BSC Limited v Sargon Capital Pty Limited

[2017] NZHC 2609

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2917-404-1263 [2017] NZHC 2609

BETWEEN

BSC LIMITED

First Plaintiff

BATH STREET CAPITAL LIMITED Second Plaintiff

ANDREW HOWARD BARNES Third Plaintiff

AND

SARGON CAPITAL PTY LIMITED Defendant

On thepapers:	25 October 2017
Appearances:	M Kersey and A R MacDuff for the Plaintiffs M OʼBrien QC and J Johnson for the Defendant
Judgment:	25 October 2017

ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL

Solicitors:

Russell McVeagh, Auckland, for the Plaintiffs

Wynn Williams, Christchurch, for the Defendant

Copy for:

J Dixon QC, Auckland, for the Plaintiffs

M O”Brien QC, Auckland, for the Defendant

BSC LIMITED v SARGON CAPITAL PTY LIMITED [2017] NZHC 2609 [25 October 2017]

[1]      BSC Ltd discontinued its summary judgment application under r 12.15 of the High Court Rules.  Sargon Capital Pty Ltd applies for costs on the discontinuance. That turns on the application of the principles established by the Court of Appeal in NZI Bank Ltd v Philpott.1    The normal rule is that unless there are special reasons otherwise, costs on an opposed interlocutory application must be fixed when the application is decided and should be paid when fixed.2     The exception under r

14.8(3) for applications for summary judgment means that the principles in NZI Bank Ltd v Philpott continue to apply.  The Court of Appeal said:3

As with most questions of costs, they should be approached on broad principles.  Whilst a defendant may be regarded as successful in one sense in resisting an application for summary judgment, it is of course not a final determination in the proceeding itself.   If ultimately the plaintiff does succeed it seems to us in the general run of cases that the defendant should pay  for  both  proceedings,  the  Court  paying  particular  attention  to  the reasons why the plaintiff was unsuccessful in the first case.  If those reasons include some question of fault on the part of the plaintiff then it may be appropriate to reduce or even eliminate an entitlement to costs for that part of the proceedings so far as the plaintiff is concerned.  Where, however, the defendant has raised defences which cannot by their nature be resolved at a summary judgment application but ultimately turn out to have no basis, then costs on both sets of proceedings belong to the plaintiff.

There will be other cases where the plaintiff has embarked on summary judgment proceedings erroneously in the sense that the rules do not allow the summary judgment procedure, or in the certain knowledge that there is a bona fide question of fact or law which can be determined only after a trial. In those circumstances the Court should be able in its discretion to deprive the plaintiff of costs in those unsuccessful and abortive proceedings and award costs to the defendant.

Having regard to the difficulty in determining those matters until the case itself is concluded, in many cases the best course will be for the Judge or Master to reserve the question of costs until the litigation is determined.  In some cases (and this may be one) the impecuniosity of the defendants may mean the plaintiff will not proceed to the more expensive contested hearing having failed at the summary judgment level.  That does not mean that a defendant who feels he is entitled to costs is prevented from bringing the matter before the Court and having the question argued and obtaining an order if necessary   We repeat however that the incidence of costs is best settled when the result of the litigation is known.   Hence the widespread practice as we see it of reserving costs in such situations.  The Master may well indicate for the trial Judge the extent and duration of the argument on the application.

1      NZI Bank Ltd v Philpott [1990] 2 NZLR 403 (CA).

2      High Court Rules, r 14.8(1).

3      NZ I Bank Ltd v Philpott [1990] 2 NZLR 403 (CA) at 405-406.

[2]      BSC’s sale of shares in Complectus Ltd for $200 million was to settle on

31 May 2017.   A deposit of $15 million was held in the trust account of Russell McVeagh (BSC’s lawyers).  Sargon did not settle but BSC says that it was ready, willing and able to settle.  On the same day Russell McVeagh gave Sargon written notice under cl 8.1 of the sale agreement, requiring Sargon to complete within 10 business days, and informing that BSC would be entitled to cancel and sue for damages or sue for specific performance.

[3]      On 7 June, Wynn Williams, newly instructed lawyers for Sargon, wrote to Russell McVeagh stating that Sargon believed with good cause that BSC had made fraudulent misrepresentations, had breached warranties and its pre-completion obligations.   The letter also contended that BSC was not in a position to fulfil its obligations under the agreement and to complete, and that Sargon had a right to rescind and/or cancel.   The letter set out matters Sargon relied on to support its allegations.   BSC was suspicious that Sargon did not have the funds to settle. Correspondence between Russell McVeagh and Wynn Williams followed, but Wynn Williams did not provide further information to support its allegations.  It did give some information as to Sargon’s ability to complete if the transaction was to settle. On 16 June 2017 Sargon gave notice cancelling the agreement.  BSC rejected that and gave its own cancellation notice on the same day, alleging that Sargon had repudiated.

