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Court of Appeal of New Zealand |
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Court of Appeal of New ZealandLast Updated: 16 November 2011
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CA671/2010
[2011] NZCA 559 |
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BETWEEN MAGSONS HARDWARE LIMITED
Appellant |
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AND CONCEPTS 124 LIMITED
Respondent |
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Hearing: 16 August 2011
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Court: Arnold, Winkelmann and Andrews JJ
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Counsel: L Ponniah for Appellant
G Bogiatto for Respondent |
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Judgment: 7 November 2011 at 10.30 am
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JUDGMENT OF THE COURT
____________________________________________________________________
REASONS OF THE COURT
(Given by Andrews J)
Introduction
[1] This is an appeal by Magsons Hardware Ltd (Magsons) against the dismissal of its application for an order setting aside a statutory demand made by the respondent, Concepts 124 Ltd (Concepts), in the judgment of Associate Judge Bell delivered on 10 September 2010 (the judgment).[1] $20,000 is at issue. It was paid by Concepts to Magsons by way of four payments of $5,000, for the removal of each of four caveats registered by Magsons against the titles to land owned by Concepts.
Background
[2] There is no dispute as to the background facts. The following summary is taken from the judgment,[2] and the judgment of Associate Judge Abbott on applications by Magsons for orders that the caveats not lapse.[3]
[3] Magsons operates a Mitre 10 franchise. Between May and October 2008 it supplied building materials to Flat Bush Construction Ltd (FBCL) for use in construction projects in Flat Bush, South Auckland. FBCL’s director, Mr Cummins, guaranteed its indebtedness to Magsons for those supplies. Mr Cummins is also a director of Concepts, which owned land at Flat Bush, on which FBCL constructed buildings. Although Magsons had a contract with FBCL, there was no contractual relationship between Magsons and Concepts.
[4] FBCL was put into liquidation on 27 November 2008. Magsons is an unsecured creditor. As at the date of liquidation, Concepts owed Magsons $404,542.96, excluding interest and recovery costs. Magsons obtained summary judgment against Mr Cummins on his guarantee on 15 October 2009,[4] for $555,376.13.
[5] On 27 February 2009, Magsons registered caveats against 13 titles to land owned by Concepts at Flat Bush. It claimed that Concepts held part of its interest in the land on trust for it, because Magsons could trace building materials it supplied into buildings erected at Flat Bush.
[6] Between 16 March and 15 June 2009 there were discussions, meetings, and correspondence between the parties and their solicitors (Corban Revell for Magsons and Mr Bogiatto for Concepts) concerning challenges to the validity of the caveats, the removal of caveats from individual titles, payments to be made for removal, and settlement of matters between Magsons, Concepts and Mr Cummins. On 19 March 2009, Magsons withdrew two of the caveats to allow sales to proceed. On 6 April 2009, it filed an application for the remaining caveats to be sustained (as well as further caveats registered against the titles of others of Mr Cummins’ companies). Following this there were negotiations between the parties. These resulted in Magsons withdrawing four of the remaining caveats on 13 and 21 May 2009, when Concepts made payments totalling $20,000.
[7] Shortly before the hearing of Magsons’ application on 15 June 2009, Corban Revell advised Mr Bogiatto that the application to sustain the caveats over Concepts’ titles would be withdrawn, and the caveats themselves were withdrawn.
[8] By a demand pursuant to s 289 of the Companies Act 1993 dated 2 June 2010 (served on 3 June 2010) Concepts demanded that Magsons pay $20,000:
... in respect of payments made on a without prejudice basis pending an application to sustain a caveat over 46 Carlos Drive, which ultimately failed.
The demand included the usual statement that if Magsons failed to comply with the demand it would be presumed to be unable to pay its debts.
[9] Magsons applied to set aside the demand by an originating application dated 17 June 2010. The stated grounds were that:
2.1 There is no amount outstanding by [Magsons] to [Concepts].
2.2 Alternatively there is a genuine dispute as to whether there is an amount outstanding by [Magsons] to [Concepts].
2.3 [Magsons] is solvent and able to pay its due debts.
