DEMPSEY v HOWE & ORS CA674/2013 [2015] NZCA 9

DEMPSEY v HOWE & ORS CA674/2013 [2015] NZCA 9 [5 March 2015]IN THE COURT OF APPEAL OF NEW ZEALANDCA674/2013[2015] NZCA 9BETWEEN PAUL JOHN DEMPSEYAppellantAND BRUCE WILLIAM HOWE, JENNIFERMARGARET HOWE AND MBTLIMITEDRespondentsHearing: 4 February 2015Court: Ellen France P, Harrison and Wild JJCounsel: D J MacRae and L G Cox for AppellantH L Thompson for RespondentsJudgment: 5 March 2015 at 3.30 pmJUDGMENT OF THE COURTA The appeal is allowed in part. The High Court judgment is amended to provide that the net judgment amount is $193,789.03, not $258,135.95.B Costs on the appeal lie where they fall.____________________________________________________________________REASONS OF THE COURT(Given by Ellen France P)Table of contentsIntroduction [1]Background [7]Decision [15](a) Rate of interest payable to the Howes [16](b) Approach to the gain on resale [32](c) Deposit [43]Result [44]Introduction[1] On 22 March 2010 the appellant, Paul Dempsey, entered into an agreement for the purchase of a residential property owned by a family trust. The trustees were the respondents, Bruce and Jennifer Howe, and MBT Ltd, a trustee company. The agreement used the standard form REINZ/ADLS agreement form (8th ed, 2006(2)).[2] The agreement failed after Mr Dempsey did not settle for over two years and the vendors (the Howes) resold the property to someone else.[3] The Howes brought a proceeding in the High Court seeking interest until resale at the contractual rate for late settlement and to forfeit the deposit. Mr Dempsey cross-claimed seeking a refund of the deposit.[4] The Howes obtained judgment in their favour in the High Court.1 Miller J found the Howes were not entitled to cancel the agreement and nor had Mr Dempsey repudiated. The Judge also held that the agreement had been brought to an end. By selling to a third party, in the circumstances, the Howes had repudiated the agreement, a decision Mr Dempsey had accepted. But the Judge found that theHowes were entitled to damages for delay resulting from Mr Dempsey's failure tosettle on the due date.[5] Miller J held that interest was available to the Howes on the unpaid purchase price at the contractual rate of 12.5 per cent per annum.2 His Honour found thatsome of the Howes' claimed costs were to be recovered but that the gain on resale was too remote.3 Lastly, the Judge concluded that Mr Dempsey was entitled to credit for the deposit and also that the Howes were not entitled to keep the deposit by way of forfeit.4[6] Mr Dempsey appeals. The issues on appeal relate only to the calculation of damages. In particular, the matters in dispute are as follows:1 Howe v Dempsey [2013] NZHC 2297 at [70].2 At [80].3 At [90][94].4 At [88][96].(a) whether and at what rate interest is available to the Howes;(b) whether the gain on resale and resale costs should be factored in; and(c) what the position was relating to the deposit paid by the purchaser.Background[7] The narrative can be briefly stated as there is no dispute over the relevant background as recorded by Miller J.5[8] Under the agreement for sale and purchase, the purchase price was $5,500,000. The deposit due was $500,100. Settlement was to occur a year later and the interest rate for late settlement was 12.5 per cent. Mr Dempsey paid the deposit. However, he ran into difficulties and, near the settlement date, the parties negotiated a three month extension in exchange for further payment of $100,000 to the Howes by the original settlement date. Mr Dempsey did not pay the further $100,000. The Howes issued a settlement notice under cl 9.1 of the agreement on 24 March 2011 requiring settlement within 12 working days, time being of the essence.[9] Mr Dempsey did not settle, because of a lack of funds. The Howes opted notto cancel the agreement. Instead, as Miller J recorded, "they chose to keep their options open by keeping the agreement on foot while also taking steps to resell".6There was correspondence with Mr Dempsey to this effect via the Howes' solicitor.Their intention was that both parties would try to sell the property to another purchaser. Over this period of time, the Howes took steps to facilitate the resale of the property including cleaning up the overgrown section and demolishing the house.[10] On 22 March 2012, a year after settlement was originally due to take place, Mr Dempsey secured a sale for $5,850,000. This agreement fell through after the parties were unable to agree over whether this would release Mr Dempsey from his obligation. The discussions at the time included a proposal from Mr Dempsey that he would in effect settle his obligations for less than the balance due.5 At [4][22].6 At [14].