Wire by Design Limited (in receivership and in liquidation) v Commercial Factors Limited [2015] NZHC 985 (11 May 2015)

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BETWEEN	WIRE BY DESIGN LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION) First Appellant HADLEY JOHN WRIGHT Second Appellant HADLEY JOHN WRIGHT, LORRAINE WRIGHT and DAVID SCHNAUER Third Appellants
AND	COMMERCIAL FACTORS LIMITED, COMMERCIAL FACTORS AND FINANCE LIMITED, COMMERCIAL FINANCE AND SECURITIES LIMITED Respondents

Hearing:	12 February 2015
Appearances:	Andrew Commons for the Appellants Paul Dale for the Respondents
_Judgment:	_{11 May 2015}

This judgment was delivered by me on 11 May 2015 at 3:00pm pursuant to Rule 11.5 of the High Court Rules.

WIRE BY DESIGN LIMITED (IN RECEIVERSHIP AND IN LIQUIDATION) & ORS v COMMERCIAL FACTORS LIMITED & ORS [2015] NZHC 985 [11 May 2015]

Introduction ..............................................................................................................[1] Background...............................................................................................................[6] District Court decision ...........................................................................................[40] Grounds of appeal ..................................................................................................[43] Issues on appeal ......................................................................................................[46] Approach to appeal ................................................................................................[47] Discussion of issues/questions

in the 27 July email? ..................................................................................[49] (b) What is the correct meaning of this contract? ...........................................[75] (i) What is the effect of the break fee clause? .....................................[82]

(ii) Who were the parties to the contract? ............................................[88] (iii) Was the date of 4 August 2010 an essential condition? .................[95]
(c) What was the effect of the 23 November 2010 agreement? ......................[98]

in the 27 July email? ................................................................................[108] Counterclaim ........................................................................................................ [115] Cross appeal – indemnity costs ...........................................................................[122] Summary ...............................................................................................................[134] Result .....................................................................................................................[138]

[1] Since at least 2008 the Tawil Group of companies (“Tawil”) was experiencing financial difficulties. It turned to Commercial Factors Limited (“CFL”) for financial assistance. As its name suggests, CFL’s primary business is debt factoring.

[2] Tawil’s most valuable asset was its leasehold interest in a commercial property owned by Transit New Zealand (“Transit”). Transit wished to compulsorily acquire the land and the parties had been engaged in lengthy, although largely fruitless, negotiations over the value of Tawil’s leasehold interest. Tawil needed to sell its interest to alleviate the financial pressures.

[3] Its difficulty, however, was that it owed Transit arrears of rent and Transit, naturally, was not prepared to release Tawil of its obligations or to agree to assign the lease until Tawil paid Transit what was owed. But Tawil did not have sufficient funds to pay the arrears. A possible solution to this problem was for CFL to pay Transit Tawil’s arrears and thus began negotiations between Tawil, CFL and Transit as to how this might be achieved.

[4] Through a series of meetings and exchanges of correspondence, CFL claims it concluded a legally enforceable and binding agreement with Tawil. CFL claims that one of the terms of that agreement was that Tawil would continue its factoring arrangement with CFL for a further two years and, in the event Tawil dispensed with CFL’s factoring services within that period, a break fee was payable. Ultimately Tawil ceased factoring with CFL before the two year period expired and CFL sued Tawil for the break fee. The agreement relied on by CFL also provided for the payment of a success fee. CFL had deducted that fee from Tawil funds in the course of its factoring activities. Tawil counterclaims on the basis there was no enforceable agreement and thus these deductions were unauthorised.

[6] Tawil was owned and operated by Mr Hadley Wright. In about 2007 or 2008, Mr Wright approached a friend, Mr Terrence Haydon, in the hope Mr Haydon might be able to help Tawil out of its financial difficulties. Mr Haydon was the director of the respondent companies which are all part of CFL.

[7] Mr Wright and Mr Haydon discussed Tawil’s financial difficulties and how these might be resolved. Despite Mr Haydon’s reservations, principally to do with the awkwardness and potential dangers of doing business with a friend, he agreed to assist with refinancing the group. Mr Haydon developed a financial restructuring proposal to extract the Tawil Group from receivership and refinance the companies’ obligations to its bank. In exchange CFL commenced factoring invoices for Eagle Wire Limited (“EWL”) and a related company within the Tawil Group, Faulkner Collins Limited (“FCL”).

[8] Despite this it became apparent to Mr Haydon that the Tawil Group needed new capital. Mr Wright was unable to source new capital from the usual sources and so a restructuring proposal was developed. A critical component of this proposal was to preserve Tawil’s assets.

[9] Tawil’s most valuable asset was held by FCL. FCL was the lessee of commercial premises in West Auckland. The lessor was Transit. Tawil was engaged in difficult and protracted negotiations with Transit who wished to compulsorily acquire the land under the Public Works Act 1981. The land was needed as part of a proposed motorway extension. Mr Wright was of the view that the value of FCL’s interest in the land was in the order of $2 million to $3 million, a sum which was considerably more than that contemplated by Transit.

[10] One major difficulty, from Tawil’s perspective, was that FCL was the subject of liquidation proceedings brought by the Inland Revenue Department. Those proceedings were listed for hearing in this Court on 4 August 2010. There was a prospect, albeit a remote one, that on that date the company might be wound up. Obviously, if that happened, Tawil would lose its interest in the property. In order to

avoid that possibility Tawil needed to transfer ownership of the lessee’s interest to

[11] A further impediment was that FCL owed Transit, as lessor, rent arrears which neither FCL, nor Tawil generally, had sufficient funds to pay. Naturally Transit was unwilling to release FCL from its obligations under the lease until the rent arrears were paid.

[12] And so Mr Wright again turned to Mr Haydon and CFL to assist Tawil by paying FCL’s rent arrears as a pre-requisite for Transit releasing FCL and permitting an assignment of the lease to another entity within the Tawil Group.

