More to this Life Limited v Arcadia Homes Limited HC DN CIV 2008 412 001011

[2009] NZHC 2412

IN THE HIGH COURT OF NEW ZEALAND

DUNEDIN REGISTRY

CIV 2008 412 001011

BETWEEN  MORE TO THIS LIFE LIMITED

Plaintiff

ANDARCADIA HOMES LIMITED Defendant

Hearing:         14 September 2009

Appearances:  C R Andrews for Defendant/Applicant

C S Withnall QC  with C Lucas  for Plaintiff/Respondent

Judgment:      18 December 2009 at 11am

JUDGMENT OF ASSOCIATE JUDGE OSBORNE

As to Strike Out Application

Introduction

[1]      The defendant seeks to strike out the plaintiff’s claim.  The plaintiff asks the Court to hold the defendant to an agreement  to purchase the plaintiff’s  Wanaka property. On  Christmas Eve 2007  Mr  Andrew  Guest  signed  an  agreement  as  a director  of the defendant.  On 9 January 2009 the defendant’s solicitors wrote to the plaintiff’s solicitors indicating that the “directors of our   client company are unfortunately not satisfied as to the property purchase and   accordingly   the

Agreement is at an end”.  The contract was on the ADLS/REINZ form 8th  ed. 2006.

[2]      The  defendant  says  it   was  allowed  to  do  what  it  did  because  of  a  special provision in the contract which read:

THIS  AGREEMENT  IS   SUBJECT  TO  AND  CONDITIONAL  UPON Prime Approval of the Directors of Arcadia Homes Ltd 4pm on 25th  January

MORE TO THIS LIFE LIMITED V ARCADIA HOMES LIMITED HC DUN CIV 2008 412 001011  18

December 2009

2008 AND notifying the Vendor or the Vendor’s Solicitor in writing that this condition has been satisfied.  This condition is inserted for the sole benefit of the Purchaser.

[3]      Clause 8.7 of the contract is also relevant.  It provides:

8.7If this agreement is expressed to be subject either to the above 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 included   shall   do   all   things   which   may   reasonably   be necessary to enable the condition to be fulfilled by the date for fulfilment.

…

[4]      The plaintiff pleads, and for the purposes of this application I assume, that at

all material times the sole director  of the defendant company was Andrew Guest.

[5]      The plaintiff also pleads that at the time the defendant presented its offer to the plaintiff, the defendant’s agent represented to the plaintiff that:

(a)  The  reason  for  Special  Condition  15  had  to  do with  the  time  of year (Christmas time) and the consequent logistics of consulting with other directors apart from Mr Guest; and

(b) A   meeting   was   contemplated   between   Mr   Guest   and   other directors  which  was  to  take  place  on  or  before  the  25th  January 2008.

Striking out a pleading – the principles

[6]      The  defendant  invokes  the  Court’s  jurisdiction  to  strike  out  the  plaintiff’s claim  on  the  basis  that  it  discloses  no  reasonably  arguable  cause  of  action:  r  15.1 High Court Rules.

[7]      The principles applicable to this jurisdiction are:

(a)  The  pleaded  facts,  whether  or  not  admitted,  are  assumed  to  be true.  This  does  not  extend  to  pleaded  allegations  which  are entirely speculative and without foundation.

(b) The  cause  of  action  or  defence  must  be  clearly  untenable  –  the Court must be certain that the cause of action or defence cannot succeed.

(c)  The  jurisdiction  is  to  be  exercised  sparingly  and  only  in  clear cases.

(d) The  jurisdiction  is  not  excluded  by  the  need  to  decide  difficult questions of law, requiring extensive argument.

(e)  The Court should be particularly slow to strike out a claim in any developing area of law.

(See  Attorney  General  v  Prince  [1998] 1 NZLR 262 at 267, and McGechan  on Procedure HR 15.1.02).

The issues

[8]      Counsel  presented  submissions  dealing  with  detailed  aspects  of  contractual interpretation and contract law generally.

