Ocean Towing & Salvage (Vanuatu) Ltd v Custom Fleet (NZ) Ltd

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV 2005-404-3457

BETWEEN OCEAN TOWING & SALVAGE (VANUATU) LIMITED
Plaintiff

AND CUSTOM FLEET (NZ) LIMITED
First Defendant

AND KENSINGTON SWAN
Second Defendant

Hearing: 29 May 2006

Appearances: N. Gedye for Plaintiff
L.J. Taylor / J. Maslin for First Defendant

Judgment: 30 November 2006 at 4pm

JUDGMENT OF ASSOCIATE JUDGE D.H. ABBOTT

In accordance with R540(4) I direct that the Registrar endorse this judgment with the delivery time of 4pm on 30 November 2006

Solicitors: KP McDonald, PO Box 33-106, Takapuna, Auckland
Minter Ellison Rudd Watts, PO Box 2793, Wellington
Kensington Swan, Private Bag 92101, Auckland

Introduction

[1] The defendant (Custom Fleet (NZ) Limited) seeks summary judgment against the plaintiff (Ocean Towing & Salvage (Vanuatu) Limited) on the ground that its claim cannot succeed.

[2] The claim arises out of the arrest in Brisbane in July 1999 of a vessel (the Stanley Brown) owned by Ocean Towing Vanuatu as part of steps taken to recover a debt. Ocean Towing Vanuatu says that a predecessor of Custom Fleet, Capital Equipment Finance Limited (CEF) is liable to it as a result of the arrest of the Stanley Brown, both for conversion and for wrongful arrest.

[3] Custom Fleet (as successor to CEF) claims that CEF was lawfully entitled to apply for the arrest of the Stanley Brown, and cannot be held liable in conversion, because it was acting under an equitable mortgage created as part of a settlement agreement made on 4 May 1999. Alternatively, Custom Fleet says that even if the settlement agreement did not give rise to an equitable mortgage, the claim cannot succeed as Ocean Towing Vanuatu will be unable to show that the arrest was wrongful (whether judged by New Zealand law or by Australian law), and its claim for conversion is not available as the arrest was made under a Court order and the correct claim is an action for wrongful arrest.

[4] Ocean Towing Vanuatu challenges Custom Fleet’s claim that it cannot succeed. It says that the settlement agreement did not confer a charge over the Stanley Brown until formal security documents were executed, which did not happen as incorrect documents were provided. It also says that even if its failure to execute the documents was a breach of the agreement, the remedies available to CEF did not include a right to arrest. It says that Australian law applies to the claim for wrongful arrest and, under that law, it is at least arguable that CEF acted unreasonably and without good cause in procuring the arrest. It says that its claim for conversion can exist independently of the claim for wrongful arrest. Overall it says that it is inappropriate to attempt to determine these points on a summary judgment application, as there are factual disputes to resolve and a need to explore further facts which can only be done properly at trial.

Preliminary matters

[5] I record that at the start of the hearing I made an order, by consent, granting Ocean Towing Vanuatu leave to discontinue against the second defendant.

[6] I also record counsel’s advice that Ocean Towing Vanuatu is no longer pursuing its third cause of action (alleging that the settlement agreement of 4 May 1999 was an improper transaction).

Background

[7] CEF lent money to David Brown Construction Limited. The loan was guaranteed by the company’s director and shareholder, David Brown. It was also guaranteed by another of Mr Brown’s companies, Ocean Towing & Salvage (Cook Islands) Limited. CEF took action to recover its money from Mr Brown and Ocean Towing Cook Islands after David Brown Construction Limited went into liquidation. It sought and obtained summary judgment on liability against Mr Brown and issued a statutory demand against Ocean Towing Cook Islands. A hearing of both the application for summary judgment (to determine quantum) and an application by Ocean Towing Cook Islands to set aside the statutory demand was due to take place on 5 May 1999.

[8] Shortly before that hearing, the parties entered into settlement negotiations. On 4 May 1999 Mr Brown and Ocean Towing Cook Islands entered into a settlement agreement with CEF. Under the agreement Mr Brown and Ocean Towing Cook Islands were to pay CEF $300,000 by 4pm on 30 June 1999. As security for performance of the agreement Mr Brown agreed to provide a confession of claim, Ocean Towing Cook Islands agreed to provide a memorandum by its directors accepting appointment of a liquidator, and the owner of the Stanley Brown agreed to provide a registered first mortgage. CEF agreed to hold both the signed confession of claim and agreement to liquidation in escrow pending payment of the agreed amount.

[9] CEF initially required that the mortgage be provided over the Stanley Brown before it would agree to an adjournment of the hearing. Clause 8 in its settlement offer stated that the agreement was conditional on the mortgage being given prior to 5 May 1999 (the date of the hearing):

“This agreement is conditional upon the execution of the security over the Stanley Brown being completed prior to 5 May 1999.”

