Carlyle Venture Capital Limited v Robb Resources (NZ) Limited [2006] NZCA 170 (19 July 2006)

Last Updated: 26 July 2006

IN THE COURT OF APPEAL OF NEW ZEALAND

CA111/05

BETWEEN CARLYLE VENTURE CAPITAL LIMITED
Appellant

AND ROBB RESOURCES (NZ) LIMITED
Respondent

Hearing: 17 May 2006

Court: Chambers, Baragwanath and Venning JJ

Counsel: P W David and J Carlyon for Appellant
P M Fee and D P L Greig for Respondent

Judgment: 19 July 2006     

JUDGMENT OF THE COURT

A The appeal is dismissed.
B The appellant must pay to the respondent costs of $6,000, plus usual disbursements. We certify for second counsel.

REASONS OF THE COURT

(Given by Chambers J)

Non-payment of a success fee

[1]	Carlyle Venture Capital Limited, the appellant, brought a summary judgment application against Robb Resources (NZ) Limited, the respondent, with respect to Robb’s non-payment of a success fee. Carlyle claimed $250,000, plus GST, a total of $281,250.
[2]	Robb defended the summary judgment application on a number of grounds. Associate Judge Faire found two defences to be fairly arguable: HC AK CIV 2004-404-6434 17 May 2005 at [40]. These were:

(a) It was arguable that the contract between Carlyle and Robb had been orally varied in January 2004 in a way which was unclear on the evidence;

(b) It was arguable that the contract between Carlyle and Robb had been varied or novated on 5 February 2004, with the result that a company called NZ Property Investors Limited had assumed responsibility for the fee in place of Robb.

[3]	The judge considered that there was on the evidence before him "a lack of precision" as to the terms of the contract: at [42]. He considered that Carlyle had not "discharged the required onus" on a summary judgment application; the issues raised by Robb "should be resolved at trial": at [43].
[4]	Carlyle appeals against the judge’s refusal to grant summary judgment. Robb seeks to uphold the judge’s reasoning.

Issues on the appeal

[5]	Mr David, for Carlyle, attacked both of the judge’s reasons for declining the application for summary judgment.
[6]	The first issue is whether the judge was correct in finding that it was arguable that the contract had been varied in January 2004.
[7]	The second issue is whether the judge was right to find it fairly arguable that the contract had been novated on 5 February 2004, with the result that Carlyle should now be looking to Property Investors, not Robb, for its fee.
[8]	Robb did not file and serve any memorandum setting out other grounds on which it intended to support the judge’s decision: Court of Appeal (Civil) Rules 2005, r 33. Accordingly, we are not concerned on this appeal with the alleged defences which the judge found unarguable.
[9]	For reasons which will become apparent, we deal with both the issues together.

What happened in January and February 2004?

