GULL NEW ZEALAND LIMITED V GULLROS LIMITED HC AK CIV 2008-404-002305

GULL NEW ZEALAND LIMITED V GULLROS LIMITED HC AK CIV 2008-404-002305 8 September 2011IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV 2008-404-002305BETWEEN GULL NEW ZEALAND LIMITEDPlaintiffAND GULLROS LIMITEDFirst DefendantAND GULLREV LIMITEDSecond DefendantAND GULLBOT LIMITEDThird DefendantHearing: 18 and 19 July 2011Counsel: D E Smythe for PlaintiffP F Dalkie for DefendantsJudgment: 8 September 2011JUDGMENT OF WOOLFORD JThis judgment was delivered by me on Thursday, 8 September 2011 at 4:00 pmpursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarSolicitors/Counsel:Jones Young, PO Box 189, Shortland Street, Auckland 1140Young & Caulfield, DX BP62020, AucklandIntroduction[1] The plaintiff, Gull New Zealand Ltd ("Gull"), supplies petroleum products to the public through service stations operated by licensees. The defendants were licensees who operated Gull service stations at Roscommon Road in Wiri, Reeves Road in Pakuranga and Ti Rakau Drive in Botany. A dispute has arisen between the parties as to the management fees properly payable to the defendants.[2] When the operating agreements came to an end in February 2008, the defendants retained the proceeds of petrol sales from the last few days of their operation on the basis that Gull owed them an amount in excess of the retained proceeds of sale for unpaid management fees. Gull applied for summary judgment in respect of the retained proceeds of sale. The defendants opposed the application and made a counterclaim for unpaid management fees.[3] In a judgment dated 31 July 2009, Associate Judge Abbott granted summary judgment to Gull on the basis that Gull had an undisputed claim to the retainedproceeds of sale. The counterclaim did not impeach the plaintiff‟s claim sufficient togive rise to an equitable set-off as the claims were distinct. Judge Abbott also held that there was no reason to stay execution of judgment against the defendants until the counterclaim was determined.[4] The counterclaim was heard before me on 18 and 19 July 2011.[5] The operating agreements between Gull and the defendants were in similar form. Clause 18 provided for the agreement to constitute the entire agreement between the parties. It stated:18 WHOLE AGREEMENT18.1 This agreement together with the Reference Schedule and Schedules to this agreement and any other written agreements entered into between Gull and the Operator shall constitute the entire agreement between the parties and shall supersede all prior agreements or understandings between the parties whether oral or written.[6] The management fee was governed by cl 3. It stated:3. LICENCE REMUNERATION3.1 Gull shall pay the Operator the Management Fee specified in the Reference Schedule in advance on the first day of each month for that month. If the Term shall commence on a day other than the first day of a month then Gull shall pay on the Commencement Date the Management Fee calculated on a daily basis from the Commencement Date through to the end of that month.3.2 The Management Fee shall be reviewed and amended if considered appropriate by agreement between Gull and the Operator on any Review Date which Review Date shall be:3.2.1 every six months after the Commencement Date; and3.2.2 within any six month period if either party wishes to alter the terms of this agreement.3.2 On every Review Date the Operator shall provide Gull with certified copies of income and expenditure relating to its operation of the Service Station for the preceding six month period.[7] The defendants maintain that the management fee was calculated by taking all expenses incurred in the operation of the retail stores at each of the service stations (including an annual fee of $80,000, also referred to as a manager‟s salary) from the actual income received from the operation of the retail stores. The management fee was designed to cover the shortfall between the income and the expenses, according to the defendants. If the income exceeded those expenses there would be no management fee. If the income was less than those expenses, the management fee would make up the difference.[8] The initial management fee was set at $9,805 per month plus GST in the case of Gull Roscommon Road, $12,551.63 per month plus GST in the case of Gull Reeves Road and $18,517 per month plus GST in the case of Gull Ti Rakau Drive on the basis of figures obtained from the previous operator.[9] The defendants maintain that their agreement with Gull obliged Gull to review the management fee every six months and increase the management fee if the operating deficits had worsened. The level of any such increase was to be equated with the increase in operating deficit according to the defendants.[10] The operating deficits at two of the service stations worsened but despite requests the management fees were not increased to cover the worsening deficits.