Tankersley v Meroiti
[2015] NZHC 1279
•9 June 2015
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV 2012-485-641 [2015] NZHC 1279
BETWEEN RICHARD NORMAN TANKERSLEY
Plaintiff
AND
RINOTA PROJECT MANAGEMENT SERVICES SDN BHD
Second Plaintiff
AND
ESTIMATING INTERNATIONAL SDN BHD
Third Plaintiff
AND
JOHN DAVID MEROITI First Defendant
AND
DATA PLAN SERVICES LIMITED Second Defendant
AND
THE DRAFTING HOUSE LIMITED Third Defendant
AND
THE ESTIMATOR CENTRAL LIMITED Fourth Defendant
AND
JILL MEROITI Fifth Defendant
AND
CKM HOLDINGS LIMITED Sixth Defendant
Hearing: 29 May 2015 Counsel:
D Kalderimis and J Davies for Plaintiffs
First Defendant in Person
G W D Manktelow for Fifth Defendant
T Cleary for Fourth Defendant (observing)Judgment:
9 June 2015
JUDGMENT OF BROWN J
TANKERSLEY v MEROITI [2015] NZHC 1279 [9 June 2015]
[1] The plaintiffs seek damages against the first defendant (Mr Meroiti) and the fifth defendant (Ms Meroiti) for breach of fiduciary duty. They also seek damages against Mr Meroiti under s 6 of the Contractual Remedies Act 1979 in respect of misrepresentations made by him.
[2] The remaining causes of action, including various deceit claims and several causes of action involving a level of evidential complexity that renders them inappropriate for determination by way of a formal proof hearing, are not the subject of this judgment.
Formal proof hearing
[3] In November 2012 Clifford J made targeted discovery orders by consent, a key object of the plaintiffs being to obtain access to bank statements of the defendants and their associated companies in order to determine the destination of funds remitted by the plaintiffs. These orders were not complied with. Nor was there compliance with subsequent orders in the proceeding, namely:
(a) freezing orders and ancillary orders made by Kόs J on 3 May 2013;
(b)further consent orders of Kόs J on 23 September 2013 reinforcing the ancillary orders; and
(c) particular discovery orders of Goddard J made by consent on
18 November 2013, again aimed at achieving compliance with the ancillary orders.
[4] In consequence of the non-compliance, on 19 December 2013 Kόs J issued
an “unless order”.1 His Honour clearly stated the consequence of non-compliance was debarment from defending the proceedings.
1 Tankersley v Meroiti Wellington CIV-2012-485-641, Minute (3) of Kόs J.
[5] The Meroitis did not comply with the unless order. Consequently on
8 August 2014 Clifford J debarred them from defending the proceeding.
[6] In his Minute of 12 December 2014 Clifford J directed that the claim be set down for hearing by way of formal proof. He explained the limited nature of the defendants’ involvement in that procedure in this way:
[24] As required by r 15.9(4), the plaintiffs must file affidavit evidence to establish each cause of action relied on and if damages are sought, sufficient to enable the Judge to determine damages. As regards that first requirement, it would seem to reflect a practice which involves Judges requiring to be satisfied, where there was an application for default judgment, that a claim was made out “on the face of things”. Where a defendant has been debarred, no more than that should be required in my view.
[25] At the same time, the Court will be mindful of the provisions of r 15.10, which provide that any judgment obtained by default under r 15.9 may be set aside or varied by the Court on such terms as it thinks just, if it appears to the Court that there has been, or may have been, a miscarriage of justice.
[26] As for participation by the defendants there is, as I have said, on the face of things no entitlement any longer to appear. But it is not clear that change was intended. So far, the plaintiffs have indicated that they accept a continuance of the old entitlement to appear in mitigation of damages. By “mitigation” I take those old rules not to be referring to the obligation of a plaintiff to mitigate, but rather general submissions from a defendant as to quantum which would go to mitigate, that is reduce, the quantum claimed by the plaintiffs. In light of r 15.10, I consider the defendants may still, as before, adduce evidence in mitigation.
[27] If the plaintiffs, in light of this minute, seek to further restrict the defendants, I think the matter will need to be considered at a proper hearing, either at the time of the formal proof application or prior thereto. That may not be worth shot and shell.
[28] To the extent that the defendants asserted wider rights, I observe that I anticipate the Court would not turn a deaf ear to succinct submissions which identified clearly inadmissible evidence.
