Webster v Ren
[2017] NZHC 479
•15 March 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-2496 [2017] NZHC 479
BETWEEN DAVID BASIL WEBSTER AND
FRANCES KIM WEBSTER Plaintiffs
AND
LI LIANG REN First Defendant
DARGAVILLE FARMS LIMITED Second Defendant
Hearing: 15 March 2017 at Whangarei Appearances:
S J Davies-Colley for Plaintiffs
R J Harte for DefendantsJudgment:
15 March 2017
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Webb Ross McNab Kilpatrick (W McKean/S J Davies-Colley), Whangarei, for Plaintiffs
Rob Harte Law, Whangarei.
WEBSTER v LI [2017] NZHC 479 [15 March 2017]
[1] The plaintiffs, the Websters, sue both defendants for $699,800.00 for shareholders’ advances made to the second defendant, Dargaville Farms Ltd. Mr Li, the first defendant, is a director of Dargaville Farms Ltd. The Websters have applied for summary judgment.
[2] They sue under a deed of 22 January 2016 called ‘Deed of Agreement for Sale and Purchase of Shares in Dargaville Farms Ltd’. They say that both defendants have breached the deed, they have cancelled the deed and they rely on their rights available following cancellation of that deed.
[3] The test for a plaintiff’s application for summary judgment is well established. The Court of Appeal restated the principles in Krukziener v Hanover Finance Ltd.1
[26] The principles are well settled. The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried. … The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated. … The Court will not normally resolve material conflicts of evidence or assess the credibility of the deponents. But it need not accept uncritically evidence that is inherently lacking in credibility as, for example, where the evidence is inconsistent with undisputed contemporaneous documents or other statements by the same deponent, which is inherently improbable. … In the end, the Court’s assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it.
[27] …[T]he defendant need not file a statement of defence. The onus remains on the plaintiff, and summary judgment will be denied if on the hearing of the application it appears that there is an issue worthy of trial.
(citations omitted)
1 Krukziener v Hanover Finance Ltd [2008] NZCA 187; [2010] NZAR 307 at [26] – [27].
Pleadings
[4] The Websters’ statement of claim alleges breach of the deed by both first and second defendants; alleges repudiation by the first and second defendants; pleads the giving of notice of cancellation; pleads that demand was made for the return of funds advanced; and that there was a failure to repay. The prayer for relief seeks judgment on liability, judgment for $699,800.00 plus interest and costs.
[5] In submissions, counsel for the Websters sought relief under s 9(2) of the Contractual Remedies Act 1979. I do not regard the pleading as including a claim under s 9(2) of the Contractual Remedies Act. Moreover, I do not regard an application under s 9 as necessarily being straightforward and capable of easy determination on a summary judgment application. Section 9(4) of the Contractual Remedies Act makes it clear that there are a range of matters to be taken into account. The court’s award is essentially discretionary. Summary judgment in a claim where the court has to exercise a discretion balancing various factors is different from a claim based on black-letter rules of law. In a claim where a court has to exercise a discretionary judgment, the court must be satisfied that all relevant factors have been identified and that the plaintiff has disposed of all available
options other than the one that the plaintiff is seeking.2 Because the pleading does
not adequately set out a claim under s 9 of the Contractual Remedies Act, and because I am not confident that all relevant matters have been identified for a s 9 claim, I will not deal with that aspect of the Websters’ application.
[6] The defendants’ notice of opposition says that the grounds on which they
oppose the application are:
(a) that they have a good defence to the claim; and
(b) as set out in the affidavit of Liang Ren Li filed in support.
The notice says that the defendants rely on rr 12.1 to 12.4 of the High Court Rules. Mr Harte has only recently been instructed and did not prepare the notice.
