Vero Insurance New Zealand Limited v Fleet Insurance & Risk Management Limited HC Auckland CIV 2007-404-001438
[2007] NZHC 2145
•21 May 2007
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2007-404-001438
BETWEEN VERO INSURANCE NEW ZEALAND LIMITED
Plaintiff
AND FLEET INSURANCE & RISK MANAGEMENT LIMITED Defendant
Hearing: 27 April 2007
Appearances: AM Callinan and A Richmond for Plaintiff
JG Miles QC and P McDonald for Defendant
Judgment: 21 May 2007
JUDGMENT OF ASHER J
This judgment was delivered by me on 21 May 2007 at 4:30 pm pursuant to Rule 540(4) of the High Court Rules
………………………………………..
Registrar/Deputy Registrar
………………………………………..
Date
Solicitors:
Simpson Grierson, Private Bag 92518 Auckland
P McDonald, PO Box 1495 Auckland
Copy:JG Miles QC, PO Box 4338 Auckland
VERO INSURANCE NZ LTD V FLEET INSURANCE & RISK MANAGEMENT LTD HC AK CIV 2007-
404-001438 [21 May 2007]
Table of Contents
Paragraph Number
Introduction [1] A short history of Axiom [2] The move to liquidate Axiom [13] The issue [19] The approach to an interim injunction application [20] Serious question to be tried [29] Material breach [29]
Failure to exercise consent discretion in good faith [40]
Whether liquidation/termination a breach of the duty of good faith
Argument that FIRM in default because of breach of confidentiality
[54]
[61]
Breach of dispute resolution provisions [68] No repayment of the profit share advance [71] Conclusion on serious question to be tried [76] The balance of convenience [78] Competing scenarios [78] Difficulty in ascertaining damages [83] Ability to pay damages [86] Conclusion on balance of convenience [89] Overall justice [90] Result [97] Costs [99]
Introduction
[1] The plaintiff, Vero Insurance New Zealand Limited (“Vero”) applies for an interim injunction restraining the defendant, Fleet Insurance & Risk Management Limited (“FIRM”). The application relates to a joint venture company created by Vero and FIRM, Axiom Risk & Insurance Management Limited (“Axiom”). Vero seeks to restrain FIRM from taking any steps to place Axiom into liquidation, and to stop FIRM from breaches of confidentiality obligations that it has said arise under the Axiom shareholders’ agreement.
A short history of Axiom
[2] Vero is a large insurance company operating throughout New Zealand. The company is, through a series of subsidiaries, owned by an Australian parent, Promina Group Holdings Pty Ltd, the ultimate parent company being Promina Group Ltd (“Promina”).
[3] In contrast to the structure to which Vero belongs, FIRM is a small New Zealand private company, which has two shareholders. It is controlled by Mr Kevin Paxton who is the majority shareholder and sole director of the company. Mr Paxton has considerable experience in the insurance market and has been in the industry for many years. In 2000 he was developing a specialised software package for use in that industry. The joint venture was negotiated in 1999 and early 2000 between Mr Paxton and Mr Roger Bell, the chief executive of Vero. Its purpose was to create a business dealing exclusively in commercial vehicle insurance, using Mr Paxton’s insurance and software expertise and Vero’s abilities and resources as an underwriter.
[4] Two agreements in particular were signed. There was a shareholders’ agreement between Vero and FIRM, and an underwriting agency agreement between Vero and Axiom. I should mention at this stage that the underwriter signatory is not Vero, but Royal & Sun Alliance Insurance (NZ) Ltd, which subsequently became
Vero. To avoid confusion I will refer to Royal & Sun Alliance Insurance (NZ) Ltd as Vero in this Judgment.
[5] The shareholders’ agreement does not set out the respective functions of the parties. However, the affidavits disclose that FIRM, through Mr Paxton, would attract the business, deal with the customers, develop and run the necessary software and organise and control the staff. The shareholders’ agreement provided that FIRM was to provide Mr Paxton’s personal services on a fulltime basis as managing director to Axiom, and in response a fee was paid to FIRM. The shareholders’ agreement is a little unusual in that there is no restraint of trade on Mr Paxton. In
2003 a software licensing agreement was entered into between Axiom and FIRM, which permitted Axiom to use the software which had been developed by Mr Paxton.
[6] Vero’s role was essentially that of an underwriting agent, and the underwriting agency agreement was entered into on the same day as the shareholders’ agreement. Under that agreement Axiom was granted exclusivity as a specialist commercial motor vehicle underwriting agent for Vero.
[7] Axiom is essentially an agent which acts on Vero’s behalf. Vero is the underwriter who enters into and assumes the risk on the contracts of insurance with the customers. Axiom operates from Penrose and employs 43 staff. It operates independently of Vero. Axiom, through Mr Paxton, and Vero have relationships throughout the commercial motor vehicle industry. Axiom is able to make quotations for insurance without reference to Vero. Axiom handles all the customer paperwork, all the claims and all the decisions in respect of claims. Vero provides a general insurance account out of which claims are paid by Axiom. Axiom has a board on which both Mr Bell and Mr Paxton sit. Vero and FIRM are equal shareholders in Axiom, and both have two board members.
[8] Axiom has been a successful business. It has grown its gross written premium from nothing in January 2000 to approximately $60 million today. Mr Paxton asserts that this was greatly in excess of expectations. When Axiom began it was expected that if successful, Axiom would write about $15 million of
gross written premiums per annum, and that this would not be exceeded for the first five years. In fact it was exceeded within two years.
[9] Ironically it appears that with the growing success of the business, the relationship between Vero and FIRM soured. Mr Paxton believes that Vero has made significant profits, while FIRM was and is sharing in the greater than anticipated profits to only a minimal extent. Mr Paxton claims the structure of the shareholders’ agreement that has created this differential in profit sharing. The shareholders’ agreement, which has a section on profit share, effectively provides that there will be no profit share for FIRM if the loss ratio is 76 per cent and over. The required ratio for profit is not being achieved. Mr Paxton clearly feels that the profit sharing is not working fairly. He also complains that Vero insists on putting together claim-handling and other costs into the overhead expenses advance and thus into the loss ratio calculation, artificially pushing up the loss ratio.