No appeal was lodged against the directions of Clifford J. Accordingly the plaintiffs’
claim is to be determined on the basis of the directions in the Minute of
12 December 2014.
Evidence filed by the parties
[7] In accordance with the directions of Clifford J, on 5 February 2015 the plaintiffs filed and served four affidavits as evidence for the formal proof hearing. Those affidavits comprise two fact witnesses, the first plaintiff Mr R N Tankersley and Mr K G Betteridge, and two expert witnesses, Mr C M Fisken, a chartered accountant, and Mr J M Mellsop, an economist who provided expert valuation evidence on behalf of the plaintiffs.
[8] Between 20 and 23 March 2015 the first and fifth defendants filed five affirmations, namely:
(a) affirmation of Charles Stewart Fletcher dated 15 March 2015;
(b) affirmation of Penelope Anne McGoldrick dated 17 March 2015; (c) affirmation of Jill Meroiti dated 20 March 2015;
(d) affirmation of John David Meroiti dated 23 March 2015; and
(e) affirmation of George McGregor Hooper dated 23 March 2015.
[9] The plaintiffs submit that none of those affirmations contain evidence in mitigation of damages and therefore that all five should be ruled inadmissible. They contend that, in addition to several passages that are simply irrelevant to the present proceeding, the affirmations primarily contain various attempts to substantively defend the claims.
[10] Although the objection is technically sound in relation to the Fletcher and McGoldrick affirmations, I received those affirmations in order to gain a full understanding of the relationship between the original and the amended invoices analysed in Mr Fisken’s affidavit (discussed below). I consider that Ms Meroiti’s affirmation and a substantial part of Mr Meroiti’s affirmation are inadmissible as amounting to an attempt to substantively defend the claims. However I have considered Mr Meroiti’s affirmation to the extent that it is directed to the quantum of
the claims for damages. I consider Mr Hooper’s affirmation is irrelevant and hence
inadmissible.
Factual background
[11] The Meroitis owned two companies involved in the provision of quantity surveying services using specialised software. Those companies are the second and third defendants in this proceeding. Data Plan Services Ltd (Data Plan) and the Drafting House Ltd (TDHL) respectively.
[12] At a meeting on 4 April 2005 Mr Meroiti told Mr Tankersley that:
(a) Data Plan owned the intellectual property rights in three valuable software programs, SmartStart, the Builders Tool and Tracker Joe, designed to assist building supply retailers to provide quantity surveying services;
(b)Data Plan also had contracts for software development and the provision of quantity surveying services to Fletcher Distribution Ltd (Fletchers); and
(c) TDHL had been incorporated to be the entity that would actually provide quantity surveying services using the software, while Data Plan would own and develop that software.
[13] Mr Meroiti also informed Mr Tankersley that he and Ms Meroiti intended to expand their business. They wanted to develop the software and sell use rights to retailers in New Zealand and overseas, as well as significantly increase the volume of quantity surveying services they provided.
[14] Mr Tankersley was impressed by the potential profitability of the project. In his affidavit of 5 February 2015 he explained that at a meeting in Kuala Lumpur in May 2005 he and Mr Meroiti agreed to enter into a joint venture to carry out the intended expansion (the Expansion Project). It was agreed that Mr Meroiti would have oversight and control of the initial expansion of the business and that
Mr Tankersley (via the second plaintiff) would provide funding to the Meroitis (via
Data Plan and TDHL) to be used for the expansion.
[15] In an email to Mr Meroiti dated 18 May 2005 Mr Tankersley said:
It was a real pleasure meeting you again, and this time in Kuala Lumpur.
It was a pity that we only had time for a brief meeting prior to my commitment to travel to Singapore, and then only having the Saturday afternoon, to discuss many matters.
Although I have only met you briefly on a few occasions, I believe in you, and I believe in your dedication to want to deliver high quality services to Home Depot and all of their builders.
Based upon believing in you, I confirmed on Saturday, that I would be willing to provide the initial budget funds of NZ$800,000.00, and we have already sent in the application to the Registrar of Companies to try and get the following company name approved – “TDX Global Sdn Bhd”.
[16] In an email the following day to Mr Tankersley, Mr Meroiti stated:
At the heart of this now is trust. Trust in each other’s word.
June 2005 to February 2006
[17] Although Mr Tankersley and Mr Meroiti agreed to undertake the Expansion Project together, the overarching structure of the joint venture had not been settled and no formal contracts were in place. It was broadly envisaged that there would be a parent company for the Expansion Project, which would oversee the operations of various subsidiary companies in a number of countries. However, the details of that structure, including the optimum country of incorporation for the parent company, had not been finalised. Instead, the parties continued to negotiate and seek advice on a range of possible options.
[18] Nevertheless Mr Tankersley proceeded to advance funds before the arrangements had been formalised. As he stated in his affidavit:
65The discussions I had with John lasted several months while we reached an agreement that I would invest in the business.
