HAYMAN V NZ NEW OAK LTD HC AK CIV-2010-404-4143

HAYMAN V NZ NEW OAK LTD HC AK CIV-2010-404-4143 1 March 2011IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2010-404-4143BETWEEN J C HAYMAN AND M K HAYMANPlaintiffsAND NEW ZEALAND NEW OAK LIMITEDDefendantAND B YU AND S LINGSecond DefendantsHearing: 22 February 2011Appearances: P Twist for the PlaintiffsG C Jenkin for DefendantsJudgment: 1 March 2011RESERVED JUDGMENT OF ELLIS JThis judgment was delivered by me on 1 March 2011at 4 pm, pursuant to r 11.5 of the High Court RulesRegistrar/Deputy RegistrarSolicitors: The North Shore Law Practice, PO Box 31361, Auckland 0741Henry Feng, PO Box 67059, Auckland 1349Counsel: Peter Twist, PO Box 2301, Auckland 1140G C Jenkin, PO Box 2256, Auckland 1140[1] On 12 June 2007 the (then) trustees of the Tsubo Trust entered into a seven year lease with the first defendant as tenant and the second defendants as guarantors in relation to a commercial warehouse premises in Panmure.[2] The plaintiffs, who are are the present trustees of the Tsubo Trust (and to whom in that capacity the Panmure property has been transferred), seek summary judgment against the defendants for arrears of rent and specified outgoings under the lease for the period between September 2009 and June 2010, together with interest.1The outstanding rent of $39,487.502 comprises the most of the debt owing. The outstanding outgoings (which comprise a specified share of Auckland City Council and Auckland Regional Council rates, together with Body Corporate insurance charges) total $14,826.33.[3] The defendants admit that they owe these amounts to the plaintiffs but resist entry of summary judgment against them on the grounds that they have a set-off or counterclaim against the plaintiffs. This set-off or counterclaim is said to arise either from:(a) An alleged failure by the plaintiffs to adhere to an oral, pre- contractual, promise to repair leaks in the roof of the warehouse in order to render it fit for the defendants‟ (storage) purposes. The defendants say that this promise, together with their signing of the lease agreement constituted an enforceable collateral contract which has been breached by the plaintiffs;(b) An alleged breach of an express written covenant to repair contained in the lease agreement itself. 31 Being default interest at the 14% contractual rate.2 This arrears amount is slightly less than that specified in the application for summary judgment onaccount of the payment by the defendants of one month‟s rental in February 2010.3 Counterclaims based in the alternative on (a) alleged breach of the quiet enjoyment clause (b) alleged breach of the covenant not to derogate from grant and (c) alleged breach of the Fair Trading Act were not ultimately pursued before me.[4] The defendants say that, as a result of these alleged breaches, water ingress from the roof caused approximately $125,000 damage to a quantity of medium density fibreboard (MDF) that was owned and stored by them in the warehouse.[5] As a matter of fact, the plaintiffs deny:(a) that any pre-contractual promise was made; and(b) that there were any leaks in the roof; and(c) that damage was caused to the defendants‟ property.[6] Rather, they say that the floor of the warehouse became flooded with water on two occasions due to breakages to water pipes inside the warehouse caused by the inexpert handling of a forklift truck by employees of the defendants.4 On another occasion when a roof panel had become displaced the plaintiffs say it was fixed immediately and that no rain got into the warehouse. They say they knew nothing of the alleged damage to the defendants‟ MDF until the commencement of these proceedings.[7] As a matter of law, the plaintiffs say that no legal basis for any set-off or counterclaim exists because of the express terms of the lease agreement.[8] Most significantly, and in terms of the rental arrears, clause 1.1 provides that:THE Tenants shall pay the annual rent by equal monthly payments in advance (or as varied pursuant to any rent review) on the rent payment dates. The first monthly payment (together with rent calculated on a daily basis for any period from the commencement date of the term to the rent first payment date) shall be payable on the first rent payment date. All rent shall be paid without any deductions or set off by direct payment to the Landlord or as the Landlord may direct.[9] The defendants accept that this clause prevents them from being able to rely on any set-off or counterclaim in relation to the rental arrears. Accordingly I simply4 The first breakage occurred prior to the commencement of proceedings and the second one just afterwards.record that authority supports that position: Browns Real Estate Ltd v Grand Lakes Properties Ltd.5[10] Notwithstanding this concession, however, the defendants submit that I should nonetheless exercise my discretion under rule 12.12(2)(b) of the High Court Rules to decline summary judgment even in relation to the rent arrears on the grounds that the defendants have a counterclaim that "ought to be tried". Additionally or alternatively Mr Jenkin submitted that the execution of any summary judgment entered in that respect should be stayed under rule 17.29.[11] As regards that portion of the debt that does not constitute rental arrears, the defendants rely for their defence more directly on their counterclaim and say that they should be able to set-off the damages now claimed by them against the amounts sought by the plaintiffs. No other defence is pleaded.[12] The exercise of the Court‟s discretion under rule 12.12.2(b) in relation to therental arrears and the existence of a possible defence by way of set-off in relation to the remaining amounts owing under the lease both give rise to essentially the same inquiry:(a) Is there a counterclaim that ought to be tried such that summary judgment for the rental arrears should not be entered?; and(b) Is there a real question to be tried as to whether the counterclaim gives rise to the possibility of a set-off against the arrears of outgoings?