Haig v Edgewater Developers Limited HC Auckland CIV 2006-488-322

[2008] NZHC 2474

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2006-488-322

BETWEEN  ROBERT HAIG Plaintiff

ANDEDGEWATER DEVELOPERS LIMITED First Defendant

ANDCARRINGTON FARMS LTD Second Defendant

ANDPH II INCORPORATED Third Defendant

ANDPAUL KELLY Fourth Defendant

Hearing:         19 December 2007

Appearances: J R Billington QC for Plaintiff in opposition

J D McBride & B A Ng for defendants in support

Judgment:      1 August 2008 at 2.30 pm

JUDGMENT OF ASSOCIATE JUDGE ROBINSON

This judgment was delivered by me on 1 August 2008 at 2.30 pm, Pursuant to Rule 540(4) of the High Court Rules

Registrar/Deputy Registrar

Date……

Solicitors:           Bell Gully, PO Box 4199, Auckland

Wayne W Peters & Associates, PO Box 5053, Whangarei

ROBERT HAIG V EDGEWATER DEVELOPERS LIMITED AND ORS HC AK CIV 2006-488-322 1 August

2008

[1]      Robert  Haig,  who  is  the  plaintiff,  managed  the  development  of  property situated on the Karikari peninsula, Northland. The fourth defendant, Paul Kelly, is the director of Edgewater Developments Limited, the first defendant, and Carrington Farms Limited, the second defendant. He is also the President and Chief Executive Officer of PH II Incorporated, the third defendant.

[2]      Mr Haig brings these proceedings against Edgewater Developers Limited and Carrington  Farms  Limited  for  15%  of  the  equity  and  share  capital  of  those companies on the basis that those companies hold 15% of their shares in trust for him. As an alternative cause of action against the third defendant,  he seeks  an enquiry as to damages should the benefit he is to receive under an agreement in July

1999 relating to the entitlement of shares in Edgewater Developers Limited and Carrington Farms Limited result in the value of those shares being less than the value he would have received immediately before the date of that agreement.

[3]      The defendants bring this application for summary judgment on the ground that none of the causes of action in the plaintiff’s statement of claim can succeed. In the alternative the defendants seek to strike-out the claim.

[4]      It is also submitted on behalf of PH II Inc that New Zealand is forum non conveniens and that in the circumstances of this case, the United States of America is the appropriate forum in which the plaintiff’s claim against PH II Inc should be tried.

Background

[5]      PH II Inc was incorporated in the State of Connecticut in the United States of America. Through a series of companies, PH II Inc owns the share capital in Edgewater Developers Limited and Carrington Farms Limited. In 1995 Paul Kelly decided to develop property at Karikari, Northland. That development comprised:

a)        A luxury lodge b)         A golf course

c)        A vineyard and winery d)         A cattle farm

e)       Fourteen residential villas adjourning the golf course

f)        A residential subdivision to be completed in several stages

[6]      The  lodge,  golf  course,  vineyard  and  winery are  owned  by  a  subsidiary company of Carrington Farms Limited. The residential subdivision is owned by Edgewater Developers Limited.

[7]      By letter dated 2 April 1996 Mr Jeffrey B Gayner, Chairman of the Board of Edgewater Developers Limited, offered Mr Haig the position of Chief Executive Officer of Edgewater Developers Limited at a salary of $100,000 NZD together with an equity interest equivalent to 15%. In that letter, Mr Gayner supplied the following information concerning Edgewater Developers Limited, referred to in the letter as EDL, and the development being undertaken on the Karikari peninsula:

EDL, a subsidiary of PH II, Inc., is involved in the subdivision and development of residential properties on the Karikari peninsula. At this time, the Company is engaged in the sale of residential lots in one completed subdivision, and plans to apply to the regulatory authorities to develop approximately an additional four hundred residential lots on land owned by the  Company  on  the  Karikari  peninsula.  The  market  value  of  these subdivision   projects   is   estimated   to   be   between   NZ$12,000,000   –

15,000,000. In addition to the development of the aforesaid residential subdivision, we also intend to consider building houses for sale on certain of the subdivided lots owned by the Company. It is our expectation that the completion of the aforesaid projects will require your on-site residence for a period of at least three years. To date, we have invested NZ$3,000,000 on the  Karikari   Peninsula  and   we  expect   our   incremental   development investment during the next three years to be at least NZ$15,000,000. In addition,   we   estimate   that   between   25-50   local   new   employment opportunities  will  be  created  as  a  result  of  our  planned  development activities.

[8]      In a letter to Mr Haig of 4 June 1996, Mr Kelly states:

PH II INC                  33 Riverside Avenue    Phone [phone]

5th Floor  Fax: [phone]

Westport, Connecticut 06880

June 4, 1996

Mr.Robert B. Haig

127 Cedar Street

Rehoboth, Massachusetts 02769

Dear Bob:

Since you will be making plans to relocate to New Zealand in the near future, I am sending you this letter to add to your files as an addendum to the letter which was sent to you by Jeff Gaynor on April 2, 1996, outlining the terms of your employment with Edgewater Developers, Ltd.

