Beech Cove Properties Ltd v Bernard Property Investments Ltd HC Auckland CIV 2010 425 28

[2010] NZHC 1768

IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY

CIV 2010 425 000028

BETWEEN  BEECH COVE PROPERTIES LIMITED Plaintiff

ANDBERNARD PROPERTY INVESTMENTS LIMITED

First Defendant

ANDRUSSELL JOHN WHITE Second Defendant

Hearing:         31 August 2010

Appearances: JM Kirkland for Plaintiff

ADG Hitchcock for Defendants

Judgment:      6 October 2010 at 3.30pm

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

Background

[1]      Beech Cove Properties  Ltd is the developer of an apartment complex  at Queenstown known as The Rees.  In 2004 Beech Cove negotiated the sale of Unit C202 at The Rees.  The negotiations were with Russell John White.  A contract was entered into in which, under a heading “PARTIES”, Beech Cove Properties Ltd appeared as “Vendor” and Bernard Properties Ltd and/or Nominee appeared as “Purchaser”.   Mr White did not at that point have a company called Bernard Properties Ltd.  For the purposes of this application the undisputed evidence is that

the purchaser was a company of that name which Mr White would be incorporating.

BEECH COVE PROPERTIES LIMITED V BERNARD PROPERTY INVESTMENTS LIMITED AND ANOR HC INV CIV 2010 425 000028  6 October 2010

[2]      It transpired that there had been a company on the New Zealand Register called Bernard Properties Ltd, incorporated in 1979 and struck off in July 2001.  Mr White therefore decided to incorporate a company to be called Bernard Property Investments Ltd which was done.  Bernard Properties Investments Ltd then ratified the contract.

[3]      A deposit of $70,500.00 was paid towards the purchase price (the purchase price comprising a $705.000.00 for the unit and a furniture package of $5,000.00).

[4]      The units were being sold off the plans as The Rees was in development. Settlement was to occur upon completion and the issuing of title.  There was a sunset clause requiring the vendor to obtain deposit of the Unit Plan by July 2008.  In May

2007 Beech Cove and “Bernard Properties Limited” signed a variation agreement extending the sunset date to December 2008.

[5]      The global financial crisis intervened.  In that climate the purchaser was not able to raise the finance necessary to complete the purchase when the time for completion came in January 2009.

The plaintiff’s claims

[6]      The Beech Cove claims in this proceeding are:

a.   against Bernard Properties Investments Ltd – for an order for specific performance.

b.against Mr White –   for damages for liability as purchaser under a contractual provision.

c.   as an alternative claim against Mr White – for damages for liability at common law, having contracted on behalf of a non-existent principal.

d.as an alternative claim against Mr White –   for just and equitable damages or other relief for breach of a ratified pre-incorporation contract.

The plaintiffs had a further and alternative cause of action against the second defendant based on a purported statutory liability under s 183(1) Companies Act

1993 to cover the possible eventuality that the Court would hold that the contract had not been ratified by Bernard Properties Investments Ltd.  It was common ground by the time of the hearing that the contract had been ratified and Mr Kirkland confirmed that that cause of action was not being pursued.

Summary judgment applications

[7]      The  applications  immediately  before  the  Court  are  competing  summary judgment applications.

[8]      Mr White applied for summary judgment against Beech Cove.

[9]      Faced with that application Beech Cove sought summary judgment against

Mr White.

[10]     Each party opposed the other’s application.

Summary judgment – the principles

[11]     The starting point for a plaintiff’s summary judgment application is r 12.2(1) High  Court  Rules,  which  requires  that  the  plaintiff  satisfy  the  Court  that  the defendant has no defence to any cause of action in the statement of claim or to a particular cause of action.

