Critchley v Bermingham [2012] NZHC 728 (23 April 2012)

Last Updated: 27 April 2012

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2009-404-001190 [2012] NZHC 728

BETWEEN GARRY CRITCHLEY Plaintiff

AND WARRYN PATRICK BERMINGHAM First Defendant

AND KENNETH JAMES TELFAR Second Defendant

AND 26000 VODKA LIMITED Third Defendant

Hearing: 26-28 March 2012

Counsel: N J Carter for Plaintiff

A G Stallard for First and Second Defendants

Judgment: 23 April 2012

In accordance with r 11.5 I direct the Registrar to endorse this judgment with the delivery time of 4.00pm on the 23rd day of April 2012.

_{RESERVED JUDGMENT OF COLLINS J}

TABLE OF CONTENTS

Introduction.........................................................................................................[1] The parties.........................................................................................................[1] Meeting between plaintiff and first and second defendants..............................[6] The claim..........................................................................................................[13] The Evidence......................................................................................................[16] The plaintiff ’s case...........................................................................................[16] The defendants’ case........................................................................................[44] Findings of fact...................................................................................................[78]

Did the first and second defendants agree to “gift” 15 per cent of the shares in

the company to the plaintiff on 12 January 2007?..........................................[79] Did the first and second defendants agree to sell 15 per cent of the shares in the company to the plaintiff on 12 January 2007?................................................[80]

CRITCHLEY V BERMINGHAM HC AK CIV-2009-404-001190 [23 April 2012]

What were the conditions of any sale to the plaintiff of 15 per cent of the shares in the company?..............................................................................................[81] When was the sale to take place?....................................................................[82] What consideration was the plaintiff to provide for the shares?.....................[85] Other conditions..............................................................................................[88] What, if any value can be placed on the services which the plaintiff provided to the company during the course of 2007?........................................................[89] What, if any financial benefit did the first and second defendants receive from the plaintiff ’s services during the course of 2007?..........................................[93]

Legal principles..................................................................................................[99] Re-interpreting“sell”.....................................................................................[100] Partnership or joint venture?.........................................................................[103] Quantum meruit.............................................................................................[108] Exemplary and general damages...................................................................[111] Conclusion.........................................................................................................[114]

Introduction

The parties

[1] The plaintiff has considerable experience in the business of marketing, distributing and selling alcohol products.

[2] The first defendant also has considerable experience in the alcohol industry. In 2005 the first defendant was in the business of selling a vodka product called “shot sticks”. The company formed to carry on this business was called Futonic Enterprises Ltd (Futonic). The first defendant sold the “shot sticks” through a bar in Nelson. The duty manager of that bar was the second defendant.

[3] In 2006 the first defendant realised that an opportunity existed to distil vodka using water extracted from a subterranean aquifer in the Tasman area. The water in the aquifer is apparently 26000 years old.

[4] The first defendant appreciated that he required additional capital to distil, market and sell the vodka he wished to produce. Thus, in 2006 he sold 40 per cent of the shares in Futonic to the second defendant for $120,000.

[5] On 10 August 2006 Futonic’s name was changed to 26000 Vodka Ltd (the company). The respective roles and responsibilities of the first and second defendants in the company were set out in a detailed shareholders agreement prepared by the first and second defendants’ lawyers. The vodka was to be sold under the label “26000 Vodka”.

Meeting between plaintiff and first and second defendants

[6] The second defendant knew the plaintiff. They had been at school together many years earlier. The first and second defendants knew that the plaintiff was at that stage employed by Pernod Ricard (Pernod), a large international alcohol distribution and marketing company.

[7] On 11 January 2007 the first and second defendants flew to Auckland. They met the plaintiff at a well known Auckland bar. The next day the first and second defendants travelled to the plaintiff’s home. Discussions took place. They had lunch and thereafter the first and second defendants flew back to Nelson.

[8] The central issue in this case is whether or not an agreement was reached between the plaintiff and the first and second defendants on 12 January 2007.

[9] The essence of the plaintiff’s case is that on 12 January the first and second defendants offered him 15 per cent of the shares in the company in consideration for the plaintiff arranging to have 26000 Vodka accepted by major alcohol distribution companies.

[10] The first and second defendants dispute the plaintiff’s version of events. They say they agreed that they would consider selling the plaintiff 15 per cent of the shares in the company at some future point in time if the plaintiff succeeded in generating $500,000 worth of sales of 26000 Vodka.

[11] I will return to the events of 12 January, and the evidence relied upon by both parties in support of their positions when determining whether or not there was an agreement, and if so, what its terms were.

[12] At this introductory juncture it is sufficient to note that in an interesting tactical move the plaintiff applied to the High Court in July 2009 to have the company placed in liquidation. That application succeeded. The company has now been liquidated and removed from the Register of Companies. As a consequence of these unfortunate events the first defendant has lost in excess of $600,000. The second defendant has lost in excess of $500,000. The plaintiff and his wife have now also invested heavily in this proceeding.

The claim

[13] In his latest amended statement of claim the plaintiff seeks:

1. Fifteen per cent of the proceeds received by the first and second defendants from the sale of the company.
   

2. Fifteen per cent of “any dividends received by the first and second

defendants as shareholders” of the company.

3. Interest.

4. An inquiry into damages resulting from the sale of the company.

5. Damages of $257,318.

6. Punitive damages of $20,000.

7. General and aggravated damages of $20,000.

The request for an inquiry into damages was abandoned in the plaintiff’s closing

submissions.

[14] The causes of action pleaded by the plaintiff are:

(1) Breach of contract. It is said the contract in question was either:

(a) a partnership agreement; or

(b) a joint venture agreement. (2) Unjust enrichment.

(3) Quantum meruit.

[15] In preparing this judgment I have been assisted by the closing submissions

from both counsel, including the plaintiffs’ submissions in reply which were filed on

18 April 2012.

The Evidence

The plaintiff ’s case

[16] The plaintiff explained that he recalled the second defendant making contact with him in the latter half of 2006 for information and ideas on how the defendants could market 26000 Vodka. He says that he did not want to provide his advice and expertise without reward. Thus he says that he telephoned the second defendant on

1 January 2007 and told the second defendant that he did not wish to assist the

defendants anymore unless “there was an opportunity to join them”.

