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Court of Appeal of New Zealand |
|
IN THE court of appeal of new zealand |
ca228/01 |
between |
GRAHAM ROY TURNER | |
Appellant |
AND |
FORMULA EXPORTS (NZ) LIMITED | |
Respondent |
Hearing: |
11 March 2002 |
Coram: |
Tipping J Hammond J Randerson J |
Appearances: |
G M Harrison for Appellant G J Judd QC for Respondent |
Judgment: |
18 March 2002 |
judgment of the court delivered by HAMMOND J |
Introduction
[1] This is an appeal against a judgment of Williams J declining the defendant/appellant's application to enter summary judgment in his favour.
The Background
[2] The appellant, Graham Roy Turner, manufactures large pleasure craft, in Auckland.He was associated with a company, Formula Boats Limited.It became insolvent.Mystere Investments Limited, another company with which Mr Turner was associated, then purchased the boat moulds, machinery and stock from Formula Boats Limited, and took over its lease.Mystere also continued to employ the former employees of Formula Boats.
[3] Mr Frederick Wilson became interested in endeavouring to sell boats of this character as an agent for Mr Turner's enterprise, in the Americas.In the result, on 30 August 1999, an agreement was entered into between a new company, Formula Cruises Limited (FCL), and Formula Export (NZ) Limited (FE).FE was Mr Wilson's company.He signed the agreement "for and on behalf of the Formula Export (NZ) Limited".Mr Turner signed the agreement under the words, "signed by Formula Cruises Limited on behalf of the principal".It is common ground that, as at the date of the agreement, FCL was not in fact incorporated under the Companies Act 1993.It was incorporated on 13 January 2000.
[4] This agreement was for an initial two year term.The commission rate was 10% of the New Zealand invoiced price.The agreement could be determined by the other party for failure to comply with the obligations under the agreement, and any such failure (if rectifiable) was not remedied within 90 days of written notice.
[5] On an unspecified date sometime prior to December 1999, Mr Wilson procured an order for a 45 foot boat from Delta Pacific Yachts in the United States.Mr Turner already had a 45 foot boat under construction on a "production line" at Mystere.It was aimed at the local New Zealand market.There were discussions over specification and price.Mr Turner says that when this order was obtained from America, "then that boat had the particular specifications order, incorporated into it".
[6] Mr Turner says that his accountant suggested to him that he register a new company (ie. one other than Mystere Investments Limited) "because of the different requirements for taxation and GST that would apply through trading international".He further claims there was no point in registering a new company "if the order from California was not made final by the transmission of a letter of credit".Mr Turner says that in December 1999, Mystere received advice that its bank had received a letter of credit for the purchase of the boat.It was then, he says, that he instructed his accountant to register the company.
[7] On 25 January 2002, Auckland solicitors gave notice on behalf of "Formula Cruisers Limited", that it considered there to have been breaches of the agreement by FE; it was said those breaches were of a character which could not be remedied; and the agreement was terminated.Mr Wilson says that giving notice on behalf of "Formula Cruisers Limited" was a mistake.There was in fact no company called Formula Cruisers Limited in existence at that time.He says the notice was on behalf of FCL.
[8] In August 2000 FE commenced these proceedings against Mr Turner in person, seeking damages of $13 million "for wrongful cancellation of the agreement being the amount of the commission the plaintiff expected to earn on the sale of vessels [in the Americas]".By its statement of claim, FE relies upon the provisions of s.183(1) of the Companies Act 1993 viz, that there were "implied warranties" by Mr Turner that FCL:
* Would be incorporated within such period as may be specified in the agreement, or if no period was specified, then within a reasonable time after the making of the agreement; and
* Formula Cruises would ratify the contract within such a period as may be specified in the agreement, or if no agreement was specified, then within a reasonable time after the incorporation of Formula Cruises.
[9] By his pleadings, Mr Turner accepts that the agreement was subject to the statutory provision we have just referred to.And it is common ground that there was not, in this instance, any provision in the agreement as to time, in relation to either limb of s.183(1) of the Companies Act.
