A family dispute over interest on a loan secured over a Hauraki Plains farm exemplifies legal contortions needed to enforce contract variations. Variation of an existing contract is itself a contract and legal principles require both sides to receive a benefit to have an enforceable variation. Lawyers could borrow from economists: if the varied outcome makes you feel good; it is a benefit.
Lawyers often search in vain for a quantifiable benefit justifying a contract variation. Agreeing to accept less than previously agreed is simply a gift to the other side; the donor receives no financial benefit (consideration in legal jargon) and the variation is not enforceable. In jargon used by economists, benefits are measured by the ‘utility’ received. A gift is not valueless for a donor; warm fuzzies and enhanced social reputation enjoyed by the donor are an economic benefit.
Variations to a loan, part of an inter-generational transfer of a Flook family farm on the Paeroa-Kopu Road, are better described as benefits falling into the warm-fuzzies category, rather than needing lawyers to scrabble around looking for evidence of a financial benefit for both borrower and lender.
The High Court was told Kay and Kevin Flooks passed on the family farm to son Trevor in 2008 at a price of $6.77 million. Of the purchase price, Kay and Kevin left in $3.4 million secured by second mortgage security. This loan was repayable in June 2018, with a formula for interest to be paid on a band between eight per cent and twelve per cent per annum.
The loan was simply rolled over in 2018, with no new repayment date fixed. Interest charged was reduced progressively over the years in line with market rates. Ever since 2015, interest charged has been below the minimum eight per cent specified in the mortgage document.
A family dispute arose on their father’s death in 2020. Daughters Tracey and Debra took exception to the financial concessions that had benefitted their brother. As one of the estate administrators, Tracey refused to sign off on a discharge of the mortgage. She disputed the amount needed to repay the loan.
Separately, both Tracey and sister Debra are challenging terms of the family farm’s sale to their brother.
Justice Edwards ruled there was an oral agreement between Trevor and his parents to both roll over the loan and to reduce interest payable below the contract rate. These variations were enforceable on grounds of the ‘practical benefit’ to the family, she ruled.
Estate administrators were ordered to sign a discharge for their father’s half share of the mortgage since the debt to him had been repaid in full. If Tracey refuses to sign, the High Court registrar was authorised to sign in her stead.
Oaklane Dairy Ltd v. Flooks – High Court (17.07.23)
23.117