Tomita v The Unnamed Vessel (No 3)

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
AD.36/00

BETWEEN YOSHINARI TOMITA
Plaintiff

AND THE UNNAMED VESSEL formerly known as AMAMI TAIKI GO and also known as INTREPID
Defendant

AND MASAMI YOKOYAMA
Third Party

Hearing: 22 November 2001

Counsel: Andrew Tetley for plaintiff
John Gresson for defendant

Judgment: 5 December 2001

JUDGMENT OF POTTER J

Solicitors: Russell McVeagh, DX CX 10085, Auckland
Norton White, P.O. Box 6623, Auckland

Introduction

[1] The defendant vessel owned by Boyd Allen Smith who has entered an appearance was arrested on 9 August 2000 on the application of the plaintiff. It is held at the Whangarei Town Basin.

[2] The plaintiff Mr Tomita, claims an interest in the vessel under a "neteitoken", a security in the nature of a ship's mortgage, dated 1 December 1995 entered into in Japan with a previous owner of the vessel to secure the unpaid balance of purchase price.

[3] Mr Smith has challenged the plaintiff's claimed security interest in the vessel in the Japanese Courts. On 27 July 2001 the Osaka High Court reversing the decision of the Osaka District Court, held against the plaintiff. He has applied to the Supreme Court of Japan to appeal the High Court judgment.

[4] The neteitoken which secures JPY$18.6m (approximately NZ$300,000) has given rise to a raft of litigation. In addition to these proceedings in rem in New Zealand and those mentioned above in Japan, Mr Smith successfully sought from the Kobi District Court a declaration that Blue Lagoon Company Limited ("Blue Lagoon") of which the plaintiff is managing director, has no equitable mortgage right over the vessel. This followed service of an enforcement notice by Blue Lagoon on Mr Smith, relying on the neteitoken. Previously, in July 1999 the Osaka District Court declined an application by the plaintiff for delivery up of registration papers and other documents needed to remove the vessel from Japan. The Court held that the plaintiff had not presented evidence to support his claim to an interest in the vessel.

[5] Further, Blue Lagoon has issued in the Osaka District Court proceedings claiming damages against Mr Smith and the vendor of the vessel. Mr Smith has issued proceedings for wrongful detention of the vessel and he and his Japanese lawyer have issued defamation proceedings against the plaintiff's lawyer in Japan.

[6] These proceedings in rem have already been before this Court on many occasions. Three judgments on interlocutory matters have been issued. When the plaintiff's application for an order for sale pendente lite and for joinder of Blue Lagoon as a plaintiff came before Anderson J, he issued a minute dated 22 August 2001 in which he recorded the parties' acceptance that they should seek to agree a "commercial arrangement" as a full or partial solution, given the conflict of laws issues and other difficulties that attended the matter. He adjourned the plaintiff's applications so a commercial arrangement might be established or the plaintiff's applications rescheduled for hearing. There was a further adjournment and then on 4 October 2001 the plaintiff advised the Court that agreement had been reached; he claimed an agreement with Mr Smith to provide security. Mr Smith denied this was so. Prior to the listed date Mr Smith had filed notices in opposition to the plaintiff's two applications which Anderson J had adjourned.

Applications

[7] This judgment concerns a number of interlocutory applications.

[8] Plaintiff

That -

[a] The vessel be sold unless the defendant provides security in the form of a bank guarantee in the amount of JPY 18.6m in respect of any judgment the plaintiff or Blue Lagoon may obtain against the defendant or the vessel in Japan or New Zealand.

[b] The proceedings be stayed or adjourned following provision of the security, pending judgment by the Supreme Court of Japan on the plaintiff's appeal.

[c] Blue Lagoon be joined as a plaintiff.

[d] As a fallback position, that the vessel be sold pendente lite pursuant to the plaintiff's previous application.

These applications are opposed by Mr Smith.

[9] Defendant

If the Court determines to grant a stay, Mr Smith seeks it be on condition that -

[a] The vessel is released unconditionally; and

[b] The plaintiff gives security for costs for the whole of the proceedings since discovery (to which point security of $23,000 was previously ordered), up to and including trial.

