TPD 2018 Limited v Godfrey and Company Limited
[2021] NZHC 431
•9 March 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2019-404-93
[2021] NZHC 431
BETWEEN TPD 2018 LIMITED
Plaintiff
AND
GODFREY AND COMPANY LIMITED
Defendant
AND
CNZ (AUCKLAND) LIMITED (IN LIQUIDATION)
First Third Party
Hearing: 2, 3, 4, 5, 6, 9 and 10 November 2020 Appearances:
S O McAnally and N W Coyle for the Plaintiff and First Third Party
R J Hollyman QC and T E Bielby for the Defendant
Judgment:
9 March 2021
JUDGMENT OF GAULT J
This judgment was delivered by me on 9 March 2021 at 3:00 pm pursuant to r 11.5 of the High Court Rules 2016.
Registrar/Deputy Registrar
……………………………………
Solicitors:
Mr S McAnally, Keegan Alexander, Auckland
Mr K Stolberger and Mr T Bielby, Lowndes Jordan, Auckland
TPD 2018 LTD v GODFREY AND COMPANY LTD [2021] NZHC 431 [9 March 2021]
[1] The plaintiff (TPD) claims as assignee of the claim of Thomas Pasley and Associates Ltd (TPA) against the defendant (Godfreys) following a joint operation in anticipation of a full merger that ultimately did not proceed and had to be unwound.
[2] TPD claims the joint operation was a joint venture and Godfreys was obliged to account to TPA for revenue received on behalf of the joint venture as a fiduciary or by way of breach of contract. TPD claims it is entitled to a final accounting.
[3] Godfreys says in its defence that the joint operation was a partnership and that, applying equitable principles where details were not agreed, Godfreys overpaid TPA. In a third party claim, Godfreys seeks recovery of the overpayment from CNZ (Auckland) Ltd (in liquidation) (CNZ), TPA’s successor following a subsequent amalgamation. Godfreys’ defence also disputes the assignment to TPD on the basis that TPA’s rights had been carved out of the merger with CNZ and the assignment was of a bare cause of action, which is void. In addition, Godfreys pleaded breaches of fiduciary duty by TPA and a limitation defence (but these were not pursued at trial).
[4] The trial began with TPD claiming that Godfreys owed $1,320,139 and Godfreys claiming that it was owed $1,453,394 (that is, a difference between the parties of $2,773,533). There were numerous issues. However, the accounting experts continued to confer and narrow the differences during the trial, and filed further joint statements. As a result, the remaining issues reduced considerably and the quantum difference reduced to $1,243,264 with TPD claiming Godfreys owes $817,286 and Godfreys claiming it is owed $425,978.
Factual background
[5] TPA and Godfreys were each established firms carrying on the business of insurance loss adjusting. Leading up to the events in issue, the two directors and shareholders of TPA were Mr Pasley and Mr Ziegler. TPA was based in Auckland. The major shareholders of Godfreys were Mr Godfrey and Mr Moonlight. Godfreys had three other shareholders, including Mr Buckley who was not an insurance loss adjuster. Godfreys had several offices around New Zealand.
[6] Sometime prior to 4 September 2010, Godfreys approached TPA about a possible merger. The idea was not progressed immediately. Following the first major Canterbury earthquake on 4 September 2010, the increase in workload and other business imperatives led to further discussions. Financial information was exchanged, and a meeting was held on 18 November 2010. The parties informally agreed to progress towards a merger by 1 April 2011 and started co-operating in the interim.
[7] The catastrophic earthquake of 22 February 2011 led TPA and Godfreys to meet that night and agree that joint operations as TPA-Godfreys (TPAG) should commence immediately. They announced an operational merger the next day.
[8] There was no formal written agreement recording the terms of the joint operation but it is common ground that TPA and Godfreys also agreed:
(a)Invoicing would be done using Godfreys’ existing infrastructure; Godfreys would receive payments and account to TPA for its share of net proceeds of the joint operation.1 Revenue and costs of their respective existing businesses were to remain the benefit/obligation of each.
(b)TPAG would use Godfreys’ premises in Christchurch and, progressively, TPA’s premises in Auckland.
(c)Each party would reimburse the other for the increased costs incurred by each giving effect to the combined operation.2
(d)Mr Godfrey would be the managing director of TPAG and Mr Pasley would be the professional practice leader.
[9] Although the parties’ proportionate shares in the net proceeds had been discussed and modelled prior to 22 February 2011, this was not agreed until later. On 10/11 June 2011 the parties met and agreed that the net proceeds derived from the
1 Except that TPA would bill QBE and those receipts would be treated as a credit.
2 A dispute as to exactly how increased costs over each party’s pre-22 February 2011 costs would be determined was not pursued.
TPAG operation would be shared in proportions of 62.5 per cent to Godfreys and
37.5 per cent to TPA, with the same proportions used to determine each party’s share of the other’s increased costs.
[10] Similarly, allocation of staff between the existing businesses and TPAG was not finalised on 22 February 2011. This was addressed in the monthly reconciliations that Mr Godfrey began to provide in the following months.
[11] In April 2012 Mr Godfrey suffered a heart attack and was off work for some weeks before returning, initially for three days per week. In August 2012 a new chief operations officer was engaged.
[12] Formal merger was not progressed due, it seems, to the post-earthquake workload. Mr Pasley urged the resumption of discussions in early 2013. The parties met in March 2013 and discussions continued, evidently with different expectations, until Mr Pasley advised Mr Godfrey on 14 May 2013 that TPA no longer wished to proceed with the merger. The parties exchanged documents relating to the unwind later in May 2013, but there was no new agreement relevant to the remaining issues affecting the parties’ respective shares of the net proceeds derived from the TPAG operation.
[13] Relations deteriorated somewhat thereafter, culminating with news that TPA would become part of CNZ, followed by Mr Godfrey’s email on 23 October 2013 stating that the joint venture should be concluded on 31 October 2013. Despite allegations both ways in relation to the reasons for the breakdown, it was ultimately common ground that the reasons are not material and the joint operation terminated with effect from 31 October 2013.
[14] Although there were subsequent attempts, the parties never reached agreement on the reconciliation of their respective shares of the net proceeds.
[15]On 30 November 2013 TPA amalgamated with CNZ.
[16] On 31 March 2018 CNZ, in anticipation of its liquidation as part of a group restructure, assigned its rights against Godfreys to TPD.