[11] Three causes of action are pleaded:(a) On a proper construction of the operating agreements, Gull breached the agreements by failing to review the management fee at any time during the term of each agreement and to increase the management fee so as to obtain the agreed minimum profit to each of the second and third defendants of $80,000 per annum.(b) It was an implied term of the operating agreements that upon application of the review clause the management fee would be adjusted in the manner pleaded, such implied term arising because it was obvious and necessary to give business efficacy to the agreement. In breach of the implied term, Gull failed to review the management fee and to increase it so as to obtain the agreed minimum profit.(c) The review clause in the operating agreements did not accuratelyrepresent and record the parties‟ mutual intention and the operatingagreements ought to be rectified accordingly. Upon rectification, the defendants seek damages as pleaded.Factual background[12] Gull approached Mr Nicholas Paterson in around December 2004 to ascertain whether he would be interested in taking over three Gull sites from an operator who had given notice to Gull of their intention to quit the sites.[13] Mr Paterson had previously operated a Gull service station in Rosebank Road, Avondale. He also operated a number of service stations for Caltex. In an e-mail dated 9 December 2004, Mr Paterson said to Gull:Before I go to far Ulrik, for me to consider the sites, I would be prepared to own the Stock.I would also be looking to generate an income from the sites of between $80- 100K. this is per site.Can you let me know your thoughts before I jump in to make a model??[14] In a subsequent email exchange Mr Paterson made it clear that the income he was looking to generate was after a manager‟s salary. He told Gull that currently he cleared about $70k per year from the worst Caltex site he had after everything including a manager‟s salary. Mr Ulrik Olsen replied on behalf of Gull:Ok i see. if you tell us what you need then we can look at it from there.Shouldn‟t be out of the question.[15] Mr Paterson then prepared some models for each site based upon the information supplied to him by Gull from the previous operator for each of the three sites as well as from his own experience operating the Gull service station in Rosebank Road and a number of Caltex service stations. In an e-mail sent to Gull on 12 December 2004 Mr Paterson attached the models and stated:Hi there. Here is the model I have worked under.I am sending you the [Profit and Loss] for the sites. With a fee Payable once a month. Similar to the way it was done in the past....Gull to pay nic Paterson a monthly fee based on the figures from the Profit and Loss attached.Nic to show Gull expenses from the site every 6 months from nic‟saccountant to verify. This is to keep me honest. If I can make savings – these will be past on to Gull.[16] The parties had a meeting in late December 2004. It is common ground that there was no agreement before this meeting. There is no contemporaneous record of the meeting but on 30 December 2004, Mr Geoff Gillot of Gull sent another email to Mr Paterson stating:Hi Nic,This note is to set out what I believe are the basic terms/parameters which we have discussed over recent days regarding the 3 South Auckland sites....6. ... The shop profits are to your own benefit and we are still awaiting details of the product range and cost of goods summary from Woolworths so that you may have an opportunity of purchasing some stock items directly from Progressive Enterprises. All dry stock will be purchased and owned by you....9. Gull will contribute the following monthly Management fees to your company for operating the sites on our behalf. These are based upon the recent P & L‟S you presented to us earlier this month.Botany - $18,517 + GstReeves - $11,157 + GstRoscommon - $9,805 + GstAs you suggested, these fees are reviewed every 6 months and based upon an open-book policy of your operating expenses ex your own accountant....Nic, that said, we are very interested to discuss the sub-leasing of existing shop space at any of the outlets for the mutual benefit of both parties. Our interests are to reduce the above Management fees, rentals and outgoings and you are wanting to increase your own profits from the overall operations. We consider your ideas to introduce a Subway at Roscommon for example to be potentially very viable....Nic, I trust this is a good start and I look forward to any comments of feedback.[17] Draft operating agreements were then prepared by Gull‟s in-house counsel, which were fundamentally in the same terms for each of the three sites, the only variation being the management fee. The management fee set out in each of the operating agreements was the same sum shown in the models prepared by Mr Paterson as the projected loss for each site after payment of an annual fee of $80,000.