[13] On 26 July 2010 Mr Wright and Mr Haydon met to discuss how, in principle and in practice, this arrangement would operate. By this time CFL had been providing factoring services to FCL since about December 2008.

[14] It is CFL’s case that on this date CFL entered into an oral contract under which FCL’s lease would be assigned to Eagle Wire Limited (“EWL”), another company in the Tawil Group. In order to achieve this CFL would undertake to Transit that EWL would pay all rent arrears to 3 January 2011 subject to various terms and conditions involving EWL and CFL. Most significantly, CFL claims that EWL and/or a re-constituted FCL would remain factoring for CFL for a further minimum term of two years and, in the event EWL and FCL stopped using FCL’s factoring services, a break fee of $100,000 would be payable to CFL. Furthermore EWL, on confirmation of the assignment of the lease, was to pay CFL a success fee of $20,000 payable at $2,000 per month.

[15] CFL claims that the oral agreement reached between Mr Wright and Mr Haydon on 26 July 2010 was recorded in writing the following day in an email (“the 27 July email”) to Mr Wright from Mr Haydon. This email is reproduced in full below:

Following on from our conversation yesterday morning I confirm that we have agreed the following relating to the assignment of the Faulkner Collins

(FC) Lease to Eagle Wire Ltd (EW)¹and the obligations taken on by CFL to accommodate this.

1) The Transit/Crown (and/or agent) rental subsidy or differential is to be assigned to CFL. You are concerned that there may be legal restraints to do this, however I do not share that concern and expect the assignment to be completed at the time of any documentation done by David/Andrew or whoever completes the transaction document for EW. We will contest these agreed rights if necessary as the assignment is fundamental to our undertaking.

2) Eagle Wire Limited and or a reconstituted Faulkner Collins will remain factoring with CFL for a further minimum term of 2 years. The term to start from the 3/01/2011. The term of two years is subject to:

(a) EW and FC, collectively and not individually, having the right to discontinue factoring and using CFL services after 1 year of the term in 2) on the payment of $100,000.00.

(b) Along with the receipt of the $100,000.00 CFL has the right to review any competitive written offer that will be used to supplant CFL funding and services (as in 2)(a)) with the right to match the written offer thereby retaining the business of both EW and FC.

3) EW on the confirmation of the assignment of the FC lease will pay CFL a success fee of NZ$20,000.00 at NZ$2,000.00 per month paid on the 15th of the month from retention.

CFL also undertakes to fund further business until the outcome of the lease assignment is confirmed on a select basis so that any funds that are outlaid will be represented in invoiced goods prior to the 03/08/2010 or are specially agreed to by both parties.

[16] A few hours after this email was sent, Mr Haydon sent an email to the solicitors acting for Transit. He copied in, amongst others, Mr Wright, Mr Tennent (the Financial Controller of Tawil Holdings Limited) and Mr Commons

[17] This email was directed at the concerns expressed by Mr Wright and referred to by Mr Haydon in his earlier email. Mr Wright had apparently expressed reservations there may have been legal difficulties in Transit assigning the rental subsidy or differential to CFL. Mr Haydon was of a contrary view and the purpose of his email to Transit’s lawyers was to address this. In this email he stated:

“We understand that at issue is the payment of outstanding rentals and a guarantee that all rentals will be paid on time, once the arrears has [sic] been brought up-to-date, to the 03/01/2011.

I confirm my advice to you that we will make payment to your trust account of the arrears immediately on confirmation that the lease will be assigned on or before the 03/08/2010 and receipt of same. We will also guarantee the rental payments to the 03/01/2011 ...

We stress a condition of our assistance as per either of the above is that the assignment of the lease from FC to EW is completed prior to the 3^rdAugust

I look forward to your favourable comment as time is of the essence from our prospective [sic].

[18] This email was met by a reply from Transit’s solicitors which, given the parlous financial state of EWL, predictably posed the question as to what strength the guarantee from CFL added. Transit’s lawyers requested:

“... objective assurance around Commercial Factors’ financial position to assist our ongoing consideration of the request by FCL to assign the lease to EWL.”

[19] The following morning Mr Haydon replied, commenting that he was confident CFL could give Transit the reassurance it needed and suggested that the lawyers call him. The letter also expressed urgency. Although not explained in the correspondence the urgency arose from the fact that the liquidation proceedings were due to be called in this Court on 4 August 2010. If FCL was wound up Tawil’s principal asset would be lost.

[20] Transit’s solicitors responded that no commitment could be given to complete the transaction that day because the solicitors were waiting for information from

FCL which had been promised by the company some time before and which needed to be reviewed and discussed with the client before any commitment could be given.

“Our intentions are. This is not an offer for I do not know the amount Transit are seeking nor the amount of the monthly subsidy they will pay. I need these figures to firm up but I see it something like this.”

[22] There then followed eight numbered paragraphs which set out Mr Haydon’s views on what the final position might look like. He finished with the following words:

“No doubt a refinement may be necessary but that is how I see it possibly working.”

[23] The following day Mr Tennent replied. He and Mr Haydon were due to meet later that morning and in readiness for that meeting, Mr Tennent said:

Hadley understands your thinking in terms of item 5. He needs assurance that the rental subsidy, once the advance from CFL is cleared, is free to facilitate the subsidy being applied as the rental subsidy to the Landlord (whether that be the existing Landlord or a Tawil Group entity as the owner.)

The outstanding issue he has, is being locked into a further 2 years with CFL presumably from 3/1/2011 - which in his mind is 2.5 years from today. Although we would need to give notice in any case so to my mind it is somewhere in between. ...”

[24] Thus Mr Tennent, on behalf of Mr Wright, confirmed that Mr Wright would accept the $20,000 success fee and referred to the fact that the Tawil Group was locked into a further two years debt factoring with CFL.

