Pure Elite Holdings Limited v Bodco Limited
[2017] NZHC 2317
•25 September 2017
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
I TE KŌTI MATUA O AOTEAROA
KIRIKIRIROA ROHE
CIV-2016-419-261 [2017] NZHC 2317
UNDER The Companies Act 1993 BETWEEN
PURE ELITE HOLDINGS LIMITED First Plaintiff
PEH NEW ZEALAND LIMITED Second Plaintiff
EVER HEALTH NEW ZEALAND LIMITED
Third Plaintiff
RANDOLPH EDWARD CASIMIR VAN DER BURGH
Fourth Plaintiff
GEOFFREY IAN POLLARD Fifth Plaintiff
AND
BODCO LIMITED First Defendant CONTINUED OVERLEAF
Hearing: 23 August 2017 Appearances:
Mr A Ross for plaintiffs
Mr M Branch for defendantsJudgment:
25 September 2017
JUDGEMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
25.09.17 at 10 a.m., pursuant to
Rule 11.5 of the High Court Rules. Registrar/Deputy Registrar
Date……………
PURE ELITE HOLDINGS LIMITED v BODCO LIMITED [2017] NZHC 2317 [25 September 2017]
ANDBRIAN NOEL WAGSTAFF Second Defendant
RICHARD CHEW YOUNG Third Defendant
[1] The defendants seek summary judgment under r 12.2(2) of the High Court
Rules.
[2] This litigation between two corporate groups relates to a contract that they entered into on 24 September 2014.
Background
[3] The plaintiffs were involved in supplying different brands of foodstuffs to the Chinese market. They wanted a link to a New Zealand manufacturer and canner of infant milk commodities.
[4] The defendants were in the process of building a canning factory which would be suitable for infant milk formula. They had incorporated a company, Danpac (NZ) Limited (“Danpac”), to build and run the factory. They also had a minority interest in a site for a proposed milk powder processing factory which had the necessary consents from the territorial authority and which was to be owned by Mataura Valley Milk Limited (“MVM”). The defendants could therefore potentially create and develop a business for the production of milk products suitable for export to China for sale. The plaintiffs had brands which were recognised in China, as well as substantial distribution networks and regulatory approvals in China, which would enable them to market and sell the products. The agreement that they reached proposed to connect these two potentialities.
[5] The agreement that the parties entered into on 24 September 2014 was home made. Its principle elements were as follows. Under the agreement which the parties identified as a “Heads of Agreement” (“HOA”), the second plaintiff was to acquire 51 per cent of Danpac. The shares would be acquired from the defendants who had incorporated Danpac and owned the entirety of the shares. The second plaintiff would also have the power to appoint the majority of the directors. Each party was to supply capital. The second plaintiff was to provide its share of the capital by way of a cash contribution of $5,300,000, while the first defendant was to provide assets valued at $1,600,000 and cash of $3,500,000. Some of the other obligations of the parties under the contract will now be described.
[6] First, within 30 days of signing the HOA, the first plaintiff was to have completed due diligence and the parties were to agree a revised business plan and budget for the next 18-24 months. Within that 30 days, the parties were also required to carry out the “initial capitalisation of Danpac as per business plan”. This required the provision of an “initial working capital” of $3,000,000. It was not specified in the HOA which of the parties would have to complete that obligation. Within a period of 18-24 months, the parties were to “complete the capitalisation of Danpac as per the business plan”. The agreement also provided that Danpac and associated parties were required to terminate any discussions they were currently involved in with any person concerning the transaction “or any transactions substantially similar to the transaction” which was the subject of the HOA. There was an associated restriction on Danpac from permitting any other person to carry out due diligence on the proposal during the same period. The first schedule to the agreement provided that the total capital to be contributed was $10,400,000 approximately. The defendants would provide their contribution by way of plant and credit for costs already incurred, a total of $1,600,000 and cash of approximately $3,500,000. The contribution by the plaintiffs was to be entirely monetary, there is no provision for them making contributions in kind. They would contribute $5,300,000. The agreement also contemplated that further working capital of $5,000,000 would be required. This item was described as referring to capital requirements:
Which may be required in 2015 and beyond.
[7] There was no date fixed in the agreement by which such additional capital contributions were to be required, nor how any such future contributions were to be divided between the plaintiffs and the defendants.
[8] There was reference in the agreement to the parties preparing a revised business plan and budget for the next 18-24 months. This obligation too was to be completed within 30 days of signing the HOA. Clause 2.3 provided:
All parties agree to commit the necessary resources and work together to plan, facilitate and complete the transaction within 30 days of signing this FOA.
[9] As it turned out, neither party raised their capital contributions under the HOA. This led to recriminations, with some of the defendants taking the position that the plaintiffs had failed to meet their obligations under the HOA. I note though, as Mr Ross pointed out for the plaintiffs, that those same parties did not address the question of the failure of the defendants themselves to provide their share of the capital.
