PETERS V COSFORD HC AK CIV-2010-404-001275

PETERS V COSFORD HC AK CIV-2010-404-001275 1 October 2010IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2010-404-001275UNDER the District Courts Act 1947 IN THE MATTER OF an appeal against a decision of the District Court BETWEEN LINDA ANNE PETERS Appellant AND ALLAN RAY JAMES COSFORD Respondent Hearing: 22 September 2010 Counsel: W A Endean for appellant D K Wilson for respondent Judgment: 1 October 2010 at 2.30pmRESERVED JUDGMENT OF DOBSON JThis judgment was delivered by me on 1 October 2010 at 2.30pm pursuant to Rule 11.5 of the High Court Rules. Registrar/Deputy Registrar DateSolicitors: Dawsons, PO Box 38-143, Howick, Auckland for appellant Duggan & Murphy, PO Box 11145, Ellerslie, Auckland for respondentThe dispute[1] The dispute between these parties relates to alleged non-performance by the respondent (Mr Cosford) of obligations assumed under a deed concluded between them (the Agreement) pursuant to s 21 of the Property (Relationships) Act 1976 (the Act) subsequent to the termination of the de facto relationship between them. [2] In 1997, the parties commenced a de facto relationship. They both had children from previous relationships and lived together in the residence previously occupied by Mr Cosford, whilst the residence belonging to the appellant (Ms Peters) was retained and rented to others. At some point, both residences were transferred to a family trust. [3] In 1999, they each raised money for an investment by Mr Cosford in the company with which he was then working. Ms Peters invested $40,000 and Mr Cosford $60,000 for the acquisition of a 20 per cent shareholding in MCS Holdings Limited (the company). The parties separated in August 2001. [4] On 1 May 2002, the parties entered into the Agreement. Mr Cosford retained as his separate property the 100,100 shares in the company that constituted their 20 per cent stake. The Agreement addressed this shareholding in the following terms:3.1.3 Upon any sale of all of the shares in MCS Holdings Limited (Company) by its shareholders, or the sale of the whole of the Company's business and assets within five years of the Date of Settlement, Allan will pay Linda the sum of $40,000 (Company Payment). The Company Payment, if made, will be made less: (a) The sum of any monies paid to Linda by the trustees in accordance with clause 3.1.4 below; and (b) Any other part-payments of the Company Payment which Allan may make to Linda within five years following the Date of Settlement; 3.1.4 The trustees of the Trust will pay to Linda a sum equivalent to 40 per cent of any dividends received by them from their shares in the Company (Dividend Payment), the Dividend Payment to continue to be paid until the full Company Payment is paid or a saleof all of the shares in or the business and assets of the Company occurs in accordance with clause 3.1.3, whichever is the earlier; ... 3.1.6 Allan undertakes that he will use his Best Endeavours to facilitate a sale of all of the shares in or the business and assets of the Company in accordance with clause 3.1.3 within five years of the Date of Settlement.[5] No payment was made under clause 3.1.3 of the Agreement. In 2007, Ms Peters sued Mr Cosford in the District Court claiming the balance of the sum of $40,000 for breach of a claimed obligation to make payment under clause 3.1.3, and for breach of the obligation to use best endeavours under clause 3.1.6. 1[6] The claim was heard in the District Court at Manukau in December 2009 and Judge Spiller delivered a reserved decision on 3 February 2010 dismissing the claims. It appears that Ms Peters' case was argued in the District Court on an amalgam of breach of contract and entitlement to relief under ss 21J and 21M of the Act. Mr Cosford originally disputed the jurisdiction of the District Court to hear claims in this form, but that objection appears not to have been pursued at the hearing. Judge Spiller considered an invitation to set the Agreement aside on the grounds that it had become unfair or unreasonable in light of changes of circumstances under s 21J(4)(d) of the Act, but declined to do so. [7] On argument of the appeal, for Ms Peters Mr Endean conceded that there had not been jurisdiction to pursue relief under the Act before the District Court. Accordingly, on the appeal, he did not advance any arguments for relief under the Act. [8] Accordingly, the appeal focused on the claim as solely one for breach of contract, on which the District Court had found against Ms Peters, essentially on the grounds that clause 3.1.3 had not been triggered because there had not been a sale of all of the shares or all of the business and assets of the company, and that she could not make out a breach of Mr Cosford's best endeavours obligations to procure such a sale.1 The circumstances of partial payments attributed by Ms Peters to the obligation under clause 3.1.3 are addressed in [20] below.Mr Cosford's conduct in relation to the company[9] Mr Endean focused primarily on the circumstances claimed to constitute a breach of the best endeavours obligation. To evaluate the arguments, it is first necessary to understand a little more of the background to Mr Cosford's