Chan v Boston Trustees 6037 Limited
[2021] NZHC 1694
•8 July 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-002422
[2021] NZHC 1694
BETWEEN EVELYN DREAMI CHAN, as trustee of the DREAMI TRUST
First PlaintiffEVELYN DREAMI CHAN
Second PlaintiffAND
BOSTON TRUSTEES 6037 LIMITED and
KWOK PING WINNIE CHAN, as trustees of the KP CHAN FAMILY TRUST
First Defendants
KWOK PING WINNIE CHAN
Second Defendant
Hearing: 21 June 2021 Appearances:
H L R McDermott for Plaintiffs S C I Jeffs for Defendants
Judgment:
8 July 2021
JUDGMENT OF ASSOCIATE JUDGE P J ANDREW
This judgment was delivered by Associate Judge Andrew on 8 July 2021 at 1.00 pm
pursuant to r 11.5 of the High Court Rules Registrar / Deputy Registrar
Date ………………………
CHAN & OR v BOSTON TRUSTEES 6037 LTD & ORS [2021] NZHC 1694 [8 July 2021]
Introduction
[1] In May 2020, the parties entered into an agreement for the sale and purchase of the entire shareholding (1,000 shares) in Eastern Dragon Sushi Ltd (the Company). The Company operates a franchise network selling sushi and other food products from kiosks in Countdown supermarkets in the North Island.
[2] The defendants were the vendors. The plaintiffs were the purchasers. The defendants agreed to sell the Company’s shares to the plaintiffs for $1m.
[3] The agreement for sale and purchase (ASP) did not settle. The plaintiffs have paid no part of the purchase price. The defendants claim to have lawfully cancelled the ASP.
[4] In the substantive proceedings, the plaintiffs sue the defendants for specific performance requiring the defendants to settle under the ASP with undertakings provided in accordance with the vendors’ warranties.
[5] In the present interlocutory proceeding, the defendants seek to strike out the whole of the plaintiffs’ amended statement of claim. The defendants say that the pleadings, containing a sole cause of action for breach of contract, is incapable of success; there is no tenable claim of a breach of obligations under the ASP and no tenable claim that the failure to complete the settlement was in any way caused by a breach of the defendants’ contractual obligations.
[6] The critical issue I must determine is whether the amended statement of claim discloses no reasonably arguable cause of action because there is no tenable claim for breach of contract or any other basis for the order of specific performance sought.
Factual background
[7] The parties had initially agreed to an agreement for the sale and purchase of the sushi business of the Company. However, the ASP subsequently entered into was for the sale and purchase of the shares in the Company.
[8] The ASP defined “completion” to mean “performance by the vendors and the purchaser of their respective obligations under cl 4.2 - 4.5 (inclusive)”. It also defined the completion date.
[9]By consent, the completion date was extended until 1 October 2020.
[10] Clause 4.2 of the ASP contained the vendor’s pre-completion period obligations and included at 4.2(a)(xvi) the following:
In the event that the vendor becomes aware of any changes to the Company or the Business or circumstances or events, as stipulated above, occurring after this Agreement is signed, the Vendor will immediately notify the Purchaser and provide new details requested by the Purchaser.
[11]Clause 5, entitled “Warranties”, provided at cl 5(f):
The Vendor warrants that all securities registered against the business will be discharged on or before the Completion. The Vendor shall be responsible for any debts or securities against the business prior to Completion Date.
[12]Clause 5(h) of the ASP reads:
The Vendor warrants that all the assets owned by the Vendor in the Business (if any) shall be passed to the Purchaser on the Completion Date free from any interest, charges and/or other liabilities whatsoever either to the Vendor or to any third party. The Vendor shall be positively responsible to pay and to cause the discharge of any interests, charges, and/or other liabilities at its own costs prior to Completion Date.
[13] Clause 5 also provided that each of the warranties is to be repeated continuously from the date of the Agreement until completion and “to remain in effect by reference to the facts and circumstances then existing”.
[14]Clause 6.1 of the ASP provides, in respect of default:
If a party does not fulfil its obligations under clause 4.2 to clause 4.6 (Defaulting Party) then, without prejudice to any other rights or remedies available to the other party (Non-Defaulting Party), the Non-Defaulting Party may:
(a)sue the Defaulting Party for specific performance; or
(b)cancel this Agreement and sue the Defaulting Party for damages.
[15]Clause 11 contains “an entire agreement” clause.
[16] Prior to 2020, the Company operated under Countdown’s health and safety food licences. The plaintiff says that she first became aware in July 2020, at a meeting with General Distributors Ltd, the operators of Countdown, that the Company would need to acquire its own health and food safety licences and that in doing so, audit
records for all the stores would be required to ensure compliance with the new food control plan. The plaintiff says that the defendants did not inform her of this change as required by cl 4.2(a)(xviii) of the ASP.
