Punter Management Limited v Advocate Advertising Limited HC Auckland CIV 2009-404-2233
[2010] NZHC 1169
•25 June 2010
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2009-404-002233
BETWEEN PUNTER MANAGEMENT LIMITED Plaintiff
ANDADVOCATE ADVERTISING LIMITED, HELMA MITCHELL AND TONY RICHARDS
Defendants
Hearing: 12 August 2009
Counsel: E St John for plaintiff
C T Patterson for defendants
Judgment: 25 June 2010 at 5:00pm
JUDGMENT OF ASSOCIATE JUDGE ABBOTT
This judgment was delivered by me on 25 June 2010 at 5:00pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Stafford Klaasen, PO Box 29185, Auckland 1347 for plaintiffFarry & Co, PO Box 91212, Auckland 1142 for defendants
PUNTER MANAGEMENT LIMITED V ADVOCATE ADVERTISING LIMITED & ORS HC AK CIV 2009-
404-002233 25 June 2010
[1] This is a dispute over an agreement for sale and purchase of an advertising business sold by the plaintiff, Punter Management Limited (Punter), to the first named defendant, Advocate Advertising Limited (Advocate). The second and third named defendants (Ms Mitchell and Mr Richards) are the directors and shareholders of Advocate.
[2] The agreed purchase price was $1,750,000, but it was subject to an upward or downward adjustment depending on the earnings of the business for the two and half years following settlement. It was to be paid by an initial lump sum, quarterly payments over the following two and a half years, and a final payment being any balance due after adjustment of the contract price.
[3] Advocate paid the deposit, the initial lump sum payment and one instalment
($700,000 in total) but nothing further. Punter has applied for summary judgment for
$1,050,000, being the unpaid purchase price according to the agreement, together with interest for late payment and costs. It seeks judgment both against Advocate and against Ms Mitchell and Mr Richards, contending that the latter are parties to the agreement.
[4] The defendants oppose summary judgment. They say they have arguable defences that Ms Mitchell and Mr Richards are not parties to, and have no liability under, the agreement and that Advocate is not liable to make any further payments until Punter has provided restraints of trade by its directors and shareholders. They also say that Punter misrepresented the turnover, expenses and net revenue of the business, as a consequence of which it has already paid $500,000 more than the business was worth. They say that the misrepresentations are actionable by Advocate, which has counterclaimed for this alleged overpayment, or the difference between earnings as represented and actual earnings, and for a declaration that it is not obliged to pay any more of the stated purchase price.
[5] For the reasons I will now give I have come to the view that Punter is entitled to summary judgment against Advocate in respect of liability, but the amount of the
judgment and the liability of Ms Mitchell and Mr Richards are to be determined at trial.
The factual background
[6] On 30 April 2008 Punter and Advocate entered into an agreement under which Punter agreed to sell its advertising business to Advocate. At the time of the agreement Punter was named Advocate Advertising Limited and Advocate was named Media Merchant Holdings Limited (Advocate was formed specifically to acquire the business – it was not incorporated until 1 May 2008, but nothing turns on that). They agreed to change their names following settlement so that Advocate obtained the full benefit of the goodwill in the business.
[7] The agreement was stated to be between Advocate Advertising Limited (now Punter) as vendor and Media Merchant Holdings Limited (now Advocate) and its principal shareholders Helma Mitchell and Tony Richards as purchaser. The words “and its principal shareholders Helma Mitchell and Tony Richards” had been added in handwriting to the typewritten name Media Merchant Holdings Limited purchaser. The addition was initialled by all signatories except for Mr Richards. The agreement was signed by the three directors of Punter, by Ms Mitchell and Mr Richards as directors of Advocate, and by three non-director employees of Punter who were to become employees of Advocate. There is a dispute as to whether the handwritten amendment to the name of the purchaser had been added prior to signature of the agreement. It is not in dispute that all signatories other than Mr Richards initialled this amendment.
[8] The agreement was based on the REINZ/ADLS standard form agreement for sale and purchase of a business (4th edition 2008), with the addition of further clauses dealing with various matters including due diligence rights and obligations, adjustment of the purchase price, transfer of certain of Punter’s employees to the employment of Advocate, and exceptions to the restraint of trade provisions in the standard terms of the agreement.
[9] The purchase price was reached by negotiation between the parties, based on financial information that Punter provided to Ms Mitchell and Mr Richards (Advocate had not been formed at that point). They had this information reviewed by their accountants, Gilligan Sheppard, and took advice on the mechanism for fixing the purchase price (future maintainable earnings at an agreed multiple).
