Awly Investments Limited v McPhail [2012] NZHC 3599 (21 December 2012)

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Awly Investments Limited v McPhail [2012] NZHC 3599 (21 December 2012)

Last Updated: 11 January 2013

IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY

CIV-2012-409-000086 [2012] NZHC 3599

BETWEEN AWLY INVESTMENTS LIMITED Plaintiff

AND CHISTOPHER LANE MCPHAIL, PHILIP IVAN REDMOND, MARTIN MAURICE BELL, RACHEL BETH ROBERTSON AND MARK STUART HENDERSON Defendants

Hearing: 3 December 2012

Appearances: G D Jones and M R Bendall for Plaintiff

N A Till QC and M M Bell for Defendants

Judgment: 21 December 2012

_{JUDGMENT OF CHISHOLM J}

A Both the claim and counter-claim are dismissed.

_{B Costs are to be resolved in accordance with [42].}

AWLY INVESTMENTS LIMITED V MCPHAIL, HC CHCH CIV-2012-409-000086 [21 December 2012]

_REASONS

Introduction

[1] In 2010 the plaintiff agreed to lease part of its commercial premises to the defendants. The agreement was, however, conditional upon the parties reaching agreement about refurbishment of the premises. As an inducement for the agreement to be finalised, the plaintiff offered to pay the defendants $299,000 (including GST) and that offer was accepted by the defendants. The agreement then became unconditional, the plaintiff made the inducement payment, and the defendants paid a

rental deposit of $43,873.94.1

[2] Before the lease commenced the premises were rendered untenantable by an earthquake and were later demolished. The plaintiff now seeks restitution of the inducement payment on the basis that there has been a total failure of consideration. This is denied by the defendants who counter-claim for the return of the rental deposit. To a large extent there is agreement about factual matters and resolution of the proceeding comes down to applying the law to the agreed facts.

Background

[3] The plaintiff owned a multi-storey building at 293 Durham Street, Christchurch, known as Amuri Courts. In May 2010 the defendants, a firm of solicitors, became interested in leasing part of level 6. At that stage the defendants were also looking at other possibilities, including staying where they were.

[4] Following lengthy negotiations the plaintiff and defendants entered into an agreement to lease dated 1 October 2010 (the agreement to lease). The agreement to lease provided for a lease of 12 years commencing on 1 April 2011 with two rights of renewal and a three month rental holiday from the commencement date. The

_{defendants were to complete the fit out at their own expense in accordance with}

1. Which included a double counting of GST, but that is of no particular significance in the present context.

plans that had been prepared. The agreement was conditional upon the parties reaching agreement regarding refurbishment of the premises on or before 18 October

2010.

[5] On 12 October 2010 the parties met to discuss the cost of the fit out and to negotiate the amount of the inducement payment that the plaintiff had earlier indicated it was prepared to make to the defendants. Agreement in principle was reached both as to the figure ($260,000 plus GST) and the purpose of the payment. The figure of $260,000 reflected the estimated cost to the defendants of completing the fit out.

[6] A formal offer to make the inducement payment was contained in a letter from the plaintiff to the defendants dated 15 October 2010:

We refer to our offer to pay to you an inducement to enter into the lease of the premises situated at Level 6, Amuri Courts, Durham Street, Christchurch.

This letter records the terms of our offer to pay you an amount of $260,000 plus GST (if any) (“Inducement”) in consideration of your acceptance of the grant to you of the lease on the terms and conditions contained in the Agreement to Lease dated 1 October 2010 (“Agreement”).

The Inducement shall be paid by us to your nominated bank account the later of the date being 30 days following execution of the Agreement or the date that the Agreement is confirmed unconditional in all respects.

If you do not confirm the Agreement as unconditional on or before

18 October 2010, this Inducement shall be deemed to be immediately withdrawn without further notice.

You will have the right to terminate the Lease on written notice to us if the

Inducement payment is not paid in full when due.

...

The terms of this inducement offer were accepted by the defendants and the agreement to lease was made unconditional on 18 October 2010.

[7] The plaintiff made the inducement payment of $299,000 (including GST) to the defendants on 26 November 2010 and three days later the defendants paid the rental deposit of $43,873.94. Although possession date under the lease was not until

1 April 2011, the defendants were permitted access to the premises so that the fit out could be completed before possession date.

