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Court of Appeal of New Zealand |
Last Updated: 20 January 2016
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IN THE COURT OF APPEAL OF NEW ZEALAND
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BETWEEN
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First Applicant |
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Second Applicant |
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Third Applicant |
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AND
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Respondents |
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Hearing: |
23 November 2015 (further submissions received
16 December 2015) |
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Court: |
Randerson, French and Kós JJ |
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Counsel: |
K J Crossland for Applicants
P J Dale for Respondents |
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Judgment: |
JUDGMENT OF THE COURT
(a) the liability of David Schnauer being limited to the assets of the Hadley Wright Family Trust; and
(b) the liability of the first applicant being limited to the amount
payable for costs for a standard application on a band A basis
together with
usual
disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by French J)
Introduction
[1] Wire by Design Ltd (Wire) and associated parties wish to appeal a decision of the High Court given by Moore J.[1] Leave is required under s 67 of the Judicature Act 1908 because this would be a second appeal, Moore J’s decision being itself an appeal from the District Court.[2]
[2] Leave is sought from this Court because, in a separate leave decision, Moore J declined to grant leave to appeal.[3]
Background
[3] The respondents, Commercial Factors Ltd, Commercial Factors and Finance Ltd and Commercial Finance and Securities Ltd (Commercial Factors),[4] are in the business of debt factoring. In 2008 Commercial Factors began providing debt factoring services to a group of companies called the Tawil Group, owned and operated by Mr Wright, the second applicant, and his interests.
[4] The applicant Wire is one of the companies in the Tawil Group.
[5] On 23 November 2010 Commercial Factors and Wire entered into a written debt factoring agreement. Commercial Factors claimed Wire was bound by an earlier agreement Commercial Factors had entered into with other Tawil entities before Wire was incorporated. The agreement was said to be recorded in an email of 27 July 2010 sent by Commercial Factors to Mr Wright. One of the terms of the alleged agreement was that the Tawil entities would remain factoring with Commercial Factors for a further minimum period of two years and pay a break fee of $100,000 should the factoring be discontinued before the two years expired.
[6] On Commercial Factors’ version of events, the obligation to pay the break fee was part of a deal designed to ensure that a valuable leasehold interest held by another Tawil company facing liquidation was preserved by assigning it to a different entity in the group. The leasehold interest was particularly valuable because the lessor, Transit New Zealand, wanted to use the land for the construction of a highway and, accordingly, significant compensation would be payable to the lessee under the Public Works Act 1981 for the loss of its leasehold interest.
[7] Although it was originally intended the entity that would take over the lease and enter into factoring arrangements with Commercial Factors would be a Tawil company called Eagle Wire Products Ltd (Eagle), it ended up being Wire. Other terms in the agreement Commercial Factors alleged had come into existence included an obligation on the part of Commercial Factors to pay the rent arrears owing under the lease so that the lessor would consent to the assignment of the lease to a different Tawil entity.
[8] Wire did cease using Commercial Factor’s services before the expiry of the two year period and a dispute arose as to whether a break fee was payable.
The District Court proceeding
[9] Commercial Factors issued proceedings in the District Court against Wire for recovery of the $100,000. It also sought recovery from Eagle, Mr Wright and his family trust on the basis they had entered into “all obligations” guarantees under which they guaranteed Wire’s obligations to Commercial Factors. Those deeds of guarantee were signed on 23 November 2010.[5]
[10] We pause here to note that Eagle, which was in receivership and liquidation, was not represented in the District Court and has taken no part in the appeal process.
[11] The claim in the District Court was heard by Judge Mathers.
[12] Judge Mathers rejected Wire’s argument that the email of 27 July 2010 was only a conditional offer that was never accepted.[6] She held the email recorded an oral contract that had been concluded the previous day at a meeting. In response to another argument raised by Wire, Judge Mathers found the contract had endured and, although Wire was not an original party to the agreement, it had become a party by assignment in November 2010.[7] The Judge recorded that no issue had been taken with the validity of the guarantees,[8] and entered judgment in favour of Commercial Factors against all the parties sued.
