court. Kingdon was subsequently placed into voluntary liquidation. The liquidators chose to not pursue the appeal. Morning Star's appeal was dismissed in a judgment of this Court delivered on 17 October 2007. Morning Star now seeks leave to appeal to the Court of Appeal.Principles[2] The application for leave to appeal is made under s 67 of the Judicature Act 1908. The test to apply on such applications is now well established. The appeal must raise some question of law or fact capable of bona fide and serious argument in a case involving some interest, public or private, of sufficient importance to outweigh the cost and delay of a further appeal: Rutherfurd v Waite [1923] GLR 34;Cuff v Broadlands Finance Limited [1987] 2 NZLR 343 and Waller v Hider [1998] 1 NZLR 412. In the end the guiding principle must be whether it is in the interests of justice to grant leave. [3] Two issues arise on this particular application:• Is there a question of law capable of bona fide and serious argument? And,• If there is, is it of such interest public or private and of sufficient importance to outweigh the cost and delay of the further appeal so that the interests of justice require a grant of leave.Is there a question of law capable of bona fide and serious argument?[4] On the appeal Morning Star sought to argue that SaiteysMcMahon was in breach of its obligations under a clause of the rental underwrite agreement in that it had failed to use its best endeavours to procure a lease of the untenanted space. That argument was raised before the District Court. The Judge rejected the argument on its facts. [5] In the course of dismissing the appeal this Court found that Morning Star was not able to argue SaiteysMcMahon was in breach of its obligations as the obligations were owed to Kingdon, not Morning Star and the point had been determined against Kingdon in the District Court. In coming to that view this Court found that the obiter comments of the Court of Appeal in McLean v Bank of New Zealand (1996) 9 PRNZ 473 were applicable, namely – (and referring to that decision but replacing the parties to that case with reference to the parties in this case):But, assuming to the contrary that [SaiteysMcMahon] could claim against [Morning Star] under the [underwrite guarantee] as a party liable for [Kingdon Development's] obligations is [Morning Star] to be permitted to contest [Kingdon's] liability when it can no longer do so? [Morning Star's] liability is derivative from [Kingdon's], in the sense that [Morning Star] is not liable unless [Kingdon] is. Whether or not someone subject to a derivative or dependent secondary obligation of this kind is viewed as a privy because of the contractual nexus or mutuality of interest with the person guaranteed, or whether it is simply seen as an abuse that a creditor be put to proof of a debtor's liability a second time, [Morning Star] should not be permitted now to raise a question about [Kingdon's] liability. We incline to the opinion that if [Morning Star] faced liability for [Kingdon's] debt, [Morning Star] would have to be regarded as a privy notwithstanding [Morning Star's] lack of knowledge of the guarantee and non-participation in the summary judgment proceedings and the application to set the judgment aside. We are, of the provisional view that where the debtor is estopped from disputing the validity of the debt, the guarantor may not do so.[6] This Court concluded:[10] In the present case it is not so much a question of Kingdon not being able to pursue the appeal as a matter of law but rather Kingdon choosing not to pursue its rights of appeal. In my judgment that is not a matter upon which the reasoning of the Court of Appeal can be distinguished. The important fact is that the principal debtor's obligations under the contract in issue have been determined by a Court. Further, the position fromSaiteysMcMahon's point of view on this case is stronger than that of the bank in the McLean case to the extent that Morning Star was a party to the earlier hearing and raised exactly the same defence that Kingdon had raised.[7] The question of law Morning Star seeks to pose to the Court of Appeal is whether a guarantor has an equitable right to take up its principal debtor's right to appeal in the same proceeding in which it is sued should the principal debtor (for whatever reason) decide not to exercise it. Mr Herbert submits that given the widespread existence of contracts of guarantee this is a question of sufficient public importance to outweigh the cost and delay of further appeal. In support of the application counsel submitted that Kingdon's failure to continue with its appeal prejudiced Morning Star as guarantor and Morning Star should, in equity, have standing to protect its own interests and to take up the right otherwise available to Kingdon to pursue the appeal. [8] There are some difficulties for the applicant with that proposition. To the extent the applicant seeks to assert an equitable right to take up the principal debtor's right to appeal, clause 6.1 of the rental underwrite and guarantee clause applies. It provides:To the fullest extent permitted by law, the Guarantor waives such of the rights of the Guarantor (legal, equitable, statutory or otherwise) which may at any time be inconsistent with any of the provisions of this guarantee and indemnity.[9] The guarantee clearly provides for Morning Star's liability to pay rental in the event that Kingdon does not pay the rental. That event has occurred. [10] The underlying thrust of Mr Herbert's submission is that it is in some way unfair that Morning Star should have to pay Kingdon's liability for rental when it cannot pursue the claim against SaiteysMcMahon for breach of the rental underwrite agreement or, put another way, that Morning Star is precluded from pursuing an argument that SaiteysMcMahon was in breach of its obligations to Kingdon under the rental underwrite agreement. The answer to that proposition is that as a guarantor Morning Star has rights in relation to such a claim. It could pay out its obligations under the guarantee and then be subrogated to whatever rights Kingdon may have against SaiteysMcMahon or it could reach an agreement with theliquidators to fund such claim against SaiteysMcMahon by the company in liquidation. Although the proceedings have been before the court for some time neither of those steps have been taken by Morning Star. [11] I am not satisfied that there is a bona fide point capable of argument. However, in the event I am wrong in that, I go on to consider whether the question of law is of such interest, public or private and of sufficient importance to outweigh the cost of delay of a further appeal the question that Morning Star seeks to pose might be a point of law of some interest.Is the question of law of such interest, public or private of sufficient importance to outweigh the cost and delay of the further appeal?