Rockwell One Limited v Astoria Development Limited (formerly MGK Development & Management Limited)
[2021] NZHC 3036
•11 November 2021
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE
CIV-2021-470-55
[2021] NZHC 3036
BETWEEN ROCKWELL ONE LIMITED
Plaintiff
AND
ASTORIA DEVELOPMENT LIMITED
(formerly MGK Development & Management Limited)
First Defendant
AND
MINGON KANG
Second Defendant
Hearing: 1 November 2021 Appearances:
A D Marsh for Plaintiff
L Wong and A Cherkashina for Defendants
Judgment:
11 November 2021
JUDGMENT OF ASSOCIATE JUDGE LESTER
ROCKWELL ONE LIMITED v ASTORIA DEVELOPMENT LIMITED (formerly MGK Development &
Management Limited) [2021] NZHC 3036 [11 November 2021]
[1] The plaintiff, Rockwell One Limited, seeks summary judgment for $250,000 as damages plus a share of profits on a joint venture it entered into with the first defendant, Astoria Development Limited (Astoria).1
[2] Astoria says it has not breached its obligations to the plaintiff and accordingly, damages are not available. Astoria submits the other causes of action relied on by the plaintiff based on money had and received and under the Fair Trading Act 1986 are not suitable for determination in a summary judgment context.
[3] Mr Kang, the second defendant, is the sole director and shareholder of Astoria. It was originally alleged that the $250,000 introduced by the plaintiff to Astoria ended up with him. This claim was not pursued as explained below.
Context
[4] Astoria was in 2018 the owner of not quite 7,500 m2 of land suitable for residential and commercial development in Tauranga. The land was subject to two mortgages arising from Astoria’s acquisition of the land. Astoria was seeking an investor to join it in a joint venture to develop the land to which it would contribute the land and the joint venture partner would contribute cash. The plaintiff was introduced to Astoria as such an investor, leading to a Memorandum of Agreement between the parties dated 25 October 2018 (the Agreement).
The Agreement
[5] It is necessary to set out some detail of the Agreement which was apparently not drafted by a New Zealand lawyer.
[6] There is disagreement as to who was responsible for drafting the Agreement. There is evidence that Mr Kang prepared the first draft, there being an email where he forwarded it to Mr Kwon of the plaintiff. Mr Kwon says he was not happy with the Agreement so he consulted a lawyer in the Philippines, after which the Agreement was finalised.
1 The claim for summary judgment for a pro rata share of profits while abandoned was not addressed at the hearing.
[7] The Agreement recorded that the land was subject to a first and second mortgage totalling just over $3,600,000. The project was to be completed in stages. There would be a development of 12 “Units of Townhouse” and the development of 30 “Units of Residential Apartment and Eleven (11) Units of Commercial Complex”.
[8] The subdivision consent for the first development of the 12 Units was recorded as having been approved with the resource consents and building consents having been approved and released by the local authority.
[9] The development of the 12 Units would be undertaken in two stages. The first stage was the construction of four Units of three-storey townhouses and to include laying the foundations for all of the 12 Units. It seems once that stage was completed, the remaining eight Townhouses would be built.
[10] The Agreement required the incorporation of what was called a Special Purpose Company (SPC). The parties incorporated “Rockwell Two Limited” on 16 October 2018 for this purpose. The plaintiff says Mr Kang was the sole signatory of the bank account of Rockwell Two Ltd.
[11]The Agreement provided that the SPC would have the following capital:
(a)$3,340,000 in cash to be contributed by the plaintiff in accordance with a schedule attached to the Agreement, and $1,000,000, deemed to be the plaintiff’s profit from stage one of the development (that is the 12 Townhouses), would be left in the project by the plaintiff.
(b)The plaintiff was to have a 51 per cent shareholding in the SPC and Astoria was to have a 49 per cent shareholding.
(c)The Agreement spelt out the timing for the contribution of the plaintiff’s capital with payments to be made between 25 October 2018 and 30 May 2019, initially of $100,000 and increasing to a final payment of $1,440,000.
[12] As it happens, the plaintiff paid only $250,000 between October and December 2018.
[13] The Agreement required Astoria to contribute the land into the SPC. Once the plaintiff had paid $1,900,000, Astoria was to refinance its existing debt and at that point title to the property would be transferred to the SPC. Once the plaintiff had invested the $1,900,000 the plaintiff would be allowed mortgage security for that amount against the land which, at that stage would be vested in the SPC. That the Agreement provided for the plaintiff having a mortgage muddies the waters as to the status of the plaintiff’s funding. However, a mortgage could be framed to protect the plaintiff’s profit share on the sell down of the development. The funding is expressly capital, not an advance, and the Agreement has no provision for repayment of the capital – only for a profit share.
