Commercial Factors Limited v Scenic Hotel Group Limited
[2022] NZCA 300
•8 July 2022 at 10.30 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA495/2020 [2022] NZCA 300 |
| BETWEEN | COMMERCIAL FACTORS LIMITED |
| AND | SCENIC HOTEL GROUP LIMITED |
| Hearing: | 8 September 2021 |
Court: | Miller, Clifford and Courtney JJ |
Counsel: | P J Dale QC and A J Steel for Appellant |
Judgment: | 8 July 2022 at 10.30 am |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe cross-appeal is dismissed.
CThe issue of costs in the High Court is remitted to the High Court for determination.
DWe make no order as to costs on the appeal.
____________________________________________________________________
REASONS OF THE COURT
(Given by Courtney J)
Table of Contents
| Para No | |
| Introduction | [1] |
| Issues arising on appeal | [10] |
| A brief history of events | |
| Factors and Scenic begin negotiations and Factors acquires the hotel | [14] |
| Pacific begins trading | [21] |
| Factors exits the joint venture | [26] |
| Pacific continues to trade while the parties negotiate Factors’ exit terms | [31] |
| The case in the High Court | |
| The pleadings | [39] |
| Factors applies to join Pacific | [41] |
| The first High Court judgment | [45] |
| The judgment is recalled | [54] |
| The supplementary decision and final (reissued) decision | [56] |
| Issue 1: the finding of a joint venture between Factors and Scenic | |
| Did the Judge err in recording Scenic’s concession? | [59] |
| Did the pleading permit consideration of a joint venture? | [62] |
| Was the finding of a joint venture between Factors and Scenic open on the evidence? | [66] |
| Issue 2: the finding that Pacific was not indebted to Factors for $2.65m | [75] |
| Issue 3: relief | |
| Did the lack of any asserted breach preclude consideration of a declaration or an accounting? | [81] |
| Did the Judge err in declining to order the taking of an account of the joint venture? | [85] |
| Costs in the High Court | [91] |
| Result | [95] |
| Costs on appeal | [97] |
Introduction
In 1998 Commercial Factors Ltd (Factors) lent money under a debt factoring facility to a New Zealand company, with the advances guaranteed by the company’s owners. Some of the advances were used for the construction of a hotel on leasehold land in Tonga, which formed part of the security. The debtor defaulted. Factors eventually obtained judgment against the guarantors for NZ$5.731 million.[1]
[1]Unless otherwise specified, all amounts referred to are in New Zealand dollars.
The hotel represented the only means for Factors to recover its loss on the loan. One option was for Factors to acquire the leasehold of the hotel itself. But Factors had no experience in hotel ownership or management. Its sole director, Mr Terence Haydon, approached Scenic Hotel Group Ltd (Scenic) and proposed a joint venture to acquire and run the hotel. Scenic was interested and the parties began discussions about the basis on which Scenic might become involved. Scenic was represented in those discussions by one of its directors, Mrs Lani Hagaman, and its Managing Director, Mr Brendan Taylor.
After Factors obtained judgment against the guarantors in January 2011, it and Scenic began negotiating in earnest towards a joint venture to acquire and operate the hotel. The plan, broadly, was for Factors to acquire the leasehold of the hotel and sell it to a joint venture company owned by subsidiaries of Factors and Scenic incorporated for that purpose. Discussions proceeded on the basis of a sale price hotel of NZ$6.25 million.[2]
[2]This figure was based on a 2009 valuation on a going concern basis of Tonga Pa’anga (TOP) of $5.5 to 7 million with an allowance for the cost of bringing the hotel up to standard.
The plan would require a joint venture agreement between the subsidiaries, and a sale and purchase agreement between Factors and the joint venture company. The subsidiaries were incorporated.[3] The parties began to negotiate the terms of the joint venture agreement and the sale and purchase agreement. Factors purchased the leasehold of the hotel for $6.25 million. Negotiations continued. The joint venture company, Pacific Hotels Limited (Pacific), was incorporated.[4] Negotiations continued. Pacific occupied the hotel and began trading. Negotiations continued. By 2014, there were still no concluded agreements. Factors called time and ceased contributing to the hotel’s operating costs. Pacific continued to trade, funded by Scenic.
[3]Haydon 2 Ltd (Haydon 2), owned by Factors, was incorporated on 23 April 2010 and Scenic Hotels (International) Ltd (Scenic International), owned by Scenic, on 20 June 2011.
[4]Incorporated on 21 March 2012.
Negotiations as to the terms of Factors’ exit were unsuccessful. In 2016 Factors brought proceedings against Scenic. It asserted a joint venture between it and Scenic and wanted (among other things) an account taken of the joint venture’s affairs. Its principal allegation was that the joint venture was indebted to it for $6.25 million. Factors sought to have that amount credited to it in any accounting, specifically in relation to the respective shareholders’ advances to Pacific.
Scenic denied the existence of any joint venture between it and Factors and denied that it, or Pacific, was indebted to Factors for $6.25 million.
By the time the claim reached trial the hotel had been badly damaged by Cyclone Gita and Pacific was insolvent. However, Pacific held an insurance policy covering material damage to the hotel and business interruption cover which responded to the loss. Factors applied, unsuccessfully, to join Pacific into the proceeding in order to address the status of insurance claim.[5]
[5]Commercial Factors Ltd v Scenic Circle Hotels Ltd [2019] NZHC 568 [Interlocutory judgment] at [16] and [28(a)].
Osborne J delivered his judgment on 19 September 2019.[6] He found that a joint venture existed between Factors and Scenic between June 2011 and 26 March 2015 and made a declaration to that effect.[7] But he held that neither Scenic nor Pacific was indebted to Factors for the “intended purchase price” of the hotel, which was $6.25 million.[8] Initially, the Judge ordered the taking of accounts of Pacific as the joint venture vehicle on the basis that any insurance moneys be brought into account.[9] Subsequently, the Judge recalled that judgment.[10] In a supplementary judgment he concluded that an account was not appropriate because, by then, Pacific’s liquidation was inevitable and he considered that Pacific’s indebtedness to Factors was best determined in the context of the liquidation.[11] The judgment was reissued without reference to the taking of accounts and the only relief granted being the declaration as to the existence and duration of the joint venture.[12]
[6]Commercial Factors Ltd v Scenic Hotel Group Ltd [2019] NZHC 2370 [First judgment].