[10] Mr Paxton claims that over the seven years to 31 December 2006 Vero made a net profit from Axiom “before tax and profit share” of $30.66 million. This includes investment income. In contrast, he says, the profit share paid to FIRM totals $744,500 for the same period. Mr Paxton acknowledges that FIRM makes profits before tax derived through an overhead expense advance that must be paid by Vero to FIRM. However, he says that in excess of 80 per cent of that has had to be reinvested into the business and has not been available for FIRM.
[11] Mr Paxton complains that he first raised this alleged inequity with Vero representatives on 17 February 2001. He complains that Vero has unreasonably refused to accommodate his legitimate wishes to negotiate a fairer profit share. He now openly states that FIRM wishes to exit the joint venture. This was first signalled at an Axiom board meeting in December 2005. His reasons do not only include the failure to resolve the profit share issue. He claims that Vero has allowed another competitor to act as an underwriting agent on commercial motor vehicle insurance in breach of the exclusivity arrangements. He complains that Vero has allowed a subsidiary joint venture company to come to New Zealand to compete with Axiom. He says that Vero does not work cooperatively with Axiom. There
have been negotiations for the sale of FIRM’s shares in Axiom. They have been unsuccessful.
[12] FIRM believes the Axiom business as a whole is worth around $70 million. It does not believe that Vero has offered a fair price for FIRM’s shares in Axiom. Mr Paxton asserts that he is dissatisfied with the joint venture, and he believes that FIRM has been treated unfairly throughout. His relationship with Mr Bell, the chief executive of Vero, has broken down. For reasons that are the subject matter of this application, he believes he is entitled to wind up Axiom, and that that is the appropriate step to take.
The move to liquidate Axiom
[13] In October 2006 the ultimate owner of Vero was the former Royal & Sun Alliance Insurance (NZ) Ltd, which had been rebranded as Promina Group Ltd. In October 2006 Promina was in merger discussions with Suncorp–Metway Ltd (“Suncorp”), an Australian general insurance and finance services company. On
21 October 2006 a merger implementation agreement was announced.
[14] Under clause 5.1 of the shareholders’ agreement between Vero and FIRM, the parties are obliged to request the written consent of the other party of the shareholders’ agreement if there is a transfer in the ownership of their shares in Axiom. A “change of control” of one party to the shareholders’ agreement is deemed to be a transfer of the ownership of their shares.
[15] It is not in dispute that the merger between Promina and Suncorp constituted a change of control sufficient to invoke the requirement for consent under clause 5.1. FIRM have refused to consent to this change of ownership. FIRM formally advised Vero of this on 26 February 2007. FIRM has taken the position that the change of control without consent constitutes a material breach of the shareholders’ agreement, which entitles it to liquidate Axiom. On 28 February 2007 FIRM through its solicitors advised Vero of its intention to place Axiom in liquidation. It noted that the underwriting agency agreement would, as a consequence, also terminate. It also stated that it would proceed to cancel the software agreement.
[16] Vero responded by denying FIRM’s entitlement to liquidate, and formally sought consent to the change of control under clause 5.1. This was refused by FIRM’s solicitors. On 14 March 2007 Vero’s solicitors wrote to FIRM’s solicitors outlining the areas in dispute, and giving FIRM notice that Vero was triggering the dispute resolution clauses in the shareholders’ agreement, which would take some
20 business days to progress. An undertaking was sought from FIRM not to require Axiom to be placed in liquidation under the shareholders’ agreement or to take steps under the Companies Act to liquidate it while the dispute resolution process was underway.
[17] FIRM’s solicitors wrote back the next day denying that there was a dispute and refusing to participate in the dispute resolution process. They advised that they were no longer instructed to negotiate the sale of FIRM’s shares and interests in Axiom to Vero. It was clear that FIRM was going to proceed with the liquidation of Axiom. The threat of permanent liquidation of Axiom by FIRM led Vero to issue substantive proceedings seeking declarations and relief restraining FIRM from taking steps to liquidate Axiom.
[18] I gather that informal undertakings have sensibly been given by FIRM not to take any steps to liquidate, pending the outcome of this interim injunction application. FIRM has nevertheless maintained throughout that it is entitled to liquidate, and will do so unless restrained by order of this Court.
The issue
[19] The core issue between the parties is FIRM’s ability to liquidate Axiom. Pursuant to clause 10.4.3 of the shareholders’ agreement, if a party has caused an event of default then, following the giving of notice, the party not in default may place the company in liquidation at the earliest reasonable opportunity. The question thus arises as to whether an event of default has taken place under the shareholders’ agreement. FIRM claims that an event of default has occurred. Vero maintains that it has not. Vero also asserts that the obligation to give consent to a change of control must be exercised in good faith to be effective and that it was not so exercised by FIRM. It further argues that FIRM is acting in breach of its good faith obligations
under the shareholders’ agreement and so for that reason cannot claim a material breach or serve notice terminating the agreement. Alternatively, Vero argues that FIRM has breached its confidentiality obligations under the shareholders’ agreement and other obligations and is itself a party in default, and for that reason may not give any notice terminating the shareholders’ agreement and invoking the option to liquidate. It asserts that FIRM’s refusal to participate in the dispute process also placed it in default, so that it was not entitled to terminate and liquidate. It is now necessary to consider these issues in the context of this interim injunction application.
The approach to an interim injunction application
[20] The general principles applying to interim injunctions in New Zealand are well known, and were succinctly stated in Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 (CA), following the line of authority based on American Cyanamid Co v Ethicon Ltd [1975] AC 396. The first issue to be considered is whether the plaintiff has established a “serious question to be tried”. If this is established, the second question is where the balance of convenience lies, with particular reference to the adequacy of damages for either party, if that party is ultimately successful at trial. Associated with this second question is a series of discretionary considerations, including the relative strengths of the parties’ cases, any undue delay by the plaintiff, the relevant status quo and the conduct of the parties. In the end the Court must stand back from these particular factors and ask where the justice of the case lies.
[21] Mr Miles QC for FIRM invites the Court to consider Vero’s contractual arguments and to conclude that Vero has not raised a serious question to be tried. He submits that in this case, with a few relatively minor exceptions, the facts are abundantly clear. The issue, he submits, is primarily one of interpretation of the shareholders’ agreement and can be resolved now.
