Mudgway v Chapman [2013] NZHC 3005 (13 November 2013)

Last Updated: 9 May 2014

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2013-485-653 [2013] NZHC 3005

BETWEEN	RAYMOND TERRENCE MUDGWAY Appellant
AND	PETER CHAPMAN Respondent

Hearing:	19 August 2013
Counsel:	K Sullivan for Appellant T Stallard for Respondent
Judgment:	13 November 2013

_{JUDGMENT OF WILLIAMS J}

[1] The issue in this appeal is whether the respondent, Peter Chapman, provided a loan to the appellant, Ray Mudgway personally, to Mr Mudgway’s company, JAG Living Limited, or to another entity, the Yukon Trust.

[2] In the District Court, Judge Zohrab found that the loan was to Ray Mudgway personally and he was responsible accordingly for its repayment.¹ Mr Mudgway argues on appeal that the Judge was wrong in that conclusion and that the loan was either to JAG Living Limited or the Yukon Trust. JAG Living Limited is in liquidation and is impecunious. The Yukon Trust, as I shall explain, is an entity over which the appellant has no control and in which he has no interest.

The facts

[3] JAG Living Limited was a residential construction company owned by

Ray Mudgway and his father. The company entered into an informal joint venture with the Yukon Trust. The objective of the joint venture was to develop a property at

¹ _{Chapman v Mudgway DC Wellington CIV-2012-085-000168, 22 March 2013.}

MUDGWAY v CHAPMAN [2013] NZHC 3005 [13 November 2013]

85 Downing Street in Crofton Downs. JAG Living Limited would do the build without the usual margin and Yukon Trust would fund the cost. Profits would be shared 50/50. The trustees of the Yukon Trust were Shane and Samantha Harrison. They provide the connection to the respondent lender, Peter Chapman. Mr Chapman’s partner, Val Harrison, is the mother of Shane Harrison, one of the trustees of the Yukon Trust in the joint venture. Messrs Chapman and Mudgway had not met prior to the events giving rise to this dispute.

[4] The development required regular progress payments from the Trust to JAG Living Limited. In June 2010, a progress payment of $32,000 was overdue but the Yukon Trust was struggling to provide the funds. On 23 June, Val Harrison called Ray Mudgway. Mr Mudgway was in a state of agitation. He thought that Samantha Harrison (Shane’s wife and the person who had practical control of the Yukon Trust accounts) was not going to pay JAG Living Limited. Mr Mudgway indicated that work would stop unless the progress payment was made. At some point in the discussion, Peter Chapman took the phone from Val and offered to advance $32,000 to the project from his own funds. The offer was taken up and an account number given for the transfer. The transfer was duly made. It transpired that Ray Mudgway gave Peter Chapman a JAG Living Limited bank account number and his advance was transferred into that company’s accounts.

[5] Beyond that, the parties disagree over the content of their discussion. Peter Chapman says he had no knowledge of JAG Living Limited, and proceeded on the basis that the advance was to Ray Mudgway personally. Mr Mudgway says he never dealt with Mr Chapman in his (Mr Mudgway’s) personal capacity. He says when dealing with matters related to the project, he always spoke as a director of JAG Living Limited.

[6] The key conclusion of the learned Judge is found at [36](g) and (h) of the judgment. There the Judge recorded his conclusions as follows:

(g) I also accept that there was no discussion about the Yukon Trust or who was controlling it with Mr Chapman, nor was there any discussion about any of the limited liability companies Mr Mudgway was involved in. I also formed the conclusion that Mr Chapman was not fully familiar with the details of the business venture between

Mr Mudgway and Mr Harrison and Ms Samantha Harrison, or of the company and trust structures. It is clear to me that Mr Mudgway was making a number of assumptions as to the state of Mr Chapman’s knowledge on those matters.

(h) This was a situation where without full knowledge of the background Mr Chapman believed he was in a position where he could help out Mr Mudgway, and ultimately Mr Harrison and Ms Samantha Harrison, by way of a short term loan. However, Mr Chapman was not involved in any way with the Yukon Trust and had not disclosed his spontaneous decision with either Mr Harrison or Ms Samantha Harrison. Accordingly, the loan advance was done without their knowledge or involvement, in either their personal capacity or their capacity as trustees of the Yukon Trust, so was not made to the trust and was a short term loan to alleviate Mr Mudgway’s difficulties. Furthermore, Mr Chapman did not have any knowledge of JAG Living or its limited liability status.

[7] Peter Chapman says that his advance was intended to be no more than a bridging loan until the Yukon Trust money was forthcoming. As it transpired, neither Peter Chapman nor Samantha Harrison seemed to know what the other was doing. Unbeknown to Mr Chapman, Samantha Harrison had in the meantime secured BNZ funding and arranged for another payment to JAG Living Limited of

$31,000. Thus, as matters turned out, JAG Living Limited received $63,000 rather than the $32,000 required.

