Hwang v M & R Contractors Limited HC Auckland CIV 2011-404-002136 [2011] NZHC 1610 (26 August 2011)

Last Updated: 22 November 2011

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV 2011-404-002136}

BETWEEN YONG CHUL HWANG AND AE SOON NOH HWANG

Plaintiffs

AND M & R CONTRACTORS LIMITED Defendant

Hearing: 24 August 2011

Appearances: M L Dillon for the Plaintiff

E J Werry for the Defendant

Judgment: 26 August 2011

JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN

This judgment was delivered by me on

25.08.11 at 4:30pm, pursuant to

Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date...............

Solicitors/Counsel:

A J Steele/J Scott, Martelli McKegg Wells & Cormack, Auckland – [e-mail]

G Presland, Presland & Co, Glen Eden – [e-mail]

E Werry, Barrister, Auckland – [e-mail]

YONG CHUL HWANG AND AE SOON NOH HWANG V M & R CONTRACTORS LIMITED HC AK CIV

2011-404-002136 26 August 2011

[1] The plaintiffs claim damages against the defendant for the defendant‟s failure to settle its land purchase from the plaintiffs. The property in question is situated at

137 Hall Avenue, Mangere. It comprised an area of 6098m2. The agreement for sale

and purchase was dated 27 July 2007 when the plaintiffs, together with their neighbours H & M Wong sold their adjacent properties. Mr & Mrs Wong‟s property was situated at 129 Hall Avenue, Mangere and comprised 6093m2. The sale price for both properties was $2,260,000.

[2] The purchase price was noted “ongoing concern or plus GST (if any)”. The agreement provided for settlement to occur on 31 July 2008 or earlier by mutual agreement.

[3] Special clause 15 of the agreement noted:

Vendor agrees to give access to the purchaser, surveyor and/or necessary technical people to access the site for proposed development.

[4] Clause 16 noted:

Extra chattels included in the sale. (a) 129 Hall Ave, Mangere

3 X Diesel Air/Blow System Circulation

1 X Diesel Water Boiler Pipe Circulation

1 X Solo Motorised Blower Sprayer (Knapsack 10/12 Liters) 1 X Solo Hand Pump Knapsack Sprayer 15 Liters

1 X Tomato Grader / Washer

Computerise Irrigation System Complete with Pipes to Feed

Plants

(a) 137 Hall Ave, Mangere

Complete Irrigation System

Feed Tank

Wire Cradles

Solo Sprayer

Scales

Heater

_{Water Tank}

[5] The following day, on 28 July 2007 the parties signed a variation to contract

(the first variation). It noted:

Purchase Price is $2,260,000 ongoing concern.

(“or plus GST (if any): is deleted.)

[6] Later, a further variation of the agreement (the second variation) was signed. Relevant parts of that include:

...

2) The vendors hereby agree to vary the existing Agreement by stating for the record that the purchasing price, deposit and expenses conferred on the vendors under the Agreement shall be shared equally by the vendors.

3) There will effectively create two new agreements for the sale and purchase of the two properties under the Agreement, namely;

(a) an agreement between Harry Wong & Mei Soo Wong and M & R Contractors Ltd and/or nominee for the sale and purchase of

129 Hall Avenue, Mangere, Auckland under the same terms and

conditions of the original Agreement with ½ share of the purchasing price of $2,260,000.00 and ½ shares to the deposits including the last instalment to be paid by 14 November 2007 as agreed by the extension given; and

(b) an agreement between Yong Chul HWANG & Ae Soon NOH HWANG and M & R Contractors Ltd and/or nominee for the sale and purchase of 137 Hall Avenue, Mangere, Auckland under the same terms and conditions of the original Agreement with ½ share of the purchasing price of $2,260,000.00 and ½ shares to the deposits including the last instalment to be paid by

14 November 2007 as agreed by the extension given.

[7] The second variation is dated 31 August 2007 but appears to have been executed on 8 November 2007.

[8] This proceeding concerns only the sale of the plaintiffs‟ „half‟ of the property

to the defendant.

[9] The defendant paid the deposit of $92,500 due to the plaintiffs.

[10] On 23 July 2008 the plaintiffs‟ solicitor issued and delivered to the defendant‟s solicitor a settlement statement identifying a sum of $1,037,276.39 (including an adjustment for payment of rates) as due on settlement on 31 July 2008.

[11] The defendant‟s solicitor replied by letter dated 30 July2008:

I would also like to raise the issue of the GST status of the agreement. I note the following:

1. The sale is one of land (two titles) on which are various glass houses and two homes.

2. The glasshouses are vacant and there are no ongoing leases on either the glass houses or the homes. The homes will be vacant on possession date.

3. The agreement anticipates that the property will be redeveloped and subdivided. The current use will not be continued.

