Tri-Star Customs and Forwarding Limited v Denning CA 170/97 [1998] NZCA 261; [1999] 1 NZLR 33; [1998] TRNZ 106; (1998) 6 NZBLC 102,577; (1998) 8 TCLR 431; (1998) 18 NZTC 13,982 (2 July 1998)

Last Updated: 29 December 2023

IN THE COURT OF APPEAL OF NEW ZEALAND CA 170/97

BETWEEN TRI-STAR CUSTOMS AND

FORWARDING LIMITED

Appellant

AND DAVID RAYMOND DENNING AND PHYLLIS MAE DENNING

Respondents

Coram: Richardson P Henry J Thomas J Keith J Tipping J

Hearing: 22 June 1998

Counsel: S P Bryers and D A Towle for Appellant

R J Katz QC and A R Tobin for Respondents

Judgment: 2 July 1998

JUDGMENT OF THE COURT DELIVERED BY HENRY J

This appeal from a judgment of Salmon J (now reported at [1996] NZHC 1142; [1996] 3 NZLR 630) raises a question concerning the entitlement of a party to a contract (here the respondents) to relief under the Contractual Mistakes Act 1977. A cross-appeal is directed to providing the respondents with alternative relief under the Court’s equitable jurisdiction, either to order rectification for unilateral mistake or to apply the doctrine of estoppel.

The appellant (Tri-Star) and the respondents (the Dennings) executed a written agreement dated 9 March 1993, under which Tri-Star agreed to lease from the Dennings a commercial property situated in Mangere, Auckland for a term of 9 years. Clause 4.1 of the agreement provided:

In consideration of the sum of One thousand dollars ($1,000.00) to be paid by the Lessee to the Lessor on the Lease Commencement Date, the Lessor agrees to grant to the Lessee or its nominee an option to purchase the Property for a price of SEVEN HUNDRED TWENTY THOUSAND DOLLARS ($720,000.00) such option to be exercisable at any time during the period of two (2) years commencing upon the Lease Commencement Date.

A dispute subsequently arose between the parties which resulted in the present litigation. It centred over the question whether the purchase price referred to in cl 4.1 was inclusive or exclusive of Goods & Services Tax. Following a four day trial, Salmon J ordered a variation of the written document pursuant to s7 of the Contractual Mistakes Act by adding the words “plus GST” after the recorded option price. He also ordered specific performance of the resulting agreement to purchase the property at the price of $720,000 plus GST. Before he turned to the Contractual Mistakes issues, Salmon J rejected the claim by the Dennings which sought rectification of the agreement to lease, and their allegation that Tri-Star was estopped from denying that the purchase price was $720,000 plus GST. The rectification argument related to that doctrine in its classical sense, namely a contention that the written document failed to record the true intention of the parties. The cross-appeal against rejection of that claim was not pursued in this Court.

Background

In late 1992 Tri-Star was seeking new premises for the conduct of its business as a customs and forwarding agent. Tri-Star was seeking to negotiate a lease of suitable premises which included a right of purchase during the initial term of the lease at a fixed price. A property owned by the Dennings situated in Mangere, Auckland, near the Auckland International Airport was located through the services of a real estate agent, Mr Blakey, and negotiations ensued. The officer of Tri-Star primarily

concerned with the proposed transaction was one of its directors, Mr Davis. Mr Davis had engaged a merchant banker friend of his, Mr Smith, to assist on Tri-Star’s behalf in the negotiation discussions with Mr Blakey and to report back to Tri-Star. Mr Smith had no authority to bind Tri-Star.

As a result of the discussions, Mr Blakey prepared an agreement providing for initial rental of $73,000 per annum plus GST (subject to concessions over the first three years), and an option to purchase for $600,000. The option price made no reference to GST. In late 1992 or early 1993 that agreement was executed by Tri-Star and presented to but rejected by the Dennings, who sought rental of some

$90,000 and a sale price of $750,000. A meeting attended by the Dennings, Mr Blakey and Mr Smith resulted, but no agreement was reached. Mr Blakey then prepared a second agreement, providing for rental at $89,144 per annum and a purchase price of $700,000. It represented the basis on which both Mr Blakey and Mr Smith believed their respective principals would find acceptable. It is common ground that down to that time neither the parties nor their representatives expressly addressed the question of GST and its implications on the proposed sale. At about this time (1 March 1993) Tri-Star sought legal advice on the second agreement, and ascertained that if it purchased the property the transaction would be subject to GST, enabling it (Tri-Star) to claim a refund of tax on the purchase price. Tri-Star instructed its solicitors to prepare an agreement. This showed the purchase price under the option as $700,000. As before, the relevant clause did not refer to GST. On receipt of this agreement, the Dennings amended the figure of $700,000 to

$720,000 and executed it in that form. It was then sent to and countersigned by Tri-Star on 9 March 1993, resulting in a binding agreement which contained as one of its provisions cl 4.1 as previously set out. The Schedule to the agreement recorded the initial annual rental as being “$89,144.00 per annum (plus GST)”. The reference to GST in the rental figure was also consistent with the drafting of the previous forms of agreement.