[9]      This is a defendant’s application for an order striking out the plaintiff’s claim

in its entirety upon the basis that it discloses no reasonably arguable cause of action. While  I  will  refer  to  some  of  the  detailed  submissions  shortly,  including  the recognition  that  this  jurisdiction  is  not  excluded  by  the  need  to  sometimes  decide difficult questions of law, in my judgment the peculiarities of Special Condition 15 and the circumstances surrounding it strongly suggest that the plaintiff has a story to tell which is legally arguable in the sense that when a trial Court hears the evidence it might find for the plaintiff’s contentions.

[10]     I turn to consider the following issues raised in this strike out application:

(a)       Issue 1 - Was there arguably a contract between the plaintiff and the defendant?

(b)       Issue   2   –   What   is   the   correct   interpretation   of   Special Condition 15 – did it apply if Mr Guest was the defendant’s sole director?

(c)Issue  3  -  Did  the  defendant  arguably  breach  its  obligations under Special Condition 15 and cl 8.7(2)?

(d)      Issue   4   –   What   is   the   correct   interpretation   of   Special Condition  15  –  was  the  power  of  the  directors  to  “approve” fettered and, if so, how?

Issue   1   -   Was   there   arguably   a   contract   between   the   plaintiff   and   the defendant?

[11]     A   first   and   fundamental   submission   made   by   Mr   Andrews   at   the commencement  of  the  oral  hearing  was  that  the  agreement  for  sale  and  purchase dated 24 December 2007 did not constitute a contract.   This was inconsistent with the  defendant’s  statement  of  defence  filed  on  12  February  2009  in  which  the defendant had admitted that the form of agreement constituted a contract for sale and purchase.       Mr  Andrews  accordingly  submitted  at  the  hearing  a  draft  “amended statement of defence” in which the defendant placed in issue whether a contract had been  formed.      Mr  Withnall  did  not  object  to  the  Court’s  consideration  of  the withdrawal of the concession as to a contract.

[12]     That  the  24  December  2007  document  constitutes  a  contract  is  plainly arguable:

(a)  It is signed by the vendor and purchaser companies through their directors;

(b) It is stated to be an agreement for sale and purchase of real estate.

(c)  It  contains  no  special  words  purporting  to  qualify  or  limit  its contractual status as an agreement.

(d) Rather  the  agreement  is  expressed  to  be  subject  to  one  special condition only, namely Special Condition 15.

(e)  Under cl 8.7 (because there is no other express provision) Special Condition 15 is subject to the provisions sub-clauses 8.7(1) – (6), including  the  statement  that  the  special  condition  is  a  condition subsequent.

(f)  Accordingly, no event referred to in Special Condition 15 altered the status of the agreement for sale and purchase as a document contractually binding the parties upon its signing.

[13]     I also observe that the defendant has on at least two occasions since the 24

December 2007 document was signed conceded that it constituted an agreement.  In the first letter from its solicitors dated 9 January 2008, when the defendant purported

to  bring  the  agreement  to  an  end,  the  defendant’s  solicitors  stated  “our  client  has asked  us  to  convey  its  thanks  to  your  client  for  entering  into  the  conditional agreement”.  Subsequently, when this proceeding was issued, the defendant through its solicitors in its statement of defence admitted without qualification that a contract had been formed on 24 December 2007.   With the law still unsettled as to whether subsequent  conduct  of  the  parties  is  admissible  to  construe  a  contract  –  see Attorney General  v  Dreux  Holdings  Limited  (1996)  7  TCLR  617  at  627  –  the plaintiff at trial may be able to pray in aid the subsequent conduct as a further aid to interpretation so as to confirm the contractual status of the document.

Issue  2  –  What  is  the  correct  interpretation  of  Special  Condition  15  –  did  it apply if Mr Guest was the defendant’s sole director ?

[14]     The  defendant  says  that  Special  Condition  15  on  its  proper  construction rendered the agreement conditional upon the approval or the director  or directors, as the case may be, of the plaintiff prior to 4pm on 25 January 2008.

[15]     The words “the approval of the director   or directors, as the case may be, of the applicant” are a purported amplification or clarification of the words in fact used

in Special Condition 15. The words  in  fact  used  are  “…Prime  Approval  of  the

Directors of Arcadia Homes Ltd.…”.

