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Court of Appeal of New Zealand |
Last Updated: 20 March 2013
IN THE COURT OF APPEAL OF NEW ZEALAND CA 120/97
BETWEEN JONATHON RALPH SHEARER First Appellant
AND JOSSUTH MICHAEL JOHN NEWMAN Second Appellant
AND REX ALLAN KRAMMER and RETA MARY KRAMMER
Respondents
Coram: Richardson P Henry J
Elias J
Hearing: 20 August 1997
Counsel: G P Malone for appellants
G M Downing for respondent
Judgment: 22 September 1997
JUDGMENT OF THE COURT DELIVERED BY ELIAS J
The appeal is brought from a decision of the High Court in Nelson, granting the respondents’ application for summary judgment against the appellants for non-payment of quarry royalties. The background to the application is the sale of a quarry business by the respondents to the appellants. In granting the application, Master Venning refused to treat cross-claims by the appellants in other proceedings between the parties as giving rise to equitable set off amounting to a defence to the summary judgment application. The
principal issue raised by the appeal was whether the Master was correct in holding that the liability for payment of royalties for which summary judgment was claimed was independent of the claims for misrepresentation and mistake arising out of the sale of the quarry business. Because of the history of the matter, which had given rise to some procedural complexity, it is also necessary to decide whether the Master was correct in holding that the availability of set-off had been determined by an earlier decision of the High Court which gave rise to an issue estoppel between the parties. It is necessary also to determine whether the Master was correct in holding that issue estoppel did not arise from an earlier determination in the District Court declining a summary judgment application between the same parties in respect of royalties, on the basis that set-off was available.
Background
On 19 November 1993 the appellants, as agents for a company to be formed, entered into an agreement with the respondents for the sale and purchase of a quarry business. Under the agreement the appellants remained liable as if principal parties after formation of the company.
The purchase price of $352,000 was made up of goodwill of $150,000 and plant and fixtures of $202,000. The agreement also provided for a quarry right granted by Aniseed Valley Farm Ltd, the owner of the land on which the quarry was situated, to be transferred to the purchaser after variation and registration. The agreement was made conditional upon Aniseed’s agreement to the assignment and the variation of the quarry right agreed upon between vendor and purchaser. Pending registration of the quarry right, it was agreed that the purchaser could withhold $50,000 of the purchase moneys for the business.
The agreement for sale and purchase of the business provided that, in consideration of the transfer of the quarry right, the purchaser would pay royalties to the vendor, additional to those payable to the landowner. The royalties provided for in the agreement were at the rate of $1 plus GST per cubic metre for rock removed. A minimum royalty was payable annually irrespective of the quantity actually quarried. The minimum payment provided for was $30,000 plus GST in the first year and $50,000 plus GST in each
subsequent year. It was a further term of the agreement that the payment of royalties to the vendor would be secured by a registrable memorandum of encumbrance over the purchaser’s registered quarry right. The form and terms of the encumbrance were specified in the agreement for sale and purchase.
A memorandum of encumbrance in such terms was entered into on 22 November
1993. It was made between the purchasing company (then known as Overview Holdings (No.42) Limited, but later renamed Federal Quarry Company Limited) as grantor, the vendors (the respondents in this appeal) as grantees, and the appellants as covenantors of the obligations of the grantor.
As is apparent from the terms of the agreement for sale and purchase, the memorandum of encumbrance was intended to govern the payment of royalties, transfer of the quarry right, and remedies for default. The remedies available to the grantee under the memorandum of encumbrance included the appointment of a receiver of income.
The quarry right granted by Aniseed was for a term of five years, commencing on
30 March 1992. It provided for rights of renewal for two further terms, with a final expiry date in February 2007.
Federal entered into possession of the business in November 1993. The quarry right was assigned to it on 29 November 1993. The company operated the quarry until 2
September 1996 when the quarry right was terminated by Aniseed for non-payment of royalties. During the nearly three years for which Federal operated the quarry, rock extracted by it was only slightly short of the volume for which the minimum royalty payment was set.
