Lee v Ricketts HC Auckland CIV 2006-404-7888
[2007] NZHC 2032
•23 August 2007
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2006-404-007888
BETWEEN SARAH LEE Appellant
ANDGLENN RICKETTS Respondent
Hearing: 2 July 2007
Appearances: B Henry for Appellant
J Long and C Wilson for Respondent
Judgment: 23 August 2007 at 11:00am
(RESERVED) JUDGMENT OF ANDREWS J
This judgment was delivered by Justice Andrews on
23 August 2007 at 11:00am
pursuant to r 540(4) of the High Court Rules.
…………………………………… Registrar/Deputy Registrar
Date: ………………………
Solicitors/Counsel:
B Henry, PO Box 4070, Auckland (for Appellant)
Lee Salmon Long, PO Box 2026, Shortland Street, Auckland (for Respondent) D J Gates, PO Box 222, Whangaparaoa (for Appellant)
S LEE V G RICKETTS HC AK CIV 2006-404-007888 23 August 2007
[1] Ms Lee and Ms Gillan were the shareholders in a company ITmaniacs Limited. Ms Lee owned 60% of the shares and Ms Gillan 40%. On 24 March 2003 they signed a “Memorandum of Understanding” with Mr Ricketts, under which he would provide management consulting services to the company and in return each of them would transfer 5% of their shares in ITmaniacs to Mr Ricketts, and Mr Ricketts would be paid an agreed share of the company’s profits.
[2] Ten percent of the shareholding in ITmaniacs was transferred to Mr Ricketts and he was appointed a director. However, over time, differences arose and Mr Ricketts was removed as a director in or about August 2004.
[3] In March 2005 Mr Ricketts issued proceedings claiming $142,841.77, which he alleged is owed to him as a profit share. He sought summary judgment against Ms Lee. Ms Lee had by this time bought out Ms Gillan’s interest in the company.
[4] Ms Lee filed a statement of defence. Later, she filed an application for summary judgment by defendant. She was required to apply for leave. Her application for leave, and for summary judgment, was dismissed in a reserved judgment of Judge Joyce QC given in the District Court at Auckland on 1 December
2006.
[5] The Judge held that he was not satisfied that Ms Lee had a clear and complete answer to Mr Ricketts’ claim. The issue in this appeal is whether he was wrong in so holding. Mr Henry argued that the Judge was wrong, and that Mr Ricketts’ claim could not possibly succeed because Ms Lee was not the proper defendant, and Mr Ricketts was not the proper plaintiff. The basis of this argument lay in three questions:
a) Is the Memorandum of Understanding a binding contract?
b)If it was, then was ITmaniacs, rather than Ms Lee, the proper defendant in the proceeding?; and
c) Was there a novation, such that a company owned by Mr Ricketts, Lionfire International Limited, rather than Mr Ricketts, was the proper plaintiff?
Summary judgment for defendant
[6] Under r 152(2) of the District Courts Rules, the Court has a discretion to grant summary judgment against a plaintiff if a defendant can satisfy the Court that none of the plaintiff’s causes of action can succeed. Ms Lee was required to satisfy the Judge that she had a clear and complete answer to Mr Ricketts’ claim, which
could not be contradicted.1 It is not appropriate where there are disputed issues of
material fact. As Elias J said in Westpac v M M Kembla, at [62]:
Application for summary judgment will be inappropriate where there are disputed issues of material fact or where material facts need to be ascertained by the Court and cannot confidently be concluded from affidavits. It may also be inappropriate where ultimate determination turns on a judgment only able to be properly arrived at after a full hearing of the evidence. …
[7] The plaintiff’s right to have his day in court is not to be lightly denied.2 As in any application for summary judgment, the Judge considered the application on the basis of affidavit evidence, in the absence of the scrutiny by cross-examination that occurs at trial.
