Leading Media Limited t/a Godfreys Botany v Wang
[2015] NZHC 148
•12 February 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-001683 [2015] NZHC 148
UNDER the District Courts Act 1947 BETWEEN
LEADING MEDIA LIMITED trading as
GODFREYS BOTANY Appellant
AND
YUFENG (TONY) WANG Respondent
Hearing: 15 October 2014 Counsel:
H L Thompson for the Appellant
T M Bates for the RespondentJudgment:
12 February 2015
JUDGMENT OF DUFFY J
This judgment was delivered by Justice Duffy on 12 February 2015 at 4.00 pm, pursuant to
r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Solicitors: McMahon Butterworth Thompson, Auckland
Legal Vision, Auckland
LEADING MEDIA LTD v WANG [2015] NZHC 148 [12 February 2015]
[1] The appellant was unsuccessful in the District Court. The appellant now seeks to appeal against that decision on the ground that the District Court Judge erred in fact and in law. The respondent cross-appeals, relying on other grounds that were not addressed in the District Court judgment.
[2] The essence of the dispute between the parties is whether the respondent is contractually obliged to the appellant for stock on hand at a retail store when he took the retail business over from the appellant.
Factual background
[3] The appellant company, Leading Media Ltd, was incorporated on 4 October
2006, with a Mrs Vora and a Mr Amarnath as directors and shareholders of the company. In early 2007, the respondent was introduced to Mrs Vora by Mr Amarnath, with a view that the respondent would invest in the company and acquire a third shareholding.
[4] In March 2007, the respondent invested approximately $33,000 in the appellant company for the purpose of purchasing a franchise from the Australian company that specialises in vacuum cleaners, “Godfreys”. Its operations are conducted in New Zealand by the New Zealand Vacuum Cleaner Company Ltd. The appellant then acquired a shop, known as Godfreys Botany, in July 2007.
[5] The parties then invested further funds in the appellant to purchase another
Godfreys retail store in New Lynn. To this end, the respondent invested $11,000.
[6] The respondent mostly worked in the New Lynn store, while Mr and Mrs Vora were more concerned with Godfreys Botany. The New Lynn store did not prove to be profitable and was operating at a loss. Its debts were covered by Godfreys Botany. Various strategies to remedy the situation were discussed. Despite two approaches from prospective purchasers to buy the New Lynn store, a sale could not be concluded. The next strategy was for all three shareholders to put further capital into the appellant company. The respondent was not in a position to do so. Mr and Mrs Vora and Mr Amarnath suggested to the respondent that he could either
surrender his investment in the appellant company, or alternatively, he could purchase the New Lynn franchise from the appellant and operate it as a separate venture. The respondent adopted the latter proposal.
[7] The parties agreed that the respondent would purchase the New Lynn franchise from the appellant company and would incorporate GUI Holdings Ltd to undertake the new venture.
[8] In a letter dated 18 July 2008, and re-dated 21 August 2008, Mrs Vora, Mr Amarnath and the respondent, Mr Wang, wrote to the New Zealand franchise manager of the New Zealand Vacuum Cleaner Company Ltd, Mr Barry Thomas, in the following terms:
Dear Barry
We wish to request the following ownership and management changes for our two Godfreys franchises at Botany and new Lynn.
· Currently leading Media Ltd has 3 shareholders and Directors, being Madhavi Ashok Vora (Madhavi), Yuefeng Wang (Tony) and Dinesh Singh Amarnath (Dinesh) that own the 2 Godfreys Franchise businesses at Botany and New Lynn.
· Leading Media wants to sell the New Lynn franchise to Tony, who will set up a new company where he will be the sole director and shareholder;
· This new company will be a standard limited liability company that can be set up within 1 day of approval of this proposal;
· Tony will resign as a director and shareholder of Leading Media Ltd and this will mean that Madhavi and Dinesh will be the sole directors and shareholders of Leading Media Ltd;
· Tony has approved financing from ANZ bank for the purchase of the
New Lynn franchise from Leading Media;
· Currently each franchise business has a Godfreys Loan (New Lynn =
$125k over 5 years with current balance of $119.790 & Botany = $125k over 3 years with a current balance of $87,400);
· Each franchise business wishes to retain their current Godfreys Loans;
· The current combined stock and merchant account balances of both stores will become the liability of the Botany Franchise only, which means the new company to be formed to own the New Lynn franchise will start with a nil merchant and stock account balance.
[9] On 18 September 2008, an email signed by Mr Vora, Mr Amarnath and the respondent was sent to Mr Rob Lewis, noted as Mr Barry Thomas’ “superior” in the District Court judgment. The email stated:
Dear Rob Lewis:
It was nice talking with you today and we are extremely happy and satisfied with your suggestions.
We wish to purpose [sic] the following ownership and management changes for our two Godfreys franchises at Botany and New Lynn.
