GTV Holdings Ltd v Harris
[2018] NZCA 95
•8 May 2018 at 3 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA53/2017 [2018] NZCA 95 |
| BETWEEN | GTV HOLDINGS LIMITED |
| AND | JOHN EVAN HARRIS AND SARAH LOUISE JONES AS TRUSTEES OF THE DELARGEY TRUST |
| Hearing: | 7 November 2017 |
Court: | Kós P, Courtney and Toogood JJ |
Counsel: | A J Horne and A E Simkiss for Appellants |
Judgment: | 8 May 2018 at 3 pm |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
B The appellants are jointly and severally liable to pay the respondents one set of costs for a standard appeal on a band A basis and usual disbursements.
____________________________________________________________________
REASONS OF THE COURT
(Given by Kós P)
Shares in a production company specialising in reality television shows were sold, with nearly 20 per cent of the purchase price deferred. Payment of the deferred portion was subject to an adjustment formula. If full adjustment must be made, as the appellant purchasers contend, the purchase price reduces by $554,720. The respondent vendors say no adjustment should be made.
In a claim brought by the respondents for the deferred portion, Heath J held no adjustment was required, so that the deferred portion was payable, with interest, from the date it fell due.[1] He also rejected warranty counterclaims made by the appellants.[2]
Background
[1]Harris v GTV Holdings Ltd [2016] NZHC 3123 [HC judgment] at [81].
[2]At [99] and [112].
The facts are set out in detail in the judgment appealed.[3] We summarise them here.
[3]At [1]–[12].
Greenstone TV Ltd (Greenstone) produces and licenses reality television programmes, most of which show police and customs officers undertaking their duties. It was owned by the respondents. GTV Holdings Ltd (GTV), the principal appellant, was incorporated for the purpose of acquiring Greenstone. Its parent, Cordell Jigsaw Zapruder Productions Pty Ltd, produces similar shows to Greenstone in Australia.
The parties entered into negotiations for the purchase and sale of the shares in Greenstone. Late in those negotiations an issue arose about the entitlement of each party to benefits Greenstone expected to obtain from the licensing of a second series of Highway Cops (Highway Cops 2) to the Australian Seven Network (Operations) Ltd (Seven). That licensing deal had not been formalised. The series was in production during negotiations between Greenstone and Seven. Estimated income from licensing that series to Seven was included in projections for the 2014 financial year.
The respondents took the view GTV should pay for the value of the expected licence. GTV however did not want to overpay in case Seven backed away, either altogether or if it deferred the licence income from the 2014 financial year. The parties agreed to insert a clause specifying the way that licence income would be treated.
To deal with this, the share purchase agreement (the Agreement) provided a purchase price of $6,050,000 with payment in two instalments. The initial payment of $4,800,000 was to be paid on completion of the sale and purchase of Greenstone’s shares. The balance of $1,250,000 was payable no later than six months from the date of completion. However the deferred portion was subject to an adjustment that depended upon when and whether Greenstone licensed Highway Cops 2 to Seven. If the adjustment applied in full, it would have the effect of reducing the amount payable by $544,720. Functionally, it allocated the risk Seven might not enter the licensing agreement before the end of Greenstone’s nominated 2014 financial year (30 June 2014). If it did proceed, the respondents expected to get the benefit by way of the full adjustment amount because Greenstone (now owned by GTV) would get the licensing income. GTV however assumed any consideration from Seven for a licence would not manifest before the end of the 2014 financial year, so they would not need to pay the full adjustment amount.
The Agreement was signed on 13 November 2013. Greenstone licensed Seven to show Highway Cops 2 on 9 December 2013 (the HC2 Licence). The licence term was for four years with a licence start date of 15 February 2014. Greenstone, now under the appellants’ ownership, invoiced Seven for the full licence fee of AUD 360,000 (20 episodes at a rate of $18,000 per episode) on 15 June 2014, and received the remaining payment for the HC2 Licence on 17 July 2014. The respondents say they are entitled to the entirety of the deferred portion, while GTV says they entitled to none.
Heath J found for the respondents. On appeal GTV seeks findings on liability only. Any issue of quantum remains for the High Court.