[11] Eventually, under an agreement dated 23 May 2012, the Howes sold the property for $5,860,000. They purported to cancel the agreement with Mr Dempsey under cl 9.4(2). That clause permits a vendor with a right to cancel to do so by entering an agreement for resale.[12] The Howes treated the deposit as forfeit and retained it. They sued Mr Dempsey in the High Court claiming in debt interest at the contractual rate on the unpaid purchase price or damages made up of the interest and resale costs.[13] The Howes' case was based on the claim that Mr Dempsey breached the agreement by failing to settle and that he repudiated it in March 2012 when he asked to settle for less. They asserted they had cancelled the agreement by resale. MrDempsey defended the proceeding on the basis the Howes' settlement notice was notvalid, the Howes had affirmed the agreement before they resold, and could not claim interest at the contractual rate. Mr Dempsey also asserted that the deposit plus the gain on resale exceeded any loss. Finally, Mr Dempsey counterclaimed for the recovery of the deposit.[14] As we have foreshadowed, the issues on appeal have narrowed. In the High Court, the focus was on the contractual aspects and, in particular, on the impact ofthe Howes' failure to sign Authority and Instruction forms required for an electronic dealing. As we apprehend it, the parties paid less attention before Miller J to the issues of calculation of damages which are now the focus on appeal.Decision[15] We deal first with whether the contractual rate of interest was the appropriate measure of loss.(a) Rate of interest payable to the Howes[16] Miller J upheld the Howes' claim for interest at the contractual rate of12.5 per cent.7 He ordered that interest was payable on the unpaid balance from 22 March 2011 to the day of settlement of the resale, 23 May 2012. The Howes7 At [80].were also entitled to interest on the resulting sum under s 87 of the Judicature Act 1908 from the settlement of the resale until judgment.8[17] Mr Dempsey says the Judge was wrong to award interest at the contractual rate rather than, at most, the rate payable under s 87 of the Judicature Act. That is because neither cls 3.12 nor 9.4(3), which provide for interest at 12.5 per cent per annum, applied in this case. In the circumstances, Mr Dempsey submits the Howes were required to prove actual loss and did not do so.9[18] Mr Thompson's response on behalf of the Howes is that loss in this caseshould be assessed at the time of loss of the bargain. The submission is that although contractual damages are usually measured at the date of breach, "this is not an [absolute] rule".10 If loss is assessed in this way, performance of the contract would have involved payment at the contractual rate for late payment. Absent any suggestion that the contractual rate is a penal rate or somehow unreasonable, the Judge was right to treat that rate as an appropriate measure of the loss.[19] We accept Mr MacRae's submission for Mr Dempsey that neither cls 3.12nor 9.4(3) applied. Indeed, Mr Thompson did not base his argument on the direct application of either clause.[20] As Miller J said, cl 3.12 provides for interest on the purchaser's latesettlement not, as here, for failure to settle at all.11 Clause 3.12 is entitled "Purchaser Default: Late Settlement" and deals with the situation where the vendor is not indefault and "any portion of the purchase price is not paid upon the due date for payment". In that situation, cl 3.12(1) provides:The purchaser shall pay to the vendor interest at the interest rate for late settlement on the portion of the purchase price so unpaid for the period from8 At [81].9 The appellant relies on Sempra Metals v Inland Revenue Commissioners [2008] 1 AC 561 (HL) and Clarkson v Whangamata Metal Supplies Ltd [2007] NZCA 590, [2008] 3 NZLR 31.10 Citing amongst other cases, Johnson v Agnew [1980] AC 367 (HL) at 401 per Lord Wilberforce although the passage cited would support assessing damages at 23 May 2012, when the contract was lost.11 Howe v Dempsey, above n 1, at [77]. See also Peter Blanchard A Handbook on Agreements for Sale and Purchase of Land (4th ed, Handbook Press, Auckland, 1988) at [413] in relation to a clause the equivalent of cl 3.12 and D W McMorland Sale of Land (3rd ed, Cathcart Trust, Auckland, 2011) at 508509.the due date for payment until payment ("the default period"); but