Jeff’s letter pretty well covers the basic terms of your employment, including salary and benefits. The letter also mentions that you will be offered an equity investment interest equivalent to 15%. This 15% interest applies to both Carrington Farms Limited and Edgewater Developers Limited. As agreed, you will pay the same price for 10% of your equity interest as PH II has paid, i.e., the same proportional purchase price, plus related closing costs (legal fees, filing fees, etc.). The other 5% equity interest will be awarded to you as an incentive based upon your agreement to oversee the New Zealand project for a period of at least three years. While your 5% equity interest will automatically vest in full three years from the date of the start of your employment, you will also be entitled to your share of any distributions made by either Carrington Farms Limited or Edgewater Developers Limited during your employment prior to the end of the three-year vesting period. In other words, as an employee in good standing, you will be entitled to your prorata share of any distributions made by either company from the date of your employment. The payment for your 10% interest is due, but we will keep it open for the remainder of this year without any interest charge to you. If there is any amount outstanding at the end of this year, we will establish a fair interest rate, to be payable going forward on the unpaid balance.

I thought that you should have this additional correspondence in your files for your own benefit, particularly since the aforementioned letter from Jeff Gaynor does not deal with the specifics of your 15% equity interest.

Best regards, Paul K Kelly

President

[9]      The offer contained in the letters of 2 April 1996 and 4 June 1996 was accepted by Mr Haig who relocated to New Zealand on 4 July 1996 to take up his position as Chief Executive Officer and project manager.

[10]     By memorandum to Mr Haig of 21 July 1998, Mr Kelly states:

PH II INC                  33 Riverside Avenue    Phone [phone]

5th Floor  Fax: [phone]

Westport, Connecticut 06880

MEMO TO:    Bob. Haig

FROM:          Paul Kelly

DATE:           July 21, 1998

RE:                Application for NZ Citizenship

Bob:

Enclosed is a letter evidencing your 15% equity interest in Carrington Farms Limited and Edgewater Developers Limited, together with a Note to PH II, Inc. which permits you to become immediately the equity owner of record of

10% of the shares of Edgewater Developers and Carrington Farms which, together with the 5% “sweat equity” interest you are receiving, will equal

15% of the equity of the combined enterprises. Please sign and return to me

one copy of the enclosed Note and keep the second copy for your files.

The equity payment which you are making is, as you know, less than the actual amount of PH II initial investment, since we structured a portion of our initial equity investment as debt (shareholders advances). This debt is, of course, payable prior to any payments received by the equity shareholders. In addition, your equity investment includes a pro rata (10%) share of the closing costs (legal fees, transfer fees, etc.) incurred at the time of purchase of the properties.

Even allowing for a higher NZ$ exchange rate at the time of some of our earlier loans to Carrington Farms and Edgewater Developers, we now have a cash investment in these properties of at least NZ$6 million, with a present market value that I would estimate to be more, due to the substantial development improvements which have already been completed.

Best Regards

Paul

[11]     Enclosed with the letter of 21 July 1998 was the following certificate:

PH II INC                  33 Riverside Avenue    Phone [phone]

5th Floor  Fax: [phone]

Westport, Connecticut 06880

July 21, 1998

TO WHOM IT MAY CONCERN

PH II, Inc. is the controlling owner of both Carrington Farms Limited and Edgewater Developers Limited, in New Zealand. PH II’s original combined investment in these two properties was NZ$3,000,000, and the purchase of both properties was completed in February, 1996. Since that time, additional shareholders advances of US$1,921,000 (approximately NZ$3,694,000 at current exchange rates) have been invested in the properties for their development. Current plans are for continued extensive development of both properties which will necessitate a considerable amount of additional investment by the equity owners.

This letter will confirm that Robert B. Haig, who is the resident Project Manager for both of these properties, has a 15% equity interest in both Carrington Farms Limited and Edgewater Developers Limited. If you have any questions in this matter, please feel free to contact me directly.

Sincerely

Paul K. Kelly

President

[12]     Also enclosed  was  a  document  headed  “Demand  Promissory Note”,  that document was as follows:

July 21, 1998

DEMAND PROMISSORY NOTE

I, Robert B. Haig, hereby agree to pay to PH II, Inc. the amount of US$197,536.18 in payment for a 10% equity interest in Carrington Farms Limited and Edgewater Developers Limited.

This note will be due and payable on demand and is collateralized by my underlying equity interest in Carrington Farms Limited and Edgewater Developers Limited, both of which evidences of equity ownership will be held by PH II, Inc. until this Note is paid in full. The Note will bear interest at a rate of 9% per year from the date of this Note through its payment in full.

This Note agreement shall be governed by, and construed in accordance with, the laws of the State of Connecticut.

[13]     On  24  August  1998,  Mr  Kelly  wrote  the  following  letter  to  Mr  Haig concerning the terms of Mr Haig’s employment. The letter was on PH II Inc. letterhead and was signed by Mr Kelly as President:

PH II INC

August 24, 1998

Mr. Robert B. Haig

127 Cedar Street

Rehoboth, Massachusetts 02769

Dear Bob:

Per our recent conversations on the subject, this letter will confirm that, effective as of this date, we are changing the form of the payment required for you to purchase your 10% equity interests in Edgewater Corp. and Carrington Holdings, Inc. The following structure and methodology will supersede any previous agreement between PH II Inc. and you.