conduct in relation to the business of the company. [10] The Agreement having been completed in May 2002, in September 2004 Mr Cosford sold down one half of his 20 per cent holding for $90,000. Mr Endean treated this as a relevant fact that had not been before the District Court. Although the adducing of documents establishing this as new evidence on the appeal was consented to on behalf of Mr Cosford, Mr Wilson disputed that the existence of that sale had not been available at the time of the hearing before the District Court. [11] In any event, that sale diluted what had been a 20 per cent minority stake, down to 10 per cent, and at least subsequent to that time it appears the directors of the company were by no means united in their views on its governance and any proposals for its sale. Mr Cosford had not assumed any obligation by clause 3.1.3 of the Agreement to account to Ms Peters on the sale of his shareholding in the company, but rather only in the event of a sale of the whole of the company, either by sale of the shares or its business and assets. The agreement committed him to use his best endeavours to obtain that objective. A reduction in his shareholding is therefore not relevant in terms of triggering the obligation. However, it is indirectly relevant in the sense that Mr Cosford might well have even less ability to control the governance of the company in any initiatives to sell it after that reduction in the extent of his shareholding. [12] After what appear to have been protracted negotiations, including the prospect of selling the whole of the company's business, contracts were concluded in October 2005 for the sale of the bulk of the assets of the company to another company operating in the business of radio-telephone communications (Team Talk). The deal was structured on terms that Team Talk acquired the remaining 90 per cent of the shares in the company, subject to Mr Cosford taking over the whole of that shareholding. The remaining shareholders were paid cash at a rate agreed to amountto approximately $150,000 per 10 per cent holding. For his part, Mr Cosford became the sole owner of the company that had vested in it the remaining assets not acquired by Team Talk in the course of its acquisition and on-sale of the balance of the shares. [13] Mr Wilson was inclined to concede Mr Endean's analysis of these transactions having the effect that the original investment of $100,000 to acquire 20 per cent of the company had, by the two transactions in 2004 and 2005, been transformed into $90,000 repayment in cash (for a 10 per cent holding), and acquisition of shares relating to assets valued at approximately $150,000, totalling at that point some $240,000 in value relative to the original $100,000 investment. [14] The Agreement also resolved terms on which the parties would separate their respective interests in the two residential properties owned by them at the outset of the relationship. Counsel were inclined to attribute different implications to the way in which the parties had settled these respective interests in clauses 3.1.1 and 3.1.2 of the Agreement. In round terms, it appears that Ms Peters' property was subject to a mortgage of some $110,000 at the commencement of the de facto relationship. By the end of the relationship, she had made reductions in the capital outstanding of some $10,000 so that the mortgage would have been $100,000 but for the further $40,000 she borrowed to invest in Mr Cosford's business. Accordingly, at the time of the Agreement, a complete repayment of the mortgage indebtedness would have required $140,000. On the terms of the Agreement, Ms Peters was to provide $60,000 of this (effectively be re-mortgaging after the settlement) and Mr Cosford was to provide $80,000. There is no sufficient basis for suggesting that the contribution made by Mr Cosford to reduction of the mortgage on Ms Peters' property was some form of consideration for the investment she had funded in the shares in the company. Accordingly, I do not treat those clauses as having a bearing on the application of the clauses dealing with the repayment of the money Ms Peters contributed to the investment in the company.Scope of best endeavours obligations[15] In the District Court, the thrust of criticisms on behalf of Ms Peters was to the effect that Mr Cosford had made inadequate attempts to sell the remainder of the business once he was in control of it, because he did not explicitly list it for sale in any form, or retain any agent or broker to assist in marketing it. His rejoinder to this was that he had made attempts to sell what remained of the company's business to an Australian entity that was perceived as having a complementary interest, but that that was unsuccessful. There was no evidence of those attempts continuing past early 2006. Beyond that, Mr Cosford claimed that no point would have been served by retaining others to market the business as the industry was very small, he was thoroughly familiar with it, and could adequately assess all reasonable prospects of sale without assistance. The District Court found that Mr Cosford had not breached clause 3.1.6. [16] What then was the scope of his best endeavours