Focus Construction Interiors Limited v Spaceworks Design Group Limited
[2020] NZCA 269
•1 July 2020 at 11.00 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA515/2019 [2020] NZCA 269 |
| BETWEEN | FOCUS CONSTRUCTION INTERIORS LIMITED |
| AND | SPACEWORKS DESIGN GROUP LIMITED |
| AND | ELIZABETH MARY CHARLOTTE HINES (nee WHALEY) |
| Hearing: | 15 June 2020 |
Court: | Goddard, Ellis and Katz JJ |
Counsel: | B P Henry and A R Kenwright for Appellant |
Judgment: | 1 July 2020 at 11.00 am |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellant must pay costs to the respondents for a standard appeal on a band A basis with usual disbursements.
____________________________________________________________________
Table of contents
Para No
Introduction
Background
High Court judgment
Period within which Spaceworks was required to refer work to Focus
Negotiated tender work
The obligations imposed on Spaceworks to refer work
Allegations of breach by Spaceworks
Causation and loss
Issues on appeal
The obligation imposed on Spaceworks
Appellant’s submissions
Analysis
Did Spaceworks breach the Agreement?
Appellant’s submissions
Analysis
Result
REASONS OF THE COURT
(Given by Goddard J)
Introduction
The appellant, Focus Construction Interiors Ltd (Focus), is a construction company which provides interior fitout construction, joinery and project management services. The first respondent, Spaceworks Design Group Ltd (Spaceworks), is a commercial interior design company. The second respondent, Ms Whaley, is the owner, sole director and chief executive officer of Spaceworks. We will refer to both respondents as “Spaceworks”, except where it is necessary to make specific reference to the position of Ms Whaley.
In February 2010 Focus and Spaceworks entered into an agreement which required Spaceworks to make reasonable endeavours, acting in good faith, to refer work to Focus with a total gross value of $3 million[1] (the Agreement). Only work actually carried out by Focus would count towards this total.
[1]This figure, and all other figures in this judgment, are exclusive of GST.
Over the next four and a half years Spaceworks provided a number of opportunities to Focus to undertake work with a potential value of around $6.5 million, mostly involving opportunities to participate in competitive tenders for projects managed by Spaceworks. Focus carried out work with an aggregate value of $1,252,255.96. Focus declined to tender for some projects, and unsuccessfully tendered for a number of other projects.
Focus formed the view that Spaceworks was failing to use reasonable endeavours and act in good faith in seeking to refer work to Focus. In July 2016 Focus notified Spaceworks that it would no longer tender for any more of Spaceworks’ projects. Focus then brought proceedings claiming that Spaceworks had breached its obligations under the Agreement. The claim was unsuccessful in the High Court. Gault J found that Spaceworks had met its obligations under the Agreement.[2]
[2]Focus Construction Interiors Ltd v Spaceworks Design Group Ltd [2019] NZHC 2211 [High Court judgment].
Focus appeals to this Court, arguing that:
(a)The Judge erred in his interpretation of the Agreement. He set the bar too low for Spaceworks’ obligation to use reasonable endeavours, acting in good faith, to refer work to Focus. In particular, the Judge was wrong to find that Spaceworks was free to decide not to refer certain projects to Focus where it was not in Spaceworks’ commercial interests to do so.
(b)Spaceworks failed to meet its obligations under the Agreement, properly interpreted.
We agree with the Judge’s interpretation of the Agreement. We also agree with the Judge that Focus has not established that Spaceworks failed to use reasonable endeavours, acting in good faith, to refer work to Focus. Spaceworks sought to refer a significant number of projects to Focus, with a value in excess of $6.5 million. Spaceworks provided explanations for the decisions it made not to refer other projects to Focus. Focus was not able to identify any projects or classes of project where the reasons given by Spaceworks for not referring the project to Focus were not genuine, or were unreasonable. Whether one looks at the aggregate picture, or at specific projects, the evidence did not establish a breach by Spaceworks.
The appeal must therefore be dismissed.