Effective as of the date of this letter, you will have an option, expiring August  24,  2001,  to  acquire  10%  of  the  equity  of  both  Edgewater Developers  and  Carrington  Holdings,  Inc.,  and  the strike  price for  each option will be the amount of the Capital of Edgewater Corp. and Carrington Holdings Inc., respectively, “Capital”, as of the date of the exercise of the option(s). “Capital” shall be defined as the paid-in amount of equity, plus positive retained earnings, plus the face amount of any debt outstanding, plus accrued  but  unpaid  interest,  on a  consolidated basis. This  structure  will eliminate any interest payable by you to acquire an equity interest in either property and this will save you a significant amount of interest payable to PH II Inc. to finance your equity interests prior to you actually paying for them.

In regard to the 5% sweat equity interests in both Edgewater Corp. and Carrington Holdings, Inc., which you will receive at the end of your third year of employment, you will receive a perpetual $1.00 option to acquire such interests at the value paid by PH II, Inc. initially for such pro-rata equity interests, including the initial purchase price, plus related closing and legal costs, etc. Any additional Capital amounts invested since the initial acquisition closing in the various Edgewater or Carrington Holdings properties, must be repaid to the sources providing such Capital before the equity holders can receive any distributions in regard to future profits related to the properties. As such, you will be responsible for repayment of such additional pro-rata Capital contributions above the initial purchase prices, as previously described, of the 5% equity interests which you are receiving free of initial charge, prior to receiving any equity distributions in regard to these

5% interests.

In  regard  to  future  distributions  to  the  equity  holders  of  the  various Edgewater and Carrington Holdings properties, if you have not fully paid off the total Capital amounts advanced by other sources in proportion to your total 15% equity interests, other than the value of the 5% sweat equity interests as herein defined, any distributions in regard to either the various

Edgewater or Carrington Capital advances. In regard to any such Capital advances  provided  by  PH  II,  Inc.,  or  its  affiliates,  or  Paul  K.  Kelly personally,  the  amount  of  any  such  distributions  which  are  used  to extinguish your pro-rata responsibility for repaying such Capital advances will be grossed up by the personal tax rate of Paul K. Kelly. This grossing up procedure is necessary in order that PH II, Inc., its affiliates and/or Paul K. Kelly will receive, on an after tax basis, the same net amount which has been advanced by them.

This Agreement shall be governed by, and construed in accordance with, the laws of the State of Connecticut. All monetary amounts mentioned in this letter of Agreement are denominated in the currency of the United States of America.

If this letter of agreement accurately reflects our understanding, please sign and return one original copy to me at PH II, Inc and keep the other copy for your files.

Sincerely,

Paul K. Kelly

President

Agreed to:---------------------- Robert B. Haig

[14]     Mr Haig did not sign and return the letter to Mr Kelly as requested. On 1 July

1999 Mr Kelly as President of PH  II Enterprises  Inc.  and  Mr  Haig signed  the following document:

PH II ENTERPRISES, INC.

33 Riverside Ave., 5th Floor

Westport, Connecticut 06880

203-226-6288

July 1, 1999

Mr. Robert B. Haig

127 Cedar Street

Rehoboth, MÄ 02769

Dear Bob:

This letter agreement will confirm our mutual understanding that effective July 1, 1999, you will have an option to acquire from PH II Enterprises, Inc., for a total aggregate purchase price of US$1.00 10 shares of common stock of Edgewater Corp. and 10 shares of common stock of Carrington Holdings, Inc. representing 5% of the 200 issued and outstanding common shares of Edgewater Corp. and Carrington Holdings, Inc., respectively, as of July 1,

1999, through June 30, 2049. This option is also assignable by you at any

time to any members of your family who may be designated your heirs and/or beneficiaries.

In addition, effective as of the date of this letter agreement, and for the period ending June 30, 2009, you will have the right to acquire from PH II Enterprises, Inc. 20 shares of common stock of Edgewater Corp. and 20 shares  of  common  stock  of  Carrington  Holdings,  Inc.,  from  PH  II Enterprises, Inc., for a total aggregate purchase price of US$223,300.00. the foregoing common stock share amounts represent 10% of the 200 issued and outstanding shares of common stock of Edgewater Corp. and Carrington Holdings Inc., respectively, of July 1, 1999. This option is assignable at any time during the option period to your designated heirs and/or beneficiaries.

This letter agreement represents the full extent of the understanding between PH II Enterprises, Inc., and all of its affiliates, including PH II, Inc. and Paul K. Kelly, and Robert B. Haig in regard to the potential equity participation of Mr. Haig in common stock ownership of Edgewater Corp. and Carrington Holdings, Inc. In addition, this letter agreement supersedes any previous understandings by the aforementioned respective parties in regard to this subject matter. This agreement is subject to the laws of the State of Connecticut.

If the foregoing accurately reflects our mutual understanding, please sign one copy of this letter and return it to me and retain the other copy for your files.