Those applications are in turn opposed by the plaintiff.

[10] Issues

[a] Was there an agreement for provision of security by Mr Smith?

[b] If so, to what extent should the Court have regard to it?

[c] If not, should the plaintiff's application for stay be granted?

[d] If so, upon what terms?

[11] The plaintiff claims that an agreement to provide security has been concluded and should be enforced by the Court in the manner of specific performance.

[12] Mr Smith denies any concluded agreement and says that the Court has no jurisdiction to direct that security be provided additional to that provided by the res under arrest. The various applications must be considered against the background of the plaintiff's claim to an interest in the vessel which Mr Smith submits is "overwhelmingly weak". All the transactions and events relied on by the plaintiff are subject to Japanese law and within the jurisdiction of the Japanese Courts before which to date the plaintiff has consistently failed to establish any valid, effective or enforceable right in the vessel.

Is there an enforceable agreement to provide security?

[13] Following the hearing before Anderson J the parties entered into concentrated and detailed correspondence relating to security to be provided by Mr Smith which would enable the vessel to be released from arrest. Matters subject to negotiation included the amount, type and form of the security.

[14] On 21 August 2001 Russell McVeagh for the plaintiff wrote to Norton White for Mr Smith in response to an initial letter from Norton White on the same day which set out various proposals including that a stand-by letter of credit be provided for the New Zealand dollar equivalent of JPY 18.6m plus interest and costs. Russell McVeagh wrote -

... any arrangement which secures and stays the New Zealand proceedings should be subject to the following conditions -

(1) A draft form of proposal (sic) security in favour of our client and other details of the security arrangements have to be provided and to be acceptable to our client...

[15] On 28 August 2001 Norton White responded -

The viability of the proposal obviously depends upon your clients being satisfied that the suggested stand-by letter of credit provides adequate security for their claims. We note Andrew Tetley's brief reference in discussions last week to standard P&I Club guarantee wordings, and this could certainly form a starting point. However, both our client and the banks will likely require some reasonably specific wordings, comparable with more conventional letter of credit conditions.

We have in mind some adequately detailed reference to the types of proceedings, and the courts in which your clients as named beneficiaries of the stand-by letter of credit will pursue their claimed monetary remedy. If you at least tell us where, and in what manner your clients will proceed against our client in the Japanese court(s), we can initiate a draft wording in consultation with the issuing bank.

[16] Following further correspondence, on 20 September 2001 Russell McVeagh wrote as to various of the conditions under discussion and enclosed a proposed draft joint memorandum to the Court for comment by Mr Smith's counsel. The form of this joint memorandum was never agreed.

[17] On 1 October 2001 Norton White wrote the letter upon which the plaintiff principally relies in its claim to an enforceable agreement -

Our client would, however be in a position to provide a guarantee, accessible by your clients in respect of any judgment they may obtain in either Japan or New Zealand, for the amount of the claim - that is, Yen 18,600,000. Whilst in quantum this may be less than they would expect in other circumstances under Part 14 of our High Court Rules, it does provide them with a fund against which to enforce in Japan where none would otherwise be available.

In the event that your clients decline to accept this alternative, then their opposed applications for joinder of an additional plaintiff, and for sale of the defendant vessel, listed in the Duty Judge list this Thursday 4 October, will need to be brought on for hearing. In light of two further judgments by Japanese courts adverse to your clients, delivered since their applications were filed and served, we will need to file and serve a further up-dating affidavit, and amended notices of opposition. Subject to your prompt response to this communication, it should be possible to have those documents with you ahead of Thursday's calling of the matter.

[18] On 3 October 2001 Russell McVeagh responded by facsimile -

We have been instructed by our clients that they will accept your client's suggested amendment for the guarantee to be limited to the amount of Yen 18,600,000.

Accordingly we suggest asking the Court for an adjournment of two weeks to allow for the guarantee to be put in place by a first class bank. We look forward to receiving the draft letter of Guarantee as soon as possible.

[19] On receipt of the 3 October fax counsel for Mr Smith responded immediately on 4 October 2001, that in the absence of a response to his earlier letter he had filed on behalf of Mr Smith the notices of opposition. The proposal for a guarantee not having been taken up it had expired. There might still be merit in the revised proposal but other issues such as additional security for costs and likely duration of the guarantee would require consideration.

