Private Accounting Trustee Limited v Flavell
[2020] NZHC 2945
•12 November 2020
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2020-404-000012
[2020] NZHC 2945
BETWEEN PRIVATE ACCOUNTING TRUSTEE LIMITED
First Plaintiff
SUSAN CARREL MACKEN and JACK
LEE PORUS in their capacity as executors and trustees of THE ESTATE OF PAMELA ANNE DRAKE GRAVNING
Second Plaintiffs
AND
CHRISTOPHER PHILLIP FLAVELL
Defendant
ARACAPITAL INVESTMENTS PTY LIMITED
Second Defendant
COSY DELL TRUSTEE LIMITED and DUNEDIN INDEPENDENT TRUSTEES
LIMITED in their capacity as trustees of THE COSY DELL TRUST
Third Defendants
FLAVELL FAMILY TRUSTEE LIMITED and HAMLET CAPITAL PTY LIMITED in
their capacity as trustees of THE FLAVELL FAMILY TRUSTFourth Defendants
Hearing: 11 August 2020 Appearances:
S Russell and D van Hout for the Plaintiffs T Sycamore for the Defendants
Judgment:
12 November 2020
JUDGMENT OF ASSOCIATE JUDGE GARDINER
PRIVATE ACCOUNTING TRUSTEE LTD v FLAVELL [2020] NZHC 2945 [12 November 2020]
This judgment was delivered by me on 12 November 2020 at 1.30 p.m. pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date.......................................
Introduction
[1] This is an application by the plaintiffs for summary judgment. The plaintiffs seek orders for the first defendant to pay the first plaintiff (or in the alternative the second plaintiff) an amount said to be owing under a Deed of Acknowledgement of Debt (“the Deed”) signed by the first defendant. The plaintiffs also seek orders that the second defendant return to the first plaintiff certain shares it holds as a nominee shareholder for the first plaintiff. The application is opposed by the defendants, except for the return of shares.
[2] The parties dispute the purpose and effect of the Deed. The plaintiffs contend that the Deed created a standalone legal obligation on the first defendant to pay the debt to the plaintiffs on demand. The defendants say that, viewing the Deed objectively in its factual context, it is so unclear what the parties intended that the Deed is invalid for uncertainty.
Facts
[3] Pamela Gravning and the first defendant, Mr Flavell, were long-term friends and acquaintances. Mr Flavell is an investment advisor and banker.
[4] Between 2010 and 2016, Mrs Gravning advanced to Mr Flavell over $2 million for Mr Flavell to invest in shares, properties and a fishing quota. In their dealings, Mrs Gravning dealt directly with Mr Flavell. The majority of the various investment assets were held by Mr Flavell’s investment entities. The terms of these advances were not formally documented.
[5] Mrs Gravning was diagnosed with a terminal illness in late 2016. Mrs Gravning wanted to formally document the various advances Mrs Gravning had provided to Mr Flavell over the years before she passed away.
[6] The Deed was signed on or around 21 June 2017 between Mrs Gravning and Mr Flavell. Neither side had legal representation or review when drafting or formalising the Deed, although Mr Flavell accepts that he entered it freely.
[7]The key parts of the Deed are:
PARTIES
PAMELA ANNE GRAVNING (“Lender”)
CHRISTOPHER PHILLIP FLAVELL (“Borrower”)
INTRODUCTION
A.The Lender has advanced or agreed to advance to the Borrowers the sum of NZ $2,136,000 per the attached schedule.
B.The parties wish to record the terms of the advance.
OPERATIVE PROVISIONS
1.The sum of NZ$2,136,000, advanced by the Lender to the Borrower, shall remain outstanding as a debt (“Debt”) payable by the Borrower to the Lender on demand.
2.The Lender may at any time demand that the Borrower repay the Debt in whole or in part.
3.The Borrower shall pay on demand to the Lender interest on the Debt calculated during the preceding 12 months. The applicable interest rate if demanded will be 8%.
4.Any demand made under this deed may be made only by the Lender. The ability to make demand shall not be transferrable to any other person except as
5.Any such demand:
(a)shall be made in writing by letter and be signed by the person making demand;
(b)shall be sent to the Borrowers by scanned attachment to email;
(c)shall not be effective until received by that Borrower;
(d)shall be deemed to be received:
i.on the date sent by email to the email address of the borrower, being [email protected]
provided that any notice or communication received or deemed to be received after 5 pm on a working day in the place to which it is sent, or on a day which is not a working day in that place, shall be deemed not to have been received until the next working day in that place.
