Homestead Bay Trustees Limited v Fiordland Experience Group Limited
[2023] NZHC 3248
•16 November 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2022-404-2160
[2023] NZHC 3248
BETWEEN HOMESTEAD BAY TRUSTEES LIMITED
Applicant
AND
FIORDLAND EXPERIENCE GROUP LIMITED
Respondent
Hearing:
Further submissions:
14 June 2023
3 and 18 July 2023
Appearances:
R Hollyman KC and R Stewart for the applicant A Butler KC and R Harrington for the respondent
Judgment:
16 November 2023
JUDGMENT OF CAMPBELL J
This judgment was delivered by me on 16 November 2023 at 4.00 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar
HOMESTEAD BAY TRUSTEES LIMITED v FIORDLAND EXPERIENCE GROUP LIMITED [2023] NZHC
3248 [16 November 2023]
[1] The applicant, Homestead Bay Trustees Ltd (HBTL), owns land in Homestead Bay, near Queenstown (the land). The respondent, Fiordland Experience Group Ltd (FEG), lodged a caveat against dealings with the land. FEG claims an interest in the land pursuant to an agreement with HBTL under which HBTL granted FEG an option to purchase lots to be subdivided from the land.
[2] HBTL applies for an order that FEG’s caveat be removed. HBTL says FEG does not have a reasonably arguable case to support the interest it claims in the land. HBTL says this is for several reasons: the agreement on which FEG relies is illegal and unenforceable; the agreement has been avoided by HBTL; the agreement has been cancelled by FEG; and in any event the agreement never conferred a caveatable interest in the land. Further, HBTL says that even if FEG has a reasonably arguable case for a caveatable interest, I should exercise my residual discretion to remove the caveat.
Background
The players
[3] The current directors of HBTL are Hong Biao (Brian) Chen and Dan (Cassie) Xiao. Mr Chen and Ms Xiao are also, together with a Hong Kong company, the current shareholders of HBTL.
[4] HBTL is one of several property development companies of which Mr Chen and Ms Xiao are directors and shareholders. Another is Murphys Development Ltd (MDL).
[5] Another director of both HBTL and MDL was Andrew Guest. Mr Guest was a director of those companies at relevant times until August 2021. He has, however, never been a shareholder of either HBTL or MDL.
[6] Mr Guest has, since 2010, been a director and shareholder of Viranda Holdings Ltd (VHL). VHL provides commercial property services including acquisition analysis. One of Mr Guest’s co-directors and co-shareholders in VHL is Mark Bridgman.
[7] FEG was incorporated in 1987. Roy Toms was a director and shareholder of FEG for many years, until his death in August 2020. Mr Toms was a good friend of Mr Guest. FEG traded as Air Fiordland until 2010, when it sold all its business assets. Mr Guest deposed that in 2010 he and Mr Toms “decided to use FEG as a company for the pursuit of joint ventures by us in Central Otago”.
[8] Mr Chen and Ms Xiao, and through them HBTL, allege Mr Guest earned secret commissions from apparently arm’s-length transactions between HBTL and FEG in which Mr Guest had an undisclosed interest. They say Mr Guest did this from 2014 but that they became aware of it only in 2021.
An opportunity to purchase the Homestead Bay land
[9] In 2014, Mr Chen, Ms Xiao and Mr Guest became aware of an opportunity to purchase and develop the Homestead Bay land. The land was in two lots: lots 6 and
7. There was already permission to subdivide lot 6 into 12 lakefront lots. These were known as “OSR” lots. Lot 7 had both a zoned commercial village area and an area that had potential for intensive residential subdivision into what were known as “OSH” lots.
[10] At that time, Mr Chen, Ms Xiao and Mr Guest were the directors of MDL. MDL decided to incorporate a new company, HBTL, to purchase the land. HBTL was incorporated on 26 August 2014. Two days later, HBTL was nominated as purchaser of the land under an existing agreement for sale and purchase,1 and accepted the nomination.
[11] The initial directors of HBTL were Mr Guest and Mr Bridgman. The initial shareholder was Viranda Nominees Ltd (VNL), a company associated with Mr Guest. In October 2016, VNL transferred its shares in HBTL to the three shareholders of MDL (Mr Chen, Ms Xiao and the Hong Kong company). HBTL says that VNL always held the shares on trust for those three persons. FEG disputes this.
1 I was not told whether the original purchaser under this agreement had any relationship with MDL, HBTL, Mr Chen, Ms Xiao or Mr Guest.
The First Agreement between MDL (or HBTL) and FEG
[12] In 2014, at around the time that HBTL was nominated as purchaser of the land, either MDL or HBTL agreed to engage FEG to provide services to assist in the funding of the purchase of the land (the First Agreement). There is a dispute as to who engaged FEG under the First Agreement, when FEG was engaged, and what services FEG was engaged to provide.
[13] FEG says it was engaged by MDL, prior to HBTL being incorporated, to underwrite the sale, for a total price of $12 million, of the 12 lots that were expected to be subdivided from lot 6. FEG says this engagement was oral and not documented.
[14] HBTL says either it or MDL engaged FEG. It says FEG was not engaged to provide underwriting services, but rather the services described in an email dated 10 October 2014, sent by Mr Guest to Mr Chen and Ms Xiao. In this email, Mr Guest said:
I have taken steps to coordinate the initial presales that will ensure financing arrangements. … I have put together a package so that immediate sales and underwriting can occur in New Zealand. This is essential and I seek full support from the Board for this.
I have invited a marketing and property investment firm to procure (cause) the sale of the 12 OSR lots and for each ORS [sic] Lot to have an added 2 x OSH lots in the new intensive subdivision.
These sales will be unconditional as far as the purchaser is concerned; they will be based in New Zealand; suitable to support financing; and a deposit would be paid with sufficient part of the deposit to be released for payment of the marketing fee to that organisation. The fee would be $75,000 for each OSR lot and $25,000 for each OSH Lots [sic]. After prepaying the marketing fee from the sales price the 12 OSR lots would have a value of $12m and the associated 24 OSH lots sold as part of the package would have a value of $6m so the combined presales would be $18m. I need to finalise this detail and negotiate the documentation. The whole sale process would be completed by 30 November 2014.
…
I therefore respectfully seek immediate approval and authority to enter into an exclusive marketing agreement with this company on the basis expressed and to allow me to undertake whatever associated management steps required to secure presales of $18m. …
…
May I please have your approval to this proposal and the discretion to finalise the exclusive marketing arrangement to ensure the sales happen.
[Emphasis and underlining in original]
[15] HBTL says Mr Guest’s proposal was discussed at a meeting of the boards of directors of MDL and HBTL on 4 December 2014. The minutes of that meeting record:
The Board confirmed the marketing agreement with Fiordland Experience Group Ltd (FEGL) who have been commissioned to arrange the same [sic] of the 12 OSR Lots and up to 24 of the OSH Lots at a discount to assist with funding. (Note: The terms of the agreement with the marketing company (FEGL) are known by the Directors to be those set out in Andrew’s [Mr Guest’s] email of 10.10.2014.)
[16] Whatever the terms of the First Agreement, Mr Guest did not tell Mr Chen or Ms Xiao that he was using FEG for the pursuit of joint ventures with Mr Toms.2
Mr Guest reports to Mr Chen and Ms Xiao on sales and marketing fees
[17] Mr Guest reported to Mr Chen and Ms Xiao on FEG’s success in selling lots and on a possible negotiation over the fee payable to FEG in an email sent on 23 December 2014:
Dear Directors and Friends,
The company we have our marketing agreement with, namely “Fiordland Experience Group Ltd” (FEGL), has confirmed to me that the 12 OSR Lots have been sold for a total of $14.4m! This is excellent news.