The company had also fallen into arrears in royalty payments to the vendors in terms of the memorandum of encumbrance. In April 1995 the respondents applied to the District Court at Nelson for summary judgment for $24,493.47 in unpaid royalties due to February 1995. By statement of defence and counterclaim in those proceedings, the appellants denied the obligation to pay royalties and raised a number of defences. They claimed that as a defence the minimum royalty was subject to a waiver in the agreement
which applied where the company was unable to remove rock because of conditions outside its control. They claimed by way of defence that the agreement for sale and purchase and the memorandum of encumbrance which arose from it were made under a mistake, common to the parties, as to the quantity and quality of the rock in the quarry and upon misrepresentations by the vendors as to the quality of rock, the productive capacity of the quarry, the condition of plant and equipment and the profitability and value of the quarry. By counterclaims based upon the same misrepresentations pleaded as defences, Federal sought damages quantified at more than $250,000 to 31 March 1995, with the indication that further losses would be quantified before hearing. The facts pleaded were verified by affidavit for the purposes of the summary judgment hearing.
The judgment of Judge Walker was delivered on 12 May 1995 It declined summary judgment. The Judge treated the appellants’ counterclaim as giving rise to equitable set off. Applying the principles described in Grant v New Zealand Motor Corporation Ltd [1989] 1 NZLR 8, he concluded that the claims were in effect interdependent and that it would be “unjust to allow the plaintiffs to have judgment without bringing the cross-claim to account”.
An appeal was filed by the respondents against the decision. The substantive proceedings were later themselves transferred into the High Court under M18/95 and an amended statement of claim and counterclaim filed. The damages claimed in the amended counterclaim were increased to $688,524.00 as at May 1995, increasing by $18,333.00 per month thereafter.
On 20 June 1995 the respondents appointed a receiver of income for Federal, in exercise of their powers under the memorandum of encumbrance for non-payment of royalties. The appointment of the receiver was challenged by Federal and the present appellants. The receiver and the present respondents applied for a declaration under s 34 of the Receivership Act 1993 that his appointment was valid and for related orders. The application was opposed by the appellants and the company on the basis that the counterclaim in the summary judgment proceeding qualified as a set-off, preventing exercise of the right to appoint a receiver of income under the memorandum of encumbrance. It was argued that the cross claim would extinguish the liability to pay
royalties, the failure to make such payment being the basis of the entitlement to appoint a receiver.
Following a defended hearing in the Nelson High Court in July, Greig J by judgment of 6 September 1995 made an order declaring that the receiver of income had been validly appointed. In making the order he rejected the contention that the counterclaim alleging misrepresentation qualified as a set-off to prevent exercise of the powers retained by the present respondents as grantees under the memorandum or encumbrance.
The Judge noted that the defendants (the appellants in the present proceedings) had not at any stage repudiated or taken any steps to terminate the agreement for sale and purchase and had continued to operate the quarry business. He concluded that two breaches of the memorandum of encumbrance had been established by the plaintiffs. First, the defendants were in breach through their acknowledged failure to make royalty payments to the landowners. That breach, the Judge held, could not be affected by the defendants’ counterclaim against the plaintiffs. The second breach proved was non- payment of royalties due to the vendors as grantors in terms of the memorandum of encumbrance. Greig J was of the view that the principle described in Grant v NZMC was limited to money claims, referring to the judgment of Somers J at p 11. While the enforcement of rights sought in the proceedings then before the Court depended upon non-payment of money,
the true position is that the plaintiffs are exercising their rights under a mortgage or encumbrance arising on breach of that and in right of their protection of their security and here the quarry rights which inures, subject to renewal, until 2007.
Since there was no challenge to the existence of the breach of the encumbrance or the status of the plaintiffs to exercise their rights under it, Greig J concluded that a set-off could not be substantiated. The cross claim did not qualify as a defence and there was insufficient inter-dependence to enable the defendants’ claim to call into question the plaintiffs’ demand and consequent exercise of their rights:
It is correct that the royalty, the non-payment of which the plaintiff relies upon, originates in the sale and purchase agreement and so arises from the one contractual matrix. The royalty is clearly distinguished from the purchase price but it is payable only because the
purchase took place. It is not however, I think, to be described as part of the purchase price. It depends upon the working of the quarry although there is a provision for minimum payments. Moreover, for payment it requires a long term of some 13½ years from 22 November 1993 to 28 February 2007. What creates its independence, is the fact that the royalty is secured and payable under a separate instrument, the memorandum of encumbrance. That, although anticipated and indeed obligated under the sale and purchase agreement, is an entirely separate instrument creating its own obligations. It is secured to protect the quarry right and the continuance of its rights during the whole term. The non-payment of royalty is a breach of that encumbrance and is a continuing breach of that.
