Abdulamir Dawood Sabur v Saad Al-Azi

IN THE COURT OF APPEAL OF NEW ZEALAND

CA219/00

BETWEEN	ABDULAMIR DAWOOD SABUR
First Appellant

AND	SAAD AL-AZI
Second Appellant

AND	EMAD MANHAL
Respondent

Hearing:	17 May 2001
Coram:	McGrath J Ellis J McGechan J
Appearances:	D H Abbott for the Appellants R O Parmenter for the Respondent
Judgment:	31 May 2001

JUDGMENT OF THE COURT DELIVERED BY MCGRATH J

This is an appeal against the grant of summary judgment by Master Gambrill on a claim for specific performance of an agreement for sale and purchase of shares in a company.
The first and second appellants, Mr Sabur and Mr Al-Azi, and the respondent, Mr Manhal, are shareholders of Al-Rafidan Services Ltd (the company) which owns and operates a service station business in Onehunga. The first appellant is the registered holder of 10,000 issued shares in the company. He holds 3,333 of those shares on trust for the second appellant and 3,333 in trust for the respondent. The three parties together operated the service station business from 1 April 1998 until 23 February 1999 when their relationship broke down. The appellants have since continued to run the business without the involvement of the respondent.
On 14 October 1999 a written agreement for sale and purchase (the agreement) was signed by the three shareholders which provided that the respondent’s beneficial interest in shares in the company would be purchased by the appellants. The first appellant agreed to buy 1667 shares and the second appellant 1666 shares. The agreement provided that the price to be paid to the respondent by each appellant would be determined by a chartered accountant, Mr Lala, who had experience in share valuation and with the business operation of service stations. The agreement also provided that Mr Lala’s “valuation shall be final and binding on all parties and no rights of appeal shall accrue”.
In a letter the parties sent to Mr Lala on the same day they signed the agreement they instructed him to determine the price to be paid for the shares and what sums if any were payable to the respondent on account of profits. Mr Lala was also notified of the respondent’s concern that the books of the company did not reflect the true trading picture in relation to business income and that the respondent thought he had not received his share of the profits of the company for the period from 1 April 1998 to 30 September 1999.
As to the basis of valuation the parties jointly instructed Mr Lala in their letter as follows:
i.You are to make such investigations as you think appropriate including interviewing any of us.
ii.You are to provide a written report to each of us within 28 days if at all possible.
iii.You are to establish the true trading accounts for the company from 1st April 1998 until 30th September 1999.
iv.You are to determine what sums, if any, are payable to Mr Manhal as his share of any profits.
v.You are to determine a fair value for his 3,333 shares in the company and then add to that sum any share of profits established in order to reach the figure which Mr Manhal shall receive from us for his shares.
On 15 November 1999 Mr Lala reported to the parties the 1999 financial accounts of the company did not appear to reflect its true trading results and he had difficulty in establishing the results of the business for the period 1 April 1998 until 30 September 1999. This was because sales recorded on the computer system of the business were higher than those indicated in its banking plus GST returns. Mr Lala requested that the parties reach an agreement on the shortfall in bankings, business expenses and drawings, which would enable him to complete his valuation of the shares. The parties did not however provide Mr Lala with such an agreed statement although the first appellant did offer an explanation for the shortfall. He also told Mr Lala of his view that there was an error in the sales figures recorded in the computer.
On 21 February 2000 Mr Lala reported to the parties on his findings as to the true trading results for the business, the valuation of the company and shares being sold and the overall sums that were to be paid to the respondent. Clearly Mr Lala had not found the task easy for he said:
This assignment has been a very difficult task and borders on “not possible to determine”. We received conflicting information from Mr Emand Manhal and Mr Amir Sabur and were often placed in the position of “who to believe?” Both parties have been very co‑operative, however neither party seems able to agree on anything!
The valuation of the company is largely dependant on the trading results thus any assumptions taken into account to determine trading results will have a bearing on the valuation.
In his report of 21 February Mr Lala started with the reported profit shown in the company’s 1999 financial accounts. Taking into account what the first appellant and respondent had respectively told him, Mr Lala made adjustments to the net profit for the year as shown in the accounts. He produced two separate reconstructions according to the two versions given him. He then averaged those two reconstructed profit figures and by that means reached the view that the true trading result of the business for the 1999 year was in the vicinity of $102,178. The appellant was entitled to receive one third of the company’s profit so ascertained namely $34,059.40. He expressed the opinion that result reflected a more reasonable level of income from the business than did the figures shown in the company’s financial accounts.
Mr Lala then valued the company using three different approaches: the assets and liability method, the profits capitalisation method and making an open market value assessment. Given the difficulties he had encountered in ascertaining the annual profit he decided it was appropriate to take the average result of the three methods applied as his determination of the company’s value. That put a value of $120,670 on the business and $40,223.55 (which should have been $40,223.33) on the appellant’s one third shareholding interest.