Brandon will be attending to the contracts in January. The sum due to FEGL will be $900,000 plus gst (15%). Would the Directors like me to try to negotiate a part payment arrangement whereby we offer up to say 50% of the sum due ($450,000 plus gst) now and the balance of 50% plus interest after refinancing say 31 May 2015? …
[18] In contrast to the excellent news conveyed in that email, Mr Toms emailed Mr Guest on 1 January 2015 to report that he had only nine “definitely confirmed” sales, leaving three lots. One of the confirmed sales was to himself, though Mr Toms told
2 Mr Guest deposed, in an affidavit dated 25 November 2022 at [31], that he had told “HBTL” several matters, but these did not include his use of FEG for the pursuit of joint ventures with Mr Toms. At the hearing, Mr Butler KC confirmed that [31] of Mr Guest’s affidavit was the extent of the evidence of disclosure by Mr Guest to Mr Chan or Ms Xiao.
Mr Guest “I haven’t got the deposit for mine”. Mr Guest replied the next day, saying “Fill the three last slots (FEGL have filled them in the meantime!) and then we’ll get the lawyers form of agreements out for signature and deposits”. He added that although he had told MDL “very accurately” that “FEGL have been successful”, MDL would not be expecting contracts until late January “which gives you [Mr Toms] the opportunity to get and me to formalise the whole 12”.
[19] On 30 January 2015, Mr Guest sent an email to Mr Chen and Ms Xiao confirming he would try to defer some of the fee payable to FEG. He said his aim was to ask “them” to accept half now with interest on the balance. On 12 February 2015, he sent a further email to Mr Chen and Ms Xiao saying he was pleased to confirm that “the marketing company [FEG] have agreed to spread their marketing fees over two payments with half payable now and half on 31 August with 8% pa interest charged”. Mr Guest’s emails gave the impression that FEG was independent from him. He had still not told Mr Chen or Ms Xiao of his connection to FEG.
HBTL pays marketing fees to FEG; VHL invoices FEG for half those fees
[20] On 25 February 2015, FEG issued two invoices, one to HBTL for $280,000 and one to MDL for $170,000. The description on each was “Fee for marketing services provided”. HBTL paid both invoices.
[21] Soon thereafter, VHL invoiced FEG for half of what HBTL had paid to FEG on the above invoices. As noted earlier, Mr Guest and Mr Bridgman were shareholders in VHL. Mr Guest did not tell Mr Chen or Ms Xiao that a company in which he was interested was invoicing FEG for half of what HBTL was paying FEG.
[22] On 31 August 2015, FEG issued an invoice for its fee for “marketing services” to MDL in the sum of $468,086.96 (the $450,000 balance of the fee, plus interest). HBTL paid the invoice.
[23] In November 2015, Mr Guest sent an email to VHL’s financial controller, a Mr Martin. He asked Mr Martin to arrange an invoice by VHL to FEG for $234,000 (half the amount FEG had invoiced MDL). Mr Guest did not tell Mr Chen or Ms Xiao this was happening.
The Replacement Agreement between HBTL and FEG
[24] It had been expected that the sale of the Homestead Bay land to HBTL would settle in March 2015. Settlement was delayed and did not occur until 26 May 2016.
[25] On 31 July 2016, HBTL and FEG entered into an agreement to replace the First Agreement (the Replacement Agreement). By this time, the directors of HBTL were Mr Guest, Mr Chen and Ms Xiao (Mr Bridgman having resigned).
[26]Because of its importance, I set out the Replacement Agreement in full:
Deed of Surrender of Underwriting Agreements and Replacement Agreement for compensation and provision of new lots on terms
Between Homestead Bay Trustees Ltd (“HBTL”) and Fiordland Experience Group Limited (“FEG”) Whereby:
1.In 2014 and 2015 FEG were requested by HBTL to provide (and FEG did provide) an underwriting (“the underwriting agreement”) of the sale of 12 lots that HBTL intends to subdivide on the land that it had contracted to purchase located within the OSR designation of Lot 6, Homestead Bay, Queenstown, the underwriting being at a price of
$1m plus gst for each of those 12 lots.
2.Due to a change in circumstances HBTL have requested, and FEG has agreed, that FEG surrender its underwriting of these lot sales in return for a replacement agreement and benefits set out herein.
3.The parties now record the terms of their agreement to replace “the underwriting agreement”
The parties hereby record their agreement as follows:
4.FEG hereby surrenders its underwriting and agreement to purchase the 12 OSR Lots restoring them directly to the unfettered control of HBTL and FEG will have no further rights to those 12 lots.
5.HBTL will pay to FEG or the nominee of FEG as FEG may direct for management services, the total sum of $600,000 (plus GST) upon presentation of invoices by FEG and/or its nominee to HBTL.
6.FEG is hereby granted an option to purchase a different 12 lots to be subdivided by HBTL within the presently described OSH designation within Lot 7, Homestead Bay, Queenstown, upon usual sale and purchase agreement terms including the following:
a.Settlement is to be 15 days after issue of title at a price that FEG may elect of either:
i. 2/3rds of a registered valuers written valuation as at date of the issue of title; or
ii. $200,000 under such valuation figure
7.FEG will receive the transfer of a 6 further Lots on terms including the following:
a.Settlement to be 15 working days after issue of title
b.Each transfer will be at a cost of $10 per lot.
8.To determine which lots are to be transferred to FEG pursuant to (6) and (7) above, the following is agreed:
a.Upon finalising and gaining consent for the new sub-divisional plan for the area currently described as OSH on Lot 7, Homestead Bay, Queenstown, HBTL will give written notice requiring a selection process to begin forthwith.
b.In the 4 weeks following that notice the parties will nominate the lots per the following timetable on making their selection each party will advise the other party of the selections that they have made:
i. In week 1 - HBTL will choose the first 9 Lots to retain
ii. In week 2 - FEG will choose the next 9 Lots to purchase
iii. In week 3 - HBTL will choose the next 9 Lots to retain
iv. In week 4 - FEG will choose its final 9 Lots to purchase
9.FEG may determine which of the 18 lots so selected it allocates under either paragraph (6) and (7) above.
Signed by Fiordland Experience Group Limited by its Managing Director
[signature]
………………… Roy Stewart Toms
Signed by Homestead Bay Trustees Ltd by the directors
[signature] [signature] [signature] ………………… ………………… ………………… Dan Xiao Brian Chen Andrew Guest
Dated 2016
[27] There is a dispute as to why the parties entered into the Replacement Agreement. Here, I will refer simply to what the documents show about the negotiation of the agreement.
[28] On 18 July 2016, about two weeks before the parties entered into the Replacement Agreement, there was a meeting of the directors of HBTL. The minutes of the meeting state that Mr Guest, Mr Chen and Ms Xiao attended. The minutes record that after “extensive negotiations” the Board authorised the reaching of an agreement with FEG under which FEG would “surrender its underwriting and purchase of the 12 OSR Lots returning them directly to the unfettered control of HBTL”. The minutes then detailed the basis upon which that would happen. As will become apparent, those details seem to have been drafted after the meeting, but nothing turns on that.