[10] The additional terms of sale recorded that the purchase price was based on anticipated earnings for the following 2.5 years (referred to as Forward Maintainable Earnings) of $700,000 p.a. (plus or minus 10%). The parties agreed in clause 16 of the additional terms that if the earnings in that period varied (upwards or downwards) by more than 10%, the purchase price and the final payment would be adjusted by the percentage rise or fall (and any amount overpaid would be reimbursed). Forward Maintainable Earnings were defined as a year’s “gross surplus” less agreed amounts for personnel costs and expenses. Although the term is not defined in the agreement, it is common ground that “gross surplus” means the difference between sales (turnover) and direct costs of sale. The agreed personnel costs were in respect of Punter’s principal account managers who were to transfer their employment to Advocate and continue to run the business. The agreed expenses were an assessment of the general operating and overhead expenses associated with running the business.
[11] The additional terms of sale contained (clause 23) express vendor warranties including that:
a) All information given in the course of negotiations was true and correct in all material respects (clause 23.3(a)); and
b)The accounts, records and all other information disclosed to the defendants were correct and accurate and such accounts had been prepared in accordance with normally used accounting methods and generally accepted accounting practice, and showed the true, fair and accurate position regarding the financial position of the business up to the date that the accounts had been made up (clause 23.3(b)).
[12] The information that Punter supplied to Ms Mitchell and Mr Richards comprised:
a) A single page financial summary of the business for the 2007 financial year prepared by Punter’s accountants, two pages of explanatory notes listing main clients and commenting on the information in the summary, and two pages of notes as to salaries/consultants’ fees applicable to the business all under cover of an email sent on 29 February 2008;
b)An email sent on 4 March 2008 giving information on turnover projections and suggesting use of gross revenue less personnel and other operating costs as the mechanism for determining price (by reference to a multiplier of the resultant net revenue);
c) A single page financial summary for 10 months of the 2008 year (again prepared by Punter’s accountants) and two pages of updated information as to consultants’ fees and turnover, under cover of an email dated 7 March 2008; and
d) GST returns for the two periods.
[13] On 20 March 2008 Mr Richards provided Punter (through Mr Shaw) with a draft offer for discussion. It adopted the mechanism proposed by Mr Shaw for reaching a purchase price (agreed figures for future maintainable earnings and a multiplier, with both those figures to be subject to due diligence). The parties negotiated on this basis, and whilst those negotiations were continuing, Ms Mitchell and Mr Richards had their accountants undertake a due diligence exercise on the information provided.
[14] In mid-April the accountants requested copies of Punter’s financial accounts. Punter declined to provide them on the basis that they were not selling the company and had provided information on sales (the revenue stream) and the expenses associated with those sales, which was what Advocate was purchasing.
[15] On 18 April 2008 Advocate’s solicitor provided Mr Richards with a report on the future maintainable earnings of the business, based on the review of the information provided by Punter. They expressed reservations about the figure of
$700,000 for future maintainable earnings (recommending a lower figure), and commented on uncertainties as to turnover and potential for changes for direct costs. They noted the proposed figure for operating expenses and said that it appeared to be sufficient (there were potential savings to be made on their calculations).
[16] The parties agreed to use a figure of $700,000 for future earnings, and a multiplier of 2.5 to reach the purchase price, but subject to adjustment if the earnings were not achieved. They signed the agreement for sale and purchase on 30 April
2008. Advocate paid the deposit ($60,000), the initial payment of $540,000 on settlement, and the first quarterly instalment ($100,000) on 30 September 2008.
[17] Shortly before the second quarterly payment was due (31 December 2008), the defendants indicated that the business was in financial difficulty. On
12 November 2008 Ms Mitchell sent Punter an email indicating that Advocate could not pay the instalment. She alleged, explicitly for the first time, that Punter had misrepresented financial information about the business, including the average profit margin of 25%.
[18] Advocate defaulted on the instalment due on 31 December 2008. Punter called up the unpaid balance of the purchase price, relying on clause 10.3(1) of the agreement.
Principles for summary judgment
[19] The principles that the court applies in determining an application for summary judgment are well established and can be found in the leading cases Pemberton v Chappell and Bilbie Dymock Corp v Patel[1] and more recently Jowada Holdings Ltd v Cullen Investments Ltd.[2] The following are relevant to the present application:
[1] Pemberton v Chappell [1987] 1 NZLR 1 (CA); Bilbie Dymock Corp v Patel (1987) 1 PRNZ 84 (CA).
[2] Jowada Holdings Ltd v Cullen Investments Ltd CA248/02, 5 June 2003.
a) The onus is on the plaintiff seeking summary judgment to show that there is no arguable defence, and the court must be left without any real doubt or uncertainty in the matter;
b)The court will not hesitate to decide questions of law where appropriate;
c) The court will not attempt to resolve genuine conflicts of evidence or to assess the credibility of statements made in affidavits; but
d)The court must balance caution that there not be any prejudice to a defendant with a robust and realistic attitude when called for by the facts of the case.