[12]     Before turning to the particular issues which arise in relation to this case, I

summarise the general principles which I adopt in relation to the application:

a)        Commonsense, flexibility and a sense of justice are required (Haines v

Carter [2001] 2 NZLR 167, (CA), 187.

b)The onus is on the plaintiff seeking summary judgment to show that there is no arguable defence.  The Court must be left without any real doubt or uncertainty on the matter.

c)       The  Court  will  not  hesitate  to  decide  questions  of  law  where appropriate.

d)The Court will not attempt to resolve genuine conflicts of evidence or to assess the credibility of statements and affidavits.

e)       In determining whether there is a genuine and relevant conflict of facts, the Court is entitled to examine and reject spurious defences or plainly contrived factual conflicts.   It is not required to accept uncritically every statement put before it, however equivocal, imprecise, inconsistent with undisputed contemporary documents or other statements, or inherently improbable.

f)        In assessing a defence the Court will look for appropriate particulars and a reasonable level of detailed substantiation.

g)       In weighing these matters, the Court will take a robust approach and enter judgment even where there may be differences on certain factual matters if the lack of a tenable defence is plain on the material before the Court.

h)Where a last-minute, unsubstantiated defence is raised and an adjournment would be required, a robust approach may be required for the protection of the integrity of the summary judgment process.

i)Once the Court is satisfied that there is no defence, the Court retains a discretion to refuse summary judgment but does so in the context of

the general purpose of the High Court Rules which provide for the just, speedy and inexpensive determination of proceedings.

The key contractual provisions

[13]     For the purpose of the argument between the parties there are two key sets of provisions within the contract.

[14]     First, there was the provision on the first page identifying the parties as being

Beech Cove (Vendor) and Bernard Properties Ltd and/or Nominee (Purchaser).

[15]     Secondly, through incorporation of the REINZ/ADLS General Terms of Sale

(7th Edition (2), July 1999), the following clause:

1.3(2)  Where the purchaser executes this agreement with provision for nominee, or as agent for an undisclosed principal, or on behalf of a company to be formed, the purchaser shall at all times remain liable for all obligations on the part of the purchaser hereunder.

[16]     There  then  follow  through  a  mixture  of  the  General  Terms  of  Sale  (as adopted and as amended) and the detailed rights and obligations of the vendor and the purchaser respectively.

The plaintiff’s case

[17]     As Mr Kirkland aptly summarised it, the only issue before the Court on this application is whether or not Mr White has personal liability pursuant to the contract.

The meaning of clause 1.3(2)

[18]     First, Mr Kirkland, as a matter of interpretation of the contract, submits that where the named purchaser is a company which did not exist but was intended to be incorporated, and was subsequently incorporated, the purchaser as referred to in cl

1.3(2) includes the signatory to the agreement.

[19]     Mr Kirkland referred to the following matters admitted by Mr White in his evidence:

a.   Mr White signed the agreement on 23 July 2004.

b.The purchaser, to be called Bernard Properties Limited, was still to be incorporated.

c.   The agreement was presented to Mr White for signing.

[20]     It is Mr Kirkland’s submission that on this basis Mr White did “execute this agreement…on behalf of a company to be formed…” within the meaning of cl

1.3(2).

[21]     Mr Kirkland as support for his submission on the facts of the case referred to

Professor McMorland’s text Sale of Land  (2nd ed, 2000) at [3.03], page 68:

Clause 1.3(2) of the REI-ADLS form provides that where the purchaser executes the agreement with provision for a nominee, or as agent for an undisclosed principal, or on behalf of the company to be formed, the purchaser shall at all times remain liable for all obligations on the part of the purchaser  thereunder.    This  provision  cannot  create  contractual  liability where none would otherwise exist, and if there is contractual liability, the provision merely states expressly what would in any event be the legal position.

(Footnotes omitted)

The effect of cl 1.3(2) is also discussed, to similar effect, earlier in the text at [1.16], p 32.

[22]     In developing these submissions orally, Mr Kirkland identified four specific points in his argument:

a.   Clause 1.3(2) was not struck from the agreement – it must be taken to have been intended to have effect.

b.There  were  only  two  –‘parties-’  in  existence  at  the  date  of  the agreement (namely Beech Cove and Mr White), and for there to be contractual liability at that point Mr White must be treated as a party.

c.   Mr White was the person who signed the agreement for the purchaser.

d.   The company, Bernard Properties Ltd, was yet to be incorporated.