[22] In considering the issue of a “serious question to be tried” set out by Lord Diplock in American Cyanamid v Ethicon Ltd, Lush J stated in Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VR 309 at 311:
In order to determine whether there is a serious question to be tried it is necessary to consider what is the applicable law and whether there are arguable differences concerning it, what the facts are said to be on the opposing sides, and where the issues lie, and whether there is a tenable combination of resolutions of the issues of law and fact on which the plaintiffs could succeed.
[Emphasis added]
[23] This approach has been adopted in a number of New Zealand decisions, including Sutton v The House of Running Ltd [1979] 2 NZLR 750 at 753, Plix Products Ltd v Frank M Winstone (Merchants) Ltd (1984) 3 IPR 373 and Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd at 133. Somers J in Sutton v The House of Running Ltd observed at 753 that there is a “fine line” between ascertaining whether there is a serious question to be tried and avoiding a decision on “difficult questions of law which call for detailed argument and material considerations” referred to by Lord Diplock in American Cyanamid v Ethicon Ltd at 407. He noted that just as in a strike-out application, a Court may be called on to conclude that the plaintiff quite simply has no tenable case. He observed:
If however it is not demonstrated that the case of the plaintiff on a matter of law is clearly untenable the admonition of Lord Diplock in American Cyanamid v Ethicon Ltd [1975] AC 396 will apply.
[24] Indeed, Lord Diplock stated in American Cyanamid v Ethicon Ltd at 407:
It is no part of the Court’s function at this stage of the litigation to try to resolve conflicts of evidence on affidavit as to facts on which the claims of either party may ultimately depend, nor to decide difficult questions of law which call for detailed argument and mature considerations.
[Emphasis added]
This dicta has been referred to with approval in a number of New Zealand cases, including Villa Maria Wines Ltd v Montana Wines Ltd [1984] 2 NZLR 422, Sutton v The House of Running Ltd [1979] 2 NZLR 750 and Eveready New Zealand Ltd Gillette New Zealand Ltd HC WN M1130/98 28 August 1998, Elias J.
[25] It seems to be accepted that the existence of complex issues of fact and law tells for there being a “serious question to be tried”. The Court of Appeal in Carter Holt Harvey v Carroll Logging Limited CA204/03 21 November 2003, Glazebrook, Heath, Doogue JJ, granted an interim injunction application to restrain Carter Holt
from taking steps consequent upon its purported termination of contract. A critical issue was whether the contract principle of fair, open and honest dealing was an express term of each contract or, at least, an aid to the interpretation of express terms. The Court held that the exact nature of the “overall” contract principle ought not to be finally determined in an interlocutory context.
[26] The Court observed that it had to approach the question whether a serious question to be tried existed on the basis that evidence adduced by the parties was capable, if accepted at trial, of providing an evidential foundation for the claims. The Court was satisfied that the evidence went that far. The Court refused to say more about the substance of the cases given the interlocutory nature of the proceedings, observing that it was undesirable to comment further because it was unclear what facts would be found at trial.
[27] It is also worth bearing in mind that there is a distinction in the Court’s function in an interim injunction application and in an application to strike-out. In an application to strike-out there will normally be only a limited number of issues, which will have been traversed between the parties over some months in the lead-up to the hearing, and argued in full with detailed written submissions and reference to authorities. The Court is able to make its decision without undue pressure, and reserve its judgment for whatever reasonable period is required. In contrast, an interim injunction application is, by definition, urgent. The parties have only a limited period of time in which to prepare. The factual background is more likely to be wide-ranging and in dispute. The actual time allocated for the hearing must generally be limited. The Court is required to produce a decision quickly. None of these circumstances gives the opportunity for the detailed argument and mature consideration required for the determination of a complex and important point of law.
[28] For these reasons a Court will be more cautious about finally determining issues of law in an interim injunction hearing than in an application to strike-out. I will approach the question of whether there is a serious question to be tried by considering whether there is a tenable combination of resolutions of issues of law and fact on which Vero could succeed.
Serious question to be tried
Material breach
[29] Vero accepts that it has breached clause 5.1 in that it has not obtained FIRM’s consent to the merger between Promina and Suncorp. Clause 5.1 of the agreement reads as follows:
5.1 Consent required: In addition to any requirement appearing in the Constitution relating to the transfer of any Shares, neither party may transfer the beneficial or legal ownership of those Shares without the prior written consent of the other party (which the other party may withhold at its absolute discretion or may grant subject to such conditions as that party may consider appropriate at its absolute discretion). For the purposes of this clause, a change in the control of any party shall be deemed to be a transfer of the legal and beneficial ownership of that party’s Shares.
The meaning of “change of control” is set out at clause 1.2.6 of the agreement. As the majority of Vero’s board members will soon be from Suncorp it can safely be said that there will be a change of control.
[30] FIRM emphasises the phrase “may withhold at its absolute discretion”. It submits that the clause clearly means what it says. The parties are not to have strangers foisted upon them against their will even if they will only sit on the international board and have no impact on the New Zealand operation.
[31] Vero while accepting that a breach of clause 5.1 has occurred, submits that it was not a material breach and therefore did not invoke the right to terminate and liquidate. That right arises where there is an event of default. It is an event of default under paragraph 10.2.4 for a defaulting party to commit a “material breach of the agreement”. Clause 10.2.4 reads:
10.2.4 The Defaulting Party has committed any material breach of this agreement, which breach is not reasonably capable of being remedied by the Defaulting Party within 10 Business Days, provided that the Non-Defaulting Party may not at any time give such a notice terminating this agreement if, at that time, the Non-Defaulting Party is in default under this agreement.
Clearly if there is a breach by a change of control without consent, it cannot be remedied within ten business days. Therefore, there was no restriction on the giving of notice.
[32] “Material breach” is not defined in the agreement. However, both parties accept that it is a same as a breach giving rise to a right to cancel, as defined in s 7 the Contractual Remedies Act 1979. This was the conclusion reached in TNF Bandit Ltd v Air National Ltd HC AK CIV-2005-404-1886 6 December 2006, where Keane J had to interpret the phrase “material breach” in a contract. He held that the concept or material breach aligned closely with the notion of substantial breach, set out in s 7.