Issues
[17]The remaining issues to be determined are:
(a)the nature of the joint operation;
(b)allocation of staff;
(c)allowance for Mr Godfrey as managing director;
(d)Godfreys’ “run off” costs;
(e)whether TPD had inherited TPA’s rights by assignment and, if not, whether that matters.
Nature of the joint operation
[18] The parties ultimately agreed that nothing turned on whether the joint operation was characterised as a joint venture or a partnership. I consider that is correct given that what the parties agreed at the time is important whether the joint operation is characterised as a partnership or a joint venture giving rise to fiduciary obligations,3 and given the confined issues remaining in dispute. Nevertheless, the characterisation was addressed in submissions and I therefore address it (relatively briefly).
Submissions
[19] Mr McAnally, for TPD/CNZ, submitted that the following circumstances, cumulatively, point away from the existence of a partnership:
(a)This was not a case where an established partnership restructured and adopted another guise such as an incorporated company (as in
3 Partnership Law Act 2019, s 35; and Paper Reclaim Ltd v Aotearoa International Ltd
[2007] NZSC 26, [2007] 3 NZLR 169 at [31].
Amaltal Corporation Ltd v Maruha Corporation).4 Rather the relationship in issue might fairly be categorised as something of a “waiting room”. The general notion of the partnership as an available business structure would suggest a partnership should not be thought of as something that happens by accident while waiting to implement the intended end structure.
(b)The parties did not, jointly or in common, own any assets.
(c)The parties did not jointly contract. For example, employees were engaged by one or the other of the two companies and contractors in the “shared pool” were contracted by Godfreys.
(d)The parties took none of the steps that would be usually expected, such as formalising some sort of partnership agreement, opening shared bank accounts or registering and reporting as a partnership for matters such as payment of GST.
(e)The parties retained separate business interests in the sense of the resources they entered the relationship with, it being agreed that pending “formal merger”, the “shared pool” of contract resource and the associated uplift of the cost to service it was to be shared.
[20] Mr McAnally accepted that a partnership is defined as “the relationship that exists between persons carrying on a business in common with a view to profit”,5 but submitted that is analogous with the essence of a joint venture that has been described as an arrangement or understanding between two or more parties to work together towards achieving a common objective.6 He submitted that here terms were loosely agreed on or about 22 February 2011 but were the subject of ongoing development, as was progress, or lack thereof, towards a formal amalgamation of the two companies. In many respects it was not until at least June 2011 that important matters of principle were resolved (such as the division of net proceeds) and, given the ever present eye to
4 Amaltal Corporation Ltd v Maruha Corporation [2007] NZSC 40, [2007] 3 NZLR 192.
5 Partnership Law Act 2019, s 8.
6 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [91].
the future amalgamation, it cannot be said the relationship ever matured to the point that the parties intended to assume the formalities of partnership (such as joint liability for debts or obligations incurred by the other party,7 joint and several liability for the acts of TPAG no matter who executed them,8 or responsibility for the admissions or representations of the other).9
[21] Mr Hollyman QC, for Godfreys, submitted that where the parties’ arrangements provide for profit sharing, that will be prima facie evidence that a partnership exists. He referred to s 5(c) of the Partnership Act 1908 which provides that the receipt by a person of a share of the profits of the business is prima facie evidence that he or she is a partner in the business (now s 14(1) of the Partnership Law Act 2019 which provides that if a person receives a share of the profits of the business it is presumed, in the absence of evidence to the contrary, that the person is a partner in the business), and Clark v Libra Developments Ltd.10
[22] Mr Hollyman submitted that exactly describes the TPAG relationship. He submitted it is common ground that the parties agreed to carry on a loss adjusting business together, whereby profits and expenses would be shared in accordance with its terms, pending formal merger. He submitted that is supported by the evidence, and in particular Mr Pasley’s description of profit sharing, as the most important feature of the parties’ agreement. He submitted that partnership is also wholly consistent with the parties’ intention to merge, and to do so in short order. Although that did not prove possible, the parties pursued that option in good faith and with full engagement, until they gave up in May 2013. He submitted that the fact that the parties acted with a view to formal merger tips the relationship into one of partnership.
Discussion
[23] There is no real dispute as to the Court’s approach to determining whether the parties had entered into a partnership. That approach has been confirmed since the hearing by the Court of Appeal in Zheng v Deng.11 In that case, the parties carried out
7 Partnership Law Act 2019, s 22.
8 Section 25.
9 Section 29.
10 Clark v Libra Developments Ltd [2007] 2 NZLR 709 (CA) at [155]-[157].
11 Zheng v Deng [2020] NZCA 614.
a number of property development and construction projects through various companies before agreeing to separate their affairs. A central issue was whether there was an overarching partnership. Despite the absence of the familiar language and trappings of partnership, and the existence of the corporate vehicles through which the projects were carried out, the Court of Appeal concluded there was an overarching business carried on by the two parties in common with a view to profits; that is, a partnership. The Court stated:
The test for a partnership
[90] It was common ground before us that the question whether the parties had entered into a partnership was a mixed question of fact and law. The starting point is s 4 of the Partnership Act, which provides:
4 Definition of partnership
(1)Partnership is the relation which subsists between persons carrying on a business in common with a view to profit.
(2)But the relation between members of any company or association registered as a company under the Companies Act 1993 … is not a partnership within the meaning of this Act.
