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Rudyard Holdings Limited v Kiwibank Limited [2014] NZHC 1253 (5 June 2014)

Last Updated: 18 June 2014

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2012-404-003684 [2014] NZHC 1253

_{JUDGMENT OF THOMAS J}

This judgment was delivered by me on Thursday 5 June 2014 at 4.00 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date:...............................

Solicitors:

Neilsons Lawyers Ltd, Auckland

_{Buddle Findlay, Wellington}

RUDYARD HOLDINGS LIMITED v KIWIBANK LIMITED [2014] NZHC 1253 [5 June 2014]

Background

[1] The plaintiff, Rudyard Holdings Limited (RHL), is a company incorporated to undertake a refinancing and property development. In August 2008 RHL and related parties entered into financing arrangements, which are the subject of these proceedings, with the defendant, Kiwibank Limited (the Bank).

[2] Mr Reece has a beneficial interest in RHL. He is an experienced and successful builder, had been involved in an unsuccessful business venture through the Reece Wang Group and as a result was made bankrupt. Through a trust he had an interest in two development sites at Crestview, Papakura, Auckland and Naylors Drive, Mangere, Auckland. His family trusts owned residential properties at Paritai Drive and Polo Prince Drive both mortgaged to the Bank and guaranteed by him. His lawyer and co-trustee, Graeme Halse, became involved in attempting to assist Mr Reece. Mr Halse is a shareholder and director of RHL. Through his solicitor’s mortgagee practice, Mr Halse had advanced some short term funding to Mr Reece. By mid 2008 Mr Reece was in default of his loans from the Bank on Paritai Drive and Polo Prince Drive. Due to the state of the property market the Bank faced a shortfall were it to realise those securities. A meeting was held on 19 August 2008 and was attended by Mr Reece and Mr Halse and Bank representatives. What happened at the meeting is at the heart of these proceedings.

[3] Following the meeting the Bank sent a loan offer to RHL whereby the Bank would provide finance for the construction of three houses at Crestview, a living allowance for six months for Mr and Mrs Reece, capitalisation of interest for the Reece Family Trusts’ borrowings and an increase of its existing facility to accommodate facility balance arrears. The borrowings were to be guaranteed by RHL and the Reese Family Trusts and a security given by way of first mortgages over the Crestview and Naylors Drive properties. Mr Halse would also personally guarantee the borrowings of RHL.

[4] RHL’s case is that the principal contract between the parties was an oral

agreement made at the meeting on 19 August 2008 which was not fully reflected in

the loan documents signed by the parties on 22 August 2008. Key terms of the oral contract were not included in the loan documents, RHL maintains, including:

(a) That the Bank would fund the construction of all 15 houses at

Crestview; and

(b) That the core debt would roll over at the end of the first 12 months.

[5] The plaintiff maintains that, without those terms, the transaction would be financial suicide for the plaintiff and its related interests.

[6] Other relevant persons/entities are:

(a) The Carolyn Reece Family Trust: trustees being Carolyn Reece and

Graeme Halse.

(b) The Rob Reece Family Trust: trustees being Rob Reece and Graeme

Halse.

Together the above trusts are known as the Reece Family Trusts (RFTs). (c) The Double R Trust: trustees being Graeme Halse and Rob Reece.

[7] The properties involved are:

(a) Paritai Drive and Polo Prince Drive. These properties were owned by the RFTs (each trust held 50 per cent interest in each). The Bank held a first ranking mortgage;

(b) Two development sites, both at the start mortgage free and owned by the Double R Trust, one at Crestview, Papakura, Auckland and one at Naylors Drive, Mangere, Auckland; and

(c) Litten Road, Howick (subsequently obtained as part payment on the sale of Polo Prince Drive).

[8] The Bank financed the construction of six houses at Crestview. RHL built a further two houses which the Bank eventually declined to finance. The RFT loans went into default and the Bank exercised its power of sale in respect of Crestview and Naylors Drive.

The pleadings

Second amended statement of claim

[9] RHL originally pleaded four causes of action. However, the third and fourth causes of action (breach of the Fair Trading Act and contractual misrepresentation) were effectively not pursued. I do however deal with them briefly at paragraphs [150]-[158].

[10] The first two causes of action are breach of contract and estoppel.

_{Breach of contract}

[11] RHL submits that the terms agreed upon in the meeting of 19 August 2008

constituted a “principal” oral contract.

[12] The Bank would provide the following finance:

(a) $700,000 to RHL, guaranteed by the RFTs, Mr and Mrs Reece, and Mr Halse, for the construction of three residential dwellings at Crestview. The funds would be paid out subject to the Bank’s standard construction lending criteria.

(b) $700,000 to RHL, guaranteed by the RFTs, Mr and Mrs Reece, and Mr Halse, for the purpose of reimbursement of earlier expenditure secured by way of mortgage over Crestview and Naylors Drive.

(c) $60,000 to RHL, guaranteed by the RFTs, Mr and Mrs Reece, and

Mr Halse, as living allowances for six months for Mr and Mrs Reece,

to be paid into the trust account of Foy and Halse solicitors and distributed to Mr Reece at $10,000 per month.

(d) $100,000 to RHL, guaranteed by the RFTs, Mr and Mrs Reece, and Mr Halse, for the capitalisation of interest for facilities (a), (b) and (c) above.

(e) $420,000 to the RFTs, guaranteed by Mr and Mrs Reece and RHL, for the capitalisation of interest for the RFTs’ borrowings.

(f) $300,000 to the RFTs, guaranteed by Mr and Mrs Reece and RHL, to increase the existing loan facility from $250,000 to $300,000 to accommodate facility balance arrears for the RFTs’ borrowings.

(g) Interest would be charged on RHL’s borrowings at the Bank’s

business bank rate, less a discount margin.

(h) Interest would be charged on the RFTs’ borrowings at the Bank’s

variable housing rate.

(i) The Crestview and Naylors Drive properties would be transferred to RHL, which would undertake the development of the 15 Crestview sites with the provision of funding from the Bank.

(j) Security would be given for the above borrowings by way of first mortgages over the Crestview and Naylors Drive properties.

(k) The Bank would provide funding for the construction of the 15 houses at Crestview by way of loan advances of up to $700,000 per stage on a basis of three houses per stage.

(l) RHL would guarantee the obligations to the Bank of the RFTs’ borrowings. These borrowings were not to be called up pending completion of the 15 houses and would be repaid:

(i) From the sale of the properties at Paritai Drive and Polo Prince

Drive on an orderly basis; and if necessary,

(ii) Through the profits made from the construction of the 15 houses on Crestview.

(m) Another company named Rudyard Homes Limited would be incorporated to undertake the construction of the houses on Crestview.

(n) Mr Halse would underwrite the sale of the 15 houses at the registered value once complete, less 15 per cent, and on a staged basis of three houses at a time. In return, Mr Halse was to receive 20 per cent on the net sale proceeds from the sale of each house.

(o) Mr Halse would provide a personal guarantee for all of the borrowings undertaken by RHL.

(p) Mr Halse would be the sole director of RHL and Rudyard Homes

Limited.

(q) The net proceeds of sale from the construction of the 15 houses at

Crestview were to be distributed as follows: (i) First, 20 per cent to Mr Halse;

(ii) Secondly, to be paid against the borrowings taken out by

RHL;

(iii) Thirdly, to the RFTs borrowings; and

(iv) Fourthly, to RHL.

(r) The funding facilities referred to in (a) and (f) would be rolled over if necessary on the settlement of each tranche of three houses at Crestview.

(s) The principal contract was conditional upon all borrowers and guarantors, in particular Mr and Mrs Reece, obtaining independent legal advice.

[13] RHL pleads that terms (a) to (g) and (i) to (s) were express representations. RHL says term (h) was an implied representation.

[14] However, to the extent that the terms of the principal contract were not expressed at the meeting, RHL submits that they were implied, given the matters known to both parties at the time, namely:

(a) In the absence of a voluntary addition to the Bank’s security in relation to loan advances to the RFTs, the Bank was likely to suffer a loss of up to $2 million.

(b) Without the Bank providing funding for the construction of 15 houses on Crestview, it would be impossible for RHL to repay the borrowings referred to in [12](b) above.

(c) The Crestview and Naylors Drive properties were worth $6.425 million at that time and were not secured in favour of the Bank.

(d) The Reece interests had no incentive to offer the Crestview and Naylors Drive properties to the Bank as additional securities unless they received in return funding for the development of the 15 houses on the Crestview sections.

(e) If the Reece interests gave first mortgage securities over the Crestview and Naylors Drive properties to the Bank they would lose the opportunity to raise further funds to develop the Crestview and Naylors Drive sections from other sources.