Background
Focus and the precursor business of Spaceworks had a working relationship dating back to 2002. In 2004 Ms Whaley joined Spaceworks’ precursor as an employee. In mid‑2006 the then owner wished to sell the business. Ms Whaley was interested in buying the business. She suggested to the owner and managing director of Focus, Mr Plumpton, that they should purchase it together. They agreed to do so. The purchase took place in October 2006. Mr Plumpton acquired a one-third interest in the newly incorporated Spaceworks through an entity called Franklin Investment Holdings Ltd (Franklin). Ms Whaley purchased a two-thirds interest in Spaceworks. Ms Whaley and Franklin entered into a shareholders’ agreement dated 7 September 2007, which included a provision in relation to Focus:
9.1[Spaceworks] has for many years used the expertise of Focus in relation to many interior fitout contracts. It is anticipated that [Spaceworks] will continue to work with Focus wherever possible in relation to interior design fitouts, and continue to foster the business between Focus and [Spaceworks].
In 2008 the relationship between Mr Plumpton and Ms Whaley broke down. The parties disagree about the cause. Referral work from Spaceworks to Focus diminished. In 2009 Focus alleged that Ms Whaley was in breach of the shareholders’ agreement. Mr Plumpton was concerned about the lack of referral work and the use of other contractors. Letters were exchanged between solicitors. Following a mediation in November 2009, in February 2010 the parties (and Franklin) entered into the Agreement. The Agreement provided that it was entered into as a full and final settlement of the differences between the parties. Franklin agreed to transfer its shares in Spaceworks to Ms Whaley. The consideration for the transfer of those shares included a cash payment, an adjustment of shareholder accounts, and a commitment by Spaceworks in relation to referrals of work to Focus. The relevant provisions read as follows:
3.Spaceworks and [Ms Whaley] shall make reasonable endeavours, acting in good faith, to refer work to Focus having a total gross value of $3 million (excluding GST), it being anticipated that this can be achieved over a period of four years from the date of this agreement.
4.Spaceworks, [Ms Whaley] and Focus shall make reasonable endeavours and act in good faith towards one another to achieve the referral of work as set out at clause 3 above. To this end, Spaceworks and Focus shall each appoint a liaison person acceptable to the other to liaise between them. In the event that any issues arise, Spaceworks and Focus shall negotiate in good faith to resolve them.
5.For the purposes of clauses 3 and 4 above:
(a)‘work’ shall consist of hard fitouts including subcontractors except where Spaceworks’ clients require otherwise;
(b)‘work’ shall be considered to have been referred to Focus only when it is actually undertaken by Focus or its subcontractors (for example it shall not include work for which Focus is invited to tender but does not undertake);
(c)Spaceworks, [Ms Whaley] and Focus shall make reasonable endeavours and act in good faith to put in place mutually acceptable invoicing and payment arrangements for each job, recognising Focus’s wish either to contract directly with the client (where that is acceptable to the client) or to be properly secured for payment (whether by advance payment or otherwise);
(d)Spaceworks, [Ms Whaley] and Focus shall make reasonable endeavours and act in good faith to achieve referral work that is of a negotiated tender nature where Spaceworks invites only Focus to provide a quote for the work, subject always to the requirements of the client; and
(e)‘work’ shall only be accounted for in terms of clause 3 above when it is paid for by the client or Spaceworks as the case may be and shall not include bad debts.
6.Spaceworks shall report annually to Focus regarding the work that Spaceworks has undertaken and what part of that work has been referred to Focus. This obligation shall continue until the $3 million figure set out in clause 3 above has been achieved.
Focus became dissatisfied with the volume and nature of the work referred to it by Spaceworks. As noted above, in July 2016 Focus notified Spaceworks that it would not tender for any more Spaceworks projects. Shortly afterwards Focus filed proceedings against Spaceworks alleging breach of the referral provisions in the Agreement.
High Court judgment
Period within which Spaceworks was required to refer work to Focus
In the High Court Focus argued that cl 3 of the Agreement required Spaceworks to seek to achieve the target of $3 million of referred work within the period of four years referred to in cl 3. Spaceworks denied that there was a requirement to meet the $3 million target within four years, saying that it was clear from cl 3 and other provisions of the Agreement that although the parties expected that this amount of work could be referred within a four-year period, that was simply an expectation and not an obligation.
The Judge accepted Spaceworks’ approach, finding that there was no obligation to seek to refer $3 million of work within a four-year period.[3]
Negotiated tender work
[3]At [22]–[23].