Contractual framework
The Agreement provides for two payment tranches:
4. Purchase Price
4.1 Amount
(a) the Purchase Price for the Shares is:
(i) the Initial Purchase Price, plus
(ii) the Deferred Payment Amount,
subject to adjustment under clause 4.3.
(b)Subject to Completion occurring, title to, possession of, property in and the benefit and risk of the Shares until Completion remains solely with the Vendors, and passes to the Purchaser on and from Completion.
…
4.4Payment of the Initial Purchase Price
The Purchaser must pay the Initial Purchase Price on Completion in accordance with clause 7.3(a).
4.5 Payment of Deferred Payment Amount
The Purchaser must pay the Vendors the Deferred Payment Amount in accordance with clause 9.
The Initial Purchase Price is defined as meaning “$4,800,000” and the Deferred Payment Amount as:
9.1 Deferred Payment Amount
(a)The Deferred Payment Amount is $1,250,000 less the Highway Cops 2 Adjustment Amount.
(b)The Purchaser must pay the Vendors the Deferred Payment Amount and the Deferred Payment Interest Amount on (or before) the date that is six months from the Completion Date.
A formula is provided to determine the adjustment (HC2 Adjustment):
Highway Cops 2 Adjustment Amount means the amount determined in accordance with the following formula:
2 x ((20 – a) x $13,868),
where a equals the Episodes Acquired.
To state the mathematically obvious, if “a” equals 20, the HC2 Adjustment Amount is zero and the full $1,250,000 would be payable by GTV to the respondents. But if “a” is equal to only 10, for example, the adjustment is $277,360 and GTV would be required to pay only $972,640 under cl 9.1(a). To put it another way, the Agreement incentivised the vendors to achieve 20 “Episodes Acquired”.
Under cl 1.1 “Episodes Acquired” means:
the number of Highway Cops 2 episodes acquired by Seven … as a full price First Run New Series or First Run Existing Series under the Program Acquisition Agreement on or before the date that is six months from the Completion Date and which acquisition has a licence period start date on or before 30 June 2014.
The reference to the Programme Acquisition Agreement is to an agreement between Greenstone and Seven (the PAA). The italicised terms are defined in the PAA as follows:
Licensed Programs:
· First Run Existing Series – first run series of Serious Crash Unit (NZ) or an alternative program to be reasonably agreed by the parties if Serious Crash Unit (NZ) is not produced, Border Patrol and Coastwatch (NZ), namely series produced after Border Patrol Series Five and Coastwatch (NZ) Series Five.
· First Run New Series – first run series of any new television series (excluding dramas and any series commissioned by Seven) produced by [Greenstone] and made available to Seven for licence by it in [Australia] in each year of the term.
The following “caretaker” warranty provisions in the Agreement are relevant to the counterclaim brought by the appellants:[4]
[4]The subject of Issue 2, below at [46] of this judgment.
5.4 Prohibited actions
Without limiting clause 5.1, except as expressly contemplated in this agreement, the Vendors must ensure that the Company does not before Completion without the prior written consent of the Purchaser (not to be unreasonably withheld):
…
(c)enter into any abnormal or unusual transaction which materially adversely affects the Business;
(d)enter into any commitment (or series of commitments) for capital expenditure in excess of $50,000;
(e)enter into any contract with a value of $50,000 or more;
…
And sch 8 of the Agreement relevantly contained the following warranties:
Warranty 6 -The Accounts
…
6.2 Since the Accounts Date:
…
(c)the Company has carried on the Business in the ordinary and usual course and has not entered into any contracts or arrangements other than in the ordinary and usual course of carrying on business of the Business;
…
(e)the Company has not acquired or disposed of or dealt with any assets, nor has it entered into any agreement or option to acquire or dispose of any assets other than in the normal course of business for full market value;
…
Warranty 8 - Commitments
8.1 As far as the Vendors are aware, there are no agreements, arrangements or understandings affecting the Company or the Business that:
…
(b)are outside the ordinary and proper course of business of the Business or otherwise contain any unusual, abnormal or onerous provisions;
The following “information” warranty provisions are likewise relevant:
Warranty 20 - Information
20.1The Vendors have disclosed to the Purchaser all material information relating to the Company and the Business or otherwise in relation to the subject matter of this agreement which might, if disclosed, reasonable be expected to affect the decision of a prospective purchaser to enter into this agreement,
20.2No information has been omitted from the Due Diligence Materials that would render the Due Diligence Materials misleading in any material respect.