2.4 Appearing in the affidavit of Sunita Patel sworn on 17 June 2010.
[10] In her affidavit in support of Magsons’ application to set aside the demand, Ms Patel, accountant for Magsons, referred to the correspondence between the parties concerning the caveats and the payments, and asserted that the debt referred to in the demand is not a genuine debt. She also stated that Magsons has an annual turnover in excess of $60 million, was able to pay $20,000 if it were genuinely due, and was able to pay its debts as they fell due.
[11] An affidavit sworn by Mr Cummins was filed in opposition to Magsons’ application. His affidavit referred to the correspondence surrounding the payments to Magsons. He said that the negotiations concerning the removal of the caveats and payments were on a without prejudice basis, as Concepts maintained throughout that lodging the caveats was improper. He said that payments to Magsons to release the caveats were made “under duress and for expediency – purely to allow settlements to proceed on unconditional sale contracts which the caveats were impeding from settling”.
[12] Ms Patel swore an affidavit in reply on 21 July 2010. In essence, she denied Mr Cummins’ assertions.
The judgment
[13] Having set out the background facts and referred to the judgment of Associate Judge Abbott, Associate Judge Bell accepted that Magsons had an arguable case that, when it lodged the caveats, it honestly believed on reasonable grounds that it had a caveatable interest.[5] He referred to a submission made by Mr Bogiatto that only $2,290 worth of Magsons’ building materials had found their way into the development at 46 Carlos Drive. However, he found that Magsons had an arguable case that there was nothing improper in their caveats against all of the titles to Concepts’ land.[6]
[14] The Associate Judge went on to consider Concepts’ submission that it made payments to Magsons under duress. In doing so, he referred to the correspondence between solicitors and the application to sustain the caveats. He recorded that Concepts had negotiated sales of units in the Carlos Drive development and had asked Magsons to release its caveats so the sales could proceed, but that Magsons had declined to do so. He further recorded that in the following negotiations, an arrangement was reached that in return for a payment of $5,000 from the proceeds of sale of a unit, Magsons would remove its caveat in respect of that unit, and that the four payments of $5,000 made pursuant to that agreement were what Concepts sought to recover.[7]
[15] The Associate Judge held that it was clear from the evidence that Concepts was in a position of vulnerability, being heavily indebted, with no equity in its property, and needing sales to apply to the mortgages.[8] He did not accept Magsons’ submission that the negotiations could be characterised as a legitimate compromise of a dispute.[9] He concluded that Magsons had taken improper advantage of its position as caveator, having used its refusal to remove the caveats as leverage to put pressure on Concepts, and had obtained as a result payments which should have gone to the mortgagees.[10]
[16] The Associate Judge found that Concepts had made out the ingredients for economic duress. Magsons had applied illegitimate pressure by refusing to remove the caveats to allow sales to proceed, when they had no right to leave the caveats in place in the face of clear evidence that there was no equity in the properties.[11] Accordingly, he found that the agreements to pay $5,000 for each caveat removed were voidable for duress.[12] In the circumstances, he found that Concepts was entitled to be refunded $20,000, and that there was no substantial dispute as to Magsons’ liability to refund the payments. The application to set aside the demand was dismissed.[13]
Issues on appeal
[17] On behalf of Magsons, Mr Ponniah set out five issues in his Summary of Issues. They may be paraphrased as follows:
- (a) whether, at the time the demand was made, Magsons owed a debt to Concepts;
- (b) whether the hearing of an application to set aside a statutory demand is an appropriate forum to properly consider a claim of economic duress, which requires a resolution of disputed questions of fact and issues as to credibility on affidavit evidence alone;
- (c) whether the Associate Judge erred in ruling that the agreement under which Concepts paid (in total) $20,000 was void for duress;
- (d) whether, in any event, it was necessary for Concepts to have taken steps (such as an application to the Court) to void the agreements; and
- (e) whether, in all the circumstances, there was a substantial dispute as to whether there was a debt owed by Magsons to Concepts at the time the statutory demand was issued, such that the demand ought to have been set aside and the dispute resolved by means other than proceedings under the Companies Act.
[18] At the hearing, the issues were compressed into the following two issues:
- (a) Was the Associate Judge wrong to make an affirmative finding that Concepts paid $20,000 to Magsons under economic duress?