[10] At this point, the email then listed most of the bullet points outlined in the letter dated 18 July 2008. Of importance, the email addressed the issue of liability:
·The current combined stock and merchant account balances for both stores will become the liability of the Botany franchise only, which means GUI Holding Ltd will start with a nil merchant and stock account balance.
·15th October 2008 is the date we would like to start trading under GUI Holding Ltd at New Lynn store.
[11] With the departure of the respondent, Mr Amarnath decided to sell his shares in the appellant company to Mr Vora, and a meeting was arranged at a solicitor’s office on 28 October 2008. A handwritten memorandum of understanding (“MOU”) was signed by Mr Amarnath, Mr Vora and the respondent. The appellant was neither a party nor a signatory to the MOU.
[12] The first two clauses of the first version of the MOU (“MOU 1”) provides:
1.Lynmall store of Godfreys will be taken over by Tony Wang with all the stock existing and assets and liability.
2. No future liability of New Lynn will asked from Leading Media Ltd
(Diniesh, Madhavi) Ashok.
The remaining clauses concerned the transfer of Mr Amarnath’s shares to Mr Vora.
[13] The second version of the MOU (“MOU 2”) is a copy of MOU 1 with handwritten alterations noted on it. The first two clauses of MOU 2 are the same as in MOU 1. Then there is a third version of the MOU (“MOU 3”) which has additional handwritten alterations recorded on it. The copy of this document that is in evidence is different from the earlier versions of the MOU, as MOU 3 omits cl 1
of the earlier versions and commences with cl 2. None of the versions of the MOU in evidence are originals. So it is difficult to know if the omission of cl 1 in MOU 3 is due to imperfect copying of the original, or an intentional decision to omit cl 1 from this version.
[14] The visible alterations to MOU 2 and MOU 3 all relate to the transfer of Mr Amarnath’s shares to Mr Vora. The respondent did not initial any of those alterations, whereas Mr Amarnath and Mr Vora did.
[15] The new arrangement was put into effect. On 24 November 2008, the New Zealand Vacuum Cleaner Company Ltd issued a statement indicating that the Godfreys New Lynn store had a nil balance owing for stock at that date.
District Court decision
[16] The appellant’s claim in the District Court was based on breach of contract and unjust enrichment. The latter cause of action was abandoned. Regarding the contractual claim, the appellant claimed the sum of $89,554 from the respondent for breach of the MOU. Here, the appellant alleged that the respondent agreed to assume responsibility for the appellant company’s existing liabilities for the New Lynn store. The claim failed; Judge Harrison found in favour of the
respondent.1
[17] The Judge found that the appellant company benefited significantly from the agreement to split the Godfrey’s vacuum cleaner franchise into two companies. He noted that at the time of the split, the appellant and Godfreys Botany assumed a total loan liability of $227,400, whereas the total loan liability assumed by the respondent and the Godfreys New Lynn store was $315,814.2
[18] The Judge found that the amount owing by the appellant for stock at both stores was $89,554, although actual stock at the New Lynn store was $62,462.3
1 Leading Media Ltd v Wang DC Auckland CIV 2012-004-000360, 9 June 2014.
[19] The Judge held that the specific reference in cl 1 of the MOU to “all stock existing and assets and liabilities” was enough to remove the stock from inclusion in the phrase “assets and liability”.4 Thus, the clause did not necessarily have the effect of rendering the respondent liable for existing stock.
[20] The separation of stock from assets and liabilities was found to be consistent with the emails of 21 August and 18 September 2008, each of which confirmed that the respondent was to operate Godfreys New Lynn, under the auspices of GUI Holdings Ltd, starting with a nil merchant and stock account balance.5 The Judge saw this position to be consistent with the respondent’s evidence that at the time of the split, he did not have capacity to introduce further capital into the appellant company.6 The Judge inferred that as the respondent could not introduce capital into the new venture, it was therefore crucial for him that he would have stock to operate the business when he took over the Godfreys New Lynn store.
[21] In interpreting the MOU, the Judge considered that the MOU did not alter the fundamental condition of the respondent taking over the New Lynn store, with it having a nil balance for stock owing.7
[22] The Judge further found that Godfreys’ conduct was consistent with the respondent taking the stock at a nil balance. In this regard, he noted that as from 14
November 2008, Godfreys had forwarded a nil balance statement to GUI Holdings Ltd and thenceforth Godfreys had looked to the appellant as the party liable for debt relating to stock. Additionally, the appellant had paid that debt.8
[23] The Judge noted that his findings so far treated the MOU as binding as between the appellant and the respondent with the terms of the MOU favouring the respondent.9 However, the Judge then went on to find that there was force in the
respondent’s argument that the MOU was void for uncertainty.10 In this regard, the
4 At [25]. In making this finding, the District Court Judge did not distinguish between the different versions of the MOU.