[12] There is a further difficulty for the applicant in the second part of the test that is applied to an application for leave such as this. The overriding issue is whether the interests of justice require leave in the circumstances of the particular case bearing in mind the cost and delays of further appeals. [13] A powerful reason for declining leave in this case is that the appeal was dismissed, not just on the basis of the point referred to, but also on several other grounds as well. Even if the point sought to be raised on appeal was determined in the applicant's favour it would not assist the applicant in this case because of those other findings, some of which relate to the law and some of which relate to the facts. [14] Importantly any claim for breach of clause 4.1 (even if Morning Star can pursue such a claim) is a counterclaim, which does not amount to a defence to a summary judgment application: Grant v NZMC Ltd [1989] 1 NZLR 8. A claim under clause 4.1 is not a defence to a claim for rental payable under the rental underwrite deed but rather a separate and independent counterclaim. [15] But even if the claim could be characterised as a set-off and therefore constitute a defence, as a matter of law Kingdon expressly contracted out of its right to set-off by clause 3.1 of the underwrite deed which provided:3.1 The Covenantor promises to the Covenantee that due and punctual payment of the Income as follows: (a) The Rent Component shall be paid by the Covenantor by equal monthly instalments in advance, payable on the 1st day of each month without deduction or set-off.If the point that Morning Star wishes to raise is correct and Morning Star can assert Kingdon's right to argue that SaiteysMcMahon was in breach of its obligations under the underwrite deed clause 3.1 would prevent Kingdon from raising that claim as a set-off to SaiteysMcMahon's claim for rental. Morning Star can not be in any better position than Kingdon. As Kingdon could not raise a breach of clause 4.1 by way of set-off so it must follow that nor can Morning Star, even if it was able to assert Kingdon's right, which would be the purpose of the appeal. [16] Next, in both the District Court and this Court as a matter of fact it was held that the substantive defence by Kingdon (which Morning Star now seeks to pursue) that SaiteysMcMahon was in breach of its obligation under the rental underwrite to use its best endeavours to procure a lease was not available to Kingdon and Morning Star on the facts. [17] This Court accepted, as did Judge Beattie in the District Court, that the only response Mr Morgenstern made to SaiteysMcMahon's demands for payment of the outstanding rental was to give an undertaking to settle outstanding amounts by 8 December 2006. At no stage prior to the issue of these proceedings did Mr Morgenstern raise any issues regarding alleged failure to co-operate or to exercise best endeavours in breach of the clause the applicant now seeks to rely on. The surrounding factual circumstances and the wording of the particular clause itself do not support that defence. Mr Herbert referred to the decision of Mana & Anor v Fleming (2006) 7 NZCPR 663 as to the obligations of the vendors of a property in that case to use reasonable endeavours to sell the property. With respect to his reference to that case I do not find it of assistance. It dealt with a quite different factual situation. In my view it does not assist the applicant's position. [18] For all those reasons, even if leave was granted and the point that the applicant has identified was determined in its favour, both as a matter of law and onthe factual findings to date there would be no point in the appeal as the appeal would have to be determined against Morning Star. [19] It is timely to refer to the observation of the Court of Appeal in Waller v Hider:The scarce time and resources of the High Court and of [the Court of Appeal] are not to be wasted, nor additional expense for an unsuccessful client incurred without realistic hope of benefit.[20] Given the hopelessness of any such appeal, particularly the finding as a matter of law (which was not challenged by Mr Herbert on behalf of Morning Star), that the claim that is sought to be pursued is at best a counterclaim and even if a set- off is precluded by contract, that is the clear position in the present case.Result[21] The application for leave to appeal must be determined against the applicant. The interests of justice do not support the grant of leave. The Court of Appeal would be asked to decide a point of law in a situation where the decision of the Court on that point could not determine the appeal in the applicant's favour. It is difficult to imagine a clearer example of the waste of the scarce resources of the Court of Appeal. The application for leave to appeal is dismissed.Stay[22] I understand that Morning Star filed an application to stay liquidation proceedings that SaiteysMcMahon issued following delivery of the judgment dismissing the appeal. I am told that that application has a first call at 11.45 a.m. on 21 November 2007. It is of course for the Associate Judge dealing with the matter on that day to deal with it as he or she sees fit but to the extent that the stay is premised on any prospect of an appeal against the decision of this Court I have to observe that for the reasons given above there can be no merit in the application for stay.Costs[23] That leaves the issue of costs. The respondent seeks costs on a solicitor/client basis in relation to this application. Costs were fixed on a 2B basis when the appeal was dismissed. They were fixed on that basis because that was the basis referred to and agreed at an earlier conference prior to the appeal. The appeal having been determined, however, costs are now at large. Clause 6.1 of the clause provides for solicitor/client costs by way of indemnity. I do not understand Mr Herbert to suggest that the clause could not apply in these circumstances. There is authority to support the proposition that a clause of that nature can support solicitor/client costs: Anglesea Medical Properties Limited v Braemar Hospital Limited HC HAM CIV 2006-419-001492 9 October 2007 Allan J. This application had no realistic prospect of success. In the circumstances I am satisfied and agree with the respondent's submissions that costs should be on a reasonable solicitor/client basis. I make an order for costs in the respondent's favour on that basis accordingly. __________________________ Venning J