[8] In any event, although Mr Mudgway was overpaid, he did not repay Mr Chapman immediately as Mr Chapman says he expected. There was then a series of email exchanges between Mr Chapman and/or Val Harrison on one hand and Mr Mudgway on the other. In the course of these exchanges, it was agreed that instead of being immediately repaid, Peter Chapman’s advance would be left in until the development was sold, and that the borrower (whether Ray Mudgway or JAG Living Limited) would pay interest at 5.8 per cent per annum on the sum borrowed.

[9] The money was not repaid to Peter Chapman as agreed, whether that agreement was with JAG Living Limited or Ray Mudgway.

[10] I note however, that the development had been sold off the plans and the purchasers settled in September 2010. According to an email from Gibson Sheat Solicitors to Ray Mudgway dated 21 September 2010, the proceeds were to be paid to Gibson Sheat as solicitors for the Yukon Trust – the official vendor in the project.

The proposal was that “Val and Peter” would be repaid plus interest as agreed out of the second proceeds. From there the trail seems to go cold. Neither party was able or willing (I am not sure which) to advise me what happened to the proceeds after that, except of course, none of the proceeds found their way to Peter Chapman.

The decision in the District Court

[11] The learned Judge in the District Court found that the loan was to Mr Mudgway personally. He applied the doctrine of the undisclosed principal relying in particular on the decision of Hugh Williams J in Rothwell v Mawhinney² to the effect that the onus is on a director to explain to the other party to a contract that that party is contracting with a company.

[12] The learned Judge found that the oral contract formed over the telephone on

23 June 2010 did not involve any explanation by Mr Mudgway that the contract was with JAG Living Limited.

[13] The Judge considered that the evidence of emails between the parties some months after that telephone conversation – from August to September – did not change the position. Although these email communications do refer to companies within the JAG group, at no point did they indicate that JAG Living, or the two tourism focused operations within the group, were limited liability companies. The

Judge found:³

If [the appellant] seeks to have the benefit of limited liability then he needs to fully inform that world of that fact. It is not good enough, for example, to require people to look at a web page or for him to work on assumptions as to the people’s knowledge about business structures. Indeed, the emails with reference to jagliving.co.nz, jagescape.co.nz, and jagair.co.nz at the bottom simply imply the existence of three companies but fail to mention their limited liability status.

Arguments

[14] Before me, Mr Sullivan for the appellant developed the arguments for the appellant into the following essential propositions:

² _{Rothwell v Mawhinney [1988] 2 NZLR 87, (1988) 12 PRNZ 71 (HC) at 82.}

³ At [41].

(a) The payment by Peter Chapman was originally intended to be on behalf of the Yukon Trust. Mr Chapman had earlier paid $60,000 to the JAG Living Limited bank account on behalf of the Yukon Trust, and the Trust rather than JAG Living Limited had subsequently repaid that sum to Mr Chapman. Mr Sullivan’s argument was that the transaction in dispute in this case was a simple repeat of a familiar process.

(b) When Samantha Harrison paid the $31,000 progress payment a few days after Mr Chapman paid his $32,000, Mr Chapman sought repayment of the advance direct from JAG Living Limited.

(c) After it became clear that Yukon Trust was having ongoing cashflow issues, Peter Chapman resolved to leave the money with JAG Living Limited until settlement, provided interest and reimbursement of the break fee for Mr Chapman’s term deposit was paid at that point.

[15] Mr Sullivan argued that the learned Judge’s contrary conclusion betrayed an unrealistic appreciation of the way in which parties behaved in these circumstances. Mr Sullivan submitted that the undisclosed principal doctrine does not apply with any particular vigour in the context of an oral contract. It is a doctrine designed primarily for contracts in writing. He argued that Ray Mudgway made it perfectly plain that JAG Living Limited was the party that owed the obligation once Peter Chapman resolved to leave the money in the project, and the emails make it clear that Val Harrison and Peter Chapman understood that on their part as well.

[16] For Peter Chapman, Mr Stallard submitted that the learned Judge in the District Court was correct to apply the undisclosed principal doctrine. He argued that the crucial exchange was the telephone discussion on 23 June 2010, and the Judge’s findings as to what transpired in that exchange ought to be treated with respect. The Judge saw the witnesses before making his assessment. I did not have that advantage, Mr Stallard submitted. Subsequent email correspondence between the parties was not about the content of the agreement between them, but rather about the means or procedure by which repayment would be effected. They were,

for that reason, beside the point. Mr Stallard argued in addition that none of the emails make it clear that JAG Living (or any other entity within the JAG group) was a limited liability company, as required by the undisclosed principal doctrine. So reference in the emails to any entity within the JAG Group as opposed to Mr Mudgway himself availed the appellant nothing.

[17] Mr Stallard accepted that there was one email dated 8 September 2010 from Ray Mudgway in which there is reference to a JAG Living Limited company bank account but that was sent to Samantha and Shane Harrison and their solicitors. It was never sent to Peter Chapman. Thus, it was argued, none of this correspondence meets the standard set in Rothwell v Mawhinney or the authorities relied on in that judgment.

Analysis

[18] The evidence provides two possible scenarios.