[10] To continue the narrative, some steps were taken by way of implementation of the agreement. The most significant of these for the purposes of this dispute are that the defendants, as directors and controlling shareholders of Danpac, transferred
51 per cent of the shares of the company to the plaintiffs and arranged for the appointment of Messrs Van Der Burgh and Pollard as directors. However, in late December/early January 2015, Mr Wagstaff on behalf of the defendants sought the resignation of those two directors and that the second plaintiff, which was the shareholding company associated with the plaintiffs, reduce its shareholding in Danpac to 10 per cent. The plaintiffs did not accede to these suggestions. On 23
February 2015, the defendants procured amendments to the Companies Office registrar which evidenced the removal of the second plaintiff as a 51 per cent shareholder in Danpac and removing Messrs Van Der Burgh and Pollard as directors of Danpac. The plaintiffs protested these steps and sought their reversal without success. After that, Danpac, under the control of the defendants who were the shareholders and directors, issued convertible notes to a third party financier in the sum of $500,000 convertible to 10 per cent of the shares in Danpac. This, as the parties agreed, had the indirect effect of valuing the company at approximately
$5,000,000, at least between the parties to that transaction.
[11] The plaintiffs continued to assert their entitlements to continued participation in the company and reversal of the changes which they said had been unauthorised. However, the defendants were not swayed by these representations and, on 30
November 2015, they registered changes to the Companies Office register which evidenced an amalgamation between Bodco Limited (the first defendant) and Danpac, as well as the consequential striking off of Danpac as a company. Danpac therefore went out of existence and Bodco by this transaction acquired its assets. On
26 July 2016, Bodco issued shares to the China Animal Husbandry Group and
appointed four new directors. That is where matters came to rest at the point when the present proceedings were filed.
[12] The plaintiffs filed proceedings and the latest iteration of their statement of claim includes, as a first cause of action, allegations that the defendants by their actions breached the HOA contract entered into in September 2014. This claim is at the heart of the dispute between the parties. The other claims, including that based on the Fair Trading Act 1986, may be viewed as being of subsidiary importance. As will be seen, I regard the contractual cause of action as determinative in this application. It is for that reason that attention in this judgment is directed solely to the contractual cause of action.
[13] The defendants filed a summary judgment application. A minor complication is that the summary judgment application which the defendants filed pre-dates the second amended statement of claim. However, the summary judgment application is to be taken as extending to all the causes of action, including the contract claim added in the second amended statement of claim. The parties argued the application on an opposed basis before me on that understanding.
[14] The summary judgment application sets out the grounds in relation to what was previously the first cause of action in the following way:1
The Heads of Agreement contained an implied term that the defendants may unwind any actions taken to change the shareholding, directorship and otherwise deal with Danpac (NZ) Limited in any way they wished if the plaintiffs failed to fulfil their obligations under the Heads of Agreement to raise the necessary capital within the prescribed time frame.
[15] This succinct statement of position is sufficient to gain an understanding of the approach that the defendants take to the contractual claim which has been brought against them.
The parties’ contentions
[16] In respect of the application for summary judgment, Mr Branch for the defendants said that in summary:
1 It is now the second cause of action.
The First Cause of Action in the Amended Statement of Claim (“the Claim”)
– (Breaches of the Companies Act 1993) is untenable and cannot possibly succeed as it was an implied term of the Heads of Agreement dated 24
September 2014 (“HOA”), that if the Plaintiffs did not make the payment set
out in Schedule 1 of the HOA, or the HOA came to an end, Pure Elite Holdings Limited (“PEH”) was not entitled to 51% of the shares in Danpac (NZ) Limited (“Danpac”) and that any steps taken by the Defendants to transfer the shares to PEH could be unwound.
It is submitted that it is obvious that PEH and the Plaintiffs are not entitled to the benefits of the HOA in circumstances where they completely failed to perform under the HOA and/or the HOA expired or was terminated.
[17] Mr Ross for the plaintiffs said that the HOA notably did not:
a) have a fixed term;
b) make timing of the performance of the various obligations essential; and
c) supply machinery for an event of breach (nor did it define breach).
The claim in contract
[18] The contract claim asserts that, notwithstanding the delays on both sides in raising funds to complete capitalisation, the HOA remained on foot. The plaintiffs claimed that, in February 2015, the defendants engaged in a series of steps that breached the HOA, including procuring the amendment to the Companies Office records in order to remove the second plaintiff as a shareholder in Danpac, as well as removing Messrs Van Der Burgh and Pollard as directors, amongst other things. The plaintiffs assert that, by these unauthorised actions, the defendants breached the HOA:
Went to matters fundamental to the joint venture, namely the joint control of
Danpac through which the joint venture was to operate.
[19] The plaintiffs allege further that the steps which the defendants took, which the plaintiffs identify compendiously as “the Unauthorised Actions”, amounted to a demonstration on the part of the defendants:
That they would not perform the HOA, despite the fact that at the time of taking the unauthorised actions, the defendants had themselves failed to raise any capital contributions pursuant to the HOA but did not consider themselves in breach of the HOA.