2 See Carey-Venable v Carey [2016] NZHC 2646 at [4]-[6].
Under r 7.24 a notice of opposition is required to state the grounds of opposition and any particular enactments or principles or judicial decisions on which the respondent relies. That means that affirmative defences must be identified. Facts on which the respondent relies must be pleaded.3 A general plea of “having a good defence to the claim” is not adequate. The grounds of opposition need to be particularised so that the matters truly in issue are identified for both the plaintiff and the court. The most
that I can make of the notice of opposition is that the defendants are, in effect, putting the plaintiffs to proof and saying that they have not made out a proper case for summary judgment on their application. Mr Harte accepted that that was the defendants’ position.
Background
[7] Indirectly through various companies, Mr and Mrs Webster owned three dairy farms in the Dargaville area: at Bee Bush Road, Arapahoe, owned by Beejay Stud Ltd; at Mititai Road, Waiotira, owned by Clear Ridge Station Ltd; and at Arapohue Road, Aropohue, owned by Ridgeview Farms Ltd. The farms all needed significant infrastructure upgrades, including upgrade to races and effluent systems. Recently the farms had been prosecuted for effluent discharges under the Resource Management Act and had been fined heavily. Each company ran an operating dairy farm with dairy company shares, livestock, plant and equipment. Some of the plant and equipment was owned by other companies.
[8] Mr Li Liang Ren is Chinese but has lived in New Zealand since 1995. He is an Auckland businessman. He has forest and farm investments, but has no practical knowledge of dairy farming.
[9] During 2015 the Websters and Mr Li negotiated the sale and purchase of the farms. The Websters were keen to maintain a connection and to have some on-going management of the farms. Likewise, Mr Li was apparently not to be involved in the day-to-day management of the farms – clearly in the light of his lack of experience
in dairy farming.
3 Alderton & Kingston Nominees Ltd v MacDonald (1988) 1 PRNZ 550 (HC).
[10] The settlement of the sales of the farms took place on 29 January 2016. That transaction involved a number of agreements. On 11 December 2015, there was an offer letter and a separate document called “Confidential Terms of Offer”. The parties were Mr Li on the one hand, and the Webster Group - identified as Mr and Mrs Webster as trustees of their family trust and the three farm-owning companies. Under these agreements, Mr Li was to pay $17 million. That was to be applied as to
$11 million to the purchase of the farm properties; as to $3.3 million to the purchase of dairy company shares; and as to $2.7 million for a 70 per cent shareholding in a new company to be formed. The Websters were to advance $1 million for a 30 per cent shareholding in that company. That company was to use the $3.7 million to buy the livestock, plant and equipment on the three farms. Mr Li would lease the farm properties to the new company for an initial term of five years, at a fixed rental per grazeable hectare. The lessee was to be responsible for fertiliser, weed control, plant maintenance, race maintenance, fence maintenance. The farms were to be maintained to the standard of rural leases in the district. Mr Li would own the dairy company shares, and the dividends would be paid to him, but he would instruct the dairy company to pay 100 per cent of the milk payments to the new company. Mr and Mrs Webster were to manage the day-to-day running of the farms for five years, unless otherwise agreed and reviewed in five years.
[11] The farm properties were sold without vendor warranties. Mr Li acknowledged in the confidential terms of offer that he had been advised that the company would be required to invest approximately $1.8 million into farm infrastructure over the next 18 months. The new company was formed – that is, Dargaville Farms Ltd, the second defendant. On incorporation on 21 December
2015, Mr Li was the sole owner of the 1,000 shares. The Companies Office records now show that the shares are held: 800 by Mr Li and 200 by Webster Family Management Ltd. Webster Family Management Ltd is a company established by the Websters. That company not only held shares in Dargaville Farms Ltd but it was also the vehicle through which the Websters provided management services to Dargaville Farms Ltd.