[10]	The judge made it clear that, with respect to the period up to the end of 2003, Carlyle had satisfied him to the requisite standard "as to the nature of the varied contract, who the contracting parties were, and as to the amount owing under the contract": at [40]. It was only what happened or might have happened in January and February 2004 which caused him concern; what happened then, in the judge’s view, might have altered what was the clear legal position up until then.
[11]	Before we come to what happened in early 2004, we set out briefly the relevant facts that occurred in 2003. Those who want a fuller version of the facts should read the judge’s reasons for judgment at [13]-[28].
[12]	Carlyle operates a venture capital and private equity consultant service. One of its directors is David Hayde.
[13]	Robb is the parent of a number of subsidiary companies in New Zealand, two of which are specifically relevant to this proceeding, namely Freedom Group Limited and Auckland Financial Management Corporation Limited. The sole director of Robb is Dudley Quinlivan.
[14]	In early 2003, Mr Quinlivan on behalf of Robb decided to sell the businesses of Freedom and Auckland Financial Management. Ken Eade, acting on behalf of Mr Quinlivan, approached Mr Hayde in late May 2003 to see whether he could assist with the sale. After discussions, Carlyle and Robb entered into a written agreement, setting out clearly what Carlyle’s role would be and what Carlyle would be paid. That agreement comprised an engagement letter dated 5 June 2003, countersigned by Robb on 12 June 2003, and Carlyle’s "Standard Terms of Business". The agreement specifically named Robb as the party responsible for Carlyle’s fees. Carlyle was to receive both a consultancy fee and, if the sale were successful, a success fee. The success fee was to be calculated on the basis of 10% of the net sale price, less the consultancy fee. Based on the figures contained in a valuation which the parties had, and assuming a sale at that valuation, the letter of engagement recorded that the success fee would be $400,000 plus GST, less whatever was paid by way of a consultancy fee.
[15]	In late June 2003, the proposal as to how the business was to be sold changed. The details of that change are not currently relevant. But, as a consequence of the change, "the transaction started to look more straightforward", according to Mr Hayde. As a consequence, he and Mr Eade (for Robb) agreed that Carlyle’s success fee would now be $250,000 plus GST.
[16]	In the latter half of 2003, Robb entered into negotiations with Rodney Hjort and Shane Atkins, two senior managers of Freedom, for them to buy the business from Robb. Mr Hayde played a significant role in structuring the deal. In the end, it was agreed that the purchaser of the business would be a new company, which when incorporated was called NZ Property Investors Limited. By 22 December 2003, all the documents associated with the sale had been executed by all the parties. After the signing of the documents, Mr Hayde asked Mr Eade to whom he should send his invoice, as in his view the sale had triggered Carlyle’s fee. Mr Eade told Mr Hayde to send it to him and he would deal with it. On 30 December 2003, Mr Hayde sent Mr Eade a tax invoice, addressed to Robb. The fee was $250,000 plus GST. The tax invoice recorded:

Description
Services of David Hayde for the period to 24 December 2003 in accordance with letter dated 5 June 2003.

Fee: as reduced in discussions with Ken Eade on 24 June 2003.

[17]	Had matters stopped there, Associate Judge Faire thought the position was clear: Robb was bound to pay Carlyle the reduced fee of $250,000, plus GST. In accordance with Carlyle’s Standard Terms of Business, the fee was payable "at the time the final settlement takes place". Settlement of the sale of the business was due to take place on 30 January 2004.
[18]	On that date, Property Investors was unable to settle in terms of the agreement. On that date, Mr Quinlivan, on behalf of the vendor interests, and Craig Alexander, a solicitor acting for the purchaser interests, reached a compromise, whereby it was agreed that settlement would take place on the basis that the amount paid would be lower but Property Investors would assume responsibility for Carlyle’s fees. (There were other conditions as well, but they are not material for current purposes.) This agreement was recorded in writing. In an affidavit filed in this proceeding, Mr Hjort disputed that Mr Alexander had authority to enter into an agreement on those terms and said that he had only recently seen the written agreement signed by Messrs Quinlivan and Alexander. Mr Alexander rejects the assertion that he acted without instructions. He says that Mr Hjort approved the compromise and that the written agreement was sent and signed by Mr Alexander "on instructions from [Mr Hjort]". Obviously that factual dispute cannot be resolved on the papers.
[19]	Of course, the 30 January 2004 agreement did not of itself shift liability for Carlyle’s fee from Robb to Property Investors, as it is clear that Carlyle was not informed of the new arrangement at that time.
[20]	Mr Hayde’s account of what then took place is set out in his affidavit in these terms:

25. On 30 January 2004, the settlement of the transaction took place. I did not take part in the settlement transaction. I had expected, in accordance with the terms of the Agreement, to be paid on settlement. However, I did not receive any money. I asked Mr Hjort about the [30 December] Invoice and he advised that he would take it up with Mr Quinlivan.
26. On 5 February 2004, I met with Mr Hjort and Mr Atkins. They told me that I would be paid $75,000 this week, $75,000 in instalments over the next 2-3 months and the balance out of future cash flows. A suggestion was made that the balance would be paid by allowing me to purchase an apartment over which one of Mr Quinlivan’s companies had rights at a reduced price. I understood that the money would be paid by [Property Investors] as monies came in to it from settlements and were due to Freedom as part of the Purchase Price. This was a method of payment of the Invoice over a deferred time period.
27. After this deferred payment scheme had been agreed to, I prepared another invoice covering the payment of the two sums of $75,000. This further invoice, dated 31 January 2004, was for $150,000 plus GST and was addressed to Robb. I annex at "F" a true copy of that invoice. I gave the invoice to Mr Hjort who said that he would give it to the accountant to enter into the accounting records. Subsequently, the accountant confirmed to me that he had a copy of that invoice. I do not know if the invoice was, in fact, entered into the accounting records.
28. I never received the initial $75,000 or any payment towards the agreed fee of $250,000. I asked Mr Hjort about it several times, but he always told me that he was still discussing payment with Mr Quinlivan.
29. On 2 April 2004, Reon Witherdin (Mr Quinlivan’s brother in law) was appointed, in accordance with the rights held by Freedom under the debenture, as an investigator to manage [Property Investors].
30. Initially I assisted Mr Withderin. I briefed him on the situation, as it then was, at [Property Investors]. I asked him when the payments which I was owed would be received (by this stage I was also owed for consulting services provided since 1 January 2004). Mr Witherdin said that he would pay me and other creditors when settlement of a majority property transaction known as H47 settled. This was initially due to take place in March 2004 and then seemed to get continually delayed.

[21]	The tax invoice referred to in paragraph 27 (exhibit F) – which we shall call "the exhibit F invoice" - was in these terms:

Description
Services of David Hayde for the period to 24 December 2003 in accordance with letter dated 5 June 2003.
Initial fee was reduced in discussions with Ken Eade on 24 June 2003. This fee was further reduced after discussions with Rod Hjort in January 2004.
150,000
GST 18,750

Total amount due $168,750.00

[22]	There is no affidavit from Mr Atkins as to what happened at the meeting of 5 February 2004. Carlyle did file an affidavit from Mr Hjort, but Mr Hjort does not deal with the meeting of 5 February. In these circumstances, it is impossible to be definitive as to what was discussed on 5 February. In light of that, it is impossible to be definitive as to the legal consequences of the discussion.
[23]	It is Robb’s case that the agreement between it and Carlyle was novated as a consequence of the 30 January agreement between Robb and Property Investors and the 5 February agreement between Carlyle and Property Investors. Mrs Fee, for Robb, submits that there is at least an arguable case that the consequence of the 5 February meeting was that Carlyle agreed to release Robb from its obligations in return for Property Investors assuming the like obligations.
[24]	We agree with Mrs Fee’s submission. Even on Mr Hayde’s evidence, it is fairly arguable that the original agreement was novated. In support of that, we note the following features:

(a) It seems highly likely that Messrs Hjort and Atkins must have told Mr Hayde about their 30 January agreement with Robb. Otherwise, why would they have been offering to pay Carlyle’s fee? So it is reasonable to assume that Mr Hayde knew that Property Investors had not been able to come up with the settlement figure and had had to agree, in order to save the deal, that Property Investors would assume responsibility for Carlyle’s fee.

(b) Mr Hayde himself refers to the new "deferred payment scheme" as having been "agreed to". So, at least in his eyes, an agreement of some sort had been reached between him on behalf of Carlyle and Messrs Hjort and Atkins on behalf of Property Investors.

(c) Mr Hayde prepared a new invoice for the new amount of $150,000 plus GST, which was to be paid by Property Investors "over the next 2-3 months". That suggests that he did see Property Investors as being under a liability for the amount that had been agreed that day.

(d) The balance of the fee was to be paid out of Property Investors’ "future cash flows". That also suggests that he saw Property Investors as now being responsible for the entire fee.

(e) Mr Hayde gave the invoice for $150,000 plus GST to Mr Hjort to give it "to the accountant to enter into the accounting records". Presumably Mr Hjort was referring to Property Investors’ accountant and Property Investors’ accounting records: it was, after all, Property Investors which was to pay the invoice and the balance of the fees.

(f) It is noteworthy that in the months that followed, when the fee was not paid, it was Mr Hjort and Mr Witherdin, both of Property Investors, whom Mr Hayde approached for payment. (Mr Witherdin, although Mr Quinlivan’s brother-in-law and appointed by Freedom, was acting as Property Investors’ manager at this time.)