(f) RHL had been established specifically to complete the Crestview

subdivision and so did not have the ability to service the Bank’s

interest requirements (including the RFTs’ borrowings) without

completing the whole of the subdivision.

(g) Mr Halse had no incentive to provide a guarantee and or to underwrite the sales without funding to build on all 15 sections at Crestview.

(h) The Bank knew that there were likely purchasers of the houses as they were constructed because of its connection with the Auckland Community Housing Trust.

[15] Alternatively, to the extent that the loan letter of 20 August 2008 from the Bank is thought to be inconsistent with the principal contract and purported to vary or replace it, RHL submits that the loan letter did not reflect the intention of the parties and should be rectified by adding at the commencement of the letter “the following terms are to be read, and are subject to, the terms of the principal contact of 19 August 2008”.

[16] RHL contends that the Bank’s calling up of all loans, exercise of its powers of sale in relation to RHL’s properties and its refusal to advance further loans to enable completion of the 15 Crestview houses was a breach of the principal contract.

[17] RHL claims damages, namely:

(a) The loss of sales proceeds that RHL would have received from the completion and sale of houses 9 to 15 at Crestview; and

(b) The loss following the sale of houses 7 and 8 at Crestview at an undervalue; and

(c) The loss of value of Naylors Drive. [18] RHL also claims interest and costs.

_Estoppel

[19] In the alternative, RHL submits that at the meeting on 19 August 2008 the Bank, by its representatives Mr Beer and Ms du Plessis, represented and undertook to RHL that in return for a first mortgage security over Crestview and Naylors Drive properties, the Bank intended to provide funding as set out in [12] above and in particular:

(a) To provide funding for the construction of all 15 houses on the

Crestview properties;

(b) To refinance the existing mortgage over the Crestview and Naylors Drive properties on the same terms (on the settlement of each tranche of three houses);

(c) To apply the proceeds of sale in accordance with the agreement set out at [12](q) above;

(d) To refinance the existing mortgage loans over the Crestview and Naylor Drive properties and RFTs borrowings on the settlement of each tranche of three houses.

[20] RHL says the Bank intended that, in reliance on these representations, RHL would grant the Bank a first mortgage over the Crestview and Naylors Drive properties.

[21] In reliance on the representations, RHL did grant a first mortgage over these properties. In the circumstances it would be unconscionable to allow the Bank to resile from its representations.

[22] RHL submits that the Bank did renege on the representations. [23] RHL therefore claims:

(a) Damages to be particularised following judgment as to liability; (b) Interest and costs.

Second amended statement of defence

_{Breach of contract}

[24] In relation to the first cause of action, the Bank pleads that the purpose of the meeting on 19 August 2008 was to gather information from Mr Reece and Mr Halse on the proposed borrowing and to discuss options but not to enter into any agreement for the lending of money by the Bank. The Bank denies that it made an offer of lending facilities to RHL at any time during the meeting of 19 August 2008.

[25] The Bank submits that its representatives said that if construction and sale of the three houses on Crestview was successful, the Bank would consider further funding for construction on the Crestview sections in three house tranches, on a case by case basis and against presales. Its representatives said that, before the Bank would make an offer of funding to RHL, the Bank would require:

(a) First registered mortgages from RHL over the Crestview and Naylors

Drive properties;

(b) A breakdown of constructions costs approved by a quantity surveyor; (c) Presales of the proposed three houses before funding would be

considered and formal underwrites of those sales from Mr Halse;

(d) That RHL and the Trustees cross-guarantee each other’s indebtedness

to the Bank;

(e) Personal guarantees from Mr Halse, Mr Reece and Mrs Reece; and

(f) That Mr and Mrs Reece obtain independent legal advice in relation to the proposed restructure.

[26] The Bank submits that it explained that if, after considering the proposal internally, an offer was to be made, then it would be made on Wednesday 20 August

2008 or Thursday 21 August 2008.

[27] In the alternative, the Bank submits that if there was an agreement entered into at that meeting, then the agreement was too uncertain to be enforceable. The alleged agreement did not stipulate the:

(a) Amounts to be loaned over the whole life of the transaction, being the construction of 15 houses;

(b) Terms and conditions of the lending;

(c) Terms for which the loans would be offered;

(d) Payments that were required to be made in respect of each loan and when;

(e) Terms and conditions of the guarantees and other securities for the lending;

(f) Treatment of interest;

(g) Circumstances constituting default; and

(h) Consequences of default.

[28] The Bank denies the matters allegedly “known to both parties” and on the basis of which RHL says the terms should be implied. With regards to the Reece interests’ lack of incentive to offer the Crestview and Naylors Drive properties as security (above at [14](d)), the Bank says that the restructure, as proposed by Mr Reece and Mr Halse:

(a) Gave Mr Reece the opportunity to:

(i) Decrease the trustees’ indebtedness to the Bank;

(ii) Obtain time for the orderly sale of the Paritai Drive and Polo Prince Drive properties to maximise the sale proceeds and the reduction of debt;

(iii) Avoid the bankruptcy of Mrs Reece;

(iv) Repay the $700,000 advanced by Mr Halse to Mr Reece; and

(v) Provide remuneration to Mr Reece from his work for RHL in managing the development.

(b) Provided Mr Halse with the opportunity to:

(i) Recover the $700,000 loaned by Mr Halse to Mr Reece;

(ii) Assist Mr Reece, his close friend, in improving his position; (iii) Make a profit from Rudyard Homes Ltd’s contract with RHL

for the construction of the houses; and

(iv) Make a profit from the sharing arrangement that Mr Halse had made with Mr Reece, without the Bank’s knowledge, for 20 per cent of any profit from the development of Crestview and Naylors Drive.

[29] With regard to RHL’s pleading at [14](d), the Bank says that it was open to the Reece interests to arrange to refinance with another lender.

[30] The Bank notes that each of the loan agreements, which were signed by RHL, the Trustees, Mr and Mrs Reece and the Bank, specified that (cl 1.2):

(a) The applicable terms and conditions of the loan agreement are set out in the agreement and the Bank’s lending terms and conditions; and

(b) By signing the agreement, the customer agrees to be bound by both documents.

[31] The Bank relies on those terms and other terms and conditions of the loan agreements and deeds of guarantee and indemnity as if they were pleaded in full.

[32] The Bank therefore denies that it breached any contract with RHL. It acted in accordance with the formal documentation by enforcing its rights in relation to the outstanding indebtedness of the trustees and RHL to the Bank.

[33] The Bank denies that it caused any loss to RHL. The Bank denies that it sold houses 7 and 8 at Crestview undervalue. Furthermore, RHL entered into agreements for the sale of houses 7 and 8 prior to seeking funding from the Bank, and the refusal of the Bank to fund construction was not causative of any alleged undervalue in sale price.

_Estoppel

[34] The Bank denies RHL’s allegations of estoppel. The Bank says that no unequivocal promises or representations were made by the Bank during the meeting and that its representatives informed Mr Reece and Mr Halse that any offer of loan facilities would be made by the Bank on 20 and 21 August 2008.

[35] The loan offer of 21 August 2008 and the subsequent loan and security documentation signed by RHL contained all of the terms and conditions of the contract between the parties and were consistent with any statements of intention made by the Bank in the meeting.

[36] The Bank says that it acted in accordance with the terms of the written loan and security documents and made no promises or representations inconsistent with the terms of those documents.

[37] Furthermore the Bank points out that it was dealing with experienced business people who can be expected to record their positions in writing. The Bank

submits that it was not reasonable for Mr Reece or Mr Halse to rely on any matters

not contained in the Bank’s written offer of 21 August 2008.

[38] Quite some time after conclusion of the hearing the Bank sought leave to amend its pleadings. RHL opposed the application. The application was refused. The amendments were not necessary to determine the controversy between the parties.

Issues

[39] The issues to be considered are:

(a) Did the parties enter into an oral contract on 19 August 2008?

(b) If not, are there additional contractual terms existing between the parties either implied or contained in a collateral oral contract?

(c) Should the contract be rectified?

(d) Did the Bank create or encourage a belief through representations given by it to the plaintiff on 19 August 2008 on which the plaintiff reasonably relied to its detriment in circumstances where it would be unconscionable for the Bank to depart from that belief?

(e) Was there misleading and deceptive conduct?

(f) Did the Bank make any misrepresentations which induced the plaintiff to enter into the contract?

The evidence

[40] The evidence relating to all the issues centres on what happened at the meeting attended on 19 August 2008 by Mr Halse and Mr Reece, and Mr Beer, Mr Symons and Ms du Plessis for the Bank. What happened at that meeting is at the core of the plaintiff ’s case whether it is in contract or estoppel. All those who attended the meeting gave evidence. There was one further witness for the Bank,

Mr Apperley, whose evidence was relevant only to show what happened when the RHL file was sent to him in the recoveries department of the Bank. My findings are crucial to the legal analysis and I set them out in some detail.