[7]At [244] and [251]. The Judge described the relationship as a pre-contractual joint venture. We consider the more apt description is an operating joint venture but, for convenience, refer simply to joint venture.
[8]At [242].
[9]At [265(b)].
[10]Commercial Factors Ltd v Scenic Circle Hotels Ltd [2019] NZHC 3243 [Recall judgment].
[11]Commercial Factors Ltd v Scenic Hotel Group Ltd [2020] NZHC 1868 [Supplementary judgment] at [40]. Pacific was ultimately placed in liquidation on 24 June 2021.
[12]Commercial Factors Ltd v Scenic Hotel Group Ltd [2019] NZHC 2370 [Final judgment].
Factors appeals and Scenic cross-appeals.
Issues arising on appeal
Factors supports the finding that the operation of the hotel created a relationship which, whether labelled as joint venture or partnership, gave rise to equitable obligations. It challenges the finding that Pacific was not indebted to it for $6.25 million (the proposed purchase price of the hotel); it asserts that the hotel, at that value, is properly viewed as a capital contribution by it to the joint venture and either owned by Pacific in equity or held by Pacific on a constructive trust for Factors. It says that the correct treatment of the hotel raises difficult questions that are not suitable for determination in the context of Pacific’s liquidation and that an account should be ordered.
Scenic says that the Judge’s finding of a joint venture between Factors and Scenic was not open on the pleadings and not supported by the evidence. It does not accept that Pacific is indebted to Factors in relation to the hotel itself — Pacific’s only indebtedness is to its shareholders, the subsidiary companies Scenic Hotels (International) Ltd (Scenic International) and Haydon 2 Ltd (Haydon 2), for advances made to meet operating costs. It also says that the Judge was not entitled to give relief in the form of a declaration as to the existence of a joint venture. Scenic supports the Judge’s conclusion that the issues between the parties are best resolved in the context of Pacific’s liquidation.
We approach the issues as follows:
(a)Was it open to the Judge on the pleadings and the evidence to find that a joint venture existed between Factors and Scenic? (cross-appeal)
(b)Did the Judge err in finding that Pacific was not indebted to Factors for $6.25 million for the purchase of the hotel? (appeal)
(c)Did the Judge err in his approach to relief, including by (1) making the declaration that a joint venture had existed; and (2) refusing to order an accounting between the parties? (cross-appeal and appeal)
In its amended notice of appeal, Factors also asserted error by the Judge in awarding costs to Scenic rather than to Factors or, alternatively, in not reserving costs pending an account being undertaken. In fact, although the final judgment invited the parties to file memoranda as to costs, it appears that no costs order was ever made. We therefore do not see this issue as raising a ground of appeal, though we do briefly comment on it later.
A brief history of events
Factors and Scenic begin negotiations and Factors acquires the hotel
Negotiations towards the joint venture proceeded on the basis that Factors would appoint a receiver, acquire the hotel from the receiver and sell the hotel to the yet-to-be-incorporated joint venture company. As noted earlier, the parties worked on the basis of a purchase price of $6.25 million. Factors would leave the purchase price in as vendor finance for an agreed period, after which the joint venture company would seek to refinance the vendor loan with a bank loan. The hotel would be managed under a separate contract by another Scenic subsidiary, Scenic Hotels (Tonga) Ltd (Scenic Tonga).[13]
[13]Previously named Scenic Circle (Kaikoura) Ltd.
By June 2011 the shareholder subsidiaries — Haydon 2 and Scenic International — had been incorporated. A draft sale and purchase agreement was produced showing a purchase price of $6.25 million and full vendor finance. Other aspects, particularly the interest rate and security to be provided for the vendor finance, were not yet settled.
On 8 April 2011 Factors appointed a receiver, Christine ’Uta’Atu. On 6 May 2011 Scenic Tonga entered into an interim management agreement with the receiver to manage the hotel for 90 days during the sale process.
There were numerous issues to resolve. These included the tax implications of the proposed structure, the application of Tongan law to the joint venture agreement and sale and purchase agreement, the exact terms of the vendor finance to be provided by Factors and the basis on which Scenic would be reimbursed for providing the management services. Consideration was also given to whether the ground lease could be extended. Also to be factored into the process was the requirement for Cabinet approval of the transfer of the ground lease from Factors to the joint venture company.[14]
[14]Under Tongan law, all land is owned by the Crown and the Cabinet of Tonga must approve the transfer of all land leases. See Land Act 1988 (Tonga), s 89.
In late June 2011, before Pacific had been incorporated and while negotiations were on-going, Factors successfully tendered for the hotel at $6.25 million. The purchase price was satisfied by off-setting the judgment sum that Factors had obtained against the guarantors under the debt factoring facility so no cash actually changed hands.
After Factors acquired the hotel, negotiations continued over the terms of the joint venture agreement and the sale and purchase agreement. Particular pressure points were whether the joint venture parties should be subject to a restraint of trade that would prevent either from embarking on another hotel venture in the area and Factors’ request for a general security agreement (GSA) to secure the vendor finance.
On 26 August 2011 Cabinet approved the transfer of the ground lease to Factors.[15] The receiver assigned the leasehold of the hotel to Factors. She also assigned the interim hotel management to Factors.[16]
Pacific begins trading
[15]The transfer was registered on 12 September 2011.
[16]The deed of assignment before the Court was executed by the receiver and Mrs Hagaman on behalf of Scenic Tonga.
Although the parties had not reached a final agreement on the terms of sale of the hotel by Factors to Pacific, plans proceeded for Pacific to assume the operation of the hotel. In April 2012 it began trading as Scenic Hotel Tonga. There was a formal opening ceremony on 25 July 2012, which was the date from which accounts were later produced showing Pacific’s trading position.
Mr Wass, for Scenic, confirmed that to the extent that there was anything to be done “on the ground”, it was done by Scenic Tonga at the direction of Scenic itself. Pacific was not paying a management fee to Scenic Tonga. Nor was it paying rent to Factors. The parties had agreed that neither would be paid until Pacific was in a position to do so. Operating expenses were shared between Factors and Scenic through Haydon 2 and Scenic International.