Issues for determination
[20] Mr St John, counsel for Punter, submitted that this was a relatively straight- forward case. He noted that there was no dispute over the fact that Advocate ceased paying the instalments of the purchase price, and that Punter had given notice that it was exercising its right to claim the full amount of the purchase price pursuant to clause 10.3(1) of the agreement. He submitted that there was no evidential basis for the defendants’ contention that Punter had misrepresented the information on which the parties negotiated the purchase price. He argued that the defendants could not resist payment of the balance of the purchase price on the ground that deeds of restraint of trade had not yet been delivered. Finally, he argued that there was no arguable basis for Ms Mitchell’s and Mr Richards’ contention that they personally were not parties to the agreement.
[21] Mr Patterson, counsel for the defendants, submitted that the disputes could not be resolved summarily. He said that the information provided by Punter was critical to his client’s decisions to purchase the business, and to use the forward maintainable earnings figure of $700,000 to establish the purchase price. He submitted that because the historical information was materially incorrect, the historical profit of the business was exaggerated, and Punter did not have a
reasonable factual foundation for its projection of future profits. He said that Advocate would not have purchased the business, or paid this purchase price, if it had been given correct information. He referred to evidence that the business had failed to achieve the results represented by Punter notwithstanding that the same people were running the business, in the same way as before. He argued that this raised an inference that the financial information provided by Punter was inaccurate, and that the defendants should be entitled to investigate this through discovery, and by cross-examination at trial. He also submitted that Punter could not call up the balance of the purchase price because it was in default under the agreement by failing to deliver deeds of restraint of trade. Finally he said that the question to whether Ms Mitchell and Mr Richards were parties to the agreement, and personally liable, could not be resolved without determining disputed facts relating to execution of the agreement.
[22] The issues for determination on this application are whether any of the defendants have arguable defences to Punter’s claim arising out of the alleged misrepresentations, or the restraint of trade obligations under the agreement, or on the basis that Ms Mitchell and Ms Richards are not parties to the agreement. It will also be necessary to decide whether there are any disputes of fact, or there is a need for further inquiry, such that the matter is unsuitable for summary judgment.
Further affidavits
[23] Mr Patterson sought leave to file further affidavits by Ms Mitchell and Mr Richards replying to the second affidavit of Mr Shaw (which was an affidavit in reply). Ms Mitchell’s affidavit started with three paragraphs purportedly updating financial data provided in her first affidavit. Mr Patterson submitted that the balance of the affidavit was in reply to new matters raised in either Mr Shaw’s or Mr Ballard’s affidavit. Mr Richards’ affidavit was said to be in reply to new material in Mr Shaw’s affidavit.
[24] I was satisfied that the evidence of Mr Shaw and Mr Ballard did not raise new matters. Moreover, I did not accept that the evidence in these additional affidavits took matters further than the evidence previously filed on behalf of the
defendants save for one point raised in Mr Richards’ (as to the timing the handwritten amendment to the names of purchasers in the agreement). For reasons I will address at a later stage of this judgment, it was not necessary for me to allow admission of the affidavit in order to determine the issue. I declined the application for leave. The affidavits are not to be read.
Is there an arguable case for misrepresentation?
[25] Mr St John’s primary submission on this issue was that the defendants had failed to establish an evidential basis for their contention that the Punter had misrepresented the financial position of the business. He developed this as follows:
a) Advocate’s allegations of misrepresentations were no more than assertions, unsupported by evidence. He referred to evidence from Punter’s director, Mr Shaw, and its external accountant, Mr Ballard, to the effect that the information had been compiled by Mr Ballard’s firm, had been checked by him, and had subsequently been verified by others in his firm;
b)Advocate’s real matter of complaint was that it had not achieved the gross profit margins on which the purchase price had been structured, but there had been no warranty in that respect;
c) Advocate was purchasing Punter’s revenue stream, and had made its own assessment of the costs of taking that revenue stream into its existing business (the costs of the key staff who were being taken over to manage the business had been fixed and Advocate had made its own assessment of other expenses).
[26] The essence of the defendants’ case is that there is such a discrepancy between the historical information provided by Punter and the actual results achieved in the nine months following settlement, that the historical information could not be accurate. Consequently, they contend that Punter did not have a reasonable basis for its projections of future gross margin. Initially the defendants contended that this
applied to all three elements of the pricing formula: turnover, direct costs of sales, and general costs of running the business. By the time of hearing the defendants accepted that the turnover figures were accurate, and that any difference between the historical figures and actual turnover could be attributed to the global economic downturn. That leaves for consideration their contention that the downturn in gross margin was so substantial (their accountant calculates this as 59%) and so disproportionate to the reduction in turnover (said to be 18%) that there could be no explanation other than that the historical figures were inaccurate. The critical question for this application is whether there is a sufficient evidential basis for this contention.
i) Direct costs of sale
[27] Mr Patterson acknowledged that the defendants could not demonstrate that the direct costs of sale given to it in the financial summaries were incorrect. He relied, however, on the evidence of Advocate’s accountant, Mr Ashby, that Advocate was unable to achieve gross margins in excess of 15% (compared to Punter’s claimed 25%), and that his firm had had no independent means of checking direct costs when it undertook due diligence. Mr Ashby said that the drop in the gross surplus for the first twelve months could not be explained by the estimated shortfall in turnover for the same period. Mr Patterson submitted that it could be taken from this evidence that the direct costs (or costs of sale) had been understated significantly in the financial summaries, even allowing for the drop in turnover as a result of the downturn in the economy.