[10] Subsequently CEF accepted that it would not be possible for the mortgage to be provided before the hearing. Its settlement terms were changed to allow the mortgage to be provided later. The change was recorded in a new opening paragraph to the agreed terms which read:

“We confirm your telephone advice that your clients have accepted the settlement terms as set out below. Our client is prepared to grant an extension for the time for compliance with clause 8 by requiring the registered owner of the Stanley Brown to execute the requisite security documentation no later than 5 days after we advise [that] the security documents are ready to be executed. Failure to execute within that time will be a breach of the settlement agreement.”

The other terms, including clause 8, were not changed.

[11] The agreement was recorded in a fax drawn up by counsel for CEF (there being some doubt, at least on the part of CEF, as to which of Mr Brown’s companies then owned it). Mr Brown, Ocean Towing Cook Islands and the owner of the Stanley Brown were asked to sign it. Mr Brown did so on his own behalf, and on behalf of both Ocean Towing Cook Islands and the owner of the Stanley Brown. As a result of this agreement the hearing on 5 May did not proceed.

[12] Mr Brown and Ocean Towing Cook Islands complied promptly with the other terms of the agreement (delivery of a confession of claim and a consent to liquidation) but the documents for the mortgage over the Stanley Brown were not delivered to Mr Brown’s barrister until 26 May 1999. The mortgage documents were not signed by Ocean Towing Vanuatu. The agreed sum of $300,000 was not paid by 4pm on 30 June 1999 (or at any time since).

[13] After the deadline for payment passed on 30 June 1999 CEF sent instructions to Brisbane solicitors to apply for a Court order for the arrest of the Stanley Brown. It was arrested under a Court order on 2 July 1999.

[14] Ocean Towing Vanuatu filed the present proceedings on 30 June 2005. This was two days before the claim became time-barred under the Limitation Act.

Applicable principles for summary judgment

[15] Counsel were agreed that r 136(2) of the High Court Rules permits the Court to award summary judgment to a defendant, where the defendant satisfies the Court on the balance of probabilities that none of the plaintiff’s claims can succeed: Jones v Attorney-General [2004] 1 NZLR 433, applying the principles stated by the Court of Appeal in Westpac Banking Corporation v MM Kembla New Zealand Ltd [2001] 2 NZLR 298 at paras [58-64].

[16] For the present application the following passages from the Court of Appeal’s decision in Westpac Banking Corporation v MM Kembla New Zealand Ltd are particularly relevant:

[62] Application for summary judgment will be inappropriate where there are disputed issues of material fact or where material facts need to be ascertained by the Court and cannot confidently be concluded from affidavits. It may also be inappropriate where ultimate determination turns on a judgment only able to be properly arrived at after a full hearing of the evidence. Summary judgment is suitable for cases where abbreviated procedure and affidavit evidence will sufficiently expose the facts and the legal issues. Although a legal point may be as well decided on summary judgment application as at trial if sufficiently clear (Pemberton v Chappell [1987] 1 NZLR 1), novel or developing points of law may require the context provided by trial to provide the Court with sufficient perspective.

[63] Except in clear cases, such as a claim upon a simple debt where it is reasonable to expect proof to be immediately available, it will not be appropriate to decide by summary procedure the sufficiency of the proof of the plaintiff’s claim. That would permit a defendant, perhaps more in possession of the facts than the plaintiff (as is not uncommon where a plaintiff is the victim of deceit), to force on the plaintiff’s case prematurely before completion of discovery or other interlocutory steps and before the plaintiff’s evidence can reasonably be assembled.

[64] The defendant bears the onus of satisfying the Court that none of the claims can succeed. It is not necessary for the plaintiff to put up evidence at all although, if the defendant supplies evidence which would satisfy the Court that the claim cannot succeed, a plaintiff will usually have to respond with credible evidence of its own. Even then it is perhaps unhelpful to describe the effect as one where an onus is transferred. At the end of the day, the Court must be satisfied that none of the claims can succeed. It is not enough that they are shown to have weaknesses. The assessment made by the Court on interlocutory application is not one to be arrived at on a fine balance of the available evidence, such as is appropriate at trial.

Opposing arguments and issues arising

[17] Custom Fleet argues that:

a) It has a complete answer to both causes of action in that the agreement of 4 May 1999 created an equitable mortgage of the Stanley Brown in favour of CEF, which gave CEF the right to seek arrest of the Stanley Brown in enforcement of rights as mortgagee.

b) Even if it is open to Ocean Towing Vanuatu to argue that the agreement (and hence the mortgage) may not have been in force when Custom Fleet procured the arrest of the Stanley Brown, Ocean Towing Vanuatu cannot meet the test for wrongful arrest. This is so either under New Zealand law (where it has to show that the arrest was in bad faith or grossly negligent) or under Australian law (where it has to show that the arrest was unreasonable and without good cause). It cannot meet these tests because at the time of the arrest Custom Fleet had a strongly arguable case, at the very least, for an equitable mortgage; it acted on legal advice; and it gave clear warning that enforcement steps would be taken unless payment was made.

c) In addition to the justification afforded by the equitable mortgage there is no basis for the claim for conversion given that the arrest was pursuant to a court order. The accepted way in which to seek damages for an arrest under a court order is by the cause of action for wrongful arrest. Allowing the claim for conversion would cut across well established principle.