Sincerely

Paul K. Kelly

President

Agreed and Accepted:

[15]     According to Mr Kelly PH  II Enterprises  Incorporated being a  company incorporated in the United States of America is a subsidiary of PH II Inc the third defendant.   PH II Inc has 100% of the share capital of PH II Enterprises Inc.   It appears that as at July 1999 PH II Enterprises Incorporated owned 100% of the stock of Edgewater Corporation and Carrington Holdings Incorporated.  Both Edgewater Corp and Carrington Holdings Incorporated were companies incorporated in Delaware in the United States of America.   It appears that at that time Edgewater Corp owned 100% of the share capital in Edgewater Management Limited incorporated in New Zealand which in turn owned 100% of the share capital in Edgewater Developers Limited the first defendant.  It also appears that at that time Carrington Holding Incorporated had 100% of the share capital in Carrington Management Limited a company incorporated in New Zealand which in turn had

100% of the share capital in Carrington Farms Limited the second defendant.

[16]     In October 2000 Mr Kelly decided to separate PH II Enterprises Inc, then the parent of Edgewater Developers Limited and Carrington Farms Limited from PH II Inc for tax purposes. This would separate the New Zealand land development companies from the US manufacturing companies.

[17]     In June 2003, Carrington Corporation and Edgewater Enterprises restructured for United States tax reasons. The restructuring involved establishing two new entities; Carrington Capital LLC and Edgewater Capital LLC, both incorporated in the Unites States of America, which, took over the shares in Edgewater Management Limited, a company holding shares in Edgewater Developers Limited and Carrington Trustees Limited, a company incorporated in New Zealand, which had shares in Carrington   Farms   Limited.   Such   restructuring   was   necessary   according   to Mr F A Rossetti,  the  Managing  Director  of  Knox  &  Co,  to  obtain  certain  tax advantages and to avoid double taxation being incurred by both Mr Kelly and Mr Haig. In his memorandum to Mr Kelly of 12 December 2003, Mr Rosetti pointed out:

To  refresh  your  memory,  the  reason  for  this  restructuring  was  that Edgewater Corp. (US) and Carrington Holdings (US) are both subchapter “S” corporations. Another subchapter “S” corporation, PH II Enterprises, owns  each  of  these  companies.  According  to  IRS  regulations,  “any subchapter “S” corporation owned by another subchapter “S” corporation must be owned 100% by the owning subchapter “S” corporation, or you lose the tax pass through benefit of the subchapter “S” corporation.

Therefore assuming one day Bob Haig will exercise his purchase option, I needed to set up a vehicle that owns the New Zealand assets, yet, will not penalize both of you with double taxation, once at the corporate level and then at the personal level for both you and Bob. I have therefore set up the two new LLC’s, which now sit between the original “S” corporations mentioned  above  and  the  New  Zealand  entities  to  prevent  this  double taxation. These entities for the sake of convenience are called Carrington Capital, LLC and Edgewater Capital, LLC. Bob’s option to purchase his share of Carrington and Edgewater will now be through exercising his option in these LLC companies.

[18]     By mid 2005 the development at Karikari had been largely completed. On 1

June 2005 Mr Haig wrote to Mr Kelly about his role and his “exit strategy”. Mr Kelly in response pointed out to Mr Haig that as the arrangements for Mr Haig’s employment as Chief Executive Officer and manager were with PH II Inc., Mr Haig should address his concerns to that corporation. Mr Haig in reply stated as follows:

Upon selling and restructuring my businesses in the US and preparing to relocate to New Zealand you proceeded to modify the agreement via Jeff Gaynor’s letter. Since that time as stated all company “machinations” were in your hands and I, as you are aware was alerted to those changes when they occurred from time to time. However the initial verbal agreement was still to stand and I never understood that any restructuring was to change the substance of our verbal arrangement.

PHII was the entity which the OIC approved to complete the development via Carrington Farms Limited and Edgewater Development Limited. As you are aware in July 1998, for example, you provided me with a letter (on PHII letterhead) which confirmed that I had a 15% equity interest in Carrington Farms Limited and Edgewater Developers Limited, together with a note to PHII Inc which permitted me to become immediately the equity owner of

10%  of  Edgewater  Developers  and  Carrington  Farms  Limited,  which together with the 5% sweat equity interest totalled 15% of the equity of the combined enterprises. In summary I always understood that PHII via Carrington Farms Limited and Edgewater Developers Limited owned the “project”.

Subsequently in August 1998, that arrangement changed by virtue of a letter forwarded to me which stated that at the end of my third year of employment I  would receive a perpetual $1.00 option to acquire such interests “at the value paid by PHII for such pro-rata equity interest, including the initial purchase price plus related closing and legal costs”.

Again in July 1999, the arrangement was varied once again, and while I signed  the  document,  I  did  so  in  the  belief  that  the  original  verbal arrangement was being mirrored by the July 1, 1999 document.

Over the years I have taken our conversations and your letters in good faith that our original agreement was still in force. Now however, you are proposing  the  liquidation  of  EDL  and  in  addition  the  ownership  of Carrington Holdings has been “reconfigured” into other subsidiaries.

Put simply Paul, I have understood for some years, that on payment of US$223,300.00 I get a 10% stake in the entire project. As to 5% I am entitled to have same transferred to me by way of sweat equity.

Can you please confirm that you are in the position to transfer the sweat equity shares to me and also confirm that the shares have the value as represented in the July 1, 1999 letter?

Please also confirm that if I pay US$223,300.00 I will have transferred to me

10% of the equity in the “Carrington project”, whatever the ownership structure, based on the 1999 debt equity ratios.

Could I please have a reply within ten days, as I wish any working relationship to be underpinned by having all other matters resolved with some certainty?