[28] Mr Patterson submitted that it would be unjust to determine the matter without allowing Advocate discovery of Punter’s primary source documents to establish whether or not the direct costs included in the financial summaries were accurate. He accepted that the direct costs were in keeping with those set out in Punter’s financial statements for 2007 and 2008, but submitted that that was not conclusive. He referred to substantial differences between the operating and overhead expenses recorded in Punter’s financial statements for 2007 and 2008 and those given in the financial summaries, and submitted that further investigation was needed (through discovery of Punter’s source documents) to establish whether all
direct costs had in fact been identified. He also argued that the disclosure in Punter’s year end accounts that it had made little or no profit for those years was further support for the need for investigation.
[29] This contention that the direct costs associated with Punter’s revenue stream “cannot be right” has to be assessed against the direct evidence given by Punter. Although the agreement does not provide a definition of “direct costs”, the defendants did not contend that there was any dispute as to what expenditure came under that heading. Mr Shaw, in his affidavit in reply, set out definitions of the various financial terms used in the financial summaries and Mr Shaw’s emails, including “gross revenue”, “direct costs”, “gross surplus”, and “margin”. Punter’s accountant, Mr Ballard, agreed with these definitions and added:
Cost of sale is the deduction of all “Supplier and Creative Direct Costs”
associated with and attributable to the invoiced value of a sale. Costs eg:
TV and Radio Bookings, Newspaper and Magazine Bookings, Yellow Pages, Artwork, Printing, Signage, Copywriting, Talent costs, Electronic and Audio Production and Post Production.
[30] Although Punter’s evidence on this point is given in its affidavits in reply, these terms are consistent with Ms Mitchell’s assessment of the information given to the defendants (identified in paragraph 23 of her affidavit in opposition). This is not surprising. Ms Mitchell had been working reasonably closely with Punter for the preceding year, and Mr Richards was clearly familiar with the advertising and media industries. Ms Mitchell did not say that she did not understand what costs would fall under the description of direct costs.
[31] Two matters lead me to the view that there is an insufficient evidential basis for the defendants’ contention that direct costs were understated. The first is the direct evidence given by Mr Ballard. The second is the absence of any explanation as to the direct costs that Advocate put against the gross revenue to reach its view on the comparable gross profit or profit margin.
[32] Mr Ballard is a chartered accountant of more than 39 years’ standing. He makes the following statements as to his experience and knowledge of this business:
I provide advice to medium businesses on a range of issues including accounting, valuation, taxation and business sales and acquisitions. I have expertise in advising companies operating in the advertising and media industries. I have particular expertise in advising clients on valuation methodology for advertising and media businesses.
I have previously given expert evidence in the District Court, High Court and in mediation.
....
I was the director responsible for accounting and taxations returns for Advocate Advertising Limited which comprised the business that was sold to the defendants. I was responsible for approving financial statements and income tax returns. I am and was intimately familiar with that business.
[33] Mr Ballard said that he provided Punter with the information which Mr Shaw passed to the defendants. He says that he was responsible for preparation of the financial summaries. Mr Patterson argued that that was not necessarily conclusive as Punter may not have provided Mr Ballard (or his firm) with all of the underlying information. There is no evidential basis for this submission. Mr Ballard states:
Myself and my team, review the monthly client turnover and check the supplier and direct costs against each expenditure category to establish that they are properly coded and appropriately classified as cost of sales. This then gives the monthly margin and the gross surplus. We also check the appropriate classification of all staff and consultancy costs, all overhead and other expenses, and net surplus analysis, that forms the basis of the Financial Statement for the financial year.
[34] Turning to the second point, Mr Ballard says that in order to respond to Mr Ashby’s evidence as to Advocate’s actual gross profit, he needed to know what Mr Ashby had included in the costs of sales used to derive Advocate’s gross margin. Mr Shaw requested this information in an email to Mr Richards on 19 December 2008, but the information provided (in a spreadsheet provided by Ms Mitchell in January
2009) is in summary form only, and does not allow any comparison with the figures prepared by Mr Ballard. Furthermore the figures cannot be reconciled with other figures provided by Ms Mitchell (so that there is no one clear statement as to Advocate’s direct costs).
