Forest Holdings (NZ) Limited v Sheung
[2021] NZCA 608
•17 November 2021 at 9 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA416/2020 [2021] NZCA 608 |
| BETWEEN | FOREST HOLDINGS (NZ) LIMITED |
| AND | THEAN KAI SHEUNG |
| Hearing: | 1 November 2021 |
Court: | Kós P, S France and Katz JJ |
Counsel: | K I Bond for Appellant |
Judgment: | 17 November 2021 at 9 am |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThere is no order for costs.
____________________________________________________________________
REASONS OF THE COURT
(Given by Kós P)
The question in this appeal is whether judgment should have been given (by formal proof) for specific performance of a joint venture agreement to manage and mill a forest. The High Court Judge found the agreement unenforceable. Differing in part, we find the agreement enforceable, and the defendant to be in breach, but we dismiss the appeal because specific performance is not an appropriate remedy here.
Background
Forest Holdings owns forestry rights for a 25-year term over a 618-hectare property at Hanga Road, Kaimai. The forest contains rimu and tawa timber. Forestry Holdings sought a co-investor. Its sole director and shareholder, Roderick Scott, a man with some 35 years’ experience in the industry, prepared an investment proposal. It involved the establishment of a joint venture. Mr Scott would manage it, undertaking the harvesting, timber milling, kiln drying, timber processing and local market sales of the wood produced. The investor’s role would be passive, but would hold 50 per cent of the forestry rights in exchange for an investment of $1.17 million. The project thereafter would self-fund.
In June 2017 a business associate of Mr Scott’s, Ms Chee Kin “Esther” Sum, sent the investment proposal to Mr Sheung, who also goes by the name Zax. At that stage the proposal involved the establishment of a new company, Pristine Timber Co Ltd, with its shares to be held 40 per cent by Mr Sheung, 10 per cent by Ms Sum and 50 per cent by Mr Scott. Mr Sheung subsequently entered the joint venture, but on different terms to those originally proposed.
The joint venture agreement is between Forest Holdings, Pristine Timber and Mr Sheung. Ostensibly dated 29 August 2017, it in fact was executed by Mr Sheung on 6 October 2017. The essential thrust of the agreement is set out in the recitals:
A.[Forest Holdings (FHL)] is the holder of a Forestry Right in relation to the Land and FHL wishes to enter into an agreement with [Pristine Timber (PT)] to jointly own the Forestry Right and fund business to undertake maintenance, harvesting and sale of the timber produced from the Land.
B.PT operates a business which provides forestry investment services and [Mr Sheung (TKS)] agrees to provide the funds to PT for the purchase of the Forestry Right.
C.Chee Kin Sum agrees to transfer 90% of PT shares to TKS and to appoint TKS as Director of PT.
D.PT is entering the Agreement to purchase 50 percent of the Forestry Right from FHL for the sum of NZ$1,170,000 (one million one hundred and seventy thousand dollars.)
E.FHL and PT have agreed to form a joint venture in order to purchase the Forestry Right and carry out the maintenance, harvesting and sale of the timber on the Land.
F.The parties have entered into this Agreement to set out the terms of the establishment and conduct of the affairs of this joint venture and the parties’ mutual undertakings, obligations and intentions in relation thereto.
The following for present purposes are important clauses of the agreement:
2.Establishment of Joint Venture
2.1This Agreement shall commence upon its execution by the parties and FHL receiving in its NZ ASB bank account NZ $1,170,000 (one million one hundred and seventy thousand dollars) plus GST if applicable in cleared funds. The parties agree this will occur on or before 29 September 2017. It shall terminate in accordance with clause 9. Chee Kin Sum will transfer 90% of PT shares to TKS and will appoint TKS as Director of PT on the same day payment is made to FHL for the forestry right as provided for in this clause.
2.2The Joint Venturers hereby establish a joint venture in accordance with the provisions of this Agreement for the purpose of pursuing the Business.
2.3The Joint Venture shall operate as from the Commencement Date and the Joint Venturers shall conduct themselves in relation to the Joint Venture and this Agreement for the maximum commercial advantage of the Joint Venture and the Joint Venturers (as a group) consistent with prudent commercial practice and the laws of New Zealand.
…
Unhelpfully, the definition of “Commencement Date” is “the date referred to in clause 2”, a circular non-definition. The agreement appears to be based on a properly drafted legal precedent, but thereafter modified by the parties themselves. This has created a number of problems.
There are also provisions regarding variation of the agreement. Two are relevant:
17.Variation
17.1No modification, alteration of or addition to this Agreement shall be binding on the parties unless in writing and signed or acknowledged by each of the parties.