[17] On 9 January 2007 the plaintiff sent the second defendant an email. The second line of the email reads:

I have some questions that I need to know about, before we move to the next stage.

The email then poses 26 questions, most of which related to marketing issues. The second defendant responded to that email. The last question reads:

26. I am very keen to get involved and with 25 years in the business, I have many contacts, but am on very good pay, so I really would require some share into the business, as I see this being extremely good for all of us ... My integrity means everything to me, so the product needs to remain top class, like it is now, if I get involved you cannot make any changes to taste etc, without me knowing.

The response to this question/statement reads:

No worries.

[18] The plaintiff recalled the first and second defendants visited Auckland on 11

January 2007. The plaintiff, his fiancée (now wife) and the first and second defendants met at the Euro Bar. They had a general discussion about vodka with bar staff.

[19] The following day the first and second defendants went to the plaintiff’s home in Pakuranga. The plaintiff’s fiancé was at the house. The plaintiff says that he and the first and second defendants had “quite a lengthy debate over the actual value of the business”. The plaintiff says that the defendants agreed the company was worth $3 million.

[20] The plaintiff says that the parties then discussed the plaintiff’s shareholding in the company. He says the first and second defendants offered to “gift” the plaintiff:

(1) a five per cent shareholding in the company if he got 26000 Vodka into Tasman Liquor Ltd (Tasman), a major distributor;

(2) a further five per cent shareholding in the company if he got 26000

Vodka into Gilmours (also a major distributor); and

(3) a further five per cent shareholding in the company for getting 26000

Vodka into any overseas market.

[21] The plaintiff said in evidence that initially he was seeking a 20 per cent shareholding in the company but this proposal was rejected. He says it was agreed that he would receive 15 per cent of the shares in the company with an option to purchase a further five per cent closer to Christmas 2007. The plaintiff says he “was happy to go forward for a 15 per cent shareholding in the company, in return for [his] liquor industry knowledge/contacts/and ability”.

[22] The plaintiff’s evidence was that he and the first and second defendants were happy with the arrangements he says were agreed to on 12 January 2007. He says that it was understood the:

... agreement would be completed on paper and [he] would be sent the documents shortly ... [He] started [his] work straight away [in] good faith and on the understanding that [he] had a contractual relationship in anticipation of formulating [his] interest in the company.

[23] The plaintiff explained that on 11 February 2007 he and his wife went to Nelson where he met with the first and second defendants to discuss the progress of the business. The following day a directors’ meeting was held.

[24] The plaintiff pointed to two pieces of evidence which came into being at this time to support his view that he was, at this stage, a director of the company:

(1) a set of business cards produced by the second defendant, which referred to the plaintiff as being a director of the company; and

(2) the minutes of the directors’ meeting held in Nelson on 12 February

2007. The plaintiff was named as an attendee at the meeting, together with the first and second defendants.

[25] By this stage the plaintiff had been undertaking work on behalf of the company and was represented as a “director”. For example, on 25 January 2007 the plaintiff signed a supply agreement whereby the company would supply 26000

Vodka to Allied Liquor, a subsidiary of Tasman. The agreement is signed by the plaintiff using the title “director”. This was one of a number of examples of the plaintiff representing the company as a “director” when arranging for Tasman to accept the company’s vodka for distribution from mid-January 2007.

[26] The issue of the plaintiff’s shareholding in the company was raised at the directors’ meeting held in Nelson on 12 February 2007. Item 21 of the minute says:

It was finalised that [the first and second defendants] would sell 15% of the company to [the plaintiff].

[27] On the same day the directors’ meeting was held the following document was written and signed by the plaintiff and first and second defendants:

12th February 2007

Directors Meeting for 26000 Vodka Ltd

To Gary Critchley,

Warryn Bermingham and Kenneth Telfar Directors of 26000 Vodka Ltd sell to Garry Critchley 15% of the shares held by 26000 Vodka Ltd. This amounts to 45000 shares. These shares can only be sold back to the Directors of 26000 Vodka Ltd.

Yours Faithfully, Signed K Telfar

Kenneth Telfar

12/02/07

Signed W Bermingham

Warryn Bermingham

12/02/07

Signed G Critchley

Garry Critchley

12/02/07.

[28] The plaintiff questions the accuracy of this document. He says the word “sell” was not correct as it had previously been agreed that the first and second defendants would “gift” him 15 per cent of the shares in the company.

[29] On 24 February 2007 the plaintiff sent the first defendant an email in which

he advised that he had established his own company called “26K Limited”.

[30] On 25 March 2007 the plaintiff sent the first defendant an email in which he set out three options which were designed to enable him to “come on board, considering [his] Expertise/Knowledge of Industry/Contacts/Willingness to work hard/Asset”. The email then set out the three options which the plaintiff wished the first and second defendants to consider. None of those options referred to the plaintiff being either a director or shareholder of the company at that time.

[31] The plaintiff explained in some detail the work he performed on behalf of the company during the first eight months of 2007. The following is a short summary of what the plaintiff explained that he did:

(1) He secured supplies of 26000 Vodka for distribution by Tasman. The invoices for these supplies of 26000 Vodka totalled $157,872.

(2) He says he secured the placing of 18 cases of 26000 Vodka with “The

Mill Liquor Store”.

(3) He made presentations to the Liquorland Group. (4) He produced a “message from the still” newsletter.

(5) He prepared a presentation for Moore Wilson Distributors in

Wellington.

(6) He prepared promotions for other retail outlets.

(7) He met with a bottle manufacturing company (“Saverglass”) to

discuss bottle styles.

(8) He spent time corresponding with a US liquor/importer/distributor

called “Happy Hours.Com”.

(9) He developed a distributor’s page on the company’s website.

(10) He arranged advertisements for the Gilmours Food Service Magazine. (11) He arranged advertisements in the Allied Liquor Price Catalogue.

(12) He designed a supplier agreement for the company to use in

connection with a distribution business in India called “Dhuall Ltd”.

(13) He arranged a promotion of 26000 Vodka for the “Degree Bar”.

