Lookman v Design Electronics Limited
[2020] NZHC 1066
•21 May 2020
IN THE HIGH COURT OF NEW ZEALAND NELSON REGISTRY
I TE KŌTI MATUA O AOTEAROA WHAKATŪ ROHE
CIV-2018-442-41
[2020] NZHC 1066
BETWEEN MICHAEL ANDREW LOOKMAN AND 187 BRIDGE TRUSTEES 53 LIMITED
(as Trustees of the Lookman Family Trust) PlaintiffsAND
DESIGN ELECTRONICS LIMITED
First Defendant
AND
RICHARD WARWICK JONES
Second Defendant
Hearing: 12 May 2020 Appearances:
G M Downing for Plaintiff s (via AVL to Nelson)
S J Jamieson and J V Ormsby for First and Second Defendants
Judgment:
21 May 2020
JUDGMENT OF ASSOCIATE JUDGE LESTER
This judgment was delivered by me on 21 May 2020 at 10am pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar 21 May 2020
LOOKMAN v DESIGN ELECTRONICS LIMITED [2020] NZHC 1066 [21 May 2020]
[1] The background to this application for summary judgment can be found in an earlier judgment dated 23 September 2019 between the parties, Design Electronics Ltd v Lookman.1 That judgment in turn referred back to an earlier judgment of Associate Judge Matthews between the parties.
[2] In the 23 September 2019 judgment, I adopted the background contained in two paragraphs from Associate Judge Matthews’ judgment of 2 May 2018.2 (The parties referred to are Design Electronics Ltd (“DEL”) and Lookman Family Trust (“LFT”)).
[12] On 14 December 2016 the parties entered an agreement titled “Investment and Shareholding Agreement 14 December 2016”. The agreement was for a term of five years “unless terminated earlier in accordance with its conditions”. It recorded that the Lookman trustees would advance $2,100,000 “on a reimbursement model” to Design Electronics from the date of an earlier promissory note issued on 8 May 2016. The funds were to be interest free for a period of one year from the date of the first advance, after which interest would be charged at 10 per cent per annum payable monthly. The document is expressed to be the entire agreement between the parties in relation to its subject-matter, replacing and extinguishing all prior agreements, draft agreements, arrangements, undertakings or collateral contracts of any nature made by the parties, whether oral or written, in relation to such subject-matter.
…
[14] The Lookman trustees have advanced $1,820,000 pursuant to this agreement. The security to be given to the Lookman trustees was “security over SenSys IP” the name SenSys being the defined name of Design Electronics in this agreement. A personal guarantee was also to be given to the Lookman trustees from the director of Design Electronics, Mr Warwick Jones.
[3] In the May 2018 decision, the issue was whether the advance was repayable upon demand. Associate Judge Matthews concluded DEL had established an arguable case that the advance made by LFT were not repayable on demand, but rather were term advances for the five years of the Investment and Shareholding Agreement (“the Agreement”). The statutory demand was issued on the basis that the advance was repayable upon demand was therefore invalid and the liquidation proceeding on which the demand was based was stayed.
1 Design Electronics Ltd v Lookman [2019] NZHC 2400.
2 Lookman v Design Electronics Ltd [2018] NZHC 904.
[4] The Agreement between the parties provided at cl 3 that the “Investment and Shareholding Agreement (“Agreement”) commences on the commencement date will continue for a period of 5 years unless terminated earlier in accordance with its conditions.”
[5] Associate Judge Matthews noted in his judgment of 2 May 2018, there is nothing in the agreement relating to its termination.
[6] Under the Agreement, LFT, which is defined as the lender, had the right to purchase 51 per cent of the shareholding in DEL at the share price of NZ$2,100,000. That option to purchase was expressed to survive for three years from the date of the original advance by LFT being 8 May 2016.
[7]Clause 10 of the Agreement provided as follows:
10 Monthly Meeting Each month a meeting will be held on the 6th working
day of the month. Date subject to change by prior agreement.
The meeting is to provide information and be a focus for an overall view of the company, and to document agreements.
Minutes will be recorded at the meeting and goals and decisions will be documented and prior meetings minutes discussed.
At least 24 hours prior to the monthly meeting the following will be available to the meeting participants:
Accurate monthly and annual YTD financials which reflect proper and accurate inventory recording.