…
23.Entire Agreement
23.1 This Agreement constitutes the sole understanding of the Joint Venturers with respect to the subject matter hereof and supersedes all prior understandings, written or oral, which shall be of no further force or effect. No modification, alteration or waiver of the terms of this Agreement shall be binding unless the same shall be in writing dated subsequent to the date of this Agreement and duly executed by both the Joint Venturers.
Despite having executed the agreement, Mr Sheung failed to make payment of the sum required by it. The circumstances are set out in an affidavit sworn by Ms Sum, which we set out so far as relevant:
Attempts to make payment of the Purchase Price
8. After signing the JVA, Zax told us that he intended to make payment of the Purchase Price as soon as possible and that he was just facing logistical difficulties in getting the funds transferred to New Zealand. For example, on 25 September 2017, he informed me that he had been to his bank in Malaysia and attempted to transfer the funds to New Zealand in anticipation of paying the Purchase Price but had been unsuccessful.
9. Rod and I continued to wait patiently and Zax always had an explanation for why he had not made payment as promised. Most of the difficulties seemed to arise from difficulty getting the money out of China. However, in or about late October 2017 he also told us that he had had a heart attack in Shanghai and went in for an angioplasty to have a [stent] inserted in his artery. He told us there were problems with the angioplasty procedure he had had done in Shanghai, and that he needed to get it re-done in Kuala Lumpur. Throughout these conversations, Zax continued to indicate that he would be making payment as soon as possible. For example, on 13 December 2017, he sent me a text message, saying:
…Do tell Rod went [sic] I'm able to come off bed I’ll prioritize his matter first.
…
10.After his procedure and recovery, Zax returned to China to try to transfer the Purchase Price from China to New Zealand. Zax operated a property and industrial business there. However, on 16 February 2018 Zax told me that he had not been successful in transferring the funds and that he was actually detained by Chinese authorities for transferring funds out of China without paying tax and not declaring profits in his Chinese company. I understand that Zax’s passport was confiscated and he was required to pay a fine before the Chinese authorities would return it to him and allow him to travel. I understand that he paid the fine and his passport was returned to him. I do not know exactly what happened after that, but I am aware that Zax is now back in Kuala Lumpur so assume that he was able to resolve issues with the Chinese authorities.
11.From about early October 2018, Zax simply stopped responding to my correspondence, and I have not heard from him since then.
In addition, there was before us an email sent by Mr Sheung to Mr Scott on 7 September 2018 which states in relevant part:
As I mentioned once settle here I’ll go back to KL and hv organize my account there then can deliver the 50% to u and balance 50% within another 10 days.
Demand was made of Mr Sheung in Malaysia, requiring payment of the $1.17 million by 19 November 2018. No such payment was received.
It will be apparent from the nature of the claim that the contract has not been cancelled by Forest Holdings. Rather, Forest Holdings seeks performance of Mr Sheung’s obligations by means of an order for specific performance. It must be a precondition for that remedy that the other contracting parties are ready, willing and able to perform their contractual obligations.
Forest Holdings commenced proceedings in the High Court at Hamilton in March 2019. The primary claim was for specific performance of Mr Sheung’s obligation to pay the sum of $1.17 million. Forest Holdings also advanced an alternative cause of action for damages based on profits that would have been earned had the joint venture commenced in October 2017. That claim was based on a loss calculated at approximately $21,000 per month, which was sought up until the date the $1.17 million was paid.
Forest Holdings sought summary judgment on the basis of the first cause of action only. In July 2019, Associate Judge Smith raised concerns as to whether Mr Sheung owed any direct obligation to Forest Holdings at all, or whether his obligation was in fact to pay the $1.17 million to Pristine Timber (who would then pay the money onto Forest Holdings). The Associate Judge also expressed some concern about whether summary judgment was appropriate for specific performance, given other interdependent obligations associated with payment. In particular, the Associate Judge noted that Mr Sheung was to receive 90 per cent shares in Pristine Timber.
In a subsequent judgment dated 23 August 2019 the Associate Judge dismissed the application for summary judgment.[1] He found that the agreement provided for Mr Sheung to pay the $1.17 million not to Forest Holdings but to Pristine Timber. The Associate Judge said that made sense, as the defendant was entitled to receive 90 per cent of the shares in Pristine Timber on the same day his payment was made. Presumably, the Associate Judge said, Mr Sheung would have wanted to receive an executed share transfer contemporaneously with payment.[2]
[1]Forest Holdings (NZ) Ltd v Sheung [2019] NZHC 2090.
[2]At [33].
