JOHN ROBERT PORTER, I-SPIRE PLC AND PACIFIC TRAVEL HOLDINGS PTY LIMITED V GULLIVERS TRAVEL GROUP LIMITED CA CA245/06

JOHN ROBERT PORTER, I-SPIRE PLC AND PACIFIC TRAVEL HOLDINGS PTY LIMITED V GULLIVERS TRAVEL GROUP LIMITED CA CA245/06 14 August 2007IN THE COURT OF APPEAL OF NEW ZEALAND CA245/06 [2007] NZCA 345BETWEEN JOHN ROBERT PORTER, I-SPIRE PLC AND PACIFIC TRAVEL HOLDINGS PTY LIMITED Appellants AND GULLIVERS TRAVEL GROUP LIMITED Respondent Hearing: 15 May 2007 Court: Arnold, Gendall and Harrison JJ Counsel: S A Grant and T A Chubb for Appellants J W S Baigent and N Alley for Respondent Judgment: 14 August 2007 at 3 pmJUDGMENT OF THE COURT A The appeal is dismissed. B The appellants must pay to the respondent costs in the sum of $6,000 plus usual disbursements. We certify for second counsel.____________________________________________________________________REASONS OF THE COURT(Given by Gendall J) [1] This is an appeal against a decision of Baragwanath J, delivered in the High Court at Auckland on 12 October 2006, declining to grant to the appellants aninterim injunction: HC AK CIV-2006-404-5280. The appellants' amended application for interim injunction sought to restrain the respondent (Gullivers) from referring a dispute to an expert until further order of the Court. It also sought the provision of certain information and the return of, or access to, certain "statutory records". [2] The dispute arose out of a contract for the sale and purchase of the appellants' travel business to Gullivers (the contract) and concerns a price adjustment mechanism. Gullivers said that the appellants were liable to pay it a substantial sum under the price adjustment provisions. The appellants disputed this and invoked the dispute resolution process contained in cl 28 of the contract (set out below at [9]). The first step in that process was that the parties were to "use their best endeavours to resolve the dispute by negotiation in good faith" and were to hold at least one meeting for that purpose. The parties did meet, unsuccessfully. Gullivers then required that the matter be referred to an independent expert for resolution. [3] The appellants issued proceedings claiming in detinue for the return of certain business records and also alleging that Gullivers had breached the contract in three respects. The appellant sought orders in the nature of mandatory interim injunctions to require Gullivers to provide certain lists, schedules, bank statements, documents and information on the grounds that some of the documents were the appellants' property, and all of the material was necessary to enable the appellants to verify for themselves the accuracy of calculations made by accountants for Gullivers under the price adjustment provisions. The appellants sought to prevent any reference to an independent expert in the meantime.Essential background[4] By contract dated 2 October 2005 the appellants sold their travel business to Gullivers for $22.9m. The transaction settled on 28 October 2005. [5] The contract provided that there would be an adjustment to the purchase price after settlement to take account of a deficit in working capital, which the parties hadagreed existed but which they had not quantified at the time of contracting. In general terms, the contract contemplated that the parties would make a provisional estimate of the deficit at settlement and then Gullivers would recalculate it after about six months. Gullivers' recalculation of the working capital would be audited by PriceWaterhouseCoopers (PWC), with whom the parties had the right to liase regarding the audit. The appellants undertook to pay the amount of the deficit, and to purchase any of the company's debts unpaid ninety days after the completion date. [6] The process for the calculation of the shortfall is set out in cl 3.2, which provides:Completion Working Capital: The parties shall determine the level of working capital that is in the Businesses as at the Effective Date, as calculated in accordance with the Completion Working Capital Statement formula below, (the Completion Working Capital) in accordance with this clause 3.2. (a) Pre-Completion: Prior to the Effective Date, the parties shall have undertaken and agreed the Completion Working Capital Statement as at the Effective Date and estimate the level of Completion Working Capital. . (b) Post-Completion:(i) Following estimation under clause 3.2(a) of the Completion Working Capital, and on or about the date that is six months following the date of Completion, Gullivers will (unless the parties agree otherwise) audit and recalculate the Completion Working Capital Statement (as at the Effective Date), provided that the Auditors use the same treatments for their audit as set out in this clause 3.2. The [appellants] and Gullivers will both have rights to liaise with the Auditors regarding the audit. The Auditor's costs in undertaking the audit will be shared between the [appellants] and Gullivers equally. (ii) The Auditors will notify Gullivers and the [appellants] of the result of that audit, and the [appellants] shall, within 5 Business Days of such notification, either confirm their agreement with such determination or if they do not agree with such determination invoke the dispute resolution process provided for in clause 28. (iii) . (iv) .For the purposes of this clause, the Completion Working Capital Statement shall be:A minus BWhere:A = the Cash, the Prepayments, the Debtors and the Inventory; andB = the Creditors and those Employee Liabilities referred to in (b) of the term as defined in this Agreement. .