Jaundzems v Clapshaw - [2012] NZHC 3239

[2] The plaintiffs filed this proceeding on 14 December 2011 seeking (amongst other remedies) an order that a single share in Middle Pakiri Beach Farms Limited (the third defendant) be transferred to them. The second defendant transferred that share on 14 February 2012. Consequently, the plaintiffs filed a notice of discontinuance, but reserved a claim for costs.

[3] The plaintiffs have applied for the costs of issuing the proceeding, for their attendance at a case management conference on 3 April 2012, and for preparing and filing a memorandum in respect of costs. They claim costs in accordance with the High Court Rules, on a scale 2B basis. They contend that they are entitled to these costs because the defendants have conceded to their demand for transfer of the share.

[4] The defendants oppose the application on the basis that the proceeding was commenced unreasonably. They say that they transferred the share simply to avoid the costs that otherwise would have been incurred in the proceeding, and having regard to the low value of the disputed shares. The defendants say that costs ought to lie where they fall.

[5] I have come to the view that the first and second defendants’ contention that costs should lie where they fall is the appropriate one in the circumstances of this case. As the parties have presented extensive evidence and submissions on their respective positions, I will set out the reasons for coming to this view.

Background

History of Middle Pakiri Beach Farms Ltd

[6] Middle Pakiri Beach Farms Ltd (MPBF) was incorporated on 21 May 1971 to acquire a coastal property at Pakiri Beach. 16,000 shares were issued in four blocks of 4,000 shares. Each set of 4,000 shares had attached to it an occupational

lease to approximately a quarter of the property, and any sale of the shares had to be accompanied by a sale of the related lease (and vice versa).

[7] The occupational leases were issued for a period of 20 years or less, with no right of renewal, to avoid triggering any requirement for subdivision consent for the property. Renewal of the leases, therefore, was dependent upon the vested interest of the shareholders in granting further leases to each other.

[8] On 20 October 1997 MPBF adopted a constitution which included pre- emptive rights in respect of the shares. Clause 11.2 of the constitution requires a shareholder seeking to sell to give a “transfer notice” to MPBF, stating the shareholder’s desire to sell, the value the shareholder placed on the shares, and constituting MPBF as agent for sale to any other shareholder at that sum or a fair value otherwise fixed in accordance with the constitution. Clause 11.3 requires the Board to offer those shares to existing shareholders. This right of pre-emption could be by-passed if all shareholders approve the transfer (clause 11.11 of the constitution).

Genesis of the current dispute

[9] In 1979 the holder of one of the blocks of shares sold 3,997 shares to the first-named plaintiff, Ms Jaundzems, and transferred the remaining three shares in that holding (referred to as “the additional shares”), one each to the other three shareholders. These shares were to be held on trust for Ms Jaundzems. The splitting of the block of shares in this way occurred because Ms Jaundzems is not a New Zealand resident. The splitting of the legal ownership was to avoid overseas investment approval requirements which are triggered when a non-New Zealand resident purchases a 25% or greater share in coastal property. Ms Jaundzem subsequently (in 1997) transferred 1,998 of her shares to the second-named plaintiff, Mr Goosev, and a further single share to herself and Mr Goosev jointly, so that they each held a 50% interest in that block of shares and the related occupancy lease.

[10] In 2001, one of the other shareholders died. Subsequently, the executors of her estate entered into a sale and purchase agreement (dated 23 March 2003) with the

first defendant (“the agreement”). Under that agreement the executors sold the estate’s block of 4.000 shares, and in addition provided for the first defendant to acquire the single additional share held under the arrangement made when Ms Jaundzem acquired her block of shares. The relevant clause in the agreement reads:

16.0The Vendor further agrees to transfer and the Purchaser agrees to accept transfer of one further share (“Additional Share”) in the Company. The Purchaser hereby acknowledges and confirms that it will hold the Additional Share on trust for Madaline Jaundzems and Peter Timothy Goosev which share shall be transferred to them by the Purchaser upon demand.