[18] Mr Paterson signed the operating agreements without referring them to his lawyer. However, he said he read them through before signing them. He formed the three defendant companies to operate each of the sites and commenced operations at each site in February 2005.[19] In September 2005 the parties held their first review of the management fees. Mr Paterson told Gull that the trading figures then achieved were quite close to thosein the models but that trading was still in its early stages. The parties agreed to review the management fees again in one year.[20] In May 2006 there was a second meeting held to review the management fees set out in the operating agreements. Mr Paterson told Gull that he wanted to increase the management fees because all sites were losing money and making bigger losses than those set out in the models he had prepared at the outset. Nothing was resolved at the meeting. Gull later told Mr Paterson that they wanted to reduce the management fees payable.[21] Mr Paterson then delegated the problem of the management fees to his general manager, Mr Mark Hawes. Mr Hawes had a meeting with Gull on 21 November 2006. Prior to the meeting, he sent Gull some material for discussion at the meeting. It included copies of the pre-contract e-mail exchanges and tax invoices for the trading losses. In the accompanying letter to Gull dated 13 October 2006, Mr Hawes stated:Store profitabilityProfitability of Sites as discussed with Geoff, Ullrik and Rhona. The attached profitability spreadsheets show the result of all three sites. The agreement between Gull and Nick Paterson the understanding was that each site was to produce a minimum return of $80,000k per site less the Salary of Ben Paterson. The Net Return should be $240,00[0] minus $80,000 leaving $160,000.Using the attached sheets it shows that Rosscommon outperformed the target by $9,846 and between Botany and Reeves they underperformed by $113,988 with the net deficit of $104,142 to March 2006....This has continued from April 2006 and we would obviously like something sorted out regarding last year and urgent attention made to this year. This needs quick and effective resolution.[22] In the event, there was no resolution. The defendants then involved their lawyers who wrote a letter to Gull on 21 November 2006. Gull held firm to its position that cl 3.2 of the operating agreements did not require Gull to ensure that the defendants received a minimum profit of $80,000 per year for each site. The situationremained unresolved until the end of 2007 when Gull gave notice to the defendants that it would not renew their contracts, which were due to expire in February 2008.Hearsay evidence[23] The defendants sought to lead hearsay evidence from a former employee of Gull with whom they had dealt, Geoff Gillot. In his written statement tendered to the Court, Mr Paterson stated:37. After Geoff Gillot left Gull I spoke to him on the telephone about the dispute we were having with Gull. I do not recall when this was, except that it was before the summary judgment application went to a hearing. I did not make any notes of my conversation with Geoff. It is not generally my practice in business to do so. We talked about the discussions we had leading up to the agreement we reached about my companies operating the three sites. We went over the discussion about the Gull payment was to be adjusted up or down depending on the trading results. Geoff said that he understood that was precisely what we had agreed ie that the revenues would need to be made up by Gull should the sites not perform according to the model figures of profit and loss I had provided. And, if trading was better than the notional figures arrived at in the models for each store, then the payment from gull was to be adjusted downwards. I asked him whether he would put this in writing for me. My recollection of his answer to that was that he did not want to put anything in writing because even though he no longer worked for Gull he did not want to get off side with Gull now or in the future.[24] Mr Hawes also wished to refer to a telephone call with Mr Gillot in which Mr Gillot is said to have confirmed what he told Mr Paterson.[25] I declined to admit the hearsay evidence. Mr Gillot was available as a witness.1 The defendants chose not to subpoena him as a witness. I was also not satisfied that the circumstances relating to the statement provided reasonable assurance that the statement was reliable.2 Both statements sought to be admitted were telephone conversations. The dates of the conversations were uncertain. No notes were kept. Mr Gillot purported to refuse to put anything in writing.