The solicitors for the Dennings then prepared a Deed of Lease, which expressed the purchase price in the option as being $720,000 plus GST, thus giving

rise to the present dispute. Both parties to the agreement initiated proceedings, which were consolidated before trial.

It is now common ground that unless an agreement for sale and purchase such as that now in question provides otherwise, the price is inclusive of the tax. Looking at the words of cl 4.1 of this agreement, that must be so. The consideration moving from the lessee to the lessor for the transfer of the property is $720,000. The clear words of the provision define the lessee’s obligation in this respect, and in the absence of some other contractual or statutory provision it cannot be called on to pay a greater sum.

Contractual Mistakes Act 1977

As one of the causes of action the pleading alleged that the omission of the words “plus GST” after the price in cl 4.1 was a mistake which influenced the decision of the Dennings to enter into the agreement. The mistake found by the Judge was a belief “that they would get $720,000 out of the transaction”. The belief was mistaken because they did not make allowance for the incidence of GST. Having held that the mistake was material, Salmon J went on to hold that Tri-Star had “constructive” knowledge of the Dennings’ mistake, and that a substantially unequal exchange of values had resulted. The findings of materiality and an unequal exchange of values are not under challenge.

Relief based on mistake is governed by the Contractual Mistakes Act 1977, in particular for present purposes by s6(1)(a)(i) which provides:

6. Relief may be granted where mistake by one party is known to opposing party or is common or mutual - (1) A Court may in the course of any proceedings or on application made for the purpose grant relief under section 7 of this Act to any party to a contract-

(a) If in entering into that contract-

(i) That party was influenced in his decision to enter into the contract by a mistake that was material to him, and the existence of the mistake was known to the other party or one or more of the other parties to the contract (not being a party or parties having

substantially the same interest under the contract as the party seeking relief);

The critical issue concerns the requirement that the existence of the mistake must be “known” to Tri-Star. Salmon J held that although Tri-Star did not have actual knowledge of the mistake (that the Dennings had not considered the GST implications), it should have been aware of that fact. Salmon J’s reasons indicate that by the term constructive knowledge he was referring to the objective assessment of a series of facts which should have led to knowledge - in effect an “ought to have known” situation. He therefore held that the requirement was satisfied. In the course of the argument Mr Katz for the Dennings responsibly accepted that he was unable to support the judgment on this construction of s6(1)(a)(i) and conceded that actual knowledge was required.

The starting point is the use of the word “known” in the statute. In its ordinary meaning the word connotes possession of information, or a state of awareness. We can see no justification for construing s6(1)(a)(i) as requiring anything other than actual knowledge. It may of course be proper for a Court to infer actual knowledge from proved circumstances, even if the person in question denies having that knowledge. There is nothing in the statute which calls for a different construction. An example where an extended meaning of the word to include “ought to have known” was rejected can be found in London Computator Ltd v Seymour [1944] 2 All ER 11. There the Divisional Court, headed by Viscount Caldecote LCJ, gave the word its ordinary meaning when construing Defence Regulations.

The same approach has previously been adopted in respect of s6(1)(a)(i). In McKee v McMorran (1992) 5 TCLR 221, Gallen J recognised there were conceptual difficulties in imputing knowledge of an agent to a principal in this context. In Weddell New Zealand Ltd v Taylor Preston Ltd [1992] NZHC 2851; [1993] 2 NZLR 104 Heron J effectively rejected an argument that something short of actual knowledge may suffice. Actual knowledge was the test applied by this Court in Jenkins v Lind (CA147/87, 20 September 1987), and awareness of the mistake was seen as a necessary element by Tipping J in Shivas v Bank of New Zealand [1989] NZHC 862; [1990] 2 NZLR 327,355. It can also be

noted that the report of the Contract & Commercial Law Reform Committee’s report on “The effects of Mistakes on Contract” (May 1976) which led to enactment of the Act, expressly considered and rejected anything short of actual knowledge as being necessary for relief.

It is also pertinent to note that the concept of “knew or ought to have known” is frequently captured in legislation, but by use of those express words. Some examples in the broad commercial context are: the Companies Act 1993, ss141(5)(a), 297(1)(d); the Incorporated Societies Act 1908, s23A(5); the Producer Board Acts, such as the Meat Board Act 1997 Schedule 1 cl 11(5)(a); the Sale of Goods (United Nations Convention) Act 1994, Convention Articles 2(a), 9(2), 38(2), 49(2) etc. The short point is that where the word is intended to have a meaning extended from its ordinary meaning, the Legislature can be expected to spell that out.

