NICHOLLS V TWIN PINES HC WHA CIV 2007-488-325

NICHOLLS V TWIN PINES HC WHA CIV 2007-488-325 22 November 2007IN THE HIGH COURT OF NEW ZEALAND WHANGAREI REGISTRY CIV 2007-488-325BETWEEN STEVEN NOEL NICHOLLS JANE NICHOLLS Appellants AND TWIN PINES (1994) LIMITED Respondent Hearing: 28 August 2007 Appearances: D James for the appellants K F Shaw for the respondent Judgment: 22 November 2007RESERVED JUDGMENT OF PRIESTLEY JThis judgment was delivered by me on 22 November 2007 at 4.15 pm pursuant to Rule 540(4) of the High Court Rules. Registrar/Deputy Registrar Date: Counsel/Solicitors: D James, Palmer Macauley, P O box 576, Kerikeri K F Shaw, Harkness Henry, Private Bag 3077, HamiltonIntroduction[1] In March 2006 the respondent filed a statement of claim against the appellants in the Kaikohe District Court. The amount claimed was $84,723.42 plus default per diem interest. [2] The respondent invoked the summary judgment procedure. The appellants took no steps. As a result a summary judgment was entered against them on 16 May 2006 for $89,333.46. [3] The respondent then commenced bankruptcy proceedings against the appellants in respect of the judgment debt. The appellants' financial position is clearly precarious. In an endeavour to stave off bankruptcy the appellants applied to set aside the respondent's judgment. That application was filed in January 2007, over seven months after judgment had been entered. [4] The appellants' application to set aside the judgment was heard by Judge D G Harvey in the Whangarei District Court on 24 April 2007. The Judge delivered a clear and comprehensive oral judgment that day dismissing the application. [5] The appellants challenge the Judge's decision by this appeal. In terms of the issues placed before the Judge and the submissions made to him, his judgment appears to be correct. On appeal counsel argued the same issues. A fundamental issue, unnoticed by counsel at either level, and unaddressed in their submissions, occurred to me. I thus invited further comment from counsel.Contractual Background[6] The respondent is linked to, but a separate entity from, the Galbraith Family Trust. Both entities are controlled by the same people. [7] In June 2004 the Galbraith Family Trust leased business premises at Haruru Falls, known as Twin Pines Restaurant Bar and Accommodation, to a company, SN & J Nicholls Ltd, which the appellants controlled. The appellants, in accordancewith normal business practice, guaranteed the company's performance under the lease. In the same time frame (June 2004) SN & J Nicholls Ltd and the respondent also entered into an agreement for the sale and purchase of chattels. Again the appellants guaranteed the company's performance of that agreement. [8] I turn to the agreement in the next section of this judgment. It lay at the heart of the respondent's summary judgment. SN & J Nicholls Ltd is in liquidation. The business operated by the appellants failed. The respondent's summary judgment was grounded on the appellants' liability for that company's default under the agreement for sale and purchase of the chattels.The Agreement[9] The agreement was charitably described by the Judge, in part, as "unhappily worded". The contractual intention of the parties is, in my judgment, clear. Nonetheless, as a commercial document, the format of the agreement leaves a lot to be desired. It is undated. The paragraph numbering system on its first page is irregular. One of the clauses purports to limit the respondent's liability to the net assets of the Galbraith Family Trust "available at the time of distribution", but the Trust is not a party to it. [10] The agreement relates to the sale and purchase of chattels in the Twin Pines Restaurant and Bar premises which the appellants' company was leasing. The agreement includes a five page schedule of a large number of bar and restaurant related items. The schedule is effectively a chattels valuation. The "in use" value specified is $90,800. [11] The agreement is substantially a "rent and buy" agreement. The purchase price is stipulated as the assessed market value of the chattels, being $90,800 plus GST. SN & J Nicholls Ltd was the purchaser. The respondent was the vendor. The appellants were guarantors. [12] The purchaser's obligation was to pay a deposit, probably meant to be 10% but in fact written as the higher figure of $9,800 plus GST. The balance of thepurchase price was to be paid two years after the "commencement date" which was defined in the preamble as being the start of the lease period, 12 December 2003. [13] Clause 2.5 of the agreement stipulates that the purchaser is to rent the chattels for a period of two years from the commencement date at an amount equal to 10% of the $90,800 purchase price plus GST, such rent to be paid in advance by equal monthly instalments. The purchaser had the option (clause 2.6) to pay the outstanding balance of the purchase price prior to "the two year period outlined in clause 2.3" (which clause does not exist but which I assume is the two year rental period), in which case the rent obligation would cease. The chattels were to be at "the purchasers (sic) risk" from the commencement date (clause 4.1). [14] As the Judge correctly stated, the terms of the agreement and the contractual obligations imposed were tolerably clear and not really disputed. There was an obligation on the purchasers to buy the chattels. A deposit was paid. Settlement was deferred for two years. In the