ARREN CIVIL LIMITED v DALLAN ENTERPRISES NO. 50 LIMITED & ORS [2001] NZCA 293 (20 September 2001)

IN THE COURT OF APPEAL OF NEW ZEALAND

ca109/00

	between	ARREN CIVIL LIMITED
		Appellant

	and	DALLAN ENTERPRISES No. 50 LIMITED
		Respondent

ca16/01

	between	DALLAN ENTERPRISES No. 50 LIMITED
		Appellant

	and	ARREN CIVIL LIMITED
		Respondent

Hearing:	15 May 2001
Coram:	Thomas J Ellis J McGechan J
Appearances:	M A Gilbert and B G Hall for Arren Civil D G Hurd and S Stokes for Dallan Enterprises
Judgment:	20 September 2001

judgment of THE COURT DELIVERED BY ELLIS J

[1] Arren Civil Limited (Arren) agreed to buy two sections of land from Dallan Enterprises No. 50 Limited (Dallan).Dallan purported to cancel the contracts. Arren sued for specific performance and Dallan counterclaimed for damages for breach of contract.After separate trials, Paterson J dismissed both claims. Both Dallan and Arren appeal.

The history of the transaction

[2] The parties entered into a written contract dated 9 October 1995 (the Development Contract) whereby Arren agreed as contractor to undertake the development of land owned by Dallan at Albany.At the same time they entered into a series of 13 contracts whereby Arren agreed to buy 13 of the lots.Each contract was on the same terms, price and settlement date apart.The Development Contract and these contracts were interrelated as the purchase price was to be satisfied from the monies to be paid to Arren under the Development Contract.The development was in two stages estimated to be completed in July 1996 and March 1997 respectively.On the completion of the first stage there was to be settlement of the purchase of 11 sections and on the completion of the second stage the other two.It is this final stage that gives rise to the dispute.

[3] The sale contracts provided for settlement on the fifth working day following advice that title was available.For the settlement of the last two sections this became 9 December 1997.It is necessary first to recount the essential facts leading up to this against the terms of the Development Contract.It was a modified form of the standard Civil Engineering Contract promulgated by the Standards Association of New Zealand.The contract price was $2,598,944.50 plus GST payable in progress payments following claims by the contractor and certification by the Contract Engineer, Mr Wright.There was a maintenance retention clause which entitled the developer to retain 50% until theissue of separate titles in the two stages.This was designed to be absorbed by the price for the sections.At the completion of stage 1 there was accordingly $1,011,659 standing to the credit of Arren to be applied towards the purchase of the eleven sections.The final claim was to be made by Arren not later than two months after the expiry of the three month maintenance period, or within such further time that the Engineer might reasonably allow. The maintenance period ran from practical completion which turned out to be 11 June 1997.The developer was obliged to pay the contractor the amount certified by the Engineer within ten days of the certificate.On receipt of the final claim the Engineer was obliged to issue his final payment certificate as soon as practicable after receipt of the claim.There was a provision that disputes were to be referred to arbitration.

[4] The timing of events is of importance.Arren lodged its 18^th and final claim on 24 November 1997 (so some few days after the expiry of five months from the date of completion, but no issue arises from this).The claim was for $649,008.13 including GST.The claim was for work done and interest on late payments amounting to $181,182.84.The Engineer had already issued his 18^th certificate on 21 November 1997.After agreed adjustments, $211,020.15 (including GST) was the amount due to Arren and so available as a credit towards the purchase of the last two sections.In issuing his certificate, however, he purported to deduct $35,000 for liquidated damages and a further $75,000 for maintenance retentions.The Engineer conceded on 11 December 1997 that a further $2,019.19 plus GST was owing to Arren.He issued no further certificates and did not respond directly to Arren's Final Claim of 24 November 1997.It seems that he intended his letter of 11 December 1997 to be his final word and so the position from that date until the dispute was resolved by arbitration on 25 February 2000 was that Arren claimed $649,008.13 and Dallan allowed only $211,020.15.

[5] Against this background we turn to the contracts for sale and purchase. They were for two lots to a total price of $509,375.00 plus GST.A deposit of $25,500.00 had been paid and settlement was due five working days after the vendor advised the purchaser that title was available, and so 9 December 1997. Dallan's solicitors sent Arren's solicitor a settlement statement late that day showing adjustments for rates and GST and crediting $287,813.25 as "Credit by vendor for 50% retention (representing the balance due on certified amounts) in accordance with Claim No. 18", then deducted the $35,000 and $75,000 referred to above and a further sum of $37,046.00, being a claimed overpayment.This last item was resolved as an error. The parties agree that the net amount credited was $211,020.15.