(14) He commenced communications with United States Beverages

(USB), a major American distribution company.

(15) He arranged for cocktail cards to be prepared which promoted 26000

Vodka.

(16) He prepared an information card for placing in each carton of vodka. (17) He discussed with the first defendant the employment of marketing

staff.

(18) He visited stores in Auckland to arrange 26000 Vodka displays. (19) He made a presentation to Hancock’s Wines & Spirits.

(20) He made a presentation to the University Club at Auckland on 8

August 2007 and “convinced the bar manager to [stock] 26000 Vodka

as opposed to 42 Below”.

The plaintiff says the work done on 8 August was the “last major work” he did for

the company.

[32] The plaintiff presented in evidence a schedule which set out in detail the work he said that he did for the company. When an hourly charge out rate of $200 is applied to the work listed in that schedule the plaintiff says he undertook work worth

$219,575 for the company from 10 October 2006 to 12 January 2008.

[33] In mid-July 2007 an incident occurred which was described during the

hearing as the “Saverglass incident”. The plaintiff’s evidence was that on 11 July

2007 the first defendant sent him an email in which it was said that Saverglass was seeking $1.2 million from the company for orders for bottles which it was said the plaintiff had placed on the company’s behalf with Saverglass.

[34] The plaintiff explained in his evidence that the second defendant telephoned the plaintiff on 13 July saying that two representatives of Saverglass were at the

company and that “we would have to declare bankruptcy and we would all lose our houses if we didn’t pay up”. The plaintiff said that the second defendant told him the only solution was for the plaintiff to disavow having any interest in the company, or authority to place the orders in question with Saverglass. The plaintiff says he was certain that he had not placed $1.2 million worth of orders with Saverglass, but, nevertheless, he says he acceded to the second defendant’s request and faxed the following document to the company:

13/07/07

I Gary Critchley am writing this letter to give acknowledgement, that I do not represent or have financial interests in 26000.

Yours sincerely

Signed G Critchley

Gary Critchley.

[35] The plaintiff says that he deliberately misspelt his name as “Gary” (with one r) to indicate this letter “was signed under duress, if [the first and second defendants] tried to use this document against [him]”.

[36] There are two other matters that need to be considered in support of the plaintiff’s claim that an agreement had been created on 12 January 2007. The first concerns a meeting held at Tasman on 30 August 2007. The second matter relates to an email sent by the first and second defendants to the plaintiff on 10 January 2008.

[37] In August 2007 Tasman was becoming increasingly concerned about the poor sales of the stock of 26000 Vodka which it had acquired from the company. A meeting was held between the first defendant, the plaintiff and two representatives of Tasman (Mr Jefferies and Ms Kira) on 30 August 2007. It is part of the plaintiff’s case that at that meeting Mr Jefferies specifically asked the first defendant if the plaintiff was a shareholder in the company.

[38] It is the plaintiff’s case that the first defendant assured Mr Jefferies and Ms Kira that the plaintiff was a shareholder in the company and that the formalities of transferring shares to the plaintiff would be attended to in a matter of weeks.

[39] On 10 January 2008 the first and second defendants sent the plaintiff an email. In that email the first and second defendants recorded their understanding of the events which had unfolded during 2007. The most significant portion of the email reads:

Mate we’ve only been in business for 1 year and it has been a very steep learning curve for us. Everybody has had an opinion and we have ALL made some less than great decisions.

We felt that everybody was trying to take us to the cleaners. You fell into that basket by way of the Saverglass shit, and not paying for the proposed shareholding by way of promised sales yes you got it into Tasman and Gilmours and they now want to have it sent back. We felt burnt by that.

...

You provided sales in return for shares that never eventuated because we lacked the experience and $$ to get it into the market in the way we wanted to. Then you said you would come on board to help but for 100K per annum. You then resigned as you were too busy at Pernod. We were green and looking to you for some leadership.

So I suppose we have felt (rightly or wrongly) duped. ... So we could start again but maybe on this basis only: you will be paid a royalty on every bottle sold in China for the next 5 years if you can get it in there.

[40] The plaintiff called his wife as a witness. Her evidence focused on the meeting that took place on 12 January. Mrs Critchley confirmed that she had met the first and second defendants with the plaintiff at the Euro Bar the previous evening and that on 12 January she heard the first and second defendants agree that the plaintiff “would receive 15% of the shares in the company and would be made a director for his input and assistance”.

[41] The plaintiff also called his former manager at Pernod to give evidence. Mr Bernie said that in early February 2007 the plaintiff told him “he had been given a shareholding and Directorship in 26000 Vodka Ltd”.

[42] Mr Jefferies and Ms Kira also gave evidence for the plaintiff:

(1) Ms Kira was present at the meeting that took place at Tasman on 30

August 2007. She said that during the meeting the first defendant

“advised in no uncertain terms that [the plaintiff] was a shareholder of

26000 Vodka Ltd”. She also said the plaintiff’s name would appear

on the share register during the next two weeks.

(2) Mr Jefferies’ evidence was very similar to that of Ms Kira.

Mr Jefferies took a file note at the meeting. The relevant portion of the file note reads:

Critch shareholder? Yes – will show in next two weeks.

[43] The final witness called by the plaintiff was Mr Cleghorn, who was described as being an Executive Business Consultant specialising in liquor and small to medium sized privately owned businesses. He has had extensive experience in the liquor industry in New Zealand. The essence of Mr Cleghorn’s evidence was:

(1) The plaintiff was well known in the New Zealand Liquor Industry.

His knowledge and reputation enabled him to get products into

distribution companies (called “ranging”).

(2) Mr Cleghorn thought a reasonable charge out rate for the plaintiff providing “ranging” services would be in the vicinity of $200 - $250 per hour plus GST. Mr Cleghorn said:

To get a product listed or ranged is incredibly difficult and the majority never get it in front of the decision makers of the major distributors and/or retailers. It is more about who you know rather than what you know. Getting the “door open” for distribution is extremely difficult and without that the product is doomed to fail.

(3) Mr Cleghorn had examined a schedule of services which the plaintiff produced in evidence. In Mr Cleghorn’s opinion the fees that the plaintiff claimed were reasonable in the circumstances of this case.

