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High Court of New Zealand Decisions |
Last Updated: 2 August 2016
IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY
CIV-2016-442-000012 [2016] NZHC 1444
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BETWEEN
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ECOTECH HOMES (NEW ZEALAND)
LIMITED Applicant
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AND
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MARKUS BAUMANN Respondent
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Hearing:
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10 June 2016
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Appearances:
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K M McMullen for Applicant
G M Downing for Respondent
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Judgment:
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29 June 2016
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JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
Introduction
[1] Ecotech Homes (New Zealand) Limited (Ecotech) applies to
set aside a demand issued against it by the respondent
(Mr Baumann) under
s 289 of the Companies Act 1993 (the Act). The demand requires payment by
Ecotech of the sum of $40,265.29.
This sum represents a deposit paid by Mr
Baumann to Ecotech under a contract dated 13 April 2015 by which he agreed to
purchase
a modular home. Mr Baumann maintains that he has validly cancelled the
contract for breach by Ecotech, entitling him to repayment
of his
deposit.
[2] The statutory purpose of a demand under s 289 of the Act is to lay an evidentiary foundation for an application to the Court to appoint a liquidator under s
241. One of the grounds for an appointment is that the company in question is unable to pay its debts. Under s 287 a company is presumed to be unable to pay its
debts if it fails to comply with a demand under s
289.
ECOTECH HOMES (NEW ZEALAND) LTD v BAUMANN [2016] NZHC 1444 [29 June 2016]
[3] Section 290 of the Act provides that the Court may set aside a
statutory demand on the application of the company
against which it is
issued. The application must be made within 10 working days of service of the
demand, and served on the
creditor who issued the demand within the same time.
No extension of these time limits can be given. The application may be granted
on certain grounds, the first of which is that there is a substantial dispute
over whether or not the debt is owing or is due. Ecotech
relies on this ground.
It also relies on the third, namely that the demand ought to be set aside on
other grounds, in this case that
the deposit is not a sum which can be demanded
under s 289, as a matter of law.
[4] The Court of Appeal has laid down the way in which the Court is to
approach an application under s 290:1
[24] We note that the statutory scheme is for applications to set aside
statutory demands to be a summary proceeding. ... The
section calls for a
prompt judgment as to whether there is a genuine and substantial dispute. It is
not the task of the Court to
resolve the dispute. The test may be compared with
the principles developed in cognate fields such as applications to
remove
caveats, leave to appeal an arbitrator’s award and opposition
to summary judgment.
[25] ... The tight time constraints distinguish the s 290 discretion from
that to be exercised on, say, a summary judgment application,
where the presence
of complex legal issues is not necessarily a bar to a remedy. As with leave to
appeal an arbitrator’s award,
the hearing should, in the normal course, be
short and to the point, and the judgment likewise.
[5] Recently the Court of Appeal observed:2
[22] It is important to keep in mind the words of the statute. What the
applicant must show is that the dispute it raises has
substance; the applicant
must explain to the court what the dispute is; and the dispute so shown must be
real and not a fanciful
or insubstantial dispute. The Court must bear in mind
that it is operating in the summary jurisdiction, with the accompanying
disadvantages
that brings for any applicant. The Court must also keep in mind
the requirement that what is intended to be a summary hearing should
not be
converted into a full-blown trial.
[6] Evidence in this case is given by affidavit. As a general rule the
Court will not determine genuine conflicts of evidence
given in this way.
However, the general
1 Industrial Group Ltd v Bakker [2011] NZCA 142, (2011) 20 PRNZ 413 (citations omitted).
rule does not always apply. In
Attorney-General v Rakiura Holdings Ltd the Court
said:3
In a matter such as this it would not be normal for a judge to attempt to
resolve any conflicts in evidence contained in affidavits
or to assess the
credibility or plausibility of averments in them. On the other hand, in the
words Lord Diplock in Eng Mee Yong v Letchumanan, the Judge is not
bound:
to accept uncritically, as raising a dispute of fact which calls for further
investigation, every statement on an affidavit however
equivocal, lacking in
precision, inconsistent with undisputed contemporary documents or other
statements by the same deponent, or
inherently improbable in itself it may
be.