[29] About a week later, on 24 July 2016, Mr Guest sent an email to Mr Chen and Ms Xiao. He reported “I think I have made good progress with FEG and hope to finalise a Deed with them shortly.” He set out the basis of what was then proposed and said “I think this is a good result”. Mr Chen replied with an email thanking Mr Guest for his efforts.
[30] Mr Guest responded on 26 July 2016, saying the deal was not finalised “but I am fairly confident I can get there”. He said he would then get a deed prepared and send out minutes based on the final decision. He sent a further email that day with a proposed wording for the agreement with FEG. He asked Mr Chen and Ms Xiao to confirm “and I will put this into the Minutes and get a Deed prepared for Fiordland” (Fiordland clearly being a reference to FEG).
[31] On 29 July 2016, Mr Guest sent an email to Mr Chen and Ms Xiao, attaching an agreement “that I hope to have Fiordland sign”. He asked for confirmation it was suitable. Confirmation appears to have been forthcoming, as the agreement was signed two days later.
[32]Mr Guest’s emails continued to give the impression that FEG was independent
from him. Mr Chen and Ms Xiao were still unaware of his connection to FEG.
HBTL pays further fees to FEG; VHL invoices FEG for half those fees
[33] On 5 August 2016, FEG sent an invoice to HBTL for $600,000 (as contemplated by the Replacement Agreement). It was described as being for “marketing services and surrender of underwriting Lots 1–12 OSR Homestead Bay and other services”. On the same day, Mr Guest sent an email to Mr Martin asking him to issue an invoice from VHL to FEG for $300,000. He told Mr Martin that the invoice should be paid from the $600,000 that was due to arrive in VHL’s account for the credit of FEG.3
[34]MDL paid the $600,000 invoice on behalf of HBTL on 8 August 2016. The
particulars on the bank transaction record for the payment said “Underwrite”.
Part of the Homestead Bay land is subdivided
[35] The 12 OSR lots were subdivided from lot 6 of the Homestead Bay land. Those 12 lots were sold on the open market during 2018 and 2019, apparently for about
$2 million per lot.
[36] Lot 7 has yet to be subdivided. According to Mr Guest, through until 2021 HBTL devoted considerable effort and money into seeking the optimum subdivision. Mr Chen deposed that HBTL initially intended to subdivide lot 7, and took some steps to do so, but the subdivision process took a different direction following a review of the relevant District Plan. Mr Chen said that by 2020 the prospect of subdivision had been deferred indefinitely.
HBTL purports to avoid the Replacement Agreement
[37] In mid-2021, Mr Chen and Ms Xiao learnt that Mr Guest or his companies had been receiving half of some of the payments made by HBTL to FEG. They also learnt something of the relationship between Mr Guest and Mr Toms (and thereby FEG). As a result, on 13 September 2021 Ms Xiao emailed Mr Guest. She said that, because Mr Guest’s interests had not been disclosed, “HBTL hereby avoids the transactions
3 Here, and elsewhere, I have used the GST-exclusive amounts.
contemplated by the [Replacement Agreement]”. She said this meant that Agreement
was now null and void and unenforceable.
MDL and HBTL start a substantive proceeding
[38] On 9 November 2021, MDL and HBTL started a substantive proceeding in the High Court against Mr Guest. On 20 April 2022, MDL and HBTL filed an amended statement of claim, joining VHL as second defendant.
HBTL puts lot 7 on the market; FEG lodges a caveat
[39] In 2022, HBTL put lot 7 on the market. FEG learnt of this. On 28 August 2022, FEG wrote to HBTL seeking details of any sale and asking how HBTL proposed to protect FEG’s interest in lot 7 under the Replacement Agreement. HBTL responded by saying it had avoided the Replacement Agreement and thus FEG had no interest in lot 7.
[40] FEG was dissatisfied with this response. On 2 September 2022, it lodged a caveat against lot 7, claiming an interest in that land under the Replacement Agreement.
MDL and HBTL join FEG to the substantive proceeding
[41] On 17 October 2022, MDL and HBTL filed a second amended statement of claim in the substantive proceeding. In doing so, they joined Mr Bridgman and FEG as third and fourth defendants.
[42] FEG responded with a statement of defence and counterclaim dated 22 November 2022. The counterclaim contained only one cause of action, against HBTL. FEG alleged that HBTL had repudiated its obligations under the Replacement Agreement, as a result of which FEG would suffer loss. It sought damages for the difference between the price per lot in the Replacement Agreement and the current value of those lots.
[43] HBTL says that, if the Replacement Agreement had not been validly avoided, FEG’s counterclaim constituted an irrevocable election to cancel the Agreement on the ground of HBTL’s alleged repudiation.
Principles on applications to remove caveats
[44] HBTL applies under s 142 of the Land Transfer Act 2017 for an order that FEG’s caveat be removed. On an application under s 142, the onus is on the caveator to show it has the estate or interest in the land that the caveator claims. However, the caveator need only show a reasonably arguable case for the estate or interest claimed.4 In other words, and subject to the residual discretion mentioned below, the caveat will be removed only if it is patently clear that the caveat cannot be maintained.5
[45] The reasonably arguable case standard reflects the summary process by which caveat applications are determined. That summary process is not suited to determining disputed questions of fact. The court therefore should not try to resolve genuine conflicts of affidavit evidence on a caveat application. By genuine I mean to capture the oft-quoted words of Lord Diplock, speaking for the Privy Council in Eng Mee Yong v Letchumanan.6 Lord Diplock said that a court is not bound:7
… to accept uncritically, as raising a dispute of fact which calls for further investigation, every statement on an affidavit however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself it may be.
[46] There is also a limit on the extent to which the court should determine questions of law on a caveat application. It may do so if the relevant facts are not in dispute and the law has been fully argued.8 But the court should not try to determine very difficult questions of law that require full contextual analysis and thorough argument.9
4 Sims v Lowe [1988] 1 NZLR 656 (CA); and Philpott v Noble Investments Ltd [2015] NZCA 342 at [26].
5 Philpott v Noble Investments Ltd [2015] NZCA 342 at [26(c)]; and Green & McCahill Holdings Ltd v Ara Weiti Development Ltd [2022] NZCA 218, (2022) 23 NZCPR 259 at [82].
6 Eng Mee Yong v Letchumanan [1980] AC 331 (PC).
7 At 341.
8 Field v Fitton [1988] 1 NZLR 482 (CA) at 491.
9 I respectfully adopt the obiter view of the Court of Appeal in Green & McCahill Holdings Ltd v Ara Weiti Development Ltd [2022] NZCA 218, (2022) 23 NZCPR 259 at [82] (the Court there drawing an analogy with the position that applies with interim injunction applications).
[47] If the caveator fails to show a reasonably arguable case, the caveat must be removed. If the caveator succeeds in showing a reasonably arguable case, the caveat will usually be sustained, though the court retains a residual discretion to remove it. That discretion will be exercised cautiously: the caveat will be removed only where the court is completely satisfied that the caveator’s legitimate interests will not thereby be prejudiced.10
The issues
[48] FEG claims an interest in the Homestead Bay land under the Replacement Agreement. That agreement confers on FEG an option to purchase 12 lots that are to be subdivided from the land.