[13] The Judge’s finding of a concluded oral contract on the terms alleged by Commercial Factors was also sufficient to dispose of a counter-claim Wire had filed. This primarily related to the deduction of monies from Wire’s account by Commercial Factors for a success fee of $20,000 due under the oral contract.
[14] In a later costs decision, Judge Mathers dismissed an application by Commercial Factors for indemnity costs but awarded costs on a 2B scale basis.[9]
[15] Dissatisfied with this outcome, Wire, Mr Wright and his family trust appealed to the High Court. Commercial Factors cross-appealed the Judge’s refusal to award it indemnity costs.
The appeal to the High Court
[16] In the High Court, Moore J disagreed with Judge Mathers’ analysis of the 27 July 2010 email. In his view, the email was inconclusive and in itself insufficient evidence on which to conclude the parties had reached agreement on all the necessary terms and conditions.[10] Correctly construed, it was an offer that required only Mr Wright’s agreement to make it binding. Justice Moore further found that in a subsequent email of 2 August 2010, Mr Wright did agree to all the terms contained in the 27 July email (including the break and success fees), except for one term. The one term was a provision that Commercial Factors would be assigned the benefit of any future rental subsidy or differential payable by the lessor as a result of the lessee having to relocate to more expensive premises.
[17] In his email, Mr Wright explained why he could not agree to this and asked Commercial Factors to abandon its demand for an assignment of the rent differential. In the Judge’s assessment, because Mr Wright’s email of 2 August 2010 did not agree to all terms, it amounted to a counter-offer, which Moore J went on to find was accepted by Commercial Factors in a letter dated 3 August 2010.[11]
[18] Justice Moore therefore concluded that on 3 August 2010 a binding contract on the terms and conditions contained in the 27 July email (excluding the provision in the email relating to the rent differential) came into existence.
[19] The Judge went on to find the agreement was intended to bind not only the existing Tawil lessee but also any other Tawil entity that might later be assigned the lease, with novation to occur on assignment of the lease.[12] It followed that novation must have occurred on 22 or 23 November 2010 when the assignment of the lease to Wire was signed.
[20] The Judge’s finding that the agreement came into existence on 3 August 2010 meant it was unnecessary for him to consider another argument that had been raised in the District Court and rejected by Judge Mathers.
[21] The argument in question was founded on repeated references in the correspondence between the parties to the need for haste and the requirement that the lease be assigned by 3 August 2010. The significance of that date was that on 4 August 2010 the liquidation proceedings against the existing lessee were due for mention in the High Court. As it transpired, the liquidation proceedings did not proceed on 4 August but were adjourned. Wire, however, argued that time was of the essence and that any agreement was conditional on the lease being assigned by 3 August 2010. The non-fulfilment of that condition meant the contract came to an end.
[22] In rejecting that argument, Judge Mathers ruled the contract was not conditional.[13] In the High Court, having found the agreement only became binding on 3 August, Moore J held it was “clear that any condition that the lease be assigned by that date had been waived”.[14]
[23] A further argument considered by Moore J was whether the contract had been superseded by the more formal debt factoring agreement signed in November 2010. The debt factoring agreement made no mention of a break fee and contained a termination clause that permitted either party to terminate the agreement without cause on 30 days’ notice. Having regard to the background matrix of facts, Moore J held that the debt factoring agreement could not be interpreted as releasing Wire from its obligations under the 3 August agreement because to do so would be to construe the agreement in a way contrary to the clear intention of the parties.[15]
[24] As regards the liability of the guarantors, Moore J noted the guarantees were expressed in the widest possible terms in order to capture all obligations Wire owed to Commercial Factors. Those obligations included the obligations under the 3 August 2010 agreement and, in particular, the obligation to pay the break fee. Judge Mathers was therefore, he said, correct to decide the guarantees were enforceable.[16]
[25] Justice Moore stated he was also satisfied the obligation to pay a success fee was a term of the agreement he found had been formed on 3 August.[17] That meant the counter-claim relating to deductions on account of the success fee must fail.[18]
[26] Turning to the cross-appeal, Moore J held Commercial Factors was entitled to indemnity costs under the terms of the guarantees.[19] The cross-appeal was therefore allowed. The Judge did not expressly differentiate between Wire and the other Tawil parties sued in their capacity as guarantors for this purpose, but obviously the guarantees could not generate a costs liability on the part of Wire.