- (b) Was the issuing by Concepts of a statutory demand appropriate in the circumstances?
Economic duress
[19] The argument for Magsons on this issue was put on two alternative bases. The first was that the Associate Judge was wrong to find that Concepts could rely on economic duress as, at the time of the alleged duress, there were no existing contractual relations between Magsons and Concepts. The second was that it was not, on the facts, open to the Associate Judge to find economic duress. For Concepts, it was argued that the Associate Judge was correct on both counts.
Elements of duress
[20] In Universe Tankships Inc of Monrovia v International Transport Workers Federation,[14] Lord Scarman identified two elements in establishing economic duress. The first is pressure amounting to compulsion of the will of the victim and the second is the illegitimacy of the pressure exerted.[15] His identification of these two elements has been endorsed by the Privy Council (on appeal from the New Zealand Court of Appeal) in Attorney-General for England and Wales v R,[16] and by this Court in Haines v Carter[17] and McIntyre v Nemesis DBK Ltd.[18] In McIntyre the Court said:[19]
[19] Contractual duress is the imposition of improper pressure by threats that coerce a party to enter a contract. Contracts that have been procured by duress are voidable at the discretion of the coerced party ..., unless that party has subsequently affirmed the contract ... While originally duress was restricted to threats of physical injury, it has subsequently expanded to encompass both threats in relation to property and the exertion of economic pressure.
[20] Duress involves two fundamental elements ... First, there must be the exertion of illegitimate pressure on a victim. Secondly, the imposition of that pressure must have compelled the victim to enter the contract.
Illegitimate pressure
[21] The Court in McIntyre emphasised the distinction between legitimate and illegitimate pressure. It observed that the fact that one party to a contract has exerted pressure does not, on its own, amount to duress: pressure (and even threats) is commonly exerted in commercial dealings. There must be the exertion of illegitimate pressure.[20]
[22] Illegitimate pressure will generally arise from an unlawful act, or a threat to commit an unlawful act. However, a threat to do something lawful may nonetheless be regarded as “illegitimate”. In Attorney-General for England and Wales v R, Lord Hoffmann observed:[21]
Generally speaking, the threat of any form of unlawful action will be regarded as illegitimate. On the other hand, the fact that a threat is lawful does not necessarily make the pressure legitimate.
[23] In McIntyre,[22] the Court said that observation had to be understood against the background of the comments made by Salmon J in the High Court judgment in that case, as follows:[23]
[115] There are no definitive criteria for determining whether pressure is legitimate or illegitimate. The criterion most commonly resorted to is that of “lawfulness”. Thus, where the pressure consists of an unlawful act or a threat to commit an unlawful act, then prima facie the pressure is illegitimate. Although the criterion of lawfulness is useful, it cannot be definitive. If it were, the inquiry would be directed to the lawfulness of the pressure rather than to its legitimacy. It follows that some instances of unlawful pressure may be legitimate and that some instances of lawful pressure may be illegitimate. An example of the former might be a party’s threat to break a contract when a change in circumstances beyond their control has meant that they are genuinely unable to perform. An example of the latter might be a party’s threat to disclose information which would discredit the victim.
Compulsion
[24] In relation to compulsion, this Court in McIntyre[24] adopted the approach taken by Lord Scarman in Universe Tankships:[25]
Compulsion is variously described in the authorities as coercion or the vitiation of consent. The classic case of duress is, however, not the lack of will to submit but the victim’s intentional submission arising from the realisation that there is no other practical choice open to him.
[25] The Court in McIntyre observed that consideration of whether there was coercion in fact focuses on the availability of alternatives. Other factors relevant to the analysis are whether the person said to have been coerced did or did not protest, was independently advised, and whether after entering the contract, he took steps to avoid it.[26]
Duress in the present case
[26] As we have said, Mr Ponniah argued that Associate Judge Bell was wrong to find economic duress in the present case for two reasons. He submitted, first, that economic duress only arises where there is a pre-existing contractual relationship between the parties at the time the alleged duress is brought to bear. He said that, in the present case, there was no such pre-existing contractual relationship between the parties. Secondly, he submitted that a finding of economic duress was not open on the present state of the evidence.