[33] The meaning of “substantial breach” giving rise to a right to cancel under sections 7 and 8 of the Contractual Remedies Act 1979 was discussed in the Court of Appeal in MacIndoe v Mainzeal Group Ltd [1991] 3 NZLR 273 at 284-285. It was stated by Richardson J:
Substantiality in that statutory context is a matter of fact, degree and impression. It has the same flavour as "significantly" and "considerably". It is equally incapable of any kind of arithmetical analysis. One must stand back and, assessing the matter objectively, determine whether the effect of the breach will be, to take the most obvious provisions subparas (i) and (ii), substantially to reduce the benefit of the contract to Mainzeal or substantially to increase the burden on Mainzeal under the contract.
Substantiality is to be considered by putting the contract and the breach into their
“relevant factual setting”: at 286.
[34] Ms Callinan for Vero argues that the merger will not make any difference to the people with whom FIRM deals in the joint venture. The jobs of senior management have already been confirmed. The merger will not alter the remuneration that FIRM receives, and Axiom operates independently of Vero in any event. She points out that Suncorp has no business interest in New Zealand apart from a real estate arm, and that there is a continuity of Vero board members in Axiom. Nothing is likely to change in Axiom’s day-to-day operations.
[35] Mr Miles for FIRM, on the other hand, points out that this is a relational contract. Clause 4 of the shareholders’ agreement is headed “Relational Management” and states that the parties must act in good faith towards each other. They must also manage their relationship on an open and informal basis, and ensure that the personnel involved in Axiom are the same persons with the same responsibilities through the term, to the extent that this is reasonably practicable, in order to achieve continuity of personnel and approach in relation to the company: clause 4.1.3(b). He submits that any change of shareholding creates a risk of an adverse impact on Axiom. FIRM cannot wait around to see the effect of the merger on the New Zealand public of Vero over the years to come. It has to make a decision now as to whether to give consent.
[36] Mr Miles’ argument went as far as to submit that all breaches of clause 5.1 are necessarily a material breach. This was tantamount to a submission that clause 5.1 was an essential term, any breach of which was sufficient to warrant cancellation or, in this case, termination. He also points out that FIRM’s chief executive Mr Paxton says he has real concerns about the new ownership. However, I would observe that these have not been specified.
[37] I am not able to say at this stage, given the limited argument on the point, that there is no tenable argument that the breach of clause 5.1 was not a material breach. This conclusion must turn not just on the words of the contract but also on the relevant factual setting of the contract and breach. If a Court were satisfied that the exercise of the absolute discretion was capricious and without sound commercial basis, and that there was no material disadvantage arising from the change of control to which any commercial person could reasonably object, then the breach might well not be a material one. Vero may, for instance, wish to call expert evidence from others in the industry to show that no commercial party in FIRM’s position could have any serious concerns about the merger. A Court could conclude that the breach did not substantially reduce the benefit of the contract to FIRM or increase the burden on FIRM. The fact that a similar merger in March 2003 was consented to by FIRM without objection is relevant, as is Mr Paxton’s inability to come up with any good reasons for an objection, save for a general reference to “unforeseen repercussions”. It might well be that a properly informed Court could be persuaded
that the breach did not substantially reduce the whole benefit of the contract or increase its burdens.
[38] Further, as a matter of construction, it is arguable that clause 5.1 is not an “essential” term as that word is used in s 7(4)(a) of the Contractual Remedies Act 1979. The parties have not necessarily agreed that the performance of the stipulation is essential to FIRM. While the importance of continuity of personnel and approach is important in a relational contract such as this, and indeed is specifically referred to in clause 4.1.3, I would be reluctant to hold at this stage that it can be inferred that every breach of clause 5.1 could give rise to a right to cancel. To use the test pronounced by Jordon CJ in Tramways Advertising Pty Ltd v Luna Park (NSW) Ltd (1938) 38 SR (NSW) 632 at 634, was it of such importance to FIRM that it would not have entered into the contract unless it had been assured of strict or substantial performance of the promise not to transfer without consent? There are no words in the clause to indicate that it was of such importance and an essential term. The question will be whether the clause goes to the heart of the contract. It is not possible to say that Vero’s position is not seriously arguable.
[39] In relation to this point, it is possible, then, using the phraseology of Lush J in Henry Roach, that there is a tenable combination of resolution of issues of law and fact on which Vero could succeed in persuading a Court that the breach of clause 5.1 was not material. There is a serious question to be tried as to whether there has been a material breach, and therefore whether FIRM was entitled to liquidate Axiom.
Failure to exercise consent discretion in good faith
[40] Vero submits that the discretion to refuse consent in clause 5.1 must be exercised in good faith. It points to clause 4.1.1 of the agreement, which provides that the parties shall at all times during the term “act in good faith towards each other in relation to the company.”
[41] As Mr Miles for FIRM points out, clause 4.1.1 must be read together with clause 4.2, which provides that the provisions of clause 4.1 are subject to and are not intended to limit the effect of any “contrary” provision in the agreement. He submits
that the “absolute discretion” provided in clause 5.1 is “contrary” to clause 4.1 and therefore the good faith provision does not apply to clause 5.1. Mr Miles submitted that FIRM thus did not have to justify the exercise of its discretion. He submitted that it was perfectly legitimate for FIRM to refuse its consent to a change of control simply because it wanted to take the opportunity to get out of the agreement.
[42] I am not prepared to reject the possibility that the Court in substantive proceedings could hold that the discretion in clause 5.1 should be exercised in good faith. I do not consider that the words “absolute discretion” necessarily exclude the application of a duty of good faith. Any discretion in a contract that is untrammelled by qualifying words is notionally absolute. The word “absolute” does not necessarily add anything. In a relational contract of this kind, in which the parties have to closely cooperate with each other over a long period of time, it would be surprising if the explicit term of good faith in clause 4.1.4 did not apply to an absolute discretion of this type. I do not consider that clause 5.1 is necessarily “contrary” to the good faith provision in clause 4.1.1. Indeed, it may be concluded that clause 4.2 was actually intended to qualify broad discretions of the sort in clause
5.1.