All warranties were subject to cl 11.5 of the Agreement:
11.5 Qualifications
The Warranties are given subject to and are qualified by the matters that are:
(a)fairly disclosed in the Due Diligence Materials, the Disclosure Letter, or in this agreement;
(b)within the actual knowledge of the Purchaser or any of its Representatives as at 15 September 2013.
Issues
Counsel filed an agreed issues list. There were four issues, with a number of sub-issues. In the event we consider it more convenient to analyse the issues under two broad headings. One concerns whether the HC2 Adjustment is triggered, and the other concerns potential warranty claims by the appellants.
(a)Issue 1: did the High Court err in finding Greenstone sold licences for 20 episodes of Highway Cops 2 on terms satisfying the requirements of the HC2 Adjustment, in particular the requirements for “Episodes Acquired”?
(i)Sub-issue 1: were the 20 episodes sold “under the [PAA]”?
(ii)Sub-issue 2: were the 20 episodes sold “at full price”?
(b)Issue 2: did the High Court err in rejecting the appellants’ warranty claims?
(i)Sub-issue 1: did the HC2 Licence breach the respondents’ caretaker warranties?
(ii)Sub-issue 2: Did the licensing of Border Patrol 7, Serious Crash Unit 7 or the HC2 Licence breach the respondents’ information warranties?
The first issue relates to the respondents’ claim, while the second concerns GTV’s counterclaim. While a further warranty claim was made under the general warranty in clause 11.5, it adds nothing to the caretaker and information warranties and it is unnecessary to consider it further.
Issue 1: did the High Court err in finding Greenstone sold licences for 20 episodes of Highway Cops 2 on terms satisfying the requirements of the HC2 Adjustment, in particular the requirements for “Episodes Acquired”?
Judgment
Heath J concluded that evidence of pre‑contractual negotiations was not helpful for interpretation purposes, each party having decided to proceed on the basis of different imperatives. As the Judge put it: [5]
The [respondents’] interests were prepared to take the risk that they could negotiate a “start date” that required the full purchase price to be paid, whereas [GTV] took the view that the risk that the HC2 Adjustment would not take effect was minimal. Those differing viewpoints highlight the risk allocation nature of the provision.
[5]HC judgment, above n 1, at [60].
For the purpose of interpreting the HC2 Adjustment, only the defined terms “First Run Existing Series” and “First Run New Series” assumed significance. The second series of Highway Cops fell within the scope of one or other, but Heath J did not need to decide which.[6]
[6]At [63].
The more difficult issue for the Judge was whether the qualifying words “full price” had been met. The Judge found that those words were used to ensure that any licence that was granted by Greenstone to Seven was for market value — that is, that there was an equality of value given and received.[7] The Judge concluded that full price had been given (and that GTV had not directly taken issue with that proposition).[8] In essence the Judge found GTV’s complaint was that a better articulated clause as to timing ought to have been negotiated and applied in their favour. But the Court had no power to improve the agreement which the parties had entered, and it was no function of the Court to make the contract fairer or more reasonable, even if it took the view that the contract was unreasonable.[9] The Judge went on to consider and reject an implied term argument advanced by the appellants.[10] That argument was not renewed before us.
Submissions
[7]At [66].
[8]At [73].
[9]At [74].
[10]At [75]–[80].
As noted at [16] of this judgment, this issue has two sub-issues: whether the 20 episodes of Highway Cops 2 were sold “under the [PAA]”, and whether the 20 episodes were sold at “full price”. Mr Horne, on behalf of the appellants, submitted the ordinary meaning of the words “under the [PAA]” is “in accordance with all of the terms of the PAA”. The HC2 Licence therefore needed to be sold on the standard licence term set out in the PAA, including the specified duration and price of the licence.
Mr Horne submitted that under the PAA, all licences of a First Run New Series or a First Run Existing Series must be for a term of three years. A PAA licence is per episode and permits a number of broadcasts:
… such licences to be for 3 runs on Seven’s primary channel and 7 runs on Seven’s secondary channels over 3 years for each episode of the First Run Existing Series and First Run New Series licenced by Seven.