[6] The contracts for sale and purchase contained the following clause providing for the interdependence with the Development Contract and it is this clause that defines the dispute:

"16.0 Inter-dependency

16.1 The parties acknowledge and agree that this Agreement is entered into contemporaneously with a certain agreement for the development of the whole of the land comprised in Annexure A (`the Development Contract') pursuant to which the Vendor is the principal and the Purchaser is the contractor.

16.2 The Purchaser shall not be obliged to complete settlement pursuant to this Agreement unless the Vendor as the principal under the Development Contract has paid or contemporaneously pays the balance of all moneys properly payable to the Purchaser as contractor under the Development Contract PROVIDED THAT:-

(a) The Purchaser may complete settlement of this Agreement notwithstanding that there are any outstanding obligations by the Vendor as principal under the development contract and in such circumstances the parties rights and obligations under the Development Contract shall not merge with settlement of this Agreement; or

(b) In the event that there is a bona fide dispute arising out of the Development Contract and money is retained by the principal pending resolution of such dispute the Purchaser shall complete settlement of this Agreement and/or of any other agreement entered into contemporaneously herewith and affecting part of the Annexure A land but may decline to settle any agreement or agreements to a total consideration which is not more than $50,000.00 less than the amount so retained."

The underlining is ours to highlight the wording that must be interpreted.

[7] Arren claimed it was entitled not to settle because of the unresolved dispute as to how much it was entitled to under the contract.Dallan claimed it was entitled to settlement, issued a settlement notice on 10 December 1997 and when Arren did not settle purported to cancel the contracts on 23 December 1997.Before this Court the parties agree that if Arren was entitled to refuse to settle, then Dallan's cancellation was invalid.

[8] The first question is what was "the balance of all monies properly payable to the purchaser as contractor under the Development Contract".Mr Gilbert for Arren submitted it was "the amount actually due and objectively determined", and so the amount eventually determined by the arbitrators in their decision, namely $405,298.60 (being $397,921.61 inclusive of GST plus interest $7,377.35).The Judge took the view that it was the amount then certified as owing under the Development Contract by the Engineer, thereby agreeing with the submissions for Dallan.We set out his analysis in full:

"[28] Both counsel accepted that it is necessary to interpret the provisions of clause 16.2 of the agreements in the context of the interdependent agreements. The sequence of events was such that the contract works were completed prior to the titles for the second stage sections issuing.This was not an inevitable consequence but one to be expected.In fact, the contract works had obviously been completed by the time progress payment No. 17 was issued on 17 July 1997. The purpose of the set-off provision in clause 16.2 was that Arren should have available to be applied towards the section purchases a total of $1,229,472.25. Arren had this amount available as these were the total retentions made prior to 9 December 1997.The purpose of the agreements is therefore not defeated by determining that the balance properly payable was the balance certified as being due and payable by the Engineer.

[29] In my view, the correct interpretation of the clause does not permit of the interpretation sought by Arren.The clause must be considered in the context of the factual situation at the time the interdependent agreements were entered into and must have been capable of an objective assessment on the settlement dates of all section sales.Clearly the arrangement entered into provided that the 50% retention from each progress payment would be utilised to fund in part, the purchase prices of the sections payable by Arren.An interpretation of the clause which would place the parties in the position of not knowing on settlement date whether or not there was an obligation to settle is, in my view, an unlikely and untenable interpretation.This is particularly so when it was originally contemplated that the settlement date of the stage 1 sales was eight months before the settlement date of the stage 2 sales. Arren's interpretation would mean that the balance properly payable may not have been determined for some time and it would then not be known whether or not there was an obligation to settle under the substantive provision of clause 16.2.Commercial reality dictates that the clause must have been capable of an objective interpretation and assessment on 9 December 1997, just as it was when the stage 1 sales were completed.

[30] It is necessary to interpret contractual terms within the contractual context.However, in my view, Mr Gilbert places too much emphasis on the provisions of the provisos.They do not interpret and modify the substantive provision as submitted.The proviso in clause 16.2(a) would, in most circumstances, but not necessarily, apply to Dallan's obligation to pay the contract price under the development contract.There may have been circumstances where Dallan was not prepared to pay the amount certified or allow it to be set-off against the purchase prices because of some independent claim.A possible example would be a refusal to pay the full amount because of faulty work and an obligation to remedy the fault.The proviso gave Arren the right to settle in these circumstances.

