WAYNE J HARRISON V CATHERINE WINIFRED FRANICH CA CA223/06

WAYNE J HARRISON V CATHERINE WINIFRED FRANICH CA CA223/06 23 November 2007IN THE COURT OF APPEAL OF NEW ZEALAND CA223/06 [2007] NZCA 538BETWEEN WAYNE J HARRISON Appellant AND CATHERINE WINIFRED FRANICH Respondent Hearing: 30 October 2007 Court: Chambers, O'Regan and Ellen France JJ Counsel: G Bogiatto for Appellant K F Quinn for Respondent Judgment: 23 November 2007 at 4 pmJUDGMENT OF THE COURT A The appeal is allowed in part. The orders made in the High Court are rescinded and the orders set out below are substituted. B In relation to the agreement dated 7 June 2002 between Mr Harrison and Ms Franich, known as the "Magic partnership" agreement, we make declarations that: (a) The agreement created a partnership; (b) The Magic partnership had come to an end by 30 June 2003; and (c) Mr Harrison and Ms Franich each separately own 11 shares of the total 40 shares in the stallion Magic Ring.C Mr Harrison is to pay Ms Franich the sum of $85,156.25 in relation to the Magic partnership. D In relation to the Magic Ring syndicate, we make declarations that: (a) The Magic Ring syndicate agreement or agreements did not create a partnership; (b) Mr Harrison owed fiduciary duties to the syndicate as its agent including the duty to account for monies received on behalf of the syndicate and the duty not to prefer his own interest; (c) The management committee of the Magic Ring syndicate had not approved payment of the management fee to Mr Harrison and the syndicate agreement makes no provision for that; (d) Mr Harrison holds the $50,000 he paid to himself as a management fee on trust for the Magic Ring syndicate; and (e) The meeting on 6 August 2003 was not properly constituted and the purported resolutions made were not valid. E By 18 December 2007, Mr Harrison is to provide full details to Ms Franich of all monies received and expended by him on behalf of the Magic Ring syndicate. F The claim against Messrs Nicholson and Halls is dismissed. G Mr Harrison has judgment in his favour on the first and second counterclaims in the sum of $9,291.00. H Ms Franich has judgment in her favour in relation to the Marju filly in the sum of $8,500.00. I Mr Harrison is liable to Ms Franich for interest up to 18 September 2006 in the sum of $20,404.10. J Ms Franich has costs of $54,660.00 plus disbursements of $21,212.00 in the High Court.K We make no order for costs in this court. L For the purposes of rule 538 of the High Court Rules, interest has been accruing since 18 September 2006 at the rate of $37.12 a day and will continue to accrue at that rate until payment is made. M Liberty to apply to the High Court is reserved in respect of any issue relating to the implementation of Orders B - J. REASONS OF THE COURT(Given by Ellen France J)Introduction[1] Mr Harrison and Ms Franich were parties to an agreement dated 7 June 2002 (the "Magic partnership" agreement) to buy a stallion, Magic Ring. They then sold shares in Magic Ring and, as part of that enterprise, created a syndicate known as the Magic Ring syndicate. [2] In a judgment delivered on 18 September 2006, Courtney J concluded that the Magic partnership agreement created a partnership between Mr Harrison and Ms Franich: HC AK CIV-2003-404-4131. She found that Mr Harrison had breached his obligations under the partnership and made various orders to rectify matters. Courtney J also made a number of orders in relation to the Magic Ring syndicate. Mr Harrison now appeals. [3] The main focus of Mr Harrison's submissions was a challenge to the Judge's conclusion that the Magic partnership agreement created a partnership. We deal with Mr Bogiatto's extensive submissions on this topic below. However, while maintaining that the relationship between the parties was not a partnership, Mr Bogiatto accepted that if the court found there was a partnership, then the orderswe make, which were discussed in draft form with counsel at the hearing, flowed inevitably from that finding. [4] Because of the way in which matters developed at the hearing, it is not necessary for us to set out the factual background in any detail. Reference should be made to [14] to [24] and [54] to [63] of the High Court judgment for a description of the relevant facts. [5] For ease of reference, we have rescinded all of the orders made in the High Court and substituted the orders set out above.Order B(a) - Did the Magic partnership agreement create a partnership?