[10] On those pleadings, the issue between the parties therefore narrowed to whether FCL was incorporated within a reasonable time; and, whether it failed to ratify the agreement "within a reasonable time and/or prior to the purported cancellation of the agreement" (paragraph 18, Statement of Claim).
[11] Mr Turner pleaded that FCL was incorporated:
As soon as reasonably practical after [Formula Exports] arranged for the purchase of a vessel then partly constructed to pay a deposit . . . further that it was reasonable to incorporate Formula Cruises on 13 January 2000 in circumstances where the agency agreement provided that its commencement date meant `the date on which the first boat ordered by a customer of the agent is delivered by the principal in terms of the condition . . .'.At the time Formula Cruises was registered, the subject boat was several months from completion.
[12] As to the allegation of failure to ratify, the pleading is two fold. First, that once FE had arranged for the payment of the deposit, work recommenced on the construction of the boat (as had been contemplated by the agreement).Secondly, that FE "acknowledged by a solicitors letter of 28 January 2000 that the agency agreement was in full force and effect".
The Summary Judgment Application
[13] On 11 June 2000, Mr Turner applied for summary judgment against FE upon the stated ground "that none of the causes of action in [FE's] statement of claim can succeed".The particularised grounds assert that FCL was registered within a reasonable time and "in terms of the contract between it and [FE]", and that "[FCL] ratified the agreement immediately after incorporation which ratification was acknowledged by [FE]".The delay in making the application was ascribed to a need to complete discovery before the application was made.
The Judgment Under Appeal
[14] This application was heard by Williams J on 21 August 2001, and a reserved judgment was delivered on 3 September 2001.
[15] In the High Court, Mr Harrison accepted that a "reasonable time" for the purpose of s.183 is a question of fact.The Judge records:
Mr Harrison submitted that Formula Cruises was incorporated within a reasonable time of the contract because it was incorporated within a reasonable time after confirmation of the initial contract to sell one of the vessels overseas - the reason for the company's existence - and payment of the deposit.He drew the Court's attention to the fact that the vessel, partly constructed at the time the contract was confirmed and the company incorporated, was not delivered until May 2000 and submitted that the course of events did not prejudice Formula Exports.
[16] Mr Harrison then submitted that in any event FCL ratified the contract with FE "within a reasonable time after its incorporation, relying more on ratification by conduct of the principal that on express ratification ....". It was submitted that "the instructions to Formula Cruises solicitors, and their writing the letter of cancellation to Formula Exports, amounted to ratification since they could not write such a letter on behalf of the company unless ratification had preceded their instruction (sic)."
[17] In the High Court, Mr Judd's arguments before the Judge were recorded as being:
[a] There was no adequate proof that Formula Cruises had been incorporated at all, submitting that it was intended that the company should be called Formula Cruisers Limited and relying on the later purchase of a company and the adoption of that name.He also relied on the absence from evidence of Formula Cruises' constitution, submitting that the Court would need to be assured that it had power to enter into the agency agreement.In the Court's view, there was little in either point.Mr Turner now controls Formula Cruises Ltd and Formula Cruisers Limited and it is sufficient that the agency contract is in the former name.Although the constitution was not put in evidence, it is highly unlikely that both companies cannot contract, given such statutory provisions as the Companies Act 1993, ss 16 and 17.
[b] There was no sufficient proof that Formula Cruises was incorporated within a reasonable time after the making of the contract.In this regard, Mr Judd drew attention to the definition of "commencement date" in the agency agreement, submitting that the correct interpretation of the inception of the contract and thus of what might be a reasonable time for incorporation and ratification could not be decided until the Court had access to all relevant information at trial.Within the contract itself, he drew attention to various provisions affecting that question.The Court accepts that there may be some weight in Mr Judd's submissions having regard to those other clauses and the way in which the contract defines "Commencement Date".
[c] Mr Judd also drew attention to the lack of factual material concerning such matters as acquisition of the moulds, machinery and premises, the course of construction of the first boat, and the course of correspondence said to have occurred between the parties.He also submitted that Formula Cruises should have been incorporated before receipt of the deposit and that it was incorrect for Mystere Investments to receive the same.If this application is unsuccessful, those matters must also await trial.