[49] An option to purchase land generally confers on the option-holder an interest in the land that is sufficient to support a caveat.11 HBTL nonetheless argued that FEG did not have a reasonably arguable case to support its claimed interest. Primarily, HBTL said this was because the Replacement Agreement was unenforceable or, if enforceable, had been avoided or cancelled. As pleaded, and then developed in written and oral submissions, HBTL advanced four arguments:
(a)The Replacement Agreement was fraudulent and therefore unenforceable. HBTL said the fraud was that the Agreement falsely recorded that it was entered into in return for FEG surrendering an earlier underwriting agreement, when no such earlier agreement existed and/or FEG had not made any actual sales under any earlier agreement.
(b)The Replacement Agreement involved payment of a commission to FEG for arranging sales of land and this was real estate agency work for which FEG required a licence under the Real Estate Agents Act 2008 (the REAA). As FEG did not have such a licence, HBTL said the Replacement Agreement was illegal under the REAA and therefore unenforceable.
10 Pacific Homes Ltd (in rec) v Consolidated Joineries Ltd [1996] 2 NZLR 652 (CA) at 656; and
Stewart v Kaipara Consultants Ltd [2000] 3 NZLR 55 (CA) at [23].
11 Bevin v Smith [1994] 3 NZLR 648 (CA) at 665.
(c)In any case, HBTL had validly avoided the Replacement Agreement under s 141 of the Companies Act 1993.
(d)FEG elected to cancel the Replacement Agreement when it counterclaimed for damages for HBTL’s alleged repudiation of the Replacement Agreement.
[50] If all those arguments failed, HBTL said that the option to purchase in the Replacement Agreement was in such conditional terms that it never conferred a caveatable interest in the first place.
[51] Finally, HBTL submitted that even if FEG established a reasonably arguable case to support its claimed interest, I should exercise my residual discretion to remove the caveat.
[52]Several issues arise:
(a)Is the Replacement Agreement fraudulent and therefore unenforceable?
(b)Is the Replacement Agreement illegal under the REAA and therefore unenforceable?
(c)Did HBTL validly avoid the Replacement Agreement under s 141 of the Companies Act?
(d)Did FEG elect to cancel the Replacement Agreement when it counterclaimed for damages?
(e)Is the Replacement Agreement in such conditional terms that it never conferred a caveatable interest?
[53] Those issues must be determined by applying the reasonably arguable case standard. So, for example, all that FEG has to do on the first issue is show a reasonably arguable case that the Replacement Agreement is not unenforceable.
[54] If FEG does establish a reasonably arguable case on each issue, the final issue is whether I should exercise my residual discretion to remove the caveat.
Is the Replacement Agreement fraudulent and therefore unenforceable?
[55] I will deal with the fraud issue briefly. It received considerable attention in HBTL’s written submissions, but Mr Hollyman KC, senior counsel for HBTL, did not advance it with any vigour at the hearing. He acknowledged the difficulty that a court has in determining fraud allegations on a summary application.
[56] HBTL alleged (in its application to remove the caveat) that the Replacement Agreement was “fraudulent” because it “purport[ed] to replace an earlier underwriting agreement between the parties that never existed”. HBTL’s allegation referred to the recital in the Replacement Agreement, which said that “FEG were requested by HBTL to provide (and FEG did provide) an underwriting (“the underwriting agreement”) of the sale of 12 lots that HBTL intends to subdivide on the land”, and to cl 4 of the Agreement, which said that FEG was surrendering “its underwriting and agreement to purchase 12 OSR Lots restoring them directly to the unfettered control of HBTL and FEG will have no further rights to those 12 lots”.
[57] HBTL said that the recital and cl 4 were fraudulent for two reasons: the First Agreement was not an underwriting agreement; and FEG had not actually sold any lots, so in no sense was the Replacement Agreement “restoring” them to HBTL’s “unfettered” control. HBTL submitted that the courts will not generally allow litigants to benefit from fraud or to enforce an illegal or fraudulent contract, referring to the “ex turpi” principle: no cause of action should arise from illegal acts.12
[58] Although HBTL did not articulate it this way in its written submissions (or in its application), its allegation is that it entered into the Replacement Agreement on the basis of a fraudulent misrepresentation by FEG. Claims of this sort are not governed by the broad ex turpi principle. They are governed by the provisions of the Contract and Commercial Law Act 2017 (CCLA) that deal with when a party may cancel for
12 Ex turpi causa non oritur actio.
misrepresentation.13 Those provisions apply whether the misrepresentation is innocent or fraudulent.14
[59] At the hearing, Mr Hollyman addressed HBTL’s allegations in terms of the CCLA provisions. He said the first misrepresentation by FEG was that the First Agreement was an underwriting agreement. He said the First Agreement, documented in the email from Mr Guest to Mr Chen and Ms Xiao dated 10 October 2014, was merely an exclusive marketing agreement under which FEG was engaged to procure sales of the lots. It was not an underwriting agreement.
[60] This engaged the dispute, to which I referred earlier,15 about what services FEG was engaged to provide under the First Agreement. FEG says it was engaged by MDL to underwrite the sale of 12 lots for a total price of $12 million. FEG says this engagement was oral, not documented, and predated the email of 10 October 2014. HBTL says the First Agreement was on the terms set out in that email.
[61] There are considerable difficulties with FEG’s assertion that there was an oral underwriting agreement that predated the 10 October 2014 email.16 But I do not have to finally determine whether it is reasonably arguable that there was such an oral underwriting agreement. This is because, even on the assumption that the terms of the First Agreement are set out in the 10 October 2014 email, it is not patently clear that describing this as an underwriting agreement was a misrepresentation. “Underwriting” does not have a fixed meaning that the parties must be taken to have used. The 10 October 2014 email referred to the proposed agreement as one that would enable immediate sales and “underwriting”. The parties may well have considered the agreement that arose from that email to be appropriately characterised
13 Contract and Commercial Law Act 2017 [CCLA], ss 36–42. These provisions have effect in place of the applicable rules of common law and equity: s 40.
14 Section 37(1)(a).
15 Above at [12].
16 One would have expected such a significant agreement to have been documented in some way. FEG was unable to point to any such documentation. The alleged agreement is inconsistent with Mr Guest’s email to Mr Chen and Ms Xiao of 10 October 2014, which sought approval from HBTL’s Board (which did not come until December 2014) for a package that would ensure “immediate sales and underwriting” and made no reference to an existing underwriting agreement. Mr Guest’s affidavit evidence in support of the alleged oral underwriting agreement lacks any precision.
as an underwriting agreement. The affidavit evidence from HBTL did not touch upon this topic.
[62] Further, even if there was a misrepresentation as to the nature of the First Agreement, a misrepresentation is actionable under the CCLA only if the innocent party is induced by the misrepresentation to enter into the contract.17 The affidavit evidence from HBTL did not address such inducement until the second affidavit in reply by Mr Chen and the only affidavit in reply by Ms Xiao. In both affidavits, the evidence was expressed only in general terms.
[63] The other misrepresentation that Mr Hollyman said had been made by FEG was that it had sold the 12 OSR lots. Here HBTL is on firmer ground, but still not sufficiently firm to show it is patently clear that a misrepresentation was made and that it induced HBTL to enter into the Replacement Agreement. It may be recalled that, on 23 December 2014, Mr Guest sent an email to Mr Chen and Ms Xiao saying that FEG “has confirmed to me that the 12 OSR Lots have been sold for a total of
$14.4m!”. It is, to say the least, difficult to square Mr Guest’s statement with the email that Mr Toms sent to Mr Guest on 1 January 2015 reporting that he had only nine “definitely confirmed” sales.