nevertheless this stipulation is without prejudice to any of the vendor's rightsor remedies including any right to claim for additional expenses and damages. [21] As Miller J also said, cl 9.4(3) "does not govern [the] case, of course, notonly because more than a year elapsed but also because [the case] was confined to post-cancellation claims under cl 9.4(1)(b)(ii)".12 Clause 9.4 deals with the situation where a purchaser does not comply with the terms of a settlement notice. In that case, subject to cl 9.1(3) dealing with damages, cl 9.4(1) states that "[w]ithout prejudice to any other rights or remedies available to the vendor at law or in equity",the vendor may:(a) sue the purchaser for specific performance; or(b) cancel this agreement by notice and pursue either or both of the following remedies namely:(i) forfeit and retain for the vendor's own benefit the depositpaid by the purchaser, but not exceeding in all 10% of the purchase price; and/or(ii) sue the purchaser for damages.[22] Further, cl 9.4(2) provides as follows:(2) Where the vendor is entitled to cancel this agreement the entry by the vendor into a conditional or unconditional agreement for the resale of the property or any part thereof shall take effect as a cancellation of this agreement by the vendor if this agreement has not previously been cancelled and such resale shall be deemed to have occurred after cancellation.[23] Finally, cls 9.4(3) and (4) state that:(3) The damages claimable by the vendor under subclause 9.4(1)(b)(ii) shall include all damages claimable at common law or in equity and shall also include (but shall not be limited to) any loss incurred by the vendor on any bona fide resale contracted within one year from the date by which the purchaser should have settled in compliance with the settlement notice. The amount of that loss may include:(a) interest on the unpaid portion of the purchase price at the interest rate for late settlement from the settlement date to the settlement of such resale; and12 At [78].(b) all costs and expenses reasonably incurred in any resale or attempted resale; and(c) all outgoings (other than interest) on or maintenance expenses in respect of the property from the settlement date to the settlement of such resale.(4) Any surplus money arising from a resale as aforesaid shall be retained by the vendor.[24] Clause 9.4(3) can be seen as "designed to foreclose controversy overforeseeability and remoteness of loss in post-cancellation claims".13[25] It is accepted that in cases not involving cancellation, the vendor may bringclaims at common law or in equity. Miller J noted that, "far from limiting suchremedies, clauses 3.12 and 9.4 sought expressly to preserve them".14 Interest is available so long as it is pleaded and proved.[26] Against this background, the issue is whether the contractual rate was an appropriate measure of the loss as Miller J found.[27] The general rule in New Zealand is that damages in contract are assessed asat the date of the breach but courts may depart from this to work out a "fairer solution".15 Applying the general rule, damages would be assessed in this case at 22 March 2011 when Mr Dempsey failed to settle in breach of contract. However,we agree with the submission for the Howes that a "fairer solution" is to assessdamages as at 23 May 2012 when the property was resold to the third party. Prior to that date both Mr Dempsey and the Howes were actively trying to find a new purchaser who was able to buy the property. The breach had been ongoing for a lengthy period. At the same time, there was no suggestion that it was unreasonable for the Howes to keep the contract on foot for the period during which they did.[28] The position here is complicated by the fact that the contract was lost to the Howes through their own default in selling to the third party when they were not13 At [78], citing Mana v Fleming [2007] NZCA 324, (2007) 8 NZCPR 469 at [56] but see [64].14 At [78].15 Stirling v Poulgrain [1980] 2 NZLR 402 (CA) at 420 per Cooke J; see also John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (4th ed, LexisNexis, Wellington, 2012) at [21.2.2(c)].contractually entitled to do so. Or, at least not without first issuing a fresh settlement notice to Mr Dempsey which he did not comply with. However, the fairer result is to treat the resale to the third party as, effectively, inconsequential in assessingdamages. The resale mitigated damages by bringing to an end the Howes'continuing losses from the breach. It also limited the damages for which Mr Dempsey was liable. If loss is assessed on this basis, the late payment interest rate can be applied. The award can therefore be seen as, in effect, equating to liquidated damages. Further, it should not matter in this case whether or not the Howes settled with Mr Dempsey because Mr Dempsey was never, in fact, ready, able and willing to settle.