The defendants’ case

[44] The first and second defendants dispute almost all aspects of the plaintiff’s

evidence. The gravamen of their case is that on 12 January 2007 they agreed that

they would, at some future point, be willing to sell the plaintiff 15 per cent of the shares in the company, provided he sold $500,000 worth of 26000 Vodka.

[45] The second defendant was the first of the defendants to give evidence. He accepts that he made contact with the plaintiff in late 2006. He did so because he knew the plaintiff worked for Pernod. The defendants wanted “access to distributors”.

[46] The second defendant explained that he was not surprised when the plaintiff expressed an intention to get “in on the action”. He said that he and the first defendant had been approached by a number of persons who were excited about

26000 Vodka and who wanted to gain an interest in the company.

[47] The second defendant explained that in addition to acquiring a 40 per cent interest in the company, he and the first defendant formed a second company in 2006 called Kenwar Ltd (Kenwar). That company purchased the land which had a well through which the water used to distil 26000 Vodka was accessed.

[48] The second defendant fully accepted that he had responded to the plaintiff’s email of 9 January 2007. He said that his answer to Question 26 in the email (refer [17] above) was based on the first and second defendants’ view “that there was no reason why [the plaintiff] could not have an opportunity to purchase shares in the company in the future”. However, the second defendant said that it was his “... intention that a price would need to be agreed first”.

[49] The second defendant explained that he and the first defendant went to Auckland on 11 January 2007. They met the plaintiff and Mrs Critchley at the Euro Bar. The second defendant said this was “just an informal get together”.

[50] The second defendant’s account of the meeting which took place at the plaintiff’s home in Pakuranga on 12 January 2007 was as follows:

(1) Initially the plaintiff said he wanted a gift of 20 per cent of the shares in the company.

(2) The second defendant said that he would not agree to “gift” shares, and that any shares acquired by the plaintiff would have to be sold to him.

(3) The first and second defendants offered to sell 15 per cent of the shares in the company to the plaintiff on the condition that he first sold $500,000 worth of 26000 Vodka during a 12 month period “to prove his value to the company”.

(4) The second defendant said in evidence that the plaintiff said at the

12 January meeting that the sales target was easily achievable.

(5) That it was only after the plaintiff had achieved the sales target that the first and second defendants would “sit down [with the plaintiff] and work out the terms”.

(6) The second defendant said in evidence that “essentially [the plaintiff] would be working for free” at least until the sales target had been achieved.

[51] The second defendant told the Court that the plaintiff gave him and the first defendant “every confidence that achieving $500,000 of sales would be no problem for him at all”. The second defendant was adamant that no agreement was reached on 12 January 2007 for the plaintiff to acquire a 15 per cent shareholding in the company.

[52] The second defendant explained that he arranged for the plaintiff’s business cards and that he used the salutation “director” on the cards because the plaintiff “insisted he would not be able to make any sales unless he appeared to be an owner of the company”.

[53] The second defendant acknowledged the minutes of the directors’ meeting

held on 12 February 2007 and the memorandum (refer [27] above) signed by the

plaintiff and the first and second defendants. The second defendant said the directors’ minutes and the 12 February memorandum:

reflected [the first and second defendants’] intention to allow [the plaintiff] to purchase an ownership stake in the company should he reach the target ... of $500,000 of sales of the vodka.

The second defendant said that if an agreement had eventually come into existence then he would have expected a formal share sale and purchase agreement to have been prepared as had happened when he acquired his 40 per cent shareholding in the company.

[54] The second defendant’s recollection of the Saverglass incident was:

(1) In June 2007 the plaintiff committed the company to purchase

$1.2 million worth of bottles from Saverglass.

(2) This was an exceptional act on the part of the plaintiff which placed the company in serious financial peril.

(3) The second defendant telephoned the plaintiff and told him that he was acting outside of his authority and that he was not part of the company.

(4) The second defendant said in evidence that he did not request the plaintiff fax the memorandum of 13 July 2007 (refer [34] above).

(5) The second defendant said he told Saverglass that the plaintiff did not have the authority to deal with Saverglass.

(6) The order in question was able to be cancelled.

[55] The second defendant vigorously challenges the value of the services undertaken by the plaintiff. In particular, the second defendant said:

(1) Tasman agreed to accept $120,000 worth of 26000 Vodka but on the condition that the company would purchase back what quantities of vodka Tasman could not sell. The second defendant said that Tasman invoked the “buy back” clause and that the company ended up purchasing $105,000 worth of vodka back from Tasman.

(2) The attempted introduction to USB “was a disaster” and that the

company would have been better off without it.

(3) The plaintiff did not place any orders with The Mill. The first

defendant had placed all of the company’s orders with The Mill.

[56] The second defendant explained that as a result of the company’s ultimate

failure he lost over $500,000.

[57] The first defendant also gave evidence. The first defendant explained the transformation of the company from Futonic to 26000 Vodka Ltd following the second defendant’s injection of $120,000 into the company and acquisition of 40 per cent of the shares in the company in August 2006.

[58] The first defendant explained that he succeeded in establishing a “sales

relationship with The Mill in November 2006 and with Liquorland – well before any

... involvement [of the plaintiff]”.

[59] The first defendant explained his recollection of the meetings with the plaintiff on 11 and 12 January 2007. In summary, the first defendant’s evidence in these matters was:

(1) The meeting at the Euro Bar on 11 January 2007 was just a social event.

(2) At the meeting held the following day, the first defendant says that he “never offered to give 15% of the company (or any percentage for that matter) to [the plaintiff]”. He said in evidence that he had only met the plaintiff the night before, that he had no idea what the

company was worth, but that he “knew it was worth enough not to

give away any shares”.

(3) According to the first defendant it was the plaintiff who said that he wanted the opportunity to generate $500,000 of sales of vodka to purchase shares. On this basis, the first defendant said that he was prepared to sell the plaintiff 15 per cent of the shares in the company if the plaintiff generated $500,000 worth of sales of 26000 Vodka.