[27] Mr Bogiatto submitted that the Associate Judge correctly found that Magsons had used the caveats for a purpose other than the genuine protection of a claimed interest in land. He submitted that the illegitimate pressure lay in Magsons maintaining the caveats when it knew that its beneficial interest in the caveated land was limited to $2,290.
Is a pre-existing contractual relationship required?
[28] In support of his submission that a claim of duress could not succeed as there were no existing contractual relations between Magsons and Concepts, Mr Ponniah referred to Butterworths Commercial Law in New Zealand.[27] The authors state:
Economic duress usually will only be available in relation to a variation of an existing contract brought about by an unlawful threat not to perform it.
A similar statement as to the availability of economic duress is made by the authors of Law of Contract in New Zealand:[28]
... a plea of economic duress will not succeed in cases where at the time the pressure is exerted there are no existing contractual relations between the parties and one does no more than strike a hard bargain, or where there is an existing contract and one induces a new agreement simply by threatening to enforce it. In neither case is there a threat to do something unlawful, nor can the pressure be seen as illegitimate.
[29] We observe that the above statements are not couched in the absolute: the authors do not say that duress will never be available in the absence of an existing contract. There are cases where a contract has been avoided where a party has established that it was entered into under duress. For example, in Dimskal Shipping Co SA v International Transport Workers Federation; The Evia Luck,[29] the appellants (the owners of the Evia Luck) succeeded in the House of Lords in their claim that they had lawfully avoided employment contracts entered into as a result of a threat that the ship would be “blacked” unless those contracts were entered into. In his speech, Lord Goff said:[30]
... it is now accepted that economic pressure may be sufficient to amount to duress ..., provided at least that the economic pressure may be characterised as illegitimate and has constituted a significant cause inducing the plaintiff to enter into the relevant contract...
[30] In his article “Restitution”, Peter Watts suggested:[31]
The essence of economic duress is that the threatener has threatened to interfere with the pre-existing economic rights of the complainant. There is no right to equal bargaining power between citizens. But if the complainant has an existing duty owed to it, it will be illegitimate for anyone to threaten to cause the duty not to be performed. ... Most often, the existing duty the performance of which is being threatened will in fact be one owed by the threatener itself, pursuant to a prior contract between the parties.
[31] In light of the conclusion we have reached in relation to Magsons’ second argument, it is not necessary for us to decide whether a plea of duress was available to Concepts in the present case. It is not an issue that can be addressed satisfactorily in the context of an application to set aside a statutory demand and we prefer to leave the point open.
Was it open to the Associate Judge to find economic duress?
[32] In relation to the second argument, the above review of the elements required to be proved for a finding of duress highlights that it is in very large part a factual inquiry. Each of the elements requires a careful consideration of the evidence and the competing interpretations of the evidence. It does not lend itself to determination on affidavit evidence, in the absence of cross-examination of deponents, in a summary procedure such as an application to set aside a statutory demand.
[33] In this case, the dealings between the parties leading up to and following the agreement to pay $5,000 for each caveat removed comprised correspondence between solicitors, meetings of the parties and their solicitors, and dealings between the parties themselves. The assertion of economic duress was strongly contested, as to whether there was illegitimate pressure on the part of Magsons, whether Concepts was coerced into agreeing to make the first payment, and whether, thereafter, the payments amounted to affirmation. Relevant factors also included the fact that Concepts at all times had legal representation and the fact that it took no steps, after agreeing to make the payments, to void the agreement. Further, there was clearly an issue as to whether Concepts had no alternative but to pay Magsons. There were proceedings before the Court and Concepts could have sought a priority fixture so that the validity of the caveats could be determined before they were required to give clear title. There is no suggestion that they did so.
[34] The actions relied on as constituting illegitimate pressure cannot be said to have been unlawful. Magsons had lodged caveats and was being asked to remove them in advance of the hearing of an application for an order that the caveats not lapse. Magsons had invoked a lawful process to defend the caveats. To succeed with its argument that the agreement to pay was obtained through the application of illegitimate pressure, Concepts would have to show that Magsons’ conduct, in all the circumstances, was unconscionable and left Concepts with no practical choice. Such issues do not lend themselves to determination in a summary hearing on affidavits.