[20] The plaintiff relying on the recent decision of the Court of Appeal in Fletcher Challenge Energy Limited v Electricity Corporation of New Zealand Limited (unreported, 10 October 2001, CA. 132/00) submitted that the background circumstances of the agreement clearly indicated that the parties intended to enter into a legally binding agreement. The parties entered into negotiations by agreement following Anderson J's minute, and correspondence evidencing the parties' endeavours to reach agreement indicates the parties' intention to be bound by the agreement. In particular the offer of 1 October 2001 was expressed as a final offer and contained all the essential terms of a guarantee. That offer was accepted by the plaintiff by facsimile of 3 October 2001. Counsel referred to paragraph 60 of the decision of the Court in the above case -

The intention of the parties, as discerned by the Court, to be bound or not to be bound should be paramount. If the Court is satisfied that the parties intended to be bound, it will strive to find a means of giving effect to that intention by filling in the gap. On the other hand, if the Court takes the view that the parties did not intend to be bound unless they themselves filled the gap (that they were not content to leave that task to the Court or a third party), then the agreement will not be binding.

[21] Counsel submitted that the form of guarantee is a relatively straightforward matter. Mr Tetley annexed to his submissions copies of forms of such guarantees from the P&I Club and the Midland Bank, which were examples of guarantees in common. use. Alternatively he proposed that the Court could determine the form of guarantee under r. 781(1) High Court Rules -

The amount of any security required under this Part may be determined by the Court or a Judge on an application by any party.

[22] He submitted that a party should not be able to renege on an agreed security and that the Court should make an order for specific performance of the concluded agreement.

[23] The defendant submitted that the letter of 1 October 2001 was merely a continuance of the ongoing dialogue, that its focus was quantum, that it put forward a revised offer limited to the amount of the security, JPY 18.6m, but did not cover interest, costs and other provisions which had been under detailed discussion. Counsel submitted that there were a number of matters still to be concluded as referred to in his letter of 4 October 2001. In particular he considered the scope of the guarantee, i.e. what it was intended to answer, was not defined although it had been the subject of detailed exchanges in the correspondence.

[24] I do not consider that in the circumstances of this case there is evidence of a clear intention to be bound such that a legally binding agreement was concluded.

[25] At the outset of the negotiations Russell McVeagh required in their letter of 21 August 2001 that a draft form of the proposed security be provided. That was in response to the defendant's proposal for a stand-by letter of credit, which Mr Tetley submitted was a less common document than the forms of guarantee regularly used in providing security of this type. He said that the form of any guarantee to be provided was a much more straightforward matter with ample reference points in commercial practice.

[26] However, the negotiations of the parties proceeded on the basis that the security to be provided was by stand-by letter of credit. Issuing banks and other details were discussed. All the negotiations were in the context of a letter of credit.

[27] Then on 1 October 2001 the defendant's offer reverted to a "guarantee". In the context in which it appears it is not clear whether the word guarantee was intended to refer to a different type of security or was a loose description of the letter of credit facility which up until that point in the correspondence had been the nature of the security addressed exclusively and in considerable detail. If the document referred to was a letter of credit there were still matters to be agreed, for example the issuing and correspondent bank which had been raised in previous correspondence. If, however, Norton White were proposing a different form of security, namely a guarantee, there had been no discussion at all about its nature or form.

[28] I do not accept in the circumstances of this case, and given the detailed interest both parties had taken in every aspect of the security, that by introducing for the first time a reference to "guarantee" in its letter of 1 October 2001 Norton White so defined the nature of the security that the parties could be said to be ad idem as to that, a critical aspect of the security arrangement. Russell McVeagh demonstrated this was not so when they conveyed the purported acceptance on 3 October 2001, by introducing a qualification - that the guarantee was required from "a first class bank".

[29] Another relevant aspect is that the negotiations regarding security took place in response to the Court's suggestion that the parties should seek an agreed solution. It was always contemplated that the parties would go back to the Court with that solution and seek appropriate orders. To that end Russell McVeagh submitted a draft memorandum with their letter of 20 September 2001. But the negotiations never reached the point where the parties addressed a joint memorandum or draft consent orders for submission to the Court. Negotiations were not concluded to the point where that became possible. When the parties returned to the Court on 4 October 2001 they presented disparate positions.