[60] The first defendant’s evidence in relation to the shareholders’ meeting that took place on 12 January 2007 was that the minutes of the meeting and the memorandum signed that day recorded the first and second defendants’ intention to sell the plaintiff 15 per cent of the shares held by the company, should the plaintiff sell $500,000 worth of the company’s vodka. The first defendant said that:

If any share sale had eventually resulted to [the plaintiff he] would have expected a formal share sale and purchase agreement to be drawn up as was done when [he] sold some shares to [the second defendant].

[61] The first defendant explained that the plaintiff’s proposed three options for joining the company which he sent on 25 March 2007 were unsolicited. He explained that he and the second defendant rejected the plaintiff’s proposals. The first defendant explained that following the rejection of the plaintiff ’s 25 March 2007 proposals “to come on board” the plaintiff then wrote a further email on 9 April 2007 in which he said, inter alia, that he would remain at Pernod until the company could afford him. That email explained the plaintiff’s existing work pressures at Pernod. The email set out proposals to employ sales representatives until the company was able to afford to pay for the plaintiff. There is no mention of the plaintiff being a shareholder or director of the company in the 9 April 2007 email sent by the plaintiff to the first and second defendants.

[62] The first defendant’s explanation of the “Saverglass” incident was that the plaintiff purchased $1 million worth of bottles from Saverglass without authority. The first defendant said that when the plaintiff telephoned him to explain what he had done the plaintiff rationalised his behaviour by suggesting that he had been lured into making the purchase by the Saverglass sales woman. The first defendant said

that he believed the plaintiff sent his letter of 13 July 2007 explaining he had no interest in the company because by that stage he, the plaintiff, realised he would be unlikely to achieve $500,000 worth of sales of vodka.

[63] The first defendant’s explanation of the meeting held at Tasman on 30 August

2007 was that he did say that the plaintiff represented the company because he feared that Tasman would demand the company buy back the stock that Tasman had accepted. The first defendant said that he was “in damage control” because he knew that buying back the stock from Tasman would cause serious financial problems for the company. He said he wanted to keep Tasman on side so reassured the Tasman representatives that the plaintiff was still involved with the company.

[64] The first defendant explained in evidence that unfortunately Tasman did invoke the buy back clause in the supply agreement during the latter stages of 2007. As a consequence the company had to purchase back more than $100,000 of the

$120,000 (first defendant’s figure) worth of vodka that Tasman had accepted.

[65] The first defendant also explained that the plaintiff’s contacts with USB proved to be of no value. According to the first defendant USB agreed to purchase US$108,000 worth of vodka but USB failed to pay that sum. The company had to invoke its debtors’ insurance policy to cover this loss. Furthermore, the first defendant said that he, not the plaintiff, managed the negotiations with USB.

[66] The defendants presented evidence from Mr Morice, a Nelson solicitor whose firm provided legal services to the company. Mr Morice was able to provide unchallenged evidence about three transactions involving purchases of shares in the company during the course of 2007 and 2008.

[67] The first investment was made by a Mr Ford in November 2007 who wished to invest money in the company and Kenwar. Apparently there were immigration advantages for Mr Ford if he invested in New Zealand companies.

[68] The first and second defendants agreed to sell 150,000 shares in the company, and 333 shares in Kenwar. A shareholders’ agreement was executed on

16 November 2007. On that date 150,000 shares were issued to Mr Ford and he was appointed a director of the company. The price paid by Mr Ford for his 150,000 shares was $1 million.

[69] Mr Ford elected to return to England in May 2008. The first and second defendants purchased Mr Ford’s shares back from him on 16 May 2008 for $1.12 million.

[70] At the same time Mr Ford’s shares were being purchased back by the first and second defendants, they executed a sale of 150,000 shares to a Mr Dridger for

$1.12 million. As with the transactions involving Mr Ford, the sale and purchase of shares involving Mr Dridger were fully documented with a formal agreement for sale and purchase of shares, a shareholders’ agreement, and share transfer documentation.

[71] In July 2008 Mr Morice was instructed to undertake legal work required to transfer 4.6 per cent of the shares in the company to a Mr Little, an engineer who had provided services to the company. The actual amount paid by Mr Little for his shares was $966,666.

[72] The defendants called Mr Weber as an expert witness. Mr Weber is a chartered accountant in Auckland. He has had very extensive experience in providing company valuation services in New Zealand and Australia.

[73] Mr Weber undertook a very detailed assessment of the remnants of the financial records of the company. The following is a brief summary of his evidence:

(1) As at March 2007 the company’s liabilities exceeded its assets by

$19,899.

(2) An improvement in trading and addition of capital saw the company’s financial position improved so that by September 2007 its assets exceeded its liabilities by $80,768.

(3) Unaudited financial records for the company showed a loss of

$490,961 for the financial year ending 31 March 2008.

(4) Unaudited financial records for the company showed a further loss of

$462,234 for the financial year ending 31 March 2009.

(5) The most appropriate way of assessing the value of the company was to use a combination of a discounted cashflow evaluation together with a net asset evaluation.

(6) Applying these methods of calculation Mr Weber estimated the value of the company to have been:

(a) as at January 2007 – $333,000;

(b) as at November 2007 – $333,000; (c) as at May 2008 – $170,000; and (d) as at August 2009 – Nil.

[74] The second and third of the dates referred to above coincided with the share purchase agreements involving Mr Ford and Mr Dridger.

[75] The advances made to the company by the first and second defendants had a significant impact on the true value of the company. Mr Weber calculated the first and second defendants advances to the company were:

_{First Defendant Second Defendant}

_{March 2007 $120,013 Nil}

_{March 2008 $120,013 $300,000}

March 2009 $565,202 $613,612

[76] Basing his calculations on the shareholders’ advances Mr Weber calculated that as at November 2007 when the company was probably at its peak value, 15 per cent of the value of the company would have equated to approximately $51,785.

[77] Mr Weber carefully evaluated Mr Cleghorn’s evidence. Mr Weber pointed out in his evidence that Mr Cleghorn appeared to be endorsing a fee being charged by the plaintiff of $164,000 for “ranging” the company’s vodka with five principal distributors (and some smaller outlets).