Finally in his report of 21 February 2000, Mr Lala considered the extent to which cash from the business had been applied to the appellant’s benefit. Again averaging results of the differing assertions of the appellant and the first respondent he determined that $20,926.07 of the respondent’s entitlement of $34,059.40 remained owing to him.
Accordingly in his report of 21 February Mr Lala determined that the total price to be paid by the appellants to the respondent was as follows:
Value of interest in shares of appellant  $40,223.55
Balance of profit for year ended 31/3/99                     20,926.07
  $61,149.62
The respondent’s legal adviser immediately pointed out to Mr Lala that the respondent’s claim was for loss of profits for the period ending 30 September 1999. Mr Lala then sent a second report to the parties on 23 February 2000 in which he said that the appellant’s one-third share of the profit for the further six months period not previously addressed was $17,029.70. That figure was based on his finding as to the net profit for the year ended the previous 31 March. Although the respondent was no longer participating in the running of the business during this six month period no adjustments were made on that account. The overall effect of the findings in this report was that $17,029.70 was to be added to the previously determined sum of $61,149.62 so that the sum payable by the appellants to the respondent totalled $78,179.10.
Thereafter Mr Lala provided two further reports. The first, dated 15 March 2000, was prompted by the legal adviser of the first appellant. It revisited the sales figures for February and March 1999 consequent on advice received since 23 February 2000 from a computer company engaged by the company that “there could have been an error” in those figures. Arithmetical errors in the earlier report were also corrected. The result was a lower annual profit figure, a lower valuation of the respondent’s shares and a lower figure for his outstanding profit entitlements. It is unnecessary to discuss the content of this report in any further detail.
Finally, on 4 April 2000, Mr Lala provided a fourth report, this time for the respondent’s legal advisers who asked, first, that he assume he was unable to depart from the February March 1999 profit figures which were the basis of his reports of 21 and 23 February 2000 and, secondly, that he incorporate the corrections to the arithmetical errors in those reports which he had made in his 15 March 2000 report.   On this basis Mr Lala’s view of the respondent’s entitlements was as follows (figures in the report of 23 February 2000 given for comparison).
23/2/00                 4/4/00
Value shares of appellant   40,223.55            40,223.33
Balance of profit (year ended 31/3/99)   20,926.07             16,797.40
Share of profit (6 months ended
   30/9/99)                 17,029.70            16,987.59
   78,179.32            74,008.32
Proceedings thereafter were issued by the first appellant for summary judgment claiming for specific performance of the agreement by the payment of sums of $74,008.32, in terms of the report of 4 April 2000, or alternatively $61,149.62 in terms of the report of 21 February 2000. The claim was opposed by the first and second appellants.
In giving judgment for the respondent the Master held:
I am satisfied that the plaintiff in terms of the agreement made, is entitled to recover the sum as settled by the letters of Mr Lala dated 21 February 2000 and 23 February 2000. The contract made between the parties limited the rights to revisit the matter and there is no right of appeal. On this basis I would grant the plaintiff summary judgment for the sums as outlined in the letter of 21 February 2000 together with the sum awarded in the letter of 23 February 2000 together with interest thereon and costs all as sought in the statement of claim.
That judgment was delivered on 15 August 2000. However on 15 September 2000, after hearing counsel, the Master clarified the intended effect of her earlier judgment as follows.
I am satisfied that the figures for judgment can be detailed and were the figures that I worked on to reach a conclusion of a sum owing of $74,008.32.
(a)The figure from Mr Lala’s first report dated 21 February $61,149.62 pleaded in the statement of claim; identified in paragraph (6) of the plaintiff’s first affidavit.
(b)The extra six months loss of profits which is an amendment to the report known as the first computational correction pleaded in the statement of claim and referred to in paragraph (8) of the plaintiff’s affidavit delivered on 23 February making the sum Mr Lala specified at $78,179.32.
(c)The further amendment made by Mr Lala referred to in paragraph (13) of the plaintiff’s affidavit and in the statement of claim at $74,008.32. I accept that there should be no re-visiting of the sales figures and the argument made in respect thereof by the plaintiff.
In addition she awarded interest at the contractual rate of 15% on the sum of $74,008.32 and on costs she had awarded at 11% from the date of judgment.