(citations omitted)
Relevant facts
[7] Ecotech and a related company, Modular Housing Solutions (New
Zealand) Limited (Modular) supply and, if required, instal
modular houses.
According to Mr A S Frost, the director of both companies, they work together on
each project though have different
roles. Modular takes responsibility for
manufacturing and delivery of each modular home up to its arrival and clearance
through
the port of New Zealand in which it arrives from its manufacturer in
China. Ecotech then picks up the modular home from the port
and deals with
delivery, site works and completion.
[8] Notwithstanding this apparently clear delineation of roles the contract Mr Baumann entered for his purchase of a modular home starts with a paragraph described as “company details” which are given as “Modular Housing Solutions (New Zealand) Limited, trading as Ecotech Homes (New Zealand) Limited (Ecotech)”. Despite this nonsensical provision, all the obligations on the part of the supplier are stated to be given by “Ecotech” and although the copy of the contract produced to the Court is not a signed copy it provides for execution by Ecotech Homes (New Zealand) Limited and not by Modular Housing Solutions (New Zealand) Limited. I am assured that a contract was signed by both Ecotech and Mr Baumann in the form produced to the Court. The deposit was paid to Ecotech. I
proceed, as did counsel, on the basis that a contract was signed in the
form produced,
3 Attorney-General v Rakiura Holdings Ltd (1986) 1 PRNZ 12 (HC) at 14.
and I am satisfied that the contracting party is Ecotech Homes (New
Zealand) Limited. Neither counsel suggested otherwise.
[9] The contract provides for a purchase price of $134,217.65 including
GST, and payment of a deposit of $40,265.29 immediately
after execution. The
contract then provides:
The balance of the Contract Price is payable on the earlier of issue of a
Code Compliance Certificate or 60 days of the date of the
original Bill of
Lading certificate. Prior to shipping the Client will provide to Ecotech a
Letter of credit for an amount of $93,952.36.
[10] While Mr Baumann’s home was being manufactured in China,
Ecotech undertook preparatory site works on a property which
Mr Baumann owned,
ready for the house to be delivered and placed on foundations once it arrived in
New Zealand. Difficulties arose,
however, in relation to the provision by Mr
Baumann of a Letter of credit as required by the contract. According to Mr
Jones, the
home was complete and ready to be shipped from its manufacturer in
China by November 2015. In order for it to be released, however,
Mr Jones says
that Ecotech was required to submit the Letter of credit to be provided by Mr
Baumann under the contract to the Chinese
manufacturer. Mr Jones says he
advised Mr Baumann in the early stages of their contractual negotiations that
the required Letter
of credit would need to be an international Letter of credit
rather than a domestic Letter of credit.
[11] Mr Baumann says that in October 2015 Mr Frost told him he wanted to make a change to the contract. Instead of providing Ecotech with a Letter of credit in the terms set out in the contract, Mr Baumann would be required to provide a Letter of credit in Chinese currency in favour of the Chinese factory that was manufacturing the home for Ecotech. Mr Baumann says he sought advice from his bank (BNZ) and was told that this was not possible. He produced an email from BNZ advising that it would only issue a Letter of credit in New Zealand dollars, and only in favour of Ecotech not a Chinese company, as it was Ecotech with which Mr Baumann had contracted. On 24 November 2015 a Letter of credit in these terms was provided to Mr Baumann by BNZ, and was tendered by Mr Baumann to Ecotech in accordance with what he saw as his obligation under the contract. The Letter issued was in
favour of Ecotech in the sum of $NZ93,952.36. It provided for a latest
shipping date of 11 December 2015, was to expire on 29 February
2016, and was
irrevocable.
[12] Although, according to Mr Frost, Ecotech tendered this Letter of
credit to the Chinese manufacturer, the manufacturer would
not accept it.
