Clode v Sullivan
[2016] NZHC 1561
•8 July 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-2717 [2016] NZHC 1561
BETWEEN BRENT DOUGLAS CLODE
First Plaintiff
SYNERGY MANAGEMENT LIMITED Second Plaintiff
AND
MICHAEL GRANT SULLIVAN AND DUTHCO TRUSTEES (SULLIVAN) LIMITED AS TRUSTEES OF THE SULLIVAN FAMILY TRUST NO 1
First Defendants
DAVID ROBERT JANS Second Defendant
THOMPSON PARK TRUST LIMITED AS TRUSTEE OF THE THOMPSON PARK TRUST
Third Defendant
Hearing: 4-7, 11 April 2016 Appearances:
A M Swan for Plaintiffs
S C D A Gollin and M D Pascariu for Defendants
P T Finnigan for Second Defendant (appearance excused)Judgment:
8 July 2016
JUDGMENT OF PALMER J
This judgment is delivered by me on 8 July 2016 at 5.20pm pursuant to r 11.5 of the High Court Rules.
Solicitors:
MinterEllisonRuddWatts, Auckland
Duthie Whyte Solicitors, Auckland
..................................................... Registrar / Deputy Registrar
CLODE v SULLIVAN & ORS [2016] NZHC 1561 [8 July 2016]
Contents
Summary ................................................................................................................[1] The facts .................................................................................................................[2]
The players [2]
2006-2011: Jans and Sullivan [5] October to December 2011: Jans and Clode [6] December 2011-March 2013: Jans and Sullivan [10] March 2013 – May 2014: Jans and Clode Again [11] May 2014 – June 2014: Default and the PSAs [16] June 2014: Finding a funder [29] Friday 27 to Sunday 29 June 2014: Clode & Sullivan Interactions [36] Tuesday 1 July to Thursday 3 July: Clode and Sullivan Negotiations [42] Thursday 3 July 2014: The Settlement Agreement [58] July – December 2014: Aftermath and breakdown [60]
Overview of issues and submissions....................................................................[79] Issue 1: Did Mr Clode mislead Mr Sullivan into entering the Agreement?
Submissions [83] Relevant Law [85] Was Mr Clode “in trade”? [87] Did Mr Clode make a misrepresentation or an expression of opinion
on good faith? [88] Does Mr Clode have a defence of estoppel by convention? [102]
Issue 2: Did the Agreement include transfer of Unit 80 at no cost?
The parties’ submissions [105] The relevant law of contractual interpretation [107] Interpreting the Agreement [111] Rectification as an alternative [117]
Issue 3: Was the Agreement validly cancelled and, if so, by whom?
The parties’ submissions [123] The relevant law of repudiation, misrepresentation and cancellation [126] Did Mr Clode cancel the Agreement on 14 October? [131] Did Mr Clode’s conduct after entering the Agreement amount to
repudiation? [134]Was Mr Sullivan’s cancellation a repudiation? [147] Issue 4: What remedies should be granted? [150] Result..................................................................................................................[155]
Summary
[1] This case concerns a messy contractual dispute between Auckland property developers. Mr Brent Clode, the plaintiff, wants to be paid what he says he is owed under a Settlement Agreement with Mr Michael Sullivan. The Agreement was intended to settle Mr Clode’s claims relating to a property development at Thompson Park in Mt Wellington, Auckland. That allowed Mr Sullivan to purchase the development. Several issues arise:
(a) Mr Sullivan says he entered the Agreement based on a misrepresentation by Mr Clode. Mr Clode disagrees. I hold that Mr Sullivan did enter the Agreement on the basis of a misrepresentation by Mr Clode which breached the Fair Trading Act 1986.
(b)Mr Clode says the Agreement required a unit in the development to be transferred at no cost to him or, otherwise, the Agreement should be rectified to that effect. Mr Sullivan says the terms of the agreement do not say that although he acknowledges that is what the parties intended. I hold that the Agreement required transfer of the unit at no cost to Mr Clode.
(c) Mr Sullivan says Mr Clode repudiated the Agreement by his conduct after it was signed. Mr Clode says Mr Sullivan repudiated the Agreement by purporting to cancel it. Mr Sullivan says he was lawfully entitled to do so because of Mr Clode’s repudiation or misrepresentation. I hold that Mr Clode did not repudiate the Agreement and that Mr Sullivan was not entitled to cancel the Agreement on the basis of repudiation by Mr Clode but he was entitled to cancel it on the basis of Mr Clode’s misrepresentation.
(d)They both seek remedies. Under the Fair Trading Act I order that the Settlement Agreement has always been void and that Mr Clode must refund the $150,000 he was paid under the Agreement, with interest.
The facts
The players
[2] Mr Brent Clode, the first plaintiff, is a property developer and qualified structural engineer. He is the sole shareholder and director of Synergy Management Ltd, the second plaintiff. I refer to this current company, which was incorporated on
13 November 2012, as Synergy. Mr Clode had earlier been shareholder and director of a different company named Synergy Management Ltd which was renamed SM Litigation in March 2012 and removed from the Companies register in January 2014. I refer to that earlier company as SML. Mr Clode also had a beneficial interest in half of the shares in Thompson Park Holdings Ltd (TPHL). His former partner was Ms Joanne Cooper. Mr David Oliphant is a business partner of Mr Clode’s.
[3] Mr Michael Sullivan is a property developer and owner of a construction company, Clearwater Construction Ltd. He is one of the first defendants, as a trustee of the Sullivan Family Trust No 1 (the Sullivan Trust). The trustee who is the other first defendant is Duthco Trustees (Sullivan) Ltd. For convenience I refer to the first defendant as Mr Sullivan. He is a 50% shareholder and director in Box Property Investments Ltd (BPIL) with Mr Jans. As trustee of the Thompson Park Trust Mr Sullivan is also the sole director of Thompson Park Trust Ltd (TPTL), the third defendant. Mr Nigel Harrison, a solicitor with Duthie Whyte, acted for the trustees of the Sullivan Trust, BPIL, TPTL and, on occasion, for Mr Jans.
[4] Mr David Jans is a property developer, a valuer by profession, and the second defendant. He is an equal shareholder and director in BPIL with Mr Sullivan. He was also the director and sole registered shareholder in TPHL, incorporated in September 2013 and now in liquidation. He held half of the shares in TPHL in trust for Mr Clode. Mr Matthew Carson, a solicitor with Carson Fox, acted for Mr Jans and TPHL.
2006-2011: Jans and Sullivan
[5] In July 2006 BPIL, with Mr Jans and Mr Sullivan as its directors and shareholders, purchased a property at 8 Thompson Park Rd, Mt Wellington,
Auckland. The property comprised around 8,200 square metres of land and a building of approximately 3,500 square metres, used as workshop and office space. BPIL initially attempted to find commercial tenants for the property but in 2010 Mr Jans and Mr Sullivan decided to investigate its development as apartments.
October to December 2011: Jans and Clode
[6] Around October 2011 Mr Jans, with the knowledge of Mr Sullivan, asked Mr Clode to do some design work on the plans for the property for BPIL. Mr Jans says he asked Mr Clode to reconfigure the plans and Mr Clode produced a concept plan within two weeks. There is some dispute about the nature of the work. Mr Clode says he prepared a replacement apartment scheme of 110 units, rather than the previous 64 unit scheme, with an added fifth level, covered car parking and other improvements. Mr Sullivan says the ideas of adding a fifth level and other improvements had “already been floated” by Mr Jans and Mr Sullivan and Mr Clode’s involvement was “minimal”.
[7] In December 2011 Mr Clode and Mr Jans parted ways. Two chains of emails on 22 November 2011 and from 30 November 2011 to 15 December 2011 show that Mr Jans suggested Mr Clode receive 5% of gross profit less a development management fee for his ongoing involvement. Mr Clode proposed his company, SML, receive 10% of gross profit (which he calculated at $960,000) or 5% of gross profit and a $2,000 per week retainer for development management services. There was some suggestion by both Mr Clode and Mr Jans in their evidence that Mr Clode’s work to that point had already earned him a profit share. Mr Clode says that Mr Jans reneged on that when Mr Clode did not agree a profit share suitable to him.
[8] No agreement was reached. Mr Sullivan says Mr Clode’s expectations were “unrealistic” and Mr Jans says they were “unreasonable”. On 21 December 2011 Mr Harrison, on behalf of BPIL, advised Mr Clode that no binding contractual arrangements existed between the parties as at 7 December 2011 and negotiations were at an end. Mr Clode dropped out of involvement with the project, for a time.
[9] The correspondence shows that Mr Jans and Mr Sullivan understood Mr
Clode had been receiving an hourly consultancy rate of $200 per hour paid to his
company SML. In evidence are two invoices from SML to BPIL of 21 October 2011 and 11 November 2011 totalling $20,900 for “development management services” at
$200 per hour. Mr Harrison’s letter of 21 December characterised this rate as excessive but the invoices were paid. Mr Sullivan and Mr Jans say the invoices were from SML because Mr Clode was bankrupt at the time (from 12 February 2009 until
9 March 2012). Mr Clode says that, while it was agreed SML would be appointed as the development manager, the payments to SML were not for the apartment scheme he had created. In cross-examination Mr Clode said the payments to SML were for “development management services”. The parties did not agree what the payments to SML were for, other than for “development management services”.
December 2011-March 2013: Jans and Sullivan
[10] Planning by BPIL proceeded. In late August 2012 BPIL obtained a resource consent from Auckland Council to develop a 94 unit apartment complex. However, Mr Sullivan says that he was not satisfied development of the property was worthwhile because of expert advice he received that the construction cost would be in the range of $23-24 million. Similarly, Mr Jans’ evidence is that by 2013 his association with Mr Sullivan had come under pressure as they held different views as to the potential profit to be made from the development.
March 2013 – May 2014: Jans and Clode Again
[11] In March 2013 Mr Jans approached Mr Clode to become involved in developing the property again. In an email of 22 March 2013 Mr Jans acknowledged to Mr Clode that he had “a debt/obligation to you in the IP that you have bought [sic] to the project”. Mr Jans proposed that Mr Sullivan sell his interest in BPIL and Mr Jans enter, with Mr Clode, “a 50/50 partnership with adjustment for equity and tax losses at face value”. Neither Mr Clode nor Mr Sullivan were interested in working with each other.
