First NZ Properties Limited v Millar
[2024] NZHC 1225
•16 May 2024
IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY
I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE
CIV-2020-442-62
[2024] NZHC 1225
UNDER the Companies Act 1993 IN THE MATTER OF
breaches of director’s duties and breaches of contract
BETWEEN
FIRST NZ PROPERTIES LIMITED
Plaintiff
AND
MICHAEL JOHN MILLAR
First Defendant
INVESTMENT SERVICES LIMITED
Second DefendantPAUL JOHN MEPHAN
Third Defendant
CONTINUED…
Hearing: 1–5, 8–9 and 12 May 2023 Counsel:
B M Nathan, N Laing and E V Kittelty for the Plaintiffs M J Radich and S A Wadworth for the First and Second Defendants
R J B Fowler KC for the Third Defendant in CIV-2020-442-62/63
Judgment:
16 May 2024
JUDGMENT OF GWYN J
Solicitors:
Duncan Cotterill, Nelson Radich Law, Blenheim
FIRST NZ PROPERTIES LIMITED v MILLAR [2024] NZHC 1225 [16 May 2024]
CIV-2020-442-63 BETWEEN
SPRINGS ROAD PROPERTY LIMITED
PlaintiffAND
MICHAEL JOHN MILLAR
First Defendant
INVESTMENT SERVICES LIMITED
Second DefendantPAUL JOHN MEPHAN
Third Defendant
CIV-2020-442-64 BETWEEN
SUPERSTORE PROPERTIES LIMITED
PlaintiffAND
MICHAEL JOHN MILLAR
First Defendant
INVESTMENT SERVICES LIMITED
Second Defendant
TABLE OF CONTENTS
Introduction [1]
Background [6]
The property companies [6]
First NZ Properties Ltd [6] Springs Road Property Ltd [11] Superstore Properties Ltd [14] Investment Services Ltd [17] Property management services [22] Breakdown of relationship between property companies and ISL [27] Witnesses
[31]
Overview of First NZ’s claims
[38]
First NZ Management Agreement [39] Preliminary interpretation questions
[49]
What were ISL’s obligations and entitlements under the First NZ Management Agreement? [50] Discussion [59] When did the First NZ Management Agreement come to an end? [72] Discussion [86] First NZ’s claims
[109]
Disclosed property management fee [110] “Excess” property management fees [118] Directing payments to Gravtec and Terra Firma [131] Gravtec [132] Terra Firma [135] Gain fees [145] Kilmore Street [156] Symonds Street [162] Causes of action pleaded by First NZ
[164]
Claims against ISL [165] Breach of contract [167] Discussion [170] Negligence [189] Discussion [194] Claims against Mr Millar and Mr Mephan [213] Requirements of a fiduciary [232] Statutory provisions [236] Mr Millar [238]
Section 131 [262]
Section 137 [269]
Mr Mephan [279]
Claim in relation to Barnes’ fraud [290]
Knowing receipt [291]
Discussion [298]
Unjust enrichment [304]
Superstore Properties Ltd [314]
Superstore claims [314]
Superstore Management Agreement [316]
Discussion [331]
Springs Road Property Ltd [347]
Springs Road Management Agreement [348]
Discussion [367]
Notices to Avoid [389]
Counterclaims [392]
Repudiation [393]
ISL’s submissions [396]
Plaintiffs’ submissions [398]
Discussion [417]
Affirmative defences [421]
Indemnity and limitation of liability – ISL [421]
Deeds of indemnity – Mr Millar and Mr Mephan [434]
Estoppel [443]
Quantum meruit [447]
Remedies [451]
First NZ [452]
Superstore [453]
Springs Road [454]
Delay [457]
Introduction
[1] This is a consolidated claim, brought by each of three related companies which own various commercial properties which they lease to third parties (property companies). The claims are against Investment Services Ltd (ISL), which operates as a commercial property and investment manager; Michael Millar, who is a former director of the plaintiff companies and a director of ISL; and Paul Mephan,1 who was a director of the property companies for a period between 2018 and 2020.
[2] The plaintiffs’ claims relate to fees they say were taken from the property companies, by ISL, in breach of its contract and duty of care, and in breach of Mr Millar’s and Mr Mephan’s fiduciary and statutory duties owed to the property companies.
[3] The plaintiffs say that each of ISL and Mr Millar has been unjustly enriched by the receipt of a benefit, taken from the property companies. The property companies also plead that Mr Millar knowingly received the plaintiffs’ assets in breach of fiduciary obligations owed to them.
[4]The defendants raise a number of counterclaims and affirmative defences.
[5]The proceedings relate to the period 2006 to 2020.
Background
The property companies
First NZ Properties Ltd
[6] Foodstore Properties Ltd (which later became First NZ Properties Ltd (First NZ)) was incorporated on 23 August 1995, together with its three subsidiary companies (the subsidiaries) which purchased a supermarket each:
(a)Foodtown Birkenhead;
1 In CIV-2020-442-62 and CIV-2020-442-63.
(b)Foodtown Blockhouse Bay; and
(c) Foodtown Te Atatu. (the First NZ Properties).
[7] On 25 September 1995 First NZ and its subsidiaries entered into a Management Agreement with Farmers’ Mutual Investment Services Ltd (FMIS) for the investment and property management of the First NZ Properties (the First NZ Management Agreement). At that date, Mr Millar was both a director of First NZ and the Chief Executive Officer (CEO) of Farmers’ Mutual Group, FMIS’s parent company. At the time of signing, the Agreement was an arm’s-length arrangement, there being one independent board member of the First NZ companies.
[8] Also on 25 September 1995, FMIS entered into a Management and Administration Agreement with The Franklin Co Ltd (Franklin), a third party property management company, for Franklin to provide property management services for the First NZ Properties (the First NZ Franklin Agreement). Franklin was paid a management fee of 3.25 per cent of annual gross rentals received.
[9] The last of the First NZ Properties referred to in the First NZ Management Agreement was sold on 4 November 2004.
[10] Further properties were purchased by First NZ: 50 Kilmore Street, Christchurch (Kilmore Street), on 24 December 2003 and 110 Symonds Street, Auckland (Symonds Street) on 31 July 2012.
Springs Road Property Ltd
[11] On 2 December 1997 Springs Road Property Ltd (Springs Road) was incorporated and purchased a commercial property at 7 Springs Road, East Tamaki, Auckland (Springs Road Property).
[12] On 13 January 1998 Springs Road entered into a Management Agreement with FMIS for investment and property management (the Springs Road Management
Agreement). At that time, Mr Millar was a director of Springs Road and remained the CEO of Farmers’ Mutual Group.
[13] As with First NZ, there was an agreement between ISL and Franklin (entered into on 16 January 1998 by FMIS) for Franklin to perform property management services for Springs Road (the Springs Road Franklin Agreement). Franklin received a fee equivalent to four per cent of the gross rentals received in respect of the Springs Road Property.
Superstore Properties Ltd
[14] On 25 January 1999, Superstore Properties Ltd (Superstore) was incorporated. Shortly after, three subsidiary companies each purchased a commercial property (Superstore Properties).
[15] On 9 February 1999, Superstore entered into a Management Agreement with FMIS for investment and property management (the Superstore Management Agreement). Mr Millar was a director of Superstore, and remained the CEO of Farmers’ Mutual Group, at the time.
[16] Also on 9 February 1999, FMIS entered into a Management and Administration Agreement with Franklin, for Franklin to provide property management services in respect of the Superstore Properties (the Superstore Franklin Agreement) for a property management fee of three per cent of annual gross rentals received.
Investment Services Ltd
[17] ISL was incorporated on 19 June 2000. The initial directors of ISL were Mr Millar and Kenneth Lance Franklin. Mr Millar is currently the sole director of ISL. ISL is owned by the Kaiuma Family Trust. Mr Millar’s children are the beneficiaries of the Trust.
[18] FMIS assigned and novated all of its rights, benefits, interests and obligations under the First NZ Management Agreement, the Springs Road Management
Agreement and the Superstore Management Agreement to ISL by deed on or about 12 February 2001. The consideration for the assignment was $200,000 payable, by ISL.
[19] For most of the period the subject of this claim Neil Barnes was the CEO of ISL. Mr Barnes invoiced ISL for his services through his company, Activa Consulting Ltd (Activa). Mr Barnes was also a director of the property companies from 25 June 2001 until 27 February 2018.
[20] Mr Barnes defrauded the property companies of $2,037,946.30. That fraud was disclosed to shareholders after the September 2018 Annual General Meeting. Mr Barnes fled to the United States and, at the time of the hearing in this proceeding, was subject to investigation and prosecution in New Zealand by the Serious Fraud Office. The plaintiffs make some allegations against the defendants in respect of Mr Barnes’ fraud. These are discussed at [223] and [290] below.
[21] Mr Millar approached Mr Mephan in or about 2017 to ask if he would be interested in working at ISL. When Mr Barnes stopped working for ISL and the plaintiff companies at the end of February 2018, Mr Mephan took over his duties and responsibilities, assuming the role of CEO. Mr Mephan contracted his services to ISL and the plaintiff companies through his company Corvus Consulting Ltd. Mr Mephan was a director of all three property companies from 13 February 2018 until 21 April 2020. He received no director’s fees from those companies. From February 2018 to April 2020, Mr Mephan was CEO of ISL. Mr Mephan was not a director of ISL.
Property management services
[22] Franklin provided property management services for the property companies pursuant to the respective Franklin agreements, from the incorporation of each property company until 31 December 2003.
[23]ISL terminated the Franklin agreements on or about 31 December 2003.
[24] From 1 January 2004 ISL employed David Penrose as National Property Manager, effectively an in-house property manager. From April 2007 to August 2010,
Mr Penrose’s company Penrose Property Management Ltd (PPML) contracted to ISL to provide property management services.
[25] Gravtec Ltd (Gravtec) a company incorporated by Richard Eberlein and Philippa Eberlein, provided property management services to each of the property companies, for First NZ from 1 April 2011 to 31 December 2020; for Springs Road from 1 April 2011 to 31 March 2020; for Superstore from 1 October 2011 to 31 March 2020.
[26] Terra Firma Group Ltd (Terra Firma) provided property management services to First NZ in respect of Symonds Street between 1 April 2012 and 31 March 2020.
Breakdown of relationship between property companies and ISL
[27]Mr Mephan resigned as a director of the property companies on 21 April 2020.
[28]Mr Millar resigned as a director of First NZ, Springs Road and Superstore on
7 May 2020. Following a resolution to amend the constitution and allow for shareholders to appoint directors, passed at the September 2020 Annual General Meeting, new directors were appointed. The directors as at the time of this hearing were Damien Prendergast (appointed by Mr Millar from 7 May 2020 and reappointed by shareholders from 28 September 2020) and John Murray (appointed as an independent director from 28 September 2020).