[35] Moreover the direct costs of sales recorded in the year end accounts accord with those in the financial summaries. Mr Ballard confirms that he approved
taxation returns prepared on the basis of year end accounts (financial statements) and recommended that those returns be filed.
ii) Other operating costs
[36] In addition to his argument that the decrease in gross margin could only be explained by understatement of direct costs, Mr Patterson submitted that there was also a need to investigate whether Punter had misrepresented the operating expenses that it incurred in achieving the gross revenue. He acknowledged that Mr Shaw stated in his email of 29 February 2008 that the direct operating and overhead expenses stated in the financial summary for 2007 were limited to those associated with the business, but argued that that amounted to an implied representation that Advocate would not have to incur any of the expenses that had been excluded in order to achieve that turnover. Mr Patterson also accepted that Mr Ballard had said that his firm had checked and verified the figures, but pointed out that he had not explained the process followed in deciding what costs to exclude.
[37] Mr Patterson submitted that there was good reason to consider that Punter may have excluded expenses that should have been disclosed as expenses that would need to be incurred in running the business. He referred to Punter’s total expenses for 2007 and 2008 (disclosed for the first time in the financial statements produced by Mr Ballard), and relied on the fact that expenses totalling $549,458 had been excluded from the financial summary for 2007, and $383,020 from the 2008 financial summary (the latter being the defendants’ adjusted figure taking into account that the summary was for 10 months only). Mr Patterson argued that it was not credible that Punter could have achieved the same turnover without incurring at least some of these excluded expenses. By way of example he referred to the total staffing costs referred to in the 2007 financial statements which were $330,460 higher than the allowance for consultant’s fees in the 2007 financial summaries.
[38] The defendants’ contention on this point needs to be considered in relation to the transaction being undertaken. Advocate was purchasing the revenue stream, not the company, and was contemplating that work being built into Ms Mitchell’s and Mr Richards’ existing business, with consequent cost savings. This is apparent from
the offer put forward by Mr Richards in March 2008 as the basis for settlement discussions. The mechanism used to establish a purchase price was the gross revenue (the revenue stream which Advocate was wanting), less the direct costs incurred in creating this revenue stream (directly attributable to each billable job), and less an allowance for other costs that the operator of the business would have to incur to run this business. Put broadly, these operating costs were the cost of the key account managers who moved across from Punter to run the business, and general costs such as support staff, stationery, telephone, equipment, premises and communication costs.
[39] In other words, the defendants had an existing structure, which would absorb some of the operating costs (leaving aside direct costs which I have already addressed), and the pricing mechanism provided for the defendants to fix the personnel costs that needed to be taken over and the additional operating expenses that would be needed. As I have mentioned, the account managers’ salaries were agreed, and the defendants undertook their own assessment of the operating costs that would be incurred with advice from their accountants. It is noteworthy that Punter invited the defendants to seek any further information needed directly from its accountant, but no approach was made. This is consistent with the fact that only the defendants knew what capacity they had to absorb the additional costs within their existing structures.
[40] Seen in this context, I accept the submission for Punter that the defendants cannot succeed on a claim that operating and overhead expenses were misrepresented. The major item, the costs of the account managers who were to run the business were fixed and agreed with those managers. As to the other expenses, there is no evidence to support a misrepresentation of the historical figures. Mr Ballard’s evidence is clear that this was carefully assessed, knowing the purpose for which the financial summaries were to be used. It is also clear that the defendants did not rely on Mr Shaw’s assessment of $120,000 for additional operating expenses, but undertook their own analysis and agreed to that figure for their own reasons.
[41] The disparity between expenses claimed by Punter in its financial statements, and the specific expenses related to generating the revenue stream, does not raise a
necessary inference that Mr Ballard’s allocation of costs was incorrect. The biggest factor in the discrepancy appears to be the exclusion of a significant amount of salary or wage costs. There can be a number of explanations for that, but the defendants’ argument is met by the fact that the by far the largest component was the account managers’ salaries, and these were fixed. Certainly some support/administration wages would have been required, but these were reviewed by the defendants’ accountants, who made their own assessment. In the context of this particular transaction, the substantially greater figures in Punter’s financial statements are not material.
iii) Profit margin
[42] Mr St John submitted that the defendants’ case came down to an argument that historically Punter had represented that Advocate would achieve a 25% gross profit margin. He submitted (correctly in my view) that, on the evidence, there could be no argument that Punter had achieved 25% gross margin, and that this negated any possibility of an argument that Punter’s projections of future earnings did not have a sound base.
[43] Although it is not expressly pleaded, Mr Patterson submitted that the representations as to turnover and direct costs supported an implied representation that Advocate would achieve a 25% gross margin. He argued that this fell within the express warranty as to accuracy of information, and was an actionable representation either in terms of the Contractual Remedies Act or for the purposes of the Fair Trading Act. I am not persuaded that the defendants can mount an arguable defence on this basis:
a) For the reasons already given I have come to the view that there is no evidential basis for contending that the 25% margin achieved by Punter in 2007 and 2008 was incorrect;
b)The defendants have not given evidence of the direct costs that they have charged in order to produce the gross margins they are claiming,
to establish a reasonable evidential foundation for inaccuracy of the historical figures;
c) Those historical figures provide a reasonable basis for Punter’s projection of future gross margins they fit the test in New Zealand Motor Bodies Ltd v Emslie[3] for a forecast (that it be realistic, reasonable and attainable having regard to historical facts);
[3] New Zealand Motor Bodies Ltd v Emslie [1985] 2 NZLR 569 (HC).
d)Significantly, the parties contemplated a potential variation in the gross margin and made specific provision for adjustment of the contract price to allow for that.