[43] Assuming, then, that the good faith requirement applies to clause 5.1, I turn to the issue of whether it is arguable that FIRM in fact did not exercise that discretion in good faith. Parties to commercial contracts often exercise contractual powers for an ulterior motive. For instance, a right to cancel for breach will often be invoked for commercial reasons having nothing to do with the breach but rather because a party wishes to get out of the contract. In such a situation if the cancellation is on the grounds of a substantial breach and there is a right to cancel under the Contractual Remedies Act 1979, the motive for cancellation is irrelevant. It would be most surprising if that sort of right to cancel could be subject to the qualification that it must be exercised in good faith. A system of contract where the motives of parties exercising rights of cancellation for substantial breach of an essential term could be subject to scrutiny in the Courts could lead to chaos, with every defaulting party getting a second chance.
[44] However, the discretion in clause 5.1 is not a discretion to cancel for cause. It is an apparently unfettered discretion to give or withhold consent. There are some authorities which indicate that an obligation to exercise such contractual discretions must be exercised in good faith. Vero referred to a considerable number in endeavouring to provide a definition as to the meaning of “good faith” in the context of this contract. However, none of those authorities deals with the application of the notion of good faith to an unfettered contractual discretion. Although a number of New Zealand cases have considered the circumstances in which a term of good faith will be implied, for example Bobux Marketing Ltd v Raynor Marketing Ltd [2002] 1
NZLR 506, the application and meaning of good faith in contracts has not as yet
been thoroughly considered in New Zealand.
[45]
three
I a notio
a)
m mindful of Sir Anthony Mason’s suggestion that “good faith” embraces ns:
An obligation on the parties to cooperate in achieving the contractual
objects (loyalty to the promise itself); b)
Compliance with honest standards of conduct; and
c)
Compliance with standards of conduct which are reasonable having regard to the interests of the parties.
(Sir Anthony Mason, “Contract and its Relationship with Equitable Standards in the Doctrine of Good Faith” The Cambridge Lectures (8 July 1993), cited in Burger King Corp. v Hungry Jack’s Pty Ltd [2001] NSWCA 187 at [171]; Alcatel Australia Ltd v Scarcella (1998) 44 NSWLR 349 at 367 and Hughes Aircraft Systems International v Air Services Australia (1997) 146 ALR 1 at 37, discussed further in “Contract, Good Faith and Equitable Standards in Fair Dealing” (2000) 116 LQR
66).
[46] In Burger King Corp v Hungry Jack’s Pty Ltd [2001] NSWCA 187 at [181 –
182] it was held that franchisor’s withholding approval of recruitment of further third party franchisees for reasons having nothing to do with the wellbeing of the
franchise, was in breach of the implied term of good faith and reasonableness in a franchise contract. In Gan Insurance Co. Ltd v Tai Ping Insurance Co. Ltd (No. 2) [2001] 2 All ER (Comm) 299 a reinsurance contract contained a clause that no settlement could compromise a claim by the insured without the prior approval of the reinsurers. It was held that disapproval could only take place after consideration of, and on the basis of, the facts giving rise to the particular claim. It could not be made by reference to considerations extraneous to the subject matter of the particular reinsurance: at [67]. These cases indicate that the duty of good faith demands that absolute discretions of the type in clause 5.1 in the shareholders’ agreement must be exercised by reference to considerations relevant to the change of control, rather than extraneous considerations, such as a wish to get out of the contract.
[47] Thus, the proposition can be put that parties to a contract must, in exercising a broad contractual discretion, be true to the ideal that lies behind the contract. In the words of Lord Steyn in First Energy (U.K.) Ltd v Hungarian International Bank Ltd [1993] 2 Lloyd’s Rep 194:
A theme that runs through our law of contract is that the reasonable expectations of honest men must be protected. It is not a rule or principle of law. It is the objective which has been and still is the principal moulding force of our law of contract …
Another way of articulating the meaning of good faith in this context is to say that a discretion, having regard to the provisions of the contract by which it is conferred, must not be exercised arbitrarily, capriciously, or unreasonably: Abu Dhabi National Tanker Co. v Product Star Shipping Ltd (The “Product Star” (No. 2)) [1993] 1
Lloyd’s Rep 397 at 404.
[48] For the purposes of the limited consideration of whether there is a serious question to be tried, I consider that FIRM’s refusal to consent so that it can escape an unwelcome contract may be an arbitrary and unreasonable action, not connected to the objects of the contract, and not in accord with what would, on an objective test, be the reasonable expectations of the contracting parties. Such a purpose has nothing to do with the change of shareholding. It has nothing to do with the justified expectations of the parties when they entered into the contract.
[49] Thus it is arguable that in exercising its discretion to decline to consent for reasons that may have nothing to do with the merger between Promina and Suncorp, FIRM was not being true to the contractual ideals behind the shareholders’ agreement and was being disloyal to the contractual relationship. FIRM may, therefore, have acted in bad faith.
[50] It could be said that in accepting such an argument a Court would be effectively implying a term that consent would not be unreasonably withheld, of the type implied in leases in relation to the landlord’s consent to assignments: s 110 of the Property Law Act 1952. However, Vero does not go so far as argue for an implied term that consent will not be unreasonably withheld. The requirement for good faith is not commensurate with a requirement for reasonableness. A Court in the substantive proceedings need not evaluate the reasonableness of that refusal, providing the reason for the refusal related to the objects of the contract. Any analogy with administrative law concepts of reasonableness must be applied with caution: Abu Dhabi National Tanker Co. at 404. The essential question is whether the power has been abused: Abu Dhabi National Tanker Co. at 104. Here the Court may conclude that the reason for the refusal had nothing to do with the change of control at all, and the power was therefore abused.
[51] FIRM may of course ultimately persuade a Court that it was entitled to refuse to consent simply because it became unhappy with Vero and wished to escape its contract. Alternatively it may persuade the Court that there was a proper basis for the refusal to consent, connected to the implications of a change of control. However, in this interim injunction application I do not feel able to conclude that Vero’s argument that the discretion must be exercised in good faith, and that it was not in this case, cannot succeed.
[52] If it were concluded by a Court in substantive proceedings that the discretion has not been exercised in good faith, then it might well find that it has not been exercised at all. The consequence could be that there has been in fact no breach of the shareholders’ agreement at all because there had been no contractually valid refusal to consent. Alternatively, it could be that the material breach provision in
clause 10.2.4 does not apply because FIRM was itself in default by breaching the good faith requirement of clause 4.1.1 of the agreement.