[41] I start by setting out my findings in relation to two of RHL’s key witnesses.

Graeme Halse

[42] Mr Halse, the director and shareholder of RHL, was also a trustee of the RFTs, a trustee of the Double R Trust, Mr Reece’s personal lawyer and a lender to Double R Holdings Ltd through his contributory mortgage practice. His firm was instructed by the Bank to act for it on the loan transaction. He personally underwrote the sale of the first six houses at Crestview and intended to do so on the next tranches of housing to be built. He guaranteed the obligations of RHL in respect of the loan advances made to it ($1,560,000).

[43] The fact that Mr Halse wore a number of different hats means that some care needed to be taken in analysing his evidence. While the Bank raised some issues in an effort to undermine the Court’s impressions of Mr Halse’s integrity, it must be remembered that he exposed himself to quite some risk in supporting Mr Reece in the way in which he did it. He gave the Bank his personal guarantee in respect of the loan to RHL and he underwrote the sale price of the first six houses. Whether or not the Bank in fact agreed that he should retain a share of any sale proceeds, it was still a considerable exposure to undertake. In fact it appears that, at no stage, did Mr Halse take the full share of any sale proceeds to which he claimed he was entitled.

[44] Any suggestion that Mr Halse was motivated to proceed with the loan to allow the RFTs to repay advances made on a short term basis from Mr Halse’s contributory mortgage practice is untenable in the context of that exposure.

[45] The Bank also placed some reliance on an earlier loan offer in March 2008 of

$3.5 million to Double R Holdings Limited with guarantees required from Mr Reece and Ms Wang for the development of Crestview. The Bank referred to the letter

written by Mr Halse to Ms Wang’s lawyer after Mr Halse had received instructions from the Bank to act on the proposed loan suggesting that it impacted adversely on Mr Halse’s general credibility. I am not prepared to draw the inference the Bank suggested from Mr Halse’s letter wherein he outlined the ways in which the advance could be utilised which was different from the purpose the Bank intended. What I am prepared to infer, however, is that Mr Halse demonstrated that he was prepared to take a relatively flexible approach to bank funding on the basis that, once money had been advanced, it could be used for a variety of purposes despite the Bank’s purpose in advancing the money.

[46] The Bank’s case would have it that RHL made a bad commercial decision in entering into the transaction. On the face of it that would seem unlikely given Mr Halse’s 36 years as a commercial lawyer including in the area of commercial property. That he would have allowed Mr Reece, with whom he had a long, close association and for whom he was taking on liability, to enter into an arrangement which was potentially so disadvantageous for both him and Mr Reece is difficult to accept. That said, Mr Halse agreed that, in hindsight, the documentation should have been amended to make it clear that the funding was to be “rolled over”. He described it as “an error by omission”. Furthermore he made the comment that he:

“was brought up in an era when if somebody says something they do it and they don’t rely on strict legalities to avoid it.”

Mr Reece

[47] Mr Reece was a beneficial owner of the relevant properties, a Director of Double R Holdings and had a beneficial interest in RHL. Mr Reece accepted that in his experience major trading banks usually make loan offers in writing.

[48] Mr Reece said that, at the time of the meeting, he was actively perusing other funding options for the development of Crestview. No documents establishing any offers of such funding were presented to the Court. At best there were indications by email of potential second tier lender interest. I accept that the information before the Court suggests that what funding may have been available was at high interest rates with high fees and for short terms.

[49] There is no doubt that Mr Reece is a very good builder. He is clearly driven and energetic. He can say with some justification that he has been hard done by, by what has happened, given that he made available security to the Bank worth, as the Bank witnesses agreed, more than $6 million. Mr Reece was bankrupt. The two properties, Crestview and Naylor Drive, being held by the Double R Family Trust, were outside of the Bank’s reach. The Bank’s own documents referred to its potential losses of between $800,000 and $2,000,000. If the agreement as alleged by the plaintiff had been fulfilled, the plaintiff says that all borrowings would have been repaid in full and a surplus of $512,000 would have been generated (all going well). This would have been the result after construction and sale of the first three houses built on Crestview and the subsequent 10 sales to the Auckland Community Housing Trust (ACHT). In addition, Mr Reece would have been left in effective possession of the last two remaining sections at Crestview and the whole of the development site at Naylors Drive.

[50] There was some suggestion in the evidence that it was possible for Mr Reece to have derived some benefit from the sale of Paritai Drive and Polo Prince Drive. That presumably would have been only if the properties had sold extremely well. In the meantime, he (or the RFTs) was incurring interest costs on those properties. Polo Prince Drive was sold in a deal involving a cash payment and Litten Road in exchange. Mr Reece spent efforts himself doing up Litten Road in order to maximise value. The sale of Paritai Drive took much longer than expected, all parties having assumed it would sell within 12 months. There was at one stage an offer of $2.8 million but the evidence of Mr Reece was that he did not accept the offer because of a forthcoming auction where the Bank had required a reserve price of $2.9 million. With the possible exception of Mrs Reece, the only party who benefited from the transaction at issue was the Bank.

Background to meeting on 19 August 2008

[51] Mr Halse and Mr Reece seemed to say that the assurances which they maintained Mr Beer gave them at a meeting on 14 May 2008 underpinned their interpretation of the events of 19 August. They alleged that Mr Beer had said, “we are not in the position of selling properties by mortgagee sale or bankrupting people,

that is not our style”. Mr Beer and Ms du Plessis, Bank employees who attended that meeting, do not recall any such unequivocal assurances. I prefer their evidence, bolstered as it is by the reality of the situation. Mr Beer was an employee of the Bank, a commercial entity in the business of making money. It is inherently unlikely that any such unequivocal comment would have been made. It is more likely that Mr Beer gave, as he maintained, general reassurances to the effect that the Bank would not act precipitously in exercising its mortgagee sale powers. However, even if Mr Beer said what was alleged, it was only in the context of a preliminary meeting. It would have been unreasonable in the circumstances and particularly given Mr Halse’s position as an experienced commercial lawyer, for him to rely on any such statement to the extent claimed by him.

[52] Mr Halse’s evidence was that at the 14 May 2008 meeting he had formed the impression that Mr Beer had authority to approve any borrowing up to $10 million. I accept the Bank’s evidence that it did not, and would not, have told Mr Halse this. In any event, it takes the plaintiff ’s case no further as Mr Halse’s own evidence is that, following the meeting of 19 August 2008, he expected a loan offer to be issued by the Bank. In other words he knew that the parties would enter into written documentation which would constitute the contract recording the terms of the loan advance.

[53] Mr Halse also placed reliance on the fact that the Bank had introduced him and Mr Reece to Titan One, a Wellington development company, and ACHT. A possible joint venture to develop Crestview with Titan One was explored. ACHT purchased the first six houses at Crestview and there was the possibility of future sales. From the context of those introductions, Mr Halse inferred that the Bank was prepared to lend funds to develop all 15 sections at Crestview, particularly if Titan One was involved.

[54] Mr Beer’s evidence about these matters was somewhat equivocal. The evidence of the other two bank witnesses’, Mr Symons and Ms du Plessis, painted a picture of Mr Beer being rather more involved than his evidence might suggest. Mr Beer was clearly enthusiastic about a potential joint venture between RHL and Titan One as well as the potential for ACHT to be involved in Crestview.

[55] The plaintiff says this bolsters its case that the Bank had agreed to finance RHL’s construction of all 15 houses at Crestview. However, I accept the Bank’s analysis of the difference between any such proposal and that involving Mr Halse. The Titan One proposal involved an experienced development company in an apparently healthy financial position and with a strong marketing and sales infrastructure. Furthermore I note that Titan One’s proposal for a joint venture with RHL involved the Crestview sections being transferred to the joint venture for the value of one dollar. That provides some context to the situation in which Mr Reece found himself in 2008.

Meeting on 19 August 2008

[56] Although Mr Reece admitted he did not have a clear recollection of the meeting on 19 August, what is telling is his diary note of 19 August where he said, “very good meeting”. He has the best recollection of the events surrounding the meetings on 18 and 19 August but by his own admission played little part in the vital meeting of 19 August.

[57] Mr Reece said in evidence that Mr Halse took the lead role in the meeting and that he was only generally following the discussion. His evidence was that his aims going into the meeting were to protect his wife from bankruptcy, to gain time for the orderly sale of Polo Prince Drive and Paritai Drive and to obtain an income. When questioned, he said the wish to protect his wife from bankruptcy was not a major driver. He did accept that the written loan offer allowed him to achieve his aims from the meeting.