[20] The plaintiffs contend that they affirmed the contract notwithstanding the breach and repudiation referred to in the second amended statement of claim. It is pleaded that it did so by writing to the defendants on 26 March 2015, requiring them to rectify the changes that had been made to the companies’ records. The plaintiffs assert that at all times they remained ready, willing and able to perform the HOA, subject to the extent to which the defendants’ repudiatory conduct impaired the plaintiffs’ ability to perform. Finally they plead:
[46] On 12 May 2017, the plaintiffs accepted the defendants / the defendants accepted the defendants’ repudiation of the HOA and cancelled [it].
The nature of the contract claim
[21] The plaintiffs claim damages representing the loss they suffered through being deprived of the 51 per cent shareholding in Danpac. They estimate this loss to be no less than $55,000,000. They further claim the damages for the “loss of value in the first plaintiff”, which is estimated to be not less than $227,000,000. They seek such other relief as the Court thinks fit pursuant to s 9 of the Contractual Remedies Act 1979.
[22] I apprehend that the second claimed head of loss represents diminishment of the value of the first plaintiff because it no longer has in place the connection with Danpac, which was a link in the manufacturing and marketing chain that would have led to sales of infant formula products in China. No doubt the assumption is made that the loss of that business, which would have been profitable, has resulted in the diminishment in value of the first plaintiff which was the party that was going to have the advantage of the contractual entitlements arising from the relationship with the defendants and Danpac.
Summary judgment principles
[23] The defendants seek summary judgment under r 12.2(2) of the High Court Rules. It states that “[t]he court may give judgment against a plaintiff if the defendant satisfies the court that none of the causes of action in the plaintiff’s statement of claim can succeed.”
[24] The principles which the courts have adopted in cases for application for defendant’s summary judgment impose a formidable barrier to the party taking that course.
[25] The leading authority on the principles applicable to a defendant’s application for summary judgment is the Court of Appeal in Westpac Banking Corp v M M Kembla New Zealand Ltd.2 It relevantly commented:
[61] The defendant has the onus of proving on the balance of probabilities that the plaintiff cannot succeed. Usually summary judgment for a defendant will arise where the defendant can offer evidence which is a complete defence to the plaintiff’s claim …
[62] Application for summary judgment will be inappropriate where there are disputed issues of material fact or where material facts need to be ascertained by the Court and cannot confidently be concluded from affidavits. It may also be inappropriate where ultimate determination turns on a judgment only able to be properly arrived at after a full hearing of the evidence. Summary judgment is suitable for cases where abbreviated procedure and affidavit evidence will sufficiently expose facts and the legal issues. Although a legal point may be as well decided on summary judgment application as at trial if sufficiently clear … novel or developing points of law may require the context provided by trial to provide the Court with sufficient perspective.
[63] Except in clear cases, such as a claim on a simple debt where it is reasonable to expect proof to be immediately available, it will not be appropriate to decide by summary procedure the sufficiency of the proof of the plaintiff’s claim. That would permit a defendant, perhaps more in possession of the facts than the plaintiff (as is not uncommon where a plaintiff is the victim of deceit), to force on the plaintiff’s case prematurely before completion of discovery or other interlocutory steps and before the plaintiff’s evidence can reasonably be assembled.
[64] The defendant bears the onus of satisfying the Court that none of the claims can succeed. It is not necessary for the plaintiff to put up evidence at all although, if the defendant supplies evidence which would satisfy the Court that the claim cannot succeed, a plaintiff will usually have to respond with credible evidence of its own. Even then it is perhaps unhelpful to describe the effect as one where an onus is transferred. At the end of the day, the Court must be satisfied that none of the claims can succeed. It is not enough that they are shown to have weaknesses. The assessment made by the Court on interlocutory application is not one to be arrived at on a fine balance of the available inference, such as is appropriate at trial.
2 Westpac Banking Corp v M M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA).
Time by which the plaintiffs were required to make capital contribution
[26] The case for the defendants was that the plaintiffs were obliged to perform their part of the contract and to pay funds for the capitalisation of Danpac in accordance with the timeline which was part of the contractual document. The timeline envisaged this step would be completed within 30 days. It is common ground that the plaintiffs did not make the payment within that time.
[27] The plaintiffs’ contentions are that the timeline provided a target date but it cannot have been expected that there would be exact compliance with it. There was no express statement in the HOA that the obligation of the plaintiffs to contribute capital exactly in conformity with the timeframe was required. The plaintiffs were therefore submitting that time was not of the essence for the performance of this obligation. Before I consider that issue, some attention needs to be given to another aspect of the contract which bears upon the question of when the payment of the capital was due. It concerns what the contract said about the timing of the payments.
What did the contract say about the timing of capital payments?
[28] It was a requirement of the HOA that the initial capitalisation would take place “as per business plan”. I am not aware of any evidence establishing that a business plan covering that aspect of the matter was actually completed. What the HOA seemed to contemplate is that the date for the contribution of capital would be nominated by the business plan. There was an expectation that the business plan would be completed in the first date range set out in the HOA and that contribution of capital would take place in the second date range, 11-30 days after the signing of the HOA.
[29] It is unclear what the contract contemplated if a business plan was not completed during the first date range.