In practical terms, the funding was initially advanced by Scenic to Pacific and Scenic’s Group Finance Manager then sought repayment from Haydon 2 and Scenic International (which were, in turn, fully funded by Factors and Scenic). In addition, some expenses (insurance was given as an example) were paid directly by Scenic and then “recharged” through Pacific.
Throughout 2012 negotiations continued, unsuccessfully, toward a formal joint venture agreement and agreement for the sale of the hotel to Pacific.
In 2013 there were adverse developments in the Tongan tourism industry. The existing airline servicing Tonga, Air Chathams, ceased operations as a result of an agreement reached between the Tongan Government and China for the provision of a plane to a rival airline. The New Zealand Government warned against flying on the new plane because it was uncertified. Because the hotel was located close to the airport and relied to a significant extent on transit business, this was a significant concern. In late 2013 another issue arose. Scenic became interested in the opportunity to acquire another hotel in Nuku’alofa. This reopened the question of a restraint of trade clause, with Mr Haydon concerned about Scenic becoming involved in other Tongan hotels. Notwithstanding these problems the parties continued to negotiate.
Factors exits the joint venture
In June 2014 Mr Haydon called Mrs Hagaman to say that an opportunity had arisen for him to purchase another business. He talked about exiting the hotel venture and having Scenic buy him out. Mrs Hagaman was prompted to obtain an indicative assessment of the value of the hotel from Colliers, which had produced the 2009 valuation. In August 2014 Mr Haydon wrote to Mrs Hagaman, floating the idea of Factors continuing to fund the hotel for 10 years at 3 per cent interest, with the interest capitalised, and Scenic buying Haydon 2’s interest in Pacific for $2 million. Scenic’s response was negative. A few days later Colliers advised that its indicative assessment of the hotel’s value on a going concern basis was TOP2.5–$3 million, significantly less than what Factors had paid.
Mrs Hagaman responded to Mr Haydon’s email, commenting that “this is about the worst time for you to want to exit the partnership”, explaining:
… While we are building the business in line with the plan, it is still early days and financially the company will experience another couple of years of losses.
The recent assessment of the property value undertaken by [Colliers] would mean that any exit by you at this time would result in your equity (and ours) in [Pacific] having no value and you would need to write off a significant proportion of [the Factors] loan.
Mr Haydon responded that he was only “testing the water” as a result of the opportunity that had arisen in relation to the other business and concluded that as “there does not seem to be an acceptable way to exit for [Factors] and we have committed to Scenic and Tonga then that is our priority, to honour that commitment”.
Towards the end of 2014, however, Mr Haydon became increasingly concerned about the financial performance of the hotel. Mr Haydon questioned the financial reports being prepared by Scenic and in an email of 23 December 2014 Mrs Hagaman acknowledged that “numbers are very tight”, that Scenic was “watching every penny” but that the real problem was “a lack of bums in beds rather than an overrun of costs”.
Factors ceased contributing to the operating expenses, though did not give formal notice to Scenic or Pacific of its intention to do so. In early 2015, with Scenic’s Group Finance Manager signalling the need for further funding of Pacific, Mr Haydon advised that he would not make further advances and was withdrawing from the operation. On 26 March 2015, at a conference with Mrs Hagaman and Mr Taylor, Mr Haydon confirmed that Factors wanted to exit the venture.
Pacific continues to trade while the parties negotiate Factors’ exit terms
Efforts to negotiate a satisfactory exit arrangement were unsuccessful. During those negotiations the parties took differing positions regarding the status of the joint venture and of the hotel. Notwithstanding Colliers’ indicative assessment of the hotel’s value at TOP2–3 million, Factors strongly maintained its view that Pacific was indebted to it for $6.25 million. It was obvious that Pacific was not in a position to repay that amount. Factors was prepared to either leave the amount with Pacific as vendor finance or see the hotel sold at market value. In the latter case, however, it would require the loss to be treated as a loss to Pacific and shared between the shareholders, Scenic International and Haydon 2.
At a meeting in August 2015 Mrs Hagaman asserted that Pacific was the owner of the hotel and controlled the right to decide whether to sell it or not. At trial and on appeal Factors relied heavily on these statements. However, we view statements about the legal position of the parties, made by a lay person in the context of negotiations, as of little probative value. Further, they are inconsistent with the fact that the negotiations continued on the basis that a sale to Pacific was yet to be concluded.
From March 2015 Pacific continued to trade supported by Scenic. Mr Haydon’s agreement to the placement of insurance was sought as his consent in his capacity as a director of Pacific was needed. Otherwise, however, Factors played no part in the hotel’s operations. Nor did it seek rent for Pacific’s ongoing use of the hotel. Factors was not provided with any financial or other reports relating to the hotel after March 2015.
A formal valuation of the hotel by Colliers, on a going concern basis as at April 2015, was TOP2.5–3.5 million. There were several reasons given for the significant drop in value since 2009. Some were related to the market — the ongoing impact of the Global Financial Crisis had affected visitor forecasts, the departure of Air Chathams had affected tourism and the impact of a newly refurbished hotel in Nuku’alofa. Others were specific to the hotel itself — the ground lease had only 28 years to run, there was extensive deferred maintenance and the hotel was underperforming.[17]
[17]Factors and Scenic cooperated in an initial effort to negotiate a new lease for 50 years but did not pursue it because of the price sought by the owner.
In February 2018 the hotel was badly damaged by Cyclone Gita. Scenic had continued to insure the hotel in Pacific’s name for material damage and business interruption and the policy responded to this event.[18] Inexplicably, Scenic did not advise Factors of either the damage or the insurance claim. In January 2019 the insurer made an offer of TOP5,032,644 (approximately $3.3 million) in settlement of both material damage and business interruption claims. Most of this related to the material damage claim and the insurer made an interim payment of TOP1,575,299.31 (the equivalent of $1 million) towards the material damage claim. Still Scenic did not advise Factors.
[18]First judgment, above n 6, at [14].
In early 2019, without advising Factors, Scenic closed the hotel and removed the hotel’s chattels to New Zealand.