[58] In my assessment Mr Beer was keen to down play what occurred at the meeting on 19 August 2008. For example he referred to it as a “workshop”. It was clearly more than that given that Mr Symons’ own notes referred to the imminence of a formal loan offer. His recollection was also different from that of Ms du Plessis and Mr Symons, Mr Symons referring to the proposed ongoing relationship as “a journey” and Ms du Plessis acknowledging that it was envisaged at the meeting that the houses would be built in tranches of three.

[59] Ms du Plessis’ evidence about the events of the meeting seemed candid and fair. Her recollection was that there was an expectation that funding was likely to continue provided the required information was provided and the Bank was satisfied with the overall position each time further finding was required. She accepted that it would not have been an unreasonable assumption for someone to think that offers going forward after the initial transaction would have been made.

[60] Ms du Plessis was however firm that there was no commitment to fund all 15 houses given at the meeting on 19 August 2008. She did not accept that the next tranche would have been a foregone conclusion, noting that, before any offer was made by the Bank, it was necessary for a credit memorandum to be prepared and for the credit committee to provide approval.

[61] Mr Symons did not resile from his evidence that nothing was said on 19

August 2008 that could have been taken as an agreement by the Bank to fund the whole development. Furthermore, he maintained that, if any such commitment had been made, he would have noted and remembered it. His evidence was that the Bank would never have loaned the funds it did without the security over both Crestview and Naylors Drive.

[62] Mr Beer’s evidence was that the Bank was not in a position to agree to any deal on 19 August 2008 because of the financial information that needed to be analysed by the Bank in a credit memorandum and the requirement for credit approval. Furthermore, had the analysis not supported the lending, then the lending would not have been approved and the offer would not have been made. His position was that the Bank would not have proceeded if the requirement was for funding of construction of 15 houses. Notwithstanding my comment about Mr Beer above, I accept that evidence.

[63] There was quite some dispute as to why the loan offer was limited to three sections. The Bank says that was a requirement of the Bank. Mr Halse says that was his requirement because he did not want to underwrite more than three houses at a time. I am satisfied from the evidence that it was only Mr Reece who was looking at doing the full development of 15 sections. I accept the evidence of both Mr Halse

and Mr Beer that each of them for their own reasons wanted three sections only to be developed at the outset. The Bank’s evidence in this regard is supported by Mr Symons’ evidence and in particular his hand written notes which refer to the possibility only of ten sales to ACHT in the future.

[64] I accept Mr Symons’ evidence that, had there been mention that Mr Halse was to receive a 20 per cent profit share of sale proceeds, then he would have written it in his notes. There is no doubt that would have been material information that should have been included in the credit summary. The same observation can be made with regard to the other items allegedly agreed at the meeting such as continued rolling over of the loans including the capitalised interest facilities; that the Bank would fund the development of Naylors Drive; that the interest rates would be at the rate alleged by Mr Halse; that RHL’s cross guarantee of the Reece Family Trust debt would not be called up pending completion of the 15 houses and the way in which the net proceeds of sale from the construction of the 15 houses would be applied. It is inconceivable that, were these matters discussed and agreed at the meeting, Mr Symons would not have recorded them. Mr Symons recorded such mundane points as the fact that Mr Reece was good at finding houses and his wife had a job. He would hardly have neglected to record matters obviously important for the Bank’s offer of funding.

[65] The principal difficulty is that the plaintiff’s case relies entirely on the meeting of 19 August 2008. The only person who made any notes at that meeting was Mr Symons. Mr Halse made no notes either at or immediately following the meeting of 19 August 2008. His own evidence as to the events of that meeting has changed over time, for example his affidavit evidence in the summary judgment proceeding is different from the evidence given at this hearing. He claims to recollect 22 terms of an oral agreement he maintains was reached at the meeting on

19 August.

[66] Mr Halse agreed that his understanding from the meeting was that RHL would shortly receive an offer setting out the agreed terms. Mr Halse in fact made hand written amendments to the offer limiting his guarantee and amending a clause

reference. He did not insert any reference to the construction of all 15 houses or the rolling over of the various loans.

The credit memorandum

[67] The Bank’s evidence that the credit memorandum was required before any credit decision and loan offer could be made further supports the Bank’s witnesses’ evidence that no agreement could have been made at the meeting of 19 August 2008. The credit memorandum was prepared mainly by Mr Symons but with input from Mr Beer and Ms du Plessis.

[68] The first page under the heading “Matter for consideration” recorded that approval was sought for new facilities “to assist with initial construction of three residential houses on ... Crestview. This will also incorporate the provision of interest capitalisation facilities and new underpinning guarantor”.

[69] The memorandum recorded that “the clients have done all the right things in a collapsing financing market and are committed to protecting themselves and [the Bank] as they work through the present issues”.

[70] At the time of the memorandum there was an offer on Polo Prince Drive and an auction scheduled for 7 September 2008 on Paritai Drive. The real estate appraisal indicated a realisable value of $3.1 million for Paritai Drive (then

$1 million below the original May 2007 rateable value).

[71] The memorandum noted that on sale of the three planned houses the net proceeds of $0.474 million would be applied to the ongoing holding costs of the group and future development plans through reduction of debt. The report said:

Important note:

Mr Reece has commenced conversations with the Auckland Community Housing Trust (ACHT) who are considering purchasing ten (of the remaining 12) sites at Crestview...and contracting the clients to construct houses thereon. It is envisioned that, whilst there will be the need to fund construction costs, Mr Reece will realise a profit realisation of approximately 1.580m if it proceeds.

ACHT are also interested in Mr Reece’s property at Naylors Drive in

Mangere.

[72] In respect of the proposed funding of six months living costs the Credit

Memorandum said:

Upon full utilisation of the facility, the client should have realised the net profit from the project of approximately $0.474m and be self sustaining again.

[73] The credit memorandum records that the value of the existing held security, Polo Prince Drive and Paritai Drive, totalled $3.64 million being 80 per cent of their estimated sale price. The proposed new securities totalled $3.817 million being calculated at 50 per cent of the registered value in the case of the undeveloped lots and 80 per cent in the case of the proposed three houses.

[74] Debt servicing was described as having been accommodated largely by way of interest capitalisation facilities for the next 6–12 months until the profit and risk outlay from the project could be realised.

[75] An interest capitalisation facility of $0.42 million was proposed to service the existing RFT debts “for the next 12 months (pending sale of Paritai/Polo Prince properties)”.

[76] The proposed facility was for “an interest capitalisation facility of 0.100m ...

to accommodate six months interest costs for these facilities. This also allows for

1.5 months additional interest in the event of delays”. The credit memorandum noted “the potential sale(s) ACHT which may eventuate in the coming weeks/months. ACHT have expressed a strong interest in entering contracts for the purchase of ten completed houses” within Crestview. The memorandum said:

Applying the same metric as the project feasibility for the proposed three houses, Mrs Reece and Halse would be expected to realise a profit margin of

$1.580m from selling ten houses to ACHT in Crestview...nor is any

potential realisation from the Naylor/Mangere site where it is likely to be a joint venture project within the next 3-6 months between Rudyard Holdings

Limited and Titan One Limited.

[77] The memorandum stated:

Mr Reece has fallen victim to finance company/R2M industry collapse following on from the softening of housing market. This has left Mr Reece exposed on his existing development stock and therefore curtailed his realisation of profits. Rather than galvanise any Kiwibank loss (estimated at

800k – 2m), it has been determined that proceeding with the above outlined proposal is a more satisfactory means of exiting the present situation and minimising any loss carried by the client and/or Bank. Mr Reece has the support of his close friend and solicitor, Graeme Halse, who with Mr Reece intend to facilitate the outline proposal to retire debt. Coupled with this there is fresh relationship with ACHT which, if it comes to fruition, could be providing significant profit realisation to the client.

[78] The stepped cash flow analysis annexed as appendix three to the Credit Memorandum showed the existing borrowing; that proposed; the reduction of total group debt to $2.638 million on the sale of Paritai Drive and Polo Prince; a further reduction to $1.6 million once three houses were sold; and a return to profit of

$0.512 million if 10 houses were completed and sold to ACHT. It said:

Ultimately servicing/exit will come from the renewed construction activity of Mr Reece upon restitution of the market to normal trading activity.

[79] If the Credit Memorandum is seen as a reflection of what was discussed at the meeting on 19 August, it does reflect a common understanding going forward. The Credit Memorandum assumed Paritai Drive and Polo Prince Drive would sell within 12 months, it assumed the first three houses would be built and sold within six months. The possibility of continued Bank involvement was signalled, particularly if ACHT were interested in purchasing 10 more houses. Notably the Credit Memorandum did not consider or analyse the potential development of all 15 houses on Crestview.