With  the  company still  to  be  incorporated  an  objective  bystander would understand Mr White to have been entering the contract as purchaser.

[23] It is convenient to return to a discussion of this part of Mr Kirkland’s submissions once I have identified Mr Kirkland’s discussion of the common law position. That position is touched on in the quotation from Professor McMorland’s text as relied on by Mr Kirkland (above at [21].

Liability at common law

[24]     The common law recognises circumstances in which a party who contracts on behalf of a non-existent principal becomes liable in relation to the contract.

[25]     Beech  Cove  identified  in  its  formal  claim  the  liability  of  Mr  White  at common law as an alternative, and stand-alone, basis of claim.

[26]     In his written submissions, Mr Kirkland summarised the position at common law as being that Mr White, having contracted on behalf of a non-existent principal (a company which to his knowledge has not been incorporated at the time) had “presumptive personal liability”.   Mr Kirkland referred to some 10 cases and to commentaries in elaboration or explanation of that proposition.

[27]     When Mr Kirkland addressed his oral submissions to the Court he placed the common law position not as a stand-alone basis of Beech Cove’s claim but as a matter of “background” to the contract itself.  Thus the combined submissions on the two which he presented orally were as I have summarised them above.

Discussion

[28]     I therefore turn to deal with both the common law position and the position particularly under the terms of the contract between the parties.

[29]     As I have come to a clear view that the submissions of Mr Hitchcock, on behalf of Mr White, constitute a complete answer to Mr Kirkland’s position, I do not intend to summarise Mr Hitchcock’s submissions.  Rather, I incorporate them into the discussion which follows.

[30]     The concept we are dealing with is the pre-incorporation contract.

[31]     In Phonogram Ltd v Lane [1982] 1 QB 938,945 Oliver LJ recognised the true common law position in relation to pre-incorporation contracts as being:

Does the contract purport to be one which is directly between a supposed principal and the other party, or does it purport to be one between the agent himself albeit acting for a supposed principal and the other party?

[32]     This formulation was noted (with implicit approval) by the Court of Appeal in Turner v Formula Exports (NZ) Ltd CA228/01, 18 March 2002.

[33]     The contract in this case is in the first category – a contract which purports to be directly between the supposed principal and the other party.  Nothing surrounding Mr White’s signature points towards a contract between Mr White himself (albeit acting for a supposed principal) and Beech Cove.  Mr White’s liability cannot arise simply because Bernard Property Investments Ltd did not exist at that date so as to be bound.  That that is the legal position is reflected in the judgment of Richardson J for the Court of Appeal in Walker v Carter (1993) 6 NZCLC 68,376 at 68,381 where his Honour said:

In some of the cases discussed…it has been said that there is a presumption of personal liability on the part of the agent or trustee.  But in the end it is a matter of determining the intention of the parties as expressed in the contract and considered against the factual matrix.   Whether the persons who contracted  on  behalf  of  the  then  non-existent  principal  were  themselves liable depends on what the parties to the agreement intended.  And if there is nothing in the circumstances to show that such a party contracted personally there is no rule which converts that person automatically into a principal

merely because at the time of the contract there was nobody else capable of being bound.

[34]     The passage in Professor McMorland’s book, relied upon by Mr Kirkland in his own submissions, (above  at [21]) correctly reflects that  position.   Professor McMorland observes that cl 1.3(2) of the REINZ/ADLS form does not create contractual liability when none would otherwise exist.

