Stanley's Nightclub Ltd v IBA Ltd HC Auckland CIV 2004-404-003646
[2005] NZHC 1685
•3 May 2005
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2004-404-003646
BETWEEN STANLEY’S NIGHTCLUB LTD
First Appellant
AND
STANLEY FREDERICK GORDON
Second Appellant
AND
IBA LTD
First Respondent
AND
BROOKFIELDS
Second Respondent
Hearing:
18 February 2005
Appearances: DA Wood for Appellants
IM Hutcheson for First Respondent MG Ring QC for Second Respondent
Judgment: 3 May 2005
RESERVED DECISION OF LAURENSON J.
In accordance with r 540(4) I direct the Registrar to endorse this judgment with the delivery time of 9.45am on Tuesday 3 May 2005.
Solicitors:
Metro Law, Auckland
Chapman Tripp Shieffield Young, Auckland Voulk McCarthy, Manukau City, Auckland
STANLEY’S NIGHTCLUB LTD And Anor V IBA LTD And Anor HC AK CIV 2004-404-003646 [3 May 2005]
Introduction
[1] This is an appeal against a decision of District Court Judge Mathers delivered in the District Court at Auckland on 17 June 2004.
[2] The facts giving rise to the original dispute are relatively straightforward. The pleadings which arose from them are not.
Factual background
[3] The first appellant, Stanley’s Night Club Limited (“SNC”) is a duly incorporated company having its registered office at Auckland. It carries on business as a night club operator.
[4] The second appellant, Mr Gordon, is the Managing Director of the first appellant.
[5] On 19 April 2000 SNC entered into an agreement for the purchase of the first respondent’s business known as “Herzog Night Club and Bar” in Karangahape Road, Auckland.
[6] The first respondent, (“IBA”) is a duly incorporated company having its registered office at Auckland.
[7] The second respondent, (“Brookfields”) is a firm of solicitors practising in Auckland. It acted for the first and second appellants on the purchase of the business.
[8]The agreement for sale and purchase provided for a total purchase price of
$100,000 (plus GST, if any). This sum was made up of $50,000 for the plant fittings and fixtures as set out in the schedule to the agreement, and $50,000 for the goodwill of the business including (where applicable) the benefit of the lease of the premises. The sum of $100,000 was to be paid as to $50,000 on possession direct to the vendor, and the balance on 30 September 2000 with interest at 10%. The balance of
$50,000 was secured by a term loan contract dated 14 April 2000, which was guaranteed by the second appellant, Mr Gordon.
[9] The transaction was carried out in some haste. The directors of SNC, Messrs David and Richard McCabe, had decided they wished to sell their business. They mentioned this to a Mr Corlett of Dominion Breweries. He apparently mentioned it to Mr Gordon. Mr Gordon met with Messrs McCabe and after a relatively brief negotiation an agreement was reached that SNC would purchase the business.
[10] The involvement of Dominion Breweries Ltd (“DB”) is significant. This company supplied product to IBA under a marketing services agreement which, in effect, bound IBA to purchase only DB product. In return, DB lent IBA $40,000 which was to be written off over the term of the marketing services agreement, providing IBA kept to the terms of that agreement. In addition, DB lent IBA a further $40,000 which was to be repaid over the same period. It is this loan which is the crux of the problem in this case.
[11] During the course of the negotiations between Mr Gordon and Messrs McCabe, reference was made by Mr David McCabe to a “hook” to DB. By this he was referring to the arrangement between IBA and DB. The McCabes intended by this reference to alert Mr Gordon to the existence of the marketing services agreement and both loans. Mr Gordon who owned other similar businesses, assumed that the “hook” referred to was a reference to a marketing services agreement together with the loan which was to be cancelled over a period providing the terms of the marketing service agreement were kept.
[12] After the negotiation had been completed both parties went to see their solicitors. Mr Voulk of Price Voulk and McCarthy acted for IBA. He prepared an agreement for sale and purchase (doc. 31) which provided for a total purchase price of $60,000 comprising $10,000 for plant fittings and fixtures, and $50,000 for goodwill. $10,000 was to be paid on possession and the balance of $50,000 on 30 September 2000 together with interest at 10%. The agreement included a special provision which stated:
This agreement is conditional upon the consent of DB to the assignment to the purchaser of the DB loan agreement and marketing service agreements on or before the 15th March 2000.