[8] A severe earthquake on 22 February 2011 rendered the premises untenantable. By this time the defendants had spent $232,712.79 on the fit out which was well advanced. The defendants were, however, unable to take occupancy when the lease commenced on 1 April 2011 and no further payments of rental were made under the lease. The building was demolished early in 2012.

[9] Subsequently the plaintiff received an insurance pay-out from its insurer under a business interruption policy. Ms Yeo, a director of the plaintiff, has calculated that of that payment $187,161.13 was attributable to the loss of rent in relation to the premises that were to be leased to the defendants.

[10] The company undertaking the fit out for the defendants also held insurance cover. Ultimately the defendants received a payment of $190,288.48 which was attributable to that cover.

[11] In terms of the agreement to lease it was terminated if the building of which the premises formed part was destroyed or so damaged as to render it untenantable.

The pleadings

[12] When this proceeding was first issued that statement of claim alleged that the agreement to lease was frustrated by the earthquake or, alternatively, by the direction of the Canterbury Earthquake Recovery Authority directing that the building be demolished. However, that pleading was abandoned in favour of a new pleading based on a total failure of consideration in relation to the inducement agreement. It is common ground that the agreement to lease and inducement are separate agreements.

[13] In terms of the amended statement of claim now before the Court the plaintiff alleges:

14. The defendants have not performed their promise to the plaintiff under the inducement agreement to lease the premises for 12 years.

15. The consideration for the inducement payment has wholly failed and the defendants have had and received the sum of $299,000.00 to the use of the plaintiff.

16. The plaintiff accepts that the deposit paid by the defendants under

the agreement to lease should be set off against the plaintiff’s claim.

Each of those allegations is denied by the defendants, in some cases with an explanation accompanying the denial.

[14] The defendants’ statement of defence in response to the amended statement of claim pleads that the defendants performed their promise under the inducement agreement by confirming that the agreement to lease was unconditional. They also plead that the consideration for the payment of $299,000 comprised one or more of the following:

(a) entering into the inducement agreement;

(b) confirming the agreement to lease was unconditional; (c) foregoing other leasing options that were open to them;

(d) incurring expenses for the purpose of performing the inducement agreement and/or the agreement to lease totalling $281,291.79.

With reference to paragraph 16 of the amended statement of claim the defendants plead that the plaintiff is obliged to return the deposit.

[15] Two alternative defences are pleaded. The first defence is that the defendants changed their position in reliance on the validity of the inducement payment, such that it would be inequitable for the Court to order its return. This pleading relies on both s 94B of the Judicature Act 1908 and the common law defence of change of position. The second defence based on the Frustrated Contracts Act 1944 was not pursued.

[16] The counter-claim is advanced on the basis that the deposit is repayable to the defendants as money had and received because the plaintiff was unable to provide possession to the defendants. In its reply to the counter-claim the plaintiff admits the defendants’ allegations in the statement of claim, but says the deposit should be set off against the plaintiff’s claim.

The competing arguments

[17] Given the foregoing précis of the pleadings, the summary of the competing arguments can be relatively brief.

Plaintiff ’s arguments

[18] The earthquake resulted in the defendants not performing the promise that they gave in return for the inducement payment, namely, that they would lease the premises for the next 12 years. On the plaintiff’s calculation this would have produced rents in the vicinity of $2.7 million. Consequently the plaintiff “had nothing to show” for the inducement payment and there was a total failure of consideration. Under those circumstances the plaintiff is entitled to restitution of the inducement payment.

[19] Mr Jones emphasised that in this context “consideration” means performance of the promise rather than the promise made in return for the plaintiff ’s payment. In this case it was not enough for the defendants to promise to start the lease; the lease had to actually start, and this did not happen. Relying on Goss v Chilcott2 Mr Jones submitted that payment of the rental in advance did not preclude a total failure of consideration.

[20] As to the defence based on s 94B of the Judicature Act, Mr Jones submitted that that defence could not apply because the inducement payment had not been made “under mistake” as required by that section. In relation to the common law

_{defence the plaintiff alleges that there is nothing in the circumstances of this case}

2 Goss v Chilcott [1996] 3 NZLR 385 (PC).

that would render it inequitable for the defendants to have to repay the inducement payment.