1 See Ferrymead Tavern Limited v Christchurch Press Limited (1999) 13 PRNZ 616, Westpac
Banking Corporation v M M Kembla New Zealand Limited [2001] 2 NZLR 298 (CA) and
Attorney-General v Jones (2003) 16 PRNZ 715 (PC).
2 See Bernard v Space (2000) Limited &Ors CA 232/00, 5 July 2001 (CA) at [22].
[8] The Memorandum of Understanding is central. It is as follows:
[LOGO] ITmaniacs.LTD
MEMORANDUM OF UNDERSTANDING DATED 24 March 2003
PARTIES
1 SARAH LEE (“Sarah”)
2 LAUREL ANDREW GILLAN (“Laurel”)
3 GLENN RICKETTS (“Glenn”) OPERATIVE PART
1Sarah agrees to sell 5% of the fully paid up share in ITmaniacs Limited (“ITM”) to Glenn and Laurel agrees to sell 5% of the fully paid up shares in ITM to Glenn. The 10% shareholding that Glenn acquires will be non dilutable.
2The consideration for the two share transfers will be the time and effort Glenn has put into ITM to date and his proposed future investments of time and effort. The financial consideration for the respective 5% is $1 each.
3Glenn shall be entitled to an equal share of all profits of ITM for a period of twenty four (24) months from April 1st 2003. After this period of time his profit share shall drop to 10% in line with his shareholding.
4 Glenn shall be appointed a director of ITM by the shareholders.
5All expense lines, salaries, commissions and head count will be agreed by Sarah, Laurel and Glenn for the period referred to in the first sentence of clause 3 of this Agreement.
6As soon as possible the parties shall amend the existing Shareholders Agreement to bring in Glenn as a party on the above terms and once this is signed, arrange the transfers of the shares and the appointment of Glenn as a director.
[Signature] [Signature] S Lee G Ricketts [Signature]
L A Gillan
Is the Memorandum of Understanding an “agreement to agree”?
[9] Mr Henry for Ms Lee argued that the Memorandum of Understanding was not a binding agreement, because there was no common intention by the parties to it to create legal relations. Rather there was an intention to create legal relations at some point in the future – that is, the Memorandum was an “agreement to agree”, or an “important staging post on the way to final agreement”.3 He said this was clear from the “complete factual matrix”, and from the terms of the Memorandum.
The factual matrix
[10] Mr Henry submitted that in determining whether the parties intended to create binding legal relations, it is appropriate to refer to the “complete factual matrix”. He said that what in fact transpired was an agreement whereby Lionfire (Mr Ricketts’ company) provided consultancy services to ITmaniacs. This was shown by the invoices for the services, which were rendered by Lionfire and paid by ITmaniacs.
[11] However, as the Judge noted, that factual assertion is disputed by Mr
Ricketts. The Judge commented at [40] that:
… one cannot blithely stride by his contention that it was still him personally who was providing the services.
[12] The Judge then pointed to one possible explanation for the invoicing that was not that put forward by Mr Henry. This is a material fact. The factual dispute cannot be resolved on the affidavits. It can only be resolved at trial, when the evidence can be tested. As noted in Westpac v M M Kembla, summary judgment is not appropriate where there are disputes of material fact. The “factual matrix” does not, therefore, support summary judgment.
3 See Fletcher Challenge Energy Limited v ECNZ Limited [2002] 2 NZLR 433, at [50] and [75]
[13] Mr Henry also submitted that it was evident from the Memorandum itself that the parties to it intended it to be an “agreement to agree” rather than a binding legal agreement. He described it as a memorandum of understanding both in name and nature, and as lacking “sufficient structure” to create a binding contract. This argument does not appear to have been raised in the District Court.
[14] In support of this submission, Mr Henry pointed to Clauses 1 and 2, which refer to the transfer of shares to Mr Ricketts and consideration for the transfers. He submitted that these clauses contemplated a share transfer at some future date, but not at the time of the agreement. Clause 6 which provides that “as soon as possible”, the parties will amend the existing Shareholders Agreement was, he said, an express indication that the agreement between them would be set out in a shareholders agreement – in other words, he said, the parties did not intend to be bound until a shareholders agreement was executed (which never occurred).