[53] For these reasons also I consider that there is a serious question to be tried as to whether the right to terminate and liquidate is being lawfully invoked.
Whether liquidation/termination a breach of the duty of good faith
[54] I turn now to Vero’s related argument that for FIRM to proceed to liquidate in these circumstances would also be a breach of the duty of good faith. This argument is not as strong as the preceding argument relating to the discretion to consent in clause 5.1. There are two reasons for this.
[55] First, the right to liquidate and terminate in this contract only arises if there has been a material breach. As stated earlier in this Judgment, material breach may in this case be seen as the same as a substantial breach under the Contractual Remedies Act 1979, which gives rise to a general right to cancel without reference to any specific contractual provision. When a contract is terminable for a serious breach that would give rise to a right to cancel in any event, it is unlikely that a Court would limit that power by applying a requirement of good faith. That has never been such a restriction on the common law right to rescind or the Contractual Remedies Act right to cancel.
[56] Second, there may also be a basis for drawing a distinction between the exercise of a defined contractual right in a contract (such as the right to liquidate in this contract at clause 10.4) and the exercise of a broad unfettered discretion of the type in clause 5.1. In relation to a prescribed right to terminate for a specific reason in clause 10.4, the duty to act in good faith may have no application. It may be assumed that where the parties have agreed on a right to terminate in certain defined circumstances, good faith does not apply.
[57] It could be said against this argument that there are a number of Australian cases where the right to terminate has been held to be subject to a duty of good faith. However, in those cases the contracts expressly contained a right to terminate for
minor breaches. In circumstances where a trivial breach has been used as an excuse to terminate by reliance on an explicit contractual power, the Courts have interpreted the power as not extending to proposed actions which exceed what is necessary for the protection of the parties’ legitimate interests. In Renard Constructions (ME) Pty Ltd v Minister for Public Works (1992) 26 NSWLR 234 at 263-269, a clause in a building contract authorised the principal to take over or cancel the contract if the contractor failed to comply with any direction from the principal, however minor the direction or accidental the failure. It was held that such a power had to be exercised “reasonably”. In Burger King Corp v Hungry Jack’s Pty Ltd the New South Wales Court of Appeal held that where there was a right to terminate for a minor breach, that right had to be exercised in good faith.
[58] Thus, in both these cases the contracts had conferred a power to a party that was wider than was necessary to protect the legitimate interests of that party. That cannot be said of clause 10.4 in the shareholders’ agreement, where the right to terminate and liquidate only arises in the event of a material and thus a substantial breach. It may be concluded that it would have been the reasonable expectation of the contracting parties that if there is a right to cancel because of a substantial breach of the contract, it should be exercisable whatever the motives of the wronged party.
[59] In contrast, as I have stated, a party exercising a broad unfettered discretion to consent may have a duty to act in accordance with the ideals of the joint venture embodied in the contract, and only withhold consent for a reason connected with those ideals.
[60] For these reasons, I do not consider that this second good faith argument adds particular weight to Vero’s case. If there has been a substantial breach giving rise to a right to liquidate, I think it unlikely that in those circumstances a Court would scrutinise the exercise of the power to liquidate and terminate on the basis of whether this had been done in good faith.
Argument that FIRM in default because of breach of confidentiality
[61] As a further argument, Vero contends that FIRM cannot rely on material breach to terminate or liquidate because it is itself in default for breach of confidentiality.
[62] Clause 6 of the shareholders’ agreement states that each party shall maintain as confidential at all times, and shall not directly or indirectly disclose, any confidential information. Confidential information is defined in the agreement, and includes information relating to the terms of the agreement. It is alleged that Mr Paxton effectively disclosed the existence of clause 5.1 and disclosed other confidential information, when on a social occasion he spoke to the chief executive of another substantial insurance company, Aon Insurance Brokers Ltd. It is said that Mr Paxton disclosed in a general way a number of confidential matters, including the fact that as a result of the Suncorp merger Vero had to buy FIRM out of Axiom. Mr Paxton denies this.
[63] It is not necessary for me to traverse the facts of this conversation or the competing detailed contentions about it in detail, although there has been extensive affidavit evidence on the point. I have already found that some of Vero’s arguments raise serious questions to be tried. However, I must say that I have difficulties with this part of Vero’s submissions. The alleged breaches of confidentiality by Mr Paxton were at worst minor slips. The alleged remark was made to a close friend of the chief executive of Vero. The remark, if it was made, is unlikely to be regarded as a serious breach of confidence.
[64] There may well also be an argument that the absence of default that is a prerequisite to a party exercising its termination powers under clause 10.2.4, must in itself be a default that is a “material breach”. I consider it likely that if there has been a default as alleged by a breach of confidentiality, that it was minor and not a substantial default.
[65] The evidence on these competing contentions could take some time to consider at trial. I have not heard that evidence but from the perspective I have at
present, I cannot conclude that this factor alone creates a serious question to be tried. It has the appearance of a makeweight, put forward by Vero to counterbalance the failure to obtain consent.
[66] There is nothing to indicate that further breaches of confidentiality are likely. Given the weak nature of the claim and the lack of any indication that an injunction is necessary to stop further breaches, I would have declined to grant an interim injunction relying on FIRM’s alleged breach of confidentiality as disentitling it to liquidate, if that were the only point raised. However, it is not necessary that I take this discussion further, given that I have already found that there are other serious questions to be tried.
Breach of dispute resolution provisions
[67] Clause 8 of the shareholders’ agreement provides that where a dispute arises, a dispute process must be followed before Court proceedings are commenced. Before it issued proceedings, Vero formally triggered the dispute procedure by designating a representative for negotiations in a letter to FIRM of 14 May 2007. Pursuant to clause 8.2 of the shareholders’ agreement the second party, FIRM, “shall” within five business days after receipt of that notice give written notice designating its representative. FIRM did not initially do so, asserting that because the position was straightforward and FIRM was correct, there was no “material matter in dispute” and so the dispute provisions could not apply.
[68] After receipt of that letter from FIRM, Vero issued proceedings. FIRM then, still within the five-day period, changed its mind, and wrote to Vero nominating a representative and indicating that it would participate in the dispute resolution process. Vero then wrote back declining to participate in the disputes resolution process.