[7] The recalculated working capital as audited by PWC was to become the final figure unless the appellants did not agree, at which point the dispute resolution process referred to below would come into play. [8] In addition to the recalculation of working capital, the contract contemplated that there might be a further adjustment to the price to take account of aged debts. Clause 7.5 of the contract provided:7.5 Uncollected Debtors:(a) Collection of Debtors: Gullivers will use reasonable endeavours, consistent with its usual business practices, to collect any Debtor. (b) Indemnity for Non-Collection of Debtors: Any Debtor that remains outstanding for a period exceeding 90 days from the Completion Date shall be re-assigned to the [appellants] (in accordance with clause 9.2) and the [appellants] will pay Gullivers the full amount of such Debtor.[9] The provisional estimate adopted by the parties at settlement was slightly under $4m. After settlement, Gullivers began the recalculation process. PWC conducted its audit. The appellants say that they did not have an opportunity to liase with PWC before the audit commenced, but it seems clear that they did liase with PWC during the audit. Foe example, they were provided with PWC's initial issues report and were given access to PWC's audit files and work papers. The amount of unpaid debtors and working capital deficit was fixed at $7.9m. The appellants did not accept that assessment. They then invoked the dispute resolution clause, which provided:DISPUTE RESOLUTION28.1 In the event of a dispute arising between any one or more of the [appellants] on the one hand, and Gullivers on the other, about interpreting or implementing this Agreement's provisions: (a) Negotiate: the parties will use their best endeavours to resolve the dispute by negotiation in good faith. The parties will attend at least one meeting to discuss an attempt to resolve the dispute as a condition precedent to taking any other steps concerning the dispute (including but not limited to commencing any legal proceedings other than an application for injunctive relief); and (b) Expert Determination: subject to clause 28.2, if the dispute is not resolved within 10 Business Days after applying clause 28.1(a), then the parties will refer the dispute to an expert, to be agreed on by both parties or, failing agreement, to an expert nominated by the President (or equivalent officer) for the time being of the New Zealand Law Society. The expert will make a decision which shall be final and binding on the parties concerning the dispute and as to costs.[10] Clause 28.2 deals with a dispute over the Completion Working Capital Statement, and its audit, where the sum involved is between $50,000 and $500,000. It provides a simpler procedure in such cases, involving reference to a partner in Deloittes. [11] After the appellants gave notice that they invoked the dispute resolution procedure, the parties met in accordance with cl 28.1(a). They were unable to reach agreement, although the appellants did make a proposal for settlement. On 11 August 2006 Gullivers required the dispute to be referred to an expert, pursuant to cl 28.1(b). [12] The appellants then commenced their action in the High Court at Auckland, alleging two causes of action. First, they claimed in detinue, seeking return from Gullivers of "statutory records", being the business records said to be owned by the appellants. Secondly, they pleaded breach of contract by Gullivers in three respects - non-compliance with the time limit for the examination of the level of working capital; lack of good faith in negotiations (failing to provide the appellants with certain information); and failure to use reasonable endeavours to collect moneys owing by debtors. Under the second cause of action the appellants sought ordersdirecting recalculation and audit of "completion working capital" and the supply of certain documents and information to the appellants. The appellants also claimed damages, to be quantified "following discovery", and costs. At the same time, the appellants filed their interlocutory application seeking interim orders, which was amended on 5 October 2006. [13] The amended application for interim relief was heard before Baragwanath J. The appellants