IBA LIMITED V STANLEY'S NIGHTCLUB LIMITED AND ANOR CA CA265/05

IBA LIMITED V STANLEY'S NIGHTCLUB LIMITED AND ANOR CA CA265/05 29 November 2006IN THE COURT OF APPEAL OF NEW ZEALAND CA265/05BETWEEN IBA LIMITED Appellant AND STANLEY'S NIGHTCLUB LIMITED First Respondent AND STANLEY FREDERICK GORDON Second Respondent Hearing: 29 November 2006 Court: William Young P, Robertson and Arnold JJ Counsel: I M Hutcheson for Appellant P F Dalkie for Respondents Judgment: 29 November 2006JUDGMENT OF THE COURT A The appeal is allowed, the judgment of Laurenson J is set aside and the judgment of Judge Mathers is restored. B Costs (in relation to both the High Court and this Court) are reserved. If the parties cannot agree, the appellant is to lodge written submission within seven days and the respondents within a further seven days. REASONS OF THE COURT(Given by William Young P)Introduction[1] IBA Ltd (IBA) sold a nightclub and bar to Stanley's Nightclub Ltd (Stanley's) for $100,000 on terms requiring Stanley's to assume liability to Dominion Breweries Ltd under "a loan agreement and marketing services agreements". In fact there were two loan agreements, each in the sum of $40,000, and only one marketing services agreement. Stanley's signed a document (described as an "assignment") accepting liability in relation to both loan agreements. But it now alleges that it was aware of only one of the loan agreements. [2] Stanley's initially claimed that it was induced to accept liability under the assignment in relation to both loans by misrepresentations made to it by IBA. The resulting dispute was resolved in IBA's favour in the District Court by Judge Mathers but her judgment was reversed in the High Court by Laurenson J albeit that in that Court Stanley's argument was rather different, namely that under the sale and purchase agreement IBA remained liable for the second loan. [3] IBA now appeals to this Court pursuant to leave granted by Lang J. [4] The case raises two broad issues: (a) Was Stanley's required to assume responsibility for both loans under the contractual arrangements with IBA? (b) Did IBA misrepresent the effect of the assignment agreement? [5] Before we address those issues directly, it is necessary to discuss the facts in a little more detail and also to address the key features of the judgments of Judge Mathers and Laurenson J.The facts[6] IBA (a company associated with Messrs David and Richard McCabe) owned Herzog's Nightclub and Bar which was on Karangahape Road, Auckland. It acquired its beer from Dominion Breweries from which it had borrowed two sums of $40,000. The first advance was in the nature of a soft loan associated with a loyalty agreement (styled a "management services agreement") and was to be, in effect, written off providing IBA adhered to the management services agreement. The other was a hard loan and required repayment. The first payment was due on 31 July 2000. [7] Stanley's is owned by Mr Stanley Gordon, the second respondent. [8] The negotiations for the purchase by Stanley's of the business started in March 2000. It is common ground that in the course of these negotiations Mr David McCabe, in a discussion with Mr Gordon, referred to a "hook" to Dominion Breweries. Stanley's and Mr Gordon have maintained throughout that Mr Gordon was aware only of the soft loan and associated marketing services agreement and that the arrangement as to Stanley's assuming liabilities owed to Dominion Breweries was confined to that agreement. IBA's position has been that Mr McCabe told Mr Gordon that he wanted $100,000 for the business and for Stanley's to take over liability for all money owed to Dominion Breweries. Mr David McCabe maintained that he never mentioned a figure and left it to Mr Gordon to deal direct with Dominion Breweries over the detail. [9] The documenting of the agreement followed a tortuous course and this has led to some apparent incongruities in the dating of the agreements. [10] The agreement for sale and purchase was entered into on and dated 19 April 2000. This was after the execution of associated documentation referred to in it and, indeed, after settlement had actually occurred (on 18 April 2000). The agreement was in the REINZ/ADLS standard form agreement for sale and purchase of a business and recorded the key features of the transaction in these terms:Name and Description of Business: HERZOG NIGHTCLUB AND BAR For the plant, fittings and fixtures as set out in the Schedule: $50,000.00For the goodwill of the business including (where applicable) the benefit of the lease of the premises: $50,000.00 TOTAL PURCHASE PRICE: $100,000.00 (Plus GST if any) – see clause 16.0 Deposit: $50,000.00 payable on possession direct to the vendor Balance of purchase price to be paid or satisfied as follows: (a) Adjustments for incomings and outgoings on the possession date. (b) The balance on the 30 th September 2000 together with interest thereon at 10% pa.[11] Clause 6.1(3) of the general conditions of sale provided:6.1 The vendor warrants and undertakes that (3) The vendor will pay and discharge all debts and liabilities incurred or arising prior to the close of business on the possession date in connection with the business or in respect of any contract dealing or occurrence relating to the business and shall indemnify the purchaser from and against all claims proceedings expenses and costs in connection therewith.