66Despite the fact that a number of loose ends remained, John was pressuring me to invest and invest quickly. On 1 June 2005, John wrote to Michael and me, stating that he had decided to personally
fund Data Plan’s expansion into the United States with Digital Canal. He said, “The momentum begun with Home Depot and others is an opportunity that must not rest on last minute negotiations between our companies”…
67 I believed John’s message was that I would be excluded from the
Expansion Project if I did not move quickly.
68Because of the urgency indicated by John, I agreed for Rinota to send funds before we had finalised the business structure.
…
71John and I had a number of discussions about the fact that I was trusting him – I was investing without any formal structures in place to protect my investment.
72I understood that our relationship was a joint venture undertaking the Expansion Project. We were partners working towards a common goal: John was taking primary responsibility for progressing the project and would contribute the valuable intellectual property; I was to supply capital for funding the project. Pursuant to this understanding, we were depending on each other to make progress towards this common objective. I went ahead because I believed that I was acting in the best interests of the partnership. John and I referred to our relationship as being a joint venture throughout the course of our association. It was this understanding that led me to repose trust and confidence in John from an early stage of our acquaintance.
[19] The arrangement was that, at least in the short term, Mr Tankersley would contribute by reimbursing expenses incurred by Data Plan and TDHL in undertaking the Expansion Project. Invoices were to be tendered to Mr Tankersley through Rinota and he was to make payments via Rinota accordingly. Receipts for the invoiced expenses were to be provided.
[20] Mr Tankersley contributed a total of NZ$956,920.65 to the Expansion Project by way of 10 payments made between July and December 2005 as shown in the table below:
Invoice
Date
Invoice
Number
Invoice rendered by
Date money sent
Sent from
Amount
(NZD)
7/7/05
129
TDHL
13/07/05
RINOTA
$50,000.00
03/08/05
130
TDHL
10/08/05
RINOTA
$121,500.00
08/08/05
131
TDHL
10/08/05
RINOTA
$86,635.21
18/08/05
136/139
TDHL
23/08/05
RINOTA
$86,215.19
05/09/05
143
TDHL
06/09/05
RINOTA
$98,167.65
15/09/05
147
TDHL
16/09/05
RINOTA
$99,735.40
05/10/05
151
TDHL
06/10/05
RINOTA
$123,212.30
20/10/05
156
TDHL
20/10/05
RINOTA
$71,920.30
09/11/05
162
TDHL
10/11/05
RINOTA
$109,062.30
02/12/05
173
TDHL
13/12/05
RINOTA
$110,472.30
Total $956,920.65
[21] The payments were made in response to brief summary invoices which described the expenditure only in general terms. Despite continuous requests from Mr Tankersley and numerous assurances that they would do so, the Meroitis failed to supply the relevant receipts.
[22] By late 2005 Mr Tankersley had become concerned about the failure to provide receipts or detailed records of the claimed expenditure. He stopped sending money.
[23] The plaintiffs allege that the Meroitis misspent or misappropriated the funds comprised in the 10 payments and that those funds were used for the personal benefit of the Meroitis and for the advancement of their business interests outside of the joint venture.
[24] An analysis undertaken by Mr Fisken indicated that at least $697,098.65 of those funds were not spent on Expansion Project expenses as shown below:
Payment Amount $
Not Project Expenses
Payment 1
$50,000.00
$12,500.00
Payments 2 & 3
$208,135.21
$200,000.00
Payment 4
$86,215.19
$67,302.00
Payment 5
$98,167.65
$61,617.65
Payment 6
$99,735.40
$51,787.00
Payment 7
$123,212.30
$68,235.00
Payment 8
$71,920.30
$58,311.00
Payment 9
$109,062.30
$102,346.00
Payment 10
$110,472.30
$75,000.00
$956,920.65
$697,098.65
[25] Mr Fisken explained that in undertaking his review he adopted a conservative approach, such that where he was not able to determine the actual circumstances because of a lack of information and there was doubt about what the funds had been used for, he gave the Meroitis the benefit of the doubt. He said:
19I have only concluded that funds were not spent for a proper purpose in one of three cases:
19.1where I could see what the funds were spent, or alleged to be spent on, and that this was not a legitimate joint venture expense. For instance, I have noticed certain lease payments for which I can see no basis;
19.2where there appears to have been an accounting error in the invoicing process, leading to no apparent basis for the relevant invoice. For instance, I have noticed a cheque which was drawn to repay expenses, which had already been claimed and reimbursed; or
19.3where I could see that the funds were transferred to or withdrawn by Jill Meroiti (or another party) who, in the circumstances, I believe had no legitimate interest in the funds. In these cases, I have inferred that the funds were not spent on a legitimate joint venture expense.