[18] Ocean Towing Vanuatu says that it is at least arguable that:

a) On its true construction the agreement of 4 May 1999 did not confer a charge over the Stanley Brown as it was conditional on a formal mortgage document being signed, the documents were not signed, and a conditional agreement to mortgage in which the condition is never fulfilled, cannot create a charge in equity;

b) Ocean Towing Vanuatu was entitled to not sign the mortgage documents as they were incorrectly drawn up, and the agreement was unenforceable for lack of consideration until the documents were signed;

c) Any breach of the agreement only gave CEF a right to terminate, or take steps against the owner of the Stanley Brown, not to arrest the boat;

d) Australian law applies because the Stanley Brown was berthed in Brisbane and the arrest took place there, so the correct test for an action for wrongful arrest is whether the arrest was unreasonable and without good cause. CEF did not act reasonably or with good cause: there was no charge until the mortgage documents were signed, incorrect documents were proferred, an offer to pay had been made, the agreement gave no right to arrest and CEF did not warn that it was proposing to seek arrest;

e) Its cause of action in conversion (being a strict liability tort) is likely to succeed if no charge came into being.

[19] Ocean Towing Vanuatu’s primary argument, however, is that summary judgment is inappropriate. There were two broad aspects to the argument. First, the true construction of the agreement must be determined in context and requires findings on disputed background facts. Secondly, a detailed examination of Custom Fleet’s decision to seek arrest is needed to decide whether that step was unreasonable in all the circumstances. As Custom Fleet justifies its action on the basis of legal advice this examination needs to extend to whether or not that advice was unreasonable. Ocean Towing Vanuatu says that such consideration can only be given properly at trial, with the benefit of cross-examination.

Issues

[20] The Court is faced with the following questions in deciding whether Custom Fleet has established that Ocean Towing Vanuatu cannot succeed on its claims:

a) Is it arguable that the agreement did not confer a charge over the Stanley Brown?

b) Is there an arguable case that Australian law applies for the test for wrongful arrest?

c) Is it arguable that Custom Fleet acted in bad faith or with gross negligence (the New Zealand test) or unreasonably and without good cause (the Australian test) in arresting the Stanley Brown?

d) If the agreement did not confer a charge, is there an arguable case that CEF acted without lawful justification so as to make it liable for conversion?

e) Is there any dispute on material facts or need for further investigation of the facts which makes this case unsuitable for determination by summary judgment?

Is it arguable that the agreement did not confer a charge?

[21] If the May 1999 agreement was binding at the time of the arrest, the agreement to provide a registered first mortgage over the Stanley Brown will be sufficient to create an equitable mortgage unless the terms of the agreement indicate otherwise: Meeson Admiralty Jurisdiction and Practice (3ed 2003) at paras 10-047 and 10-048:

Mortgages may be legal or equitable. A legal mortgage of personalty is a conditional assignment to the mortgagee of the mortgagor’s legal interest in the property. An equitable mortgage may according to general principles be created … [by]

(i) An agreement to make a legal mortgage

Notwithstanding the lack of proper formality sufficient to create a legal mortgage, such an agreement will be enforced in equity according to the maxim “equity treats as having been done that which ought to have been done”.

[22] The terms of agreement as initially proposed and accepted on 4 May 1999 were undoubtedly conditional on execution of security over the Stanley before the hearing on 5 May 1999. That is not in dispute. Nor is there any dispute that those initial terms were changed to provide for the security to be given later (by the addition of the opening paragraph to the agreement, which I have set out at paragraph [10] above). The issue is whether the parties intended their agreement to give rise to a charge enforceable in equity before the formal mortgage was signed.

[23] Ocean Towing Vanuatu will only succeed if it can establish that the agreement remained conditional on security being given, so that the equitable charge did not arise.

[24] Counsel for Custom Fleet submitted that that interpretation does not accord with the words of the agreement and the clear intent of parties in entering into the agreement, when put into context and as evidenced by their subsequent conduct.

[25] Counsel for Ocean Towing Vanuatu submitted that this was the only reasonable and tenable interpretation, as the words of the opening paragraph merely extended time for compliance with the clear condition in clause 8 and was more consistent with other references in the agreement to the provision of a registered mortgage. He submitted that in order to decide the correct interpretation of the agreement, the Court had to ascertain the intention of the parties, and could not properly do that without consideration of the factual matrix. He argued that this required a broad enquiry into the purpose of the agreement (from both parties’ perspectives) and the commercial context in which it had arisen. He argued that the nature of this exercise, and unresolvable conflicts in the opposing affidavits for this application on the contextual facts, together made the case unsuitable for summary judgment.

[26] Whether or not the agreement (and hence Custom Fleet’s equitable mortgage) is conditional on execution of the security documents, is a matter of interpretation of the agreement. The principles to be applied in interpretation are well established: Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 (CA), adopting Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL). Essentially it is a question of ascertaining objectively the intention of the parties at the time they entered into the agreement. The exercise involves giving sensible and natural meaning to the words actually used, both within the (internal) context of the agreement as a whole, and in light of the external context (the factual matrix out of which it arose). The meaning should reflect the contractual purpose, and provide a reasonable outcome in terms of making good sense.