Ecotech continued to ask Mr Baumann for a Letter of credit in favour of the
Chinese manufacturer and in Chinese currency;
Mr Baumann remained unable to
provide the Letter of credit sought. Correspondence was exchanged between the
solicitors for each
party but no progress was made in resolving the stand-off.
The BNZ Letter of credit was not drawn down by Ecotech, and nor could
it be
because the date for payment of the balance of the contract sum had not arrived.
The house remained in China. After the Letter
of credit expired Mr
Baumann’s solicitors sent a Letter to Ecotech’s solicitors seeking
both the return of the deposit
and payment of losses that Mr Baumann maintained
he had suffered, a total of $58,822.33. The statutory demand in issue on this
application
was also issued that day, though in respect only of the
deposit.
[13] Mr Downing, for Mr Baumann, argues that the notice under s 289
constituted cancellation of the contract, and says that
as a result
the deposit is repayable. Ms McMullen, for Ecotech, says that Mr Baumann did
not fulfil his obligation under the
contract to provide an international Letter
of credit to the Chinese manufacturer, that he repudiated the contract and his
deposit
has been forfeited.
[14] There are two issues to be decided:
(a) Is there a substantial dispute on the facts over whether or
not Mr Baumann complied with his contractual obligation
in relation to provision
of a Letter of credit?
(b) If Mr Baumann is not in breach of the contract can he demand repayment of his deposit as a matter of law?
First issue: Is there a substantial dispute on the facts over whether or
not Mr Baumann complied with his contractual obligation
in relation to provision
of a Letter of credit?
[15] I have recorded the express contractual obligation on Mr
Baumann in paragraph [9]. The obligation has two elements.
The first is to
pay the balance of the contract price either on issue of code compliance for the
new home, or 60 days after the
date of the original bill of lading, whichever is
earlier. The second is the provision of a Letter of credit to Ecotech prior to
shipping of the home from China.
[16] Notwithstanding these clear contractual terms, Mr Jones contends
that he made it clear to Mr Baumann that Mr Baumann was
obliged to provide a
Letter of credit in favour of the Chinese manufacturer in Chinese currency. By
this means, Ecotech contends
that there is a substantial dispute on the
facts in relation to Mr Baumann’s obligation.
[17] I am not satisfied this is the case, for four reasons, but before setting these out it is necessary to understand the purpose of a Letter of credit. This is well summarised by Lord Denning in Pavia & Co v Thurmann-Nielsen in the following terms:4
The sale of goods across the world is now usually arranged by means of
[irrevocable] credits. The buyer requests his banker to open
a credit in
favour of the seller and in pursuance of that request the banker, or his foreign
agent, issues [an irrevocable] credit
in favour of the seller. The creditors
are promised by the banker to pay money to the seller in return for the shipping
documents.
Then the seller, when he presents the documents, gets paid the
contract price. The conditions of the credit must be strictly fulfilled,
otherwise the seller would not be entitled to draw on it.
I have substituted the word “irrevocable”, for the word used at
the time this case was decided, “confirmed”.
[18] Consistent with this principle the Letter of credit provided by the
BNZ was an irrevocable promise to pay the sum of $93,952.36
in the following
terms:
Upon our receipt of the documents in order, at maturity, we shall honour the
presentation as instructed. The negotiating bank is
to forward documents
in
4 Pavia & Co v Thurmann-Nielsen (1952) 2 QB 84 (CA) at 88, per Denning LJ.
one lot by courier to Bank of New Zealand International Banking Centre ...
[address follows].
[19] Maturity is stated to be 29 February 2016 New Zealand
time, and the document required is a tax invoice
to show the full
value of NZ$134,217.65 inclusive of GST, less the deposit paid of NZ$40,265.29
showing balance of NZ$93,952.36.
The payment terms are either presentation of
the code of compliance certificate or 60 days from the date of the original bill
of
lading, whichever is the earlier.