[19]     As Mr Haig has not received a satisfactory response to his claim for a 15%

share in the development he issued these proceedings.

Claim by Plaintiff against Defendants

[20]     In the first statement of claim filed in June 2006, Mr Haig relied on causes of action under s174 Companies Act 1993 and a cause of action based on deceit by the defendants resulting in frustration of a legitimate expectation by Mr Haig when taking up his position of manager of the Carrington Development, part performance, and undue influence. The application by the defendants for summary judgment and strike-out against Mr Haig were based on that statement of claim.

Claim Against Fourth Defendant

[21]     The amended statement of claim filed on 7 December 2007 raises no cause of action or claim for relief against the fourth defendant. Consequently counsel for the plaintiff conceded that the claim against the fourth defendant should be struck out. As the amended statement of claim encloses no cause of action against the fourth defendants the claim against the fourth defendants is struck out pursuant to rule

186(a) High Court rules.

Claim against the First, Second and Third Defendants

[22]     The amended statement of claim of 7 December 2007 pleads that as part of his contract as manager for the design and development of the land at Karikari into a tourist resort including golf club, general subdivisions of sections and vineyard, Mr Haig would be entitled to an equity shareholding of 15% in the company or companies developing the land of which 5% was to be “sweat equity”. The first cause of action seeks a declaration that 15% of the equity share capital of Edgewater Developers Limited and Carrington Farms Limited are held in trust for Mr Haig and an order for specific performance requiring both companies to transfer 15% of their issued share capital to Mr Haig together with an inquiry as to damages. As a further cause of action Mr Haig seeks damages from PH II Inc. if any variation in the arrangement for his employment resulting from the alleged agreement of July 1999 resulted in Mr Haig receiving less than the amount he would have been entitled to had the parties not entered into the agreement of July 1999.

Case  for  Defendants  in  support  of  application  for  summary  judgment  and strike-out

[23]     It is submitted on behalf of the defendants that Mr Haig has never been a shareholder in the companies. The documents produced go no further than to confer an option for Mr Haig to acquire the shares.

[24]     Counsel for the defendant points out that an option to acquire shares can be structured in two ways: -

a)       A company can contract to issue new shares to a person who will decide  at  a  future  date  whether  to  take  up  that  option  with  the company or not; or

b)An existing shareholder can create an option to purchase a number of the existing shares in the company.

[25]     It is submitted that if the company is creating an option to issue the shares itself, then such option is illegal by virtue of s 40 Companies Act 1993: -

40        Contracts for issue of shares

A contract or deed under which a company is or may be required to issue shares,  whether  on  the  exercise  of  an  option  or  on  the  conversion  of securities or otherwise, is an illegal contract for the purposes of the Illegal Contracts Act 1970 unless-

(a)  the board is entitled to issue the shares; and

(b) either-

(i)  the board has complied with section 47 or section 49; or

(ii) all entitled persons agree or concur with the issue of the shares under section 107(2); or

(iii) the contract or deed expressly provides that the contract or deed is subject to-

(A)      the board complying with section 47 or section 49; or

(B)      all entitled persons agreeing to or concurring with the issue of the shares under section 107(2).

[26]     There is no evidence that the companies have complied with S 40(a) and (b). Those subsections require compliance with s 47 and s 49 which lay down strict rules to be observed by the directors before shares can be issued by the company. Consequently the defendants contend this option to obtain shares to be issued by the company must be illegal.

[27]     If the option was granted by an existing shareholder then it is submitted that the option was granted by PH II Inc. In this respect, counsel refer to the correspondence evidencing the agreement which was on the letterhead of PH II Inc and signed by Mr Kelly as the president of PH II Inc.   However, the statement of claim does not plead an agreement with PH II Inc conferring and option on Mr Haig to acquire that corporation’s shares in Edgewater Developers Limited and Carrington Farms Limited.

[28]     In  summary,  the  defendants  contend  that  there  is  no  agreement  for  the plaintiff to receive 15% of the shares in Edgewater Developers Limited and Carrington Farms Limited. It is contended that the plaintiff’s terms of employment included an option to acquire 15% of those shares. The purchase price of 10% had been fixed at $197,536.18 USD had the plaintiff exercised his rights to acquire those shares in July 1998, and $223,300 USD had the plaintiff exercised his option after July 1999. The sweat equity of 5% was also in the form of an option. The plaintiff having not exercised his option cannot be entitled to claim the 15% equity.

[29]     With regard to the alternative cause of action pleaded by the plaintiff against PH II Inc, based on a claim that the agreement in July 1999 resulted in a reduction in the value of the equity the plaintiff was to receive in the first and second defendants, the defendants contend: -

a)        There is no evidence to support the conclusion that the value of the equity the plaintiff was to receive has been reduced.

b)        That  as  the  holder  of  an  option  to  acquire  shares  in  Edgewater

Developers Limited and Carrington Farms Limited, the plaintiff could

not prevent the PH II Group from restructuring its capital. In this respect, counsel for the defendant relies on the judgment of Lord Brightman in the Privy Council in Forsayth Oil & Gas NL v Livia Pty Ltd (No 2) (1985) 9 ACLR 831 at p 834: -

The existence of an option to take up shares in a company does not by itself impose a fetter on the exercise by the company of the powers conferred on it by the articles in relation to its share capital. Short of fraud, the company remains at liberty to increase or reduce its capital, and to consolidate or subdivide its shares.

c)       That in any event the defendants can establish that the courts of  the  United  States  of  America  are  the  appropriate  courts  to determine   the   claim   by   the   plaintiff   against   PH   II   Inc   and consequently those proceedings should be stayed.

