Restaurant Brands Limited v Forsgren NZ Limited
[2019] NZHC 602
•27 March 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-1708
[2019] NZHC 602
UNDER the Declaratory Judgments Act 1908 BETWEEN
RESTAURANT BRANDS LIMITED
Plaintiff
AND
FORSGREN NZ LIMITED
First Defendant
HENRY BARRY FORSGREN
Second Defendant
Hearing: 21 March 2019 Appearances:
J Carlyon and C Fleming for the Plaintiff
A Barker QC and C Hollings for the Defendants
Judgment:
27 March 2019
JUDGMENT OF ASSOCIATE JUDGE SMITH
This judgment was delivered by me on 27 March 2019 at 2.30pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors / Counsel:
Meredith Connell, Auckland Burton & Partners, Auckland
A Barker QC / C Hollings, Auckland
RESTAURANT BRANDS LTD v FORSGREN NZ LTD [2019] NZHC 602 [27 March 2019]
[1] The defendants apply for orders for particular discovery of documents in a dispute arising out of the 2014 sale to the plaintiff (RBL) of a number of fast food restaurants operating in Auckland under the "Carl's Junior" brand (the Sale Agreement). The vendor was the first defendant (Forsgren). The second defendant (Mr Forsgren) was a covenantor under the Sale Agreement.
[2]The application is opposed by RBL.
Background
[3]The following facts are not in dispute.
[4] Forsgren used to own the Auckland franchise for the Carl's Junior fast food restaurant chain. It owned seven stores in Auckland. In November 2014, it sold that business to RBL.
[5] One of those stores was located on Upper Harbour Highway, North Harbour (the Store). As part of its due diligence, RBL identified the possibility of road works affecting the access to the Store from Upper Harbour Highway. If that were to happen, it could have a significant impact on the commercial viability of the Store. RBL did not want to purchase the Store with that level of uncertainty.
[6] To resolve this problem, the parties entered into a separate arrangement in respect of the Store (the Side Letter) on 2 December 2014. The Side Letter made two important changes to the overall transaction.
[7] The first was that, rather than Forsgren assigning the lease that it held for the Store to RBL (as was being done with the other stores), Forsgren would sub-lease the site to RBL (the Sublease). RBL would be able to terminate the Sublease if certain events occurred, leaving Forsgren with the problem of the underlying lease to the landlord. The termination events related to access to the neighbouring roads being permanently closed, or there being a significant disruption to traffic flow in the neighbouring area (paragraph 3(a)(ii) of the Side Letter).
[8] The second change was that RBL would keep back $400,000 of the purchase price (the Escrow Amount) against the possibility that the Sublease would be terminated within the first four years (the Escrow Period). The circumstances in which RBL would be entitled to claim the Escrow Amount were set out at paragraph 3(f) of the Side Letter as follows:
If at any time prior to the end of the Escrow Period [the Sublease] is terminated or lapses for any reason (other than due to the [RBL's] unremedied default under [the Sublease]), including termination by [RBL] in accordance with paragraph (a)(ii) or lapse due to the dissolution of [Forsgren], then [RBL] is entitled to the full amount of [the Escrow Amount].
[9] If RBL did not become entitled to payment of the Escrow Amount within the 4 year Escrow Period, then Forsgren would be entitled to receive the Escrow Amount.
[10] Subsequently, the Crown indicated its intention to take the entire site under the provisions of the Public Works Act 1981 (the PWA) for the Northern Corridor Improvements project. That led to negotiations between RBL and New Zealand Transport Agency (NZTA) over compensation.
[11] Those negotiations resulted in an agreement with the Crown recorded in a Memorandum of Agreement dated 14 May 2018 (the Compensation Agreement), whereby RBL would be paid the amount of $1,418,667 + GST (the compensation payment) in compensation for the loss of its interests under the Sublease. The structure of the Compensation Agreement was that RBL would sell its interest in the Sublease to the Crown, and the Crown would then terminate the Sublease.
[12] Having received the compensation payment from the Crown, RBL has sought to claim the Escrow Amount on the basis that the Sublease has "terminated or lapsed for any reason", under paragraph 3(f) of the Side Letter.