[26] Mr Fisken determined that the $697,098.65 had been disposed of in the following illegitimate ways:
(a) $122,978 paid to Ms Meroiti personally;
(b)$200,000 withdrawn directly by the Meroitis and used to part fund the purchase of a property, Lindale Lodge, which was transferred to a company owned by the Meroitis called Lindale Lodge Ltd, before being later transferred to the Meroitis’ family trust and sold to a third party;
(c) $77,792.65 in unexplained payments to Data Plan; (d) $105,000 paid into the Lindale Lodge bank account;
(e) $88,552 in unjustified payments to the Meroitis’ company
CKM Holdings Ltd, the sixth defendant.
March 2006 to 2007
[27] In his affidavit Mr Tankersley stated that as a consequence of his continued concerns, he and Mr Meroiti entered into a formal agreement, the International e_Business Ltd Shareholders’ Agreement (the IEB Shareholders’ Agreement) signed on 29 March 2006.
[28] Importantly from his perspective the IEB Shareholders’ Agreement gave him part ownership of the relevant software. He explained:
Under this Agreement, I reluctantly agreed to purchase 49% of the shares in IEB from John in an endeavour to overcome some of my concerns. I did this on the basis that the ownership rights in SmartStart, Tracker Joe and The Builders Tool had been transferred to IEB and that the value of the software was NZ$4,000,000. This agreement was reached after a number of negotiations by phone and email.
[29] IEB was previously owned entirely by the Meroitis. Mr Meroiti advised Mr Tankersley that he would transfer to IEB the intellectual property rights in the three valuable software applications owned by Data Plan. Mr Tankersley stated:
As part of the March 2006 negotiations leading towards the IEB Shareholders’ Agreement, John told me that ownership of the software would be transferred to IEB and that this would mean that IEB would also
own all developments that were made to it, subject only to Fletchers right to use SmartStart and The Builders Tool in New Zealand and Australia.
[30] A letter dated 29 March 2006 addressed to Mr Tankersley from Susie Mills, a lawyer acting for the Meroitis, stated:
John Meroiti via Data Plan Services has formally novated the following
Intellectual Property (IP) to IEB:
a) Smartstart
b) Builders Tool c) Tracker Joe
[31] Mr Tankersley deposed that that letter provided the clear confirmation that he required. Consequently he was reassured that entering the IEB Shareholders’ Agreement would secure his investment. He understood that his equity in IEB would provide him with part ownership of the assets at the heart of the Expansion Project. He said:
I entered the IEB Shareholders’ Agreement solely as a way of securing my investment, in that I got a stake in the only valuable asset associated with the business venture.
[32] In addition, Mr Meroiti advised that IEB would receive significant licence fee income from other companies using the software, of which Mr Tankersley would receive 75 per cent.
[33] Relevant to this proceeding the IEB Shareholders’ Agreement provided:
#1. Richard Tankersley will buy 49% shareholding in IEB $NZD
2,000,000.00 [Two Million New Zealand Dollars]
#2. Richard Tankersley has already paid $NZD 953,000.00 [Nine Hundred and Fifty Three Thousand New Zealand Dollars] This money was used for development of Intellectual Property owned by IEB and will form part of his payment for the 49% shares in IEB.
#3. Therefore the balance Richard Tankersley owes John Meroiti for his
49% shares in IEB is $NZD 1,047,000.00 [One Million Forty Seven
Thousand NZ Dollars]
#4. Of this balance Richard Tankersley will pay John Meroiti
$NZD 500,000.00 by March 31st 2006.
#5. A further payment for the 49% IEB shares of $NZD 250,000.00 will become payable from Richard Tankersley to John Meroiti when the IEB 5% license fee owed by TDH Company’s using the IEB IP achieves an amount of $NZ 9,000.00 per month. The payment of this $NZD 250,000.00 is clearly performance based and is not due until the 5% fee target is met. [Expected target date in July 2006]
#6. A final payment for the 40% IEB shares of $NZD 297,000.00 will become payable from Richard Tankersley to John Meroiti when the IEB 5% license fee owed by TDH Company’s using the IEB IP achieves an amount of $NZ 13,000.00 per month. The payment of this $NZD 297,000.00 is clearly performance based and is not due until the 5% fee target is met. [Expected target date in October 2006]
#7. John Meroiti agrees that he will advance to IEB an amount of
$297,000.00 from the sale of his 49% shares in IEB for the express use of
IEB IP development.
#8. For the avoidance of doubt the IP IEB owns is the software desktop applications known as SmartStart, The Builders Tool and Tracker Joe. IEB IP functionality developed for TDH Company use will be owned by IEB.