Case for the Plaintiff

[30]     It is submitted on behalf of the plaintiff that the letters written on 2 April

1996, 4 June 1996, and 21 July 1998 confirm the plaintiff’s entitlement to shares in Edgewater Developers Limited and Carrington Farms Limited. Emphasis is placed on the letter from Mr Kelly in support of the plaintiff’s application for New Zealand citizenship. In that letter Mr Kelly certifies that the plaintiff has a 15% equity interest in these companies.

[31]     The plaintiff claims:

i)That but for the letter of 1 July 1999, the plaintiff would have been entitled to the 15% equity at the expiry of 3 years from the date of his contract of employment, namely by 21 August

2001. It is therefore submitted that the alleged variation of the contract by the letter of 1 July 1999 is unenforceable as such variation is not supported by any consideration.

ii)       That when he agreed to the variations contained in the letter of

1 July 1999 on Mr Kelly’s assurance, that there was no change

in  the  initial  arrangements,  and  that  the  variation  was  to achieve an adjustment in Mr Kelly’s position which would not be at the expense of the plaintiff.  Consequently as he entered into the variation of the agreement under mistake as to the effect of the variation, the plaintiff was entitled to relief under the Contractual Mistakes Act 1977.

iii)That the defendants cannot inequity benefit from their own wrongdoing. It is contended on behalf of the plaintiffs that the defendants have wrongfully arranged for an assignment of the agreement existing prior to 1 July 1999 and therefore cannot invoke equitable principles which will have the effect of enabling them to benefit from their own misconduct. In this respect the plaintiff relied upon the Court of Appeal decision in Telecom New Zealand Limited v Sintel-Com Limited [2007] NZCA 499 judgment delivered 14 November 2007.

iv)That as the cause of action arose in New Zealand, the essential elements of the claim are between the plaintiff and New Zealand companies, and the relief claimed which is 15% of the share capital of two New Zealand companies is only enforceable   in   New   Zealand.   Therefore   the   Courts   in New Zealand  are  the  appropriate  forum  to  determine  this

claim.

Discussion

[32]     It  is  fundamental  to  the  plaintiff’s  claim  that  part  of  the  terms  of  his employment he is entitled to 15% of the share capital of Edgewater Developers Limited and Carrington Farms Limited.  The defendant, however, contends:

a)        That the plaintiff only had an option to acquire 10% of the share capital of the two defendant companies;

b)That prior to the plaintiff being entitled to the 5% of the shares in those companies at the expiration of three years from the commencement  of  his  employment,  the  agreement  was  varied  in terms of the letter of 1 July 1999;

c)       That in terms of that letter the plaintiff has an option to acquire 10% of the share capital of Carrington Holdings Inc and Edgewater Corporation, two  companies  incorporated  in  the  United  States,  on payment of US$223,300 together with an option to acquire a further

5% of the shares in those companies to be exercised on or before

30 June 2049 on payment of US$1.

[33]     The plaintiff contends that as he had almost completed three years of his contract of employment he was almost entitled to a 5% shareholding in the two defendant companies.  It is also pointed out on his behalf that he had an option to acquire a further 10% in those companies on payment of US$197,536.18 and has therefore submitted that there was no consideration provided by the defendant for the variation of the agreement recorded in the letter of 1 July 1999.

[34]     Counsel for the defendants submits that consideration was provided for the variation contained in the letter of 1 July 1999 because the agreement of 1 July 1999 conferred a further benefit on the plaintiff in that the plaintiff would be able to assign his option to purchase the shares.

[35]     The document recording the agreement dated 1 July 1999 is on the letterhead of PH  II Enterprises  Inc and relates to options to acquire stock held by PH  II Enterprises Inc in Edgewater Corporation and Carrington Holdings Inc.   It must follow therefore if the offer contained in the letter of 1 July 1999 was made by PH II Enterprises Inc and not PH II Inc.  That is the offer the plaintiff accepted.

[36]     It is significant that a previous offer contained in a letter of 21 July 1998 now relied upon by Mr Haig as establishing his right to 15% of the share capital of Edgewater Developers Limited and Carrington Farms Limited invited him to sign and return a promissory note requiring him to pay US$197,536.18 on demand with

interest at 9% per annum.  Mr Haig never signed the promissory note nor did he sign a letter containing a further offer to acquire 10% of Edgewater Developers and Carrington Holdings Inc in a letter of 24 August 1998.  He was invited to sign that letter if the letter accurately reflected his understanding of the arrangements.

[37]     Mr  Haig claims  the  correspondence  in  1996  and  1998  which  includes  a promissory note he did not sign represents the agreement for the 15% equity in the company.  On the other hand he claims that the letter he did sign of 1 July 1999 does not represent the arrangement and in particular he did not understand the agreement was now with PH II Enterprises Inc and that he was forfeiting his shares in the New Zealand company.