[6] The appellant submits that the Judge erred in finding that the agreement of 7 June 2002 created a partnership between Mr Harrison and Ms Franich. The key points from the submissions can be summarised as follows. First, Mr Harrison said there was no business carried on in common with a view to profit as required by s 4 of the Partnership Act 1908. Rather, he says, for both parties this was a hobby reflecting their interest in thoroughbred racing. [7] Second, Mr Harrison argues that within a week of entering into the agreement on 7 June, Ms Franich changed some of its essential components. Those changes extinguished any partnership or at least undermined the notion that the agreement created a partnership between the parties. [8] Third, Mr Harrison submits that the agreement was explicable by reference to a co-ownership arrangement or a joint venture on specific terms. It was not necessary then, he says, to overlay a partnership on the parties' relationship. The associated submission is that there are a number of features missing from the 7 June agreement which one would normally expect to see in a partnership agreement, for example, some provision as to profit sharing.[9] Finally, Mr Harrison argues that if there was a partnership then it was on specific terms and a number of the statutory provisions have been modified by the terms of the agreement. [10] The agreement of 7 June 2002 is fairly brief and relevantly provided that:Funding1. Cathy [Ms Franich] to provide all funding to import MR [Magic Ring]. 2. Cathy will transfer monies to parties as requested (forward cover on exchange advised). 3. Cathy will purchase 50% of the MP [Magic partnership] for $65,000 + GST. 4. MP will own the stallion, MR. 5. MP will own 11 @ $20,000 + GST shares in MR. 6. MP will endeavour to sell 9 shares @ $20,000 + GST each from a total of 20 shares. 7. The total value of the MR syndicate $400,000 + GST. 8. The repayment of monies will be from sale of shares. 9. Cathy will leave $45,000 as working capital in Synd a/c interest free loan for one year. 10. The balance of funding to be returned to Cathy on sale of Shares (see costs).MR Syndicate will:a. Appoint Kingston Duff as Syndicate Accountants (Rowan Kingston). b. Establish a new bank account (Westpac Trust). c. Apply for GST no. d. Manage to sell shares and complete documentation.[11] The agreement then set out a list of importation costs, a funding schedule and details of the repayment of the funding loan to Ms Franich. [12] The High Court Judge accepted that there was a large hobby element in the agreement to purchase the stallion. Courtney J said there was, however, a profitmotive. That there was a profit motive was evidenced, Courtney J found, from the syndication of Magic Ring. The Judge put it this way:[29] The importation was expected to cost about $190,000. The sale of nine shares in the horse at $20,000 each would yield $180,000. This meant that Ms Franich and Mr Harrison anticipated acquiring 11 shares at a face value of approximately $220,000 for a total cost of only $10,000. If the syndication of Magic Ring was intended to do no more than advance the parties' mutual interest in horse breeding it would have been unnecessary to structure the syndicate so as to produce such a substantial profit. The profit motive is abundantly clear and I am satisfied that the purchase was part of a business plan that was intended to produce sufficient profit to enable Mr Harrison and Ms Franich to participate in the Magic Ring Syndicate without having to meet the full cost of purchasing shares in the horse.[13] The Judge saw two other factors as significant in this context. The first was that under the agreement Mr Harrison and Ms Franich would not own shares in the horse individually. Rather, their syndicated shares would be held jointly in their capacity as members of the Magic partnership. The Judge said that although co-ownership was not, in itself, decisive of partnership, "in this case joint ownership would inevitably result in Mr Harrison and Mrs Franich sharing the costs and profits associated with those shares equally" (at [30]). [14] Next, Courtney J saw it as significant that Ms Franich was to make a capital contribution of $65,000 for her 50 per cent share of the Magic partnership. There was no similar provision for Mr Harrison and the Judge considered at [31] that it "seemed clear" from the evidence that he expected to receive a 50 per cent equity share of the partnership without having to make a capital contribution. Courtney J continued at [31]:The existence of a capital contribution tied to a 50% share of the partnership seems a clear signal that the parties did intend to create a partnership between them. In the absence of such a relationship there could be no explanation for Ms Franich paying that money for the mutual benefit of both she and Mr Harrison.