Thomas v Thomas HC Timaru CIV-2011-476-000075

[2011] NZHC 1683

IN THE HIGH COURT OF NEW ZEALAND TIMARU REGISTRY

CIV-2011-476-000075

BETWEEN  MICHAEL BERNARD THOMAS AND JANE EASTON THOMAS

Plaintiffs

ANDDANIEL BERNARD THOMAS AND KERRYN ELIZABETH THOMAS Defendants

Hearing:         19 October 2011

Counsel:         D M Lester for Plaintiffs

R S Cunliffe for Defendants

Judgment:      28 October 2011

JUDGMENT OF ASSOCIATE JUDGE MATTHEWS

[1]      This  is  an  application  by  the  plaintiffs  for  summary  judgment  ordering specific performance of the terms of an agreement dated 6 November 2008 reached at the conclusion of a mediation convened to settle disputes between the parties arising from their shareholdings in Killermont Run Limited and the future operation of a high country farming property known as “Killermont”, owned by the company. The issues in this case are whether the defendants are in breach of the agreement, if so whether orders by way of specific performance should be made, and if so their terms.

Background facts

[2]      The  defendants  are  the  son  and  daughter-in-law  of  the  plaintiffs.    The plaintiffs  own  51  percent  of  the  shares  in  Killermont  Run  Limited,  and  the defendants 49 percent.  Each of the plaintiffs and the first-named defendant are the directors of the company.  The defendants, through their company Killermont Station

Limited, lease and farm the entire property and own all the stock and plant.   The

MICHAEL BERNARD THOMAS AND JANE EASTON THOMAS V DANIEL BERNARD THOMAS AND KERRYN ELIZABETH THOMAS HC TIM CIV-2011-476-000075 28 October 2011

plaintiffs  live  on  the  farm  in  a  house  located  on  a  block  of  1.8349  hectares subdivided from a larger title as a result of the mediation, but remaining in the ownership of Killermont Run Limited.

[3]      Killermont comprises four titles:

(a)       389.6687 hectares – the Pebbly Block.

(b)      1183.9853 hectares – the Red Flat Block. (c)    2117.9753 hectares – the Run Block.

(d)      1.8349 hectares – the House Block.

[4]      The plaintiffs and the first-named defendant farmed in partnership for some

20 years prior to 2003.  Killermont Station Limited is indebted to Rabobank as its farm financier.  Killermont Run Limited is a guarantor of this debt.

[5]      The plaintiffs are aged in their 70s.  They are, as the first-named defendant said in his affidavit, limited in their ability to work.  They wish to have title to the home they have lived in for many years in their name and also wish to divest themselves of their shares in Killermont Run Limited and be relieved from the concerns they have over the level of indebtedness of the company to Rabobank and the consequent exposure of Killermont Run Limited.  Killermont Station Limited is making trading losses.  If the guarantee of Killermont Run Limited were called up the plaintiffs stand to lose their home, and the value of their shareholding in Killermont Run Limited would be at risk.

[6]      The defendants have as their priority continuation of their farming business and outright ownership of Killermont through ownership of all the shares in Killermont Run Limited.   They, too, live on the property and are responsible for actively farming it.

[7]      The respective aspirations of the parties and the differences between them relating to farm management and the level of debt being incurred with Rabobank led to it being necessary, in the late 2000s, to resolve a number of issues.  This proved to

be difficult but in November 2008 the parties participated in a mediation which led to the agreement in issue in this case.   There are a number of provisions in this agreement which are relevant to the issues before the Court.

[8]      Clauses 1 and 2 are in the following terms:

1.    Vendors (the present plaintiffs) agree to sell and purchasers (the present defendants) to purchase the vendor’s shares in Killermont Run Limited on terms and conditions set out in this agreement (subject to clause 8).

2.    The share sale price is $2,100,000.00 to be paid as follows:

(i)  320,000.00 by transfer of house and 1.8ha of land and improvements as per survey completed and with appurtenant easements shown on plan

(ii)  200,000.00 on sale of “Pebbly Block” should this proceed as

per contract completed

(iii) balance from sale of “Red Flat” should this proceed as per

contract completed

(iv) should neither of above sales, or either, not be completed the purchasers are to undertake other land sales sufficient to pay the balance purchase price remaining.

It will be seen from the provisions of clause 2 that the parties envisaged that payment of the agreed price for the plaintiffs’ shares would be derived from sales of land, and would be partly satisfied by an agreed value for the house block which was to be subdivided from the Run Block.