[16]     In his submissions, Mr Andrews put the defendant’s formulation of the plain meaning and proper construction of Special Condition 15 in a slightly different way again  –  he  submitted  that  Special  Condition  15  rendered  the  agreement  “entirely conditional upon the approval of the defendant’s directors (regardless of number of directors) and notice of approval, prior to 4pm on 25 January 2008”.

[17]     In support of both of the defendant’s constructions of Special Condition 15

Mr Andrews submitted that to read the reference to “the directors” as a reference to “the directors (if more than one) or director (if only one)” is the plain and natural meaning of the  words  actually used.   He submitted that this is  consistent with the approach, common in contracts, of reading the plural to include the singular and vis versa.  In this document (the 8th  Edition of the REINZ/ADLS Agreement) there is no “plural/singular” construction rule included in the interpretation provisions of cl 1. This may be contrasted with the statutory provisions concerning the interpretation of legislation: see s33 Interpretation Act 1999.

[18]     There   is   nothing   in   the   agreement   to   automatically  require   the   plural “directors”  to  be  read  as  referring  to  “directors  or  director”.   That  is  one  possible construction.   But  for  the  plaintiff  Mr  Withnall  says  that  there  are  other  possible constructions.   Put another way, he says that Special Condition 15 is ambiguous in relation to directors’ approval.

[19]     The  principles  applicable  to  the  interpretation  of  contractual  documents  are those stated in Lord Hoffmann’s speech in Investors Compensation Scheme Limited v  West  Bromwich  Building  Society [1998]  1  All  ER  98  at  114  to  115:  see  Boat Park Limited v Hutchinson [1999] 2 NZLR 74 at 81 to 82. I summarise the modern approach to contractual interpretation as follows:

(a)  Contracts   should   be   interpreted   according   to   common   sense principles by which any serious utterance would be interpreted in ordinary life.

(b) Interpretation  is  the  ascertainment  of  the  meaning  which  the document   would   convey   to   a   reasonable   person   having   all background   knowledge   which   would   reasonably   have   been available to the parties in the situation in which they were at the time of the contract.

(c)  The available “matrix of fact” or background includes absolutely anything  which  a  reasonable  person  would  have  regarded  as relevant   and   affecting   the   reasonable   understanding   of   the language in the document.

(d) The previous negotiations of the parties and their declarations of subjective intent are inadmissible background for the purposes of interpretation – they are available only for claims based on such matters as rectification and misrepresentation.

(e)  The  meaning  of  a  document  is  to  be  distinguished  from  the meaning of its particular words – the meaning of the document is what the parties using those words against the relevant background would reasonably have been understood  to  mean. This  may  involve  a  conclusion  that  the  parties,  for  whatever reason, have used the wrong words or syntax.

(f)  If the background indicates that something has gone wrong with the language of the document – if the detailed analysis of words in

a  commercial  contract  leads  to  a  flouting  of  business  common sense or absurd consequences - such construction must be made to yield to business common sense.

[20]     I deal with this issue in the interlocutory setting of a strike out application.  I

do not have, as a trial Judge would have, a full understanding of the background.   I have limited background through the affidavit evidence appropriately filed and in the form of the plaintiff’s pleadings of fact which in this context I take to be correct.

[21]     Such matters of background knowledge which would reasonably have been available to the parties at the time of the contract included:

(a)  The  form  of  wording  (in  Special  Condition  15)  referring  to  the approval  of  the  directors  came  from  the  defendant  (itself  or through its agent).

(b) Special  Condition  15  was  explained  by the  defendant’s  agent  as having  to  do  with  the  time  of  the  year  (Christmas)  and  the consequent  logistics  of  consulting  with  directors  other  than  Mr Guest.

(c)  The defendant’s agent explained that a meeting was contemplated between Mr Guest and other directors which was to take place on

or before 25 January 2008 (the final date for the approval referred

to in Special Condition 15).

[22]     Mr Andrews  submitted that it was also background knowledge available  to the  parties  (both  companies  at  the  time  having  sole  directors)  that  New  Zealand companies, under the Companies Act 1993, may have constitutions allowing them to operate under sole directors.

