Chen v Chen

[2014] NZHC 2788

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2013-404-3186 [2014] NZHC 2788

BETWEEN

YEN WEI CHEN and KUEI HUAN

CHEN Appellants

AND

SHAN HUA CHEN and WENG YUAN TSAO

Respondents

Hearing:	6 November 2014
Appearances:	G Collecutt for Appellants R Hesketh for Respondents
Judgment:	10 November 2014

JUDGMENT OF LANG J

This judgment was delivered by me on 10 November 2014 at 4.30 pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

CHEN v CHEN [2014] NZHC 2788 [10 November 2014]

[1]      This appeal concerns a dispute between two couples who agreed to undertake a joint venture to operate a suburban bakery and takeaway business.  The parties had been friends for many years.  Their decision to go into business together ultimately proved to be disastrous, and led to litigation in the District Court.

[2]      In  a  judgment  delivered  on  23  May  2013,  Judge  Hubble  directed  the appellants, Mr and Mrs Chen, to pay the respondents, Ms Chen and Mr Tsao, the sum of $29,750.1   That sum represented the bulk of the money that Ms Chen and Mr Tsao had paid to acquire a stake in the business.

[3]      Mr and Mrs Chen appeal against that decision on several grounds.   The primary ground of appeal is that the Judge failed to decide the case on the basis of the pleadings.   Because I have concluded that the appeal must succeed on that ground alone, I do not propose to consider the remaining grounds of appeal.

Background

[4]      Mrs Kuei Huan Chen is the owner of two adjoining retail premises in a small suburban  shopping  centre  in  Howick.    Until  May  2009,  she  and  her  husband operated a bakery business from one of the premises, and rented the other to a person who operated a takeaway business from it.

[5]      In May 2009, the parties agreed that they would join forces to operate both a bakery  business  and  a  takeaway  business  from  the  premises.     Unfortunately, however, they never recorded their agreement in writing and neither party obtained legal or valuation advice.

[6]      At joint expense the parties incorporated a company called Alligators Fast

Food Limited.   They took equal shareholdings in that company, and were also all directors.

1      Chen v Chen DC Manukau CIV-2010-092-5263, 23 May 2013.

[7]      Ms Chen and Mr Tsao were required to pay the sum of $32,500 in order to acquire a one-half share in the venture.  They duly paid Mr and Mrs Chen an initial deposit in the sum of $3,000, and then made another payment subsequently in the sum of $29,750.2   Mr and Mrs Chen used that money for their own purposes.

[8]      Both parties provided the company with the sum of $2,000 to provide it with initial working capital. The company then began operating the business.

[9]      The parties soon fell out, and this led to Ms Chen and Mr Tsao walking away from  the  business  a  short  time  after  it  opened.    Thereafter  Mr  and  Mrs  Chen continued  to  operate  the  business  without  their  input  or  assistance.     They subsequently sold the business to a third party

The Judge’s decision

[10]     The  focus  of  the  Judge’s  decision  was  on  the  nature  and  effect  of  the

agreement that the two couples reached when they decided to undertake the venture.

[11]     The only contemporaneous note that appears to have been made when the parties negotiated the transaction contains the following information:

Weng Yuan Tsao & Shan Hua Chen (purchaser) Yen-Wei Chen & Kuei-Huan Chen (Vendor)

75930062

The Deposit of purchase a Business

“Taiwan Bakery”
Attached a plant list

Address of business premises “4A Botany Road, Howick Total purchase price

$65,000 + G.S.T. + Stock
Half share = $32,500 + G.S.T.   + ½ stock

Deposit $3,000 only

Kuei-Huan Chen”

[12]     The parties disagree regarding the nature and effect of the agreement that they reached.  Ms Chen and Mr Tsao contend that both couples agreed to provide the new company with working capital to the value of $32,500.  Mr and Mrs Chen were

to provide their contribution by transferring their existing plant and equipment to the

2      This payment included the sum of $250 being their share of the cost of incorporating the company.

new company.  Ms Chen and Mr Tsao were to provide the company with cash in the sum of $32,500.

[13]     Mr and Mrs Chen have a different view.  They contend that Ms Chen and Mr Tsao agreed to purchase a one-half share in the existing bakery business.  The new company would then extend that business into the field of selling takeaways.  Under this scenario, the parties agreed that the existing business had a value of $65,000, and that Ms Chen and Mr Tsao would be required to pay the sum of $32,500 to Mr and Mrs Chen in order to acquire a half share in the business.  Mr and Mrs Chen claim that they were therefore entitled to retain the monies that Ms Chen and Mr Tsao paid to them.