[91] Some factors that may be relevant to determining whether or not a partnership exists are set out in s 5:
5 Rules for determining existence of partnership
In determining whether a partnership does or does not exist regard shall be had to the following rules:
(a)joint tenancy, tenancy in common, joint property, or part ownership does not itself create a partnership as to anything so held or owned, whether the tenants or owners do or do not share any profits made by the use thereof:
(b)the sharing of gross returns does not of itself create a partnership, whether the persons sharing such returns have or have not a joint or common right or interest in any property from which or from the use of which the returns are derived:
(c)the receipt by a person of a share of the profits of a business is prima facie evidence that he or she is a partner in the business, but the receipt of such a share or of a payment contingent on or varying with the profits of a business does not of itself make him or her a partner in the business; and, in particular,—
(i)the receipt by a person of a debt or other liquidated amount, by instalments or otherwise, out of the
accruing profits of a business does not of itself make him or her a partner in the business or liable as such:
(ii)a contract for the remuneration of a servant or agent of a person engaged in a business by a share of the profits of the business does not of itself make the servant or agent a partner in the business or liable as such:
(iii)a person being the widow, widower, surviving civil union partner, surviving de facto partner, or child of a deceased partner, and receiving by way of annuity a portion of the profits made in the business in which the deceased person was a partner, is not by reason only of such receipt a partner in the business or liable as such:
(iv)the advance of money by way of loan to a person engaged or about to engage in any business on a contract with that person that the lender shall receive a rate of interest varying with the profits, or shall receive a share of the profits arising from carrying on the business, does not of itself make the lender a partner with the person or persons carrying on the business, or liable as such: provided that the contract is in writing, and signed by or on behalf of all the parties thereto:
(v)a person receiving by way of annuity or otherwise a portion of the profits of a business in consideration of the sale by him or her of the goodwill of the business is not, by reason only of such receipt, a partner in the business or liable as such.
[92] There is limited assistance to be had from the authorities, because the analysis is inevitably highly fact-specific. The warning given by Cooper J in Aldridge v Paterson more than 100 years ago remains apposite:12
Very little assistance can be obtained from the numerous cases reported in which the question of partnership or no partnership has been decided. In all such cases the particular facts — what were in effect the respective contracts — were intimately connected with the questions of law.
[93] As this Court said more recently, the question “is a legal question to be determined by the Court on the basis of what the parties said and did”.13
[94] It is important to bear in mind the infinite variation in partnership structures and avoid the assumption that a partnership must have certain characteristics or incidents other than those actually required by s 4(1) of the
12 Aldridge v Paterson (1914) 33 NZLR 997 (SC) at 1006.
13 Clark v Libra Developments Ltd [2007] 2 NZLR 709 (CA) at [51].
Partnership Act. As the learned authors of Lindley & Banks on Partnership
say:14
There is … a danger that what are, in truth, normal incidents or characteristics of partnership are wrongly perceived as pre-requisites to the existence of that relationship, thus distorting the application of [the United Kingdom equivalent of s 4(1) of the Partnership Act].
[24] Mr Hollyman referred to the Partnership Act 1908 whereas Mr McAnally referred to the Partnership Law Act 2019 on the basis that it is now in force and applies to every partnership regardless of when it was formed.15 Which Act applies makes no difference in this case. For present purposes, Part 2 of the Partnership Law Act 2019 is similar in effect to the 1908 Act referred to in Zheng v Deng.
[25] Here, against the background of informal merger discussions, TPA and Godfreys agreed on the same day as the 22 February 2011 earthquake that joint operations should commence immediately. They announced an operational merger the next day. It was agreed that the joint operation applied to new business – not the parties’ respective existing businesses. At that stage, the parties also agreed the method of invoicing, use of premises, and the leadership roles of Mr Godfrey and Mr Pasley. However, the proportionate shares in the net proceeds and the related calculation of the other’s increased costs were not agreed at that time.
[26] In the circumstances, I do not consider that the agreement between the parties on 22 February 2011 gave rise to a partnership. The profit share was yet to be agreed. The terms of the joint operation relating to the profit share and allocation of staff were progressively agreed over the following months. On 10/11 June 2011 the parties agreed their respective profit shares in the joint operation, but I do not consider that converted the joint operation into a partnership.
[27] I accept, however, that the parties clearly agreed to engage in a joint operation from 22 February 2011 and I consider the arrangement was such as to give rise to fiduciary obligations of loyalty in respect of the joint operation or joint venture, albeit that no issue of breach of fiduciary duty arises – the relevance of fiduciary obligations
14 Roderick l’Anson Banks Lindley & Banks on Partnership (20th ed, Sweet & Maxwell, London, 2017) at [2-15].
15 Partnership Law Act 2019, s 6 and sch 1, cl 1.
here being that equity may fill a gap in the parties’ agreement. In that respect, this case is different from Li v 110 Formosa (NZ) Ltd, where the parties’ joint venture was detailed in their cooperation agreement.16
[28] Following termination of the joint venture, the party holding more than its share of the net proceeds of the joint venture had an obligation – in contract or equity
– to account to the other for the other’s share. It is common ground that the Court is taking a final account and will make an order for payment.
[29] I now turn to consider the claimed adjustments to the revenue and cost reconciliation.
Allocation of staff
[30] This issue requiring determination is whether (as Godfreys claim) the financial treatment of the revenue of six staff who were allocated to TPA should be reallocated to “Shared”: Ms Bennett, Ms Paki, Mr Webb, Mr Kearvell, Mr Lawless and Ms Pratt. The parties are agreed as to the quantum of each of the claimed adjustments to the profit share.
[31] Mr McAnally submitted that throughout the joint venture staff revenue was allocated in accordance with the joint venture terms and, more importantly, with the full agreement of Godfreys – and Godfreys, ultimately, controlled the monthly reconciliations and the calculation of revenue within them.
[32] Mr Hollyman submitted that the parties agreed an overarching principle in relation to the treatment of new staff members who joined TPAG after 22 February 2011, expressed in Mr Godfrey’s evidence as agreement that each would claim as its own only its permanent employees at that date and that all other personnel, whether contractors or new employees, would be for the benefit of the merger, and thus shared on the agreed ratio.
16 Li v 110 Formosa (NZ) Ltd [2020] NZCA 492 at [100]-[106].
[33] Mr Pasley accepted this “as a principle”, although correspondence at the time indicates he did not make a distinction between existing permanent employees and contractors.
[34] Mr Ziegler, who was more involved in the reconciliation involving staff allocation at the time, accepted Mr Godfrey’s proposition.
[35] I doubt there was such an explicit agreement on or shortly after 22 February 2011, as Mr Godfrey claimed. His relevant evidence was as follows:
Because Godfreys would be introducing both the bulk of the professional work from which revenue would be derived and the bulk of the contract personnel to undertake the work, it was agreed either at the 22 February 2011 meeting or shortly thereafter that the merger would require a joint benefit of the large volume of work and resources or Godfreys would benefit much more than its share in the 62.5%/37.5% principle established for the proposed company. The parties therefore agreed that each would claim as its own only its permanent employees at that date and that all other personnel, whether contractors or new employees would be for the benefit of the merger, and thus shared on the agreed ratio.
