Burri v Schuler Brothers Limited
[2018] NZHC 2567
•1 October 2018
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE
CIV-2018-419-109
[2018] NZHC 2567
BETWEEN RENÉ BURRI and
VERENA CHRISTINA MARIA BURRI
Plaintiffs
AND
SCHULER BROTHERS LIMITED
Defendant
Hearing: 26 September 2018 Appearances:
Mr T Braun and Ms E Rawson for defendant / applicant Mr D Taylor for plaintiffs / respondents
Judgment:
1 October 2018
ORAL JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
[1] This is an application by the defendant, Schuler Brothers Ltd (applicant), for orders staying the proceeding (including an application for summary judgment) commenced by the plaintiffs, René and Verena Burri (respondents), and referring a dispute which is said to exist to arbitration.
[2] I describe it in that way notwithstanding the terms of the applicant’s interlocutory application dated 23 July 2018 which uses different terminology but which effectively seeks such orders.
[3]The background is not complex.
[4] The applicant and the respondents are shareholders in a company by the name of Swiss Belle Farm Ltd which operates a dairy goat farm in the Waikato.
BURRI v SCHULER BROTHERS LIMITED [2018] NZHC 2567 [1 October 2018]
[5] On 6 May 2015 the parties entered into a shareholders’ agreement. This contemplated that, over time, the applicant would sell its shares to the respondents in four tranches. Schedule 2 set out a process for the valuation of the company’s shares annually. However, it seems to me that, for the purposes of this case, that process must necessarily be regarded as having been overtaken by the parties’ subsequent agreement referred to below.
[6] On 18 July 2017 the parties entered into an agreement for the sale and purchase of the first tranche of shares. Pursuant to this agreement, the applicant agreed to sell and the respondents agreed to purchase a parcel of 216 shares. The sale and purchase price was to be set as at 31 May 2017. The process by which that would occur is contained in cls 2 and 3 which I set out in full:
2.The price for the Shares (“the Price”) to be paid by the Purchasers to the Vendor is to be established by the independent chartered accountant Rob Braithwaite of Braithwaite & Pearks Limited in Hamilton, in accordance with the Shareholders Agreement dated the 6th day of May 2015 (“the Shareholders Agreement”), with the valuation to be based on the value of the Shares as at 31 May 2017.
3.However, if either or both of the parties do not accept the value of the Shares as established by Rob Braithwaite, then in terms of Schedule 2 of the Shareholders Agreement, such party can appoint a registered valuer to suggest a value. If the other party is not comfortable with the valuer’s report, then such other party can appoint its own registered valuer. If the two registered valuers cannot agree, the value issues goes to arbitration.
[7] Although these clauses are not well drafted, it is plain enough that the parties agreed:
(a)they were to arrange for Braithwaite & Pearks to value the shares as at 31 May 2017;
(b)if either party did not agree with Braithwaite & Pearks’ valuation then that party was entitled to appoint a valuer to “suggest a value”;
(c)if the other party was “not comfortable with” the first party’s valuer’s valuation, then that party was entitled to appoint its own valuer;
(d)assuming that the parties’ valuers arrived at different valuations, then they were to confer in order to establish whether they could reach agreement;
(e)if the valuers could not agree, then the question of the value of the shares as at 31 May 2017 would be referred to arbitration.
[8]What happened here is that:
(a)Swiss Belle Farm’s Annual General Meeting was held on 10 August 2017. There was some discussion about altering the process for determining the value of the shares. Except in one respect the minutes do not support any suggestion that agreement was reached as to this. The exception is that both parties appear to have accepted that the timeframe for settlement contained in the agreement for sale and purchase was unrealistic in the event of any disagreement as to value;
(b)Braithwaite & Pearks issued their valuation on 30 August 2017. They valued the parcel of shares at $271,000;
(c)for different reasons, neither party was prepared to accept this valuation;
(d)the respondents engaged KPMG. KPMG provided their valuation on 12 October 2017. They valued the parcel of shares at $192,685;
(e)the applicant did not accept this valuation. This was confirmed in its solicitor’s letter dated 3 November 2017 to the respondents’ solicitors. In the same letter the applicant’s solicitors signalled that it had resolved to obtain its own valuation;
(f)things went quiet for a time;
(g)on 15 February 2018 the respondents’ solicitors wrote to the applicant’s solicitors expressing frustration at the delay and saying that the applicant had two weeks to provide its valuer’s report;
(h)on 8 March 2018 the applicant’s solicitors appear to have emailed the respondent’s solicitors but this email was not in evidence;
(i)on 9 March 2018 the respondents’ solicitors wrote to the applicant’s solicitors asking when it was expected that the applicant’s valuer’s report would be available;
(j)on 16 March 2018 the applicant’s solicitors wrote to the respondents’ solicitors providing the former’s valuer’s report. This was a report provided by PWC dated 9 March 2018. They valued the parcel of shares at $458,000;
(k)on 17 April 2018 the respondents commenced this proceeding seeking specific performance of an alleged agreement between the parties for the sale and purchase of the parcel of shares at the valuation arrived at by KPMG and applied for summary judgment;
(l)on 2 July 2018 the defendant filed an appearance under protest to jurisdiction and the application which is now before the Court followed.