[30] As well, the timeline in the contract speaks of the understanding that there
would be an “initial capitalisation”. The initial capitalisation is defined as being
$3,000,000. The defendants apparently assume that all this amount was to be the responsibility of the plaintiffs. But a further provision of the contract, which sets out
the proposed “shareholder structure and capital contributions”, mentions only that a lump sum of $3,000,000 is to be paid. In light of the fact that both parties had an obligation to make capital contributions, it is unclear whether the understanding of the defendants is correct or not. It could be that both of them were expected to contribute to the initial capitalisation, and not just the plaintiffs.
[31] The point that is being made is not that the contract was somehow void for uncertainty. It is fair to say though that the contract contains some uncertainties and will, if the proceedings continue, require interpretation in light of the surrounding circumstances. What cannot be said is that the defendants have an open and shut case at this stage of the proceedings that the plaintiffs were to provide $3,000,000 not later than 30 working days after the execution of the HOA.
[32] An issue which is touched on subsequently in this judgment is that the proposed capital contributions were to be spent on the completion of the canning plant. No doubt the business plan which the parties contemplated would attempt to map out the various stages of construction and the capital requirements for each. The contract contemplated that there was to be a “capitalisation timetable” drawn up under the contract. That was to occur in the first 10 days, but it does not appear to have been reached. Until the business plan and the capitalisation timetable had been completed, therefore, it is arguable that the requirement to contribute capital on the part of the plaintiffs did not arise.
[33] While the contract does not expressly say so, it would not be outside the range of what a reasonable interpretation of the contract would call for. But it does not appear that any such later date was ever specified.
[34] The first point then is that it is arguable that the obligation to contribute capital had never been triggered. The significance of that outcome will be considered later in this judgment.
Preliminary discussion of contractual provisions in relation to shares
[35] In general terms, performance of obligations by one side of the contract is not a precondition to the other side becoming liable to perform its obligations. There are
exceptions, such as that contained in s 30 of the Sale of Goods Act 1908 where a vendor can decline to deliver property unless there has been performance of the obligation to pay the price.
[36] Whether the obligations are concurrent is to be determined by the intentions of the parties as appearing from the terms of the contract. There is no express linkage in this case between the obligation to provide the shares and the payment of the share capital. It is not therefore arguable that the defendant was entitled to withhold performance of transfer of the shares. I appreciate that that is not the argument which the defendants put forward. But consideration of these points will assist the understanding of the position that the defendants take. Their contention is that having delivered what they were required to do under the contract by transferring the shares, they are now entitled to recover the shares because of the non-payment.
[37] The contract does not contain such a provision. It does not include the equivalent of a retention of ownership clause. It does not confer security on the defendants which would enable them to seize the shares in the event of non- payment. None of this is seen as a difficulty by the defendants who say that the court can imply terms which have this effect. These contentions will be discussed below.
Time of the essence
[38] If it is assumed that the contract can sensibly be understood as imposing an obligation on the plaintiffs to pay the sum of $3,000,000, and fixing a date for that to occur,3 there is a further issue to be considered and that is whether compliance with that date for contributing capital was of the essence. If the provision was not of the essence, it will not qualify as an essential term of the contract which would have justified the defendants in taking this step of treating the plaintiffs as being in breach
of the HOA. Before examining this question, brief reference should be made to
authorities on the question of time of the essence in contractual stipulations.
3 That is, 11 to 30 days after execution of the HOA.
[39] The parties addressed their arguments to me on the basis that the question involved was whether time was of the essence for completion of this step in the contractual performance.
[40] The law concerning the effect of failure to comply with a time stipulation in the contract was stated in the following terms in the Supreme Court decision of Mana Property Trustee Ltd v James Developments Ltd, where the Court said:4
[36] Section 7 of the Contractual Remedies Act is, as we have already remarked, a code governing cancellation. It permits cancellation when an essential term is breached but leaves it to the parties to choose the respects in which a term is essential to their bargain. In determining whether they have made this choice in relation to a requirement for timely performance on a specified date, the courts continue to be guided by the prior law. A failure to settle a land sale contract on the appointed settlement date is not normally a breach regarded as having a substantial consequence enabling cancellation under s 7(4)(b). It is the same when the term which has been breached is expressly or impliedly agreed to be an essential term, unless it can also be seen that the parties have expressly or impliedly agreed that the time of performance is essential to the cancelling party (or to both). In other words, the courts normally do not attribute to the parties to a land sale contract an agreement that time for performance of the settlement obligation is essential.
[41] In the present case, the parties do not expressly state that exact compliance with the time requirements in the contract was essential to the parties. It would nonetheless be open to the Court to conclude that time was of the essence. The rules which equity developed and which are now part of the common law have been described in the following terms:5
My Lords, the rules of equity, to the extent that the court of chancery had developed them up to 1873 as a system distinct from rules of common law, did not regard stipulations in contracts as to the time by which various steps should be taken by the parties as being of the essence of the contract, unless the express words of the contract, the nature of its subject-matter or the surrounding circumstances made it inequitable not to treat the failure of one party to comply exactly with the stipulation as relieving the other party from the duty to perform his obligations under the contract.