[36] As indicated, it is common ground that the 62.5/37.5 per centage ratio was not agreed until June 2011. Therefore, I consider it more likely that any early discussion about staff allocation was less explicit than suggested, or in principle. In any event, the principle is the appropriate starting point, but subject to subsequent agreement in relation to specific personnel. It is clear from the correspondence that changes were made over time, after Mr Godfrey’s initial iteration of the inter-company analysis in April 2011.
Ms Bennett
[37] Ms Bennett is Mr Pasley’s partner (common-law wife). It is common ground that she was not a permanent employee of TPA as at 22 February 2011. Mr Godfrey said that she was only a contractor to TPA prior to the second earthquake and thus should have been a shared employee. Mr Pasley accepted that “in principle” she should have been characterised as a shared staff member. But Mr Godfrey allocated her to TPA for reconciliation purposes. The question is whether he agreed to do so (perhaps knowing she was Mr Pasley’s partner) or made an error believing she was a permanent employee of TPA as at 22 February 2011 (which was not corrected by TPA).
I consider it more likely that he agreed to do so than that he was effectively misled into thinking she was a permanent employee and would not have agreed if told she was a contractor. I do not consider an adjustment is required.
Ms Paki
[38] It is common ground that Ms Paki was an employee of TPA on 22 February 2011. She had been with TPA since 2002. However, she subsequently resigned as an employee and became a contractor. As Mr Hollyman submitted, she did so because she wanted to contract back to TPAG on a non-exclusive basis. Godfreys claim she was wrongly categorised as a TPA employee. On the other hand, Mr McAnally submitted that Ms Paki continued to perform the same functions, and that applying Mr Godfrey’s own principle a change after 22 February 2011 requires no adjustment.
[39] Applying the agreed principle according to its terms, I consider that Ms Paki was an employee at 22 February 2011 and not “other personnel”. I do not consider the principle required that a person who changed status after 22 February 2011 was then treated as a separate person, let alone that the person’s earlier status also changed.
[40] In any event, Mr Godfrey was aware of Ms Paki’s change of status and nevertheless agreed to allocate her to TPA. I do not consider it likely that he did so by mistake. Ms Paki’s reference to contracting back to “TPAG” is not significant. TPAG was not a legal entity and I do not infer from that reference that she specifically wanted to contract to the merged business. She did not do so. Even if Mr Godfrey did not see that reference, I do not consider his allocation was a mistake requiring adjustment.
Mr Webb
[41] Similarly, Mr Webb was a long-term employee of TPA on 22 February 2011. He subsequently resigned as an employee and returned as a contractor to run off his existing files. Mr Hollyman submitted that given his return as a contractor, Mr Webb should have been treated as a shared employee; that his allocation was also a mistake.
[42] As indicated, I do not consider the principle required that a person who changed status after 22 February 2011 was then treated as a separate person, let alone
that their earlier status changed as well. In any event, Mr Godfrey agreed to the allocation and I do not see this as a mistake requiring adjustment.
Mr Kearvell
[43] It is common ground that Mr Kearvell was a contractor rather than a permanent employee as at 22 February 2011. While I doubt the distinction is determinative given the nature of the agreed principle, Mr McAnally acknowledged that Mr Kearvell’s allocation is de minimis and warrants no further consideration. In the absence of specific agreement, I accept that Mr Kearvell should be treated as Shared.
Mr Lawless
[44] Mr Lawless joined as a contractor in March 2011. He was initially treated as Shared but later changed by Mr Godfrey to TPA. Mr McAnally acknowledged that, but for the change, Mr Lawless would properly be treated as Shared, but submitted the change was agreed. Mr Hollyman submitted the agreed change was for a temporary period of two to three months only, after which Mr Lawless would be returned to Shared. On this basis, some apportionment would be required.
[45] The change followed discussion between Mr Godfrey and Mr Ziegler on or around 11 June 2011. Neither witness’s evidence-in-chief referred specifically to that discussion and there was no suggestion in Mr Godfrey’s evidence-in-chief that either he or Mr Ziegler had said the change was for a temporary period only (nor was that put to Mr Ziegler).
[46] The issue is whether that was implicit. Mr Ziegler was asked in cross- examination whether he said to Mr Godfrey that it would only be a month or two until the merger, and he could not recall. However, Mr Godfrey, in cross-examination while explaining the context of the correspondence dealing with the change, said:
… what I said to Mr Ziegler, who had pressed for Mr Lawless to become a TPA or T class adjuster more than once was that we were about to merge at that stage still contemplated to happen at 30 September for a 1 October joint venture company and that in response to his request for Mr Lawless to be a TPA employee that for that period it was fine. That was the dialogue we had at the meeting…
[47] I accept that at the time of the conversation in June 2011, Mr Godfrey and Mr Ziegler anticipated that the merger would occur, and the next possible date was 30 September 2011, whether or not it was contemplated at that time that it would happen at 30 September 2011. Later in his evidence, Mr Godfrey acknowledged that, as at 22 June 2011, merger on 30 September 2011 was not realistic.
[48] Overall, I consider it unlikely Mr Godfrey said, or the parties agreed, that the change to Mr Lawless’s status was for that period only or otherwise implied it was temporary if the merger did not occur at 30 September 2011. The references in the contemporaneous documents to changing Mr Lawless from Shared to TPA do not suggest it was temporary. Rather, I consider it more likely that Mr Godfrey simply accepted the change proposed by Mr Ziegler because Mr Godfrey considered the merger would occur soon and the change would not make any material difference. That did not make the change temporary or conditional. Rather, it was up to Mr Godfrey to revisit the matter if he wished to do so once it became evident that the merger would not occur as soon as anticipated. He apparently did not do so. Even accepting the agreed change turned out to be in effect for longer than Mr Godfrey anticipated, I do not consider there is a gap that equity should fill. That would be re-writing the agreed change. No adjustment is required.
Ms Pratt
[49] Ms Pratt started with TPA in August 2011. The starting point therefore is that she should have been Shared, having not been with TPA as at 22 February 2011. Mr McAnally submitted, however, that her employment was in prospect prior to 22 February 2011 and that Godfreys personnel were fully involved in her recruitment and Mr Godfrey agreed to allocate her to TPA. Mr Godfrey said that he just “wasn’t over it adequately”. Mr Hollyman submitted this was a mistake that should be corrected.