[14] The Agreement went on under various headings to deal with the financing of the balance of the project and how the development of the project would be undertaken, including identification of builders. One clause states the plaintiff is obliged to make a capital contribution of $4,340,000, that is, $3,340,000 in cash and
$1,000,000 of profit from stage 1 of the project.
[15] The Agreement contains an entire agreement clause and a clause stating the Agreement can only be amended in writing. There is also a no waiver clause.
[16] The Agreement contains provisions relating to termination for cause, dispute resolution and the following special conditions:
Article XIII Special Conditions
Section 1. Rockwell One may stop its investment in the middle of the investment period or schedule without incurring any liability or penalty. In such case, the profit allocation of the parties shall be pro rata with the investment amount based on Annex 1 hereof. (Feasibility Study). The parties shall further discuss other options available for the completion of the project.
Section 2. The parties expressly agree that Rockwell One shall be allocated with a fixed profit of $1,000,000 from the completion of the construction of the 12 units of townhouse, upon payment of capital investment by Rockwell One in the amount of NZ$1,900,000.00. All the other remaining profit
from the development and sales of the 12 units of townhouse shall inure to [Astoria].
Section 3.The parties further agree that Rockwell One shall be allocated with a fixed profit of $2,000,000.00 from the completion of the construction of 30 Units of Residential Apartment and 11 Units of Commercial Complex which amount shall be considered as 51% of the total profit. On the other hand, [Astoria]shall be entitled to the profit in the amount equivalent to 49% in relation to the 51% allotted to Rockwell One. The remaining excess profit, if any, after deducting the
$2,000,000 fixed profit of Rockwell One considered as 51% of the profit and deducting the profit allotted to [Astoria]in the amount equivalent to 49% in relation to the 51% allotted to Rockwell One, shall be distributed as follows: 40% of the excess profit shall be allotted to Rockwell One and 60% of the excess profit shall be distributed to [Astoria].
…
[17] The plaintiff’s claim for a pro rata profit share is made pursuant to “Section 1” in Article 13 (incorrectly noted as “Section 2” in the application for summary judgment). Interest is sought on the damages claim as an alternative to a profit share.
Statement of claim
[18]The plaintiff’s claim is in damages. While at times the plaintiff refers to the
$250,000 it provided as an advance, the Agreement calls the payments “capital”. Accordingly, the plaintiff frames its breach of contract claim in damages.
[19] The plaintiff says that Astoria was in breach of the Agreement due to a disagreement between the parties as to the availability of mortgage security for the money the plaintiff was introducing. Further, it says Astoria breached the Agreement by failing to ensure, as required by the Agreement, that the money introduced by the plaintiff was applied to the SPC. In short, it is said that the plaintiff’s money was diverted by Mr Kang for Astoria’s own use.
[20] The plaintiff, however, pleads that the Agreement has never been formally terminated by either party, no doubt to maintain the plaintiff’s claim for a pro rata profit share as provided by Section 1 of Article 13, set out above. It is also pleaded that Astoria failed to transfer the land to the SPC.
[21] The plaintiff pleads that, following its decision not to advance further money to the SPC, it sought repayment of the amounts it had paid and that such payment has not occurred.
[22] As to the claims against Mr Kang personally, it is said that Mr Kang diverted the money away from Astoria for his own use.
[23] The claim against Astoria under the Fair Trading Act 1986 is based on the proposition that Astoria was required to use the funds solely for the purpose of the joint venture “with full transparency and accountability”. The plaintiff says, in breach of the Agreement, the land was not transferred to Rockwell Two Ltd and the payments made by the plaintiff were not used for the development as required by the Agreement. It is then pleaded that those actions “amount to misleading and/or deceptive conduct under s 9 of the Fair Trading Act”. The plaintiff says it suffered loss as a result because it has not been able to recover its funds.
[24] While not formally abandoning the application for summary judgment based on the damages and Fair Trading Act causes of action, Mr Marsh, on behalf of the plaintiff, focused his submissions on the money had and received claim. I am satisfied the application based on the claim for contractual damages should be dismissed. The evidence is that the money the plaintiff introduced to the SPC was used for the purposes of the joint venture. The plaintiff has no contractual right to require a refund of its capital. Any arguable breach by Astoria of the Agreement would sound in damages which would not necessarily equate with the capital introduced by the plaintiff.