[20] I turn now to the four reasons for not accepting Mr Jones’
contention. First, the contractual obligation to provide
a Letter of credit is
clear and without ambiguity. The Letter of credit issued by the BNZ to Mr
Baumann, provided to but rejected
by Ecotech, precisely complied with the
express wording of the contract, which was drafted by Ecotech. It gave Ecotech
an irrevocable
undertaking that it would be paid the balance of the contract
price at the time the contract required. If Mr Jones had wished to
specify a
different contractual arrangement for payment, he could have drafted the
contract in different terms. These terms would
have specified an obligation on
Mr Baumann to pay the Chinese manufacturer, not Ecotech, in Chinese currency,
not New Zealand dollars
and presumably at a Chinese address. That did not occur
despite Mr Jones’ contention that he initially advised Mr Baumann
during
contractual negotiation that an internal international Letter of credit would be
required.
[21] If Mr Jones intended that Ecotech would impose that contractual
obligation on Mr Baumann at the conclusion of those negotiations,
it could
easily have done so.
[22] Secondly, there is a significant difficulty in accepting Mr Jones’ version of events given the timing of the obligation to pay the balance of the contract price. This did not arise until the earlier of the issue of a code compliance certificate, or 60 days from the date of the original bill of lading certificate. I take the latter provision to mean 60 days from point of departure from China. The former, the issue of a code compliance certificate, could not take place until the house was in New Zealand, and installed in accordance with the local authority’s building code. There is a significant inherent unlikelihood in there being any obligation on Mr Baumann to
give an irrevocable Letter of credit to the Chinese manufacturer before the
house left China when he was not obliged to pay for it
until it was in this
country, or 60 days after it was shipped.
[23] Thirdly, Mr Jones says that one of the steps Ecotech took in
pursuance of the contract was to pay the manufacturer.5 That is
consistent with Mr Baumann giving a Letter of credit to Ecotech to give
it comfort to pay the manufacturer, and
inconsistent with the
inverse.
[24] This leads to the fourth point. The contract is well capable of
realistic commercial application if complied with precisely
as drafted. When
the BNZ Letter of credit was presented to Ecotech it knew it would be paid the
balance of the contract sum, by
the BNZ, because the Letter of credit was
irrevocable. It also knew when it would be paid. Fortified by that assurance
Ecotech
could have paid the Chinese supplier in accordance with its apparent
requirement that it be paid before shipping the house. That
would have accorded
with the very reason that Letters of credit are issued. In my opinion the
contract provided for an entirely
workable commercial arrangement. Why Mr
Jones sought to give the clear wording of the contract a meaning that it is not
capable
of bearing, tried to require Mr Baumann to pay for his house before it
left China instead of two months later, or on code compliance,
and failed to
pay the Chinese supplier when his company had an irrevocable assurance of
payment by Mr Baumann’s bank is not
explained. There is no reason to
interpret the clause in a way that differs from its clear meaning in order to
give commercial efficacy
to the contract.
[25] I am satisfied there is no substantial dispute about Mr Baumann’s contractual
obligation in relation to giving a Letter of credit to Ecotech, or over
whether he complied with that
obligation.
5 Affidavit of Mr Jones dated 15 March 2016 at [12.2].
Second issue: If Mr Baumann is not in breach of the contract can he demand
repayment of his deposit?
[26] Mr Downing says that by issuing his notice under s 289 Mr Baumann
validly cancelled the contract. Although the notice does
not expressly state
that it is an act of cancellation, the sum claimed is described as:
the amount due and payable being the deposit paid by [Mr Baumann] under the
pre-fabricated building supply agreement dated 13 April
2015, which agreement
has terminated.
[27] Section 8(2) of the Contractual Remedies Act 1979 provides that
cancellation may be made known by words or by conduct evincing
an intention to
cancel or both. It is not necessary to use any particular form of words as long
as the intention to cancel is made
known.
[28] Mr Downing argues that Mr Baumann’s intention to cancel the
contract was made known in terms of s 8(2) by the statement
that the agreement
had terminated, and the claim for return of the deposit. Ms McMullen did not
argue otherwise. I accept that
the statutory demand issued by Mr Baumann was a
valid notice of cancellation. It clearly showed an intention to
cancel.