obligation? [17] The context when the Agreement was concluded in May 2002 was that Mr Cosford could contribute to, but did not control, any initiatives to sell either all of the shares or the business and assets of the company. The terms of clause 3.1.3 suggest that a realisation of all the current shareholders' investments in the company was the only source from which Mr Cosford was expected to repay the amount Ms Peters had contributed to the purchase price of the shares. She was to get back her contribution, if he was funded by a sale of his investment in the course of a complete sale. She had no interest in an increase in its worth, and nor did she share any risk in a decrease in its worth. There was no provision for payment of interest, and in the event that Mr Cosford accounted to her for 40 per cent of any dividends received on his shareholding, then such amounts were to be treated as reducing the $40,000 liability. [18] On the terms of clause 3.1.3, if there was no complete sale within the five year period, then Mr Cosford's liability to pay Ms Peters the $40,000 came to an end. Accordingly, if clause 3.1.3 was intended to be a provision ensuring Ms Peters received repayment whilst protecting Mr Cosford from a demand when his resourceswere insufficient to make the payment, then it was poorly drafted from her perspective. On the wording of the clause, she ran a significant risk of not being paid anything at all if the company did not pay dividends, and the sale of the whole of the company's business and assets, or all of its shares, was not procured within five years. No liability arose if he simply sold his shareholding to others, and his best endeavours obligation did not extend to requiring him to sell his shares, independently of a sale of the whole business or all the shares. [19] In this regard, clause 3.1.3(b) has somewhat uncertain effect. It was not the subject of comment by either counsel, but I take it to acknowledge the prospect of contributions to the sum of $40,000 being volunteered by Mr Cosford at any point in the five year period, irrespective of the occurrence of a relevant sale under clause 3.1.3 or the company paying any dividends. Without more, there is no reasonable basis for inferring that clause 3.1.3(b) gives rise to any obligation to make contributions to the sum of $40,000, unless the triggering events specified in clause 3.1.3 have occurred. [20] As matters transpired, Mr Cosford did make two payments of $2,500 each, which he treated as being voluntary payments responding to Ms Peters' financial needs. Ms Peters' advisers were inclined to treat those payments as an acknowledgement of his obligation to pay the full sum of $40,000. Ms Peters' claim treated the $5,000 as being on account of the $40,000 and accordingly the claim pursued was for a payment of $35,000. Again, without more evidence suggesting an assumption of some obligation under the Agreement, there is no basis for treating those payments as other than voluntary ones as contemplated on the interpretation I suggest of clause 3.1.3(b). [21] On the terms of clause 3.1.3 then, there are a number of realistic contingencies in which Ms Peters would not be paid at all. Because of that, the scope of Mr Cosford's best endeavours obligation should be seen as intended to improve the prospects that she would be paid, rather than providing anything in the nature of a guarantee that that would occur. The best endeavours obligation was assumed in the context where Mr Cosford could contribute to, but not control, initiatives to sell the business. Clause 3.1.3 was also drafted without making anyprovision for the turn of events that ensued, in which Mr Cosford did acquire the ability to control the sale process in respect of the remnants of the company. Once the remnants of the company were under his entire control, if his "best endeavours" went to the limit of what could be achieved, then a sale was achievable. The assets left after sale of the majority of the company's undertaking to Team Talk are not described in detail but apparently included stock, plant and machinery and debtors. No accounts were adduced as evidence, so it is not possible to discern whether, on its separation from the majority of the company's undertaking, any significant goodwill could realistically have been recognised. [22] In Mr Cosford's description of the attempts to sell the remaining parts of the business, he gave the impression that it depended on technology that was becoming less marketable, and somewhat eclipsed by cell phone technologies, in the period between 2005 and 2007. The company went into liquidation in 2008. Irrespective of whether a sale of assets promptly after Mr Cosford took control would involve forgoing any significant goodwill, judicial notice can be taken of the fact that assets sold in such a break up situation are likely to achieve materially less than if they can be sold as a going concern. [23] The best endeavours obligation in clause 3.1.6 has no qualification as to the price to be achieved, relative to any benchmark such as original investment cost, but that is understandable when the obligation was assumed in the context where Mr Cosford's attempts would be constrained by a view of a majority of the shareholders. [24] I do not accept Mr Wilson's argument that the obligation was qualified by use of the words "Company's business and assets" in clause 3.1.3, so as to limit the obligation to finding a buyer for the business as a going concern. The essence of the obligation, as it applied once the majority of the assets had been sold, was to quit what remained. If there was no immediate market for the business, but there was a market for the assets when he was in control of what amounted to some 10 per cent of the original undertaking of the company, then it is artificial to confine the best endeavours obligation to only finding buyers for the partial business as a going concern in its then reconstituted form.