[12] The change from a 70/30 per cent shareholding in the initial agreements to the 80/20 per cent shareholding came about because the Websters could not come up
with $1 million. They could contribute only $700,000.00. This change led to the
Deed of Agreement for Sale and Purchase of Shares in Dargaville Farms Ltd dated
22 January 2016. That is the deed which is the basis for the plaintiffs’ claim in this case. The parties to the deed are Mr Li, the Websters and Dargaville Farms Ltd. Under the agreement Mr Li, as holder of 1,000 shares in the company, agreed to sell
200 shares to the Websters for $200. Mr Li agreed to make advances to the company of $2,299,200.00. He would also pay $800.00 as capital – that is, his input in equity and shareholders’ advances would come to $3 million. The Websters, in addition to paying $200 for the shares, made an advance to the company of $699,800.00 making their contribution $700,000.00.
[13] The deed has this indemnity provision:
6.3 Indemnity
Each party will at all times indemnify the other party in respect of any loss, damage or cost including consequential loss or damage suffered or incurred by the other party as a direct or indirect result of a breach by the first party of any Vendor Warranty (if applicable) or any other obligation of the first party contained or implied in this Agreement.
[14] Under the deed, Mr Li and the Websters undertook to negotiate in good faith to agree the terms of a shareholders’ agreement. In the interim, they agreed to matters set out in the schedule to the deed. The schedule contains these provisions:
1. The board of the Company shall comprise a maximum of three directors.
The Vendor shall have the right to appoint and remove up to two of those directors and the Purchaser (or nominee) shall have the right to appoint or remove up to one of those directors.
2 The terms of this Schedule prevail over any terms of the Constitution which conflict with or are inconsistent with the terms of this Schedule, and the parties will take all steps and sign all documents necessary to amend the Constitution if requested by any party to remove any such conflict or inconsistency.
3 The Vendor and the Purchaser shall procure and ensure that any director appointed by them to the Company’s board of directors shall act in the best interests of the Company, in preference to the interest of the shareholder that appointed that Director.
4 The Company may not engage (and the Vendor and Purchaser shall take all steps to procure that the Company does not engage) in any of the following activities or determine any of the following matters without the prior written approval of all of the shareholders in the Company:
…
(b) the guarantee the indebtedness of any person or provide security in relation to the indebtedness of any person other than the Company;
…
(d) repay all or any of the advances made by any shareholder other than in a pro rata manner
5 No interest shall be paid on advances made by the shareholders to the Company provided there are no tax issues for the shareholders or the company with that position. … All advances made by shareholders to the Company shall be treated equally and where any repayment of an advance is agreed by the shareholders, unless agreed otherwise advances will be repaid pro-rata in proportion to the percentage that each of the shareholders’ advances compares to total advances made by all shareholders.
[15] The Websters’ case is that the defendants have breached the provisions in Schedule 1. I will deal with breaches later, but I make some observations about some of the terms of the schedule.
[16] Under cl 1 the vendor, Mr Li, can appoint and remove up to two directors and the Websters can appoint and remove up to one director. To make business sense of that, the party removing a director can remove only a director appointed by it. There is no right under cl 1 to remove a director appointed by the other party. While the words taken literally might allow one party to remove another party’s director, it makes better business sense that each shareholding group has a defined right to appoint and remove particular directors.
[17] As to the advances made under the agreement, both groups of shareholders are unsecured and rank equally in any insolvency. Before any insolvency, any repayment of advances is to be made pro rata according to each group’s respective contributions. That follows from cl 4(d), and also from cl 5, which provides that advances by shareholders are to be treated equally and also deals with pro rata distribution. When there is no agreement among shareholders as to repayment, the default position is that any shareholder may on demand require repayment of
advances.4
4 United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 (CA) at [38]-[39].
[18] Mr Harte submitted that this right to make demand at any time also applies under cl 4 and cl 5. From a practical point of view I do not regard that as the case. Mr Li and the Websters were involved in a venture together. The agreement of both groups is required for any advances to be repaid. Any unilateral demand by one shareholder requiring repayment of all or part of their advances would be resisted by the company and the other shareholder, unless the other shareholder also agreed with the repayment so that pro rata distribution could be maintained.