[12] Mr Jans incorporated a new company, TPHL. On 24 September 2013 TPHL purchased the property from BPIL, including the work done to progress the development, at a price of $4 million. TPHL obtained funding of $3,650,000 by way of a loan from New Zealand Mortgages and Securities Ltd (NZMS) with a grant to
NZMS of a general security interest and a mortgage over the land. Mr Jans was guarantor. TPHL paid BPIL $3,412,023.04 leaving a debt of $188,750 owing from TPHL to BPIL. The balance was Mr Jans’ equity in BPIL which he left in the property under TPHL. Mr Sullivan’s involvement ceased. The transaction settled on
5 November 2013.
[13] Mr Clode’s evidence is that, as a recently discharged bankrupt, taking a role as director might “attract unwanted attention” so Mr Jans would be the sole director and would hold Mr Clode’s 50% shareholding on trust for him. Mr Jans’ evidence is that he agreed to hold 50% of the shares in TPHL on behalf of Mr Clode. On 24
November 2013 (according to Mr Clode), or in “early 2014” maybe March (according to Mr Jans), Mr Jans and Mr Clode signed a one page shareholders agreement, drafted by Mr Clode, to that effect. It purports to be witnessed by Ms Joanne Cooper, Mr Clode’s then partner. Mr Jans is adamant that did not occur in his presence.
[14] Mr Jans and Mr Clode undertook a lot of work in development of the property from September 2013. TPHL obtained a further resource consent for the development of 13 additional units in February 2014. Mr Clode says that the work he and Mr Jans did significantly increased the expected gross revenue for the project (from around $40 million to around $53 million).
[15] The evidence is that Mr Jans and Mr Clode took drawings, characterised as loans for tax reasons, from TPHL’s bank accounts as payment for the work they were doing on the development. Mr Jans believes Mr Clode’s drawings between November 2013 and May 2014 totalled $119,500 and his own were around $60,000. Mr Jans also suggests Mr Clode took other payments from TPHL’s bank accounts of some $51,000 for unrelated costs. Mr Clode’s evidence is that there were two distinctly different roles. One was development management and one was the creation and implementation of the intellectual property. Mr Clode says Synergy (as it was by this point) was partially remunerated for the former.
May 2014 – June 2014: Default and the PSAs
[16] TPHL was unable to secure funding to develop the property. On 20 April
2014 the loan fell due and on 8 May 2014 NZMS demanded repayment. NZMS then assigned its rights against TPHL to Dragon Private Capital Ltd (Dragon) around 3
June 2014.
[17] On 5 June 2014 Dragon served on TPHL a notice under s 119 the Property
Law Act 2007 (PLA Notice) demanding payment of $5,009,336.19 on or before 2
July 2014, otherwise its right to enter into possession of, and sell, the mortgaged land would become exercisable. In fact the statutory period expired on 3 July, which all parties seem to have understood and worked to.
[18] Mr Jans characterises this as a dire situation with huge pressure to find alternative financing. Mr Jans considers he was facing “a real prospect of bankruptcy” and was concerned that he might be liable if TPHL was trading while insolvent. He and Mr Clode scrambled to find funding to save the development.
[19] Mr Jans had fronted negotiations with BNZ, Kiwibank and ASB but none came to fruition. Mr Jans says BNZ told him they would not fund the project if Mr Clode was involved in it. Mr Clode disagrees. Kiwibank made an offer but withdrew it on 20 June 2014 when it became aware of Dragon’s PLA Notice and the default on the NZMS loan. ASB would not accept the estimate of development costs.
[20] To keep the development work going, Mr Jans borrowed $200,000 from his brother in law, Mr Roger Hills. Mr Clode procured a loan of $250,000 from his associate Mr David Oliphant in May 2014, guaranteed by Mr Clode and Mr Jans and secured by a caveat registered on 9 June 2014. Mr Clode proposed that TPHL should assign pre-sale contracts to Mr Oliphant. On 6 June 2014 Mr Clode emailed to Mr Jans a draft agreement to that effect based on a template draft deed of assignment and a draft general security agreement he received from Mr Carson, TPHL’s solicitor, that day. The final assignment to Mr Oliphant was dated 26 May
2014 by Mr Clode but both Mr Clode and Mr Oliphant accept it was likely signed on
8 June 2014.
[21] Mr Clode also proposed that the intellectual property in the development should be assigned to another entity. Mr Jans says that, also on 6 June 2014, Mr Clode asked Mr Jans to sign a Professional Services Agreement Mr Clode had drafted between Mr Clode, TPHL and BPIL (the Clode PSA). Under the PSA the parties:
(a) Noted that Mr Clode had provided development management and professional services from October 2011 to BPIL and TPHL for the development “without compensation”.
(b)Noted that Mr Clode “owns the concept, idea, copyright, design, engineering and methodology for the Project described as the intellectual property from inception of the Project”.
(c) Noted that “[t]he parties agree to record the ownership of the IP, payment for the IP and security provided by BPIL and TPHL to [Mr Clode] by way of this deed”.
(d)Agreed that the project had a profit margin of approximately $14.62 million plus GST, recorded in a valuation in August 2013 (that is not in evidence) and would not have been conceived or possible without the current and continuing IP.
(e) Agreed that TPHL will pay Mr Clode $5 million plus GST plus interest at 7% in consideration for the IP and items defined as “Material Contracts”.
(f) Agreed that the amounts owing to Mr Clode pursuant to the PSA were secured by a Deed of Assignment, signed at the same time, by way of mortgage of the Material Contracts.
[22] The Clode PSA and assignment were dated 23 September 2013. They were signed by Mr Jans for TPHL and BPIL and by Mr Clode. Mr Sullivan, although an equal shareholder and director in BPIL, was not aware of the PSA. All signatures
are purportedly witnessed by Ms Joanne Cooper. Mr Jans says she was not present at the time. Mr Clode does not accept that.
[23] There is also another PSA and accompanying Deed of Assignment (the Synergy PSA), that Mr Clode also drafted, between TPHL and Synergy (as it was by this point). Its terms are similar to those of the Clode PSA except that:
(a) Synergy (rather than Mr Clode) is said to own the IP;
(b)the development management and professional services are not said to have been provided without compensation;
(c) the deed is said to record the sale and security of the IP but not its ownership; and
(d) the $5 million was to be paid to Synergy (not Mr Clode)
[24] The Synergy PSA is signed by Mr Clode and, apparently, by Mr Jans though Mr Jans has no memory of doing so. It is witnessed by Mr Lance Gilbertson an associate of Mr Clode and, Mr Clode says, of Mr Jans.
[25] The Synergy PSA is dated 16 December 2013. Mr Clode’s evidence is that it was signed on or within a day of 8 June 2014. He says it was the first PSA. Mr Clode says he and Mr Jans dated the PSAs to reflect “a point where the ‘intellectual property’ I generated crystallised”. Mr Oliphant’s understanding is also that the stated date was when the PSA “became effective”. Mr Clode says 16 December
2013 was around the date he had reconfigured the 94 unit scheme to a 107 unit scheme. He says the Clode PSA came later and replaced the Synergy PSA, corrected to be in his name. He says it was signed on or around 23 June 2014 and that he and Mr Jans dated it to be 23 September 2013, just before the transfer of the land from BPIL to TPHL.
[26] Mr Jans says he did not properly read the PSA or discuss it with Mr Clode when he signed it. He says he and Mr Clode did not intend to give effect to the PSA. TPHL had no funds to do so. Mr Jans’ evidence is that Mr Clode said at the time
that “the Clode PSA would give us some leverage with Dragon if we backdated the document as we could ‘run interference’ with its intended mortgagee sale”. Mr Carson’s evidence is that, in requesting the template agreement, Mr Clode stated his intention was “to create running interference” to the anticipated mortgagee sale by Dragon. Under cross-examination, Mr Clode’s evidence was that he doesn’t use that language. However he then acknowledged he has used it in other documents put to him. Mr Clode said he couldn’t remember saying the PSA would give him and Mr Jans leverage against Dragon.
[27] Mr Clode’s evidence is that the PSAs were not shams and not intended to prevent a mortgagee sale taking place. Rather, he says the documentation was to protect his interest in the work he had created and “was always intended by me to be effective”. He accepts, as a non-lawyer, the legal definition of intellectual property may be different from the definition recorded in the PSAs. He says he was not concerned about the Dragon PLA Notice because the land value was $9.3 million plus GST which was more than enough to cover the Dragon debt. Mr Clode says he wanted a second ranking security interest protecting him if there were issues with other creditors. He says he explained all this to Mr Jans who was completely aware of it. He does not accept Mr Jans had not properly read the document and he does not accept that they had no intention to give effect to the terms of the PSA.
[28] The dates of both PSAs and assignments are prior to the general security agreement and mortgage entered into with NZMS and assigned to Dragon. As explained above, Mr Clode says the earlier dates reflect the point at which his intellectual property in the project crystallised.
June 2014: Finding a funder
[29] By mid June 2014 TPHL’s main contractor, Hughes Construction, ceased work as TPHL had been unable to obtain finance. Other creditors were also chasing payment of debts. At the end of June mezzanine funding of $2.65 million was obtained from Property Funding Services Ltd, at a high price and for a caveat on the property.
[30] If the development were to be pursued a new source of funding was required. The PLA Notice deadline was Thursday 3 July 2014.
[31] Mr Clode explored options with Mr Brian Hughes of Hughes Construction, Mr Tim Edney and Mr John Sax. Mr Jans met with Mr Hughes on Friday 27 June. Mr Clode met with Mr Edney the same morning. Mr Clode says that, on the evening of Saturday 28 June, Mr Edney agreed to fund the purchase of Dragon mortgage. There were further email exchanges between Mr Edney, Mr Clode, Mr Jans and Mr Hughes on Monday 30 June But Mr Clode says that at a certain point Mr Jans stopped engaging.
[32] In fact, by then, Mr Jans had already received an offer of help or, as he puts it, “a lifeline” from Mr Sullivan. Mr Sullivan, of course, had his own view of the development and says he was prepared to take a punt that he could develop it at a profit. He met with Mr Jans around 24 to 25 June 2014 and was apprised of the situation. Mr Jans provided Mr Sullivan with a valuation on Wednesday 25 June
2014. Mr Sullivan retained Mr Harrison on 26 June and, through him, established that Dragon would be willing to sell the debt and associated securities to the Sullivan Trust.
[33] In an email on the afternoon of Thursday 26 June 2014 Mr Sullivan proposed that his Family Trust purchase the development at a price that would settle the debt to Dragon and then clear the debts to Mr Oliphant and Mr Hills on establishing a full development funding facility. By the afternoon of Thursday 26 June TPHL’s solicitors, Carson Fox, were asking Mr Jans by email whether settlement with Mr Sullivan would occur on Friday or Monday. Mr Clode still didn’t know about the proposal.
[34] At a meeting on the morning of Friday 27 June Mr Jans advised Mr Clode about the proposed deal with Mr Sullivan. That morning Mr Sullivan and Mr Harrison were copied in to the previous day’s exchange and Mr Sullivan advised settlement would be Wednesday. Mr Jans met with Carson Fox that morning and instructed them to prepare an agreement for sale and purchase from TPHL to the Sullivan Family Trust.