[13] The answer to either question turns on the tenability of the counterclaim itself and it is therefore to that issue I now turn.Tenability of the counterclaim[14] The plaintiffs submit that the terms of the lease preclude either aspect of the counterclaim from succeeding. As regards the alleged breach of the covenant to5 Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425.repair, they say that although clause 11.1 of the lease does constitute such a covenant, it also limits any claims for breach of it. That is because the obligation to repair contained in clause 11.1 is subject to a number of qualifications, one of which is that:... the Landlord shall not be liable for any:(d) Loss suffered by the Tenant arising from any want of repair or defect unless the Landlord shall have received notice in writing thereof from the Tenant and shall not within a reasonable time thereafter have taken appropriate steps to remedy the same....[15] In the present case the defendants accept that no written notice of any leak or water ingress problem was ever given by the defendants to the plaintiffs, although they say that the plaintiffs were notified of the leaks verbally. This is denied by the plaintiffs. Plainly, however, in terms of clause 11.1 there is a significant impediment to the success of any counterclaim based on an alleged breach of this covenant.[16] As to a counterclaim based on a collateral contract arising from a pre- contractual promise to repair (this being the principal counterclaim ground relied on by Mr Jenkin before me) the plaintiffs point to clause 40.1 of the lease, which provides:NO warranty or representation expressed or implied has been or is made by the Landlord that the premises are now suitable or will remain suitable or adequate for use by the Tenant or that any use of the premises by the Tenant will comply with the by-laws or ordinances or other requirements of any authority having jurisdiction.[17] Mr Jenkin submitted that the promise to repair was somehow different from a"warranty or representation". I do not accept that submission. Clause 40.1 in my view presents a prima facie barrier to the collateral contract counterclaim.[18] Notwithstanding this Mr Jenkin sought to rely on the opening passage ofCooke J‟s judgment in Industrial Steel and Plant Ltd v Smith6 as authority for the proposition that it is possible to have an enforceable collateral contract that was6 Industrial Steel and Plant Ltd v Smith [1980] 1 NZLR 545 (CA).inconsistent with a term of the principal or subsequent contract. It is therefore necessary to examine that submission in more detail.[19] What Cooke J said in Industrial Steel was this:7Of collateral contracts Cheshire and Fifoot on Contract say (5th NZ ed, 1979, 53-54):„The name is not, perhaps, altogether fortunate. The word „collateral' suggests something that stands side by side with the main contract, springing out of it and fortifying it. But, as will be seen from the examples that follow, the purpose of the device usually is to enforce a promise given prior to the main contract and but for which this main contract would not have been made. It is rather a preliminary than a collateral contract. But it would be pedantic to quarrel with the name if the invention itself is salutary and successful.‟Among the illustrations given in that book are a series of hire purchase cases. One of these is Webster v Higgin [1948] 2 All ER 127, where in consideration of an oral „guarantee‟ of the condition of a car a customer entered into a written hire purchase agreement which expressly excluded warranties. He was held entitled to enforce the guarantee as a separate collateral agreement.[20] Understandably, it is the reference to the decision in Webster v Higgin upon which Mr Jenkin particularly relied. However a brief perusal of the Webster decision itself shows that in that case it was held that the wording of the clause in the hire purchase agreement was not sufficiently clear to abrogate the separate collateral agreement constituted by an offer of a guarantee and the signing of the agreement by the purchaser. Webster is not, in my view, authority for the proposition that it is possible to have a prior collateral contract that is inconsistent with the principal or main contract.[21] The correct position therefore continues to be as set out in Lysnar v National Bank of New Zealand Ltd 8 (a case to which Cooke J in fact referred in the paragraph that immediately follows the one from which I have quoted). In that case the Privy Council said:97 At 555-556.8 Lysnar v National Bank of New Zealand Ltd [1935] NZLR 129 (PC)9 At 140-141.It might seem that in strict logic any such collateral matter should have been dealt with by amending the written contract before it was signed and that, if the contracting party signed the written contract without embodying the new term, he should be shut out from giving evidence that what he signed did not contain all that was agreed at the time; hence the warning of Lord Moulton that the rule must be applied most guardedly. But though the rule is established, it is subject at least to one definite limitation; though the collateral contract must inevitably, it seems, add to the written contract, it must not vary it in the sense of being inconsistent with, or contradictory of, the written contract to which it is collateral; thus in New London Credit Syndicate, Ltd v Neale evidence of a contemporaneous oral agreement to renew a bill of exchange was rejected on the ground that it would contradict the term of the bill whereby it was payable in three months. The line between what is contradictory of, and what is merely supplemental to, the written instrument may not be easy in all cases to draw, as appears fromErskine v Adeane; but in the present case it seems beyond question for reasons sufficiently explained earlier in this judgment that the terms contained in the letter of May 2, 1931, were not consistent with those of the letter of May 1, 1931, particularly in regard to the management of the station; in their Lordships' judgment evidence of any such collateral oral agreement was not admissible.