4. The variation to the agreement deletes the reference to “or plus GST

(if any).

5. My client is registered for GST. A GST number was provided on

November 9, 2007.

In the circumstances I question if the transaction can be zero rated and I

suggest the purchase price is $2.26 million including GST.

Please confirm and provide the appropriate invoices.

[12] By facsimile dated 30 July 2008 at 5:00pm the plaintiffs‟ solicitors

responded:

We enclose for your reference:

1. Copy of the front page of the Agreement for sale and purchase dated

27 July 2007 (indicating the purchase price is to be “on going concern

or Plus GST”;

2. Copy of the Variation to Contract dated 27 July 2007 whereby the “Purchase price is $2,260,000.00 on going concern (“or plus GST (if any)” is deleted)”; and

3. Copy of the front page of the Variation of the Agreement dated

31 August 2007 acknowledging a separation of the agreement with the purchasing price of $2,260,000.00 (in light of the variation dated

27 July 2007 where the purchase price was based on a zero rate-GST

on going concern).

Therefore, we note that the respective parties always intended the agreement to be on a going-concern basis. If your clients cannot accept the current taxable activity and thereby fail to adhere to clause 12.0, then your clients will be negating the variation signed on 27 July 2007 and we note that your clients would have to pursue this agreement on a plus GST basis as per the agreement dated 27 July 2007. We further note that your clients will be responsible for any penalty interest payable to IRD as a result of the overdue payments due to IRD for the plus GST transaction.

In terms of your request to extend the settlement date, we note our facsimile dated 28 July 2008 and request your confirmation in acceptance of our clients requests for payment of penalty interests.

[13] The defendant‟s solicitor responded by facsimile the following morning on

31 July 2008:

I have discussed matters further with the representative of my client.

It appears clear that the sale is not one of a going concern. Even if there was agreement to treat it this way it does not constitute the agreement as the sale of a going concern.

I have sought a second opinion and hope to have a response by next Monday. I note that I have not received GST inclusive invoices in respect of the sale. Is it a situation where our clients respective accountants could discuss the matter with a view of reaching consensus?

[14] The plaintiffs‟ solicitor responded by facsimile at 2:30pm that afternoon:

As you have not confirmed to our clients‟ proposals in response to your requests to defer settlement date, we note that settlement date remains to be today.

...

In all other aspects, we advise that we are ready, willing and able to settle.

[15] Subsequently on 31 July 2008 the plaintiffs‟ solicitor delivered a settlement notice to the defendant‟s solicitor that noted that the defendant had failed to settle its purchase; that the vendor was and remained in material respects ready, able and willing to settle and had been unable to settle by reason only of the purchaser‟s default. The notice stated the defendant was required to settle its purchase within twelve working days when the settlement sum would be payable together with interest at the penalty rate of 14 per cent.

[16] On 20 August 2008 by facsimile the plaintiffs‟ solicitor delivered notice of

cancellation of the agreement for sale and purchase.

[17] Subsequently the plaintiffs marketed their property for sale between

6 October 2008 and 29 August 2010. The services of seven real estate agents were engaged/contracted. The property continues to be marketed for sale. The plaintiffs report that two offers for about $700,000 were received in 2009. However, no contracts for sale have been concluded. The property was valued in April 2011 at

$661,000 excluding GST. It is on that basis the plaintiffs sued to recover the sum of

$376,500 being the difference between the purchase price in their agreement with the defendant and the value of the property since determined by registered valuation. As well the plaintiffs claim interest at the penalty rate on the unpaid settlement sum from 31 July 2008 to date of judgment.

Opposition to summary judgment

[18] The grounds for opposing are:

(a) The contract was invalidly cancelled because the plaintiffs sought payment of the contract price and zero rated the transaction for the purposes of the Goods and services Tax Act (the Act), whereas the contract provided for the purchase price to be GST inclusive.

(b) The plaintiffs failed to ensure that the supply was one of a going concern under clause 13.1(4) of the agreement for sale and purchase by allowing all crops on the property to die.

(c) If the plaintiffs are entitled to damages then it should not be assessed by reference to a value of the property as at April 2011, but rather by reference to a value as at 31 July 2008 or 18 July 2008.

(d) There is insufficient particularisation of the plaintiffs‟ claim for the

payment of interest.

[19] In brief the case is about whether or not the contract price was to be GST inclusive, or whether the property was sold on a going concern basis in which case the transaction would have been zero rated for GST purposes.

[20] If the purchase price was GST inclusive then the plaintiffs would have had to account for the GST portion of their sale price to the Inland Revenue Department. In turn the defendant purchaser would in due course have been able to claim a refund of the GST portion contained in its purchase price. In this case that would have amounted to a sum of about $162,500.00.