Factors finally learned of the cyclone damage, the insurance claim and the closure of the hotel in March 2019, during preparation for trial. The interim insurance payment is being held on trust; entitlement to the insurance moneys are the subject of separate proceedings in which Factors claims, in reliance on the Judge’s finding of a joint venture and declaration to that effect, that it is entitled to the funds.[19]
[19]The pleadings in the insurance proceedings were not before us.
Factors subsequently sold the hotel at a nominal amount, which Mr Dale QC, for Factors, described as a “fire sale”.[20]
The case in the High Court
The pleadings
[20]Mr Dale thought the sale price was either $100,000 or $65,000.
In its third amended statement of claim, Factors set out details of its negotiations with Scenic towards a contractual joint venture, the events leading to its withdrawal of further funding and subsequent efforts to negotiate the terms on which the parties would disengage. It asserted that it was owed $6.25 million, plus interest, by the joint venture and had contributed a further $2,198,665. It referred to Scenic’s contributions during the course of the joint venture as $1,737,957.16 and noted Scenic’s claim to have contributed a further $1,848,208.32.
Factors pleaded three causes of action — estoppel, breach of concluded joint venture agreement and “partnership”. The first cause of action, in estoppel, failed. It has no relevance to the issues arising in the appeal. The second cause of action rested on the assertion of a concluded joint venture and alleged that Scenic was in breach of the terms, including by refusing to acknowledge that Factors was entitled to an adjustment between the parties to reflect Factors’ greater contributions. A declaration and an enquiry into Factors’ losses were sought. The third cause of action repeated the same allegations and asserted that the parties had “entered into a partnership for the purchase and operation of the Hotel”. Factors pleaded the dissolution of the partnership and sought declarations as to the partnership and its dissolution and an order for the taking of accounts of the partnership.
Factors applies to join Pacific
The trial was set down to begin on 1 April 2019. On 4 March 2019, Factors received Mrs Hagaman’s brief of evidence, together with further discovery. From these documents it learned, for the first time, of the cyclone damage more than a year before, the insurance policy in Pacific’s name and the insurer’s offer of approximately $3.3 million. Further enquiries revealed that Mrs Hagaman was in negotiations with the insurer in her capacity as a director of Pacific.
Factors applied to join Pacific as a defendant and amend its pleadings.[21] Initially, Factors proposed to seek Pacific’s liquidation. After opposition on the ground that joinder was unnecessary because Scenic International would agree to liquidation, Factors asserted that liquidation should be treated as a last resort to preserve tax losses available to the shareholders. It maintained the application for joinder on the basis that the question of liquidation should be left until the conclusion of the proceeding when the Court would be familiar with the issues between the parties.
[21]Factors also sought to join Haydon 2 as a plaintiff but that aspect is not relevant to the appeal.
The Judge refused the joinder application.[22] He considered that the liquidation application would necessitate an adjournment of the trial, which was undesirable given that the case related to events then some 10 years old and the relief was sought partly on equity and conscience.[23] Further, he thought that Mr Haydon’s wish to effectively park the liquidation application demonstrated that any liquidation application should be pursued separately.[24]
[22]Interlocutory judgment, above n 5, at [16] and [28(a)].
[23]At [16].
[24]At [17].
With hindsight, it can be seen that it was an error not to join Pacific into the proceeding. On any view of the case, Pacific was a joint venture vehicle, and the only substantial asset of the asserted joint venture was represented by the insurance claim. The parties’ respective positions would have been better served dealing with that issue in the context of the existing proceedings.
The first High Court judgment
In his judgment, delivered on 19 September 2019, the Judge recorded Mr Dale’s opening submissions on behalf of Factors:[25]
…
47.The plaintiff has pleaded that the terms of the joint venture agreement were actually agreed. However it recognises that the parties also agreed that those terms were to be reduced to writing and that the parties would not be bound until they had been signed. It does not follow that there is no joint venture.
…
50.The plaintiff says that consistent with the remarks of Tipping J [in Chirnside v Fay] … the test is whether the parties reached a point where they had a common objective. Those negotiations were all between [Factors] and Scenic, and it is those parties which the plaintiff says form the joint venture entity.
…
52.Alternatively, if the Court concludes that the failure to execute the documents means there is no [joint venture] or partnership, it is still open to find in the estoppel cause of action that [Factors] relied upon Scenic’s assurances in committing to buy the hotel, would not have done so but for those assurances, and that it has suffered loss as a consequence.
(Footnote omitted.)
[25]First judgment, above n 6, at [141].
The Judge held that the parties had not reached a binding contractual arrangement by 24 June 2011, when Factors tendered for the hotel.[26] Nor had they resolved outstanding material terms so as to reach a concluded joint venture agreement at any point thereafter.[27] In relation to the second cause of action, the Judge considered that, to the extent the assertion of a “concluded joint venture agreement” was correctly read as a cause of action in contract, it would fail for that reason.[28] In relation to the third cause of action the Judge held that the lack of any concluded contractual arrangement meant that a cause of action based on the assertion of a contractual partnership must also fail for that reason.[29] There is no challenge to either finding.
[26]At [191].
[27]At [191].
[28]At [221].
[29]At [229].
The Judge then turned to consider the possibility of a joint venture of the kind described in Chirnside v Fay — a joint venture without any contractual basis — between Factors and Scenic.[30] He prefaced his findings with observations about the “seismic shifting of the ground upon which [Factors] based its case” between its initial pleading and the trial.[31] He noted that in 2016 Pacific was still running the hotel and appeared viable, with Scenic’s ongoing support, though this would become increasingly difficult, given the substantial advances needed for ongoing trading and the unresolved issue of the terms on which Factors would exit the undertaking. By the time the case came to trial the hotel had been closed and Pacific had no ongoing prospects.[32] The Judge made the following observations:
[242] At that point, [Factors’] aspiration of making (through this litigation) a significant recovery effectively disappeared, unless it had a right of action in contract against Scenic (which I have found it does not). For completeness, I record that neither is the joint venture vehicle, [Pacific], indebted in contract or otherwise to [Factors] on account of the intended purchase price on the sale of the hotel to [Pacific]. It never entered into such a contract to purchase. In any event, [Factors] chose in this proceeding not to sue [Pacific] with the consequence that even had I found (contrary to the finding I have made) that [Pacific] had become contractually indebted to [Factors] on account of the intended purchase price, relief in that regard could not be granted in this proceeding against [Pacific].
