Mahon v Crockett CA92/98 [1999] NZCA 374; (1999) 8 NZCLC 262,043 (22 July 1999)

Last Updated: 10 February 2019

IN THE COURT OF APPEAL OF NEW ZEALAND CA92/98

BETWEEN NEVILLE CHRISTOPHER

MAHON

Appellant

AND THOMAS WISHART CROCKETT

Respondent


Hearing: 21 June 1999

Coram: Elias CJ Keith J Gallen J

Appearances: J G Miles QC and K L Miles for the Appellant
R B Stewart for the Respondent

Judgment: 22 July 1999

JUDGMENT OF THE COURT DELIVERED BY GALLEN J

[1] The appellant controls a number of limited liability companies all of which are related and which are engaged in construction, development, and related activities. The respondent claimed commission alleged to have been earned in respect of several large developments in which Woodland Construction Limited, one of those companies, had been engaged and also sought to recover a percentage of development profits from the appellant personally.

[2] The original proceedings came before the Master in Auckland and a consent order was made on 5^th November 1996 for trial of a preliminary issue, namely, was there a contract between the respondent and the appellant as alleged by the respondent?
[3] The preliminary issue came before Smellie J in Auckland in June 1997. He accepted that the issues to be resolved were (a) was there a binding agreement for the payment of a percentage of development profits? (b) If the answer to (a) is ‘yes’, is Mr Mahon (the appellant) personally liable? The Judge found in favour of the respondent on both questions.

[4] The hearing of the dispute was complicated by the fact that it was dealt with in two parts. After counsel for the respondent, the plaintiff in the proceedings, had concluded his submissions following the completion of the taking of the evidence, the Judge made reference to a bench note that he had recorded. The penultimate paragraph of that note was in the following terms:

Before Mr Dale [counsel for the defendant] commenced his submissions I indicated that I appreciated his anxiety in this area and suggested to him that his client’s position would be protected if I made it clear at this juncture (since I intend to reserve my decision) that if I found there was an agreement as an agent for an undisclosed principal, I would reconvene, advise of that, and hear counsel further on whether or not witnesses should be called for further examination and any other aspects of law in respect of which either there hasn’t been time, or there has been an election not to cover them this morning in view of the contents of this Bench note.

[5] On 22^nd August 1997 the Judge issued a reserved judgment by way of an interim judgment. He concluded that interim judgment in the following way:

The Court will reconvene to hear further argument and/or give evidence on Monday 20^th October and counsel are directed to file and serve synopses of the further arguments they propose to advance, together with notices of witnesses to be recalled, not later than midday on Friday 10^th October. If the 20^th October presents difficulty for counsel an alternative date can be arranged with the Fixtures Registrar in which event the timetable for synopses and notices can be adjusted accordingly. Counsel should be able to agree on any such adjustments without further assistance from the Court.

[6] In accordance with that view the hearing continued on 16^th and 17^th March 1998 and on 23^rd March 1998 the Judge issued a final judgment. It is against that judgment that the present appeal has been brought.
[7] The appellant contends that the Judge was wrong in both law and fact in the conclusion to which he came. Mr Miles’s principal contention on the law was that in approaching the question of whether or not the respondent had established that the appellant had entered into a contract with him personally to pay the commissions claimed as distinct from a contract with one or more of the companies controlled by the appellant, the Judge had failed to take into account the principles in Trevor Ivory v Anderson [1992] 2 NZLR 517 (CA); Edgeworth Construction Ltd v ND Lea & Associates Ltd [1993] 3 SCR 206; and Williams v Natural Life Health Foods Ltd [1998] UKHL 17; [1998] 1 WLR 830 (HL). Those cases all dealt with the liability of directors of companies personally as distinct from that of the companies of which they were directors. All three cases arose in circumstances where the allegations were of tortious liability and all emphasised that before there could be personal liability on the part of a director there had to be proof on an objective basis that the director concerned had assumed a personal responsibility. Mr Miles submitted that similar principles applied in cases of contract as tort.

[8] There are two things to be said about these cases and the approach to problems of this kind. The first is that limited liability means what it says. Secondly, companies, by their nature, must act through human agency and mere actions on behalf of a company do not, of themselves, provide a basis for alleging that the agent, by whom the company has acted, has thereby become subject to a personal responsibility.