[21] As is clear from the first variation to the agreement for sale and purchase the purchase price is described as “on going concern”. Clarification is given to the issue of GST by the clear words indicating that any reference to the purchase price as being „GST inclusive – if any‟ no longer applied.

[22] In support of the defendant‟s case Mr Narayanaraja a director of the defendant deposes that when the defendant purchased it was its intention to continue with the market garden business operated upon the property for a while but eventually that the property should be subdivided into smaller residential sections.

[23] Mr Narayanaraja states there had been a disagreement concerning the payment of GST which was not resolved. He said the company‟s position was that the transaction was subject to GST and the purchase price was GST inclusive.

[24] When the two sites were originally observed they were used partly for private purposes and partly for market gardening. Mr Narayanaraja recalls asking about the crops. He said the future use of the glasshouses was often referred to in discussions with the property owners. He indicated they might be tenanted.

[25] Mr Narayanaraja recalls discussions with the plaintiffs about whether or not the sale was a going concern. He believes this occurred after a purchase price had been agreed. He recalls the words “on going concern” being on the original agreement but did not recall discussing this with the vendor or the agent. He said there were no discussions about the „on going conduct of the business on the site‟.

However that statement appears to contradict the claim earlier noted in [23] herein, that the defendant intended to continue operating the market garden business.

[26] He understood that the company‟s proposals to develop the site were known by the vendor from the start. Work relating to the subdivision commenced, he says, the day the agreement was signed.

[27] Mr Narayanaraja said when he signed the agreement on 27 July he intended the purchase price to be GST inclusive. He said there were no discussions concerning GST at that time. When he signed the variation the following day he thought the words stated that no GST would be payable. He said the defendant did not take legal or accounting advice before signing.

[28] He said the GST issue only arose as an issue shortly before settlement, as the correspondence between solicitors show.

[29] Mr Narayanaraja refers to the fact that the settlement statement concerning the defendant‟s purchase from Mr & Ms Wong shows, unlike the plaintiffs‟ settlement statement, that the purchase was “plus GST”. The Wongs were represented by different solicitors than were the plaintiffs.

[30] Mr Narayanaraja notes that in addition to the purchase deposits paid (which were not been returned), the defendant had, as well, spent about $65,000 in costs related to the proposed subdivision of the properties in question.

The plaintiffs’ response

[31] Mr Hwang deposes that when the two properties were initially listed for sale the price was indicated on a GST excluded basis and it was on that basis he understood the defendant negotiated its purchase.

[32] Mr Hwang says the defendant agreed their property and the Wong‟s property were worth $1.13M each exclusive of GST and that is why the agreement stated that the purchase price was $2.26M “plus GST”.

[33] Mr Hwang said he discussed GST with Mr Narayanaraja who encouraged the plaintiffs to convey the property as a going concern. He said Mr Narayanaraja seemed to have a good knowledge of GST matters. Indeed he later discovered that Mr Narayanaraja was a real estate agent for that same agency with which the properties were initially listed.

[34] Mr Hwang was comfortable with the property being sold on a going concern basis for $1.13M because that would have meant they would have received the whole of that sum, without deduction.

[35] Mr Hwang remembers being approached with the first variation, by Mr Ye the agent who prepared the agreement. He says he understood from Mr Ye that Mr Narayanaraja had requested the first variation. Initially Mr Hwang had no interest in the first variation because the plaintiffs would receive $1.13M whether it was conveyed plus GST or as a going concern. He said there was no suggesting the first variation would make the purchase price inclusive of GST and nor would he have agreed to such. Also they already had an agreement stating that the purchase price would not include GST. He said that at the time the first variation was made Mr Narayanaraja had only ever indicated that the defendant would take over the market gardening operation and those were the reasons they agreed to convey on a going concern basis, and why they included an extensive list of chattels with the property to be sold. He said Mr Narayanaraja did not refer to renting out the glasshouses until after the first variation. Also he said Mr Narayanaraja had given him no reason to think the property would not be conveyed as a going concern, until the day before the settlement date.

[36] Nine months earlier than the settlement date the plaintiffs‟ solicitor had requested the defendant‟s GST number because such was required if a property was to be conveyed as a going concern. He said at the time no issue was raised of the circumstances for which the GST number had been requested.

[37] Mr Hwang disputes Mr Narayanaraja‟s complaint about the condition of the glasshouses at the time settlement was due. Mr Hwang says the glasshouses were in the same condition then as they were when the agreement was made. Likewise with

respect to issues raised in connection with the condition of the irrigation system, the feed tank, the wire cradles, the solo sprayer, the scales, the heater and the water tank. Mr Hwang says the market gardening business was running normally at the settlement date.

[38] Mr Hwang explained that the planting of determinate (as opposed to indeterminate) tomato plants accounts for the fact that the tomato plants were at settlement observed to be dying. The reason is the determinate types die annually.