The defendants’ claim is not for breach of the contract but for a misrepresentation affecting the value of the assets which it purchased. The defendants are not claiming that there is no agreement. As I have noted the defendants do not repudiate or terminate the agreement. They do not say that they are not liable to purchase or to pay. All they say is that, by way of adjustment, they should not have to pay any more. There are, here, distinct and separate liabilities and obligations. The claim does not qualify as a set-off.
After the appointment of the receiver was confirmed and he entered into possession, the respondents received payment through him of the arrears which had been the subject of the decision in the District Court.
In September 1996 the landowner re-entered and terminated the quarry right on the grounds of non-payment of royalties due to it under the right.
In December 1996 the respondents issued the present proceedings seeking summary judgment of approximately $40,000 for royalties unpaid to them calculated on the minimum annual payments for the years to the end of November 1994-1996, and
$562,500 for loss of the minimum royalties which would have been payable from 22
November 1996 to 22 November 2006 if the quarry right had not been terminated (the failure to pay the royalties due to the landlord which gave rise to the termination being itself a breach of the obligations to the respondents under the encumbrance). This claim, while more extensive, overlapped with the claim in M18/95 to the extent of the claim to arrears to February 1995.
The application for summary judgment was heard by Master Venning. He noted the overlap between the present proceedings and those transferred to the High Court under M18/95. On his intimation that the maintenance of two sets of proceedings constituted an abuse of process, counsel for the respondents accepted that the appeal against the decision of Judge Walker should be dismissed with costs reserved, and that the plaintiffs’ claim in
M18/95 should be stayed, leaving the counterclaim only to be determined in those proceedings. In this Court Mr Downing, for the respondents, explained that proceeding with the appeal from the judgment of Judge Walker seemed unnecessary because the arrears, the subject of that judgment, were to be repaid by the receiver and Greig J had resolved the set-off point. Master Venning made the orders to achieve this result, with the indication that, if the application for summary judgment were declined, the present proceedings and the counterclaim in M18/95 should be consolidated so that they could be decided at one hearing.
By judgment of 25 March 1997 Master Venning awarded the respondents
$59,273.64 together with costs and interest. That amount was the sum of the unpaid royalties at the minimum rate in the years to end of November 1994-1996 and a minimum payment for the period 1 December 1996 to 29 March 1997 (the date of expiry of the quarry right if not renewed). Master Venning declined the claim for royalties after that date on the basis that the appellants were under no contractual obligation to renew the quarry right after March 1997.
The appellants had not filed a statement of defence in the present proceedings. Their affidavits filed in opposition to summary judgment deposed to the facts upon which the counterclaims in M18/95 are based and themselves refer to the affidavits filed in the other proceedings. Although additional evidence is put forward in the affidavits, the issues at which that evidence is directed are issues identified in the pleadings and in the affidavits in the earlier proceedings.
Master Venning considered that there were three issues for determination:
2. Is the set off raised by the defendants open to them on the facts?
The Master concluded on the first point that the judgment of Judge Walker did not give rise to issue estoppel because the summary judgment was not a final finding on the issues in the proceedings, but simply a determination that the matter was not suitable for
summary determination and should proceed to a substantive hearing. In addition, further evidence had been put before the Court since the decision of the District Court and the present proceedings fell to be determined on those additional facts. The changed nature of the case made any question of issue estoppel inappropriate.
In the case of the decision of Greig J, however, Master Venning considered that Greig J’s express rejection of the contention that the defendants’ cross claims raised an equitable set off by reason of the inter-dependence of the cross claims with the plaintiffs’ claim, raised an issue estoppel. He was of the view that the resolution of the issue was necessary for the determination of the proceeding before Greig J and a matter distinctly put in issue in the proceedings before him:
The principal finding of Greig J which determined the application against the defendants was that their argument for set-off did not apply. It was directly raised by the defendants and determined against them.