A monthly balance sheet.
Listing of AR and AP with their payment dates.
Cash flow for the current month and pro forma for the next 6 months.
A sales report in table form with a listing of major sales prospects, potential sales volumes and margins and a date range (earliest to later) and a probability factor, this report to be cumulative to provide sales history.
Actual sales report by customer compared with budget.
Report on IP protection progress.
A brief operations report, on product development and monthly goals and problem issues.
At this meeting the amount of money to be advanced will be discussed and agreed upon.
Money will be advanced by the 10th working day of the month. (Subject to the agreed upon maximum).
[8] Clause 8 of the Agreement also required DEL to make available its electronic accounting system and records to enable independent access to statements.
[9] It is also necessary to refer to another judgment of Associate Judge Matthews concerning the same parties, dated 18 December 2018, as it sets out the background to the present application.3 As a result of DEL ceasing to make this information available, LFT sought and obtained from Associate Judge Matthews in the December 2018 judgment, an order for specific performance in the following terms:4
[49] I am satisfied that the Court should enter summary judgment for the Lookman Trust on part of its claim by making orders for specific performance in the following terms:
(a)Design Electronics Ltd will forthwith provide access to the Lookman Family Trust to its electronic accounting system and records from 1 August 2017 and will continue to provide such access.
(b)Design Electronics Ltd will comply in every respect with the obligations imposed on it by clause 10 of the agreement between it and the Lookman Family Trust dated 14 December 2016. All information required by that clause to be made available will include information for the period August 2017 to the end of the month before the first meeting following this judgment.
[10] As I will develop below, I am satisfied that DEL failed to comply with the terms of the order.
[11] LFT, as a result of DEL’s non-compliance, waited until the expiry of the option to write to DEL’s solicitor cancelling the Agreement because of DEL’s
3 Lookman v Design Electronics [2018] NZHC 3396.
4 At [49].
non-compliance with the orders for specific performance. The advance and outstanding interest were demanded and, in due course, a further statutory demand for the advance and unpaid interest was served.
[12] DEL applied to set aside the second demand which resulted in my judgment of 23 September 2019. Because of the existence of Associate Judge Matthews’ specific performance orders, I held that the Agreement was under the supervision of the Court. In practice the ability to cancel no longer rested with the parties in the event of breach, but with the Court.
[13] I also referred to Associate Judge Matthews earlier conclusion that it was arguable that the term of the advance was for five years. At the date of the alleged cancellation, the advance was not a debt due, thus not an accrued debt that would be recoverable as a debt post cancellation.5 That meant that had the cancellation been valid, LFT would have had to seek damages or relief under s 43 of the Contract and Commercial Law Act 2017 (“the Act”). Neither of those steps had been taken. Accordingly, the demand was set aside.
[14] To meet the issues identified in the September 2019 judgment, LFT has bought a further application for summary judgment seeking an order setting aside the 18 December 2018 orders for specific performance and seeking an order in substitution that DEL pay damages to LFT for breaches of the Agreement. Further orders are sought cancelling the Agreement and in respect of costs.
[15] A preliminary issue arises in respect of the pleadings. The original statement of claim in this proceeding was filed on 4 July 2018. Relief sought in that statement of claim was aimed at requiring DEL to comply with its obligations to provide disclosure. No amended statement of claim has been filed seeking orders for cancellation or attempting to quantify damages or relief under s 43 of the Act. I will return to this point.
5 Brown v Langwoods Photo Stores Ltd [1991] 1 NZLR 173 (CA), and Garratt v Ikeda [2002] 1 NZLR 577 (CA) at [20].
[16] Affidavit evidence has been filed by the parties in relation to the issue of compliance with the orders. DEL asserts it has not failed to comply with the orders for specific performance. DEL also says it has continued to be charged and has paid interest on the funds advanced by LFT as required by the Agreement.
[17]Accordingly, it is necessary to examine:
(a)whether the terms of Associate Judge Matthews’ specific performance orders have been complied with;
(b)whether those orders should be discharged;
(c)if there was non-compliance with the orders by DEL, whether in addition to the orders being set aside, the Agreement should be cancelled by the Court for the breaches by DEL;
(d)what loss has LFT suffered as a result of the breaches that have occurred;
(e)how should the Court treat the outstanding advance arguably for a fixed term if the Agreement is cancelled.