[44] Finally, and for the sake of completeness, I reject any possible argument that Punter could be said to have warranted the net profit. Although I did not understand Mr Patterson to advance that contention, in their evidence the defendants refer frequently to the discrepancy in net profit between that suggested by the financial summaries and what has in fact been achieved. I accept the submission for Punter that this is not a matter that would normally be warranted, and there are many operating variables which could influence the result.
[45] Mr Patterson submitted that this was one of the cases where the courts needed to be alert to the possibility of injustice because clear facts to support the defence could not be obtained without discovery (in this case of Punter’s source data). He relied on the following passage in Middleditch v New Zealand Hotel Investments Ltd.[4]
[4] Middleditch v New Zealand Hotel Investments Ltd 1992 5 PRNZ 392, 395 (CA).
The courts must of course be alert to the possibility of injustice in cases in which some material facts to establish a defence are not capable of proof without interlocutory procedures such as discovery and interrogatories. That does not mean that defendants are to be allowed to speculate on possible defences which might emerge but for which no realistic evidential basis is put forward.
[46] I accept the need for caution in this regard, but do not accept that the defendants have shown enough to warrant putting Punter to the costs of defending a
claim which on the evidence before the court has no realistic foundation. It is for the defendant to show that there is some evidential basis for the alleged misrepresentations. They might have got to that point had they demonstrated what they were charging against the revenue received by way of direct costs. However, their failure to do that, despite requests, speaks against them on this point. After settlement Punter had no ability to determine the financial treatment of the various costs to be brought to account.
[47] It follows from the above that the defendants have not established that they have an arguable defence based on misrepresentation (this also disposes of their counterclaim which is based on the alleged misrepresentations). I turn now to consider the other two matters, namely whether Punter is entitled to call up the balance of the purchase price, and whether Ms Mitchell and Mr Richards are liable in addition to Advocate.
Entitlement to call up the full purchase price
[48] Mr St John, for Punter, accepted that the defendants had the right to call on it to procure its shareholders and directors to enter into the deeds, but submitted that that did not give the defendants a ground to resist Punter’s right to enforce the defendants’ payment obligations under the agreement. He argued that the obligations were not interdependent, and also that Advocate had settled without requiring delivery of the deeds (and had not tendered deeds for execution prior to settlement), thereby waiving the stipulation in the agreement that the deeds were to be provided on or before settlement.
[49] The defendants contend that Advocate’s obligation is expressly conditional on Punter providing the deeds of restraint of trade. Counsel argued that the deeds form part of the consideration for the purchase price, that the agreement provided (clause 3.3 (2)(e)) that they were to be delivered at settlement in exchange for the purchase price, and that the agreement provided expressly that these obligations were interdependent (clause 3.4). Counsel submitted that the combined effect of the obligation to pay the balance of purchase price on settlement (clause 3.3.(1)), the provision for part of the purchase price to be paid by instalments (clause 16.3), the
provision for delivery of the deeds on settlement, and the interdependency of the settlement obligations (clause 3.4) gave Advocate the right to withhold payment if the deeds were not delivered. He also argued that Punter was not entitled to resist delivery of the deeds on the ground that Mr Richards was declining to initial the handwritten amendment to the agreement or otherwise accept personal liability as a purchaser.
Discussion
[50] There is no dispute that Advocate did not tender deeds of restraint of trade for execution by Punter’s shareholders and directors ahead of settlement, and that Advocate paid the purchase price due on the settlement date notwithstanding that deeds had not been executed. It is also common ground that although deeds were subsequently prepared, after somewhat protracted negotiations, Punter has declined to deliver them to Advocate for reasons set out in Mr Shaw’s affidavit in reply. In brief, he says that all of the shareholders and directors have complied with the obligations under the deeds, but Punter has held back delivery saying that there was an agreement for completion of all outstanding contract issues (including the deeds) which the defendants are not complying with, because Mr Richards has declined to initial the handwritten amendment to the names of the purchaser.
[51] I am not persuaded by the defendants’ argument that the obligations of Punter to provide the deeds of restraint of trade and of Advocate (or all of the defendants) to pay the balance of the purchase price are interdependent.
[52] The critical clauses are clauses 3.3 and 3.4 of the agreement. They are part of general clause 3.0 setting out terms for possession and settlement. It is a standard printed term. Clause 3.3 sets out the parties’ obligations on the settlement date, including delivery of executed deeds of restraint of trade. Clause 3.4 provides that all the obligations under clause 3.3 are interdependent. There can be no doubt that Advocate would have been entitled to withhold the part of the purchase price that was due on settlement date ($540,000) if it had tendered deeds to Punter and Punter had failed to provide executed deeds at settlement. However, Advocate did neither of these things (tender deeds for execution or withhold payment of the $540,000). I
see no reason to treat Advocate’s obligation under 16.3 (expressly stated to follow the possession date) as one of the interdependent obligations expressly provided for settlement.