[d] Mr Judd submitted that even if Formula Cruises had been incorporated within a reasonable time of the date of the contract, there was insufficient evidence that ratification was actually carried out by the company.He submitted that it was circular and inconclusive to argue that the solicitors wrote a letter on behalf of the company cancelling the contract as evidence that the company had ratified the same.
[18] Williams J held that whether or not the company was incorporated within a reasonable time after the contract is a question of fact.As to that issue the Judge said:
Leaving aside the question of whether the "Commencement Date" was of the contract or defines renewal of the term, it is clear that whether or not the company was incorporated within a reasonable time after the contract is a question of fact.The Court does not have all the facts before it.As an example, whilst it may perhaps have been reasonable to delay incorporation of a company whose principal business was the manufacture of boats and their sales overseas until an order and a deposit were on the point of being received, it could turn out to be the case that delaying incorporation beyond that point was unreasonable.Further, the contract in this case was a valuable one and it could perhaps turn out to be unreasonable for the manufacturing company not to be incorporated in time to receive the deposit or, in the circumstances of this matter, for there to be a delay in incorporation for some six weeks or so between receipt of the deposit and action being taken to cancel the contract, if indeed it turns out to have been the contracting company which took that action.
[19] The Judge took the view that "the question of whether incorporation was effected within a reasonable time after the date of the contract, may also, in part at least, turn out to be a question of law".This because, in the Judge's view, there was at least room for argument as to whether, and if so, how far, the rule in Kelner v Baxter (1866) LR 2 CP 174 has been modified by s.183 (and its precursor, s42A in the Companies Act 1955).
[20] Having regard to all those matters, the Judge held that Mr Turner had failed to satisfy the Court that the claim against him could not succeed on the issue relating to the incorporation of the company because there were factual matters that needed to be determined; there were some difficulties in the interpretation of the contract; and, on the Kelner v Baxter point, "uncertainty as to determining the intention of the parties".
[21] On the ratification issue, the Judge noted that Mr Turner had not adduced any formal document of ratification; nor had he provided any particulars of the conduct by FCL which he said amounted to his ratification of the contract.The Judge considered that the letter of cancellation, in the particular circumstances of this matter, did not amount to unequivocal evidence of conduct amounting to ratification.Thirdly, although all the evidence is not of course in, the Judge observed "that it was likely Mr Turner (in person), who instructed the solicitor" to send the letter of termination.
[22] The Judge therefore declined the application, with costs in favour of FE.
The Test for Entry of Summary Judgment on a Defendant's Application
[23] Both parties accept that the law on this point was settled by this court in Westpac Banking Corp v M M Kembla (NZ) Limited [2001] 2 NZLR 298. The Court said, at page 313:
The defendant must have "a clear answer to the plaintiff which cannot be contradicted".
See also Bernard & Space 2000 Limited v Knobs & Knockers Limited (5 July 2001, CA 232/00).
The Law Relating to Pre-Incorporation Contracts
[24] Given the view we take of the proper disposition of the appeal before us, it is neither necessary, nor appropriate, for us to traverse the law in this area closely.As we will shortly indicate, we are of the view that there are factual issues which must perforce be left to trial.There are some difficult legal issues which may very well require ventilation at trial.But it is conceivable that some of those issues might then be returned to this court, on an appeal, on the merits.In those circumstances it would be premature for this court to pronounce on those matters in the abstract, and absent appropriate factual findings.We therefore confine ourselves to a mere description of so much of the law as is strictly necessary to indicate the context of the dispute, and to appreciate the factual issues we consider need to be addressed.