The order for specific performance and compliance
[18] Associate Judge Matthews’ orders, as set out at [9] above, required DEL to provide access to its electronic accounting system.
[19] In respect of that issue, Mr Jones the director DEL, in his affidavit in respect of the present application said:
Mr Lookman had never, at any stage, had access to DEL’s accounting system and so would not be provided with it now. Notwithstanding this, even if DEL had agreed to provide this level of access, it was not possible to provide that to a person outside the company.
[20] This is in direct contradiction to what was ordered by Associate Judge Matthews. Mr Jones says the parties understood the reference to access to
DEL’s electronic accounting only required access to DEL’s bank accounts. There is some evidence that DEL attempted to give access to its bank accounts and, had DEL’s breach been limited to this issue, then LFT may have struggled to show that DEL’s conduct warranted vacating the specific performance orders.
[21] As set out at [7] above, the obligation under cl 10 of the Agreement was to each month hold a meeting; “… to provide information and be a focus for an overall view of the company …”. At least 24 hours prior to the meeting, the information set out in cl 10 of the Agreement was to be provided. Accordingly, that was an on-going monthly commitment. Associate Judge Matthews’ order, in respect of cl 10, required DEL to comply “in every respect” with the obligations in cl 10.
[22] DEL provided some information on 4 February 2019. However, it is common ground that it provided no further information after that date. This is a further clear breach for which no real explanation is offered.
[23] Further, LFT complains the information that was in fact provided did not go into the detail required by cl 10 and gives the example of accounts receivable and accounts payable, which cl 10 requires to be listed with their payment dates. The information provided simply gave totals.
[24] I do not need to go further. DEL failed to comply with Associate Judge Matthews’ orders in substantial and material ways. Even if there is some explanation in respect of access to the accounting system, there is none in respect of the other matters.
Discharge of the order for specific performance
[25] LFT sought specific performance orders to allow it to receive the disclosure it needed to consider whether to exercise the option to take up a 51 per cent shareholding in DEL. The shareholding option expired on 8 May 2019.
[26] While the Agreement does not state the provision of information to also cease on that date, the reality is that with the time for the exercise of the option having expired, the orders for specific performance become, to a real extent, redundant.
[27] Clause 10 of the Agreement provides it was to be at the monthly meetings that the possibility of further advances being made by LFT were to be discussed. The language used in cl 10 is that of an agreement to agree in relation to further advances. There is no absolute obligation to provide further funding in cl 10. In any event, the monthly supply of information ended with the disclosure in February 2019. Given the relationship between the parties, the prospect of a further agreement as to a further advance is nil.
[28] Given DEL does not accept the order in relation to access to its accounting system can be given effect to and that the order does not reflect what was in fact intended, it should be discharged.
[29] As to the second order, the obligation to provide the monthly information, Mr Ormsby, counsel for the first and second defendants, submitted rather than it being discharged, it should be varied to allow DEL time to comply. That proposal was only made during Mr Ormsby’s submissions at the hearing on 12 May 2020. That proposal is too little, too late, from DEL who has not complied with orders for specific performance after February 2019. It is no answer to say that LFT did not chase compliance with the order. Nor is it an answer that LFT purported to cancel the Agreement in May 2019. DEL did not accept the validity of that cancellation and so it was obliged to comply with the order and the terms of the Agreement.
[30] The orders now serve no real purpose. What the orders do, is provide an unintended protection to DEL for its failure to make its interest payments in a timely way. The day before the hearing of the present application, DEL paid interest arrears covering the first four months of 2020. There is an issue between the parties as to whether interest is to be paid in advance or in arrears, but leaving that to one side, the specific performance orders mean LFT cannot take steps to cancel the Agreement if such should be warranted by DEL’s failure to pay interest or comply with cl 10 in the future in a timely way. The specific performance orders remaining in place, ties LFT’s hands in respect of the remaining life of the Agreement. DEL’s position is the five year advance has the balance of its term to run, but at the same time its position is that the specific performance orders should remain in place, meaning LFT could not
exercise a contractual right to cancel, should it arise. Given those matters, I find that LFT is entitled to an order vacating the order for specific performance.