[9]      A representative from Rabobank attended the mediation, so the parties could ensure they made realistic provision for Rabobank’s interests in any arrangement they made, though Rabobank itself was not a party to the agreement.  Clause 6 of the agreement provided as follows:

Rabobank loan facility to the purchaser’s trading entities are to be reduced

$1.00  for  $1.00  for  repayments  received  from Pebbly  proceeds  and  the

Killermont Run Ltd guarantee of Killermont Station Ltd will be reduced accordingly ($2.5m to 1.6m).

[10]      Clause 9 of the agreement provided for the transfer of the shares:

On settlement the shares will be transferred free of encumbrance from the vendors to the purchasers or their nominee, settlement to be completed on completion of all payments provided for by clause 2 (subject to clause 8).

[11]     Clause 9 was expressed to be subject to clause 8, in which the parties agreed to structure the transaction provided for in clause 1 in the manner recommended and agreed by their professional advisors, and allowed for alternative arrangements to be entered including, if appropriate, winding-up Killermont Run Limited.

[12]     By clause 10 the parties agreed to sign all documents “and cooperate fully in all transactions necessarily arising out of this agreement”.

[13]     At the time the agreement was entered the Pebbly Block and the Red Flat Block were each sold, conditionally.   Shortly after the agreement was entered the Pebbly Block sale contract came to an end.  The Red Flat Block agreement had been entered in 2003.  It was subject to a number of conditions concerning water rights. Issues concerning allocation of water in the lower Waitaki Basin have been the subject of prolonged consideration through various processes under the Resource Management Act since at least 2003 and are not yet resolved.  The Red Flat Block sale contract still remains on foot, and conditional.

[14]     After  the  mediation  agreement  was  entered  and  after  the  Pebbly  Block contract was terminated the defendants agreed to Killermont Run Limited selling the Pebbly and the Run Block, resulting in there being a period when the entire property was under contract.  This contract, however, was also terminated.  Neither of these blocks, nor any part of them, has been sold since.

[15]     In the period of 10 months after the agreement all necessary steps were taken to subdivide the House Block from the Run Block and a separate title has issued.  It remains, however, in the name of Killermont Run Limited.

[16]     Four days after the agreement was entered Rabobank wrote to the directors of Killermont Station Limited (the defendants) advising that the bank had reviewed the agreement, had no objection to the nature of the agreement and was prepared to

cooperate with the agreed assets sale strategy and proposed security amendments so long as the borrower was not in default with any of the bank’s terms and conditions. The bank stated that it would agree to the partial release from its security of approximately 1.8 hectares known as the House Block and approximately 389 hectares known as the Pebbly Block “subject to minimum consideration of $870,000, with $254,000 of sale proceeds allocated to Mike and Jane Thomas”.

[17]     The letter went on to provide that the guarantee amount from Killermont Run Limited would be reduced from $2.5m to $1.6m subject to the debt reduction just referred to being effected.

[18]     At the time the Pebbly Block was under contract for $1.2m.  There was no evidence before the Court on the sale expenses but it would seem that Rabobank’s requirements accounted for the net proceeds of sale, or thereabouts.  Essentially, this allowed the $200,000 payment to be made by the defendants to the plaintiffs as required by clause 2(ii) of the agreement, together with a further $54,000 which the defendants were required to pay under clause 3 of the agreement, with the expected balance to be utilised in debt reduction, with an almost exactly equivalent reduction in guarantee exposure of Killermont Run Limited.  Thus if the Pebbly Block contract had been confirmed the way was cleared by Rabobank for the House Block to be transferred to the plaintiffs and the first cash payment of $200,000 to be either paid, or set aside from the sale proceeds, the correct interpretation of that obligation being one point to be determined in this case.

[19]     The Red Flat Block contracts provide for a sale price calculated on a per hectare basis, equating to a total of $2,900,763.00.

[20]     The latest advice from the Commissioners now charged with determining water right issues relevant to the Red Block sale contract is that “a decision will in all likelihood be available in the week commencing 21 November 2011” but this is tempered by the Commissioners as an “indicative date”.

[21]     The defendants say that if the Red Block contract is confirmed it will provide sufficient funds to pay the cash portion of the share sale price ($1.78m) without it

being  necessary for  other  land  to  be  sold,  but  that  depends  on  the  position  of Rabobank as mortgagee in relation to how much of its overall indebtedness it would require to be repaid from the proceeds of sale of that block in consideration of partial release of its security.   Although clause 6 of the agreement provided for the net proceeds of sale of the Pebbly Block to be applied as to half for debt repayment, this does not refer to the proceeds of sale of the Red Flat Block and in any event, as may be seen by the letter dated 10 November 2008 from Rabobank referred to earlier ([16] and [17]), was not in fact accepted by Rabobank.  Thus it is not possible to determine whether, should the Red Flat Block contract be confirmed, it will be possible  for  the  defendants’ obligations  to  the  plaintiffs  (to  pay  $1.78m)  to  be satisfied from that sale alone.