[29] In view of this, and the finding I have made on the first issue, Mr
Baumann is, for present purposes, a contracting party
who has validly cancelled
a contract for breach by the other party to the contract.
[30] Mr Downing argues, correctly in my view, that it is open to the
Court to make an order granting to Mr Baumann a remedy under
s 9 of the
Contractual Remedies Act including, of present relevance, a direction that
Ecotech pay to him the amount of the deposit.
With respect, though, that is
not the question presently before the Court. Ms McMullen accepts that such a
proceeding could be
brought. She says that this is the course Mr Baumann should
follow but that the deposit paid by Mr Baumann is not a debt that is
due, and
for which a demand can therefore be made under s 289 of the Act.
[31] Ms McMullen says that a deposit is a payment made by a purchaser to seal the bargain struck with the vendor and is the price paid by the purchaser for the
vendor’s willingness to commit to the contract of sale. She is
correct in that contention, and in her further contention that
in the event of
default by a purchaser, a deposit is forfeited to a vendor. There is a
comprehensive discussion of this in Garratt v
Ikeda.6
[32] Here the point is different. The purchaser is not in default.
Rather, the vendor is in default for not having provided
the house, despite Mr
Baumann having complied with his obligation under the contract. In this
circumstance a purchaser has certain
remedies. These may be provided by the
contract itself,7 but the contract in the present case is silent on
what should happen to the deposit in the event of Ecotech not performing its
obligations
under the contract.
[33] There are also situations where a purchaser may recover a deposit under the general law.8 First, a purchaser can recover a deposit after a purchaser has cancelled under s 7 of the Contractual Remedies Act 1979 (as argued by Mr Downing, [30] above). No doubt that is the basis on which Mr Baumann’s solicitors wrote to Ecotech’s solicitors not only demanding repayment of the deposit, but also seeking recompense for other damages suffered by Mr Baumann as a result of Ecotech not
performing its obligation under the contract. Secondly, a purchaser can also
recover a deposit when the contract is being cancelled
by agreement of the
contracting parties, though this is of no application in the present case.
Thirdly, there can be a claim for
money had and received where a contract is
avoided for failure of a contingent condition.
[34] None of these avenues for recovery of the deposit is relevant to the present case unless the deposit is classified as a due debt for the purposes of s 289 of the Act. In OPC Managed Rehab Ltd v Accident Compensation Corporation the Court of Appeal discussed the meaning of the word “debt” in the context of s 289. The Court
said:9
6 Garratt v Ikeda [2001] NZCA 316; [2002] 1 NZLR 577 (CA).
7 See for example, the NZLS/ADLSI Agreement for Sale and Purchase of Real Estate (edition
2012) clause 3.4 in common use for sale and purchase of land.
8 D McMorland Sale of Land (3rd ed, Cathcart Trust, 2011) at [7.12] and [5.16].
9 OPC Managed Rehab Ltd v Accident Compensation Corporation [2005] NZCA 322; [2006] 1 NZLR 778.
[54] In the result, we conclude that, if a payment is received in circumstances where the recipient is obliged to repay it, whether because of a contractual or statutory provision to that effect or because the circumstances give rise to an obligation to repay on the basis of money had and received, the amount can be treated as a “debt due” for the purposes of s
289(2)(a)...
[35] As I have observed, there is no contractual provision imposing on
Ecotech an obligation to repay; nor is there any
relevant statutory
provision to that effect. Therefore, it is necessary to decide whether the
circumstances of this case give
rise to an obligation to repay the deposit on
the basis of the restitutionary remedy of money had and received.
[36] An action for money had and received is an aspect of the law of restitution. It is an action used by a claimant seeking to recover from a defendant money which has been paid to that defendant in certain circumstances. Long recognised circumstances in which the action will lie include where money has been paid by mistake, where consideration given has totally failed, or as a result of imposition, extortion or oppression, or as a result of undue advantage having been taken of a
plaintiff’s situation in certain
circumstances.10
[37] In the present case Mr Downing argues that consideration has totally
failed, because Ecotech has not delivered the house
which Mr Baumann contracted
to buy, through no fault of his. In short, Mr Baumann has not received anything
pursuant to the contract.