[25] By 2 August 2010 Mr Haydon had not received an answer from Mr Wright to the 27 July email. This is the email which CFL claims captured the terms of the oral

agreement reached between the parties on 26 July 2010. And so Mr Haydon emailed both Mr Wright and Mr Tennent stating:

I need Hadley to agree to this. I know we have agreed on a hand shake but think under the circumstances that we need it in writing for the benefit of all including Andrew Commons.

The legal difficulty is that the landlord has built the rent differential into the lease as his security for payment for a portion of the lease for the next three years. The legal difficulty is that we cannot assign it to two parties both of whom are saying that it is the deal breaker. I have obviously not signed the lease as I try to negotiate out of this condition but his solicitor is advising him that this is essential as he has very limited protection. I obviously, personally would prefer the CF option as it would be a big help to me if the FC should fail as it would lesson my exposure. I am still working on this. It would be helpful if we could compromise by saying that once the rental is paid to Transit and is paid in full that the rent differential then be paid directly to the new landlord.

[27] This email reveals that the only outstanding term in issue between the parties was the assignment of the rent. The other two terms were expressly accepted.

[28] Mr Haydon, on behalf of CFL, replied by letter on 3 August 2010. He agreed to waive the requirement for the rental subsidy to be assigned to CFL but noted this

was a major concession. He added that he hoped this would allow an agreement to be reached with Transit.

[29] The following day, on 4 August 2010, the Commissioner of Inland Revenue’s

[30] On 12 August 2010 Mr Haydon emailed Mr Wright and Mr Tennent to discuss the implementation of what had been agreed. Mr Haydon summarised the telephone conversation and set out what he understood had been agreed with Mr Wright as to how the assignment to a new entity would be given effect while still preserving CFL’s position in relation to FCL.

“Terry ... You have confirmed our discussions correctly. After our discussions I am seeking a price to value the FCL assets.

[32] From this point onwards the negotiations with Transit accelerated. However, FCL continued to demand that an appropriate deed assigning the lease be prepared as a condition to the agreement.

FCL’s business and assets, including the lease, were sold to WBD. These transfers were explicitly consented to by CFL on 23 November 2010 on the condition that WBD would fulfil all of FCL’s obligations to CFL. On the same date WBD also signed the standard form debt factoring agreement with CFL. That agreement contained the following clause:³

[34] In fulfilment of its obligations under the putative oral agreement of 26 July

2010 CFL undertook to pay all rent arrears and ultimately paid $55,000 which was

transferred in cleared funds to Transit’s solicitors’ trust account on 24 November

2010. Its assets and the lease had been transferred to WBD as required and the restructure was complete. CFL had continued to provide factoring services to FCL and, subsequently, to its successor, WBD.

[35] CFL, evidently without objection at the time, deducted the $20,000 success fee.⁵This was paid, in accordance with the terms of the agreement, at the rate of

$2,000 per month over 10 months, a mechanism apparently designed to assist the Tawil Group’s cash flow. The deductions commenced in December 2010 and the last payment was made in September 2011.

[36] In October 2011, apparently to Mr Haydon’s surprise, Mr Wright advised CFL that Tawil intended to refinance with another factoring company. According to Mr Haydon, Mr Wright was advised that if that occurred CFL expected payment of the $100,000 break fee in terms of the agreement. Mr Wright disagreed and the parties entered discussions in an attempt to resolve the issue.

[37] These discussions were fruitless and CFL brought proceedings to recover the

$100,000 break fee. CFL sued the Tawil Group parties both directly (in the case of WBD) and under guarantees they had given (in the case of the other parties) for the break fee of $100,000.

[38] WBD counterclaimed seeking $20,000 in damages being the payment WBD claims was wrongly made to CFL on the basis that this was an unauthorised unilateral levy imposed by CFL on WBD as well as $7,500 deducted by CFL from WBD’s account purported to be a fee claimed by CFL for additional attendances by

CFL in relation to its negotiations with Transit and FCL and, ultimately, WBD. WBD claims this deduction was also unauthorised.

[39] CFL cross appeals against the Judge’s award of costs on a 2B basis. CFL claims that there was a contractual basis which required indemnity costs to be awarded.

[40] In the District Court Judge Mathers was universally critical of the parties’ failure to accurately record their dealings in writing. She was also critical of the manner in which the proceedings had been conducted in the District Court going so far as to note that in some circumstances the standard of proof in civil trials may mean that the parties find themselves bound by agreements which differ significantly from those which they understood themselves to be entering.

[41] Her Honour concluded that the 27 July email reflected a concluded oral contract which had been agreed the previous day. She found that the contract endured and was assigned to WBD in November 2010. She determined Tawil’s defences to the claim were technical and without merit. She also decided that the guarantees given by the second and third appellants extended to the obligations contained in that agreement. She thus found that the $100,000 break fee was payable and, necessarily, that the Tawil counterclaim could not succeed.

[43] Tawil, through WDL, appeals on the basis that the Judge erred in finding they were obliged to pay the $100,000 break fee and in rejecting their counterclaim. In particular, Tawil claims the Judge erred in concluding that:

(a) the parties had entered an oral contract which was memorialised in the email of 27 July 2010;

(e) the guarantees given by Tawil extended to the obligations contained in the July contract.

27 July email accurately recorded the respective positions between the parties and remained on foot until the determination of the factoring relationship in October 2011. CFL says the break fee was payable as at this date and that it falls on the guarantors to pay this sum.

[45] CFL also cross appeals on the basis there was an agreement in place which provided for the payment of indemnity costs in the case of any proceedings. CFL claims the Judge was wrong to award costs on a 2B basis only. Tawil opposes the cross appeal on the basis that much of the costs which CFL was put to were as a consequence of CFL’s own misconceived understanding of the claim. They thus submit that it would be unfair to order indemnity costs.

[46] In determining this appeal it is necessary to consider the following questions:

(b) What is the correct meaning of this contract? (i) What is the effect of the break fee? (ii) Who were the parties to the contract?

(iii) Was the date of 4 August 2010 an essential condition? (c) What was the effect of the 23 November 2010 agreement?