[29] In these circumstances, unless there was some basis for taking a different approach, for example, evidence that the contractual rate was penal in nature, thecontractual rate was an appropriate measure of the loss. On this aspect, Miller J'srelevant finding is as follows:[79] In this case, [the] agreement was of long duration, the vendors' lossfrom their inability to use the purchase price was expressly contemplated by cl 9.4 and anyway must be accounted a normal consequence of delay, their loss did not end after a year, and the resale occurred soon after the anniversary. My attention has been drawn to nothing that might displace the inference that the loss foreseeably continued for the additional period, or that might suggest the contract rate no longer measured the loss appropriately. I conclude that the Howes' claim to interest on the unpaid balance has beenbrought to an end not by effluxion of time but by termination and receipt, on settlement of the resale, of a sum exceeding the balance of the purchase price.[30] Mr MacRae submits this approach renders cl 9.4 redundant. We do not consider that argument has any force. There is no reason why the common law needs to produce a different result. The question is rather a factual one: what is theappropriate measure of the loss in the particular case? Miller J's finding, that therewas nothing to suggest the contractual rate for late payment did not appropriately measure the loss, answers this question in the present case.16[31] This ground of appeal is not successful.16 At [79].(b) Approach to the gain on resale[32] This issue arises because the sale price on the resale to the third party was $360,000 more than the price that the Howes would have obtained if Mr Dempseyhad settled. Miller J's conclusion was that the resale costs were too remote from thespecific breach for which the Howes were awarded damages. The "corollary" wasthat "so too is the gain that they made on resale".17[33] Mr Dempsey says both the capital gain on the resale and recoverable resale costs need to be taken into account. The Howes have separately been compensated for their use of the money by the payment of interest as damages. Accordingly, it issubmitted that Miller J's approach has given rise to a double recovery or windfall forthe Howes. Further, it is submitted that Miller J was wrong to say that the capital gain was too remote. If the matter is considered at the time the contract is made, it was reasonably foreseeable that on there being no settlement the property would be resold applying the rule in Hadley v Baxendale18 as restated by Asquith LJ inVictoria Laundry (Windsor) Ltd v Newman Industries Ltd.19 The gain flowed directly from the breach.[34] Mr Thompson advanced his submissions on this aspect on the basis that thereare greater conceptual difficulties with the Judge's finding that the gain on resale wastoo remote. However, he submits the outcome is a sound one. Mr Thompson suggests difficulties arise because the Howes breached the contract as they had not made time of the essence before cancelling. That meant there were difficulties in awarding damages flowing from repudiation. In this circumstance, he submits the Judge was referring to remoteness in a causation sense and decided, as a matter of common sense, that Mr Dempsey's breach did not cause the Howes to incur resalecosts.17 At [94].18 Hadley v Baxendale (1854) 9 Ex 341 (Exch).19 Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 (CA).[35] Mr Thompson's alternative submission is that this is really a mitigation case and mitigation principles should be applied to all of the relevant items in dispute.20On that approach, Mr Thompson submits that, as resale is generally treated as mitigating, any costs reasonably incurred in achieving a resale are recoverable. If the $360,000 gain on the resale is treated as resulting from steps taken by the Howes to mitigate their loss, on the same basis the Howes should recover all costs associated with the resale.