6.The Debt shall include any further advances which may be made by the Lender to the Borrower after the date of this deed. The words “further advances” mean such further sum or sums advanced or credit or other accommodation provided by the Lender to, or at the request of, the Borrower.
7.The borrower agrees that the debt in relation to each investment is repaid, prior to any profit distribution from the related investment being made to either the borrower or the lender.
8.The borrower agrees that the Colmax Debt is a moral obligation and payment for this debt will be received only upon realisation of the Colmax asset.
[8] The first plaintiff, Private Accounting Trustee Ltd, is the corporate trustee of Silver Fern Property Trust (“the SFP Trust”). The SFP Trust was established by Mrs Gravning in 2014 to hold her commercial assets for the benefit of her three children and their descendants, who are the sole beneficiaries of the SFP Trust. The directors of Private Accounting Trustee Ltd are Susan Carol Macken and Megan Patricia Shaw. Ms Macken and Ms Shaw drafted the Deed.
[9] Sadly, Mrs Gravning passed away on 3 September 2017. Shortly after, Ms Macken and a Jack Lee Porus (together “the Executors”) were appointed as the executors and trustees of the estate of Mrs Gravning. The Executors are the second plaintiffs in this proceeding.
[10] The second defendant, AraCapital Investments Pty Ltd, is an Australian investment management company owned and controlled by Mr Flavell.
[11] The third defendants, Cosy Dell Trustees Ltd and Dunedin Independent Trustee Ltd, are the trustees of the Cosy Dell Trust, one of Mr Flavell’s personal trusts.
[12] The fourth defendants, Flavell Family Trustees Ltd and Hamlet Capital Pty Ltd, are trustees of the Flavell Family Trust, another of Mr Flavell’s personal trusts.
[13] Shortly after signing of the Deed, Mrs Gravning purported to assign the rights to recover the outstanding debt owed to Mrs Gravning under the Deed (“the Debt”) to the SFP Trust. Mr Flavell does not accept that the Deed was properly assigned. For the purposes of the summary judgment, and while reserving their position if the matter proceeds to trial, the plaintiffs advance their application on the basis that the Executors (the second plaintiffs) claim the right to repayment of the Debt.
[14] The SFP Trust and the Executors have written to Mr Flavell requesting that the Debt is repaid. Mr Flavell has not repaid the Debt.
[15] The SFP Trust has also formally requested that Mr Flavell transfer the Ecobiotics shares to the first plaintiff. Mr Flavell has agreed to do so, but the parties cannot agree on the price.
Summary judgment principles
[16] The plaintiffs apply for summary judgment under r 12.2(1) of the High Court Rules 2016. The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; there is no real question to be tried.1 The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated.2 The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, including where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable.3 In the end, the Court’s assessment of the evidence is ultimately a matter of judgement. The Court may take a robust and realistic approach where the facts warrant it.4
1 Pemberton v Chappell [1987] 1 NZLR 1 (CA) at 3.
2 MacLean v Stewart (1997) 11 PRNZ 66 (CA).
3 Eng Mee Yong v Letchumanan [1980] AC 331 (PC) at 341.
4 Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).
Issues
[17] The parties disagree on the intended and actual effect of the Deed. The plaintiffs claim that the Deed was intended to, and does, give Mrs Gravning, her estate, and/or the SFP Trust the right to enforce repayment of the advances against Mr Flavell personally following Mrs Gravning’s death. The terms and status of the original arrangements between them are largely irrelevant — the plaintiffs say the Deed sets up a new, standalone legal obligation on Mr Flavell personally.
[18] The defendants dispute that the parties intended this outcome. They say that the Deed was not intended to, and does not, establish a legal obligation on Mr Flavell personally to repay the advances on demand. Mr Flavell says that the Deed was only intended to be a record, in one place, of all the amounts owing. The defendants submit that, looking at the Deed objectively in context, it is so uncertain what the parties intended, that the Deed should be declared void or, in the alternative, not decided on summary judgment.
[19]Therefore, the issues for determination in this application are:
(a)Whether the Deed create a legally binding and enforceable obligation on Mr Flavell to pay the outstanding advances on demand. That is—
Did the parties intend the Deed to be binding and enforceable?
(ii)Is the correct interpretation of the Deed that it creates an enforceable legal obligation on Mr Flavell personally to repay the debt on demand? (These two sub-issues involve overlapping considerations in this case).
(b)If so, what sum is due and owing by Mr Flavell under the Deed?
Also at issue is the value at which the Ecobiotics shares should be transferred.
Plaintiffs’ submissions
Did the parties intend the Deed to be binding and enforceable?