The documents sought by the defendants
[13] On 18 October 2018 I made an order for standard discovery. Verified discovery lists were subsequently filed by each party.
[14] The defendants then applied for orders for particular discovery of two categories of documents:
1.documents relating to discussions of the escrow arrangements after the Side Letter was executed; and
2.documents comprising or recording the negotiations between RBL and/or its agents and NZTA and/or its agents prior to the Compensation Agreement.
[15] In its notice of opposition, RBL said that all documents in category 1 have been discovered. Mr Barker accepted that position, subject to it being confirmed on oath by RBL. At the hearing, I directed RBL to file an affidavit within five working days, confirming that it does not have any category 1 documents in its control that have not been discovered.
[16]The only issue therefore relates to the documents in category 2.
Applications for particular discovery — legal principles
[17]Rule 8.19 of the High Court Rules:
8.19Order for particular discovery against party after proceeding commenced
If at any stage of the proceeding it appears to a Judge, from evidence or from the nature or circumstances of the case or from any document filed in the proceeding, that there are grounds for believing that a party has not discovered 1 or more documents or a group of documents that should have been discovered, the Judge may order that party—
(a)to file an affidavit stating—
1.whether the documents are or have been in the party’s control; and
2.if they have been but are no longer in the party’s control, the party’s best knowledge and belief as to when the documents ceased to be in the party’s control and who now has control of them; and
(b)to serve the affidavit on the other party or parties; and
(c)if the documents are in the person’s control, to make those documents available for inspection, in accordance with rule 8.27, to the other party or parties.
[18] The basic requirements for an application under r 8.19 were summarised by Asher J in Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd as follows:1
1.Are the documents sought relevant, and if so how important will they be?
2.Are there grounds for belief that the documents sought exist?
3.Is discovery proportionate?
4.Weighing and balancing these matters, is an order appropriate?
[19] It is common ground in this case that the critical issue is over the relevance of the documents sought.
The pleadings — statement of claim, statement of defence and counterclaim, and reply and defence to counterclaim
The statement of claim
[20] In the statement of claim, RBL recites the background of its acquisition of the Store, substantially as described above.
[21]It then pleads the following provisions of the Side Letter:
(a)Forsgren will retain the lease of [the Store] and enter into the Sublease with RBL (paragraph 3(a));
(b)RBL will pay [the Escrow Amount] to [RBL's solicitors, Harmos Horton Lusk Ltd — "HHL"] as Escrow Agent pursuant to clauses 6.2, 6.3, 6.5, 7.4 and 8 of [the Sale Agreement], which apply "with all necessary modifications and subject to paragraph (g)" (paragraphs 3(c) and (d));
1 Assa Abloy New Zealand Ltd v Allegion (New Zealand) Ltd [2015] NZHC 2760; [2018] NZAR 600, at [14], applied in Lighter Quay Residents Society Inc v Waterfront Properties (2009) Ltd [2017] NZHC 818 at [16].
(c)RBL:
… may terminate the Sublease by notice to [Forsgren] if at any time prior to [the end of the Escrow Period]:
(A)access and egress to and from the road currently called Upper Harbour Highway or Paul Matthews Road is permanently closed; or
(B)there is, or works commence that are reasonably likely to result in, significant disruption to traffic or traffic flow (other than of a temporary nature) in the vicinity of [the Store].
(paragraph 3(a)(ii));
(d)HHL will hold [the Escrow Amount] on trust for RBL and Forsgren has no interest in or entitlement to [the Escrow Amount] unless and until it becomes entitled to payment of [the Escrow Amount] under paragraph (h) (paragraph 3(e)).
(e)RBL is entitled to payment of [the Escrow Amount] as follows:
3(f)If at any time prior to the end of the Escrow Period the Sublease of [the Store] is terminated or lapses for any reason (other than due to [RBL's] unremedied default under the Sublease), including termination by [RBL] in accordance with paragraph (a)(ii) or lapse due to the dissolution of [Forsgren], then [RBL] is entitled to payment of the full amount of [the Escrow Amount].
(f)HHL is required to pay [the Escrow Amount] as follows:
3(g) If [RBL] becomes entitled to payment of [the Escrow Amount], [RBL] may give written notice to the Escrow Agent requiring payment of [the Escrow Amount] to [RBL] and the Escrow Agent must comply with that notice.