(e) Are indemnity costs payable? If so, should they be reduced? If not, should 2B costs have been awarded?

[47] Under s 72 of the District Courts Act 1947 there is a general right of appeal to this Court against every decision made in the District Court. Such an appeal is by way of rehearing.⁶

[48] The powers of the High Court on appeal are contained in s 76(1) which empowers this Court to:

(iii) to enter judgment for any party to the proceedings concerned the High Court directs;

(a) Was a contract entered into on the terms memorialised in the 27 July email?

[49] This question is central. CFL seeks to enforce the break fee clause which is set out in clause 2(a) of the 27 July email. Thus the first question is whether the parties entered a contract as reflected by that email.

[50] Mr Commons, for the appellants, submits that the negotiations between CFL and the Tawil Group occurred in the context of FCL being in negotiation with Transit to receive compensation. The protection of FCL’s leasehold estate was the focus of all negotiations. He submits that the “factual imperatives” between July and November 2010 were fluid and the attempts to protect FCL’s leasehold estate generated a number of different proposals over several months as negotiations evolved. He submits that the 26/27 July 2010 proposal was simply one in a series of

proposals designed to enable the lease to be assigned.⁷Mr Commons submits that it

is significant that four months after the 26/27 July 2010 proposal, events culminated in the assignment of the lease from FCL to WBD on 23 November 2010 when Transit’s solicitors set out the proposal to assign the lease from FCL to WBD. Mr Commons submits that this was the agreement which succeeded rather than the terms identified in the 27 July email.

[51] Furthermore, Mr Commons submits that this situation simply reflects the fact that the whole contractual environment had changed dramatically from that which existed in July 2010. In particular WBD, not EWL, was to be assignee of the lease and there was no requirement to pay $230,000 for the assignment to take place. Transit had reduced the amount by $70,000 and a further $105,000 had been deducted as reflecting the value of the lessee’s interest in the commercial property. He submits the funds required to complete the assignment and proceed with the revised memorandum of understanding (with WBD as the receiver of the

⁷Mr Commons submits the 27 July 2010 proposal was simply the third of nine of which the last

27 July email it is necessary to turn to first principles. For the formation of a valid contract five elements must exist. These are:

(e) the terms of the contract must be sufficiently certain to be enforceable.¹²

[53] In practice each of these requirements is likely to overlap to a significant degree. In order for an offer to be binding it must be an offer which is intended to be legally binding. The same principle applies in relation to acceptance. Both consideration and certainty, while often treated as firm legal principles, also tend to be viewed as representing special elements of legal intention with the facts of consideration and certainty of terms being strong indicia that the parties intended

[54] In the present case the question is when, if ever, the parties intended to enter into a legally binding contract. This question is complicated by the fact that the emails in question do not appear to contain the actual offer and acceptance which would underpin the contract. Instead, the emails purport to record oral agreements

_{reached in earlier discussions between the parties. Nonetheless, in
analysing the five}

¹⁰_{Rose and Frank Company v J R
Crompton and Brothers Ltd [1923] 2 KB 261 (CA).}

¹²G Scammell and Nephew Ltd v Ouston [1941] AC 251 (HL); Re Murphy (deceased) v Otahuhu

¹³See especially Anton’s Trawling v Smith Co Ltd [2002] NZCA 331; [2003] 2 NZLR 23 (CA).

elements the emails provide a source of useful inferences for assessing when, if ever, the parties intended their discussions to become a legally binding.

[55] It is important when examining this question to remember it is not the subjective intentions of the parties which are determinative. Rather, the intention of the parties is to be assessed objectively from their conduct.¹⁴The policy behind this rule is plain. The law of commerce requires that contracting parties be held to contracts they agree to. They should not escape being bound merely by reason of the fact that their unexpressed intentions (whether by act or declaration) differed from the intentions they expressed and displayed to the world.

[56] In the present case, given the nature of the putative agreement between the parties, it is also important to distinguish between an agreement to agree and a conditional contract. An agreement to agree is not a binding contract. This is because the Courts will not force parties to agree.¹⁵Obviously when parties agree to negotiate there can be no certainty those negotiations will lead to the formation of a contract. Conversely, a conditional contract is binding on both parties until and if the conditions are met. If the conditions are not met then the contract is not binding and cannot be enforced.

[57] Applying these principles to the present case the question must be whether the negotiations were complete or whether they were still ongoing as at 27 July

2010. In other words did the discussions between the parties relate to the fulfilment

¹⁴Carlill v Carbolic Smoke Ball Co [1892] EWCA Civ 1; [1893] 1 QB 256 (CA); Harvey v Facey [1893] UKPC 1; [1893] AC 552 (PC); Dysart Timbers Ltd v Nielsen [2009] NZSC 43, [2009] 3 NZLR 160; GHP Piling Ltd v Leighton Contractors Pty Ltd [2012] NZHC 1695, [2013] 3 NZLR 255.

¹⁵Winn v Bull (1877) 7 Ch D 29; May & Butcher Ltd v R [1934] 2 KB 17; Courtney and Fairbairn Ltd v Tolaini Brothers (Hotels) Ltd [1975] 1 All ER 716 (CA); Wellington City Council v Body Corporate 51702 (Wellington) [2002] NZCA 191; [2002] 3 NZLR 486 (CA); but compare W N Hillas and Co Ltd v Arcos Ltd [1932] UKHL 2; [1932] 38 Com Cas 23 (HL); Foley v Classique Coaches Ltd [1934] 2 KB 1 (CA); and Attorney-General v Barker Bros Ltd [1976] 2 NZLR 495 (CA).

[58] This requires an examination of the 27 July email, the opening words of which are:

“Following on from our conversation yesterday I confirm that we have agreed the following relating to the assignment of the FCL lease to EWD and the obligations taken on by CFL to accommodate this.