[21] The plaintiffs rely on the Court of Appeal’s formulation of the law of contract formation in Fletcher Challenge Energy Ltd v Electricity Corp of New Zealand Ltd:5
[53]The prerequisites to formation of a contract are therefore:
(a)An intention to be immediately bound (at the point when the bargain is said to have been agreed); and
(b)An agreement, express or found by implication, or the means of achieving an agreement (eg an arbitration clause), on every term which:
(i)was legally essential to the formation of such a bargain; or
(ii)was regarded by the parties themselves as essential to their particular bargain.
A term is to be regarded by the parties as essential if one party maintains the position that there must be agreement upon it and manifests accordingly to the other party.
[54] Whether the parties intended to enter into a contract and whether they have succeeded in doing so are questions to be determined objectively. In considering whether the negotiating parties have actually formed a contract, it is permissible to look beyond the words of their “agreement” to the background circumstances from which it arose — the matrix of facts. This can include statements the parties made orally or in writing in the course of their negotiations and drafts of the intended contractual document.
[55] The established rule is that in interpreting a contract it is permissible to look to the factual matrix, but that evidence of negotiations and statements of subjective intention must be disregarded. For present purposes we have no need to reconsider that rule (noting, however, Professor David McLauchlan’s renewal of his criticisms of it in his article “A Contract Contradiction” (1999) 30 VUWLR 175). But it is inapplicable when the issue is, instead, one of contract formation. …
[56] It is also permissible when considering contract formation (or rectification) to look at subsequent conduct of the parties towards one another, including what they have said to each other after the date of the alleged contract (Australian Broadcasting Corp v XIVTH Commonwealth Games Ltd (1988) 18 NSWLR 540 at 550). However, as Gleeson CJ observed in the Australian Broadcasting case (at 550), the position is by no means so clear in connection with internal memoranda, communications of one party with a third party or statements of subjective intention made by individuals in the course of giving evidence. We have proceeded on the basis of treating such
5 Fletcher Challenge Energy Ltd v Electricity Corp of New Zealand Ltd [2002] 2 NZLR 433 (CA).
material as admissible but we share that reservation, particularly in relation to direct expressions of subjective intent. …
…
[58] The Court has an entirely neutral approach when determining whether the parties intended to enter into a contract. Having decided that they had that intention, however, the Court's attitude will change. It will then do its best to give effect to their intention and, if at all possible, to uphold the contract despite any omissions or ambiguities …
[22] The plaintiffs say that the parties intended that Mr Flavell would be personally bound by the Deed and that it would be enforceable against him. The plaintiffs rely on the words of the Deed (which they say are clear and unambiguous), the background context, and the subjective intentions of the parties.
As to the words of the Deed, they highlight its operative provisions, including:
(a)Clause 1: “The total sum of NZD $2,136,000 advanced by the Lender to the Borrower shall remain outstanding as a debt (“Debt”) payable by the Borrower to the Lender on demand.”
(b)Clause 2: “The Lender may at any time demand that the Borrower repay the Debt in whole or in part.”
(c)Clause 3: “The Borrower shall pay on demand to the Lender interest on the Debt calculated during the preceding 12 months. The applicable interest rate if demanded will be 8%.”
(d)Clause 5: which sets out the mechanics of how a demand can be made.
The “Lender” is defined as Mrs Gravning and the “Borrower” as Mr Flavell.
[25] The plaintiffs maintain that it is clear from the words of the Deed that new obligations are being imposed on Mr Flavell. They point to the fact that the obligation to pay 8 per cent interest is not found in the template summaries of the original agreements.
[26]The plaintiffs say that the factual matrix confirms this intention:
(a)Mr Flavell had already summarised each advance and the respective investments in the templates he had provided to Ms Macken. If all that was intended was a summary of the status of each advance, the completed templates would have fulfilled that purpose.
(b)Mr Flavell is a sophisticated banker who would not sign a document that purported to create a binding obligation if he did not understand it and intend to bound. He could have inserted a clause saying that it was a summary only and not personally binding on him, but he did not.
(c)The Deed was the product of six months of negotiations. If Mr Flavell did not intend to be bound, one would expect him to have said that in one or other of the emails preceding the Deed, but he did not.
(d)In his evidence, Mr Flavell acknowledges that he and Mrs Gravning were very close friends and one-time companions. In the circumstances of Mrs Gravning’s terminal diagnosis, it is quite conceivable that Mr Flavell would have intended to assume personal liability for the advances to give her the comfort she required, before she died.