In this Court Mr Abbott, counsel for the appellants, argued that, read together, the agreement for sale and purchase and the letter of instruction set up a mechanism for determining the price to be paid for the respondent’s shares and interests in the company which required the production of true and objectively accurate trading accounts and a valuation of his shareholding based on those accounts. An exercise in the nature of an audit was required. What Mr Abbott said had rather happened was that Mr Lala had prepared no more than an estimate of the profit for the periods in issue and proceeded to reach decisions without fully exploring issues identified by the parties. This argument emphasised that the instruction was “to establish the true trading accounts for the company from 1 April 1998 until 30 September 1999”. Mr Abbott contended that the most important matter affecting true trading results was the difference between sales recorded on the computer system and bankings. The various assumptions made by Mr Lala were said to discount the appellants’ concern over an error in the record of the computer system in particular for February and March 1999. That error was only addressed in the report of 15 March 2000. Mr Abbott argued that the very real issues raised over whether Mr Lala had carried out the instructions given him indicated the case was not one appropriate for summary judgment. Alternatively summary judgment should have been entered for $61,149.62 as determined in the report of 21 February 2000.
In order to ascertain the nature and scope of the agreed direction to Mr Lala it is necessary to read the relevant provisions of the agreement for sale and purchase and the contemporaneous letter of instruction together.
The direction to Mr Lala was to establish the true trading accounts for the relevant period as the basis for determining what was his share of profits and the fair value of his shares. The letter of instruction stipulated that the process he was to follow was informal and flexible. He was to make such investigations as he thought appropriate and could interview any of the parties. The 28 day time set for the task indicates that its early completion was part of the parties’ contractual intention. These elements in themselves are inconsistent with the intention there be an exercise undertaken in the nature of an audit.
It also seems inherently unlikely that the parties intended an audit approach be taken to addressing the respondent’s concern over the business practice with cash receipts. The parties all recognised this would be “a complication to the valuation”. In our view the letter is to be read as requiring Mr Lala, who the parties understood to have a good knowledge of the trade concerned, to apply his judgment in this area of difficulty. In this context we are satisfied that the direction “to establish the true trading accounts” for the relevant period required Mr Lala to apply a rational but robust approach to establishing the company’s true trading position, as the basis for determining the value of the respondent’s shares and his entitlement to profits. The parties intended that he apply his expertise, make the inquiries he thought fit, interview the parties who could assist him and, if possible within the anticipated timeframe, apply his own judgment to decide the company’s true trading position and the appropriate profit share and valuation figures.
Mr Abbott’s alternative submission was that the first of Mr Lala’s determinations of price payable for the shares was binding so that the sum payable to the respondent by the appellants was $61,149.62. It is true that this was the figure determined in the first report. However the parties had agreed that Mr Lala, was to determine the sums payable to the respondent as his share of profits for a period expiring on 30 September 1999 as well as the value of his shares. In the report of 21 February 2000 the share value was determined together with the balance owing to the respondent for his share of profits for the year ending 31 March 1999. The final six months period was not addressed. So far as that report went, it was final and binding on the parties in terms of their agreement to that effect. But either party was entitled to call on Mr Lala to complete the exercise all had agreed he should carry out, and the respondent’s legal advisers did so. The report of 23 February 2000 addressed the respondent’s entitlement to profits from the final period and completed what was required of Mr Lala.
Thereafter Mr Lala revisited both the valuation and the determination of profits in light of doubts about the sales figures for February and March 1999. In our view he should not have been asked to do so. The parties had earlier agreed his determination should be final both in relation to the share valuation and, implicitly, the respondent’s profit share entitlements. To ask Mr Lala to reconsider his completed determination and reach fresh judgments on these matters was contrary to the parties’ agreement as to the finality of the outcome, once the process had been properly applied by Mr Lala. That finality was an integral part of their contract. It is strictly unnecessary to consider whether correction of arithmetical errors by Mr Lala was implicitly authorised by the agreement as outcome of the subsequent action taken by Mr Lala in that respect is accepted by the respondent and is to the appellants’ advantage. We incline to the view that the course he followed was correct in law in any event.
The result is that in our view the sum owing is that reflected in Mr Lala’s report of 4 April 2000 namely $74,008.32 together with interest and costs as decided by the Master. The report itself has no formal status but it conveniently presents Mr Lala’s conclusions as set out in his reports of 21 and 23 February 2000 along with his subsequent corrections. It is this combination which represents the final determinations the parties agreed Mr Lala should provide and those determinations are binding on them.
For these reasons we agree with the decision reached by Master Gambrill as set out in her second judgment and we dismiss the appeal.
The respondent is entitled to costs of $3500 together with all reasonable disbursements including travelling and accommodation expenses of counsel which are to be agreed or failing agreement to be fixed by the Registrar.

Solicitors

M I Koya, Auckland, for Appellants
Daniel Overton & Goulding, Auckland, for Respondent

[2001] NZCA 186

31 May 2001