Following dismissal of its application for summary judgment, Forest Holdings amended its statement of claim to plead a variation of the joint venture agreement made orally “[i]n or about August 2018 or early September 2018” that the purchase price be paid directly to Forest Holdings. An affidavit sworn in support by Ms Sum states:[3]
After the JVA was signed, Zax was attempting to arrange for the Purchase Price to be paid to Pristine and Pristine would then pay FHL. However, as time went on and there were more and more delays in getting the payment made, we agreed between us that payment should instead be made directly to the plaintiff as there was no particular reason why the funds needed to be funnelled through Pristine and it would just add more logistical problems and delay. Rod and I discussed and agreed this in or about August or September 2018. Zax also agreed and his agreement is referred to in an email he sent to Rod dated 6 September 2018 which I have seen.
[3]Mr Scott gave affidavit evidence to the same effect.
It was this amended claim that then came before Duffy J in 2020. Forest Holdings now sought judgment on the first cause of action by way of formal proof. In a judgment dated 1 July 2020, Duffy J held the joint venture agreement had no legal effect and Mr Sheung was not obliged to pay $1.17 million directly to Forest Holdings (or, indeed, anyone).[4]
[4]Forest Holdings (NZ) Ltd v Sheung [2020] NZHC 1529 [High Court judgment].
Forest Holdings now appeals.
Is the contract enforceable?
We start with the Judge’s analysis of the contract.
High Court judgment
The Judge held that execution, payment and property transfers were interdependent obligations intended to occur on the same day.[5] Until execution of the agreement and payment of cleared funds, Forest Holdings remained free to deal with the forestry rights as it saw fit. Until payment, “the agreement was legally ineffective”.[6] Otherwise, as the Judge put it, Forest Holdings would find itself “in the invidious position” of being unable to sell forestry rights elsewhere if payment was delayed and not forthcoming.[7] She saw this as a more helpful interpretation of the agreement in the event of a default by Mr Sheung, than that advanced by counsel for Forestry Holdings. The Judge concluded:[8]
As matters currently stand, I am satisfied that the JV Agreement has no legal effect and it has never had any legal effect. Forest Holdings has been free to dispose of its forestry rights as it saw fit. That it has not done so has nothing to do with Mr Sheung.
[5]At [26]–[27].
[6]At [29].
[7]At [30].
[8]At [38].
In case the Judge erred in reaching that conclusion, she went on to consider whether Forest Holdings could have required Mr Sheung to pay the $1.17 million directly to it. She answered that question in the negative.[9] Noting the failed application before Associate Judge Smith, and the subsequent asserted variation, she held that Mr Sheung’s email of 6 September 2018 was insufficiently clear to indicate acknowledgement of the existence of a contractual obligation to pay Forest Holdings rather than Pristine Timber.[10] As evidence of a variation, it was insufficient.[11] Further, the formalities required by cl 17.1 (quoted at [7] above) had not been met in this case, and “[w]ithout that and without proof of such written agreement no variation would be legally effective let alone enforceable.”[12] In addition, the Judge suggested that the variation left unclear who was then to receive the 50 per cent interest in the forestry rights, Mr Sheung or Pristine Timber.[13]
[9]At [40].
[10]At [43]–[48].
[11]At [47].
[12]At [50].
[13]At [52].
The Judge therefore dismissed the claim and entered judgment in favour of Mr Sheung.[14]
Our assessment
[14]At [60]–[61].
We reach a different view on the meaning and effect of the agreement.
We start from the proposition that in entering a formal agreement occupying 12 closely-printed pages, with all the formalities and flourishes of a commercial joint venture agreement, completed by execution before witnesses, the parties were intending to enter legal relations by means of a binding contract. If effect can be given to that mutual intention, it should be.[15]
[15]Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433 (CA) at [60] per Richardson P, Keith, Blanchard and McGrath JJ, and [137] per Thomas J. See also, for interpretations taken to avoid absurdity: Bathurst Resources Ltd v L & M Coal Holdings Ltd [2021] NZSC 85 at [45] per Winkelmann CJ and Ellen France J, endorsing Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [93] per McGrath, Glazebrook and Arnold JJ.
The construction given by the Judge to the agreement rendered it legally ineffective until payment was made by Mr Sheung. We agree with Mr Bond, counsel for Forest Holdings, that the Judge’s interpretation has the effect of turning the agreement into the grant of an option.
Construction involves the ascertainment of:[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.
Assessing the matter in that way, we do not read the agreement as leaving Forest Holdings remaining free to deal with the forestry rights as it saw fit until payment. A reasonable reader would not read the contract as permitting Forest Holdings to gazump Mr Sheung, or Mr Sheung to walk away without paying. That would be a remarkable reading of the extensive, formal commitments recorded by the agreement, unless that reading is mandated by express provision (in effect establishing a mere option).