[23]     The purchaser had reference included in the contract (Special Condition 15)

to  the  defendant’s  “directors”. The  plaintiff  alleges  that  the  agent  spoke  of discussions  to  take  place  between  Mr  Guest  and  other  directors. I  was  asked  to accept  for  the  purposes  of  this  application  that  at  all  material  times  there  were  no other directors – Mr Guest was the sole director.   By way of some explanation for that  situation,  there  was  correspondence  from  the  defendant’s  solicitors  after  the event (on 31 January 2008) which contained the comment that “Mr Guest advised us earlier in January that his brother Bill had agreed to become a director   of Arcadia Homes Limited effective 3 January 2008”.

[24]     Against this background the Court  must  ask itself  on this strike out application  whether  Special  Condition  15  represented  the  agreement  of  the  parties

that Mr Guest would have a power of approval (or disapproval) in the event he was and  remained  the  sole  director  of  the  defendant  during  the  relevant  period. The answer is that the defendant’s interpretation is not the only arguable interpretation.

[25]     Having regard to the background known to the parties it is at least arguable that the intention of Special Condition 15 was, in the event that additional directors were appointed within the relevant period, to provide a period for approval by the directors.  It is unnecessary for me to determine in this interlocutory setting whether in such event the correct meaning of the clause would be that only the new directors would have the power of approval or that the new directors together with Mr Guest would as a body have the power of approval. It is at least arguable  against  the background of the way in which the defendant company was being described that the parties  to  the  contract  were  contemplating an  approval  process  involving  directors other than Mr Guest.  To clarify Special Condition 15 so as to conform with such an intention, one might reword Special Condition 15 to read:

15.      THIS   AGREEMENT   IS   SUBJECT   TO   AND   CONDITIONAL UPON  Prime  Approval  of  the  Directors  of  Arcadia  Homes  Ltd  (if there be more than one director) by 4pm on 25th  January 2008 AND notifying  the  Vendor  or  the  Vendor’s  Solicitor  in  writing  that  this condition has been satisfied.   This condition is inserted for the sole benefit of the Purchaser.

[26]     Such an interpretation of Special Condition 15 might be supported by these considerations:

(a)  It places some weight on the express use of the plural “directors” by the parties and may be said to give some emphasis to the literal meaning of Special Condition 15.

(b) It  also  places  emphasis  on  the  background,  as  stated  by  the defendant’s agent, which created an understanding that there were other directors to involve in an approval process.

(c)  It avoids what Mr Withnall submits   would   be   the   absurd consequence that in the form of what appears to be a contractual commitment (subject to one special condition) Mr Guest claims to

have reserved to himself alone (as well as with other directors if appointed) a right to disapprove a contract which he had signed on behalf of the company on 24 December 2007. It is questionable whether a reasonable bystander would have taken the vendor to be granting  Arcadia  Homes  Limited  what  was  effectively  a  one month  option  over  the   summer  period   for  no  consideration. (There was to be no payment of money by the defendant during the  period  before  confirmation,  with  the  10%  deposit  to  be  paid only upon confirmation).

[27]     This is not a case where the issue between the parties can be said to involve merely a  difficult  question  of  law  which  the  interlocutory Court  can  resolve  upon extensive  argument.   From  the  factual  information  before  the  Court  and  upon  the assumption  that  pleaded  facts  are  true,  the  defendant  fails  to  demonstrate  that  the plaintiff’s construction of the contract is clearly untenable.

[28] It is arguable that Special Condition 15 did not apply if Mr Guest, who signed the contract for the defendant, was the director of the defendant when the time arrived for the approval of the directors. It is then arguable for the reasons I come to at [31] below that the defendant acted in breach of its contractual obligations under cl 8.7(2).

[29]     Mr Andrews urged upon the Court the view that the Court would be finding

an  ambiguity  where  none  would  otherwise  exist  (thereby  ignoring  the  danger identified by the Court of Appeal in Potter v Potter [2003] 3 NZLR 145 at 156). In my view, nothing said by Fisher J for the Court in Potter v Potter cuts across the conclusion  which  I have  reached  above.   In  fact,  the  Court  of  Appeal’s  review  of four particular limits to Lord Hoffmann’s use of “background knowledge” reinforces the plaintiff’s case for interpretation in a particular way:

(a)  There is ambiguity in Special Condition 15 – it does not spell out what will happen if there is only one director.

