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High Court of New Zealand Decisions |
Last Updated: 12 December 2019
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IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
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CIV-2019-409-000356
[2019] NZHC 3177 |
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UNDER
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the Contracts and Commercial Law Act 2017
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IN THE MATTER
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Of lifetime nomination rights to the stallion Highly Recommended
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BETWEEN
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MARK JAMES RAMON HARRIS and FRANCES RYMAN
First Plaintiffs
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AND
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STEWART MCGIFFERT and SUE MCGIFFERT
Second Plaintiffs
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AND
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KAREN GAYE PARSONS
Third Plaintiff
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AND
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LAURIE ROSS BECKETT
Fourth Plaintiff
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AND
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HEDWOOD THOROUGHBREDS LIMITED
Fifth Plaintiff
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AND
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MARK JAMES RAMON HARRIS
Sixth Plaintiff
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AND
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EDWINA MORRIS and ALAN JONES
trading as BERKLEY STUD Defendants
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Hearing:
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21 November 2019
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Appearances:
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M Bell and H G Max for Plaintiffs D Jackson for Defendants
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Judgment:
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4 December 2019
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HARRIS v MORRIS [2019] NZHC 3177 [4 December 2019]
JUDGMENT OF ASSOCIATE JUDGE PAULSEN
[1] The owner of a stallion may sell rights to nominate mares to be covered by the stallion. These rights may be granted for so long as the stallion is able to cover mares and are called lifetime nominations.
[2] The defendants purchased a stallion called Highly Recommended. To finance the purchase, they sold lifetime nominations in the stallion to the plaintiffs on terms set out in lifetime nomination agreements. They later sold a 70 per cent interest in Highly Recommended whilst preserving the plaintiffs’ nomination rights.
[3] The plaintiffs argue that under the lifetime nomination agreements, upon the sale of Highly Recommended they became entitled to 2 per cent of the sale price for each lifetime nomination held. They seek summary judgment for those amounts. They also seek declarations that they are entitled to continue to nominate mares for so long as Highly Recommended stands at stud and to 2 per cent of any sale by the defendants of their remaining 30 per cent share in the stallion.
[4] The defendants contend that the plaintiffs are only entitled to payment if the sale of Highly Recommended extinguishes their nomination rights and this has not occurred.
[5] The case, therefore, primarily concerns a narrow issue of interpretation of the lifetime nomination agreements.
The facts
[6] The defendants trade in partnership as the Berkley Stud. They purchased Highly Recommended in 2013 intending to put him to stud. To finance the purchase, they sold lifetime nominations in Highly Recommended for $10,000 plus GST. In some cases, an additional sum was paid for infertility insurance provided via NZ Bloodstock Ltd.
[7] The lifetime nominations were offered to persons the defendants knew as breeders or friends. The plaintiffs are, with just one exception, described as either horse-trainers or horse-breeders and they all purchased lifetime nominations at the price sought.
[8] All the lifetime nomination agreements contained the following terms:
➢ Five (5) service rights in the first three stud seasons commencing 2013 with a maximum of two (2) service rights in any one stud season and thereafter one service right for each stud season commencing 2016 so long as HIGHLY RECOMMENDED (AUS) is standing at Stud.
➢ To secure a lifetime nomination a payment of $10,000 plus GST is required now. If insurance is required the cost is $800 including GST for the first 12 months which includes congenital infertility extension insurance. Insurance will be invoiced directly by New Zealand Bloodstock Insurance.
That in the event of payment by underwriters for a claim of less than 100% of the ownership of HIGHLY RECOMMENDED under the Congenital Infertility Extension Insurance, underwriters nonetheless shall have the right thereafter to control the career of HIGHLY RECOMMENDED, including the right to enforce a sale of 100% interest in HIGHLY RECOMMENDED.
[9] At this juncture I note that it is cl 5 that is principally in issue. I also note that under cl 3, the plaintiffs agreed to comply with the defendants’ usual terms and conditions of service at the Berkley Stud. These were set out as Further Terms which I do not need to set out in full.
