Kiwi Freeholds Queen Street Ltd v Shanti Holdings Ltd

[2008] NZCA 177

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IN THE COURT OF APPEAL OF NEW ZEALAND

CA237/07
[2008] NZCA 177

BETWEENKIWI FREEHOLDS QUEEN STREET LIMITED

First Appellant

ANDKIWI INTERNATIONAL HOTEL QUEEN STREET LIMITED

Second Appellant

ANDR T SCHOFIELD

Third Appellant

ANDSHANTI HOLDINGS LIMITED

First Respondent

ANDAHIMSA DEVELOPMENTS LIMITED

Second Respondent

ANDD M V GIBBS AND H DROEGE

Third Respondents

ANDD AMARSEE

Fourth Respondent

ANDRAHDA DEVELOPMENTS LIMITED

Fifth Respondent

ANDRADHIKA DEVELOPMENTS LIMITED

Sixth Respondent

ANDSAI DEVELOPMENTS LIMITED

Seventh Respondent

ANDD M V GIBBS

Eighth Respondent

ANDD M V GIBBS AND V MILLS

Ninth Respondents

Hearing:21 May 2008

Court:William Young  P, Glazebrook and Chambers JJ

Counsel:J G Krebs for Appellants

M A Gilbert and P A Paterson for Respondents

Judgment:23 June 2008 at 12.30 pm

JUDGMENT OF THE COURT

A        The appeal is allowed.

BThe answer to the second question posed in the High Court is that the second respondent had no right to cancel the Whitford contract under cl 8.7, the ground relied on in its notice of 8 November 2006.

CCosts of $6,000 plus usual disbursements are payable to the appellants.

______________________________________________________________

REASONS OF THE COURT

(Given by Glazebrook J)

Table of Contents

Para No

Introduction  [1]
Background  [4]
Keane J’s decision  [17]
Issues  [21]
Did cl 18 contain a condition to which cl 87 applies?  [22]

Submissions of the parties  [22]
Construction of cl 18  [25]
Adverse consequences  [36]
Conclusion  [41]

Did Ahimsa Developments do everything necessary in
terms of cl 8.7(2)  [42]

Result and costs  [48]

Introduction

[1]       This appeal concerns a property swap between Mr Schofield and companies associated with him and companies associated with Mr Amarsee.  In simplistic terms, the Schofield interests were to provide a hotel (Kiwi International) to the Amarsee interests.  In return, the Amarsee interests were to provide a property in Whitford plus $5.5m to the Schofield interests.

[2]       The swap was documented in three separate contracts between different entities:  the first relating to the hotel land; the second relating to the hotel business; and the third relating to the Whitford land.  Settlement of each agreement was expressed to be conditional on settlement of the other two. 

[3]       The issue for this appeal is whether one Amarsee entity was entitled to cancel the Whitford contract when another Amarsee entity had failed to settle the hotel land contract.

Background

[4]       As noted above, there were three separate contracts entered into on 24 February 2004.  In the first, a Schofield entity, Kiwi Freeholds Queen Street Ltd, agreed to sell the Kiwi International hotel land at 411 Queen St Auckland to Shanti Holdings Ltd, or nominee.  The price was originally $10.7m.  This was to be satisfied by the payment of $6.7m in cash and settlement contemporaneously of the Whitford property.  In March 2004, the price was reduced to $9.2m. Mr Amarsee is the sole shareholder and director of Shanti.

[5]       The second contract was between another Schofield entity, Kiwi International Hotel Queen Street Ltd, and Shanti (or nominee) for the purchase of the hotel business.  The purchase price was $300,000.

[6]       The third contract was between Ahimsa Developments Ltd and Mr Schofield personally (or nominee).  Under that contract, the property in Whitford was to be sold to Mr Schofield for a purchase price of $4 million to be satisfied by the settlement contemporaneously of the hotel property.  Mr Amarsee and a Mr Innes‑Jones were shareholders of Ahimsa Developments with Mr Innes-Jones’ shares being transferred to Mr Jaishree Dhanshuk on 21 April 2004.  The sole director is Mr Amarsee.