[4]      BSC began this proceeding on 20 June 2017.  It sought a declaration that it was beneficially entitled to the residual deposit held in Russell McVeagh’s trust account and directing Russell McVeagh to pay the deposit to it.

[5]      In its notice of opposition of 3 August 2017 Sargon, amongst other things, alleged  fraudulent  misrepresentations  by  BSC  and  Mr  Barnes.     It  filed  four significant affidavits in support of its opposition.  BSC advised of the discontinuance in the parties’ joint memorandum of 21 September 2017.   Its withdrawal of the summary  judgment  application  at  that  stage  is  understandable  in  the  light  of Sargon’s evidence.

[6]      Sargon relies on the second paragraph in the passage from NZI Bank Ltd v Philpott above.  It says that when BSC started the proceeding, it already knew that there were bona fide questions of fact which should be determined only after a trial and the case was not suitable for summary judgment.   It refers to the matters in Wynn Williams’ letter of 7 June 2017 and notes that they were also raised in its notice of opposition.

[7]      The matter is to be assessed against the circumstances when the proceeding was filed.  Those circumstances may include a consideration of what steps the other side might take in response to the summary judgment application.

[8]      Sargon’s opposition was based on affirmative defences, not on any failure by BSC to make out a case on its cause of action.  For Sargon to avoid liability under BSC’s claim for the funds held by Russell McVeagh, it had to cancel the agreement. So long as the agreement remained in force it was in default of performance and BSC would be able to rely on cls 8.1 and 8.3 of the agreement to obtain the deposit. Cancellation could be under express terms of the agreement or under the general law

– under s 7 of the Contractual Remedies Act 1979.4   Sargon’s correspondence refers

to rescission and treating the contract as void ab initio, but that is misdirected in the light of s 7(1) of the Contractual Remedies Act.5

[9]      As to cancellation under the agreement, clause 8.2 gives the purchaser an express right of cancellation in the event of default by the vendor under cl 7.2, vendor’s obligations on completion.   At 20 June 2017, BSC had good grounds to believe that it could show compliance with cl 7.2.  It is not disputed that on 30 May

2017 both parties’ lawyers met and it was confirmed that BSC would be in a position to complete on 31 May 2017.  Sargon had not alleged any breach of clause 7.2.  If it were to allege any such breach and a default were capable of remedy, Sargon had to give  BSC  notice  to  remedy  within  ten  business  days  under  cl  8.2(a).    Sargon

terminated  without  giving  any  such  notice.     There  are  no  other  cancellation

4      Now Contract and Commercial Law Act 2017, s 37. The Contractual Remedies Act 1979 was in force at the start of the proceeding. The Contract and Commercial Law Act came into force on 1

September 2017 and applies retrospectively: ss 2 and 6, Schedule 1, cl 14.   There are no substantive differences between the Contractual Remedies Act and Part 2 subpart 3 of the Contract and Commercial Law Act.

5      Now Contract and Commercial Law Act, s 40.

provisions in the agreement Sargon can rely on.  Instead the question is whether BSC had good grounds to apply for summary judgment in the face of a cancellation under the general law.

[10]     Sargon’s  allegations  of  breach  of  warranties  were  unlikely  to  assist  in resisting the summary judgment application.   Under cl 10.4 and 11.2 of the agreement, the primary remedy for breach of a warranty is an adjustment to the purchase price (including by a refund).  Sargon may be able to argue that a breach of warranty with substantial effect under s 7(4)(b) of the Contractual Remedies Act6 would justify cancellation but nothing in the correspondence from Wynn Williams suggested that any alleged breaches of warranty had that effect.  BSC’s position is

reinforced by cl 17 of the agreement, under which an escrow amount, $17,500,000, was to be held after completion to meet any claims by the purchaser.   That gives Sargon a powerful remedy for warranty breaches discovered after completion.   It makes it harder to contend that warranty breaches had substantial effect.  Indeed, in its notice of opposition Sargon did not rely on warranty breaches.

[11]     Wynn  Williams’  letter  of  7  June  alleged  breaches  of  pre-completion obligations.  Clause 6.1 requires BSC to carry on its business as a going concern. Under cl 6.2 BSC must meet a number of obligations (both negative and positive) up to completion.  Significantly the clause provides:

The Vendor acknowledges that damages alone would be an inadequate remedy for any breach of the covenants in this clause 6.2, and that, in the event of such breach, the Purchaser will be entitled to seek an injunction to restrain the breach or an order for specific performance (without prejudice to any other rights that the Purchaser may have).

The acknowledgement that damages would not be an adequate remedy makes it easier for Sargon to argue that breaches of obligations under cl 6.2 did have substantial effect so as to justify cancellation.