[9] The starting point in the case of a limited liability company is that such an officer or agent has not done so and before personal liability can be established it is necessary to prove that there was an actual assumption of liability. In Trevor Ivory v Anderson, (supra) Cooke P, where the claim was in tort, said at page 524 that something special was required to justify putting a case in that class. Hardie Boys J, at page 527 said:

Essentially I think the test is, or at least includes, whether there has been an assumption of responsibility, actual or imputed.

[10] McGechan J at page 531 noted that it was necessary to weigh on the one hand the focus on personal services and on the other a clear desire of the person carrying
out those services to distance himself from personal liability. That is a reference to limited liability.

[11] In Williams v Natural Life Health Foods Ltd (supra) Lord Steyn accepted the reasoning of La Forest J in the Canadian case of London Drugs Ltd v Kuehne & Nagel International Ltd [1992] 3 SCR 299. In that case, and Lord Steyn accepted that the law of England was the same, reliance had to be reasonable to give rise to personal responsibility.

[12] All three cases applied to tortious liability. All three therefore proceeded to discuss questions related to the duty of care and the reliance placed upon that in the light of the observations in Hedley Byrne & Co Ltd v Heller & Partners Ltd [1963] UKHL 4; [1964] AC 465.

[13] The second point is considerations in contract may well be analogous but there are also differences. This is not a case to analyse those differences. It is enough to say that, for the purposes of contract, before a litigant can establish personal liability as distinct from corporate liability it must be established that there was a contract and that that contract unequivocally involved the company officer or agent accepting a personal liability apart from any liability which might exist on the corporation with which he or she was associated.

[14] In determining whether or not such a contract existed it is necessary for the proponent to establish its existence objectively against the assumption that limited liability is intended to achieve just that. The question for determination then becomes one of fact but that fact will be determined against the background to which reference has already been made.

[15] Although the Judge in this case did not specifically refer to the legal principles on which Mr Miles has relied it is apparent that he did see the question with which he was faced as being one of fact and he analysed the factual material before him in order to determine whether or not the respondent had established the contractual liability of the appellant on which he relied. Mr Miles submitted that the Judge’s analysis of the factual material needed to be examined in the light of the
above principles and he contended that in any event both the factual material upon which the Judge relied and the Judge’s analysis of it inevitably led to a conclusion contrary to that to which the Judge had come.

[16] The starting point is that the accounts, which both the respondent and the appellant gave, of the various oral communications of negotiations to which they were party, differed. The judge, having heard the evidence, came to the conclusion that he preferred the evidence of the respondent and he specifically concluded that where questions of credibility arose he accepted the version of the respondent over that of the appellant. Mr Miles accepted that he was obliged to approach the case in the face of that finding but nevertheless submitted that the essential elements necessary to support a conclusion that a contract of the kind relied upon by the respondent existed, were not established so that it was not open to the Judge to come to the conclusion to which he did.

[17] With that in mind it is necessary to consider the way in which the judgment proceeded. The Judge first analysed the pleadings. He then considered the question as to whether or not the respondent had established agreement for payment of development profits’ commission as distinct from construction commission which was conceded. When considering this question the Judge specifically left aside the question of whether there was any personal liability on the part of the appellant. After a careful analysis of the evidence the Judge came to the conclusion that he was satisfied the respondent had established that agreements had been reached in negotiation with the appellant and the content of those agreements.

[18] The Judge then went on to consider who were the parties to the agreements reached. Having arrived at the conclusion that on questions of credibility he preferred the evidence of the respondent and that agreements had been established, he went on to consider indicators, one way or the other, as to the entity with whom that agreement had been reached. He noted first, an assertion of the respondent that the development entities involved were often complex structures established by the appellant and deliberately constructed in a way so as to facilitate changes in those structures from time to time, that the respondent was not aware of the corporate and trust structures which had been created, and that the appellant always referred to
himself or his interests when referring to the developments. There was also an assertion from the respondent that the developer was always separate and distinct from the construction company. He noted further evidence whereby the respondent quoted the appellant as having said he would prefer the respondent to receive a percentage of the development profits made “through his various interests, as Mahon put it, he would pay me 10 percent of what he made”. The Judge then noted that the respondent had also said:

At the time of our agreement on development profits I was not aware of the ownership structure of the developers. I simply knew that they were entities owned and controlled by Mahon and ultimately these profits went to him personally.