[35] The same morning Mr Harrison, on behalf of Mr Sullivan, liaised with Mr Oliphant about his caveat over the property. Mr Oliphant advised Mr Harrison of Mr Clode’s 50% shareholding in TPHL. Later that afternoon Mr Jans forwarded Mr Sullivan’s emailed proposal to Mr Oliphant and Mr Hills and copied it to Mr Clode. Rather inconsistently with his instructions to Carson Fox, in another email that afternoon, Mr Jans also reassured Mr Clode that “the deal with Mike Sullivan is far from a done deal”. Mr Jans maintains that there was no contractual obligation at that point.
Friday 27 to Sunday 29 June 2014: Clode & Sullivan Interactions
[36] Mr Clode did not want to be part of the project if Mr Sullivan was involved (and the feeling was mutual). But Mr Clode had some bargaining chips, through his shareholding in TPHL and his PSAs. Interactions between Mr Clode, Mr Jans and Mr Sullivan ensued.
[37] At 1.45 pm Friday 27 June Mr Clode emailed Mr Jans with a proposal that in return for his shareholding he be paid $2 million (comprised of $250,000 on settlement, $750,000 from the first bank construction drawdown and the first $1 million profit). He noted that the sale of the property by TPHL could not take place without a major transaction resolution by the shareholders. Mr Oliphant forwarded the proposal to Mr Harrison and Mr Jans and Mr Jans forwarded it to Mr Sullivan.
[38] On Saturday 28 June Mr Sullivan asked Mr Jans about the share arrangement with Mr Clode, saying that Mr Clode “needs to be treated equitably which should be valued independently”. Mr Jans advised Mr Sullivan that the original intention that Mr Clode be entitled to 50% of the value added had morphed into Mr Jans holding
50% of the shares in TPHL on trust for Mr Clode and he did not have a copy of the documentation.
[39] On Sunday 29 June Mr Harrison asked for the “base document” on which Mr Clode was relying. Mr Clode did not provide any further documentation and left it to Mr Jans to explain. Mr Clode left his offer for purchase of his shareholding open until 10 am Monday 30 June.
[40] On Sunday 29 June 2014 Mr Jans advised Mr Sullivan of the alternative offer. In reply the same day Mr Sullivan thought that might crystallise the value of Mr Clode’s shares but suggested purchasing the mortgage from Dragon before they realised there was competition for it.
[41] To this point, Mr Sullivan had not responded to Mr Clode’s proposals, despite
Mr Clode’s deadline.
Tuesday 1 July to Thursday 3 July: Clode and Sullivan Negotiations
[42] Mr Sullivan says delivery of the PSAs and assignments on Tuesday 1 July
2014 triggered more serious negotiations with Mr Clode.
[43] On the morning of Tuesday 1 July Mr Oliphant provided to Mr Harrison a copy of the assignment of pre-sale contracts to Mr Oliphant as well as a copy of the Clode PSA and assignment. Mr Oliphant believes he did this in a visit to Mr Harrison’s office on Monday or Tuesday but Mr Harrison does not. In any case there is an email record of their provision on the Tuesday morning. Mr Clode’s evidence is that he asked Mr Oliphant to explain that the dates on the PSAs were not when they were signed but that they were signed in June 2014. Mr Oliphant also believes that, later (by phone) but before settlement, he told Mr Harrison the PSA and assignment were incorrectly dated, or that there was doubt about the date they were signed. Again, Mr Harrison does not believe Mr Oliphant said they were incorrectly dated but that he said they were dated with their intended effective date, which is what Mr Clode said in an email to Mr Harrison on 2 July 2014.
[44] At some time, probably during the negotiations but it is not clear when, a 3
October 2015 affidavit by Mr Harrison suggests that he became aware that the PSAs had been backdated.
[45] Mr Sullivan had known about Mr Oliphant’s loan and caveat but not of the PSAs. Mr Sullivan says the rights under the PSAs “had the potential to derail the development of the Property” as they affected obtaining finance for the development
and completing it in accordance with the contractual timetables with the purchasers. Mr Sullivan’s evidence is:1
I was extremely concerned about the implications that the Clode Assignment could have for the intended purchase of the Property. The material contracts referred to in that document included documents which were essential to completing the development and on its face, the Clode Assignment predated the Dragon securities which we were looking to purchase.
[46] That evening, Mr Clode emailed the Synergy PSA and assignment to Mr Harrison and copied it to Mr Jans and Mr Oliphant. He advised he would be entering into an agreement to sell the assignment at midday the following day should he not hear confirmation of his offer. At 8.54 am on Wednesday 2 July, by email to Mr Jans and Mr Harrison, Mr Clode withdrew his 27 June offer to sell his shareholding.
[47] Mr Jans had no recollection of signing the Synergy PSA or assignment and believed Mr Clode had created them. He emailed Mr Clode at 9.39 am Wednesday 2
July calling it a fraudulent document and threatening to refer it to the Police. Mr Clode’s email reply that day with eleven itemised points was similarly robust. He accused Mr Jans of: denying the existence of the shareholding agreement and the assignment to Mr Oliphant and the PSAs; accusing others of fraud in witnessing the PSAs; falsifying a personal equity contribution to TPHL; blackmailing Mr Clode to agree with Mr Sullivan; illegally and fraudulently attempting to sell Mr Clode’s shareholding in TPHL without his consent for his own profit; and “running interference” on confirmed refinancing options for TPHL to protect his own arrangements. Mr Clode threatened to lay a formal complaint with the Companies Office Enforcement Unit.
[48] On the same Wednesday Mr Jans and Mr Sullivan went to see Ms Cooper, Mr Clode’s then partner. Mr Jans was certain she was not present when he signed the documents. Ms Cooper told them the documents were signed when they were dated.
[49] Mr Sullivan was faced with uncertainty about the PSAs which he considered significant. He says there was no time to investigate their validity any further and he
1 Brief of Evidence of Michael Grant Sullivan in Reply at [29].
had to accept them at face value. Negotiations proceeded between Mr Sullivan and
Mr Clode through Mr Harrison and Mr Oliphant.
[50] Mr Sullivan says he was “forced” to offer Mr Clode around $1 million “because of the risk posed by his purported PSAs”. In the early afternoon of Wednesday 2 July Mr Sullivan outlined his assessment of the profitability of the development, attaching an assessment of project feasibility showing $7 million of profit as “the very best it will achieve with a lot of work and risk” and likely profit of
$5 million. The feasibility calculations were apparently developed by Mr Jans based on a document created by Mr Clode. This made its way to Mr Clode. Mr Sullivan says he made an offer on the night of 1 July but it is not now clear what that offer comprised.
[51] Later that Wednesday afternoon of 2 July 2014 Mr Clode made another offer
– to sell his 50% shareholding in TPHL and the “project IP” for $1,771,000
comprising
(a) $200,000 on settlement on 3 July;
(b) $350,000 from the first bank drawdown; and
(c) “[d]elivery of clear title” to unit 80 (valued at its asking price of
$505,000), unit 99 (at $475,000) and a studio unit (at $241,000) with associated carparks.
[52] Mr Oliphant forwarded the offer to Mr Harrison at 4.48 pm on Wednesday, noting that “25% of $7m is $1,750,000”. In return, at 6.30 pm, Mr Oliphant forwarded to Mr Clode Mr Sullivan’s counteroffer of two options:
(a) $1,120,000 (comprising $100,000 up front, $100,000 on first bank drawdown and Mr Clode’s choice of two apartments at $460,000 each); or
(b)$955,000 (comprising $100,000 up front, $250,000 on first bank drawdown and unit 80 at $505,000 and $100,000 on final settlement).
[53] On the morning of Thursday 3 July Mr Clode made a further counteroffer “to sell my 50% shareholding in Thompson Park Holdings Ltd (TPHL)” and “the project IP (established from 17 October 2011)” for $1,430,000, comprising:
(a) $150,000 on settlement on 3 July;
(b) $300,000 from the first bank drawdown estimated at one month;
(c) delivery of clear title to units 80 at $505,000, unit 99 at $475,000 and associated carparks; and
(d) sale of shares in Metro Property Ltd for $1.00.2
[54] Mr Sullivan says he still considered the price was unjustified but if Mr Clode’s claims could not be resolved, with the certainty required to take on the development of the project, there would be no point in proceeding further. Accordingly Mr Harrison sent, on Mr Sullivan’s behalf, a letter dated 3 July 2014 with one further counteroffer “to settle matters at issue” for a total of $1,055,000 comprising:
(a) $150,000 on settlement on 3 July;
(b) $300,000 from the first drawdown of funding for the project finance; (c) “entering into an Agreement for Sale and Purchase in normal form for
the development of Unit 80 at $505,000” with settlement after the
bank funding has cleared; and
(d) $100,000 on settlement of Unit 80.
[55] The letter also said “[w]e must record that we do not accept Mr Clode’s
claims in respect of shareholding and this is without prejudice to our client’s position”.
2 Mr Clode says Metro Property was a brand name TPHL was going to use to market the property and he wanted the right to use the name to incorporate a new company.
[56] Overwhelmed by stress, Mr Jans became very unwell on the afternoon of Wednesday 2 July and was hospitalised on Thursday 3 July, the date of Dragon’s deadline. Mr Clode says that, on receiving that news on 3 July he promptly settled his interests.
[57] Mr Clode accepted the offer in Mr Harrison’s 3 July letter. With that, they had a deal.
Thursday 3 July 2014: The Settlement Agreement
[58] On the evening of 3 July 2014 Mr Clode, Synergy, BPIL and Mr Sullivan and Duthco Trustees (Sullivan) Ltd as trustees of the Sullivan Family Trust entered into a Settlement Agreement (Agreement) hurriedly drafted by Mr Harrison “in about an hour” according to his evidence. The Agreement is reproduced in an Annex to this judgment. In summary:
(a) Recital A states that Mr Clode and/or Synergy “have carried out certain works” on the development.
(b)Recital B states that Mr Clode and Synergy have “claimed an interest in the development through TPHL”.
(c) Recital C states that the Sullivan Trust was acquiring the development
“and has agreed to settle all claims made by Brent and Synergy”. (d) Clauses 1 and 2 set out the $150,000 and $300,000 payments.
(e) Clause 3 states that “[t]he Sullivan Trust has instructed Messrs Duthie Whyte in writing to make the payments referred to in paragraphs 1 and 2 above from funds received”.
(f) Clause 4 states that “[t]he Sullivan Trust will cause an Agreement to be entered into for the sale of Unit 80 (including a carpark) for the sum of $505,000.00 (including GST)” on specified terms which included the $100,000 payment to Mr Clode on settlement.