(Emphasis added.)
But the HC2 Licence had a term of four years. It was not therefore “under” or “in accordance with all of the terms of” the PAA.
The second sub-issue is whether the episodes were acquired for “full price”. Mr Horne submitted that the High Court’s finding that that meant “market value” (and that Seven had acquired it for that value) was wrong. Rather, “full price” was a reference to the prices specified in the PAA and invariably agreed by Greenstone and Seven. The PAA provided for a per-episode price of AUD 18,000, and that ostensibly was the price applicable here. But it was not in fact “full price” because Seven had acquired an extra year’s licence with a four-year term. As Mr Horne put it “Seven paid nothing for the extra year”. Secondly, Greenstone granted Seven extensions to other licence agreements already in place (for the programmes Dog Wars and Highway Cops 1) as part of the HC2-Licence deal.
Analysis
The HC2 Adjustment clause is a compromise, drafted in imprecise terms that invited litigation of the very kind that has resulted. We think Heath J was right to observe:[11]
The HC2 Adjustment has all the hallmarks of a clause that was designed to enable the parties to conclude a final agreement but was, almost inevitably, going to lead to a dispute. It was the last major point to be negotiated. The [respondents’] interests (on one side) and [GTV] (on the other) saw the need for the clause through very different eyes. Each believed it would get the benefit it sought. Putting it colloquially, the clause was drafted to secure the deal. It was its lack of precision that gave rise to the inevitability of a dispute. If either side had insisted on its position being spelt out explicitly the deal may or may not have proceeded.
[11]At [56].
A similar point was noted in this Court in Ward Equipment Ltd v Preston:[12]
… there are essentially three sources of dispute about contractual content: incompleteness, ambiguity and error. Significantly, both incompleteness and ambiguity may arise from either inadvertence or deliberate equivocation (where one or both parties identify the issue ahead of entry into the contract, but prefer not to attempt to resolve it). The gap is sometimes a deliberate one.
Deliberate equivocation, which is what confronts us in this appeal, is what Lord Steyn called an instance of “studied ambiguity”:[13]
Clarity is the aim in drafting commercial contracts but absolute clarity is unattainable. It is impossible for contracting parties to foresee all the vicissitudes of commercial fortune to which their contract will be exposed. Moreover, and quite understandably, business bargains have to be struck under great pressure of time and events. Often the phenomenon of studied ambiguity obtrudes: the parties cannot resolve a particular difference but leave it to the court to settle the issue. It is therefore tiresome for judges to expatiate on the quality of draftsmanship of commercial contracts. Judges must simply do the best they can with the raw materials produced in the real world.
[12]Ward Equipment Ltd v Preston [2017] NZCA 444, at [85] (footnote omitted).
[13]Johan Steyn “The Intractable Problem of the Interpretation of Legal Texts” (2003) 25(1) Sydney Law Review 5 at 8.
This, then, is a familiar task imposed on the courts. The parties have adopted a deliberately imprecise provision. But being a contractual provision, it may be presumed to have a common purpose and meaning.[14] The Court’s task is to find what those are. In many instances of studied ambiguity the implication of a term is necessary to resolve meaning. As Professor McLauchlan has observed, assuming the gap is not so serious as to raise a question of contract formation, the justification in a case such as this for the implication of a term is at its strongest “because it is reasonable to suppose that the parties themselves have mandated such action.”[15] The gap in this contract is neither so great as to compel invalidation for uncertainty nor completion by the implication of a term. Interpretation is adequate to give precision to this imprecise provision.
[14]See for example Gerard McMeel The Construction of Contracts (2nd ed, Oxford University Press, Oxford, 2011) at 50: “[t]he contract is the governing instrument and must be made to yield a solution.”
[15]David McLauchlan “Construction and Implication: in defence of Belize Telecom” [2014] Lloyd’s Maritime and Commercial Law Quarterly 203 at 234.