[31] Nor do I accept that clause 16.2(b) should be interpreted in the manner suggested by Arren or that it, in effect, governs the settlement provisions to the extent contended.It was suggested that on settlement date there was a bona fide dispute arising out of the development contract in respect of Arren's final claim.The facts do not support this.While a final claim had been made by Arren on 24 November 1997, it had not been rejected by settlement date although it was substantially rejected shortly thereafter.There may have been a bona fide dispute on 9 December 1997 but there was no such dispute at that stage in respect of Arren's claim of $649,008.16.

[32] The interpretation contended for on behalf of Dallan is also the plain English meaning of the term balance properly payable (emphasis added). No sum was payable under the development contract except in accordance with the contract's terms.Clause 11.2.4 of the development contract placed a mandatory obligation on Dallan to pay the amount certified by the Engineer within 10 working days of the date of the certificate.An amount claimed by Arren did not become payable until certified by the Engineer.Dallan was therefore not in default unless it failed to make a payment within 10 working days of the Engineer's certification.On this analysis, only those claims certified up to and including the certificate issued on 21 November 1997, but not paid on 9 December 1997, can be described as the balance properly payable at settlement date.The plain meaning of the term does not include any uncertified sum claimed by Arren nor does it include any amount included in a certificate issued after the settlement date.

[33] For the reasons given it is my view that the correct interpretation of clause 16.2 is the one contended for on behalf of Dallan.The substantive provision of clause 16.2 provided that Dallan was to pay the balance properly payable which was moneys they due and owing and certified as such by the Engineer.Arren's submission that the money properly payable was the sum of $405,298.96 is, in my view, untenable.For reasons which appear in paragraph 38 it is my view that the moneys properly payable on 9 December 1997 totalled $211,020.15 (including GST)."

[9] We agree with the Judge and for the reasons he has given.The sum "properly payable" in terms of clause 16 was the sum of $211,020.15 (including GST).

[10] The Judge then approached the formula provided in clause 16.2(b) and held that the "money retained" had to be part of the money properly payable, and so part of the $211,020.15.As a backstop he said that even if this is not correct, the only other tenable alternative was that it was the $110,000 comprising the $35,000 and $75,000 referred to in para [5] above.In our view, the Judge's view must be correct and that if Dallan was prepared to credit the full amount certified and so "properly payable", no money was retained and clause 16.2(b) does not come into play.Again if the $110,000 can be classified as retained, then this must be compared with the "total consideration" of the agreements, namely $509,375.00, which is "more than $50,000 less than" $110,000.We have considered argument that the "total consideration" referred to the amount required to settle and like the Judge, consider this is not a possible interpretation of the words.In short, we agree that clause 16.2(b) cannot avail Arren, and it was accordingly obliged to settle.Its appeal against the Judgment of Paterson J is accordingly dismissed.

[11] For the sake of completeness, and to respond to Mr Gilbert's third submission in reply, we make the following calculation.If the money retained is Arren's bona fide claim of $649,008.13, and one deducts the amount allowed of $211,020.15, this leaves the amount in dispute as $437,987.98.The total consideration in the agreements is $509,375.00, which is more than $50,000 less than the sum retained, and so the subclause does not operate in Arren's favour either.

Dallan's appeal on its counterclaim

[12] On the basis that it had validly terminated the two contracts for sale, Dallan counterclaimed for alleged losses arising from Arren's failure to settle.Following a later and separate hearing, Paterson J dismissed the counterclaim.

[13] As a result of the arbitrations already referred to, as at 25 February 2000 Dallan owed Arren $353,708.00 (this included the $110,000.00 already referred to) plus interest to 25 February 2000 totalling $132,928.19.These sums bore interest at 11% from that date.Since then Dallan has paid some $375,585.93 and withheld the balance pending resolution of these proceedings.

[14] Dallan claimed damages resulting from Arren's failure to complete comprising:

(a) Reimbursement of interest paid

on the certified sum$97,350.99

(b) Interest on settlement balance$116,784.20

(c) Rates (excluding GST)$7,989.48

(d) Anticipated sale expenses$24,640.00

__________

$246,764.67

Less increased value of sections 81,625.00

Deposit paid25,500.00 $107,125.00

__________

$139,639.67

Interest above was calculated to 6 December 2000.