(b) The  extrinsic  facts  to  which  I  have  referred  were  within  the mutual contemplation of the parties.

(c)  In finding that Special Condition 15 is ambiguous, I did not have regard to the subjective intentions of the parties.

(d) The  examination  of  the  discussions  which  occurred  in  the  pre- contract  negotiation  stage  has  been  for  the  limited  purpose  of ascertaining  what  objectively  observable  facts,  as  distinct  from intentions,  must  have  been  within  the  contemplation  of  both parties.

[30]     By reason of these conclusions as to arguable interpretation, it is unnecessary

for  me  to  consider  the  competing  submissions  presented  by  Mr  Withnall  and  Mr Andrews as to the objectively intended meaning of “prime” in the expression “prime approval”.       Despite  submissions  as  to  sense  which  might  be  made  of  the  word “prime”, one possibility is that “prime” was a typographical error for “prior”.  As it is,  the  existence  of  dispute  on  the  intended  meaning  of  “prime  approval”  may  be taken as reinforcing a measure of ambiguity in Special Condition 15 as a whole.

Issue  3  –  Did  the  defendant  arguably  breach  its  obligations  under  Special Condition 15 and cl 8.7(2)?

[31]     Given my finding on Issue 2 (that it is arguable that Special Condition 15 did not apply given that Mr Guest remained the sole director), it becomes arguable that the defendant’s refusal to settle the purchase was a breach of the contract – when Mr Guest as sole director purported to withhold approval it was a legally irrelevant act.

[32]     The plaintiff’s pleading also alleges both a failure to take reasonable steps to obtain approval and a breach of good faith (in purporting to appoint a second director who it was known would not approve the agreement).  The Court must accept the pleading in this interlocutory context. In the event the trial Court were to find that Special Condition 15 applied in the situation that Mr Guest was the only formally

appointed  director   there  is  then,  on  the  pleadings,  an  arguable  breach  of  the defendant’s duties.

Issue 4 – What is the correct interpretation of Special Condition 15 – was the power of the directors to “approve” fettered and, if so, how?

[33]     For the defendant Mr Andrews submitted that the Court is not permitted to scrutinise  on  an  objective  basis  whether  Mr  Guest  as  the  defendant’s  sole  director had good grounds for not approving the contract. As Mr Andrews put it  – “[approval] was also necessarily a subjective decision because it could not be subject

to   outside   scrutiny  on   any   objective   criteria”. He   related   this   mandate   for subjectivity to the fact that directors are a company’s directing mind and will.

[34]     By reason of my findings on Issues 2 and 3 above, it becomes unnecessary to decide  the  application  on  the  basis  of  this  fourth  issue. Had  it  been  necessary  I would have found against the defendant’s application on this issue also.

[35]     Mr Andrews submitted that there are striking similarities between the facts of this case and those in Horgan v Thompson (2004) 5 NZCPR 81 (Venning J).  In that case the agreement was  “conditional upon the agreement being confirmed by both parties…”.  Mr Andrews noted the use in the contract in the present case of the word “confirmation” in relation to when the deposit was payable,  as an indication that the parties  were  equating  “approval”  in  Special  Condition  15  to  “confirmation”  (as  in Horgan  v  Thompson). He  suggested  that  in  terms  of  the  distinction  drawn  by Venning J in that case, the contract in this case was similarly distinguishable from contracts where there is an obligation to take reasonable steps to achieve satisfaction of  the  condition  (such  as  solicitors’  approval  or  property  reports). Mr  Andrews submitted that pursuant to the Horgan v Thompson approach and in the absence of an ascertainable qualification or criterion, none should be imported.

[36]     Had I found that the  only  arguable  interpretation  of  Special  Condition  15

permitted Mr Guest as a sole director  to approve or disapprove the contract, I would

have  found  that  when  read  in  its  background,  Special  Condition  15  arguably imported some objective considerations.  I note particularly:

(a)       The required approval in this case was by directors of the defendant –

in Horgan v Thompson it was the parties to the contract who were to confirm the agreement (my emphasis).  Giving the approval power to the  directors is  not  necessarily  the  same. Mr  Withnall  captured a similar point in his suggestion that the concept of “prime  approval” may have been intended to limit the subject matter to be considered by the directors.