[26] However, in response to a subsequent specific request from the defendants‟solicitors, Mr Gillot did put something in writing which was admitted as part of the common bundle. His response was:1 Evidence Act 2006, s 18(1)(b)(i)2 Ibid, s 18(1)(a).I am in receipt of your letter and attachments of 8th March 2007 and have studied these.My responses to the best of my understanding to each question follow:1. Whilst I am not an accountant I note there is no mention of a specific minimum net profit of $80,000 per site in my e-mail correspondence to Nic of 30th Dec 2004. My personal recollection was that the dealwas based upon Nic‟s achievements and expectations of the return oninvestment at his (then) other branded Service Station outlets and theGull "top up" money at each site was based upon achieving samereturns. I do note however the earlier e-mail correspondence between Ulrik Olsen and Nic which discussed incomes of between $80-$100 K per site but my e-mail correspondence to Nic of 30th Dec 2004 wasbased on P & L‟s discussed between Nic and the Gull accountant, Rhona Hoffman.2. It was agreed that there would be review periods of each site‟s performance every 6 months, not 3 months. Such review wouldlikely result in amendments to monthly Gull "top ups" based uponprior (recent months) results....I hope the matter between Nic and Gull is quickly and amicably resolved.[27] Mr Hawes acknowledges that this was "not what he had told me over the phone". In those circumstances, I ruled the hearsay evidence inadmissible.Contract interpretation[28] The Court‟s approach to contract interpretation is governed by the principles in Vector Gas Ltd v Bay of Plenty Energy Ltd.3 I am aware of academic criticism to the effect that the principles of contract interpretation remain unsettled.4[T]he underlying theory remains in a state of confusion and there are fundamental divisions among commentators, practitioners and judges as to what the process of interpretation is and ought to be all about.[29] I do not think it is controversial, however, that the principal enquiry is to ascertain the actual or objective consensus of the parties. In that regard, the first step is a careful analysis of the words in issue and their ordinary meaning. Even if the meaning appears plain, there are some circumstances in which a Court can look beyond the plain meaning. The words may have a specific meaning in trade or the3 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 (SC).4 David McLauchlan, "Contract Interpretation: What is it about?" (2009) 31 Syd LR 5 at 6.parties may have agreed to use the words in a manner quite different from normal usage.[30] If an analysis of the words in issue does not provide the answer, the surrounding circumstances can generally be taken into account. These include both pre and post-contract conduct of the parties to properly inform a Court as to the meaning attached to the words by the parties or by one party with the knowledge and acquiescence of the other party.5[31] Commercial reality is also an important factor in interpretation disputes. Parties are presumed to have regard to prevailing standards of commerce.6[32] In an often quoted passage, Lord Hoffmann restated what he saw as the fundamental principles of interpretation in Investors Compensation Skill Ltd v West Brunswick Building Society7(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.(2) The background was famously referred to by Lord Wilberforce as the"matrix of fact," but this phrase is, if anything, an understated description ofwhat the background may include. Subject to the requirement that it should have been reasonably available to the parties and to the exception to be mentioned next, it includes absolutely everything which would have affected the way in which the language of the document would have been understood by a reasonable man.(3) The law excludes from the admissible background the previous negotiations of the parties and their declarations of subjective intent. They are admissible only in an action for rectification. The law makes this distinction for reasons of practical policy and, in this respect only, legal interpretation differs from the way we would interpret utterances in ordinary life. The boundaries of this exception are in some respects unclear. But this is not the occasion on which to explore them.(4) The meaning which a document (or any other utterance) would convey to a reasonable man is not the same thing as the meaning of its words. The meaning of words is a matter of dictionaries and grammars; the meaning of the document is what the parties using those words against the relevant5 Vector Gas Ltd v Bay of Plenty Energy Ltd at [30]-[31] per Tipping J.6 Ibid, at [19].7 Investors Compensation Skill Ltd v West Brunswick Building Society [1998] 1 WLR 896 at 912-913, noted in Vector Gas Ltd v Bay of Plenty Energy Ltd at [4], [22] and [61].background would reasonably have been understood to mean. The background may not merely enable a reasonable man to choose between the possible meanings of words which are ambiguous but even (as occasionally happens in ordinary life) to conclude that the parties must, for whatever reason, have used the wrong words or syntax...