[59] On their face and taken in isolation these words tend to indicate that in the mind of the author agreement had been reached between the parties. The purpose of the email was to record the terms agreed. However, the last paragraph of the email contradicts this. It reads:

“Hadley ... we are awaiting Andrews’ confirmation of the sum requested by the Crown [Transit] and I request your acceptance of the above by return.”

[60] Ultimately this email is inconclusive. Without surrounding, supporting evidence it does not provide, in itself, sufficient evidence on which to conclude on the balance of probabilities that the parties had reached an agreement as at either

[61] Some support for this conclusion is to be found in the 27 July email from Mr Haydon to Transit’s solicitors in which Mr Haydon recorded that a condition of CFL’s offer to the Tawil Group was the completion of the assignment of the lease prior to 3 August 2010. I agree with Mr Commons that this reflects that the assignment of the lease was a conditional undertaking or an incohate agreement at best.

[62] This view is also supported by the email of 28 July 2010 in which Mr Haydon, corresponding with Transit’s solicitors, stated that he needed to know the amount which Transit was seeking. He stated:

We have put a plan to FC management and it is for them to agree to our terms. The cost of finance is to FC’s account and accordingly, as per your email, there is no need for CFL’s financials.”

[63] The language of this correspondence indicates Mr Haydon, on behalf of CFL, did not consider himself bound by the 27 July email.

[64] This view is reinforced by the emails between Mr Haydon and Mr Tennent. In his email of 28 July 2010 Mr Haydon, in the context of a discussion about FCL’s rent payments and the repayment process, opened the dialogue with the following words:

[66] Plainly, at this stage at least, negotiations were continuing and the final shape of any agreement was uncertain.

[67] The following day, on 29 July 2010, Mr Tennent replied to Mr Haydon seeking further assurances in relation to the rental subsidy as well as relaying Mr Wright’s concerns about Tawil being:

[68] It is plain from the history of this dialogue that, as at 29 July 2010, Tawil was continuing to negotiate the terms and the parties had not reached agreement on all of the necessary terms and conditions.

Mr Haydon sent Mr Tennent and Mr Wright an email recording he required Mr Wright’s agreement noting that they had agreed “on a hand shake” but in the circumstances needed it to be in writing.

[70] The plain wording of that communication indicates that it was an offer which required only Mr Wright’s agreement to make it binding. The email is an offer on the basis of the terms contained in the 27 July email.

[71] This is confirmed by Mr Wright’s reply which made express reference to the emails of 27 July 2010 and 2 August 2010. In this correspondence Mr Wright explicitly accepted Term 2, namely that EWL or a reconstituted FCL would remain factoring with CFL for a further minimum term of two years starting from 3 January

2011. The email also explicitly accepted the Term 3, namely that on confirmation of the assignment of the lease FCL would pay CFL a success fee of $20,000 at $2,000 per month. The only term not explicitly agreed to by Mr Wright in the 2 August

2010 email was the question of the assignment of rent. On this point Mr Wright stated:

“It would be helpful if we could compromise by saying that once the rental is paid to Transit and is paid in full that the rent differential then be paid directly to the new landlord.”

[73] However, Mr Wright’s counter offer was accepted by Mr Haydon in his letter of 3 August 2010. The elements necessary for the formation of a legally binding contract were thus met.

3 August 2010 is that on 3 August 2010, CFL entered into a binding contract with members of the Tawil Group on the terms and conditions contained in the 27 July email, save for the requirement that the rent differential be assigned.

[75] Having determined that a binding contract existed, it is now necessary to consider what it meant. This raises three questions:

¹⁶Hyde v Wrench [1840] EngR 1054; (1840) 3 Beav 334; Shaw v Jones [1924] NZLR 1133(SC); Cross v Davidson (1898) 17 NZLR 576 (CA); but compare Stevenson Jacques & Co v McLean (1880) 5 QBD 346; and Powierza v Daley [1985] NZCA 73; [1985] 1 NZLR 558 (CA).

(i) First, what is the effect of the break fee clause? (ii) Secondly, who were the parties to the contract?

[76] However, before I deal with each of these questions it is necessary to examine the legal principles which are engaged when interpreting contracts.

[77] The traditional approach to contractual interpretation placed a strong emphasis on the written terms of the document. This, combined with the effect of the parole evidence rule, led to an approach where the actual intentions of the parties and the context in which the agreement was made were often entirely secondary to

[78] This formulation has now been overtaken by an approach which places the central focus on determining the objective meaning of the contract in light of its factual matrix. In understanding this context, the Court is permitted to have regard to a wide range of material, probably even including prior negotiations, insofar as that material tends to reflect the objective meaning of the contract.¹⁸

[79] Similarly, on the question of implied terms the traditional approach has been a variegated one. Traditionally, several tests existed, each of which required different prerequisites to be satisfied before a term could be implied. Under this approach it was necessary to first identify the ground on which the term was to be implied (for example, by convention or by business efficacy) and then to demonstrate that the proposed clause satisfied the requisite test.

[80] This approach has now been subsumed by a more holistic test which treats all terms equally and applies a single unified approach to the question of whether a

¹⁷See for example Benjamin Developments Limited v ROB Jones (Pacific) Limited [1994] 3 NZLR

¹⁸See particularly Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1

WLR 896 (HL) at 912-913 and Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] NZLR 444.

given term should be implied.¹⁹In determining whether a term ought to be implied the Court will have regards to the criteria set out in BP Refinery (Westernport) Pty Ltd v Shire of Hastings:²⁰

(2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;

(3) it must be so obvious that "it goes without saying"; (4) it must be capable of clear expression;

[81] These criteria should not be viewed as a strict test, but each is a strong indicia of the true test, namely whether the reasonable person would have understood the contract to include the proposed term.

[82] The break fee clause was contained in paragraph (2) of the 27 July email. It is reproduced below:

“2) Eagle Wire Limited and or a reconstituted Faulkner Collins will remain factoring with CFL for a further minimum term of 2 years. The term to start from the 3/01/2011. The term of two years is subject to:

(a) EW and FC, collectively and not individually, having the right to discontinue factoring and using CFL services after 1 year of the term in 2) on the payment of $100,000.00.

