MANCO ENGINEERING GROUP LIMITED v TIMBERJACK GROUP OY [2002] NZCA 133 (13 June 2002)

IN THE COURT OF APPEAL OF NEW ZEALAND

ca269/01

	between	MANCO ENGINEERING GROUP LIMITED
		Appellant

	AND	TIMBERJACK GROUP OY
		Respondent

Hearing:	25 March 2002
Coram:	Keith J Blanchard J Durie J
Appearances:	M P Glucina for the Appellant T M Johnstone for the Respondent
Judgment:	13 June 2002

judgment of the court delivered by KEITH J

Introduction

[1] This appeal concerns the extent of the obligations of the respondent, Timberjack Group OY (Timberjack), to grant the appellant, Manco Engineering Group Ltd (Manco), first rights of refusal, when Timberjack onsold two former subsidiaries of Manco.Manco contends that Timberjack breached Manco's rights under rights agreements between the two parties.Manco appeals against the refusal by Master Kennedy-Grant to grant summary judgment that Timberjack was liable.

[2] By separate contracts dated 20 April 1998 Manco sold the assets and undertakings of two of its subsidiaries, Trackweld Group Ltd (TGL) and Trackweld Hire Ltd (THL).TGL was sold to Trackweld Timberjack Ltd (now Timberjack (NZ) Ltd), a wholly owned subsidiary of Timberjack, and THL was sold to Trackweld Timberjack Hire Ltd (now Timberjack Hire (NZ) Ltd), a wholly owned subsidiary of Trackweld Timberjack Ltd.The transactions totalled around NZ$1.9 million.The reality was that Timberjack was the buyer and Manco the seller.

[3] Three days later and in terms of provisions included in the initial sale agreements, Timberjack and Manco entered into the two rights agreements. Clause 2.1.1 of each conferred on Manco the right of first refusal in the event of Timberjack Group procuring or permitting the sale or other disposition of the shares in Timberjack (NZ) Ltd or in Timberjack Hire (NZ) Ltd (the Shares) or the particular business which had been purchased (the Business).

[4] In or about December 1999 Timberjack, together with its parent company and related companies, transferred all of the forestry equipment business and associated assets making up the Timberjack Group to Timberjack Group LLC (John Deere Corporation) and various of its subsidiaries.The transfer included the shareholding in the New Zealand companies.The consideration for the whole transaction was approximately EUR644,000,000 (well in excess of $NZ 1billion). The sale was formally effected on 28 April 2000.Manco was not given the opportunities to exercise the rights of first refusal which it claims were provided for in the rights agreements in relation to the sale.(Its allegation that an earlier sale of one of the New Zealand businesses was in breach of the relevant rights agreement was not pursued before the Master.)

[5] Manco sought summary judgment against Timberjack, alleging breaches of the obligations to afford to Manco its rights of first refusal.

[6] The Master was satisfied that the transfer to Deere was caught by cl 2.1.1 in each of the rights agreements and that these agreements reflected the common intention of the parties.The Master also held that no ground existed for the implication of a term excluding from cl 2.1.1 a transfer of the two purchasing companies of the businesses purchased by them as part of the transfer of the whole Timberjack Group.While the respondent's written submissions raised that issue, no notice to support the judgment on another ground was filed and the issue was not argued before us.More importantly, respondent's counsel accepted before us that it was in breach for not making an offer to Manco in respect of the whole transaction relating to its total business, including the New Zealand elements.While the appellant did not contend that it would accept an offer in respect of the whole much larger Timberjack deal, its evidence was that it would have acted on its rights if made an offer in respect of its two former businesses. The Master nevertheless held against Manco's application for summary judgment for this reason:

[24] I am not however satisfied that the plaintiff [Manco] is entitled, on the proper interpretation of cl 2.1.1 of the contracts entered into on 23 April 1998, to be offered first refusal in respect of the shares in the (purchasing) companies or the businesses purchased from the former subsidiaries of the plaintiff in isolation from the other elements of any contract entered into or proposed to be entered into by the defendant [Timberjack Group] in relation to those shares and/or business. The clause, on the interpretation which I have placed on it, could apply as easily to the disposal of the shares or businesses in question in isolation from other assets controlled by the defendant as to their disposal as part of a larger transaction involving other assets as well (as in fact happened).I think that it is at least arguable that there is nothing in the clause that entitles the plaintiff to require the defendant to offer the shares or the businesses to the plaintiff on terms other than those in which it has contracted, or is proposing to contract, with another party. In other words, if it is part of a larger deal, that is the deal that the plaintiff had first refusal on, because that is the "disposition" in terms of the clause.If the deal is limited to the shares or the businesses, as the case may be, without other assets being involved, then that is the deal that is offered and in respect of which the plaintiff has right of first refusal.