[80] It could be said that the Credit Memorandum failed to present the full picture from the perspective of the plaintiff. For example it did not properly record the strength of Mr Reece’s position given the Double R Trust’s ownership of the two unencumbered development sites. As a result of the transaction the Bank obtained new securities with registered valuations of $7.634 million ($3.817 million secured value) in return for total proposed new borrowings of $1.980 million. This demonstrates the security that would have been available to Mr Reece, through the Double R Trust, had he abandoned his liabilities on Polo Prince Drive and Paritai Drive. On the face of it, given that the new borrowings of $1.98 million included

capitalisation of interest costs on Paritai Drive and Polo Prince Drive, Mr Reece through the Trust would have been able to borrow money to develop Crestview and provide for his living costs. That was an option open to Mr Reece. The evidence however suggested that the state of the market at the time meant this was not the attractive proposition for lenders that the plaintiff submits was the case. The only evidence of other lender interest was from second tier lenders at high interest rates for short term. It is unclear from the brief email evidence how many houses could be built at a time with such financing. As noted above, Titan One was interested in a joint venture provided Crestview was transferred to the joint venture for $1.

[81] The Credit Memorandum was a Bank document. It recorded the transaction from the Bank’s perspective. The Bank obviously envisaged Mr Reece being back on his feet after the sale of three houses. Whether that assumption was right or wrong, that was the Bank’s analysis. The Credit Memorandum, prepared as it was the day following the meeting of 19 August 2008, supports the Bank’s case.

[82] The plaintiff placed some reliance on what it alleged were breaches of the Bank’s lending policies, for example in that the transaction provided financing to enable the borrowers to meet existing debt servicing obligations to the Bank. Whether or not the Bank’s policies were breached does not advance the plaintiff’s case. The transaction was approved at the requisite level in the Bank. The only relevance to the plaintiff ’s case of any breach could be to support a submission that the Bank officers breached Bank policy by entering into an oral contract on 19

August 2008. However, the evidence does not support that contention.

What happened next?

[83] A significant amount of time at the hearing was devoted to what happened after the loan was made. It is relevant to a consideration of the parties’ intentions in respect of the claimed oral contract.

[84] On 20 August 2008 the Bank sent the letter of offer to RHL and the RFTs. It was accepted on 21 August 2008 and Mr Halse wrote to the Bank noting that Mr and Mrs Reece had received independent advice from another firm of solicitors. As

mentioned above, Mr Halse amended the letter of offer to show that his personal guarantee was limited to the advances from the Bank to RHL.

[85] Although Ms Boyce, senior lawyer at Foy and Halse, was not at the crucial meeting she did deal with documentation of the loan offer. She gave evidence that she requested an increase in the Bank priority amount. That might well emphasise what the plaintiffs intended or hoped following the August 2008 meeting but goes no further than that.

[86] The loan documentation was entered into on 22 August 2008.

[87] In December 2008 Mr Reece sold Polo Prince Drive for cash plus Litten

Road, resulting in the Bank receiving just over half a million dollars on 10 February

2009.

[88] The sale of the first three lots at Crestview settled on 29 April 2009.

[89] On 11 May 2009 RHL requested funding to build another three houses. No formal application was required. In June, the Bank sent a letter of offer to RHL for a

$700, 000 term loan for that purpose.

[90] In August 2009 the sale of Litten Road settled.

[91] At some stage Mr Symons realised that the facility of $420,000 in respect of interest capitalisation would not cover Mr Reece for 12 months and that the facility should have been increased to $465,000. Although he requested that this was actioned, it was not. I note that the drawdown of funds commenced on 28 October

2010, whereas the first default recorded by the Bank was in mid August 2010, that is, prior to expiration of the 12 month facility period. Had Mr Symons’ request been actioned, it is reasonable to assume that the plaintiff’s file would not have been sent to the recoveries department of the Bank when it was.

[92] Mr Apperley was not involved during the relevant time when any alleged contract was made. His involvement was limited to considering the file once it had been passed to him in the recoveries department of the Bank. As could be expected,

he then took a different view of the transaction than the other bank officers who gave evidence. He was focused on protecting the Bank’s position and recovering what he understood to be a default. Matters proceeded extremely slowly and ultimately the decision was taken by him to realise the Bank’s securities. A great deal could be said about the reasonableness or otherwise of what happened at this point and some of it was conceded by Mr Apperley in evidence. The unfortunate sequence of events started with the Bank considering that there had been a default whereas, if the error identified by Mr Symons had been corrected, this would have not occurred, at that time anyway. Matters then went from bad to worse. Interest was mounting and progress was not being made. While I can express concern at the way in which matters were dealt with and indeed comment on the resulting unfairness to RHL and the RFTs, those events do not assist in my determination of the plaintiff’s case.

[93] In September 2009 the sale of the houses on lots four and five settled. Lot six did not settle until mid March 2010.

[94] In April 2010 RHL requested funding to build two more houses (7–8).

[95] The sale of Paritai Drive did not take place until mid August 2010, two years after the events in question.

[96] The result of the transaction was as at 26 November 2010 the Bank had received total payments of $2.6 million plus $3.028 million being the proceeds from the sale Polo Prince Drive, Paritai Drive and the last house constructed at Crestview. From 21 August 2008 the total new lending by the Bank totalled $2 million. In addition the Bank received approximately $1.3 million from the mortgagee sale of Crestview and Naylors Drive. The total recovery by the Bank was approximately

$7 million.

The Bank’s view of the situation

[97] The Bank’s witnesses were cross-examined in quite some detail about the consequences of the transaction and about its logic from the perspective of the plaintiff. The purpose of the questions was, I surmise, to endeavour to show that the

transaction which eventuated made no sense from the plaintiff ’s perspective, the Bank must have known that, the “contract” alleged by the plaintiff made sense from the Bank’s perspective and therefore the “contract” must have contained the terms claimed. Relevant examples of this are set out in this section of the decision.

[98] Mr Beer was initially unwilling even to accept that the Bank would have given consideration to funding houses after the first three were constructed. He did, however, eventually accept that, if the same level of information had been provided as had been for the six houses and Mr Halse provided the sales underwrite, then he could not think of any reason why the Bank would not lend on future development. Mr Symons agreed with that. Mr Beer also conceded that, if he had been involved in August 2010, he would most likely not have recommended that the file was referred to the recoveries department. He conceded that the best option was to continue with building.

[99] Ms du Plessis confirmed that it was her expectation that, if three houses were built and sold and the same level of information and sale underwrites were received for the next three houses, then new funding would be provided.

[100] Mr Symons accepted that the way that RHL would recover from its difficulties was by developing all of Crestview.

[101] While the Bank was provided with a valuation for Crestview as both undeveloped and fully developed immediately after the meeting on 19 August 2008, the Bank’s witnesses were clear that before there could be a funding proposal for the whole development, pre sales were required.

[102] The evidence on behalf of the Bank from Mr Beer and Mr Symons was that RHL could have refinanced the development with another lender. However both Mr Symons’ and Mr Beer’s evidence was that the Bank needed all the security it took for the construction of three houses only and that it would not have provided any financing without the full security.

[103] Mr Symons’ evidence was that, if Polo Prince Drive and Paritai Drive had sold within the 12 months as expected and three houses completed, then refinance would have been an option because then the ratio between the residual debt and remaining security was a reasonable one.

[104] Mr Beer and Mr Symons conceded that, even if the loan for interest capitalisation had to be extended, the Bank still had considerable security.

[105] The Bank’s witnesses agreed that it was in the Bank’s best interests for the sale of Polo Prince and Paritai Drive to be an orderly process in order to obtain highest possible price.

[106] Mr Symons was asked about the way in which any payments received by the Bank should have been applied. The plaintiff placed reliance on this noting that in August and September 2009 when various substantial sums were received, the Bank did not consult RHL as to where they were to be applied. The plaintiff said that, had the Bank applied them to the accrued interest accounts, there would have been no default.

[107] While the Bank’s witnesses generally agreed that, all things being equal, further funding was likely to have been advanced after the first three houses, they did not accept that there was any intention to hold the Bank to that course at the meeting on 19 August 2008. Each new proposed tranche of funding would have to have been considered afresh. Whether those involved in August 2008 would have expected the plaintiff’s matters to have been referred to the recoveries section of the Bank is not the issue. The reasonableness or fairness of what happened subsequent to the original transaction is not the issue. The issue is what occurred on 19 August 2008.

Oral contract

The Law

The question of whether there has been a concluded bargain can be broken down into two requirements:¹

(a) An intention to be immediately bound (at the point when the bargain is said to have been agreed); and

(b) An agreement, express or found by implication, or the means of achieving an agreement (e.g. an arbitration clause), on every term which

(i) was legally essential to the formation of such a bargain; or

(ii) was regarded by the parties themselves as essential to their particular bargain.