[19] He noted that under cross-examination the respondent had insisted that it was the appellant who would be liable for the development profit and commission and concluded that the fact that he had in an important letter, addressed the appellant as the “Managing-Director” of the construction company was merely a matter of convenience. When asked why a draft agreement prepared by a solicitor with regard to the payment of commissions showed companies as parties and did not name the appellant, the respondent had said it did not register with him that the appellant was not shown as a party liable to pay.

[20] When the construction company failed, letters of demand were sent on behalf of the respondent to the three companies referred to in the draft agreement. He explained that by saying he had received legal advice that that was the procedure to follow. The Judge noted that, in evidence, the respondent had said:

I always believed that he (Mahon) was ultimately the person who contracted parties, he wore many hats and at times difficult to know which hat he was wearing.

[21] In summary on this aspect of the matter the Judge accepted a submission of counsel to the effect that:

He (Mahon) never disclosed the entities who would receive the development profits. Crockett was entirely unaware of what the structures were or what entity or entities would be entitled to the development profit.
[22] The Judge noted, however, that the appellant had insisted throughout he negotiated as managing-director of the construction company. The Judge regarded it as significant that both parties understood commission on construction profit was different than commission on development profit and that there were other entities than the construction company which were associated with or controlled by the appellant that were financing the projects and stood to make whatever ultimate profits was available as a result. The Judge noted that he was obliged to objectively assess who were the parties to the agreements and in doing so he was assisted by the factual matrix or background facts known to both appellant and respondent and again he emphasised their knowledge that production and development profits were to accrue to different entities. He rejected the contention of the appellant that the appellant was contracting throughout only for the construction company.

[23] The Judge then turned to the specific contention that the appellant was to be personally liable. He noted that the only statements attributed directly to the appellant were first, that the appellant said he would pay ten percent of “what he made” and subsequently “whatever I make you will get 10% of”. He noted, however, that both were aware that the appellant was not going to make anything in the direct personal sense. The Judge found that the respondent had interpreted the words as referring to ten percent of the profits ultimately enjoyed by entities owned by or controlled by the appellant. He accepted that the respondent understood that the appellant would not have the immediate legal right to development profits from which the ten percent would be paid and concluded that the intention of the parties must have been that in some way or other the appellant would see that those payments were made.

[24] The Judge noted that in his closing address counsel for the respondent said :if the Court accepts Mr Crockett’s evidence that Mr Mahon said he would pay 10% of the development profits which he made, albeit through his private interests, then he is liable for payment”. In respect of that submission the Judge said:

Without the benefit of further argument (which I intend to call for) there appear to be two difficulties with that contention. First, as I have already indicated, the parties knew that Mahon would not personally receive the development profits and under those circumstances it is difficult to conclude that they intended that he
should be personally liable as opposed to the companies or trusts which he utilised to effect the developments.

[25] The Judge went on to note that he had a concern over consideration and made reference to a submission that if the appellant was not personally liable then he was liable as agent for undisclosed principals.

[26] The Judge then referred to a submission for the appellant that if the appellant were liable that liability might have arisen out of

[a] Contracting personally in his own right.

[b] As guarantor – but there was no memorandum in writing.

[c] As agent for a disclosed principal.

[d] As agent for an undisclosed principal.

And noted that no evidence had been adduced on the alternative issues nor had there been any cross-examination on them because they were not contained in the pleadings. In the light of those concerns the Judge ordered that the Court would reconvene for further argument and/or evidence.

[27] At this point it is appropriate to observe that the Judge’s conclusion appears to have been that at the very least there were difficulties with any contention that the appellant was personally liable.

[28] The Court did reconvene and the Judge issued a final decision. In that decision he noted that there had been a submission that he had not made a final decision that the contract was not with the construction company. He noted that at the resumed hearing the respondent had elected not to call further evidence but was made available for further cross-examination and, in addition, the accountant to the group of corporations with which the appellant was associated and their solicitor, were called to give evidence.

[29] The Judge then spent some time dealing with the possibility that other entities might be responsible but came to the conclusion that “the end result was

inconclusive and did not, in my view, really shake Mr Crockett’s contention that he regarded himself as contracting with Mr Mahon personally”.