[64] However, the question is whether there was an operative misrepresentation when the Replacement Agreement was entered into on 31 July 2016. Even assuming that Mr Guest’s representation on 23 December 2014 that FEG had sold all 12 lots continued to operate,18 it is not patently clear this was a misrepresentation. It depends on what the parties meant by “sold”.
[65] HBTL’s case assumed that “sold” meant that FEG had procured purchasers to sign written agreements for sale and purchase (and it is clear there were no such agreements). I accept that “sold” would normally take on this meaning in the context of a development of this size, in which HBTL was looking for presales so that it could obtain funding to purchase the Homestead Bay land. But there is an indication that
17 Section 37(1)(a).
18 Or that a similar representation was made or repeated in the negotiations towards the Replacement Agreement.
the parties used the term “sold” in a looser sense, to mean that FEG had obtained non- binding commitments from third parties to purchase the lots and that FEG would step in and purchase if the third parties did not (and there is evidence that FEG arguably achieved that outcome). Despite the importance to HBTL of achieving these “sales” to ensure funding for its own purchase, and the significant fees that HBTL paid to FEG for achieving the “sales”, there is no evidence that HBTL ever asked FEG to provide copies of agreements for sale and purchase in respect of the “sold” lots or asked to be paid the deposits that would normally be payable under such agreements. Further, the Replacement Agreement says that FEG surrenders its “underwriting and agreement to purchase the 12 OSR Lots”. It does not refer to or contemplate the existence of any third-party purchasers. It is therefore reasonably arguable that by the time the Replacement Agreement was entered into, HBTL did not consider that FEG had “sold” the lots in the sense of having obtained signed written agreements for sale and purchase.
[66] It is therefore reasonably arguable that HBTL was not entitled to cancel the Replacement Agreement on the ground of (fraudulent) misrepresentation.
Is the Replacement Agreement illegal under the REAA and therefore unenforceable?
[67] The REAA provides, in s 6, that a person must not carry out any real estate agency work unless the person is licensed under the REAA or is exempt from the licensing requirement. Failure to comply is an offence under s 141. Section 4 defines “real estate agency work” as “any work done or services provided, in trade, on behalf of another person for the purpose of bringing about a transaction”. A “transaction” includes “the sale, purchase, or other disposal or acquisition of a freehold estate or interest in land”.
[68] HBTL’s application pleaded that the Replacement Agreement was an illegal contract because “it represents a fee or commission payable for arranging sales of land, which sales are prohibited because [FEG] did not have a real estate licence”. HBTL’s written submissions likewise said the Replacement Agreement was illegal because “it was a further commission to FEG for arranging sales of land … where [FEG] did not
have a real estate agent’s licence”. It is not in dispute that FEG did not have a licence under the REAA.
[69] HBTL’s oral submissions expanded the focus of its illegality argument to include the First Agreement. HBTL submitted that the First Agreement provided for FEG to carry out real estate agency work. HBTL submitted that because FEG was not licensed to carry out such work FEG was not entitled to any fees under that agreement. HBTL submitted that the Replacement Agreement was entered into in consideration of FEG surrendering its entitlement to fees under the First Agreement. Given that it had no such entitlement, the consideration for the Replacement Agreement was illusory.
[70] I deal first with the submission that the Replacement Agreement itself is illegal under the REAA. I consider that there are two difficulties with that argument. First, on the face of the Agreement, FEG was not obliged to do any work or provide any services for the purpose of bringing about a sale of any land, and therefore was not obliged to carry out any “real estate agency work”. The only thing that FEG did under the Replacement Agreement was surrender the First Agreement. The surrender may have (as the Replacement Agreement said) restored lots to HBTL’s control, and may therefore have been for the purpose of bringing about a sale by HBTL of those lots. But a surrender of legal rights does not easily fit within the concepts of “work done” or “services provided”. If a surrender did fall within those concepts, a surrender of an option or right of first refusal or right of leasehold renewal could fall within the definition of “real estate agency work”. This seems an unlikely meaning or application of the REAA. I do not finally decide the point, as I did not hear full argument on it.19 It suffices to say that it is not patently clear that the Replacement Agreement involved FEG carrying out real estate agency work.
[71] Secondly, even if FEG was carrying out real estate agency work under the Replacement Agreement, it is not obvious that this would make the Agreement illegal (or unenforceable). Any illegality would arise only from performance of the Agreement being in breach of the REAA. Section 72 of the CCLA provides that a
19 Mr Hollyman submitted there was real estate agency work under the Replacement Agreement, but he did not make detailed submissions on the point.
contract lawfully entered into does not become illegal or unenforceable by reason of its performance being in breach of an enactment “unless the enactment expressly so provides or its object clearly so requires”. The REAA does not expressly so provide. I heard little argument on whether the object of the REAA clearly requires a contract to be illegal or unenforceable if its performance is in breach of the REAA. It is enough to observe some difficulties for HBTL:
(a)Section 126 of the REAA provides that a licensed real estate agent is not entitled to commission in connection with any real estate agency work unless the work is performed under a written agency agreement signed by, or on behalf of, the client and the agent. There is no equivalent provision disentitling a person who is not a licensed agent (such as FEG) from receiving commission in connection with any real estate agency work.
(b)If a person commits an offence under s 141 of the REAA by carrying out any real estate agency work without a licence, s 139 of that Act provides that the person is liable to forfeit to the Crown all money received by way of commission for any services or work performed as an unlicensed agent. Section 139 is inconsistent with the Court’s power, in respect of a contract that is illegal under the CCLA, to grant relief by way of restitution of any property transferred under that contract.20
[72] I now turn to the First Agreement. If that agreement was on the terms set out in the email of 10 October 2014, HBTL has a strong case that FEG was to carry out real estate agency work under it. In the email, Mr Guest said he had invited a firm “to procure (cause) the sale” of certain lots. But, for the reasons I have just outlined with respect to the Replacement Agreement, this does not mean that the First Agreement was illegal and unenforceable. Further, if under the First Agreement FEG was also to provide underwriting services (which would not appear to be “real estate agency
20 CCLA, s 76.
work”), the underwriting aspect might survive any illegality associated with the work that FEG was to carry out to procure the sale of lots.
[73] It is therefore reasonably arguable that the Replacement Agreement is not illegal or unenforceable under the REAA.
Did HBTL validly avoid the Replacement Agreement under s 141 of the Companies Act?
[74] Section 141 of the Companies Act is in the part of that Act that deals with transactions in which a director is self-interested. It provides:
141 Avoidance of transactions
(1)A transaction entered into by the company in which a director of the company is interested may be avoided by the company at any time before the expiration of 3 months after the transaction is disclosed to all the shareholders (whether by means of the company’s annual report or otherwise).
(2)A transaction cannot be avoided if the company receives fair value under it.
(3)For the purposes of subsection (2), the question whether a company receives fair value under a transaction is to be determined on the basis of the information known to the company and to the interested director at the time the transaction is entered into.
(4)If a transaction is entered into by the company in the ordinary course of its business and on usual terms and conditions, the company is presumed to receive fair value under the transaction.
(5)For the purposes of this section,—
(a)a person seeking to uphold a transaction and who knew or ought to have known of the director’s interest at the time the transaction was entered into has the onus of establishing fair value; and
(b)in any other case, the company has the onus of establishing that it did not receive fair value.