[108] A term is to be regarded by the parties as essential if one party maintains the position that there must be agreement upon it and demonstrates that accordingly to the other party.²

[109] In the context of verbal agreements, in Verissimo v Walker, the Court of Appeal held that three questions were relevant to the issue of whether there was a binding agreement:³

(a) Did the parties arrive at a consensus?

(b) If so, was the consensus capable of forming a binding contract?

(c) If it was, did the parties intend that the consensus at which they arrived should constitute a binding contract?

[110] Absent factors to the contrary, there is a natural inference that the parties do not intend to be legally bound by any consensus reached until formal documentation

¹ Electricity Corporation of New Zealand Ltd v Fletcher Challenge Energy Ltd [2002] 2 NZLR

_{433 (CA) at [53] [Fletcher Challenge].}

² _{At [53].}

³ Verissimo v Walker [2006] 1 NZLR 760 (CA) at [26] and [33], adopting the reasoning of

Mahoney JA in Carruthers v Whitaker [1975] 2 NZLR 667, 671 (CA).

has been executed.⁴ What is common practice in New Zealand in relation to entering into a particular kind of contract (in this case banking) is also relevant.⁵

Analysis

[111] It would be evident from my findings that I am not satisfied that the parties entered into an oral contract at the meeting on 19 August 2008.

[112] Having objectively assessed the parties’ intent I am not satisfied that they intended to be bound at the meeting. All the Bank’s witnesses were clear on this point. Mr Halse acknowledged that he awaited a written letter of offer from the Bank. The natural inference from that is that there was no intention to be bound until an agreement was formally recorded in writing. This inference is strengthened by the Bank’s requirement referred to at the meeting and acknowledged by RHL that Mr Reece was to be separately advised. The context reinforces that conclusion. The Bank required its loan agreements to be recorded in writing after completion of the necessary internal review procedures at the Bank. Mr Halse and Mr Reece were both aware of that. This situation was an unusual one. Mr Reece was bankrupt, the Bank faced a considerable shortfall in realising its existing securities and yet proposed to advance further funding to Mr Reece.

[113] Furthermore material conditions of the loan were not even discussed, for example, the interest rates and terms of the loan.

[114] At best on 19 August there was a common understanding of a potential path going forward, based on assumptions that Polo Prince Drive and Paritai would sell within 12 months, that the houses would be built and sold more quickly than, after the first three, they were. The unfolding events demonstrated that the expectations were not fulfilled. Paritai Drive did not sell until two years later. By March 2010 six houses only had been constructed and sold.

[115] The claim essentially is that the Bank benefitted from an unfair deal. That may well be the case. However it is an un-commercial and unrealistic proposition

⁴ _{At [32].}

⁵ At [20].

that the Bank should have been considering the transaction from Mr Reece’s point of view and looking to protect him. As Ms du Plessis said, “We are a Bank”. That the Bank was not considering his view point was obvious from the way in which the Credit Memorandum was framed.

Implied Terms

The law

[116] The Court of Appeal recently traversed the law on implied terms, stating:⁶

[243] The most commonly cited test for implied terms is that described in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings [1977] HCA 40; (1977) 16 ALR 363 (PC) at 376:

“In [their Lordships’] view, for a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (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; (5) it must not contradict any express term of the contract.”

[244] More recently, in Equitable Life Assurance Society v Hyman, Lord

Steyn said:

“If a term is to be implied, it could only be a term implied from the language of [the instrument] read in its commercial setting.”

[245] In 2009, the Privy Council delivered its judgment in Attorney-General of Belize v Belize Telecom Ltd discussing the implication of terms in the context of the articles of association of a company providing telecommunications services... Lord Hoffman (speaking for the Board) discussed the implication of terms in some detail. In a key passage, Lord Hoffman said:

“... the court has no power to improve upon the instrument which it is called upon to construe, whether it be a contract, a statute or articles of association. It cannot introduce terms to make it fairer or more reasonable. It is concerned only to discover what the instrument means. However, that meaning is not necessarily or always what the authors or parties to the document would have intended. It is the meaning which the instrument would convey to a reasonable person having all the background knowledge which would reasonably be available to the audience to whom the instrument is addressed: see Investors Compensation Scheme Ltd v West Bromwich Building Society [1998]

1 WLR 896, 912-913. It is this objective meaning which is conventionally called the intention of the parties, or the intention of Parliament, or the intention of whatever person or body was or is deemed to have been the author of the instrument.”

⁶ Hickman v Turn & Wave Ltd [2011] 3 NZLR 318 (CA) at [243]–[249].

[246] Lord Hoffman supported this statement by reference to the remarks of Lord Pearson (with whom Lord Guest and Lord Diplock agreed) in Trollope and Colls v Northwest Metropolitan Hospital Board:

“The Court’s function is to interpret and apply the contract with the parties have made for themselves. If the express terms are perfectly clear and free from ambiguity, there is no choice to be made between different possible meanings: the clear terms must be applied even if the Court thinks some other terms would have been more suitable. An unexpressed term can be implied if and only if the Court finds that the parties must have intended that term to form part of their contract...”

[249] This point was made succinctly by Lord Hoffman when discussing whether an implied term is “necessary to give business efficacy” to the contract. His Lordship said:

“That formulation serves to underline two important points. The first, conveyed by the use of the word “business”, is that in considering what the instrument would have meant to a reasonable person who had knowledge of the relevant background, one assumes the notional reader will take into account the practical consequences of deciding that it means one thing or the other. In the case of an instrument such as a commercial contract, he will consider whether a different construction would frustrate the apparent business purpose of the parties. That was the basis upon which Equitable Life Assurance Society v Hyman [2002] 1 AC 408 was decided. The second, conveyed by the use of the word “necessary”, is that it is not enough for a court to consider that the implied term expresses what it would have been reasonable for the parties to agree to. It must be satisfied that it is what the contract actually means.”

(footnotes omitted)

Analysis

[117] The Bank tended an offer to RHL. The terms of the offer were explicit and readily ascertainable. The real crux of the plaintiff’s case is that the deal was unfair. As the authorities emphasise, however, it is not a matter for the Court to seek to impose fairness between the parties or include reasonable terms. There is no need to imply any terms to give the contract business efficacy; the contract is effective without the additional terms sought; the terms sought, for example that interest would continue to be capitalised no matter how long it took to sell Paritai Drive, are certainly not so obvious that they go without saying; and some of the terms sought, for example the length of the contract, would contradict express terms.

[118] Mr Dale submitted that there were terms that required implication, for example that RHL would progress the construction of the houses and that all reasonable efforts would be made to sell Paritai Drive and Polo Prince Drive. Those

are indeed good examples of terms that could be implied on a proper legal analysis. The terms the plaintiff seeks to have implied are in a different category.

[119] While the terms RHL seeks to have implied would make the deal better for RHL, it would have made it considerably worse for the Bank. When the transaction is analysed from the Bank’s perspective, there would be no benefit whatsoever in implying the terms sought by the plaintiff. Indeed to imply such terms would result in a commercially unsound Bank decision. For example the terms sought would require the Bank to capitalise interest on the Reece Family loans indefinitely with no fixed term and no fixed amount, not call in loans when they were in default and offer ongoing construction financing on unclear terms. Mr Halse accepted that nobody envisaged Paritai Drive remaining unsold for more than 12 months. The terms the plaintiff would have implied into the contract would have to allow for that possibility. However not even the plaintiff contemplated that situation.

[120] Finally, RHL is faced with the difficulty that the Bank’s loan documentation contains what is clearly intended to be an entire agreement clause. Such clauses are inserted for the purpose of precluding agreements such as the plaintiff contends as they provide that all of the relevant contractual terms are found in the documents themselves.

Collateral Contract

The law

[121] In Krukziener v Hanover Farms the Court of Appeal stated:⁷

Extrinsic evidence is admissible to establish a collateral contract, which may supplement or vary the principal agreement in ways that do not contradict its primary purpose: Lysnar v National Bank of NZ Ltd [1935] NZLR 129 (PC), A M Bisley & Co Ltd v Thompson [1982] 2 NZLR 696 (CA). In a commercial transaction between experienced parties who are legally represented, strong and unequivocal evidence is needed to warrant an inference of a common understanding that was not expressly recorded: Air NZ Ltd v Nippon Credit Bank Ltd [1997] 1 NZLR 218 (CA), at p 225.

⁷ Krukziener v Hanover Finance Ltd (2008) 19 PRNZ 162 (CA) at [35].

Analysis

[122] The starting point is that no binding offer was made by the Bank on

19 August 2010. If that is the case regarding the initial loan advance for three houses, then a collateral contact covering the balance of the development could not have been formed on that day either. I accept the Bank’s evidence that there was no authority to enter any such contract. Furthermore Mr Halse accepted he was waiting for an offer.

