Vikram Kumar and Nirupama Kumar v Station Properties Ltd ((in Liquidation) and (in Receivership))

• Jurisdiction: New Zealand
• Judge: Elias CJ,McGrath,William Young,Glazebrook,Arnold JJ
• Judgment Date: 15 October 2014
• Neutral Citation: [2014] NZSC 146
• Docket Number: SC 39/2013
• Court: Supreme Court
• Date: 15 October 2014

BETWEEN

Vikram Kumar and Nirupama Kumar

First Appellants

Robert James Selwyn

Second Appellant

Michael Donaldson And Patricia Bronwyn Donaldson

Third Appellants

and

Station Properties Limited (In Liquidation and In Receivership)

Respondent

[2014] NZSC 146

Court:

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

SC 39/2013

IN THE SUPREME COURT OF NEW ZEALAND

Appeal from the Court of Appeal's finding that the appellants had repudiated agreements for sale and purchase by refusing to settle — agreements were for the purchase of units in an apartment development — appellants claimed to have entered agreements on the understanding that they would not be required to purchase the units, their role being simply that of underwriters facilitating the raising of funding to enable the construction of the development so that it could be on—sold — side agreements existed for the of payment of a fee of one per cent of the purchase price for the relevant apartment, the provision of a $30,000 furniture package and the arranging of a management contract enabling the units to be operated as serviced apartments — respondent provided a certificate of practical completion from company other than that agreed to — whether the obligation to provide a certificate by particular company and the performance of the side agreements were essential terms of the agreements — whether the respondent had been entitled to cancel the contract under s7 Contractual Remedies Act 1979 (“CRA”) (cancellation of contract) — whether under s7 CRA a party who wished to cancel a contract had to give a valid reason at the time of cancellation.

Counsel:

R M Kelly, K J Jarvis and S A Eckhoff for Appellants

D J Goddard QC, M J Tingey and S V A East for Respondent

JUDGMENT OF THE COURT

• A The appeal is allowed.

• B The orders of Toogood J are reinstated.

• C The respondent must pay costs of $25,000 to the appellants collectively, together with reasonable disbursements.

• D The order for costs in the Court of Appeal is quashed. Costs in that Court are to be fixed in light of this judgment.

REASONS

	Para No
Elias CJ, McGrath, Glazebrook and Arnold JJ	[1]
William Young J	[103]

ELIAS CJ, McGRATH, GLAZEBROOK and ARNOLD JJ

(Given by Arnold J)

Table of Contents

	Para No
Introduction	[1]
Section 7 of the Contractual Remedies Act 1979	[4]
Factual background	[10]
High Court and Court of Appeal decisions	[37]
Overview of arguments	[48]
Our assessment	[50]
Preliminary observations	[50]
Framework for analysis	[55]
Was Station in breach of an essential term?	[67]
(i) Certificate of practical completion	[68]
(ii) Side agreements	[76]
Basis of appellants’ refusal to complete	[95]
Decision	[102]

Introduction

1 Between late 2005 and early 2006, the appellants entered into agreements with the respondent, Station Properties Ltd (in liquidation and in receivership) (Station), for the purchase of units in an apartment development in Queenstown (the agreements). They claimed to have done so on the understanding that they would not be required to purchase the units, their role being simply that of underwriters facilitating the raising of funding to enable the construction of the development so that it could be on-sold to an organisation which would operate it under a brand name as serviced apartments. They were, in effect, investors who expected to receive a return on what was intended to be a relatively short-term investment.

2 Between the time the agreements were made and the time the development was substantially completed in mid-2008, the value of the units dropped significantly as a result of a general downturn in the property market. Station was unable to find a purchaser for the development and looked to the appellants and other purchasers to settle their transactions. The appellants refused to settle. One, Mr Selwyn, purported to cancel his agreement. Ultimately, in April 2010, Station took the view that the appellants had repudiated the agreements and cancelled them. Station then sued the appellants for damages for breach of contract, based on the resale prices achieved for the units or, in the case of the Donaldsons, on its then market value.

3 Station was unsuccessful in the High Court, 1 but succeeded in the Court of Appeal. 2 The question on which this Court granted leave is whether Station was entitled to cancel the agreements. 3 Important to the resolution of this question are the circumstances and effect of the appellants’ refusals to complete. As s 7 of the Contractual Remedies Act 1979 provides the framework for analysis, it may be helpful if we briefly state its effect at the outset.