(6)A transaction in which a director is interested can only be avoided on the ground of the director’s interest in accordance with this section or the company’s constitution.
[75]Section 139 defines when a director is “interested” in a transaction to which
a company is a party. It includes transactions in which the director: will or may derive
a material financial benefit; has a material financial interest in another party to the transaction; or is otherwise directly or indirectly materially interested.
[76] Mr Guest was a director of HBTL when the Replacement Agreement was entered into. HBTL said that Mr Guest was interested in the Replacement Agreement because (among other things):
(a)FEG was paying VHL (in which Mr Guest had an interest) half of whatever fees HBTL paid to FEG; and
(b)Mr Guest held a beneficial interest in FEG.
[77] HBTL said that Mr Guest did not disclose his interests and this meant HBTL was entitled to avoid the Replacement Agreement within three months after disclosure to HBTL’s shareholders (including Mr Chen and Ms Xiao). HBTL said that Mr Chen and Ms Xiao did not learn that VHL was being paid half the fees that HBTL paid to FEG until the middle of 2021 and did not learn of Mr Guest’s beneficial interest in FEG until after this proceeding began. HBTL avoided the Replacement Agreement before the three months elapsed, by letter to Mr Guest as director of FEG dated 13 September 2021. Finally, HBTL said that it was plain HBTL was not receiving fair value under the Replacement Agreement.
[78] Mr Butler, for FEG, did not dispute that FEG was paying VHL half of whatever fees HBTL paid to FEG. Mr Butler also accepted that Mr Guest currently holds a beneficial interest in FEG. That acceptance was inevitable. Mr Guest is executor of Mr Toms’ estate. Mr Toms’ shares in FEG (amounting to a 100 per cent shareholding) have been transferred to Mr Guest, as executor. In that capacity, Mr Guest has signed a declaration of trust reciting that until Mr Toms’ death on 11 August 2020, those shares were held beneficially as to 50 per cent for Mr Guest. He declared that he holds the shares equally for Mr Toms’ estate and for his own interests. The declaration is also signed by a Ms Hislop, who Mr Guest describes as the primary beneficiary of Mr Toms’ estate.
[79] Mr Butler did not accept that the declaration of trust was definitive as to when Mr Guest acquired a beneficial interest in FEG. I accept that. However, there is other evidence that does definitively show that Mr Guest had a beneficial interest in FEG when the Replacement Agreement was entered into. In his affidavit dated 25 November 2022, Mr Guest began by describing his relationship to FEG. He deposed that he held 100 per cent of the shares in FEG as executor for Mr Toms’ estate and that Ms Hislop had acknowledged “a 50% interest to me in accordance with the original plans developed with Roy Toms” (emphasis added). Mr Guest then deposed, clearly by way of explanation of what those “original plans” were, that Mr Toms was a shareholder of FEG, that he and Mr Toms were very good friends with a lengthy business relationship, and that FEG had traded for about 30 years as Air Fiordland before selling its business assets in about 2010, leaving FEG without assets but available to pursue other business opportunities. Mr Guest finally deposed:
In around 2010, Roy Toms and I decided to use FEG as a company for the pursuit of joint ventures by us in Central Otago.
[80] On his own evidence, Mr Guest had an interest in FEG from 2010. This is reinforced by the documentary evidence from 2014 onwards. For example, on 9 October 2014, Mr Guest emailed Mr Toms about the proposal to find buyers for HBTL. Mr Guest, after referring to the commissions that would be payable, commented “great for us along the way”. Mr Guest emailed Mr Toms on 2 January 2015 about the slow sales, asking Mr Toms to fill the last three slots but commenting “FEGL have filled them in the meantime!”. FEG paid VHL half of what HBTL paid to FEG in fees.
[81] I therefore find there is no reasonable argument that Mr Guest did not have a beneficial interest in FEG when the Replacement Agreement was entered into.
[82] Mr Guest’s beneficial interest in FEG, and the fact FEG was paying VHL half of whatever fees HBTL paid to FEG, each meant that Mr Guest was “interested” in the Replacement Agreement that HBTL entered into.21
21 The former is an interest by virtue of s 139(1)(b) of the Companies Act, the latter by virtue of s 139(1)(a) or (e).
[83] The evidence from Mr Chen and Ms Xiao was that Mr Guest had not told them of these interests in the Replacement Agreement. Mr Guest deposed that he had told “HBTL”22 who the purchasers of the lots would be drawn from (including him). Mr Butler accepted that was the extent of the evidence of Mr Guest’s disclosure of any interests he might have had. He did not suggest that Mr Guest had at any time disclosed to Mr Chen and Ms Xiao his beneficial interest in FEG or the arrangement under which FEG paid VHL half the fees paid by HBTL.
[84] FEG primarily resisted HBTL’s claim that the Replacement Agreement had been avoided under s 141 on three grounds:
(a)The three-month time limit under s 141 starts when the transaction is disclosed to all the shareholders, whereas HBTL’s claim assumed that the time limit starts when the director’s interest in the transaction is disclosed to all shareholders.
(b)In any event, if the time limit starts to run when the director’s interest is disclosed to all shareholders, such disclosure occurred at the time the Replacement Agreement was entered into. That is because at that time the sole shareholder of HBTL was VNL, VNL’s directors were Mr Guest and Mr Bridgman, and they both knew of the interests.
(c)Further, HBTL could not avoid the Replacement Agreement if it received fair value under it. Whether HBTL received fair value could not be determined on a summary application.
[85] As to the second point, HBTL responded that VNL held its shares in HBTL on trust for the shareholders of MDL (Mr Chen, Ms Xiao and the Hong Kong company). HBTL said that in those circumstances disclosure of Mr Guest’s interests for the purposes of s 141 needed to be to those three persons. At the hearing, I noted that this raised an issue of imputation or attribution that had not adequately been addressed by the parties. I asked for, and received, supplementary written submissions on the point.
22 Mr Guest did not say which persons he told. By contrast, elsewhere in his affidavit he says that he told things or made things clear to identified persons.
[86]I now turn to the issues that arise.
Does the time limit in s 141 start from disclosure of the transaction or disclosure of the director’s interest in the transaction?
[87]It will be convenient to set out s 141(1) again:
A transaction entered into by the company in which a director of the company is interested may be avoided by the company at any time before the expiration of 3 months after the transaction is disclosed to all the shareholders (whether by means of the company’s annual report or otherwise).
[88] A superficial reading of s 141(1) supports the meaning advanced by FEG. But an examination of the subsection, s 141 as a whole, the legislative purpose and s 141’s background show that the time limit starts only once there has been disclosure of the director’s interest in the transaction to all shareholders.
[89] The words “the transaction” in the latter half of s 141(1) are shorthand for the earlier words, “transaction entered into by the company in which a director of the company is interested”. Thus, what has to be disclosed to all shareholders (in order to start time running) is that there is a transaction in which a director is interested. Such disclosure is not made merely by disclosing the fact of the transaction. There also has to be disclosure of the director’s interest.
[90] Section 141(1) contemplates that disclosure may occur by means of the company’s annual report. A company’s annual report must state particulars of entries in the company’s interests register.23 In respect of transactions in which a director is interested, s 140 requires a director to cause to be entered in the company’s interests register the monetary value of, or nature and extent of, that interest. Section 141(1) therefore contemplates that the three-month limit will commence upon disclosure of the director’s interest in the transaction.
