N3747

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

WS NO. 1072 OF 2001

BETWEEN:

CHAN CONSOLIDATED LIMITED
Plaintiff

AND:

CONSUMER AFFAIRS COUNCIL
Defendant

Waigani: Manuhu, J.

2007: November 20, 22 & 27.
2009: October 23.

COMMERCIAL LEASE – Claim for rental arrears for balance of lease – Unlawful termination – Mitigation of damages.

PRACTICE AND PROCEDURE – Mitigation of damages – Burden of proof – Failure to disclose details of new lease – Duty to give full disclosure.

No case cited.

Counsel:
F. Griffin, for the Plaintiff
J. Goava, for the Defendant

23rd October, 2009

1. MANUHU, J.: Chan Consolidated Limited (CCL) is suing Consumer Affairs Council (CAC) for outstanding rental arrears for the balance of the lease period pursuant to a Lease Agreement (Agreement) the parties had entered into.

2. The Agreement was entered into on 18th May, 2000 in relation to a commercial property described as Allotment 11, Section 59, McNicol Street, Rabaul, East New Britain Province. The lease was for 3 years from (predated) 1st November 1999 to 31st October 2002. The annual rental was agreed at K18,000 payable in quarterly installments of K4,500. 

3. On 13th December 2000, CAC gave 14 days notice to vacate the property and physically vacated the property on 3rd January 2001. On 18th December 2000, CCL advised CAC that the notice to vacate was not valid. Despite the objection, CCL accepted the termination on 14th March 2001 and mitigated its loss by leasing the property to Novello Limited (Novello).

4. CCL is suing for the rental arrears for the balance of the Agreement. In that regard, if CCL succeeds, the computation of rental arrears ought to take into consideration that CCL has mitigated its loss. This means that all the issues raised in relation to the question of liability relate essentially to the question of whether or not the lease was lawfully terminated by CAC. 

5. CAC maintains that it had lawfully terminated the contract. The reasons for the termination are set out in its letter of termination dated 13th December 2000 as follows:

"The reasons for the termination of these contract is mainly for the office condition related matters such as, water leakages on the roof, all air conditions malfunctioning, no maintenance to water and sewerage systems and electrical wirings which causes power cuts and that also caused damages to the modem of our computer. These had caused inconveniences to our operation.

You are advised that, ever since we have relocate our office from Kokopo and moved into your property at Rabaul town in November 1999. No-one has ever concern of our existence in the building so that appropriate actions can be made to address request made by our office.

And on other note, With recent spate of seismic activities, continued occupancy of our office in Rabaul town has become point of human concern. The dust from the lava spew and other activities has been tagged as health hazard by relevant Authorities." (sic.)

6. CAC further relies on a report by Health Inspector Patrick Palangat dated 13th March 2001. The report suggests that the premises in question be closed down due to health concerns. The report shows that Mr. Palangat carried out the inspection on 12th March 2001 well after the lease had been terminated. 

7. CAC also argues that the lease was frustrated by the continuous fall out of volcano dust from the nearby volcano which dust settled on the property thereby rendering the property as a health hazard and unsafe for human occupation.

8. On the other hand, CCL argues that the termination notice was not valid and promptly forewarned the CAC of legal action. In its letter of 18th December 2000, CCL wrote:

"With reference to the alleged problems which you claim of the premises, we note that some of these matters are natural circumstances and beyond our control, and others are your responsibility to maintain under Clauses 2.9, 2.13 & 2.17 of the Lease Agreement.

Furthermore under Clause 2.24 of the Lease Agreement, you are required to give us prompt notice in writing of any such problems, and this you have failed to do."

9. It is apparent, and I so find, that CAC does not rely on the provisions of the Agreement to terminate. If it did, it would have cited a provision of the relevant clause in its letter of termination. In any event, there is no provision in the Agreement permitting CAC to give 14 days notice. Indeed, CAC relies on the common law doctrine of frustration as the basis for terminating the lease. 