[13] Mr Gordon saw his solicitor, Ms DJ Miller, a partner in Brookfields. According to a note said to have been prepared by Ms Miller, Mr Gordon gave her the same instructions as to the purchase price with the further instruction that SNC was to take over a direct marketing agreement valued at $40,000 with DB.
[14] It seems, although the evidence is not clear, that both parties advised their respective solicitors that the total purchase price was to be $60,000 on some ill defined basis that there would be a further $40,000 paid by way of cash. It seems that this proposal was discarded such that Mr Voulk prepared and sent a further agreement wherein the total purchase price was referred to as being $100,000. This agreement was not included in the agreed bundle of documents.
[15] Prior to settlement, Brookfields received an assignment of the liability due by IBA to DB. They arranged execution of same by the first and second appellants. However, when doing so they failed to notice that the assignment referred to not just one loan agreement but both loan agreements together with the marketing services agreement (that is the two $40,000 loans from DB).
[16] On 13 April 2000 seemingly after SNC had entered into possession of the premises, Mr Voulk sent a letter to Brookfields dated 13 April 2000 (doc. 56) stating, inter alia:
We enclose proposed new agreement. We recall first time around we omitted a clause in the special conditions required by you but cannot recall what it was. Please add as appropriate.
[17] This agreement is dated 19 April and is signed by all parties. It appears to have been in exactly the same terms as the first draft agreement, with the following exceptions:
[a]The total purchase price is referred to as being $100,000 (plus GST, if applicable).
[b]The plant fixtures and fittings were included at $50,000 and the goodwill at $50,000. $50,000 was payable on possession direct to the
vendor and the balance on 30 September 2000 together with interest at 10%.
[c]There was a full list of plant fittings and fixtures and the date for the lessor’s consent was amended to 17 April 2000. Possession date was referred to as being “18 April 2000 or such earlier date as may be agreed”.
[18] Importantly, this agreement also included the same special condition which I have referred to (see para [12]) but with the date being amended from 15 March 2000 to 17 April 2000.
[19] At some point after the transaction had been settled, and after the agreement had been signed, the appellants became aware that DB was seeking to hold them liable for payments due under the additional loan of $40,000.
[20] Mr Gordon advised Ms Miller who, according to Mr Gordon’s evidence, immediately accepted that Brookfields had failed to notice the inclusion of the further loan in the assignment and that this should not have been included in the assignment.
[21] The appellants later sought advice from a Barrister, Mr Wiles. He in his evidence stated that, Mr Kevin Hall, the General Manager of Brookfields, and its solicitor, Mr M Gilbert of Chapman Tripp, both conceded that Brookfields “had made an error and that Mr Gordon would not be out of pocket “one cent” and that Brookfields would stand behind him and indemnify him”.
[22] The appellants endeavoured to resolve the matter with IBA by tendering the sum of $8,003.73 which, taking into account interest adjustments, was basically the
$50,000 due under the term loan agreement less the amount of the additional loan. This was not accepted with the result that the $50,000 plus interest remained owing to IBA.
[23] The difficulties compounded when the appellants refused to pay the first instalment due to DB in respect of the additional loan of $40,000. The result was that, both IBA and DB, issued proceedings against the appellants.
The pleadings
[24] The two proceedings were later heard together before Judge Mathers. The first proceeding by IBA sought to recover $50,000 plus interest under the terms of the term loan agreement. The second proceeding by DB sought to recover $40,000 plus interest being the amount of the additional loan on the basis of the assignment signed by the appellants. Judgment was finally given in favour of DB against the appellants and this decision has not been appealed.
[25]So far as the IBA claim is concerned, the appellants admitted that the sum of
$50,000 was owing but sought a counterclaim and/or setoff in respect of the sum of
$40,000 being the additional loan due to DB. They pleaded that, in presenting the assignment to include a loan by IBA to DB:
[a]IBA had misrepresented either fraudulently or negligently to the appellants that they were liable to DB for the additional loan.
