Vegar v Osborne HC Auckland CIV-2011-404-001696 [2011] NZHC 631 (13 April 2011)

Last Updated: 8 July 2011

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

_{CIV-2011-404-001696}

BETWEEN PAUL FREDERICK VEGAR AND PATRICIA FRY

Plaintiffs

AND PHILIP MARK OSBORNE AND TIMOTHY JAMES HEATH Defendants

Hearing: 7 April 2011

Appearances: D S McGill for Plaintiffs

T J Herbert for Defendants

Judgment: 13 April 2011 at 2:30 PM

_{JUDGMENT OF COURTNEY J}

This judgment was delivered by Justice Courtney on 13 April 2011 at 2:30 pm

pursuant to R 11.5 of the High Court Rules.

Registrar / Deputy Registrar

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

Solicitors: Duncan Cotterill, P O Box 5326, Auckland

Fax: [phone] – D McGill

Kemps Weir, P O Box 62566 Kalmia Street, Auckland 1544

Fax: [phone]

Counsel: T J Herbert, Level 13 Shortland Chambers, 70 Shortland Street, Auckland 1010

_{Fax: [phone]}

VEGAR V OSBORNE HC AK CIV-2011-404-001696 13 April 2011

Introduction

[1] The plaintiffs and defendants purchased a property in Northland as a joint venture in 2005 with the intention of subdividing and developing it. They borrowed most of the purchase price from the ASB on interest-only terms. The plaintiffs say that the defendants assumed responsibility for making the interest payments in the first instance. The defendants did, in fact, make the interest payments until October

2010. The interest payments are now in arrears but the defendants have refused to resume making payments until an outstanding dispute about the funding of the interest payments is resolved.

[2] As a result of the default the ASB intends to serve a notice under the Property Law Act 2007. The plaintiffs fear that a forced sale of the property will result in substantial loss because the planned subdivision of the property will not be able to be completed. This fear is all the greater because, in anticipation of the subdivision being completed, the original house on the property has been split in two with the upper storey relocated on one half of the site and the lower half left in situ, significantly damaged and without a roof.

[3] The plaintiffs have applied for an interim mandatory injunction requiring the defendants to pay the arrears due under the loan and resume making the required interest payments and, if they do not, seek further orders that would enable the plaintiffs to proceed to complete the subdivision. The orders sought are that:

(a) The defendants specifically perform their obligations under the property agreement and the trust/relationship agreement by paying all arrears of interest due to the ASB and to continue to meet their obligation to pay all interest accruing to the ASB henceforth;

(b) In the event the defendants fail to meet their obligations to pay the interest due and owing to the ASB and to pay all interest accruing to the ASB henceforth then, after the expiration of 21 days, the first named plaintiff be authorised to execute on behalf of all the

defendants the necessary documentation to enable the issue of new certificates of title; and

(c) In the event that the defendants fail to meet their obligations to pay all the interest due and owing to the ASB and to pay all interest accruing to the ASB henceforth, after the expiration of 21 days, the plaintiffs shall be entitled to enter into an agreement for the sale of the defendants’ share of the property with the proceeds applied firstly to the defendants’ share of the ASB loan, secondly, in payment of any costs associated with the sale and, thirdly, the balance of funds to the defendants.

[4] Although the defendants accept that they are jointly and severally liable to the ASB, they deny any current liability to meet the whole of the interest payments in the first instance. In any event, they maintain that the circumstances of the case do not justify the kind of orders being sought and are sceptical about the plaintiffs’ ability to meet an award of damages notwithstanding the undertaking given by the first named plaintiff, Mr Vegar.

Relevant principles

[5] Mr McGill, for the plaintiffs, accepted that, although his application was framed so as to seek an order for specific performance, the true nature of the order sought was an mandatory injunction under which the defendants would be required to make good their breach (by paying the arrears of interest due) and continue to meet their future obligation to make such payments. He also acknowledged that, although the application was framed as one for interim relief, the effect of the order sought would be to grant final relief to the plaintiffs.