[19] There were other agreements made at the same time. Each of the farm- owning companies – that is, Ridgeview Farms Ltd, Beejay Stud Ltd and Clear Ridge Station Ltd – entered into agreements to sell their livestock to Dargaville Farms Ltd. Mr Li says that under those agreements the total livestock sold was 4,487 head. There was also an agreement for sale and purchase of farm plant and machinery by Bas-Lyn Farms Ltd, Ridgeview Farms Ltd, Beejay Stud Ltd and Clear Ridge Station Ltd and Louda Farms Ltd to Dargaville Farms Ltd.
[20] Mr Webster was appointed the director of Dargaville Farms Ltd so he is the purchasers’ director under cl 1 of the schedule. Mr Li remained the other director. At that time Mr Li did not exercise any power under the schedule to appoint another director.
[21] As noted, the shares the Websters bought under the deed of agreement for sale and purchase of the shares were taken in the name of Webster Family Management Ltd. That company is also the vehicle through which the Websters provided their management services to Dargaville Farms Ltd.
[22] I note these relationships established at the end of January 2016:
(a) Mr Li and Webster Family Management Ltd are shareholders of Dargaville Farms Ltd and all three are bound by the deed of agreement for the sale and purchase of shares at 22 January 2016.
(b)Mr and Mrs Webster personally made advances to the company – that was a creditor/debtor relationship.
(c) Mr Li made advances to the company, but through his family trust.
That is also a creditor/debtor relationship. The provisions of the deed of agreement for sale and purchase of the shares which refer to Mr Li’s advances refer equally to the advances he made through his family trust. The family trust appears to be no more than a vehicle he used to make advances. His evidence is consistent with his treating the family trust advances as his own advances.5
(d) Mr Li and Mr Webster are both directors of Dargaville Farms Ltd.
Each owed the company duties as directors under the Companies Act, at common law and at equity.
(e) As mentioned, Mr and Mrs Webster provided management services to Dargaville Farms Ltd through their company, Webster Family Management Ltd, an independent contractor. There was no employment relationship.
(f) Dargaville Farms Ltd leased the farms from Mr Li’s family trust.
That was a landlord/tenant relationship.
While Mr Li was clearly the dominant partner in this venture, the Websters still had a role. They were still to be involved in ongoing management of the farms and they also had a financial stake in the venture through the $700,000 that they had contributed.
[23] During 2016 Mr Li and the Websters fell out. Mr Davies-Colley pointed out a matter well-known throughout the country that during 2016 the dairy pay-out prices were in decline. That had affected the returns to the farms. The Websters see Mr Li’s disappointment with them as dissatisfaction with the decline in returns he was receiving from the farm, after having made a very significant investment. On the other hand, Mr Li clearly has lost all trust and confidence in the Websters. Mr Li is suspicious that Dargaville Farms Ltd did not receive the 4,487 head of stock on
settlement of the purchase at the end of January 2016. He is also suspicious that
5 Mr Li’s affidavit, paragraphs [45] and [47].
either before or after settlement the Websters disposed of stock without accounting to Dargaville Farms Ltd. In particular, he focuses on the Websters’ sale of 89 bulls in December 2015. There is considerable evidence as to livestock numbers and accounting for livestock movements, disposals and deaths. The Websters point out that on settlement of the purchase, Mr Li chose not to have a stock-take. They say that stock numbers can be accounted for. They deny any wrongdoing. Mr Li alleges that missing livestock is worth about $700,000. The Websters say that if there any missing livestock, the value is much less than that.
[24] Mr Li alleges mismanagement by the Websters. He gives evidence as to animal welfare and environmental issues. He refers to the heavy fines imposed on the Websters’ farm companies for effluent discharges. He also says that the farms were over-staffed. Mr Webster was required to manage the farms of Dargaville Farms Ltd full time but he is suspicious that Mr Webster was in fact helping with another farm called Twin Coast, in which he had an interest. Mr Li holds Mr Webster responsible for a shortfall in machinery when some items were found missing after a stock-take was carried out.