[30] The Judge then dealt specifically with the question as to whether or not the appellant could be personally liable. He dealt specifically with the question of consideration and he noted that he had expressed a preference for the evidence of the respondent and then referred to the conclusion he had expressed in his interim judgment that, in some way or other, the appellant would see that the payments were made to the respondent. Without analysing the matter further he then came to the conclusion that there was a contract between the respondent and the appellant as alleged by the respondent. He dealt with the question as to whether or not there was an undisclosed principle but concluded that the statements made by the appellant to the respondent were a recognition of personal liability which left no room for the application of the undisclosed principle approach.

[31] We have considerable sympathy for the Judge in the situation which arose. The hearing took longer than expected so that there were difficulties in there being adequate time available for the varying points of view to be appropriately summated to the Judge. In addition, the raising of additional material meant that the Judge’s attention was directed at matters other than those which had engaged his concern in the interim decision.

[32] We have looked at the matter with care but in the end cannot escape the conclusion that there is a non sequitur between the two judgments. In the interim judgment the Judge expressed the view that, for the reasons which he indicated, it was difficult to conclude that the parties intended the appellant should be personally liable as opposed to the companies or trusts which were utilised to effect the developments.

[33] In the final judgment he does not return to that concern but refers to one, at least, of the difficulties which gave rise to the doubts expressed. He refers to the understanding of the respondent that the appellant would not have immediate legal right to development profits and that in some way or other the appellant would see that the payments were made. The Judge then goes on to hold that in terms of the
pleadings the respondent had established his case but he does not give the reasoning which led him to that conclusion, nor does he explain the inconsistency with the tentative conclusion already expressed in the interim judgment.

[34] It follows then, that we cannot avoid some consideration and analysis of the material which was before the Judge.

[35] Mr Stewart put an emphasis on the fact that it was known to both parties that the development profits, as distinct from the construction profits, would be earned by entities other than the construction company and he noted that the Judge had accepted three statements made by the appellant as having significance. The first, was that the appellant would prefer that the respondent receive:

(a) A percentage of the development profits which he made through his various interests. As Mahon put it he would pay me 10% of what he made.

(b) Mahon had always made it absolutely clear to me that I would receive ... 10% of the construction profit earned by WCL and 10% of the development profit which he or his interests earned. Mahon said to me many times during our discussions between September 1993 and February 1994 ‘Tom, whatever I make you will get 10% of’.

(c) Mahon always referred to himself or his interests when referring to the developments.

[36] Mr Stewart stressed that the actual employer of the respondent, the construction company, had no interest in the developments and received no part of the development profits; that there was evidence that those profits would go to a family trust established by the appellant; and that the respondent did not know how the interests of the appellant had been structured or what they were. He noted, too, that some of the entities controlled or owned by the appellant were not in existence at the time the agreements relating to development profits were concluded. He submitted also that on the evidence there was no dispute that any payments which would have been made to the respondent would not have been made by the construction company.

[37] In contrast Mr Miles submitted first, that it was unlikely that a personal commitment of the kind on which the respondent relied would have been given to
the respondent by a person using corporate structures to distance himself from liability. Secondly, that by letter dated 10^th August 1993 the respondent endeavoured to confirm the basis for payments of commission by writing to the governing director of the construction company as distinct from the appellant personally. He noted that a commission paid to the respondent in respect of a particular contract relating to the Ports of Auckland development was paid by the construction company.

[38] He put, however, most reliance on a letter dated 15^th October 1993 which was a letter written by the respondent to the managing director of the construction company. It had annexed to it an appendix which proposed a formula as to the payment of commissions and noted first, that this was directed to the managing- director of the construction company, not to the appellant personally. Mr Miles drew attention to the fact that the appendix to the letter refers in paragraph 1.iii to commission monies being payable in circumstances where projects were retained by “the company”. He submits that the whole tenor of the appendix is to the effect of liability against the company and there is no mention in it of a personal liability on the part of the appellant. He noted, in particular, that the appendix was not confined to construction projects (for which the construction company was clearly responsible) but is headed, as referring to development contracts, and refers to both construction and development contracts in paragraph 1.1. He notes, in particular, that in paragraph 1.4 the payments are to be made by “Woodland” which, he says, is a clear reference to the construction company or associated companies.

[39] He then relied upon the draft agreement referred to above which, although not signed, clearly shows the parties as being the respondent and companies associated with the appellant, rather than the appellant himself.