[25] Mr Wilson resisted any suggestion that the best endeavours obligation extended to procuring a sale of the assets on a break up basis, once Mr Cosford was in sole control. He objected that the notion had never been tested on the evidence in the District Court, and that the availability of a sale on any terms was too speculative to give rise to any finding of liability, by way of reversal of the District Court's conclusion on the point.Was the best endeavours obligation breached?[26] I consider it reasonable for Mr Cosford to have appreciated that the nature of his best endeavours obligation changed once he was in control of the remaining part of the company. It seems apparent from his conduct that he did not appreciate that point. His answers in cross-examination, and indeed the terms of a 10 February 2006 email he sent to Ms Peters, reflect a position that he considered himself free to decide, as an unconstrained business decision, the best future for the remnants of the business he acquired out of the Team Talk transaction. That communication included:I am now left with a lot smaller business than before but am at least in charge and any money I make or decisions I make are at least mine... The net effect is that unfortunately I do not have the money to give you, as you wish, even if I wanted. My first goal is to make sure MCS survives as without that you and I will never receive anything more.[27] The focus in the District Court was on the claimed inadequacies in his attempts to sell the remainder of the business. On appeal, a somewhat different tack was argued, and Mr Cosford's attitude was characterised as a conscious decision to pursue the future of the remaining business as a going concern because of the perceived preference he had to retain the assets as a vehicle for generating income in the longer term. That was argued to be an approach that was not open to him because it was necessarily inconsistent with a best endeavours commitment to procure a sale. [28] Mr Endean placed substantial reliance on Mr Cosford's assessment that he was better to seek to improve the residue of the business than any alternatives hecontemplated at the time. Mr Endean invited the inference that Mr Cosford's wish to retain the shares as a source of income for him was a pretext for holding onto the shares for longer than five years to avoid his obligation to pay Ms Peters. This is also a somewhat different form of alleged breach from a straightforward criticism of the inadequacy of the attempts that were made to sell. Mr Endean supported this submission by reference to another passage in the 10 February 2006 email from Mr Cosford to Ms Peters. In that email, he denied any obligation to pay her $40,000 under the Agreement because it was specific in that the obligation was only triggered if he sold all his shares, and he explained that as he had not sold his shares, then strictly speaking he did not owe her any money. Mr Endean invited the inference that that demonstrated a keen appreciation of the scope of obligation on Mr Cosford, and an intention to structure his affairs so as to avoid it. [29] It is a criticism that is strengthened by the point that, once in control, Mr Cosford could procure a sale of the assets by any means at all, and his obligation was not qualified by any particular level of price that could be achieved on a sale. [30] In the end, I concur with the District Court Judge that Mr Cosford's refusal to retain brokers or otherwise advertise the business does not constitute a breach of his best endeavours obligation. However, Mr Cosford's refusal to acknowledge that wider opportunities for sale arose once he was in complete control, together with the evidence suggesting that he elected to manage the assets into a position where they may ultimately be worth more and would be a source of income for him over a medium to long term, were attitudes that prevented his adequately discharging his best endeavours obligation. I accordingly find that there was a breach of that provision in the Agreement.Quantum of loss[31] Ms Peters' claim was pursued on the simple basis that if a breach of the best endeavours obligation was made out, then the damage was the remaining portion of the $40,000 that would inevitably have become payable if best endeavours were applied. The sale did not have to be at any particular price and, on this view, a sale would have ensued, if best endeavours were used.