[25] I do not intend to traverse all the evidence. I record that the Websters do provide answers to these matters. They point out that Mr Li knew when he took over the farms that a considerable investment in infrastructure upgrading was required. They also refer to his inexperience in dairy farming.
[26] Mr Li says that he has made further advances of $500,000 to the company, and that Dargaville Farms Ltd has not been paying rent under the lease. The outstanding rent was now about $300,000 and the company has been running at a loss.
[27] For summary judgment purposes, I record these as a background to what Mr Li did, given his dissatisfaction with the Websters. I do not make any findings as to who is in the right and who is in the wrong in relation to these matters. Those are fact-specific matters which would require a full hearing on the merits and are not suitable for summary judgment disposal.
[28] On 22 June 2016 Mr Li, as director of Dargaville Farms Ltd, gave notice to Webster Family Management Ltd terminating the management contract immediately. In this proceeding the Websters do not contest termination of that contract.
[29] On 22 July 2017 Mr Li gave written notice of a shareholders’ meeting of
Dargaville Farms Ltd to be held in Auckland on 10 August 2016. The agenda was:
1 removal of David Basil Webster as director;
2 appointment of Judy Wan-Jou Chiang as director;
3 approve execution of general security agreement in favour of the Li Liang
Ren Family Trust (that was to be a special resolution); and
4 to consider matters raised in general business.
[30] The Websters did not attend the meeting. The meeting went ahead on
10 August 2016. Only Mr Li attended. Resolutions were passed for Mr Webster to be removed as director, Ms Chiang to be appointed director and for the company to give a general security agreement to secure advances made by the trust to Dargaville Farms Ltd.
[31] In response on 31 August 2016 lawyers acting for the Websters wrote to Mr Li and Dargaville Farms Ltd giving notice of cancellation of the deed of agreement for the sale and purchase of shares, and demanding repayment of the advance of $699,800.00.
[32] Mr Li sent an email on 1 September 2016. He accused the Websters of stealing 800 cattle and refused to deal with other matters. He threatened to report the Websters to the Police.
Cancellation of the deed of agreement for sale and purchase of the Dargaville
Farms Ltd shares
[33] To justify their cancellation of the deed of agreement for sale and purchase of the shares, the Websters say that Mr Li has repudiated under s 7(2) of the Contractual
Remedies Act 1979. They say that the terms he has breached are essential and that there is also a substantial breach under s 7(4) of the Contractual Remedies Act. It is possible to cancel a contract only if it is in force. While the deed provided for the sale and purchase of shares and that purchase settled, the agreement contains a non- merger clause. The provisions of the deed as to the shareholders’ agreement, including schedule 1, are clearly intended to continue in force after settlement of the purchase. While Mr Li had apparently lost all trust and confidence in the Websters, he did not cancel the deed. It therefore remained in force up to 31 August 2016. It was capable of being cancelled for breach on that date.
[34] In written submissions, Mr Li conceded breach of contract but during the hearing Mr Harte wavered on that and took issue with some of the allegations of breach of contract. The breach allegations go to the removal of Mr Webster as director, and to the granting of the general security agreement to Mr Li’s family trust.
[35] As I have pointed out, cl 1 of the schedule to the deed allows each shareholder group to appoint and remove their own directors. It does not give a power to remove a director appointed by the other group. Accordingly, Mr Webster could be removed only by Mr and Mrs Webster; he could not be removed by Mr Li. Mr Li’s exercise of his voting power at the meeting on 10 August to remove Mr Webster as director was a breach of cl 1.