[35]     Against this background, Mr Kirkland’s first proposition (in his four point oral submission) that Mr White is to be treated as a purchaser, in part because cl 1.3(2) was not deleted, is not correct as a matter of law.  Clause 1.3 does not put Mr White into the status of “purchaser” with an accepted liability.  His identification as purchaser, if it exists, must be found elsewhere in the contract.  Furthermore, to the extent that there was implicit in Mr Kirkland’s proposition a suggestion that Mr White must be found liable as purchaser because cl 1.3(2) otherwise has no effect is misconceived – this is a standard form provision which has its meaning if there is the identification of such person identified as purchaser elsewhere in the contract.  If there is not, cl 1.3(2) simply does not bite.

[36]     Mr Kirkland’s second of his four point oral submission – that there were only two parties in existence at the date of the contract – carries with it the implication that the Court must find Mr White to be a party because he is the only person (apart from Beech Cove) who can be.  The complete answer to that submission is contained in the final sentence of the discussion of the Court of Appeal in Walker v Carter, quoted above at [34].   If the properly construed intention of the parties does not involve Mr White as a purchaser, then the law is not concerned that there was nobody else capable of being bound.

[37]     Mr Kirkland’s third proposition of the four point oral submissions was that Mr White’s signature was on the agreement.   There is nothing in that point.   The question is what the parties intended by that signature.   The parties recorded that they were respectively Beech Cove (vendor) and Bernard Properties Ltd (purchaser). An unnamed individual signed for “vendor” on the execution page and Mr White signed for “purchaser” on the same page.  In the operative clause on that page they agreed that the vendor sells and the purchaser purchases the property upon the terms

set out in the agreement including the schedules and the special conditions and the general conditions of sale attached.  There is nothing else in the general terms of sale (as adopted or as amended) which indicates that the term “purchaser” is meant to have any meaning other than the party which will eventually settle the purchase.

[38]     Mr Kirkland’s final proposition of his four poinr oral submissions related to the “timing issue” arising from the fact that the company was yet to be incorporated. But the timing issue arises in every pre-incorporation contract.  What the authorities (including the passage from Walker v Carter quoted above at [33]) clearly indicate is that in cases where the “principal” does not exist at the time of the contract the issue of ‘agent” liability turns on what the parties to the agreement intended.

[39]     Two cases referred to  by counsel in the course of submissions illustrate contracts with the sort of wording which indicates an intention of the parties that an individual signing the contract is to be treated as a “purchaser” in terms of cl 1.3(2). In Taylor v Todd [2004] 3 NZLR 76, the signatory (Mr Todd) signed as “of Queenstown as agent for a company/ies and/or trust(s) to be formed”. In Magabook Pty Ltd v Magabook (1996) Ltd [1998] DCR 126, Mr and Mrs Rose in the parties clause were described as “operating as the Rose Partnership at Auckland as trustee for a company to be formed (“purchaser”).  Taken with the wording of provisions such as cl 1.3(2) there was an identification of Mr Todd and of the Roses as “purchaser” in each case.  Mr Kirkland’s submission was that the absence of such a formula in the “parties” clause is not fatal to his argument.  The absence of such a formula may not be fatal.  Where, however, neither the formula appears nor is there anything else in the agreement to objectively indicate an intention of the parties that the individual signatory is to be treated as “purchaser”, then the absence of a formula will almost inevitably be determinative.

Liability at common law - Damages for breach of a ratified pre-incorporation contract – s 185 Companies Act 1993

[40]     Section 185 Companies Act provides:

185 Breach of pre-incorporation contract

In proceedings against a company for breach of a pre-incorporation contract which has been ratified by the company, the Court may, on the application of the company, any other party to the proceedings, or of its own motion, make such order for the payment of damages or other relief as the Court considers just and equitable, in addition to or in substitution for any order which may be made against the company, against a person by whom the contract was made.

[41]     In turn, s 182 Companies Act defines the term “pre-incorporation contract” as it is used in sections 183 – 185 of the Act:

182 Pre-incorporation contracts may be ratified

(1)In this section and in sections 183 to 185 of this Act, the term pre- incorporation contract means—

(a)A contract purporting to be made by a company before its incorporation; or

(b)A contract made by a person on behalf of a company before and in contemplation of its incorporation.