[27] As to evidence of the parties’ subjective intentions, the plaintiffs point to an email from Ms Shaw to Mr Flavell dated 26 May 2017, around one month before the Deed was signed. That email reads as follows:
During the meeting we reviewed the spreadsheet (attached) you have worked on with Pamela showing the PDG-Silver Fern Investment Returns with the objective of getting agreement on the amounts due. I have outlined our thoughts in relation to the loans and repayment below and shown adjustments on the spreadsheet:
Balance due
- As per your spreadsheet the amount due is NZ$2,287,000. This includes what Pamela and you agreed to be a moral obligation for the Colmax Investment of $525,000 (Au $500,000 x 1.05).
- Our financial statements show that Station Mews Apartments owes Pamela $620,000 because she deposited further funds to repay a loan after the sale of Belle Terrace. Station Mews also owes Pamela $50,000 personally.
- There is debt in Station Mews of $189,000 owed from Cosy Dell, Great King Street Apartments and the Flavell Family Trust.
- You have repaid debt to date in Station Mews Apartments Ltd of
$195,000.
- You have repaid debt via PDG Consulting of $145,000.
- So we believe the amount outstanding at today’s date is NZ$2,406,000.
- Rather than have this move with the exchange rates we are happy to fix the above amount in NZD as it stands.
We propose to assign the amount owing to the Silver Fern Property Trust so that as Trustees we are able to account for the fund’s movement.
The loan will be interest payable at 8% if demanded (this is required from a tax perspective in NZ) and principal payments as outlined below. However Pamela does not intend to demand repayment.
Repayment
We would also like to firm up the arrangements around the repayment of the debt because as you know, we are dependent on this to assist the cash position of the Trust and Pamela’s children going forward.
We understand that in relation to some of their assets, we will realise funds when they achieve IPO status, so have tried to build this into our calculations.
We would like to see a repayment of the debt as follows:
- Increase the current repayments to $20,000 per month. This will provide us with a reliable sum to run the Trust operations going forward.
- In Station Mews apartments the loan repayments from this entity will be included as a drawing from Station Mews to you and then a transfer from you to Pamela.
- We recognise the Colmax debt as a moral obligation and would only expect repayment of this upon the realisation of the Colmax asset.
- The debt for the Ecobiotics asset ($315,000) is to be repaid prior to any share of profit in this asset. Once this is paid you can choose to use your remaining share of the profit to pay down any other debt owing. This will apply to all other investment assets in the Trust. If the asset is realised under the value of the loan, then the remaining loan will be repaid over time from the monthly repayments above.
(Emphasis added)
[28] The plaintiffs submit that this email is evidence that the parties intended to enter into a new binding contract with new legal obligations. It is clear that it was intended that Mrs Gravning, or her estate, would have the legal power to demand
payment of the full outstanding balance, but that she did not, at that stage, intend to exercise it. Instead, the intention was to allow repayment over time.
[29] As to Mr Flavell’s evidence in this application as to what he intended, the plaintiffs submit that the Court can ignore inherently improbable propositions. As in Jowada Holdings Ltd v Cullen Investments Ltd,6 the words of the Deed and the factual matrix objectively assessed does not support Mr Flavell’s evidence on his intention.
Is the correct interpretation of the Deed that it creates an enforceable legal obligation on Mr Flavell personally to repay the debt on demand?
[30] As the Court of Appeal confirmed in Fletchers, if the Court concludes that the parties intended to enter into a contract, it will do its best to give effect to that intention, and, if possible, uphold the contract despite any omissions or ambiguities.
[31]The plaintiffs also rely on the case of Malthouse Ltd v Rangatira Ltd:7
[19] Briefly, these authorities confirm that New Zealand courts take an objective approach to contractual interpretation which does not limit the background material available to interpret the contract. That material must however be reasonably relevant, and it must be objective; evidence of a party's individual subjective intentions is inadmissible to interpret the contract.
…
[21] As the Supreme Court later clarified in Firm PI, the text of the contract remains “centrally important”. The Court there noted that:
If the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant.
…
[22] The provisional meaning derived from the language of the contract is cross-checked against the contractual context. As Tipping J explained in Vector:
[24] In some recent cases it has been suggested that contractual context should be referred to as a “cross-check”. In practical terms that is likely to be what happens in most cases. Anyone reading a contractual document will naturally form at least a provisional view of what is words mean, simply by reading them. That view is, in a sense, then checked against the contractual context. This description
6 Jowada Holdings Ltd v Cullen Investments Ltd CA248/02, 5 June 2003.
7 Malthouse Ltd v Rangatira Ltd [2018] NZCA 621.
of the process is valid, provided the initial view is provisional only and the reader is prepared to accept that the provisional meaning may be altered once context has been brought to account. The concept of cross-check is helpful in affirming the point made earlier that a meaning which appears plain and unambiguous on its face is always susceptible to being altered by context, albeit that outcome will usually be difficult of achievement …
[32] The plaintiffs say that the essential terms of the contract are clear: the amount of the debt, the fact that it is repayable on demand and the interest repayable. The factual matrix is relevant as a cross-check. The plaintiffs’ submissions on the factual matrix are set out in the following section.
