IN THE Court of appeal OF new Zealand

I TE KŌTI PĪRA O AOTEAROA	
 CA245/2019
 [2020] NZCA 3

	
BETWEEN	
ANDREW LAURIE MONTGOMERIE
First Appellant

MIA BELLA TRUSTEE LIMITED
Second Appellant	
	
AND	
JAMES LESTER MONTGOMERIE
Respondent	

Hearing:	
12 November 2019	

Court:	
Goddard, Brewer and Gendall JJ	

Counsel:	
W G C Templeton for First and Second Appellants
D J Neutze and A J Woodhouse for Respondent	

Judgment:	
28 January 2020 at 4.00 pm	

JUDGMENT OF THE COURT

A	The appeal is dismissed.
B	The first appellant must pay the respondent indemnity costs in accordance with cl 6 of the 2011 agreement.
C	The second appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________

REASONS OF THE COURT

(Given by Brewer J)

Introduction
[1]	The respondent (James) is the brother of the first appellant (Andrew).  Andrew, a property developer, fell into financial difficulty as a result of the global financial crisis of 2008.  James gave Andrew a loan to help him.  Andrew has failed to repay the loan.  Over the years, there were negotiations which resulted in varied or further agreements as to how the loan would be repaid.  But it was not repaid (although Andrew did reduce it by $200,000 in March 2017).
[2]	Eventually James ran out of patience.  In October 2018 his solicitors demanded that Andrew pay the outstanding amount of USD 865,123.72 plus interest.  Andrew asked for an extension to May 2019.
[3]	James issued proceedings claiming the USD 865,123.72 plus interest as well as costs on a solicitor-client basis.  He applied for summary judgment on his claim.  Andrew defended the claim on the basis that the latest agreement between him and James, on his interpretation, means he does not yet have to repay the loan and, besides, the doctrine of frustration applies.
[4]	On 8 May 2019, Associate Judge Smith found that Andrew has no defence to James’s claim and entered summary judgment against him.
[5]	Andrew now appeals Associate Judge Smith’s decision.  His case, broadly, is that his interpretation of his latest agreement with James is the correct one; so, he has no immediate obligation to repay the loan and thus Associate Judge Smith erred in entering summary judgment for James.  He also says the latest agreement is frustrated in whole or in part, with the result that he is not required to make any further payments under it.  
The agreement
[6]	The agreement in question is dated 9 March 2017.  It is intituled:
Agreement to renegotiate and repay debt from refinance of mortgaged property and from sale of that and other properties
[7]	Having recited the history of the various agreements between the brothers, the agreement provides that James can require immediate payment of all outstanding monies “in the event that the Capped Debt … is not repaid in accordance with clauses 2–5 below or if there is any material breach of the following clauses 2–4.”
[8]	Clause 2.1 requires Andrew to pay James $200,000 on or before 28 March 2017 (which he did).
[9]	Clause 2.2 requires Andrew to pay James the net proceeds of sale of a property at Neil Avenue and one at Hunterville Road.  Andrew undertook to continue to market for sale the properties, but there is no time limit specified.
[10]	Clause 2.3 requires payment:
2.3	of the net proceeds of sale (up to an amount required to repay the Capped Debt in full) from settlement of the Units being developed by Alberton Lane Limited at Alberton Lane, Mt Albert, Auckland, which Andrew anticipates will be completed/settled by 30 April 2018, but with such payment of full net proceeds to (sic) made to James no later than 15 October [2018] (time being of the essence) … 
[11]	The capped debt was a concession by James.  Clause 3 provides:
3.	James agrees that in consideration for Andrew procuring the assistance of Foy & Halse and committing his related entities to the payments promised in 2.2 and 2.3 above and strictly on the basis that James receives the payments referred to in 2.1 and 2.3 above (and in 2.2, if the Hunterville Road and/or Neil Avenue properties are sold before Alberton Lane), James (and Andrew) agrees that the amount to (sic) repaid by Andrew will be “capped” as at 15 February 2017 at NZ$1 million (the “Capped Debt”) …  
[12]	Clause 4 is also significant:
4. 	James, and Andrew, agree and acknowledge that, if contrary to Andrew’s estimate James is not repaid in full through payment to James from the proceeds of the Alberton Lane Development (or has otherwise paid the Capped Debt), but provided James has, by 15 October 2018 (time being of the essence) received the payment referred to in clause 2.1 (or from clause 5) plus a substantial payment from the proceeds of the Alberton Lane Development (and is satisfied on reasonable grounds that Andrew has accounted to him fully for the full net proceeds of those sales), then James and Andrew will negotiate in good faith for the payment by Andrew of the balance of the Capped Debt, either through the sale of the Hunterville Road and/or Neil Ave properties, if not sold prior, or otherwise.