[b]IBA had fraudulently or mistakenly induced the appellants to enter into a contract for the additional loan with DB.
[c]IBA had engaged in misleading or deceptive conduct in trade inducing the appellants to execute the assignment of the agreement for the additional loan.
[d]IBA had refused and/or declined to rectify the assignment and resume responsibility for the additional loan.
[26] IBA denied the counterclaim and setoff pleading that the terms of the assignment had been discussed previously with Mr Gordon.
[27] The appellants then issued third party proceedings against Brookfields seeking contribution or indemnity for any sum or sums that the appellants may be liable for to IBA (note: not DB). The grounds pleaded by the appellants were:
A contractual breach of the implied retainer between the appellants and Brookfields whereby Brookfields would exercise the care and skill to be expected of reasonably competent solicitors in performing their duties pursuant to the retainer and/or a tortious breach of Brookfields duty to take care when acting for the appellants in relation to the assignment.
[28] The third party responded to the appellants’ third party claim by admitting failures to:
[a]detect that the assignment included the additional loan of $40,000; and
[b]to draw this to the appellants’ attention; but
[c]denying liability on the ground that those failures were not negligent because the appellants were not liable for the $40,000 due under the second loan to DB.
[29]Brookfields denied liability in respect of the IBA claim on the grounds:
[a]IBA had misrepresented the position regarding the additional loan to the appellants; and
[b]IBA had as well mislead or deceived the appellants in terms of the Fair Trading Act 1986; and
[c]IBA had breached the terms of the agreement for sale and purchase in that it had failed to indemnify the appellants pursuant to clause 6.1(3) of the agreement for sale and purchase, which said:
The vendor warrants and undertakes that: the vendor will pay and discharge all debts and liabilities incurred or arising prior to the close of business on the possession date in connection with the business or in respect of any contract dealing or occurrence relating to the business and shall
indemnify the purchaser from and against all claims proceedings expenses and costs in connection therewith.
[30] So far as the pleadings are concerned, there were two fundamental omissions so far as the appellants were concerned.
[a]Brookfields were not joined as a third party to the claim by DB against the appellants; and
[b]the claim for relief against Brookfields in respect of the claim brought by IBA claimed an indemnity or contribution only in respect of “any sum or sums that that appellants may be liable for to IBA” i.e. no such claim was made in respect of any sum or sums that the appellants may be liable for to DB.
The Judge’s findings
[31] The Judge found in relation to the IBA claim against the appellants that their counterclaim and/or setoff failed because:
[a]There had been no misrepresentations or breaches of the Fair Trading Act by IBA.
[b]There had, however, been a careless unilateral mistake by Mr Gordon which could not provide a basis for rectification of the assignment of the loans due to DB.
[32]The consequences of these findings were:
[a]IBA was entitled to recover $50,000 from the appellants under the term loan agreement.
[b]DB was entitled to recover the additional loan which had been assigned by IBA to the appellants.
[33] So far as the appellants’ claim for contribution or indemnity from Brookfields was concerned, but for the negligence of Brookfields the transaction would have proceeded. Accordingly, the appellants were entitled to judgment against Brookfields for the sum or sums for which the appellants were liable to IBA i.e. the
$50,000.
The appeals
[34]There was no appeal against the finding that the appellants were liable to pay
$50,000 to DB.
[35] As I have already mentioned there was no appeal against the judgment given in favour of DB against the appellants for the $40,000 being the second loan from DB.
[36]The appellants submitted the Judge wrong in finding:
[a]The additional loan was the responsibility of the appellants rather than IBA.
[b]Brookfields also appealed against the finding it should indemnify the appellants in respect of the $50,000 due under the term loan agreement.
The appellants’ arguments on appeal
[37] The appellants submitted in summary that the Judge was wrong in determining:
[a]The agreement for sale and purchase did not represent the agreement between the parties.
[b]That the additional loan was part of the agreement.
[c]The assignment did represent the agreement between the parties.
[d]The additional loan was the responsibility of the appellants rather than IBA.