(g) Clause 5 states:3
This Agreement constitutes a full and final settlement of all claims legal or equitable made by Brent and Synergy Management (and any related entities to Synergy or Brent) in respect of the development to be carried out at 8 Thompson Park Road (previously by Thompson Park Holdings Limited) and all claims in respect of equity or other interests, monies or requirements in respect of parties and in any way touching or concerning TPHL its shareholders and the development including and not by limitation forgoing any interest in the “Material Contracts” as defined in Deed purported to be dated 23
September 2013 and the deed between Synergy and TPHL.
(h)Clauses 6 to 8 dealt with the further execution by Mr Clode and Synergy of any documents reasonably necessary to give full effect to the Agreement as well as confidentiality and counterpart signatures.
[59] On Thursday 3 July 2014 the Trustees of the Sullivan Family Trust paid the
$5,145,400 million owed by TPHL to Dragon for the debt and securities. On 4 July
2014 Mr Clode was paid his $150,000. The other creditors of TPHL were also paid.
July – December 2014: Aftermath and breakdown
[60] The sale of the development by TPHL to TPTL settled on 22 July 2014.
[61] Mr Sullivan says that the development needed to be modified to be financially viable. The Trustees applied for funding on 25 August 2014. On 19
September 2014 ANZ provided a development facility agreement to the new development company, TPTL, to fund the project. However the information necessary to secure the funding only became available in November 2014. The concept plans had to be corrected, a new valuation prepared, and a Quantity Surveyor Report prepared. Mr Sullivan signed the facility on behalf of TPTL on 5
November 2014. The first drawdown under the development facility occurred on 2
December 2014. The funds were used to reimburse TPTL, and Mr Sullivan’s
construction company, Clearwater Construction Ltd, for payments they had made to progress the development.
3 The italicised words were added by Mr Clode in handwriting and initialled by all parties.
[62] Mr Clode did not receive his $300,000, Unit 80, or the $100,000 envisaged by the Agreement. Mr Sullivan says that soon after the Agreement was entered into, settling Mr Clode’s claims, Mr Clode “started making these claims again”:
(a) On 9 July 2014 Mr Clode emailed Mr Jans accusing him of “dishonest and deceitful conduct” in 11 itemised ways (and asserting the PSAs were signed on 10 June 2014).
(b)On 16 July 2014 Mr Clode asked Mr Jans to update the Companies Office share registry for TPHL to show his 50% shareholding. Mr Jans forwarded this to Mr Sullivan who forwarded it to Mr Harrison. Mr Sullivan says he was confused by this because his shareholding claim had been settled by the Agreement. Mr Harrison advised them that the Companies Register doesn’t recognise trusts and that Mr Clode had “waived/settled” his claim in the Agreement and suggested Carson Fox write back immediately. That apparently occurred the same day but the letter is not in evidence
(c) On 21 July 2014 Mr Clode replied to TPHL’s solicitors, Carson Fox, rejecting the notion “that the settlement deed entered into for my IP has anything whatsoever to do with my 50% shareholding in TPHL”. He asked for details of the sale of the property by TPHL without his consent. Mr Carson advised Mr Jans that the email did not deserve a response. Mr Sullivan says that he was beginning to wonder what his payment of $150,000 was for.
[63] Mr Sullivan’s advisers were considering the situation. In an email to Mr
Harrison on Thursday 17 July Mr Carson, acting for Mr Jans, said:
I note the settlement agreement does not state that Clode doesn’t pay for the unit, so inversely he does. I suggest that be sat on for the moment and used as leverage later.
[64] On 22 August 2014 Mr Carson advised Mr Harrison that Mr Clode’s PSAs were based on a template Mr Carson had emailed Mr Clode on 6 June. He also reiterated his view that the terms of the Agreement obligated Mr Clode to pay for
Unit 80. Mr Harrison’s email in reply noted that there were emails referring to the transaction but agreed that “it gives Clode another obstacle to get over and a considerable cost of enforcement”. Mr Sullivan, under cross-examination, accepted that the intent was that Mr Clode would not have to pay for Unit 80 but considered that was not what the Agreement stated.
[65] Mr Clode had expected the drawdown condition for the $300,000 payment would be satisfied in about a month from the 3 July Agreement. At the beginning of August he saw that Clearwater Construction had commenced construction and he had seen a letter from Mr Harrison to a contractor of the development advising the “financier” had approved payment. Accordingly, on 1 September 2014, Mr Clode wrote to Mr Harrison, requesting payment of his $300,000 under the 3 July Agreement, noting that construction on site had started and that “the Sullivan Trust is acting as project financier”.
[66] The first drawdown did not occur until December 2014 so the $300,000 payment was not due at this time, contrary to Mr Clode’s surmise. Mr Sullivan says that, by this point, he had started to have serious doubts about the legitimacy of the rights Mr Clode had claimed. By then Mr Jans had told Mr Sullivan that Mr Clode had advised his PSAs were backdated. Mr Sullivan decided to make further inquiries and obtain advice before responding. Mr Clode received no response to his demand.
[67] On the same day as Mr Clode’s demand for payment, 1 September 2014, Synergy invoiced TPHL for fees of $202,500 which Mr Clode says related to day to day business of TPHL that was unfinished business. He says the purpose of that invoice was to “neutralise the thought that the payments that were made to Synergy Management were loans which they are not because Synergy Management undertook value for that work”.
[68] Also, on 1 September, Mr Clode emailed Mr Jans and Mr Carson objecting to TPHL being placed in liquidation. He described the transfer of the development from TPHL to TPTL as a “voidable transaction” and advised that liquidation should not occur until all creditors had been paid. He noted that “in the event of liquidation
I will be a creditor and I will make this email available to all other creditors for
voting purposes”.
[69] On 2 September 2014 Mr Clode emailed Mr Jans, Mr Carson and Mr Harrison with a copy of the share register for TPHL. In response, the next day, Mr Carson emailed to say that any interest of Mr Clode was dealt with in the Agreement.
[70] On 11 September 2014 Mr Clode issued proceedings against TPHL for rectification of the share register. Mr Clode says the Court ended the application because TPHL was in liquidation.
[71] On 25 September 2014 Mr Clode served a statutory demand on TPHL for payment of $5 million relying on the Clode PSA. On 10 October 2014 TPHL applied to set aside the statutory demand on the basis of clause 5 of the Agreement, supported by affidavits by Mr Harrison, Mr Sullivan and Mr Jans. Mr Clode withdrew the application.
[72] On 14 October 2014, having still had no reply to his 1 September request for payment, Mr Clode again wrote to Mr Harrison. In a letter entitled “Notice of Cancellation” Mr Clode stated that the failure to pay the $300,000 was a “material breach” of the Agreement and that “I hereby cancel the Clode Settlement Deed effective today”. The same day he also advised Mr Harrison that he had filed substantive proceedings in the High Court, which he had.
[73] On 15 October 2014, Mr Harrison agreed to accept service of the documents and stated:
We will respond to your totally erroneous statements in your communication of yesterday purporting to cancel the Settlement Agreement dated 3 July
2014 in due course.
[74] Mr Clode replied the same day, seeking confirmation of whether the
$300,000 had been paid or not, in case it had mistakenly been paid to someone else. He received no response until 20 November 2014.
[75] Mr Sullivan formed the impression that Mr Clode had no intention to abide by the terms of the 3 July Agreement. On 20 November 2014 the new solicitors of the Sullivan Family Trust, Minter Ellison, wrote to Mr Clode. The letter:
(a) explained that the $300,000 was not yet payable because, as at 18
November, the first drawdown had yet to occur;
(b) referred to Mr Clode’s cancellation of 14 October and issuance of
proceedings against the Trustees;
(c) characterised those actions as repudiating the Agreement “by making it clear that you did not intend to perform your obligations under it”;
(d) and cancelled the Agreement, with immediate effect, under 7(2) of the
Contractual Remedies Act 1979.
[76] By letter also dated 20 November Mr Harrison made the drawdown request. [77] On 21 November 2014 Mr Clode replied to Minter Ellison by email
withdrawing his notice of cancellation, stating that there was no basis for the 20
November “attempted cancellation” and reserving his rights.
[78] At some point since April 2015, Unit 80 has since been sold to someone else.
Overview of issues and submissions
[79] This case involves a variety of aspects of contract law: interpretation; misrepresentation; repudiation; cancellation; rectification, damages and other remedies.
[80] Broadly, Mr Clode’s claim is:
(a) The Agreement required that Unit 80 be transferred to Mr Clode without payment.
(b) Mr Clode’s purported cancellation of 14 October 2015 was based on a
mistake and of no effect.
(c) Mr Sullivan wrongfully repudiated the Agreement on 20 November
2014 in purporting to cancel it.
(d)In response, Mr Clode validly cancelled the Agreement in pursuing these proceedings.
(e) Mr Clode seeks damages, and relief under the Contractual Remedies Act of $970,000 being the outstanding sums due under the Agreement and the sale value of Unit 80.
[81] Mr Sullivan opposes Mr Clode’s claim and counterclaims that:
(a) Mr Clode misled or deceived Mr Sullivan into entering the Agreement in reliance on Mr Clode or Synergy having proprietary rights in the development through the PSAs and assignments, when they did not.
(b)Mr Clode’s purported cancellation of 14 October 2014 was based on a mistake and of no effect. But Mr Clode’s other behaviour after the Agreement was entered into constituted repudiation of the Agreement.
(c) In response to Mr Clode’s repudiation, Mr Sullivan validly cancelled the Agreement on 20 November under the Contractual Remedies Act.
(d)Mr Sullivan seeks an order under the Fair Trading Act 1986 that the Agreement is void and Mr Clode should refund the $150,000 he received under it.
[82] I apply the relevant law to the facts in terms of four discrete issues in the chronological order in which they arose:
(a) Did Mr Clode mislead Mr Sullivan into entering the Agreement?
(b) Did the Agreement include transfer of Unit 80 at no cost? (c) Was the Agreement validly cancelled and, if so, by whom? (d) What remedies should be granted?
Issue 1: Did Mr Clode mislead Mr Sullivan into entering the Agreement?
Submissions
[83] Mr Gollin, on behalf of Mr Sullivan, submits that a reasonable person in Mr Sullivan’s situation would likely have been misled or deceived by Mr Clode’s representation that he and/or Synergy had proprietary rights in documentation which was a key to the development. He says those documents were shams and Mr Clode and Synergy had no such rights. Accordingly, he submits that Mr Clode engaged in misleading and deceptive conduct by representing Mr Clode and Synergy had rights in the development, including intellectual property rights, which breached s 9 of the Fair Trading Act 1986. He also submits that constituted a misrepresentation under the Contractual Remedies Act 1979.
[84] Mr Swan, on behalf of Mr Clode, submits that Mr Clode was not “in trade” for the purposes of the Fair Trading Act and that Mr Clode’s belief that he had rights under the PSAs were an expression of his opinion made in good faith, not a misrepresentation of fact.