The technique the common law adopts for interpretation in such a case is not far removed from the technique it adopts for implication. In effect, the common law conjures up a notional reasonable bystander (cousin to the ‘officious bystander’ of implied term renown).[16] Primacy is given to text, but within the relevant context. The reasonable bystander is omniscient — having all the background knowledge reasonably available to the parties.[17] The truth of the matter, as Lord Radcliffe observed sixty years ago, is that the reasonable bystander is simply a personification of the Court itself:[18]
The spokesman of the fair and reasonable man, who represents after all no more than the anthropomorphic conception of justice, is and must be the court itself.
[16]As to this collection of fictional yet vigorous persons, see the judgment of Lord Reed in Healthcare at Home Ltd v Common Services Agency for the Scottish Health Service [2014] UKSC 49, [2014] 4 All ER 210 at [1]–[3].
[17]Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60]; Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 at [21].
[18]Davis Contractors Ltd v Fareham Urban District Council [1956] AC 696 (HL) at 728.
The law asks the reasonable bystander what he or she would understand the clause to mean. While the actual parties stand by, mute in that forum (for they are not allowed to depose to their subjective intentions), the reasonable bystander is instead asked to proclaim the meaning that reflects the most reasonable common expectation of the parties in the circumstances of the contract.[19] The only real difference here between interpretation and implication is whether the law places a pen in the hand of the bystander. This exercise is what the court really does when it identifies the “presumed common intention” of the parties.[20] Astute self-interest may be the reason the parties left the gap in meaning in the contract in the first place. But the gap will be filled by the reasonable bystander’s assessment of meaning in the manner we have described. That approach is the price paid for studied ambiguity, and for leaving the task to the law courts.
[19]Johan Steyn “Contract law: fulfilling the reasonable expectations of honest men” (1997) 113 LQR 433 at 440–441; and David McLauchlan “A Contract Contradiction” (1990) 30 VUWLR 175 at 194–195.
[20]A concept identified by Lord Sumner in the context of frustration in Bank Line Ltd v Arthur Capel and Co [1919] AC 435 (HL) at 455 and applied to construction by Viscount Simon in British Movietonews v London and District Cinemas Ltd [1952] AC 166 (HL) at 186.
This is what lies behind application of the interpretive technique prescribed by the Supreme Court in Firm PI 1 Ltd v Zurich Australian Insurance Ltd in the circumstances of the present case — that is, where the court has to confront a gap in meaning, left advertantly. As the Supreme Court went on, in a passage that applies to construction in all contexts:[21]
[60] Given the issues in the case, it is not necessary that we discuss the approach to contractual interpretation in any detail. It is sufficient to say that the proper approach is an objective one, the aim being to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”. This objective meaning is taken to be that which the parties intended. While there is no conceptual limit on what can be regarded as “background”, it has to be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning.
[61] The requirement that the reasonable person have all the background knowledge known or reasonably available to the parties is a reflection of the fact that contractual language, like all language, must be interpreted within its overall context, broadly viewed. Contextual interpretation of contracts has a significant history in New Zealand, although for many years it was restricted to situations of ambiguity. More recently, however, it has been confirmed that a purposive or contextual interpretation is not dependent on there being an ambiguity in the contractual language.
…
[63] While context is a necessary element of the interpretative process and the focus is on interpreting the document rather than particular words, the text remains centrally important. 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. But the wider context may point to some interpretation other than the most obvious one and may also assist in determining the meaning intended in cases of ambiguity or uncertainty.
[21]Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 (footnotes omitted). See also Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173.
We will interpret the HC2 Adjustment in accordance with the principles stated at [25] to [30]. We start by noting that the price for the shares in Greenstone was a multiple of the sustainable EBITDA for the years: 2011–2014.[22] The multiple is 3.67. The HC2 Adjustment provided a potential deduction of two times the expected EBITDA attributable to the HC2 Licence— in the event that the HC2 Adjustment was triggered. That reflected the reality that Highway Cops 2 remained an asset, and was likely to be acquired by Seven, but that the price therefor and timing remained uncertain. As GTV’s witness Mr Fraser observed:
An adjustment of 2x the net income of Highway Cops 2, rather than the full multiple of 3.67, recognised that Greenstone would very probably be able to sell all 20 episodes of Highway Cops 2 in the secondary market, but possibly not in 2014, and, if Seven were not interested, an alternative purchaser might pay less than the $18,000 per episode Seven had agreed to.