[14]     The Judge found in favour of Ms Chen and Mr Tsao on this point.   As a result, he found that the funds Ms Chen and Mr Tsao were required to contribute to the venture were to be for the use and benefit of the company.  In using the money for their own purposes, Mr and Mrs Chen breached the terms of their contract with Ms Chen and Mr Tsao.  Having found in favour of Ms Chen and Mr Tsao on this point, the Judge considered that it was not necessary to go on to determine their remaining claims.

[15]     Before proceeding to determine whether the Judge decided the case outside the ambit of the pleadings, it is necessary to consider a preliminary point.   This relates to the final scope of the pleadings.

Preliminary issue: the pleadings in the District Court

[16]     Ms Chen and Mr Tsao commenced their claim in the District Court on 13

December 2010 by filing a notice of claim in the prescribed form.  This contained numerous allegations, including several based on alleged breaches by Mr and Mrs Chen of various provisions in the Companies Act 1993.  The District Court had no jurisdiction to deal with these aspects of the plaintiffs' claim, because the definition of “Court” in the Companies Act 1993 means that the High Court has exclusive

jurisdiction to determine all questions arising under the legislation.3

3      Companies Act 1993, s 2(1).

[17]     The remaining claims related to alleged misrepresentations by Mr and Mrs Chen, as well as alleged breaches of the Fair Trading Act 1986 through misleading or deceptive conduct.

[18]     On 20 April 2012, counsel for Ms Chen and Mr Tsao filed a memorandum seeking leave to file an amended notice of claim.   After reciting events that had occurred since the filing of the original claim, the memorandum went on to say:

a.      Alligators Fast Food Ltd (“the Company”) was incorporated on 22 May 2009.  From the outset, the Company operated a fast food and takeaway business (“the Business”).

b.      The  Plaintiffs  invested  $32,750  into  the  Company  as  their capital contribution.  This was the only capital invested into the Company as the Defendants, despite having agreed to invest a matching amount, did not make any capital contributions.

c.      On or about 1 June 2010, the Company purported to sell the

business to the Second Defendant (“the Sale”).

d.      The Sale occurred without the Plaintiffs’ knowledge or consent, and in contravention of the applicable provisions of the Companies Act 1993.

e.      In particular, despite the Sale being a major transaction, it was never put to a vote of the shareholders, and nor was the board of directors even invited to approve the Sale.

f.      Prior to the Sale the Defendants had forced the Plaintiffs out of their active involvement in the Business and excluded them from the management and financial affairs of the Company.

g.      The effect of this secret transaction was that the Defendants transferred the business to themselves without paying any monetary consideration.

h.      As a result, and despite being the only party to have invested capital, the Plaintiffs have lost their investment money and have been deprived of any share of the proceeds from the operation of the Business, or proceeds from its sale.

21.     The remedies that the Plaintiffs seek are:

a.      Pursuant to section 174(2)(b) of the Companies Act 1993, an order requiring the Defendants to pay compensation of not les than $32,750 to the Plaintiffs;

b.      Pursuant to section 174(2)(b) of the Companies Act 1993, a further order that the Defendants pay to the Plaintiffs 50% of all profits  earned  by  the  Company  (Alligators  Fast  Food  Ltd) during the period prior to its sale on 1 June 2010;

c.      A further order that the Defendants account to the Plaintiffs for one half of all profits earned by the Business during the period

1 June 2010 until such time as payment for the Business is made to the Plaintiffs (pursuant to item (a) above).

[19]     Clause 20 of the memorandum makes it clear that Ms Chen and Mr Tsao wished to file an amended notice of claim containing the allegations therein set out, and seeking relief under the Companies Act 1993 notwithstanding that such relief was  beyond  the  jurisdiction  of  the  District  Court.    For  that  reason  it  could  be expected that, if the application was granted, it would be on terms requiring the plaintiffs to file and serve an amended notice of claim within a specified period.