Relevant Law
[85] Section 9 of the Fair Trading Act provides “[n]o person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive”. The leading judgment of the Supreme Court in Red Eagle Corporation Ltd v Ellis makes clear that:4
(a) “In trade” is “a broad term encompassing all kinds of commercial dealing by the party whose conduct is under examination”.
4 Red Eagle Corporation Ltd v Ellis [2010] NZSC 20, [2010] 2 NZLR 492 at footnote 13 and
[28].
(b)The test for misleading or deceptive conduct is objective – intention to mislead or deceive does not have to be shown. Neither does it have to be proved that the defendant was actually misled or deceived.
(c) Context is crucial, including the circumstances in which the conduct occurred and “the characteristics of the person or persons said to be affected”. The Court distinguished between a sophisticated businessman, a consumer and someone with intellectual difficulties.
(d)“The question to be answered in relation to s 9 in a case of this kind is accordingly whether a reasonable person in the claimant’s situation – that is, with the characteristics known to the defendant or of which the defendant ought to have been aware – would likely have been misled or deceived.”
(e) “If the conduct objectively had the capacity to mislead or deceive the hypothetical reasonable person, there has been a breach of s 9. If it is likely to do so, it has the capacity to do so.”
[86] In summary, under s 7(3)(a) of the Contractual Remedies Act, a party to a contract may cancel it if “he has been induced to enter into it by a misrepresentation, whether innocent or fraudulent, made by or on behalf of another party to that contract”. That will be so if, under s 7(4), the parties have expressly or implied agreed that the truth of the representation is essential to the cancelling party or the effect of the misrepresentation will be to substantially reduce to the benefit of the contract to, or increase the burden under the contract to, the cancelling party.
Was Mr Clode “in trade”?
[87] Mr Swan submits that Mr Clode was not “in trade” for the purposes of the Fair Trading Act because the transaction represented by the Agreement was a one off settlement and is not his trade. This argument does not stand up. Mr Clode was clearly “in trade” in the property development business. He entered into the Agreement in the course of his dealings.
Did Mr Clode make a misrepresentation or an expression of opinion on good faith?
[88] There is persuasive evidence that the PSAs and associated assignments were sham documents. They were concocted by Mr Clode when he and Mr Jans were in a “dire situation”, in Mr Jans’ words, facing the Dragon PLA notice which required repayment of some $5 million. Unless they were able to find alternative funding they would lose any return from the significant work they had put into the development to that point. The funding they obtained from Mr Hills and Mr Oliphant was not enough to prevent that.
[89] Mr Clode, rather impressively, drafted the PSAs and associated assignments on the basis of templates provided by Mr Carson. However, Mr Clode and Mr Jans differed in their views of their purpose. Mr Jans’ evidence, supported by Mr Carson’s evidence, that Mr Clode said the Clode PSA would give them leverage to “run interference” with Dragon’s intended mortgagee sale rings true. Mr Clode’s denial that he uses that phrase was rather undermined by proof that he does. And that purpose fits the timing and context in which the documents were generated. The Dragon PLA Notice was served on 5 June 2014. Mr Clode asked for and received the assignment template from Mr Carson on 6 June and emailed his draft to Mr Jans the same day. Mr Clode’s evidence is that the first PSA was signed around 8 June
2014. And the terms of the PSA do not match Mr Clode’s evidence of the means by which he would share in the profits of the development – by a 50% shareholding held on trust by Mr Jans.
[90] I find Mr Jans’ evidence that they did not intend to give effect to the documents is more credible than Mr Clode’s evidence that they were intended to provide Mr Clode with a second ranking security interest protecting him if there were issues with other creditors.
[91] The backdating and the witnessing of the documents does not boost their credibility. The Synergy and Clode PSAs and assignments were backdated to 16
December 2013 and 23 September 2013 respectively. There is no reason to doubt
Mr Clode’s evidence that that the Synergy PSA and assignment was signed around 8
June 2014 and the Clode PSA was signed around 23 June 2014. Mr Clode,
supported by Mr Oliphant, says they were backdated to the point in time at which the intellectual property in the project “crystallised” and just before the transfer of the development from BPIL to TPHL. Mr Clode acknowledges he may not be using the term “intellectual property” in its legal sense. But that purpose and timing lends weight to the suggestion that they were generated in order to throw a spanner in the works of a potential purchaser of the development, rather than representing genuine proprietary rights owned by Mr Clode and Synergy.
[92] I do not rely on Mr Jans’ lack of memory of signing the Synergy PSA. Human memory is fallible. But I do find Mr Jans’ positive assertion that Ms Cooper was not present when the Clode PSA was signed to be credible, compared with her assertion to Mr Jans and Mr Sullivan on 2 July that it was signed when it was dated. Everyone agrees the latter assertion was not true.
[93] Were the PSAs and assignments valid and enforceable? Mr Gollin submits, and I accept, that neither Mr Clode nor Synergy had copyright in any of the hand- written drawings Mr Clode had produced (and been paid for) on commission for BPIL, which were incorporated into plans by Creative Arch, and they had no other intellectual property (in the legal sense) in the development. And Mr Clode could not personally have had intellectual property rights arising from his 2011 work because he was bankrupt until 9 March 2012.
[94] Mr Clode was paid for his work done through Synergy by TPHL and his negotiations for a claim to a profit share for his 2011 work did not materialise. Those negotiations broke down. I do not find credible Mr Clode’s suggestion that he was not paid for his intellectual property. I reject the suggestion that was rectified by a backdated document drafted in June 2014 in the heat of a prospective mortgagee sale and signed without the knowledge of a director of one of the parties.
[95] That leaves Mr Clode’s submission that his view of the validity of the PSAs and the assignments were merely a statement of his opinion and that Mr Sullivan was a sophisticated business person, with legal advice and the opportunity to assess the claims. Indeed, Mr Swan goes as far as to submit that Mr Sullivan “knew that
the plaintiffs’ claims with regard to the PSAs were unproven, uncertain and without substance”.5
[96] It is true that an honestly held and reasonably based expression of opinion has been held not to be a misrepresentation for the purposes of the Contractual Remedies Act or the Fair Trading Act.6 But the representation by Mr Clode was not that his claims to the intellectual property in the development were uncertain. He was assertive in claiming they were valid as I demonstrate below. And he was in a better position to know than was Mr Sullivan. An integral element of his representation to Mr Sullivan must be taken to have been that Mr Clode knew of no reason why they would be invalid. Alternatively, which may amount to the same thing, I consider Mr
Clode’s asserted opinion that the PSAs and assignments were valid was not honestly
held and reasonably based.
[97] In Ben Nevis Forestry Ventures v Commissioner of Inland Revenue the
Supreme Court has set out the essence of a sham:7
In essence a sham is a pretence. It is possible to derive the following propositions from the leading authorities.8 A document will be a sham when it does not evidence the true common intention of the parties. They either intend to create different rights and obligations from those evidenced by the document or they do not intend to create any rights or obligations, whether of the kind evidenced by the document or at all.
[98] I am satisfied that the PSAs and associated assignments did not evince a true common intention on the part of Mr Jans via TPHL (in respect of both PSAs and assignments) and BPIL (in respect of the Clode PSA and assignment) to create or assign intellectual property rights to Mr Clode or Synergy. These documents do not
reflect the true nature of what the parties agreed. Instead, they were designed by Mr
5 Plaintiff ’s closing submissions at [50](d).
6 Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd [2015] NZHC 1444 at [184]-[186] citing Premium Real Estate Ltd v Stevens [2008] NZCA 82, [2009] 1 NZLR 148 at [51]. On appeal neither the Supreme Court nor the Court of Appeal took issue with Dunningham J’s discussion of misrepresentation. And see John Burrows, Jeremy Finn, Stephen Todd Burrows, Finn and Todd Law of Contract in New Zealand (5th ed, LexisNexis NZ Limited, Wellington,
2016) at 354-356.
7 Ben Nevis Forestry Ventures v Commissioner of Inland Revenue [2008] NZSC 115, [2009] 2
NZLR 289 at [33].
8 Snook v London and West Riding Investments Ltd [1967] 2 QB 786 (CA); Paintin and Nottingham Ltd v Miller Gale and Winter [1971] NZLR 164 (CA); and NZI Bank Ltd v Euro- National Corporation Ltd [1992] 3 NZLR 528 (CA).
Clode, and agreed to by Mr Jans, as a means of “running interference” with a potential mortgagee sale by Dragon. The PSAs and assignments meet the legal definition of a sham.
[99] Mr Clode negotiated with Mr Sullivan from 1 July to 3 July 2014 on the basis that he had valid intellectual property rights in the development. Whether or not Mr Sullivan was aware, through Mr Harrison, of the backdating of the documents is immaterial. Neither it is material whether both or only one of the PSAs were said to be valid. It is beyond argument that Mr Clode represented to Mr Sullivan that he had valid intellectual property rights (through both of the PSAs, and assignments, not just one) in the development. This is demonstrated by:
(a) Mr Clode’s emailing of the Synergy assignment to Mr Harrison on the
evening of 1 July 2014 and his threat to sell it the following day;
(b)Mr Clode’s email response on 2 July to Mr Jans who had characterised the Synergy PSA and assignment as fraudulent. Mr Clode described particulars of Mr Jans’ “dishonest and deceitful conduct”, in relation to the PSAs and assignments as:
Denying the existence of the assignment of the IP in TPHL
to me despite it being signed by you and witnessed on 10
June 2014;
Denying the existence of the assignment of the IP in TPHL to Synergy Management Limited despite being signed by you and witnesses on 10 June 2014;
Accusing Lance Gilbertson and Joanne Cooper of fraud in falsifying witness signatures to the deeds in [the above two and other] items herein;
(c) Mr Clode’s offers on 2 and 3 July to sell his 50% shareholding and the
“project IP” (the latter of which he described as “established from 17
October”).
(d) The terms of the Agreement itself which refers explicitly to the
Material Contracts “as defined in Deed purported to be dated 23
September 2013” and, added in handwriting by Mr Clode “and the deed between Synergy and TPHL”.
[100] I do not need to determine whether Mr Clode intended to mislead or deceive in negotiating with Mr Sullivan on the basis that the PSAs and assignments were valid. But, for the reasons canvassed above, I consider either Mr Clode must have known they were not or a reasonable person in his position would have known that.