Focus also argued that the Agreement required Spaceworks to make reasonable endeavours to refer work with a value of $3 million that was “negotiated tender” work of the kind referred to in cl 5(d). Focus argued that competitively tendered projects did not qualify as “work” for the purposes of the Agreement, and did not count towards the $3 million target. Spaceworks responded that the “work” to be referred under the Agreement was not limited in this way, and extended to work that was competitively tendered. The Judge agreed.[4]
The obligations imposed on Spaceworks to refer work
[4]At [25]–[26].
The Judge went on to consider the nature of the obligation imposed on Spaceworks by cls 3 to 6 of the Agreement. The Judge considered that the relevant provisions were sufficiently certain to be enforceable, as the objective of the endeavours was sufficiently certain: $3 million of referred work.[5] The Judge summarised the nature of the obligations imposed by cls 3 to 6 as follows:
[36] Agreements can impose “endeavours” obligations of [various] strictness – “best endeavours” and “reasonable endeavours” are but two examples. Of course, such an obligation is not an absolute or unconditional obligation. The nature and extent of such an obligation is necessarily conditioned by what is reasonable in the circumstances, which can include circumstances that may affect the obligor’s business. A reasonable endeavours obligation usually does not require the obligor to sacrifice its own commercial interests, unless the contract specifies that certain steps have to be taken. Also, a “reasonable endeavours” obligation may be contrasted with an “all reasonable endeavours” or a “best endeavours” one in that where a number of reasonable courses of action are available to achieve the desired outcome, the obligation probably only requires a party to take one reasonable course, not all of them. [Counsel for Focus] acknowledged that an obligation to use “reasonable endeavours” is less stringent than one to use “best endeavours”.
(Footnotes omitted.)
Allegations of breach by Spaceworks
[5]At [31] and [35].
The Judge went on to analyse in considerable detail the complaints made by Focus about the adequacy of Spaceworks’ efforts to refer work to Focus. Focus alleged that Spaceworks had undertaken over 720 projects in the period from 2010 to 2016, including 419 projects with a build element in Auckland and 114 out of Auckland. Of these, Focus claimed, there were only approximately 44 projects where work was referred to Focus, or Focus was invited to tender. Focus claimed that much of the full project work was “turnkey” projects where Spaceworks could choose the construction contractor, but Spaceworks chose to tender the work and preferred other construction contractors over Focus. In particular, Focus complained about the referral of a substantial number of projects to Practec Interiors Ltd (Practec), work which Focus says it could have undertaken.[6]
[6]At [37].
Spaceworks denied that it had breached the Agreement. It argued that converting the number of projects actually carried out by Focus into a percentage of the total number of projects Spaceworks undertook did not establish anything. Some projects were limited to design or furniture supply, with no build element. Where there was a build element, Spaceworks did not control whether Focus actually worked on any particular project. The market changed after the 2008 financial crisis and Spaceworks’ clients wanted the build element to go to a competitive tender. Often Focus was outbid on price. Spaceworks recommended Focus for a project when they thought Focus could be suitable. They attempted to refer over $6.5 million of work to Focus between 2010 and 2016. Of that, Focus completed $1,252,256.96. The rest it either did not win — usually because it was too expensive — or declined.[7]
[7]At [39]. Focus tendered unsuccessfully for work it priced at $2.153 million, and declined projects valued at $2.723 million.
The Judge recorded that the evidence did not permit, and Focus did not propose, a job-by-job analysis of the reasonableness of Spaceworks’ endeavours.[8] Rather, the reasonableness of Spaceworks’ endeavours was challenged by reference to the explanations given by Spaceworks for not referring “negotiated tender” work to Focus, and not inviting Focus to tender on certain types of project. Focus was also critical of the discovery provided by Spaceworks, and submitted that adverse inferences could be drawn on the basis of the alleged deficiencies in that discovery.
[8]At [40].
The Judge rejected all of these complaints. The evidence did not support the submission that Spaceworks had been free to refer work to Focus on a negotiated tender basis, but had chosen not to do so. It was open to Spaceworks to decide not to recommend Focus for some projects, for example where, acting reasonably and based on experience, Spaceworks considered that a project was not suitable for Focus. Focus had not established that the approach adopted by Spaceworks fell short of the obligation to use reasonable endeavours.[9] The claim therefore failed.