[29] Mr Prendergast and Mr Murray sought independent advice following the possibility of a derivative action being taken by a shareholder and the property companies issued these proceedings in December 2020.
[30] On 31 December 2020 Mr Millar cancelled the First NZ Management Agreement, the Springs Road Management Agreement and the Superstore Management Agreement, alleging that the plaintiff companies had repudiated the agreements.
Witnesses
[31] Four witnesses gave evidence for the plaintiff companies. Damien Prendergast, a director of the companies, gave evidence about the nature of the companies, their properties, his discovery of the nature of their relationship with ISL, and what occurred subsequently.
[32] John Murray, an independent director and chair of the property companies, appointed in September 2020, gave evidence responding to ISL’s counterclaim, in particular the allegation that the property companies’ actions amounted to repudiation, entitling Mr Millar to cancel on behalf of ISL.
[33] David Osborn, a forensic accountant, gave expert evidence for the property companies reconstructing payment flows across the property companies and ISL, calculating the amount of the property companies’ alleged losses and the gains allegedly received by ISL.
[34] Craig Stobo, an experienced company director, gave evidence about the application of directors’ duties to the events in question.
[35]The witnesses for Mr Millar and ISL were:
(a)Mr Millar himself.
(b)David Penrose, one of the professional property managers engaged by Mr Millar to provide property management services to the plaintiffs.
(c)Euan Abernethy, an expert in securities regulation, who discussed the First NZ and Superstore prospectuses and their relevance to the parties’ contractual obligations.
(d)Keith Sutton, an expert in corporate governance.
(e)Lorinda Kelly, an expert forensic accountant and chartered accountant, who gave evidence on the extent of the plaintiffs’ alleged losses.
[36]Ms Kelly and Mr Osborn also provided a joint statement of experts.
[37]Mr Mephan, the third defendant, gave evidence on his own behalf.
Overview of First NZ’s claims
[38]I deal first with the claims made by First NZ.
First NZ Management Agreement
[39] The stated purpose of the First NZ Management Agreement was to appoint FMIS/ISL as First NZ’s agent for the ongoing administration and investment management of First NZ, the subsidiary companies and the identified Properties.
[40]FMIS’s duties and responsibilities were:
3.DUTIES AND RESPONSIBILITIES OF FMIS
FMIS shall manage the affairs of FPL and the Subsidiaries, from the date of this Agreement, including without limitation:
3.1attend to all matters necessary or desirable in relation to the Offer, including the preparation of the prospectus, promotion of the Offer, procurement of an underwriter, payment of brokerage and processing of applications;
3.2arrange finance for their activities from such sources and on such terms and conditions as to security or otherwise as FMIS in consultation with FPL and the Subsidiaries deems fit;
3.3procure and supervise the acquisition, management and eventual sale of the Properties with the assistance of a professional property manager;
3.4arrange the management of FPL's share register and the payment of all distributions;
3.5arrange for the issue of share certificates and the operation of the secondary market for FPL's shares;
3.6procure the filing of all returns for FPL and the Subsidiaries with the Inland Revenue Department and the Companies Office;
3. 7 arrange for the preparation and audit of such financial statements and accounts as FPL and the Subsidiaries are required by any statute to prepare and have audited;
3.8operate all bank accounts;
3.9instruct such solicitors, accountants, auditors, valuers or other consultants or advisers as FMIS deems necessary or desirable in connection with any of its duties and responsibilities under this Agreement;
3.10do or perform any other act or thing which FPL or a Subsidiary may reasonably request in connection with the investment and administrative management of FPL, the Subsidiaries, and the Properties.
…
[41] The First NZ Management Agreement provided that, in “consideration of the performance by FMIS of its duties and responsibilities under this Agreement” it would receive a management fee of 3.25 per cent per annum of gross rentals received in respect of the Properties, for an initial period to 31 March 1996. Thereafter, FMIS was to be paid an “annual management fee” of 6.50 per cent per annum of annual gross rentals until termination of the Agreement.
[42] From the time the First NZ Management Agreement was entered into, until termination of the First NZ Franklin Agreement, the cost of property management was met from within the management fee paid to FMIS/ISL2 under the First NZ Agreement.
[43] ISL terminated the First NZ Franklin Agreement on or about 31 December 2003.
[44] After the First NZ Franklin Agreement was terminated, ISL appointed an in- house property manager to manage the First NZ Properties. Mr Penrose and his company PPML provided those property management services until October 2011. Mr Penrose and PPML’s fees were met from within the management fee.
[45] The essence of First NZ’s claim is that following termination of the First NZ Franklin Agreement ISL charged First NZ, and First NZ paid ISL, amounts additional to the management fee, allegedly for the provision of property management services, without authorisation or agreement.
[46]In total, the amounts First NZ says it paid were:
2 As noted at [18] above, FMIS’s rights under the Management Agreement were assigned to ISL on 12 February 2001.
(a)ISL $1,159,081.00 plus GST, being 3.25 per cent of gross rentals, as a property management fee, pursuant to the First NZ Management Agreement (“property management”/“disclosed fees”); and
(b)ISL $183,220 plus GST ($15,000 per month) also for property management (“excess fees”); and
(c)Gravtec $204,328.87 plus GST ($22,000 per annum), for property management services; and
(d)Terra Firma $203,143.86 plus GST ($30,000 per annum) for property management services for Symonds Street.
[47]First NZ further claims that ISL directed payment to itself of gain fees, totalling
$830,000, on the sale of two First NZ properties, to which it had no entitlement.
[48] First NZ says the payments listed at [46] and [47] above were made with the knowledge, and at the direction of, Mr Millar who was at all times a director of both First NZ and ISL and, between 13 February 2018 and 31 March 2020, with the knowledge, and at the direction of, Mr Mephan. First NZ’s various claims are framed in breach of fiduciary duty (Mr Millar and Mr Mephan), breach of ss 131 and 137 of the Companies Act 1993 (Mr Millar and Mr Mephan), unjust enrichment (Mr Millar and ISL), knowing receipt (Mr Millar), and breach of contract and negligence (ISL).
Preliminary interpretation questions
[49] First NZ’s claims raise two significant questions: first, what were ISL’s obligations and entitlements under the First NZ Management Agreement? In particular, what did the 6.50 per cent management fee encompass? Second, when did the First NZ Management Agreement come to an end and what were the terms of the agreement between First NZ and ISL after the sale of the last of the First NZ Properties?
What were ISL’s obligations and entitlements under the First NZ Management Agreement?
[50] First NZ says that at all relevant times it paid ISL a management fee of 6.50 per cent of annual gross rentals of the First NZ Properties.
[51] Mr Osborn gave evidence for the plaintiffs of the manner in which Franklin was paid while it was First NZ’s property manager (up to 31 December 2003). Franklin collected the gross rentals from the tenants, deducted its 3.25 per cent property management fee, then passed the remaining rental income to First NZ. First NZ then paid the remainder of the 6.50 per cent management fee to ISL.
[52] First NZ says that is how ISL complied with the contractual obligation to “procure and supervise the acquisition, management and eventual sale of the Properties with the assistance of a professional property manager”. It says those undisputed arrangements illustrated the proper contractual arrangement between First NZ and its property manager. That is demonstrated by the performance of the contract from 1995 to the end of 2003. Some of ISL’s own working documents referred to the “Property Management Fee” as 3.25 per cent.
[53] In support of its interpretation First NZ also relies on a statement in the 5 October 1995 prospectus issued by the Farmers’ Mutual Group, for Foodstore Properties Ltd. The prospectus explained the arrangement under the First NZ Management Agreement as being:
(a)FMIS (“Investment Manager”) was responsible for the investment management of First NZ, including promotion, financial management and ongoing administration.
(b)The Investment Manager was to receive (after 31 March 1996) an investment management fee of 6.50 per cent of annual rental income payable monthly in arrears.
(c)Franklin (“Property Manager”) would provide independent and operational property management services in respect of the Properties.
(d)The ongoing property management fee shall be borne by the Investment Manager, out of the investment management fee.
[54] First NZ says that nothing changed in the eight years following signing of the First NZ Management Agreement on 25 September 1995 to justify any change in the way the terms of the Agreement applied and, in particular, nothing would have justified ISL treating the 6.50 per cent annual management fee as being solely for investment management.
[55] The defendants argue that ISL’s obligation under the First NZ Management Agreement was to “supervise” management of the plaintiffs’ property, with the assistance of a professional property manager. ISL was entitled to engage an external property manager on First NZ’s behalf, to be paid by First NZ in addition to the
6.50 per cent management fee paid to ISL under the Agreement.
[56] That supervision was carried out with the assistance of a professional property manager from the outset, initially Franklin. While the defendants agree that Franklin’s fees were met from the management fee to which ISL was entitled under cl 11.1(c) of the Agreement, that was not required by the Agreement. They say there was no allocation of the fee to 50 per cent for investment management and 50 per cent for property management as First NZ submits. By way of example, they point to two invoices rendered by ISL to First NZ which refer to the “management fee” of
6.50 per cent.
[57] The defendants rely on cl 3.9 of the First NZ Management Agreement, in combination with cl 4.1. Clause 3.9 provides:
FMIS shall manage the affairs of FPL and the Subsidiaries, from the date of this Agreement, including without limitation:
…
3.9 instruct such solicitors, accountants, auditors, valuers or other consultants or advisors as FMIS deems necessary or desirable in connection with any of its duties and responsibilities under this Agreement;
[58]Clause 4.1 states:
In performing its duties and responsibilities under this Agreement, FMIS shall act solely as the agent of FPL and the Subsidiaries. All costs, disbursements, expenses, taxes, debts and liabilities to third persons incurred by FMIS in the performance of its duties and responsibilities under this Agreement shall be the costs, disbursements, expenses, debts and liabilities of FPL and the Subsidiaries (as relevant) only and FMIS shall not be liable for any such obligation by reason of performance of its duties and responsibilities under this Agreement.
Discussion
[59] I accept the plaintiffs’ submission that, in the context of the First NZ Management Agreement as a whole, cl 3.9 of the Agreement cannot be construed to include a property manager within the category of “other consultants or advisors”, when cl 3.3 specifically refers to “professional property managers”. The general principles of interpretation apply so that the specific prevails over the general.3
[60] Nor do I accept the defendants’ interpretation of cl 4.1 of the Agreement. Clause 4.1 is a boilerplate clause, recognising the agency function that FMIS/ISL would be carrying out for First NZ. The purpose of that clause is to protect ISL from being held liable to third parties separately as a principal. It is predicated on ISL as agent properly incurring a liability to a third party. It does not apply to ISL’s first party liability to First NZ if it acts outside the terms of their agreement.4
[61] The First NZ Management Agreement did not specifically divide the “annual management fee” of 6.50 per cent per annum of annual gross rentals into “property management” and “investment management” components. Nevertheless, the practice under the agreement, from September 1995 to December 2003, when the First NZ Franklin Agreement was terminated, was that 3.25 per cent of the fee was applied by ISL to property management. That is accepted by the defendants. The high point of their argument is the two invoices that refer to the management fee of 6.50 per cent. That is not of much assistance — the management fee as a whole was 6.50 per cent, the question is what it encompassed.