[38] IBA submitted in reply first that, the Judge had not erred in her consideration of the agreement for sale and purchase, when she found that “the agreement for sale and purchase did not represent the agreement of the parties”. It was submitted in this regard that the Judge was not called upon in the context of the pleadings in the District Court to make a finding on whether or not the agreement for sale and purchase properly represented the agreement of the parties. I should mention at this point that I do not accept this submission because the issue of the importance of the agreement for sale and purchase had been raised directly by the third party in its defence to the plaintiffs’ claim.
[39] Secondly, the Judge was correct in determining that the additional loan was part of the agreement of the parties, namely, she accepted the evidence of Messrs McCabe that the $100,000 was to be clear of the money owing to DB.
[40] Thirdly, the Judge was right in holding that the assignment did represent the agreement of the parties because both DB and IBA always knew there were two loan agreements of $40,000 which were to be assigned, and that both IBA and DB had a common intention that this was to be the case and Mr Gordon was careless in his discussion with the plaintiffs and probably honestly believed there had been a mistake. If there had been a mistake, however, it was his unilateral mistake. The result was that “to the extent that the defendants made a unilateral mistake, neither the plaintiff nor DB had knowledge of it and in my view were innocent parties”.
[41] Fourthly, on the pleadings the Judge was not required to find “that the additional loan was the responsibility of the first and second appellant rather than the first respondent”, and in fact did not make any such finding.
[42] Fifthly, based on these pleadings, the Judge simply found that the appellants had failed to make out their counterclaim.
Decision
[43] I do not propose to examine the Judge’s reasoning in detail because I am satisfied that in her decision she failed to recognise that the central issue to be determined in this case was the issue of what was agreed upon as the total consideration to be paid for the business. The appellants claimed this was $100,000 (plus GST, if any) as stated in the agreement for sale and purchase. IBA claimed it was $100,000 (plus GST, if any) plus any indebtedness owed to DB.
[44] In my view the contention by IBA is quite untenable. Unfortunately, consideration of the central issue became confused by an incorrect analysis of the significance of who was to assume liability for the second additional loan of
$40,000.
[45] My conclusion that IBA’s contention is untenable is based on the terms of the agreement which IBA and the appellants finally signed on 19 April 2000 (doc. 68). This agreement states quite specifically:
Name and Description of Business: HERZOG NIGHT CLUB AND BAR
For the plant, fittings and fixtures as set $ 50,000.00 out in the Schedule
For the goodwill of the business including (where applicable) the benefit of the lease
of the premises $ 50,000.00
TOTAL PURCHASE PRICE $100,000.00 (Plus GST if any) see clause 16.0
Deposit:$ 50,000.00 payable on possession direct to the vendor
Balance of purchase price to be paid or satisfied as follows:
(a)Adjustments for incomings and outgoings on the possession date.
(b)The balance on the 30th September 2000 together with interest thereon at 10% pa
earlier date as may be agreed.
Possession date: 18th April 2000 or such interest rate for late settlement: 20% pa
[46] IBA contend that, in fact, the agreement somehow imposed a liability on the appellants to assume liability for a further $40,000 thereby relieving IBA for any
liability for this sum. If IBA was correct in this contention, then the total consideration to be paid was $140,000.
[47] There is nothing in the agreement for sale and purchase which provides any foundation for such a contention. To the contrary:
[a]The specific terms of the agreement for sale and purchase, which I have referred to above, which clearly define the total purchase price as being $100,000 (plus GST, if any).
[b]GST is referred to as being only relevant to the sum of $100,000. There is no provision taking into account GST in relation to any further $40,000.
[c]As Mr Richard McCabe agreed in evidence “Mr Gordon accepted
$100,000 as a fair price”.
[d]Furthermore, the terms of clause 6.1(3) (see para [29] above) cannot be overlooked in this context.
[48] If it had been the case that the parties had intended that the total consideration to be paid was to include the appellants assuming liability for the additional $40,000 due to DB, then in the case of an agreement for sale and purchase prepared by the vendor’s solicitor (as it was in this case) the consideration provisions in the agreement would have referred to:
· A total purchase price of $140,000 (plus GST, if any).