[22]     The plaintiffs’ position is that apart from the homestead and its environs having been subdivided onto a separate title, nothing has happened since the mediation agreement was reached.  They have not received payment of the sums to which they are entitled, title to the homestead property, nor any relief from the exposure of Killermont Run Limited to the indebtedness of Killermont Station Limited, and the consequent risk to them of losing their home and the value of their shareholding.  The defendants’ position is that apart from continuing to comply with the Red Flat Block sale contract they are not obliged to take any further steps until that contract is confirmed and settled or comes to an end.

The plaintiffs’ case

[23]     The plaintiffs’ case is that:

(a)    The House Block should have been transferred to them upon title being issued, it being the responsibility of the defendants and Killermont Station  Limited  to  make  such  arrangements  as  may  have  been necessary with Rabobank to enable clear title to be transferred.  In this respect they point to the failure of the defendants or Killermont Station Limited to give to Rabobank a further security in the form of a general security agreement in order to have the House Block title released from Rabobank’s mortgage to facilitate transfer to them.

(b)The defendants are in breach of their obligations to place Pebbly Block back on the market immediately after the initial sale collapsed, and to place all or part of the Run Block on the market in order to effect sales from which their shares may be paid for.

[24]     In support of this argument Mr Lester submitted that the agreement requires the defendants to honour their several commitments in separate steps, as events occur: to transfer the House Block on title being issued, to continue to endeavour to sell parts, or if necessary all of the property, in order to meet the payments provided for in the agreement and to pay as settlements occur.  He relied on clause 2(iv) of the agreement, submitting that on its true reading it obliged the defendants, in the event of  either  of  the  sales  of  the  Pebbly  Block  sale  or  Red  Flat  Block  not  being completed, to undertake other land sales sufficient to pay the balance of the purchase price.  Thus, had the Pebbly Block sale been confirmed and settled, but the Red Flat contract collapsed, it would have been necessary to put other areas of land on the market  in  order  to  achieve  sales  to  honour  the  remaining  obligation  to  pay

$1,580,000.  Mr Lester submitted that this was the clear interpretation of clause 2(iv)

on its wording, and was supported by other terms of the contract.

[25]    First, clause 9 provides for the shares in Killermont Run Limited to be transferred to the defendants “on settlement”, and settlement is “to be completed on completion of all payments provided for by clause 2”.  Mr Lester submitted that the reference to payments, in conjunction with the provisions of clause 2 requiring the share sale price to be satisfied in specific ways and from specific sources, made it clear that the possibility of there being several payments on account of the share price was contemplated by the agreement and this supported what he submitted was an obligation on the part of the defendants to cooperate in placing other areas of land on the market for sale if either of the Pebbly Block and Red Flat Block contracts was not completed.

[26]     Secondly, Mr Lester submitted that it would not have been necessary for clause  6  to  be  included  in  the  contract  had  it  not  been  the  obligation  of  the defendants to arrange or agree to a payment to the plaintiffs at the time a sale of the Pebbly Block was completed.   An interpretation of the contract to the effect that

payment for the shares was to be made in one sum after enough land sales had been effected would have meant that as each sale was completed monies would have been put aside for the plaintiffs, and accumulated until the cash portion of the share sale price was accumulated, but on that interpretation clause 6 would have been unnecessary.

[27]     Thirdly,  Mr  Lester  also  referred  to  the  provisions  of  clause  2(ii)  which provided for $200,000 to be paid “on the sale” of the Pebbly Block should the contract be completed, a clear indication, he submitted, that the share sale purchase price was  to  be paid  as land sales  were achieved,  which  in  turn  supported  his submission that the contract obliged the defendants to continue to market parts of the property on an ongoing basis until full payment for the shares had been made.

[28]     Fourthly,  Mr  Lester  submitted  that  there  would  have  been  no  reason  to specify a sum to be paid from the Pebbly Block and the balance from the Red Flat Block if the obligation of the defendants was just to pay the cash portion of the consideration in one sum, sourced how and when they wished.