3 See for example Kim Lewison The Interpretation of Contracts (8th ed, Sweet & Maxwell, London, 2024) at [7.46].
4 Ian Gault (ed) Gault on Commercial Law (online ed, Thomson Reuters) at 19.5.2.
[62] The defendants also say that the purchase of new properties by First NZ necessitated different arrangements from those in place when Franklin was providing property management services. But as I discuss later, the defendants did not at any point specifically raise with First NZ that it proposed to change the arrangement that existed under the Franklin Agreement and treat the 6.50 per cent annual management fee as being solely for investment management.
[63] The prospectus relied on by First NZ post-dates the First NZ Management Agreement by 10 days and therefore, the defendants say, cannot be called in aid by First NZ.
[64] In Bathurst Resources v L&M Coal Holdings Ltd,5 the Supreme Court considered the admissibility of extrinsic material of surrounding circumstances both before and after the execution of the relevant contractual documents.
[65] In relation to the parties’ conduct in undertaking their contractual obligations after entering into the contract, the Court concluded (agreeing with the approach of Tipping J in Wholesale Distributors Ltd v Gibbons Holdings Ltd6) that the approach to the admissibility of subsequent conduct should be the same as the approach to the admissibility of prior negotiations.7 The Court also cited Tipping J’s later refinement of this approach in Vector Gas, where he said:8
[31] There is no logical reason why the same approach should not be taken to both post-contract and pre-contract evidence. The key point is that extrinsic evidence is admissible if it tends to establish a fact or circumstance capable of demonstrating objectively what meaning both or all parties intended their words to bear.
[66] In Bathurst the Court said “the court must ask itself whether the subsequent conduct tends to prove anything relevant to the objective approach to interpretation.”9
5 Bathurst Resources Ltd v L&M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696.
6 Wholesale Distributors Ltd v Gibbons Holdings Ltd [2007] NZSC 37, [2008] 1 NZLR 277.
7 Bathurst Resources Ltd v L&M Coal Holdings Ltd, above n 5, at [89].
8 At [88], quoting Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [31].
9 Bathurst Resources Ltd v L&M Coal Holdings Ltd, above n 5, at [89].
[67] Here, the prospectus was plainly proximate to the Agreement (issued some 10 days later). Farmers’ Mutual Group issued the prospectus. Mr Millar was CEO of Farmers’ Mutual Group at that point. The directors of Foodstore Properties Ltd (later First NZ) at that time were Mr Millar, Mr Barnes and Virginia Laughton. It is mutual in that both parties to the Agreement must have been aware of it, and having regard to Mr Millar’s roles in each of Farmers’ Mutual Group and Foodstore Properties/First NZ (although the Supreme Court said the subsequent conduct need not necessarily be mutual10).
[68] While of course it is not determinative, the statement in the prospectus is relevant to the question how the payment arrangement under the First NZ Management Agreement should be interpreted and it is consistent with the practice for the first eight years of the Agreement and the interpretation now advanced by First NZ.
[69] In conclusion, as the Supreme Court put it in Bathurst,11 the term to be implied arises from the text of the contract, interpreted against the relevant background.
[70] I find that the First NZ Management Agreement required the cost to ISL of engaging a property manager was to be funded from the property management fee paid by First NZ to ISL.
[71] The consequence of that interpretation is that ISL is not entitled to claim the management fee under the Agreement and a separate amount to pay itself and/or an external property manager for property management services. That is discussed further below in relation to First NZ’s specific claims.
When did the First NZ Management Agreement come to an end?
[72] First NZ says that the very purpose of the Management Agreement was the First NZ Properties (being the entirety of First NZ’s business). Those properties are specifically defined in the Schedule to the Agreement:
10 At [89]
11 At [115].
SCHEDULE
1. Description of the Properties: Foodtown Blockhouse Bay
19-29 Donovan Street
(to be acquired and owned by Foodstore Properties (Blockhouse Bay) Limited
Foodtown Birkenhead 180 Mokoia Road
(to be acquired and owned by Foodstore Properties (Birkenhead) Limited)
Foodtown Te Atatu
Edmonton Road and Te Atatu Road (to be acquired and owned by Foodstore Properties (Te Atatu)
Limited)
[73] The Agreement did not refer to the acquisition of any additional or replacement properties. After the sale of the last property, ISL no longer had any duties or responsibilities in respect of the Properties, nor were any management fees payable because there was no longer any rental income being received in respect of the First NZ Properties.
[74] Accordingly, First NZ says, the Management Agreement came to an end when the last of the Properties (Foodtown Te Atatu) was sold on 4 November 2004. At that point, the purpose of the Agreement was exhausted.
[75] First NZ says that after sale of the Te Atatu property, ISL, as evidenced by its conduct, made an offer to First NZ to consider providing investment and property management services. First NZ accepted that offer and a new, unwritten, agreement took the place of the Agreement; it was not simply a variation or amendment of the initial Management Agreement. The new contract was entered into in or around November 2004.
[76] First NZ’s submission is that, as under the First NZ Management Agreement, the new agreement provided for a payment to ISL of a management fee of 6.50 per cent of annual gross rentals. The new agreement covered subsequently acquired properties and provided that 3.25 per cent of annual gross rentals (that is 50 per cent of the total
6.50 per cent management fee) was to be applied by ISL to property management of the subsequently acquired properties. That new contract continued for some 15 years.
[77] First NZ urges the adoption of a broader approach, “considering objectively the totality of the parties’ dealings to determine whether a concluded bargain has been reached”.12
[78] The first and second defendants in response say that the First NZ Management Agreement continued following the sale of the last of the three original First NZ Properties and applied to the subsequent acquisition by First NZ of further properties.
[79] The defendants point out that the First NZ Management Agreement did not have a fixed term, nor did it provide that it would expire on the sale of the last of the original Properties.
[80] Mr Millar’s evidence was that neither First NZ nor ISL considered the agreement to have terminated after the sale of the last First NZ Property. Following the sale, ISL was to continue managing any replacement properties purchased by First NZ on the basis that the Management Agreement was continuing.
[81]Mr Millar said:
… both parties were operating on the basis that the management agreement was, despite the sale of the last original property, continuing and neither party considered the agreement to have terminated.
[82] The defendants also note that the directors of First NZ sought shareholder approval by way of special resolution to purchase a “replacement property” following the sale of the last of the original Properties. The shareholders did authorise the purchase of a replacement property and, by extension, the continued management of
12 Gault, above n 4, at [CC2.01].
that property by ISL on the terms and conditions in the First NZ Management Agreement. The shareholders’ approval of the purchase of a replacement property is evidence that the shareholders also accepted that the term “Property” in the management agreement would apply to the replacement property.
[83] The defendants rely on CSR Ltd v Adecco (Australia) Pty Ltd.13 In that case a formal contract for the supply of labour between Adecco and CSR had expired. Under the contract, Adecco was liable to indemnify CSR against personal injury suffered by temporary staff. After the agreement expired, Adecco continued to supply labour, and CSR continued to pay at the same price as in the expired contract. The New South Wales Court of Appeal held that, following expiry of the agreement, the parties’ continued conduct gave rise to an implied contract on the expired terms, including the indemnity provision.
[84] The defendants say that is the situation here — First NZ continued to own property and ISL continued to provide property management services, under a new contract, on the terms of the First NZ Management Agreement.
[85] The third defendant submits that the parol evidence rule applies, with the consequence that any evidence from the plaintiffs to establish the existence of a new, undocumented arrangement between First NZ and ISL is inadmissible.
Discussion
[86]First I address the discussion about the parol evidence rule.
[87] I accept the submission for First NZ that it did not in fact adduce any evidence to suggest that the First NZ Management Agreement was added to, varied or contradicted in any way. It says there was no related party transaction approval, no disclosure in the interests register, and no other corporate documentation suggesting there was an amendment. First NZ says it was a new agreement.
13 CSR Ltd v Adecco (Australia) Pty Ltd [2017] NSWCA 121. See also Andar Transport Pty Ltd v Brambles Ltd [2002] VSCA 150.
[88] In addition, as First NZ notes, the relevance of the parol evidence rule has greatly diminished, as a consequence of the Evidence Act 2006, which largely codifies the rules of admissibility.14 In the Bathurst case the Supreme Court held that it is well- settled that the parol evidence rule does not govern the admissibility of extrinsic material in relation to contractual interpretation and the correct approach is to start with the Evidence Act to determine the admissibility of all evidence in court proceedings.15
[89] In Bathurst, the Supreme Court described the proper approach to contractual interpretation as an objective one, the aim being to ascertain:16
… 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.
[90] At first blush the interpretation advanced by the plaintiffs is not completely consistent with the wording of the Agreement. For example, in the Introduction to the Agreement, cl D states:
FPL [Foodstore Properties Ltd] and the Subsidiaries wish to appoint FMIS as their agent for the ongoing administration and investment management of FPL, the Subsidiaries and the Properties, and FMIS wishes to accept such appointment, on the terms and conditions set out in this Agreement.
[91] That wording is largely repeated in cl 1 of the Agreement. The wording suggests that the purpose of the Agreement is broader than the management of the named Properties. That is, it also covers the ongoing administration and investment management of Foodstore Properties Ltd and its subsidiaries.
[92] On that view, in the absence of a terminating event in terms of cl 17, the Agreement would have continued on foot, because its ambit was broader than the First NZ Properties.
14 Helen Winkelmann, Susan Glazebrook and Ellen France “Contractual Interpretation” (2020) 51(3) VUWLR 463 at 504.
15 Bathurst Resources Ltd v L&M Coal Holdings Ltd, above n 5, at [56]–[58].
16 At [41], quoting Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912.
[93] However (apart from an establishment and administration fee) ISL’s remuneration under cl 11 of the Agreement is framed solely in terms of fees in relation to the Properties. First, a management fee in respect of the Properties up until 31 March 1996; second, an annual management fee, based on annual gross rentals, thereafter; and third, a proportion of any capital gains on the sale of any of the Properties.
[94] ISL’s ongoing fees were dependent on there being at least one property to generate the gross rentals. “Gross rentals” is defined (in cl 11.2) as:
means all rental premiums, licence fees, monies received from or in respect of any loss of profits pursuant to an insurance policy or policies and all other income whatsoever received in respect of the Properties…
[95]The Properties are set out in the Schedule and described at [72] above.
