BURRI v SCHULER BROTHERS LIMITED [2018] NZHC 2567

BURRI v SCHULER BROTHERS LIMITED [2018] NZHC 2567 [1 October 2018]IN THE HIGH COURT OF NEW ZEALANDHAMILTON REGISTRYI TE KŌTI MATUA O AOTEAROAKIRIKIRIROA ROHECIV-2018-419-109[2018] NZHC 2567BETWEEN RENÉ BURRI andVERENA CHRISTINA MARIA BURRIPlaintiffsAND SCHULER BROTHERS LIMITEDDefendantHearing: 26 September 2018Appearances: Mr T Braun and Ms E Rawson for defendant / applicantMr D Taylor for plaintiffs / respondentsJudgment: 1 October 2018ORAL JUDGMENT OF ASSOCIATE JUDGE JOHNSTON[1] This is an application by the defendant, Schuler Brothers Ltd (applicant), fororders staying the proceeding (including an application for summary judgment)commenced by the plaintiffs, René and Verena Burri (respondents), and referring adispute which is said to exist to arbitration.[2] I describe it in that way notwithstanding the terms of the applicant'sinterlocutory application dated 23 July 2018 which uses different terminology butwhich effectively seeks such orders.[3] The background is not complex.[4] The applicant and the respondents are shareholders in a company by the nameof Swiss Belle Farm Ltd which operates a dairy goat farm in the Waikato.[5] On 6 May 2015 the parties entered into a shareholders' agreement. Thiscontemplated that, over time, the applicant would sell its shares to the respondents infour tranches. Schedule 2 set out a process for the valuation of the company's sharesannually. However, it seems to me that, for the purposes of this case, that process mustnecessarily be regarded as having been overtaken by the parties' subsequent agreementreferred to below.[6] On 18 July 2017 the parties entered into an agreement for the sale and purchaseof the first tranche of shares. Pursuant to this agreement, the applicant agreed to selland the respondents agreed to purchase a parcel of 216 shares. The sale and purchaseprice was to be set as at 31 May 2017. The process by which that would occur iscontained in cls 2 and 3 which I set out in full:2. The price for the Shares ("the Price") to be paid by the Purchasers tothe Vendor is to be established by the independent charteredaccountant Rob Braithwaite of Braithwaite & Pearks Limited inHamilton, in accordance with the Shareholders Agreement dated the6th day of May 2015 ("the Shareholders Agreement"), with thevaluation to be based on the value of the Shares as at 31 May 2017.3. However, if either or both of the parties do not accept the value of theShares as established by Rob Braithwaite, then in terms of Schedule 2of the Shareholders Agreement, such party can appoint a registeredvaluer to suggest a value. If the other party is not comfortable withthe valuer's report, then such other party can appoint its ownregistered valuer. If the two registered valuers cannot agree, the valueissues goes to arbitration.[7] Although these clauses are not well drafted, it is plain enough that the partiesagreed:(a) they were to arrange for Braithwaite & Pearks to value the shares as at31 May 2017;(b) if either party did not agree with Braithwaite & Pearks' valuation thenthat party was entitled to appoint a valuer to "suggest a value";(c) if the other party was "not comfortable with" the first party's valuer'svaluation, then that party was entitled to appoint its own valuer;(d) assuming that the parties' valuers arrived at different valuations, thenthey were to confer in order to establish whether they could reachagreement;(e) if the valuers could not agree, then the question of the value of theshares as at 31 May 2017 would be referred to arbitration.[8] What happened here is that:(a) Swiss Belle Farm's Annual General Meeting was held on 10 August2017. There was some discussion about altering the process fordetermining the value of the shares. Except in one respect the minutesdo not support any suggestion that agreement was reached as to this.The exception is that both parties appear to have accepted that thetimeframe for settlement contained in the agreement for sale andpurchase was unrealistic in the event of any disagreement as to value;(b) Braithwaite & Pearks issued their valuation on 30 August 2017. Theyvalued the parcel of shares at $271,000;(c) for different reasons, neither party was prepared to accept thisvaluation;(d) the respondents engaged KPMG. KPMG provided their valuation on12 October 2017. They valued the parcel of shares at $192,685;(e) the applicant did not accept this valuation. This was confirmed in itssolicitor's letter dated 3 November 2017 to the respondents' solicitors.In the same letter the applicant's solicitors signalled that it had resolvedto obtain its own valuation;(f) things went quiet for a time;(g) on 15 February 2018 the respondents' solicitors wrote to the applicant'ssolicitors expressing frustration at the delay and saying that theapplicant had two weeks to provide its valuer's report;(h) on 8 March 2018 the applicant's solicitors appear to have emailed therespondent's solicitors but this email was not in evidence;(i) on 9 March 2018 the respondents' solicitors wrote to the applicant'ssolicitors asking when it was expected that the applicant's valuer'sreport would be available;(j) on 16 March 2018 the applicant's solicitors wrote to the respondents'solicitors providing the former's valuer's report. This was a reportprovided by PWC dated 9 March 2018. They valued the parcel ofshares at $458,000;(k) on 17 April 2018 the respondents commenced this proceeding seekingspecific performance of an alleged agreement between the parties forthe sale and purchase of the parcel of shares at the valuation arrived atby KPMG and applied for summary judgment;(l) on 2 July 2018 the defendant filed an appearance under protest tojurisdiction and the application which is now before the Court followed.