[50] I do not consider the preliminary discussions with Ms Pratt prior to 22 February 2011 are significant but I accept that Godfreys personnel on the TPAG executive were actively involved in confirming her engagement around June 2011. As Mr Hollyman acknowledged, Mr Godfrey was responsible for the allocation and
there is no compelling evidence of mistake at the time of the initial allocation nor during the subsequent reconciliations. But neither does the evidence sufficiently indicate an agreement to allocate Ms Pratt to TPA (as an offset for Ms Page or otherwise). Given the starting principle, I therefore consider Ms Pratt’s status should be adjusted to Shared.
Allowance for Mr Godfrey as managing director
[51] Godfreys seeks an adjustment of $111,215 to reflect Mr Godfrey’s work as managing director of the joint operation for which he/Godfreys was not separately remunerated.17 It is common ground that Mr Godfrey was designated the managing director of the joint operation and was intended to be the managing director of the new entity should the merger complete. It is also common ground that he expended significant time on administrative matters and had lower billable hours than other senior members of staff.
[52] Mr Godfrey said he was only prepared to take on the role without remuneration on the basis there would be a merger. Mr Hollyman acknowledged there was no express agreement for payment of a salary but submitted there was an inferred agreement to pay him if there was no merger or that equity must fill the gap.
[53] The adjustment sought between the parties should not be conflated with Mr Godfrey’s personal remuneration. In any event, the evidence does not indicate there was any agreement with TPA, inferred or otherwise, that there would be an adjustment reflecting Mr Godfrey’s work as managing director if there was no merger. Mr Godfrey did not suggest that was discussed or agreed, and the early modelling of remuneration in a proposed merged entity does not assist.
[54] In the absence of such an agreed adjustment and given the agreed approach to revenue and cost apportionment, Godfreys had no entitlement to payment for Mr Godfrey’s work such as would justify a deduction when settling the profit obtained by the joint venture.18 There is no gap for equity to fill. Equity will not intervene to
17 The claimed adjustment is for the period from 22 February 2011 to late April 2012 (the date of Mr Godfrey’s heart attack).
18 As in Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433 at [37].
revisit the agreed apportionment. As Mr McAnally submitted, an obligation to act equitably towards one another upon dissolution of a joint venture does not give rise to such an equitable claim. Any claim to payment for services rendered by an agent arose when those services were supplied. In the absence of an agreement, the only claim would be an unpleaded quantum meruit claim, which would be statute barred. Here such a claim would be inconsistent with the agreed revenue and cost apportionment, which was not subject to adjustment if the merger did not occur. In that context, the cases where a fiduciary is given an allowance for effort and skill despite a breach do not assist.19
Godfreys’ “run off” costs
[55]Godfreys seeks contribution for certain TPAG “run off” costs:
(a)$23,763 for direct cost recoveries for contractors from 1 November 2013;
(b)$46,639 for administrative staff from 1 November 2013 to 31 March 2014;
(c)$60,451 for rent in Featherston Street from 1 November 2013 to September 2019; and
(d)$16,782 for loss on disposal of its Featherston Street premises in September 2019.
[56] Mr McAnally submitted that these claimed costs cannot be shown to be joint venture expenses, are inconsistent with the joint venture agreement and are bereft of an evidential basis.
Contractor costs
[57] Mr McAnally accepted as a general proposition that TPA would have been required to meet its share of any expenses arising from the joint venture after
19 Crampton-Smith v Crampton-Smith [2011] NZCA 308, [2012] 1 NZLR 5 at [65]-[69].
31 October 2013, notwithstanding termination on that date. However, he sought to distinguish between expenses incurred after that date that are due to ongoing joint venture work and those claimed because there was a joint venture up to 31 October 2013. He submitted that the costs were not pleaded and there was no evidence other than Mr Godfrey’s statement in his supplementary evidence in chief that:
… contractors could choose who they worked for after 31 October and they either left or did so, but Godfreys carried on paying costs for those contractors that were working for one or other of the companies that were not necessarily Godfreys’ benefit [sic] and that amount relates to those costs. They would’ve included accommodation largely in Christchurch and per diems which all of the contractors were paid.
[58] It is common ground that the joint venture files were allocated as of 31 October 2013 either to Godfreys or TPA based on the lead loss adjuster and each entity finished the work and billed them separately. What is unclear is the extent to which the contractors paid thereafter were working for TPA. However, I accept Mr Godfrey’s evidence provides an evidential basis for this modest adjustment.
Administrative staff
[59] Mr Godfrey accepted that the claim in respect of administrative staff was not due to the staff having attended to joint venture work between 1 November 2013 and 31 March 2014 but on the basis that Godfreys had taken on more administrative staff during the course of the joint venture than might otherwise have been the case and some were made redundant about a year later. It appears 31 March 2014 was simply a cut-off date applied by Godfreys.
[60] I accept that Godfreys had likely taken on more administrative staff during the course of the joint venture than might otherwise have been the case, but I do not consider that provides a basis for the claimed adjustment for administrative staff costs after 31 October 2013. As Mr McAnally submitted, there was no evidence of the extent of the surplus in staff over Godfreys’ subsequent separate requirements, or that staff were not gainfully employed given that Mr Godfrey said several of those staff lasted for more than a year after that. Godfreys knew from 14 May 2013 that TPA no longer wished to proceed with the merger and the parties exchanged documents relating to the unwind later in May 2013.
Rent in Featherston Street
[61] Godfreys claims an adjustment for rental of its Featherston Street premises from November 2013 to September 2019 when the lease expired. Godfreys accepts that at some point it was able to swap premises with another tenant and sublet part of those premises. It seeks an adjustment for 37.5 per cent of its losses.
[62] The context is that before the joint venture Godfreys had premises in Lower Hutt. The lease of those premises was due to expire in July 2013. There were issues with those premises that led to consideration of early termination in 2012, during the joint venture, and it was decided that Godfreys would move back into the central city to be nearer clients. The TPAG executive were consulted but Mr McAnally submitted that the decision was ultimately for Godfreys alone. Even though Godfreys were to enter the lease, I accept that it was entered during the joint venture with the greater needs of the joint operation in mind. On that basis, I accept that equity may treat it as a joint venture expense in the absence of agreement.