Findings of fact

[78] The plaintiff’s pleadings require me to answer the following questions of

fact:

(1) Did the first and second defendants agree to “gift” 15 per cent of the

shares in the company to the plaintiff on 12 January 2007?

(2) If not, did the first and second defendants agree to sell 15 per cent of the shares in the company to the plaintiff on 12 January 2007?

(3) If the answer to question 2 is “yes”, what were the conditions of any sale to the plaintiff of 15 per cent of the shares in the company?

(4) What, if any, value can be placed on the services which the plaintiff provided to the company during the course of 2007?

(5) What, if any, financial benefit did the first and second defendants

receive from the plaintiff ’s services during the course of 2007?

Did the first and second defendants agree to “gift” 15 per cent of the shares in the

company to the plaintiff on 12 January 2007?

[79] There are two key reasons why I have concluded that the first and second defendants did not agree to “gift” 15 per cent of the shares in the company to the plaintiff. Those reasons are:

(1) The documentation relied upon by the plaintiff, namely:

(a) the minutes of the directors’ meeting held on 12 February

2007; and

(b) the memorandum signed by the plaintiff and first and second defendants on 12 February 2007.

specifically refers to the first and second defendants selling shares in the company to the plaintiff. I fully appreciate that this documentation was prepared without the benefit of legal advice. However, I conclude that when the parties used the word “sell” they knew what they were saying. “Sell” does not mean “gift”.

(2) Perhaps more importantly I do not think it was remotely likely that the first and second defendants would have “gifted” shares in their company on 12 January 2007. The first defendant had only just met the plaintiff. He had sold a 40 per cent shareholding in the company to the second defendant for $140,000 just six months earlier. There was no compelling reason why either the first or second defendants would give 15 per cent of their company to the plaintiff on the basis of their discussions of 11 and 12 January 2007.

Did the first and second defendants agree to sell 15 per cent of the shares in the company to the plaintiff on 12 January 2007?

[80] I have concluded that on 12 January 2007 the first and second defendants agreed that at some future point in time they would sell 15 per cent of the shares in the company to the plaintiff if certain conditions were met. My reasons for reaching this conclusion are:

(1) As at 12 January 2007 the first and second defendants had no real idea what value the plaintiff could in fact provide to the company. They obviously hoped that the plaintiff would be able to significantly increase sales of the company’s vodka but from the defendants’

perspective it was a matter of waiting to see if in fact the plaintiff could achieve the desired sales. In these circumstances I do not believe the first and second defendants agreed to sell 15 per cent of the shares in the company with effect from 12 January 2007.

(2) The first and second defendants were very particular in ensuring sales of shares in the company were properly recorded. Thus:

(a) the sale of shares from the first to second defendant; and

(b) the sale of shares from the first and second defendants to

Mr Ford; and

(c) the repurchase by the first and second defendants of Mr Ford’s

shares; and

(d) the sale of shares by the first and second defendants to

Mr Dridger; and

(e) the sale of shares to Mr Little

were fully documented in sale and purchase agreements, shareholder agreements and share transfers. The absence of such documentation in relation to the purported sale of shares to the plaintiff is a factor that weighs heavily against the plaintiff’s case.

(3) The shareholders’ minutes of 12 February 2007 recorded that the first and second defendants “would” sell 15 per cent of the company to the plaintiff. The word “would” is used to convey future action. By contrast the memorandum signed on 12 February 2007 uses the word “sell” in a context that suggests the present tense. However, this confusion in terminology only adds to my conclusion that the plaintiff has not proven that there was an agreement to sell him shares on

12 January 2007.

(4) I am mindful that on 30 August 2007 the first defendant told representatives of Tasman that the plaintiff was a shareholder in the company and that the share register would be amended within the next two weeks to reflect this. I fully accept the evidence of Ms Kira and Mr Jefferies on this matter. The file note made by Mr Jefferies is conclusive. However, I have also concluded that the first defendant deliberately misrepresented the true position concerning the plaintiff ’s interests in the company at that meeting. The first defendant was desperate not to lose Tasman’s confidence in the company. He knew that Tasman was likely to cease its association with the company if Tasman thought the plaintiff was not a shareholder or director of the company. For this reason the first defendant deliberately misrepresented the plaintiff’s status in the company to the representatives of Tasman.

(5) I am also mindful of the fact that the first and second defendants allowed the plaintiff to represent that he was a director of the company and that the second defendant also prepared business cards for the plaintiff which described the plaintiff as a director. I have concluded that both categories of misrepresentation were marketing ploys designed to persuade distributors of alcohol to accept the company’s product.

(6) Finally, I believe the conclusions set out in this paragraph are generally consistent with the first and second defendants’ email to the plaintiff of 10 January 2008. These conclusions are also consistent with the fact that when the plaintiff was endeavouring to negotiate a position with the company in late March and early April 2007 he made no reference to being a shareholder and director at that stage.

What were the conditions of any sale to the plaintiff of 15 per cent of the shares in the company?

[81] This question raises two sub-questions: (1) When was the sale to take place?

(2) What consideration was the plaintiff to pay for the shares?

When was the sale to take place?

[82] It is an essential part of the plaintiff’s case that he became a shareholder in

the company as a result of the meeting which took place at his home on 12 January

2007.

[83] I have concluded the plaintiff is mistaken on this point. In my assessment, the first and second defendants were not willing to have the plaintiff as a shareholder until he had demonstrated that he could provide significant assistance to the company by facilitating substantial sales of the company’s vodka. This would have taken some time to achieve.

[84] The first and second defendants said that they were willing to consider selling shares to the plaintiff towards the end of 2007. That appears to me to have been a realistic time for the plaintiff to have demonstrated his value to the company. Other factors that have influenced my decision on this point are:

(1) I consider it highly improbable that the first defendant in particular would have been willing to accept the plaintiff as a shareholder on

12 January. The first defendant had only just met the plaintiff.

(2) The absence of a formal sale and purchase agreement, shareholder agreement and share transfer documentation all strongly suggest that if the plaintiff was to acquire shares in the company then this would occur at a future point in time, probably towards the end of 2007.

What consideration was the plaintiff to provide for the shares?