[15] I do not accept this submission. It is the very nature of a contract that it is in respect of the performance of obligations in the future. In this case, the future obligation was the transfer of shares. The fact that the Memorandum set out an obligation to be performed in the future does not, in an of itself, render it an agreement to agree, rather than a binding contract. I am not satisfied that the it is evident from the terms of the Memorandum that the parties did not intend to be bound until a further agreement was executed.
[16] Mr Henry also submitted that the Memorandum of Understanding lacked “sufficient structure”, in that the profit entitlement referred to in clause 3 (equal one- third share for the first 24 months, then a 10% share), could not have flowed from Mr Ricketts’ 10% shareholding. He submitted there was no consideration for the additional payment, other than that consultancy services were to be provided to ITmaniacs. Therefore, he submitted, in order for the Memorandum to be legally binding, ITmaniacs needed to be a party to it. As it was not, the Memorandum was not a binding agreement.
[17] However, the fact that two parties reach an agreement that one of them is to provide services to a third does not itself render the agreement non-binding. It is not necessary for the third party to be party to the contract. Such a situation is indeed the focus of the Contracts (Privity) Act 1982, which permits the beneficiary of a contract to enforce a promise made in it.
[18] It is also clear from Ms Lee’s affidavit evidence, that in fact Mr Ricketts’ services were of benefit. At paragraph 13 of her affidavit dated 2 October 2006 she said that:
“in those early days [Mr Ricketts] brought a lot to the company in terms of his experience and the company experienced growth as a result”
I accept Mr Long’s submission that the company’s shareholders would therefore have gained a benefit from Mr Ricketts’ services.
[19] Accordingly, I do not accept Mr Henry’s submission that the Memorandum of Understanding “lacked sufficient structure” to be legally binding. Ms Lee has not established that Mr Ricketts’ claim that the Memorandum is a binding contract cannot succeed.
Was ITmaniacs, rather than Ms Lee, the proper defendant in Mr Ricketts’
proceeding?
[20] Mr Henry submitted that if the Court were satisfied that the Memorandum of Understanding is a binding contract, then the Court must conclude that because the consultancy services were to be provided to ITmaniacs, the Company, rather than Ms Lee, should have been the defendant. He submitted that it was always the parties’ intention that consideration for the consultancy services would be paid by ITmaniacs, and that the company would receive the benefit of the services.
[21] Mr Henry said this was clear from clause 3 of the Memorandum of Understanding. No evidence was put forward by Mr Ricketts, he submitted, to suggest that the parties’ intention as to who would benefit from services changed, or that there was any intention that Ms Lee would benefit from the services, or pay for them. Accordingly, he submitted, the Judge was wrong to conclude that this point
could only be determined after evidence was given and tested at trial. There was sufficient evidence before the Judge to determine the point conclusively.
[22] This argument must also fail. First, it is for Ms Lee, as a defendant seeking summary judgment, to establish a clear and complete answer to Mr Ricketts’ claim, not for him to put up evidence to support it. Second, as noted at [17], a contract between two parties may provide for one party to provide services to a third party, and the beneficiary may under the Contracts (Privity) Act 1982, sue to enforce the benefit conferred by the contract.
[23] Further, Mr Long argued that it was not necessary for the company to be a party to the Memorandum of Understanding. The only way the obligations set out in the Memorandum of Understanding could be met was by the parties themselves – Ms Lee, Ms Gillan and Mr Ricketts – taking steps, for example, to procure the payment of Mr Ricketts’ profit share.
[24] Mr Long acknowledged that the Memorandum of Understanding does not include a clause to the effect that the parties would procure the company to do anything required to give effect to the Memorandum. However, he submitted that as a matter of “commercial necessity”, if necessary the Court could imply such a clause.