Contractual terms

[7] The clauses in question in the rights agreements read as follows:

2.1.1 ... Timberjack shall not sell, transfer, assign, sub-licence, or enter into any other legal or equitable disposition of or dealing in the Shares, the Business or this Agreement of an absolute nature (each "a Disposition") without first having granted Manco or its nominee a right first to acquire the Shares or the Business ("the Right") on the following terms:

a) Timberjack shall by notice and writing to Manco offer to sell the Business or the Shares to Manco or its nominee and shall set out in full the terms of any Disposition of the Business;

b) Manco or its nominee shall be entitled within 15 days after the receipt of the notice from Timberjack to accept the offer by giving Timberjack notice in writing of the acceptance;

c) If Manco or its nominee does not accept the offer of Timberjack under clause 2.1.1(b) Timberjack shall be entitled to offer the Business or the Shares to any third party on the same terms and conditions as were contained in the notice to Manco or its nominee under clause 2.1.1(a);

d) Timberjack shall not be entitled to make a Disposition of the Shares or the Business to a third party at any lesser price or on more favourable terms than those offered to Manco without first re-offering by notice in writing that price on those terms to Manco or its nominee, and Manco's rights of first refusal shall apply equally to any such subsequent notice.

The term "Shares" is defined as shares in the relevant purchasing company - Trackweld-Timberjack Ltd or Trackweld-Timberjack Hire Ltd.The term "Business" is defined as the assets and undertakings purchased from the relevant subsidiary of Manco.

The meaning of cls 2.1.1

[8] The only issue on appeal is whether Master Kennedy-Grant failed properly to apply cls 2.1.1 of the Rights Agreements. Both counsel, who made their submissions with exemplary clarity and economy, agreed on the starting point - that the provisions of the agreement and in particular of cls 2.1.1 are to be given their ordinary and natural meaning.The approach is captured by Lord Hoffman in his statement in Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896, 912 H, and in particular the proposition that

(1) Interpretation is the ascertainment of the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.

[9] For Manco the ordinary and natural meaning of cls 2.1.1 of each agreement was that if Timberjack was planning to sell either of the businesses or both it was obliged to give Manco a right of first refusal in respect of the particular business or of both.That was so irrespective of whether the business or businesses were part of a sale and purchase agreement involving other companies of the business.

[10] The right of first refusal granted (or really the duty of first offer imposed) by the introductory words of cls 2.1.1 is in respect of "the Shares" or "the Business".According to Manco, in each cl 2.1.1 those expressions relate to the particular business which it had sold to Timberjack.

[11] Counsel for Manco also referred to the entire agreement provisions of the rights agreements:

This Agreement:

(a) constitutes the entire understanding and agreement of the Parties relating to the transactions contemplated and subject matter of by this Agreement; and

(b) supersedes and extinguishes all prior agreements, arrangements and understandings between the Parties relating to the transactions contemplated and subject matter of by this Agreement.

[12] Counsel for Timberjack emphasised the words of the entire cls 2.1.1.It was entitled to offer Manco the right of first refusal of the two New Zealand companies on the same terms as the John Deere transaction because of the following features of the provision:

(a) The last line of the first paragraph of clause 2.1.1 refers to the right being offered "on the following terms:".

This statement immediately indicates that the Right was subject to terms and was not an unfettered right.

(b) Paragraph (a) then states that the notice of offer to sell the Business or the Shares must set out in full the terms.

(c) Paragraph (c) refers to the procedure to be followed if Manco chooses not to exercise the right and states that Timberjack:

shall be entitled to offer the Business or the Shares to any third party on the same terms and conditions as were contained in the notice to Manco or its nominee under clause 2.1.1(a) (emphasis added).

Thus paragraph (c) reemphasises that the right offered to Manco can be made subject to terms and conditions.

(d) Paragraph (d) provides Manco with protection from Timberjack attaching unreasonable terms and conditions so as to defeat Manco's rights. Timberjack is prevented from making any disposition to a third party:

at any lesser price or on more favourable terms than those offered to Manco without first re-offering by notice in writing that price or those terms to Manco or its nominee ... . (emphasis added)

Again the clause explicitly recognises that the right could be offered to Manco on terms and conditions.

There is nothing in the words of clause 2.1.1 that specifically restricts the nature of the terms and conditions that may be attached to the right.

The restriction on making a disposition to a third party on terms more favourable than offered in the right does, however, import a commercial restriction on the terms that would be offered.As a matter of commercial reality an offer will only be made on terms and conditions that some other third party finds acceptable.