The High Court decision
[13]	Associate Judge Smith held there were two issues for him to decide:
(1)	Have the defendants breached their obligations under the March 2017 Agreement, so that the plaintiff became entitled to demand payment of the Total Debt,7 minus the $200,000 paid on 28 March 2017, plus further interest to the date of judgment?
(2)	Is it reasonably arguable for the defendants that the “events of frustration” referred to at paragraph [47] of this judgment made it impossible for the defendants to perform, or otherwise frustrated, the March 2017 Agreement, so that the defendants were discharged from further performance of the March 2017 Agreement?
7	As at 15 February 2017, US$921,264.31, plus agreed costs of NZ$4,750 and further costs of NZ$12,119.09, all as defined in cl I of the Background section of the March 2017 Agreement.
[14]	On the first issue the Associate Judge decided that reading the agreement in context provides a clear conclusion that Andrew had an obligation to pay James the capped amount by 15 October 2018, time being of the essence.  This obligation was subject only to cl 4.
[15]	Associate Judge Smith summarised his view of the agreement:
[70]	In my view the essential purpose of the March 2017 Agreement was to define a particular set of circumstances in which the plaintiff would be prepared to accept in full satisfaction a sum that was much lower than the debt that was owed to him.  Part of that definition was full payment of the capped debt by 15 October 2018, but how that would be achieved was the defendants’ concern, not the plaintiff’s.  The defendants would lose the benefit of having the debt capped at the lower amount if it was not paid by 15 October 2018.
[16]	On the second issue, frustration, the Associate Judge reviewed the law and held (in broad summary) that the agreement defined particular circumstances in which the debt Andrew owed James could be capped at a much lower figure and repaid at that figure.  The cut-off date for paying the capped sum was 15 October 2018.  Although the agreement imposed obligations on Andrew to apply three potential sources of money towards payment of the debt, including the net proceeds of sale of the Alberton Lane development, completion of that development was not a principal purpose of the agreement.  Accordingly, the inability of Andrew to complete the Alberton Lane development in time to apply the proceeds to the capped debt was not a basis for frustration of the agreement.
[17]	Associate Judge Smith found for James on both issues and entered summary judgment accordingly.
The appeal
The first issue: was Andrew in breach of the agreement?
[18]	Mr Templeton for Andrew submits the Associate Judge erred in three ways:
(a)	The Associate Judge was wrong to hold that the principal purpose of the agreement was to “define particular circumstances in which the debt … would be capped at the significantly lower figure of NZ$1 million”.  In Mr Templeton’s submission the agreement’s principal purpose was the satisfaction of the capped debt by clearly defined property sales and raised finance.  The vast majority of the capped debt was to come from the Alberton Lane development.  
(b)	The Associate Judge was in error when he held:
[65]	In my view, the Background section of the March 2017 Agreement, and in particular cl H, provides the key to the essential question, which is whether the plaintiff could demand payment of the full debt in circumstances where none of the townhouses had been sold before 15 October 2018.
[66]	Clause H first recorded the first defendant’s offer to settle for the capped amount, by making or procuring payments to the plaintiff from three named sources.  The clause then recorded the plaintiff’s willingness to accept the capped amount in full settlement, provided payment was made “by the above means”.  However, if payment was not made “by the above means”, the plaintiff would become entitled to enforce payment of the original debt, plus interest and costs.
Mr Templeton submits that cl H was merely to provide information about the background and purpose of the agreement, rather than to form a part of it.  He notes that cl J follows it and refers to “the following agreement”, which he says clearly excludes cl H itself from constituting part of the agreement.  He says there would be conflicts with other parts of the agreement if cl H were to have a legal effect.