[12]     Sargon alleged that BSC had breached cl 6.2:

[a]       by the removal of art works removed from company premises;

[b]       through Mr Barnes’ intimate relationship with an employee;

[c]       by Mr Barnes bullying staff;

[d]      by manipulation of calculations of the value of the business for a long term incentive plan, which deprived employees of their entitlements; and

[e]       by deceptive behaviour of Mr Barnes on his vaunted philanthropy.

These were matters within Mr Barnes’ knowledge.  He could instruct BSC’s lawyers

as to the factual basis (or otherwise) for these allegations.

[13]     BSC answered the substance of these matters in its lawyers’ letter of 15 June

2017.   At a minimum the response showed that it had arguable grounds to refute Sargon’s allegations.  It went beyond a general denial and explained matters which had raised questions.   In the circumstances I accept that it applied for summary judgment on the basis that if Sargon did allege breaches of pre-completion obligations, it would give evidence to refute them.  On that it has been vindicated, as Sargon’s   notice   of   opposition   does   not   allege   breaches   of   pre-completion obligations.

[14]     That leaves Sargon’s allegations of fraudulent misrepresentation, which it maintained in its notice of opposition.   Sargon had to allege that BSC’s representations  were fraudulent,  because of the  limitations  under cl  11.2  of the agreement on relief available to the purchaser for misrepresentations.   There is an exception for fraud.

[15]     A fraudulent representation inducing a contract is arguably essential under s 7(4)(a) of the Contractual Remedies Act.7    Parties negotiating a contract rely on each other’s honesty.  Each deals with the other on the basis that they are honest in what they say.  Whether what they say is correct or not is another matter.  If one party finds out that the other is dishonest in negotiating the contract, they would no

longer continue negotiating.   That arguably meets the test for essentiality.8     It is unnecessary to satisfy any substantial effect test.

[16]     Sargon alleged these misrepresentations:

[a]      Representations as to good growth in the private client business and ongoing growth prospects, when Mr Barnes had acknowledged that growth in that business was challenging;

[b]      Representations that the Kowhiri business (not part of the business to be  sold)  was  not  necessary  for  the  growth  of  the  private  client business – belied by the attempt to buy back the Kowhiri business;

[c]       Representations that the management team operated independently of

Mr Barnes, whereas he was the effective CEO;

[d]      Representations that there were no payments due under the long term incentive plan, when there had been manipulation to deprive staff of their entitlements;

[e]       Representations as to Mr Barnes’ philanthropy which went to the

reputation of the business.

[17]     BSC answered the substance of these matters in Russell McVeagh’s letter of

15 June 2017.   Again the response showed that it had arguable grounds to refute

Sargon’s allegations.

[18]     BSC had grounds to be sceptical of the fraud allegations.  Up to 30 May 2017 the  parties  had  been  preparing  for  settlement.    There  was  no  suggestion  that settlement might not go ahead.   Sargon’s failure to settle was a surprise.   BSC

suspected that one of Sargon’s backers may have withdrawn financial support and

8Progeni Systems Ltd v Hampton Studios Ltd HC Christchurch CP105/86, 11 August 1987; Mana Property Trustee Ltd v James Developments Ltd [2010] NZSC 90, [2010] 3 NZLR 805. The finishing point may be close to the common law which allowed rescission for fraud, but it is reached by a different route.

that Sargon did not have the funds to settle.   BSC’s lawyers probed Sargon’s assertions of fraudulent misrepresentation, but received no more information from Sargon to substantiate the allegations.

[19]     Allegations of fraud are serious.   In a summary judgment application the plaintiff  has  the  onus  throughout.    At  the  same  time  a  defendant  is  under  an obligation not to allege fraud without a sound basis.9   There may be pre-trial scrutiny

whether there is a proper basis for fraud allegations.10     The point here is that an

application to test fraud allegations need not come within the second paragraph in

NZI Bank Ltd v Philpott.

[20]     In these circumstances I consider that BSC was entitled to test Sargon’s fraud allegations.  BSC’s withdrawal of its summary judgment application does not count against it.  To the contrary, recognising before a hearing that a summary judgment application may not succeed is responsible in saving the parties and the court added work.

[21]      In  NZI Bank  Ltd  v Philpott  the Court  of Appeal  recognised  that  in  the majority of cases the better course is to reserve costs until the case is finally determined.   I apply that here.   A final hearing on the merits is likely to show whether the summary judgment application was justified.  At this stage it is too early to tell.

[22]     Accordingly, costs on the summary judgment application are reserved.

……………………………….

Associate Judge R M Bell

9      See, for example, Schmidt v Pepper New Zealand (Custodians) Ltd [2012] NZCA 565 at [15].

10     E.g. Commissioner of Inland Revenue v Redcliffe Forestry Venture Ltd [2012] NZSC 94, [2013]

1 NZLR 804 at [33] in respect of a proceeding to set aside a judgment obtained by fraud.