[36] The general security agreement in favour of Mr Li’s family trust gave Mr Li security over his advances while leaving the Websters unsecured for their advances. In doing that, Mr Li preferred his own interests over those of the Websters. He was involved in passing the resolution – and that involved a breach by him. I also find that it was a breach by the company, because by giving security to Mr Li and his family trust without providing equal security to the Websters, the company treated the advances by shareholders unequally, contrary to cl 5. Mr Li was making sure that on any insolvency his family trust would be the secured creditor, and the Websters would be left as unsecured creditors. That meant that there would not be a pari passu distribution. Equally, if the Websters had to enforce the debt before any insolvency, they would be confronted with the family trust’s prior rights as secured creditor. That, in my view, amounts to breaches of cl 5 of the deed by both Mr Li
and the company, as well as a breach by the company of the requirement for pari passu distribution in cl 4. Mr Harte took issue with the way that the breaches had been pleaded in paragraph 16 of the statement of claim. That pleading is not to be read in the rather pedantic fashion that Mr Harte suggested. The pleading is that both were involved in breaches although the way the breaches were carried into effect involved actions by the first and second defendant separately.
[37] Mr Li does not attempt to justify the actions of the defendants. He does not, for example, say that he was entitled to remove Mr Webster for cause. He does not assert any breach of the deed by the Websters. If there has been any breach of the management contract, that may give Dargaville Farms Ltd remedies against the Webster Family Management Ltd but it does not give Mr Li a remedy under the deed of agreement for sale and purchase of shares.
[38] The defendants’ submission in part was that Mr Li’s actions at the shareholders’ meeting on 10 August 2016 were ineffective. The Websters have suffered no harm, and therefore they have no right to cancel. I understand that submission to be that the resolution had no validity at all and would not stand up to judicial scrutiny – and would probably not withstand scrutiny by a liquidator if the company went into liquidation (at least so far as the general security agreement applies to past advances).
[39] It is necessary, however, to take into account the practical effect of the resolutions. Mr Li has had the Companies Office records changed to show that Mr Webster is no longer a director of the company and that Ms Chiang has been appointed in his place. Mr Webster cannot for all practical purposes exercise any of the powers of a director of the company. He could not realistically hold himself out as continuing to be a director of the company. Similarly, any general security agreement will have practical effect unless the Websters take steps to have it set aside. So the practical effects of what Mr Li did on 10 August 2016 are that the Websters no longer have any role in the running of Dargaville Farms Ltd and he has taken priority over them for advances made to the company, whereas before they were ranked pro rata with Mr Li and his family trust.
[40] Given Mr Li’s evidence that the company is struggling financially, his preference for his advances means that the Websters are likely to have little or no freeboard for their advances. In my judgment, the loss of the directorship and the loss of parity for the advances have substantially reduced the benefit of the deed to the Websters. It gives them ground to cancel under s 7(4)(b) of the Contractual Remedies Act.
[41] Mr Davies-Colley also relied on breach of an essential term. I do not regard it as necessary to go into that aspect, as I am satisfied that the breaches do have substantial effect under s 7(4). Care is needed with submissions as to an essential breach. It can be too easy at times to find that the parties might not have entered into an agreement but for the particular term relied on.
[42] I come back to the practical effect of Mr Li’s actions. If the Websters would still have to take steps to undo Mr Li’s actions, that might require taking action in court. But any remedial steps they took would involve them affirming the contract notwithstanding the breaches. There is no obligation on the Websters to affirm the contract after breach. The Contractual Remedies Act gives them a choice. If the breach does have substantial effect, they are entitled to cancel.
[43] If there were anything in Mr Li’s submission that what the defendants did was ineffective, the Websters would still be entitled to cancel under s 7(2) of the Contractual Remedies Act because the defendants’ actions amounted to repudiation of the deed. Under that subsection a party may cancel a contract if by words or conduct another party repudiates the contract by making it clear that he does not intend to perform his obligations under it or, as the case may be, to complete such performance. If Mr Li’s deliberate actions were effective – and I have found that they were practically so – they would allow cancellation because they would reduce the benefits of the contract substantially to the Websters. If the same actions were deliberately carried out but they were ineffective, they would still show an intent on Mr Li’s part – and by attribution, the company’s – not to abide by the contract. Mr Li clearly wanted to oust the Websters from any decision-making and management and to prefer his trust’s position over theirs. His position is shown in his affidavit at paragraph 50:
I believe I had no choice other than to remove David Webster as a director and to stop all involvement he had in the management and operation of Dargaville Farms Ltd.
Clearly, he no longer intended to be bound by the deed. Given that repudiation, the Websters were entitled to cancel. For completeness, I find that the letter of the Websters’ lawyers of 31 August 2016 did give proper notice of cancellation.
The effect of the cancellation
[44] At the start of this section I come back to the point I made at the beginning of my judgment, that there is no claim for relief under s 9 of the Contractual Remedies Act. Both the plaintiffs and the defendants referred to the court’s powers to give relief under s 9. I do not regard the matters as properly raised on the pleadings, and I would not enter into enquiry as to relief under s 9 given the number of variables available. Instead, I make the point that under the Contractual Remedies Act claims for damages are available notwithstanding any relief that might be available under s 9. That is clear from s 8(4), s 9(3) and s 10(1):
8 Rules applying to cancellation
(4) Nothing in subsection (3) shall affect the right of a party to recover damages in respect of a misrepresentation or the repudiation or breach of the contract by another party.
…
9 Power of court to grant relief
(3) Any such order, or any provision of it, may be made upon and subject to such terms and conditions as the court thinks fit, not being in any case a term or condition that would have the effect of preventing a claim for damages by any party.
…
10 Recovery of damages
(1) Subject to sections 4 to 6, a party to a contract shall not be precluded by the cancellation of the contract, or by the granting of relief under section 9, from recovering damages in respect of a misrepresentation or the repudiation or breach of the contract by another party; but the value of any relief granted under section 9 shall be taken into account in assessing any such damages.
[45] Perhaps because of the s 9 issue Mr Harte took the Websters’ position as one seeking cancellation ab initio, as though the Websters wanted to be restored to their original position as in a claim for rescission. Cancellation under the Contractual Remedies Act operates prospectively. The parties are not returned to their original positions. See s 8(3):
Subject to this Act, when a contract is cancelled the following provisions apply:
(a) So long as the contract remains unperformed at the time of the cancellation no party shall be obliged or entitled to perform it further.
(b) So far as the contract has been performed at the time of the cancellation no party shall, by reason only of the cancellation, be divested of any property transferred or money paid pursuant to the contract.
[46] Up until cancellation of the contract, the Websters were subject to constraints on repayment of their advances. That is because the advances had to be treated equally with those made by Mr Li’s family trust. The practical effect of that was that they could not withdraw money out of the company without the co-operation of Mr Li. Effectively, their money was locked in pending agreement with Mr Li for repayment and on any repayment they would share pro rata with his family trust.
[47] Now that the agreement is cancelled, those restrictions no longer apply. There is still a creditor/debtor relationship between the Websters and the company. But their advances no longer rank pro rata with Mr Li’s. The Websters are not beholden to Mr Li to obtain his agreement for repayment of advances. They are, instead, entitled to ask for their advances to be repaid upon demand. That is a liability sounding in debt which remains enforceable notwithstanding the cancellation. That means that the Websters are entitled to judgment for the
$699,800.00 against Dargaville Farms Ltd. I am satisfied on the summary judgment test that Dargaville Farms Ltd does not have any defence to the claim for repayment of the Websters’ advances.
[48] For completeness, I record that Dargaville Farms Ltd has not raised any other defences to the claim for repayment. It has not raised any set-offs under the shareholders’ advance account. It has not alleged any breaches of other contracts by
way of equitable set-off. If it were to allege breaches of the management contract it would run into problems of mutuality because the management contract is with Webster Family Management Ltd, not with the Websters personally.
The claim against Mr Li
[49] Under the deed of agreement for sale and purchase of shares Dargaville Farms Ltd is the debtor, not Mr Li. The Websters accordingly do not have a direct claim in debt against Mr Li. The question is whether they have an alternative claim. The Websters refer to the indemnity provisions in cl 6.3. There are also damages at common law.
[50] I begin with damages at common law. Before the meeting of 20 August
2016, the face value of the debt was $699,800.00. If the debt had been called up, the Websters might not have received payment in full. That is because of Mr Li’s evidence showing that Dargaville Farms Ltd was trading at a loss. Even if Mr Li had not arranged for the general security agreement in favour of his family trust, a pro rata distribution may not see the Websters paid in full. On a summary judgment basis, the Websters have not shown that before the general security agreement they would have been paid in full but for the general security agreement. With the general security agreement, they stand to be paid even less. The reduced payment they might receive by reason of the general security agreement goes to the loss that they have incurred as a result of Mr Li’s breach of the deed of agreement for sale and purchase of shares in procuring the general security agreement. That loss is recoverable as common law damages. Those damages are unliquidated, and it is not possible on the evidence in this application to work out what those damages are. Those damages may only be able to be calculated either after there has been disclosure of the company’s finances or after the Websters first try to enforce their judgment against Dargaville Farms Ltd. At this stage I can only indicate the availability of damages.
[51] The Websters say that they have a better argument under cl 6.3 of the deed. They say that under it, Mr Li is required to indemnify them for any loss, damage or cost as a result of any breach by him of any obligation in the agreement.
[52] I accept that breaches of the provisions in the schedule are breaches of obligations for the purpose of cl 6.3. But in my judgment, the indemnity clause goes no further than providing that to the extent that any breach by Mr Li has caused loss, he is to indemnify the Websters. He is not, however, required to indemnify them for losses that they would inevitably incur regardless of any breach of contract by him. That is, cl 6.3 does not cover any shortfall in recovery by the Websters that they might suffer had Mr Li not breached the contract. Any shortfall they would have suffered on recovery as at 9 August 2016 is not a loss caused by Mr Li. For these reasons I do not regard the indemnity clause as taking the Websters’ position any further than they would recover for common law damages.
[53] I note these matters as well. Mr Li has not pleaded any set-offs – and I have not been required to take into account any set-off arguments in this case. But through Mr Harte the defendants have indicated an intention to bring separate proceedings against the Websters. He referred to potential counterclaims. Mr Li and Dargaville Farms Ltd remain free to bring separate proceedings against the Websters or against Webster Farm Management Ltd for any remedies that Mr Li and Dargaville Farms Ltd consider they might have. The fact that they were not raised as defences to the application for summary judgment does not bar them from running separate proceedings for them. The entry of summary judgment against them on this application does not bar them from bringing their own separate proceedings against
the Websters on a later occasion.6
Outcome
[54] I make these orders:
(a) I give judgment to the Websters against Dargaville Farms Ltd for
$699,800.00 and interest on that sum from 15 September 2016 until the date of judgment at the rate of 5 per cent, under s 87 of the Judicature Act 1908. I have taken that start date for interest so as to allow reasonable time for Dargaville Farms Ltd to respond to the
demand of 31 August 2016.
6 Ace-Kirker v Piper [2017] NZHC 226 at [37]– [46].
(b)I give judgment to the Websters against Mr Li on liability for breach of contract, but the question of damages is reserved for decision later.
(c) I grant the plaintiffs scale costs, category 2, band B. If counsel cannot agree costs memoranda may be filed and I will decide costs on the papers. The Websters sought costs on a solicitor/client basis, relying on cl 6.3. Such indemnity clauses are not normally treated as providing for payment of solicitor/client costs. Normally scale costs apply. Mr Davies-Colley sought increased costs under r 14.6. While the defendants have been unsuccessful, the matters they raised do not require any increase in costs.
(d)I adjourn the summary judgment application to be called in the summary judgment list on Monday 1 May 2017 at 10:00am. The purpose of that call is to give case management directions for the matters that I have not decided, that is, the amount of any damages claimed against Mr Li. I encourage the parties to confer as to directions. In particular it would be helpful if the parties could confer as to the terms of any discovery orders to be made. An Associate
Judge has jurisdiction to determine damages.7
………………………………………
Associate Judge R M Bell
7 Senior Courts Act 2016, s 20(f).
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