On that basis alone I consider I am bound to find that the defendants cannot raise the set- off as a defence argument in these proceedings. They are, of course, free to pursue the matters raised by them as a separate counterclaim against the plaintiffs.
Although his conclusion that issue estoppel applied, was sufficient to dispose of the plaintiffs’ claim to set-off in the proceedings before him, Master Venning went on to consider, in the alternative, whether the claim and counterclaim lacked sufficient inter- dependence to constitute equitable set-off. He concluded that the defendants’ cross-claim did not impeach the plaintiffs’ claim adopting the reasoning of Greig J on the point.
Master Venning considered whether other defences raised in the affidavits prevented the entry of summary judgment. He considered clause 2(f) of the memorandum of encumbrance which provided waiver of minimum royalties did not apply. It provided that:
In the event of the inability of the Grantor to win and remove rock from the quarry or sell in the marketplace by reason of strike, lockout right, industrial action, fire, storm, tempest, flood, operation of law or other cause beyond the control of the grantor.... The term ‘other cause’ shall be deemed to include Baigent Forestry Industries Ltd removing its approval either temporarily or permanently to the use of Meads Road by the Grantor (in circumstances where no other practicable alternative access to the quarry is or can be made available), the lack of a suitable market for rock, the cancellation of the resource consent in relation to the quarry, or the imposition of conditions on the review of the resource consent which would make it impracticable to operate the quarry.
It was submitted on behalf of the appellants to Master Venning that there was no “suitable market for rock”. Master Venning was of the view that a statement in the evidence that the demand for the quality of rock able to be produced by the quarry was not “good”, was insufficient to support the allegation of lack of a suitable market. Citing Pemberton v Chappell [1987] 1 NZLR 1, he concluded that the defendant had failed to supply reasonable particulars of a defence to resist summary judgment. A further submission, that the defendants were unable to win the minimum rock from the quarry (because of the poor state of the machinery acquired under the agreement for sale and purchase) was rejected by Master Venning on the basis that the state of the machinery was not a matter which could be characterised as being “beyond the control of the grantor” within the meaning of clause 2(f) of the memorandum of encumbrance:
if machinery broke down the defendants should have had it repaired or replaced.
An affidavit filed on behalf of the appellants challenged the quantity of rock won from the quarry during 1996. The Master held that because minimum royalties were payable in any event, the amount of rock won from the quarry was irrelevant to the obligation.
An affidavit filed on behalf of the appellants claimed that the company and the appellants had been induced to enter the agreement for sale and purchase and the memorandum or encumbrance as a result of mistake, common to both parties, as to the quantity of high quality rock in the quarry and the quantity of over-burden. The Master was of the view that the evidence failed to suggest any common mistake and that unilateral mistake was not a ground for relief under s 6(1)(a)(i) of the Contractual Mistakes Act
1977, so that the defence based on mistake must fail.
Finally, Master Venning agreed with the contention on behalf of the appellants that in the absence of any agreement with the plaintiffs that they would renew the quarry right after 29 March 1997, the plaintiffs’ right to receive royalties ceased if the quarry operator chose not to exercise its right of renewal. He accepted that the plaintiffs had no claim for royalties after 29 March 1997 on that basis.
The Master quantified the claim as the sum of the shortfall figures for the years to November 1994, 1995 and 1996, and the minimum payment (calculated on the annual minimum of $50,000 per annum plus GST), attributable to the period 1 December 1996 to
20 March 1997 (that being the expiry date of the five year period of the quarry right if not renewed). After considering that there were no grounds to decline to enter summary judgment or to stay execution pending hearing of the defendants’ counterclaim (a stay not being sought on behalf of the appellants), the Master entered judgment for the plaintiffs against the defendants in the sum of $59,273,64 with interest and costs. He indicated that if the defendants wished to pursue a stay of execution they would have to apply for such stay “in the ordinary course of events”.
The appeal
The appellants appeal. They claim the judgment to be erroneous in holding that issue estoppel arose from the judgment of Greig J and that, in any event, set-off was not open to the appellants. They contend, rather, that the judgment of Judge Walker constituted an issue estoppel on the question of set-off. The determinations relating to the application of the waiver clause, the relevance of the quantity of rock won from the quarry, and the conclusion as to mistake are also challenged.