[38] The force of that argument can readily be seen. Ms McMullen points out, however, that provision of the house was only one aspect of the contract. Ecotech was also obliged to carry out foundation work on the site, and to apply for and obtain building consent. According to Mr Jones, it provided design assistance in adapting a standard modular house to the specific requirements of Mr Baumann, including assisting with the factory shop drawings and drafting specifications for production drawings. It assisted with obtaining a building consent, including obtaining engineering advice, attended to issues arising from the production line of the house,
provided shipping certification at a cost of approximately NZ$8,000, and
carried out
10 Moses v Macferlan [1760] EngR 713; (1760) 2 Burr 1005 (KB) at 1012.
90 per cent of the required foundation works at Mr Baumann’s site ready
for delivery of the home.
[39] Mr Downing argues that none of that work has provided any
benefit to Mr Baumann given that it is all related to a house
he has not
received, including the foundations installed on his land which could only be
useful if he purchased or built another
house of precisely the same dimensions,
for which the foundations were in all respects suited, and if the local
authority gave building
consent for their use for a different house.
[40] All of the work outlined by Mr Jones in evidence was directed at the
eventual intended outcome under the contract, the installation
and code
compliance certification of Mr Baumann’s home on his site. I accept, as
Mr Jones claims, that some of the monies
paid by Mr Baumann by way of deposit
have been expended by Ecotech in taking the steps to which Mr Jones refers. The
difficulty is,
however, that without his house having arrived from China and
been installed on his land, nothing which has been done by Ecotech
appears to
provide him with any value or benefit at all. On the other hand, had Ecotech
delivered the house to Mr Baumann’s
site and undertaken all other work
required to obtain code compliance, all the work done prior to now would be of
significant value.
[41] On an application to set aside a statutory demand it is for the applicant to establish the basis on which it should be set aside. Ecotech has not provided any evidence to show that any of the work it says it has undertaken has any value to Mr Baumann, or will have any value to Mr Baumann unless and until the house he contracted to buy, and for which the foundations were provided, is installed on site and certified as code compliant. For example, there is scant evidence in relation to the foundations installed on the site, and no evidence that those foundations can be used for any other house, foundation design being specific to a given house both in terms of lay-out and suitability, as well as being compliant with a building consent issued in respect of a specific building project. In the absence of any such evidence, the position disclosed is that Mr Baumann has not received any benefit at all for the payment he has made to Ecotech.
[42] Where there has been a total failure of consideration the
recipient of a payment is obliged to repay it, and
the amount to be repaid can
be treated as a debt due for the purposes of s 289(2)(a) of the
Act.11
[43] A claim for return of money on the basis of a total failure of
consideration is a claim based not in contract but on the
principle of
restitution. Availability of a remedy for breach of contract does not prevent a
claim for restitution based on total
failure of consideration.12
The word “consideration” is not used in this context as
consideration in the law of contract. More recently the courts
have come to
describe this remedy as a response to a total failure of basis, that is to say
the basis upon which the money in issue
was paid has entirely failed, whether
the basis on which it was paid was pursuant to a contract, or in some other
circumstance.
As the learned authors of Goff & Jones, The Law of Unjust
Enrichment put it:13
The core underlying idea of failure of basis is simple: a benefit has been
conferred on the joint understanding that the recipient’s
right to retain
it is conditional. If the condition is not fulfilled the recipient must return
the benefit. The condition might
take one of a variety of forms. For instance,
it might consist in the recipient doing or giving something in return for the
benefit
(hereafter referred to as
“counter-performance”).