(Emphasis added.)
[30]At [232], citing Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [91]–[93] per Blanchard and Tipping JJ.
[31]At [238].
[32]At [240]–[241].
The Judge went on to conclude that:
[244] … a pre-contractual joint venture came to exist between [Factors] and Scenic no later than June 2011 when [Factors] was successful in its tender for the hotel. The context giving rise to the parties’ mutual obligations was that they were working towards the hotel being purchased with the intention that that joint venture vehicle would buy the hotel from [Factors], [Factors] would become a mid-term financier of the [joint venture] company, and the [joint venture] company would be operated for the mid-term with a view to establishing its financial viability to the point [Factor’s] advances could be repaid. The parties then formed the [joint venture] company and caused the [joint venture] company to begin its operations, incurring the costs of re-establishing and then operating the hotel at significant cost to each shareholder entity.
[245] In terms of Chirnside v Fay, a relationship of trust and confidence thereby arose, with each party entitled to expect from the other loyalty to the joint cause. Neither was thereafter entitled to act solely in its own interests.
The Judge also determined the situation after Factors had ceased to contribute to the hotel operation. He recorded that it was common ground that the relationship between Factors and Scenic had come to an end.[33] He referred to Mrs Hagaman’s evidence that, as no documents had been signed, Mr Haydon could withdraw and if necessary the whole venture (including Pacific) could be wound up, but that Pacific would be insolvent without ongoing funding and she wanted to preserve the value that had been built up and not risk damaging Scenic’s reputation.[34]
[33]At [248].
[34]At [249]–[250].
The Judge found that the joint venture terminated with effect from 26 March 2015 and after that date “the decision to continue to fund [Pacific] was, on Mrs Hagaman’s own evidence, a decision taken in the interests of Scenic and not directly in the interests of the previously jointly-interested two parties”.[35] The findings are not under challenge.
[35]At [251].
The Judge indicated that he would make a declaration reflecting his finding as to the existence and duration of the joint venture and explained that:
[253] The consequence of that declaration is that [Factors] and Scenic are entitled to be brought into account in the accounts of [Pacific] the contributions made up to 26 March 2015 by or on behalf of Haydon 2 and [Scenic International] respectively. But for the period after 26 March 2015, when Scenic continued to fund [Pacific] for the reasons stated by Mrs Hagaman in her evidence, Scenic was no longer funding [Pacific] as a joint venture vehicle and will have no entitlement to bring the contributions made after 26 March 2015 into account.
The Judge then turned to consider whether the taking of an account should be ordered. Relying on the statement in Chirnside that termination of a pre-contractual joint venture proceeds by analogy to the termination of a formal partnership,[36] the Judge concluded that:
[260] … Equally, the accounting between the pre-contractual joint venture partners must proceed on the same basis in relation to the period during which the pre‑contractual joint venture enured (that is, until 26 March 2015). Therefore, subject to the substitution of “Pacific Hotels Ltd”, as the pre‑contractual joint venture vehicle for the word “partnership”, the relief sought by [Factors] is the appropriate relief. There will be an order for the taking of accounts of Pacific Hotels Ltd as the pre-contractual joint venture vehicle.
[36]Chirnside v Fay, above n 30, at [92] per Blanchard and Tipping JJ.
The terms of the order made required the insurance monies to be brought to account:[37]
(b)The plaintiff and first defendant are to procure the taking of accounts of Pacific Hotels Ltd, as their pre-contractual joint venture vehicle, for the period from incorporation to 26 March 2015, upon the basis that all receipts from any insurance policy in relation to the hotel (whether received before or after 26 March 2015) shall be brought into account.
The judgment is recalled
[37]First judgment, above n 6, at [265(b)].
Scenic applied to have the judgment recalled on the basis that Factors had not sought relief in the terms ordered, namely the direction regarding how the insurance moneys were to be treated and the period to which the account would relate. Scenic complained that it had not been put on notice that such relief as ordered might be granted.
The Judge accepted these submissions and directed that the judgment be recalled and reissued without reference to the order for the taking of accounts.[38] He adjourned the proceeding for a further hearing on relief.
The supplementary decision and final (reissued) decision
[38]Recall judgment, above n 10, at [21(a)].
COVID-19 interrupted the planned timetable for the hearing on relief, which did not take place until July 2020.[39] Scenic submitted that Factors had not actually pleaded a pre-contractual joint venture. Further, there was no need for such relief now that the liquidation of Pacific was inevitable: Scenic and Scenic International had given notice to Pacific requiring repayment of their advances and intended to place Pacific in liquidation. Requiring an account would create undue complexity and the insurance proceeds ought not to be included as an asset of the joint venture of the kind the Judge had found to exist.
[39]By then Scenic had filed an appeal against the making of the declaration that there had existed a pre-contractual joint venture between it and Factors but the hearing on relief proceeded on the basis that the declaration was in force.
On 30 July 2020, the Judge delivered a “supplementary” decision in which he accepted Scenic’s argument:[40]
[39] [Pacific] has not traded for some years. On the evidence adduced it appears to be insolvent. The shareholders are deadlocked.
[40] The appropriateness of a liquidation is apparent. A liquidation will bring benefits beyond those which the taking of accounts will achieve. It will immediately move the shareholders of [Pacific] to a position where an independent professional/s in the person of the liquidator/s will have the power and responsibility to determine and get in the assets of [Pacific] and to resolve issues of liability. …
[41] I recognise, with rights of the parties resting on equitable principles, there may be issues which the liquidators themselves cannot resolve without Court intervention but such would also be the position in relation to the taker of accounts.
[40]Supplementary judgment, above n 11.
The substantive decision was reissued, with the only relief a declaration in the same terms as granted in the original judgment — that a pre-contractual joint venture between Factors and Scenic was terminated with effect from 26 March 2015.[41]
Issue 1: the finding of a joint venture between Factors and Scenic
Did the Judge err in recording Scenic’s concession?
[41]Final judgment, above n 12, at [255].
The Judge recorded Scenic’s acceptance that:[42]
[227] … a limited, undocumented joint venture came into existence in this case, whereby the parties were working together to fund and manage the hotel in what was supposed to be the short term while they negotiated a contractual joint venture agreement, a sale and purchase agreement and associated agreements.