[83] As I understood Mr Commons’ submission it is that clause 2(a) should be interpreted to mean that EWL and FCL would not be required to pay the break fee if they discontinued using FCL’s factoring services within the first year of the two year

¹⁹_{Attorney-General of Belize v Belize Telecom Ltd
[2009] UKPC 10, [2009] 1 WLR 1988 at [27].}

²⁰BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC) at 283.

[84] Mr Commons’ interpretation is not only strained but it also ignores the purpose of the break fee clause. The plain meaning of clause 2 in the 27 July email is either EWL or FCL or both must continue factoring with CFL for the two years beginning on 3 January 2011. After 3 January 2012 the companies may cease factoring with CFL but only on payment of $100,000.

[85] In the present case, accepting for the moment that this clause applies to WBD and had not been superseded by the 23 November agreement (both claims which Tawil contend), there is a difficulty that WBD ceased factoring with CFL in October

[86] It cannot reasonably be argued that the parties intended the clause to mean that EWL and FCL could cease factoring without cost or penalty either before

3 January 2012 or after 3 January 2013, but must pay the break fee if they ceased factoring between those dates. The purpose of the clause is to preserve the factoring relationship and to provide CFL with alternative compensation if that relationship proved to be shorter than expected. Furthermore, there is no commercial sense to CFL agreeing to relieve Tawil from its obligation to pay a break fee in the first year but not the second. By the second year CFL would have enjoyed the benefits of its factoring business with Tawil over the previous year. If Tawil’s interpretation was preferred, it begs the question as to why there was a two year term at all.

[87] The only reasonable interpretation is that the break fee is payable if the factoring relationship ended before 3 January 2013. Under the contract, the Tawil parties were obliged to continue factoring until at least 3 January 2012 following which, in terms of clause 2(a), it could lawfully discontinue on payment of $100,000. It is at least arguable that further damages might be payable for termination earlier than 3 January 2012.

[88] Mr Commons submits that the Judge erred in identifying the contracting parties. He submits the only contracting party was EWL. In support of this submission Mr Commons relies on the evidence of CFL that as at 27 July 2010:

(a) EWL was the only party with obligations the subject of the respondents’ claim;

(b) FCL would be liquidated: the “reconstituted” FCL in the 27 July 2010 proposal would be a new company, not FCL, and could not be a party to the agreement;

[89] Mr Commons submits that the appellants, WDL, Mr Wright and the guarantors, were not parties to the 26 and 27 July 2010 agreement and, as a consequence, no liability can attach to them.

[90] The reference in the 27 July email to a “reconstituted Faulkner Collins”²¹was plainly intended to capture any future entity which might have replaced FCL. Mr Haydon described this in his evidence as an attempt by FCL to “cover their bets”. The contract was agreed between Mr Haydon on behalf of CFL and Mr Wright who controlled the Tawil Group. It is plain from the language of the email that the agreement was intended to bind not only FCL but also EWL and any other Tawil entity that was later assigned the FCL lease. There are two possible interpretations which give effect to this intention:

(a) the contract was between FCL and CFL but contained a requirement that FCL obtain the consent of any assignee of the lease to be bound

(b) the contract was between CFL and Mr Wright as controller of the Tawil Group of companies and obliged him to bind any member of the group (present or future) which was assigned the lease.

[91] In practice and effect these are distinctions without a difference. On either interpretation the parties to the contract were obliged to obtain the consent of any future party to be bound. As such, both parties must have anticipated that novation would occur when the lease was assigned.

[92] Parties to a contract are generally not permitted to assign either the benefits or the obligations of a contract without the consent of the other contracting party. This is because a party is only required to perform those obligations which they have undertaken to perform under the agreement. In some cases, the identity of a party is fundamental to the contract either because they possess some special skill or knowledge or because the work to be done is of a particular kind.²²Consequently, a contracting party will normally only be permitted to assign its obligations and rights under contract with the consent of the other party. This is novation.

23 November 2011 CFL gave its express consent for the assignment of the lease on the basis that WBD would assume the obligations of FCL under the agreements between CFL and FCL. The only reasonable explanation to account for this is that WBD accepted FCL’s obligations under the contract including the obligation to factor with FCL until 3 January 2013.

[94] It follows that I do not accept that the Judge erred in identifying the contracting parties. Nor do I accept that the only contracting party was EWD.

[95] Mr Commons submits that the date of 4 August 2010 was an essential condition and that the Judge erred in not making this finding.

²²Lambly v Silk Pemberton Ltd [1976] 2 NZLR 427 (CA) at 433); Karangahape Road

International Village Ltd v Holloway [1988] NZHC 159; [1989] 1 NZLR 83 at 101-102.

[96] This submission is founded in the repeated references in the correspondence on 27 July 2010 and in the following days to the need for haste and the requirement the terms be settled by 3 August 2010. The significance of this is that 4 August 2010 was the date when the Commissioner’s liquidation proceedings against FCL were to be called. Thus, there was the spectre, albeit remote, the company could be wound up on that date and its assets lost to Tawil.

[97] In the end I do not need to decide this point. Having found the agreement became binding on 3 August 2010, it is clear that any condition that the lease be assigned by that date had been waived.

[98] Mr Commons submits that even if there had been an agreement in terms of the 27 July 2010 and WBD had been a party to that agreement (both matters being denied by the appellants) the agreement would have been amended/superseded by the 23 November 2010 factoring agreement the terms of which were different from the terms set out in the 27 July email.

[99] Mr Commons submits that by 23 September 2010 the situation between the parties had changed materially and, in particular, WBD, rather than EWL, was to be the assignee of the lease and the amount required to be paid to give effect to the assignment had changed.

2010, the terms of which were essentially identical to that which CFL had with EWL, allowed either party on 30 days’ notice to terminate the agreement without cause.