[11] The transfer was approved by all shareholders (in accordance with clause

11.11 of MPBF’s constitution) and the 4,001 shares were transferred to the first defendant.

[12] In May 2006, the first defendant transferred his shares to his father, the second defendant. It appears that a transfer notice was not given to MPBF as required by clause 11.2 of the constitution.

[13] Relations between the shareholders deteriorated. On 30 November 2009 the plaintiffs made demand on the second defendant for transfer of the additional shares. The second defendant referred that demand to the first defendant. A number of further demands were made over the following year, but not met.

The terms of the trust over the disputed share

[14] The dispute between the parties is centred on the nature of the alleged trust over the additional shares:

(a) The plaintiffs contend that it is clear from the agreement that the first defendant purchased 4,000 shares in his own right and agreed to hold one share on trust for Ms Jaundzems, transferrable upon demand. They note that the agreement makes no reference to the other two additional shares, and did not impose any conditions as to when the plaintiffs might demand transfer of the share.

(b)The first and second defendants contend that the arrangements made with Ms Jaundzems in 1979 occurred against the backdrop of another trust agreement dating back to about 1977, under which the additional shares were only transferrable together and only if Ms Jaundzems obtained New Zealand residency or wished to transfer her shares to a purchaser without overseas investment issues. They say that a right to call for a single share would make no sense, as it would allow Ms Jaundzems to call for the transfer of two of the additional shares and still avoid triggering the overseas investment requirements. Although not expressly stated, I infer that requiring the additional shares to be transferred together would ensure that there was always unanimity amongst the other shareholders in relation to Ms Jaundzems having satisfied the underlying requirements for transfer. Against that background, the defendants say that clause 16 of the agreement has to be interpreted to mean upon demand once the underlying conditions for transfer were satisfied. The first defendant also contends that he was not aware of clause 16 when he entered into the agreement (he says his lawyer did not bring it to his attention) and he assumed that he was acquiring legal and beneficial ownership of the 4,001 shares, and denies any knowledge of the historic arrangement about the shares at the time he entered into the agreement.

The plaintiffs’ claim

[15] The plaintiffs issued their proceeding relying on the plain wording of clause

16 of the agreement. They pleaded three causes of action:

(a) That the agreement conferred a benefit on them pursuant to s 4 of the Contract (Privity) Act 1982. They sought an order against the first defendant that he specifically perform the agreement to transfer the share to them (along with other consequential orders and costs).

(b)Alternatively, that the purported transfer of the share from the first defendant to the second defendant was a nullity because it was in

breach of the constitution’s pre-emptive provisions. They sought a declaration against the first and second defendants to that effect and that the first defendant continued to hold the share on trust for them. They also sought an order against the third defendant to rectify the company’s share register, and consequential orders requiring the first defendant to transfer the share to them and, if the pre-emptive provisions applied to this transfer, orders to give effect to that requirement and providing that any value received by the first defendant for that share be held on trust for them.

(c) That the second defendant is in breach of trust because he received the share with notice of the trust in favour of the plaintiffs and for no consideration (and therefore received the share subject to that trust) and failed to transfer it to them when they made demand. The plaintiffs sought an order that the second defendant transfer the share to them, and similar consequential orders to those sought in respect of the second cause of action if the pre-emptive provisions apply.

Costs principles

[16] There is a general presumption that a party who discontinues a proceeding will be liable to the defendant for costs incurred up to and including the date of discontinuance.[1] This general presumption is subject to the Court’s overriding discretion as to costs[2] and may be displaced where it will be just and equitable to do so. The onus is on the plaintiff to satisfy the Court that the presumption should not apply in the particular circumstances of a case.[3]
[1] High Court Rules r 15.23.
[2] High Court Rules r 14.1.
[3] Paul v Raklander HC Auckland CIV 2009-404-3811, 20 June 2008.

