Planet Kids Ltd v Auckland Council

• Jurisdiction: New Zealand
• Judge: Elias CJ,McGrath,Glazebrook,Gault JJ,Glazebrook J,William Young J
• Judgment Date: 17 December 2013
• Neutral Citation: [2013] NZSC 147
• Docket Number: SC 5/2013
• Court: Supreme Court
• Date: 17 December 2013

Between

Planet Kids Limited

Appellant

and

Auckland Council

Respondent

[2013] NZSC 147

Court:

Elias CJ, McGrath, William Young, Glazebrook and Gault JJ

SC 5/2013

IN THE SUPREME COURT OF NEW ZEALAND

Appeal from a Court of Appeal decision that a settlement agreement had been frustrated by a fire — appellant operated childcare business on land leased from respondent council — council had agreed to pay the appellant compensation after giving notice under s18 Public Works Act 1981 (“PWA”) (prior negotiations required for acquisition of land for essential works) of its intention to acquire its leasehold interest for roading purposes — appellant was to receive compensation for the loss of goodwill arising from the closure of its business and council receive would access to site, surrender of lease and chattels and plant — business destroyed by arson which caused lease to automatically terminate — respondent said settlement agreement was ended through doctrine of frustration — whether the fire rendered performance of the settlement agreement impossible or radically different — whether the respondent could only pay compensation if the land was compulsorily acquired under the PWA — whether hardship was a prerequisite to the doctrine applying.

Counsel:

G P Blanchard and J P Nolen for the Appellant

J A Farmer QC and L A O'Gorman for the Respondent

JUDGMENT OF THE COURT

A. The appeal is allowed. A declaration is made that the settlement agreement subsists.

B. The other orders sought by the appellant in its application for summary judgment are not made but the matter is referred back to the High Court to deal with the remainder of the application.

C. The respondent is to pay to the appellant costs of $25,000 plus all reasonable disbursements to be fixed if necessary by the Registrar. We certify for two counsel.

REASONS

	Para No
Elias CJ	[1]
McGrath, Glazebrook and Gault JJ	[18]
William Young J	[173]

Elias CJ

1 Planet Kids Limited operated a childcare business on land leased from the Auckland Council. The Council gave notice of intention to acquire the leasehold interest under the provisions of the Public Works Act 1981 because the land was required for roading purposes. Planet Kids objected to the proposed taking. Eventually the parties concluded a settlement agreement on 3 June 2010.

2 Under the settlement agreement, Planet Kids (which was accepted to be unable to relocate) was to receive compensation from the Council for the loss of goodwill arising from the closure of its business. In addition, the Council agreed to forgo a disputed claim for rent said to be due under the lease. In return, the Council was to receive a surrender of lease and vacant possession, a restraint of trade covenant from Planet Kids, and the chattels and plant on the premises. A deposit of 10 per cent of the compensation was paid by the Council with the balance to be paid on settlement, which was set for 20 December 2010, or earlier should the parties agree. By cl 8 of the settlement agreement it was agreed that the “[b]usiness shall remain at the sole risk of [Planet Kids] until the settlement date”. Clause 9 affirmed that the Council was not purchasing Planet Kids' business but was instead merely compensating Planet Kids for the closure of the business as if the business had been sold as a going concern and that Planet Kids remained liable for any obligations connected to the business. Finally, the settlement agreement meant that the Council could tender for the road works before settlement and gave the Council and its agents the ability to enter upon the land, on 48 hours notice, for preliminary purposes associated with the roading project.

3 In early August, Planet Kids gave notice to its staff that the business would be closing. In September parents were advised that the business would close so that they could make other child care arrangements. A tender for the road works was awarded by the Council on 1 October 2010. On 2 October the building was destroyed by fire. It is not in dispute that the effect of cl 40.1 of the lease was that the lease terminated with immediate effect as a result of the destruction caused by the fire.