[39] Mr Hwang understood that the defendant would eventually subdivide the property. He says neither he nor Mr Narayanaraja discussed how long that process would take. The inclusion of chattels in the agreement for sale and purchase was to enable the defendant to continue to run a market garden in the interim.

[40] Mr Hwang has provided business records to show the market gardening business was continued for not less than nine months beyond the date when settlement he says was due.

Considerations

[41] The defendant refused to settle in terms of the settlement notice. Its explanation for refusing to tender payment in the sum it considered was payable is unacceptable. Payment could have been tendered on the basis that the GST issue be left for argument and resolution. In fact even if, as the defendant contends, the price payable was GST inclusive, then the defendant would have been liable to pay exactly the same sum as the plaintiffs required in terms of its settlement notice.

[42] The parties‟ contract including the two variations to the contract clearly identify a price of $2.26M “on going concern”. This is made clear by the first variation which deleted reference to including GST.

[43] Mr Narayanaraja provides a somewhat confused explanation about the purpose of the first variation. In paragraph 2 of his first affidavit he deposed that

“the intention was to purchase the property, continue on with the market for awhile but eventually subdivide the property into smaller residential sections”.

[44] Then in paragraph 12 of his first affidavit he states “at no stage were there discussions about the outgoing conduct of the business on the site. I had understood that the company‟s proposals to develop the site were known by the vendor from the start”.

[45] As the contract implies it was the purchaser‟s long term intention to develop the property but in the meantime and at settlement to maintain the property as a market garden going concern.

[46] Mr Narayanaraja complains that the property was let run down. He observed plants dying. He infers the property was not trading as a going concern at the time when settlement was due. In fact he is vague on the specifics and appears to rely upon casual observation. He made no enquiries at the time. The alternative explanation, supported by business records is to be preferred. The market garden operation continued for up to nine months beyond the date of settlement. It ceased at that time because the plaintiffs had intentions of pursuing other business opportunities.

[47] There is an element of credibility about the plaintiffs‟ account concerning the going concern situation. By contrast the defendant‟s explanation is not credible. Moreover, it appears to have been raised in hindsight as a fallback position to a claim that he never intended to purchase the property as a going concern anyway.

[48] This is an appropriate case for the Court to adopt a robust approach in response to claims of a defence which clearly are not arguable.

[49] It is not a requirement of a going concern transfer that the purchaser carryon the taxable activity conducted by the vendor. There only needs to be the intention that the taxable activities are capable of being carried on at the time of conveyance. Of course, in this case, in addition to the conveyance of land there was a transfer of a significant inventory of chattels associated with the taxable activity.

[50] More problematic for the Court is the issue of the plaintiffs‟ damages claim. It is based upon a registered valuer‟s valuation of $661,000 GST exclusive as at April 2011. In short the plaintiffs wish to recover the value lost between the date of cancellation of the contract in August 2008 to date of valuation, some two years eight months later.

[51] I have concerns about the basis of the plaintiffs‟ calculation of loss even though there is clear evidence the plaintiffs have through a variety of land agents endeavoured to on sell the property since August 2008.

[52] As a general rule damages will be assessed to the date of breach. On the other hand an estimate of damages needs be assessed with reference to the circumstances of the particular case.

[53] Until recent times of economic reversal land values have usually increased. In the outcome of recent times values of certain land types have decreased. The evidence is the plaintiffs‟ land has significantly decreased in value since that time the parties‟ agreement was struck in April 2007.

[54] I am of the view that damages ought to be fixed as payable to a certain date only beyond the date of settlement.

[55] Both parties have obtained registered valuations of the land as at about the time settlement was due. That from the defendant shows a drop in value between date of contract and date of settlement of about $108,000 exclusive of GST. That from the plaintiffs provided a figure of about $182,000 GST exclusive.

[56] Also to be taken into consideration is the fact that the plaintiffs continued to operate the property as a taxable activity and have received income as a consequence. Also, it should not be forgotten that the defendant has forfeited a deposit of $92,500.

[57] I explained to counsel that I was not prepared to make a determination about the extent of damages at this time. Rather the issue of quantum should be deferred

for further consideration and for that purpose I was adjourning the proceeding for call in the summary judgment list before me on 29 September 2011 at 2:15pm. Meanwhile it is to be hoped that counsel and their clients will confer with a view to resolving matters. If resolution is impossible then on 29 September 2011 I will timetable obligations with respect to receipt of further evidence and submissions.

Result

[58] Judgment will be entered in favour of the plaintiffs against the defendant on the issue of liability.

[59] The proceeding is adjourned for call on the summary judgment list at 2:15pm on 29 September 2011 to consider a process for fixing damages and associated

_expenses.

Associate Judge Christiansen