The defendants’ case

[29]     Mr Cunliffe argued that the primary purpose of the agreement was to secure succession of ownership of Killermont Run, and thus a transfer of ownership to the defendants.  He accepted, however, that it was also a purpose of the agreement to provide for the retirement of the plaintiffs.  Mr Cunliffe relied on Vector Gas Limited v Bay of Plenty Energy:1

[19]      The  ultimate  objective  in  a  contract  interpretation  dispute  is  to establish the meaning the parties intended their words to bear.  In order to be admissible,  extrinsic  evidence  must  be  relevant  to  that  question.    The language used by the parties, appropriately interpreted, is the only source of their intended meaning.  As a matter of policy, our law has always required interpretation issues to be addressed on an objective basis.  The necessary inquiry therefore concerns what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean.  The court embodies that person.  To be properly informed the court must be aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties’ minds.  Evidence is not relevant if it does no more

1      Vector Gas Limited v Bay of Plenty Energy [2010] 2 NZLR 444 at 457.

than  tend  to  prove  what  individual  parties  subjectively  intended  or understood their words to mean, or what their negotiating stance was at any particular time.

[30]     Thus the Court is required to interpret the contract objectively but in the context in which it was made.   On the evidence before me I am satisfied that the context of the agreement was a mutual wish of both the plaintiffs and the defendants to provide for the shares in the farm-owning company to pass to the defendants, thereby securing succession of ownership of all or most of the property within the family, but at the same time securing for the plaintiffs separate ownership of a small area of land and the homestead in which they had lived for many years, together with a sum sufficient for them to utilise in their retirement, and freedom from the ongoing financial obligations necessitated by remaining as owners of shares in the property- owning company whose guarantee was required for the ongoing operation of the farm.   The plaintiffs and the defendants might, separately, have had intentions in their minds about how they would secure to their own satisfaction outcomes which achieve their separate aspirations, but these cannot be taken into account in interpreting the contract.

[31]     Mr Cunliffe emphasised the phrase “the balance purchase price remaining” in clause 2(iv) of the agreement.  He submitted that the balance of the purchase price could only be established after the sale of the Red Flat Block had been completed because prior to that point the balance could not, as a matter of arithmetic, be established. He described clause 2(iv) as “a catchall”.

[32]     Mr  Cunliffe  submitted  that  although  clause  9  of  the  agreement  requires transfer  of  the  shares  in  the  company  to  be  completed  “on  completion  of  all payments  provided  for  by  clause  2”,  it  does  not  specifically  provide  that  the payments set out in clause 2 will be made at the time that each source of funds becomes  available.    He  invited  me  to  interpret  the  clause  in  light  of  what  he described as normal practice for substantial sums such as those involved in each of the steps foreshadowed by clause 2 only to be paid when the shares are transferred in consideration, and thus in one lump sum.

[33]     Mr Cunliffe pointed out that nothing in the agreement contains an obligation for any step to be taken with a time limitation upon it and thus both the plaintiffs and the defendants took on the risk of delay in completion of the contract being possible. Thus, he submitted that the passing of time before placing any other part of the property back on the market does not amount to a breach of contract and therefore there is nothing for the Court to currently enforce by way of specific performance.

[34]     Mr Cunliffe drew my attention to the fact that the contract contemplated an arrangement with Rabobank for partial repayment of its loans as recorded in clause

6.  He submitted that clause 10 does not require the defendants to grant any further security over any assets to Rabobank because at the time the agreement was entered the parties had recorded in clause 6 a position which they believed would be acceptable to Rabobank.

Consideration of the respective submissions of the parties

[35]     Whilst the argument Mr Cunliffe made in relation to the interpretation of clause 2(iv) is superficially attractive, I think, on balance, that the interpretation argued by Mr Lester is the correct one, for the following reasons.  First, the Red Flat Block contract had, at the time, been on foot for some five years and it would appear to potentially defeat the purpose of the agreement in securing the homestead for the plaintiffs, and their release from ongoing involvement, to interpret the contract in such a way that nothing to that end was required to occur until some unknown and unforeseeable date in the future when the final result of the Red Flat Block contract became clear, and possibly beyond that point.

[36]     Secondly, I am satisfied the phrase “the balance purchase price remaining” means all of the cash portion of the sale price, or such part as remains owing from time to time, not merely the unknown sum left owing (if any) if the Red Flat Block sale proceeded and released an unknown sum for the plaintiffs after payment of some of the proceeds to Rabobank.   This is because it expressly provides for the position if neither of the existing sale contracts proceeded, in which circumstance it could only refer to the original cash position.   It also expressly provides for the position if either of the existing sale contracts collapsed; in this circumstance the

quantum of the balance could at any time be ascertained.  As matters have turned out, to date, the original cash sum remains the balance of the purchase price.