[9] This is an appropriate point at which to record that the point at issue betweenthe parties concerns only one aspect of the valuations. Attached to each share are milksupply rights or MSRs. These are rights to supply to the co-operative that processesthe milk produced. The differences in the three valuations is solely referable todifferent values placed on the MSRs attaching to the tranche of shares being sold.[10] One contention advanced by Mr Braun on behalf of the applicant was that theprocess of determining a valuation for the parcel of shares under the agreement forsale and purchase misfired from the outset because Braithwaite & Pearks expresslyindicated that they were not valuing the MSRs and KPMG did not provide reasons forthe value they placed on them.[11] In relation to this issue Mr Taylor took me through the KPMG valuation (anda Telfer Young valuation of the land and buildings on which KPMG relied) and indoing so sought to demonstrate that both Telfer Young and KPMG had indeed madejudgments about the value of the MSRs even although the basis for those judgmentswas not articulated.[12] I am not convinced that I need to resolve this issue for the purposes of theapplication before me. KPMG, in the process of assessing the value of the company,and therefore the parcel of shares, placed a value on the MSRs. It is true that they didnot articulate the basis upon which they did so. It is also true that there are indicationsin the report that they exercised little in the way of independent judgment on that score.Nevertheless, for the purposes of the valuation exercise, my judgement is that theapplicant must accept that KPMG placed a value on the MSRs.[13] Mr Taylor's written submissions for the respondents contains the followingparagraph:[13] The [respondent's] summary judgment application relies upon animplied term in the schedule to the effect that a party desiring toprovide its own valuation must do so within a reasonable time. Thisis necessary to give business efficacy to the contract. If the contractdoes not contain some obligation to undertake the necessary valuationwithin a reasonable time, the object of the agreement to transfer theshares can be frustrated indefinitely and, in fact, that is what the[applicant] sought to do.[14] This I think points to the key issue for determination.[15] Counsel were in agreement as to the law relating to the implication of terms incontracts. For the applicant, Mr Braun outlined the position, and Mr Taylor did notdisagree with his analysis. Where counsel parted company was in relation to theapplication of the law to the facts here.[16] Mr Braun began with the well known case of BP Refinery (Westernport) PtyLtd v Shire of Hastings where the Privy Council said that a term will be implied into acontract where:1(a) it is reasonable and equitable;(b) it is necessary to give business efficacy to the contract, so that no termwill be implied if the contract is effective without it;(c) the term is so obvious that it "goes without saying";(d) it is capable of clear expression; and(e) it does not contradict any express term in the contract.[17] He then referred to the Privy Council's later judgment in Attorney-General ofBelize v Belize Telecom Ltd in which Lord Hoffman described the BP Refinery test asa " collection of different ways in which judges have tried to express the centralidea that the proposed implied term must spell out what the contract actually means,or in which they have explained why they did not think that it did so".2[18] Mr Braun then referred to the more recent case of Marks & Spencer Plc v BNPParibas Securities Services Trust Co (Jersey) Ltd 3 in which support was expressedfor the certainty of the BP Refinery test, and Rintoul Group Ltd v Far North DistrictCouncil 4 in which this Court seems effectively to have applied that test.[19] Mr Taylor submitted, essentially on business efficacy grounds, that it wasnecessary to read into the submission to arbitration contained in cls 2 and 3 of theagreement for sale and purchase a requirement that a party electing to appoint its ownvaluer and providing that valuer's assessment must do so within a reasonable time.1 B P Refinery (Westernport) Pty Ltd v Shine of Hastings (1977) 180 CLR 266 (PC).2 Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10 at (27).3 Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2016] AC742.4 Rintoul Group Ltd v Far North District Council [2017] NZHC 1132.[20] He then submitted that the applicant had not complied with that impliedobligation having regard to the lapse in time between the date of the KPMG valuationand the PWC valuation. On that basis he submitted that the parties must be treated ashaving agreed to accept the former and that, accordingly, there is no live dispute to bereferred to arbitration and the respondents are entitled to pursue their application forsummary judgment.