(g)Forsgren is entitled to payment of [the Escrow Amount] as follows: 3(h) If [RBL] does not become entitled to payment of [the
Escrow Amount] by the expiry of the Escrow Period,
then [Forsgren] is entitled to payment of the full amount of [the Escrow Amount].
[22] Completion as between RBL and Forsgren took place on 9 December 2014. The Escrow Period therefore ran from that date until 9 December 2018.
[23] HHL has been holding the Escrow Amount, and has undertaken to deal with that sum in accordance with the provisions of the Side Letter.
[24] RBL pleads that, in or around late 2017, the Crown notified it of its intention to acquire the land and close the Store under the PWA. It says that, in or around May 2018 it entered into the Compensation Agreement under the PWA. Under the Compensation Agreement:
1.RBL sold its interest in the Store; and
2.the Sublease was terminated by the Crown.
[25] RBL says that, as a result of the acquisition of the land and the Sublease by the Crown, the Sublease terminated and/or lapsed and it became entitled to payment of the Escrow Amount in accordance with paragraphs 3(f) and (g) of the Side Letter.
[26] RBL's statement of claim also refers to a letter from the defendants' solicitors dated 14 February 2018, in which the defendants are said to have accepted that the Crown's acquisition of the land resulted in the termination of the Sublease and Forsgren's loss of entitlement to the Escrow Amount.
[27] The defendants having objected to the payment of the Escrow Amount to RBL, RBL seeks a declaration that it is entitled to payment of the Escrow Amount in accordance with the Side Letter.
The statement of defence and counterclaim
[28] In their statement of defence and counterclaim, the defendants generally deny knowledge of the terms of settlement reached between the Crown and RBL under the PWA. Subject to that, they accept that the effect of the Compensation Agreement was that RBL sold its interest in the Store (including the Sublease) to the Crown. The defendants further say that RBL was fully compensated for its interest in the Store, by way of a payment of the compensation payment. They say that the Crown did not acquire the headlease from Forsgren.
[29] In those circumstances the defendants say that, if the headlease and the Sublease have been terminated (which they deny), the termination has been brought about by operation of law, as a result of the compulsory acquisition of the land. They
deny that those circumstances give RBL the right to payment of the Escrow Amount under the Side Letter.
[30] The defendants' two counterclaims both relate to the terms of the Side Letter. In their first counterclaim, they seek a declaration that Forsgren is entitled to be paid the Escrow Amount. They contend that the circumstances under which RBL would have been entitled to payment out of the Escrow Amount have not occurred, as paragraph 3(f) of the Side Letter does not apply in circumstances where RBL has sold its interest in the Store for value, or where its interest in the Sublease has been compulsorily acquired under the provisions of the PWA. They say that the Sublease has not otherwise been "terminated" or "lapsed" within the meanings of those expressions as used in the Side Letter.
[31] The defendants' second counterclaim pleads that, for reasons of business efficacy, it is necessary to imply a term into the Side Letter to the following effect:
Paragraph 3(f) does not apply when:
(a)RBL sells its interest in the Sublease for value;
(b)RBL's interest in the Sublease is compulsorily acquired under the provisions of the [PWA] and it is paid compensation for that interest by the acquiring authority.
[32] The defendants then plead that, in accordance with that implied term, RBL has sold its interest in the Sublease for value, and/or RBL's interest in the Sublease has been compulsorily acquired and RBL has been paid compensation for that interest by the acquiring authority.
The reply and statement of defence to counterclaim
[33] RBL has filed a short reply and statement of defence to counterclaim. It denies the interpretation of the Side Letter for which the defendants contend, and it denies that the term for which the defendants contend should be implied in the Side Letter.
Counsel's submissions
Mr Barker
[34] Mr Barker submitted that the Compensation Agreement shows that RBL has been compensated on the basis that it did not terminate the Sublease in the first four years, and that it would have continued to operate it for years to come.