[96] The Agreement related to the Properties as defined. Once the Properties were sold, the terms of the Agreement no longer applied, even though the termination provisions were not invoked.
[97] While the plaintiffs in this case sought to distinguish CSR v Adecco on the basis that it arose in an employment context, I think the defining feature of CSR for the purpose of this case is that it involved the implication of a new contract, on the expired terms, as between two arms-length parties. That was not the case here.
[98] The question in this case is whether the Court can “conclude with confidence”17 that the conduct of the parties signalled consent to an ongoing arrangement on the old terms.
[99] It is clear that there was no express intention or consent from First NZ. Mr Millar says neither party considered the agreement to have expired and both parties were operating on the basis that the same terms continued to apply.
17 Blackpool and Fylde Aero Club Ltd v Blackpool Borough Council [1990] 3 All ER 25 at 31.
[100] But, as Mr Millar conceded in cross-examination, “neither party” meant Mr Millar, wearing his ISL director hat, on the one hand, and his First NZ director hat, on the other. The other two directors of First NZ at the time of the sale of the last of the Properties were Mr Millar’s employees, Ms Laughton and Mr Barnes. There were no independent directors.
[101] Mr Millar could not recall whether he had considered, in his capacity as a director of the plaintiffs, whether it was in the best interests of First NZ to continue with the First NZ Management Agreement. Nor was the question of continuation of the Management Agreement specifically put to shareholders, either at the point of sale of Foodtown Te Atatu or when shareholder consent was sought to purchase a new property. The 25 June 2003 letter to shareholders (signed by Mr Millar) inviting attendance at the Extraordinary General Meeting to vote on the acquisition of a new property did not address the ISL/First NZ management arrangements.
[102] In addition, it was plainly in ISL’s business interests to continue as if it were business as usual. As Mr Mephan acknowledged in cross-examination, the plaintiffs comprised between 50 and 75 per cent of ISL’s business.
[103] Nor can it be said that it was necessary for business efficacy or so obvious that it goes without saying18 that the terms argued for by defendants be implied. One commentator has observed19 that in Andar Transport Pty Ltd v Brambles,20 the continuing relationship between the parties was inexplicable, absent the expired terms.
[104] In this case there was no evidence specifically directed at what specific terms were necessary for business efficacy, but there must have been a practical possibility that if the situation had been brought to the attention of First NZ in a clear and independent way, it may well have sought to exclude any ongoing provision for gain fees and would likely not have agreed to a practical increase in the management fee.
18 The second and third of the five conditions for implication of a term set out by the Privy Council in BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266 (PC) at 283.
19 Ben Sears “Implied contract? When conduct continues after a contract expires” (LLB research paper, Victoria University of Wellington, 2022).
20 Andar Transport Pty Ltd v Brambles Ltd, above n 13.
[105] In those circumstances, it is not possible to imply a continued contract on the terms argued for by the defendants.
[106] I conclude that the First NZ Management Agreement was solely for the purpose of the Properties and came to an end on the sale of the last of the Properties.
[107] Nevertheless, plainly, and as the parties agree, there was a further management agreement between them after the sale of the last of the First NZ Properties in November 2004. ISL continued to provide property management services for subsequently acquired properties and First NZ continued to pay ISL.
[108] I conclude that continuation of a contract between First NZ and ISL was on the basis of ISL continuing to be paid a total management fee of 6.50 per cent of annual gross rentals, which was to cover both “investment management” and “property management”, as had been the case while Franklin was engaged as property manager. I also accept First NZ’s submission that the new agreement did not provide for the payment of gain fees on the sale of any further-acquired properties. This is discussed further at [176]–[185] below.
First NZ’s claims
[109]The specifics of First NZ’s claims are set out below.
Disclosed property management fee
[110] From 1 April 2005 to 31 March 2021 ISL received from First NZ a property management fee of $1,159,00.81 plus GST. This was 3.25 per cent of gross rentals, being the property management fee. First NZ characterises the $1,159,00.81 plus GST as the “disclosed property management fee”.
[111] The First NZ agreement with Franklin came to an end on or about 31 December 2003. ISL then took the property management function “in-house”, engaging David Penrose, and then PPML, as property manager.
[112] The cost to engage Mr Penrose to provide property management services in- house was a fraction of the cost of engaging Franklin: for example, for the financial year ending 31 March 2007, the cost of property management recorded in the general ledger was $9,500. The disclosed management fee was $94,530. 50 per cent of that amounted to $47,265.
[113] Notwithstanding that, FNZ says there was no review on termination of the First NZ Franklin Agreement and bringing the property management function in-house, of what would be in First NZ’s best interests.
[114] The plaintiffs say that there is no evidence that Mr Millar, as director of First NZ, ever considered whether continuing to charge a property management fee at
3.25 per cent would be in the best interests of First NZ. Rather, he allowed a situation where, on termination of the First NZ Franklin Agreement, ISL was immediately able to increase its earnings from the First NZ Management Agreement.
[115] First NZ purchased the Kilmore Street property in December 2003. Kilmore Street had multiple tenants and therefore an operating expenses (Opex) management account. First NZ says that ISL continued to receive the 3.25 per cent property management fee, where that fee was effectively being met by the tenants of the First NZ properties and made no reduction to First NZ. In doing so, Mr Millar and Mr Mephan (from 13 February 2018 to 31 March 2020) profited in breach of their fiduciary and statutory duties to First NZ.
[116] In summary, First NZ paid ISL the entire management fee when at the same time the actual costs of property management were significantly less than were incurred by ISL.
[117] First NZ seeks recovery of an amount equal to half of 6.50 per cent of the annual gross rentals paid to ISL from 1 April 2005 to 31 March 2021.
“Excess” property management fees
[118] In the period 1 April 2006 to 31 March 2020, First NZ paid to ISL an “Opex management” fee of $183,220.00 plus GST, characterised by First NZ as undisclosed “excess” property management fees.
[119] It says this amount was paid by way of monthly automatic payments from First NZ to ISL and it was “excess” in that it was charged in addition to the 3.25 per cent property management fee.
[120] First NZ says that ISL was not entitled to charge First NZ fees for property management services that it did not perform and that were already part of the management fee being charged to and paid by First NZ.
[121]First NZ says there was no contractual basis for the payments.
[122] Where a property was tenanted the tenants were charged an amount equivalent to the excess fees, as Opex. First NZ says that where Opex was received from the tenants it did not retain those amounts, but paid them to ISL.
[123] Mr Osborn’s evidence for the plaintiffs was that the Opex charges were not revealed in the Annual Reports for each of the plaintiff companies, because the charges and their payment by tenants net to an overall nil figure. Mr Osborn observed that there is no reporting of the excess property management fees as a line item, nor of the receipts from tenants. The excess fees were paid regardless of whether the relevant property was tenanted and Opex paid.
[124] Mr Millar accepted that there was no contract for fees to be paid by First NZ to ISL over and above the 6.50 per cent management fee, but agreed that ISL did in fact receive these, additional payments.
[125] The defendants’ response is that the “excess” fees were for legitimate services provided to First NZ by ISL, additional to the services it was obliged to provide under the Management Agreement. The defendants say that the fees were in fact not for property management, but for “Opex management”. The Opex management services
provided by ISL were services previously provided by Franklin and which neither of the third party professional managers subsequently appointed (Gravtec and Terra Firma) were in a position to provide. These services were therefore in addition to the management services provided by ISL to First NZ in terms of the First NZ Management Agreement.
[126] As to the allegation that the fees were undisclosed, the defendants rely on s 140(2) of the Companies Act to submit that general disclosure of the payments was sufficient. This took the form of general disclosure in all annual accounts that all transactions between First NZ and ISL were related party transactions and transactions in which Mr Millar had an interest.
[127] Second, they were recorded in general terms — that Mr Millar was personally interested in transactions between First NZ (and Springs Road) on the one hand and ISL on the other — in the companies’ interest registers, in all relevant periods.
[128] Further, although Mr Millar was an interested director, he was able to approve the fees because the First NZ Constitution specifically provides that an interested director is able to authorise transactions in which he or she has an interest.
[129] The defendants agree that the “excess” fees did not appear in the annual accounts of First NZ, but say this was not a failure of disclosure in accounting terms (although this was not pleaded). The fees do not appear in the annual accounts because they were not revenue, costs or expenses of First NZ and had no bearing, positive or negative, on the equity position of First NZ which is required to be described in the annual accounts.
[130] Accordingly, the fees cannot be said to be “undisclosed” in breach of the defendants’ obligations.
Directing payments to Gravtec and Terra Firma
[131] First NZ also claims in respect of payments made to third party property managers Gravtec and Terra Firma. In respect of both First NZ says the payments were made with the knowledge, and at the direction, of Mr Millar and Mr Mephan (in
the period 13 February 2018 to 31 March 2020) in breach of their fiduciary and statutory duties.
Gravtec
[132]Between 1 April 2011 and 31 December 2020, First NZ paid Gravtec fees of
$204,328.87 plus GST for property management services. It is common ground that Gravtec’s fee was not met from within the 3.25 per cent property management fee. First NZ also says the payments to Gravtec were not disclosed by ISL.
[133] The defendants rely on an agreement between Gravtec and First NZ as the legal basis for the payments to Gravtec. That agreement (signed by Mr Barnes for First NZ) is dated 20 November 2017, but stated to commence on 1 October 2011.
[134] First NZ submits that Mr Millar’s explanation for the backdating — in essence, to minimise the risk of Mr Barnes “causing difficulty” on his termination — lacks credibility and was an artifice. In addition, the Gravtec agreement was not disclosed to First NZ shareholders until the 2020 Annual Report. Again, First NZ submits that Mr Millar’s explanation for this — that it was not intentionally disguised but was a matter of “property administration” — lacks credibility.
Terra Firma
[135]Between 1 April 2012 and 31 March 2020, First NZ paid Terra Firma fees of
$203,143.86 plus GST for the provision of property management services for First NZ’s property at Symonds Street. As with Gravtec, the fees to Terra Firma were paid by First NZ in addition to the management fee paid to ISL and in addition to the “excess” property management fees.
[136] The defendants rely on an agreement between First NZ and Terra Firma as the legal basis for the payments to Terra Firma. The agreement is undated, states that it relates to “a period expiring on 31 March 2019”, but does not have a start date. Mr Mephan signed that agreement on behalf of First NZ and confirmed that it was likely signed on or about March 2018.
[137] First NZ alleges that, as with Gravtec, the engagement of Terra Firma was to fulfil a function for which ISL was already receiving a fee from First NZ and was, in addition, receiving Opex management fees from the tenants of the properties.
[138] First NZ also say the existence of the agreement and payments to Terra Firma were not disclosed to First NZ’s shareholders — they were not mentioned in the annual accounts. Mr Sutton, in his evidence for the defendants as an expert in corporate governance, acknowledged that the agreement and payments were not in plain sight.