(5) The "rule" that words should be given their "natural and ordinary meaning" reflects the common sense proposition that we do not easily accept that people have made linguistic mistakes, particularly in formal documents. On the other hand, if one would nevertheless conclude from the background that something must have gone wrong with the language, the law does not require judges to attribute to the parties an intention which they plainly could not have had. Lord Diplock made this point more vigorously when he said inAntaios Cia Naviera SA v Salen Rederierna AB;8if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.Discussion[33] The words used in cl 3.2 of the operating agreements must be the starting point:3.2 The Management Fee shall be reviewed and amended if considered appropriate by agreement between Gull and the Operator on any Review Date...[34] The plain meaning of the clause is that there has to be agreement between the parties to amend the management fee. There does not appear to be any ambiguity. I accept, however, that that does not preclude a Court from considering the factual matrix.[35] The defendants submit that Gull had, in effect, already agreed that the management fee would be amended in accordance with a simple formula. After deduction of a manager‟s salary of $80,000, the management fee would equate to the trading loss incurred by the retail store at each of the three sites. The defendants submit that the only agreement envisaged by cl 3.2 was that the plaintiff had to be satisfied that the figures provided by the defendants were accurate. In that regard,8 Antaios Cia Naviera SA v Salen Rederierna AB [1984] 3 All ER 229 at 233, [1985] AC 191 at201.cl 3.3 obliged the defendants to provide Gull with certified copies of income and expenditure for each of the sites for the preceding six month period.[36] There was obviously a consensus that the management fee would be reviewable and may be varied up or down. Given his evidence at trial, it also seems clear that Mr Paterson‟s subjective intention was that the management fee would bemaintained at a level that guaranteed his companies an $80,000 annual profit fromeach site. However, I do not believe that Gull knew that was Mr Paterson‟s subjectiveintention and then allowed him to sign the agreements and take over the sites. There is nothing in the pre-contractual exchange of e-mails or other documentation which specifically refers to a guarantee of an $80,000 profit.[37] Mr Paterson acknowledged that in the e-mail he sent to Gull on 12 December 2004 enclosing the models for the three sites, his comment about a fee payable once amonth "similar to the way it was done in the past" was a reference to the previousagreement he had with Gull in relation to the Rosebank Road site in which the management fee was fixed for the duration of the agreement: 9Q. You in the first, no, the second line "With a fee payable once a month similar to the way it was done in the past" Is that a reference in thatemail to the contract you had with Gull in respect of Rosebank Road?A. YesQ. And is that the contract in which the management fee was fixed in effect for the term of the contract?A. Yes Your Honour[38] There was however no agreement before the crucial meeting with Gull in late December 2004. Of this meeting, Mr Paterson stated:13. I do not recall now how long this meeting took, or whether we had one or two meetings. It was just one of many business meetings I had in and around that time. Nothing stands out about it now in my mind, and nor should it. At this time I was also engaged in negotiating to purchase several Subway franchises which was a much larger opportunity for me than what I was contemplating with Gull at the time. At the end of the meeting they said they would get a contract drawn up by their lawyers.9 Notes of Evidence, page 47, lines 10-16.[39] Following this meeting, Gull sent a two-page e-mail to Mr Paterson with 13"basic terms/parameters" set out. In para 6, Mr Gillot for Gull stated:The shop profits are to your benefit.[40] In para 12, Mr Gillot also stated:Our intentions are to reduce the above management fees, rentals and outgoings and you are wanting to increase your own profits from the overall operations.[41] This latter comment was in the context of a proposal to sub-lease existing shop space at any of the three sites with an example given of the introduction of a Subway at Gull Roscommon.