If the Deed is binding and enforceable against Mr Flavell, what sum is due and owing?
[33] The Debt at the time of the Deed was signed as $2,136,000. When the plaintiffs filed their application for summary judgment, the amount sought was
$1,096,000 plus interest in the sum of $170,880. The following amounts were credited from the total debt for the purposes of the summary judgment:
(a)$525,000 in relation to the Colman advance as that portion of the Debt was noted in the Deed as not being payable on demand;
(b)$200,000 in relation to the Plexure advance as the plaintiffs had recovered the Plexure shares from the defendants and that extinguished that portion of the debt; and
(c)$315,000 in relation to the Ecobiotics advance — the plaintiffs seek an order that the defendants transfer these shares and, if that order is made, it will extinguish that portion of the Debt.
[34] At the hearing, Mr Russell advised that the amount payable by Mr Flavell should be further reduced to sever the Station Mews advance, in recognition of the that fact that it was not advanced by Mrs Gravning or received by Mr Flavell. That reduces the sum sought to $696,000 plus interest of $55,680.
Defendants’ submissions
Did the parties intend the Deed to be binding and enforceable?
[35] The defendants do not dispute that the funds were advanced or that they are outstanding. Mr Flavell says in his evidence:
First, there is no dispute that I signed the Deed; that I did so consciously and freely; or that the sums stated in the Deed and this proceeding are outstanding
– there never has been any real dispute about those matters.
[36] But the defendants maintain that the debt obligations created by the advances were owed by the various “borrower entities”, being one or the other of the second, third or fourth defendants. The purpose of the Deed was simply to be a “statement of all the debt obligations, created by the advances, to the various borrower entities, recorded in on place”. Mr Flavell says that “it was never intended that the Debt was separately repayable on demand other than by the various Borrowers and in accordance with the various arrangements, because Pamela knew I personally wouldn’t be able to pay without liquidating the associated investments”.
[37] The defendants point to a range of problems with the Deed and the plaintiffs’ case as to what the parties intended by it:
(a)The Deed defines the “Borrower” as Mr Flavell, but Mr Flavell was not the “borrower” under the original agreements. The borrowers were the various Flavell entities. The Deed defines Mrs Gravning as the “Lender”. But not all advances were made by Mrs Gravning. The Station Mews advance was made by the SFP Trust. Therefore, the parties to the Deed are not the parties to the original agreements/loans.
(b)The Deed makes no mention of the original agreements or their parties, nor does it indicate that Mr Flavell was agreeing to stand as a separate debtor for the same debts or be their guarantor.
(c)The Deed effectively varies the terms of the original agreements. For example, implicitly, the borrower’s right to determine when shares in each case would be sold was being extinguished. But there is no
suggestion in the Deed that the parties contemplated any variation of those agreements (other than an inference arising from cl 7).
(d)If the Deed was intended to create a separate standalone obligation between Mrs Gravning and Mr Flavell as the plaintiffs allege, there was no obligation on Mrs Gravning to pass any repayment of the Station Mews capital to the SFP Trust, so repayment of that “loan” would not extinguish that “debt”.
(e)There is no mention by Ms Macken or Ms Shaw, during their dialogue with Mr Flavell which led to the Deed, of an intention to create a new legal obligation. In the final drafts of the templates completed by Mr Flavell, the “debtors” are the Flavell entities, not Mr Flavell personally. The defendants say that there is no evidence from Ms Macken or Ms Shaw that the parties went on from there to deliberately establish a new standalone personal liability. The email from Ms Shaw of 26 May 2017 could be read to suggest that Mrs Gravning was intending to create new obligations but did not intend to enforce them. Mr McIntosh, for Mr Flavell, submitted that he would want to cross-examine Ms Shaw on what she meant by that email.
(f)If, despite these and other problems, it was intended that the Deed created a separate, personal liability for Mr Flavell, it is not clear from the Deed what would happen to the original loan agreements and the investments if the Debt is demanded and paid.