[21] Finally, in relation to the counter-claim Mr Jones submitted that if the plaintiff’s claim fails, so also should the defendants’ claim. He submitted that it would be extraordinary if the defendants were able to avoid repaying the inducement payment but were able to obtain a refund of the rental deposit.

Defendants’ arguments

[22] The consideration for the inducement payment was not, as alleged by the plaintiff, a promise to lease the premises for 12 years; rather the consideration was the promise to enter into the agreement to lease by making it unconditional. The defendants performed that promise and the inducement agreement was accordingly fully executed.

[23] Apart from making the agreement to lease unconditional, the defendants gave up their option to lease other premises and also provided the plaintiff with the benefit of their commitment to the lease which enabled the plaintiff to successfully claim under its business interruption insurance. If that insurance was inadequate, that was the plaintiff’s problem. Moreover, the defendants incurred expenses relating to occupancy and the fit out totalling $281,291,79.

[24] In terms of the defences Mr Till QC focused on the defence of change of position at common law. He submitted that in this case the balancing of the plaintiff’s interest in obtaining restitution against the circumstances giving rise to the defendants’ change of position favoured the defendants. He argued that the Court should require the plaintiff to make counter-restitution of the benefits it received under the insurance policy and give credit for the “change of position” expenditure incurred by the defendants. He argued that whereas the agreement to lease contemplated that the plaintiff would take out insurance for loss of rent, there was no similar agreement in relation to the fit out.

[25] Finally, in relation to the counter-claim, Mr Till submitted that no defence other than set off had been pleaded and that if the plaintiff’s claim fails, so too must its claimed set off.

Was there a total failure of consideration?

[26] In Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd3

Viscount Simon drew a distinction between consideration in a contractual context and consideration in a restitution context:

...In English law, an enforceable contract may be formed by an exchange of a promise for a promise, or by the exchange of a promise for an act – I am excluding contracts under seal – and thus, in the law relating to the formation of contract, the promise to do a thing may often be the consideration; but, when one is considering the law of failure of consideration and of the quasi-contractual right to recover money on that ground, it is, generally speaking, not the promise which is referred to as the consideration, but the performance of the promise. The money was paid to secure performance and, if performance fails, the inducement which brought about the payment is not fulfilled.

That distinction was endorsed by the Privy Council in Goss v Chilcott.4

[27] I have not identified, nor have counsel suggested, any particular feature of this claim for restitution that would take it outside the category in which the performance of the promise represents the consideration. It is also important to keep in mind that there are two separate agreements (the agreement to lease and the inducement agreement) and that in terms of the pleadings it is the consideration for the inducement payment that is said to have wholly failed.

[28] The letter from the plaintiff offering to make the inducement payment5 records that it is an inducement “to enter into the lease” and that if the defendants do not confirm the agreement as unconditional on or before 18 October 2010 the inducement will be deemed to have been immediately withdrawn without notice. By

_{that time the parties had, of course, already entered into the agreement to lease which}

3. Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour Ltd [1942] 2 All ER 122 at 129 (HL).

4 _{At 390.}

5 See [6] above.

recorded all the terms of the lease other than the issue of refurbishment in respect of which the agreement to lease remained conditional. Agreement on that remaining issue, including the quantum of the inducement payment, had been agreed on

12 October 2010.

[29] Under those circumstances I am satisfied that the consideration flowing from the defendants under the inducement agreement was the making of the agreement to lease unconditional on or before 18 October 2010. Thus the defendants performed the inducement agreement by making the agreement to lease unconditional on that date. Contrary to the plaintiff’s argument, the plaintiff had something to show for the inducement payment: an unconditional agreement to lease.

[30] Apart from that the defendants’ commitment to the agreement to lease enabled the plaintiff to take out business interruption insurance covering the part of level 6 that was to be occupied by the defendants. While that cover was limited in time, and the plaintiff now considers that the insurance was inadequate, this was nevertheless a tangible benefit flowing from the inducement payment. I also note that the agreement to lease contemplated that earthquake cover would be taken out by the plaintiff.