[25] Prior to an amendment to the Companies Act 1955 in 1983, pre-incorporation contracts by a company were governed by a distinctly complicated set of common law principles based around the law of agency.There was a good deal of argument as to what those principles were.For present purposes, it suffices to note that in Phonogram Limited v Lane [1982] 1 QB 938 Oliver LJ said that the "true common law position" was, simply:
Does the contract purport to be one which is directly between the supposed principal and the other party, or does it purport to be one between the agent himself - albeit acting for a supposed principal - and the other party? (p949)
In the view of that court such a question has to be addressed by looking at the whole of the contract and not just at the formula used in connection with the signature.If after such an examination the latter is found to be the case, the promoter would be personally liable at common law, no matter how he or she signed the document.
[26] Nevertheless, real difficulties continued to arise in practice.A 1983 amendment to the New Zealand companies legislation endeavoured to address these ongoing issues of the enforceability of pre-incorporation contracts and the personal liability of purported agents, by confirming the validity and enforceability of a pre-incorporation contract provided it has been ratified by the company, and by specifying the extent of the liability of the agent (see Companies Act 1955, s.42(A) as inserted by the Companies Amendment Act (No.2) 1983, s.15).
[27] The Companies Act 1993, while retaining some of the key features of the 1983 amendment, has elaborated on these issues to a considerable extent.A "pre-incorporation contract" is defined in a similar way to the 1983 amendment as meaning a contract purporting to be made by a company before its incorporation or a contract made by a person on behalf of a company before and in contemplation of its incorporation:s 182(1).A pre-incorporation contract may be ratified within such period as may be specified in the contract or if no period is specified, within a reasonable time after incorporation of the company: s 182(2).By s 182(4), a pre-incorporation contract may be ratified by a company in the same manner as a contract may be entered into on behalf of a company under s 180 of the Act.Especially where the contract (and hence the ratification) need not be in writing, there is a lack of precision about how a company may ratify a contract.For example, there is no express statutory requirement for communication of ratification, although doubtless that would be prudent in commercial terms.Nor is there any guidance in the Act as to whether ratification may be implied by conduct or otherwise.
[28] The enforceability of pre-incorporation contracts is complicated by the existence of the Contracts (Privity) Act 1982.As a general proposition, that Act enables a person who is not a party to a contract, but on whom the contract confers a benefit, to enforce the contract (Contracts Privity Act 1982, s.4). However, the operation of that act in relation to pre-incorporation contracts is specifically excluded by the Companies Act 1993 (s.182(5)). Hence if the pre-incorporation contract has not been ratified, or validated by the court (under s.184), the company may not enforce or take the benefit of it.
[29] Unless a contrary intention is expressed in the contract, a pre-incorporation contract contains an implied warranty by the person who purports to make the contract in the name of, or on behalf of the company, that the company will be incorporated within the time specified in the contract, or within a reasonable time after the making of the contract; and that the company will ratify the contract within the time specified in the contract, or within a reasonable time after incorporation.(See s183(1)(a) and (b)).
[30] The amount of damages recoverable from the contracting person for a breach of an implied warranty, is the same as the amount that would have been recoverable in an action against the company for breach by that company of the unperformed obligations under the contract, if that contract had been ratified and cancelled (Companies Act 1993, s.183(2)).Section 183(3) provides that the liability of the contracting person under the implied warranty is discharged where a company, after its incorporation, enters into a contract in the same terms as, or in substitution for, the pre-incorporation contract (not being a contract ratified by the company under s182).
[31] If a pre-incorporation contract is not ratified by a company after its incorporation, any party to that contract may apply to the court for relief (s.184(1)).If the court considers it just and equitable to do so, it may make any order or grant any relief that it thinks fit.Relief for failure to ratify does not depend on an order having been made for breach of a warranty implied in a pre-incorporation contract (s.184(2)).
[32] If a pre-incorporation contract is ratified by a company, but subsequently a breach of that contract occurs, the Court may, on the application of any of the parties to proceedings against the company, or on its own motion, grant relief against the person by whom the contract was made, where the Court considers it just and equitable to do so.The relief may be an order for the payment of damages or any other relief considered just and equitable (s 185).
Disputed or Unclear Facts
[33] Mr Harrison accepted that Mr Turner would only be entitled to summary judgment if it could be established that FE could not succeed on either of the warranties in s 183(1).The first issue is therefore whether FCL was incorporated within a reasonable time of the execution of the agreement on 30 August 1999.We consider there were several questions of fact which were still very much at large at the time the summary judgment application came before Williams J, and which preclude such a conclusion.