[12] The following special condition of sale was also part of the agreement:SPECIAL CONDITIONS OF SALE 2. This agreement is conditional upon the consent of DB to the assignment to the purchaser of the DB loan agreement and marketing service agreements on or before the 17 th April 2000.This was the written manifestation of the "hook" to Dominion Breweries referred to by David McCabe. Unfortunately it was, on any view, inaccurately recorded. There were two loans and only one marketing services agreement. We note that a clause in this form appeared in the first version of the draft agreement which would appear to have been prepared on 8 March 2000. [13] The balance of the purchase price ($50,000) was secured by a term loan contract dated 14 April 2000 between IBA and Stanley's of which Mr Gordon was guarantor. This contract provided for interest at 10% per annum until 30 September 2000 (when payment was to be made) with a penalty rate of 20% per annumcompounding monthly in the event of non-repayment. Furthermore, Stanley's agreed to pay IBA's solicitor-client costs on any legal services associated with any default on its part. [14] An "assignment" of the loans was prepared and executed by the parties. In effect Stanley's accepted primary responsibility for the loans and agreed to indemnify IBA in relation to the consequences of any default on its part. This document is dated 16 March 2000 (ie more than a month before execution of the final version of the agreement for sale and purchase). It is not entirely clear on the evidence when it was executed by IBA. Mr Gordon's evidence suggests that it was executed on behalf of Stanley's on 16 March. It was, however, sent to Dominion Breweries on 13 April and would appear to have been signed by that company on 19 April. [15] Some time after settlement, Mr Gordon became aware that Dominion Breweries was seeking to hold Stanley's liable for the hard loan. Mr Gordon refused to pay the first instalment due to Dominion Breweries under the loan, and refused to pay the $50,000 due to IBA as the balance of the purchase price under the term loan contract.The proceedings[16] Both IBA and Dominion Breweries brought proceedings against Stanley's and Mr Gordon and these claims were heard together by Judge Mathers. Also part of the proceedings were third party claims by Stanley's and Mr Gordon against their solicitors. We need not discuss the claim by Dominion Breweries or the third party claims against the solicitors save to note that the solicitors, irregularly in our view, filed what purported to be a statement of defence to the claim by IBA against Stanley's and Mr Gordon.[17] IBA sought the $50,000 together with interest (and legal costs on a solicitor- client basis) under the term loan contract. Stanley's in effect admitted liability under the loan agreement with IBA but alleged a counterclaim and/or set-off against IBA in relation to the $40,000 hard loan. Prior to the litigation commencing, Stanley'stendered to IBA what it accepted was owing under the term loan after allowance for its set-off and/or counterclaim.[18] Stanley's statement of defence and counterclaim referred to the soft loan and then went on:13. Unbeknown to [Stanley's] and to [Mr Gordon, IBA] included in the assignment an additional loan of FORTY THOUSAND DOLLARS ($40,000.00) also due to DB but containing otherwise different terms [to the first loan]. 14. In presenting the assignment to include a loan due by [IBA] to DB: (a) [IBA] has misrepresented, either fraudulently or negligently, to [Stanley's] and to [Mr Gordon] that they were liable to DB for the additional loan. (b) [IBA] has fraudulently or mistakenly induced [Stanley's] and [Mr Gordon] to enter into a contract for the additional loan with DB. (c) [IBA] has engaged in misleading and deceptive conduct in trade in inducing [Stanley's] and [Mr Gordon] to execute the assignment of the agreement for the additional loan.The decision of Judge Mathers[19] Judge Mathers found in favour of IBA:[39] I am satisfied, having heard the evidence, that both DB and [IBA] always knew there were two loan agreements of $40,000 which were to be assigned to the defendant. It is hardly likely that they would not include them in the sale. Therefore both [IBA] and DB consider that the formal documentation covers correctly their common intention. [40] I have concluded that Mr Gordon was careless in his discussion with [IBA] and probably honestly believes there has been a mistake. If there has been a mistake however it was his unilateral mistake. I reject all allegations of fraudulent or negligent conduct of [IBA] as pleaded by [Stanley's] and by [the solicitors] in their statements of defence. I reject also the factual basis for any suggestion of misleading conduct in trade under the Fair Trading Act. I do not accept that [IBA] misrepresented the position and induced [Stanley's] to execute the agreement. I do not accept that [IBA] wrongly included an additional loan contrary to the intention of the parties. Neither do I accept the pleaded breach of contract because the additional loan was part of the agreement and therefore there can be noindemnity for a breach that did not occur. I prefer the evidence in relation to my above findings of [IBA]. [46] I consider that the common intention of the parties was that [Stanley's] would take over whatever were the term loans (and Mr Gordon was careless