[16]Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912 per Lord Hoffmann, cited with approval by the Supreme Court in Bathurst Resources Ltd v L & M Coal Holdings Ltd, above n 15, at [41].
The Judge took the words at the start of cl 2.1 — see [5] above — as that mandating provision. We disagree. The context in which the reasonable reader must construe the agreement is one in which parties are modifying for themselves a precedent joint venture agreement drafted by someone else (presumably, given its form, a lawyer). But no lawyer was engaged on the process of amendment, and the bespoke drafting is far from clear. Asking herself what the first sentence of cl 2.1 means, the reasonable reader would bear that context in mind. Reference might also be made to the preceding investment proposal; it contains no suggestion of an option.[17] Secondly, the expression in cl 2.1, “[t]his Agreement”, is itself muddled; “Agreement” is a defined term referring to a separate agreement by which Forest Holdings is to transfer 50 per cent of the forestry rights to Pristine Timber. The parties “agree” in cl 2.1 that payment (by Mr Sheung) will “occur on or before 29 September 2017”, and earlier, recital B records Mr Sheung as agreeing to provide the funds. The reader would, we think, instead infer the parties’ intention in the first sentence of cl 2.1 to be to define when the joint venture created by the agreement begins, not to create an agreement wholly conditional for effect upon making of a payment (which is then optional, rather than obligatory). Nothing in the context suggests an option, and nothing said by Mr Sheung afterwards suggests it either.[18]
[17]Bathurst Resources Ltd v L & M Coal Holdings Ltd, above n 15, at [75]–[76].
[18]At [89].
We also think the Judge made too much of the fact that the stated date for payment had passed by the time of execution. True to the inattention to legal detail which is the hallmark of this agreement, it is dated 29 August 2017 but was in fact executed by the final party, Mr Sheung, on 6 October 2017 — one week after the date for payment provided in cl 2.1. The Judge considered it might be possible to construe the 29 September 2017 payment obligation as permitting a later performance date if execution is delayed (as it was).[19] She suggested severance under cl 24, dealing with partial invalidity.[20] We do not think such resort was necessary. Rather, the reasonable reader would note the distinctive one-month gap provided between the nominal execution date and the nominal payment performance date, and sensibly infer that in the face of delay (and now literal impossibility of making payment a week prior), it is that one-month period that defines the obligation.
[19]High Court judgment, above n 4, at [35].
[20]At [36].
We do not think any of this places Forest Holdings in the “invidious position” perceived by the Judge. The contract was not an option. Mr Sheung was obliged to pay — at the latest by 6 November 2017 — provided of course 50 per cent of the forestry rights was conveyed to Pristine Timber, and 90 per cent of the shares in that company were conveyed to him. If Mr Sheung did not pay, Forest Holdings had the usual remedies open to a disappointed contracting party. The normal response would be cancellation, resale and a claim for damages. For reasons not entirely apparent, that course did not commend itself to Forest Holdings here.
Finally, we are not satisfied that the evidence before us on formal proof establishes the oral variation alleged by Forest Holdings – i.e. that payment be made to it, rather than Pristine Timber. The agreement contains cl 17.1 — set out at [7] above — which proscribes informal variation. The proper approach to such boilerplate commercial clauses is that they raise an evidential presumption against variation being effective unless the required formalities are met, but do not prohibit them absolutely.[21] That is because the variation may be effective to vary the non-variation clause also. However, the burden of proof lies here on Forest Holdings to show the parties intended to vary the structure of the settlement arrangements in the manner now alleged. In Stevens v ASB Bank Ltd, this Court said:[22]
If the parties had intended to bind themselves to some new arrangement, we have no doubt that [the respondent] would have documented that appropriately. In the absence of such documentation, we see no justification for going behind these plainly worded provisions, which are intended to prevent the uncertainty and dispute that so often arises where written agreements are said to have been varied orally.
[21]Savvy Vineyards 3552 Ltd v Karaka Estate Ltd [2014] NZSC 121, [2015] 1 NZLR 281 at [112]; and Beneficial Finance Ltd v Brown [2017] NZHC 964 at [70]–[77]. Cf in England where such clauses may have greater prohibitory effect: MWB Business Exchange Centres Ltd v Rock Advertising Ltd [2018] UKSC 24, [2019] AC 119.
[22]Stevens v ASB Bank Ltd [2012] NZCA 611 at [27].