(c)	The Associate Judge erred in holding that the date of 15 October 2018 was a deadline for the payment of the capped debt.  Mr Templeton submits that date related only to the receipt of “sale proceeds” from the Alberton Lane development.  However, even for that purpose the date was not a deadline.  It was to be extended if by that date part‑payment had been made, namely the $200,000 plus a substantial payment of the sale proceeds from the Alberton Lane development.  Mr Templeton submits there was no deadline for payment of the capped debt and this was evidenced by the express provision for ongoing “good faith” negotiations and the fact there was no date for payment from some of the other identified sources of repayment.  He also submits that, contrary to the Associate Judge’s finding, the inherent subjectivity of the term “substantial” as it appears in cl 4 demonstrates a lack of certainty in the contract, undercutting any confidence in a definitive cut-off date.  
[19]	Mr Templeton made lengthy submissions on how the law of contract applies to the interpretation of the agreement.  In his written submissions he traversed at length the history of the dealings between the brothers leading up to the making of the agreement.  In our view, all that is needed is to consider the plain meaning of the terms of the agreement.
[20]	We find James agreed to accept a lesser amount than he was owed (the capped debt) from Andrew so long as it was paid by 15 October 2018, with time being of the essence.  Three sources of money were identified, and the net proceeds of those sources were to be applied in reduction or repayment of the capped debt.  If by 15 October 2018 the capped debt was not repaid but it had been reduced, first by the $200,000 and second by a substantial payment from the proceedings of the Alberton Lane development, then a good faith negotiation for the payment of the balance could take place.
[21]	Clauses 2 and 3 are clear.  Clause 2.3 refers to the net proceeds of sale from the Alberton Lane development “which Andrew anticipates will be completed/settled by 30 April 2018, but with such payment of full net proceeds to (sic) made to James no later than 15 October [2018] (time being of the essence).”
[22]	Clause 3 provides:
James agrees that … strictly on the basis that James receives the payments referred to in 2.1 and 2.3 above … the amount to (sic) repaid by Andrew will be “capped” as at 15 February 2017 at NZ$1million …
[23]	Clause 4 never became operative because no payment other than the $200,000 was made.  However, it reiterates that 15 October 2018 (time being of the essence) was the deadline for “the payment referred to in clause 2.1 (or from clause 5) plus a substantial payment from the proceeds of the Alberton Lane Development…”.
[24]	Clause 1(d) makes it clear that if the capped debt is not repaid pursuant to the agreement then James is entitled to demand the immediate repayment of the total debt.  
[25]	It is correct that cl H is not an operative part of the agreement.  Clause H is one of the recitals preceding the main text.  But it is well settled that recitals can be used to assist with the interpretation of an agreement.  The Associate Judge did not err in taking cl H into account.  It records Andrew’s offer to settle for the capped amount by making or procuring payments to James from the three named sources.  James was willing to accept the capped amount in full settlement provided payment was made “by the above means”.  But if such payment was not made, James would become entitled to enforce payment of the original debt, plus interest and costs.
[26]	There is nothing in cl H which is inconsistent with the relevant operative parts of the agreement.  Andrew was obliged to account for the net proceeds of the three sources of money in reduction or full repayment of the capped debt.  But that had to be by 15 October 2018.
[27]	If Mr Templeton is right, then the date of 15 October 2018 means nothing.  The agreement would be essentially open-ended.  The plain meaning of the agreement refutes that submission.
[28]	It follows we agree with the analysis of Associate Judge Smith.  
The second issue: frustration
[29]	Andrew argues that the doctrine of frustration applies to relieve him from any obligation to complete the sale of the Alberton Lane development and apply the net proceeds to reduce the debt by 15 October 2018.  In the High Court, and in his written submissions in this Court, Mr Templeton argued that the agreement was frustrated.  In his oral submissions Mr Templeton advanced a modified version of this argument, contending that it is only the obligation to make a payment out of the proceeds of sale of the units that was frustrated, with the balance of the agreement remaining enforceable.  In particular the agreement by James to cap the debt remained enforceable although the obligation to make a payment in reduction of the debt out of a sale of the Alberton Lane development by 15 October 2018 was frustrated, and therefore unenforceable.  
Is it arguable that the agreement was frustrated in whole or in part?