wanted to prevent referral to an expert, contending that Gullivers had not fulfilled the condition precedent in cl 28.1(a). In particular, Gullivers had not acted in good faith in refusing to provide the appellants with documents that the appellants said they needed to verify the audited calculations. The appellants contended that without these documents they would be prevented from participating in good faith negotiations and in dealing with any proceeding before an agreed expert. The appellants further contented that Gullivers had acted in bad faith by resiling from an agreed variation, exploiting a position of dominance, refusing to answer reasonable requests for relevant information, and failing to allow the appellants access to information in respect of debtors and the completion working capital.High Court decision[14] In his judgment Baragwanath J defined the issue as being:[27] The essential question is whether this Court should resolve the dispute over provision of the documents prepared by Gullivers post- settlement as a necessary step to determining whether the jurisdictional condition precedent to appointment of the independent expert has been satisfied; or whether the condition precedent should be treated as satisfied and the matters in dispute referred to the expert.[15] As the Judge later said (at [30]), as a practical matter the difference between the parties is whether the dispute over the provision of documentation and information was to be resolved through the courts or through the contractual dispute resolution process. [16] Baragwanath J summarised the legal principles applicable to "good faith" clauses and said:[35] The present obligation is to "use best endeavours to resolve the dispute by negotiation in good faith" and to "attend a meeting to discuss an attempt to resolve the dispute", as a condition precedent to taking other steps (namely reference to an expert). In the present context I see no difficulty in construing the contract. Just as in criminal law and the tort of deceit the Courts are required to infer from conduct whether there has been fraud and thus to assess a state of mind, so here the Court must simply apply as a question of fact the test the parties have selected. Gullivers has either performed in good faith or not.[17] Each of the parties led expert accounting evidence. The appellants led evidence from two independent experts, Messrs Hagen and Hussey, to the effect that the appellants needed further information to enable them to participate in the price adjustment process, particularly post-settlement information. Gullivers led evidence from one such witness, Ms Dawson, to the effect that the audit process would have addressed any issues in this regard. The Judge observed that although there were significant differences between the expert witnesses that was:[42] as so often in matters of professional judgement, a difference of responsibly held opinion which it is for the decision-maker to resolve. I believe I understand both views: Mr Hussey's [that the appellants'] demonstrably poor record-keeping requires recourse to the post-settlement information to get a true figure for the capital deficiency as at settlement; Ms Dawson's that the process of audit by [the auditors] to which Gullivers was privy will have removed any real room for concern.[18] The Judge concluded:[43] I am not persuaded that Gullivers' refusal to hand over the documents it has created has been shown to be arguably unreasonable and still less that it has acted otherwise than in good faith. In reaching that conclusion I take into account that, for reasons to be mentioned, the expert is not prevented from having access to the disputed information should he or she consider it to be required in order to do justice. [44] It follows that the decision-maker must be the expert rather than the Court.[19] Baragwanath J concluded that the appellants did not have an arguable case that Gullivers had not acted in good faith. The contractual dispute resolution process set out in cl 28.1(b) applied, and the matter should be referred to an expert. [20] Although not strictly required to do so, the Judge also considered the balance of convenience, saying that even if he had been satisfied that the appellants' claim as to the issue of Gullivers' good faith was arguable:[45] in the absence of substantial evidence of bad faith I would be disinclined to restrain the appointment of an expert on grounds of balance of convenience. The dispute resolution model selected by the parties has the great virtues of both quality and efficiency. The parties are able to agree on the most suitable expert; or alternatively can be confident that such an expert will be selected by the President of the New Zealand Law Society. The judgement between the opinions of the two experts should be made by the decision-maker appointed in terms of the parties' contract rather than by this Court. The earlier the stage at which that expert is introduced the better the parties' expressed intention will be given effect. The comparison to be made is not with the negotiation process, which has clearly been unsuccessful, but with the delays of trial and potential appeal of the Court process. The fact that the parties are in quite heavy adverse litigation suggests that negotiation has failed.