[32] The outcome is a finding that Mr Cosford breached such an obligation that is cast in different terms from those contended against him in the District Court. It may be that there were a range of practical considerations that could have precluded a sale of the assets on a break up basis. Mr Cosford was not required to justify his conduct in that context in the course of his cross-examination. [33] In the alternative to his primary position for Mr Cosford, Mr Wilson's fall- back position, if a breach was made out, was that Ms Peters could not make out more than the loss of a chance that a complete sale would have ensued. [34] The law on when assessment of damages on a loss of chance basis may be appropriate, and how that exercise is to be undertaken, was reviewed by the Court of Appeal in Benton v Miller & Poulgrain (a firm). 2 Benton arose in circumstances of alleged negligent performance of a solicitors' contract of retainer, but there was no discussion of any differences that could arise as between damages' assessments in tort and in contract. On the present facts, I treat the analysis in Benton as equally applicable to assessing what is required to restore Ms Peters to the position she would have enjoyed, had the Agreement been performed. [35] The plaintiff in Benton had claimed negligence for his solicitors' failure to advise of the prudence of completing an agreement under the Matrimonial Property Act 1976. The plaintiff argued that, if such advice had been given, an agreement would have been concluded confirming the separate status of property that he subsequently had to share with his former wife. The majority judgment distinguished the respects in which a plaintiff must prove, on the balance of probabilities, that a breach of duty would be causative of loss, from those in which the quantification of loss that would have depended upon a contingency can be assessed in favour of a plaintiff on a "loss of a chance" basis. The latter approach will be appropriate where the relevant contingency involves the conduct of a third party. Once breach of a relevant obligation is made out, but reconstructing how different conduct would have avoided a claimant's relevant loss cannot be tested in evidence because it depended on a third party, then it may become appropriate to2 Benton v Miller & Poulgrain (a firm) [2005] 1 NZLR 66 (CA) at [43]-[49].measure the damages recoverable by an evaluation of the chance of the loss being avoided. [36] The situation in Benton is analogous to the present in that the failure to advise as to the prudence of a matrimonial property agreement would not necessarily have led to the completion of an agreement on terms that would have protected the claimant from the loss that subsequently occurred. Once the duty to advise of the desirability of such an agreement was established, it was a question of evaluating the relative strength of the chance that such an agreement would have been concluded by both Mr and Mrs Benton on terms which avoided the loss he subsequently incurred. [37] In the same way here, the breach alleged is not of one to sell Mr Cosford's interest and account to Ms Peters for $40,000 of the proceeds, but of the breach of an obligation to use best endeavours to procure a sale of the remnants of the business. Once breach is established, the issue is whether the application of best endeavours would indeed have procured a sale. Here, the question is what would a prospective third party buyer or buyers have done? It is particularly appropriate to assess quantum on a loss of chance basis when this particular scenario was not tested at the District Court hearing. On the evidence so far as it goes, Ms Peters could argue for a strong prospect of a sale on some terms of the remnants of the business Mr Cosford was left with after the Team Talk transaction. The assets he acquired were roughly equivalent to the $150,000 paid in cash for each of the remaining 10 per cent parcels of shares, and there is no suggestion of dramatic diminution in value between the conclusion of the Team Talk transaction in late 2005 and after the prospect of a sale disappeared in early 2006. On that basis there appears to have been a high prospect of a realisation so that the loss would be the full balance of $35,000. [38] As against that, Mr Cosford was not tested on the prospects for a sale on such terms. The extent of Ms Peters' chance must be discounted by an appropriate margin to reflect the prospects of unforeseen contingencies. In the end, I am satisfied that the chance of a payment being made to Ms Peters, had Mr Cosford appreciated the full extent of his best endeavours obligation once he was in control of the remnants of the business, is to be assessed at 50 per cent.[39] Accordingly, the appeal is allowed. Ms Peters is entitled to judgment for $17,500. Given the way the case progressed and was argued in the District Court, the appropriate entitlement in respect of interest is to award interest on that sum at Judicature Act rates only from the date of this judgment.Costs[40] The costs order made in favour of Mr Cosford in the District Court is reversed. Ms Peters is entitled to costs on a 2B basis for a half day hearing in this Court.Dobson J