[38] The Defendants say it is a relevant part of the factual matrix that the Deed was drafted by Ms Macken and Ms Shaw, neither of whom are lawyers and neither of whom were privy to the original arrangements between Mrs Gravning and Mr Flavell. Nor did they or Mrs Gravning or Mr Flavell receive legal advice. The result is that the drafters may have intended the legal outcome they assert, but they did not know how to achieve that at law and failed to do so. On the current evidence, it is not clear that the parties themselves (Mrs Gravning and Mr Flavell) understood or intended that
outcome. The defendants say that this is the kind of rare situation envisaged where it is so uncertain what the parties intended that the agreement must be declared void.8
[39] Alternatively, Mr McIntosh submits that whether the Deed is void for uncertainty cannot be decided on summary judgment. He submits that there should be cross-examination of Ms Macken and Ms Shaw on the drafting of the Deed and on what is meant by some of its clauses.
[40]The key aspects of the plaintiffs’ reply to the issues raised above is:
(a)It does not matter that the “Borrower” under the Deed (Mr Flavell) is not the borrower under the original agreements. There was nothing to preclude Mr Flavell from assuming a separate standalone legal responsibility through the Deed to pay the debts himself, and this is what he did. The result is that the estate and/or Trust could choose to either enforce the original informal agreements against the Flavell entities or enforce the Deed against Mr Flavell himself. If the plaintiffs are successful in enforcing the Deed, the principle of full satisfaction means that the debtor entities will have a complete defence against any claim the plaintiffs may have in relation to the same debts. The only remaining liability for the Flavell entities will be for any profit share obligations owing to the estate and/or Trust under the original informal agreements.
(b)As to the Station Mews advance, when the Deed was drawn up, it was intended that all the debts would be assigned to the SFP Trust, so this point does not impinge on the parties’ intention to be bound. Despite that, for summary judgment purposes, the plaintiffs have removed this loan balance from the debt claimed.
8 Svenson v Ngakuru HC Whangarei CIV-2006-488-302, 1 March 2007.
Is the correct interpretation of the Deed that it creates an enforceable legal obligation on Mr Flavell personally to repay the debt on demand?
[41] If the Court finds that the parties did intend to create a binding obligation, Mr McIntosh submits that the Deed only makes sense if it is read as Mr Flavell signing as principal of the various debtor entities (not personally). He could enter into the Deed to confirm the outstanding debts and vary the original agreements between Mrs Gravning and the Flavell entities.
[42] Again, Mr McIntosh submits that in a case such as this where there is an arguable alternative interpretation to a contract, summary judgment is inappropriate, and the Court would benefit from oral examination of the original loan terms, the drafting of the Deed, and Ms Shaw’s email to Mr Flavell dated 26 May 2017.
If the Deed is binding and enforceable against Mr Flavell, what sum is due and owing?
[43] The defendants do not dispute the plaintiff’s calculation, except for the Ecobiotics shares.
Analysis
[44] I find that the plaintiffs’ demand for repayment under the Deed is not suitable for summary judgment, for the following reasons.
[45] First, the factual matrix is relevant to determining whether the parties intended the Deed to create a new, binding legal obligation by the Deed, and to its interpretation. The original informal agreements relating to each advance are a critical part of the factual matrix. The “Debt” to which the Deed relates is the sum of the advances made by Mrs Gravning to Mr Flavell over the course of 2011 to 2015, less any amounts repaid. Those advances and the amounts outstanding are set out in an attachment to the Deed. Even if the Deed was intended to create a standalone legal obligation, the terms of the original informal agreements are relevant.
[46] As the original informal agreements were not the focus of this application, it is not clear that I have the full evidential record before me. Mr Flavell does not give any detailed evidence about the terms of the original advances. The only evidence of the
original informal agreements is found in the affidavit of Ms Macken. It constitutes completed “template” descriptions of the terms of each advance, which Mr Flavell completed at her request when she was looking to confirm what was owing to Mrs Gravning, before she died. For the purposes of the summary judgment, Mr Russell, for the plaintiffs, did not dispute the terms as set out in those templates. That includes the description of the borrower entities as the various Flavell entities (as opposed to Mr Flavell personally). Mr McIntosh submitted that to be the case; Mr Russell was prepared to accept that for the summary judgment application only. However, that issue would benefit from full examination at the trial, including cross-examination of Mr Flavell. I could conceive an alternative view, given that Mrs Gravning dealt with Mr Flavell personally in relation to each investment. But I am unable to make a finding on this point based on the limited evidence and submissions on this point presently before me.
[47] Secondly, there are some aspects of the factual matrix which raise doubt about whether Mr Favell and Mrs Gravning intended to create a new, standalone legal obligation on Mr Flavell personally, payable on demand. This is despite the apparently clear words of the Deed.