[30]	In Planet Kids Ltd v Auckland Council the Supreme Court identified three salient features of the doctrine of frustration:
(a)	For fundamental policy reasons related to the sanctity of contract, the threshold for frustration is high.  
(b)	It does not depend on application or election by the parties but occurs automatically by operation of law to discharge the contract “forthwith, without more and automatically.”
(c)	The doctrine of frustration operates to bring the contract to an end at the time of the frustrating event.  The contract is not deemed invalid from the outset and so at common law there was usually no relief for part performance occurring prior to the supervening event.  The Frustrated Contracts Act now allows some restitutionary relief.  
[31]	In National Carriers Ltd v Panalpina (Northern) Ltd Lord Simon summarised the circumstances in which a contract is frustrated:
Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.
[32]	Associate Judge Smith was right to find it was not arguable that the agreement was frustrated as a result of the difficulties encountered by Andrew in completing the Alberton Lane development.  Applying the standard for frustration set out above, the possibility that the units would not be sold and no proceeds would be paid to James in reduction of the debt owed to him was contemplated by the agreement.  The agreement expressly provided that if payment of the proceeds of sale of the units did not occur by 15 October 2018, time being of the essence, the cap on the amount payable would no longer apply and the full debt would be payable.  The parties contemplated the possibility of non-payment, for whatever reason, and made provision for that scenario.  
[33]	Nor did the difficulties encountered in completing the Alberton Lane development significantly change the nature of the parties’ contractual rights or obligations from what the parties could reasonably have contemplated at the time the agreement was entered into.  The agreement to cap the debt was dependent on the fact of repayment, not on the reasons for any failure to make that payment.  
[34]	Nor is it arguable that it is unjust to hold the parties to the agreement as we have interpreted it.  To the contrary, it would be unjust to deny James the ability to call up the full debt and bring recovery proceedings in circumstances where no payment had been received in substantial reduction of the debt by 15 October 2018.  
[35]	The argument that the agreement was frustrated in part fails for the same reasons.  There is no provision or group of provisions in the agreement in respect of which the test for frustration is arguably met.  The partial frustration argument also faces the further insurmountable hurdle identified in Burrows, Finn and Todd on the Law of Contract in New Zealand that:
… frustration operates in an all-or-nothing fashion.  If the contract is not frustrated it remains on foot, and both parties remain liable for its non‑performance.  If it is frustrated it falls completely and neither party can continue with performance.  Generally, there is no such thing as selective frustration whereby individual terms are severed; the contract stands or falls as a whole.
[36]	The authors of Burrows, Finn and Todd record in a footnote that there are some “anomalous exceptions” to the all-or-nothing effect of frustration.  At common law, where a contract contains severable parts, each of which provides for one party’s performance and the other party’s corresponding payment for that performance, it may be possible for one of those stand-alone parts to be frustrated although the balance of the contract remains valid and enforceable.  The New Zealand legislation appears to limit the operation of that common law principle to cases where a severable part has been performed before the frustrating event occurs.  Section 68 of the Contract and Commercial Law Act 2017 provides:
68 	Court must treat performed part of contract that can be properly severed as separate contract
(1) 	This section applies if—
(a) 	the court considers that a part of a contract to which this subpart applies can properly be severed from the remainder of the contract; and
(b) 	that part of the contract was—
(i) 	wholly performed before the time of discharge; or
(ii) 	wholly performed before the time of discharge except for the payment, in respect of that part of the contract, of money that is or can be ascertained under the contract.
(2) 	The court must treat—
(a) 	the part of the contract described in subsection (1) as if it—
(i) 	were a separate contract; and
(ii) 	had not been frustrated; and
(b) 	sections 60 to 66 as applying only to the remainder of the contract.