[69] FIRM may well have been in the wrong in initially rejecting the dispute resolution process. However, it is not suggested that that action constituted repudiation. Once FIRM changed its mind and agreed to participate within the time limit, it was no longer in breach. It was Vero, then, who refused to follow the
dispute resolution process, asserting that it was too late. In doing this, Vero may well have been wrong to consider it was then excused from following the dispute resolution process it had invoked. It seems unlikely that FIRM’s brief and later corrected refusal to participate in dispute resolution would disqualify it from relying on clause 5.1, thus giving Vero an arguable case.
[70] However, given that I have already found that there are serious questions to be tried, I do not express any final view on the point. It can be observed that the parties’ failure (at different times) to engage in this dispute resolution process was surprising. A commercial dispute between joint venturers such as this is eminently suited to a negotiated solution through dispute resolution rather than the heavy hand of Court orders.
No repayment of the profit share advance
[71] Vero advanced $100,000 in profit share at FIRM’s request to FIRM in December 2006 on the basis of a certain anticipated profit. In fact the anticipated profit was not realised. FIRM does not deny that it must repay the money, but argues that it is not required to repay the money in one lump sum and may pay it off over a period of time. Vero argues that the email exchange recording this advance constituted a written variation to the shareholders’ agreement, and that FIRM’s failure to repay establishes a “default” disentitling FIRM from relying on any breach of clause 5.1.
[72] I find it hard to comprehend FIRM’s argument that it does not have to repay the whole overpayment, now that it has become clear that it was an overpayment. If a $100,000 advance is made on an anticipated profit and it is implied that the sum will be repaid if the anticipated profit is not realised, then it could be expected that the $100,000 will be repaid in the same way that it was paid; in a lump sum. Vero’s argument on this point appears strong.
[73] Of greater difficulty is Vero’s argument that the advance constituted a variation of the shareholders’ agreement, and that the failure to repay puts FIRM in default and therefore in a position where it cannot rely on termination and proceed to
liquidate. This is an awkward issue of contractual interpretation. In the absence of any specific agreement that it should be treated as a term of the shareholders’ agreement, it could be that the payment in advance was a collateral but stand-alone contract. It would be helpful to know whether there had been any former advances of this type, and, if so, on what basis they had been repaid. It is an area where the factual background to the advance will be of considerable relevance.
[74] Whatever the outcome on the construction point, FIRM is likely to be found to be at fault in not repaying the advance. It has offered no real excuse, save for its interpretation of the terms of the advance. The refusal to repay seems to be an uncharitable response to the favour it received from Vero.
[75] It is arguable that this failure to repay put FIRM in default. Whether such a default would prevent FIRM from relying on the breach of clause 5.1 and its right to liquidate is again difficult, but it is arguable. This is, therefore, a further serious question to be tried.
Conclusion on serious question to be tried
[76] When a Court considers an interim injunction application, on occasion it is possible to express a concluded view on a question of law. The Court may have sufficient confidence that all matters that could be raised for and against the proposition have been aired before it, and that the claim is clearly untenable. In such circumstances there is no serious question to be tried. On other occasions, factual propositions relied on by an applicant may be obviously wrong or without foundation, and a Court can have the confidence to put them to one side.
[77] That is not the case here. Vero’s arguments raise in the words of Lord Diplock in American Cyanamid, difficult questions of law which call for detailed argument and mature consideration. Some of them may require the consideration of further evidence. It is possible to see a tenable resolution of the issues of fact and law in favour of Vero. I consider that there are at least two serious questions to be tried, being no material breach, and breach of good faith in withholding consent under clause 5.1. There is a possible third question in relation
to the $100,000. Any of these, if established, would mean that it was unlawful for
FIRM to proceed to liquidate. The balance of convenience Competing scenarios
[78] In considering the balance of convenience, it is necessary to weigh the practical consequences of Court intervention or non-intervention at the present moment, against the practical consequences after the conclusion of the substantive proceedings, if a party has succeeded in showing that an injunction that was granted should have been declined, or that an injunction that was declined should have been granted.
[79] FIRM argues that the shareholders’ agreement always contemplated that in certain circumstances the agreement would be terminated and that Vero would take over the claims files, and the management of the policies. FIRM argues that Vero will be able to do this following liquidation, and will then be able to compete with any underwriter who might purchase the Axiom brand, or which could be set up with Mr Paxton on termination of the joint venture. FIRM asserts that the loss of the brand was always contemplated by the contract when the joint venture wound up. It submits that parties to relational contracts should not normally be ordered to continue the relationship when it has clearly broken down. It asserts that the necessary level of trust which is an essential component of such a relationship is gone. It submits that Vero is already making extensive preparations for an upcoming battle in the marketplace for the business of Axiom. FIRM points out that it is not free to prepare for that battle because of the undertakings that it has given. It will remain constricted if an interim injunction is granted.
[80] While there is force in all these submissions, they do not address the fundamental point that if FIRM is not restrained, Axiom, a company with a good reputation in the marketplace, goodwill, and a very successful business, will be ended by liquidation. Staff will have to be dismissed, although they may be re- employed by FIRM or a competing Vero venture.
[81] The insurance industry is sensitive to the reputations of insurers and brokers. Although the Axiom brand can be transferred, I am satisfied that the brand would be tarnished by liquidation. Goodwill would be lost, and staff will at the least suffer considerable disruption. Vero, if it failed to get an interim injunction but succeeded at trial, is unlikely to be able to resurrect Axiom. Mr Paxton accepted in his affidavit that it would cost Vero millions to rebuild or replace Axiom. Mr Grant Graham, an expert accountant who has filed an affidavit on behalf of Vero, confirms this. He notes that Axiom’s competitors will take full advantage of the uncertainty that will follow the liquidation. He is likely to be correct in his observation that the transfer of customer services will result in decreased customer service levels and considerable disruption to those customers, which will result in real damage to the Axiom brand.
[82] Once the company is placed into liquidation, the damage is done. It cannot be unwound if, at a later full hearing, it is found that liquidation should not have been initiated. The purpose of these proceedings, which is essentially to obtain contractual declarations as to the position between the parties and, if Vero is successful, thereby establish that there is no entitlement to liquidate, will be rendered nugatory. It will be too late. As against that drastic consequence, the inconvenience to FIRM in having to continue in Axiom is of less moment. If this injunction is granted the status quo continues and nothing changes. If the injunction is not granted, Axiom is liquidated and that can never be unwound. Axiom is changed forever.