[42] The contract in this case did not explicitly state that time was of the essence for the performance of the obligation to contribute funds by way of capital. Another
possibility, which is not referred to in the above extract from United Scientific
4 Mana Property Trustee Ltd v James Developments Ltd [2010] NZSC 90, [2010] 3 NZLR 805.
5 United Scientific Holdings Ltd v Burnley Borough Council [1978] AC 904, [1977] 2
All ER 62 (HL) at 70.
Holdings Ltd v Burnley Borough Council, is that time can be made essential by a party giving notice to that effect.6 It is common ground in this case that no such notice was provided. Therefore, if the failure to pay the capital amount required in accordance with the HOA timeframe is to be viewed as of being of the essence, that can only be so if the Court comes to the view that, having regard to matters such as the nature of the subject matter and the surrounding circumstances, it is to be
assumed that the parties implicitly agreed that exact compliance with the date for performance was required. These are matters that I will consider next.
[43] Some of the relevant aspects of the contract and the background circumstances in which it entered into will now be considered to see how they bear upon the question of whether time was of the essence for performance of the obligation to contribute capital.
[44] The defendants’ position is that it was necessary for the parties to know where they stood because it was clear from the terms of the contract that if the plaintiffs were unable to provide the funding sought, then Bodco would be free to look elsewhere for a marketing and financing partner and it would not be bound by the exclusivity of dealing provision contained elsewhere in the contract.
[45] If the plaintiffs failed to provide the funds at the stipulated time, and if the defendants had grounds to cancel and considered that they ought to cancel the agreement, then the defendants would be back looking for a replacement co- venturer. If they cancelled the contract, they would from that point be free from the exclusive dealing obligation.
[46] From the point where they entered an agreement with the plaintiffs, they were prevented from canvassing for alternative co-venturers and indeed everyone, including themselves, would have assumed that there was no need for them to do so.
[47] It is true that if the HOA failed, the defendants would be disadvantaged from the point of view that they would then need to start again from scratch in attempting
to attract another party who was a reliable source of funding. In the meantime, their
6 United Scientific Holdings Ltd v Burnley Borough Council, above n 5.
project would be partially completed and at a standstill. I agree that, from this point of view, it would be preferable for them to know at an earlier date rather than a later date that they were free from obligations contained in the HOA so that they could get started on finding a replacement co-venturer.
[48] On the other hand, there are considerations which support the view that the parties did not intend that they would be in breach of the contract if they had not completed the various steps set out in the timeline and the contract by the date therein specified.
[49] There seems to be good reason to suppose that the intention of the parties was that capital would be contributed as and when it was needed, with that issue to be resolved by the business plan.
[50] If there was uncertainty about the capital expenditure program - when money was going to have to be available to be spent on the Danpac development - then it is difficult to see why the parties would have required the plaintiffs to pay the entire amount of $5,200,000 as at 24 December 2014, even though it might be months before the money would be required.
[51] The question of whether the date in this case was of the essence is one that can therefore only be answered by considering the overall circumstances, namely the context in which the HOA was signed. The expected date for expenditure on items of equipment might be one such factor. If, for example, there was evidence that the parties had a discussion in the terms of which the defendants informed them that payment for equipment was now due and that a debt would be overdue for payment if no payment was made in the time range of 11-30 days, then a further argument could be advanced that it was essential that initial capitalisation should take place. It would depend upon the resources currently available to Danpac. Again, for example, if there were already liabilities that had to be met but they were not substantial and well within the ability of the company to pay from existing resources, or from credit from another source, then there may be difficulty in understanding why it should be essential that the plaintiffs should provide $5,300,000 punctually within the 11-30 day time range.
[52] On the other hand, it is not clear that the actual construction and development of the Danpac facility could have been planned, agreed upon and actually commenced by the end of the 30 day period. There is no evidence that there was a pressing need for the amount of $3,000,000 or $5,300,000 to be paid at such an early stage in the life of the co-venture. This lends support to the consideration discussed earlier in this judgment that payment of the capital contribution may well have been contingent upon the preparation of the business plan. Further, there is room for argument that had the business plan ever been agreed upon, it would have provided for a staged provision of capital as and when needed. These matters are a contradiction to suggestions that the funding was to be paid in 30 working days, irrespective of the needs of Danpac or the stage at which construction had reached.
[53] It may have been as well that funds were required for marketing and sales purposes. The company would need working capital to tide itself over until production had commenced, sales and marketing staff had been engaged and organised and other costs relating to the marketing of the proposed products had been outlaid. The steps were presumably going to be far distant from the 30 working day period from the execution of the HOA. It would be difficult to understand why the provision of capital for such future needs needed to be made in such a truncated timeframe as the defendants say it was.
[54] An argument could be made that if the funding was not going to be required for immediate outlay on capital expenditure, then in the absence of any entitlement of the plaintiffs to security, they would seem to be put in a position where they were exposing themselves to risk by paying the money over to Danpac.