Section 7 of the Contractual Remedies Act 1979

4 Subject to particular statutory exceptions, and to the ability of the parties to make their own contractual arrangements, 4 s 7 of the Contractual Remedies Act operates as a code in relation to the circumstances in which a contract may be cancelled for breach, misrepresentation or repudiation. As this Court said in Mana Property Trustee Ltd v James Developments Ltd, 5 this is clear from s 7(1), which provides:

• (1) Except as otherwise expressly provided in this Act, this section shall have effect in place of the rules of the common law and of equity governing the circumstances in which a party to a contract may rescind it, or treat it as discharged, for misrepresentation or repudiation or breach.

5 Section 7(2) deals with a party's right to cancel a contract where the other party repudiates it. It provides:

This is a key provision in the present case, given the party's arguments. The appellants say that Station manifested an intention not to fulfil certain essential obligations under the agreements, thereby repudiating them. As a consequence, the appellants were not required to complete the transactions. By contrast, Station says that the appellants repudiated the agreements by indicating through a continuing course of conduct between mid-2008 and early 2010 that they had no intention of completing the transactions under any circumstances. Accordingly, Station was entitled to cancel the agreements and seek damages for breach of contract. Any breach of contract by Station was irrelevant.

• (2) Subject to this Act, a party to a contract may cancel it if, by words or conduct, another party repudiates the contract by making it clear that he does not intend to perform his obligations under it or, as the case may be, to complete such performance.

6 Sections 7(3) and (4) deal with a party's right to cancel a contract for misrepresentation or breach (including anticipated breach), as follows:

• (3) Subject to this Act, but without prejudice to subsection (2), a party to a contract may cancel it if–

  • (a) he has been induced to enter into it by a misrepresentation, whether innocent or fraudulent, made by or on behalf of another party to that contract; or

  • (b) a term in the contract is broken by another party to that contract; or

  • (c) it is clear that a term in the contract will be broken by another party to that contract.

• (4) Where subsection (3)(a) or subsection (3)(b) or subsection (3)(c) applies, a party may exercise the right to cancel if, and only if,–

  • (a) the parties have expressly or impliedly agreed that the truth of the representation or, as the case may require, the performance of the term is essential to him; or

  • (b) the effect of the misrepresentation or breach is, or, in the case of an anticipated breach, will be,–

    • (i) substantially to reduce the benefit of the contract to the cancelling party; or

    • (ii) substantially to increase the burden of the cancelling party under the contract; or

    • (iii) in relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for.

7 The appellants argue that Station's non-performance related to contractual obligations that were essential, entitling them to cancel the agreements. 6 Accordingly, Station's failure to perform these obligations amounted to repudiation, justifying the appellants’ refusals to perform. Station accepts that it was in breach of the relevant contractual obligations, but says that the appellants did not refuse to complete as a consequence of those breaches but for other reasons. Consequently they repudiated the agreements, which ultimately led Station to cancel them. Apart from that, Station says that the terms breached were not essential and the breaches were not substantial.

8 Finally, we mention s 7(5) and ss 8(1) and (2). Section 7(5) provides that the right to cancel may be lost where the innocent party affirms the contract:

The appellants submitted that, if they had wrongfully repudiated their agreements, Station had affirmed them, a contention that Station contested.

• (5) A party shall not be entitled to cancel the contract if, with full knowledge of the repudiation or misrepresentation or breach, he has affirmed the contract.

9 Sections 8(1) and (2) provide:

8 Rules applying to cancellation

• (1) The cancellation of a contract by a party shall not take effect–

  • (a) before the time at which the cancellation is made known to the other party; or

  • (b) before the time at which the party cancelling the contract evinces, by some overt means reasonable in the circumstances, an intention to cancel the contract, if–

    • (i) it is not reasonably practicable for the cancelling party to communicate with the other party; or

    • (ii) the other party cannot reasonably expect to receive notice of the cancellation because of that party's conduct in relation to the contract.

• (2) The cancellation may be made known by words, or by conduct evincing an intention to cancel, or both. It shall not be necessary to use any particular form of words, so long as the intention to...