as to what they were), which obviously had to be repaid, and the marketing services agreement. I do not consider that [Stanley's] can found [its] whole case upon the sale and purchase agreement, first submitted in draft form, having the term loan as singular and marketing agreements as plural. That does not accurately represent the mutual intention of the parties. She also declined to grant rectification in favour of Stanley's against Dominion Breweries and IBA (in relation to the assignment).Laurenson J's decision[20] Stanley's and Mr Gordon appealed to the High Court and their appeal was allowed by Laurenson J. [21] Laurenson J's concluded that the case turned on the true construction of the agreement for sale and purchase. Although this approach had not been taken by Stanley's in the District Court, Laurenson J considered that it had been signalled in the solicitors' statement of defence (see [16] above). He was critical of the approach taken by Judge Mathers in [46] of her judgment, and in particular her conclusion that the sale and purchase agreement did not represent the mutual intention of the parties. The key elements in his reasoning were as follows:[46] IBA contend that, in fact, the agreement somehow imposed a liability on the appellants to assume a liability for a further $40,000 thereby relieving IBA for any liability for this sum. If IBA was correct in this contention, then the total consideration to be paid was $140,000. [47] There is nothing in the agreement for sale and purchase which provides any foundation for such a contention. To the contrary: [a] The specific terms of the agreement for sale and purchase, which I have referred to above, which clearly define the total purchase price as being $100,000 (plus GST, if any).[b] GST is referred to as being only relevant to the sum of $100,000. There is no provision taking into account GST in relation to any further $40,000. [c] As Mr Richard McCabe agreed in evidence "Mr Gordon accepted $100,000 as a fair price". [d] Furthermore, the terms of clause 6.1(3) (see para [29] above) cannot be overlooked in this context. [48] If it had been the case that the parties had intended that the total consideration to be paid was to include [Stanley's] assuming liability for the additional $40,000 due to DB, then in the case of an agreement for sale and purchase prepared by the vendor's solicitor (as it was in this case) the consideration provisions in the agreement would have referred to:• A total purchase price of $140,000 (plus GST, if any).• $50,000 being payable on possession.• Balance of purchase price to be paid or satisfied as follows: [a] $40,000 by the purchaser assuming liability under the additional loan agreement (doc. 2).[b] Adjustments for incomings and outgoings on the possession date. [c] The balance on 30 September 2000 together with interest thereon at 10%. The agreement contained no such provision. [49] It occurred to me after the hearing that, if indeed, IBA had intended that the appellants were to assume liability for the additional advance of $40,000, then this would have been indicated by apportionment of interest in respect of this loan in the settlement statement. Unfortunately, this document was not included in the agreed bundle of documents, nor does it appear to have been produced at the hearing in the District Court.[22] Laurenson J then decided the case in favour of Stanley's on the basis that as there was no requirement under the sale and purchase agreement for Stanley's to accept liability for the hard loan, its acceptance of that liability under the assignment meant that it was entitled to a reduction in the purchase price payable to IBA (in effect to come off the term loan liability). The basis upon which the Judge reached this conclusion is not made entirely explicit in the judgment.[23] Laurenson J accepted (at [64] of his judgment) that, given the factual findings made by Judge Mathers which were not challenged on appeal, the case had to be decided on the basis that:[a] There was a common intention between IBA, the appellants and DB, that the appellants would assume liability for all debts owned by IBA to DB, whatever these may have been. [b] The appellant, Mr Gordon, was careless in failing to establish what were those liabilities.It is clear that the Judge's interpretation of the contract did not lead to the consequence that Stanley's had made out its misrepresentation claim. At the time the assignment was submitted to Stanley's solicitors there was no final contract between IBA and Stanley's. The assignment as drafted was congruent with the common understanding of the parties (as determined by Judge Mathers). So there was no misrepresentation implicit in the presentation of the assignment to Stanley's solicitors. Indeed in the High Court, Stanley's was no longer pursuing a misrepresentation claim. [24] It seems to us that Laurenson J's judgment proceeds on the basis that under cl 6.1(3) of the general conditions IBA was in breach of contract for not paying off the hard loan and that Stanley's was entitled to an indemnity in relation to its liability under the assignment. Not addressed by the Judge is how that conclusion could be reconciled with the clear words of the assignment, under which Stanley's accepted primary responsibility for that loan. If Stanley's had defaulted on the payment to Dominion Breweries leaving it to be paid by IBA, the effect of the assignment was that IBA would then have been entitled to indemnity from Stanley's. So on the approach taken by the Judge there was an inconsistency between the assignment and the sale and purchase agreement.Was Stanley's required to assume responsibility for both loans under the contractual arrangements with IBA?