We think that applies here also. The Associate Judge and Judge below both found the primary meaning of the contract remained that payment had to be made to Pristine Timber; the evidence in support of the alleged variation being insufficient on either summary judgment or formal proof to displace that conclusion.[23] We agree. The email relied on is ambiguous, the documentary record tendered is incomplete and the consequential effect upon settlement unclear. We do not consider Forest Holdings has discharged the burden, on formal proof, of proving the alleged variation was effected by the parties. That said, there can be no doubt Forest Holdings was always to be the ultimate recipient of the payment. It, after all, was the party supplying the forestry rights to the joint venture.
Is the defendant in default?
[23]Forest Holdings (NZ) Ltd v Sheung, above n 1, at [39]-[40]; Judgment under appeal, above n 4, at [48].
As we see the agreement, there is no reasonable defence available that the defendant is not in default of his (acknowledged) obligation to invest in the joint venture, albeit by payment to Pristine Timber (which would on-pay to Forest Holdings).
Should a decree of specific performance have been granted?
There are a number of difficulties standing in the way of specific performance as an appropriate remedy.
First, while it is not beyond possibility that a court grant specific performance in relation to an obligation to make payment, the remedy is equitable, and discretionary. The normal remedy for default in making payment is damages; specific performance is most unlikely to be ordered where that remedy is adequate.[24] First, because, almost by definition, money in the form of damages recompenses money
unpaid under the contract.[25] Secondly, because the common law holds open the possibility of efficient breach, where a defaulting party may invest in another more profitable enterprise provided they pay damages under the contract they have walked away from.[26] Although the efficient breach principle has often been challenged,[27] it remains the prevailing opinion. Equity generally avoids interfering with it where only money is involved.[28]
[24]See, for example, Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand (6th ed, LexisNexis, Wellington, 2018) at [21.4.1].
[25]See, for example, James Edelman (ed) McGregor on Damages (21st ed, Sweet & Maxwell, London, 2021) at [4‑002]–[4‑003].
[26]See, for example, Gregory Klass “Efficient Breach” in Gregory Klass, George Letsas and Prince Saprai (eds) Philosophical Foundations of Contract Law (Oxford University Press, Oxford, 2014) 362 at 362, citing Oliver Wendell Holmes “The Path of the Law” (1897) 10 Harv L Rev 457 at 462.
[27]See, for example, Fionnghuala Cuncannon “The Case for Specific Performance as the Primary Remedy for Breach of Contract in New Zealand” (2004) 35 VUWLR 657 at 662–667.
[28]See, for example, Finn, Todd and Barber, above n 24, at [21.4.1]. See also Aspec Construction Wellington Ltd v Fawcet [2015] NZHC 535.
We are not persuaded that there is any need to depart from orthodoxy here to grant discretionary equitable relief in the form of specific performance. The most efficient course for all parties is that Forest Holdings cancel the contract with Mr Sheung, recontract with someone else, and sue Mr Sheung for damages for the difference in price received, together with consequential losses. In this respect we are wholly unpersuaded by Mr Bond’s arguments as to difficulty and disadvantage in doing so. All this came from the bar; it lacked foundation in the evidence filed. Rather, Mr Scott gives evidence in his first affidavit of the sort of losses he has suffered and provides a rough but not uncogent calculation.
Secondly, in any event, specific performance is patently an inappropriate remedy here. It would require Humpty Dumpty to be put together again. Mr Sheung has gone to ground, overseas. He may be taken to be an unwilling joint venturer. Yet specific performance here would require reconstruction of this stalled joint venture, with Mr Sheung becoming co-shareholder (and director) of Pristine Timber, and with decisions under the joint venture requiring the support of both Forest Holdings and Pristine Timber. Mr Sheung’s role would not be wholly passive, and we are disinclined to speculate, as Mr Bond asked us to, about his truculence turning to enthusiasm when his money has been handed over. It is a reasonably settled principle that specific performance will not be granted where the consequence is to require the continued conduct of a business.[29] This is a case where continuing participation and supervision would be required. As a recipe for a bad omelette, it could barely be beaten.
[29]Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1 (HL). See generally Finn, Todd and Barber, above n 24, at [21.4.2(h)].
Thirdly, it transpires that Pristine Timber is not in a position to perform its part in the joint venture in any event, the Court having ascertained it was removed from the Companies Register in September 2020. Mr Bond was disposed to accept that was a “rather significant impediment” to the remedy sought. While he may be correct that Ms Sum could have the company restored, the mooted making of now conditional equitable relief here simply underscores the difficulty with the entire remedial proposition.
Result
The appeal is dismissed.
The respondent not having participated in the appeal, there is no order for costs.
Solicitors:
Braun Bond and Lomas, Hamilton for Appellant
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