[6] The well settled approach to an application for interim injunctive relief is to consider, first, whether there is a serious question to be tried.[1] If there does exist a

_{serious question to be tried, the Court must nevertheless be satisfied both that the}

balance of convenience favours the granting of an injunction[2] and, in any event, that the overall justice of the case favours the making of an injunction.[3]

[7] While a mandatory injunction of the type sought by the plaintiff is very uncommon and essentially amounts to final order, there is no authority to preclude such an order being made. Noting the paucity of precedent in this area, Eichelbaum CJ in Soft-Tech International Pty Ltd v Ball said:[4]

Mandatory injunctions are relatively uncommon, interim mandatory injunctions are rare indeed and interim mandatory injunctions having the effect of a final order and involving the payment of a sum of money which normally would be described as a debt, in my experience are completely novel. Notwithstanding the remarks I have just made, no authority has been cited to suggest that there is no jurisdiction to make such an order; but neither has any precedent been drawn to my attention.

A serious question to be tried?

The agreements between the parties

[8] At the time of purchase the property comprised two lots with a dwelling on one. The plan was to subdivide the land into three titles and build a unit on each. This is recorded in an agreement, referred to at the hearing as “the property agreement” entered into by the parties on 27 July 2005. It included the following provision:

2. Tim [Heath] and Philip [Osbourne] shall be responsible for meeting all interest payments due in respect of the ASB advance and shall indemnify and protect and keep indemnified PL [Paul Vegar and Linda Fry] from and against any failure to meet their obligations in terms of the ASB advance.

[9] The agreement identified the shares in the property as being held one-third by Mr Vegar and Ms Fry, one-third by Mr Heath and one-third by Mr Osborne. The schedule also provided:

Obligation in respect of ASB advance:

_{Paul Frederick Vegar and Linda Patricia Fry nil}

Timothy James Heath $406,000

Philip Mark Osborne $650,000

[10] It was common ground that this provision reflected an agreement that, notwithstanding their joint and several liability to the ASB as between the parties themselves, it was the defendants who would be liable to meet the interest payments and, ultimately, repay the principal in the proportions recorded.

[11] Within a few months, however, the parties had entered into another agreement. This agreement, dated 21 September 2005, was referred to by the parties as “the trust/property agreement”. It purported to record “the mutual understandings and the nature of the trust relationship undertaken with regards to the property purchase and ongoing requirements of the two parties”.

[12] The trust/property agreement fleshed out some aspects of the investment strategy to be adopted. It also recorded a change in the parties’ obligations in respect of the bank debt:

(g) The two parties agree that the level of bank debt on the property purchase is acknowledged as follows:

Paul and Linda are jointly responsible for $275,000. Tim and Phil are jointly responsible for $381,000 ...

(o) Linda and Paul acknowledge that they are liable for the interest

component of their $275,000 accrued through TP’s investors.

[13] It was common ground that under this agreement the plaintiffs, who (as between them and the defendants) had not been liable for any of ASB loan, assumed responsibility for $275,000 (and the interest on that amount). The trust/property agreement was silent as regards the provision in the property agreement imposing the obligation for payment of the interest in the first instance on the defendants.

[14] However, it had been intended from the outset that the interest payments would be met through private borrowing. The reference in the trust/property agreement to “TP’s investors” was a reference to the private funders that the defendants were arranging to provide the necessary funds. It was also common

ground that the plaintiffs would meet the cost of funding their share of that funding as part of a “wash up” at the conclusion of the subdivision. Until October 2010 the defendants attended to payment of the interest to the ASB using the private funding they had arranged. They made no request for a contribution from the plaintiffs.

The dispute between the parties

[15] The plan for the successful development of the site did not eventuate as the parties had hoped. By 2009 the defendants were trying unsuccessfully to re-finance their part of the ASB loan. By late 2009 there were serious concerns on the plaintiffs’ part about the time it was taking the defendants to re-finance and the fact that the plaintiffs had been unable to extract a copy of the private investor agreement relating to the funding of the ASB interest from the defendants. In an email

26 November 2009 Mr Vegar signalled his desire to split up the joint venture. He said that if he did not receive a copy of the investor loan agreement he would take no responsibility for the amount owed to the private investors.

[16] Mr Vegar also proposed a change to the development plan, suggesting that the property be subdivided in two rather than three; the subdivision plans were at a stage whereby two new titles could be available in early 2010. The defendants were not keen on that proposal because they would not be in a position to finance their site. Nevertheless, the plaintiffs persevered with the suggestion of subdividing the site into two titles. In March 2010 Ms Fry emailed the defendants with two proposed options. Option B involved splitting the existing house, keeping the basement structure where it was to create a small bach and lifting the top floor off it, moving that to the other lot to create a second bach. At a relatively low cost the parties could then each have a site with a house on it and go their separate ways, including re-financing themselves. The defendants signalled their agreement to this plan and emails evidence a reasonable level of communication over the arrangements for the separation of the house.