[48] When Ms Macken began the dialogue with Mr Flavell on Mrs Gravning’s behalf, it appears that the objective was to gather information from Mr Flavell about each advance and agree the record. In her first email, Ms Macken said that the goal of the exercise was “to have the templates completed and agreed amongst ourselves by the end of the week, and then we should discuss and finalise with PDG [that is, Mrs Gravning] the following week.”
[49] Mr Flavell completed and returned two increasingly detailed versions of the template for each investment. The completed templates include the amount advanced, the date, the investment, the holding vehicle, and the profit share or fee arrangement. Based on those templates, except for the Station Mews investment, each agreement involved Mrs Gravning advancing a sum of money to Mr Flavell to be invested in shares, or in one case a fishing quota. Mrs Gravning is guaranteed repayment of her advance in full provided she does not force the sale of the investment at market value. She also received a share of the profits (on sale of the investment). The investments
are held by different entities associated with Mr Flavell, and in the case of the Plexure shares, by the SFP Trust. In the templates, Mr Flavell said that each agreement is between the relevant Flavell entity and Mrs Gravning / the SFP Trust, as the case may be.
[50] The Station Mews investment is different in that the majority of the advance is made by the SFP Trust rather than Mrs Gravning, the holding vehicle is a company which is owned 50:50 by the SFP Trust and Cosy Dell Trust, and the return is repayment of the advance (guaranteed), interest of 10 per cent per annum on the outstanding amount plus a half share of the net income from the apartments.
[51] Therefore, the completed templates suggest that under the original arrangements between Mrs Gravning/the SFP Trust and Mr Flavell/Flavell entities:
(a)the advances were guaranteed, but not repayable on demand (logically, if Mrs Gravning could force the sale of the investments when she liked, there could be no guarantee that the value at that point in time would meet or exceed the value of her advance); and
(b)aside from Station Mews, Mrs Gravning’s return is profit share rather than interest or a fee.
[52] On the plaintiffs’ theory, somewhere along the way the intention of the parties changed from collating and recording the details of each advance and the outstanding amount to creating a new, standalone legal obligation enforceable against Mr Flavell. In that context, I do find it curious that there is no evidence of discussion between Ms Macken or Ms Shaw and Mr Flavell preceding the execution of the Deed about an intention to create a new legal obligation. Ms Shaw’s email to Mr Flavell on 26 May 2017 comes close, but that email is ambiguous. One would expect the creation of a new legal obligation on Mr Flavell, which represents a significant departure from the existing original arrangements, to warrant a deliberate discussion. This aspect of the background to the Deed requires further examination at a full hearing.
[53] There is a further issue. The plaintiffs maintain that the Deed created a separate and additional legal obligation on Mr Flavell personally, which sits alongside the original informal agreements. The plaintiffs can choose which to enforce, and the principle of satisfaction prevents double recovery. But that means that there are two live arrangements which are inconsistent with each other. Under one (the Deed), the plaintiffs can demand repayment of the advances which effectively forces the sale of the assets at that point in time. If the proceeds of sale of all the investments (or some, if only part is demanded) is not enough to cover the debt demanded, Mr Flavell must make up the difference and interest is payable in the meantime. Under another (the original agreements), the plaintiffs cannot demand repayment of any of the advances, or if they do, they will only receive the value of the investment at that time, which may be less than the original advance. The result is two parallel mechanisms which could result in quite different outcomes. If the parties had intended that, one would expect there to have been explicit recognition of that in the Deed and/or the surrounding negotiation.
[54] An alternative interpretation, which received some attention at the hearing, is that the parties intended the Deed to vary the original informal agreements. But the Deed does not purport to vary the original informal agreements, and Mr Russell made it clear that the plaintiffs do not, for the summary judgment at least, maintain that the Deed does so. I note that the plaintiffs’ statement of claim pleads:
The acknowledgement formalised parts of the oral and written contractual agreements relating to the various advances Mrs Gravning had provided for the purposes of the Investments. It also varied the Investment Agreements by creating a standalone debt obligation on Mr Flavell personally to repay the Advances as debt payable on demand.
[55] Related to that issue, the Deed is silent as to the effect on the original profit share arrangements if the “Debt” is demanded and paid under the Deed. It is unclear whether Mrs Gravning’s estate / the SFP Trust is still entitled to any share of the profit anticipated by the original arrangements. Or, if the plaintiffs make a demand under the Deed, does the profit share entitlement fall away? Notably, the relief the plaintiffs seek in their statement of claim is for judgment for the outstanding debt and interest as per the Deed and judgment for the profit from the investments. They have sought summary judgment based on the Deed and intend to deal with the claim to profit share
at the substantive hearing. I conclude that the issue of liability to repay the advances, any profit share and questions around ownership of remaining investments should be determined in the round, at full trial.