[53] Counsel for the defendants submitted that the issue would turn on whether or not Punter was entitled to withhold the deeds once requested, and that this in turn would depend on whether there was any obligation on Mr Richards to initial the amendment to the agreement. He submitted that there were facts in dispute which could not be resolved without discovery and cross-examination. However, that submission hinges on his argument as to interpretation of the agreement and interdependency of the obligations. The disputes are immaterial as I have found against that interpretation.
[54] However, I am not satisfied that that disposes of this point. Counsel for Punter relied on clause 10.0 of the standard terms of the agreement, providing for remedies on default. He relied particularly on clause 10.3(1) which reads:
10.0 Notice to complete and remedies on default
10.3 (1) If this agreement provides for the payment of the purchase price by instalments and the purchaser fails duly and punctually to pay any instalments on or within seven (7) working days from the date on which it fell due for payment, then whether or not the purchaser is in possession, the vendor may immediately give notice to the purchaser calling up the unpaid balances of the purchase price, which shall upon service of the notice fall immediately due and payable.
[55] The parties provided in additional clause 16.3 for the balance of the purchase price to be paid by instalments:
16.3Payment of the purchase price shall be satisfied by payment of the deposit of $50,000.00 when the Agreement becomes unconditional, payment of $540,000.00 on Possession Date and by the following payments to be made by the Purchaser to the Vendor on the dates shown:
September 30, 2008 $ 100,000.00 December 31, 2008 $ 100,000.00 March 31, 2009 $ 100,000.00 June 30, 2009 $ 100,000.00 September 30, 2009 $ 100,000.00
December 31, 2009 $ 100,000.00
March 31, 2010 $ 100,000.00
June 30, 2010 $ 100,000.00
September 30, 2010 $ 100,000.00
December 31, 2010 $ 100,000.00
Subtotal $1,600.000.00
and Final Payment $ 150.000.00 (approx to be adjusted and paid in accordance with clause 16.4 below)
TOTAL $1,750,000.00
[56] Reading clause 10.3(1) together with clause 16.3, Punter would appear to have a right to call up the balance of the purchase price of $1,750,000. However, counsel did not address me on the relationship between clause 16.3 and 16.4. The latter reads:
16.4 The “Final Payment” will be made when the Forward Maintainable Earnings have been assessed to December 31, 2010 but in any event such payment shall be made no later than March 31, 2011. The final Payment will be calculated as the amount left to pay to achieve the “Final Purchase Price”. The Final Purchase Price will be $1,750,000.00 if the Forward Maintainable Earnings for the 2.5 years from July 1, 2008 to December 31,
2010 are $1,750,000.00 plus or minus 10%. If the Forward Maintainable
Earnings of the business for the 2.5 years from July 1 2008, to December 31,
2010 have risen to more than $1,925,000,.00 or fallen to less than
$1,575,000.00 as the case may be then the Final Purchase Price will be adjusted by the percentage rise or fall and the Final Payment will be adjusted
accordingly. If the Final Purchase Price is less than the amount already paid
by the Purchaser then the Vendor will reimburse the Purchaser for any amount over-paid no later than March 31, 2011.
[57] If these three sub clauses are read together, there is an argument that the balance of the purchase price cannot be determined until the actual earnings of the business from 1 July 2008 to 31 December 2010 have been determined. Punter is entitled to immediate payment of the balance of the purchase price, but due to the adjustment mechanism of clause 16.4 that balance cannot be calculated in a simple arithmetical way. Clause 10.3(1) cannot be construed to override clause 16.4, to give Punter an entitlement to a fixed purchase price of $1,750,000 upon default. The parties contemplated adjustment of the purchase price. Although Punter is entitled under the agreement to the instalments payments as they fall due, the “unpaid balance of the purchase price” has still to be determined. The defendants’ evidence suggests that if payments were made in accordance with the payment schedule there could be a significant sum to be reimbursed to Advocate. The balance of the purchase price cannot be determined on the evidence before the court.
[58] For this reason I have come to the view that although the defendants do not have an arguable case on liability, there is still an issue to be determined as to the quantum of any judgment.
The parties to the agreement
[59] Punter contends that as both Ms Mitchell and Mr Richards are named as parties to the agreement, they are thereby liable with Advocate for the unpaid balance of the purchase price. Mr St John argued that it is not open to the defendants to call extrinsic evidence to contradict the written agreement, and that clause 26.1 of the agreement (which provides that where more than one party is named as purchaser all are jointly and severally liable) precludes any argument that Ms Mitchell and Mr Richards signed merely as directors of Advocate.