It is unnecessary to review English and Canadian authority which is directed to the common law when what is at issue is the construction of the clear wording of the 1977 Act.

Mr Katz however went on to submit that the evidence established Tri-Star had actual knowledge of the Dennings’ mistake. Although as the argument proceeded in this Court the precise nature and identification of the mistake became a little elusive, it is sufficient for present purposes to go to the Judge’s finding, which was that the Dennings believed the purchase price would yield a net $720,000, with no GST impact.

The major difficulty facing this submission is Salmon J’s express finding that Tri-Star did not have actual knowledge, and his associated discussion of the contrasting concept of constructive knowledge. Mr Katz placed reliance on the Judge’s findings which led him to his conclusion as to constructive knowledge. As analysed by Mr Katz they were:

(a) The first offer at $600,000 was the amount the respondents would receive

(b) The two agents (Blakey and Smith) discussed price on a basis which involved yield calculations. Those calculations used a net rental figure as the basis of calculation.

(c) The rental was always expressed in all the draft agreements as net of GST.

(d) For the yield calculations to be meaningful they would have to utilise an option price exclusive of GST

(e) The option price at $700,000 was necessary if there was to be any prospect of success. The rental figure in all the agreements represented a similar yield throughout.

Reliance was also placed on the fact that Tri-Star’s solicitor Mr MacDonald, having been instructed by Mr Davis that the agreement should reflect the price was GST inclusive, did not expressly refer to GST in the document. The other matters called in support do not add anything of substance to the above.

We are unable to see how these matters, taken in conjunction, require this Court to make a finding rejected by the trial Judge. At most they indicate a source of suspicion that the Dennings may not have appreciated the GST position. At no stage did “GST exclusive” enter into the discussions between the parties, and in our view the evidence is quite insufficient to allow an inference that Tri-Star knew the Dennings believed the price was GST exclusive. When discussing the question of actual knowledge, Mr Katz referred to the five categories of knowledge listed by Peter Gibson J in Baden and others v Sociéte Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1992] 4 All ER 161. The relevance of that classification, made in a “knowing assistance” to a breach of fiduciary case, is questionable. The usefulness of such a classification even in that area has been doubted in later cases, particularly by the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan [1995] UKPC 4; [1995] 3 All ER 97. It is sometimes said that so-called wilful blindness constitutes actual knowledge. Again, whether such a separate classification is helpful may be doubtful. The deliberate shutting of eyes to what is an obvious fact may well lead to a finding or assist in drawing an inference of knowledge in a particular set of circumstances. But the need to have regard to specified categories is not apparent,

and can lead to undesirable rigidity. The enquiry is a straightforward question of fact, which does not require either the substitution of other words or the application of a formula. We also doubt whether the further category relied on by Mr Katz, namely wilful and reckless failure to make the enquiries an honest person would make, could be said to necessarily demonstrate actual knowledge. It could be said to indicate the contrary. Be that as it may, both these categories have little relevance to the present case when regard is had to the way it was presented to the Judge at trial and the issue of knowledge was addressed in the evidence. We therefore uphold the finding that Tri-Star did not have knowledge of any relevant mistaken belief held by the Dennings.

It is accordingly unnecessary to consider the two further questions raised by Mr Bryers under this head of claim. The first is that there was no operative mistake because the Dennings had not thought about the issue of GST at all - the proposition being that the failure to consider an issue cannot amount to a mistaken belief about that issue (The New Zealand Refinery Co Ltd v Attorney-General [1992] NZCA 308; (1993) 15 NZTC 10,038). It may well be that the present case is distinguishable on the facts, depending upon the precise identification of the mistake. The second issue, namely whether the mistake was as to the interpretation of the agreement and therefore excluded from the provisions of the Act by s6(2)(a), can also be left open.

Rectification in Equity

There is some doubt whether this separate head of claim was properly pleaded, and it does not appear to have been expressly addressed by Salmon J. It was submitted that since the enactment of the Contractual Mistakes Act 1977, equity has moved and now provides relief by way of rectification for unilateral mistake in circumstances where a party to a contract deliberately sets out to ensure that the other party does not become aware of the existence of his or her mistake. The first difficulty with this argument arises from the 1977 Act, which is a code. The relevant provisions of s5 are:

5. Act to be a Code - (1) Except as otherwise expressly provided in this Act, this Act shall have effect in place of the rules of the common

law and of equity governing the circumstances in which relief may be granted, on the grounds of mistake, to a party to a contract or to a person claiming through or under any such party.