[44] The premise underlying this right of restitution is that the entire basis of the arrangement which led to a payment being made by one party to another has failed. Historically, a distinction was drawn between a benefit conferred by a monetary payment, and other forms of non-monetary benefits.14 The distinction, caused initially by different procedures for claims to recover monetary payments and others, was important because where the benefit conferred took the form of a money payment the failure of basis was required to be total. No equivalent requirement was imposed by the courts where the benefit was non-financial.15 If even a small part of the benefit for which a payment was made had been conferred, an action to recover money based on total failure of basis would not lie. Difficulties said to justify this
included valuation of the benefit received, though in numerous areas of
the law
11 OPC Managed Rehab Ltd v Accident Compensation Corporation, above n 9, at [54], applied in
SHT Holdings Ltd v Rowberry [2015] NZHC 3281.
12 Goss v Chilcott [1996] 3 NZLR 385 (PC) at 390-391.
13 Goff & Jones The Law of Unjust Enrichment (8th ed, Sweet & Maxwell, United Kingdom, 2011)
at [12.01].
14 See the discussion in Goff & Jones, above n 13, at [12.03]-[12.05].
15 E G Powell v Braun [1954] 1 WLR 401.
courts have not been reluctant to embark on exercises of valuation, often
with expert evidence to assist. And the case frequently
cited for the
proposition that the Court would require total failure of consideration because
of the difficulty of apportioning the
value received, Whincup v
Hughes,16 was preceded by at least two cases in which the courts
were willing to undertake an apportionment in materially similar
circumstances.17
[45] Nor, in more recent years, has this difficulty stood in the way of restitution being granted in respect of monetary payments for total failure of basis, even where there has been some benefit to the payer. In Goss v Chilcott, the respondent had advanced a sum of money to the appellants. Two instalments of interest had been paid. The mortgage instrument was discharged by alteration of it without the knowledge of the appellants. The respondent sued to recover the principal sum. The Privy Council held that the alteration to the mortgage discharged the appellants from any liability under it, and from the obligation created by the appellants’ prior oral agreement to repay the advance which had merged in and been superseded by the mortgage. The Privy Council found, however, that the respondent could recover the principal sum: despite there having been payment of two instalments of interest, there had been a total failure of consideration in respect of the capital sum advanced,
and it was recoverable on that basis. The Court
said:18
In the present case, since no part of the capital sum had been repaid, the
failure of consideration for the capital sum would plainly
have been total. But
even if part of the capital sum had been repaid, the law would not hesitate to
hold that the balance of
the loan outstanding would be recoverable on
the ground of failure of consideration; for at least in those cases in which
apportionment
can be carried out without difficulty, the law will allow partial
recovery on this ground (see David Securities Pty Ltd v Commonwealth Bank of
Australia. (citations omitted)
[46] The cases largely turn on their facts, as can be seen from the cases of
Fibrosa,19 and Stocznia Gdanska.20
In the former, a contract for the purchase of machines provided for
payment in advance and for machines to be delivered to a
16 Whincup v Hughes (1871) LR 6 CP 78.
17 Newton v Rowse (1687) 1 Vern 460; Hirst v Tolson [1850] EngR 313; (1850) 42 ER 52 (Ch).
18 Goss v Chilcott, above n 12, at 391.
19 Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] UKHL 4; [1943] AC 32 (HL), applied in
Goss v Chilcott, above n 12.
20 Stocznia Gdanska v Latvian Shipping Co [1998] UKHL 9; [1998] 1 WLR 574 (HL).
buyer in Poland. The German occupation of Poland during the Second World War
intervened and it was held that since the machines could
not be delivered there
had been a total failure of basis for the advance payment which had been made.
The Court ordered its return.
[47] In Stocznia Gdanska the contract provided for the recipient
of the payment to design, build, complete, and deliver six ships, with the price
payable in
instalments at specified stages of the work. The contract was
terminated by the ship builder for non-payment of one of those instalments
and
the Court had to consider whether the instalments already paid could be
immediately recovered on the ground of failure of basis.
The House of Lords
decided they could not. The payments were made not solely for the delivery of
the vessels but also for their
design and construction and since some part of
that work had been undertaken the basis had not totally failed.
[48] The distinction between the two cases appears to be based on the
fact that in Fibrosa the contract did not attribute any significance to
preparatory work in relation to the machines, prior to delivery, whereas in
Stocznia Gdanska the payment of instalments was conditional on progress
in the design and construction of the vessels.