[56] Finally, Mr Flavell’s explanation is that the intention of the Deed was simply to record in one place the previously unrecorded advances made from Mrs Gravning and her trust to Mr Flavell and/or his entities. Such an interpretation involves a considerable departure from the words of the Deed, which plainly states that the Debt will be repayable on demand and interest payable on any unpaid sum following a demand. However, in an email to Mr Flavell dated 26 May 2017, Ms Shaw said:
The loan will be interest-payable at 8% if demanded (this is required from a tax perspective in NZ), and principal payments as outlined below. However, Pamela does not intend to demand repayments.
[57] The Deed was drafted by Ms Shaw. She was not a party to or involved in the original agreements. Plainly, from the fact that she had to ask Mr Flavell to provide her with the details of the agreements, she had no direct knowledge of them. Neither she nor Mr Flavell received legal advice in relation to the Deed.
[58] Looking at all these surrounding circumstances objectively, and the difficulties with reconciling the Deed with the original agreements, one possible explanation is that there was a dissonance between what Ms Shaw intended the Deed to achieve, what Mr Favell intended it to achieve, and what in law it does achieve.
[59] I find that there is enough doubt about the intended meaning and effect of the Deed to render summary judgment of the cause of action under the Deed inappropriate. The Deed needs to be interpreted in the context of the underlying agreements and cannot be divorced from a determination of what, if any, liabilities exist for profit- share pursuant to those original arrangements. I have not had the benefit of full evidence or submission on the original arrangements. Liability under both the Deed and the original informal arrangements should be considered together at the hearing.
Ecobiotics shares
[60] In 2011, Mrs Gravning advanced Mr Flavell AUD$300,000 at the exchange rate of 1.05 agreed to in the Deed. Mr Flavell used this money to purchase 1,200,000 shares in Ecobiotics Pty Ltd. It was agreed that these shares were to be held by AraCapital as nominee shareholder for the SFP Trust.
[61] It is not a contested fact that AraCapital holds the Ecobiotics shares as nominee shareholder for the benefit of the SFP Trust. The defendants have admitted this in their Statement of Defence.
[62] AraCapital have agreed to transfer the Ecobiotics shares back to the SFP Trust. However, the parties cannot agree at what price. The SFP Trust has calculated the Ecobiotics share value from the weighted average price of all share sales over the last 6 months as 72 cents (this is calculated from the share price information set out on the company website). This values the share transfer at AUD 864,000, which is the market price. The defendants, on the other hand, value the shares at a price of 90 cents per share, but provide no basis for that valuation.
[63] In support of their asserted price, the plaintiffs have provided six months of data on the off-market transfer price of the shares.
[64] The plaintiffs have agreed that the transfer of the shares will extinguish the debt arising out of the original AUD 300,000 advance made by Mrs Gravning to Mr Flavell to purchase these shares. The total amount extinguished would be
$450,000 (NZD), made up of the original Ecobiotics advance plus $135,000 due to the defendants as its 20 per cent profit share as per the terms of the original agreements.
[65] The defendants appear to dispute not just the value that should be attributed to the shares, but also how the transfer should be treated in terms of the outstanding Debt. They have maintained that unless the proceedings are settled, the total Debt should be extinguished by the amount of the full market value.
[66] I am quite unable to make an order that the Ecobiotics shares be transferred to the SFP Trust and set the value for the transfer. The claim for the return of the shares
is not made under the Deed, but rather in the context of the original informal agreement between Mrs Gravning, Mr Flavell and AraCapital. It is the terms of that original informal agreement which are relevant, and I have not had the benefit of full evidence or legal submission on what those terms were. The value attributable to the Ecobiotics shares needs to be determined at the substantive hearing in that broader context.
Orders
[67]I order:
(a)The plaintiffs’ application for summary judgment is dismissed.
(b)The costs and disbursements of the summary judgment application are reserved pending the outcome of the substantive proceeding.9
(c)The Registrar is to allocate a case management conference for this proceeding.
Associate Judge Gardiner
Solicitors:
Carson Fox Bradley, Auckland Woodward Street Chambers, Wellington
S Russell, Auckland T Sycamore, Dunedin
9 See NZI Bank Ltd v Philpott [1990] 2 NZLR 403 (CA) as cited in McGechan on Procedure (online looseleaf ed, Thomson Reuters) at [HR14.8.05(b)].
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