[63] However, the parties had agreed the approach to sharing costs; that is, each party would reimburse the other for the increased costs incurred by each giving effect to the combined operation. On that basis, the Featherston Street costs should be benchmarked against the existing Lower Hutt costs before even considering a run-off adjustment. The claimed adjustment was not calculated on that basis. Further, if it were a joint venture expense, for a run-off adjustment Godfreys would need to show what its rental would otherwise have been post termination (taking reasonable steps to mitigate its loss). A spreadsheet provided by Ms Beckett, an expert engaged by Godfreys, referred to a benchmark of the rent paid when Godfreys swapped to smaller premises, but there was no evidence as to when that occurred or substantiating that the difference reflected the surplus joint venture expense.
[64] In the absence of sufficient evidence as to the increased costs and surplus joint venture expense, I do not consider the claimed adjustment is warranted.
Featherston Street disposal
[65] Godfreys seeks an adjustment for a loss on disposal of its Featherston Street premises in September 2019. This was described by Ms Beckett as the unexpired book value of leasehold improvements at the end of the tenancy. Her spreadsheet refers to blinds, Spaceworks fitout, two F&P dishdrawers and alarm and security.
[66] As Mr McAnally submitted, there was no evidence to establish that those assets were joint venture expenses, as opposed to part of the premises Godfreys required for its own business. No adjustment is warranted.
Assignment
[67] From TPD’s perspective, this was a preliminary issue in the sense that the assignment founds its right of action. It is not relevant to Godfreys’ third party claim against CNZ. Godfreys initially disputed the assignment to TPD on the basis that TPA’s rights had been carved out of the merger with CNZ. It also submitted the assignment to TPD was of a bare cause of action and therefore void. Ultimately, there was a degree of common ground that the assignment issue was something of a technicality that could be overcome by amendment to the pleadings if necessary.
[68] Dealing first with Godfreys’ carve out submission, clause 7.8 of the merger agreement dated 27 November 2013 provided:20
TPA has advised that there is currently a dispute between TPA and Godfrey and Company Limited (“Godfrey”) in relation to the settlement between the parties of arrangements relating to the termination of the joint venture arrangements between them (the “Godfreys Dispute”), which may result in a receipt or payment by TPA or the Amalgamated Company, depending on when the Godfreys Dispute is resolved.
The Godfreys Dispute (each a "Dispute") shall be treated as being excluded from the Amalgamation and for the account of the TPA Shareholders as follows:
…
(b)If the relevant Dispute is resolved after the Amalgamation and any agreed settlement amount is to be paid by the relevant party to the dispute after the Amalgamation, then:
20 The gaps appear to be redactions in the Court copy.
(i)if resolved in TPA's favour, any settlement amount received by the Amalgamated Company shall be for the sole benefit of the TPA Shareholders and the parties shall determine an appropriate mechanism to achieve that objective subject to and in accordance with clause 7.B(c)(iv); and
(ii)if resolved in Godfreys' favour or favour (as the case may be), any settlement amount to be paid by the Amalgamated Company shall be paid by the Amalgamated Company by the due date for payment, provided that:
(1)the full cost to the Amalgamated Company of such payment is ultimately borne by the TPA Shareholders (and not by any CNZ Auckland Shareholder);
(2)subject to sub-clause (3) below and unless all CNZ Auckland Shareholders agree in writing, the Amalgamated Company's cash reserves are promptly restored to the pre-payment level by the TPA Shareholders;
(3)the parties shall, subject to and in accordance with clause 7.8(c)(iv), determine an appropriate mechanism to achieve the requirements set out in this clause 7.B(b)(ii); and
(4)the TPA Shareholders hold each of the CNZ Auckland Shareholders harmless in respect of any such payment.
(c)In either case:
(i)each of the TPA Shareholders warrant to each of the CNZ Auckland Shareholders that the joint venture arrangement between TPA and Godfreys (“TPA/Godfreys JV”) has been terminated and that except for the Godfreys’ Dispute there are no other outstanding, threatened, or pending proceedings, claims or actions either between TPA and Godfreys arising out of the TPA/Godfreys JV (including its termination) or between TPA and any other person arising out of any services provided by TPA while the TPA/Godfreys JV was in place;
(iii)the TPA Shareholders hereby indemnify the Amalgamated Company and the CNZ Auckland Shareholders for all costs, losses, expenses (including legal costs on a solicitor/client basis), liabilities and obligations incurred or suffered by the Amalgamated Company or by any one or more of the CNZ Auckland Shareholders arising out of or in connection with, whether directly or indirectly, each of the Godfreys Dispute and Dispute; and
(iv)the parties shall, acting reasonably, determine an appropriate mechanism to be used to give effect to the intention of the parties as set out in clauses 7.8(a) and 7.8(b) having regard to the Amalgamated Company's solvency requirements, tax efficiency considerations of the relevant Shareholders and the Amalgamated Company, and any other relevant factors.
…
[69] I consider TPA’s rights against Godfreys were not assigned or otherwise excluded by the merger agreement and therefore became CNZ’s rights as a result of the amalgamation. That is the effect of amalgamation of two companies.21 Notwithstanding the words “shall be treated as being excluded from the Amalgamation”, read as a whole I do not consider the effect of the merger agreement was to carve out TPA’s rights against Godfreys. In closing, Mr Hollyman accepted the claim was not excluded. In context, the merger agreement provided that, as between the shareholders who were parties to the agreement, any settlement amount received by CNZ would be for the benefit of the named TPA shareholders and likewise any settlement amount paid by CNZ would be borne by the named TPA shareholders. The agreement was not purporting to assign TPA’s rights (or obligations – which cannot be assigned) to the shareholders. If it were an assignment of TPA’s rights to the shareholders, the technical issue could be dealt with by amendment to join the TPA shareholders as plaintiffs with no prejudice to Godfreys.