[25] The appellant's argument before us was basically that the judgment in the High Court deviated unacceptably from the pleadings. There is a good deal of force in this complaint. If the approach taken by Laurenson J had been appropriatelypleaded (ie as a claim for damages or indemnity associated with cl 6.1(3) of the general conditions), it would have been open to IBA to call more evidence addressed to the provenance of the agreement for sale and purchase and perhaps to seek rectification. Given that there is an inconsistency between cl 2 of the special conditions and the assignment with the latter document being in accord with the common intention of the parties (as determined by Judge Mathers), such a claim may have succeeded. This may have turned on the level of generality at which the question of common intention would have to be assessed. On the approach taken by Judge Mathers, there was a common intention that Stanley's would accept liability for all money owed with Mr Gordon simply being mistaken as to the amount and nature of the loans. Such mistake would not necessarily be inconsistent with rectification. We, however, prefer to address the case by reference to the merits rather than the pleading issue. [26] As already identified, the fundamental problem with the agreement for sale and purchase is that cl 2 of the special conditions is inaccurately worded. There was, on any view, only one marketing services agreement. Yet the clause refers to "marketing services agreements" in the plural. There were two loan agreements but the clause refers to "loan agreement" in the singular. [27] It is not the law that every typographical error or misstatement or other infelicity in a contract can only be remedied by rectification proceedings. It is open to the courts to look at the surrounding matrix of facts including associated contractual documentation. [28] Here, the matrix of facts generally supports IBA: (a) There were two loan agreements and one marketing services agreements and the most logical explanation for the terms of cl 2 is that whoever drafted the clause simply put the words "agreement" and "agreements" in the wrong place. (b) The assignment agreement correctly refers to loan agreements in the plural and marketing services agreement in the singular.[29] With respect to Laurenson J, the considerations he mentions in [46], [47], [48] and [49] of his judgment are not controlling: (a) Because this was the sale of business as a going concern it was zero rated for GST. (b) There is no necessary incongruity between the purchase price being identified as $100,000 and Stanley's taking over liability under the hard loan. Stanley's after all were taking over liability under the soft loan and yet this did not feature in the calculation of the purchase price as expressed in the agreement for sale and purchase. (c) There was no explicit provision for apportionment in relation to interest on the hard loan in the agreement for sale and purchase and we are prepared to infer that no such adjustment was made on settlement. These are features of the case which provide some support for the view taken by Laurenson J. But as the first payment was not to be made until 31 July 2000, the appropriateness of such an adjustment may not have been obvious to the parties and in any event the conveyancing associated with the transaction was generally sloppy. So these factors are not decisive. [30] There is the further point that on the approach taken by Laurenson J there is an inconsistency between the assignment (under which Stanley's has primary liability for the hard loan) and the agreement for sale and purchase (under which it was to be paid by IBA, see [24] above). [31] All in all we are satisfied that on the true interpretation of the contractual arrangements, Stanley's was to assume liability for the hard loan.Was there a misrepresentation by IBA in submitting the assignment documents to Stanley's?[32] On the basis of these conclusions and the unchallenged factual conclusions of Judge Mathers there is no basis for maintaining that there was any misrepresentation.[33] The assignment was itself prepared by Dominion Breweries and was executed first by IBA and delivered by IBA to Stanley's solicitors sometime in the first half of March 2000. Given Judge Mathers' findings as to the common understanding of the parties, findings which Laurenson J did not interfere with, it is simply not possible to treat the submission of the assignment to Stanley's solicitors as a misrepresentation. Understandably therefore, the misrepresentation issue was not relied upon by Stanley's in this Court.Result[34] The appeal is allowed, the judgment of Laurenson J is set aside and the judgment of Judge Mathers is restored. We reserve all question of costs (in relation to both the High Court and this Court) are reserved. If the parties cannot agree, the. appellant is to lodge written submission within seven days and the respondents within a further seven days.Solicitors: Murdoch Price, Auckland for Appellant Metro Law, Auckland for Respondents