[139] Mr Millar accepted that the property management services provided by Gravtec, and subsequently Terra Firma, were a subset of the services that were being provided by ISL to First NZ.
[140] Mr Millar also accepted that First NZ’s shareholders would not have been aware of the backdated contract with Gravtec.
[141] But the defendants say that the payments were for legitimate property management services for which First NZ had an obligation to pay. ISL had a contractual entitlement to the management fee of 6.50 per cent of annual gross rentals. In addition, the Management Agreement gave ISL power to “instruct such … consultants or advisers as [ISL] deems necessary or desirable in connection with any of its duties and responsibilities under this Agreement”. It relies on cl 4.1 of the Agreement to submit that the costs incurred in doing so are First NZ’s costs.
[142] The payments were for legitimate services, actually provided by Gravtec and Terra Firma. Further, the costs of engaging Gravtec and Terra Firma were incurred by the tenants, by way of Opex, and not by First NZ, therefore there was no loss to First NZ.
[143] Mr Millar, Mr Mephan and ISL did not benefit from the payments to Gravtec and Terra Firma — none of them has any interest in those companies.
[144] The defendants also submit that there was no obligation to disclose the Gravtec and Terra Firma agreements and payments to First NZ’s shareholders because the payments were not a cost, expense or revenue of First NZ.
Gain fees
[145] In addition to the fees for property management, First NZ also seeks to recover gain fees paid to ISL:
(a)$380,000 plus GST for 50 Kilmore Street. The full gain fee charged was $430,000 plus GST. However, $50,000 plus GST has been recovered from Mr Barnes as part of the fraud recovery; and
(b)$450,000 plus GST for 110 Symonds Street.
[146] The First NZ Management Agreement provided for the payment of gain fees of five per cent of any capital gains realised on the sale of First NZ Properties. But First NZ says there was no contractual or other entitlement for the payment to ISL of the gain fee on either of the Kilmore Street or Symonds Street properties. Clause 11.1(d) of the First NZ Management Agreement (the gain fees provision) did not apply at all to either property, or any other property which was not one of the Properties described in the Schedule to the First NZ Management Agreement. (In any event, it says, Kilmore Street was not “sold”).
[147] Nor is there any evidence that the parties intended for, or provided any consideration for, the claiming of a gain fee on the sale of a replacement property for the Properties.
[148] First NZ also relies on the introduction to the First NZ Management Agreement which explains that each of the subsidiary companies intends to purchase a specific property. Each property is defined as a “Property” and together they are defined as the “Properties”. The Agreement does not refer to any intention to purchase additional properties, or to the payment of fees if additional properties are purchased. The payment provision, and the First NZ Management Agreement as a whole, refer expressly to the “properties” only.
[149] First NZ points to the First NZ prospectus of 5 October 1995, to support this submission. The prospectus refers only to the Properties. The Chairman’s letter refers to the “ownership of the premises of three suburban Auckland supermarkets, Foodtown Te Atatu, Foodtown Blockhouse Bay, and Foodtown Birkenhead.” It goes on to say:
Foodstore Properties Limited has been developed specifically to allow investors to participate in the attractive income flows generated from these properties as well as any capital growth that may be realised from their eventual sale.
[150] Clause 3 of the First NZ Management Agreement states that ISL shall manage the affairs of First NZ and the Subsidiaries, including the “acquisition, management and eventual sale of the Properties” and shall do any act or thing reasonably requested by First NZ or a Subsidiary”. First NZ says this supports the view that the First NZ Management Agreement is focused on acquisition and management of the Properties only.
[151] First NZ says that ISL had no contractual or other entitlement to the gain fees. In respect of the Kilmore Street gain fee, Mr Millar, and in respect of the Symonds Street gain fee, Mr Millar and Mr Mephan, breached their fiduciary and statutory duties owed to First NZ by directing the payment of the gain fees:
(a)when it was not in the best interests of First NZ;
(b)where there was a failure to exercise due care and skill to establish an obligation on the part of First NZ to make the payment; and
(c)where there was no proper contractual basis to do so.
[152] By directing the payment of the gain fees, Mr Millar (in the case of Kilmore Street) and Mr Millar and Mr Mephan (in the case of Symonds Street) profited at the expense of First NZ.
[153] The defendants rely on the terms of the First NZ Management Agreement which provided, at cl 11.1(d) that Foodstore Properties Ltd (First NZ) agreed to pay to
FMIS (ISL) “5.0 per cent of any capital gains realised on the sale of any of the Properties.”
[154] The defendants say that the First NZ Management Agreement, including the provision relating to payment of a gain fee, did continue in effect after the sale of the three Properties named in the Schedule and cl 11.1(d) should be construed as applying to the sale of any subsequently acquired properties. By way of example, Mr Millar gave evidence of the First NZ shareholders approving the purchase of a new property. On that basis ISL was entitled to the payment of both the Kilmore Street and Symonds Street gain fees.
[155] The parties’ experts accepted that the gain fees had been correctly calculated, however Ms Kelly, for the defendants, identified an error in the calculation of the fee in the amount of $15,630, in relation to Kilmore Street. The first and second defendants accept an obligation to repay this amount.
Kilmore Street
[156] Mr Millar directed the payment of a $430,000 plus GST gain fee from First NZ to ISL in 2012.
[157] The Kilmore Street gain fee was paid in two tranches. First, $280,000 plus GST, on 11 June 2012, for an “interim fee for capital gain following the settlement of the Material Damage claim on Kilmore Street”. Second, $150,000 plus GST on 17 August 2012 for the “Balance of fee for capital gain following sale of the Kilmore Street land”. ISL did not receive the entire gain fee as $50,000 (plus GST of $7,500) was paid fraudulently to the company Activa. For that reason First NZ seeks to recover only $380,000 in this proceeding.
[158] First NZ says the Kilmore Street gain fee was not disclosed in any annual accounts as a related party transaction. As acknowledged by Ms Kelly for the defendants, it was not included as part of the Management Fee reported in the 2013 annual accounts. First NZ says that it is disguised by the reporting of the proceeds of the disposal of the property as a net figure.
[159] First NZ says that even if the First NZ Management Agreement did apply to allow payment of a gain fee, there was no “sale” of Kilmore Street. The Kilmore Street property suffered damage in the Christchurch earthquakes of 2010 and 2011. In 2012 Foodstore (Cranmer) Ltd (a wholly owned subsidiary of First NZ) settled an insurance claim in respect of damage to the building for $12,600,000 plus GST and sold the bare land for $3,000,000 plus GST.
[160] Mr Millar’s evidence covers what happened to Kilmore Street as a result of the September 2010 and February 2011 earthquakes. Some repair work was necessary after the first earthquake. ISL took responsibility for First NZ’s obligations as landlord of the property and organised some repair work, liaising with tenants, the insurance company and the professionals responsible for the repairs. Shortly before tenants were due to move back into the building the second, February, earthquake struck. ISL again took responsibility, as First NZ’s agent, to obtain expert reports about the structural integrity and safety of the building. The cost of carrying out the experts’ recommendations for keeping the building stable was significant and the insurance company would not commit to the cost of the repairs. A settlement was negotiated with the insurance company which resulted in a payment to First NZ of $12,600,000 plus GST. The building was then demolished and the bare land was sold for
$3,000,000 plus GST. ISL was responsible for negotiating the insurance settlement and the sale of the land, Mr Millar said at considerable effort, for an ultimate pay-out to First NZ of the insurance proceeds and, later, the sale of the bare land.
[161] Mr Millar’s evidence is that ISL considered it was entitled to a gain fee in relation to the insurance proceeds under the First NZ Management Agreement because of the transaction with the insurance company being a “deemed sale”. ISL took a gain fee on the basis of the difference between the building and the bare land acquisition values and the sales. It invoiced First NZ for a gain fee totalling $430,000 plus GST.
Symonds Street
[162] The multi-storey property at 110 Symonds Street, Auckland was purchased (through First NZ’s 100 per cent-owned subsidiary Symonds 110 Ltd) from the
remaining proceeds of the insurance settlement on Kilmore Street. It was sold in 2018. A gain fee of $450,000 on the sale was paid to ISL, on 20 November 2019.
[163] When asked in cross-examination about payment of the Symonds Street gain fee, Mr Millar admitted that there was a discussion between him and Mr Mephan about whether or not First NZ should pay the gain fee to ISL. He said:
Mr Mephan raised with me and said you know in light of Barnes’ fraud do you think we should pay ourselves this fee and I answered very clearly yes I did think we should pay ourselves this fee. The fraud was a matter that we were dealing with separately and would continue to do so.
Causes of action pleaded by First NZ
[164] I note at the outset that there is an overlap in the amounts sought by First NZ as against different defendants and across various causes of action. As I will come to, there can be no double recovery.
Claims against ISL
[165] First NZ alleges both breach of contract and negligence by ISL in making the payments referred to at [46] and [47] above. First NZ also claims in unjust enrichment against both ISL and Mr Millar. That is discussed at [304]–[313] below.
[166] My conclusion as to the nature of the ongoing arrangements between First NZ and ISL, after the sale of the Properties, is set out at [108] above. That is that the ongoing contract between First NZ and ISL required ISL to provide property management services from within the 3.25 per cent property management fee and did not provide for the payment of gain fees in respect of properties acquired after the last of the First NZ Properties was sold.
Breach of contract
[167]In relation to the breach of contract claim, First NZ says ISL:
(a)was not entitled to be paid for excess property management fees charged where no property management services were provided;
(b)was not entitled to appoint third parties Gravtec and Terra Firma to undertake the same property management services that ISL was already being paid to provide and to charge additionally for those services;
(c)was not entitled to direct the payments to Terra Firma and Gravtec;
(d)was not entitled to charge gain fees on the sale of future First NZ properties. In the case of both Kilmore Street and Symonds Street, there was no contractual basis to make payment of a gain fee. In the case of Kilmore Street, even if there were a contractual basis this was an insurance settlement and not a sale and therefore there was no basis for ISL to be paid a gain fee.
[168] First NZ says that in making the payments referred to in the preceding paragraph, ISL breached the terms of the new contract.
[169]In its second amended statement of claim First NZ claimed a total sum of
$2,579,693.54 plus GST, being:
(a)$1,159,000.81 plus GST by way of disclosed property management fee;
(b)$183,220.00 plus GST, “excess” property management fees;
(c)$204,328.87 plus GST paid to Gravtec;
(d)$203,143.86 plus GST paid to Terra Firma;
(e)$380,000 plus GST for the Kilmore Street gain fee; and
(f)$450,000 plus GST for the Symonds Street gain fee.