[49] The present case is aligned more closely with Fibrosa than Stocznia Gdanska. The fundamental obligation on Ecotech is set out in clause 1, where it is provided: “Ecotech will supply and deliver to the site of 28 Fellbridge Rise, Wakefield, Nelson, clear of duty, customs fees, shipping cost, port fees and GST”, after which follow a number of specifications for the kitset house to which the contract applied. In clause 2 a number of options are listed, said to be included in the contract price. These are the provision of transportation and crane trucks, foundations and sub-floor timber, home assembly and cantilevered roof/eaves, against which of each a sum is given. There is then reference to design plans, engineering, building consent fees, water tank and pump, water heating, connection to services, decking, kitchen appliances and window coverings, but in respect of these items the contract is contradictory. It provides for these items to be included in the quotation cost, and it then provides for them to be supplied and installed by the owner. Whatever this provision may be meant to mean, the specified sums for the first four items add up to $10,300 plus GST, but the deposit required by the contract
is $40,265.29, which is inclusive of GST and is 15 per cent of the contract
price. It cannot therefore be said that the sum which
Mr Baumann has paid is
linked to any specific items or services to be provided by Ecotech, and
unlike the payments required
in Stocznia Gdanska this payment was not
conditional on progress in the design or construction of the house.
[50] The next point to consider is that this is a contract for the supply
of goods, together with limited services. The contract
does not expressly state
when title to the goods was to pass but a clear intention may be inferred that
it would have passed on delivery
to Mr Baumann. This is consistent with the
balance of the purchase price not being paid until after that occurred, and with
Ecotech’s
obligation under clause 5 of the contract to insure the building
for full replacement, plus 5 per cent, until the building was
placed on
foundations at Mr Baumann’s site. At that point Mr Baumann was
required to insure it himself. As well,
all the services anticipated by the
contract are entirely required for the purpose of bringing about delivery of the
house as I have
said. Title to the house did not, therefore, pass to Mr
Baumann.
[51] A case which is analogous is Rowland v Divall.21 The purchaser of a car did not receive good title and the Court found that he was entitled to recover the purchase price from the vendor, notwithstanding the fact that he had had use of the car for four months. The purchaser was not required to give any credit for the benefit he had had from the car for that period. In the present case, not only has Mr Baumann not received title to the house for which he made a substantial payment, he has had no use of it either. Even more so than in Rowland v Divall, the basis of the transaction between Ecotech and Mr Baumann has totally failed. Rowland v Divall and subsequent cases demonstrate that the concept of total failure of basis can ignore real benefits received by the payer if they are not the benefits bargained for, and
despite significant detrimental reliance by the
payee.22
21 Rowland v Divall [1923] 2 KB 500 (CA).
22 See discussion in Hugh Beale (ed) Chitty on Contracts (32nd ed, Sweet & Maxwell, United
Kingdom, 2015) at [29-060].
Outcome
[52] I find that there is no basis to set aside the statutory demand
issued by
Mr Baumann. The application is dismissed.
[53] I order Ecotech to pay to Mr Baumann the sum of $40,265.29 by 5.00
pm on the tenth working day after the date of this judgment,
failing which Mr
Baumann may make an application to put Ecotech into liquidation.
[54] Mr Baumann is entitled to costs. Ecotech will pay costs on a 2B basis together with disbursements fixed, if necessary, by the Registrar, on this application. It will also pay the reasonable solicitor and client costs of issue and service of the statutory demand. If counsel are unable to agree on the amount of the latter Mr Baumann may file within 10 working days a memorandum limited to two pages explaining his costs on the demand, and Ecotech may respond by memorandum within a further five working days limited to two pages explaining why it does not accept Mr Baumann’s assessment. These memoranda may be referred to me for a
decision on this issue on the
papers.
J G Matthews
Associate
Judge
Solicitors:
Cavell Leitch, Christchurch.
McFadden McMeeken Phillips, Nelson.
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URL: http://www.nzlii.org/nz/cases/NZHC/2016/1444.html