[101] Neither do I have to determine whether Mr Sullivan was actually misled by the representation that the PSAs and assignments were valid. It is apparent that he had doubts about the authenticity of the documents, as evidenced by his visit to Ms Cooper with Mr Jans. But, on the day the Agreement was signed, Mr Jans was hospitalised. Mr Sullivan’s evidence, and that of Mr Harrison, is that in the time available he entered into the Agreement on the basis of their face value. Mr Sullivan’s evidence is that he would not have entered into the Agreement if it were not for the production of those documents. Under cross-examination he was adamant that “[w]e were never interested in offering Mr Clode one cent other than those PSAs.” Indeed, it is difficult to understand Mr Sullivan parting with $1 million other than by ascribing some material likelihood of validity to the PSAs and assignments. And his change of negotiating stance on 1 July when the PSAs were produced, from ignoring to actively engaging with Mr Clode, is clear evidence that it was the PSAs that made the difference. The validity, or likely validity, of the PSAs and assignments was essential to Mr Sullivan entering the Agreement at all.
Does Mr Clode have a defence of estoppel by convention?
[102] Mr Clode’s submitted defence of estoppel by convention is plainly unsustainable. This doctrine prevents a party to a transaction from going back on a common assumption. Mr Swan submits, on behalf of Mr Clode, that knowledge of the falsity of the assumption does not prevent estoppel. But the authority he cites states that “the rationale of estoppel is to prevent a party from going back in his word (whether express or implied) when it would be unconscionable to do so”.9 It does
not stay the effects of a contractual misrepresentation or the statutory intent of the
9 National Westminster Finance NZ Ltd v National Bank of NZ Ltd [1996] 1 NZLR 548 (CA) at
549.
Fair Trading Act. And it is most unattractive to deploy an equitable doctrine to try to do so in the circumstances here. Mr Sullivan cannot be taken to have shared a common assumption with Mr Clode about the validity of his rights in the development. The language of the Agreement itself reeks of unconfirmed suspicion. Finally, as Mr Gollin submits, s 5C of the Fair Trading Act provides that, except in circumstances in s 5D which do not apply, parties may not contract out of its obligations which is tantamount to what this submission is suggesting.
[103] I conclude that Mr Clode’s conduct in representing to Mr Sullivan that he had valid intellectual property interests in the development had the capacity, objectively, to mislead or deceive a reasonable person in Mr Sullivan’s situation. Accordingly I find that, by engaging in conduct that was misleading or deceptive, or likely to mislead or deceive, in trade, Mr Clode breached s 9 of the Fair Trading Act 1986.
[104] I also conclude that Mr Sullivan was induced to enter the Agreement by a misrepresentation made by Mr Clode as to the validity of the PSAs and assignments that was essential to Mr Sullivan and substantially increased the burden under the contract to Mr Sullivan. This satisfies the conditions for Mr Sullivan to cancel the Agreement under s 7(3)(a) of the Contractual Remedies Act.
Issue 2: Did the Agreement include transfer of Unit 80 at no cost?
The parties’ submissions
[105] Mr Swan submits, for Mr Clode, that the Agreement should be interpreted to mean that Unit 80 was to be transferred to Mr Clode without charge, as part of the Agreement. If he fails, his fall back is to seek rectification of the Agreement to reflect that meaning.10 The claim for rectification was added in the Third Amended Statement of Claim dated 16 March 2016 and filed 30 March 2016.11 It was
occasioned by discovery of the emails of 17 July 2014 and 22 August 2014 between
Mr Carson and Mr Harrison. Those solicitors appear to have assumed the mutual
10 At the outset of the hearing Mr Gollin, for Mr Sullivan, objected that Mr Clode had not pleaded his version of the interpretation of the contract, only rectification. Mr Swan, for Mr Clode, responded that if I were to agree that rectification was unnecessary because I agreed with Mr Clode’s interpretation of the Agreement, my judgment would no doubt say so. I ruled in favour of Mr Swan. As it turns out, the judgment does say so.
11 Clode v Sullivan [2016] NZHC 529.
intention was as Mr Clode claimed but suggested opposing the claim anyway to make things more difficult for him.
[106] Mr Sullivan’s position, up to and in his Amended Statement of Defence dated
3 April 2016, was to deny the mutual intention and to oppose the claim. At trial Mr Sullivan conceded that the mutual intention was that Unit 80 was to be provided to Mr Clode at no cost as part of his entitlement under the Agreement. However Mr Sullivan also stated that the terms of the Agreement do not say that. He submits rectification is not available to Mr Clode because:
(a) the contract has been cancelled and is no longer available for performance (depending on the outcome of Issue 3); and
(b) Mr Clode’s actions disentitle him from seeking such a discretionary
equitable remedy (which I address in Issue 4).
The relevant law of contractual interpretation
[107] There is an uneasy relationship between the law of interpretation of contracts and the law of rectification of contracts. In general terms, the law of equity developed rectification as a remedy for unfair effects of the old common law approach to interpreting the terms of a contract irrespective of context. The common law aimed to protect the integrity of written agreements. It interpreted a contract according to its expressed meaning irrespective of the parties’ intended meaning. This meant that contracts were sometimes interpreted to have a meaning the parties did not intend.
[108] Common law contractual interpretation has now loosened up to take context into account more than it used to do. The current law in New Zealand is stated by the Supreme Court in Firm PI 1 Ltd v Zurich Australian Insurance Ltd.12
Relevantly, in summary:
12 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60]- [63].
(a) “[T]he proper approach is an objective one, the aim being to ascertain
‘the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract’”.13
(b)The context “may point to some interpretation other than the most obvious one and may also assist in determining the meaning intended in cases of ambiguity or uncertainty”14 though there does not have to
be ambiguity.15
(c) But “the text remains centrally important” as its ordinary and natural meaning, construed in the context of the contract as a whole, “will be a powerful, albeit not conclusive, indicator of what the parties meant”.16
(d)In the interests of certainty, a more restrictive approach to the use of background might be justified if the parties are aware that their contract might be relied upon by a third party.17
(e) “[I]n interpreting commercial contracts the courts should have regard to their commercial purpose and to the structure of the parties’ bargain, to the extent that they can reliably be identified”, though there are “some dangers” in the approach.18
(f) If there is a “strong case”, persuading a court that something must
have gone wrong with the language,19 it is not required “to attribute to
13 At [60], citing Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1
WLR 896 (HL) at 912 per Lord Hoffmann. See also Chartbrook Ltd v Persimmon Homes Ltd
[2009] UKHL 38, [2009] 1 AC 1101 at [14] per Lord Hoffmann.
14 At [63].
15 At [61] citing Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at
[4] per Blanchard J, at [23] per Tipping J, at [64] per McGrath J and at [151] per Gault J.
16 At [63] and see [88].
17 At [62].
18 At [79].
19 At [88].
the parties an intention which they plainly could not have had”,20 and “a conclusion that it produces a commercially absurd result should be reached only in the most obvious and extreme of cases”.21
[109] In a footnote in Firm PI 1 Ltd, the Supreme Court noted the case did not raise any issue as to the admissibility of pre-contractual negotiations so it did not address that aspect of its previous decision in Vector Gas Ltd v Bay of Plenty Energy Ltd.22
In Vector Gas Ltd a majority of the Court decided a contract should be interpreted in light of “all the facts and circumstances known to the parties and likely to be operating on their minds”.23 The Court of Appeal subsequently summarised that as requiring consideration of the wider background and circumstances unless they go only to the subjective intention or understanding of the parties.24 Similarly, in i- Health Ltd v i-Soft NZ Ltd Asher J noted the consistency of that approach with relevance being required by s 7 of the Evidence Act 2006, usefully summarising the implications as:25
a)Exchanges in negotiations which construed objectively tend to establish background facts known to both parties are relevant;
b)Exchanges between the parties in negotiations which, construed objectively, cast light on meaning are relevant;
c)Material created by one party that relates to negotiations but is not communicated and relates to the subjective understandings and beliefs of that party is irrelevant.
[110] Since both cases, the Court of Appeal has endorsed reference to pre- contractual negotiations to establish background facts, known to the parties, in
ascertaining the meaning of the words used by the parties in the agreement.26
20 At [89].
21 At [93].
22 At footnote 42 citing Vector Gas Ltd v Bay of Plenty Energey Ltd, above n 15.
23 At [19].
24 Trustees Executors Ltd v QBE Insurance (International) Ltd [2010] NZCA 608 at [32]. To similar effect, see Arnold v Britton [2015] UKSC 36, [2015] AC 1619 at [15].
25 I-Health Limited v i-Soft NZ Ltd HC Auckland CIV 2006-404-7881, 8 September 2010 at [41].
As Toogood J noted in New Zealand Carbon Farming Limited v Mighty River Power Limited [2015] NZHC 1274 at [60], the Court of Appeal did not take issue with this summary on appeal. Neither did the Court of Appeal on appeal from Toogood J’s judgment.
26 New Zealand Carbon Farming Ltd v Mighty River Power Ltd [2015] NZCA 605 at [100].
Interpreting the Agreement
[111] Clause 4 of the Agreement is the clause relevant to Unit 80. Does it mean that Mr Clode’s payment for Unit 80 was part of the consideration under the Agreement or that he would have to pay separately for it?
[112] Clauses 1 and 2 set out two of the payments from Mr Sullivan to Mr Clode. Clause 4 states that the Sullivan Trust “will cause an Agreement to be entered into for the sale of Unit 80 (including a carpark) for the sum of $505,000.00 (including GST) on the following terms” which included “(d) Settlement of the transfer of title to Brent or nominee shall take place in terms of the settlement provisions contained in the Agreement but not before all Bank funding on the Units and development has been cleared”.
[113] I acknowledge Mr Oliphant’s evidence, as a former solicitor, that use of the phrase “settlement of the transfer of title” in clause 4(d), rather than “settlement of the purchase” is an indicator that separate payment was not envisaged. I also consider that the absence of a sub-clause providing when payment was to be made is an indication in the same direction. That is particularly so given that there is a sub- clause providing when a final payment by the Sullivan Trust was to be made: “[a]t the date of settlement of Unit 80”.
[114] In any case, applying the law as outlined to the facts as outlined, I agree with Mr Clode’s submission. It is quite clear that the objective meaning of the clause, interpreted in light of “all the facts and circumstances known to the parties and likely to be operating on their minds”,27 was that it included transfer of Unit 80 to Mr Clode at no cost to him.
[115] This is the clear implication of the exchanges in negotiations construed objectively. The value of Unit 80 was an integral element in what both sides understood Mr Clode was to receive under the Agreement as evidenced by the language used in the emails and the pattern of the overall total amounts under
negotiation. In the key series of offers and counter-offers on Wednesday 2 July:
27 Vector Gas Ltd v Bay of Plenty Energy Ltd, above n 15, at [19].
(a) Mr Clode’s offer on the afternoon of Wednesday 2 July explicitly
“totalling $1,771,000” included “delivery of clear title to units 80 at
$505,000, unit 99 at $475,000 and a studio unit at $241,000”.
(b)Mr Sullivan’s counter-offer in the early evening of 2 July of two alternatives either included:
(i) “Your choice of two of appmts. From nos. 45, 46, 47, 48 or
49” saying “These are in at $460k each so total = $1,120,000”;
or
(ii) “# 80 @ $505k” and “These total for $955k”.