[40] He emphasised that subsequently the actions taken by the respondent reinforced the view that he saw the liability as being that of the companies, rather than the appellant. He referred to correspondence from the respondent’s legal adviser which made no reference of any liability on the part of the appellant; that the respondent issued two statements of claim designed to put companies associated with the appellant into liquidation in respect of amounts which clearly related to
commissions now in dispute, in neither case making any reference to the appellant; and that in his affidavit in support of various legal proceedings he did not contend that the appellant was responsible.

[41] He contends, therefore, that the respondent resiled from his previous legal position in order to initiate proceedings against the appellant as being a more financially viable target than the companies to which he had previously looked for payment.

[42] Mr Stewart contended that each of the factors upon which the appellant relied were subject to an explanation; that in respect of the earliest correspondence the respondent was clearly enough writing within the framework of the companies with which both he and the appellant were associated; that he had failed to notice in the draft agreement that there was no reference to the appellant personally; and that his subsequent legal activities and the correspondence on his behalf were specifically directed against primary targets and did not involve any recognition that there was an inability to claim against the appellant.

[43] In assessing this material we note first, that as the Judge observed the direct statements made by the appellant that the respondent would get ten percent of what the appellant made were not decisive since both were aware that the appellant did not stand to make anything.

[44] The respondent understood the words on the Judge’s conclusion as referring to ten percent of the profits ultimately enjoyed by entities owned by, or controlled by the appellant.

[45] We note that the Judge concluded that the intention of the parties must have been that in some way or other the appellant “would see that those payments were made”. Such a conclusion falls far short of establishing objectively that there was a contract that the appellant would make those payments himself. At most the words are consistent with some kind of guarantee and, in the absence of writing, no cause of action could subsist on such a basis.
[46] We agree with the Judge that the knowledge of the parties that the appellant would not personally receive the development profits makes it difficult to conclude that there was any intention that the appellant should be personally liable as opposed to the companies or trusts which he utilised to effect the developments. Noting, therefore, that those were the conclusions at which the Judge arrived we think they are reinforced by the considerations on which Mr Miles relied. If there had been an agreement that the appellant would be personally responsible it is extraordinary that no mention of that was made in the early documents which, to a limited extent, formalised the arrangements or were seen as preliminary to formalising those arrangements. The fact that the respondent initiated legal proceedings against entities other than the appellant as his initial steps, is not decisive. After all, that is consistent with a joint liability of the various entities as well as the appellant. But while that does not destroy the respondent’s case it certainly does not add to it.

[47] While we regret differing from an experienced Judge with particular knowledge in the commercial field we are led inexorably to the view that in this case the Judge’s own conclusions expressed in his interim judgment were not translated into the final judgment. Looking at the material upon which the respondent relied objectively and bearing in mind the requirement for a clear establishment of an assumption of personal liability on the part of the appellant as distinct from the companies or corporate entities which he controlled, we cannot see that the evidence would justify such a conclusion.

[48] After the hearing had concluded the respondent sought leave to make a further submission particularly relating to one development. Counsel drew attention to the fact that in the case of that development, development profits would ultimately go to a family trust. Counsel noted that under those circumstances the particular company which undertook the development derived no profit and this accordingly reinforced the position adopted by the respondent that the commissions at issue were ultimately received by the appellant or the trust which, for the purposes of this case, might be regarded as standing in his stead.

[49] Mr Miles, for the appellant, contended that this took the matter no further since while it established that ultimate profits went to a family trust, that was
because the shareholding in the corporations from which the profits were derived, was held by the family trusts.

[50] The evidence is equivocal as to whether or not the particular profits went to a trust because it was a shareholder or because the appellant directed it there. In either event, however, this falls short of establishing that the appellant was accepting a personal responsibility with respect to the contracts entered into with the respondent.

[51] While, therefore, we gave some consideration to remitting the case for rehearing we have, in the end, concluded that it is inappropriate to do so. The appeal is allowed and the preliminary issue stated by the Master is determined by holding there was no contract between the respondent and appellant as alleged by the respondent. The appellant is entitled to costs of $5,000 and reasonable disbursements including travel and accommodation costs for two counsel to be fixed by the Registrar in the absence of agreement.

Solicitors

Grove Darlow & Partners, Auckland , for the Appellant Bradbury & Muir, Auckland, for the Respondent