[7]       The two agreements for the sale of land were in the standard form approved by the Auckland District Law Society (ADLS seventh edition).  The other agreement was in the standard ADLS form for sale and purchase of a business (second edition). 

[8]       Shanti nominated Ahimsa Developments Ltd as purchaser of the hotel land.  Accordingly, the notice of transfer prepared by the solicitors for the Amarsee interests named Ahimsa Developments as purchaser, as did the notices of sale.

[9]       Ahimsa Trading Ltd was also nominated as purchaser of the hotel business.  (The exact shareholding of Ahimsa Trading at the time the contracts were entered into is unknown but, at the time of the hearing of the appeal, it had a slightly different shareholding from Ahimsa Developments.)

[10]     On the date set for settlement, 24 November 2004, the transactions did not settle, the solicitor for the Amarsee interests indicating that they would not be in a position to settle that day.  The following day, settlement notices were issued by the Schofield interests for all three contracts.  By letter of 14 December 2004, the settlement notices having expired, the solicitors for the Schofield interests advised that they were considering their position.

[11]     On 15 December 2004 Ahimsa Developments issued a settlement notice with regard to the Whitford property.  On 1 February 2005, Ahimsa Developments purported to cancel the sale and purchase agreement relating to the Whitford land on the basis of failure to comply with the settlement notice. 

[12]     Various proceedings having been filed, it was agreed between counsel then acting that it would be appropriate for there to be a determination of a single issue, namely the validity of the settlement notice and the purported cancellation of the Whitford contract.  This issue was heard by Keane J on 8 and 9 November 2006 in the High Court at Auckland.

[13]     On the first morning of the hearing, a notice was given by Ahisma Developments purporting to cancel the Whitford contract pursuant to cl 8.7 of the agreement.  This was on the basis that the “condition” in cl 18 of the contract had not been met.  It was agreed between counsel that the preliminary issue hearing would be extended to include the validity of the second purported cancellation.

[14]     Clause 8.7 enables either party to an agreement to cancel if a condition to which the agreement is subject is not fulfilled.  It provides:

If this agreement is expressed to be subject either to the above [relating to conditions under the Land Act 1948 and s 225 of the Resource Management Act 1991] or to any other condition(s), then in relation to each such condition the following shall apply unless otherwise expressly provided:

(1)     The condition shall be a condition subsequent.

(2)The party or parties for whose benefit the condition has been inserted must do all things which may reasonably be necessary to enable the condition to be fulfilled by the date for fulfilment.

(3)Time for fulfilment of any condition and any extended time for fulfilment to a fixed date shall be of the essence.

(4)The condition shall be deemed to be not fulfilled until notice of fulfilment has been served by one party on the other party.

(5)If the condition is not fulfilled by the date of fulfilment, either party may at any time before a condition is fulfilled or waived avoid this agreement by giving notice to the other.  Upon avoidance of this agreement the purchaser shall be entitled to the return of the deposit and any other moneys paid by the purchaser and neither party shall have any right or claim against the other.

(6)At any time before this agreement is avoided the purchaser may waive any financial condition and either party may waive any condition inserted for the sole benefit of that party.  Any waiver must be by notice.

[15]     Clause 18 of the Whitford agreement provided that:

Settlement of this agreement is conditional upon settlement of the two other agreements made between Shanti Holdings Ltd as purchaser on both agreements and Kiwi Freehold Queen Street Ltd as the Vendor of the property agreement and Kiwi International Hotel Ltd as the Vendor of the business agreement contemporaneously herewith and affecting the property and business at 411 Queen Street, Auckland and settlement of all agreements shall be deemed to be completely interdependent and shall be effected contemporaneously.

[16]     Similar clauses were in the other two contracts. 

Keane J’s decision

[17]     In a judgment of 27 April 2007, now reported at (2007) 5 NZ ConvC 194,398, Keane J held that Ahimsa Developments had no right to cancel the Whitford agreement on the grounds upon which it purported to rely by its notice of 1 February 2005 but that it was entitled to cancel the agreement upon the alternative ground relied upon in its notice of 8 November 2006 – ie non-fulfilment of cl 18.