[15] The Judge found that Dallan had suffered the following losses:

(a) Lost interest$63,629.56

(b) Sales expenses$24,640.00

__________

TOTAL$88,269.56

He found that Dallan had benefited by the cancellation being the forfeited deposits $25,500.00 and the increased value of the two sections $91,125.00, so a total of $116,625.00.As a result, he held Dallanhad not suffered any loss and dismissed the counterclaim.

[16] His reasons relating to the claim for interest, rates and sales expenses were in these words:

"[31] Dallan is entitled, in my view, to claim lost interest but not for the period for which it claims it.Because of the inter-dependent nature of the land agreements and the development contract, Arren must have contemplated that default by it under the land agreements would have deprived Dallan of access to funds from which it was to pay, in part, the amount due under the development contract.Those funds represented the settlement balance which was to be paid in cash and the retention moneys ($296,301.54 and $187,573.46 respectively). Dallan did not have in cash the retention moneys as they were to be offset against the purchase price of the sections.Dallan is entitled to interest at the default rate under the development contract for the reasonable period necessary for it to replace those funds.Evidence on its behalf indicates that it did not need those funds to settle but it was still entitled to a reasonable time to arrange for the necessary funds to meet its commitments under the development contract.Unfortunately, because of the way in which Arren put its case, it did not call evidence as to what that reasonable time would have been.

[32] In the circumstances Dallan cannot complain if I fix the period for interest at 12 months.I suspect that this if far greater time than would have been needed to make the arrangements to pay the balance but as Dallan was the innocent party, I will err on its side.The rate of interest under the development contract was 1¼ times the average rate, as certified by a chartered accountant or trading bank manager, which was then currently payable by Arren for overdraft facilities.There appears to be no dispute that the appropriate rate is 13.15% p.a..Dallan is entitled to interest at this rate on the sum of $483,875 for a period of one year.This calculates to be $63,629.56.

[33] Having decided to retain the sections, Dallan is not, in my view, entitled to claim the rates.I note that if I am in error, the total rates for the one year period which I would have otherwise allowed would not alter the final result.

[34] Dallan is entitled to the anticipated sales expenses.The loss of bargain will mean that eventually it will be required to meet sale expenses on the sale of the two sections.On an expectation basis, it is not entitled to claim the expenses on the aborted sale.There was no challenge to the claim for $24,640 and that figure is therefore allowed."

[17] The Judge found as a matter of fact that the two sections were worth $600,500 as at 9 December 1997 and $653,000 as at 20 November 2000.He further found as a matter of fact that after cancelling the contracts, it did not intend to sell the sections, but decided to keep them anticipating increases in value.He said at paragraph 20:

"On behalf of Arren, it was contended that Dallan had no intention of selling the sections.Arren made an offer in December 1996 to purchase a further three sections but that offer was declined as was a further offer in February 1997 to purchase another two lots.Dallan when rejected that offer advised that on the advice of two real estate agents the lots in Stage 2 should be removed from the market to allow the possibility of higher prices down the track.The prices for Stage 2 were to be assessed when title to that stage became available and not before.Title to Stage 2, which included Lots 38 and 39, became available in December 1997.The solicitor who acted for Dallan on the property transactions relating to the subdivision gave evidence.When asked whether he could confirm that Dallan had made no attempt to sell any of these properties since November 1996, he replied `From the limited knowledge about that issue they had never been withdrawn from the market.Dallan may not have actively marketed but Mr Storey has always been open to receipt of offers and we have seen odd papers coming through our office which we immediately sent on to John.'He confirmed that there had been no sale of the lots in the sub-division since November 1996.In response to another question he said `He has an expectation of price and I'm not sure the market meets it, he doesn't need to sell'.The valuer called on behalf of Dallan accepted that if Dallan had been seeking to market the sections over the period, he would have expected sales.This evidence leads me to the view on the balance of probability that Dallan did not intend to sell Lots 38 and 39 at the time it terminated the land agreements.It moved very quickly to terminate those agreements when Arren defaulted in payment and did so at a time when the market value was markedly above the sale price.Dallan did not adduce any evidence which would lead to any other conclusion.Thus although the caveat would have prevented a sale of the sections, Dallan did not intend to sell them at the time it terminated the land agreements."