[27] The principal difficulty in interpretation in the present case arises from the fact that clause 8 was left in the agreement, unamended, when the opening paragraph was added. Counsel for Ocean Towing Vanuatu argued that the correct interpretation is reached by taking the natural meaning of the phrase “an extension for the time for compliance with clause 8” so that the condition in clause 8 remains but takes effect five days after security documents were ready to be executed rather than on the date specified in the clause. He argued that this was consistent with the provision in clause 6 of the agreement that the admission of claim and memorandum of directors of Ocean Towing Cook Islands were to be held in escrow pending performance of the agreement by the company providing security over the Stanley Brown.

[28] Developing this argument, counsel for Ocean Towing Vanuatu submitted that, read as a whole, the agreement contemplates execution of formal security documents before a charge over the Stanley Brown arose. In support of his submission he referred to:

a) Various references in the agreement to the intended charge as a “registered first mortgage”;

b) Apparent uncertainties as to ownership of the Stanley Brown leading up to execution of the agreement, suggesting that CEF did not intend to be bound until the owner of the Stanley Brown was formally recorded and identified in the security documents (he argued that the enquiry into who owned the Stanley Brown would have been of little or no importance if a charge arose merely on execution of the agreement);

c) Reference to provision of security over another vessel, and to the preparation of security documents as part of the factual matrix;

d) Lack of reference in the agreement to that (fax) document giving use to any security interest ahead of the formal documents notwithstanding the time pressure on securing the agreement;

e) Counsel for Ocean Towing Vanuatu’s inquiry into the availability of the security documents when accepting the first offer (before addition of the opening paragraph).

[29] The issue for the present application is whether or not Ocean Towing Vanuatu’s interpretation is a tenable one. Custom Fleet argues that it is untenable if one reads the whole of the opening paragraph in the knowledge that it was an addition to the initial agreement, and was inserted when it became apparent that the security documents could not be provided before the hearing scheduled for the following day. In particular, its counsel relied on the final sentence of the added paragraph, that a failure to execute within the extra time would be a breach of the settlement agreement.

[30] The words of the opening paragraph do not sit easily with the wording of clause 8. It is not in dispute that clause 8 was overtaken by the opening paragraph. The drafting of that paragraph, in retrospect, could have been much clearer. It did not, as it could have, remove clause 8, which allows argument that the agreement remained conditional. Equally, however, meaning must be found for the provision that failure to execute within time would be a breach of the agreement. It makes no sense to make provision for breach if the agreement falls away as I understand Ocean Towing Vanuatu to contend.

[31] The context is clearly important. The agreement was entered into ahead of a Court hearing on 5 May to establish quantum on a judgment for liability which CEF had obtained against Mr Brown earlier that year, and to determine an application by Ocean Towing Cook Islands to set aside a statutory demand by CEF for the same debt (both owed by Mr Brown under a guarantee). The commercial purpose of the agreement was clearly to resolve the dispute ahead of the hearing on 5 May. It is a reasonable inference that both parties were seeking certainty ahead of that hearing. It seems inconsistent with that purpose merely to have deferred resolution for an undefined time. An interpretation that a binding agreement had come into force, with obligations capable of being enforced in the event that the agreement was not performed, makes far more sense than Ocean Towing Vanuatu’s suggestion that it was only to have effect when the security documents were signed. It is also consistent with the term that the confession of claim and consent to liquidation were to be held in escrow until 4pm on 30 June 1999 (by which time the agreed payment was to be made).

[32] This interpretation is also borne out by the subsequent conduct of the parties. The delivery of the confession of claim by Mr Brown and the memorandum of consent to liquidation by Ocean Towing Cook Islands are perhaps equivocal, but there can be no such equivocality about events following delivery of the security documents. (The documents were provided to Ocean Towing Vanuatu, through counsel, on 26 May 1999; on Ocean Towing Vanuatu’s interpretation the agreement was conditional on execution by 31 May 1999).

[33] CEF’s solicitor has given affidavit evidence of correspondence and telephone contact by a staff solicitor with Ocean Towing Vanuatu’s counsel on 14 and 15 June 1999. Ocean Towing Vanuatu challenges the admissibility of this evidence on the grounds of hearsay. The evidence comprises a facsimile message and telephone attendance notes made by the staff solicitor who now resides in the United Kingdom. I consider the documents admissible under s 3 of the Evidence Amendment Act (No.2) 1980 as a business record made by the solicitor. The point of the evidence lies in a telephone attendance note dated 15 June 1999 recording a proposal for tender of a cheque rather than the mortgage, thereby indicating that Ocean Towing Vanuatu regarded the agreement as still being on foot.