[42] These pre-contractual statements suggest that Gull did not regard the reviewclause in the same way as Mr Paterson. On Mr Paterson‟s interpretation of the reviewclause, he could never increase his profits because if the income from the sites together with the management fees less expenses exceeded $80,000, the management fee would be reduced accordingly. The $80,000 „salary‟ was therefore not only the minimum profit but also the maximum profit.[43] The defendants also pointed to their post-contract conduct in support of their interpretation of cl 3.2. In this regard, they referred to their discussions with Gull in mid-to-late 2006. The defendants prepared and sent tax invoices to Gull for losses from the date they took over the sites, notwithstanding that there is no suggestion on its face that cl 3.2 is retrospective in its operation. A review clause normally operates prospectively.[44] The figures in the invoices came from unverified in-house accounts. In some instances the defendants had statements of financial performance prepared by their accountants and signed off by Mr Paterson which showed loss figures which were different to and in some cases less than the in-house accounts produced to Gull. I decline to give any weight to the defendants‟ post-contract conduct in interpreting cl 3.2.[45] I have formed the view that there was no agreement that the management fee would be amended in accordance with the formula that, after deduction of amanager‟s salary of $80,000, it would equate to the trading loss incurred by the retail store at each of the three sites. The evidence does not support the defendants‟contention. Further, not only did Mr Olsen from Gull adamantly deny it in evidence, but such an agreement does not make commercial sense. In evidence, Mr Paterson acknowledged that, if his interpretation of the contract was correct, Gull carried all of the risk: 10Q. Just a general question about this contract you say that you‟d enteredinto with Gull who carried the risk in the contract?A. I suppose the way I interpreted it was that Gull was going to carry the risk.Q. All of the risk?A. Well yes I backed myself, but yes.Q. Were you going to carry any risk at all in terms of that contract youthought you‟d entered into with Gull?A. No Your Honour.[46] Although the operating agreements provided that Gull could terminate the agreements for breach of general obligations such as ensuring merchandise for sale was in good order and neatly and attractively displayed and ensuring adequate staff were on duty at all times, the defendants had no incentive to operate the sites in such a way as to reduce costs or improve profitability if, as they say, they were guaranteed a minimum profit of $80,000 per site regardless of how they performed.[47] There is some evidence that the sites were in fact not well operated. Gullwrote to Mr Paterson on 9 May 2005 stating that the retail stores were "way below the agreed standard as detailed in our contract" and listing 29 matters as needingimmediate attention. Mr Paterson said that upon receipt of the letter he set aboutmaking sure that everything was fixed to Gull‟s satisfaction. Nonetheless, Mr Olsengave evidence that the defendants‟ management of the sites did not improve with the result that they were underperforming the models Mr Paterson had provided to Gull in December 2004.10 Notes of Evidence, page 47 lines 19-25.[48] It is my view that what Gull had agreed to was a review of the management fee but without any pre-determined formula as alleged by the defendants. If the defendants had pointed to something outside their control which adversely affected the profitability of the three sites then in my view Gull would have considered varying the management fees. However an amendment was not automatic in the manner suggested by the defendants when they prepared and sent tax invoices for"losses" to Gull based on their unverified in-house accounts.[49] Having reached this conclusion, it is unnecessary for me to consider the effect of the whole agreement clause (cl 18) in the operating agreements. If it had been necessary to consider it, however, I would have found that there was no inequality of bargaining power and no other reason why the clause should not be conclusive between the parties.Conclusion[50] The actual or objective consensus of the parties was that the management fees would be reviewed and could be varied up and down. However, Mr Paterson‟ssubjective intention that Gull carried all the risk and guaranteed an annual profit of $80,000 per annum to each of the defendants was not shared by Gull. Gull may have subsequently agreed to an increase in the management fees to give a profit of $80,000 to the defendants but it was not obliged to do so in terms of the operating agreements it entered with the defendant. In the end, there was no agreement reached to vary the management fees because of the defendants‟ insistence on the formula they thoughthad been agreed.[51] The counter-claims are accordingly dismissed. The plaintiff is entitled to costs on a 2B basis.__________________________Woolford J