[15] The Judge's conclusion was plainly open on the evidence and, for the reasons Courtney J gave, we agree the agreement of 7 June created a partnership. [16] Her Honour was satisfied on the evidence that there was nothing to suggest that the agreement itself was intended to be terminated or even significantly alteredby the events on which Mr Harrison relied which occurred shortly after the partnership agreement was signed. In fact, the only change of any substance was the reissuing of the invoice from the Whitsbury Stud in England from whom the stallion was purchased in Ms Franich's name. Again, the finding made was open to the Judge. Not surprisingly, the contrary view on this aspect was not apparent in the pleadings. [17] It follows from this that we see no merit in the submission that a number of the statutory provisions were not dealt with in the agreement between the parties. As Ms Quinn submitted, the absence of any other provisions contained in the Partnership Act in any written agreement is not fatal to any finding of partnership but rather reflects that, unless expressly provided for, the duties and obligations of partners to each other and to third parties are governed by the Act. [18] Similarly, there is nothing in the submission that the agreement has modified the terms of the Act. That interpretation is not supported by the evidence and there is nothing to suggest any intention to vary the provisions of the Act. [19] Accordingly, for the reasons given by the High Court Judge we make Order B(a).Order B(b) – dissolution of Magic Partnership[20] Courtney J in the High Court rejected Ms Franich's submission that the Magic partnership had been dissolved on the basis that Ms Franich had not given notice of her intention to dissolve the partnership (at [52]). At the hearing before us, both parties agreed that, whatever the nature of the relationship between them, the relationship known as the Magic partnership had come to an end by 30 June 2003. On that basis, we make Order B(b).Order B(c) – ownership of shares in Magic Ring[21] Following on from the finding that the Magic partnership was still in existence, Courtney J considered that the 11 shares in Magic Ring were jointly owned by Mr Harrison and Ms Franich (at [52]). [22] At the hearing before us, both parties agreed that the position as to the ownership of the shares in Magic Ring was as set out in a letter to New Zealand Thoroughbred Racing dated 7 November 2003. That letter records that both Mr Harrison and Ms Franich each individually own 11 shares (the number of shares was increased to 40 after the partnership was dissolved but the underlying proportions held by each shareholder remains the same). On this basis, we make Order B(c).Order C – sum owing to Ms Franich[23] Courtney J made orders that Ms Franich was entitled to be reimbursed $200,312.49 being the cost of purchasing and importing Magic Ring exclusive of GST. The Judge also found that the money to reimburse her was to come from the syndication of the shares ($180,000) and any future profits for Magic Ring. Her Honour also found that Mr Harrison breached his obligations under the Magic Ring partnership. It followed from these findings that the Judge gave judgment in favour of Ms Franich in the following sums (at [156(b)]):(i) $10,000, being the balance received from the proceeds of syndication and due to Ms Franich in reimbursement of the purchase costs of Magic Ring; and (ii) $65,000 being Ms Franich's capital contribution received and retained by Mr Harrison personally .The Judge also ordered Mr Harrison to provide a full accounting to Ms Franich showing monies received by him in relation to the Magic partnership and monies expended by him or on his behalf from the Magic partnership funds.