[34] An even clearer indication of the status of the agreement is contained in an exchange of correspondence between counsel on 30 June 1999 (the date when payment was due). In that correspondence, CEF’s solicitors wrote to counsel for Ocean Towing Vanuatu to advise that unless payment was received by 4pm that day “immediate further steps” would be taken, but with the proviso that reconsideration of the position would be given if counsel for Ocean Towing Vanuatu was able to demonstrate that payment would be made “today but after 4 pm”. By letter sent by facsimile at 3.17pm counsel for Ocean Towing Vanuatu referred to (and provided a copy of) an instruction given by Mr Brown to his bank (HSBC, Auckland) for transfer of funds to various parties including Ocean Towing Vanuatu, and drawing of a cheque in favour of CEF, and stated:

“I understand it is now unlikely that the money will be received by HSBC by 4.00 pm today. I am instructed however that it is almost certain to arrive tomorrow, and that it will be cleared funds, so bank cheques can be written immediately.

In the meantime, there is nothing further my client can do. I would suggest however that your client has nothing to gain by exercising its rights today, if the money is indeed going to be available tomorrow.”

[35] I regard this letter from Ocean Towing Vanuatu’s counsel as a clear indication that the agreement was in existence at that point. If the agreement had come to an end, or was incapable of being enforced, one would have expected a brief response to that effect.

[36] Counsel for Ocean Towing Vanuatu submitted that the question of interpretation should not be decided on the limited evidential basis of this application for summary judgment. He submitted that it required consideration of a broader context, and the need to examine and make findings on some of that contextural fact. He submitted that there were disputes of fact to resolve (for example, as to reasons for having an enforceable security in place by a set date, with Mr Brown challenging Custom Fleet’s rationale of avoiding delay) and aspects of the factual matrix needing to be examined (such as CEF’s change in position to clause 8). He pointed to the warning of the Privy Council in Jones v Attorney-General against failing to give proper weight to conflicts of evidence. These are all valid points in principle. The issue is whether or not they apply in the present case. I do not consider it necessary to resolve the matters of dispute raised by counsel in order to decide the interpretation of the agreement. The general context (an agreement entered into to avoid the need for a defended hearing) is not in dispute. Intention is to be established objectively, not by the parties subjective intentions. The matters relied on by counsel for Ocean Towing Vanuatu, in my view, are either matters of general context which do not affect the outcome or are matters of subjective intention (which are not to be taken into account).

[37] Ocean Towing Vanuatu’s argument that the agreement, read as a whole, contemplates execution of the formal security documents before a charge arose, in my view, cannot stand alongside the express provision that failure to execute would be a breach of the agreement. The language in the agreement on which counsel relied in support of this submission (references to registered first mortgage and to security documents), was inserted when the parties were contemplating everything being in place within a day or so (ahead of the hearing). I see no reason to read the references in that agreement to a mortgage or uncertainty over the ownership of the Stanley Brown as meaning that the parties had agreed that a charge would not arise until the documents were signed. I do not accept that inference. For the reasons I have already given, I take the view that by the end of the day on 4 May 1999 a binding agreement was in place. The parties were entitled to have that agreement performed. That extends to execution of the mortgage documents. Equitable rights arose at the point of entry into the agreement. I do not consider that those equitable rights had been negated by an inference drawn from equivocal words.

[38] Counsel for Ocean Towing Vanuatu also took issue with a suggestion that clause 8 was inserted solely for the benefit of CEF and had been waived. He argued that there were benefits under it for the other parties, the nature of which could only be explored properly at trial. Given the view I have reached on the interpretation of the agreement, this point is no longer relevant. It might have been persuasive had the agreement not been amended by introduction of the opening paragraph. However, in my view, it too is answered by the need to provide meaning to the last sentence of that opening paragraph.

[39] Finally on interpretation, counsel for Ocean Towing Vanuatu argued that even if the agreement had not fallen away, it was no more than an agreement to create a charge if and when called upon: Lakeside Estate Limited (in receivership) & Anor v Bright (HC, Auckland, CP 598-IM 00, 4 October 2001, Master Venning). He acknowledged that the security documents forwarded on 26 May 2006 represented such a call, but submitted that the call was ineffective because the documents were incorrect. Accordingly, he submitted that no equitable interest arose. I do not accept that submission. This was not a case of an agreement to charge if called upon. The wording of the agreement made it an absolute obligation to provide the security.

[40] Counsel for Ocean Towing Vanuatu referred to a factual dispute over the reason that the security documents were not executed (or executed within the time provided in the agreement). It is not necessary to resolve this dispute in coming to a decision on the interpretation of the agreement. Counsel submitted that CEF/Custom Fleet should not be able to take advantage of its own misfeasance in proferring security documents that did not conform with the agreement. On the other hand, Custom Fleet argued that it was incumbent upon Ocean Towing Vanuatu to raise any objection to the form of documents (it had an obligation to do everything necessary to execute the documents) or to draw and execute a complying mortgage (as is required in a mortgage of land: Plowman v Dillon [1985] 2 NZLR 312). I am unable to resolve the dispute on this application, but do not consider it necessary to do so given the view that I have come to as to the interpretation of the agreement.