[36] We consider the matter is best approached on the basis outlined in Mr Thompson's alternative submission, that is, by applying mitigation principles. The Judge was faced with difficulties because of the Howes' repudiation. However,Mr MacRae is right that the approach adopted has resulted in a windfall for the Howes. Further, if assessed at the time the contract is made, resale was a foreseeable outcome of failure to settle. We consider the net gain on the resale should be factored into the assessment of loss.[37] As Mr Thompson submits, if the matter is approached applying mitigation principles, other costs relating to mitigation need to be accounted for.[38] As to these items, it is common ground that the Howes were entitled torecover the real estate agent's commission on resale, rates and insurance costs. It isnow accepted by Mr Dempsey that the costs of demolition of a derelict house on the property relate to resale. The evidence was that the house was demolished after the real estate agent assisting the Howes advised them to remove the house in order to secure a resale. The only issue remaining is whether the Howes are also entitled to recover legal costs.[39] Mr Dempsey submits it is not clear how much of the $47,000 odd sought under this heading in fact relates to mitigation. The submission is that therefore the Howes have not met their onus of proof.20 Citing, amongst other cases, New Zealand Motor Bodies Ltd v Emslie [1985] 2 NZLR 569 at 598 (HC) where Barker J noted that a plaintiff "may claim for expenses incurred in taking reasonable steps to mitigate".[40] On this aspect, Miller J said:21 all the remaining items concern resale, not the passage of time. The real estate commission obviously falls into that category but I have found that so do the costs of demolition and property "maintenance". I treat all legal costsas connected with resale; there was a claim that some were incurred in mitigation of loss, but the evidence does not establish how much and what exactly the lawyers did in mitigation.[41] We agree with Mr Thompson that if the legal costs were connected with the resale they were incurred in mitigation of the loss. The Judge was right that the invoices do not differentiate.22 However, Mr Howe's unchallenged evidence wasthat they incurred legal costs of $47,119.50 "associated with steps we took in dealingwith Mr Dempsey's default, including dealing with real estate agents and taking steps to resell the property". On this basis and assessing the issue as one ofmitigation, we consider the legal costs are recoverable. We add that before us Mr MacRae sought a finding on apportionment on the reasonableness of legal costs incurred but in the absence of a challenge at trial on this point, and of findings by the Judge, it would be inappropriate for us to embark upon this exercise afresh.[42] Mr Dempsey accordingly succeeds in relation to this part of the appeal. The effect of our conclusion in monetary terms is as set out in the table below which we have taken from Mr Thompson's submissions.Net judgment amount as per schedule appended to sealedjudgment$258,135.95Less the amount by which the purchase price on resaleexceeded the purchase price under the contract between theappellant and the respondents:($360,000)Add back:1. Real estate agent's commission on resale2. Property maintenance costs3. Demolition costs4. Legal costsSUBTOTAL$141,507.50$30,624.01$76,402.07$47,119.50$295,653.08TOTAL $193,789.0321 At [93].22 At [93].(c) Deposit[43] As we have foreshadowed, there was an issue before us about how the deposit was treated. The Howes in their r 33 notice filed on the appeal said there was no basis for judgment in favour of Mr Dempsey under the counterclaim. However, Mr Thompson correctly accepted that, in the final analysis, the benefit of the deposit had to go back to Mr Dempsey. There is accordingly no reason for us to make any adjustment to the judgment in the High Court on this matter.Result[44] For these reasons, the appeal is allowed in part. The High Court judgment is amended to provide that the net judgment amount is $193,789.03 and not $258,135.95.[45] The parties before us have each enjoyed a measure of success. In these circumstances, we consider it appropriate that costs on the appeal lie where they fall. For completeness, we record that we see no need to make any change to the costs awarded in the High Court.23 The Howes have maintained the substantive findings in that Court as to breach and their entitlement to damages albeit the quantum has been reduced on appeal. In these circumstances there is no basis for disturbing the High Court approach.Solicitors:Morgan Coakle, Auckland for AppellantMcMahon Butterworth Thompson, Auckland for Respondents23 Howe v Dempsey [2013] NZHC 3243.