[70] In relation to the subsequent assignment to TPD, Mr Hollyman submitted the assignment was of a bare cause of action and offends against the rules against champerty and maintenance. Mr Hollyman acknowledged the exception to the rules where the assignee can establish a genuine commercial interest in the assignment,22 but submitted this does not apply. He submitted that TPD does not have a genuine commercial interest in the assignment. It did not even exist at the time of the partnership/joint venture. He submitted the laws of separate corporate personality prevent it from simply assuming the interest of its shareholders. He submitted there is no genuine commercial interest merely because the shareholders of TPD are the
21 Companies Act 1993, s 225.
22 It is common ground that the other exception, that of assignment of a property right or interest where the cause of action is ancillary to that right or interest, does not apply in this case. See Trendtex Trading Corporation v Credit Suisse [1982] AC 679 (HL) at 703F-G; and First City Corporation Ltd v Downsview Nominees Ltd [1989] 3 NZLR 710 (HC) at 755.
same persons who were shareholders of TPA, relying on Wayby Investments Ltd v Krukziener.23
[71] The relevant legal principle is not in dispute. As Fogarty J said in Body Corporate 160361 (Fleetwood Apartments) v BC 2004 Ltd and BC 2009 Ltd:24
The leading case on whether assignments are void by reason of maintenance and champerty is Trendtex Trading Corporation v Credit Suisse.25 This decision is regarded as the leading case in the United Kingdom, in New Zealand and in Australia. It is common ground that the Trendtex decision sets the current standard for judging maintenance and champerty by examining whether the assignee had “a genuine commercial interest in taking the assignment and in enforcing it for his own benefit”.26
[72] Fogarty J also noted that, as is the method of common law, the Commonwealth courts’ understanding of “the standard of genuine commercial interest” is being tested on a case by case basis.27 It is the application of this standard or principle that is in issue here.
[73] In Trendtex, the House of Lords upheld an assignment of Trendtex’s rights to its banker, Credit Suisse, but not a further assignment from Credit Suisse to an unknown third party who had no genuine commercial interest in the claim in return for a division of the spoils.28
[74] Fleetwood Apartments involved an assignment by apartment owners to Auckland Council in the context of leaky building litigation by the apartment owners against the Council and other defendants. The apartment owners assigned their cause of action to the Council as part of a settlement. Mr Hollyman acknowledged that the facts of Fleetwood Apartments are not materially similar to this proceeding, but he submitted the statements of principle are relevant here. Fogarty J held the assignment was void. It undermined the law of maintenance and champerty and the purpose of the Law Reform Act 1936 of achieving just and equal contributions between
23 Wayby Investments Ltd v Krukziener (2003) 16 PRNZ 907 (HC).
24 Body Corporate 160361 (Fleetwood Apartments) v BC 2004 Ltd and BC 2009 Ltd [2014] NZHC 1514, [2014] 3 NZLR 758 at [26] (emphasis in original); see also Waterhouse v Contractors Bonding Ltd [2013] NZSC 89, [2014] 1 NZLR 91 at [57].
25 Trendtex Trading Corporation v Credit Suisse [1982] AC 679 (HL).
26 At 703.
27 Fleetwood Apartments at [33].28 Trendtex at 694 and 703-704.
tortfeasors. Avoiding that statutory process was a significant feature in the case. Fogarty J concluded:29
There is a general common law hostility to enable causes of actions to be a tradable commodity. There is a longstanding reluctance of common law judges to allow assignment of claims, particularly tort claims. This is particularly so when the damage is to individuals. Part of these claims include damage to individuals, stress etc, for which there is a claim totalling approximately $20,000 per head, or nearly half a million.
The goal of the assignment on the part of the Council is to reduce the amount that it would otherwise have to pay after a combination of a trial leading to a judgment and then a second hearing leading to apportionment of the judgment sum under the Law Reform Act 1936. For otherwise the assignment would not have been entered into.
[75] In those circumstances, Fogarty J was concerned that the assignment meddled in the statutory apportionment of contribution.30 Fogarty J did not share the confidence in a just and equitable final outcome of Heath J in Auckland City Council (As Assignee) v Auckland City Council,31 which concerned a similar settlement and followed the English Court of Appeal decision of Brownton Ltd v Edward Moore Inbucon Ltd.32
[76] Separately, Fogarty J referred to a number of Australian cases,33 and the desirability of alignment of New Zealand and Australian common law.34 On the basis of the Australian cases, Fogarty J concluded that a prior “pre-existing” commercial interest in the matters that give rise to the cause of action is, at the very least, a powerful consideration in support of the assignment being legitimate and not contrary to public policy.35 The Council did not meet that criterion.
29 Body Corporate 160361 (Fleetwood Apartments) v BC 2004 Ltd and BC 2009 Ltd [2014] NZHC 1514, [2014] 3 NZLR 758 at [115]-[116].
30 At [117]-[119].
31 Auckland City Council (As Assignee) v Auckland City Council [2008] 1 NZLR 838 (HC).
32 Brownton Ltd v Edward Moore Inbucon Ltd [1985] 3 All ER 499 (CA).
33 National Mutual Property Services (Australia) Pty Ltd v Citibank Savings Ltd (1995) 132 ALR 514 (FCA); Monk v ANZ Banking Group Ltd (1994) 34 NSWLR 148 (SC); Deloitte Touche Tohmatsu v JP Morgan Portfolio Services Ltd [2007] FCAFC 52, (2007) 158 FCR 417; Dover v Lewkovitz [2013] NSWCA 452; and EWC Payments Pty Ltd v Commonwealth Bank of Australia [2014] VSC 4.
34 Fleetwood Apartments at [141].
35 Fleetwood Apartments at [142]. Fogarty J had noted at [131]-[132] that the Australian case of WorkCover Queensland v Amaca Pty Ltd [2012] QCA 240, [2013] Qd R 276 at [66] appeared to undercut a submission that the pre-existing commercial interest must be prior in time to the litigation which is being assigned.
[77]Fogarty J’s overall conclusion included the following:
[143] The common law has long been hostile to assignments of causes of action. It has identified the tort of maintenance and its most pernicious form, champerty, as wrongs contrary to public policy, by reason of being a trade in causes of action. Judges have an instinctive hostility to surrogates bringing claims, taking advantage of the misfortune of others.
[144] The torts of maintenance and champerty have not been abolished. Rather, funding arrangements which are fair are tolerated, consistent with facilitating access to justice. Secondly, when property is sold and causes of actions run with the property, the common law courts, which have always facilitated a free market in property, tolerate assignments of causes of action, including those in tort.
[145] Neither of these two qualifications, however, reflects any lessening of the basic common law hostility to there being trade in causes of action. Causes of action, unless there are special reasons, should always be brought by the persons in respect of whom the law provides rights and damages or other relief. Assignments have to be justified.