[24] As we have said, Mr Bogiatto on behalf of Mr Harrison did not concede that there was a partnership. With that qualification we have made the calculation reflected in Order C on the basis that the parties agreed that, if we found there was a partnership, the position at the time of its dissolution was as follows: (a) The partnership had no debts or liabilities to persons who were not partners; (b) The remaining asset was the sum of $75,000 that is still held by Mr Harrison (it is implicit that the shares in Magic Ring were held separately at the time of dissolution); and (c) The following sums were owing to Ms Franich: (i) all of the $75,000 held by Mr Harrison, of which $30,312.49 is the outstanding debt the Magic partnership owed Ms Franich for importing the stallion and $44,687.51 is the amount of Ms Franich's capital contribution remaining once the debt is paid; and (ii) $10,156.25 being Mr Harrison's half share of the total loss of capital ($20,312.49) (see s 47(b)(iii) of the Partnership Act and Banks Lindley and Banks on Partnership (18 ed 2002) at [25-48]). [25] Mr Harrison must pay to Ms Franich the $75,000 which he holds but which belonged to the partnership to meet her entitlement under [24(c)(i)] above. We note in this respect that Mr Harrison's independent accounting expert, Mr Self, accepted that if there was a partnership then on dissolution Ms Franich would be entitled to the return of her capital contribution of $65,000. In addition, Mr Harrison must pay the $10,156.25 which he is obliged to pay Ms Franich in terms of [24(c)(ii)].[26] The parties also agreed that, against this background, there was no need for a full accounting. We accordingly rescind the order made in the High Court for an accounting in relation to the Magic partnership. [27] Finally, for completeness, we note that Ms Franich did claim a GST refund in relation to the purchase of Magic Ring but as the figures used to calculate the monies to be repaid to Ms Franich are GST exclusive, no allowance for GST needs to be made in our order.Magic Ring syndicate[28] We turn then to the orders relating to the Magic Ring syndicate.Order D(a) – nature of Magic Ring syndicate[29] There is no challenge to the order made in the High Court that the Magic Ring syndicate agreement or agreements did not create a partnership. We make an order accordingly.Orders D(b) to (e) – the management fee[30] Courtney J concluded that, to the extent that Mr Harrison acted as the syndicate's agent, he came under fiduciary duties including the duty to account for the monies received on behalf of the syndicate and the duty not to prefer his own interest. Her Honour also found that the management committee had not approved the payment of a management fee to Mr Harrison and nor was there any provision in the syndicate agreement for it. The Judge said that in paying himself $50,000 on account of the $60,000 management fee, Mr Harrison breached his fiduciary duty to the syndicate members and was liable to disgorge those funds. However, the Judge said that Mr Harrison was entitled to be compensated for his time and effort on a quantum meruit basis. The Judge saw that as a matter for the current management committee to resolve and said that those members who were members at the relevant time would be liable to contribute severally to that amount. Courtney J also gavejudgment against Mr Harrison to the extent of Ms Franich's proportion of the management fee paid of $27,500. [31] There is no challenge on appeal to the proposition that Mr Harrison holds the money paid by way of a management fee on trust for the syndicate (Order D(d)). [32] Further, at the hearing before us, both parties accepted that the order relating to quantum meruit could not stand. That is because quantum meruit is a cause of action whereby a defendant compels the plaintiff to reasonably compensate him for rendering his services where the level of remuneration has not been agreed. It is not consistent with the nature of quantum meruit to direct the defendant effectively to determine the amount he should pay. For this reason, the order as to quantum meruit is rescinded. [33] It follows from the other orders made in the High Court (reflected in Orders D(b) and (c)) that Mr Harrison holds the $50,000 management fee on trust for the Magic Ring syndicate and we make an order to this effect. There is no challenge to the order made in the High Court that the meeting on 6 August 2003 was not properly constituted and that the resolutions made at that meeting were therefore not valid (Order D(e)).Order E – accounting for syndicate's funds[34] The parties accept there is a need for Mr Harrison to account to Ms Franich as the High Court ordered. The change we make to the order made in the High Court in this respect is to require the accounts to be provided by a set date. We