[22]EBITDA standing for “earnings before interest, tax, depreciation and amortisation”.
Against that economic reality, the word “under” is a relatively straightforward expression. It does not mean “in accordance with”, in a very strict sense, as the appellants assert. The parties cannot have intended that any departure from the terms of the PAA, no matter how immaterial, would mean that GTV would not have to account for the benefit of the HC2 Licence at all in the purchase price. That would give GTV a free ride, which neither party can objectively have intended.
This interpretation is consistent with the caretaker warranties, which are set out at [13] above. In particular, the caretaker warranty in cl 5.4(c) requires that the respondents not enter into any abnormal or unusual transaction which materially, adversely affects the business. Those terms give the respondents some flexibility in the ultimate licence terms, so long as they were not abnormal or unusual and materially detrimental to the business. We do not consider the HC2 Adjustment is intended to set a different, stricter standard. The HC2 Licence was required to be entered pursuant to the PAA, in the sense that it is not materially inconsistent with the PAA.
We are also clear that the appellant’s submission that the PAA mandates a maximum three-year licence term for Highway Cops 2 is not correct. Rather, the three‑year licence term provided in the PAA applies expressly in relation to three specific exclusive series runs only (none of which are Highway Cops 2). They are First Run Existing Series of Border Patrol and Coastwatch and one other First Run New Series. The latter could not have been Highway Cops 2 at all. Rather a new series called Nabbed filled that obligation. Seven enjoyed three-year exclusive rights to those three series only.
Highway Cops 2 was not one of those three exclusive series to which the words from the PAA set out above at [22] of this judgment apply. It fell instead to be dealt with under a separate provision of the PAA. That provided for optional licencing rights for further series “on the terms of this agreement”. Relevantly, the PAA required such series to be licensed under the “standard Seven … programme licence agreement”. That instrument has no particular duration. It might be agreed at three years, and probably would be in most cases. But it did not have to be. As both parties were perfectly well aware, Highway Cops 2 was itself unusual in containing 20 episodes. In effect, a double series. If the parties had thought about it, they would not (or should not) have been surprised if the licence term for a double series was longer than the usual licence for a single series.
We therefore agree with Mr Campbell, counsel for the respondents, that there was no required term, three years or otherwise, for an optional licence under the PAA, which is what applies to Highway Cops 2.
We turn now to the second sub-issue, concerning whether the Highway Cops 2 episodes were acquired by Seven for “full price”. Again, we are satisfied that the appellant’s argument is misconceived.
The PAA provides, in relation to optional licencing rights (which are those engaged here):[23]
Seven may elect to license further series on the terms of this Agreement at the rate of $18,000 per half hour episode for First Run Existing Series or First Run New Series (except for Serious Crash Unit New Zealand or an agreed replacement program) which will be licensed at the rate of $22,500 per half hour episode) and $7,500 per half hour episode for Library Series.
That figure was the price paid per episode, as we made clear above at [8] of this judgment. But the question is whether the fact that the Highway Cops 2 licence was for four years (rather than the usual three) makes a difference. Or that Greenstone had granted extensions to the terms of the licences for Dog Wars and Highway Cops 1.
[23]The expression “Library Series” refers to Greenstone’s back catalogue items made available for re-run. They are not relevant here.
As we have also noted, the full price of the licence was paid by Seven in the first licence year — in this case on 17 July 2014 (after Greenstone, now controlled by the appellants, invoiced that account in June 2014). It made absolutely no difference to that payment whether the licence was for three or four years.
The only difference identified by witnesses for GTV was that the extra year’s rights would defer relicensing opportunities by a further year. GTV’s Mr Murray said in cross‑examination that the four- rather than three-year term was a “pretty major difference”. In re-examination he sought to quantify the revenue loss from the delay in relicensing of one year. The four year period put back the time for relicensing by a year. He “guessed” that in the 2017 financial year Greenstone would “lose something between you know 50 to $100,000 of income”. He based that on “a sale to Foxtel and we wouldn’t be able to do that sale in that year. It would be another year later.”
We are bound to observe however that is simply a question of timing. The revenue is not lost. It is simply deferred by one year. Viewed in that sense, the net loss overall is more likely to be of the order of $2,500–$5,000. That difference is immaterial in the context of this transaction. By no means is it such a difference as to trigger a reduction in purchase price, as the appellants assert, of $554,720.