Discussion
[170] As I have found, the continuing agreement between First NZ and ISL provided for a property management fee of 3.25 per cent of gross rentals. ISL continued to
receive payment of that amount (the disclosed management fee). As I have also found, cls 3.9 and 4.1 of the First NZ Management Agreement did not entitle ISL to claim for property management fees in addition to the 3.25 per cent. That was also the position after the Agreement came to an end in November 2004. The ongoing agreement between the parties did not therefore authorise ISL to pay itself the Opex management fee/“excess” property management fee. Nor was there a separate contractual basis for the payment.
[171] Mr Millar conceded there was no contractual basis for the $183,000 payment. It was in addition to the 3.25 per cent property management fee. It was not disclosed to shareholders and was effectively concealed because it was set off against the Opex received from tenants, so showed as neutral.
[172] In any event the defendants’ evidence did not adequately establish their assertion that the “Opex management” was different from, and additional to, the property management function which ISL was already being paid to provide by way of the disclosed property management fee — that is the 3.25 per cent of gross rentals.
[173] Mr Mephan’s evidence was that in practical terms Mr Eberlein of Gravtec carried out the property management function, including supervising Terra Firma. ISL itself undertook a very limited property management function, which Mr Mephan said included paying the Opex accounts, administering the banking and maintaining the accounting records. Mr Mephan described it as a “supervising, overarching function”, carried out, at various times, by himself, Mr Barnes and Mr Millar. Mr Mephan acknowledged that ISL relied on Gravtec and Terra Firma as experts.
[174] In light of my earlier findings, nor was there a contractual basis as between First NZ and ISL for the engagement and payment of the third party providers, Gravtec and Terra Firma ($204,328.87 plus GST and $203,143.86 plus GST, respectively).
[175] However, there is no dispute that Gravtec and then Terra Firma actually carried out the property management services for which they were contracted.
[176] As to the gain fees, under the First NZ Management Agreement each property is defined as a “Property” and together they are defined in the Schedule to the Agreement as the “Properties”. The Agreement contains no reference to the purchase of additional properties or to the payment of fees if additional properties were to be purchased.
[177] Clause 3 of the First NZ Management Agreement, as discussed at [150] above, also supports the view that the First NZ Management Agreement was focused on the acquisition and management of the Properties only.
[178] Clause 11.1(d) refers to a gain fee being payable on the sale of “any of the Properties”. The last of the Properties was sold on 4 November 2004. Kilmore Street and Symonds Street were acquired subsequently. They did not fall within the definition of Properties and nor did the Agreement elsewhere refer to the payment of a gain fee on subsequently acquired properties.
[179] Even if the First NZ Management Agreement did continue in its existing form after the sale of the original Properties, it is in my view clear that the provision relating to payment of a gain fee must be interpreted as applying only to the original, defined Properties.
[180] There is no basis to imply a term or custom or practice allowing for the payment of a gain fee on other properties (and nor is this pleaded).
[181] There is no ambiguity. The plain meaning is that the gain fee is payable on the sale of the Properties.
[182] That being so, I accept that there was no entitlement to a gain fee for either of Kilmore Street or Symonds Street.
[183] Even if the First NZ Management Agreement, or the subsequent agreement, could be construed to provide for the payment of a gain fee on any subsequently acquired property, the Kilmore Street property was destroyed in an earthquake. There was no “sale” of the Kilmore Street property.
[184] The Kilmore Street gain fee was not disclosed with any annual accounts as a related party transaction. It was not included as part of the Management Fee reported in the 2013 Annual Accounts. In effect, the payment was disguised by the reporting of the proceeds of the disposal of the property as a net figure.
[185] First NZ is therefore entitled to payment of $830,000 in respect of the gain fees.
[186] I conclude that ISL was in breach of its contract with First NZ in authorising and/or making the payments referred to at [169] above and is entitled to recovery from ISL. While, as noted above, First NZ’s second amended statement of claim sought a total amount of $2,579,693.54 plus GST, in closing submissions First NZ accepted that the amount claimed for disclosed management fees must take into account that it actually received property management services. First NZ’s amended calculation of its loss is the disclosed property management fees of $1,159,000.81 plus GST, less the fees paid to Gravtec and Terra Firma, less a further amount of $77,500 plus GST paid to ISL. It is not clear what this last amount relates to.
[187] In a breach of contract claim, the plaintiff is to be put as nearly as possible into the position it would have occupied if the contract had been performed.21 First NZ contracted ISL and paid it $1,159,000.81 plus GST for property management services. It received property management services. There was no contractual basis for the excess property management fees of $183,220.00 plus GST and I have found that no additional services were provided for that payment. There was no contractual basis (as between First NZ and ISL) for the fees paid to Gravtec and Terra Firma (totalling
$407,472.73 plus GST). Nor was there a contractual basis for payment of the gain fees.
[188] Accordingly, in my view the appropriate way to calculate First NZ’s contractual loss is the uncontracted for expenditure of $183,220 plus GST, plus
$407,472.73 plus GST, plus the $830,000 plus GST gain fees.
21 See for example New Zealand Motor Bodies Ltd v Emslie [1985] 2 NZLR 569 (HC) at 598.
Negligence
[189] First NZ alleges that ISL owed a duty of care to First NZ to perform administration and investment services with reasonable skill and care. The duty required ISL to take reasonable skill and care when making payments on First NZ’s behalf: being fees for property management, payments to Gravtec and Terra Firma, and gain fees.
[190] First NZ claims that ISL negligently performed administration and investment services for First NZ, as agent for First NZ. It pleaded a consequential loss, or benefit to ISL, totalling $2,579,693.54 plus GST. The calculation of that amount is the same as for the breach of contract claim against ISL (set out at [169] above).
[191] ISL does not contend that these payments were not made and that ISL procured these payments to be made, but says the nature and extent of any duty of care it owed is set out in the First NZ Management Agreement. It is entitled to rely on that Agreement. ISL submits it did not owe First NZ a duty of care in tort — the relationship was not sufficiently proximate and there are wider policy considerations that tend to negative or restrict the existence of a duty in the circumstances of this case.22
[192] It also says that there is no evidence of what a reasonable investment manager would have done, for the purposes of comparison with what ISL actually did. Accordingly, there is no factual basis for a finding in negligence against ISL.
[193] ISL also relies on the indemnity and limitation of liability provisions in cls 6 and 7 of the First NZ Management Agreement and I consider that question in relation to the affirmative defences discussed later in the judgment.
Discussion
[194] Justice Glazebrook set out the test for ascertaining whether a duty of care exists in Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd as follows:
22 Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZLR 324 (CA) at [58].
[58] … The ultimate question when deciding whether a duty of care should be recognised in New Zealand is whether, in light of all the circumstances of the case, it is just and reasonable that such a duty be imposed. The focus is on two broad fields of inquiry but these provide only a framework rather than a straitjacket. The first area of inquiry is as to the degree of proximity or relationship between the parties. The second is whether there are other wider policy considerations that tend to negative or restrict or strengthen the existence of a duty in the particular class of case. At this second stage, the Court’s inquiry is concerned with the effect of the recognition of a duty on other legal duties and, more generally, on society.
[195] I accept that ISL was sufficiently proximate. The parties were in a contractual relationship, this being the undocumented arrangement that continued after the sale of the last of the First NZ Properties. Under this contract, ISL had an obligation to provide administration and investment services to First NZ. As First NZ notes by way of illustration of that relationship, ISL had “complete control” over the property companies, including their banking arrangements.
[196] I also accept that the fact of common directors of First NZ and ISL (Mr Millar and latterly Mr Mephan), and the merged meetings of ISL and the property companies, meant that knowledge within one entity can be imputed to the other.
[197] It was therefore reasonably foreseeable that if ISL did not exercise reasonable skill and care in performing its contractual obligations, harm would be caused to First NZ.
[198] There are no policy reasons that preclude the imposition of a duty of care on ISL in this situation. A duty on an investment manager is commonplace where there is a contractual relationship between the parties.23 The tortious duty is concurrent and coextensive with the contractual relationship between the parties.
[199] While generally contractual and tortious duties should be coextensive, a broader duty in tort may be found in some circumstances. Here, First NZ says that the duty of care in tort is wider than the contractual duty in the circumstances of a conflict of interest. As Tipping J said in Frost & Sutcliffe v Tuiara,24 in the context of a contractual relationship between a law firm and its clients, “in some circumstances it
23 Frost & Sutcliffe v Tuiara [2004] 1 NZLR 782 (CA) at [17].
24 At [19]–[22].
may be necessary, for example to avoid professional impropriety, to hold that the duty in tort is wider than that in contract”.25
[200] I accept that the circumstances of this case come within the exception to Tipping J’s general rule. Even if the First NZ Management Agreement continued beyond 2004 (which I have concluded it did not) it would be appropriate to impose a duty of care on ISL in tort, notwithstanding the purported limitations contained in cl 6 of the Agreement.
[201] The duty of care owed by ISL was to exercise a reasonable standard of care in performing its management obligations to First NZ. I accept that this required ISL to ensure that there was a proper basis for charging First NZ, or allowing it to be charged, property management fees and other fees; and the fees that were actually charged by ISL to carry out its management obligations were not excessive.
[202] I also conclude that ISL did not at any stage undertake such an assessment. Throughout it relied on its (effectively Mr Millar’s) own interpretation of the written First NZ Management Agreement, and that Agreement continuing past November 2004, despite the “Properties” to which it applied having all been sold.
[203] ISL has maintained that at all times it was entitled to a 6.50 per cent management fee. The experts for all parties accept that ISL was paid over and above this 6.50 per cent fee, including:
(a)the Excess Property Management fees, totalling $183,220 plus GST;
(b)the property management fees paid to Gravtec, totalling $204,328.87 plus GST; and
(c)the property management fees paid to Terra Firma, totalling
$203,143.86 plus GST.
[204]As noted, ISL had complete control over First NZ’s banking arrangements.
25 At [20].
[205] I conclude that, in making the undisclosed payments to Gravtec and the undisclosed payments to Terra Firma, in addition to the 3.25 per cent disclosed property management fee, ISL breached its duty of care to First NZ.
[206] ISL was also in breach of its duty of care to First NZ in authorising and making the payment to itself of the excess property management fees, where there was no written or other agreement with First NZ to charge property management fees over and above the agreed management fee.
[207] ISL was also in breach of its duty of care to First NZ in authorising and making payment of the gain fee of $430,000 plus GST on the insurance settlement of the Kilmore Street property, which was not a sale (noting that the amount claimed is
$380,000 plus GST), and a gain fee of $450,000 plus GST on the sale of the Symonds Street property. As I have already concluded, there was no contractual basis for the payment of these fees and no evidence that ISL sought to ascertain a proper basis for the payments. To the contrary, Mr Mephan’s exchange with Mr Millar on whether the Symonds Street gain fee should be paid (referred to at [163] above) could be seen as a deliberate decision by Mr Millar not to inquire further as to a proper basis for that payment.