[13] It is convenient to determine the meaning of the two clauses by way of the respondent's arguments.(The Master, it will be recalled, did not spell out his reasons for "not [being] satisfied" that Manco was entitled to an offer in respect of its former subsidiaries in isolation from the elements of any actual or proposed contract).The point is a confined one.

[14] We do not see the phrase "on the following terms" at the end of the introductory words of cls 2.1.1 as helping Timberjack's argument.They merely introduce the process to be followed.The words could have been replaced by "in the following way" or "in accordance with the following procedure" without changing their effect.We agree of course that the offer will almost inevitably include terms, for instance about the date of payment or restraint of trade.Those terms are to be offered to Manco and equally to any third party.But in terms of cls 2.1.1 the price and terms are to relate to "the Business", that is the New Zealand business, or the related Shares.They are not to relate to other businesses of Timberjack which it may also be wishing to sell.The obligations concerning resale, foreshadowed in the initial agreements of sale, relate to the two particular New Zealand businesses and only to them.The distinct obligations cannot be defeated by Timberjack deciding to sell the two businesses along with all or part of its other businesses, again without those distinct rights in respect of each of the two being offered, or even indeed by Timberjack deciding to sell the two businesses together without distinct rights in respect of each being offered to Manco. Not to require such distinct offers would be in breach both of the wording and the purpose indicated in the two sets of agreements which relate to the two particular businesses and only to them.

[15] It follows that we conclude that Timberjack was in breach of its obligations to make offers to Manco in respect of each New Zealand business.

High Court Rule 137

[16] The respondent contends that if it fails on the substantive issue summary judgment should not be granted on liability alone since Manco, it says, has not suffered any loss as a result of any alleged breach of the rights agreements. This submission is based on the existence of a discretion in R137 not to grant summary judgment and limited judicial practice and dicta.The rule states:

The Court may give judgment on the issue of liability, and direct a trial of the issue of amount (at such time and place as it thinks fit), if the party applying for summary judgment satisfies the Court that the only issue to be tried is one as to the amount claimed.

[17] We first observe that R137 itself does not require a showing of loss. Consistently with the purpose of the Rules as a whole and the summary judgment provisions in particular, it may well facilitate the just, speedy and inexpensive determination of the proceeding to determine liability separately if that matter can be sensibly separated from the issues relating to loss or damage.

[18] In one of the cases to which respondent's counsel referred - Ghent v Brinkman 11 September 1987, HC Wellington CP379/87 - in which the application for summary judgment on liability was refused, Eichelbaum J observed obiter that this was not a case where there was a clear dichotomy between issues affecting liability on the one hand and damages on the other (aggravated and exemplary damages were claimed and there were issues about the reduction of the plaintiff's damages).But that is not the present case.It is true that Manco, in its statement of claim, has not "quantif[ied] the loss and damage it has suffered" and that in Kelly v Edge Computer Ltd (HC Dunedin CP63/96 5 March 1997) Master Venning did require the plaintiff to show that there was some loss which, while presently unquantified, the plaintiff must have sustained which would justify the entry of judgment.Because he found that some loss had been suffered, he entered summary judgment for the plaintiff on liability.By contrast, the same Master, distinguishing Kelly, refused to enter summary judgment on liability in Tuscany Ltd v Costelloe (HC Christchurch CP56/99, 30 July 1999) because of the close relationship of the quantum hearing on one cause of action to the issues raised by another and the plaintiff's loss arising from that. Those factors, he ruled, made the case inappropriate for entry of summary judgment for liability.

[19] We return to the facts of this case.The relevant extent of the obligations of Timberjack under the agreements can be and has been determined distinctly from the measurement of the loss, if any, resulting from the breach of the obligations.Manco's witness testified, in unchallenged evidence, that the shares in the two businesses are now worth considerably more and Manco has lost the right to acquire the shares;but the full extent of the loss and the value of the shares cannot be accurately determined until Timberjack provides full discovery of the sales. Manco submits that Timberjack's failure to provide documentation about the John Deere transaction when it (Manco) had expressly raised the issue prevents it from ascertaining the quantum of its loss.

[20] We agree with the final argument, and considering the other factors mentioned and the wording and purpose of R137, we conclude that this is an appropriate case for the entry of summary judgment for Manco on liability.

[21] Accordingly, the appeal is allowed, summary judgment for Manco on liability is ordered and the proceedings are referred back to the High Court for a hearing on quantum.Manco is entitled to $3,500 costs plus disbursements, including the reasonable travel and accommodation expenses of counsel, to be fixed by the Registrar in the absence of agreement.

Solicitors

Craig Griffin & Lord, Auckland for the Appellant

Buddle Findlay, Auckland for the Respondent