[25] As to the Fair Trading Act claim, the plaintiff introduced its capital when its relationship with Astoria was sound. The money was used for its intended purpose. Nothing the defendants did misled the plaintiff into parting with its money. This cause of action is also not suitable for summary judgment.
[26] As to the claim for money had and received against the second defendant, that was not pursued as Mr Marsh said the evidence filed showed that the money introduced by the plaintiff to the SPC was on-paid to Astoria. As Astoria received the
money, Mr Marsh said it was the appropriate defendant for the money had and received claim.
The money flow in more detail
[27] The Agreement required the plaintiff to contribute $3,340,000 in cash as capital to the SPC by specified instalments. The plaintiff was to be a 51 per cent shareholder, Astoria was to be a 49 per cent shareholder and the parties were issued with those shares. Astoria was to control the development and was obliged to “use the capital investment, funds and other assets of the SPC solely for their intended purposes with full transparency and accountability”.
[28] The plaintiff paid $250,000 to the SPC’s bank account. Mr Kang then transferred those funds to Astoria. Astoria used the money to pay invoices – some historical – relating to the development. Mr Kang says those invoices were sent to the plaintiff before being paid.
[29] Accordingly, the plaintiff intended to make payment to the SPC and it intended that the money be used for the purposes of the joint venture. It was reasonably arguable for the purposes of this application that the money was so used. Mr Marsh was critical of the money going out to Astoria at all. He submitted there was no need for that to occur and, while the invoices paid were addressed to Astoria, their payment did not require the money to be channelled through Astoria’s bank account. That may be correct, but it does not mean it is not arguable in this context that the money was used for the purposes of the joint venture. There was nothing underhand in what Astoria did. It advised the plaintiff of the invoices that it was paying. Astoria can be seen as simply a conduit for the payments.
The substance of the plaintiff’s complaint
[30] Mr Marsh explained the basis of the plaintiff’s claim as follows. The development has not occurred through the SPC as required by the Agreement but is being undertaken by Astoria without reference to the SPC or the plaintiff. Mr Marsh noted at one point the SPC was at risk of being struck off the Companies Register for
not filing its annual return until his client intervened. This, he said, reinforces that Astoria is treating the Agreement as abandoned or, at least, not in force.
[31] Mr Marsh argued the development is alive, but the joint venture is not. The money introduced by the plaintiff for the purposes of the land development, and spent for that purpose, now benefits the development being undertaken by Astoria. He said Astoria, having had the benefit of that expenditure, is in breach of the Agreement by completing the development outside of the Agreement. Mr Marsh submitted that once the project diverged from that provided for in the Agreement, Astoria had to account for having taken over the foundations of the project that were paid for by the plaintiff.
[32] In my view, it was commercially unrealistic for the plaintiff to consider that the Agreement would continue to govern the development of the land. Under that Agreement, the plaintiff committed to advancing $3,340,000 in cash and leaving
$1,000,000 of deemed profit in the project, which was to be realised from the first stage of the development. In the end, it contributed only $250,000. The whole structure of the Agreement was overtaken by that fact. The plaintiff cannot have expected to remain a 51 per cent shareholder with the ability to appoint a director, after having contributed only $250,000 of the nearly $4,400,000 in value it committed to provide over the project. Nor could the plaintiff complain that the defendants had not transferred the land to the SPC when that was to occur when the plaintiff had contributed $1,900,000 to the SPC. In any event, the real issue here is whether the circumstances support a claim for money had and received.
Discussion
[33] The plaintiff’s claim is based on the proposition that some of the founding work for the land development project was paid for by the SPC with money it received for that purpose from the plaintiff. The cause of action of money had and received “is based on receipt of another’s money and the cause of action is complete when the money is received”.2 The plaintiff intended that the money it paid would become the SPC’s property. At the time the plaintiff paid the money to the SPC, a cause of action
2 Worldwide Holidays Ltd v Wang [2019] NZHC 2218 at [71], citing Nimmo v Westpac Banking Corporation [1993] 3 NZLR 218 (HC) at 238.
of money had and received did not arise because the SPC did not receive the money in circumstances where it could not in good conscience retain it.3 The SPC then used the money (via Astoria) for the purpose for which it had received the money. Astoria used the money as intended, that is, by paying the invoices already referred to.
[34] However, on the plaintiff’s case, its claim for money had and received arose not when it made the payments to the SPC or when the SPC transferred the money to Astoria, but at some later time when Astoria continued with the development outside the Agreement.