[101] Mr Commons submits that even if there had been a 27 July 2010 agreement and WBD had been a party to that agreement, it would have been amended/ superseded by the 23 November 2010 factoring agreement between WBD and CFL and, in particular clause 9.2. This clause permitted either party, on 30 days’ notice, to terminate the agreement without cause.

[102] In contrast, Mr Dale for CFL argues that the 23 November 2010 agreement was executed to give effect to the 3 August 2010 agreement and should be interpreted as being subject to it. As discussed above, the traditional parole evidence rule provided that where a contract is clear on its face, evidence may not be admitted to contradict that plain meaning. A strict adoption of that traditional approach would result in the 23 November 2010 agreement superseding the earlier contract thereby removing the obligation on WDL to pay the break fee.

[103] However, as also discussed earlier in this judgment, the courts have indicated an increasing willingness to admit evidence of the factual matrix in which the contract was formed to aid interpretation.

[104] The factual matrix in the present case is that the purpose of the 23 November

2010 agreement was to formalise the assignment of FCL’s obligations to WBD. The agreement was all but identical in its terms to that which FCL had previously entered. It cannot be interpreted as releasing WBD from its obligations under the

27 July email because to do so would be to construe the agreement in a way which is contrary to the clear intentions of the parties.

[105] In coming to this conclusion, I do not ignore the argument which Mr Commons pressed for that the subsequent behaviour of the parties leads to the inference that clause 9.2 of the factoring agreement, indicates that the parties intended to be bound. He argues that because CFL did not oppose WBD ending the factoring relationship, this indicates that CFL believed WBD was entitled to end the relationship in terms of clause 9.2.

[106] While this argument is superficially attractive it fails, in my view, on two grounds:

(a) First, CFL clearly still anticipated that the $100,000 break fee would be paid and took steps to enforce it. Indeed, CFL may well have formed the view that the $100,000 break fee was preferable to continue the factoring relationship and chose to pursue this claim instead. Certainly, CFL did not consider that it had to simply accept

(b) Secondly, the existence of this fact is insufficient to displace the balance of the factual matrix which indicates that the exit clause was regarded as important to CFL and was intended to form part of its relationship with WBD.

[107] It follows I am satisfied that clause 9.2 of WBD’s factoring agreement with CFL does not operate to displace or render nugatory the previous agreement between the parties that a break fee of $100,000 would be payable if EWL or a reconstituted FCL (that is, WBD) discontinued factoring with CFL after the first year of the two year term.

(d) Did Tawil’s guarantee extend to the obligations contained in the 27 July

17 December 2008 and 23 November 2010 respectively. The third defendants are the trustees of the Hadley Wright Family Trust and are guarantors of both companies under guarantees executed on 18 December 2008 and 23 November 2010 respectively.

[109] These guarantees are expressed in identical terms. In each, the guarantor:

“... unconditionally and irrevocably guarantees to each Secured Party the due and punctual payment of the Principal Debt and the due and punctual observation and performance.”

[110] The guarantee also defines the terms “Principal Debt” and “Principal

“‘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.

‘Principal Obligations’ means every present and future obligation of the Principal Debtor to the Secured Parties or either Secured Party (whether alone or with any other person, and in any capacity). It includes (without limitation) all such obligations pursuant to the Facilities.”

[111] Mr Commons submits that the Judge erred in applying the law and facts as to guarantees. In particular, he submits that WBD owed no obligation to continue factoring with the respondents and thus no breach of obligation arose requiring any of the guarantees to be called upon.

[112] However, for the reason already given, I am satisfied that WBD was intended to be bound and was bound by the obligations of EWL in the terms expressed in clause 2 of the 27 July email. Thus the question is whether the guarantees are enforceable.

[113] The obligations set out in the deeds are expressed in the widest possible terms. Plainly this was deliberate. The intention was to capture all obligations which CFL and WBD each owed to CFL. For the reasons already expressed, these obligations include the obligations under the 3 August 2010 contract which incorporated clause 2 of the 27 July email.

[114] It follows I am satisfied that her Honour was correct in deciding that the guarantees were enforceable.

[115] Mr Commons submits that the Judge erred in declining WBD’s counterclaim in the sum of $20,000. For the same reasons he advanced in support of his submission that there was no concluded contract ever reached between the parties until 23 November 2010, Mr Commons submits that CFL was not authorised to deduct the sum of $20,000 as a success fee, let alone the sum of $7,500, claimed by CFL to be justified under the factoring agreement as a claim for additional attendances as a consequence of any default by WBD in its obligations under the agreement.

[116] In response, CFL claims that clause 3 of the 27 July email is enforceable because it is a term contained in a valid and enforceable contract. CFL also claims that, in terms of its agreement with WBD, CFL was entitled to claim the $7,500.00.

[117] For the reasons already given, while I do not accept that the 27 July email evinced the terms of an oral contract concluded the previous day, I am satisfied that the success fee was a term of the contract which I have found was formed on 3

August 2010. Under that agreement clause 3 of the 27 July email was a term. Clause 3 provided:

[118] In reliance on that term CFL, apparently without objection, made 10 monthly deductions between December 2010 and September 2011 totalling $20,000.

[119] I am satisfied that CFL was entitled to make these deductions and accordingly this part of the counterclaim must fail.

[120] The next question on the counterclaim is whether CFL was entitled to deduct

$7,500 from WBD’s account. Both CFL and Tawil give different explanations for why this sum was deducted. Tawil claims that it was a fee for attendances relating to the negotiations with Transit. As such, it submits, it was wrongly charged as the 27

July agreement makes no provision for such a charge. CFL does not dispute that the

$7,500 was not covered by the 27 July agreement, but it says that the fee was charged in relation to another matter. It relies on a clause in the factoring agreement which provides that CFL may charge WBD:

“... a sum in respect of additional attendances by the Purchaser’s directors and employees as a consequence of any default by the Vendor in its obligations under this agreement. Such sum shall be determined by multiplying the time spent by the hourly rate applicable to the relevant director or employee...”