[91] Section 141(6) says that a transaction in which a director is interested can only be avoided “on the ground of the director’s interest” in accordance with s 141 or the company’s constitution. By its express words, the purpose of s 141 is to codify (apart
23 Companies Act, s 211(1)(e).
from the company’s constitution) the circumstances in which a transaction can be avoided on the ground of a director’s interest. This purpose strongly suggests that the disclosure to all shareholders that starts the three-month time limit running has to include disclosure of the director’s interest in the transaction.
[92] This is further confirmed by the background to s 141. The section is, in material respects, in the same terms as the draft provision set out in the Law Commission report that led to the Companies Act 1993.24 The Law Commission said that the law relating to self-interested transactions was unsatisfactory, and that the major purpose of its proposed reform was to replace the application to company directors of the rule of equity that made voidable any transaction in which a fiduciary is interested, irrespective of the merits of the transaction.25 One of the equitable rules was that, unless the company’s constitution provided otherwise, an interested director could obtain dispensation from the rule against conflicts of interest only by making full disclosure of the interest to the shareholders in general meeting and obtaining approval from the shareholders of the transaction.26 The requirement that disclosure be at a general meeting was unnecessarily burdensome.27 Section 141 replaces that requirement by (among other things) stating that disclosure to shareholders can be through the annual report or otherwise.
[93] For FEG’s argument to succeed, s 141 would also have to alter the equitable rule that disclosure had to be of the director’s interest in the transaction, replacing it with a rule that disclosure of the transaction suffices. Such an alteration would be most surprising and would require clear language. There is nothing in s 141 indicating an intention to make such an alteration.28 Further, the Law Commission said that disclosure to shareholders under its draft Act would be achieved through the interests register (which, as noted, record the director’s interests, not merely the transaction).
24 Law Commission Company Law Reform and Restatement (NZLC R9, 1989).
25 At [523]–[524].
26 See the discussion of the authorities in Woolworths Ltd v Kelly (1991) 22 NSWLR 189 (CA) at 207 per Samuels JA.
27 Peter Watts Directors’ Powers and Duties (3rd ed, LexisNexis, Wellington, 2022) at 277.
28 Section 140 does alter the scope of the required disclosure (for example, in the exception in s 140(1A)), but none of the alterations is relevant to the present case.
[94] I therefore find that the time limit in s 141 starts only when a director’s interest in a transaction is disclosed to all shareholders. Mere disclosure of the transaction does not start the time limit.
Were Mr Guest’s interests in the Replacement Agreement disclosed to all HBTL’s shareholders at the time the Agreement was entered into?
[95] At the time the Replacement Agreement was entered into, HBTL had only one shareholder, VNL. VNL at that time had two directors, Mr Guest and Mr Bridgman. FEG says that Mr Guest and Mr Bridgman knew of Mr Guest’s interests in the Replacement Agreement at the time it was entered into. FEG says their knowledge can be attributed to VNL and therefore disclosure to VNL of Mr Guest’s interests occurred at the time the Replacement Agreement was entered into.
[96] As noted, HBTL submitted that VNL held its shares in HBTL on trust for Mr Chen, Ms Xiao and the Hong Kong company, and that in those circumstances disclosure of Mr Guest’s interests for the purposes of s 141 needed to be to those three parties.
[97] A difficulty for HBTL is that there was scant affidavit evidence to support its contention (which FEG did not accept) that VNL held its shares on trust for Mr Chen, Ms Xiao and the Hong Kong company. Mr Chen made passing reference to this only in his (first) affidavit in reply. No documentary evidence of the trust was provided.29 While Mr Guest made a subsequent affidavit and responded to aspects of Mr Chen’s reply affidavit, I do not consider he was obliged to respond to every passing reference made by Mr Chen.
[98] While I accept that many of the surrounding circumstances support the contention that VNL held its shares on trust for Mr Chen, Ms Xiao and the Hong Kong company, it is not patently clear that that was so. It is a matter for trial.
29 HBTL’s further submissions, filed after the hearing, attached various documents that were said to be relevant to this matter. There was no affidavit and no application to adduce further evidence. I ignored the further documents.
[99] Given the view I have taken, it is not necessary for me to consider the issue of imputation or attribution that would arise if VNL held its shares on trust (namely, whether disclosure to VNL’s directors counted as disclosure to VNL or whether only disclosure to the beneficiaries could count as disclosure to VNL).
Did HBTL receive fair value under the Replacement Agreement?
[100] Mr Hollyman noted that, because FEG knew of Mr Guest’s interests in the Replacement Agreement, the onus was on FEG to establish that HBTL had received fair value.30 He submitted that it was plain HBTL received no value—let alone no fair value—under the Replacement Agreement.
[101] Whether HBTL received fair value depends on whether FEG had some rights in respect of the 12 OSR lots that it surrendered to HBTL, and the value of those rights. Mr Hollyman submitted that FEG had no such rights. But the Agreement expressly records that FEG is surrendering its “underwriting and agreement to purchase” the 12 OSR lots. Further, that is the only consideration moving from FEG to HBTL. These matters raise at least an inference that FEG had such rights, as otherwise it is difficult to understand why Mr Chen and Ms Xiao signed the Replacement Agreement. I therefore consider this is also a matter for trial.
Conclusion on avoidance
[102] It is reasonably arguable that HBTL did not validly avoid the Replacement Agreement under s 141 of the Companies Act.
Addendum
[103] As explained, I asked the parties to file further submissions on the question of imputation or attribution. HBTL’s further submissions added a comment about the possible application to this case of the duty of loyalty in s 131 of the Companies Act. HBTL did not advance that argument at the hearing, and I have not considered it.
30 Companies Act, s 141(5)(a).
Did FEG elect to cancel the Replacement Agreement when it counterclaimed for damages?
[104] In its counterclaim against HBTL in the substantive proceeding, FEG pleaded that HBTL had repudiated its obligations under the Replacement Agreement. FEG said it would suffer loss from that repudiation. It claimed damages for that loss.
[105] HBTL submitted that, by making this counterclaim, FEG made an irrevocable election to cancel the Replacement Agreement. This submission assumed, of course, that HBTL had repudiated its obligations under the Agreement, thereby entitling FEG to cancel. I return to that assumption below.
[106] A party to a contract may cancel it if, by words or conduct, the other party repudiates the contract by making it clear that it does not intend to perform its obligations under the contract.31 Where a party becomes entitled to exercise a right of cancellation (whether following repudiation or otherwise), the party has to decide whether to exercise that right: that is, whether to cancel or to affirm the contract. This decision is called an election.32
[107] An election, whether it is to cancel or to affirm, is binding and irrevocable once it is communicated to the other party.33
[108] The common law position is that, before there is an effective election, the words or conduct of the putative elector must unequivocally show an election to cancel or to affirm (as the case may be).34 The test is objective: it is not necessary that the
31 CCLA, s 36.
32 Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India [1990] 1 Lloyd’s Rep 391 (HL) at 398.
33 Scarf v Jardine (1882) 7 App Cas 345 (HL) at 360; Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India [1990] 1 Lloyd’s Rep 391 (HL) at 398; and Jansen v Whangamata Homes Ltd [2006] 2 NZLR 300 (CA) at [14] and [20] (leave to appeal declined Whangamata Homes Ltd v Jansen [2005] NZSC 71). This is reflected in the CCLA, ss 38 (a party cannot cancel once they have affirmed a contract) and 42(1) (once a contract is cancelled, no party is obliged or entitled to perform it further). On one view, cancellation is irrevocable simply by reason that it has terminated the parties’ respective performance obligations, rather than by reason of the doctrine of election (for example, Rick Bigwood “Fine-Tuning Affirmation of a Contract by Election: Part I” [2010] NZ L Rev 37 at 46). On either view, cancellation is irrevocable.