(b)Counsel for the plaintiff in Horgan v  Thompson  submitted  that “correctly interpreted the [confirmation] clause imports an obligation on  the  defendant  to do all things necessary to give effect  to  the transaction” (see Horgan v Thompson at [26]). Venning J found (at

[36]) that it  was  not  directly  relevant  to  interpret  the  clause as  a condition subsequent or  a condition precedent as the contract involved  a  bargain  including  a  condition  that neither  party  was obliged to complete unless both confirmed.  There is no indication in the judgment that the effect of cl 8.7(2) was explored.  If, as I find at least arguable in this case, cl 8.7(1) constitutes Special Condition 15 a condition subsequent, the defendant accepted an express obligation to “do  all  things  which  may  reasonably  be  necessary  to  enable  the condition to be fulfilled by the date for fulfilment”.   The parties are not entitled to read the standard clause down.   Even if it is accepted that the right of approval may contain a large measure of subjective consideration,   the   parties   are obliged to do such things   as   are reasonably  necessary  to  enable  the  approval  to  be  considered  and given or denied as the case may be.   This might involve at the least submitting all relevant information to the directors.   It may arguably involve the directors having to receive it and act in good faith to make a decision (rather than say closing their minds).

(c)       In  North  Shore  Demolitions  Limited  v  McKay  [1978] 1 NZLR 454, Moller J dealt with a clause in an agreement for sale and purchase which made the agreement conditional upon a local authority’s consent “on terms and conditions acceptable to the vendor”. His Honour rejected the two possible extreme interpretations – that the right of rejection was purely objective or that the right was purely subjective. He found the clause instead was subject to an implied term that the purchaser had to act bona fide in reaching his decision. The express words of cl 8.7(2) contain a not dissimilar but express obligation – to do all things necessary. The words of that obligation are to be given effect. It is not appropriate in this interlocutory application to seek to resolve what is the precise effect of the words in this contract against the particular background of the contract. It suffices that the plaintiff’s case is arguable. It then becomes a matter properly for trial.

Result

[37]     The  defendant  has  not  demonstrated  that  the  plaintiff’s  cause  of  action  for breach of contract is clearly untenable.   The application to strike out the plaintiff’s claim must fail.

Order

[38]     I dismiss the application to strike out the plaintiff’s statement of claim.

Costs

[39]     Costs  must  follow  the  event  and  my tentative view is that  these  should  be allowed on a 2B  basis against  the defendant. If that  indication is not  acceptable, memoranda may be filed up to five working days apart (3 pages maximum).

Timetabling

[40]     If the timetabling directions made on 27 May 2009 have been complied with, inspection of documents will have been completed.

[41]     It  does  not  appear  from  the  Court  file  that  the  defendant  has  answered  the notice to answer interrogatories dated 28 August 2009.  If that has not been attended to, the answers should now be provided without delay.

[42]     The Court assumes, having regard to [3](c) of the Minute dated 27 May 2009, that there are no other interlocutory applications anticipated.

[43]     I therefore direct  counsel to confer  with regard to matters pertaining to the hearing   and   whether   a   Judicial   Settlement   Conference   (or   alternative   dispute resolution) should be convened.

[44]     I    adjourn    the    proceeding    to    a    case    management    conference    at

9.30am 4 February 2010 by telephone.

[45]     Counsel  are  directed  to  file  three  working  days  before  that  conference preferably  a  joint  memorandum  dealing  with  the  readiness  of  the  proceeding  for hearing. The  memorandum  is  to  deal  with  the  estimated  duration  of  hearing; allocation  of  a  hearing  date;  and  timetable  directions  for  trial. It  is  to  contain  a statement of the factual and legal issues for trial.

[46]     If  counsel  are  able  to  file  the  memorandum  earlier  and  to  suggest  suitable, agreed  directions  then  those  directions  may  be  determined  on  the  papers  and  the February conference vacated.

Solicitors:

Lucas & Lucas, Dunedin

McVeagh Fleming, Auckland