[27] The relevant clause that appeared in each of the relevant guarantees was as follows:
10. COSTS AND EXPENSES INVOLVED
10.1 Costs and Expenses: The Guarantor shall pay to each Secured Party upon demand all costs and expenses on a full indemnity basis (including legal fees and goods and services and similar taxes thereon) incurred by each Secured Party in connection with:
...
(b) the enforcement or preservation of, or the attempted enforcement or preservation of, any rights under this deed and each Related Document, or in suing for or recovering the moneys due under this deed; and
...
[28] We note the following definitions in cl 1.1 of the guarantees:
“Related Document” means any agreement or arrangement relating to the whole or any part of the Principal Debt.
“Principal Debt” means all indebtedness of the Principal Debtor (whether alone or with any other person, and in any capacity) to the Secured Parties or either Secured Party (whether alone or with any other person, and in any capacity). It includes (without limitation) all indebtedness pursuant to the Facilities.
Principles governing applications for leave to appeal
[29] The principles governing applications for leave to bring a second appeal are well established. Leave will only be granted where there is a question of fact or law capable of genuine and serious argument involving an interest (public or private) of sufficient importance to outweigh the cost and delay of a further appeal.[20]
[30] In order to obtain leave, it is not enough simply to point to possible error. Upon a second appeal, this Court is not engaged in general error correction.[21] The error must be of such importance either generally or to the parties so as to justify the further pursuit of litigation that has already been twice considered and ruled upon by a court.
Grounds of the proposed appeal
Breach of natural justice
[31] The main ground of the proposed appeal is that Moore J breached the rules of natural justice because his decision is said to have been based on matters that were not pleaded, not argued by Commercial Factors and not raised with counsel during the hearing. According to Wire, the outcome in the High Court “embodied a fresh unpleaded theory of the case, an untested marshalling of evidence to support that theory and then a decision upon that theory”.
[32] Counsel for the applicants, Mr Crossland, submitted there is a very strong public interest in ensuring courts observe the rules of procedural fairness and that, of itself, this was sufficient to justify granting leave, notwithstanding the relatively modest sums at stake.
[33] In support of the application for leave, Wire provided affidavit evidence from a Mr Commons, who represented the applicants at the hearings in the District and High Courts.
[34] The specific High Court findings sought to be impugned on this basis are:
- (a) the finding that the agreement was formed on 3 August 2010;
- (b) the finding that novation must have occurred on 22 or 23 November 2010; and
- (c) the finding that indemnity costs were payable under the guarantees.
Discussion
[35] As Commercial Factors conceded, its pleading in the District Court stated the agreement was formed on 27 July 2010 and that was certainly the argument advanced at trial.
[36] We acknowledge the importance of pleadings and the right of defendants to know the case they must meet, as emphasised by Mr Crossland.[22] However, in our view, in the circumstances of this particular case it was open to Moore J to find that an agreement came into existence on a different date than that pleaded. The finding depended on an analysis of written material and correspondence, all of which was in evidence. Significantly, in his affidavit Mr Commons does not say how he would have conducted the case differently had he known the Judge was contemplating 3 August as the date the contract was formed. Similarly, when pressed by us to identify any prejudice to Wire arising from the Judge’s approach, Mr Crossland struggled to do so.
[37] All of the documents on which the Judge relied were identified by Wire itself in its statement of defence as “essential documents” for its defence. The documents were highly relevant on all theories of the case and were or should have been the subject of cross-examination and submission. Wire’s core argument was that what mattered contractually was what happened in November. It submitted there was no prior agreement or if there was one it was superseded in November. Correctly analysed, whether the alleged prior agreement was 27 July or 3 August made no real difference to that theory of the case.
[38] We also do not accept that the Judge’s finding about novation was a breach of natural justice. Wire’s arguments on this point were confusing. However, based on trial counsel’s affidavit, the objection appears to be that Commercial Factors only pleaded novation in relation to a different agreement. In our view, that is too restrictive an interpretation of the notice of claim. It was very clear that what Commercial Factors was alleging was the transfer of the obligation to pay the break and success fees to Wire, which legally could only happen through “assignment by novation” of the 27 July 2010/3 August 2010 contract.[23] Novation of that contract was very much a live issue and must have been from the outset.