[19] The first is that the 23 June 2010 telephone exchange gave rise to an agreement between Peter Chapman on the one hand, and Ray Mudgway as an officer of JAG Living Limited on the other. This is supported by the appellant’s submission that Peter Chapman’s intention was simply to make another payment on behalf of the Yukon Trust in the same way that he had earlier done with a much larger sum ($60,000). The sparsity of evidence about what transpired in the conversation – Mr Chapman’s argument is that the conversation lacked reference to JAG Living Limited, rather than any specific agreement about who the offeree was – provides some contextual support for the proposition that the parties were simply following an already established procedure. Furthermore, all the correspondence between the parties following the 23 June 2010 telephone exchange simply show Mr Chapman attempting to get Mr Mudgway as JAG Living Limited to pay the bill, as agreed upon.

[20] Alternatively, the 23 June 2010 telephone exchange gave rise to an agreement between Mr Chapman and Mr Mudgway personally. Mr Chapman was not aware that he was lending money to Mr Mudgway as an officer of JAG Living Limited. The payment was made on a personal basis to help a family member out. This is

what the learned Judge, who had the benefit of hearing the evidence, found. Thus, the doctrine of undisclosed principle applied at this point, with Mr Mudgway failing to make it clear he was only an agent. If the case ended there, Mr Mudgway would have no defence.

[21] Both scenarios have some evidential support. In the end however, it is not necessary for me to choose between them. This is because even if the second scenario is the correct one, the later emails give rise to a novation of the original agreement. The emails show a clear subsequent agreement that the loan was to be repaid by JAG Living Limited (and not by Mr Mudgway personally) after settlement, with interest of 5.8 per cent. This is clear from all the references that JAG Living Limited was responsible to pay the bill.

[22] It is clear, in my view, that whatever was agreed on 23 June 2010, that agreement changed as a result of extensive email discussions between Ray Mudgway on one side, and Peter Chapman and Val Harrison on the other. Those exchanges occurred between July and September 2010.

[23] I record the important exchanges from my point of view as follows.

[24] On 16 August 2010, Val Harrison wrote to Ray Mudgway in these terms:

Due to Sam’s inadequate communications, you received two payments of

$32,000 on 24 June when you were only requiring one.

The second amount (Peter’s money) you told Shane, you would get your Mum to repay (we presume because it was not required). Since then you seem to have changed your stance on this. The way we see it, we paid the money to you because Sam didn’t seem to be going to and the project was in jeopardy. Receiving hers, when now feel Peter’s money went to JAG Group as the extra $32,000 (which has probably come in handy for cashflow and saving overdraft interest) was over and above the progress payment required.

Are we so far out of line, thinking JAG owes us $32,000 and a fair interest rate for the convenience for (sic) the use of the extra money? If you can’t repay it until after the sale of the property then we would expect interest up and until then. As I mentioned, we thought a fair rate was 5.8% (as it was invested at 5.5% and incurred a break fee of $106) and overdraft rates are quite a bit higher.

[25] Ray Mudgway replied the next morning in these terms:

Thanks for your email. When I do the summary (hopefully tomorrow – just pulling all the figures together) I’ll work on the premise that JAG will pay you back and then get the payment as final from Whitey [Shane Harrison] and Sam.

[26] This exchange demonstrates that Val Harrison and Peter understood there was a distinction to be drawn between Ray Mudgway and each JAG Living Limited (the construction part of the business), or JAG Group more generally. They understood that it was JAG that owed the money and not Ray Mudgway in person. Judge Zohrab’s view was that this was insufficient for Ray Mudgway to avoid personal liability because it was not made clear in the written exchanges that JAG Living Limited was a limited liability company.

[27] I note that the only reference to JAG Living Limited’s corporate status is in an 8 September 2010 email from Ray Mudgway to Samantha Harrison, Shane Harrison and David Sarginson (Partner of Gibson Sheat). It provided in part:

.. The sum of $32,502.24 will be paid to Val and Peter (Shane’s mother)

directly as payment from JAG Living

... A further payment of $x (to be specified by Sam and Shane to David

Sarginson) will be paid to Val and Peter (this may already be done)

.... The sum of $41,652.76 will be paid to JAG Living

a. Account details:

i. JAG Living Limited

ii. BNZ 02-0704-0060300-00

[28] It appears that this letter was forwarded to Val Harrison at 8:56 pm on the

same day under the heading “Settlement – 85 Downing Street”.

[29] In my view, the communication on 8 September closed the loop between JAG as a separate entity from Mudgway and JAG Living Limited as a company with limited liability. It was enough to establish that whatever the nature of the oral agreement made between Ray Mudgway and Peter Chapman on 23 June 2010, by

8 September 2010, the parties had reached an agreement with the following key features:

(a) JAG Living Limited would be responsible for repaying the advance together with interest at the agreed rate;

(b) JAG Living Limited was a separate identity; and

(c) JAG Living Limited was in fact a limited liability company.

[30] I do not therefore consider that the undisclosed principle doctrine applies in this case, and I find that Ray Mudgway cannot be personally liable for repayment of the loan because the parties agreed that the obligation to repay belonged to JAG Living Limited.

[31] The appeal is allowed accordingly, and the judgment in the District Court is set aside.

_{[32] The appellant will be entitled to costs on a Category 2 basis.}

Williams J