(2) Nothing in this Act shall affect-

(a) The doctrine of non est factum:

(b) The law relating to the rectification of contracts:

(c) The law relating to undue influence, fraud, breach of fiduciary duty, or misrepresentation, whether fraudulent or innocent:

(d) The provisions of the Illegal Contracts Act 1970 or of sections 94A and 94B of the Judicature Act 1908:

(e) The Frustrated Contracts Act 1944.

...

The only escape route available to the Dennings is subs (2)(b), which protects the law relating to rectification of contracts. What is abundantly clear however, is that in the context of the Act the law of rectification referred to is that which allows a Court to vary the terms of a concluded contract which does not express the true intention of the parties to it so as to conform with that intention. The exclusion is necessary because the Act was never intended to affect this long established power to give effect to what was the true bargain between the parties. Arguably, where the contract does not do that, the concept of mistake could arise and come under the purview of the Act. That was not intended. This construction sits comfortably with s6(1)(a)(ii), which covers common mistake, with s6(1)(a)(i) which covers unilateral mistake, and also s6(2)(a) which excludes mistake as to construction. If the exclusion in s5(2)(b) is read as covering equitable relief for unilateral mistake, then s6(1)(a)(i) really becomes at best otiose, but probably also inconsistent with the equitable jurisdiction now relied upon by Mr Katz. Relief under the Act for unilateral mistake is restricted to cases where there is knowledge of the mistake. But knowledge, it is said, is not necessary for relief at equity. A further problem arises because equity may annul or rescind a contract induced by unilateral mistake. At equity relief is therefore not confined to rectification, yet s5(2)(b) is concerned only with rectification.

The second difficulty is a factual one. The principle relied on was stated by Mr Katz in broad terms. Relief from unilateral mistake, he submitted, will be granted when enforcement of the contract will be unconscionable, more particularly if a party deliberately sets out to ensure that the other party does not become aware of the mistake or misapprehension. Assuming, but without accepting, that authorities such

as Taylor v Johnson [1983] HCA 5; (1982-83) 151 CLR 422, Downtown Kings Crest Development Corporation v Massey Ferguson Industries Limited (1996) 28 OR (3d) 327, Thomas Bates & Son Ltd v Wyndham’s (Lingerie) Ltd [1980] EWCA Civ 3; [1981] 1 All ER 1077 and Commissioner for New Towns v Cooper CGBD Ltd [1995] Ch 259 establish a principle along the lines contended for, the evidence cannot support the element of misleading or deceptive conduct, which it was conceded was necessary. Mr Katz was forced to rely on the absence of any reference to GST in cl 4.1 as drafted by Mr MacDonald, which the Judge said was “a clear indication of a desire not to draw Mr Denning’s attention to that point.” This is far short of the kind of misleading conduct under discussion. Mr MacDonald explained the reason for the absence, which was his (correct) understanding of the legal position that the price was therefore GST inclusive. It required no additional words to make that clear. It was not put to either Mr MacDonald or Mr Davis that this was anything deliberate, designed to prevent Mr Denning from becoming aware of something material of which they knew or had good reason to believe he was unaware. There is no justification for now making such a finding

This ground of cross-appeal cannot succeed.

Estoppel

This issue was dealt with by Salmon J quite briefly. He held that the error or misunderstanding by the Dennings was not brought about or induced by Tri-Star. He went on to hold that estoppel by convention was not established. In his written submissions Mr Katz disavowed estoppel by convention as an available argument, so it need not be considered further. It can however be observed that this was the express pleading, which is no doubt why it was covered by the Judge. It is not clear how the issue as now presented differs in substance from that of equitable rectification. The Dennings’ mistaken belief is again at the heart of the matter, and in effect what is said is that failure to draw attention in the final agreement to the price being GST inclusive was deliberate or unconscionably misleading conduct. The Judge’s conclusion that the factual basis to support an estoppel was not made out was justified and must stand.

Conclusion

For the above reasons we allow the appeal, and dismiss the cross-appeal. The relief ordered in the High Court included an award of damages in favour of the appellant resulting from the failure to settle the transaction at $720,000 plus GST. The notice of appeal being directed against this order as well as against the orders for rectification and specific performance, we set aside all three orders recorded in the sealed judgment and remit the proceedings to the High Court for such further orders as may be appropriate in the light of this judgment.

The appellant is entitled to costs in this Court which are fixed in the sum of

$5,000, together with disbursements including reasonable travelling and accommodation expenses for one counsel, as approved by the Registrar.

Solicitors

Martelli McKegg Wells & Cormack, Auckland, for Appellant Daniel Overton & Goulding, Auckland, for Respondents