(c) Mr Clode’s further offer on the morning of Thursday 3 July “totalling
$1,430,000” included “delivery of clear title to units 80 at $505,000, unit 99 at $475,000”.
(d)Mr Sullivan’s final offer, contained in Mr Harrison’s letter dated Thursday 3 July, which Mr Clode accepted, included “[e]ntering into an Agreement for Sale and Purchase in normal form for the development of Unit 80 at $505,000, settlement after the Bank funding has been cleared”. Although the letter did not say so, the amounts of all four elements of the offer totalled $1,055,000.
[116] The language and pattern of these pre-contractual negotiations lead inevitably to the conclusion that, viewed objectively, the parties’ common intention in signing the hastily drafted Agreement was that Mr Clode would not have to pay any additional amount for Unit 80. Its value was to be included in the consideration passing to him from Mr Sullivan. That informs the construction of the meaning of clause 4 accordingly.
Rectification as an alternative
[117] The conclusion I have reached on the interpretation of the contract means I
do not have to consider whether to rectify the contract. If I did have to do so I would
rectify it except for Mr Clode’s misrepresentation causing the Agreement to be
entered into in the first place. I consider that would militate against rectification.
[118] The courts of equity developed rectification as a discretionary remedy to give effect to an admission by a party, or equivalently clear extrinsic evidence, that a contract was intended to mean something other than its terms suggested. Rectification was used with caution, when it would be unconscionable for a defendant to succeed in arguing against an intention which there was strong
irrefragable evidence the defendant had held.28 Rectification therefore allows a court
to give effect to the “true bargain” according to common law principles of contract
formation.29
[119] The more contextual approach of the common law of contractual interpretation may mean recourse to rectification is less often required now although, as Professor David McLauchlan observes, it remains “one of the most practically important areas of the law of contract”.30 Furthermore, as Lord Neuberger commented recently, the effect of interpretation is to determine, retrospectively, the meaning and effect of a contract whereas a court may refuse rectification, for example due to delay, change of position or third party reliance.31
[120] The Court of Appeal has recently confirmed that the necessary elements of rectification identified by Tipping J in 1987 are still good law:32
(1) That, whether there is an antecedent agreement or not, the parties formed and continued to hold a single corresponding intention on the point in question.
(2) That such intention continued to exist in the minds of both or all parties right up to the moment of execution of the formal instrument of which rectification is sought.
28 F. Dawson, "Interpretation and Rectification of Written Agreements in the Commercial Court" (2015) 131 LQR 344, 347-48.
29 David McLauchlan, “Refining Rectification” (2014) 130 LQR 83 at 86. In England see also
Paul S Davies “Rectification versus interpretation: the nature and scope of the equitable
jurisdiction” (2016) 75 CLJ 62.
30 McLauchlan, above n 29, at 83.
31 Marley v Rawlings [2014] UKSC 2; [2014] 2 W.L.R. 213, at [40].
32 Westland Savings Bank v Hancock [1987] 2 NZLR 21 (HC) at 30, cited by Robb v James [2014] NZCA 42 at [21]-[22].
(3) That while there need be no formal communication of the common intention by each party to the other or outward expression of accord, it must be objectively apparent from the words or actions of each party that each party held and continued to hold an intention on the point in question corresponding with the same intention held by each other party.
(4) That the document sought to be rectified does not reflect that matching intention but would do so if rectified in the manner requested.
[121] Here, it follows from my analysis above that the parties formed and continued to hold a single intention as to whether additional payment for Unit 80 was required. It is objectively apparent that that intention continued to exist up to the moment of execution and, indeed, continues to exist now given the evidence of both Mr Clode and Mr Sullivan. If the Agreement, drafted on Mr Sullivan’s behalf, did not reflect that intention then it would do so if rectified in the manner requested by Mr Clode.
[122] However, rectification is a discretionary equitable remedy. I consider that Mr Clode’s misrepresentation, that causes the Agreement to be entered into in the first place, would militate against rectification.
Issue 3: Was the Agreement validly cancelled and, if so, by whom?
The parties’ submissions
[123] Both parties now appear to accept that Mr Clode’s purported cancellation of the Agreement on 14 October 2014 was not an effective cancellation in itself because it was based on a mistake. However, they differ on who validly cancelled the Agreement after that.
[124] Mr Swan submits, for Mr Clode, that Mr Sullivan wrongfully repudiated the Agreement in purporting to cancel it in his letter of 20 November 2014. He says that Mr Clode validly cancelled the Agreement in response, in pursuing these proceedings by filing the third (or perhaps the second) Amended Statement of Claim.
[125] Mr Gollin submits, for Mr Sullivan, that Mr Sullivan’s cancellation of the
Agreement of 20 November 2014 was valid because of Mr Clode’s repudiation of
the Agreement by his conduct after entering it and also because of Mr Clode’s
misrepresentation of his rights in, and securities over, the development.
The relevant law of repudiation, misrepresentation and cancellation
[126] Section 7 of the Contractual Remedies Act governs the circumstances in which a contract may be cancelled for breach, misrepresentation or repudiation. Section 7(2) governs cancellation for repudiation and provides, relevantly:
(2) Subject to this Act, a party to a contract may cancel it if, by words or conduct, another party repudiates the contract by making it clear that he does not intend to perform his obligations under it or, as the case may be, to complete such performance.
[127] The Supreme Court recently interpreted s 7(2) in Kumar v Station Properties
Ltd (in liquidation and in receivership):
(a) “[w]here a party manifests a clear intention not to perform” the innocent party may accept the repudiation, cancel the contract and sue for damages or it may insist on completion of the contract.33
(b)Repudiatory conduct “may related to the whole of the contract or to part of it”, based on the language of s 7(2).34 But partial repudiation “must constitute a contractual breach that is sufficient to entitle the innocent party to cancel in terms of ss 7(3) and (4)”.35
(c) Repudiation is a “drastic conclusion” and “[t]he evidence must show an unequivocal intention not to perform the contract”.36
[128] Section 7(3) governs cancellation for misrepresentation and breach and s 7(4)
requires that either performance is essential to the cancelling party or the effect of the breach is substantial:
33 Kumar v Station Properties Ltd (in liquidation and in receivership) [2015] NZSC 34, [2016] 1
NZLR 99 at [56].
34 At [57].
35 At [57].
36 At [58].
(3) Subject to this Act, but without prejudice to subsection (2), a party to a contract may cancel it if—
(a) he has been induced to enter into it by a misrepresentation, whether innocent or fraudulent, made by or on behalf of another party to that contract; or
(b) a term in the contract is broken by another party to that contract; or
(c) it is clear that a term in the contract will be broken by another party to that contract.
(4) Where subsection (3)(a) or subsection (3)(b) or subsection (3)(c)
applies, a party may exercise the right to cancel if, and only if,—
(a) the parties have expressly or impliedly agreed that the truth of the representation or, as the case may require, the performance of the term is essential to him; or
(b) the effect of the misrepresentation or breach is, or, in the case of an anticipated breach, will be,—
(i) substantially to reduce the benefit of the contract to the cancelling party; or
(ii) substantially to increase the burden of the cancelling party under the contract; or
(iii) in relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for.
(5) A party shall not be entitled to cancel the contract if, with full knowledge of the repudiation or misrepresentation or breach, he has affirmed the contract.
[129] The Supreme Court in Kumar reiterated its approach to essentiality:37
… to ask whether, unless the term in question was agreed at the time of contracting to be essential, the cancelling party would more probably than not have declined to enter into the contract. That question must be answered by an objective contextual appraisal which disregards what a party may unilaterally have said about its intention in that regard.
[130] The Court also raised the question of what approach should be taken to alleged repudiatory conduct based on a mistaken understanding of contractual
obligation:38
37 At [60], quoting Mana Property Trustee Ltd v James Developments Ltd [2010] NZSC 90, [2010]
3 NZLR 805 at [23].
38 At [63] (footnote omitted).
On this point, it is necessary to return to the fundamental question under s
7(2), namely, whether an inference can reasonably be drawn in the circumstances that the relevant party no longer intends to perform its
obligations under the contract. This fact-based assessment must be made
against the background that the threshold is a high one and that disputes about the meaning of contracts or the nature of the obligations they impose are commonplace. The mere fact that a party vigorously espouses a view of a contract’s meaning that is ultimately shown or accepted to have been wrong does not mean that the party is thereby manifesting an intention not to perform its obligations under the contract. If it is clear that the party accepts that it is bound by the contract, whatever meaning it is ultimately determined to have, the party should not be held to have repudiated the contract. By contrast, if a party persistently refuses to perform unless the other party accepts additional onerous terms inconsistent with the contract or on the mistaken view that there was never an enforceable contract, the party may well be found to have repudiated the contract. In such circumstances, the stance adopted amounts to a refusal to accept any obligation to complete the contract in accordance with its terms.
Did Mr Clode cancel the Agreement on 14 October?
[131] The parties now properly agree that Mr Clode’s purported cancellation of the Agreement on 14 October 2014 was not, itself, a valid cancellation. That purported cancellation was based on Mr Clode’s belief that the drawdown condition for his further $300,000 payment had been met. They had not.
[132] Mr Clode’s 1 September letter requesting payment had gone unanswered. His 14 October letter stated that the failure to make payment was a “material breach” of the Agreement and purported to cancel it on that basis. Mr Clode was requesting that the Agreement should be performed. He only purported to cancel it on the mistaken basis that his request had been refused. The following day he even sought further clarification as to whether the $300,000 had been paid, in case it had been mistakenly paid to someone else. Mr Clode was eventually informed, in the 20
November 2014 letter, that the $300,000 was not yet payable. The next day Mr
Clode withdrew his notice of cancellation.
[133] This conduct does not constitute “making it clear that he does not intend to perform his obligations under it”, in the words of s 7(2) of the Act. It justifies no reasonable inference that he no longer intended to perform its obligations under the
Agreement. Rather, as Mr Swan submitted, it is an assertion of a right claimed to be conferred by the contract.39
Did Mr Clode’s conduct after entering the Agreement amount to repudiation?
[134] Mr Gollin submits, for Mr Sullivan, that Mr Clode repudiated the Agreement by his conduct after entering it. With the purported cancellation of 14 October as context, Mr Gollin says that Mr Clode’s conduct made it clear he did not intend to perform his obligations under the Agreement. I deal with the behaviour said to constitute repudiation in convenient groupings and then assess their overall effect.
[135] Dealing with the last, and most straightforward event first, on 14 October
2014 Mr Clode issued these proceedings seeking judgment for $3.275 million for “his 50% of the shareholders’ funds in TPHL” and judgment for $5 million, the alleged value of his IP. But this does not constitute repudiation of the Agreement for the same reason as his purported cancellation does not. The proceedings were issued on the basis of the same mistake discussed above in Mr Clode’s purported cancellation of 14 October – that it was Mr Sullivan who was repudiating the Agreement by failing to perform it when required.