(g) There was a financial motive for Mr Hayde to agree to release Robb. Had he refused to release Robb, it was at least arguable that Robb could have cancelled the agreement for sale on the basis that Carlyle would not release Robb and Property Investors would not or could not honour its promise to pay the Carlyle fee. Ironically, cancellation of that agreement might then have led to an argument that Carlyle had not "succeeded" in finding a creditworthy purchaser. In short, it is at least arguable that Carlyle had a strong financial interest to ensure that the deal between Robb and Property Investors did not unravel.

[25]	It might be argued that a novation could not have arisen on 5 February because Robb was not represented at the meeting. There are, however, two possible answers to such a proposition. The first is that it may be arguable Mr Hjort was present in two capacities on 5 February, as a representative of both Property Investors and Robb. According to his affidavit, he continued to be "involved in the general management of [Robb]" from December 2002 to 27 May 2004. It may therefore be arguable that he was wearing both hats when he approached Mr Hayde to get his consent to Property Investors’ taking over the debt and Carlyle’s releasing Robb from liability. Secondly, even if that is not the case, it is very possible when all the evidence is in that it will show that Mr Hjort soon after the meeting informed Mr Quinlivan of what had been agreed. It is clear on the affidavit evidence so far that Messrs Hjort and Quinlivan were in frequent contact during this period.
[26]	We are aware that there is other evidence (not referred to in our summary at [24]) which would support the proposition that Mr Hayde, while being prepared to accept payment of the fee from Property Investors, was not thereby releasing Robb, should the payment not be made. But it is not the function of the court on a summary judgment application to work out the probable outcome of the conflicting evidence. It is for the plaintiff to establish that there is no fairly arguable defence. Like Associate Judge Faire, we do not consider that Carlyle has established that. There is a fairly arguable defence that the result of the agreements of 30 January and 5 February was that Robb was released from its liability, responsibility for Carlyle’s fee being picked up by Property Investors. Whether what happened did amount to a novation is a matter which should be properly tested at trial. Cross-examination of Messrs Hayde and Hjort will enable a fuller picture to emerge so that definitive findings of fact and law can be made. As well, although Mr Atkins has not yet provided evidence, it is highly likely that one side or the other will want to call him, now that the crucial significance of what was said at the 5 February meeting has become clear.
[27]	In short, we do not accept Mr David’s submission that Associate Judge Faire erred on this matter. We do not accept that the novation argument is no more than "a hypothetical possibility" or that it is "not tenable as a matter of law". Contrary to Mr David’s submission, we, like Associate Judge Faire, do consider that Mr Hayde’s affidavit evidence could support an argument for novation. But, in any event, the evidence is by no means complete at this stage.
[28]	That deals with the novation point. Associate Judge Faire also raised the possibility that there may have been other discussions (of contractual effect) in January 2004. That possibility was based on the exhibit F invoice (set out at [21] above), in which Mr Hayde made reference to the fee having been "further reduced after discussions with Rod Hjort in January 2004".
[29]	Neither Mr Hayde nor Mr Hjort provides any explanation of that reference in the invoice.
[30]	We agree with Associate Judge Faire that the reference adds to the unsafety of entering summary judgment in Carlyle’s favour based on the earlier invoice for $250,000 plus GST. In the absence of a clear explanation for this reference, how can the court be sure that there were not discussions in January 2004, which led to a variation of the fee agreement and a reduction of the amount payable?
[31]	It may well be that the exhibit F invoice is erroneous and that the "reduction" was a consequence of the discussions and agreement with Rod Hjort, not in January 2004, but on 5 February 2004. It was on that date, after all, that Mr Hayde agreed with Mr Hjort that Property Investors would pay Carlyle $150,000 (over the next 2-3 weeks), with the balance being payable out of Property Investors’ future cash flows.
[32]	In our view, Associate Judge Faire was correct to conclude that the exhibit F invoice needed explanation. Mr Hayde has not provided any explanation. Nor did Mr David deal with this in his submissions.

Result

[33]	For these reasons, we agree with the judgment under appeal and dismiss the appeal.

[34]	Associate Judge Faire gave case management directions: at [45]. We do not know whether the parties followed those directions or whether they were stayed pending this appeal. Presumably Carlyle will now seek a case management conference so that the proceeding can move forward to trial.

Solicitors:
Wilson Harle, Auckland, for Appellant
Jones Fee, Auckland, for Respondent