[85] In my assessment the plaintiff was not going to have to pay any money to the first and second defendants for the 15 per cent shareholding he was to acquire. The consideration which the plaintiff was going to provide for the shares in question was his services in facilitating significant sales of the company’s vodka.

[86] The first and second defendants were adamant that the plaintiff was going to have to achieve $500,000 worth of sales of 26000 Vodka before they would consider selling him shares in the company. The plaintiff disputes this figure. He and Mr Cleghorn said that it would take approximately three years to achieve sales of that magnitude.

[87] In my assessment, the parties did not in fact specify any exact sales target for the plaintiff to achieve as a condition to him becoming a shareholder. In my assessment, on 12 January the parties believed the plaintiff would be able to facilitate significant sales of the company’s vodka. The first and second defendants were keen for the plaintiff to demonstrate his value to the company. A figure of $500,000 worth of sales may have been mentioned as a target but I do not believe the evidence enables me to conclude that any precise sales target was agreed to as a condition to the plaintiff becoming a shareholder. My reasons for reaching this conclusion are:

(1) I can find no reference in any documentation to a precise sales target which the plaintiff needed to achieve before he would become a shareholder.

(2) On 12 January 2007 and during the following two to three months the parties were endeavouring to see how their relationship would work out.

(3) Consistent with these two points, if the plaintiff had demonstrated his value to the company during the course of 2007 in facilitating significant sales of the company’s vodka then the first and second defendants would have made the plaintiff a shareholder. The plaintiff

would have acquired 15 per cent of the shares in the company in exchange for his services in achieving significant sales of the company’s vodka. This conclusion is generally consistent with the first and second defendants’ email to the plaintiff of 10 January 2008. This conclusion is also consistent with the fact that when the plaintiff was endeavouring to negotiate a position with the company in late March and early April 2007 he made no reference to being a shareholder or director of the company at that stage.

Other conditions

[88] There was one other condition which I can determine would have been imposed had the plaintiff become a shareholder in the company. That condition was that the plaintiff would only have been able to sell his shares in the company to the first and second defendants. This further condition was:

(1) Specifically referred to in the memorandum of 12 February 2007.

(2) Consistent with other sales of shares in the company to the second defendant, Mr Ford, Mr Dridger and Mr Little.

What, if any value can be placed on the services which the plaintiff provided to the company during the course of 2007?

[89] This question relates primarily to the plaintiff ’s quantum meruit claim.

[90] I am in no doubt that from 12 January 2007 to 8 August 2007 the plaintiff spent a significant amount of time promoting the company’s vodka, and arranging for it to be accepted by Tasman and other distributors and outlets. This work took place from soon after 12 January 2007 through to 8 August 2007 which was the date the plaintiff said was the last occasion he did any significant work for the company.

[91] In effect, the plaintiff is asking that he be paid on a quantum meruit basis for creating opportunities for the company to sell its vodka.

[92] In my assessment, it is futile to attempt to place any monetary value on the services the plaintiff provided to the company. My reasons for reaching this conclusion are:

(1) The plaintiff provided his services without intending to charge the company for those services. The plaintiff ’s efforts to reach an agreement to be paid for his services failed in early April 2007. He provided his services believing he could facilitate significant sales of

26000 Vodka and that he would, in due course, acquire 15 per cent of the shares of the company in exchange for his services.

(2) The value in the plaintiff’s services lay in him facilitating significant sales of 26000 Vodka not simply facilitating the possibility of sales of the company’s vodka.

(3) The services which the plaintiff provided were for the company, not the first and second defendants as shareholders and directors of the company. At all times the plaintiff knew the services he was providing were for the benefit of the company. He wanted to enhance the value of the company by facilitating significant sales of the company’s vodka. If he achieved this goal he would be rewarded by becoming a 15 per cent shareholder in what all hoped would be a valuable company. As will be explained later in this judgment, the plaintiff’s decision to liquidate the company has legal significance to his claim against the company.

What, if any financial benefit did the first and second defendants receive from the

plaintiff ’s services during the course of 2007?

[93] This question relates primarily to the plaintiff’s claim in which he seeks

damages for unjust enrichment.

[94] By the end of 2007 it was apparent the plaintiff’s services had in fact provided little value to the company, and therefore to the value of the first and second defendants’ shares in the company.

[95] The reasons for this can be succinctly stated:

(1) The plaintiff’s services would only be of true value to the company if through those services the plaintiff facilitated significant sales of the company’s vodka.

(2) By the end of 2007, the plaintiff’s efforts in having 26000 Vodka placed with Tasman proved to be of little actual value. Tasman required the company to purchase back approximately two-thirds of the stock it had agreed to accept.

(3) The sales of 26000 Vodka to USB also proved it to be financially problematic.

(4) I can find no evidence to suggest that the plaintiff’s efforts actually resulted in any meaningful increase in the value of the company’s shares during the course of 2007.

In reaching this conclusion I am mindful of the fact the company had the benefit of the money Tasman paid for the stock it acquired, until that stock was returned and that during that time the company did obtain an interim benefit. It was, however, not a meaningful benefit in the sense that ultimately the company was placed under serious financial pressure when it had to repay Tasman a little over $100,000.

[96] I am also mindful of the fact that the plaintiff did achieve advantages for the plaintiff when he persuaded Tasman and other distributors to “range” the company’s vodka. However, unless stock was sold, the plaintiff’s services were of little practical value.

[97] I have paid particular attention to the plaintiff’s efforts to demonstrate that the

sales of shares to Mr Ford, Mr Dridger and Mr Little demonstrates that shares in the

company were particularly valuable when those sales took place in November 2007, May 2008 and July 2008. There are, however, two fundamental problems with the plaintiff’s analysis:

(1) The evidence does not satisfy me that the prices obtained for the shares sold to Mr Ford, Mr Dridger and Mr Little were in fact attributable to the services provided by the plaintiff. That is because although the plaintiff’s services provided some optimism for the company up until August 2007, in reality the plaintiff’s services proved not to be of any significant value to the company.

(2) The prices paid for the shares acquired by Mr Ford, Mr Dridger and Mr Little were highly inflated and did not reflect the true value of the company.