[34] It appears that the instrument which purportedly gave effect to the novation referred to in Ms Mills’ letter2 was a document dated 1 July 2005 signed by Mr Meroiti in the following terms (the Novation Agreement):
NOVATION OF DPSL INTERLLECTUAL (SIC) PROPERTY RIGHTS TO IEB
THE PARTIES: Data Plan Services Ltd [DPSL] Waikanae
NEW ZEALAND
International e_Business Ltd [IEB] Port Villa
VANUATU
DATE: Friday 1st July 2005
THE INTERLLECTUAL (SIC) PROPERTY RIGHTS: [IP Rights] (1) Tracker Joe
(2) SmartStart
(3) The Builders Tool
(4) TDX SolidBuilder [to be built]
2 At [30] above.
THE TERRITORIES:
The territories include all international territories excluding New Zealand and Australia.
THE AGREEMENT:
DPSL agrees to the novation of its IP rights as listed above to IEB for all of the territories listed except New Zealand and Australia. The IP rights will become the exclusive property of IEB from the date of this agreement.
SIGNED BY:
“J.D Meroiti”
Director & Operations Manager Data Plan Services Ltd
[35] In the performance of his obligations under the IEB Shareholders’ Agreement
Mr Tankersley (via Rinota) paid NZ$1,094,000 in three payments as follows:
Invoice Date Invoice
Number
Date money sent
Sent from
Purportedly received by
Amount (NZD)
09/04/06
301132
30/03/06
RPMS
IEB
$500,000.00
21/04/06
26/05/06
22/06/06
202
207
211
27/07/06
RPMS
IEB
$297,000.00
28/11/06
229
07/12/06
RPMS
TDHL
$297,000.00
Total
$1,094,000
[36] The reason why the total paid exceeded the contract payments due under the IEB Shareholders’ Agreement was explained by Mr Tankersley. He had agreed to a request to reorder the second and third payments but when he came to pay the final payment he mistakenly paid the amount of $297,000 again instead of the final amount required of $250,000.
[37] The plaintiffs allege that IEB never held the intellectual property rights claimed by Mr Meroiti. Mr Tankersley was therefore induced by Mr Meroiti to purchase 49 per cent of the shares in a company with no valuable assets, and no enforceable right to collect licence fees of any kind.
First claim: breach of fiduciary duty
[38] The plaintiffs claim that both Mr Meroiti and Ms Meroiti breached fiduciary duties which they owed to the plaintiffs in the manner in which they dealt with the
10 payments totalling $956,920.65. Alternatively in the case of Ms Meroiti, they assert that, if she did not herself owe fiduciary duties to the plaintiffs, she:
(a) dishonestly assisted in Mr Meroiti’s breach of his fiduciary duties; or
(b) knowingly received property in consequence of Mr Meroiti’s breach.
[39] In Chirnside v Fay Tipping and Blanchard JJ in the leading judgment addressed the pre-contractual joint venture scenario:3
The essence of a joint venture which is not yet contractual is that it is an arrangement or understanding between two or more parties that they will work together towards achieving a common objective. It is fallacious to think that there can be no joint venture unless and until all the necessary details have been contractually agreed. A joint venture will come into being once the parties have proceeded to the point where, pursuant to their arrangement or understanding, they are depending on each other to make progress towards the common objective. Each party is then proceeding on the basis that he or she is acting in the best interests of all or both parties involved in the arrangement or understanding. A relationship of trust and confidence thereby arises; each party is entitled to from the others loyalty to the joint cause, loose as the formalities of the joint venture may still be.
[40] Where a fiduciary relationship exists the beneficiary is entitled to rely on the fiduciary not to act contrary to the beneficiary’s interests. As Elias CJ observed in her dissenting judgment (on other grounds) in Chirnside v Fay:4
… the appropriation of a joint venture by one of the parties to his sole account is as fundamental a breach of fiduciary duty as can be imagined.
[41] For the plaintiffs, Mr Kalderimis submits that the present case involves a straightforward application of the principles in Chirnside v Fay, drawing attention to three features of the situation. First, a joint venture existed between Mr Tankersley and the Meroitis in that they had agreed to pursue the Expansion Project together.
The fact that the joint venture had come into existence was evidenced by the fact of
Mr Tankersley’s forwarding funds for the Expansion Project.
[42] Secondly the joint venture was still pre-contractual. The overarching structure of the venture was still being discussed and advice was being sought throughout concerning the tax implications of various proposed structures.