[121] Neither party has been able to point me to cogent evidence which supports its explanation of how the fee was charged. In the absence of evidence I am not in a position to make any determination as to whether the fee was permitted by any of the

agreements between the parties. Because this is WBD’s cause of action, it is for WBD to satisfy me that they should succeed. They have failed to do so. For this reason, I conclude that this part of the counterclaim must also fail.

[122] Mr Dale submits that each guarantee provides that CFL is entitled to indemnity costs in any proceeding. It would seem that the issue received little or no attention in the District Court. Certainly, her Honour made no reference to CFL seeking indemnity costs. The only reference in her judgment to costs is to be found in the last paragraph where she invited the parties to attempt to resolve the issue between them and in the absence of agreement made timetabling orders. Ultimately, costs were awarded on a 2B basis.

[123] Mr Commons appears to accept there is provision under the agreement to make an award for indemnity costs but he submits that CFL unreasonably increased its own costs in preparing for arguments which were not pleaded. In particular, he claims CFL took steps in preparing for trial to address an anticipated argument that the break fee was a penalty and thus unenforceable when that question was not in issue because it had not been pleaded. Mr Commons goes further. He submits that because CFL did not succeed in its claim for interest on the judgment sum they were only 45 per cent successful and that the 2B cost award should be further reduced by

[124] While it is an accepted principle that costs may be reduced where each party has enjoyed some measure of success, this should not be extended to penalise a party simply because it was not as successful as it might have hoped. Certainly it is not a mathematical exercise where costs are to be calculated on the fraction of the pleaded claim that is awarded in the judgment.

[125] In the present case CFL was unquestionably the successful party. As a result they were entitled to costs and no reduction of the sort suggested by Mr Commons is called for.

[126] However, Mr Dale submits indemnity costs should have been ordered because r 14.6 of the High Court Rules provides that the Court may award indemnity costs in certain circumstances where it is provided for under a contract or deed.

[127] In ANZ Banking Group (NZ) Ltd v Gibson the Court of Appeal held that a contractual right to indemnity costs is enforceable. In Frater Williams & Co Ltd v Australian Guarantee Corp (NZ) Ltd, the Court said that where there is a contractual right to indemnity costs, the question for the Court to address is whether the costs

claimed are reasonable.²³However, the Court stressed that the word “reasonable” in

this context does not import a discretion in the usual sense.²⁴Rather, as the Court had observed in Beecher v Mills:²⁵

“In the case of a contract [giving an indemnity for costs] it must in the end be a matter of determining what recovery is expressly or impliedly intended. In principle, anything less than a full indemnity for costs properly incurred must leave the indemnitee with part of the liability for which the indemnifier is prima facie responsible.²⁶In the absence of a contrary indication it is not to be assumed that the parties intended such a result. Nor can there ordinarily be any room for the exercise of a judicial discretion to order less costs and thereby erode the contractual protection the indemnity was intended to provide. A contractual obligation of that kind is enforceable unless contrary to public policy and, as in ANZ Banking Group (NZ) Ltd v. Gibson²⁷we are unable to see how requiring the Beechers in this case to meet all costs (calculated on a solicitor/client basis) properly incurred by Mr Mills in

relation to the performance of the indemnity under clause 20 could be said to impede the administration of justice or otherwise be contrary to any discernible public policy considerations.”

[128] It follows 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. Of course, the reasonableness criteria allows the extent of these costs to be challenged, but other than where there is a general failure on the part of the party seeking costs to act reasonably, an award should not be made for scale costs.

[129] In the present case, there is little evidence to establish the reasonableness or otherwise of the costs claimed by CFL. However, Tawil’s objections are limited the to one issue, namely that it was unreasonable for CFL to prepare arguments addressing whether the break fee was a penalty clause. This argument was not advanced by Tawil and thus Mr Commons submits it represents wasted expenditure.

[130] In the present case, the decision to prepare for a penalty argument is perhaps best described as hedging. It is clear that the argument might well have arisen. Indeed, it is perhaps surprising it did not. It follows that it was not unreasonable for CFL to prepare its case in anticipation that this was an argument it would have to meet.

[131] I am of the view that CFL has acted reasonably. It has succeeded on all the major issues both in this Court and in the Court below. Further, I consider that it was not unreasonable for CFL to prepare to address an argument which appeared likely to arise. A party should not be penalised for being thorough in its preparations, even when it ultimately proves that such care was not required. It is only when the preparations are unreasonable that costs should be declined.

[132] I therefore order indemnity costs in favour of CFL. However, the extent of costs was not an issue argued in detail at the hearing. I thus order that the Tawil group parties pay CFL’s reasonable costs in this proceeding on a solicitor client basis. If the parties are unable to agree on the extent of these costs, I will receive

memoranda as to costs within twenty working days of this judgment, with a further five working days being granted for memoranda in reply if required.

[134] While I consider that the Judge erred in determining when the parties entered into the contract, I agree with the Judge’s conclusion that a contract was formed on the basis of the agreed terms in the 27 July email. I have determined that this occurred on 3 August 2010.

[135] I further consider that the obligations under this contract were assigned to WBD and were subject to the guarantees provided by the other Tawil parties. Consequently, I find that the Judge was correct to order Tawil to pay the break fee of

[136] I also consider that the Judge was correct in dismissing WBD’s counterclaim.

[137] In relation to the cross appeal as to costs I find in favour of CFL and order that Tawil pay CFL’s reasonable costs in this proceeding. Should the parties be unable to agree on the amount of costs, I will receive memoranda in relation to costs in terms of [132] of this judgment.

[140] CFL’s cross appeal is allowed. Indemnity costs are awarded in respect of the

District Court proceedings and the appeal to this Court with leave reserved to file memoranda on quantum in the absence of agreement.

High Court of New Zealand Decisions

Wire by Design Limited (in receivership and in liquidation) v Commercial Factors Limited [2015] NZHC 985 (11 May 2015)