[9] This is an appropriate point at which to record that the point at issue between the parties concerns only one aspect of the valuations. Attached to each share are milk supply rights or MSRs. These are rights to supply to the co-operative that processes the milk produced. The differences in the three valuations is solely referable to different values placed on the MSRs attaching to the tranche of shares being sold.
[10] One contention advanced by Mr Braun on behalf of the applicant was that the process of determining a valuation for the parcel of shares under the agreement for sale and purchase misfired from the outset because Braithwaite & Pearks expressly
indicated that they were not valuing the MSRs and KPMG did not provide reasons for the value they placed on them.
[11] In relation to this issue Mr Taylor took me through the KPMG valuation (and a Telfer Young valuation of the land and buildings on which KPMG relied) and in doing so sought to demonstrate that both Telfer Young and KPMG had indeed made judgments about the value of the MSRs even although the basis for those judgments was not articulated.
[12] I am not convinced that I need to resolve this issue for the purposes of the application before me. KPMG, in the process of assessing the value of the company, and therefore the parcel of shares, placed a value on the MSRs. It is true that they did not articulate the basis upon which they did so. It is also true that there are indications in the report that they exercised little in the way of independent judgment on that score. Nevertheless, for the purposes of the valuation exercise, my judgement is that the applicant must accept that KPMG placed a value on the MSRs.
[13] Mr Taylor’s written submissions for the respondents contains the following paragraph:
[13]The [respondent’s] summary judgment application relies upon an implied term in the schedule to the effect that a party desiring to provide its own valuation must do so within a reasonable time. This is necessary to give business efficacy to the contract. If the contract does not contain some obligation to undertake the necessary valuation within a reasonable time, the object of the agreement to transfer the shares can be frustrated indefinitely and, in fact, that is what the [applicant] sought to do.
[14]This I think points to the key issue for determination.
[15] Counsel were in agreement as to the law relating to the implication of terms in contracts. For the applicant, Mr Braun outlined the position, and Mr Taylor did not disagree with his analysis. Where counsel parted company was in relation to the application of the law to the facts here.
[16] Mr Braun began with the well known case of BP Refinery (Westernport) Pty Ltd v Shire of Hastings where the Privy Council said that a term will be implied into a contract where:1
(a)it is reasonable and equitable;
(b)it is necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it;
(c)the term is so obvious that it “goes without saying”;
(d)it is capable of clear expression; and
(e)it does not contradict any express term in the contract.
[17] He then referred to the Privy Council’s later judgment in Attorney-General of Belize v Belize Telecom Ltd in which Lord Hoffman described the BP Refinery test as a “… collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means, or in which they have explained why they did not think that it did so”.2
[18] Mr Braun then referred to the more recent case of Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd 3 in which support was expressed for the certainty of the BP Refinery test, and Rintoul Group Ltd v Far North District Council 4 in which this Court seems effectively to have applied that test.
[19] Mr Taylor submitted, essentially on business efficacy grounds, that it was necessary to read into the submission to arbitration contained in cls 2 and 3 of the agreement for sale and purchase a requirement that a party electing to appoint its own valuer and providing that valuer’s assessment must do so within a reasonable time.
1 B P Refinery (Westernport) Pty Ltd v Shine of Hastings (1977) 180 CLR 266 (PC).
2 Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10 at (27).
3 Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC742.
4 Rintoul Group Ltd v Far North District Council [2017] NZHC 1132.
[20] He then submitted that the applicant had not complied with that implied obligation having regard to the lapse in time between the date of the KPMG valuation and the PWC valuation. On that basis he submitted that the parties must be treated as having agreed to accept the former and that, accordingly, there is no live dispute to be referred to arbitration and the respondents are entitled to pursue their application for summary judgment.