[18]     The Judge accepted that “conditions” in contracts between the same parties requiring contemporaneous settlement are not true conditions but merely expressions of interdependent obligations.  In this case, however, the contracts were between different parties.  In his view, this meant that cl 18 became a true condition and thus subject to cl 8.7.

[19]     On the issue of whether Ahimsa Developments had, before it gave its notice on 8 November 2006, done everything reasonably necessary to enable cl 18 to be fulfilled (as cl 8.7(2) requires), Keane J held that Ahimsa Developments was never in a position to bring Shanti to settlement.  Though Mr Amarsee may hold interests in each, they are distinct entities.  Keane J noted that Shanti’s counsel confirmed at the fixture that Shanti was not in a position to settle and never would be.

[20]     Keane J seems to have been influenced in his conclusions by the fact that, if the cl 8.7 procedure could not be used, then there was an impasse.  The settlement notice procedure under cl 9 could not be used by either party in relation to the Whitford contract and the hotel land contract was never going to settle because of the default of the separate entity, Shanti. 

Issues

[21]     The Judge’s conclusion that there was no right to cancel the Whitford contract as at 1 February 2005 is (understandably) not challenged by either party.  Mr Schofield, however, appeals against Keane J’s finding that Ahimsa Developments was entitled to cancel the agreement on 8 November 2006 in terms of cl 8.7.  Two issues arise:

(a)     Did cl 18 contain a condition to which cl 8.7 applies?

(b)If so, did Ahimsa Developments do everything necessary to enable the condition to be fulfilled in terms of cl 8.7(2)?

Did cl 18 contain a condition to which cl 8.7 applies?

Submissions of the parties

[22]     Mr Krebs, for Mr Schofield, argues that cl 18 is no more than a contemporaneous settlement clause and that the contract as a whole is not expressed to be conditional upon it.  The clause is simply a mechanism relating to timing of settlement relative to other contracts, themselves containing the same provision.  In his submission, the same issues arise whether the parties are common or not.  Mr Krebs also points to what he submits are a number of untoward consequences of Keane J’s interpretation.

[23]     Mr Gilbert, for Ahimsa Developments, submits that Keane J was correct to hold that, as the parties to the contracts were different, cl 18 is a true condition.  He also supports Keane J’s conclusion about an impasse.

[24]     We deal first with the construction of cl 18 and then with the adverse consequences that each party relies on.

Construction of cl 18

[25]     The starting point is the wording of cl 18 itself.  Clause 8.7 operates when the agreement is expressed to be subject to conditions.  Clause 18 provides that “settlement” of the Whitford contract is conditional on settlement of the other two contracts.  It does not say that the “agreement” itself is conditional.  Therefore cl 8.7 does not apply.

[26]     Mr Gilbert points out that cl 14 of the agreement (relating to due diligence) was in similar terms to cl 18.  He submits that cl 14 is clearly a condition to which cl 8.7 applies and there is no reason to hold that it does not apply to cl 18.  Clause 14 reads:

Completion of this contract by the Purchaser is entirely conditional upon its completing and being satisfied with a due diligence programme in respect of the suitability of the property for the Purchasers intended use and any other factors it may deem necessary within 30 working days of signing this agreement.  This clause is inserted for the sole benefit of the Purchaser.

[27]     Mr Krebs submits that there are relevant differences between cll 14 and 18. Clause 14 speaks of completion rather than settlement as used in cl 18.  Clause 14 also contextually and by its nature looks like a true condition.  It is consistent with the other conditions, it has a time limit placed on its fulfilment and it is one said to be for the sole benefit of the purchaser (which can be waived in terms of cl 8.7.6). We accept Mr Krebs’ submission on this point.