[35] Mr Marsh relied on the following passage from Worldwide Holidays Ltd v Wang, in support of the plaintiff’s ability to seek relief against Astoria, in circumstances where it had received the plaintiff’s funds from the SPC and not directly from the plaintiff:4
[75] Lord Goff of Chieveley considered that in these cases (where the defendant is a third party who has not received the money directly from the claimant) the action for money had and received is not usually founded upon any wrong by the third party. It is founded simply on the fact that the third party cannot in conscience retain the money – or, as we say nowadays, for the third party to retain the money would result in his unjust enrichment at the expense of the owner of the money ...
[36] The essence of a claim for money had and received is that the defendants received money belonging to the plaintiff.5 The plaintiff here says Astoria ended up with the benefit of the money as a result of the SPC paying the money to Astoria which was used to meet development costs. The problem for the plaintiff’s claim is that the money it seeks to recover was the property of the SPC at the time it was paid to Astoria and it was then used for the purpose for which it was paid by the plaintiff to the SPC.
3 Worldwide Holidays Ltd v Wang, above n 2, at [72] and [75].
4 Worldwide Holidays Ltd v Wang, above n 2, citing Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL) at 560.
5 Peter Twist, James Every-Palmer and Marcus Dawson Laws of New Zealand Defendant receiving plaintiff’s property (online ed) at [69].
[37]In the case of Lipkin Gorman v Karpnale Ltd, the House of Lords determined:6
The plaintiffs could only bring their claim for money had and received if they could show that the money received by the defendant belonged to them, and to do this they needed to invoke the rules of tracing …
[38] Here, it appears that the plaintiff got what it bargained for under the Agreement, at least at the outset. The plaintiff made the payments now sued for and was issued shares which it retains. That those shares may now be of doubtful value does not alter the fact the plaintiff at the outset received what it intended to get and retains in theory rights to a profit share, albeit under an unclear basis pursuant to Section 1 of Article 13. The issue comes back to the fact that the plaintiff says it had the right to halt capital contributions at any time. However, any such right did not carry with it under the Agreement a right to require repayment of the capital paid up to that point. The clause relied on by the plaintiff to halt payments states what the plaintiff is entitled to in those circumstances. By maintaining a claim in this proceeding for a share of profits the plaintiff affirms the Agreement.
[39] Mr Marsh was adamant the plaintiff was entitled to a return of its capital and the profit share provided for the Agreement. That is not what the Agreement says. If the plaintiff is not entitled to the return of both its capital and a share of profit as it claims, then it cannot maintain its present claim for both. In seeking the return of its funds, the plaintiff seeks to unravel the Agreement. It cannot do that and simultaneously maintain a claim for one of the benefits under the Agreement, that is, the profit share. However, if the plaintiff validly cancels the Agreement then relief under s 43 of the Contract and Commercial Law Act 2017 may be available against Astoria.
[40] Arguably the company that has in fact suffered the loss here is the SPC. It was the SPC that was intended to have the benefit of the goods and services represented by the invoices paid from its funds. Mr Marsh is correct that the benefit of that expenditure now rests with Astoria, not the SPC. However, that fact does not give rise to a cause of action in money had and received in favour of the plaintiff. For that cause
6 William Swadling “Restitution” (1995) All ER Rev, citing Lipkin Gorman v Karpnale Ltd, above n 4.
of action to be available, it had to have arisen, that is, be complete at the time the plaintiff made the payments it now seeks to recover. That is not the case.
[41] The money was not paid under a mistake of fact, nor as the result of duress or pressure, nor applied for a purpose different from that for which it was paid. Further, the plaintiff did receive the benefits it was entitled to at the time of payment. The joint venture at least arguably came to an end as a result of the plaintiff electing to discontinue funding. The breakdown of the relationship between the parties is not capable of retrospectively changing the character of the payments the plaintiff seeks to recover. Mr Marsh expressly disclaimed that the cause of action in money had and received asserted by the plaintiff was advanced on the basis of unjust enrichment.
[42] The plaintiff was right to seek summary judgment based on a contractual right to recover sums paid under the Agreement as no such right exists in the written Agreement. Section 1 of Article 13 appears to contemplate the Agreement continuing to have some effect. Again, no party has resorted to the termination rules in the Agreement.
[43] I am satisfied that the plaintiff’s application for summary judgment in respect of its cause of action in money had and received should be dismissed.
Costs
[44]Costs are reserved.
Associate Judge Lester
Solicitors:
Kearneys, Christchurch Norling Law, Auckland
Copy to counsel:
A D Marsh, Christchurch
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