[42]Final judgment, above n 12.
Mr Wass, who carried this aspect of the argument for Scenic, submitted that although Scenic had always accepted the existence of a limited, undocumented joint venture between Haydon 2 and Scenic International, it had never accepted the existence of such a relationship between it and Factors and the Judge had erred in recording Scenic’s position.
In its “mini-opening” in the High Court Scenic only acknowledged a joint venture relationship between Scenic International and Haydon 2. Factors’ opening submissions in the High Court referred to Scenic’s pleaded position as being that there was no joint venture or partnership relationship, but that if there was a joint venture the vehicle for that venture was Pacific and the joint venture partners would be Haydon 2 and Scenic International. We therefore accept the Judge erred in describing Scenic’s concession as he did.
Did the pleading permit consideration of a joint venture?
Scenic argued that the pleadings did not permit the Judge to consider the possibility of a joint venture between Factors and Scenic. Mr Wass submitted that Factors had chosen to plead a concluded contractual arrangement and had not alleged any breach of fiduciary obligations. While he did not exclude the possibility of a relationship between Factors and Scenic that resulted in fiduciary obligations, such as an obligation not to take advantage of a valuable opportunity, Mr Wass distinguished any such relationship from the basis on which the hotel was actually operated, which he maintained was undertaken by Scenic International and Haydon 2 through Pacific.
The pleading of partnership relied on the same facts as those relied on to establish a contractual joint venture. It seems to us implicit that the pleading was one of a non-contractual relationship. There was no purpose in seeking to establish a contractual partnership as well as a contractual joint venture. In our view the “partnership” pleading was directed towards the situation that would exist in the absence of a concluded contractual joint venture. Further, the opening submissions on behalf of Factors (referred to at [45] above) made it clear beyond doubt that this was the case being run. Although in Scenic’s “mini‑opening” in the High Court Scenic disputed the parties to, and extent of, the joint venture asserted, there was no objection to Factors advancing its case on that basis.
Nor do we see the use of “partnership” as opposed to “joint venture” as conclusive. The two categories of relationship are broadly defined and there will often be a significant degree of overlap between them.[43] At their core, both involve an association between two or more parties for the purpose of pursuing a common commercial goal.[44] Here the facts as pleaded asserted that the parties purchased and ran the hotel, and both made capital contributions and contributions to the operating costs. Factors’ reliance on a Chirnside style joint venture to support the third cause of action makes it clear that it was the existence of the relationship that was at stake, not the label.
[43]It has been suggested that a partnership is simply a specialised variety of joint venture: Commerce Commission v Fletcher Challenge Ltd [1989] 2 NZLR 554 (HC) at 616.
[44]Jessica Palmer and Charles Rickett “Joint Ventures and Fiduciary Law” in Maree Chetwin and Philip A Joseph (eds) Joint Ventures Law (The Centre for Commercial and Corporate Law, Christchurch, 2008) 81 at 81–82. Joint ventures are typically distinguished from partnerships on the basis that the former tends to have a specific object, such as the exploitation of a natural resource, while the latter involves a more general, ongoing commercial arrangement. However this distinction is not always conclusive; the categorisation of the relationship is ultimately a matter of substance and intention: Commerce Commission v Fletcher Challenge Ltd, above n 43 at 616.
We therefore consider that the pleading was sufficient to permit consideration of the nature of the relationship between Factors and Scenic other than on a contractual basis, including that it was a joint venture.
Was the finding of a joint venture between Factors and Scenic open on the evidence?
We turn next to the question whether the Judge was right to conclude that a joint venture existed between Factors and Scenic. Mr Smith, for Scenic, argued that Pacific received its funding from Haydon 2 and Scenic International and the fact that they, in turn, were funded by Factors and Scenic merely reflected the joint venture structure the parties had agreed. He relied on Mrs Hagaman’s evidence that where Scenic’s interest was through a joint venture (as opposed to full ownership of a hotel) it deliberately structured its business to ensure that it is not exposed to liability for losses incurred by the individual hotel business.
It is clear that the parties intended that their involvement in the proposed contractual joint venture would be on the basis of subsidiaries incorporated for that purpose. However, they also intended that the joint venture based on this model would not come into existence until the formal documentation was executed. Since that did not happen, it cannot be said that the basis on which the parties actually conducted themselves was based on that model. We accept that the funding of the hotel’s operating expenses was made by Factors and Scenic through Haydon 2 and Scenic International. However, other essential aspects of the hotel’s operations were arranged or funded by Factors and Scenic directly, notwithstanding the lack of a concluded agreement.
First, and most obviously, Factors provided the hotel. The terms on which it did so are in dispute but the important point is that the hotel was the raison d’être of the planned joint venture and only Factors was capable of providing it. Haydon 2 had no part to play in that aspect. On the evidence, the only available conclusion was that Factors was a party to the joint venture.
Secondly, management of the hotel was provided by Scenic Tonga at the behest, and cost, of Scenic. Scenic Tonga was a Scenic subsidiary, unrelated to Scenic International, except through the common ownership of Scenic. Under the interim hotel management agreement with the receiver dated 6 May 2011 Scenic Tonga did not charge any management fee.[45] The receiver assigned the interim agreement to Factors, and although there was no further assignment from Factors to Pacific, Scenic Tonga continued to manage the hotel after Pacific began trading in 2012. While negotiations for the permanent hotel management agreement contemplated a fee based on a percentage of gross revenue, with management fees and interest payments on the vendor finance loan initially frozen to support the venture in the early stages, it appears that management services continued to be provided on the same terms as the interim hotel management agreement. The provision of management services by Scenic Tonga at no cost can only be viewed as a contribution by Scenic itself to the joint venture.
[45]Although a monthly management fee was included in the first draft of the interim hotel management agreement, Scenic ultimately agreed that no fee would be charged on the basis that if Factors’ tender was accepted, the cost would represent Scenic’s contribution on entry to the joint venture.