[35] Accordingly, we have concluded that the Associate Judge was wrong to make affirmative findings that Concepts made the payments under economic duress, that the agreement to pay was voidable for duress, that Concepts was entitled to be refunded $20,000 and that there was, therefore, no substantial dispute as to Magsons’ liability. In the circumstances, the Associate Judge erred in dismissing the application to set aside the demand.
Use of the statutory demand procedure
[36] In light of the above conclusion, the appeal must be allowed. It is, however, necessary to comment on the use of the statutory demand procedure in this case.
[37] Concepts issued the statutory demand in this case to recover the $20,000 which it paid to Magsons as part of an arrangement to have the caveats removed. Plainly its claim was highly debatable. Further, the amount claimed was very modest given Magsons’ size and financial position. It could readily have been paid by Magsons if liability was established, as is clear from Ms Patel’s affidavit in support of Magsons’ application to set aside the demand. For these reasons this was not the type of case in which the use of the statutory demand procedure was appropriate.
[38] This is not to say, however, that a statutory demand could never properly be used as, essentially, an enforcement mechanism. Its use against an apparently solvent company may be justified, for example, where there is an adamant and unreasonable refusal to pay a significant sum which is indisputably owed.[32] That is not the case here.
Result
[39] The appeal is allowed and the statutory demand issued by Concepts on 2 June 2010 against Magsons is set aside.
[40] The respondent is ordered to pay costs to the appellant as for a standard appeal on a band A basis plus usual disbursements.
Solicitors:
Corban Revell, Waitakere for Appellant
George
Bogiatto, Auckland for Respondent
[1] Magsons
Hardware Ltd v Concepts 124 Ltd HC Auckland CIV-2010-404-3723,
10 September
2010.
[2] At
[5]–[22].
[3] Magsons
Hardware Ltd v Concepts 124 Ltd HC Auckland CIV-2009-404-1971, 23 June
2009.
[4] Magsons
Hardware Ltd v Cummins HC Auckland CIV-2009-404-1188, 15 October
2009.
[5] The
judgment at [22].
[6]
At [23].
[7] At
[26].
[8] At
[27].
[9] At
[28].
[10] At
[30].
[11] At
[31].
[12] At
[34].
[13] At [35]
and [37].
[14] Universe
Tankships Inc of Monrovia v International Transport Workers Federation; The
Universe Sentinel [1983] 1 AC 366
(HL).
[15] At
400.
[16]
Attorney-General for England and Wales v R [2004] 2 NZLR 577 (PC) at
[15].
[17]
Haines v Carter [2001] 2 NZLR 167 (CA) at [108] and
[112].
[18]
McIntyre v Nemesis DBK Ltd [2009] NZCA 329, [2010] 1 NZLR
463.
[19] Per
O’Regan J. (Citations
omitted).
[20] At
[26].
[21] At
[16].
[22] At
[30].
[23]
Attorney-General for England and Wales v R HC Auckland CP641/98, 6
December 2000.
[24]
At
[66]–[67].
[25]
Universe Tankships at 400.
[26] At [68].
[27] Andrew Borrowdale (ed) Butterworths Commercial Law in New Zealand (4th ed, Butterworths, Wellington, 2000) at [5.2.1].
[28] John Burrows, Jeremy Finn & Stephen Todd Law of Contract in New Zealand (3rd ed, LexisNexis, Wellington, 2007) at [12.2.2(a)]. (Footnotes omitted.)
[29] Dimskal Shipping Co SA v International Transport Workers Federation; The Evia Luck [1992] 2 AC 152 (HL).
[30] At 165. See
also CTN Cash and Carry Ltd v Gallagher Ltd [1994] 4 All ER 714 (CA),
where Steyn LJ (Farquharson LJ and Sir Donald Nicholls V-C agreeing) rejected a
submission of economic
duress. His Lordship contemplated the possibility of
finding economic duress notwithstanding that there was no pre-existing
contractual
relationship (without expressly discussing whether a pre-existing
contractual relationship was required).
[31] Peter
Watts “Restitution” [1989] NZ Recent Law Review 386 at
392.
[32] See
AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389, (2008) 19
PRNZ 13.
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