[41] I do not accept the submission for Ocean Towing Vanuatu that the agreement may be unenforceable against the plaintiff for lack of consideration in the absence of execution of the formal security documents. I consider that there was adequate consideration afforded by CEF’s agreement to forego its existing claims against Ocean Towing Vanuatu’s director (Mr Brown) and a related company, Ocean Towing Cook Islands (of which Mr Brown was also a director). Counsel for Ocean Towing Vanuatu submitted that whether or not there was consideration was a factual issue, needing investigation into the relationship between Mr Brown and Ocean Towing Vanuatu, and the motivation for Ocean Towing Vanuatu joining in the agreement. The relationship between the plaintiff, Mr Brown and Ocean Towing Cook Islands is clear without the need for further investigation.

[42] Given the view I have reached on interpretation of the agreement, I find that an equitable mortgage arose at the time of entry into the agreement. That provides a complete answer to both Ocean Towing Vanuatu’s claims in that enforcement of that security provides unquestionable lawful jurisdiction for the arrest. I am mindful, however, of counsel for Ocean Towing Vanuatu’s agreement that this finding should only be made after full consideration of the factual matrix at trial. I have already come to the view that that will not assist further. However, against the possibility that I could be wrong on that, I will now address the other issues raised by counsel. The starting point, however, is that at the very least there is a strong case for an equitable mortgage arising under the agreement.

Applicable law on wrongful arrest

[43] I now deal with the law to be applied in considering the cause of action for wrongful arrest. Although the arrest occurred in Queensland, it is accepted by both parties that the plaintiff can sue in New Zealand both for wrongful arrest and for conversion under the double actionability rule (the events are actionable in both Queensland and New Zealand. There is an issue, however, as to the law to apply in the action for wrongful arrest, as the law in Queensland differs from that here in New Zealand. The issue does not arise on the cause of action for conversion, where the same common law principles apply in the two jurisdictions.

[44] The test for determining which law is to apply is helpfully set out in the following passage in Baxter v RMC Group plc [2003] 1 NZLR 304 at paragraph [58]:

The rule for determining choice of law in a case where a tort is committed outside New Zealand is that set out in Red Sea Insurance Co Ltd v Bouygues SA [1995] 1 AC 190. Applying the rule as outlined in that case to the facts here, the propositions which apply are:

(a) A tort is actionable in New Zealand only if it is actionable both in New Zealand and England. If this rule (the double actionability rule) is satisfied, then the substantive law to be applied is the law of New Zealand.

(b) However, if one country has the most significant relationship with the occurrence and with the parties, the substantive law of that country is to be applied.

[45] The significance of this point for the present application lies in the difference between the common law principles applying in New Zealand and the terms of s 34 of the Admiralty Act 1988 (Cth) (which codifies the common law principles formerly applying in Australia). Under New Zealand’s common law principles, a party suing for unlawful arrest must show bad faith or gross negligence whereas in Australia, under s 34, there is a lesser standard and the party suing must show only that the arresting party acted unreasonably and without good cause.

[46] The first question for the Court, therefore, is whether New Zealand law (as the lex fori) applies, or whether Australia has the most significant relationship with the wrongful arrest and with the parties so that its law should apply.

[47] This is a question of fact. Counsel for Ocean Towing argued that it could only be decided at trial. I am not persuaded about that. The material facts are before the Court in the affidavits filed, and do not appear to be in dispute. Nor was it suggested to me that there are further significant facts still be to produced which might be material. I take the view that I am able to decide this point on the facts before me.

[48] The only significant fact which provides a relationship with Australia is that the arrest took place in Queensland (at the hand of the Marshall of the Supreme Court of Queensland in Admiralty). Counsel for Ocean Towing Vanuatu acknowledged that this was due to the fact that the boat was berthed in Queensland at the time of arrest. Significantly, Australia had no connection to the dispute between the parties.

[49] On the other hand, other facts material to the arrest and to the relationship between the parties show a close connection to New Zealand. The arrest arose out of the 4 May 1999 settlement agreement and the default in making payments in New Zealand under that agreement. That agreement was concluded here in Auckland between counsel for the parties, and is clearly governed by New Zealand law. The defendant has its registered office here in Auckland and its predecessor (CEF) was also a New Zealand company carrying on business in New Zealand. Mr Brown resides in New Zealand.

[50] Ocean Towing Vanuatu’s place of registration and the place of registration of the Stanley Brown (Vanuatu) do not assist either way.

[51] The most significant issues in this case deal with the relationship between the parties leading up to the agreement of 4 May 1999, and what took place between them leading up to the arrest. All of this took place in New Zealand, save for the steps taken by Custom Fleet’s Queensland solicitors to apply for the writ of arrest. However, there is no dispute as to events surrounding the arrest. They are a matter of record. I do not consider Australia to have a sufficiently significant relationship with the occurrence to displace the presumption in favour of New Zealand law as the lex fori.

[52] I am assisted in reaching this finding by the fact that Ocean Towing Vanuatu had a choice where to bring this proceeding and chose to do so here in New Zealand, where the principal witnesses reside (factors which this Court considered material in deciding which law to apply in StarLink Navigation Ltd v The Ship “Seven Pioneer” (2001) 16 PRNZ 55).