Application of the waiver clause in the memorandum of encumbrance
It is convenient to deal with this point at the outset. It is accepted on behalf of the respondents that if, contrary to the decision of Master Venning, the waiver clause applies in the circumstances deposed to in the affidavits, it would constitute a defence to the claim which would make the entry of summary judgment inappropriate. All other matters raised are claims which do not negate the obligation to pay royalties but which raise the question of equitable set-off. If the waiver clause applies it removes the obligation to pay royalties. The application of the clause was not considered by Judge Walker or by Greig J. No question of issue estoppel therefore arises in respect of this ground of appeal.
The terms of clause 2(f) are sufficiently set out above. Where the clause applies, the grantor is liable to pay royalties only on rock extracted and not to the minimum level prescribed.
The appellant maintains the argument advanced to Master Venning that the lack of a “suitable market for rock” and the poor state of the machinery (which meant that the defendants were unable to win the minimum quantities of rock), fell within the clause and excused liability to make the minimum payment.
Apart from the assertion made by Mr Shearer in his affidavit, which has already been referred to, the only additional evidence Mr Malone was able to point to in support of the allegation was Mr Shearer’s additional statement, that “the company has always had excess rock on site and has sold what it could”. That was substantiated by the financial accounts for the company for the years to March 1994 and March 1995, showing stock on hand.
Although in summary judgment applications there is an onus on the plaintiff to satisfy the Court that there is no defence to the claim, a defendant who raises a specific defence is required to lay an evidential foundation for it. Reasonable particulars of circumstances, which go beyond the assertions here relied upon is required: Pemberton v Chappell [1987] 1 NZLR 1, 3-4 per Somers J, at 8 per Hillyer J; Australian Guarantee Corporation (NZ) Ltd v McBeth [1992] 3 NZLR 54,59. The assertions do not appear to be consistent with the actual level of operation of the quarry, which did not fall far short of achieving the quantities which established the minimum royalty figures. Although the memorandum of encumbrance provided for the rate of royalty to be reviewed annually, there is no indication that such review was initiated by the appellants during the time they operated the quarry. Nor do the claims fit with the assessments of likely demand contained in a valuation compiled by Duke & Cooke and relied upon by both parties before the sale. No evidence relating to the market for the rock supportive of the appellants’ contentions was contained in the affidavits. We are of the view that Master Venning was clearly correct to reject the affidavit evidence as establishing sufficient foundation for an allegation of lack of suitable market.
Rock won from the quarry
It was accepted by Mr Malone that if the waiver clause does not apply, the quantity of rock removed from the quarry was irrelevant. It is therefore unnecessary to consider this point further.
Issue estoppel
Counsel for the appellants submits that the decision of Judge Walker in the District Court gave rise to issue estoppel against the respondents in respect of “the issue of whether or not they could proceed to summary judgment on their claim.”
Issue estoppel arises where a determination of an issue of fact or law by a court binds the same parties in subsequent litigation where the same issue arises: Fidelitas Shipping Co Ltd v V/O Exportchleb [1966] 1 QB 630, 640 per Lord Denning MR; 641-
643 per Diplock LJ. The principle that the parties to the suit are bound by the determination of the issue, subject to appeal, is described by Diplock LJ in that case as
But an example of a specific application of the general rule of public policy, nemo debet bis vexari pro una et eadem causa.
It is a policy designed to prevent injustice to litigants. As this Court recognised in Joseph Lynch Land Co Ltd v Lynch [1995] 1 NZLR 37 at 43 the principle requires some care, particularly in its application to determinations contained in interlocutory judgments, to ensure that a doctrine “designed to prevent injustice to one litigant” does not cause “greater injustice to the other”. In that case the ultimate question was identified as being
Whether in the circumstances it is reasonable to regard the earlier decision as a final determination of the issue which one of the parties now wishes to raise.
It is not necessary for the purposes of this case to decide whether, standing alone, the determination of Judge Walker could give rise to an issue estoppel which prevented the appellants from raising equitable set-off. The argument could not seriously have been raised had the respondents’ appeal against the determination of Judge Walker not been dismissed. At that stage it was clear that the same arguments were being run in the present proceedings. The appeal would have challenged the determination upon which issue estoppel is based. It was sensibly abandoned simply to avoid overlap in the proceedings.