Thirdly, the insurance arrangements are consistent with Scenic, rather than Scenic International, being a joint venture partner. Scenic was a substantial property‑owning company in its own right, with expert advice available regarding all property matters including insurance. On Mrs Hagaman’s evidence, Scenic arranged material damage and business interruption insurance over the hotel in anticipation that Pacific would ultimately own the hotel. However, although Scenic went to some care to avoid any commitment to costs until the joint venture had been formalised, it arranged the initial insurance over the hotel and paid the premium of $202,375 in December 2011, before Pacific had even been incorporated.[46] Scenic International, incorporated to act as Pacific’s shareholder, had no role until Pacific was incorporated.
[46]Scenic’s payment of the premium prompted Mr Haydon to express his surprise and satisfaction at the “show of good faith” from Scenic. It seems that Scenic later asked for full reimbursement of the premium on the basis that an adjustment could be made after the joint venture was formally agreed.
It is not clear who the named insured was when the cover was first placed. It would be usual for an underwriter to seek details of the owner of the property when accepting a new risk, yet Factors seems not to have played any active part in the process. After Pacific was incorporated it appears always to have been the named insured, with no mention of Factors or its interests.
In an affidavit filed a few weeks before the trial in opposition to Factors’ joinder application Mrs Hagaman explained that she was now concerned that it might not be appropriate for Pacific to retain the proceeds of the material damage insurance if it did not own the hotel. She planned to advise the insurer of the current position.
In our view, there was an operating joint venture between Factors and Scenic. Broadly, it proceeded on the basis that Factors provided the hotel (we deal with the basis on which it did so later), Scenic provided the hotel management services and Pacific was used as the vehicle by which the hotel traded. It is not necessary, for the purposes of the appeal, to determine what specific obligations the parties owed one another.
The Judge was correct, on the evidence, to find that a joint venture relationship existed between Factors and Scenic. This ground of cross appeal therefore fails.
Issue 2: the finding that Pacific was not indebted to Factors for $2.65 million
At the conclusion of the argument before us, Factors’ position was essentially that it had contributed the hotel to the joint venture at an agreed value of $6.25 million, and in the ultimate accounting that contribution must be recognised alongside the other contributions made by both it and Scenic to the hotel’s operation. It was accepted that there had been no sale of the hotel. The exact means by which the joint venture might have acquired the hotel in equity were not identified in either the pleadings or submissions.
We are satisfied Factors did not intend to, and did not, part with its beneficial interest in the hotel. On the evidence, it allowed Pacific to occupy the hotel rent-free during the period of the joint venture. However, there is no evidence that Pacific paid the ground rent for the leasehold or otherwise took any step consistent with an equitable interest in the hotel. Leaving aside its support of the operating expenses, Factors’ contribution to the joint venture was simply the use of the hotel, without more. Thus, the parties conducted the joint venture on the basis that Factors allowed Pacific to occupy the hotel and Scenic provided the management services through Scenic Tonga and both contributed to the operating expenses.
It is arguable that during the course of the joint venture, Pacific’s occupation of the hotel constituted a licence for the purposes of pt 4 of the Property Law Act 2007. However, this possibility arose in the course of argument and was not developed. In any event, while the use of the hotel and the provision of management services undoubtedly had a value, there is no evidence that the parties intended to put a dollar figure on them for the purposes of the joint venture relationship.
After Factors withdrew from the joint venture, as the Judge held, Scenic was trading on its own behalf. Nevertheless, Factors allowed Pacific to continue to occupy the hotel, rent-free. This was, necessarily, unconnected to the joint venture. It undoubtedly reflected the reality that it was in the interests of both parties for Pacific to continue trading while they negotiated the terms of Factors’ exit and Pacific was not in a position to pay rent. We are satisfied that, however the occupation of the hotel is viewed, it did not result in the joint venture, or Pacific itself, acquiring any interest that could have resulted in it being indebted to Factors.
Further, although the parties took differing positions during the exit negotiations as to whether Factors was entitled to sell the hotel, ultimately there was an acceptance that it had the right to do so and that is what happened. Factors was, unquestionably, in a difficult position once Scenic closed the hotel and departed Tonga, but it was still the leaseholder and it sold the lease, apparently without any consultation with or interest from Scenic or Pacific.
The Judge was correct in his conclusion that Pacific was not indebted to Factors for $6.25 million. This ground of appeal therefore fails.
Issue 3: relief
Did the lack of any asserted breach preclude consideration of a declaration or an accounting?
Mr Wass submitted that the existence of a joint venture between the parties would create fiduciary obligations and that the failure by Factors to allege any breach of such obligations precluded relief being granted in the form of a declaration or an accounting.
We do not accept this submission. A declaration simply pronounces upon the existence or non-existence of a legal state of affairs; it is not enforceable against a defendant.[47] Damage or infringement are not, therefore, prerequisites to the availability of declaratory relief.[48] The declarations sought in relation to this cause of action did not depend on breach of any obligation being pleaded.
[47]Lord Woolf, Jeremy Woolf and Lord Eassie Zamir & Woolf: The Declaratory Judgment (4th ed, Sweet & Maxwell, London, 2011) at [1–02].
[48]At [1–12].
Nor did the taking of an account require proof of any breach. The taking of an account has been described by this Court as neither a cause of action nor a remedy, but rather a preliminary exercise by which means a claimant can establish an evidentiary basis for the imposition of some form of liability on a defendant.[49] It is available where a duty to account arises and the Court needs only to be satisfied that such an obligation exists.[50] Partners owe one another a duty to account,[51] and the taking of final accounts typically follows the dissolution of a partnership.[52] Joint venturers who have yet to reach formal agreement may also owe a duty to account on the basis that the relationship is analogous to that of a partnership. The following observations of Blanchard and Tipping JJ in Chirnside are apt:[53]
[91] … A joint venture will come into being once the parties have proceeded to the point where, pursuant to their arrangement or understanding, they are depending on each other to make progress towards the common objective. Each party is then proceeding on the basis that he or she is acting in the interests of all or both parties involved in the arrangement or understanding. A relationship of trust and confidence thereby arises; each party is entitled to expect from the others loyalty to the joint cause, loose as the formalities of the joint venture may still be. …
[92] … Because there is, as yet, no contract between the joint venture parties, each will ordinarily be free to withdraw, on giving the other notice to that effect. On the giving of that notice duties of loyalty for the future will come to an end but confidentiality obligations may remain; and any assets, tangible or intangible, held on behalf of the joint venture will still usually be held on trust for both the erstwhile joint venturers. Appropriate steps will be necessary to agree, or obtain some external resolution as to how those assets are to be dealt with. There is, in a general sense, some analogy with the steps necessary when a formal partnership is dissolved.