(2)Notwithstanding any enactment or rule of law, a pre-incorporation contract may be ratified within such period as may be specified in the contract, or if no period is specified, then within a reasonable time after the incorporation of the company in the name of which, or on behalf of which, it has been made.

(3)       A  contract  that  is  ratified  is  as  valid  and  enforceable  as  if  the company had been a party to the contract when it was made.

(4)A pre-incorporation contract may be ratified by a company in the same manner as a contract may be entered into on behalf of a company under section 180 of this Act.

(5)       Notwithstanding   the   Contracts   (Privity)   Act   1982,   if   a   pre- incorporation contract has not been ratified by a company, or validated by the Court under section 184 of this Act, the company may not enforce it or take the benefit of it.

[42]     It was Mr Kirkland’s submission that the s 185 jurisdiction to award damages arose in this case and that Mr White had no arguable defence to Beech Cove’s claim for just and equitable damages.

[43]     In support of this overall submission, Mr Kirkland first submitted that in terms of s 185 Mr White was “a person by whom the contract was made”.

[44]    Secondly, Mr Kirkland referred to factors present in this case which he submitted should indisputably lead to the conclusion that an award of damages against Mr White would be just and equitable.  Most importantly, he submitted that Mr White had acted with a high degree of bad faith in that Bernard Properties Investments Ltd had no assets at a time that Mr White was committing it to a substantial real estate purchase through which the contracting parties would remain bound to each other for four years and that Mr White’s actions could be categorised as reckless in that he was of the view that he had no personal liability.

[45]     For Mr White, Mr Hitchcock submitted that Beech Cove could not succeed on either limb of Mr Kirkland’s arguments.   Mr Hitchcock submitted that, on the contrary, Mr Kirkland’s two central propositions did not reach even an arguable level.

[46]     I will first deal with the identity of the party against whom an order for damages under s 185 of the Act may be made.

[47]     Section 185 of the Act permits the order to be made “against a person by whom the contract was made”.  Thus the provision deals with the second form of pre-incorporation contract, namely, “a contract made by a person on behalf of a company before or in contemplation of its incorporation”: s 182(1)(b).

[48]     As I have already found, Mr White did not in this case make the contract on behalf of a company to be incorporated.

[49]     The contract in this case comes within the definition of s 182(1)(a), being “a contract purporting to be made by a company before its incorporation”.

[50]     I accept Mr Hitchcock’s submission that sections 182 – 185 of the Act are carefully drafted successors to s 42A Companies Act 1955 (which was introduced in

1983).  In particular, Mr Hitchcock drew attention to the provisions of s 42A(7) of the 1955 Act – being the predecessor to s 185 of the 1993 Act.  Whereas the 1993

Act provides for damages to be awarded “against a person by whom the contract was made”, the old s 42A(7) permitted the awarding of damages “against any person by

whom that contract was made in the name of, or on behalf of the company…”.  The current provision, s 185, thus requires any damages claim to be in relation to a pre- incorporation contract of the second definition only (s 182(1)(b)), whereas both forms of pre-incorporation contract could be the subject of a damages award under s 42A(7) of the 1955 Act.  That does not leave the signatory to a s 182(1)(a) pre- incorporation contract immune from a damages award – the personal liability of that person is covered by s 183 of the Act, which imports warranties into pre- incorporation contracts.  For these reasons, in relation to the contract in the present case, the jurisdiction of the Court to award damages under s 185 of the Act does not arise.

[51]     It   follows   that   it   is   strictly  unnecessary  for   the   Court   to   consider Mr Kirkland’s consequential submission, namely that Mr White has no arguable defence to an award of damages under s 185.   Lest I am wrong in relation to the s 185 jurisdiction, I will briefly deal with the liability argument, as there is a clear answer to it in the context of the plaintiff’s (albeit not the defendant’s) summary judgment application.