[31] As already mentioned, the plaintiff relies on Goss v Chilcott. In that case the appellants had executed a mortgage to secure an advance from the respondent company. The appellants on-lent the money to Haddon, who was a director of the respondent company. Haddon wished to conceal the fact that he was the borrower and he also later altered the mortgage, which remained unregistered. This alteration to the mortgage had the effect of discharging the appellants from liability from the date the alterations were made.

[32] Because the appellants had been discharged from their obligations under the mortgage the respondent sought restitution on the basis of a total failure of consideration. The Privy Council agreed that there had been a total failure of consideration because the appellants had failed to repay the loan. In reaching that conclusion the Privy Council drew a distinction between the obligation to repay the principal sum and the obligation to pay interest.

[33] Apart from the fact that this decision confirms that in a restitution context it is generally the performance of the promise that counts, I am unable to see how this decision assists the plaintiff. Unlike that case, the promise made by the defendants was performed and, following payment of the inducement payment, the agreement was wholly executed. Moreover, to the extent that Mr Jones relied on this case to establish the proposition that payment of the rental in advance did not preclude a total failure of consideration, that issue does not arise. The defendants have not alleged that the payment of the rental deposit represented part of the consideration of the inducement agreement.

[34] The plaintiff’s claim fails accordingly.

Alternative defences

[35] Given the conclusion that I have just reached it is only necessary to make brief reference to the change of position defences advanced by the defendants.

[36] I agree with Mr Jones that s 94B does not apply because the inducement payment was not made under a mistake of law or fact. On the other hand, had it been necessary I would have upheld the defence that the defendants had changed their position in good faith and the injustice of requiring them to repay outweighs the injustice of denying restitution to the plaintiff: Lipkin Gorman v Karpnale Limited.6

[37] The change of position arises from the expenditure on the fit out which was obviously incurred in good faith after the agreement to lease became unconditional. One of the unusual features of this case is that both parties have received (directly or indirectly) an insurance pay out. Thus whatever decision the Court made there is going to be an element of injustice to one party or the other. Had it been necessary I would have decided that the injustice of requiring repayment of the inducement

_{payment outweighed the injustice of refusing such payment.}

6 Lipkin Gorman v Karpnale Limited [1992] 4 All ER 512 at 533 (HL).

The counter-claim

[38] In essence the defendants have proceeded on the basis that the counter-claim has been admitted by the plaintiff and that it should succeed accordingly. While I agree that this is a possible interpretation of the plaintiff’s reply to the counter-claim, this was not reflected in the argument presented by the plaintiff at trial. The plaintiff’s concession in relation to the counter-claim was only intended to apply if the plaintiff’s claim succeeded. To the extent that it might be necessary, I amend the plaintiff’s reply to make that clear.

[39] The counter-claim pleads7 that the deposit is recoverable by the defendants from the plaintiff as money had and received by the plaintiff for the use of the defendants. As the authors of Civil Remedies in New Zealand8 state at 8.2.1:

The claim for money had and received is available to reverse the defendant’s unjust enrichment where the subject-matter of the enrichment was money. The principal circumstances in which it is used are in respect of money paid by mistake, under duress or compulsion, and where there has been a failure of basis or consideration.

While not expressly stated, I proceed on the basis that in this case the underlying allegation is that there has been a total failure of consideration.

[40] Even though the commencement date of the lease had not arrived, the defendants were able to enter into the premises on an unofficial basis and commence their fit out. Under those circumstances I do not accept that there was a total failure of consideration or that this is a case where something less than a total failure of consideration would suffice. As Mr Jones submitted, it would be extraordinary if the plaintiff failed but the defendant succeeded.

Result

_{[41] Both the claim and counter-claim are dismissed.}

7 _{At paragraph 27.}

8 Ross Grantham and Charles Rickett “Restitutionary Remedies” in Peter Blanchard (ed) Civil

Remedies in New Zealand (Brookers, Wellington, 2003) 363 at 372.

[42] My preliminary view is that the defendants should receive costs on a 2B basis. If the parties are unable to resolve the issue of costs memoranda not exceeding three pages should be submitted so that the issue can be determined by the Court. Counsel should endeavour to submit those memoranda by the end of January

2013.

Solicitors:

Lane Neave, Christchurch, [e-mail]

Corcoran French, Christchurch, [e-mail]

Nicholas Till, Christchurch [e-mail]