[93] The point, in short, is that joint ventures, like partnerships, can generally be brought to an end by appropriate notice. The previous joint venturers must, however, still act equitably towards each other in the steps necessary to bring the affairs of the joint venture to a conclusion which is fair to all concerned. The further the joint venture has progressed the more complex those obligations may be. … In the absence of contractual regulation, equitable principles will supply the solution.
(Footnote omitted and emphasis added.)
[49]Nicholls v Nicholls [2020] NZCA 346 at [76], citing Mitchell McInnes “Account of Profits for Common Law Wrongs” in Simon Degeling and James Edelman (eds) Equity in Commercial Law (Lawbook Co, Sydney, 2005) 405 at 407.
[50]King v Library Covers (NZ) Ltd [1951] NZLR 133 (SC) at 134.
[51]Partnership Law Act 2019, s 54.
[52]Section 76. See also PRH Webb and Anthony Molloy Principles of the Law of Partnership (6th ed, Butterworths, Wellington, 1996) at [5.152].
[53]Chirnside v Fay, above n 30.
This ground of cross-appeal fails.
Did the Judge err in declining to order the taking of an account of the joint venture?
Factors submitted that the liquidation of Pacific is an inappropriate means of resolving the issues between the parties and the Judge therefore erred in declining to order the taking of an account of the joint venture. Specifically, he pointed to the need to determine the precise terms of the joint venture, and the nature of the obligations owed by the joint venture parties to one another during and after the joint venture. In addition, entitlement to the insurance moneys must be resolved. Mr Dale argued that an accounting, supervised by the trial judge, was the most efficient means of resolving the outstanding issues and avoid the risk of inconsistent findings in the separate proceedings brought to determine entitlement to the insurance moneys.
Mr Smith’s response was that, no matter who the parties to the joint venture were, any party who had a claim against Pacific could prove in its liquidation, thus ensuring that all issues between the parties would be addressed. Likewise, all contributions to the joint venture could be addressed in the liquidation, with parties proving any debt claimed. The liquidation process would also adequately address claims relating to transactions in the period following the termination of the joint venture. To the extent there is dispute over the distribution of the insurance proceeds, Mr Smith submitted that the liquidators could seek directions from the Court.
We have concluded that the joint venture (which included Pacific) did not acquire any interest in the hotel. The questions for determination now are the parties’ advances to Pacific during the periods of the joint venture and entitlement to the insurance proceeds. The advances made during the period of the joint venture could be addressed readily either through the taking of an account or in the context of Pacific’s liquidation. The entitlement to the insurance moneys is more difficult.
We have concluded that Factors was the legal and beneficial owner of the hotel at all times — during and after the joint venture — up until the hotel was finally sold. However, apart from use of the hotel rent-free, the terms on which Pacific occupied the hotel after the joint venture and the parties’ obligations during that period have not been explored. These include any obligation on Factors to insure the hotel and its obligations regarding the insurance moneys payable under the policy.
The taking of an account of the joint venture is not the appropriate means for determining these outstanding issues because, self-evidently, they post-date the joint venture relationship. The insurance issues will be determined in the separate proceedings brought for that purpose. We acknowledge Mr Dale’s understandable concern at the possibility of inconsistent outcomes in the two proceedings; although the findings in this appeal are binding on Scenic, strictly, our conclusions are not binding on Pacific’s liquidators. However, that fact cannot lead to relief being given that would be ineffective to resolve the outstanding issues.
We therefore find that there was no error in the Judge declining to order the taking of an account. This ground of appeal fails.
Costs in the High Court
The Judge reserved the costs and disbursements of the proceeding but invited the parties, if they could not agree on costs, to file memoranda with Scenic filing first, indicating that costs would be awarded to Scenic. It appears that, ultimately, no costs order was actually made.
Factors maintains that it should be entitled to costs because it sought to, and did, establish that the parties were in a business relationship that had been validly terminated in March 2015 and that an adjustment of the parties’ respective positions was required. The fact that it was refused the relief it sought (taking of an account) was solely due to the Court’s view that the alternative of Pacific’s liquidation as the forum for determining the parties’ entitlements was preferable. Factors also maintains that costs should lie where they fell in relation to the recall. Finally, it suggests that Scenic should be disentitled to costs in any event because of the position it took in relation to the joinder of Pacific and disclosure of the insurance claim.
Scenic argues that all three of Factors’ pleaded causes of action failed, by a substantial margin. No contractual relationship existed. No pre-contractual joint venture was pleaded. As regards the consequences of Scenic’s late disclosure of the insurance policy, Scenic submits that the existence of the insurance policy was disclosed in Mrs Hagaman’s brief of evidence exchanges in accordance with the agreed timetable and that Factors’ interlocutory applications were substantially unsuccessful and not the subject of any appeal.
Because no order as to costs was made, it is not appropriate for this Court to determine the issue. We remit the issue of costs for determination by the High Court. Such determination will necessarily proceed on the basis that Factors’ position regarding the existence of, and parties to, the joint venture, which was the principal issue in the High Court, has been sustained. We also make the observation that by the time this matter came to trial it was obvious that the insurance claim would become a major focus for the parties. Had Scenic advised Factors of the insurance claim earlier, the parties could have avoided many of the difficulties that have beset this proceeding and the need for separate proceedings to be issued.
Result
We have concluded that:
(a)A joint venture existed between Factors and Scenic between June 2011 and 26 March 2015.
(b)Pacific is not indebted to Factors for $6.25 million for the purchase of the hotel or on any other basis.
(c)The Judge was entitled to make the declaration as to the existence of the joint venture.
(d)The Judge did not err in declining to order the taking of an account.
(e)It is not appropriate for this Court to determine the issue of costs.
Therefore:
(a)The appeal is dismissed.
(b)The cross-appeal is dismissed.
(c)We remit the issue of costs to the High Court for determination.
Costs on appeal
Given that neither party has succeeded, we make no order for costs on the appeals.
Solicitors:
KooTelle, Auckland for Appellant
Meares Williams, Christchurch for Respondent
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