Causation and loss
[9]At [88].
The Judge went on to deal briefly with causation and loss. He concluded that if Focus had established a breach of the agreement, he would have calculated its loss as $172,573.20.[10]
Issues on appeal
[10]At [93].
On appeal Focus does not challenge the Judge’s findings in relation to the period within which the reasonable endeavours obligation operated, or the scope of work that qualified as “work” under the Agreement. At the forefront of Focus’ argument was the proposition that the Judge had incorrectly interpreted the Agreement, and had set the bar too low in terms of what Spaceworks was required to do. He had not given sufficient weight to the fact that the referral obligation was part of the purchase price for the shares in Spaceworks transferred to Ms Whaley. The referral obligation needed to be interpreted on the basis that it was a form of “earn out” clause.
Focus submitted that an inference could be drawn from the evidence that the obligations imposed by the Agreement, properly interpreted, had not been met. In particular, Spaceworks did not act in good faith in connection with referral of work to Focus. Spaceworks had established its own new business network, and preferred seeking other suppliers to enhance its own profit rather than meeting its obligations under the Agreement pursuant to which Ms Whaley had purchased the business.
The written submissions filed by Focus also challenged the Judge’s quantification of the loss suffered by Focus. But in the course of oral argument, Mr Henry, senior counsel for Focus, indicated that if the Court was minded to allow the appeal Focus would pragmatically accept the sum fixed in the High Court judgment. The challenge to the Judge’s assessment of loss was not pursued.
There are thus two principal issues before this Court:
(a)The interpretation of the Agreement: what did the referral provisions require Spaceworks to do?
(b)Breach: did Focus establish that Spaceworks had breached the referral provisions in the Agreement, properly interpreted?
The obligation imposed on Spaceworks
Appellant’s submissions
The principles that govern the interpretation of contracts were, as one would expect, common ground. Mr Henry emphasised the importance of commercial context, referring in particular to the judgment of Tipping J in Vector Gas Ltd v Bay of Plenty Energy Ltd.[11]
[11]Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444, in particular at [19]–[20], [22]–[23], [27], [29] and [33].
Mr Henry referred to the following contextual factors, which he said should inform the interpretation of the Agreement:
(a)The Agreement arose out of a breakdown in the relationship between the shareholders in Spaceworks.
(b)In order to resolve the breakdown in the relationship, it was agreed that Focus would sell its one-third interest in the company to Ms Whaley. The consideration for the shares controlled by Focus was a cash payment of $100,000 and the “earn-out formula” set out in cls 3 to 6 of the Agreement. The performance of that Agreement was an integral element of the purchase price for Focus’ shares: in effect, he said, Focus provided Ms Whaley with credit to facilitate the settlement of their dispute.
(c)Focus had to place trust in Spaceworks to deliver this component of the purchase price. Hence the reference in the Agreement to “reasonable endeavours, acting in good faith”.
Mr Henry submitted that when read against that backdrop, the obligation imposed on Spaceworks to use reasonable endeavours and act in good faith imposed a high standard, under which Spaceworks should refer most, if not all, work to Focus. Rather than making assumptions about whether Focus was well placed to undertake particular work, Focus should have been given the opportunity to make that decision for itself.
In particular, Mr Henry submitted that the Judge was wrong to find that:
(a)It was open to Spaceworks to decide not to refer a project to Focus because Spaceworks did not consider that referring that project was in the interests of the client.
(b)Spaceworks was not required to sacrifice its own commercial interests when making decisions about referrals. Just as a purchaser paying an instalment of a purchase price cannot refuse to make the payment merely because it would be in their commercial interests not to part with the money, Spaceworks was not free to decline to refer work because it was not in its commercial interests to do so.
Mr Henry also strongly emphasised the good faith requirement in cl 3, which he said elevated the overall level of obligation imposed on Spaceworks. He submitted that having regard to the “earn out” context, the combined reference to reasonable endeavours and good faith imposed a very high standard that was more demanding than a “best endeavours” clause.
Analysis
A convenient summary of the approach to interpretation of contracts approved in the two leading Supreme Court authorities is set out in this Court’s decision in Malthouse Ltd v Rangatira Ltd:[12]
[12]Malthouse Ltd v Rangatira Ltd [2018] NZCA 621 (footnotes omitted).