[18] Mr Hurd, for Dallan, accepted the Judge's findings as to value, but challenged the finding that Dallan did not intend to sell.He submitted that it was the fact that Arren had maintained a caveat over the titles that had prevented sale or other dealings with the land such as using it for security. While the existence of the caveat certainly prevented dealings, the Judge was assessing Dallan's real intentions rather than the formal restraint of the caveat.In our view, this was the appropriate approach to an important fact bearing on damages where the exercise is to ensure that the innocent party does not suffer loss as a result of the actions of the other.While in other circumstances the existence of the caveat, found to be wrongfully lodged, could cause real losses of the sort claimed by Dallan, in this case on the findings of the Judge it did not.On the evidence before him, we are satisfied he was correct in his conclusions.We add one matter of emphasis.Dallan cancelled the two contracts with deliberate speed in circumstances where they in fact owed Arren substantially more than they gave credit for.A reasonable inference is that the sections were appreciating in value and Dallan wished to take advantage of that.This, by itself, could point to both a desire to reap an immediate gain by resale, or an intention to retain the sections as an investment.It is not consistent with a company which is embarrassed by being left with two sections it thought it had sold.Against this finding, no further mention need be made of the caveat or any need to refinance, as the keeping of the sections was Dallan's own choice.

[19] The Judge summarised the principles he was to apply in assessing damages under four heads:

"(a) Although Dallan has not lost the benefit of the bargain, in that the value of the sections at the date of breach was greater than the contract price, it is still able to claim consequential losses;

(b) Dallan must give credit for any benefits received including both the increase in value of the sections and the deposit;

(c) The date for assessment of damages is normally the date of breach but the Court may vary that date to do justice to the innocent party;

(d) Dallan had an obligation to take reasonable steps to mitigate its loss."

Counsel agree with this formulation, but Mr Hurd submitted that the Judge erred in fixing the date for assessment of damages as the date of breach, namely 9 December 1997, and had not approached Dallan's obligation to mitigate reasonably.Much of the thrust of Mr Hurd's submissions is met by the finding that Dallan decided to keep the sections.Again counsel agree that the Judge correctly relied on the law stated by the House of Lords in Johnson v Agnew [1980] AC367 that the general rule is that damages should be assessed at the date of breach unless that gives rise to injustice, in which case the Court has power to fix some other date appropriate to the circumstances: per Lord Wilberforce at pages 400-401.That case involved a vendor obtaining an order for specific performance against the purchaser and when that failed, an order rescinding it and being awarded damages instead assessed at the date of recision of the order.This was on the basis that the vendor had done everything he could to complete the contract and those efforts came to an end when he obtained recision and the termination of the contract.That fits neatly with the Judge's decision in the present case that the date of breach was the appropriate date, as that was the date the vendor terminated the contract for breach.Proceeding from the finding that thereafter the vendor decided to keep the sections rather than try to sell them, we can see no argument to support the claim that damages should be assessed as at the date of hearing or judgment.We agree that if Dallan had in fact been prevented from selling because of the wrongful lodging of the caveat, then the later date may well have been appropriate.

[20] As to Mr Hurd's criticism of the Judge's conclusions on Dallan's obligation to mitigate its losses, it seems plain that as Dallan was left with two sections worth considerably more than it would have received had the sale to Arren been completed, mitigation of loss was not a question and its decision to keep the sections is immaterial, as losses crystallised on 9 December 1997 or a few days later.It follows that the Judge was correct in finding that Dallan had to give Arren credit for the deposit of $25,500.00, and the increased value $91,125.00, so a total of $116,625.00.Further, there is no criticism of Dallan's decision to retain the sections.

[21] As far as the interest award is concerned, we agree that some allowance should be made to counter any disadvantage Dallan may have suffered as a result of Arren's failure to complete.That can be reflected in the interest it had to pay on what it actually owed to Arren and that must be why the Judge chose the default rate under the development contract.We too think the period of twelve months is generous, but was an appropriate term to fix on the state of the evidence, or lack of it.We therefore reject Mr Hurd's contentions.

[22] The Judge allowed the claim for anticipated sale expenses and disallowed the claim for rates.As he said, whether he disallowed or allowed the claim for rates does not matter, as the credit given Arren exceeds the damages assessed on either basis.

[23] The appeal by Dallan is accordingly dismissed.

[24] The end result is that Arren loses its appeal against the first decision and Dallan loses its appeal against the second.There will therefore be no award of costs.

Solicitors

Chapman Tripp Sheffield Young, Auckland for Arren Civil

Rudd Watts & Stone, Auckland for Dallan Enterprises