[123] Even if there were some sort of collateral contract made on 19 August, it would have been subject to Bank approval. Bank approval was neither sought nor given.

[124] Furthermore, any collateral contract would have to have been conditional on the Bank’s approving construction costs and pre sale contracts at each stage of the development, as well as being conditional on many unknown factors, for example when Polo Prince Drive and Paritai Drive sold and how quickly the new houses could be built. There was no evidence that the parties even discussed what were to happen if Paritai Drive did not sell within 12 months. Mr Halse accepted they all assumed it would have sold within that time. When asked whether the Bank would have to continue with the arrangement as alleged by the plaintiff had Paritai Drive never sold, Mr Halse replied that the arrangement would have had to survive, however long it took. That position is plainly untenable.

[125] For essentially the same reasons as those relating to an oral contract, I reject the proposition that there was a collateral contract between the parties reached at the meeting on 19 August 2008. There might have been some general understanding as to a potential long term position but not to the extent that there was a consensus capable of forming a binding contract and any intention to form contractual relations.

Rectification

The law

[126] The principles governing rectification are set out in Swainland Buildings

Limited v Freehold Properties.⁸ The party seeking rectification must show that:

(a) The parties had a common continuing intention, whether or not amounting to an agreement, in respect of a particular matter and the instrument to be rectified;

(b) There was an outward expression of the accord;

(c) The intention continued at the time of the execution of the instrument sought to be rectified;

(d) By mistake, the instrument did not reflect that common intention.

[127] The burden of proving the common and continuing intention lies on the party who claims that the written contract should be rectified.⁹ To have a “common intention”, the parties must have actually reached agreement on the issue – it is not enough that each party formed a similar but uncommunicated belief as to a matter.¹⁰

Similarly this element will not be satisfied if the negotiations between the parties were vague and inconclusive.¹¹

[128] If the defendant can satisfy the court that he or she understood the agreement to be exactly what was stated in the written contract, rectification will be excluded.¹²

_{Importantly, a unilateral mistake will not found a basis for rectification.}¹³

⁸ _{Swainland Buildings Limited v Freehold Properties [2002] EWCA Civ 560, [2002] 2 EGLR 71.}

⁹ _{Tucker v Bennett (1887) 38 Ch D 1 (CA) at 9.}

¹⁰ Kiriacoulis Lines SA v Compangnie d’Assurances Maritime Aeriennes et Terrestres (CAMAT)

_{(The Demetra K) [2002] EWCA Civ 1070, 2 Lloyd’s Rep 581 at 592.}

¹¹ _{CH Pearce Ltd v Stonechester Ltd [1983] CLY 451.}

¹² Burrows, Finn & Todd Law of Contract in New Zealand (4^th ed, LexisNexis, 2012) at 362, citing

_{Lloyd v Stanbury [1971] 1 WLR 535, 2 All ER 267.}

¹³ Tri-Star Customs and Forwarding Ltd v Denning [1999] 1 NZLR 333 (CA).

[129] The evidence is clear that there was no mistake on part of the Bank. There may well have been a mistake on the part of RHL or Mr Reece in any event, however that was not pleaded.

[130] For the same reasons as set out above, I reject the claim seeking rectification. There was no common continuing intention and as such no intention to be recorded by rectification.

Equitable estoppel

The law

[131] Courts have frequently supported the view that all types of estoppel are species of one broad genus which is based on unconscionability.¹⁴ In National Westminster Finance NZ Ltd v National Bank of NZ, Tipping J set out a well-known statement on the rationale of the doctrine:¹⁵

The decisions of the Court in Wham-O MFG Co v Lincoln Industries [1984]

1 NZLR 641 and Gillies v Keogh [1989] 2 NZLR 327 have emphasised the element of unconscionability which runs through all manifestations of

estoppel. The broad rational of estoppel, and this is not a test in itself, is to

prevent a party from going back on his word (whether express or implied)

when it would be unconscionable to do so.

[132] However, courts are reluctant to give equitable assistance to “well-resourced, well-advised commercial parties with similar bargaining power dealing at arm’s length”.¹⁶ Thus Kirby P has stated:¹⁷

The wellsprings of the conduct of commercial people are self-evidently important for the efficient operation of the economy. Their actions typically depend on self-interest and profit-making not conscience or fairness. In particular circumstances protection from unconscionable conduct will be entirely appropriate. But courts should, in my view, be wary lest they distort the relationships of substantial well-advised corporations in commercial transactions by subjecting them to the overly tender consciences of judges.

¹⁴ _{Burrows, Finn & Todd Law of Contract in New Zealand, above n 12, at 157.}

¹⁵ _{National Westminster Finance NZ Ltd v National Bank of NZ [1996] 1 NZLR 548 (CA) at 549.}

¹⁶ _{James Every-Palmer “Equitable Estoppel” in Andrew Butler (ed) Equity and Trusts in New}

_{Zealand (2}^nd _{ed, Thomson Reuters, Wellington, 2009) at [19.2.5].}

¹⁷ Austotel Pty Ltd v Franklins Selfserve Pty Ltd (1989) 16 NSWLR 582 (NSWCA).

... is not a sort of joker or wild card to be used whenever the court disapproves of the conduct of a litigant who seems to have the law on his side... Nor do [the cases] case doubt on the general principle that the court should be very slow to introduce uncertainty into commercial transactions by over-ready use of equitable concepts such as fiduciary obligations and equitable estoppel.

Estoppel by representation

[134] A party alleging estoppel must show four elements.¹⁹

Belief or expectation created or encouraged

[135] A belief or expectation must have been created or encouraged through some action, representation, or omission to act by the party against whom the estoppel is alleged. The greater the role of the allegedly stopped party in the adoption or encouragement of the belief or expectation, the more likely that it would be bound in conscience to abide by it.

[136] The belief or expectation must be created by clear words or conduct.

[137] In The Scaptrade, this element was found to be lacking.²⁰ A contract for the charter of a ship provided that hire payments were to be made on the eighth of every month and that, if the payment was late, the owner could withdraw the vessel. The owner exercised that power on one occasion when payment was four days late. The the fact that on several previous occasions the owners had tolerated late payment was held not to create an expectation that such an approach would be adopted in future.

Robert Goff LJ stated:²¹

...it is not at all easy to infer, from the mere fact that late payments had been accepted in the past by the owners without protest, an unequivocal representation by them not to exercise their strict legal right of withdrawal in the event of late payment by the charterers of a subsequent instalment of hire, if only because the circumstances prevailing at the time when the

¹⁸ Yeoman’s Row Management Ltd v Cobbe [2008] UKHL 55, [2008] 1 WLR 1752 at [46] and

_[81].

¹⁹ _{Summarised at [19.2] in James Every-Palmer above n 16.}

²⁰ _{The Scraptrade [1983] QB 529.}

²¹ At 535.

earlier late payments were accepted may not be the same as those prevailing in the future.

[138] Travel Agents Association of New Zealand Inc v NCR (NZ) Ltd concerned a lease contract.²² The plaintiff lessee argued that a letter written to it by the defendant landlord contained an implied representation or promise to the effect that if the plaintiff located suitable alternative premises, the defendant would not insist that the plaintiff take a renewed sub-lease (as it was entitled to do under the lease). In dismissing the application, Eichelbaum CJ stated:

Certainly in the field of commercial transactions it would seem undesirable to give undue encouragement to the notion that legal rights, frequently expressed with precision in formal documents, may be overridden by conduct or informal communications of an ambiguous kind.

Reasonable reliance

[139] Reasonableness is assessed in three senses. First, the belief or expectation must have been reasonably held. Estoppel will not arise if the representee had actual or constructive knowledge that the representation made to it was untrue,²³ or knew (or should have known) that the person making the representation was not authorised to do so.²⁴

[140] Secondly, it must have been reasonable for the representee to have relied on the belief or expectation. Reasonable reliance depends on the circumstances of the case and the nature of the belief or expectation.²⁵ In the context of commercial transactions, reliance on “informal communications of an ambiguous kind” is unlikely to be considered reasonable or to override contractual rights.²⁶ James Every- Palmer notes:²⁷

The closer the relationship is to a commercial transaction paradigm between two well-resourced and self-interested parties of equal bargaining strength dealing at arm’s length, the more reasonable it is to expect their relationship to be governed by a contract. And the more reasonable it is to expect a contract to be entered into to protect a belief or expectation, the easier it is to

²² _{Travel Agents Association of New Zealand Inc v NCR (NZ) Ltd (1991) ANZ ConvR 553 (HC).}

²³ _{Waitemata Electric Power Board v King Builders Ltd [1993] 1 NZLR 312 (CA).}

²⁴ _{Legione v Hateley [1983] HCA 11; (1983) 152 CLR 406 (HCA).}

²⁵ _{James Every-Palmer, above n 16, at [19.2.2].}

²⁶ _{Travel Agents Association of New Zealand Ltd v NCR (NZ) Ltd above n 22.}

²⁷ James Every-Palmer, above n 16, at [19.3.4].

infer that by not entering into a contract a gamble was being taken that the expectation would not be fulfilled.