[136] What of Mr Clode’s steps in July and September 2014 in relation to his assertions of a continued shareholding in TPHL? On 9, 16 and 21 July 2014, Mr Clode sent three emails to Mr Jans and/or TPHL’s solicitor, Mr Carson, asserting his interest in 50% of the TPHL shares. In September 2014 Mr Clode sent an invoice to TPHL on 1 September, requested that TPHL not be liquidated on 1 September, requested TPHL to rectify the share register on 2 September, and issued proceedings to rectify the share register on 11 September 2014.
[137] The context for the September steps includes the letter by Mr Clode, also on
1 September, demanding payment of the $300,000 under the Agreement. This was based on his mistaken belief that the Agreement required that payment to be made.
The demand for payment suggests Mr Clode did intend the Agreement to be
39 Schmidt v Holland [1982] 2 NZLR 406 (HC) at 410 citing Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 WLR 277 (HL) at 283.
honoured. But do his emails and requests regarding his continued shareholding outweigh that?
[138] On analysis, I do not consider the requests and issuance of proceedings for rectification of the share register in July and September support a reasonable inference in the circumstances that Mr Clode no longer intended to be bound by the Agreement.
[139] Mr Clode made a particular point in his evidence of noting that Mr Jans and TPHL were not parties to the Agreement. I formed the impression that Mr Clode considered that, while the Agreement settled his claims against Mr Sullivan and BPIL, it did not transfer or end his beneficial shareholding in TPHL held by Mr Jans. His steps in September 2014, in the context of a demand for payment, are consistent with that belief. That is especially so when Mr Clode’s emails of 9, 16 and 21 July are considered. They were sent soon after the Agreement had been entered into and when Mr Clode was still anticipating the rest of his payment under the Agreement. In them, Mr Clode made clear his belief that he continued to hold 50% of the shares in TPHL and that his claim to being a shareholder had not been settled even if his right to oppose transfer of development had been settled. The solicitors for TPHL and Mr Sullivan, Mr Carson and Mr Harrison, clearly considered that mistaken, but Mr Clode’s belief to that effect was consistently asserted throughout.
[140] As noted above, the Supreme Court’s consideration in Kumar, of the implications of repudiatory conduct based on a mistaken understanding of contractual obligations, returns the inquiry to “whether an inference can reasonably be drawn in the circumstances that the relevant party no longer intends to perform its
obligations under the contract”.40 The Court noted that “the threshold is a high one
and that disputes about the meaning of contracts or the nature of the obligations they impose are commonplace”. Here I consider that Mr Clode’s conduct in asserting his perceived continued rights to a shareholding in TPHL fell into the category identified by the Supreme Court of “[t]he mere fact that a party vigorously espouses a view of a contract’s meaning that is ultimately shown or accepted to have been wrong does
not mean that the party is thereby manifesting an intention not to performs its
40 Kumar, above n 33, at [63].
obligations under the contract”.41 Throughout the period, up until 14 October 2014, Mr Clode was anticipating further payment under the Agreement. While Mr Sullivan and his advisers may have regarded his emails as unwelcome and mistaken, that does not mean he did not intend to honour the Agreement as he understood it.
[141] Clause 5 is the clause of the Agreement which records what claims Mr Clode was giving up – the obligations on him in settling his claims:42
This Agreement constitutes a full and final settlement of all claims legal and equitable made by Brent and Synergy Management (and any related entities to Synergy or Brent) in respect of the development to be carried out at 8
Thompson Park Road (previously by Thompson Park Holdings Limited) and all claims in respect of equity or other interests, monies or requirements in
respect of parties and in any way touching or concerning TPHL its
shareholders and the development including and not by limitation forgoing
any interest in the “Material Contracts” as defined in Deed purported to be dated 23 September 2013 [the Clode PSA] and the deed between Synergy and TPHL [the Synergy PSA].
[142] The language of clause 5 is wide. It specifically includes any interest in the “material contracts” defined in the PSAs which means what Mr Clode considered to be the “intellectual property” in the development. And it refers to TPHL, its shareholders and the development. But neither Mr Jans nor TPHL were parties to the Agreement and transfer of a shareholding is not mentioned. The legal subtlety of the clause is illustrated by Mr Harrison’s answer to my question of whether the Agreement was intended to purchase Mr Clode’s shares. He said that it wasn’t intended to purchase the shares but to settle the claim for the shares. I consider there is room in the terms of the clause for a layperson reasonably to think that Mr Clode had not abandoned his shareholding in TPHL.
[143] And, irrespective of the interpretation of the terms of the clause, that is the strong effect of the context of the pre-contractual negotiations. Mr Clode’s offers on the afternoon of Wednesday 2 July 2014 and on the morning of Thursday 3 July
2014 were to sell his 50% shareholding in TPHL and project IP. The email record of
Mr Sullivan’s responses is silent on that point. But Mr Harrison’s letter of 3 July, which is the offer Mr Clode accepted, explicitly recorded “we do not accept Mr
41 At [63].
42 The italicised words were added in handwriting by Mr Clode and initialled by all parties.
Clode’s claims in respect of shareholding and this is without prejudice to our client’s position”. So the meaning of the Agreement would not be interpreted by a reasonable person, having all the background knowledge reasonably available to the parties at the time of the contract, as effecting a sale and purchase of Mr Clode’s beneficial interest in 50% of the shares of TPHL.
[144] Perhaps, after the Agreement, it was not open to Mr Clode to exercise his rights as beneficial shareholder against Mr Jans who was a non-party to the Agreement. As Mr Gollin submitted, Mr Jans may have been able to invoke the protection of the Agreement under the Contracts (Privity) Act 1982. But, in July to September 2014 right through to being under cross-examination in April 2016, I consider that Mr Clode distinguished between an Agreement with Mr Sullivan not to oppose the development and the lack of an Agreement with Mr Jans regarding his shareholding. Mr Clode’s email of 21 July 2014 to TPHL’s solicitors distinguished between “the settlement deed entered into for my IP” and “my 50% shareholding in TPHL”. Mr Clode continued to make that distinction at trial.
[145] The action by Mr Clode which I consider comes closes to repudiation of the Agreement by conduct was on 25 September 2014. Mr Clode issued to TPHL a statutory demand seeking payment of $5 million owing under the Clode PSA. Assertion of the Clode PSA against Mr Sullivan is inconsistent with clause 5 of the Agreement. However, even this is consistent with Mr Clode’s understanding that neither Mr Jans nor TPHL were parties to the Agreement. I do not consider this one email alone, seen in context, meets the high threshold of a clear intention by Mr Clode not to perform the Agreement.
[146] Mr Clode’s behaviour after signing the Agreement was certainly aggressive towards Mr Jans and it may have been misguided. But I do not consider it made clear that Mr Clode did not intend to perform his obligations under it or to complete performance which is the test in s 7(2) of the Act. The evidence does not show the “unequivocal intention not to perform the contract” required by the Supreme Court. Accordingly, I do not consider it constituted the “drastic conclusion” of repudiation of the Agreement with Mr Sullivan.
Was Mr Sullivan’s cancellation a repudiation?
[147] The 20 November 2014 letter from Minter Ellison made it clear Mr Sullivan did not intend further to perform his obligations under the Agreement. No further payment was made to Mr Clode and Unit 80 was sold to someone else.
[148] Because I have found Mr Clode had not repudiated the Agreement, that was not a basis for Mr Sullivan to cancel the Agreement. However, because I found, in Issue 1, that Mr Sullivan was induced to enter into the Agreement by a misrepresentation, his cancellation was lawful under s 7(3)(a) of the Contractual Remedies Act 1979.
[149] Accordingly, I do not need to examine whether Mr Clode cancelled the Agreement in filing the amended Statements of Claim in this proceeding.43 (In case it becomes relevant for some reason, I would have found that he did.).
Issue 4: What remedies should be granted?
[150] I have found that:
(a) Mr Clode induced Mr Sullivan to enter into the Agreement on the basis of a misrepresentation.
(b)The Agreement should be interpreted, as Mr Clode submits, to include transfer of Unit 80 at no cost to Mr Clode.
(c) The Agreement was not repudiated by Mr Clode, either by his letter of
14 October 2014 or his conduct.
(d)Under the Contractual Remedies Act, Mr Sullivan was not entitled to cancel the Agreement on the basis of repudiation by Mr Clode but he was entitled to cancel it on the basis of misrepresentation by Mr
Clode.
43 Paragraphs 70-71 of the first and second amended Statements of Claim and paragraphs 60-61 of the third amended Statement of Claim.
(e) Mr Clode breached s 9 of the Fair Trading Act by the same misrepresentation.
[151] These findings entitle Mr Sullivan to remedies which I now consider. In one sense, Mr Sullivan’s lawful entitlement upon Mr Clode’s misrepresentation to cancel the Agreement, and not to be required further to perform it, is part of his remedy. But he also seeks:
(a) an order under s 43(3)(a)(i) of the Fair Trading Act that the Agreement was void from 3 July 2014;
(b) an order under s 43(3)(e) that the plaintiffs pay the first defendants the
$150,000 that they had paid the plaintiffs under the Agreement; and
(c) interest on the sum of $150,000 in accordance with the Judicature Act
1908.
[152] To rely on s 43(3)(a) of the Fair Trading Act Mr Sullivan has to show, according to s 43(1), that he has suffered loss “by conduct” of Mr Clode. This is the inevitable outcome of my findings above. Mr Clode’s representation that he had valid intellectual property rights in the development that he was willing to give up for compensation induced Mr Sullivan to enter into the Agreement.
[153] As Mr Gollin submits, s 43(3)(a) of the Act was the subject of welcome amendment in 2013 to remove an outdated latin phrase (void ab initio) while not changing the effect that the Agreement is able to be voided from the time into which it was entered.
[154] Since Mr Sullivan suffered loss from Mr Clode’s misleading and deceptive conduct (and contractual misrepresentation) I agree it is appropriate to make the orders he seeks.
Result
[155] I dismiss the plaintiffs’ claims. Under ss 43(3)(a) and 43(3)(e) of the Fair
Trading Act 1986 respectively, I order that:
(a) the Settlement Agreement of 3 July 2014 is, and was from 3 July
2014, void; and
(b)the plaintiffs must pay the first defendants $150,000 together with interest on that sum from 4 July 2014 in accordance with the Judicature Act 1908.
[156] I award costs to the defendants. If agreement cannot be reached on costs then the defendants have leave to file a memorandum within 20 working days of the date of this judgment and the plaintiffs have leave to file a memorandum within 10 working days of that.
Palmer J
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