4 The Council took the view that the settlement agreement had been brought to an end by frustration as a result of the termination of the lease and refused to pay the balance owing under the settlement agreement. Planet Kids then issued proceedings seeking judgment for the balance and made application for summary judgment. The Council applied to strike out Planet Kids' claim and, in the alternative, itself sought summary judgment on its defence that the agreement was frustrated by the termination of the plaintiff's lease and that it was not obliged to pay the sum claimed by Planet Kids.

5 In the High Court, Peters J accepted the Council's submission that the basis on which the settlement agreement was entered into was that Planet Kids was able to transfer a leasehold interest in the land at the date of settlement. 1 Since this was impossible following termination of the lease following the fire, she held that the agreement was frustrated. 2 Although Planet Kids' application for summary judgment was declined, Peters J did not strike out its claim or enter summary judgment for the Council, pending further submissions on the effect of the Frustrated Contracts Act 1944. 3 Planet Kids appealed to the Court of Appeal, overtaking the need for further submissions in the High Court because the additional matter of the effect of the Frustrated Contracts Act was dealt with in the judgment of the Court of Appeal.

6 The Court of Appeal agreed with the determination in the High Court that the termination of the lease had frustrated the contract. 4 Since Planet Kids no longer possessed a leasehold interest, following termination of the lease as a result of the fire, the settlement agreement was held to be “wholly or radically different from that which the parties had agreed”. 5 The Court of Appeal considered that the overlay of the Public Works Act was important background since it took the view that the

Council had “entered into the contract in the exercise of its powers under the Act”. 6 Any basis of settlement for the claim under the Act was removed when the lease terminated

7 Planet Kids appeals with leave to this Court. 7 The question for determination on the appeal is whether the Courts below were correct to hold that the settlement agreement was discharged by frustration.

Frustration

8 Discharge by frustration turns on the construction of the contract in context. 8 It is recognised that, without such discharge, injustice can result from the enforcement of a contract following significant change of circumstances which renders performance radically different from that reasonably contemplated by the parties at the time it was entered into. 9 Frustration is a tool that is “modern and flexible and is not subject to being constricted by an arbitrary formula”. 10 The need for application which is contextual and flexible has been emphasised by Rix LJ in describing an approach which is “multi—factorial”: 11

Among the factors which have to be considered are the terms of the contract itself, its matrix or context, the parties' knowledge, expectations, assumptions and contemplations, in particular as to risk, as at the time of contract, at any rate so far as these can be ascribed mutually and objectively, and then the nature of the supervening event, and the parties' reasonable and objectively ascertainable calculations as to the possibilities of future performance in the new circumstances. Since the subject matter of the doctrine of frustration is contract, and contracts are about the allocation of risk, and since the allocation and assumption of risk is not simply a matter of express or implied provision but may also depend on less easily defined matters such as “the contemplation of the parties”, the application of the doctrine can often

be a difficult one. In such circumstances, the test of “radically different” is important: it tells us that the doctrine is not to be lightly invoked; that mere incidence of expense or delay or onerousness is not sufficient, and that there has to be as it were a breach in identity between the contract as provided for and contemplated and its performance in the new circumstances.

9 Since the effect of frustration is “to kill the contract and discharge the parties from further liability under it”, 12 it is the common object of the contract that must be frustrated “not merely the individual advantage which one party or the other might have gained from the contract”. 13 Frustration is “a common relief from this common disappointment”. 14 Performance must be “radically different” such that there is “a break in identity between the contract as provided for and contemplated and its performance in the new circumstances”. 15 If non-trivial achievement of part of the contractual purpose is still possible, the contract is not frustrated. 16 The need to remedy injustice to the parties is the ultimate measure in assessing frustration. 17

Was the settlement agreement frustrated as a result of the fire?

10 Following the destruction of the building, Planet Kids could not meet its obligations to transfer chattels to the Council and provide a formal surrender of the lease. The chattels had been destroyed and the interest of Planet Kids in the leasehold had terminated on destruction of the premises under cl 40.1 of the lease so that it was no longer in a position to tender a formal surrender of lease.

Does the impossibility of performance by Planet Kids in these respects frustrate the settlement agreement

11 The settlement agreement was a compromise to resolve the dispute between the parties arising from the Public Works Act notification and subsequent objection. The formal surrender of the lease by...