10. It has to be shown by CAC, therefore, that the subject matter of the Agreement was destroyed or is affected to the extent where contractual obligations could not be honoured. It is apparent, however, that the subject matter of the Agreement, being the commercial property, was not destroyed and was not affected in a manner that prevented the parties from performing their contractual obligations. 

11. There were continuous fallout of volcanic dust but the parties were aware of such condition before entering into the agreement. In addition, the property was leased to another lessee after the termination. This means that the continuous fall out of dust did not frustrate performance of the contract.

12. CAC also complained about lack of maintenance and repair work. The Agreement caters for these matters in Clauses 2.9, 2.13, 2.17 and 2.24. Under those clauses, CAC was responsible to keep the property in a state of good repair. CAC was required to request maintenance in writing which it also failed. 

13. Furthermore, CAC, in its letter of termination, referred to "recent spate of seismic activities" and that "continued occupancy of our office in Rabaul town has become point of human concern. The dust from the lava spew and other activities has been tagged as health hazard by relevant Authorities." This, however, was not the main reason for the termination of the Agreement. It was secondary to the main reason as discussed above. 

14. In the circumstances, CAC has failed to justify its termination of the lease by the issuance of a 14 day notice. The termination of the Agreement was, therefore, unlawful.

15. I must now assess and determine the ensuing loss suffered by CCL. 

16. It is not disputed that CCL has mitigated its loss by leasing the premises to Novello. Unfortunately, evidence is scanty as to date of commencement of lease with Novello, rental rates were not disclosed and duration of the lease remains unknown. In addition, CCL has also not mentioned anything about the rental bond it collected from CAC to secure the lease. It is not clear whether it has been refunded or not. Income derived from the new lease must be disclosed and subsequently deducted from the rental arrears for the balance of the lease period in question. 

17. The onus is on CAC to prove that CCL could have mitigated its loss. CCL has relieved CAC of that burden by disclosing that it subsequently leased the property to Novello. Having disclosed the subsequent lease, CCL has the duty to give full disclosure of the appropriate terms of the new lease for the Court to assess the extent to which it has mitigated its loss. It is not equitable for the Court to award compensation over the same period CCL collected rent from Novello. Such is the utility of the principle of mitigation. 

18. In the circumstances, I have the option of dismissing the entire proceeding but the end result would be too harsh on CCL. I have decided that from whatever evidence I have, I have to make the appropriate findings of fact to complete my assessment of CCL’s loss. 

19. Accordingly, in respect of date of commencement of lease involving Novello, I take into account that termination of the Agreement was accepted by CCL on 14th March 2001. This is the only evidentiary basis for me to draw any inference that ought to be made to complete the mitigation puzzle. Acceptance of termination could have come about as a result of discussions between CCL and Novello in relation to a new lease. Allowing for a further 14 days, I find as a matter of fact, therefore, that the lease with Novello commenced on 28th March 2001. 

20. In relation to the length of the lease, the lease between the parties was for 3 years. It is more likely than not that the lease involving Novello was also for 3 years from 28th March 2001 to 28th March 2004, and I so find.

21. In relation to the rental rate, CAC was paying K4,500 per quarter. It is more likely than not that CCL leased the property to Novello at the same rate, and I so find. 

22. Ultimately, CCL’s claim for rental arrears is limited to the period from 1st November 2000 to 28th March 2001, which is approximately five months. Total rent for this period is K7,500. I find for CCL accordingly.

23. I have been asked to award 18 per cent interest pursuant to Clause 4.4(v) of the agreement. Such interest is however dependent on events described in Clause 4.4 (a), (b) and (c), and legal action or an award by the court is not one of them. I will decline this request.

24. The only interest I can award is under the Judicial Proceedings (Interest on Debts and Damages) Act Ch No. 52. An award of 8 per cent is granted. Cost is awarded to CCL which, if not agreed, shall be taxed.

_____________

Young & Williams Lawyers: Lawyer for the Plaintiff
Sannel Lawyers: Lawyer for the Defendant