[21] In declining the application for an injunction, the Judge concluded:[49] I am satisfied that both the balance of convenience and the overall justice of the case point to this Court's stepping back from the dispute and allowing appointment of the expert to proceed.Basis of appeal[22] Counsel for the appellants argued that there was, contrary to the Judge's finding, a serious question to be tried. She submitted that the Judge erred in holding that the balance of convenience lay in favour of declining the injunction. She argued that he failed to take into account relevant matters, and erred in finding that the overall justice of the case favoured declining the injunction. [23] In relation to the "serious question" issue, Mrs Grant argued that that under cl 28.1(a) the parties were required to use their best endeavours to resolve the dispute by negotiation in good faith and were required to attend at least one meeting for the purpose. This required that Gullivers provide the appellants with the documents and information which they sought so that they could have a meaningful negotiation. Gullivers' refusal to provide the information meant that it had not participated in the negotiations in good faith. As a consequence, a pre-condition to the appointment of an expert had not been met. Accordingly, the interim injunction restraining the referral should be granted.DiscussionFurther affidavit evidence[24] As a preliminary matter both the appellants and Gullivers sought leave to adduce further evidence. The appellants sought leave to file affidavits from their two expert accounting witnesses, Messrs Hagen and Hussey. They essentially expressed the view that the appellants would need certain information and documents if they were to be able to deal effectively with the matters in dispute pursuant to the contract. For its part, Gullivers sought to file an affidavit from Mr Dick, updating events since the High Court judgment of 12 October 2006. He deposed that all relevant documents have been made available to the appellants despite Gullivers' belief that it had no strict obligation to provide them. [25] The updating evidence of Mr Dick is non-contentious and we admit it. We decline to admit the further affidavit evidence of the two accountants on behalf of the appellants. Both accountants filed affidavits in support of the application for interim relief and their opinions were then available. The additional affidavits add little, and are in any event irrelevant.Interim injunction[26] It is elementary that the granting of an interlocutory injunction is a temporary and discretionary remedy to protect a plaintiff against injury by violation of its rights which could not adequately be compensated in damages if it were to succeed in its proceedings. Correspondingly, the Court has to weigh the need to protect a defendant as well as a plaintiff, in determining where the balance of convenience lies. For an interlocutory injunction to be granted the action as pleaded must be capable of supporting a claim for a perpetual injunction or other sufficient equitable relief. An interim injunction in favour of a plaintiff is to enforce, support and protect a legal right it possesses, and only the breach or threatened breach of a legal duty or the invasion or threatened invasion of a legal right enables the Court in its equitable jurisdiction to grant an interim injunction.[27] In this case the legal rights pleaded involve a claim in detinue for return of the appellants' statutory records and a claim for breach of contract.Detinue claim[28] The documents the subject of the detinue cause of action have been supplied. Gullivers say that it has, additionally, provided all remaining relevant documents or information. The appellants contend that the following are required by it, and have not been provided:(a) List of creditors paid since 28 October 2005 including pertinent information such as the relevant invoice number and amount paid and details of the travel undertaken; (b) Schedule of commencement debtors as at 28 October 2005 and receipts schedule relating to the commencement debtors including pertinent information such as the relevant invoice number and amount paid; (c) Bank statements of the quarantined businesses for 6 months after the completion date; (d) Management Accounts and Balance Sheet positions of the quarantined operations of each of the businesses.