[39] As regards the award of indemnity costs, it is well established that where indemnity costs are provided for under a contract or deed and where the proceedings have not been brought unreasonably, such costs are available as of right, subject to the quantum being reasonable.[24]
[40] The original notice of claim filed by Commercial Factors expressly sought indemnity costs, but on the grounds these were payable under the costs clause of a general security agreement between itself and Wire. In the District Court, Judge Mathers reserved the issue of costs in the event the parties were unable to reach agreement. The parties were not able to agree and Commercial Factors made an application for recovery of full solicitor/client costs, relying not on the general security agreement, but on cl 10 of the guarantees.[25] Judge Mathers declined the application essentially on the grounds that it was too late to be relying on the guarantees.[26]
[41] With respect to the Judge, that was plainly wrong. Issues as to costs are normally dealt with separate to trial and it is not necessary to produce evidence on costs as part of the substantive claim. In any event, the relevant guarantees were already before the Court and were the basis on which the Judge had earlier found Eagle, Mr Wright and his family trust jointly and severally liable for the break fee.[27]
[42] The fact the notice of claim referred to the general security agreement rather than the guarantees did not prejudice Wire in any way. In his affidavit, Mr Commons appears to suggest there was prejudice because, relying on the notice of claim, he did not adduce evidence of the circumstances in which the guarantees were entered into or cross–examine on the extent to which they may have been vitiated by subsequent events. But that assertion completely overlooks the fact Mr Wright and the family trust knew from the outset that the guarantees were the basis for the claim against them. If a genuine challenge to the validity and scope of the guarantees existed, it could and should have been made at the hearing in the District Court.
[43] It seems Moore J may have been unaware of Judge Mathers’ separate costs decision because he said the Judge made no reference to Commercial Factors’ application for indemnity costs.[28] That was an obvious error but, as Moore J recorded, Mr Commons appeared to accept in the High Court that there was provision under the guarantee to make an award for indemnity costs.[29] The focus in the High Court was whether the quantum claimed was reasonable.
[44] In these circumstances, we consider it is not seriously arguable that the award of indemnity costs is vitiated by procedural unfairness.
[45] It follows from all of the above that, in our view, the proposed ground of appeal based on an alleged breach of natural justice is not tenable.
The judgment in the High Court contains material errors
[46] Mr Crossland submitted that, independently of any issues of procedural unfairness, the Judge’s analysis was inherently flawed because:
- (a) the letter of 3 August was not capable of being interpreted as an acceptance of a counter-offer;
- (b) for a waiver of a condition to be legally effective, it must occur before the date fixed for compliance. The letter of 3 August could not revive something that was already dead; and
- (c) the analysis was contrary to the established principle that when parties enter into formal written contracts, they should be taken to have intended that the written document contains their entire agreement. In the event of inconsistencies between the formal written document and alleged oral agreements, the formal written document should prevail.
Discussion
[47] In our view, none of these proposed grounds of appeal meet the criteria for granting leave.
[48] They are all case-specific and do not raise any issue of general importance. Further, the amount at stake is relatively modest and does not warrant the cost and expense of a second appeal. It was apparent from what we were told at the hearing that the legal costs already incurred by each party exceed the amount of the judgment.
[49] As for the merit of the arguments, it is neither necessary nor appropriate for us to reach any concluded view. However, in our assessment, they are far from compelling. The Judge’s interpretation of the 3 August letter was an available one and it is supported by the subsequent conduct of the parties, as well as by commercial common sense. Commercial Factors did pay the rental arrears, which amounted to $55,000, the lease was assigned and when Commercial Factors deducted the success fee of $20,000 by way of instalments over a 10-month period (as specified in the 27 July email), there was no protest from Mr Wright. Objection was only taken when the dispute over payment of the break fee arose. There is no necessary inconsistency between the provisions in the formal documents executed in November and the agreement recorded in the July/August correspondence.
Outcome
[50] For the reasons detailed above, Mr Crossland has not persuaded us the criteria for granting leave are satisfied. The application is accordingly dismissed.