· $50,000 being payable on possession.
· Balance of purchase price to be paid or satisfied as follows:
[a]$40,000 by the purchaser assuming liability under the additional loan agreement (doc. 2).
[b]Adjustments for incomings and outgoings on the possession date.
[c]The balance on 30 September 2000 together with interest thereon at 10%.
The agreement contained no such provision.
[49] It occurred to me after the hearing that, if indeed, IBA had intended that the appellants were to assume liability for the additional advance of $40,000, then this would have been indicated by an apportionment of interest in respect of this loan in the settlement statement. Unfortunately, this document was not included in the agreed bundle of documents, nor does it appear to have been produced at the hearing in the District Court.
[50] I feel obliged to make the comment that it was in my view a notable feature of this case before the District Court that Mr Voulk who acted for IBA, and who prepared both agreements, was not called to give evidence, nor was Ms Miller who acted for the appellants. I have the distinct impression that, if either or both of these persons had been called to explain precisely how the agreements came to be drawn up, then the problems which arose in this matter would not have been nearly so difficult to resolve.
[51] In my view it is the terms of the agreement which resolves quite conclusively the nature of the bargain reached by the parties on the essential issue, namely, what was to be paid for the business.
[52] IBA bases its contention that the appellants were to assume liability for the additional $40,000 by reference to clause 2 of the special conditions, plus the terms of the assignment of the indebtedness due to DB. In my view neither of these has any bearing at all on the issue as to what was the total price to be paid for the business.
[53]Clause 2 simply said:
This agreement is conditional upon the consent of DB to the assignment to the purchaser of the DB loan agreement and marketing service agreements on or before the 17th April 2000.
[54] Putting aside the question of what was to be assigned (one or two loan agreements) this clause does nothing to indicate that the assumption of liability by the appellants was to have any bearing at all on the purchase price payable by them.
[55] Similarly, the Deed of Assignment dated 16 March 2000 (doc. 44) does nothing beyond assigning IBA’s liability to the appellants together with an indemnity by IBA in the case of default by the appellants. It says nothing to indicate that the assumption of this liability by the appellants is to be regarded as an additional consideration for the purchase of the business.
[56] Stated simply, the issue which later arose in relation to the provision of clause 2 in the Deed of Assignment was irrelevant to the issue of the agreed total purchase price. The only relevance of these two matters was whether the appellants were to assume liability to DB for one or both of the two loan agreements. Once the total purchase price was agreed at $100,000 the issue was simply whether the appellants would either:
[a]take over the marketing services agreement, and the first loan agreement (doc. 21) which clearly they had agreed to do, which would have made no call on them for additional payments providing they observed the terms of the marketing services agreement; or
[b]take over in addition the additional loan agreement which did require payment of $40,000 plus interest.
[57] If it was the second alternative, then this necessarily implied that the appellants were entitled to a reduction in the amount to be paid to IBA.
[58] When it became apparent to the appellants that by signing the assignment they had incurred the liability to DB in respect of the second loan agreement they sought to achieve that reduction. It did so by tendering a settlement sum as set out in Brookfields letter dated 22 September 2000 (doc.83).
[59] The appellants’ basic submission on appeal is that, the Judge failed to appreciate the importance of the actual terms of the agreement for sale and purchase, which settled the basic contract between the parties as to the purchase price. It was further submitted that, instead, by putting the terms of the agreement to one side and concentrating on the provisions of clause 2 in the assignment, the result emerged that the Judge incorrectly concluded that it was the terms of these documents which determined the total price to be paid by the appellants for the business. For the reasons which I have referred to this was, in my view, a basic error.
[60] Having analysed the position this way I have to say that I have considerable sympathy for the Judge given the nature of the pleadings presented to her. The basic problem was that the appellants did not specifically plead a breach of the agreement for sale and purchase. Instead, they relied on relief based on misrepresentations arising from the assignment. The position was further compounded by the nature of the relief sought against the third party, Brookfields, which was limited to any sum or sums due by the appellants to IBA. The relief sought should have included indemnity for any sum or sums due to DB i.e. the interest on the second loan.