[43] Thirdly Mr Tankersley was resident in Malaysia and did not have the ability to influence the way the money was actually used or to oversee the Meroitis’ activities. The trust element of the relationship was evident in a number of email communications including, for example, Mr Meroiti’s email to Mr Tankersley of
19 May 2005.5
Mr Meroiti
[44] I accept that as a consequence of the formation of the pre-contractual joint venture Mr Meroiti owed fiduciary obligations to Mr Tankersley (and Rinota) including the fundamental duty to spend for the benefit of the joint venture the 10 payments contributed by Mr Tankersley. Mr Meroiti was precluded from invoicing Mr Tankersley for expenses not actually incurred in undertaking the Expansion Project or from acting contrary to Mr Tankersley’s interests in relation to the joint venture. Mr Fisken’s evidence establishes that at least $697,098.65 of those funds were misspent or misappropriated.
[45] Mr Kalderimis drew attention to the fact that the breaches occurred between July and December 2005, that is more than six years prior to the commencement of this proceeding on 27 March 2012. However I accept his submission that no limitation issues arise because the cause of action is not directly analogous to a cause of action that would be time barred, as is required for the restrictions in the
Limitation Act 1950 to apply to equitable causes of action.6
[46] In any event I agree that the present case would fall within the s 28(a) fraud exception to the Limitation Act restrictions. The limitation period begins to run only once a plaintiff discovers the breach.7 Mr Tankersley’s evidence was that he did not discover the breaches of fiduciary duty until 2010.
[47] In the course of his submissions Mr Meroiti contended that certain payments of $35,000, which Mr Fisken described as unexplained and unjustified “lease payments”, were in fact payments provided for in a budget which had been discussed at an early stage. Quite apart from the fact that that line of argument amounted to actively defending the claim, I accept Mr Kalderimis’ submission that reference to an item in a budget does not sound in a relevant expense unless there is an underlying transaction supporting the expense. In this case there was no such transaction.
[48] Mr Fisken was unable to reach a conclusion on the available evidence as to the purpose for which the balance of the monies of $259,822 had been used. Mr Kalderimis submitted that the Court could and should draw an adverse inference against Mr Meroiti and find that the totality of the 10 payments were misspent or misappropriated. Notwithstanding Mr Fisken’s observation that it is possible that the funds misspent may have exceeded the figure he calculated, having regard to the detail which was available in the amended invoices and to Mr Fisken’s thorough analysis, I do not consider that it is appropriate to draw such an adverse inference.
[49] Mr Kalderimis submits that the appropriate remedy is a standard disgorgement remedy.8 I agree that Mr Meroiti should be required to make restitution in respect of the amount of $697,098.65 which can fairly be characterised as equitable compensation for the loss suffered by Mr Tankersley due to his funds being systematically misspent.
Ms Meroiti
[50] While the plaintiffs concede that Mr Tankersley’s primary point of contact
was with Mr Meroiti, they nevertheless maintain that Ms Meroiti was heavily involved in the joint venture, drawing attention to the following matters:
7 Collier v Creighton [1996] 2 NZLR 257 (PC) at 262.
(a) Ms Meroiti was a director of TDHL and Data Plan;
(b) Ms Meroiti had control of the bank account into which Mr Tankersley
(via Rinota) transferred his payments; and
(c) in several emails to Mr Tankersley Mr Meroiti referred to Ms Meroiti’s involvement in the business and oversight of the accounts.
[51] Mr Manktelow paints a different picture of Ms Meroiti as a housewife and mother of three children, the youngest only having been born on 7 March 2005 which was only a short time prior to the May 2005 meeting.9 He makes the point that a number of the references to Ms Meroiti’s alleged involvement are statements of Mr Meroiti rather than admissions of Ms Meroiti.
[52] The evidence does not establish that Ms Meroiti was actually a party to the formation of the original joint venture. Consequently on the basis of the evidence before me I do not find that Ms Meroiti owed a fiduciary obligation to Mr Tankersley.
[53] However Mr Kalderimis argues that even if Ms Meroiti did not herself owe fiduciary duties to the plaintiffs, she dishonestly assisted in Mr Meroiti’s breach of
his fiduciary duties.
[54]
Ms M
The
eroiti
necessary elements for a claim of dishonest assistance against
are:
(a)
the plaintiffs lost their money as a result of breaches of fiduciary duty or unauthorised acts;
(b)
Ms Meroiti participated, by helping or assisting, in those breaches;
and
9 At [14] above.
(c) dishonesty (or a dishonest state of mind) on the part of Ms Meroiti.
[55] In Westpac New Zealand Ltd v MAP & Associates Ltd the Supreme Court described the requisite dishonest state of mind as follows:10
The key ingredient in the cause of action for dishonest assistance is the need for a dishonest state of mind on the part of the person who assists in the breach of trust. We agree with the statement in Barlow Clowes that such a state of mind may consist in actual knowledge that the transaction is one in which the assistor cannot honestly participate. But it may also consist in what we would describe as a sufficiently strong suspicion of a breach of trust, coupled with a deliberate decision not to make inquiry lest the inquiry result in actual knowledge. For the purpose of this alternative, it is necessary that the strength of the suspicion that a breach of trust is intended makes it dishonest to decide not make inquiry. That state of mind, which equity equates with actual knowledge, is usually referred as wilful blindness. It involves shutting one’s eyes to the obvious and can thus fairly be equated with the dishonest involved when there is actual knowledge.
[56] The evidence establishes that Ms Meroiti:
(a) had a degree of control over the 10 payments received from
Mr Tankersley as she had oversight of the relevant bank accounts;
(b)participated in some decisions relating to the use of the funds in her capacity as a director of Data Plan and TDHL;
(c) with Mr Meroiti, used the funds paid by Mr Tankersley to acquire Lindale Lodge and to grow the business operations of Lindale Lodge Ltd; and
(d)used some of the money paid by Mr Tankersley to cover her personal expenses.
[57] Consequently I accept the plaintiffs’ submission that given her involvement with the Expansion Project, her position as a director of relevant companies and her
oversight of the financial accounts, Ms Meroiti must have known that her actions
10 Westpac New Zealand Ltd v MAP & Associates Ltd [2011] NZSC 89, [2011] 3 NZLR 751 at
[27].
assisted Mr Meroiti in breaching his fiduciary duties. I therefore find that she is also liable to pay to the plaintiffs the sum of $697,098.65.
[58] In the event that my conclusion on dishonest assistance is erroneous, I also find in the alternative that Ms Meroiti knowingly received the sum of $122,978 as identified by Mr Fisken.11
Second claim: misrepresentations
[59] The plaintiffs contend that Mr Meroiti made two key misrepresentations to
Mr Tankersley that induced him to enter into the IEB Shareholders’ Agreement, namely:
(a) that Data Plan owned the intellectual property rights in the software; and (b)
that Data Plan had transferred all of its intellectual property rights in the software to IEB.12
[60]
The
plaintiffs also contend that between July 2005 and March 2006
Mr Meroiti represented to Mr Tankersley that the $956,920.65 paid by Mr Tankersley (via Rinota) had been spent for the good of the Expansion Project. However the claim for damages for that misrepresentation was only pursued as an alternative to the claim relating to Mr Meroiti’s misrepresentation regarding the intellectual property owned by IEB.
[61] The plaintiffs submit, and I accept, that the representations concerning IEB’s ownership of the intellectual property rights in the software were false because the intellectual property rights in SmartStart and The Builders Tool were not owned by Data Plan alone but were jointly owned by Data Plan and Fletchers. Consequently Fletchers’ consent was required for the rights to the transferred to IEB. Such consent was never obtained. Hence such rights as Data Plan had in the software applications
were never validly transferred.
11 At [26](a) above.
[62] Even if Data Plan had been able to independently assign its intellectual property rights in the two programs, it would have been necessary to describe with precision the rights to be assigned. The Novation Agreement13 made no reference to some discrete aspect of the software owned by Data Plan rather than Fletchers. Consequently the document did not describe the relevant rights sufficiently for a valid assignment.
[63] Mr Kalderimis argues that, in any event, the Novation Agreement should be disregarded by the Court on the ground that it constitutes a sham transaction within both of the categories identified in NZI Bank Ltd v Euro-National Corporation Ltd:14
A document may brushed aside if and to the extent it is a sham in two situations. The first is where the document does not reflect the true agreement between the parties in which case the cloak is removed and recognition is given to their common intentions. The second is where the document was bona fide in inception but the parties have departed from their initial agreement while leaving the original documentation to stand unaltered.
[64] He correctly submits that as the parties to the transaction were Data Plan and IEB, both of which were managed by Mr Meroiti at the relevant time, Mr Meroiti’s intention at the time of signing the Novation Agreement is crucial. Several matters are relied upon as demonstrating that Mr Meroiti never intended the Novation Agreement to in fact assign Data Plan’s intellectual property rights in the software to IEB.
[65] It will suffice to refer to the fact that:
(a) in March 2006 Mr Meroiti, on behalf of Data Plan, entered into a further agreement with Fletchers with the same intellectual property provisions as the earlier Fletcher Agreement, namely that SmartStart and The Builders Tool were jointly owned by Data Plan and Fletchers;
(b) the financial accounts for Data Plan for the financial years ending
31 March 2006 and 31 March 2007 listed Tracker Joe, The Builders
Tool and SmartStart as assets still belonging to Data Plan.
13 At [34] above.
[66] As Mr Kalderimis stated, however analysed, Mr Meroiti continued to operate his group of companies and to behave generally as though Data Plan retained the intellectual property rights in the software. It follows that the Novation Agreement must be regarded as a sham.
[67] Section 6 of the Contractual Remedies Act states:
6.Damages for misrepresentation–(1) If a party to a contract has been induced or enter into it by a misrepresentation, whether innocent or fraudulent, made to him by or on behalf of another party to that contract–
(a) He shall be entitled to damages from that other party in the same manner and to the same extent as if the representation were a term of the contract that has been broken; …
[68] It is plain in my view that Mr Tankersley was induced to enter into the IEB Shareholders’ Agreement in reliance upon the misrepresentations concerning IEB’s ownership of the software.15
[69] As to the measure of damages, the effect of s 6(1)(a) is that generally a plaintiff will be entitled to such damages as would be required to put the plaintiff in the position he or she would have been in if the term had not been breached, namely expectation damages. However for the plaintiffs it was submitted:
95It is well-recognised, however, that “there are some situations where a plaintiff claiming for breach of contract can claim to be restored to the position he was in before he entered into the contract”. These are known as reliance damages, or sometimes as wasted expenditure. The Court in Bloxham referred, as an example of where reliance damages would be appropriate, to cases where there has been a total failure of consideration. It cited the High Court of Australia decision McRae v Commonwealth Disposals Commission, where the contract was for the sale (without warranties) of an oil tanker wrecked on a reef and said to contain oil. The purchaser mounted a salvage expedition, only to discover there was no tanker and no reef in the position indicated. The Court allowed the plaintiff to recover reliance damages, on the basis that “the breach of contract itself made it impossible to assess the loss”.
96This flexibility is also consistent with the general comment made by the Court of Appeal in Ti Leaf Productions Ltd v Baike, that:
[T]here must be room for respectable argument that with the general trend towards a rationalisation of remedies and the greater analysis of underlying principle, there no longer is need to adhere to a single approach to the award of damages for contract breaches.
[70] Mr Mellsop provided evidence that assessed the likely value of Mr Tankersley’s IEB shares, if Mr Meroiti’s representation about the intellectual property had been true, as being $2,000,000. That in fact was the agreed purchase price for the 49% holding in the IEB Shareholders’ Agreement.16
[71] However the Agreement provided that the total of the 10 payments which Mr Tankersley had already made was to form part of the payment for the IEB shares, leaving a balance to pay of $1,047,000. In fact Mr Tankersley erroneously paid
$1,094,000.17
[72] Under the first claim for breach of fiduciary duty I have already directed that Mr Meroiti is to make restitution in the sum of $697,098.65. Having regard to the contractual provision whereby Mr Tankersley’s 10 payments were to form part of his payment for the 49% shareholding in IEB, I consider that the equitable damages awarded under the first claim need to be taken into account in the assessment of damages under a s 6(a) basis.
[73] Consequently I hold that the plaintiffs are entitled to an award of damages under the second claim in the sum of $1,349,902.35 being:
2,000,000.00 – 697,098.65 1,302,901.35 + 47,000.00 1,349,902.35
16 At [33] above.
[74] In view of that finding I do not consider it necessary to address the alternative claim for damages with reference to the misrepresentation concerning the use to which the sum of $956,920.65 comprising the 10 payments was put.
Interest and costs
[75] The plaintiffs seek non-compounding interest on the amounts awarded under the two claims. Adopting the methodology in the chart at Appendix F of the plaintiffs’ submissions, I calculate interest on the judgment sums in the amount of
$441,437.91 on the first claim and $829,514.98 on the second claim. Leave is reserved to apply in the event that my calculations prove to be erroneous.
[76] The plaintiffs seek costs on a 2B basis in the sum of $39,103.50 as calculated in the chart at Appendix F of their submissions. Costs on a 2B basis are approved in the sum of $40,098.50 incorporating a single adjustment at item 34 to reflect a hearing of one day duration.
Disposition
[77] There is judgment for the plaintiffs:
(a) on the first claim against Mr Meroiti and Mrs Meroiti in the sum of
$697,098.65;
(b)a declaration that Mr and Mrs Meroiti hold on constructive trust for the plaintiffs any property, proceeds or profits – including from the sale of Lindale Lodge – that can be traced to the NZ$697,098.65 obtained by the Meroitis in breach of their equitable obligations.
(c) on the second claim against Mr Meroiti in the sum of $1,349,902.35; (d) interest in the sum of $441,437.91 on the first claim;
(e) interest in the sum of $829,514.98 on the second claim;
(f) costs in the sum of $40,098.50 with disbursements as fixed by the
Registrar.
Solicitors:
Chapman Tripp, Wellington
Brown J
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