[98] I found Mr Weber’s evidence most helpful and persuasive. His careful analysis, using net asset value and discounted cashflow analyses demonstrated that realistically, the company was worth something in the vicinity of $330,000 in November 2007. By May 2008 the value of the company had decreased to about

$170,000 because of the company’s deteriorating trade performance. Thereafter the

value of the company continued to decline.

Legal principles

[99] The issues raised by this case are substantially resolved by my findings of fact. However, the plaintiff has raised a number of legal issues which I shall address.

Re-interpreting “sell”

[100] The plaintiff correctly points out that where there is ambiguity in a contract caused through a drafting or linguistic error the Court can rectify the position provided that the relevant context clearly shows what was intended.[1]

[101] The plaintiff submits that the word “sell” referred to in the minutes of the meeting of 12 February 2007 and the memorandum of the same date was a linguistic error.

[102] If by this submission the plaintiff means that the Court should interpret “sell” to mean “gift” then the plaintiff is asking too much of the Court. As I have made clear in my findings of fact, the parties deliberately used the word “sell” to refer to a future acquisition of shares by the plaintiff in exchange for his services, provided the plaintiff facilitated significant sales of 26000 Vodka.

Partnership or joint venture?

[103] In his closing submissions the plaintiff submitted that the arrangements he says were agreed to on 12 January 2007 were more likely to be a joint venture than a partnership. The plaintiff then submitted that the joint venture was something short of a contractual arrangement (citing Chirnside v Fay),[2] and that this “joint venture” generated obligations akin to those found in a fiduciary relationship. The plaintiff submitted:

... The defendants breached their duty to act honestly and in the interests of the plaintiff. The plaintiff therefore seeks 15% of the proceeds of sale of the shares.

[104] The plaintiff’s submission in relation to this aspect of his case was very optimistic. In his evidence the plaintiff agreed in cross-examination that his claim was based on breach of contract. He accepted that the pleadings relating to joint venture and partnership were of no moment.

[105] Even if the plaintiff was wrong to have made that acknowledgement, it is surprising that he wishes to pursue an argument which effectively undermines his principal submission, by suggesting in his closing submission that the agreement of

12 January 2007 may have been something short of a contract.

[106] My findings of fact render it unnecessary to spend too long on the plaintiff’s

submissions relating to partnership or joint venture. In my assessment, on

12 January 2007, the parties agreed that at some future point in time the plaintiff would acquire 15 per cent of the shares in the company, provided the plaintiff was able to facilitate significant sales of the company’s vodka. This agreement was far from precise and left much room for debate. That, however, was the essence of the parties’ agreement.

[107] Even if the plaintiff is correct when he suggests his agreement produced duties akin to those found in a fiduciary relationship, the actions of the first and second defendants did not cause the agreement to flounder. The agreement of

12 January did not produce the desired results because the plaintiff was unable to demonstrate his value to the company by facilitating significant sales of 26000

Vodka.

Quantum meruit

[108] The plaintiff correctly points out that claims for quantum meruit and quantum valebat typically arise in respect of goods or services that have been either provided under a contract that has been discharged or is void, unenforceable or otherwise ineffective or provided outside of the contract.

[109] The services which the plaintiff agreed to provide on 12 January 2007 were for the benefit of the company. The principal purpose of incorporation is to confer upon a company its own legal personality that is separate from the legal personalities of the persons who hold shares in the company. The plaintiff fully understood that he was endeavouring to enhance the value of the company and that if he was successful, he would be rewarded by becoming a shareholder in the company. Therefore the plaintiff’s focus was on providing services for the company.

[110] Perhaps the most unusual feature of this case is that the plaintiff, acting on the advice of his former lawyers, took the step of asking the High Court to liquidate the company. As a consequence the company was removed from the Register of Companies on 21 November 2011. The company no longer exists. Any possible

claim that the plaintiff may have had against the company for quantum meruit disappeared with the company.

Exemplary and general damages

[111] At the outset of the hearing I gave the plaintiff leave to replead his statement of claim so that it would include a previously abandoned claim for exemplary and general damages.

[112] As I understand the plaintiff’s case, he seeks exemplary and general damages for the distress he suffered over the “Saverglass” incident.

[113] Exemplary and general damages cannot be awarded in a vacuum. They must attach to a successful cause of action. Even then a claim for exemplary damages will be rare[3] and general damages for injured feelings are not normally appropriate in a

commercial dispute.[4] Having found that the plaintiff cannot succeed in any of his

causes of action it is not necessary to consider his claim for exemplary and general damages.

Conclusion

[114] Sadly this case mirrors the fate of many small adventurous companies. The first and second defendants believed they had developed a highly valuable product. They invested most of their personal money and great amounts of time and energy into the venture. The plaintiff also firmly believed in the company. He was willing to put significant effort into helping develop the business and as a reward he would become a shareholder. For a variety of reasons the company failed. The aspirations of all concerned were shattered. Most unfortunately, the plaintiff has now also invested significant resources in pursuing his very optimistic claims against the first

_{and second defendants.}

[115] The plaintiff has not been able to prove his case to the requisite standard. Judgment is entered in favour of the first and second defendants.

[116] The first and second defendants are invited to file a memorandum as to costs within working 15 days of the date of delivery of this judgment, if the parties are unable to reach agreement on the issue of costs. If the first and second defendants are required to file a memorandum, the plaintiff will respond within 10 working

_days.

_{D B Collins J}

Solicitors:

Carter & Partners, Auckland for Plaintiff

Stallard Law Limited, Nelson for First and Second Defendants

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[1] Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.

[2] Chirnside v Fay [2007] 1 NZLR 433 (SC).
[3] Couch v Attorney-General (No. 2) [2010] NZSC 27, [2010] 3 NZLR 149 at [22] per Elias CJ (dissenting regarding the finding that exemplary damages should be confined to cases of subjective recklessness, but conceding that: “Because the ends of punishment and deterrence will usually be sufficiently achieved through compensatory and aggravated damages awards, exemplary damages have been rare in New Zealand”)..
[4] Bloxham v Robinson (1996) 7 TCLR 11,122.