[208] I do not accept ISL’s submission that there is no causal link between its negligent conduct and any loss suffered by First NZ.
[209]The causal link in respect of the gain fees is unarguable. That loss totals
$830,000 plus GST.
[210] In respect of all aspects of the loss claimed — the excess property management fees, the payments to Gravtec and Terra Firma and the gain fees — ISL was in effect the sole actor. It occasioned the payment of those amounts by First NZ without inquiry as to a proper basis for doing so.
[211] First NZ is entitled to be put in the position it would have been in had ISL’s negligence not occurred.
[212] I apply the same calculation as in relation to the breach of contract claim, set out at [188] above. ISL is liable to pay First NZ the uncontracted for expenditure of
$183,220 plus GST, plus $407,472.73 plus GST, plus the $830,000 plus GST gain fees.
Claims against Mr Millar and Mr Mephan
[213] The plaintiffs say Mr Millar and Mr Mephan26 were fiduciaries of the property companies and owed fiduciary duties to those companies which required them:
(a)To act in good faith.27
(b)Not to profit from the property companies.28
(c)Not to place themselves in a position where duty and interest may conflict.29
(d)Not to act for their own benefit or for the benefit of a third person without the informed consent of their principal.30
[214] First NZ alleges that, at all material times, Mr Millar and Mr Mephan failed to fulfil their fiduciary duties to the company.
[215] First NZ also alleges breach by both Mr Millar and Mr Mephan of s 131 of the Companies Act, which restates the basic common law duty of directors to the company, and s 137 of the Companies Act, which requires a director to exercise the care, skill and diligence of a reasonable director, when exercising powers or performing duties.
[216] The plaintiffs plead that Mr Millar’s personal interests conflicted with his duties to First NZ and the other property companies. He was a director of each of the property companies, a director of ISL and with effective power to appoint directors to
26 Only in respect of First NZ and Springs Road.
27 Holden v Architectural Finishes Ltd HC Wellington M659/92, 1 November 1995 at 84: “… to act as the director honestly sees as being in the best interests of the company.”
28 Holden v Architectural Finishes Ltd, above n 27.
(h)Mr Murray and Mr Prendergast approaching and soliciting Kathryn Brownlie (who was then an employee of ISL) in December 2020.
(i)FSS, in December 2020, undertaking obligations which ISL had been contracted to provide.
Plaintiffs’ submissions
[398] The plaintiffs’ response is that, as a matter of law, the actions relied on by ISL cannot amount to repudiation, which requires an irrevocable indication that a party will not perform its contractual obligations.
[399] The property companies’ primary obligation under the management agreements was to pay ISL a fee for the services provided by ISL. There is no evidence or suggestion of any intention not to perform that obligation. Mr Murray’s evidence was that the property companies were ready, willing and able to pay ISL its management fee. The property companies did in fact continue to pay ISL its fee, up to and including the date of cancellation by ISL.
[400] Second, the plaintiffs say, that as a matter of fact they did not repudiate the management agreements.
[401] From May 2020, ISL had agreed to assign the management agreements between ISL and each of the property companies to PPML (Mr Penrose’s company) and (at Mr Millar’s behest) the parties were discussing the terms of a mutually agreed transition after PPML withdrew from the negotiations with the property companies.
[402] In addition, the property companies had serious concerns over ISL’s ability to carry out its property management obligations.
[403] The first of those concerns related to insurance. ISL was unable to obtain insurance for itself, or the property companies, which was previously held under a policy headed by ISL. When Vero Liability, which had previously insured ISL and the property companies, learned of the fraud committed against the property companies by Mr Barnes, through ISL, and the allegations raised by a third party of mismanagement by ISL, it decided not to renew the policies. Vero notified ISL of its decision on 11 November 2020, with effect from 15 December 2020.
[404] This meant that ISL, the property companies and their directors were uninsured. It also meant the property companies were in breach of their agreements with Richard Eberlein who was providing property management services directly to the property companies through his company Gravtec. It was a requirement of the contracts between Gravtec and the property companies that the property companies hold insurance for the benefit of Gravtec.
[405] ISL decided not to apply for alternative insurance and advised the property companies of this on 24 November 2020.
[406] Mr Eberlein was critical to the ongoing operations of the property companies. ISL’s refusal to obtain insurance jeopardised his ongoing involvement. As a result, the directors approached Mr Eberlein to ensure his ongoing involvement with the property companies. They did not “poach” him — he was not employed or engaged by ISL, but contracted through his company directly to the property companies. In any event, the approaches were a direct consequence of, and necessitated by, ISL’s failure to obtain insurance.
[407] The plaintiffs’ second concern related to the ISL management. By late 2020 the Property companies had concerns over ISL’s ability to discharge its management obligations. The inability and/or refusal to obtain insurance occurred in November 2020. Subsequently, on 9 December 2020, David Penrose stepped down as ISL’s CEO and advised ISL and Mr Murray and Mr Prendergast of that (with four working days’ notice). There was no obvious transition. Mr Murray asked Mr Millar on 11 December 2020 to clarify how ISL would then fulfil its management obligations. On 17 December 2020 Mr Millar provided a bare assurance that ISL’s obligations would continue to be met. This was unsatisfactory for Mr Murray who asked for details of Mr Penrose’s “to-do” list. Mr Millar did not provide a clear answer.
[408] Third, as above, ISL and the property companies were in discussions about a mutually agreed and orderly transition of management functions from ISL to FSS. The plaintiffs say they were open to discussing any issues ISL had with the relationship, if a mutually agreed transition was not agreed.
[409] As to engaging staff, the plaintiffs say Kathryn Brownlie remained employed by ISL through until July 2021 and was not offered employment in December 2020. Paul Rosanowski was not employed by or contracted to ISL. Neither Ms Brownlie nor Mr Rosanowski gave evidence at the hearing.
[410] The plaintiffs say that, as in HEB Contractors Ltd v Verrissimo,64 the Court must consider the “total position”. From May 2020 ISL had agreed to assign the management agreements. The steps taken by the property companies in setting up FSS, approaching key personnel, obtaining insurance and directing Mr Millar to process payments, were all taken in preparation for the anticipated orderly transition of the management function and to ensure that in the meantime the management function continued to be performed. The plaintiffs say those steps were to ensure that ISL’s management obligations continued to be discharged in the face of ISL’s failure to do so.
[411] In any event, as set out above in relation to the question of insurance, ISL was not ready, willing and able to perform its obligations under the management agreements.
[412] Following ISL’s refusal to obtain insurance, the directors of the property companies applied for insurance. In order to do so they needed to establish a new entity. This was the reason they established FSS on 9 December 2020.
[413] On 24 December 2020 ISL was directed to advance funds from the property companies to FSS. It refused to do so, Mr Millar noting he was concerned that there was no contractual relationship with FSS. The reason for the advance was to allow FSS to pay for the insurance which the directors had managed to obtain. This was explained to Mr Millar. On 20 December 2020 ISL refused to process a payment as directed.
[414] On 23 December 2020 one of First NZ’s subsidiaries, Symonds110 Ltd, was served with draft High Court proceedings. Mr Murray twice asked Mr Millar to confirm whether the company’s insurers had been notified. Mr Millar did not respond to that question.
[415] The plaintiffs say there was a direct causative link between ISL’s defaults and the alleged acts of repudiation that ISL relied on to cancel the agreements.
64 HEB Contractors Ltd v Verrissimo [1990] 3 NZLR 754 (HC).
[416] Nor did ISL raise any concern that the property companies were intending to not perform their obligations — it did not invoke the arbitration provision of the management agreements but instead on New Year’s Eve 2020 summarily cancelled the agreement. The plaintiffs say that ISL had no intention to perform its obligations.
Discussion
[417] Repudiation requires that one party has made it clear that it would not perform its side of the bargain. In Betham v Margetts,65 the Court held that the test is an objective one:
The question is whether in all the circumstances the communication should be regarded as an irrevocable indication that the party concerned would take no further steps to perform his or her obligations under the contract or alternatively that he or she would perform it only in a manner substantially inconsistent with the obligations which the contract imposed.
[418] The position was that, as Mr Millar conceded in cross-examination, he had previously had complete control over what occurred between the property companies and ISL. He had now lost that control. I conclude from the evidence that Mr Millar then became defensive and then combative towards the property companies’ directors, attempting to thwart their intentions. I accept that Mr Millar/ISL had no intention of continuing to perform ISL’s obligations. As detailed above, Mr Millar failed to respond reasonably or in a timely fashion to requests or directions from the new directors of ISL.
[419] Having regard to the overall position, I conclude that the plaintiff companies’ actions were taken, initially, with the intention of progressing the outcome agreed between the parties. Then, in the face of Mr Millar’s intransigence, to ensure that the plaintiff companies could continue to function.
[420] I do not accept ISL’s claim that the Property Companies repudiated their respective Management Agreements, thus entitling ISL to cancel the Agreements.
65 Betham v Margetts [1996] 2 NZLR 708 (HC) at 3.
Affirmative defences
Indemnity and limitation of liability – ISL
[421] ISL pleads that it has limited its liability, and is indemnified, in terms of the substantive claims by First NZ against ISL in contract and in negligence. It relies on cls 6 and 7 of the First NZ Management Agreement, which provide:
6.INDEMNITY
6.1FMIS shall not in the performance of this Agreement be liable to FPL [Foodstore Properties Ltd] or the Subsidiaries or to any other person for any act or omission negligent tortious or otherwise of FMIS, FPL or any Subsidiary or any agent or employee of any of them and FMIS shall be entitled to be indemnified and saved harmless by FPL and the Subsidiaries from all liabilities, losses, damages, costs or expenses by reason of any of the foregoing acts or omissions.
6.2FPL and the Subsidiaries shall save harmless and indemnify FMIS from and against any liability (including liability for taxes), loss, cost, damage or expense that may be incurred or suffered by FMIS howsoever arising relating to the performance by FMIS of its duties and responsibilities under this Agreement.
7.LIMITATION OF LIABILITY
7.1FMIS shall not be liable for any loss or damage sustained or incurred by FPL or any Subsidiary arising out of or in relation to or on account of any act or omission in the course of or in connection with the performance by FMIS of its duties and responsibilities under this Agreement, for any decline in value of the Properties or any part of them or from the act, omission or default of any property manager appointed by FMIS, or for any other reason whatsoever.
7.2Without limiting clauses 6 or 7.1, FMIS shall not be liable for any failure to perform under this Agreement if FMIS is prevented from performing by any present or future statute, regulation, rule, ordinance, bylaw, or action of national or local government, or by any declaration, order or judgment of any court.