5 At [26].
6 At [27].
7 At [27] and [28].
8 At [29].
Judge found that the MOU did not create legal relations between the appellant and the respondent for the following reasons. First, whilst the respondent signed the original MOU, he did not sign the two subsequent amendments to it. Secondly, it was likely that the respondent signed the MOU as a director of the appellant to authorise the share transfer from Mr Amarnath to Mr Vora, rather than in his personal capacity. Therefore, the first two clauses of the MOU are only a preamble to the latter clauses. Thirdly, the MOU did not specify the appellant as a party, which the
Judge found to be “another glaring omission”.11
[24] Overall, Judge Harrison held that if the MOU was a contract, it did not cast an obligation on the respondent to pay the appellant for the stock at the New Lynn store. Further, he was of the view that the MOU did not create legal relations between the appellant and the respondent.12
Appellant’s submissions
[25] The appellant submits that the Judge ought to have found that the MOU had contractual effect between the parties.13 The appellant asks the Court that if the MOU was not a contract between the parties, where is the contact pursuant to which the franchises were to be split?
[26] The appellant submits that the letter of 21 August 2008 was intended to deal with questions of liability between franchisor and franchisees, not the issues between the three stakeholders in the franchises. The appellant does not dispute that it would be liable to pay the franchisor for the stock. However, the appellant’s case is that there was a side deal between the appellant and the respondent that the respondent would be responsible for that liability.
[27] The appellant submits further that whilst the Judge identified as a “glaring omission” that the MOU did not specify the appellant as a party, it did not expressly
identify any of the parties in the document. The appellant submits that the
11 At [31].
12 At [35].
13 Neither party distinguishes the different versions of the MOU, but simply refers to “the MOU”
of 28 October 2005.
respondent and Mr Amarnath signed the MOU both in their individual capacities and as representatives of the appellant company. The appellant also submits that Mr Vora signed the MOU as agent for Mrs Vora, for the purpose of binding her and the appellant company.
[28] The appellant submits that the Judge erred in his interpretation of cl 1 of the MOU and that his interpretation was heavily influenced by the respondent’s statements of subjective intention.
Respondent’s submissions
[29] The respondent submits that the Judge interpreted the MOU in light of the factual background, and that it would have made no commercial sense to the respondent if he agreed to be liable for the historic stock debt of the appellant. The respondent also submits that the conduct of both parties after entering into the MOU is consistent with the interpretation of the District Court, as 26 months had lapsed between the MOU and the appellant making formal demand upon the respondent. This time lapse was despite the franchisor making demand upon the appellant for the first time on 7 January 2009.
[30] The respondent also refers to the Deed of Termination and Release of Franchise and Licence document executed on 10 November 2008. The respondent says that if the appellant’s interpretation of cl 1 of the MOU is upheld, the effect of this deed would mean that the nil balance proportioned pursuant to cl 6 of the deed would override the effect of the MOU.
[31] The respondent submits that the MOU should be rendered void for want of certainty, and that the Judge’s conclusions on this matter were correct. The respondent submits further that there was ample documentation in place to allow the New Lynn branch to be transferred to the respondent and that the MOU added nothing to the agreements already agreed upon.
[32] The respondent raises new grounds as to why the appeal should be dismissed. First, the respondent says that the MOU was no more than a precursor to an
agreement to be drafted by Alan Clark Solicitors and that there was no intention to create legal relations within the MOU.
[33] As an affirmative defence, if the appellant’s interpretation of the MOU is upheld, the respondent argues that s 6 of the Contractual Remedies Act 1979 applies. The respondent claims that the appellant made a pre-contractual misrepresentation about the liability of the stock debt, which induced the respondent to enter into the MOU.
[34] Lastly, with respect to quantum, the respondent says that the proper amount that the appellant seeks to claim is the sum of $62,462, rather than $89,554. The lower sum represents the stock balance for the New Lynn store at the time of the franchise transfer.
Approach on appeal
[35] Under s 72 of the District Courts Act 1947, there is a general right of appeal to this Court against every decision made in the District Court. Under s 75, the appeal is to be by way of rehearing. Section 76 provides the powers of the High Court on appeal:
76 Powers of High Court on appeal
(1) Having heard an appeal under section 72, the High Court may—
(a) make any decision or decisions it thinks should have been made:
(b) direct the District Court in which the decision appealed against was made—
(i) to rehear the proceedings concerned; or
(ii) to consider or determine (whether for the first time or again) any matters the High Court directs; or
(iii) to enter judgment for any party to the proceedings concerned the High Court directs:
(c) make any further or other orders it thinks fit (including any orders as to costs).
(2) The High Court must state its reasons for giving a direction under subsection (1)(b).
(3) The High Court may give the District Court any direction it thinks fit relating to—
(a) rehearing any proceedings directed to be reheard; or
(b) considering or determining any matter directed to be considered or determined.