The indication by Master Venning that if the application for summary judgment in the present proceedings was to be declined, the proceedings and the counterclaim in M18/95 should be consolidated, makes that perfectly clear. In those circumstances the respondents could not be estopped in the present proceedings from contending that summary judgment was available, notwithstanding the earlier decision of Judge Walker.
The decision of Greig J did not deal with an application for summary judgment and the effect of the counterclaims upon it. Whether the cross-claim amounted to equitable set- off was not a matter which was necessary for him to consider given the breach in payment of royalties to the landowner under the quarry right, which itself justified appointment of the receiver. The principal reason why Greig J held that the counterclaims of the appellant could not amount to set-off against the respondents’ right to appoint a receiver, was that set-off is limited to the defence of money claims. Although the rights arose from non- payment of money,
the true position is that the plaintiffs are exercising their rights under a mortgage or encumbrance arising on breach of that and in right of their protection of their security and here the quarry right which inures, subject to renewal, until 2007.
The appellants’ cross-claim was an unliquidated one which did not discharge the mortgage debt or prevent the mortgagee from exercising its powers. But although strictly unnecessary for his decision the further conclusion of Greig J that there was insufficient interdependence to constitute set-off applies equally to the question for determination by Master Venning and in issue on the appeal: whether the misrepresentations and mistake claimed by the appellants in their cross-claim are sufficiently interdependent with the claim to royalties to make it inequitable not to treat them as a set off to the claim.
The reasoning adopted by Greig J is an obstacle to the appellants’ contention to set- off in the present proceedings. But we do not consider that Greig J’s decision on the point is reasonably to be treated as creating an issue estoppel between the parties in the present proceedings. The point was not necessary for the decision. It was not treated distinctly. As a result, the question of appeal to prevent issue estoppel arising is not likely to have been considered, particularly since the principal ground relied upon by the Judge was not capable of creating issue estoppel and is likely to have been accepted by the parties as correct. In
those circumstances we fdo not consider that the preconditions for issue estoppel have been established. It would not be just that the appellants should be bound by the determination in subsequent proceedings for recovery of royalties. We consider that Master Venning was in error in considering himself bound by the decision of Greig J to find that the appellants could not raise the set-off as a defence to the summary judgment application.
Was set-off available?
Procedure by way of summary judgment permits a plaintiff who is able to discharge the onus of establishing that there is no defence to a claim, to obtain judgment without delay: Pemberton v Chappell. The procedure is not appropriate to resolve questions of fact unless it is clear that there is no credible dispute. The procedure is not, however, to operate oppressively: Doyles Trading Co Ltd v Westend Services Ltd [1989] 1 NZLR 38. If there is a real question to be tried summary judgment is not appropriate. For the purposes of R 136 of the High Court Rules, which permits judgment to be entered where the plaintiff satisfies the Court that a defendant has no defence, equitable set-off may be regarded as a defence: M L Paynter Ltd v Ben Candy Investments Ltd [1987] 1 NZLR
257; Grant v NZMC Ltd [1989] 1 NZLR 8. In Grant v NZMC Ltd the Court set aside a summary judgment where the defendants’ claim qualified as set-off. The principle was described by Somers J, who delivered the judgment of the Court, as “clear”:
The defendant may set-off a cross-claim which so affects the plaintiff’s claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are inter-dependent: judgment on one cannot fairly be given without regard to the other; the defendant’s claim calls into question or impeaches the plaintiff’s demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract.
It may be difficult to identify when a counter-claim based upon misrepresentation may give rise to equitable set-off, making it unjust to permit summary judgment to be entered without bringing into account the claim for misrepresentation by way of set-off: Roberts Family Investments Ltd v Total Fitness Centre (Wellington) Ltd [1989] 1
NZLR 15, 21. In that case McGechan J described a tendency at first instance to treat whether set-off is appropriate as turning upon the extent to which there is significant factual over-lap. Such approach, essentially one of assessment of degree, is appropriate in balancing the competing demands of expedition and proper consideration.