[17] During 2010 there began to be instances when the ASB account was allowed to be underfunded in terms of paying the interest. In October 2010 the defendants advised that the private investors were sufficiently concerned about progress that

they wished to bring the arrangement (which had originally been four years in any event) to an end. That left the defendants without funds to meet the ASB interest payments and in November 2010 the defendants advised that they would be unable to meet the November interest payment and that they would not cover further payments, notwithstanding that this would eventually lead to a forced sale.

[18] The areas of dispute are the cost of the private funding and the obligation to pay the ASB interest in the first instance. The defendants say that the cost is 25% per annum and the plaintiffs have always known that. They refuse to make any further payments to the ASB until the plaintiffs agree to the 25% rate and maintain that they are not liable to meet all the interest payments in any event. The plaintiffs deny either knowing or agreeing to the 25% rate and say that, to the contrary, they were led to believe that the rate was between 16 and 20%. They say that the defendants are liable to meet the interest payments regardless of the dispute over the interest rate and that their refusal to perform their contractual obligations will result in loss to all the parties.

[19] In the meantime the plaintiffs have proceeded to separate the house. The defendants say that they did not know that this was actually happening and did not agree to it. The plaintiffs want to secure the defendants’ agreement to completion of the subdivision and issuing of the new titles so the parties can re-finance themselves separately and bring the joint venture to an end. The defendants refuse to agree to that. The ASB is poised to issue Property Law Act notices.

[20] On these facts I consider that there is a serious issue to be tried as to whether the defendants agreed that they would pay the ASB in the first instance with the plaintiffs liable only to meet the cost of funding their share of the interest at the end of the loan period. The trust/property agreement is silent as to when the plaintiffs would be required to actually pay for the cost of funding their share. It is strongly arguable, though not certain, that the obligation requiring the defendants to meet the interest payments was intended to have effect notwithstanding the changes brought about by the trust/property agreement.

The balance of convenience

[21] The plaintiffs’ general complaint is that if the defendants do not remedy the alleged breach of the trust/relationship agreement the ASB will force a sale of the property and, in its current state, it will fetch much less than it would if the subdivision were completed. The first point to note is that even if the defendants are obliged to make the payments in the first instance, their failure to do so can do no more than give rise to a claim for damages for breach of contract.

[22] Since the parties are jointly and severally liable to the ASB it is difficult to see that such a breach could give rise to a significant damages claim. Further, the plaintiffs are obliged to mitigate any loss that might be caused by the defendants’ alleged breach and the obvious way to do this is to make the payments themselves. If the plaintiffs were unable to make the payments and were reliant on the defendants’ performance of their obligations to preserve the status quo to allow the subdivision to be completed there might be an argument that the loss would be much greater, though it would still be compensable by damages. The plaintiffs, however, do not say that they are unable to assume the payments to the ASB and thereby prevent a forced sale. To the contrary, Mr Vegar has given an undertaking as to damages and strenuously resists the defendants’ suggestion that he is in financial difficulty.

[23] In these circumstances the balance of convenience does not favour the making of on order; the order sought would have the effect of final relief but the status quo can readily be preserved by the plaintiffs making the payments themselves and any loss can be remedied through a damages award.

[24] There are no other factors to be considered that would affect the overall justice of the case.

Result

[25] The application for injunction is declined.

[26] I reiterate comments I made at the hearing that it is staggering that these parties have allowed matters to get to this point without a genuine effort at settlement, notwithstanding the existence of a mediation clause in the property agreement. Subject to what counsel might say on the question of costs my present inclination is to let the costs in this matter lie where they fall. If, however, parties wish to address the issue of costs they may do so by memorandum filed on behalf of the defendants by 2 May 2011, on behalf of the plaintiffs by 9 May 2011 and by the

_{defendants in reply by 16 May 2011.}

P Courtney J

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[1] American Cyanamid Co v Ethicon Ltd [1975] 1 AC 396.

[2] _{Eng Me Yong v Letchumanan [1980] AC 331.}
[3] _{Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 140 (CA).}
[4] (1990) 3 PRNZ 683 (HC).