[18] The correct approach to contractual interpretation has been authoritatively established for present purposes in two judgments of the Supreme Court: Vector Gas Ltd v Bay of Plenty Energy Ltd (Vector), and Firm PI 1 Ltd v Zurich Australian Insurance Ltd (Firm PI).
[19] Briefly, these authorities confirm that New Zealand courts take an objective approach to contractual interpretation which does not limit the background material available to interpret the contract. That material must however be reasonably relevant, and it must be objective; evidence of a party’s individual subjective intentions is inadmissible to interpret the contract.
[20] Vector established that there need not be any ambiguity in the meaning of a contract before regard can be had to extrinsic evidence to shed light on its meaning. That conclusion put to bed the need for counsel to prove that contracts had such ambiguities, and instead emphasised the need for courts to take a contextual approach that inquired into the meaning of contracts against the background information known to the parties.
[21] As the Supreme Court later clarified in Firm PI, the text of the contract remains “centrally important”. The Court there noted that:
If the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant.
(Footnote omitted.)
[22] The provisional meaning derived from the language of the contract is cross-checked against the contractual context. As Tipping J explained in Vector:
[24] In some recent cases it has been suggested that contractual context should be referred to as a “cross-check”. In practical terms that is likely to be what happens in most cases. Anyone reading a contractual document will naturally form at least a provisional view of what is words mean, simply by reading them. That view is, in a sense, then checked against the contractual context. This description of the process is valid, provided the initial view is provisional only and the reader is prepared to accept that the provisional meaning may be altered once context has been brought to account. The concept of cross-check is helpful in affirming the point made earlier that a meaning which appears plain and unambiguous on its face is always susceptible to being altered by context, albeit that outcome will usually be difficult of achievement …
(Footnote omitted.)
[23] It follows that, though there is in principle no limit to the amount of “red ink” a court can use in interpreting a contract (as Lord Hoffmann famously said in Chartbrook Ltd v Persimmon Homes Ltd), there is a practical need for the party seeking to rely on the red pen to point to clear evidence justifying its use. As Tipping J explained in Vector, the exercise “is and remains one of interpretation”. There are limits to what the courts can do under the guise of interpretation, and words can only be construed with meanings that they can reasonably bear (subject, as Tipping J recognised, to considerations of rectification, private dictionary use by the parties, and similar).
[24] Finally, the authorities also establish that, where there is a natural and ordinary meaning to the term in issue, departing from it for reasons of commercial common sense should only occur “in the most obvious and extreme of cases”. It also bears emphasis, as the Supreme Court noted in Firm PI, that the commercial context may increase the weight to be placed on the provisional view formed from the words of the contract. That is because many commercial contracts have features that ordinary language lacks (particularly that they are negotiated in a detailed and formal manner that attempts to record consensus), may be relied on by third parties, or because of the nature of the particular contract at issue (such as a security document or an insurance contract).
We accept Mr Henry’s submission that the referral clauses formed an important part of the consideration provided by Spaceworks and Ms Whaley to Focus under the Agreement. We doubt that characterising this consideration as a “purchase price” adds anything to that observation. We bear that backdrop in mind. But the text of the relevant provisions remains centrally important in determining what obligations Spaceworks and Ms Whaley assumed as part of that consideration.
The meaning of the relevant provisions is in our view reasonably clear. Spaceworks and Ms Whaley did not make an absolute promise to refer work to Focus. They did not agree to give Focus a right of first refusal, under which all projects would be referred to Focus. Nor did they agree to use their best endeavours to refer work. Rather, in cl 3 of the Agreement, they agreed to use reasonable endeavours, acting in good faith, to achieve referrals of work with a total gross value of $3 million. That obligation would be breached if they refrained from referring work in a manner that was unreasonable, or if they acted in bad faith and deliberately withheld opportunities from Focus that ought reasonably to have been offered to it. And — importantly — under cl 4 Focus assumed a corresponding obligation to make reasonable endeavours and act in good faith to achieve the referral of work contemplated by cl 3. The Agreement proceeds on the basis that achieving the target of $3 million worth of referred work would require both parties to act reasonably and in good faith: Spaceworks needed to refer sufficient opportunities to make the target achievable, and Focus needed to pursue a sufficient number of those opportunities to enable the target to be met.