[21] Mr Braun contended that there was no basis for implying such a term into the sale and purchase agreement, and that, even if there was, in the circumstances, the applicant had acted within a reasonable time.
[22] I accept the respondents’ contention that this is a case in which it would be appropriate to read into the agreement for sale and purchase an obligation on the applicants to take the step of providing their valuation within a reasonable period of time.
[23] Applying BP Refinery (and subsequent cases) to cls 2 and 3 of the agreement for sale and purchase, it appears to me that business efficacy demands the implication of a term that both parties take the steps within reasonable periods of time in order to make the valuation process work. As Mr Taylor submitted, without such a term, the dispute might drag on indefinitely. In short I regard an obligation on the parties to take the various steps identified in the agreement within a reasonable time as being so obvious as to go without saying.
[24] The real issue in this case is whether the applicant complied with that obligation.
[25] The question of what is reasonable in any given case is a heavily contextual one.
[26]Several factors influence my thinking in the present circumstances:
(a)the shareholders’ agreement provides that the respondent is entitled to require that the shares in Belle Farm are to be sold by the applicant and
purchased by the respondents over a five year period in tranches; the first tranche as at 31 May 2015; the second two years after that; the third two years after that; and the last one year after that. Thus, the parties were looking at the transfer of the applicant’s shares to the respondents over a relatively lengthy period of time;
(b)turning to the agreement for sale and purchase, it is relevant I think to note that the parties themselves did not impose particular time constraints on the taking of various steps relating to the transaction; Plainly this was not uppermost in their minds;
(c)those things said, this is a commercial transaction in which the parties have identified a means of arriving at a valuation and that being so it is a process which should work efficiently and within a sensible period of time;
(d)optimistically, in cl 5 of the agreement for sale and purchase, the parties provided that the payment would be made on 31 August 2018. As I understand it both parties now accept that that was an unrealistic expectation if there was a dispute about value. Nevertheless, as Mr Taylor submits, the parties were thinking in terms of a process which might take three months;
(e)clause 5 of the agreement for sale and purchase also provided that the respondent would pay interest on any outstanding purchase price from 1 June 2017 down to the date of payment;
(f)in the particular context of this case, it is fair to observe that whilst the Braithwaite & Pearks valuation was available by 30 August 2017, the respondents’ valuation was not provided until 12 October 2017 so that even by that stage some of the deadlines which the parties had set themselves had well and truly expired;
(g)another factor which was emphasised in different ways by both counsel was that valuers with a sufficiently specialised knowledge of dairy goat farming, and therefore ability to value a business which owned a dairy goat farm and the MSR shares, are not thick on the ground; and
(h)right up until the respondents’ solicitors wrote to the applicant’s solicitors on 9 March 2018, it does seem as if the parties were jointly concerned to ensure the process operated fairly and neither party was suggesting that it should not be seen through a conclusion. The applicant’s valuation was provided two weeks later.
[27] Standing back from the matter and weighing those things up as best I can, I am satisfied — by some margin I might add — that the applicant has not breached any implied term to provide its valuation within a reasonable time.
[28] It follows that the issue of the proper valuation of the parcel of shares to change hands between these parties remains a live issue.
[29] There is no serious doubt that that issue falls squarely within the terms of the submission to arbitration contained in cls 2 and 3 of the 18 July 2017 sale and purchase agreement — indeed, that submission to arbitration was designed to deal with this very issue.
[30]It follows that the applicant is entitled to the orders it seeks.
[31]Accordingly, I make orders:
(a)staying the substantive proceeding (including the respondents’ application for summary judgment) pending further order of this Court;
(b)pursuant to s 8(1) of the Arbitration Act 1996, directing the parties to arbitration.
[32] I did not hear counsel in relation to costs. I therefore reserve them. I am confident that counsel will be able to sort the costs issue out. If it helps at all, I can
indicate that my preliminary view — without having the benefit of argument — is that the applicant is entitled to its costs of this application on a 2B basis but see no obvious grounds for an increased or decreased costs order. If counsel are unable to settle costs then they may bring the matter back to me by memorandum and I will deal with costs on the papers.
Associate Judge Johnston
Solicitors:
Braun Bond and Lomas, Hamilton Edmonds Marshall, Matamata
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