[52]     It was Mr Kirkland’s submission that “a high degree of bad faith” on the part of Mr White led indisputably to Beech Cove having an entitlement to damages under s 185.  Mr Hitchcock on the other hand pointed to the lack of significant case law on the principles by which the discretion under s 185 of the Act is to be exercised. Mr Hitchcock developed a proposition that in order to invoke s 185 the plaintiff must point to something more than the inability of the company financially to perform the contract.  He submitted that the relevant facts of this case do not contain anything more to act as a trigger.

[53]     In  my  judgment,  the  breadth  of  the  discretion  under  s  185  provides  a complete answer to the plaintiff’s claim that it is entitled to summary judgment rather than await a determination at trial.

[54]     I adopt the conclusion of Judge Cadenhead in Magabook Pty Ltd v Magabook

at 132, where his Honour stated:

What is clear is that the ambit and scope of s 185 of the Act is largely unexplored in New Zealand.   In my view, to exercise the discretion under this section would require a detailed and close analysis of the relationship existing between the second defendants and the plaintiff company…These are issues of fact that are difficult to assess on a summary judgment application.

[55]     The importance of an assessment of the evidence is heightened when, as in this case, a plaintiff alleges “a high degree of bad faith” on the part of a defendant. Despite Mr Kirkland’s submissions, there is no overwhelmingly clear evidence of bad  faith  in  this  case.     At  most,  there  is  circumstantial  evidence  to  which Mr Kirkland referred which might support a conclusion of bad faith but which, when Mr White’s evidence has been heard, might not lead to that conclusion.   Equally, because bad faith is clearly not a requirement for the exercise of the jurisdiction under s 185 of the Act, an award of damages may be justified on grounds of “justice and equity”.   The appropriate assessment of justice and equity would require the “detailed and close analysis” which Judge Cadenhead referred in the Magabook case. It would involve an assessment of not only the conduct of Mr White, but also the conduct of Beech Cove.   Furthermore, on the peculiar facts of this case the Court would need to consider the impact of the long period between contract (July 2004) and completion of the unit (December 2008).  The impact on that, and particularly of the emerging economic downturn, upon original intentions and expectations would need to be assessed.  These are matters most appropriately assessed upon trial.

[56]     Therefore, had it been necessary, I would have found that Beech Cove could not obtain summary judgment in relation to liability under s 185.

[57]     On the other hand, but for my conclusion that Mr White has a complete answer to the s 185 argument based on a lack of jurisdiction, I would have been unable to exclude the possibility that Beech Cove might have succeeded at trial on a s 185 claim for damages.  Given my finding as to the absence of jurisdiction under s 185, that does not matter.

Determination

[58]     The second defendant is entitled to summary judgment against the plaintiff on the plaintiff’s amended statement of claim.

[59]     Counsel agreed at the conclusion of the hearing that in the event of such a finding the Court should leave counsel to settle the terms of the formal order to be made.

[60]     I accordingly order that there be judgment for the second defendant against the plaintiff on the plaintiff’s amended statement of claim but I reserve leave to counsel to formulate the precise terms of the order for submission to the Court for formal order.

[61]     As I anticipate from the submissions made by counsel that agreement will be reached on the terms of the order, a joint memorandum should be filed within 10 working days.

Costs

[62]     Counsel agreed, in the event that the Court granted the second defendant summary judgment, that costs should follow the event on a 2B basis.

[63]     I therefore  order  that  the  plaintiff  pay to  the  defendant  the  costs  of  the proceeding on a 2B basis, together with disbursements to be fixed by the Registrar.

Proceeding as against first defendant

[64]     The first defendant has been struck off the Companies Register.   It was previously anticipated that the proceeding as against the first defendant would be discontinued.

[65]     Counsel  for  the  plaintiff  is  directed,  at  the  time  the  memorandum  as  to judgment is filed, either to also file and serve the relevant notice of discontinuance or

to request such further directions and timetabling as required to dispose of the claim

against the first defendant.

Solicitors:

Saunders & Co., Christchurch

AWS Legal, Invercargill