[146] The judgment that I essentially am faced with is that I cannot be sure that a trial judge during a trial and when fixing contribution after judgment, would not be distracted, deflected, or even frustrated by considerations as to the role of the assignee and the weight to be attached to the assignment. The trial judge would know, at all times, that the plaintiffs claims are being pursued in the interests of the tortfeasor, not in fact in the interests of the original plaintiffs, unless the judgment reaches up and beyond $1.7m.
[147] Ms Thodey agreed in the course of argument that if this assignment stands, there is nothing to stop any defendant, in any proceedings, entering into a bargain to purchase the plaintiff’s causes of action as part of a settlement in order to sue the other defendants. There will then be a market for the plaintiffs' causes of action when there is more than one defendant. Such a state of affairs does not happen anywhere else in the common law world. The case of Brownton stands on its own. The Australian jurisprudence does not allow it. Lindgren J’s judgment in Citibank has been cited many times by other Australian judges, without criticism.
[148] The torts of maintenance and champerty are still law. The law tolerates some relief against their strictures when there are good reasons in the public interest to do so. The reduction of those reasons to the principle of pre-existing commercial considerations existing prior to the litigation itself is the standard followed in Australia, ultimately applying the standard in Trendtex. Brownton should be confined to its facts. In that case the UK equivalent to s 17 of the Law Reform Act was not available to adjust contribution between the defendants.
[149] I do not think there is sufficient merit in this stratagem of the Auckland Council to warrant extending the toleration of such assignments. It is meddling with the common law of torts, and the purpose of the Law Reform Act 1936. It will encourage traffic in assignments of actions and will make a trial judge's duty to do justice between the parties even more difficult, and potentially prevent the judge from applying both the common law and the statute.
[78] This case is materially different from Fleetwood Apartments. It does not involve a settlement of litigation whereby one defendant is assigned the plaintiff’s rights against other defendants who are the settling defendant’s joint tortfeasors, giving rise to the Law Reform Act contribution issue. Indeed, this case does not involve assignment of a tort claim at all but rather the contractual or equitable right to an account. Nor does this case involve litigation funding. As Fogarty J acknowledged in the passage quoted, funding arrangements which are fair are tolerated, consistent with facilitating access to justice.36 At least in that context, a pre-existing right is not required.
[79] Mr McAnally submitted that the interests of a company are ultimately those of its shareholders as a whole, referring to the recent Supreme Court decision in Madsen-Ries v Cooper in the context of the duty of directors to act in the best interests of the company (the shareholder primacy model).37 He submitted it is artificial, in this context, to suggest there is any divergence in interests in the claim between TPD and the TPA shareholders that have incorporated it for the purposes of prosecuting the claim. Even so, I accept Mr Hollyman’s submission that the laws of separate personality prevent TPD from simply assuming the interest of its shareholders.
[80] Mr Hollyman relied, as indicated, on Wayby Investments Ltd v Krukziener, which involved an application to substitute a newly incorporated special purpose company as sole plaintiff following the issue of proceedings.38 The shareholders of the new entity included the original plaintiffs. Master Faire declined the application on the basis that the arrangement provided for the funding of the proceeding and a sharing of the proceeds, and did not fit within any of the recognised exceptions to the rules against maintenance and champerty. Master Faire noted the plaintiff had acknowledged that the shareholding of the new entity may change as investors entered by way of acquisition of shares and no doubt the provision of funds by way of advances.39 Given that, he was not asked to base his ruling on there being no passing of control of the proceedings by virtue of the assignment.
36 Litigation funding can also occur without an assignment.
37 Madsen-Ries v Cooper [2020] NZSC 100 at [28].
38 Wayby Investments Ltd v Krukziener (2003) 16 PRNZ 907 (HC).
39 At [8].
[81] The Court’s approach to litigation funding has developed considerably since Wayby.40 While abuse of process is a ground (but not the only ground) for challenging litigation funding arrangements,41 in the context of this case the test remains whether the assignee has a genuine commercial interest. This case differs from Wayby in the sense that there is no litigation funding element to the assignment and any passing of control is somewhat technical since there is no suggestion that the shareholders of TPA and TPD differ.
[82] In this materially different case, involving neither litigation funding nor joint tortfeasor settlement, I do not favour an overly hostile approach to ascertaining whether the assignee has a genuine commercial interest. I consider the effect of the 2013 merger agreement was that the TPA shareholders had a genuine commercial interest in the claim against Godfreys even though it was not assigned to them by TPA before the CNZ amalgamation. In the particular circumstances of this case, I also consider that TPD had a genuine commercial interest in the subsequent assignment, just as its shareholders would have had if the assignment had been to them personally, given the terms of the merger agreement and the fact that the assignment occurred in the context of a restructure of the network of companies including CNZ which anticipated CNZ’s liquidation. There was no suggestion of ringfencing by the TPA shareholders and Mr McAnally advised that security for costs had been provided. I consider the assignment was valid.
[83] In any event, since TPA’s claim was not excluded from the amalgamation by the merger agreement, even if the assignment were void, I consider this issue could be dealt with by amendment to joint CNZ (in liquidation) as plaintiff with no prejudice to Godfreys, given it is accepted there is an indemnity from the TPA shareholders.
Quantum
[84] Following the further work of the experts in narrowing the differences during the trial, counsel helpfully provided an Excel spreadsheet with which to calculate the
40 Saunders v Houghton [2009] NZCA 610, [2010] 3 NZLR 331 at [21]; and Waterhouse v Contractors Bonding Ltd [2013] NZSC 89, [2014] 1 NZLR 91 at [56].
41 Waterhouse at [56].
result based on my determination of the remaining issues. I am grateful to counsel for their assistance in focusing and confining the issues.
[85] Inputting into the spreadsheet the adjustments I have allowed for staff (Mr Kearvell and Ms Pratt) and run-off costs (direct contractor cost recoveries), the total payable by Godfreys is $589,844 (as set out in the attached version of the spreadsheet).
Result
[86]I make an order that Godfreys pay TPD the sum of $589,844.
Interest and costs
[87] The parties agreed that the calculation of interest should be deferred and, if necessary, dealt with at the same time as costs. If interest and costs cannot be agreed, TPD is to file and serve a brief memorandum within 20 working days, and Godfreys is to file and serve a brief memorandum in response within a further 10 working days. I will determine interest and costs on the papers unless I need further assistance from counsel.
Gault J
SCHEDULE 1
14
1