[37]     Thirdly, I agree with Mr Lester’s interpretation of clause 9 – that the use of the word “payments”, in the plural, contemplates sequential steps to pay to the plaintiffs $2,100,000 in money or money’s worth.   In my view there is no other reason why clause 10 would be included in the contract; had it been intended that nothing passed to the plaintiffs until the outcome of the Red Flat Block sale was known, it would have been a simple matter for the contract to have so provided. Further support to this is lent by a simple examination of the arithmetic.  In round figures the Red Flat Block contract, if confirmed, will require payment to Killermont Run  Limited  of  $2,900,000.   Allowing  for  transfer  of  the  House  Block  to  the plaintiffs the net sum payable to them in cash is $1,780,000.  That would have left around $1,120,000 available to pay Rabobank.  As noted earlier, a representative of Rabobank was present at the mediation and was aware that the parties agreed that the proceeds of sale of the Pebbly Block would be paid as to 50 percent to Rabobank. There seems no reason to think that Rabobank would require anything less than that percentage to be paid to it if the Red Flat Block was sold and settled prior to the Pebbly Block.   That  would  leave insufficient,  by a wide margin,  to  satisfy the obligation to the plaintiffs from sale of the Red Flat Block alone.  The position of Rabobank was not established at that time, of course, but the correspondence from Rabobank immediately after the contract was entered demonstrates a wish on its part to receive the entire net proceeds of the Pebbly Block, save only for $254,000, if both that block and the House Block were to be released from its mortgage.  That was the sum of $870,000.  I cannot speculate further on Rabobank’s position at that time but note these figures to demonstrate at least a reasonable possibility that if the Red Flat Block sale is confirmed and settled it will not yield sufficient to settle with the plaintiffs and given the purposes of the contract and the ages of the plaintiffs, the contract is not to be interpreted to have that result.

[38]     Finally, I agree with Mr Lester in relation to clause 6 ([26] above) and in relation to clause 2(ii) ([27] above), and his argument recorded in [28] above.   I disagree with Mr Cunliffe’s submission in relation to clause 6 ([34] above); clause 6 relates only to the proceeds of sale of the Pebbly Block.

Decision in relation to liability

[39]     For these reasons I am satisfied that the defendants are in breach of their contractual obligation to undertake land sales in order to pay the cash portion of the consideration for transfer to the defendants of the plaintiffs’ shares in Killermont Run Limited.  Given the context in which the agreement was entered and the express wording of clause 2 of the contract, the obligation to undertake “other land sales” arose at the time the Pebbly Block contract, which was in existence at the time of the agreement, was cancelled, and apart from one brief period when both the Pebbly Block and the River Run Block went under contract has continued since that time.

Remedy

[40]     The plaintiffs are entitled to specific performance of the agreement.   The terms of the orders sought in the pleadings are set out in subparagraphs (a) to (f) of the first prayer for relief and subparagraph (a) of the second prayer in the statement of claim.   Broadly I am satisfied that orders generally in  the terms  sought are appropriate, subject, however, to the following points:

(a)    The order sought in subparagraph (c) appears to seek an order directing a deadline sale but there is no evidence before the Court that this is the most appropriate method of sale; further, subparagraph (c) refers to “the farm” but the Red Flat Block remains under contract.

(b)Subparagraph (d) refers to acceptance of “the highest and best offers received” without any indication of what this phrase is intended to mean.  For example, two offers might be received, one at a higher price but on terms which are less favourable than the other.

(c)    Given  that  the  Red  Flat  Block  agreement  is  conditional  upon  the purchaser being satisfied as to the availability of sufficient water for irrigation for the purchaser’s proposed development of the block, and a decision on water rights is presently expected late in November, there may be scope for immediate orders in relation to the transfer of the Home  Block  and  the  listing  of  the  Pebbly  Block,  but  an  order  in

relation to the Run Block being made to take effect from a later date, for example (but without any decision either way) 1st February 2012.

(d)In a case of this kind there is scope for appointment of a suitable person to make decisions on such matters as whether an offer should or should not be accepted, in the event the parties cannot agree.   Conversely, leave could be reserved to refer the matter back to the Court for a direction.

(e)    Whilst paragraph (f) provides for leave reserved to the plaintiffs to apply to the Court for further orders in stated circumstances, arguably this power should be more general, but in any event it should contain a time provision.

(f)     Subparagraph  (i)  of  paragraph  (a)  in  the  second  prayer  for  relief appears to be potentially problematic. A more general direction may be more appropriate.

[41]     Counsel are invited to submit memoranda, or a joint memorandum, on the terms of the orders within 10 working days.  I will then consider those memoranda and if necessary convene a conference with counsel for argument.  A judgment on remedy will then be issued.

Costs

[42]     The plaintiffs are entitled to costs on a 2B basis plus disbursements to be fixed by the Registrar.

J G Matthews

Associate Judge

Solicitors: