FOREST HOLDINGS (NZ) LIMITED v SHEUNG [2021] NZCA 608

FOREST HOLDINGS (NZ) LIMITED v SHEUNG [2021] NZCA 608 [17 November 2021]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA416/2020[2021] NZCA 608BETWEEN FOREST HOLDINGS (NZ) LIMITEDAppellantAND THEAN KAI SHEUNGRespondentHearing: 1 November 2021Court: Kós P, S France and Katz JJCounsel: K I Bond for AppellantNo appearance for RespondentJudgment: 17 November 2021 at 9 amJUDGMENT OF THE COURTA The appeal is dismissed.B There is no order for costs.____________________________________________________________________REASONS OF THE COURT(Given by Kós P)[1] The question in this appeal is whether judgment should have been given(by formal proof) for specific performance of a joint venture agreement to manage andmill a forest. The High Court Judge found the agreement unenforceable. Differing inpart, we find the agreement enforceable, and the defendant to be in breach, but wedismiss the appeal because specific performance is not an appropriate remedy here.Background[2] Forest Holdings owns forestry rights for a 25-year term over a 618-hectareproperty at Hanga Road, Kaimai. The forest contains rimu and tawa timber.Forestry Holdings sought a co-investor. Its sole director and shareholder,Roderick Scott, a man with some 35 years' experience in the industry, prepared aninvestment proposal. It involved the establishment of a joint venture. Mr Scott wouldmanage it, undertaking the harvesting, timber milling, kiln drying, timber processingand local market sales of the wood produced. The investor's role would be passive,but would hold 50 per cent of the forestry rights in exchange for an investment of$1.17 million. The project thereafter would self-fund.[3] In June 2017 a business associate of Mr Scott's, Ms Chee Kin "Esther" Sum,sent the investment proposal to Mr Sheung, who also goes by the name Zax. At thatstage the proposal involved the establishment of a new company, Pristine Timber CoLtd, with its shares to be held 40 per cent by Mr Sheung, 10 per cent by Ms Sum and50 per cent by Mr Scott. Mr Sheung subsequently entered the joint venture, but ondifferent terms to those originally proposed.[4] The joint venture agreement is between Forest Holdings, Pristine Timber andMr Sheung. Ostensibly dated 29 August 2017, it in fact was executed by Mr Sheungon 6 October 2017. The essential thrust of the agreement is set out in the recitals:A. [Forest Holdings (FHL)] is the holder of a Forestry Right in relationto the Land and FHL wishes to enter into an agreement with [PristineTimber (PT)] to jointly own the Forestry Right and fund business toundertake maintenance, harvesting and sale of the timber producedfrom the Land.B. PT operates a business which provides forestry investment servicesand [Mr Sheung (TKS)] agrees to provide the funds to PT for thepurchase of the Forestry Right.C. Chee Kin Sum agrees to transfer 90% of PT shares to TKS and toappoint TKS as Director of PT.D. PT is entering the Agreement to purchase 50 percent of the ForestryRight from FHL for the sum of NZ$1,170,000 (one million onehundred and seventy thousand dollars.)E. FHL and PT have agreed to form a joint venture in order to purchasethe Forestry Right and carry out the maintenance, harvesting and saleof the timber on the Land.F. The parties have entered into this Agreement to set out the terms ofthe establishment and conduct of the affairs of this joint venture andthe parties' mutual undertakings, obligations and intentions in relationthereto.[5] The following for present purposes are important clauses of the agreement:2. Establishment of Joint Venture2.1 This Agreement shall commence upon its execution by the parties andFHL receiving in its NZ ASB bank account NZ $1,170,000 (onemillion one hundred and seventy thousand dollars) plus GST ifapplicable in cleared funds. The parties agree this will occur on orbefore 29 September 2017. It shall terminate in accordance withclause 9. Chee Kin Sum will transfer 90% of PT shares to TKS andwill appoint TKS as Director of PT on the same day payment is madeto FHL for the forestry right as provided for in this clause.2.2 The Joint Venturers hereby establish a joint venture in accordancewith the provisions of this Agreement for the purpose of pursuing theBusiness.2.3 The Joint Venture shall operate as from the Commencement Date andthe Joint Venturers shall conduct themselves in relation to the JointVenture and this Agreement for the maximum commercial advantageof the Joint Venture and the Joint Venturers (as a group) consistentwith prudent commercial practice and the laws of New Zealand.[6] Unhelpfully, the definition of "Commencement Date" is "the date referred toin clause 2", a circular non-definition. The agreement appears to be based on aproperly drafted legal precedent, but thereafter modified by the parties themselves.This has created a number of problems.[7] There are also provisions regarding variation of the agreement. Two arerelevant:17. Variation17.1 No modification, alteration of or addition to this Agreement shall bebinding on the parties unless in writing and signed or acknowledgedby each of the parties.23. Entire Agreement23.1 This Agreement constitutes the sole understanding of the JointVenturers with respect to the subject matter hereof and supersedes allprior understandings, written or oral, which shall be of no further forceor effect. No modification, alteration or waiver of the terms of thisAgreement shall be binding unless the same shall be in writing datedsubsequent to the date of this Agreement and duly executed by boththe Joint Venturers.[8] Despite having executed the agreement, Mr Sheung failed to make payment ofthe sum required by it. The circumstances are set out in an affidavit sworn by Ms Sum,which we set out so far as relevant:Attempts to make payment of the Purchase Price8. After signing the JVA, Zax told us that he intended to make paymentof the Purchase Price as soon as possible and that he was just facinglogistical difficulties in getting the funds transferred to New Zealand.For example, on 25 September 2017, he informed me that he had beento his bank in Malaysia and attempted to transfer the funds toNew Zealand in anticipation of paying the Purchase Price but hadbeen unsuccessful.9. Rod and I continued to wait patiently and Zax always had anexplanation for why he had not made payment as promised. Most ofthe difficulties seemed to arise from difficulty getting the money outof China. However, in or about late October 2017 he also told us thathe had had a heart attack in Shanghai and went in for an angioplastyto have a [stent] inserted in his artery. He told us there were problemswith the angioplasty procedure he had had done in Shanghai, and thathe needed to get it re-done in Kuala Lumpur. Throughout theseconversations, Zax continued to indicate that he would be makingpayment as soon as possible. For example, on 13 December 2017, hesent me a text message, saying:Do tell Rod went [sic] I'm able to come off bed I'llprioritize his matter first.10. After his procedure and recovery, Zax returned to China to try totransfer the Purchase Price from China to New Zealand. Zax operateda property and industrial business there. However, on 16 February2018 Zax told me that he had not been successful in transferring thefunds and that he was actually detained by Chinese authorities fortransferring funds out of China without paying tax and not declaringprofits in his Chinese company. I understand that Zax's passport wasconfiscated and he was required to pay a fine before the Chineseauthorities would return it to him and allow him to travel. I understandthat he paid the fine and his passport was returned to him. I do notknow exactly what happened after that, but I am aware that Zax is nowback in Kuala Lumpur so assume that he was able to resolve issueswith the Chinese authorities.11. From about early October 2018, Zax simply stopped responding tomy correspondence, and I have not heard from him since then.[9] In addition, there was before us an email sent by Mr Sheung to Mr Scott on7 September 2018 which states in relevant part:As I mentioned once settle here I'll go back to KL and hv organize my accountthere then can deliver the 50% to u and balance 50% within another 10 days.[10] Demand was made of Mr Sheung in Malaysia, requiring payment of the$1.17 million by 19 November 2018. No such payment was received.[11] It will be apparent from the nature of the claim that the contract has not beencancelled by Forest Holdings. Rather, Forest Holdings seeks performance ofMr Sheung's obligations by means of an order for specific performance. It must be aprecondition for that remedy that the other contracting parties are ready, willing andable to perform their contractual obligations.[12] Forest Holdings commenced proceedings in the High Court at Hamilton inMarch 2019. The primary claim was for specific performance of Mr Sheung'sobligation to pay the sum of $1.17 million. Forest Holdings also advanced analternative cause of action for damages based on profits that would have been earnedhad the joint venture commenced in October 2017. That claim was based on a losscalculated at approximately $21,000 per month, which was sought up until the datethe $1.17 million was paid.[13] Forest Holdings sought summary judgment on the basis of the first cause ofaction only. In July 2019, Associate Judge Smith raised concerns as to whetherMr Sheung owed any direct obligation to Forest Holdings at all, or whether hisobligation was in fact to pay the $1.17 million to Pristine Timber (who would then paythe money onto Forest Holdings). The Associate Judge also expressed some concernabout whether summary judgment was appropriate for specific performance, givenother interdependent obligations associated with payment. In particular, theAssociate Judge noted that Mr Sheung was to receive 90 per cent shares inPristine Timber.[14] In a subsequent judgment dated 23 August 2019 the Associate Judge dismissedthe application for summary judgment.1 He found that the agreement provided forMr Sheung to pay the $1.17 million not to Forest Holdings but to Pristine Timber.The Associate Judge said that made sense, as the defendant was entitled to receive90 per cent of the shares in Pristine Timber on the same day his payment was made.Presumably, the Associate Judge said, Mr Sheung would have wanted to receive anexecuted share transfer contemporaneously with payment.2[15] Following dismissal of its application for summary judgment, Forest Holdingsamended its statement of claim to plead a variation of the joint venture agreementmade orally "[i]n or about August 2018 or early September 2018" that the purchaseprice be paid directly to Forest Holdings. An affidavit sworn in support by Ms Sumstates:3After the JVA was signed, Zax was attempting to arrange for the PurchasePrice to be paid to Pristine and Pristine would then pay FHL. However, astime went on and there were more and more delays in getting the paymentmade, we agreed between us that payment should instead be made directly tothe plaintiff as there was no particular reason why the funds needed to befunnelled through Pristine and it would just add more logistical problems anddelay. Rod and I discussed and agreed this in or about August or September2018. Zax also agreed and his agreement is referred to in an email he sent toRod dated 6 September 2018 which I have seen.[16] It was this amended claim that then came before Duffy J in 2020.Forest Holdings now sought judgment on the first cause of action by way of formalproof. In a judgment dated 1 July 2020, Duffy J held the joint venture agreement hadno legal effect and Mr Sheung was not obliged to pay $1.17 million directly toForest Holdings (or, indeed, anyone).4[17] Forest Holdings now appeals.1 Forest Holdings (NZ) Ltd v Sheung [2019] NZHC 2090.2 At [33].3 Mr Scott gave affidavit evidence to the same effect.4 Forest Holdings (NZ) Ltd v Sheung [2020] NZHC 1529 [High Court judgment].Is the contract enforceable?[18] We start with the Judge's analysis of the contract.High Court judgment[19] The Judge held that execution, payment and property transfers wereinterdependent obligations intended to occur on the same day.5 Until execution of theagreement and payment of cleared funds, Forest Holdings remained free to deal withthe forestry rights as it saw fit. Until payment, "the agreement was legallyineffective".6 Otherwise, as the Judge put it, Forest Holdings would find itself "in theinvidious position" of being unable to sell forestry rights elsewhere if payment wasdelayed and not forthcoming.7 She saw this as a more helpful interpretation of theagreement in the event of a default by Mr Sheung, than that advanced by counsel forForestry Holdings. The Judge concluded:8As matters currently stand, I am satisfied that the JV Agreement has no legaleffect and it has never had any legal effect. Forest Holdings has been free todispose of its forestry rights as it saw fit. That it has not done so has nothingto do with Mr Sheung.[20] In case the Judge erred in reaching that conclusion, she went on to considerwhether Forest Holdings could have required Mr Sheung to pay the $1.17 milliondirectly to it. She answered that question in the negative.9 Noting the failedapplication before Associate Judge Smith, and the subsequent asserted variation, sheheld that Mr Sheung's email of 6 September 2018 was insufficiently clear to indicateacknowledgement of the existence of a contractual obligation to pay Forest Holdingsrather than Pristine Timber.10 As evidence of a variation, it was insufficient.11 Further,the formalities required by cl 17.1 (quoted at [7] above) had not been met in this case,and "[w]ithout that and without proof of such written agreement no variation wouldbe legally effective let alone enforceable."12 In addition, the Judge suggested that the5 At [26]–[27].6 At [29].7 At [30].8 At [38].9 At [40].10 At [43]–[48].11 At [47].12 At [50].variation left unclear who was then to receive the 50 per cent interest in the forestryrights, Mr Sheung or Pristine Timber.13[21] The Judge therefore dismissed the claim and entered judgment in favour ofMr Sheung.14Our assessment[22] We reach a different view on the meaning and effect of the agreement.[23] We start from the proposition that in entering a formal agreement occupying12 closely-printed pages, with all the formalities and flourishes of a commercial jointventure agreement, completed by execution before witnesses, the parties wereintending to enter legal relations by means of a binding contract. If effect can be givento that mutual intention, it should be.15[24] The construction given by the Judge to the agreement rendered it legallyineffective until payment was made by Mr Sheung. We agree with Mr Bond, counselfor Forest Holdings, that the Judge's interpretation has the effect of turning theagreement into the grant of an option.[25] Construction involves the ascertainment of:16 the meaning which the document would convey to a reasonable personhaving all the background knowledge which would reasonably have beenavailable to the parties in the situation in which they were at the time of thecontract.Assessing the matter in that way, we do not read the agreement as leavingForest Holdings remaining free to deal with the forestry rights as it saw fit until13 At [52].14 At [60]–[61].15 Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433(CA) at [60] per Richardson P, Keith, Blanchard and McGrath JJ, and [137] per Thomas J.See also, for interpretations taken to avoid absurdity: Bathurst Resources Ltd v L & M CoalHoldings Ltd [2021] NZSC 85 at [45] per Winkelmann CJ and Ellen France J, endorsing Firm PI1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [93] perMcGrath, Glazebrook and Arnold JJ.16 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL)at 912 per Lord Hoffmann, cited with approval by the Supreme Court in Bathurst Resources Ltdv L & M Coal Holdings Ltd, above n 15, at [41].payment. A reasonable reader would not read the contract as permittingForest Holdings to gazump Mr Sheung, or Mr Sheung to walk away without paying.That would be a remarkable reading of the extensive, formal commitments recordedby the agreement, unless that reading is mandated by express provision (in effectestablishing a mere option).[26] The Judge took the words at the start of cl 2.1 — see [5] above — as thatmandating provision. We disagree. The context in which the reasonable reader mustconstrue the agreement is one in which parties are modifying for themselves aprecedent joint venture agreement drafted by someone else (presumably, given itsform, a lawyer). But no lawyer was engaged on the process of amendment, and thebespoke drafting is far from clear. Asking herself what the first sentence of cl 2.1means, the reasonable reader would bear that context in mind. Reference might alsobe made to the preceding investment proposal; it contains no suggestion of an option.17Secondly, the expression in cl 2.1, "[t]his Agreement", is itself muddled; "Agreement"is a defined term referring to a separate agreement by which Forest Holdings is totransfer 50 per cent of the forestry rights to Pristine Timber. The parties "agree" incl 2.1 that payment (by Mr Sheung) will "occur on or before 29 September 2017", andearlier, recital B records Mr Sheung as agreeing to provide the funds. The readerwould, we think, instead infer the parties' intention in the first sentence of cl 2.1 to beto define when the joint venture created by the agreement begins, not to create anagreement wholly conditional for effect upon making of a payment (which is thenoptional, rather than obligatory). Nothing in the context suggests an option, andnothing said by Mr Sheung afterwards suggests it either.18[27] We also think the Judge made too much of the fact that the stated date forpayment had passed by the time of execution. True to the inattention to legal detailwhich is the hallmark of this agreement, it is dated 29 August 2017 but was in factexecuted by the final party, Mr Sheung, on 6 October 2017 — one week after the datefor payment provided in cl 2.1. The Judge considered it might be possible to construethe 29 September 2017 payment obligation as permitting a later performance date if17 Bathurst Resources Ltd v L & M Coal Holdings Ltd, above n 15, at [75]–[76].18 At [89].execution is delayed (as it was).19 She suggested severance under cl 24, dealing withpartial invalidity.20 We do not think such resort was necessary. Rather, the reasonablereader would note the distinctive one-month gap provided between the nominalexecution date and the nominal payment performance date, and sensibly infer that inthe face of delay (and now literal impossibility of making payment a week prior), it isthat one-month period that defines the obligation.[28] We do not think any of this places Forest Holdings in the "invidious position"perceived by the Judge. The contract was not an option. Mr Sheung was obliged topay — at the latest by 6 November 2017 — provided of course 50 per cent of theforestry rights was conveyed to Pristine Timber, and 90 per cent of the shares in thatcompany were conveyed to him. If Mr Sheung did not pay, Forest Holdings had theusual remedies open to a disappointed contracting party. The normal response wouldbe cancellation, resale and a claim for damages. For reasons not entirely apparent,that course did not commend itself to Forest Holdings here.[29] Finally, we are not satisfied that the evidence before us on formal proofestablishes the oral variation alleged by Forest Holdings – i.e. that payment be madeto it, rather than Pristine Timber. The agreement contains cl 17.1 — set out at [7]above — which proscribes informal variation. The proper approach to such boilerplatecommercial clauses is that they raise an evidential presumption against variation beingeffective unless the required formalities are met, but do not prohibit them absolutely.21That is because the variation may be effective to vary the non-variation clause also.However, the burden of proof lies here on Forest Holdings to show the parties intendedto vary the structure of the settlement arrangements in the manner now alleged.In Stevens v ASB Bank Ltd, this Court said:22If the parties had intended to bind themselves to some new arrangement, wehave no doubt that [the respondent] would have documented thatappropriately. In the absence of such documentation, we see no justificationfor going behind these plainly worded provisions, which are intended to19 High Court judgment, above n 4, at [35].20 At [36].21 Savvy Vineyards 3552 Ltd v Karaka Estate Ltd [2014] NZSC 121, [2015] 1 NZLR 281 at [112];and Beneficial Finance Ltd v Brown [2017] NZHC 964 at [70]–[77]. Cf in England where suchclauses may have greater prohibitory effect: MWB Business Exchange Centres Ltd v RockAdvertising Ltd [2018] UKSC 24, [2019] AC 119.22 Stevens v ASB Bank Ltd [2012] NZCA 611 at [27].prevent the uncertainty and dispute that so often arises where writtenagreements are said to have been varied orally.[30] We think that applies here also. The Associate Judge and Judge below bothfound the primary meaning of the contract remained that payment had to be made toPristine Timber; the evidence in support of the alleged variation being insufficient oneither summary judgment or formal proof to displace that conclusion.23 We agree.The email relied on is ambiguous, the documentary record tendered is incomplete andthe consequential effect upon settlement unclear. We do not consider Forest Holdingshas discharged the burden, on formal proof, of proving the alleged variation waseffected by the parties. That said, there can be no doubt Forest Holdings was alwaysto be the ultimate recipient of the payment. It, after all, was the party supplying theforestry rights to the joint venture.Is the defendant in default?[31] As we see the agreement, there is no reasonable defence available that thedefendant is not in default of his (acknowledged) obligation to invest in the jointventure, albeit by payment to Pristine Timber (which would on-pay to ForestHoldings).Should a decree of specific performance have been granted?[32] There are a number of difficulties standing in the way of specific performanceas an appropriate remedy.[33] First, while it is not beyond possibility that a court grant specific performancein relation to an obligation to make payment, the remedy is equitable, anddiscretionary. The normal remedy for default in making payment is damages; specificperformance is most unlikely to be ordered where that remedy is adequate.24 First,because, almost by definition, money in the form of damages recompenses money23 Forest Holdings (NZ) Ltd v Sheung, above n 1, at [39]-[40]; Judgment under appeal, above n 4, at[48].24 See, for example, Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd onthe Law of Contract in New Zealand (6th ed, LexisNexis, Wellington, 2018) at [21.4.1].unpaid under the contract.25 Secondly, because the common law holds open thepossibility of efficient breach, where a defaulting party may invest in another moreprofitable enterprise provided they pay damages under the contract they have walkedaway from.26 Although the efficient breach principle has often been challenged,27it remains the prevailing opinion. Equity generally avoids interfering with it whereonly money is involved.28[34] We are not persuaded that there is any need to depart from orthodoxy here togrant discretionary equitable relief in the form of specific performance. The mostefficient course for all parties is that Forest Holdings cancel the contract withMr Sheung, recontract with someone else, and sue Mr Sheung for damages for thedifference in price received, together with consequential losses. In this respect we arewholly unpersuaded by Mr Bond's arguments as to difficulty and disadvantage indoing so. All this came from the bar; it lacked foundation in the evidence filed.Rather, Mr Scott gives evidence in his first affidavit of the sort of losses he has sufferedand provides a rough but not uncogent calculation.[35] Secondly, in any event, specific performance is patently an inappropriateremedy here. It would require Humpty Dumpty to be put together again. Mr Sheunghas gone to ground, overseas. He may be taken to be an unwilling joint venturer.Yet specific performance here would require reconstruction of this stalled jointventure, with Mr Sheung becoming co-shareholder (and director) of Pristine Timber,and with decisions under the joint venture requiring the support of bothForest Holdings and Pristine Timber. Mr Sheung's role would not be wholly passive,and we are disinclined to speculate, as Mr Bond asked us to, about his truculenceturning to enthusiasm when his money has been handed over. It is a reasonably settledprinciple that specific performance will not be granted where the consequence is to25 See, for example, James Edelman (ed) McGregor on Damages (21st ed, Sweet & Maxwell,London, 2021) at [4-002]–[4-003].26 See, for example, Gregory Klass "Efficient Breach" in Gregory Klass, George Letsas and PrinceSaprai (eds) Philosophical Foundations of Contract Law (Oxford University Press, Oxford, 2014)362 at 362, citing Oliver Wendell Holmes "The Path of the Law" (1897) 10 Harv L Rev 457 at462.27 See, for example, Fionnghuala Cuncannon "The Case for Specific Performance as the PrimaryRemedy for Breach of Contract in New Zealand" (2004) 35 VUWLR 657 at 662–667.28 See, for example, Finn, Todd and Barber, above n 24, at [21.4.1]. See also Aspec ConstructionWellington Ltd v Fawcet [2015] NZHC 535.require the continued conduct of a business.29 This is a case where continuingparticipation and supervision would be required. As a recipe for a bad omelette,it could barely be beaten.[36] Thirdly, it transpires that Pristine Timber is not in a position to perform its partin the joint venture in any event, the Court having ascertained it was removed fromthe Companies Register in September 2020. Mr Bond was disposed to accept that wasa "rather significant impediment" to the remedy sought. While he may be correct thatMs Sum could have the company restored, the mooted making of now conditionalequitable relief here simply underscores the difficulty with the entire remedialproposition.Result[37] The appeal is dismissed.[38] The respondent not having participated in the appeal, there is no order for costs.Solicitors:Braun Bond and Lomas, Hamilton for Appellant29 Co-operative Insurance Society Ltd v Argyll Stores (Holdings) Ltd [1998] AC 1 (HL).See generally Finn, Todd and Barber, above n 24, at [21.4.2(h)].