[60] The defendants contend that their names were added as purchasers by Mr Shaw, after they assigned the agreement as directors of Advocate. They acknowledge that Ms Mitchell initialled the alteration but say that she did so following a representation by Punter that the inclusion of their names would have no material effect (would not result in any personal liability). Counsel for the defendants submitted that in light of the disputed evidence as to timing of the amendment and the alleged representation to Ms Mitchell, the matter could not be resolved in a summary way.
[61] Counsel for Punter invited me to consider the context when deciding whether or not the defendants had a basis for an arguable defence that they were not liable. He argued that it was entirely credible that Ms Mitchell and Mr Richards would have been added as parties, given that Punter was parting with control of the business upon payment of less than half of the purchase price, to a newly formed company, and without any security.
Discussion
[62] Whether or not Ms Mitchell and Mr Richards are personally liable depends on the proper interpretation of the agreement. The starting point is that they are
named as purchasers, and Ms Mitchell acknowledges signing the agreement after their names were added, and initially the handwritten amendment. As against that both added the word “Director” after their signature. In addition, Mr Richards initialled all pages of the agreement but not the amendment to the names of the purchasers, and Ms Mitchell contends that she accepted and initialled the amendment relying a statement by Mr Shaw that this was to indicate that they were “signing on behalf of [Advocate] as its shareholder”.
[63] The capacity in which a party signs an agreement is to be determined objectively. Evidence of subjective intent is not relevant: Trotter v Avonmore Holdings Ltd;[5] Doughty-Pratt Group Limited v Perry Castle.[6]
[5] Trotter v Avonmore Holdings Ltd 2005 8 NZBLC 101, 646 at [35] (CA).
[6] Doughty-Pratt Group Limited v Perry Castle 1995 2 NLR 398 at 404 (CA).
[64] I do not regard clause 26.1 (providing for joint and several liability as between purchasers) as adding significantly to the issue of personal liability. I can take into account, however, a statement made later by Ms Mitchell dated
6 November 2008 (in an email to Mr Shaw discussing contractual points that were still outstanding) which suggests both she and Mr Richards accepted that the amendment was part of the agreement:
4. Initial on contract
Tony needs to initial the ‘purchaser’ clause. I have discussed this with him and again, there is no problem with him doing this but he is concerned with
the ability of the new Advocate’s ability to pay out the remainder of the
agreement based on current performance (see point 6). We need to give him surety in this regard and then he will sign it accordingly.
[65] The critical point is whether, construed in context, it can be said that further extrinsic evidence is required to determine the matter. I have come to the view that further evidence is required for three reasons:
a) The signature of the agreement as “Director” may not be conclusive of personal liability (one way or the other). The context will be important. Ms Mitchell and Mr Richards made known to Mr Shaw in early correspondence that a company would be purchasing the business, and that they would not provide personal guarantees. Mr
Shaw acknowledges (in his affidavit in reply) that he told Mr Richards that they were not insisting on security but “required that [Ms Mitchell] and [Mr Richards] individually support the purchase”. This is consistent with Ms Mitchell’s evidence that the addition of names was to commit them as shareholders. It is also consistent with the lack of separate signature by Ms Mitchell and Mr Richards personally.
b)Even if the context does not, ultimately, support the defendants’ contentions on the proper construction of the agreement, her evidence as to the statement made to her and Mr Richards prior to signature of the agreement, if proved, could be sufficient basis for an estoppel. Mr St John correctly pointed out that this had not been pleaded in their opposition, but Mr Patterson referred to “inducements to sign” in his written submissions and raised possible estoppel in his oral submissions. I must take into account any possible
c) Finally, the timing of the amendment in relation to signature and whether Mr Richards’ failure to initial the amendment was deliberate or inadvertent need to be explored. Factual findings on these points could be determinative on his personal liability.
[66] In summary, therefore, I accept that the defendants have established a basis for an arguable defence that Ms Mitchell and Mr Richards did not undertake personal liability, sufficient to warrant that this issue be determined at trial.
Decision
[67] For the reasons given above I find that Punter is entitled to judgment against Advocate on liability, but that the quantum of the judgment needs to be determined at trial. I find that Ms Mitchell and Mr Richards have an arguable defence that they are not personally liable.
[68] Punter is entitled to costs against Advocate in respect of the summary judgment application on a 2B basis together with disbursements. Costs in respect of
Punter’s application against Ms Mitchell and Mr Richards are reserved pending final determination.
Directions for future conduct
[69] I make the following directions to advance the remaining aspects of this matter:
a) The defendants are to file and serve amended statements of defence by 24 July 2010. Advocate’s statement of defence is to be limited to matters of quantum (the balance of purchase price that is payable). Ms Mitchell’s and Mr Richards’ defences are to be limited to their personal liability and to matters of quantum.
b)The Registrar is to allocate a case management conference at the first available date after 30 July 2010. Counsel are to file memoranda ahead of that conference, addressing the usual matters for a first case
management conference.
Associate Judge Abbott
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