[55] An argument can, however, be put forward which supports the contention that the dates for payment of capital meant what they said and were intended to be complied with literally. That argument would involve the proposition that it is unlikely that the defendants would be prepared to hand over control of the company without the capital being provided in return. But, in this case, the contract did not provide any timetable which made it clear that on the date when the plaintiffs made the capital contribution, they would be entitled to call for the shares in return. While
a date was fixed for the payment of capital, the contract did not spell out that that would be the same date upon which the shares would be handed over.
[56] Such evidence as there is as to the parties’ intentions concerning the sequence of the transfer of shares or payment of capital takes the form of an inference from their conduct. By that, I mean that the plaintiffs did make a payment that was temporally linked to the transfer of the shares. At the time of the transfer of the shares in October 2014, they paid the sum of $51 which would appear to be a sum equal to the nominal value of the shares that they received. A possible inference from this evidence is that the agreement between the parties was an omnibus arrangement which had several constituent components, one of which was the sale of shares and another part which was concerned with the plaintiffs providing capital. The parties’ intentions, objectively ascertained, may have been that the transfer of the shares was contingent upon payment of the nominal or par value of the shares but not also contingent on the provision of the capital which the plaintiffs had promised to provide.
[57] In theory, this could have been a case where Danpac had little present value, but considerable potential, that would only be realised if a third party injected substantial capital.
[58] At the very early stage which the proceedings have reached, and having regard to the limited discussion of the issues which has occurred in this case, it is difficult to be confident about what the parties intended. Not enough is known about the position of Danpac to know whether arguments of a kind referred to in the previous paragraph are realistic.
[59] Further, the sequence in which events occurred in this case (the plaintiffs receiving the shares at a point where they had yet to make their capital contributions) may not have been inconsistent with the parties’ contractual intentions. It may have been that the plaintiffs wanted to already be in control of the company at the point where the funds were injected. The advantage of such an arrangement from their point of view would be a degree of control over where their money went.
[60] Then there is the point that if the contractual obligation was to pay the capital first before the shares were transferred, that was certainly not evident from the way in which the defendant’s comported themselves at the time when the shares changed hands.
[61] Even if the contract imposed an obligation on the plaintiffs to pay the capital first and then receive the shares, such a requirement could have been waived by the defendants.
[62] There are real limitations upon the ability of the court to come to any firm understanding about what the contract intended in the areas that I have just been discussing. At such a stage, the court does not have any well-developed understanding of factors which will influence the interpretation of the contract
including:7
… the genesis of the transaction, the background, the context, the market in
which the parties are operating.
[63] Materials of that kind may be of more than the usual importance in the present case given that the contract was drafted by a person(s) who was not professionally skilled and qualified for the purpose.
[64] My conclusion is that it is arguable that it is not clear whether the date which was fixed by the contract for the contribution of capital needed to be complied with literally. It would follow from those conclusions that there must be uncertainty about whether the plaintiffs were in breach of the contract at the time when the defendants, as Mr Branch euphemistically put it, sought to “unwind” the contract by appropriating the shares earlier transferred to the plaintiffs.
[65] Of course that does not mean that the plaintiffs were entitled to indefinitely delay the step of contributing the capital they were required to put into the venture. There were alternatives available to the defendants if there was unreasonable delay. They could have given a notice making time of the essence once a reasonable time
had gone by for the plaintiffs to comply with their obligation.
7 Reardon Smith Line Ltd v Hansen-Tangen [1976] 1 WLR 989 (HL) at 997.
The forfeiture of the shares and removal of directors
[66] In this section of the judgment, I will consider the question of whether, even assuming that the plaintiffs were in breach of their obligation to pay the capital before the shares changed hands, it was open to the defendants to take matters into their own hands by seeking to restore the shares to themselves and by discharging the plaintiffs’ nominated directors as directors of the company. The plaintiffs’ case rests upon the assumption that they had no such entitlement. The defendants’ case is that the plaintiffs cannot succeed and that the matter ought not to be sent to trial for decision.
[67] The defendants justified their taking back of the shares and the removal of the plaintiffs’ nominated directors on the grounds that there was an implied power on their part to take those steps. The way that Mr Branch put this part of the argument was that if shares were transferred and the transferee did not pay the agreed price for them, then it was obvious that a provision should be implied into the contract that the transferor, the defendants, had the entitlement to “unwind” the transaction in the
manner that the defendants did in this case.8
[68] The argument assumes that there had been a breach of contract on the part of the plaintiffs which would trigger the provisions of this implied term. For the reasons set out in the previous section of this judgment, I consider that it is arguable that in fact there had not been any breach of contract at the point where the steps were taken of changing the companies register so that the plaintiffs were no longer
the owners of shares and their directors no longer occupied that office.9 Likewise, I
consider that even if the obligations of the plaintiffs to provide capital had been
8 The defendants do not apparently contend that property in the shares never passed to the plaintiffs. Such a contention, had it been put forward, would have foundered on the provisions of ss 39(2) and 84(1) of the Companies Act 1993. They provide that, subject to the compan y’s constitution, shares in a company are transferred by entry of the name of the transferee on the share register. Section 89(1) states that the entry of the name of a person in the share register as holder of a share is prima facie evidence that legal title to the share vests in that person. If the plaintiff’s name was entered on register, they had legal title to the shares. The defendants would have no legal right to transfer the shares back.