[38]     However he must have recognised that the amount he was to pay for 10% of the shares had increased from US$197,536.18 in July 1998 to US$223,300 in July

1999. Mr Haig’s letter of 1 June 2005 insofar as it confirms his understanding to be entitled to 10% of the equity on payment of US$223,300 clearly confirms the agreement of 1 July 1999.

[39]     I am satisfied that the letter of 1 July 1999 records the agreement between the parties as to Mr Haig’s entitlement to 15% of the equity.  I come to that conclusion even if I accept Mr Haig’s evidence that prior to the agreement of 1 July 1999 he had a binding agreement to acquire 15% of the share capital of Edgewater Developers Limited and Carrington Farms Limited on the basis that 5% would vest in his name three years after he commenced his employment and the balance on his exercising an option to purchase.

[40]     The agreement of 1 July 1999 was a completely new contract in substitution for any contract that existed prior to that date.  Had there been any prior contract the agreement of 1 July 1999 represents a novation of that contract.  The agreement of 1

July 1999 clearly had the consent of both Mr Haig and Mr Kelly, as well as any companies Mr Kelly was representing.  As stated by the learned authors of Chitty on Contracts 29th  Ed Vol 1 reported with approval by the Court of Appeal in Hela Pharma AB v Hela Pharma Australasia Limited CA 165/03, CA 206/03 17 February

2005 at [56]

There  is  no  doubt  that  with  the  consent  of  both  contracting  parties  all contracts of any kind may be transferred, and the term “novation” has been introduced from Roman law to describe this species of transfer.  Novation takes place where the two contracting parties agree that a third, who also agrees, shall stand in the relation of either of them to the other.  There is a new contract and it is therefore essential that the consent of all parties shall be obtained:  in this necessity for consent lies the most important difference between novation and assignment (emphasis in text) (citation omitted).(para

19-085)

[41]     Clearly if an agreement did exist relating to Mr Haig having 15% of the share capital in the two companies, then the parties to that agreement agreed that the rights of Mr Haig under that contract had been transferred and incorporated in the agreement of 1 July 1999.  It is also clear that PH II Enterprises Inc agreed to the transfer of those rights and obligations.

[42]     I am also satisfied that consideration was provided for the transfer of those rights. Such consideration involved: -

a)       PH II Enterprises agreeing to Mr Haig having an option to acquire 5% of   that   corporation’s   interest   in   Edgewater   Corporation   and Carrington Holdings Inc on payment of US$1 such option to be assignable and to be exercised at any time prior to 30 June 2049.

b)Mr  Haig  had  the  right  to  acquire  10%  of  the  shares  of  PH  II Enterprises Inc in Edgewater Corporation and Carrington Holdings Inc for a total aggregate purchase price of US$223,300 to be exercised at any time prior to 30 June 2009.

c)       In return for those rights Mr Haig gave up any rights conferred under the previous contact.

[43]     From Mr Haig’s point of view in addition to the benefit of his right to assign the option no interest would be payable on the purchase price of the 10% of the share equity until he exercised his option to purchase that 10%. The prior agreement required him to pay interest on US$197,536.18 from 21 July 1998 at 9% per annum.

[44]     It is also argued on behalf of the plaintiff that he was induced to enter into the contract by a mistake.   He claims to have signed the letter on the basis that his existing arrangements would remain unchanged and that he did not understand the letter to mean he was forsaking his shares in the New Zealand companies that were to own the land.  The letter however is very clear with regard to the extent of the arrangement between the parties.  The penultimate paragraph of the letter states as follows:

This letter agreement represents the full extent of the understanding between PH II Enterprises, Inc., and all of its affiliates, including PH II, Inc. and Paul K. Kelly, and Robert B. Haig in regard to the potential equity participation of Mr. Haig in common stock ownership of Edgewater Corp. and Carrington Holdings, Inc. In addition, this letter agreement supersedes any previous understandings by the aforementioned respective parties in regard to this subject matter.

[45]     Correspondence from the plaintiff to Mr Kelly on 1 June 2005 makes it clear that the plaintiff was aware of the change in the arrangement affected by the letter of

1 July 1999.  In that letter he states:

Put simply Paul, I have understood for some years, that on payment of US$223,300.00 I get a 10% stake in the entire project. As to 5% I am entitled to have same transferred to me by way of sweat equity.

He goes onto say:

Please also confirm that if I pay US$223,300.00 I will have transferred to me

10% of the equity in the “Carrington project”, whatever the ownership structure, based on the 1999 debt equity ratios.

[46]     It is hard to see how the plaintiff can maintain that there was no variation in the arrangement effected by the letter of 1 July 1999 when he acknowledges that the amount he must pay when exercising his option to acquire 10% of the shares had increased from US$197,536.18 to US$223,300.  His evidence that he believed the arrangement prior to 1 July 1999 was not changed by the letter of 1 July 1999 is not consistent with the comments in his letter of 1 July 2005.

[47]     It follows therefore that the plaintiff is not entitled to shares in Edgewater

Developers Limited and Carrington Farms Limited.   Consequently the plaintiff’s

claim to a declaration or specific performance so that 15% of the share capital of those companies be vested in his name cannot succeed.