Difficulty in ascertaining damages
[83] In the event of liquidation, and then that liquidation having been found to be wrongful at a later trial, it would be difficult to calculate damages for the loss suffered by Vero. At issue would be the value of Axiom’s goodwill, about which there is already serious disagreement between the deponents for Vero and FIRM. The evidence indicates that the commercial vehicle insurance market in New Zealand may be changing at present, and it would be most difficult to assess the effect of those changes on Axiom’s hypothetical future turnover if it were now liquidated.
[84] I appreciate that damages may also be difficult to calculate should an injunction be granted and FIRM ultimately be successful. FIRM would have been forced to continue for a longer period in an unsatisfactory relationship. It would have been unable to pursue other business opportunities. The losses arising would also be difficult to calculate.
[85] Therefore, damages are unlikely to be an adequate remedy to either party if, having lost this interim injunction round, that party is ultimately successful. They will certainly be difficult to ascertain.
Ability to pay damages
[86] I do consider it significant that Vero is clearly in a position to pay substantial damages should it ultimately fail at trial after having succeeded in an interim injunction application. It is a major New Zealand underwriter.
[87] FIRM cannot offer this comfort. It is a small private company. It has not provided details as to its financial position. FIRM’s only known assets are its software and its stake in Axiom, and its immediate income stream will end if the joint venture is terminated. There must be doubt whether it will have the financial means to meet any multimillion-dollar claim for damages which Vero might later bring if the contractual arrangements have been wrongly terminated, and Axiom liquidated.
[88] Given the possible substantial value of Axiom, in particular its goodwill, this is a significant matter that is in favour of the existing position being preserved pending a hearing.
Conclusion on balance of convenience
[89] On any overview it is my conclusion that the balance of convenience favours Vero. It is, after all, seeking to maintain the status quo. The granting of the injunction will keep a successful company employing 43 staff operating. Practically it makes more sense to hold the existing position until this case can be properly
heard, rather than to permit FIRM to liquidate Axiom and have the proceeding essentially turn into a damages claim. Such a damages claim would be against a company which, if it loses, may not be able to pay damages.
Overall justice
[90] Finally, it is necessary to stand back from the case and consider where the justice of the case lies. It must not be overlooked that Vero has proceeded with a change of control which, on its face, is in breach of clause 5.1, which provides that FIRM’s consent was required. It is possible that over recent years Vero has been acting harshly and uncooperatively to its joint venture partner.
[91] However, given Promina’s size, and the fact that the change of shareholding has had no immediate effect and may not have any effect in the future, Vero’s breach of clause 5.1 does not appear to have been an outrageous act of commercial malfeasance. Vero, as the subsidiary of one of the multinationals that control the insurance industry in New Zealand and Australia, is likely to have had little ability to halt or indeed influence in any way international developments and mergers, which will occur whatever the position of the New Zealand subsidiaries. It is not as if Vero has deliberately sought to flout the shareholders’ agreement, or offend its joint venture partner on this matter.
[92] On the face of the evidence, FIRM has sought to exploit this change of ownership to escape an unsatisfactory relationship by refusing to consent. Although it may have a contractual right to do so, FIRM is not in a position to claim any obvious moral high ground. While FIRM asserts that Vero has taken advantage of the shareholders’ agreement by refusing to allow it to share adequately in the profits of a highly successful enterprise, it has, however, in the meantime, at least had reasonable earnings from Axiom. It has also received a $100,000 advance, which it has not repaid.
[93] As I have noted, Vero seeks only to maintain the status quo. Caution must be exercised to not treat the “status quo” as a mantra. Plaintiffs in injunction applications more often than not can pray it in aid. Here, however, as with a case
where a building is about to be destroyed, a commercial edifice in successful existence for seven years faces destruction. Maintaining the existing state of affairs until a full hearing has the mark of common sense.
[94] I appreciate that this is a relational contract and parties who have fallen out badly are being required to continue to operate together. However, they have done so over the recent months, despite the dispute. It is clear that they do not need to work closely together. There is no need for a daily interchange or for continual pooling of resources, which is often a feature of such relationships. Vero essentially stands aloof from Axiom as the underwriter, while the day to day running is the responsibility of FIRM. Thus, no obvious short-term difficulties will arise if Axiom continues. I do not ignore the fact that Axiom employs 43 people. They will be able to retain their employment pending the outcome of the proceedings.
[95] Hopefully it will not be a long time before this fixture is heard and the issues are determined. The case certainly deserves priority and should ideally be heard within the next four to six months. If that occurs, FIRM will have to put up with an unsatisfactory relationship for a limited further period. It has, after all, had to put up with that relationship for some years, and it should be able to continue to fulfil its role in Axiom until the trial. If, on the other hand, no injunction is granted, Axiom will cease to exist and the joint venture will be over.
[96] I consider that the interests of justice are best served by the situation in existence since 2000 being maintained and by Axiom continuing in business.
Result
[97] The application for an interim injunction is granted. FIRM is restrained from taking any steps to place Axiom into liquidation pending the determination of the substantive causes of action.
[98] I consider that this case should have significant priority. The ongoing dispute leaves both parties in a state of total uncertainty as to the future of their commercial vehicle underwriting enterprises and affects a considerable number of innocent third
party employees. I direct that it should be placed before the List Judge with that recommendation.
Costs
[99] Vero has succeeded in obtaining an interim injunction. However, I consider it would be unfair to require FIRM to pay costs to Vero for this hearing at this stage. The issues are complex, and FIRM’s stance may ultimately be vindicated. I have refused to find that FIRM has breached confidentiality, so FIRM has been partly successful. FIRM has reasonably given interim undertakings pending the resolution of the interim injunction application. FIRM is the smaller party, seeking to extract itself from an unsatisfactory commercial relationship with a much bigger and more powerful commercial entity. To require FIRM to pay costs might disadvantage it by creating further financial pressure. In all the circumstances I consider in my discretion that costs should be reserved.
……………………………… Asher J
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