9 The defendants took this step on 27 February 2015.
satisfactorily defined,10 it may be argued that the obligation was not one in regard to which time is of the essence.
[69] Because any implied term entitling the defendants to recover the shares is apparently contingent upon their having been a breach of contract, there are substantial reasons for concluding that the circumstances which the term was supposed to cover never actually occurred.
[70] Notwithstanding the conclusions in the preceding paragraph, I will go on to consider whether the plaintiffs have any arguments available to them in response to the contentions that the contract was subject to an implied term of the kind which the plaintiffs assert.
Implied term
[71] The defendants submit that a term is to be implied into the contract in the following form:
(a) It is reasonable and equitable to recognise that it was a term of the HOA that PEH, having failed to capitalise Danpac, is not entitled to a shareholding in 51% of Danpac and, accordingly, it is reasonable and equitable that any steps taken by the Defendants to transfer that shareholder to PEH (via Ever Health New Zealand Limited) with
51% of the shares in Danpac in accordance with clause 1.7 of the
HOA could be unwound.
[72] Mr Branch further submitted that: It follows that the parties would have agreed that if [the plaintiff] did not provide the agreed contribution by 24 October 2014, it would not be entitled to retain any shares already transferred to it. [73]
A similar outcome attached to the appointment of the directors,
in
Mr Branch’s submission.
[74] Mr Ross submitted that the current leading authority on implied terms in
New Zealand is the Supreme Court case of Mobil Oil New Zealand Ltd v
Development Auckland Ltd.11 Mr Branch did not disagree.
10 By completion of the capital contribution program and the business plan
[75] In his judgment in Mobil Oil, Young J made reference to two main English appellate level authorities, BP Refinery (Westernport) Pty Ltd v Shire of Hastings12 and Attorney General of Belize v Belize Telecom Ltd.13 In the BP Refinery case, as is well known, the Privy Council stated that there were five conditions to be satisfied before a term could be implied into the contract those being:14
(1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that “it goes without saying”; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract.
[76] Young J referred to the following passage from Belize Telecom in the following terms:15
“It is frequently the case that a contract may work perfectly well in the sense that both parties can perform their express obligations, but the consequences would contradict what a reasonable person would understand the contract to mean. Lord Steyn made this point in the Equitable Life case (at p. 459) when he said that in that case an implication was necessary ‘to give effect to the reasonable expectations of the parties.’
The same point had been made many years earlier by Bowen LJ in his well known formulation in The Moorcock (1889) 14 PD 64, 68:
‘In business transactions such as this, what the law desires to effect by the implication is to give such business efficacy to the transaction as must have been intended at all events by both parties who are business men
“Likewise, the requirement that the implied term must ‘go without saying’ is no more than another way of saying that, although the instrument does not expressly say so, that is what a reasonable person would understand it to mean.”
Lord Hoffmann then went on to say:
“The Board considers that this list is best regarded, not as series of independent tests which must each be surmounted, but rather as a collection of different ways in which judges have tried to express the central idea that the proposed implied term must spell out what the contract actually means, or in which they have explained why they did not think that it did so. The Board has already discussed the
11 Mobil Oil New Zealand Ltd v Development Auckland Ltd [2016] NZSC 89, [2017] 1 NZLR
48.
12 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC).
13 Attorney General of Belize v Belize Telecom Ltd [2009] UK PC 10, [2009] 1 WLR 1988.
14 BP Refinery, above n 12, at 283.
15 At [80]; citing Belize Telecom, above n 13, at [23]-[25], [27]. Citations omitted.
significance of ‘necessary to give business efficacy’ and ‘goes without saying’. As for the other formulations, the fact that the proposed implied term would be inequitable or unreasonable, or contradict what the parties have expressly said, or is incapable of clear expression, are all good reasons for saying that a reasonable man would not have understood that to be what the instrument meant.”
[77] In the Mobil Oil decision, the Court was therefore content to adopt what Lord Hoffmann had said in the Belize Telecom case that the central idea is that the proposed implied term must spell out what the contract actually means.16 In other words, it is an issue of interpretation.
Discussion
[78] The case for the defendants is that they are entitled to retain property that was transferred to them pursuant to a provision of the contract that they entered into. The case would be that the transfer of the shares to them and the appointment of the directors amounted to a performance of the contract.
[79] The defendants contend that the transfer of the shareholding was not something that they were contractually bound to do: that they acted gratuitously in transferring the property because the preconditions which needed to be established to any right to the property on the part of the plaintiffs had not been satisfied. It would appear to be their position, further, that the result of this is that the defendants have not become the legal owners of the shares and that they, the defendants, were never legally divested of the property in the shares.
[80] They appear to thus take the view that not only did an effective transfer of the shares depend upon satisfying preconditions, but that they did not waive their entitlement to insist upon such a condition - even in circumstances where they had apparently agreed to a transfer of the shares taking place without the plaintiffs first satisfying the precondition for the same (the contribution of capital).