[17] When considering whether it is just and equitable to displace the

presumption, the Court’s primary enquiry is whether a plaintiff acted reasonably in

commencing the proceeding, and a defendant acted reasonably in defending it.[4] It
[4] Olive Francis Retirement Home Ltd v Director-General of Health HC Auckland CIV 2005-404-
1367, 13 July 2005 at [15]; see also Oggi Advertising Ltd v McKenzie (1998) 12 PRNZ 535 (HC).

follows that it would also be a consideration whether the plaintiff acted reasonably in discontinuing the proceeding. The presumption is not displaced, however, simply because the plaintiff acted reasonably in bringing and discontinuing the proceeding: they are relevant factors but more is needed to show that a costs award in the defendants’ favour would not be just or equitable.[5]
[5] Vector Gas Ltd v Todd Petroleum Mining Co Ltd HC Wellington CIV 2004-485-1753, 7 December
2010 at [18].

[18] If the plaintiff achieves success through other means, that may justify displacement of the presumption. For instance, in Max v Auckland City Council[6] the Court awarded costs to a discontinuing plaintiff as the defendant’s counsel revised a decision that was being challenged, and the revised decision was in accordance with the alternative relief sought. That is not to say, however, that achieving success through other means will necessarily result in an award of costs to the discontinuing plaintiff. That is a decision to be made on the facts of the particular case.
[6] Max v Auckland City Council HC Auckland CIV 2006-404-1, 9 June 2006.

Analysis

[19] I accept that the plaintiffs had an arguable claim in respect of the share, although there are difficulties with the claim as it was pleaded. For example, in their first cause of action they are seeking an order requiring the first defendant to transfer a share that is not in his possession or control. Nevertheless, the agreement provides prima facie evidence of a trust over the share, and a right to demand transfer at any time. I do not see any merit in the first defendant’s position that he was unaware of clause 16. His contention does not sit easily with the clear language of the agreement (which makes a distinction between the block of 4,000 shares and the single share), as well as making the express provision in clause 16. He signed that agreement and had legal representation in relation to it.

[20] A claim against the second defendant for breach of trust was arguable – it must have been open to the plaintiffs to argue that the second defendant (as father of the first defendant) had notice of that trust, and it seems clear on the facts that he
took the shares without consideration. The plaintiffs’ claim that the first defendant

failed to comply with MPBF’s pre-emption provisions is also arguable. On the facts before me it appears that approval was not sought for the transfer from the first defendant to the second defendant.

[21] I also note that although the original trust arrangement (whatever it was) appears to have contravened the Overseas Investment Act 1973 (because in effect Ms Jaundzems did acquire a 25% beneficial interest in the coastal land) that does not automatically render the transaction void or illegal.[7]
[7] Tiroa E and Te Hape B Trusts v Chief Executive of Land Information [2012] NZHC 147, (2012) 10
NZBLC 99-703 at [21].

[22] Similarly, however, I accept on the evidence available at this stage that the defendants acted reasonably in defending the proceeding. If there was an underlying trust arrangement such as they allege,[8] they had an arguable case for saying that the plaintiffs were unable to demand transfer of a single share and that a transfer of all the additional shares could only occur if it was shown that the plaintiffs had become New Zealand residents or were transferring to a person who was. I also consider that
[8] Although there is no sworn evidence to this effect, the first and second defendants have produced a signed letter from a founding shareholder giving evidence of the underlying trust condition.
it was reasonable for the defendants to transfer the share rather than face the significant costs of defending a High Court proceeding, particularly given that the value of the share, on the undisputed evidence of the defendants, was only $80.

[23] In summary, although the plaintiffs ultimately achieved what the proceeding was intended to accomplish, I am not persuaded that the presumption has been displaced, or certainly not to the extent that the plaintiffs should be entitled to costs.

[24] Balancing the respective positions, and taking into account that the defendants did not seek costs, I consider that the appropriate outcome is that the
costs should lie where they fall. I order accordingly.

Associate Judge Abbott

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Jaundzems v Clapshaw [2012] NZHC 3239

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Tiroa E and Te Hape B Trusts v Chief Executive of Land Information [2012] NZHC 147