[29] Gullivers contend that many of the documents now sought by the appellants in this appeal are different from those sought in the High Court application and considered by the learned High Court Judge. It says that in any event all material and documents relevant to the dispute will be available to the expert in the dispute resolution process and that he or she will be able to deal with any issues arising in that connection. [30] We agree that, if there are any remaining issues as to the return or provision of documents, they should be addressed by means of the contractual dispute resolution process. We see no reason why such a dispute would not fall within the language of cl 28.1, as being a dispute about the implementation of the contract's provisions, or would not be dealt with by the expert as an adjunct to dealing with the substantive dispute, a point to which we return at [35] and [36] below.Breach of contract claim - "Best endeavours to resolve the dispute by negotiation in good faith" [31] Agreements where parties agree to negotiate in good faith have been the subject of a wealth of judicial authorities. In the judgment under appeal, Baragwanath J refers to the Australian case of Aiton Australia Pty Ltd v Transfield Pty Ltd [1999] NSWSC 996, a decision of the Supreme Court of New South Wales. There was extensive discussion on the issue of an agreement to negotiate in good faith and reference is made in that case to the House of Lords decision inWalford v Miles [1992] 2 AC 128 (HL(E)). In that case Lord Ackner said at 138:The reason why an agreement to negotiate, like an agreement to agree, is unenforceable, is simply because it lacks the necessary certainty. The same does not apply to an agreement to use best endeavours. This uncertainty is demonstrated in the instant case by the provision which it is said has to be implied in the agreement for the determination of the negotiations. How can a court be expected to decide whether, subjectively, a proper reason existed for the termination of negotiations? The answer suggested depends upon whether the negotiations have been determined "in good faith". However the concept of a duty to carry on negotiations in good faith is inherently repugnant to the adversarial position of the parties when involved in negotiations. Each party to the negotiations is entitled to pursue his (or her) own interest, so long as he avoids making misrepresentations. To advance that interest he must be entitled, if he thinks it appropriate, to threaten to withdraw from further negotiations or to withdraw in fact, in the hope that the opposite party may seek to reopen the negotiations by offering him improved terms.the vital question [is] – how is a vendor ever to know that he is entitled to withdraw from further negotiations? How is the court to police such an "agreement"? A duty to negotiate in good faith is as unworkable in practice as it is inherently inconsistent with the position of a negotiating party.[32] That approach is followed by Tipping J in delivering the judgment of this Court in Wellington City Council v Body Corporate 51702 [2002] 3 NZLR 486 at 491:[14] A contract purporting to bind the parties to negotiate, whether expressed in terms of good faith, best endeavours or otherwise, is in substance a contract to try to agree. Breach lies in failure to try, either at all or according to whatever may be required. Breach does not lie in failing to agree.and at [17]:an obligation to negotiate in good faith is not the same as an obligation to negotiate reasonably. [Counsel] properly accepted the distinction. An obligation to negotiate in good faith essentially means that the parties must honestly try to reach agreement. They remain able to pursue their own interests within what is subjectively honest, rather than what is objectively reasonable. In this respect the absence of an objective external criterion, is clearly relevant. What stance a negotiating party may take within the bounds of subjective honesty is very much more difficult to determine than if the bounds were those of objective reasonableness.[33] And further at [31]:the [theory of consensus in contract] applies by analogy to a process contract which obliges the parties to negotiate in good faith for the purpose of trying to reach agreement on all essential terms. Good faith in this context is essentially a subjective concept, as the House of Lords pointed out in Walford. There is thus no sufficiently certain objective criterion by means of which the Court can decide whether either party is in breach of the good faith obligation. The Court is unable in such cases to resolve the question whether a particular negotiating stance was adopted in good faith. The law regards the task of reconciling self-interest with the subjective connotation of having to act in good faith as an exercise of such inherent difficulty and uncertainty as not to be justiciable. The ostensible consensus is therefore illusory.