[17] The plaintiff became concerned at the cost of the audit. In reliance on cl 5(f) she contends that the costs of the audit are the obligation of the vendor, the defendants.
[18] In correspondence between the parties’ solicitors, in September 2020, the plaintiff sought undertakings from the defendants that the costs of the audit would be paid by them. The defendants did not provide the undertakings sought.
[19] By email dated 1 October 2020, the solicitors for the defendants advised that they were ready, willing and able to settle. Later that day, the solicitors for the plaintiff, advised that the defendants would need to provide an undertaking in accordance with cls 5(f) and (h) before settlement could take place.
[20]Settlement did not occur on 1 October 2020 as the parties had agreed.
[21]On 2 November 2020, the defendants cancelled the ASP.
The pleadings
[22] There are two core allegations contained in paragraphs 28 and 29 of the amended statement of claim that are said to constitute a breach of contract:
28.The defendants have breached the agreement by not:
a.Settling on the settlement date.
b.Not issuing a valid settlement notice.
29.The defendants have breached their obligations under the agreement by breaching their warranties under cl 5 by:
a.Not providing their warranties that all securities had been discharged prior to settlement date;
b.Not providing their warranties that all of the assets would be passed to the plaintiff on settlement date free from and charges, interests and any other liabilities.
[23] By way of relief, the plaintiffs seek an order for specific performance requiring the defendants to settle under the ASP “with undertaking[s] provided in accordance with the vendor’s warranties and the right of nomination by the first plaintiff”.
Relevant legal principles
Rule 15.1 of the High Court Rules 2016 provides:
Dismissing or staying all or part of proceeding
(1)The court may strike out all or part of a pleading if it –
(a)discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading; or
(b)is likely to cause prejudice or delay; or
(c)is frivolous or vexatious; or
(d)is otherwise an abuse of the process of the court.
(2)If the court strikes out a statement of claim or a counterclaim under subclause (1), it may by the same or a subsequent order dismiss the proceeding or the counterclaim.
(3)Instead of striking out all or part of a pleading under subclause (1), the court may stay all or part of the proceeding on such conditions as are considered just.
(4)This rule does not affect the court's inherent jurisdiction.
[25] The general principles applicable to the exercise of the Court’s powers under r 15.1 are summarised in the Court of Appeal’s decision in Attorney-General v Prince,1 as endorsed by the Supreme Court in Couch v Attorney-General.2 These include:3
(a)Pleaded facts, whether or not admitted, are assumed to be true. This does not extend to pleaded allegations which are entirely speculative and without foundation.
(b)The cause of action or defence must be clearly untenable.
(c)The jurisdiction is to be exercised sparingly and only in clear cases.
(d)The jurisdiction is not excluded by the need to decide difficult questions of law, requiring extensive argument.
1 Attorney-General v Prince [1998] 1 NZLR 262 (CA).
2 Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].
3 A C Beck and others McGechan on Procedure (online ed, Thomson Reuters) at [HR15.1.02.8].
(e)If a defect in the pleading can be cured by amendment, the claim should not be struck out.
Analysis and decision
[26] This is a contract interpretation case. The approach is an objective one.4 The Court must ascertain the meaning that the contract would convey to a reasonable person having all the background knowledge reasonably available to the parties at the time of entering the contract.5
[27] The parties accept that all of the relevant documentation is before the Court. They agree that it is unlikely that any further relevant evidence, whether oral or otherwise, will be produced at trial.
[28] I agree with Mr Jeffs’ submission, for the defendants, that I should proceed on the basis that all the factual information comprising the contextual matrix for the interpretation of the relevant documents is before me.6
Is there a tenable cause of action?
[29] Ms McDermott, for the plaintiffs, submitted that the parties intended the business would be purchased and that all the costs associated with that business would be paid for by the vendor right up until the date of settlement. The plaintiff became concerned when she found out about the food regulatory audit and expressed concern about a lack of information. Ms McDermott responsibly accepted that her client’s principal concern was the costs of the audit rather than any concern that the business might have to shut down because of a failure to meet any audit requirements.
[30] Ms McDermott further contended that if either party breached the ASP, they could sue the defaulting party for specific performance. That is expressly provided for in cl 6.1(a). It is claimed that the defendants, the vendors, were in breach of cl 5(f) because they failed to pay all of the audit costs for which the company’s business was
4 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60].
5 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912 per Lord Hoffmann; Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] 1 AC 1101 at [14] per Lord Hoffmann.