[35] The defendants do not know the exact basis for the compensation payment, as RBL has declined to provide access to those documents. However, it is difficult to see how compensation of $1.5 million approximately could have been given to RBL unless it included compensation for future trading after the four year Escrow Period had expired. If that is the case, there is a fundamental tension in RBL's claim. It has been fully compensated under the Compensation Agreement, but says it should also receive the Escrow Amount (which is predicated on an assumption that it ceased to trade within the Escrow Period). The defendants say that paragraph 3(f) of the Side Letter was never intended to apply where RBL has received full compensation for its losses under the PWA.
[36] Mr Barker submitted that a critical issue on RBL's claim is the meaning and effect of the Compensation Agreement. The Compensation Agreement and its consequences are said to have had the effect of triggering cl 3(f), and in those circumstances the defendants must be entitled to discovery of documents showing the context of the Compensation Agreement, to understand what exactly was agreed and why. He submitted that the category 2 documents are directly relevant to the interpretation and understanding of the Compensation Agreement.
[37] Mr Barker also referred to post-contract conduct. He submitted that RBL must have taken a position on the continuation of the Sublease in the course of its negotiations with NZTA, and possibly it also took a position on its ability to recover the Escrow Amount. The Escrow Amount may have been deducted from the compensation payment on the basis that RBL was going to recover that amount. On the other hand, it may have been ignored in any negotiations, suggesting that RBL did
not think it would be entitled to the payment.2 If the compensation payment reflected trading losses over the remaining term of the Sublease, that would support an argument that, for the purposes of cl 3(f) of the Side Letter, the Compensation Agreement was not a termination or lapse of the Sublease. That would be evidence of post-contract conduct.
[38] Mr Barker acknowledged that such conduct would not be mutual conduct, involving both parties; it would relate only to RBL's actions. However, such conduct may be admissible.3 Finally, Mr Barker submitted that RBL's construction of cl 3(f) would lead to a result lacking in business common sense. It would mean that RBL was effectively compensated twice.
[39] On the approach of the Court to a discovery application such as the present, Mr Barker referred to the judgment of Associate Judge Bell in Rapid Metal Developments NZ Ltd v Access One Scaffolding Ltd, where the Associate Judge said:4
[5] … Pleadings determine the limits of relevance. In determining relevance, the case of the party seeking discovery must be assumed to be true, not that of the party from whom discovery is sought. Similarly the Court will not try the case during a discovery application to decide the ultimate relevance alleged by the party seeking discovery. … Standard discovery does not require a party to disclose documents that are part of the story or background which, though relevant, may not be necessary for the fair disposal of the case. … Under standard discovery, documents are to be disclosed if they or the information in them are capable of being used in evidence, either because they support the case of the party making discovery or any other party, or because they are adverse to the case of that party.
[40] Associate Judge Bell also referred to the following passage from Bray on Discovery:5
Nor will the Court for the purpose of determining the relevance of the discovery to a particular issue try that issue for the purpose of determining the relevance of the discovery, for it is in order that that issue may be rightly determined that the discovery is required.
2 Subsequent conduct may be relevant to the interpretation of a written contract. See Gibbons Holdings Ltd v Wholesale Distributors Ltd [2007] NZSC 37, [2008] 1 NZLR 277 at [60] per Tipping J. See also New Zealand Carbon Farming Ltd v Mighty River Power Ltd [2015] NZCA 605 at [165].
3 Gibbons Holdings Ltd v Wholesale Distributors Ltd, above n 2, as further explained in Vector Gas Ltd v Bay of Plenty Energy Ltd at [30] to [32].
4 Rapid Metal Developments NZ Ltd v Access One Scaffolding Ltd [2017] NZHC 204 at [5].
5 Edward Bray The Principles and Practice of Discovery (Reeves & Turner, London, 1885) at 18.
Ms Carlyon
[41] Ms Carlyon submitted that the basic question to be resolved in the case is whether RBL is entitled to the Escrow Amount under the terms of the Side Letter. It is common ground that that turns on the proper interpretation of the Side Letter, in particular cl 3(f). That in turn depends on the meaning of the words "terminated and lapsed" in cl 3(f). The first question in the case will be whether a termination occurring when RBL has sold its interest in the Sublease for value is excluded from the ambit of cl 3(f).
[42] The second question will be whether a term should be implied in the Side Letter that cl 3(f) does not apply where RBL sells its interest in the Sublease for value and/or the Sublease is compulsorily acquired and compensation is paid.