[31] I have not overlooked Mr Ormsby’s submission that aspects of LFT’s conduct stand against it being granted this relief. Mr Ormsby relied on Mr Lookman not co-operating in respect of gaining access to DEL’s bank account records and on Mr Lookman not agreeing to meet with the second defendant, Mr Jones, after the provision of the February 2019 information. Had criticism of DEL’s disclosure been limited to February 2019, then these points would have had more merit.
[32] The information provided by DEL was deficient, however, there is no evidence that Mr Lookman spelt out the deficiencies to DEL . However, that is overtaken by the fact that after February 2019, DEL did not make any further information available at all.
Consequence of DEL’s breach
[33] The Agreement between the parties has two aspects. The first is, what Associate Judge Matthews held was arguably an advance for a five year term. The second, that LFT had for a set time, an option to confirm its debt to equity.
[34] The disclosure of information was relevant to LFT deciding whether to take up the debt to equity option. It was in relation to that obligation that DEL was in breach.
[35] In my view, the damages that flow from DEL’s breach, relate to the loss of opportunity by LFT, to determine whether to exercise the option. Whether that opportunity had value depends on the value of the shares in DEL, which LFT could have secured for the price fixed in the Agreement. Had fulsome disclosure, as contemplated by the Agreement, been made then that would have allowed an assessment of the value of DEL, and LFT would have been able to make the informed decision contemplated by the Agreement.
[36] That is the chance or opportunity LFT has lost. LFT has not lost its advance. The advance remains in place and DEL has been charged and is paying interest, albeit at times well in arrears.
[37] Section 40 of the Act provides the provisions of the Act relating to cancellation have effect in place of the rules of the common law in equity governing the circumstances in which a party to a contract may rescind it, or treat it as discharged, for repudiation or breach.
Cancellation
[38] Has LFT met the onus on it of demonstrating that DEL does not have an arguable defence in relation to the issue of cancellation? I have determined DEL was in breach of its disclosure obligations and Mr Ormsby did not suggest otherwise. I will deal with liability in respect of that breach, separately. But does that breach entitle DEL to cancel or to ask the Court to declare the contract is at an end?
[39] Mr Downing, counsel for LFT, submitted the cancellation provisions in the Act have no application to whether LFT can cancel the contract, and submit that the issue of cancellation was entirely within the Court’s equitable jurisdiction. I do not accept that submission.
[40] A plaintiff who has obtained an order for specific performance may, in the face of a new or continued failure by the defendant to carry out his obligations, obtain a dissolution of the order for specific performance and cancel the contract.6
[41] Upon the making of an order for specific performance, the contract remains in effect and does not merge in the judgment.7
[42] The most common situation in which the issue of cancellation arises, where an order for specific performance has been made, is in relation to contracts for the sale of land. Non-compliance with an order for specific performance will, in addition to being a breach of the court order, be a breach of the contract – the contractual obligation remains binding on the parties. In a contract for the sale of land a refusal (or more likely an inability) to settle in the face of a specific performance order, will almost inevitably be a breach of contract that will enable the innocent party to cancel.
6 I C F Spry The Principles of Equitable Remedies (Sweet & Maxwell, United Kingdom 2014) at 329.
7 Johnson v Agnew [1980] AC 367 at [15].
Satisfying the cancellation provisions in the Act in such cases would generally not present any difficulty.
[43] Here, where the Agreement is arguably a five year advance with an option to convert to equity, LFT’s entitlement to cancel is, in respect of the breach I have found, less clear. It is arguable that the provision of the information was something impliedly agreed to be essential to the parties (s 37(2)(a) of the Act). The provision of the information was arguably a key feature of the Agreement.
[44] However, because LFT took the view that it did not need to identify the provision of the Act under which it could cancel, there is no pleading in that regard and no evidence aimed at supporting the particular statutory provision that might have applied. The assumption from LFT has been that non-compliance with the orders justifies cancellation. As I have said, in some cases, non-compliance with a court order will represent a new or continued breach of the contract that would justify cancellation, but it does not follow that such will always be the case.