[48]     The  claim  against  PH  II  Inc  seeks  an  inquiry  to  determine  whether  the plaintiff’s entitlement under the agreement of 1 July 1999 results in the plaintiff receiving less than he would have been entitled to receive under the agreement existing prior to the agreement of 1 July 1999. In view of my finding that there was an effective novation which resulted in the agreement prior to the 15 July 1999 being superseded by the agreement of 1 July 1999 there can be no basis for the claim.

[49]     I am also satisfied that the equitable doctrine referred to by the Court of Appeal in the case of Telecom New Zealand Limited v Sintel-Com Limited can have no application to the circumstances of this case.  In Telecom v Sintel, the ANZ Banking Group entered into a USD$3.5 million facility agreement with Sintel which provided security by way of debenture issued by Sintel in favour of the ANZ Bank Sintel assigned absolutely to the ANZ Bank by way of mortgage all Sintel’s present and  future  choses  in  action  including  Sintel’s  rights  under  an  agreement  with Telecom to provide telecommunications services. Sintel gave notice to Telecom of the assignment to the ANZ Bank. A dispute arose between all parties including an allegation by Sintel that Telecom owed it money under its contract. That dispute was supposedly settled and as a term of the settlement, the ANZ Bank assigned its interest under the debenture and facility agreement to Telecom.

[50]     Sintel  then  issued  proceedings  against  Telecom  for  breach  of  Sintel’s agreement with Telecom. Telecom applied to strike out a number of causes of action pleaded by Sintel on the basis that such causes of action could not succeed and amounted to abuse of process. It was claimed on behalf of Telecom that Sintel had assigned its rights under the contract with Telecom to the ANZ Bank which had in turn assigned those rights to Telecom. Thus any right of action Sintel had under the contract had now been assigned to Telecom.

[51]     The Court of Appeal upheld the decision dismissing Telecom’s strike out application. At paragraphs 44-46 Hammond J, who delivered the decision of the Court of Appeal, stated:

It seems to us that the fundamental principle contended for by Mr Billington must be correct: equity will not allow a party to take advantage of its own wrongdoing (if such it proves to be). There must be an ability in a case such as this to enable a party in the position of Sintel to bring proceedings, if necessary in its own name, to set aside the underlying agreement, notwithstanding that formal effect has been given to the transaction.

Such an exception to the operation of the usual rules (which are undoubtedly as Mr Kos stated them to be) can strike deep into commercial transactions, and it ought itself to operate on the considerations which underpin the application of equitable doctrines.

One such constraint is that a party seeking to resort to equity will normally look first to resort to his or her legal remedies, for equity supplements the law. Here, if it were to redeem the debenture, Sintel could sue as of right on the basis it is presently putting forward. But the realistic position is that it is in liquidation, there are no funds available to it, and the liquidators have, for whatever reason, shown no interest in the proceeding. Further, Mr Billington also noted that, in the circumstances of this case, if the appellant was successful on this application, but the settlement agreement was eventually set aside, the respondent would encounter subsequent limitation issues.

[52]     The circumstances of this case differ significantly from the circumstances in the  case  of  Telecom  v  Sintel.  In  the  latter  case,  Telecom  was  relying  on  an assignment of the debenture which included a contract between Telecom and Sintel to prevent Sintel compelling Telecom to comply with its obligations under that contract. Thus by acquiring the ANZ Bank’s rights under the debenture, Telecom could abuse its position by preventing Sintel from forcing Telecom to comply with its obligations to Sintel.

[53]     There is no suggestion that in the present case any of the defendants could similarly abuse their position by obtaining an assignment of Mr Haig’s contractual rights and this way avoid their responsibilities under that contract.

[54]     Having established for the reasons set forth in this decision that none of the causes of action pleaded by the plaintiff can succeed, it is now necessary to consider whether it is appropriate to enter summary judgment or to exercise the power to strike out the claim under rule 186. Summary judgment for a defendant “will arise where the defendant can offer evidence which is a complete defence to the plaintiff’s claim” (See Westpac Banking Corporation v M M Kembla NZ Ltd [2001] 2 NZLR

298 at 313). My conclusion that the agreement for a share in the equity of the development is contained in the letter signed by the plaintiff of 1 July 1999 means

that the plaintiff was to receive 15% of the share equity of Edgewater Corp and Carrington Holdings Ltd and not the first and second defendants. As a consequence, the plaintiff can have no claim against the first and second defendants who are therefore entitled to summary judgment in their favour.

[55]     Similarly, the agreement of 1 July 1999 was not with PH II Inc but was with PH II Enterprises Inc. It follows that the plaintiff has no claim against PH II Incorporated the third defendant, who is therefore entitled to summary judgment in its favour.

[56]     Because of my conclusions relating to the claim against PH II Inc, it is not necessary for me to consider the claim by counsel on behalf of PH II Incorporated that New Zealand is forum non conveniens.

Summary

[57]     For the above reasons I now make the following orders:

a)       The plaintiff’s claim against the fourth defendant is struck out under rule 186.

b)Summary judgment is entered in favour of the first, second and third defendants against the plaintiff.

c)       As the defendants have been successful they are entitled to their costs on a 2B basis with disbursements as fixed by the registrar. Although two counsel appeared on behalf of the plaintiff, I am not persuaded that there should be a certificate for additional counsel having regard to the principles set forth in the decision of Nomoi Holdings Limited v

Elders Pastural Holdings Limited 2001 15 PRNZ 155.

Associate Judge Robinson