The symmetrical obligations imposed by these provisions on the two companies were carefully calibrated. Each was required to act reasonably and in good faith to enable the target to be met. Neither was required to do more than that.
It was consistent with Focus’ obligation to act reasonably and in good faith for Focus to decline work that it was not well-placed to undertake. Where a project was tendered, it was open to Focus to tender at whatever price it considered commercially appropriate. Focus was not required by cl 4 to reduce its margin or take other steps to reduce its price below normal levels in order to win jobs. The pricing decisions Focus made might mean it did not win the tender. But it would not breach its obligations by acting in its own commercial interests. Nor however could Focus complain that the outcome — not obtaining the work — was the result of a breach by Spaceworks. The work would not be counted towards the $3 million target. But referral of the opportunity to Focus plainly would count as a step taken towards fulfilment of Spaceworks’ reasonable endeavours obligations under the Agreement. At the risk of stating the obvious, the level of work actually undertaken by Focus is relevant but not decisive when assessing whether Spaceworks complied with its referral obligations.
Just as it was open to Focus to make its own reasonable commercial decisions about tendering, so too it was open to Spaceworks to make commercial decisions not to refer certain projects to Focus if Spaceworks considered, acting reasonably and in good faith, that it was contrary to the interests of its client to do so. Spaceworks was not required by the Agreement to operate in a way which was likely to result in a higher price for its client, contrary to the interests of the client and contrary to the long-term reputational interests of Spaceworks. Nor did the clause require Spaceworks to reduce its margin below normal levels with a view to cross-subsidising opportunities for Focus to do work, any more than Focus was required to do so in order to win more tenders and ensure the $3 million target could be met.
It seems to us that in these circumstances, Spaceworks’ compliance with the referral obligation needs to be assessed at two levels. First, an aggregate approach: did Spaceworks provide a level of referrals that could reasonably be expected to produce substantial volumes of work for Focus, if Focus also used reasonable endeavours and acted in good faith in pursuing the opportunities provided to it? Second, a granular approach: were there projects (or classes of project) that Spaceworks decided not to refer to Focus, which it ought to have referred to Focus if it was acting reasonably and in good faith? Decisions not to refer certain projects, or certain classes of project, must be measured against the agreed two-pronged standard of reasonableness and good faith.
Did Spaceworks breach the Agreement?
Appellant’s submissions
Focus did not seek to establish a breach by reference to decisions by Spaceworks not to refer specific projects. We invited Mr Henry to identify any specific project that Spaceworks did not refer to Focus where the reason for the non‑referral of that project given by Ms Whaley in her evidence was, according to Focus, not genuine or not reasonable. Mr Henry did not accept that invitation.
In the course of argument, Mr Henry accepted that Spaceworks was not required to refer all projects to Focus. But, he said, Spaceworks should have referred more than it did. Mr Henry was also constrained to accept that there were some categories of work — for example, projects involving only joinery and furniture — that it was difficult to criticise Spaceworks for not referring to Focus, as projects of this kind were not the core business of Focus.
Mr Henry said there were whole areas of business that were not referred to Focus, and never run past them. However when we pressed Mr Henry to identify these areas of business, and explain why the failure to refer the work was unreasonable or inconsistent with good faith on Spaceworks’ part, Mr Henry was not able to do so.
Mr Henry did refer us to some lists of projects in the evidence of Mr Plumpton, the owner of Focus, which Mr Plumpton said Focus should have had the opportunity to undertake. However these lists included a number of projects in which Focus was in fact offered an opportunity to participate, and projects that took place after Focus had advised Spaceworks that it was no longer willing to tender for Spaceworks projects. Ms Whaley provided reasons in her evidence for not referring the other listed projects to Focus. As noted above, Mr Henry did not engage with those reasons and seek to establish that they were not genuine, or were not reasonable.
Mr Henry also invoked cl 5(d), which referred to negotiated tender work that Focus alone would be invited to price. We asked Mr Henry to identify projects that Spaceworks was able to direct to Focus without the need for a tender, where Spaceworks had failed to do so. He was not able to identify any.