We decline to construe “full price” as comprehending immaterial economic variations in consideration. Given the potential significance of the H2 Adjustment, the words must be taken to be subject to a common qualification excepting such variations.
We asked Mr Horne how Greenstone or GTV was otherwise disadvantaged by the four-year term. He was disposed to accept that in the long term it was not. In fact, Greenstone received the licence income earlier than it might otherwise have. But it was an “artificial contrivance” to meet the HC2 Adjustment: Greenstone could not have achieved sale for a three-year licence term because Seven did not want the series in 2014. It would otherwise have bought the series in 2015. The end result was that the sale ended up overpriced because the 2014 sales artificially overachieved.
We have little sympathy for this argument. The prospect of a 2014 sale of the series was expressly adverted to. The parties made arrangements in the form of the HC2 Adjustment to address uncertainties in achieving that sale. The adjustment, as we have noted, incentivised the respondents to achieve a sale in 2014. The respondents have done precisely what they were incentivised to do. What they also did, however, was to enter into a four-year term. But that did not postpone receipt of the licence fee; quite the contrary. It may have deferred later relicensing revenue, but we have noted that the cost of that to Greenstone was immaterial. It follows that the four-year term of the HC2 Licence did not mean the sale was not struck at “full price”.
Heath J appeared to give little credence to the argument in relation to the extensions given by Greenstone to Seven for the other two series. He accepted the evidence of Mr Hall, who negotiated the HC2 Licence for Greenstone, that extensions were commonly sought and given, and that had those extensions been asked for independently of the HC2 Licence, Mr Hall would have agreed.[24] No persuasive basis for this Court to differ from that conclusion has been provided.
[24]HC judgment, above n 1, at [68]–[69].
The evidence does not show to the requisite standard a “quid pro quo” or “inducement” from these extensions by Greenstone for entry into the HC2 Licence. In any case, evidence quantifying the value of the concession and demonstrating that it represented a material departure from “full price”, such as might justify triggering the HC2 Adjustment, was not before the Court.
Conclusion
The answer to Issue 1 is “no”.
Issue 2: Did the High Court err in rejecting the appellants’ warranty claims?
The conclusion we have reached on Issue 1 directly affects Issue 2. All will soon be apparent from our reasoning. It may be observed that Issue 2 was decidedly secondary in significance in the appellants’ oral argument before us.
Judgment
As to the caretaker warranties, Heath J found the HC2 Licence, although different from usual, was not outside the ordinary course of Greenstone’s business.[25] The PAA did not contain fixed terms as to duration — a finding we have affirmed. The evidence of both Mr Horne and Seven’s Mr Ross was that different arrangements could be made where that benefited both parties. There was no suggestion of an inequality of bargain. The complaint as to timing affected GTV’s interests, as shareholders, rather than Greenstone itself.[26]
[25]At [97].
[26]At [98].
As to the information warranty, Heath J found that: GTV knew there were 20 episodes of Highway Cops 2 in production when the agreement was signed on 13 November 2013; GTV knew there had been a change in Greenstone’s accounting policies so that income due from sales contracted prior to year-end was accrued in the accounts; the respondents intended to enter into a licensing agreement with Seven for Highway Cops 2; GTV made erroneous assumptions in relation to the way in which the respondents might negotiate a licensing agreement with Seven; and the respondents had disclosed that Border Patrol 7 had been deferred until 15 April 2014 such that income would be recognised in the 2015 financial year.[27]
[27]At [107].
Heath J therefore dismissed the warranty counterclaims.
Submissions
Mr Horne did not take issue with the legal test adopted by the Judge for the caretaker warranty. But he submitted that the Judge did not properly apply the law to the facts. His argument very much drew on the interpretation advanced in relation to the HC2 Adjustment, which interpretation we have respectfully rejected.
Mr Horne’s essential argument on the caretaker warranty was that Greenstone had never previously granted a licence to Seven for more than three years. That then was the “ordinary course of business” for Greenstone. The four-year term was outside the ordinary or usual course of Greenstone’s business. Likewise, the extensions granted for Dog Wars and Highway Cops 1.