[20]     On  10  May  2012,  however,  a  Judge  minuted  the  file  “Notice  of  Claim amended as per memo filed by counsel for plaintiff.”  The Judge also directed that the defendants were to have ten days to file a Notice of Defence.   Given that the plaintiffs did not subsequently file an amended notice of claim, the Judge’s minute operated to amend the allegations contained in the original notice of claim to those set out in the memorandum of counsel dated 20 April 2012.  It follows that all of the issues pleaded in the amended notice of claim were beyond the jurisdiction of the District Court. This fact alone means that the Judge’s decision cannot stand.

[21]     In case I am wrong on that point, however, I will go on to briefly consider whether,  assuming the notice of claim remained in its original form,  the Judge nevertheless determined the case on a basis that was outside the pleadings.

Did the Judge decide the case otherwise than in accordance with the original pleadings?

[22]     As recorded above, the Judge determined the case on the basis that Mr and Mrs Chen breached the terms of their contract with Ms Chen and Mr Tsao because they retained the funds paid to them by Ms Chen and Mr Tsao when they should have paid those funds to the company.

[23]     The original notice of claim did not, however, contain any pleading to that effect.   Nor was any evidence given in relation to it during the hearing.   For that

reason Mr Collecutt submitted on behalf of Mr and Mrs Chen that the Judge had erred by determining the case on a basis that was outside the pleadings.

[24]     Mr Hesketh, counsel for Ms Chen and Mr Tsao, accepted that the issue of breach of contract was not expressly raised in the original notice of claim.   He pointed out, however, that the forms that were used in civil proceedings in the District Court at this time did not have the same degree of formality as those that are used in this Court.   He pointed out that the notice of claim squarely raised the existence of a contract between the parties, and submitted that the Judge was entitled to determine the case on the basis of his conclusion as to the nature of that contract.

[25]     This argument has superficial attraction, because the forms that were in use in civil proceedings in the District Court at this time were clearly designed to be less formal  than  had  previously  been  the  case.    In  the  end,  however,  pleadings  of whatever nature are primarily designed to identify the nature of the claim that a claimant is advancing.  This ensures that the opposing party understands the claim it must meet, and that the court decides the case on the basis that the parties have argued it.  It is therefore essential that cases are determined in accordance with the

pleadings that the parties have filed and rely upon at trial.4

[26]     The manner in which counsel for Mr and Mrs Chen defended the claim in the District Court also suggests he was not alert to the fact that the Judge might decide the case on the basis of breach of contract.  Had that been the case, one would expect him to have cross-examined Ms Chen and Mr Tsao with that issue in mind.  By way of example, he may have explored why they did not immediately challenge Mr and Mrs Chen when they discovered that their contribution had been used by Mr and Mrs Chen for their own purposes and not for those of the company.

[27]     The  approach  taken  by  the  Judge  also  potentially  gives  rise  to  other difficulties, particularly in relation to the issue of remedy.  He took the view that the breach of contract by Mr and Mrs Chen entitled Ms Chen and Mr Tsao to a refund of

their contribution to the venture.  It is at least arguable, however, that Ms Chen and

4      Otaki Tyre and Service Centre Ltd (in liq) v BVR Ltd HC Wellington CIV 2001-485-978, 11

December 2011 at [24].

Mr Tsao did not, directly in any event, suffer loss as a result of the breach of contract.  Rather, the company suffered the loss because it did not receive the funds it should have received from Ms Chen and Mr Tsao.

[28]     The Judge cannot be criticised for the approach that he took.   He had an unenviable   task,   because   he   was   faced   with   pleadings   that   were   highly unsatisfactory.  The fact that the parties were required to give their evidence using interpreters would also undoubtedly have added to the Judge’s difficulty in reaching conclusions on disputed issues of fact.  It is also likely, in my view, that the Judge was motivated by a desire to reach a practical and commonsense solution in order to do justice between the parties.

[29]     For the reasons I have given, however, those factors are not sufficient to prevent the appeal from succeeding.

Result

[30]     The appeal is allowed.   I make an order under s 76(1)(b)(i) of the District

Courts Act 1947 directing the case to be reheard in the District Court.

Costs

[31]     Mr and Mrs Chen have succeeded and would ordinarily be entitled to an award of costs on a Category 2B basis together with disbursements as fixed by the Registrar.  If the parties cannot reach agreement regarding this issue, their counsel may file brief memoranda (no more than three pages in length) and I will determine

it on the papers.

Lang J

Solicitors:

Prestige Lawyers Ltd, Auckland

Counsel: Shean Singh

R Hesketh