[37]	In this case it is not arguable that the obligation to make a payment in reduction of the debt out of the proceeds of sale of the Alberton Lane development by 15 October 2018 is, or is included in, a severable part of the agreement.  Rather, the promise to make such a payment was inextricably linked to the other provisions of the agreement and in particular to James’s agreement to cap the debt owing to him.  Nor is it possible to identify any distinct part of the contract that has been wholly performed before the time of the alleged frustrating event to which s 68 could apply.  The argument that the agreement was partially frustrated has no prospect of success.
Effect of frustration
[38]	The argument that the agreement was frustrated could not in any event provide the basis for an arguable defence to James’s claim for payment of the debt.  If the agreement was frustrated, the result would be that neither party was required to perform it further.  It would be prospectively unenforceable.  So James’s agreement to cap the debt would cease to be enforceable, and the full debt would remain payable under the 2011 agreement.
[39]	Andrew’s new argument that the agreement was partially frustrated appears to have been advanced to meet the difficulty that frustration of the agreement in its entirety would not assist him, as the underlying debt would remain payable.  But for the reasons explained above, the partial frustration argument is misconceived.
Summary 
[40]	We therefore agree with the Associate Judge that the appellants do not have any arguable defence based on the doctrine of frustration.
Decision
[41]	The appeal is dismissed.
Costs
[42]	But for one point the parties are agreed that costs should be awarded against the unsuccessful party or parties on a Standard Appeal Band A basis with no certification for second counsel.
[43]	The reserved point, and it must now be determined, is whether Andrew, if unsuccessful, is liable to pay indemnity costs.
[44]	The predecessor agreement to the 2017 agreement (the subject of this judgment) was entered into in 2011.  It provides relevantly at cl 6:
… If either party takes steps to enforce the performance of the other party’s obligations under this agreement the party in default must bear the non defaulting party’s costs (including legal costs on a full indemnity basis).
[45]	Clause 6 of the 2017 agreement provides:
6.	The parties agree that it is intended that:
6.1	provided the repayment terms for the Capped Debt are adhered to by Andrew (and Mia Bella) then this agreement supersedes and replaces the 2011 Loan Agreement (and 2016 variations); and
6.2	in the event that there is any default of repayment of the Capped Debt under this agreement the parties will revert to the terms of the Loan Agreement (and variations of the same) and James will be entitled to immediately call up commence proceedings to recover the Total Debt owing; and
6.3	where there is any conflict between the terms of this agreement and those of the Loan Agreement (together with the two variations) then the terms of this agreement will prevail. 
[46]	Mr Templeton submits that cl 6 of the 2011 agreement is not operative because Andrew is not in default under the 2011 agreement.  The 2011 agreement is not the subject of the present proceedings.  James has not sought to enforce Andrew’s obligations under the 2011 agreement.
[47]	We disagree.  The statement of claim pleads the 2011 agreement including, specifically, cl 6.  It pleads further that:
16.1	the debt owed by the Defendants, pursuant to the 2011 Loan Agreement (absent the Capped Debt Arrangement) was as at 15 February 2017 agreed to be US$921,264.31 (the “Total Debt”), plus agreed costs of NZ$4,750 (the “Agreed Costs”) plus further costs invoiced to March 2017 of NZ$12,119.09 (the “Further Costs”) (Background I and clause 1(a)).
[48]	The claim is for the Total Debt.
[49]	The prayer for relief includes:
(c)	Costs on a solicitor and own client basis in accordance with the terms of the 2011 Loan Agreement (as varied) and the 2017 Agreement; details of such costs to be provided at or closer to hearing.
[50]	In our view, the 2017 agreement did not replace the 2011 agreement; it provided an alternative and contingent means by which Andrew could discharge his obligations to James under the 2011 agreement.
[51]	Andrew did not comply with the 2017 agreement.  The parties reverted to the 2011 agreement.  James’s claim is for the enforcement of the 2011 agreement.  
[52]	We find Andrew is liable to pay James indemnity costs in accordance with cl 6 of the 2011 agreement.
Costs summary
[53]	Costs are to be paid as follows:
(a)	The first appellant must pay the respondent indemnity costs in accordance with cl 6 of the 2011 agreement.
(b)	The second appellant must pay the respondent costs for a standard appeal on a band A basis and usual disbursements.  Second counsel is not certified for.

Solicitors: 
Foy & Halse, Auckland for First and Second Appellants
Woodhouse Law, Auckland for Respondent