interregnum the chattels were to be leased. There is nothing in the contract to suggest that the 10% annual lease payments were to be deducted from the unpaid balance of the purchase price. Although, on 13 December 2004, the respondent issued an invoice suggesting that 24 months rent was in fact being deducted from the purchase price, nothing hangs on that for the purposes of this appeal.Subsequent Developments and Litigation[15] Unfortunately from the appellants' stand point, the operation of the Twin Pines Restaurant and Bar was not a success. They encountered a number of difficulties, including financial difficulties. The settlement date for the purchase of the chattels (12 December 2005) came and went without settlement occurring. In February 2006 the appellants and their company vacated the leased premises. Whether or not attempts were made in December 2005 by either vendor or purchaser to address settlement of the transaction is unclear from the evidence. The respondent's statement of claim and affidavit supporting the summary judgment application by Mr A P Galbraith, go no further than alleging and deposing that SN and J Nicholls Ltd failed to pay the balance of the purchase price (being $81,720) bythe required 13 December 2005 date. Demands for that sum were subsequently made. [16] In the wake of the leased premises being vacated, Mr C T Gosse, an accountant acting on behalf of the appellants' company, wrote to the respondent and Galbraith Holdings Trust on 21 February 2006. That letter addressed a number of matters not relevant here, and also the chattels question. The stance taken by Mr Gosse is, at best, optimistic. He wrote:Considering the fact that these chattels have been leased out and been in daily use for a period of two years, they are not the same assets that were valued nearly three years ago. They have been subjected to normal wear and tear which is recognised by the fact that you will have taken depreciation into account when filing your own accounts with the IRD. As a result we decline to accept these chattels, considering them to be in an unsatisfactory condition and in closing the doors of the pub on 20.02.06 with these chattels secure on the premises we regard them as being returned to Twin Pines (1994) Limited at the conclusion of the two year lease. In view of this situation we have no liability whatsoever in respect of such chattels. In fact from this situation we acquire a credit of $90,080.00 being the amount of deposit paid which can be applied against the other liabilities.The letter was signed by Mr Gosse for and on behalf of SN and J Nicholls Limited. [17] As correctly observed by the Judge, this letter is prima facie a repudiation by the appellants' company of its obligations under the June 2004 agreement. [18] I turn now to the respondent's Kaikohe proceeding, on the basis of which summary judgment was obtained. In the analysis of the statement of claim which follows, two points should be borne in mind. First, there was a valid unconditional contract for the sale and purchase of chattels between the respondent and the appellants' company. Secondly the appellants' company was in breach, both by failing to settle the contract on 12 December 2005 and by Mr Gosse's 21 February 2006 repudiation of the contract. [19] The respondent's statement of claim pleads the terms of the agreement, including the fact that the appellants were guarantors of the purchaser. It pleads the payment of the deposit (said to be $9,080 rather than the $9,800 stipulated in thecontract) and payment of monthly rental figures between December 2003 and January 2006. [20] The statement of claim alleges (para [9]) that the company failed to pay the $81,720 plus GST purchase price balance on settlement date. The operative parts of the statement of claim (paras [13] and [14]) allege the demand for the unpaid purchase price was made by solicitor's letter on 28 February 2006, which price remains unpaid. [21] Mr A P Galbraith's affidavit in support of the summary judgment application follows a similar format. Paragraph [10] of the affidavit annexes a copy of Mr Gosse's letter to demonstrate that the agreement had been breached. [22] The letter dated 28 February 2006 pleaded in the statement of claim (supra [20]) is from the respondent's solicitors to the appellants and signed by a staff solicitor. It states that the appellants' company "has defaulted in its obligations as purchaser" under the June 2004 agreement. The letter contends that the company is "indebted" to the respondent for $84,723.42, the components of which included the balance of the purchase price and default interest. [23] The letter goes on to demand that the appellants "pay the outstanding debt" together with all default interest. Failure would result in legal remedies to enforce payment. If that were necessary, the respondent would seek costs and interest "in addition to the principal amount". [24] As is apparent from the terms of this letter of demand and the format of the statement of claim, the sum claimed is alleged to be a simple debt. [25] But that analysis, in my judgment, is faulty. There is no dispute that the appellants were guaranteeing their company's performance of the contract. But what was their liability for the company's default? The respective rights and obligations of the parties to the June 2004 agreement are simple. The respondent as vendor was obliged to transfer ownership of the chattels to the company. The company