[61] In the final result, however, the critical issue, namely, what was the nature of the agreement between the appellants and IBA, was placed before the Court by the pleadings filed by Brookfields. In their statement of defence to the plaintiffs’ claim, Brookfields raised directly the principal issue - that IBA had breached the terms of the agreement for sale and purchase.
[62]Had this been appreciated it was then open to the Court to find:
[a]that the appellants were liable to IBA for the $50,000 being the balance secured under the term loan agreement and in respect of which the appellants had never denied liability; but
[b]subject to the setoff of $40,000 which was claimed by IBA to form part of the total purchase price but in respect of which I have found there was no basis.
[c]Given that the net amount had been tendered in settlement the appellants would be entitled to costs in this aspect of the judgment.
[63] Had the issues in this case been confined to the proceeding between IBA and the appellants, the above findings would have disposed of the main issues between them, and also the position of Brookfields as the third party i.e. there was no indemnity because no liability would have arisen.
[64] There remains, however, the issues relating to the second DB loan assigned to the appellants. The essential issue here, namely, who was responsible to DB for the second loan, has been resolved by the judgment against the appellants in favour of DB. That is not now in issue given that the appellants have not appealed against that judgment. In other words, the appellants have impliedly accepted the Judge’s findings:
[a]There was a common intention between IBA, the appellants and DB, that the appellants would assume liability for all debts owed by IBA to DB, whatever these may have been.
[b]The appellant, Mr Gordon, was careless in failing to establish what were those liabilities.
[65] Accepting that the issue between the appellants and DB has been resolved, there remains only the issue of the claim for contribution or indemnity between the appellants and Brookfields. This was pleaded on the basis of a breach of the retainer of service or negligence. Brookfields accepted there was a breach, but pleaded that failure was not negligent because fundamentally the appellants were not liable to IBA for the $40,000. I have found that that was correct.
[66] The evidence given by the appellants in relation to the failure by Brookfields was undisputed. It was stated by Mr Wiles that, Brookfields, had “made an error and that Mr Gordon would not be out of pocket “one cent” and that Brookfields would stand behind him and indemnify him”. This evidence was not disputed by Brookfields who did not call evidence at the hearing. However, the appellants did
not plead this undertaking or acknowledgement of liability. Furthermore, the relief sought was only in relation to any sum or sums due to IBA.
[67] In addition, Brookfields raised a further defence that, even if they were liable to indemnify the appellants for the loss of $40,000 (which is not now relevant), this had not been pleaded sufficiently, and also the appellants had failed to prove that if the failure had not occurred they would not have proceeded with the transaction. As I see it, this issue does not now arise as the claim for indemnity is not in respect of the
$40,000. What is left, however, are the costs which the appellants have incurred as a result of the two proceedings, this appeal and the interest payable to DB.
[68] I cannot see that any claim for these amounts can be founded on the pleadings which were filed. Equally, however, I cannot see any reason why the appellants cannot now issue a fresh proceeding against Brookfields, relying on:
[a]their acknowledged failure to note the terms of the assignment which has had the result of the appellants being liable directly to DB; and
[b]the undertaking given by Brookfields to indemnify the appellants for any losses arising as a result of that failure.
[69] This being the case, in the light of my findings on appeal, Brookfields (or their insurers) may be inclined to honour the undertaking given by Brookfields at the outset.
[70] What is clear, is that the judgment against Brookfields in favour of the appellants for indemnity for $50,000 being the amount due under the term loan agreement, cannot stand, because liability for that amount was never disputed. What was claimed by the appellants was a setoff for $40,000.
[71]For the above reasons I find:
[a]The appeal by the appellants against the finding that the appellants are liable to pay IBA $50,000 is allowed. That judgment is amended to a judgment for $10,000 subject to interest adjustments.
[b]The appellants are entitled to judgment on the counterclaim for
$40,000 subject to interest adjustments.
[c]Because the appellants tendered on settlement for the net amount of the above two judgments they are entitled to costs on both against IBA in both the District Court and on appeal.
[d]The judgment against Brookfields in favour of IBA is set aside.
[e]Brookfields are entitled to costs against IBA in both the District Court and on this appeal.
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