[28]     In our view, cl 18 does not contain a condition.  It merely recognises the interdependent nature of the three contracts and, as Mr Krebs submits, relates to the timing of settlement as do the contemporaneous settlement clauses in the other two contracts.  As Dr McMorland says in Sale of Land (2ed 2000) at [11.02]:

Where two properties are being sold by the same vendor to the same purchaser, but by separate contracts, or where there is an exchange of properties by two parties by separate contracts, it is a matter of construction of the contracts to determine whether they are interdependent or entirely separate contracts.  Though this is sometimes expressed by saying that each is ‘conditional’ on the settlement of the other, these are not true contingent conditions but merely expressions of the interdependent nature of the contracts.  It follows that neither contract is void or able to be avoided by failure to settle the other;  merely that the party not in default is not obliged to settle either contract until both are to be settled.

[29]     It is true that Dr McMorland appears to limit his remarks to the situation where two properties are sold or exchanged by the same parties.  However, the real point is the interdependent nature of the contracts, rather than the identity of the parties.  As Dr McMorland notes, it is a matter of construction whether the contracts are interdependent or separate contracts.  In this case, it is obvious from their terms that the three contracts are interdependent and not true independent contracts.  Indeed, cl 18 says expressly that settlement is independent.  Further, if the contracts are looked at independently, Ahimsa Developments is giving the Whitford land to the Schofield interests and receiving nothing in return. 

[30]     In addition, we note that originally all three contracts were in the name of Ahimsa Developments.  Mr Gilbert contends that the mere act of substituting a related entity, Shanti, as party to two of the contracts, turned cl 18 from a clause recognising the interdependent nature of the contracts into a condition which was subject to cl 8.7.  This occurred without any change to cl 18 itself or to any other clause.

[31]     We do not accept this submission.  In our view, the same words could not have such an ambulatory meaning when the only change to the contract has been the substitution of a party to the contract.  This is particularly the case, given the fact that Shanti was able to nominate a purchaser.  In the event, it nominated Ahimsa Developments as purchaser of the hotel land, resulting in the effective identity of the parties to the contracts.

[32]     Subsequent conduct is also relevant to the construction of contracts – see Gibbons Holdings Ltd v Wholesale Distributors Ltd [2008] 1 NZLR 277 at [7] per Elias CJ, at [52] per Tipping J, at [73] per Anderson J and at [113] and [122] per Thomas J (SC).

[33] In a letter of 25 March 2004, the solicitors acting for the Amarsee interests stated that the Whitford agreement was “deemed to be unconditional with your client having satisfied his due diligence condition [in cl 14]”. The letter also said that the hotel land agreement was unconditional and recorded the agreed reduction in price – see at [4] above. By contrast to cl 14, the Amarsee solicitors obviously did not consider cl 18 a condition or they could not have said the contracts were unconditional. They did mention cl 18 in the letter. They called it a “contemporaneous settlement provision” and confirmed that it was still in force, despite the change in price.

[34]     By letter of 30 March 2004, the solicitor for the Schofield interests confirmed that the contracts were unconditional and that the position was as set out in the 25 March letter from the Amarsee interests.

[35]     The agreement that the Whitford contract was unconditional and the characterisation of cl 18 as something other than a condition confirms our interpretation of cl 18 as being concerned only with timing of settlement and not a true condition subject to cl 8.7.  Indeed, it may even be that the agreement in the March letters that the contract was unconditional had contractual force (given that the letters recorded the agreed variation to price in one of the contracts). 

Adverse consequences

[36]     Mr Gilbert submits that cl 8.7 is the only mechanism by which either party is able to bring the contract to an end in the event of non-performance by the other parties to the other contracts.  He says that the problem with Mr Schofield’s submission (as he said Keane J correctly found) is that the contract remains in limbo if the other contract cannot be performed. 

[37]     We do not accept this submission. Keane J was considering a preliminary issue only.  The pleadings contain a variety of parties and include a number of causes of action.  We accept Mr Krebs’ submission that whether an impasse truly existed would need to be considered against the whole of the evidence in the case and against the various arguments put forward for specific performance on different grounds.

[38]     In any event, the issue of impasse was not one that could be determinative of the correct interpretation of cl 18 and its relationship with cl 8.7.  It may be in extreme case that there is an impasse but, if that is so, it is a result of the way the clause is drafted and the interdependent nature of the contracts, despite the different parties.  How any impasse might be resolved is not before us and we therefore say no more about this point.