[34] In the present case the parties contracted that, in endeavouring to resolve any dispute that arose, they would attend at least one meeting as a condition precedent to taking other steps. That was done. The evidence before the High Court did not suggest any absence of good faith on the part of Gullivers and it could not be said that an even arguable case existed that Gullivers as a negotiating party acted outside the bounds of "subjective honesty". [35] Provisions of the type contained in cl 28 are common in commercial contracts. If it should be that whenever negotiations broke down after meetings, consultations and the like, the parties could come to the Court for relief, or seek some remedy rather than following the agreed arbitration or other dispute resolution, there would be little point in having such agreed processes in commercial contracts. It is difficult to believe that commercial parties would agree to a dispute resolution process which was intended to deal with an important substantive dispute concerning the calculation of price, but was not intended to deal with disputes about the provision of information and documents relevant to that price calculation. Yet that isthe effect of the appellants' argument. We note that as part of the price adjustment process the appellants were entitled under cl 3.2(b)(i) of the contract to liase with PWC regarding the audit. This provided an opportunity for them to seek information and explanations as to the basis of the calculation prior to the dispute resolution process being invoked. [36] Further, we do not consider that it is right that a party who seeks additional information in the course of negotiations is entitled to say that the other party's refusal to provide it shows that the other party has not participated in the process in good faith. The information requested may be irrelevant, the request may be oppressive or frivolous and so on. The fact that a party has an obligation to negotiate in good faith does not mean that it must capitulate and simply accept the other party's view. Where there are disputes of this type, we consider it unrealistic to expect a court to resolve them, rather than the party who has the responsibility of resolving the substantive dispute, which in this case is the independent expert. That person is best placed to deal with what are in essence procedural issues relating to discovery of documents and disclosure of relevant information. [37] In the result, we agree with Baragwanath J that there is no substantial issue to be tried in respect of this aspect of the case. [38] Even if it was necessary to come to the question of balance of convenience, we are satisfied by a wide margin that the Judge was correct. Questions of delay loom large. If an interim injunction had been granted, the High Court proceedings remained the sole forum for the resolution of this aspect of the wider dispute. This dispute involves a significant commercial contract involving large sums of money, some of which remains held in escrow. Any delay in resolving the dispute and determining what amount if any is to be refunded to Gullivers is to be avoided. [39] Naturally, the appellants may still, if they wish, pursue the substantive proceedings. What their remedy might be is uncertain because it seems that they have received most of the documents that are sought and it is unclear what any measure of damages might be, if there be any actionable breach. It is quite apparent that the interests of justice – which, after all, is what governs the grant or refusal ofinterim injunctions – require that Gullivers be entitled to pursue the dispute resolution process that the appellants agreed to in the contract, and instigated in relation to the pricing adjustment. [40] For completeness we record that counsel for the appellants submitted that the Judge erred in fact when stating at [20] that Gullivers' position in relation to documents created after the sale being relevant was:subject to the caveat that if a creditor has actually made payment during the post-settlement period that is of course evidence that the creditors were properly listed.Counsel says the Judge erred because creditors do not make but rather received payment. That is of course correct. But it is obvious that this reference to "creditors" was a slip because the Judge correctly refers to the adjustment relating to unpaid "debtors" in the other parts of the judgment. This point does not assist the appellants. [41] The appeal is against the exercise of the Judge's discretion. The Judge has not been shown to have acted on a wrong principle, to have considered irrelevant matters or to have overlooked relevant matters. Nor has he been shown to have been "plainly wrong". Indeed, we think that he was plainly right.Decision[42] The appeal is dismissed. Gullivers is entitled to costs, which will be fixed in the sum of $6,000 plus usual disbursements. We certify for second counsel.Solicitors: Barrie Hopkins, Auckland for Appellants Simpson Grierson, Auckland for Respondent