[30] Mr Gresson for Mr Smith contended that the "scope of the security" had not been determined. This also had been the subject of extensive correspondence, commencing with the second paragraph of Norton White's letter of 28 August 2001, quoted in paragraph [15]. Given the detailed consideration, the reference in the letter of 1 October 2001 to "any judgment they may obtain in either Japan or New Zealand for the amount of the claim" is perhaps surprising but it could be inferred that with liability quantum limited to JPY 18.6m definition of the judgments or Court orders the security was intended to answer became less critical to the defendant.

[31] Mr Tetley submitted the meaning was very clear; the guarantee offered was to cover "any judgment" in Japan and New Zealand, and the only beneficiaries who would have access to the guarantee were their clients, Mr Tomita and Blue Lagoon. I am inclined to accept that "any judgment" could have been so interpreted in the context of a limitation of JPY 18.6m, had there been clear agreement on all other essential terms.

[32] However, the specific matters referred to above and the overall tenor of the parties' correspondence which indicated throughout that the parties required to be satisfied on all of many points of detail raised by each of them before an agreed position on the security to be provided by Mr Smith could be reached and presented to the Court, lead me to conclude that the parties had not reached a point in their negotiations where they intended to be bound. It is not a situation where the Court can fill gaps in a concluded agreement to give effect to the parties' intentions.

[33] The plaintiff's first two applications are therefore dismissed.

Application for Sale

[34] I also reject the plaintiff's application for sale pendente lite. There is a realistic expectation on a Registrar's sale that a competitive market value will not be realised. Mr Darrell Daish, Master Mariner, in an affidavit sworn 21 June 2001 estimates a loss on forced sale to be likely to be 40%. In the light of the history of this matter where a vessel owned by Mr Smith is subject to arrest to answer claims by the plaintiff which he has to date been unsuccessful in substantiating in the Japanese Courts (the only appropriate forum), there is no justification for Mr Smith being faced with a potential loss on realisation which would be irrecoverable.

[35] There is no evidence to suggest that the economics of retention require an order for sale on the principles of The Abruka (1996) 10 PRNZ 326. Mr Gresson for Mr Smith advised from the Bar that the vessel is insured for $600,000; the claim (allowing for costs) should not exceed $400,000; holding costs being met by the plaintiff are approximately $9,000 per month. Nor should it be overlooked that any depreciation during arrest would be of the value of improvements made by Mr Smith. When Mr Smith purchased the vessel in which the plaintiff claims a security interest, it was derelict and immobile.

Application for Stay

[36] In the absence of alternative security from Mr Smith I am not prepared at this stage to release the vessel from arrest. It should remain as security to meet any valid interest in the vessel that the plaintiff may establish if he is successful on appeal to the Japanese Supreme Court. The proceeding will be stayed. Mr Smith may seek release of the vessel in the event that -

[a] The appeal is unsuccessful; or

[b] The appeal is not diligently pursued by the plaintiff; or

[c] The appeal otherwise lapses or fails.

The defendant should be secured for his costs to date. Any further security will depend on the outcome of future events.

Joinder of Blue Lagoon

[37] Given the orders I propose to make there is no point in considering at this stage the joinder of Blue Lagoon. That application may be revived if and when it becomes relevant.

[38] Orders

[a] The proceeding will be stayed. It will be adjourned to Thursday 20 June 2002 pending the decision of the Japanese Supreme Court on the plaintiff's appeal. The matter will be listed before me at 9 a.m. on 20 June 2002. Leave is reserved to either party to bring the proceeding before the Court at an earlier date should there be an intervening event which so justifies.

[b] The plaintiff is to meet the reasonable and proper costs and expenses of maintaining the vessel while under arrest.

[c] The plaintiff is to provide within 14 days additional security for costs up to the point of stay (including costs in relation to the applications the subject of this judgment which are reserved). The amount of security is to be agreed but failing agreement leave is reserved to apply.