[43] It is not disputed that the Sublease was terminated, and nor is it disputed that RBL received the compensation payment. The defendants have been provided with the Compensation Agreement, which sets that out. While RBL does not necessarily accept that it received full compensation, the amount paid to it is not in issue, and was greater that the Escrow Amount.
[44] In those circumstances the meaning of the Compensation Agreement is not at issue in the claim. RBL is not claiming that the Compensation Agreement and its consequences triggered cl 3(f), but that the termination of the Sublease triggered cl 3(f). While the termination may have come about as a result of the Compensation Agreement, it was not the Compensation Agreement that triggered cl 3(f). On that basis, the proper interpretation of the Compensation Agreement is irrelevant, and the category 2 documents are irrelevant.
[45] Ms Carlyon accepted that the parties' conduct after the signing of the Side Letter may be relevant to the interpretation of the Side Letter, but only if that evidence sheds light on the common intention of the parties at the time they entered into the Side Letter. For that reason, documents relating to RBL's assessment of whether it was entitled to the Escrow Amount have been discovered.
[46] With reference to post-contract conduct, Ms Carlyon submitted that it is not settled whether relevant subsequent conduct must be conduct of all of the parties, or whether unilateral conduct by one party can be relevant. She submitted that the cases suggest that, if unilateral conduct can be relevant at all, it will only be relevant where the conduct is inconsistent with the interpretation that the party is arguing before the Court. She referred in that context, as relevant post-contract conduct, the letter from the defendants' solicitors to NZTA's agent dated 14 February 2018, which stated that "NZTA Acquisition … results in the termination of the Head Lease and the RB Sublease, hence negates our client's right to receive the Escrow Sum".
[47] Ms Carlyon submitted that the documents sought do not in any event evidence any relevant subsequent conduct.
[48] On the defendants' submission that it is necessary to understand the nature of the transaction between RBL and the Crown in order to assess how the compensation payment was derived (eg, was it on the basis of future trading?), Ms Carlyon submitted that the basis of payment is known — it was recorded in the Compensation Agreement. In any event, it was open to RBL and the Crown to agree to any compensation or other terms they saw fit. None of that would have changed the meaning of the Side Letter, or whether RBL was entitled to the Escrow Amount in circumstances where it had been compensated fully for the loss of the Store.
[49] In response to the defendants' argument that an "outcome" that is not intended by the parties can be relevant to the contract's interpretation (particularly if the outcome actually occurred), RBL agrees that the parties' intended consequences of a contract are relevant to its interpretation, and actual consequences may throw the parties' intentions into relief. But that does not necessarily mean that the consequences themselves are in dispute. In this case, the "outcome" is not disputed: RBL accepts that it sold its interest in the Store to the Crown for value, and received payment from the Crown. That "outcome" is not in issue, and the question remains what is the true interpretation of the Side Letter and whether it applies to that outcome.
[50] Finally, Ms Carlyon submitted that the discovery sought by the defendants will unduly broaden the scope of the case, unduly increasing complexities at no advantage
to the parties or the Court. The documents sought by the defendants are likely to lead to evidence and time at trial being spent addressing the negotiations for the Compensation Agreement and its meaning, in circumstances where that is irrelevant to the issues in the case.
Discussion and conclusions
[51] I am not satisfied that discovery of all negotiations between NZTA and/or the Crown (or their agents) and RBL (or its agents) leading up to the execution of the Compensation Agreement would be either relevant or proportionate. The details of the negotiations leading up to the signing of an agreement (and particularly the bargaining positions taken by the parties) will in many cases provide no assistance on what the agreement means.
[52] However, I accept that the defendants should be entitled to know what was actually agreed between the Crown and RBL, with particular reference to the operation of cl 3(f) of the Side Letter.
[53] The defendants are wanting to argue at trial that RBL was fully compensated for its interest in the Store by the payment of the compensation payment. They say that if RBL was fully compensated for its loss of its interest in the Sublease and the business it operated in the Store, that would have been a circumstance falling outside the terms of cl 3(f).