add that, while we make no order to this effect, Mr Harrison will of course have to account to the Management Committee in the same way reflecting his fiduciary duties to the syndicate. [35] Given the view that the management fee should be left at large and given the need to account, it is not proper to give judgment against Mr Harrison for $27,500. As we have said, that is the figure that the Judge saw as representing Ms Franich'sproportion of the management fee. The order granting judgment in the sum of $27,500 is rescinded.Orders F, G and H – other claims[36] There is no challenge to the order made in the High Court dismissing the claims made against Messrs Nicholson and Halls and so we make an order accordingly (Order F). [37] While in the notice of appeal Mr Harrison challenged aspects of the counterclaim, those matters were not pursued before us. We make Orders G and H, which in substance repeat the orders made in the High Court accordingly.Order I – interest[38] There is no challenge to the interest figures. However, on further examination we take the view there was no jurisdiction to award interest on the second counterclaim from 23 July. That date reflects the date the proceedings were filed but at that point in time the second counterclaim debt was not due. Order I otherwise reflects the High Court judgment. [39] The two interest sums are based on the following calculations:Judgment amountBalance of loan for purchase of Magic Ring $30,312.49 Outstanding capital contribution $44,687.51 Mr Harrison's half share in the partnership's loss of capital $10,156.25 Ms Franich's Marju filly claim $8,500.00 Less First counterclaim $2,253.95 Subtotal $91,402.30 Interest on subtotal $21,617.27 From 25 July 2003 to 18 September 2006 1151 days @ 7.5% per annum ($18.78 per day) Second counterclaim $7,037.05Interest on second counterclaim $1,213.17 From 1 June 2004 to 18 September 2006 839 days @ 7.5% per annum ($1.45 per day)[40] Netting off the two interest figures leads to a liability on Mr Harrison's part in the sum of $20,404.10. That is the interest figure up to 18 September 2006, the date of the High Court judgment.Orders J and K – costs[41] Ms Franich sought costs in this court on the basis that she had largely been successful on the appeal. We are satisfied that costs should lie where they fall given that each party has had a measure of success in this court.Order L – interest on the judgment debt[42] All interest under this judgment has been calculated to 18 September 2006, the date of the High Court judgment and the effective date of this judgment in substitution for it. The net effect of Orders C, G, H, I, and J is that, as at 18 September 2006, Mr Harrison owed Ms Franich $180,641.35 (inclusive of interest to that date and costs). That contrasts with the figure in the sealed High Court judgment of $201,634.12. [43] Interest on $180,641.35, at 7.5 per cent per annum, has accrued since 18 September 2006 at the rate of $37.12 a day. That is the daily rate at which interest will continue to accrue on this substituted judgment for the purposes of r 538 of the High Court Rules. The substituted sum is lower than the sum found by Courtney J. The principal reason for that is that we have found Ms Franich's loan of $45,000 was to the syndicate, not the Magic partnership.Order M – leave to apply[44] Finally, in case there are issues arising from the implementation of these orders, we give leave to apply to the High Court.Result[45] For these reasons the appeal is allowed in part. The substance of a number of the High Court orders is unaffected by this decision but, as we have said, for ease of reference all of the orders made in the High Court are rescinded and the orders set out above are substituted. [46] The practical effect of the orders we have made is as follows: (a) Mr Harrison and Ms Franich each hold 11 shares of the total 40 shares in the stallion Magic Ring; (b) Mr Harrison has to pay Ms Franich the sum of $180,641.35, plus interest from 18 September 2006 accruing at a daily rate of $37.12; (c) The question of a management fee for Mr Harrison is at large; (d) Further sums may be payable by Mr Harrison to Ms Franich once the accounting required by Orders D and E has been completed; and (e) The question of Ms Franich's loan of $45,000 to the syndicate is a matter to be resolved by Ms Franich if she wishes to pursue the matter.Solicitors: George Bogiatto, Auckland for Appellant Gill Coutts & Co, Auckland for Respondent