[21] Mr Braun contended that there was no basis for implying such a term into thesale and purchase agreement, and that, even if there was, in the circumstances, theapplicant had acted within a reasonable time.[22] I accept the respondents' contention that this is a case in which it would beappropriate to read into the agreement for sale and purchase an obligation on theapplicants to take the step of providing their valuation within a reasonable period oftime.[23] Applying BP Refinery (and subsequent cases) to cls 2 and 3 of the agreementfor sale and purchase, it appears to me that business efficacy demands the implicationof a term that both parties take the steps within reasonable periods of time in order tomake the valuation process work. As Mr Taylor submitted, without such a term, thedispute might drag on indefinitely. In short I regard an obligation on the parties totake the various steps identified in the agreement within a reasonable time as being soobvious as to go without saying.[24] The real issue in this case is whether the applicant complied with thatobligation.[25] The question of what is reasonable in any given case is a heavily contextualone.[26] Several factors influence my thinking in the present circumstances:(a) the shareholders' agreement provides that the respondent is entitled torequire that the shares in Belle Farm are to be sold by the applicant andpurchased by the respondents over a five year period in tranches; thefirst tranche as at 31 May 2015; the second two years after that; thethird two years after that; and the last one year after that. Thus, theparties were looking at the transfer of the applicant's shares to therespondents over a relatively lengthy period of time;(b) turning to the agreement for sale and purchase, it is relevant I think tonote that the parties themselves did not impose particular timeconstraints on the taking of various steps relating to the transaction;Plainly this was not uppermost in their minds;(c) those things said, this is a commercial transaction in which the partieshave identified a means of arriving at a valuation and that being so it isa process which should work efficiently and within a sensible period oftime;(d) optimistically, in cl 5 of the agreement for sale and purchase, the partiesprovided that the payment would be made on 31 August 2018. As Iunderstand it both parties now accept that that was an unrealisticexpectation if there was a dispute about value. Nevertheless, asMr Taylor submits, the parties were thinking in terms of a processwhich might take three months;(e) clause 5 of the agreement for sale and purchase also provided that therespondent would pay interest on any outstanding purchase price from1 June 2017 down to the date of payment;(f) in the particular context of this case, it is fair to observe that whilst theBraithwaite & Pearks valuation was available by 30 August 2017, therespondents' valuation was not provided until 12 October 2017 so thateven by that stage some of the deadlines which the parties had setthemselves had well and truly expired;(g) another factor which was emphasised in different ways by both counselwas that valuers with a sufficiently specialised knowledge of dairy goatfarming, and therefore ability to value a business which owned a dairygoat farm and the MSR shares, are not thick on the ground; and(h) right up until the respondents' solicitors wrote to the applicant'ssolicitors on 9 March 2018, it does seem as if the parties were jointlyconcerned to ensure the process operated fairly and neither party wassuggesting that it should not be seen through a conclusion. Theapplicant's valuation was provided two weeks later.[27] Standing back from the matter and weighing those things up as best I can, I amsatisfied — by some margin I might add — that the applicant has not breached anyimplied term to provide its valuation within a reasonable time.[28] It follows that the issue of the proper valuation of the parcel of shares to changehands between these parties remains a live issue.[29] There is no serious doubt that that issue falls squarely within the terms of thesubmission to arbitration contained in cls 2 and 3 of the 18 July 2017 sale and purchaseagreement — indeed, that submission to arbitration was designed to deal with this veryissue.[30] It follows that the applicant is entitled to the orders it seeks.[31] Accordingly, I make orders:(a) staying the substantive proceeding (including the respondents'application for summary judgment) pending further order of this Court;(b) pursuant to s 8(1) of the Arbitration Act 1996, directing the parties toarbitration.[32] I did not hear counsel in relation to costs. I therefore reserve them. I amconfident that counsel will be able to sort the costs issue out. If it helps at all, I canindicate that my preliminary view — without having the benefit of argument — is thatthe applicant is entitled to its costs of this application on a 2B basis but see no obviousgrounds for an increased or decreased costs order. If counsel are unable to settle coststhen they may bring the matter back to me by memorandum and I will deal with costson the papers.Associate Judge JohnstonSolicitors:Braun Bond and Lomas, HamiltonEdmonds Marshall, Matamata