[54] I am not here concerned with whether those contentions are right or wrong; I am simply concerned with the fact that the argument has been pleaded, and the defendants are entitled to discovery of documents which are relevant to the issues disclosed by the pleadings. In paragraph 27 of their counterclaim, the defendants expressly plead that paragraph 3(f) does not apply when the interest in the Sublease has been compulsorily acquired under the provisions of the PWA and where RBL has received compensation for the compulsory acquisition. And in paragraph 18(c) they say that the compensation received by RBL was full compensation. Those pleadings are denied by the defendants in their reply and statement of defence to counterclaim.
[55] So there is an issue on the pleadings as to whether the compensation payment did or did not constitute full compensation for RBL's interest in the Store.
[56] The Compensation Agreement did contain the following breakdown of the compensation payment:
Value of Business Asset $851,852.74 Value of Lease Terminated $48,000.00 Goodwill Lost $500,147.26 Disturbance (Income tax allowance) $18,666.67 Total $1,418,666.67
(plus GST if any)
[57] Ms Carlyon's submission that the defendants already know what compensation was paid under the Compensation Agreement does not meet the defendants' real concern, which is to know how the compensation payment was calculated. If, for example, the compensation payment was calculated as RBL's likely loss on the basis that, but for the taking of the land and the Store under the PWA, RBL would have had an asset comprising (in addition to the lessee's fixtures and chattels associated with the Store) the right to occupy the Store for the full length of the Sublease, along with such goodwill as may have been built up for the operation of the Store business in that location, but taking no account of RBL's claim to the Escrow Amount, that would appear to be capable of assisting the defendants' argument that payment of the Escrow Amount to RBL would amount to a double recovery (to the extent of the $400,000). If on the other hand the compensation payment expressly made allowance for RBL receiving the Escrow Amount, the result would be that a different "outcome" had been identified, and there could be different argument at trial as to whether the parties (when negotiating the Side Letter) intended cl 3(f) to apply to such a situation.
[58] I understand RBL's argument that all that matters under cl 3(f) is whether or not there was a termination of the Sublease, and that there clearly was such a termination (effected by the Crown). On that approach, whether or not RBL managed to negotiate for itself full and complete compensation from the Crown (and would arguably be the beneficiary of a $400,000 windfall if it is also held entitled to the
Escrow Amount), would indeed be irrelevant. But I consider that the passages from the judgment of Associate Judge Bell in Rapid Meal Developments New Zealand Ltd quoted at paragraphs [39] and [40] of this judgment apply in this case. I am not required to determine the correct interpretation of the Side Letter. It is enough that the pleadings show that the defendants have another interpretation which requires consideration of whether cl 3(f) was intended to apply where RBL had received full compensation for its business operated at the Store (including its interest in the Sublease). On that pleading, I think a relevant issue will be whether RBL did in fact receive "full compensation".
[59] Having regard to those considerations, I conclude that the defendants are entitled to particular discovery of documents in RBL's control showing how the figures in paragraph [56] of this judgment have been calculated, as communicated between RBL and NZTA/the Crown or their respective agents.
[60] Beyond that, I am not satisfied that there is a case for ordering discovery of all of the negotiations that preceded the Compensation Agreement. In particular, the possibility that communications from RBL in those negotiations might arguably have included post-contract conduct supporting the defendants' construction of cl 3(f), is in my view either fishing or already covered by the discovery sought in category 1. In either event the possibility does not provide a proper basis for a particular discovery order.
Result
[61]I make the following orders:
(1)RBL is ordered to file and serve, within 15 working days, an affidavit disclosing all documents in its control (or which have been in its control) being negotiations between RBL and/or its agents and NZTA/the Crown and/or their agents prior to the completion of the Compensation Agreement which include breakdowns, explanations, evidence or support for the calculation of any of the figures making up the compensation payment (being the figures set out in paragraph [56] of this judgment).
(2)If and to the extent RBL has had such documents in its control but no longer has them in its control, RBL's affidavit is to state when it last had the documents in its control, and where they are now believed to be.
(3)Otherwise, the application for discovery of the category 2 documents is refused.
(4)The defendants have had some success on the application, but they abandoned the first part of the application when RBL confirmed that it had no further documents in category 1. In those circumstances, and with the trial not far away, I consider that the fairest course is to reserve the costs of this application. I make an order accordingly.
Associate Judge Smith
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