[53] In New Zealand a party claiming damages for wrongful arrest must show that the arresting party had so little basis for the arrest that it must be taken to have acted in bad faith or with gross negligence: Xenos v Aldersley (The “Evangelismos”) (1858) 12 Moo PC 352; 14 ER 945 (PC). This general principle has recently been adopted by this Court in Nalder & Biddle (Nelson) Ltd v C & F Fishing Ltd [2005] 3 NZLR 698, in which recent applications of the principle are reviewed. The principles arising out of The “Evangelismos” were stated in the following paragraphs [64] and [65] (the emphasis is mine):

The principles as to when damages may be awarded for wrongful arrest are long–established, and were set out in Xenos v Aldersley (The Evangelismos) (1858) 12 Moo PC 352. That was a collision case. The Evangelismos, thought to have been the vessel involved in the collision, was arrested. The action against the vessel failed, because it was not established that it was the vessel involved in the collision. The Privy Council, on appeal from the High Court of Admiralty refusing damages for wrongful arrest, stated the principles applicable in these terms at p 359:

“The real question in this case, following the principles laid down with regard to actions of this description, comes to this: is there or is there not, reason to say, that the action was so unwarrantably brought, or brought with so little colour, or so little foundation, that it rather implies malice on the part of the Plaintiff, or that gross negligence which is equivalent to it?”

That principle was applied in Centro Latino Americano de Commercio Exterior SA v Owners of the Ship Kommunar (The Kommunar) (No 3) [1997] 1 Lloyd’s LR 22. Colman J, in the Admiralty Court, explained the principle in The Evangelismos in these terms at p 30:

“Two types of cases are thus envisaged. Firstly, there are cases of mala fides, which must be taken to mean those cases where on the primary evidence the arresting party has no honest belief in his entitlement to arrest the vessel. Secondly, there are those cases in which objectively there is so little basis for the arrest that it may be inferred that the arresting party did not believe in his entitlement to arrest the vessel or acted without any serious regard to whether there were adequate grounds for the arrest of the vessel. It is, as I understand the judgment, in the latter sense that such phrases as ‘crassa negligentia’ and ‘gross negligence’ are used and are described as implying malice or being equivalent to it.”

[54] In Nalder & Biddle (Nelson) Ltd v C & F Fishing Ltd the plaintiff claimed for unpaid costs of refit of a fishing vessel. The plaintiff had the vessel arrested after demands for payment of the costs of refit were not met. The defendant counterclaimed for damages for defective workmanship, delay and wrongful arrest. There was also a subsequent issue over a caveat filed to prevent the vessel being released from arrest, which the defendant had to apply to set aside. There was a further issue as to whether the full amount of the plaintiff’s claim was due on the date of the arrest. McKenzie J considered the question of mala fides or gross negligence in relation to the arrest. He found that the defendant, claiming damages, had not established “a lack of reasonable belief that an amount sufficient to give rise to the arrest of the vessel was then payable, such as to constitute mala fides or gross negligence (at para [70]). The decision was subsequently appealed to, and upheld in, the Court of Appeal but the finding of lack of mala fides or gross negligence was not contested.

[55] The real issue in Nalder & Biddle was the amount of security to be paid for release of the vessel, rather than the validity of the basis for arrest (which appears not to have been questioned). However, the Court found (at para [71]) that the fact that the arresting party acted on legal advice is a factor to be taken into account in determining the validity of the arrest, and makes it difficult to find bad faith or gross negligence.

Is it arguable that CEF acted in bad faith or with gross negligence?

[56] Counsel for Ocean Towing Vanuatu predicated its argument on the basis that it was arguable that Australian law applied and Ocean Towing Vanuatu had only to establish an arguable case for saying that CEF acted unreasonably and without good cause. I have already found that Australian law does not apply. However, counsel for Ocean Towing Vanuatu argued that the same factors had still to be taken into account in deciding whether CEF had acted in bad faith or with gross negligence (the New Zealand test), relying on Transpac Express Ltd v Malaysian Airlines (2002) 17 PRNZ 629.

[57] In Transpac a claim was made for abuse of process after an aircraft was arrested on the grounds of an alleged breach of charter. The warrant for arrest (and accompanying proceedings in rem) alleged that the aircraft was being used contrary to an agreement for a 12 month charter, breach of which would result in very substantial damages. The Court found that there was no charter, and that both inhouse counsel and the chairman of the arresting party acted in bad faith and with gross negligence in seeking arrest based on the non-existent charter. The Court came to this conclusion on the basis of correspondence from the arresting party ahead of the arrest first acknowledging that the charter was not binding and then (after an alleged revival of the agreement) purporting to cancel the charter. The Court also rejected evidence that the charter had been revived by an oral agreement with a person whose authority was at issue, noting that there was no written record of it notwithstanding that it was said to have secured the use of a $30 million aircraft for 12 months. The Court also noted other evidence to the effect that a previous charter had been extended, and other correspondence from the arresting party indicating that it and the owner were exploring the possibilities of an arrangement. On the basis of those facts, the Court found that the in-house counsel knew or ought to have known that there was no binding charter and, therefore, no basis for the arrest. The Court also found that the chairman, by his correspondence, had confirmed that matters had not gone past a negotiating stage but even if there was a binding agreement, he had cancelled it before the arrest. There was obviously a clear and strong evidential basis for the findings of bad faith and gross negligence. For reasons I will give below, I do not consider that Ocean Towing Vanuatu can establish any such basis in this case.