34 Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India [1990] 1 Lloyd’s Rep 391 (HL) at 398; and Jansen v Whangamata Homes Ltd [2006] 2 NZLR 300 (CA) at [14] and [18].
party actually intend to make an election.35 In the case of an election to cancel, s 41(2) of the CCLA provides:
The cancellation may be made known by words or by conduct showing an intention to cancel, or both. It is not necessary to use any particular form of words, so long as the intention to cancel is made known.
[109] I consider that s 41(2) does not alter the common law position that the intention to cancel is assessed objectively and requires unequivocal words or conduct.
[110] The first issue is whether, when FEG served its counterclaim on or about 22 November 2022, FEG was entitled to cancel the Replacement Agreement. That depends on whether at that time HBTL was repudiating its obligations under the Agreement. From 13 September 2021 (when Ms Xiao sent an email to Mr Guest purporting to avoid the Replacement Agreement under s 141 of the Companies Act) until FEG served its counterclaim on HBTL, HBTL repeatedly made it clear to FEG that the Replacement Agreement had been avoided or cancelled.36 It is clear beyond any doubt that, at the time FEG served its counterclaim,37 HBTL was telling FEG that HBTL did not intend to perform its obligations under the Agreement.
[111] This does not necessarily mean that HBTL was repudiating. It may be that HBTL was correct that the Agreement had been avoided under s 141 or that the Agreement was otherwise cancelled or unenforceable. In that case HBTL would not have been repudiating. But in that case, of course, the Agreement would be at an end or unenforceable, and FEG would no longer have a caveatable interest.
35 Jansen v Whangamata Homes Ltd [2006] 2 NZLR 300 (CA) at [17] and [18].
36 HBTL did so in its first three statements of claim in the substantive proceeding (all of which came to FEG’s attention through Mr Guest), in a letter from its solicitors dated 31 August 2022, in a further letter dated 7 October 2022 and in the application in this proceeding dated 4 November 2022 seeking removal of FEG’s caveat.
37 Mr Butler submitted that FEG had, by letters from its solicitors in August and September 2022, affirmed the Agreement in the face of HBTL’s repudiation, and therefore lost any right to cancel, so that the service of its counterclaim in November 2022 was ineffective as a cancellation of the Agreement. That argument would have had some force if HBTL had repudiated only prior to those letters. However, HBTL continued to make it clear after those letters that it did not intend to perform its obligations under the Agreement. An innocent party is not prevented by an earlier affirmation from cancelling on the ground of a continuing repudiation: Kumar v Station Properties Ltd [2015] NZSC 34, [2016] 1 NZLR 99 at [54].
[112] The other possibility is that HBTL was wrong about the Agreement having been avoided or cancelled. In that case, there is no doubt that HBTL had been repudiating the Agreement.
[113] The next issue is whether, assuming HBTL had repudiated the Agreement, FEG’s counterclaim unequivocally communicated an intention to cancel the contract. This is what FEG pleaded in its counterclaim:
As a result of [HBTL’s] repudiation [FEG] will suffer loss due to being prevented from purchasing or accepting the transfer of Homestead Land lots on terms and at the prices stipulated in the [Replacement Agreement].
[114]By way of remedy, FEG sought:
Damages in an amount representing the difference between the price per lot of the Homestead Land as provided in the [Replacement Agreement], and the current value of such lots, to be quantified before trial.
[115] In the counterclaim FEG did not expressly say that it was cancelling the Replacement Agreement. Nor did FEG use language synonymous with “cancel”. But, as s 41(2) says, a cancellation need not use any particular form of words. All that is needed (in this case) are words that unequivocally communicate an intention to cancel the contract.
[116] It is worth remembering what “cancelling” a contract means. Colloquially, it is often said that cancelling a contract means that the contract is at an end. More correctly, cancelling a contract means that the parties are discharged from further performance.38 The question, therefore, is whether FEG’s counterclaim unequivocally communicated an intention to treat both parties as discharged from further performance of the Replacement Agreement.
[117] The service of a claim seeking damages that would be awarded on cancellation of the contract can amount to notice of cancellation.39 The formal nature of such a claim is part of the context in which to assess, objectively, whether the claim unequivocally communicates an intention to cancel. It will still depend, of course, on
38 CCLA, s 42(1)(a).
39 Heyman v Darwins Ltd [1942] AC 356, [1942] 1 All ER 337 (HL) at 361–362; and John Carter
Carter’s Breach of Contract (2nd ed, LexisNexis Butterworths, Chatswood, 2018) at 440.
how the claim for damages is articulated. Some claims for damages are consistent with the contract’s obligations remaining on foot (for example, a claim for damages for delayed performance).
[118] FEG pleaded that it “will” suffer loss from HBTL’s repudiation “due to being prevented from purchasing or accepting the transfer of Homestead Land lots on terms and at the prices stipulated in the [Replacement Agreement]”. This contemplates that the lots will not be purchased by or transferred to FEG, and therefore contemplates that the parties will not be further performing the Agreement. Nonetheless, I do not consider that, standing alone, this pleading constituted notice of cancellation. By itself it is equivocal, as it could have been accompanied by a further pleading to the effect that specific performance should be ordered to avoid the loss that FEG would otherwise suffer.
[119] But FEG instead sought damages. Further, FEG quantified the damages as the difference between the price for the lots in the Replacement Agreement and the current value of the lots. This measure of damages is, plainly, available only on the basis that HBTL is discharged from its obligation to sell or transfer those lots to FEG, and FEG is discharged from its obligation to pay the prices to FEG.
[120] It follows, in my view, that FEG’s pleading as a whole unequivocally communicated an intention that both parties were discharged from further performance — in other words, an intention to cancel the Replacement Agreement.
Effect of finding on cancellation: no caveatable interest
[121] There are only two possibilities in this case. One is that, contrary to HBTL’s other arguments, the Replacement Agreement was valid and enforceable and HBTL had not avoided it under s 141 of the Companies Act. In that case, HBTL repudiated the Replacement Agreement and FEG elected to cancel it.
[122] The other possibility was that HBTL was right in its other arguments, in which case the Replacement Agreement was unenforceable or had been avoided.
[123] On either possibility, the Replacement Agreement is at an end, and so FEG does not have a caveatable interest in the land. FEG’s caveat must be removed.
[124] This means that it is not necessary to consider HBTL’s submissions that the Replacement Agreement never gave rise to a caveatable interest or that, if FEG showed a reasonably arguable case, the residual discretion should be exercised to remove the caveat.
Costs
[125] HBTL is entitled to costs on the application. I encourage counsel to agree costs. My provisional view, in the absence of any other information, is that a reduction in costs of about 50 per cent is warranted, given HBTL’s failure on most of the arguments advanced at the hearing.
[126] If costs cannot be agreed, memoranda of no more than three pages each may be filed: HBTL first, by 5 December 2023, followed by FEG within a further five working days.
Result
[127] I order that FEG’s caveat (instrument number 12551676.1) be removed from HBTL’s land (record of title 810020).
Campbell J
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