[81] Alternatively, their case would seem to depend upon the proposition that even if an effective and binding transfer of property had taken place, notwithstanding
16 At [81].
the non-fulfilment of the precondition to which I have made reference, there was an implied legal power contained in the contract for them to subsequently recover property in the shares by unilateral action on their part. That power would presumably be exercisable in the event that the expected contribution of capital did not occur.
[82] Why the implication of such a right should be seen as justifiable is not clear given the relevant provisions of the Contractual Remedies Act 1979 (“CRA”), which I will discuss next. I will briefly discuss those provisions and then return to my conclusions concerning the implied term for which the defendants contend.
Relief under the CRA
[83] Section 8(3) of the CRA provides that:
Subject to this Act, when a contract is cancelled the following provisions shall apply:
…
(b) so far as the contract has been performed at the time of the cancellation, no party shall, by reason only of the cancellation, be divested of any property transferred or money paid pursuant to the contract.
[84] Nonetheless, the court could make orders following a valid cancellation for damages, compensation or even the transfer or assignment of property pursuant to s
10.
[85] The powers under the CRA are, of course, exercisable by the courts. What the defendants in this case contend for is that, rather than leaving it to the courts, the parties intended that, in the event of a breach of the supposed condition, the defendants would have a “self-help” remedy available to them by which they could recover the shares. Because the proposed right for which the defendants contend is a unilateral one, any entitlements that the plaintiffs might have arising out of the cancellation of the contract would have to be recovered in the normal way by court proceedings being commenced. Such a course is expensive and time-consuming. It is a lot less straightforward than the self-help remedy for which the defendants
contend. That is not to say that the plaintiffs have a clear-cut case entitling them to relief.
[86] However, the court when exercising the power to grant remedies under the CRA is entitled to take account of the expectation interests of the innocent party to the cancellation.17 While the evidence that has been placed before the court is limited, it may well have been the case that existing canning/processing operators in the market were going to become scarcer. Ensuring some security of arrangements would have been an important objective of the plaintiffs. No doubt they thought they had achieved this step when the HOA was signed. The loss of their contract was intrinsically a negative outcome from their point of view. No doubt they had a
vested interest in trying to hold onto the contract if they could. All this is consistent with the fact that they have gone to the expense of taking court proceedings in which they claim that the loss of the contract has exposed them to a substantial loss of future income, which has a secondary consequence of reducing the value of their trading enterprises. The scale of the damages claimed in this case may give rise to some scepticism. But it seems likely that the plaintiffs in conjunction with a capable operator, which I assume Danpac to be, could derive substantial revenue from the Chinese market. The loss of an opportunity to trade to that market would understandably be damaging to the plaintiffs. The prospects of finding a replacement partner may have been moot.
[87] Given that there is at least a theoretical chance that the plaintiffs would be entitled to some relief, it is difficult to understand why the court should impute to the parties an intention that the defendants would be able to enforce their rights by a self-help regime which was summary in nature, that the plaintiffs would have to submit to the negation of their putative rights of property in the shares, but then wait an uncertain period in order to obtain such relief as they were entitled to under the contract.
[88] Nor is it obvious why the express provisions of the CRA which provide that cancellation does not divest a party of property it has acquired under the CRA should
be overridden by an implied contractual term.
17 Newmans Tours Ltd v Ranier investments Ltd [1992] 2 NZLR 68 (HC) at 94.
[89] It may be that at the end of the day the defendants are able to satisfy the court that they are entitled to the return of the shares and that the factual position as it exists will thereby be confirmed. However, were such an outcome to occur, it would result from the decision made by the court taken after adjusting the various rights of the parties. The process would be quite a different one from the self-help rights which the defendant say that they were entitled to exercise.
Conclusion on implied term
[90] In my assessment, a good argument can be put forward that no implied term of the kind upon which the defendants rely was part of the contractual arrangements in this case.
[91] It is not obvious in this case why the parties would have agreed to provide a unilateral and summary remedy to the defendants in the event of their coming to a view that the plaintiffs were in breach of the contract. While a provision of that kind may well have suited the convenience of the defendants, that is not the test which must be satisfied. The defendants must be able to demonstrate to the court that it was the common intention of the parties that such a provision, although not explicitly mentioned by them, was obviously intended to be part of the contractual arrangements.
[92] It may be argued that what was more likely is that the parties, in the event of a dispute, were content to either negotiate a settlement or submit their differences to the court which would then rule on them in accordance with legal principle.
Result
[93] In my assessment, the propositions upon which the defendants must rest their case are far from straightforward and are a long way from conforming with the principle that summary judgement is not appropriate unless the substantive merits of
the case are clear and are capable of summary disposal.18
18 Westpac Banking Corp v M M Kembla New Zealand Ltd¸above n 2, at [68].
[94] I consider that the plaintiffs have substantial grounds available to them upon which to defend the summary judgment application. That is not to say that I consider that the overall merits of the dispute necessarily rests with the plaintiffs. However, I do not consider that the summary judgment application which the defendants have brought is justified and it will be dismissed.
[95] The parties should confer on the question of costs and, if they are unable to agree, are to file memoranda not exceeding six pages on each side within 15 working
days of the date of this judgment.
J.P. Doogue
Associate Judge
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