In the present case, the circumstance that the obligation to pay royalties arose as a result of the agreement for sale and purchase and is provided for in that agreement, is not in itself determinative, as was explicitly accepted in Grant v NZMC Ltd in the passage already cited. The agreements between the parties distinguish the purchase price payable for the business (for plant and goodwill) and the royalty payments which depend upon extraction of rock from the quarry. This separation has been underscored by the distinct forms by which the parties have structured their obligations. Although the terms of the memorandum of encumbrance are provided for in the agreement for sale and purchase, it was designed as the document governing the royalty agreement during the working of the quarry under the quarry right. The agreement for sale and purchase has been fully performed and no attempt was made to repudiate it by the appellants. The memorandum of encumbrance, on the other hand, sets up a contractual relationship which, depending upon renewal of the quarry right, was capable of continuing until 2007. Rock was quarried for nearly three years, in quantities not far short of those envisaged by the minimum royalty payments. A significant proportion of the arrears claimed relates to the period within which the appellants quarried rock, obtaining benefit for which they were obliged to pay royalties. The appellants do not assert that they are not liable to pay the royalties, rather they seek adjustment of their liability by any amount recovered by them under their cross- claim. The cross-claim does not therefore extinguish the liability under the memorandum of encumbrance.
The cross-claim raises issues which go to the basis upon which the sale of the business was concluded. It raises questions of the valuation of the business and deficiencies in expected profitability. Those questions are much more extensive and substantially different from the questions as to liability for the royalties payable for the working of the quarry. Although we do not accept that the appellants’ cross-claims based on misrepresentation and mistake as to the quantity and quality of the rock in the quarry are unarguable and agree with the view of Master Venning that their merit could only be assessed after hearing, it is clear that they raise factual issues of some complexity which do not directly bear on the obligations under the memorandum of encumbrance.
The minimum payments provided for in the memorandum of encumbrance were at levels of extraction which were substantially reached by the appellants. They parallel minimum royalties payable to the landowner. If there is substance in the cross-claim the obligations incurred under the memorandum of encumbrance may be a consequential loss in that claim. The right to royalties arises under agreements which have not been terminated or repudiated. The cross-claim does not impugn the claim to royalties, which is an independent claim.
For the reasons which persuaded Greig J and which were adopted by Master Venning we are of the view that the two claims are insufficiently inter-dependent to amount to equitable set-off in the circumstances. We agree therefore that the cross-claims do not amount to a defence under R 136 of the High Court Rules, preventing entry of summary judgment.
Mistake
Master Venning held that on the evidence the appellant had not raised common mistake and that unilateral mistake is not by itself ground for relief under s 26(a)(i) of the Contractual Mistakes Act 1977. It was contended on behalf of the appellants in this Court that Master Venning was in error on this point and that there was a great deal of evidence to suggest that both parties were mistaken in their assumptions as to the quality and quantity of the rock in the quarry and the profitability of the business.
Although it is not possible to assess the merit of the claims of mistake on the material available without hearing, we have some doubt as to the argument as to mistake advanced by Mr Malone. At times it came close to an assertion that a mistake giving rise to remedies under the Contractual Mistakes Act 1977 occurs if the value obtained under a contract for sale and purchase of a business proves to be less than the contract price. The relief claimed in the amended statement of defence (variation of the contracts to delete the provisions as to payment of royalties) would seem to be untenable. It is not, however, necessary to express any considered opinion on the topic of mistake which will have to be considered on trial of the cross-claims. The mistake alleged in the cross-claims is alternative to the claim based upon misrepresentation and is based upon the same claimed
inadequacies in the quantity and the quality of the rock and the resultant claimed loss in the purchase of the business. The lack of inter-dependence between the claim to royalties and the cross-claim of mistake, prevents the claim of mistake, with the other cross-claim, from amounting to set-off preventing summary judgment on the royalties claim.
Conclusion
For the reasons given, the appeal against the judgment of Master Venning is dismissed.
The respondents are entitled to costs which are fixed at $3000 together with reasonable disbursements to be fixed if necessary by the Registrar.
Solicitors
Fletcher Vautier Moore, Richmond for appellants
Zindels, Nelson for respondents
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