[25] Whether such a clause needs to be, or should be, implied in this case is a matter that could only be determined at trial. That will depend on the evidence as to the intention of the parties. There is a factual dispute as to this: Mr Ricketts said in his affidavit dated 20 October 2006 that ITmaniacs was
… the vehicle around which the MOU was intended to function.
Ms Lee said
As far as I was concerned the Memorandum of Understanding was an agreement between [Mr Ricketts] and the company …
[26] It is not a matter that can be determined on a summary judgment application.
Has there been a novation, such that Mr Ricketts’ company, rather than Mr
Ricketts, was the proper plaintiff?
[27] Mr Henry’s further submission, if the Court found the Memorandum of Understanding to be a binding agreement, was that there had been either a novation or variation, such that Lionfire assumed Mr Ricketts’ obligation to provide consultancy services.
[28] This submission is based on the fact that invoices for the work done by Mr Ricketts were submitted by Lionfire. Mr Ricketts’ evidence was that he chose to invoice and receive payment of his profit entitlement through his consultancy company, Lionfire, and that was agreed to by Ms Lee and Ms Gillan. Mr Henry argued that the consequence was that the requirements for novation had been met:
a) The obligor, Lionfire had assumed complete responsibility;
b)The obligee (whether ITmaniacs or Ms Lee) had accepted Lionfire as principal rather than as agent; and
c) The obligee had also accepted the new contract in full satisfaction for the old.
[29] In the District Court the Judge held at [38] and [39]:
It is not at all clear that Ms Lee … did more in the Lionfire respect than informally go along with Mr Ricketts’ use of the Lionfire entity for collecting fees or payments.
Even taking Ms Lee’s evidence on its own, one cannot be sure at all that the actuality of a novation is the one and proper inference; there is certainly no specific sign of comprehensive agreement on the point.
[30] Mr Henry argued that the Judge was wrong to make a distinction based on “going along” with an arrangement. There was, he submitted, clearly an offer (in the form of invoices from Lionfire) and acceptance (when the invoices were paid). Ms Lee does not dispute that Mr Ricketts provided the services, she disputes the capacity in which he did so. Ms Lee contends that the invoices show that the services were provided as an employee or agent of Lionfire.
[31] For there to be a novation, as distinguished from an assignment, consent by all parties is key.4 As Mr Long submitted, in the present case, there has been no express agreement that all of Mr Ricketts’ obligations under the Memorandum of Understanding were assumed by Lionfire, and Mr Ricketts was released from all obligations. He submitted that the Court should be loathe to find novation unless the circumstances were really compelling.
[32] The invoices and payments are the only objective evidence pointed to in support of the claimed novation. In my view, in the absence of any express agreement for novation, the Judge was correct in taking the view that that was not sufficient for him to find that there was a novation. The Judge noted that there were explanations, other than novation, for the use of Lionfire. For my part, I am not satisfied that novation was not the only available interpretation.
[33] Accordingly, I am not satisfied that the Mr Ricketts’ proceeding must fail by reason of the plaintiff being Mr Ricketts rather than Lionfire.
Result
[34] I am not satisfied that the Judge was wrong to hold that Ms Lee had not established that she had a clear and complete answer to Mr Ricketts’ claim. In particular, he was not wrong to hold that Ms Lee had not established that the Memorandum of Understanding was not a binding agreement, that Ms Lee was not the proper defendant, or that Mr Ricketts was not the proper plaintiff.
[35] The appeal is therefore dismissed. Mr Ricketts is entitled to costs. I note that it is recorded in a Minute of Winkelmann J dated 27 February 2007 that the parties
are agreed that the appropriate costs category is 2B.
Andrews J
4 See Burrows, Finn & Todd, Law of Contract in New Zealand 3rd ed, LexisNexis, 2007, at 17.2.1
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