(4) The High Court may act under subsection (1) in respect of a whole decision, even if the appeal is against only part of it.
…
Is the MOU binding upon the parties?
[36] The elements of a binding contract are: (a) Intention to create legal relations; (b) Offer and acceptance;
(c) Certainty of terms; and
(d) Consideration.
[37] The parties seem to be in agreement that the respondent only signed the first version of the MOU. Thus, he was not a party to the later versions, the last of which is logically the final version and, therefore, the operative version. On this ground alone, I consider that the MOU lacks certainty of terms, as it is not clear from the evidence whether cl 1 made it into the final version of the MOU.
[38] I agree with the respondent that the purpose of the MOU was predominately to record the share transfer agreement from Mr Amarnath to Mr Vora. The handwritten versions of the MOU were seemingly never drafted into a formal agreement by Mr Amarnath’s solicitor.
[39] Apart from the appellant’s assertions, there is no evidence is support the view
that there was a “side deal” between the appellant and the respondent that the
respondent would be responsible for the stock liability. On the other hand, there is evidence in the form of the letter and email communications, set out above, that reveals the parties’ true intentions. This shows the respondent taking ownership of the New Lynn store with a nil balance owing.
[40] The terms and conditions of the sale of the New Lynn store to the respondent were agreed upon before the parties entered into the MOU. The respondent was not a party to the final version of the MOU, and I do not see, therefore, how it could bind him.
[41] As regards the earlier versions of the MOU, if they still have any legal force, they do not contradict the agreement as shown in the letter and the emails. I do not consider that cl 1 of MOU 1 is inconsistent with the agreement that is documented in the letter and emails set out above.
[42] Moreover, the appellant was not a party to any version of the MOU and, therefore, I cannot see how the appellant can sue upon that document. Indeed, the appellant’s case involves the attempt by one person who is not a party to the MOU (namely the appellant) attempting to sue someone who is also not a party to the MOU (namely the respondent) for breach of its terms. This is plainly a nonsense.
Interpretation of MOU
[43] The Supreme Court’s decision in Vector Gas Ltd v Bay of Plenty Energy Ltd is often cited for its comments on contractual interpretation.14 In this case, Tipping J said:15
[19] The ultimate objective in a contract interpretation dispute is to establish the meaning the parties intended their words to bear. In order to be admissible, extrinsic evidence must be relevant to that question. The language used by the parties, appropriately interpreted, is the only source of their intended meaning. As a matter of policy, our law has always required interpretation issues to be addressed on an objective basis. The necessary inquiry therefore concerns what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean. The court embodies that person. To be properly informed the court
14 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.
15 At [19] (footnotes omitted).
must be aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties' minds. Evidence is not relevant if it does no more than tend to prove what individual parties subjectively intended or understood their words to mean, or what their negotiating stance was at any particular time.
[44] In its notice of appeal, the appellant says the Judge erred in having regard to the subjective intentions of the parties and did not give cl 1 of the MOU its plain and ordinary meaning. In my view, those arguments cannot be sustained.
[45] Insofar as the earlier versions of the MOU have legal force, I consider that the Judge adopted the correct interpretation of cl 1 of MOU 1 and 2 that the respondent did not take the stock liability of the New Lynn store. In doing so, the Judge did not consider the subjective intentions of the parties. He conducted the necessary inquiry, as stated by Tipping J above, which is to consider what the words of the MOU might mean in light of the commercial and factual context. The factual context is that the parties agreed that the current combined stock and merchant account balances for both stores would become the liability of the Botany franchise only, and that the respondent in turn would assume legal responsibility for liabilities amounting to $315,814 which relieved the appellant from responsibility for paying the loans that made up that amount. Further, the respondent assumed those liabilities in the context where he had no capital to advance to the new company he was using to operate Godfreys New Lynn and so he needed to have stock available to him to be able to operate the business. The interpretation of cl 1 of MOU 1 and 2 that “all the stock existing” is not a “liability” is consistent with an objective understanding of what had been agreed upon between the parties.
Conclusion
[46] The MOU on its face appears unenforceable on the ground of uncertainty, as it is unclear whether the final version included cl 1, the clause relied upon by the appellant. Further, as neither the appellant nor the respondent were parties to the final MOU, they cannot sue for any breach of its terms. If the final version did include cl 1, or if earlier versions have legal force upon which the appellant is entitled to sue, I consider that the interpretation sought by the appellant cannot be
justified on an objective view of cl 1 of those versions, in light of the commercial
and factual background of the parties’ dispute.
[47] In view of the findings that I have made, I see no need to assess the other arguments raised by the respondent in the cross-appeal.
Result
[48] The appeal is dismissed.
[49] The parties have leave to file memoranda as to costs, if they cannot reach agreement on costs.
Duffy J
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