[34] Firstly, two essential premises of Mr Turner's application were that the contract, in terms, was not "commenced" until the delivery of the first boat, in America.That then formed the plank for an argument that incorporation of Mr Turner's company could reasonably be delayed until that had in fact occurred.At first blush there is some force in the argument because the definition section of the agreement provides that "commencement date means the date on which the first boat ordered by a customer of the agent is delivered by the principal".But Mr Judd says that, in commercial terms, that argument makes no sense.Why would a right to sell be purportedly conferred if the agreement did not commence until actual delivery of the first boat?His argument was that the defined date in the agreement was solely for the purpose of calculating the term of the agreement and that the agreement commenced the day it was made.From that date, FE assumed obligations "to compensate Formula Exports which would crystallise [if he did not lawfully incorporate or ratify]".
[35] Strictly speaking, this is probably a mixed question of fact and law.It is one of those all too familiar examples in the arena of commercial law where one party seeks to rely on the literal wording of a sentence in an agreement; the other party says that the agreement cannot be taken as meaning what it literally says.As it transpires, by the end of the hearing before us, this point assumed much less significance: as we understood him, Mr Harrison agreed that there must have been some obligations on execution of the agreement. Therefore the force in the argument that the contract was "postponed" in its operation, as it were, is diminished.Nevertheless, the short point here is that the precise ambit of the contract is still somewhat problematic.
[36] A second area of the facts - and we think this is the truly critical area for present purposes - is what in fact occurred after the date of the agreement, and before FCL was incorporated.Mr Harrison expressly (and rightly in our view) conceded that, in the event it could not be established that the incorporation of FCL was within a "reasonable" time, then the declinature of summary judgment was the correct course for the Judge to have taken.
[37] The "evidence" in this respect is attenuated, and in several respects consists of nothing more than (untested) assertions.The evidence as to how far construction of the "New Zealand" boat had progressed, and when manufacture switched to the "American" specifications or fit out, is at best sketchy.When was the order for the boat received?What were the details relating to the financing of the boat?When was the accountant instructed?Mr Turner asserts that, up until December 1999, there was "no need to register any company" (because no funds had been received, and construction had proceeded independently).That may well have been a matter of choice on his part, rather than necessity.And how far (if at all) FE was affected by the failure to incorporate more quickly is also somewhat unclear.Then there is the factual issue that FCL was incorporated within a week of the notice from Delta Yachts that it had significant concerns as to FE's dealings in the United States. That may be a coincidence, or the explanation may be entirely benign (Mr Turner says that he was "on vacation" at the critical time), or it might, on closer examination, be found that there is some significance in the incorporation having occurred only as possible litigation loomed.
[38] The short point here is that the Judge had to be satisfied, to the requisite standard for an application of this character, that the incorporation of FCL was within a reasonable time.Counsel were not able to refer us to any authority as to what is meant by a "reasonable time" for the purpose of these provisions.Doubtless, the standard is an objective one, and is not to be viewed solely from (say) the perspective of Mr Turner.Other traditional factors (such as any alleged prejudice to FE) would have to be weighed, but that factor alone would not be dispositive of the issue.In the time honoured phrase, all the relevant factors would have to be identified, and weighed.But that in turn depends upon the facts being clarified.What the Judge held was that he was not satisfied that the facts were sufficiently clearly established to enable him to make a proper determination as to the "reasonableness" of the delay in incorporating FCL.We are not persuaded he was wrong in that holding. Having reached that point, it is not necessary for us to consider the other points which were raised before the Judge, and again before this Court.
Conclusion
[39] In the result, the appeal is dismissed.
[40] The respondent will have costs of $3,500, together with disbursements. The disbursements are to include the reasonable travel and accommodation costs of counsel for the respondent, if necessary as fixed by the Registrar.
Solicitors:
Lovegroves, Auckland for Appellant
Morrison Kent & Co, Auckland for Respondent
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