[citations omitted][22] Accordingly the proper focus of the collateral contract inquiry in the present case is whether the alleged oral undertaking to repair can be said to be supplemental to the written lease, rather than contradictory of it.[23] While (as the Privy Council said) the line between supplemental and contradictory is not always easy to draw, subsequent authority makes it clear that the defendants face a heavy burden in this respect. As the Court of Appeal has more recently said: 10[34] Evidence of what was said in negotiations is not normally admissible to contradict the terms of a written contract (the extrinsic evidence rule, so called because the evidence is extrinsic to the contract): Edwards vO'Connor. That is so because pre-contract negotiations are normally irrelevant, except when used for the limited purpose of ascertaining what objectively observable facts, as opposed to intentions, must have been in the minds of the parties: Eastmond v Bowis, Potter v Potter.[35] Extrinsic evidence is admissible to establish a collateral contract, which may supplement or vary the principal agreement in ways that do not contradict its primary purpose: Lysnar v National Bank of New Zealand Ltd,A M Bisley & Co Ltd v Thompson. In a commercial transaction between experienced parties who are legally represented, strong and unequivocal10 Krukziener v Hanover Finance Ltd [2008] NZCA 187, [2010] NZAR307 AT [34]–[36].evidence is needed to warrant an inference of a common understanding that was not expressly recorded: Air New Zealand Ltd v Nippon Credit Bank Ltd.[36] We accept Mr Carruthers‟ submission that the defence is notarguable. The agreement that Mr Krukziener alleges is far from unequivocal and would contradict central terms of the loan agreement, namely the circumstances in which Elders would be able to accelerate the loan.[citations omitted][24] In the present case, clause 40.1 of the lease specifically excludes any warranty as to the suitability of the premises for use by the defendants. Thedefendants‟ proposed "use" of the warehouse was storage. If there was a separate(collateral) undertaking as to the weather-tightness of the premises there can be little doubt that the scope of clause 40.1 would necessarily be significantly curtailed.[25] To the extent that clause 40.1 nonetheless admits the possibility of a supplementary warranty as to weather-tightness remains, the evidence as to the existence of such a warranty is far from "strong and unequivocal". It is vehemently disputed by the plaintiffs and is hardly supported by the defendants‟ own actions. As I have said, no clear formal steps were ever taken by them in relation to the alleged leaks, and nor did they notify the plaintiffs of the alleged damage to the MDF.[26] Nor does the remainder of the contract itself support the defendants‟ position.In particular, although the first 46 clauses of the contract are in the ADLS 2002 standard form, there follow an additional eight bespoke clauses at the end of the agreement. Some of these placed specific and additional burdens on the plaintiffs. For example clause 47 stated that:The Landlord will provide 4 rows of pallet racking (cream and orange colour) for the use of the Tenant during the term of the Lease on the understanding that the Landlord provides no warranty as to the suitability orotherwise of the racking for the Tenant‟s purposes and the Tenant shall, during the term of the Lease, keep and maintain the said racking and will on the expiration or sooner termination of the Lease ensure that the racking is in a condition consistent with that existing at the commencement date of the Lease.[27] The fact that such specific additional clauses were included in the lease renders inexplicable the defendants‟ failure to ensure that the alleged warranty by theplaintiffs as to weather-tightness was also expressly included.[28] It follows from what I have said above that although I accept that there is a dispute between the parties as to certain central factual matters I do not need to resolve these here. However to the extent those matters have a bearing on the legal tenability of the counterclaims I consider that the defendants have not discharged the heavy evidential onus that is upon them.Conclusions[29] It will be evident from my analysis above that I do not consider that thedefendants‟ counterclaim has any reasonable prospect of success. By way of summary however:(a) It is accepted that there is no defence to the plaintiffs‟ claim for rentalarrears;(b) The counterclaim is untenable as a matter of law because:(i) clause 11.1 of the contract precludes a counterclaim for alleged breach of the warranty to repair, it being accepted that no written notice of the alleged leaks was ever given; and(ii) even if the alleged pre-contractual collateral promise to repair can be said to be supplemental to (rather than inconsistent with) clause 40.1 of the lease (a matter as to which I have some doubt), the evidence of the existence of such a promise is far from strong and unequivocal and is generally incompatiblewith undisputed aspects of the defendants‟ conduct and withthe remainder of the terms of the lease;(c) There is accordingly no real question to be tried in relation to thedefendants‟ putative defence to the claim for the arrears of outgoings; and(d) This would not be an appropriate case in which to exercise my discretion under rule 12.2.2(a) or to stay the execution of this summary judgment.[30] For the reasons already given the plaintiffs are entitled to summary judgment against the defendants in the sum of $54313.83 in relation to arrears owing under the lease together with default interest at the contractual rate and costs on a 2B basis.[31] A further memorandum is to be filed by the plaintiffs containing updated figures in these latter respects within 10 days of the date of this judgment. Any arithmetical objection by the defendants is to be notified by way of memorandum within a further five days of service of the plaintiffs‟ memorandum.______________________________Rebecca Ellis J