As to the information warranty, Mr Horne submitted that the Court had not considered evidence that the respondents failed to disclose a subsequent delay which had the effect of moving income for Border Patrol 7 out of the 2014 financial year. The Judge did not address the delay to Serious Crash Unit 7. Both delays were material. The respondents did not disclose the further delay to Border Patrol 7 or the original delay to Serious Crash Unit 7.
Analysis
We consider first the caretaker warranty, and in particular under cl 5.4(c) of the Agreement. There was no significant difference between the parties as to the legal effect of that clause. It was common ground that the observations of Downs Distributing Co Pty Ltd v Associated Blue Star Stores Pty Ltd (in liq) (made in the context of an insolvency case) were applicable here:[28]
… [the expression ‘ordinary course of business’] does suppose that according to the ordinary and common flow of transactions and affairs of business there is a course, an ordinary course. It means that the transaction must fall into place as part of the undistinguished common flow of business done, that it should form part of the ordinary course of businesses carried on, calling for no remark and arising out of no special or particular situation.
[28]Downs Distributing Co Pty Ltd v Associated Blue Star Stores Ltd (in liq) (1948) 76 CLR 463 at 477 per Rich J; approved in Julius Harper Ltd v F W Hagedorn & Sons Ltd [1991] 1 NZLR 530 (CA) at 543.
We are not persuaded that Heath J erred in his analysis of the application of the caretaker warranty to the HC2 Licence and other series extensions. We note five points. First, the PAA (which formed part of the ordinary course of the business between Greenstone and Seven) was not definitive as to the term for series licensing. Secondly, while the norm was three years, this was not a normal series. As both parties appreciated when entering into the Agreement Highway Cops 2 was unusual in that it had 20 episodes — in effect a double series — and longer than any previous series Greenstone had produced. While agreeing to a four-year term was unique, the appellants’ argument fails to allow for the fact the 20-episode licence was also unique. Thirdly, the course of business between Seven and Greenstone was longstanding, and mutually beneficial variation was a feature of it. Fourthly, the economic effect of the variation was, as we have demonstrated, relatively insignificant. Fifthly, the variations made to the licence terms for Dog Wars and Highway Cops 1 were manifestly within the ordinary course of business given the practice of variation in arrangements between Greenstone and Seven.
We turn now to the information warranty. The argument here concerns two series, Border Patrol 7 and Serious Crash Unit 7.
We see no reason to differ from the view taken by Heath J in relation Border Patrol 7. It is clear from the evidence that deferral of the licence start date for Border Patrol 7 to 15 April 2014 was disclosed prior to entry into the agreement. The appellant’s argument focused before us on alleged non-disclosure of a subsequent delay in delivery of episodes. We agree with Mr Campbell, however, that the evidence in relation to this point does not meet the standard required for civil proof. The short answer lies in the appellants’ own pleading, which accepted that all episodes had been delivered to TVNZ on or around 1 April 2014. Further, the appellants pleaded in their reply to the appellants’ defence to the amended counterclaims that all the episodes of Border Patrol 7 could have been delivered to Seven prior to the licence start date of 15 April 2014. There is, therefore, nothing in this point.
We turn now to Serious Crash Unit 7. The appellants’ argument is that shortly after the Serious Crash Unit 7 licence was entered, the series was subject to significant delays, not disclosed, relating to incomplete Coroners’ inquiries and other Court cases. The evidence on this particular point was also inadequate to sustain the warranty claim to the civil standard. Three episodes were complete. The fundamental question was whether delivery of the remainder could still have been achieved by 30 June 2014. Although some legal processes remained to be resolved (given the nature of the programme — a point that would or should have been appreciated by GTV) the evidence before the High Court did not show that the remaining episodes could not be completed in time. The evidence simply shows a possibility, which the appellants were aware of, for a delay in finalising the remaining four episodes of the programme. That is not enough to sustain the claims made.
Conclusion
The answer to Issue 2 is also “no”.
Result
The appeal is dismissed.
The appellants are jointly and severally liable to pay the respondents one set of costs for a standard appeal on a band A basis and usual disbursements.
Solicitors:
Minter Ellison Rudd Watts, Auckland for Appellants
Jackson Russell, Auckland for Respondents
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