6 See Yandina Investments Ltd v ANZ National Bank Ltd [2013] NZCA 469, where the Court of Appeal adopted a similar approach in the context of a strike out application involving the interpretation of three deeds of assignment.
responsible, and up until the settlement date of 1 October 2020. Particular reliance is placed on the second sentence of cl 5(f), which provides that the vendor shall be responsible for “any debts” against the business prior to the completion date.
[31] The fundamental problem for the plaintiffs is that they seek specific performance of the ASP, thereby acquiring the Company’s business, in circumstances where they cannot establish a breach of any contractual obligation and where the defendants, because of the plaintiff’s failure to meet her fundamental obligation of making payment of the purchase price, were lawfully entitled to cancel.
[32] I find that the core allegations contained at paragraphs 28 and 29 of the amended statement of claim are incapable of succeeding.
[33] It is not reasonably arguable the defendants breached the ASP, either by not settling on the settlement date or not issuing a valid settlement notice (paragraph 28 of the amended statement of claim).
[34] As recorded above, the ASP defined completion to mean “the performance by the vendors and the purchaser of their respective obligations under cl 4.2 – cl 4.5 (inclusive)”. The definition assumes that the conditions precedent in cl 4.1 (including due diligence and the necessary consent of General Distributors Ltd (Countdown)) had been satisfied.
[35] Clause 4.2 entitled “Pre-Completion Period” required the defendant vendors to maintain the status quo in the business prior to completion. Clause 4.3 stipulated the time for completion. It did not impose any substantive obligations on the vendors. Clauses 4.4 and 4.5 provided for the vendors’ completion obligations. They principally related to ensuring the Company’s unencumbered shares were transferred to the plaintiff purchasers.
[36] Clause 4.6(a) provided that once completion had taken place, the plaintiff purchasers would pay the purchase price to the defendants’ solicitors.
[37] The plaintiffs do not plead breaches of any of cl 4.1 – cl 4.5. In any event, no such pleading could be sustained. The conditions precedent were satisfied or waived by the Completion Date. On 1 October 2020, the defendants’ solicitors provided the plaintiffs’ solicitors with: copies of executed share transfers and executed and updated resignations of directors; a settlement statement; and undertakings to hold settlement funds pending release of financing statements registered by Service Foods Ltd and the BNZ, and to release on settlement the share transfers and resignations of directors.
[38] In these circumstances, the defendants had discharged their completion obligations under cls 4.3 – 4.5. The plaintiff was required to pay the purchase price in accordance with cl 4.6, but she did not. There is simply no tenable basis for the allegation that the defendants breached the agreement by not settling on the settlement date.
[39] Likewise, paragraph 28(b) of the plaintiffs’ amended statement of claim, which alleges that the defendants breached the ASP by not providing a “valid settlement notice” is equally flawed. The ASP does not prescribe a settlement notice; in fact, it does not require one at all.
[40] I also find the pleading at paragraph 29 of the amended statement of claim is also not reasonably arguable. As Mr Jeffs submitted, you cannot fail to provide something that you have in fact provided. The defendants did provide the warranties; they signed the ASP and were bound by them up until completion date. That is the effect of the proviso in cl 5.
[41] The plaintiffs cannot enforce the undertakings they seek (paragraph 31 of the amended statement of claim) because there is no contractual or legal basis for any such order.
[42] The question of whether the defendants were in breach of cl 5(h) in not paying the audit costs up until the date of settlement is not relevant. It is therefore not necessary for me to decide the meaning of cl 5(h) which on its face is somewhat ambiguous. Even if the defendants had breached that clause, it would not have prevented completion/settlement. A breach of warranty in a share purchase agreement ordinarily entitles the innocent party to recover damages for the difference in price
between the shares as received and the shares as warranted.7 Such a breach, whether actual or anticipated, would very rarely impede settlement; it could not have done so here.
[43] Ms McDermott did not propose any amendment to the pleading so as to disclose a reasonably arguable cause of action. In these circumstances it is clear that the plaintiffs’ claims are incapable of success and must be struck out.
Result
[44] The defendants’ application to strike out the whole of the proceeding is granted. The proceedings are struck out and are therefore now at an end.
[45] As to costs, I am of the preliminary view, that having succeeded, the defendants are entitled to costs and on a 2B basis plus disbursements. If costs cannot be agreed, then memoranda are to be filed and served (no more than three pages) within 14 days.
Associate Judge P J Andrew
7 James Edelman, Simon Colton and Jason Varuhas McGregor on Damages (21st ed, Sweet & Maxwell, London, 2021) at [29-008] and the cases cited therein: Lion Nathan Ltd v C-C Bottlers Ltd [1996] 1 WLR 1438 at 1442, per Lord Hoffman; V Hutt Group Ltd v Nobahar-Cookson [2014] EWHC 3842 at 184; and Bir Holdings Ltd v Mehta [2014] EWHC 3903 (Ch).
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