[58] Counsel for Ocean Towing Vanuatu relied on arguments already addressed that the agreement did not confer a right to an enforceable security without the formal security documents being signed and that incorrect documents were proferred. He also argued that inadequate steps were taken to obtain the formal security before proceeding with an arrest, and that CEF went ahead with an arrest without a clear warning of that possibility when it is arguable that the agreement contemplated enforcement by other means (filing of the admission of claim and the consent to liquidation) and in the face of an indication that payment was imminent.

[59] He submitted that there was a legal issue as to whether a breach entitled CEF to arrest the Stanley Brown. He argued that its remedies were limited to those set out in the agreement (filing the admission of claim and memorandum of consent to liquidation), or termination of the agreement on the basis of Ocean Towing Vanuatu’s perceived repudiation.

[60] He argued that there were factual issues to be determined in relation to security documents proferred by CEF, and whether Ocean Towing Vanuatu’s failure to sign them indicated an intention not to perform its side of the agreement. He referred to a line of cases in support of the submission that CEF was required to give Ocean Towing Vanuatu an opportunity to clarify whether or not it intended to repudiate, and submitted that its counsel’s advice of an intention to pay the debt within a day of the due date for payment was directly contrary to any intention not to perform.

[61] He submitted that the knowledge of the solicitors involved as to their understanding of the agreement (and whether a charge would arise ahead of the signing of formal security documents), what they knew of the security documents proferred (as to whether they conformed with the agreement or not) and their awareness of the advice that payment would be made could all be imputed to CEF and reflected on the question of whether it acted reasonably and without good cause. He argued that the solicitors’ knowledge was also relevant to a consideration of CEF’s argument that it was protected by the fact that it had acted throughout on legal advice.

[62] He argued that the reasonableness, or otherwise, of CEF’s decision to arrest could only be judged properly in light of a full examination of this evidence at trial.

[63] The matters raised by counsel for Ocean Towing Vanuatu would perhaps require further consideration at trial, rather than at summary judgment, if the test under Australian law applied. I say perhaps because the test is that the party obtaining arrest has to act unreasonably and without good cause. There may be an argument that it was unreasonable not to allow more time, at least without going back to Ocean Towing Vanuatu’s counsel to find out whether the payment indicated for the following day was to be forthcoming. However, it is difficult to see that that can succeed. There cannot be anything unreasonable about a party exercising rights after breach, particularly when the payment was not made either within the day indicated, or at any time subsequently. It is even harder to see how the matters raised can give Ocean Towing Vanuatu a basis for saying that the arrest was without good cause in light of CEF’s case for an equitable mortgage, the lack of response (other than an indication of payment) to the proferred security documents, the last minute correspondence from counsel apparently acknowledging that the agreement was on foot, and the failure to pay.

[64] I do not accept that Custom Fleet was limited to exercising rights given under clause 6 of the agreement, or terminating the agreement. The right to arrest is a part of a maritime claim. A claim to an equitable mortgage over a ship is a maritime claim. I take the view that the right to arrest would have to be excluded by express words.

[65] I have already found, however, that the appropriate test is that the arrest was obtained in bad faith or with gross negligence. CEF had (at least) a strong case for the view that there was an equitable mortgage. It acted throughout on legal advice. It heard nothing from Ocean Towing Vanuatu following delivery of the security documents to indicate that it took issue with the documents or challenged CEF’s entitlement to them. It received only indications that Mr Brown might prefer to make payment rather than provide the mortgage. The matters raised by counsel as justifying further enquiry do not call into question these further points. There is no evidence from Ocean Towing Vanuatu from which to infer bad faith, or even the possibility of it. The propositions put forward by counsel are lacking in any realistic evidential foundation. When one adds the caution about a finding of bad faith or gross negligence where a party has acted on legal advice, Ocean Towing Vanuatu’s prospects of success become improbable.

Is there an arguable claim in conversion?

[66] To succeed in its claim for conversion Ocean Towing Vanuatu must establish an intentional interference with its right to possession of the Stanley Brown without lawful justification: see generally Todd The Law of Torts in New Zealand (4ed 2005) at para 12.3.01. This claim cannot succeed in the face of the finding that the agreement gave rise to an equitable mortgage. It cannot be unlawful to act on that security.

[67] Counsel for Custom Fleet argued additionally that conversion could not succeed in any event, firstly because the arrest was pursuant to a Court order (and had lawful justification from that: Flack v Chairperson, National Crime Authority & Anor [1997] 150 ALR 153) and secondly because of long-standing authority that claims for damages arising out of arrest pursua