[141] Thirdly, ongoing reliance must have been reasonable. Where the party who has relied on the belief/expectation becomes aware that the other party intends to depart from it, the first party must take reasonable steps to mitigate its position.²⁸

Detriment

[142] A party alleging estoppel must show that detriment will be suffered if the belief or expectation is departed from. Detriment may be in the form of the time, effort or money spent in reliance on the belief/expectation, or it may be that in reliance on the belief/expectation the party claiming estoppel has forgone other opportunities to gain the benefit which will be lost or avoid the detriment that will be

suffered.²⁹

Unconscionability

[143] Lastly, it must be unconscionable for the party against whom the estoppel is alleged to depart from the belief or expectation. The preceding factors will feed into the assessment of whether this unconscionability is present. The intentions of the representor will also be relevant, particularly if he/she encouraged the other party’s

reliance “in a cavalier manner”.³⁰

[144] As the Court of Appeal noted in Hickman v Turn & Wave Ltd:³¹

[I]t is less common and more difficult to establish promissory estoppel on the basis of a pre-contractual promise or representation. This is because the party seeking to establish the presentation faces obvious evidential difficulties in proving a promise not to enforce a contractual provision when that party subsequently signs a contract in which he or she agrees to perform the relevant obligation notwithstanding the claimed promise that he or she would not have to do so. In such circumstances, statements made in pre- contractual negotiations may be over taken and contradicted by the written contact.

²⁸ _{James Every-Palmer, above n 16, at [19.2.2].}

²⁹ _{Smyth v Wadland [2007] NZHC 658; (2007) 26 FRNZ 255 (HC) at [134].}

³⁰ _{Dowell v Tower Corp (1991) ANZ ConvR 178 (HC).}

³¹ Hickman v Turn & Wave Ltd, above n 6, at [213].

[145] Lord Neuberger made a similar point, writing extra-judicially³² on the seminal cases of Cobbe v Yeoman’s Row Management and Thorner v Major. His Lordship pointed out that in a commercial context:

...it is not enough for the plaintiff to show that the defendant has behaved badly, or even to say that, to the defendant’s knowledge, the plaintiff acted in the expectation that the defendant would behave in a certain way. In equity, as in common law, a defendant is entitled to say that the plaintiff took the risk that the defendant would not act honourably.

Analysis

[146] The estoppel claim needs to be considered in the context of the commercial relationship between the parties. In a commercial setting where parties are legally represented with the expectation of a written agreement it is more difficult for the Court to conclude that, notwithstanding what was recorded in a written contract, nevertheless a party will be bound as a result of estoppel.

[147] As indicated, there may well have been a belief or expectation created at the meeting on August 2008. Mr Reece acknowledged that he played little part. It was a positive meeting and he and Mr Halse left feeling that progress had been made.

[148] I am not satisfied that the representations to the level of certainty required were in fact made. In any event, even if they were, it was not reasonable for RHL to rely on them in the circumstances. Mr Halse accepted he had considerable experience in dealing with banks and commercial lending transactions. He agreed that the major trading banks usually make loan offers in writing.

[149] It was always clear at the meeting that a written contract would be required after the Bank had undergone its internal loan approval processes. Whatever was said at the meeting of the 19 August was always subject to formal Bank approval which was to be recorded in the written offer to be made to RHL. For those reasons I am not satisfied there is any reasonable reliance on any representations made by the

_{Bank at that meeting.}

³² Lord Neuberger “Thoughts on the Law of Equitable Estoppel” (2010)84 ALJ 225; Yeoman’s Row

Management Ltd v Cobbe, above n 18; Thorner v Major [2009] UKHL 18, [2009] 1 WLR 776.

Misleading and deceptive conduct

The law

[150] AMP Finance NZ Ltd v Heaven sets out a three step test commonly used in analysing claims of misleading and deceptive conduct:³³

(a) Has there been conduct which is capable of misleading? (b) Was the plaintiff misled by the relevant conduct?

(c) Was it reasonable, in all the circumstances, for the plaintiff to be misled?

[151] I note the guidance of the Supreme Court in Red Eagle Corporation Ltd v

Ellis:³⁴

It is, to begin with, necessary to decide whether the claimant has proved a breach of s 9. That section is directed to promoting fair dealing in trade by proscribing conduct which, examined objectively, is deceptive or misleading in the particular circumstances. Naturally that will depend upon the context, including the characteristics of the person or persons said to be affected. Conduct towards a sophisticated businessman may, for instance, be less likely to be objectively regarded as capable of misleading or deceiving such a person than similar conduct directed towards a consumer or, to take an extreme case, towards an individual known by the defendant to have intellectual difficulties.

[152] There may be occasions where, on the evidence, it is clear that a person in trade never intended to deliver on a promise. In such circumstances, liability for misleading conduct arises because the innocent party is able to show that the promisor did not, at the time of making the promise, have any intention to deliver on it. However, the mere fact that a representation as to future conduct does not come

_{to pass does not of itself make the representation misleading or deceptive.}³⁵

³³ _{AMP Finance NZ Ltd v Heaven (1998) 6 NZBLC 102, 414; (1997) 8 TCLR 144 (CA).}

³⁴ _{Red Eagle Corporation Ltd v Ellis [2010] NZSC 20, 2 NZLR 492 at [28].}

³⁵ Muollo v Creative Engineering Design Ltd (2006) 8 NZBLC 101, 675 (CA) at [25]

Analysis

[153] I am not satisfied on the evidence that there has been conduct on the part of the Bank which is capable of misleading or that it would have been reasonable for RHL to have been misled. Any discussion as to future funding of the development of Crestview was simply in the context of general intent subject to a consideration of the circumstances and financial analysis at the time each tranche of funding was sought. The Bank did consider future funding when it granted financing for the second tranche of three houses constructed at Crestview. It is relevant too, as noted earlier in this decision, that the arrangement was in a commercial context involving Mr Halse, a sophisticated businessman and lawyer, who expected and was aware that a formal written contract would be required. For those reasons I am not satisfied that objectively the conduct was capable of being misleading or deceptive.

[154] The Bank points out that the claims under the Fair Trading Act were not raised until 11 March 2014 in the second amended statement of claim, whereas RHL was aware at least by May 2010 that the Bank did not consider that it was bound to provide future funding. The plaintiff did not address this issue. On that basis the Bank has a limitation defence.³⁶

Misrepresentation

The Law

[155] Section 6 of the Contractual Remedies Act 1979 provides that if a party has been induced to enter into a contract by misrepresentation then he or she is entitled to damages in the same manner and to the same extent as if the representation had been a term of the contract.

[156] A misrepresentation must relate to some existing fact or past event. It contains no element of futurity.³⁷

³⁶ _{Fair Trading Act 1986, s 43A.}

³⁷ Burrows, Finn & Todd Law of Contract in New Zealand, above n 12, at [11.2.1(a)], [11.2.4] and

[11.3.2].

[157] A statement of future intention implies that the intention exists and if this is not true there is a misrepresentation of an existing fact.³⁸ There must have been an intention by the maker of the representation to induce the representee to enter into the contract on the basis of it and the representee must have been induced to enter into the contract on the basis of the representation. Again the reasonable person test applies in that a representation will not be actionable if no reasonable person in the

position of the plaintiff would have relied on it.

Analysis

[158] I do not consider that the Bank misrepresented any intention existing at the time of the meeting. There is no evidence to support an allegation that, at the time that any statements as to potential funding of future development were made, the makers of those statements did not intend to act in the future as stated. Furthermore in all circumstances as outlined in respect of the first and second causes of action, no reasonable person could have been induced to enter into the loan agreements in their terms on the basis of those representations.

Summary

[159] In summary, I have found that:

(a) There was no binding oral contract between RHL and the Bank comprising terms (see [12] above) allegedly agreed upon in the meeting of 19 August 2008;

(b) There was no collateral contract comprising those terms;

(c) There is no basis on which to imply those terms into the written loan contract;

(d) The Bank is not estopped from enforcing the terms of the written loan contract;

³⁸ At [11.2.1]

(e) There was no misleading and deceptive conduct; and

(f) There was no misrepresentation.

Decision

[160] For the reasons given the plaintiff’s claim fails. The counter-claim remains to be dealt with. Costs on a 2B basis would seem appropriate. Leave is given to file

_{memoranda on costs if agreement cannot be reached.}

Thomas J