[39]     We also accept Mr Krebs’ submission that there are a greater number of adverse consequences if cl 18 is held to be a condition within the meaning of cl 8.7.  First, an agent would not be entitled to any commissions until after settlement of the sales and, if the contracts did not settle at all, there would be no entitlement to commission.  Secondly, any deposit paid could not be released to the vendor until after settlement (cl 2.4).  We accept the submission that neither of these consequences is a likely intended or desirable consequence of a clause such as cl 18.

[40]     Third, if settlement of one of the contracts does not take place on the contractual settlement date, an immediate right to avoid the contract and all other contracts accrues to all parties not in default under the contracts.  We accept Mr Krebs’ submission that, if cl 18 is construed to make the contract conditional upon settlement on the due date, time is effectively made of the essence as to that date, circumventing cl 9 of the contract.  Clause 9 provides for a settlement notice procedure giving twelve working days to settle when the other party to the contract fails to settle on the due date.  We accept Mr Krebs’ submission that it would be an odd result if cl 8.7 could circumvent the cl 9 settlement notice procedure in these circumstances.

Conclusion

[41]     In summary, we do not consider that cl 18 contains a condition to which cl 8.7 applies.  It follows that the purported cancellation of the Whitford contract on 8 November 2006 by Ahimsa Developments was invalid.

Did Ahimsa Developments do everything necessary in terms of cl 8.7(2)?

[42]     Given our answer to the first question, it is not strictly necessary to examine whether Ahimsa Developments did everything necessary to ensure cl 18 was fulfilled in terms of cl 8.7(2).  We do so, however, for completeness.

[43]     Mr Gilbert submits that whether or not the parties to the other contracts, including Shanti, performed their respective obligations to settle the other two agreements was beyond Ahimsa Development’s control.  He argues that the fact that Ahimsa Developments has been nominated as purchaser of the hotel land does not create an obligation to settle the purchase.  That remained with Shanti.  In Mr Gilbert’s submission, Keane J was correct to hold that Ahimsa Developments had done everything necessary in terms of cl 8.7(2).

[44]     Mr Krebs accepts that, where there has been a nomination, the ultimate obligation remains throughout with the named party.  However, he says that to all intents and purposes Ahimsa Developments was the intended purchaser.  Whether Ahimsa Developments was in a position to settle is not clear from the evidence but Mr Krebs submits that funding must have been arranged as the hotel land contract was declared unconditional in March 2004.  Thus Mr Krebs submits that Ahimsa Developments, in failing to settle the hotel land purchase, has not fulfilled the requirements of cl 8.7(2).

[45]     We accept Mr Krebs’ submission.  Clause 8.7(2) does not require parties to do only what they are contractually obliged to do.  They must do everything reasonably necessary.  Ahimsa Developments had, through the nomination, the ability, even though it had no obligation, to settle the hotel land contract.  Until it offered to settle the hotel land, it had not done all things reasonably necessary to fulfil cl 18. 

[46]     Indeed, in the case of companies so closely related (and with the same controlling mind), it might have been reasonable to expect Ahimsa Developments to have done all it could to place Shanti in a position to settle or to persuade Mr Amarsee to do so, even without the nomination.  There was no evidence of any attempts by Ahimsa Developments to do this. 

[47]     It is true that the settlement of the hotel business contract depends on another Amarsee entity but, in the context of the overall property swap, this was a very small part ($300,000 out of $9.5 million).  In any event, there is nothing to suggest that Ahimsa Trading (the nominated entity) was not in a position to settle that transaction.

Result and costs

[48]     The appeal is allowed. 

[49]     The answer to the second question posed in the High Court is that Ahimsa Developments had no right to cancel the Whitford contract under cl 8.7, the ground relied on in its notice of 8 November 2006.

[50]     Costs of $6,000 plus usual disbursements are payable to the appellants.

Solicitors:
David Armstrong & Campbell, Waipukurau for Appellants
Gilbert Walker, Auckland for Respondents