[51] As regards the costs of this application, counsel agree they are within the scope of the indemnity provided by the second and third applicants under cl 10 of the guarantees. We have set out that clause at [27] above. Counsel also agree the amount of indemnity costs claimed — namely $26,700 — is reasonable.
[52] Not all of the parties are, however, entitled to indemnity costs or liable to pay them, a fact that does not appear to have been acknowledged in the High Court and which prompted us to call for further submissions.
[53] One of the three respondents, namely Commercial Factors and Finance Ltd, was not a party to the guarantees and therefore no award of indemnity costs is sought by that company.
[54] Mr Crossland has also asked us to note that one of the third applicant trustees (Mr Schnauer) is a professional trustee whose personal liability is limited by the assets of the trust. As previously mentioned, we note too that the first applicant, Wire, was not a guarantor and is therefore not liable at all for indemnity costs. The respondents seek an award of standard costs only against Wire.
[55] Accordingly, we order that the applicants are jointly and severally liable to pay costs to the respondents Commercial Factors Ltd and Commercial Finance and Securities Ltd of $26,700 together with disbursements subject to:
- (a) the liability of David Schnauer being limited to the assets of the Hadley Wright Family Trust; and
- (b) the liability of the first applicant being limited to the amount payable for costs for a standard application on a band A basis together with usual disbursements.
Solicitors:
Shieff Angland, Auckland for Applicants
Ellis Law, Auckland for
Respondents
[1] Wire by Design Ltd (in rec and in liq) v Commercial Factors Ltd [2015] NZHC 985 [High Court judgment].
[2] Commercial Factors Ltd v Wire by Design Ltd (in rec and in liq) DC Auckland CIV-2012-004-2138, 23 September 2014 [District Court judgment].
[3] Wire by Design Ltd (in rec and in liq) v Commercial Factors Ltd [2015] NZHC 2053.
[4] The notice of application for leave to appeal did not include Commercial Factors Ltd, but it was a party to the original proceeding and counsel has confirmed its omission was due to oversight.
[5] Commercial Factors held guarantees from all the Tawil companies guaranteeing the obligations of each other and from Mr Wright and the trust guaranteeing the obligations of all those companies.
[6] District Court judgment, above n 2, at [27].
[7] At [32].
[8] At [33].
[9] Commercial Factors Ltd v Wire by Design Ltd (in rec and in liq) DC Auckland CIV-2012-004-2138, 23 December 2014 [District Court costs judgment].
[10] High Court judgment, above n 1, at [60].
[11] At [70]–[73].
[12] At [90]–[91].
[13] District Court judgment, above n 2, at [27].
[14] High Court judgment, above n 1, at [97].
[15] At [104].
[16] At [113]–[114].
[17] At [119].
[18] The other aspect of the counter-claim — a claim regarding deduction of costs of $7,500 — was held to fail for want of proof. See High Court judgment, above n 1, at [121].
[19] At [132]. The basis for the indemnity costs was discussed and their quantum decided in a separate costs decision delivered by Moore J on 7 December 2015: Wire By Design Ltd (in rec and in liq) v Commercial Factors Ltd [2015] NZHC 3084.
[20] Waller v Hider [1997] NZCA 221; [1998] 1 NZLR 412 (CA) at 413.
[21] Waller v Hider, above n 20, at 413; Downer Construction (New Zealand) Ltd v Silverfield Developments Ltd [2007] NZCA 355, [2008] 2 NZLR 591 at [33(b)].
[22] See, for example, Ye v Minister of Immigration [2008] NZCA 291, [2009] 2 NZLR 596 at [355].
[23] John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (4th ed, LexisNexis, Wellington, 2012) at 687.
[24] Black v ASB Bank Ltd [2012] NZCA 384; Gibson v ANZ Banking Group (NZ) Ltd [1986] 1 NZLR 556 (CA).
[25] Clause 10 is set out at [27] above.
[26] District Court costs judgment, above n 9, at [4].
[27] Commercial Factors did (in our view unnecessarily) seek to produce copies of two other identically worded guarantees after the hearing for the purpose of the costs application. We say unnecessarily because these were guarantees of Eagle’s obligations.
[28] High Court judgment, above n 1, at [122].
[29] At [123].
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