Ultimately Mr Henry put the argument for Focus in two main ways:
(a)He adopted the aggregate approach outlined at [35] above. He submitted that it was obvious, looking at the small proportion of projects undertaken by Spaceworks that were referred to Focus, that Spaceworks had failed to act reasonably and in good faith. If it had done so, he said, most if not all of the projects undertaken by Spaceworks would have been referred to Focus.
(b)He emphasised the number of projects referred to Practec. Practec was a construction firm similar to Focus. If Practec could do the work, Mr Henry submitted, Focus could also have done it and should have been given the opportunity to do so. The pattern of referrals to Practec showed that Spaceworks had not acted reasonably and in good faith.
We turn to consider these arguments.
Analysis
We do not consider that the submissions made by Focus about the aggregate number of projects and referrals, or about the amount of work done by Practec, provide any real assistance in determining whether Spaceworks acted reasonably and in good faith. This is not a case where there were no referrals, or only a small trickle of projects of a nature and scale that could never have met the $3 million target:
(a)Over the relevant period of approximately four and a half years Spaceworks referred a substantial number of opportunities to Focus, with a total value of some $6.5 million. A 50 per cent strike rate on the part of Focus would have been sufficient for the cl 3 obligation to be fully discharged.
(b)In a letter dated 16 April 2013, sent in response to a letter from Focus’ solicitors complaining about Spaceworks’ performance under the Agreement, Spaceworks’ lawyers provided a spreadsheet setting out details of projects referred to Focus over the previous 14 months. The spreadsheet showed that Focus had declined to participate in three projects with a total value of $1,868,987.07, and had unsuccessfully tendered for nine projects with an aggregate value in excess of $1 million. The work that Spaceworks sought to refer in this period alone would have come close to the $3 million target, if Focus had chosen to pursue it and had bid successfully.
A review of the evidence at a global level does not suggest that Spaceworks was failing to use reasonable endeavours and act in good faith in seeking to refer work to Focus over this period. Rather, the evidence paints a picture of significant efforts by Spaceworks to provide substantial opportunities to Focus, which if successfully pursued by Focus would have more than met the target level of referrals.
We agree with Mr Henry that the substantial volume of work referred to Practec invites careful scrutiny. A decision on the part of Spaceworks to systematically prefer Practec to Focus, with Focus getting opportunities only where Practec did not want them, would be difficult to reconcile with Spaceworks’ obligations under the Agreement.
But the evidence did not support the inference that Mr Henry invited us to draw that this was what Spaceworks was doing. On many occasions both Practec and Focus were given an opportunity to tender for projects: on these occasions the failure of Focus to obtain the work resulted from commercial decisions made by Spaceworks’ clients. That outcome is entirely consistent with Spaceworks meeting its obligations under the Agreement. Ms Whaley expressly rejected the proposition that she was seeking to prefer Practec over Focus. Her evidence was that she tried hard to refer work to Focus, but where she considered that the work was not of a kind that Focus was well-placed to undertake, she would select another more appropriate contractor. The evidence about the aggregate level of work that Focus was given an opportunity to tender for, and the specific reasons given for referrals to other contractors and not to Focus, are in our view consistent with that evidence. Ms Whaley provided reasons for each of the occasions on which an opportunity was offered to Practec and was not offered to Focus, and as noted above Mr Henry did not seek to challenge those reasons on a case by case basis. The evidence did not establish a systematic preference of Practec over Focus.
Finally, Mr Henry was critical of the adequacy of the discovery provided by Spaceworks in relation to projects it had undertaken. He suggested that a number of projects undertaken by Practec had only been identified when the principal of Practec, Mr Davies, was subpoenaed to give evidence. However the Judge was not persuaded that there were any significant omissions in the discovery provided by Spaceworks, or that any inference could be drawn from gaps in discovery that provided support for the case advanced by Focus. We agree.
In these circumstances Focus has failed to make out its case that there was a breach of the Agreement, whether assessed on a global basis or on a more granular basis.
Result
The appeal is dismissed.
The appellant must pay costs to the respondents for a standard appeal on a band A basis with usual disbursements.
Solicitors:
Shanahans Law Ltd, Auckland for Appellant
Gilbert Walker, Auckland for First and Second Respondents
1
2
0