[422] ISL also relies on the equivalent of cls 6 and 7 in the Springs Road and Superstore Management Agreements, in materially the same terms, in relation to the knowing receipt causes of action against ISL by Superstore and Springs Road.
[423] The plaintiffs say that while cl 6.1 in the First NZ Management Agreement provided for exclusion of liability (including for negligence) and indemnity, that provision was agreed to in a very different context. ISL had a genuine arm’s-length
arrangement with Franklin, a third party, to provide the property management services to the plaintiff companies. The arrangement was approved by an independent board.
[424] Clause 6.2 contained no reference to tortious liability, therefore negligence was not covered. In any event, it is plainly a third party save harmless/indemnity clause.
[425] Clause 7 is a limitation of liability provision. It contains no reference to negligence or tortious activities, and these are not covered. But further, given the lack of independence of ISL, it cannot have been intended that it have limited liability for the very actions and omissions it procured.
[426] First NZ also says that cls 6 and 7 of the First NZ Management Agreement ceased to exist on the sale of the last property. There was no clear and unambiguous expression by ISL that it wanted full indemnity and exclusion of tortious liability beyond that point. It is not reasonable to imply such draconian provisions.
[427]As Asher J said in Dorchester Finance Ltd v Deloitte:66
Given the premise that an exclusion clause will enable a party to escape liability for a breach of a contractual promise, it will be assumed that a party will not have intended to limit liability unless clear and unambiguous language is used. A Court will ordinarily look for clear language or necessary implication before concluding that the right to claim for damages is extinguished. Such an intention will not be lightly attributed. The ultimate objective is to ascertain what the parties intended the words to mean in the particular factual context in which the contract was made.
[428] As I have already found, the written First NZ Management Agreement came to an end in November 2004 and from that point on the relationship between the parties was governed by a new contract. ISL does not plead any “implied term” in relation to exclusion or limitation of liability in tort under the undocumented arrangement from October 2004.
[429] I agree that it would not be reasonable to imply provisions such as cls 6 and 7 into the continuing arrangement between the parties.
66 Dorchester Finance Ltd v Deloitte [2012] NZCA 226 at [33] (footnotes omitted).
[430] Even if I agreed that there were such implied terms in the continuing arrangement, in my view the wording of those clauses (as in the original Agreement), together with the context, mean that the interpretation sought by the defendants is not available.
[431] Clause 6.1 on the other hand is clearly intended to relate to ISL’s own liabilities. The wording of cl 6.1 is that ISL was entitled to be indemnified from all liabilities, losses, damages, costs or expenses by reason of ISL’s acts or omissions. As the plaintiffs submit, when the clause was inserted in each of the management agreements (1995, 1998 and 1999) the situation involved a genuine arm’s-length third party (Franklin) providing property management services, with that arrangement approved by an independent board. To construe the clause to cover the subsequent situation where, as I have found, there was no independent board and Mr Millar was to all intents and purposes ISL and had full control of the property companies, would allow ISL to benefit from its own default. I do not accept that interpretation.
[432] While cl 7 is a limitation of liability provision, it does not refer to negligent or tortious acts or omissions and cannot be read that widely. I accept that it cannot have been that such indemnity was available to ISL when the very acts and omissions that are in issue were procured by ISL.
[433] In addition, as the plaintiffs submit, there was no evidence at trial of these indemnities being entered into the interests registers of the plaintiff companies, in breach of s 162(7) of the Companies Act. The plaintiffs say that this too would void any indemnity given (to the extent that it applied at all, which they deny).
Deeds of indemnity – Mr Millar and Mr Mephan
[434] Both Mr Millar and Mr Mephan say they are indemnified against any costs and liability incurred to the plaintiffs, on the basis of the Deeds of Indemnity signed respectively in 1995 (First NZ), 1998 (Springs Road) and 1999 (Superstore). They come within the definition of “Indemnified Person” in each of those Deeds, being a director or former director of the company or a related company.
[435]The deeds are in materially similar terms. The operative clauses are:
2.INDEMNITY FOR COSTS IN PROCEEDINGS
Subject to compliance by the Indemnified Person with the requirements of clauses 5 and 6, the Company agrees to indemnify that Indemnified Person against any costs which that Indemnified Person incurs in any proceeding:
(a)that relates to liability for any act or omission of the Indemnified Person in the Indemnified Person’s capacity as a director or employee, as the case may be, of the Company or a Related Company; and
(b)in which the Indemnified Person is acquitted, or has judgment given in the Indemnified Person’s favour, or which is discontinued.
3.INDEMNITY FOR LIABILITIES INCURRED
Subject to clause 4 and to compliance by the Indemnified Person with clauses 5 and 6, the Company agrees to indemnify that Indemnified Person against:
(a)any liability the Indemnified Person incurs to any person other than the Company or a Related Company for any act done or omission made in the Indemnified Person’s capacity as a director or employee, as the case may be, of the Company or Related Company; and
(b)all costs the Indemnified Person incurs in defending or settling any claim or proceeding relating to such liability.
4.LIMITATION ON INDEMNITY FOR LIABILITIES INCURRED
An Indemnified Person shall not be indemnified under clause 3 where the liability of the Indemnified Person is:
(a)criminal liability; or
(b)where the Indemnified Person is a director, liability for breach of section 131 of the Companies Act 1993; or
(c)where the Indemnified Person is an employee, liability for breach of any fiduciary duty owed to the Company or Related Company.
[436] Clauses 5 and 6 of the Deeds address notification and consultation, and compromises of claims, respectively. Mr Millar and Mr Mephan are precluded from relying on the indemnity in the case of liability incurred in their capacity as directors for a breach of s 131 of the Companies Act (cl 4(b)). I accept that exception must logically also apply to liability incurred in breach of fiduciary duties (which mirrors s 131 liability), and s 137 of the Companies Act.
[437] The plaintiffs also submit that cl 4(c) applies to preclude cover for Mr Millar, because he received salary payments and clearly treated himself as an ISL employee. It is not clear how that provision applies to Mr Millar in his capacity as a director of the plaintiff companies.
[438] Further, the plaintiffs say that neither Mr Millar nor Mr Mephan have complied with cl 5, which requires an indemnified person to notify the company when he or she becomes aware of any actual or threatened actions, proceedings, claims or demands, to which the indemnity might apply. The plaintiffs say there is no evidence from either Mr Millar or Mr Mephan that they had ever done this.
[439] In any event, s 162 of the Companies Act applies. Insurance and indemnities for directors’ or employees’ liabilities and costs are not to be provided except in accordance with s 162. Section 162(2) provides that any indemnity entered into in breach of the section is void.
[440] Section 162(3) provides that, if authorised by the Constitution, a company may indemnify a director or employee for costs in a proceeding, in which judgment is given in his or her favour, or in which he or she is acquitted, or which is discontinued, relating to the directors’ or employees’ actions or omissions. The Constitution may also expressly authorise indemnities for directors or employees in other proceedings (regardless of a successful defence). But criminal liability, breaches of s 131, and breaches of fiduciary duty are specifically excluded by s 162(4).
[441] However it is also clear from s 162(4)(a) that an indemnity may be provided only in relation to liability to third parties (“liability to any person other than the company...”) (emphasis added).
[442] I accept that Mr Millar and Mr Mephan cannot rely on the indemnities in respect of the successful claims made against them in this proceeding.
Estoppel
[443] The defendants variously plead an affirmative defence that the plaintiffs are estopped from denying the existence of arrangements which permitted the defendants
to on-charge the cost of property management fees to the plaintiffs’ tenants, and to recover the gain fees.
[444]The three elements required to establish equitable estoppel are:67
(a)A promise or assurance given by one party (by words or conduct) which gives rise to a belief or expectation by the other party.
(b)Reliance by the party that received the promise or assurance.
(c)Detriment arising from the reliance such that it would be unconscionable for the promising party to depart from the promise given.
[445] I do not think the defendants could reasonably seek to avail themselves of this defence as a shield to claims arising from their breaches of fiduciary duty and statutory duties owed to the property companies.
[446] In any event, these affirmative defences were not argued at hearing and I do not analyse them further.
Quantum meruit
[447] ISL also pleaded quantum meruit as an affirmative defence to the breach of contract claim against it by First NZ. That claim was pleaded in the following terms:
To the extent that the Management Agreement terminated in 2005, as alleged by the Plaintiff but denied by the Second Defendant, services have been provided to the Plaintiff and value received by the Plaintiff such that the Plaintiff is required, on a quantum meruit basis, to pay a fair fee for such services and such fair fees are represented by the gain fees charged for which the Plaintiff has incurred liability (being only the amount of the shortfall in recovery from the Plaintiff’s tenants in certain years).
[448]The essence of First NZ’s response is:
(a)it does not dispute that ISL provided services to First NZ;
67 Moorgate Mercantile Co Ltd v Twitchings [1976] QB 225 at 241–242.
(b)it accepts that First NZ was entitled to be paid a “fair fee” for such services, but says that — as above — ISL received considerably more than a “fair fee”; and
(c)First NZ did not “freely accept” the services provided by ISL in the sense that such acceptance requires an opportunity for rejection.68 It says there was never an opportunity for rejection because Mr Millar was at both ends of the bargain.
[449] In any event, the defendants did not lead any evidence as to what would be a fair fee for the services they say they rendered. Nor did the defendants’ submissions address this issue.
[450]I do not consider that affirmative defence further.
Remedies
[451] All compensation or damages ordered below are subject to interest pursuant to s 10 of the Interest on Money Claims Act 2016.
First NZ
[452]First NZ is entitled to judgment in the following amounts:
(a)Against Mr Millar:
(i) $183,220 (ii) $204,328.87 (iii) $203,143.86 (iv) $830,000
68 See Cassels v Body Corporate No 86975 (2007) 8 NZCPR 740 (HC) at [46].
(total $1,420,692.73 plus GST)
(b)Against ISL:
(i) $183,220 (ii) $204,328.87 (iii) $203,143.86 (iv) $830,000
(total $1,420,692.73 plus GST)
(c)Against Mr Mephan: $450,000 plus GST
Superstore
[453]Superstore is entitled to judgment in the following amounts:
(a)Against Mr Millar:
(i) $644,945.26
(ii) $11,449.26
(total $656,394.52 plus GST)
(b)Against ISL:
(i) $644,945.26
(ii) $11,449.26
(total $656,394.52 plus GST)
Springs Road
[454]Springs Road is entitled to judgment in the following amounts:
(a)Against Mr Millar: $371,822.63 plus GST.
(b)Against ISL: $371,822.63 plus GST.
[455]As I have already noted, there cannot be double recovery by the plaintiffs.
[456] I expect the parties should be able to agree costs, but I indicate my view that the plaintiffs are entitled to 2B costs on their successful claims.
Delay
[457]I regret the delay in delivering this judgment.
Gwyn J
3
5
0