[45] While there is a good argument that the non-provision of information may justify cancellation, the issue is not without difficulty. For example, had DEL provided the information as it was required to do, then LFT may well have elected not to take up the shares, in which case it would have been left with what was arguably a five year advance. That here, LFT did not take steps to enforce the order for specific performance stands against the provision of the information being essential. Rhetorically, having obtained the court orders why, in the face of non-performance did LFT not seek compliance with the court orders if receiving that information was essential to it.
[46] Reinforcing my view that the question of cancellation is not suitable for summary judgment, is the question of affirmation. There has been a continuing breach of the Agreement by DEL in not providing the monthly information. However, LFT has on a monthly basis, invoiced for the interest payable under the Agreement and that interest has been paid, albeit at times in arrears, but nonetheless invoiced, paid and accepted. Section 38 of the Act provides:
A party is not entitled to cancel the contract if, with full knowledge of the repudiation, misrepresentation, or breach, the party has affirmed the contract.
[47] An affirmation is final, and the affirming party cannot subsequently change his/her mind and cancel in respect of the breach.8
[48] There is authority to the effect that conduct which would otherwise amount to affirmation will not have that effect if made subject to express reservation of rights that follows a communicated election to cancel.9
[49] Evidence in respect of reservation of rights here is not clear. While LFT did on 8 May 2019 purport to cancel the Agreement, that cancellation was held to have been ineffective because of the Agreement being under the control of the Court. There is an argument that making the present application could operate as a reservation of the right to cancel, (as noted in the Law of Rescission), if that were the case then DEL would be able to raise an estoppel as a barrier to cancellation, arguing that DEL had enforced the right to interest and that interest had been paid.10 The argument being that LFT cannot at the same time approbate and reprobate the Agreement.
[50] Accordingly, I find that LFT has not demonstrated that DEL does not have a defence in respect of the issue of cancellation.
[51] For completeness, I note that while it appears from DEL’s conduct that it has repudiated its obligation to provide further information, that repudiation of itself does not, without more, entitle LFT to cancel.
[52]As noted by Robert Hollyman, referring to s 36(1) of the Act:11
Where, however, a party makes clear that he or she does not intend to perform some of the remaining obligations of the contract, this does not amount to repudiation. It is, however, a breach of the contract and whether a right
8 Burrows Finn and Todd Law of Contract in New Zealand (6th ed) LexisNexis, Wellington, 2018) at [18.3.2].
9 Kenny v Fenton [1971] NZLR 1(CA), Dominic O’Sullivan, Steven Elliott and Rafal Zakrzewski
The Law of Rescission (2nd ed, Oxford University Press, Oxford, 2014) at [23.85].
10 Dominic O’Sullivan, Steven Elliott and Rafal Zakrzewski, above n 10 at [23.86].
11 Kumar v Station Properties Ltd [2015] NZSC 34, [2016] 1 NZLR 99 at [57], followed in
Sun v Peninsula Road Ltd (in rec and in liq) [2016] NZCA at [82].
to cancel arises depends on whether the requirements of s 37(1) or (2) are met.12 (emphasis as per original)
[53] Here, DEL continues to meet its interest obligations albeit, as I have said, at times in arrears.
Conclusion and orders
[54] There is an order that the specific performance orders made by Associate Judge Matthews on 18 December 2018 are vacated.
[55] I considered entering judgment for liability against DEL in respect of breach of its obligation to provide information, but do not do so given such was not the subject of submissions. However, given Mr Ormsby’s acknowledgement of breach, DEL may well not be able to resist a finding of liability.
[56] DEL needs to carefully reassess how it approaches its obligations under this Agreement. It remains subject to the obligation to provide information in accordance with cl 10 of the Agreement. If it does not do so, then I anticipate it will receive a notice making time of the essence for compliance.
[57] If LFT wants to pursue the issue of cancellation in respect of breaches prior to this decision, then it will need to carefully consider the issue of affirmation and the section of the Act it relies on, and amend its statement of claim accordingly.
Costs
[58]Costs are reserved.
Associate Judge Lester
Solicitors:
McFadden McMeeken Phillips, Nelson Tavendale and Partners, Christchurch
12 Robert Hollyman Contract – Misrepresentation – A to Z of New Zealand Law (online ed, Thomson Reuters) at [18.M.7.2.7].
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