for its part was obliged to pay the unpaid balance of the purchase price. Those reciprocalcontractual obligations were created by the June 2004 agreement. Both parties were obliged to perform their contractual obligations on 12 December 2005. The company failed to perform its obligations in two ways. First it did not settle, (assuming that it was asked to settle), on 12 December 2005. Secondly, as is apparent from Mr Gosse's letter, it repudiated its obligations on patently specious grounds. [26] So what was the respondent's remedy faced with this clear breach of contract? It had two standard options. The first option was to seek specific performance. The second option was to seek damages for breach of contract. The measure of damages for such a breach would, in general terms, be the difference between the value of chattels at the date of breach and the agreed purchase price, plus consequential losses and expenses incurred as a result of the breach. [27] Quantification of damages, especially liquidated damages, by other methods can be stipulated in a contract. No such formula appears in the June 2004 contract. [28] These conceptual errors are readily apparent from the 28 February letter of the respondent's solicitor. It treated the unpaid purchase price as a simple contract debt. It was not. The respondent's loss in the contractual situation in which it found itself was not the unpaid purchase price. Rather it was the consequential loss flowing from the company's refusal to purchase the respondent's chattels, (of which the respondent remained the owner), at the agreed contract price.Discussion[29] As stated I sought further submissions from counsel on this issue. I have considered them. The submissions of counsel for the appellants, consistent perhaps with his previous submissions, did not appear to grapple with the point. For the respondent Ms Shaw submitted (correctly) that although the quantum of the judgment might be irregular, the judgment itself had not been irregularly obtained. Counsel accepted my analysis on the issue of quantum. She further submitted that I should, in the exercise of my discretion, refuse to set the judgment aside. If the appellants were bankrupted (the current bankruptcy petition being in the name of theGalbraith Family Trust rather than the respondent), the issue of quantum could be set to right by the Official Assignee who had power to scrutinise the respondent's proof of debt. [30] Counsel also submitted that I should use the power which the Judge had under Rule 165 of the District Courts Rules 1992 to vary the respondent's summary judgment. The obvious difficulty with that submission is that there is no evidence on which I can determine the respondent's damages entitlement. Thus there is no figure to which I can vary the current judgment. [31] The discretion to set aside a judgment, as the Judge rightly recognised, is a broad discretion. I do not intend to repeat the Judge's analysis of the law which is correct. The factors to be considered include whether or not a defendant has a substantial ground for defence; whether the delay in taking steps is reasonably explained; and whether a plaintiff will suffer irreparable injury if a judgment is set aside. [32] There is no need for me to consider the Judge's conclusion on these last two aspects because clearly the first is satisfied. On that issue, of whether the appellants had a defence, counsel presented the Judge with a number of issues which conspicuously did not include the issue of the correct measure of damages for breach of contract. He had to grapple with issues of unjust enrichment, distraint, confusion of two separate classes of chattels, whether the lease payment should have been deducted from the purchase price, and various alleged irregularities. [33] Clearly the appellants would have had a defence on quantum. Had the issue been raised with the Judge I have no doubt his decision would have been the other way. There was, of course, no defence whatsoever available to the appellants on the issue of liability. Had the summary judgment application been defended on the basis of the respondent's statement of claim, the only proper outcome would have been to enter judgment for liability and to reserve for subsequent determination the issue of damages.[34] Whether rehearing the respondent's damages claim will bring much benefit to the appellants is problematic. Their financial situation, on the basis of their affidavits, is clearly parlous. They face bankruptcy. However, if they are to be bankrupted, they should at least be bankrupted for the correct sum. [35] For these reasons the appeal is allowed.Result[36] The appeal is allowed. [37] The judgment obtained by the respondent against the appellants in the Kaikohe District Court on 16 May 2006 is set aside so far as the judgment sum is concerned. Judgment is entered against the appellants in favour of the respondents in respect of liability. [38] The Kaikohe District Court Registrar is directed to arrange a timetabling conference to obtain directions for the respondent's damages claim to be heard.Costs[39] Given that both parties must bear responsibility for the unsatisfactory manner in which the respondent's Kaikohe District Court claim was pleaded, not defended, and the failure of the appellants' counsel correctly to identify correctly the relief to which his clients were entitled, I decline to make any costs orders. The parties shall bear their own costs. Priestley J