[10] Highly Recommended stood at stud at the Berkley Stud until 2018. In January 2018, the defendants sold a 70 per cent interest in Highly Recommended to Lindsay Investments Ltd (the Cambridge Stud) for $2,100,000 plus GST.
[11] Highly Recommended was briefly relocated to the Cambridge Stud but has been returned to the Berkley Stud.
[12] It is unnecessary for me to set out the terms of sale in detail. The argument proceeded on the basis that the terms of sale recognised the plaintiffs’ rights under the lifetime nomination agreements and they continue to enjoy their nomination rights.
[13] Following the sale, the plaintiffs’ solicitors made demand on their behalf for payment of $42,000 plus GST for each lifetime nomination held (a total of $252,000 plus GST) in reliance upon cl 5 of the lifetime nomination agreements.
[14] The demand was rejected by the defendants.
[15] The plaintiffs then commenced proceedings in the District Court but discontinued those proceedings because of delays in obtaining a hearing and filed this application for summary judgment.
The pleading and summary judgment principles
[16] The statement of claim pleads one cause of action on behalf of all plaintiffs. This is unsatisfactory as each plaintiff entered into a separate lifetime nomination agreement with the defendants and each should have pleaded their own cause of
action. It does not follow that because the terms of the lifetime nomination agreements were the same that the issues that arise in relation to each of them will be so. Nothing turns on this for present purposes.
[17] The starting point is r 12.2(1) of the High Court Rules 2016. That provides that to obtain summary judgment a plaintiff must satisfy the court that the defendant has no defence to any cause of action in the statement of claim or a particular cause of action.
[18] There is no dispute as to the principles which apply, which were helpfully summarised by Associate Judge Osborne in Mount Grey Downs Ltd v Pinot Properties Ltd as follows:1
[12] I summarise the general principles which I adopt in relation to this application:
(a) Commonsense, flexibility and a sense of justice are required.
(b) The onus is on the plaintiff seeking summary judgment to show that there is no arguable defence. The Court must be left without any real doubt or uncertainty on the matter.
(c) The Court will not hesitate to decide questions of law where appropriate.
(d) The Court will not attempt to resolve genuine conflicts of evidence or to assess the credibility of statements in affidavits.
(e) In determining whether there is a genuine and relevant conflict of facts, the Court is entitled to examine and reject spurious defences or plainly contrived factual conflicts. It is not required to accept uncritically every statement put before it, however equivocal, imprecise, inconsistent with undisputed contemporary documents or other statements, or inherently improbable.
(f) In assessing a defence the Court will look for appropriate particulars and a reasonable level of detailed substantiation – the defendant is under an obligation to lay a proper foundation for the defence in the affidavits filed in support of the Notice of Opposition.
(g) In weighing these matters, the Court will take a robust approach and enter judgment even where there may be differences on certain factual matters if the lack of a tenable defence is plain on the material before the Court.
(h) The need for judicial caution in summary judgment applications has to be balanced with the appropriateness of a robust and
1 Mount Grey Downs Ltd v Pinot Properties Ltd [2018] NZHC 3094 at [12].
realistic judicial attitude when that is called for by the particular facts of the case. Where a last-minute, unsubstantiated defence is raised and an adjournment would be required, a robust approach may be required for the protection of the integrity of the summary judgment process.
(i) Once the Court is satisfied that there is no defence, the Court retains a discretion to refuse summary judgment but does so in the context of the general purpose of the High Court Rules which provide for the just, speedy and inexpensive determination of proceedings.
(citations omitted)
Interpretation principles
[19] The difference between the parties is whether the plaintiffs’ entitlement under cl 5 to a share of the proceeds of sale of Highly Recommended was dependent upon such sale extinguishing their nomination rights.
[20] There was no dispute as to the relevant principles of contractual interpretation which were helpfully summarised in Firm PI 1 Ltd v Zurich Australian Insurance Ltd.2 Of most relevance in the present case is [60] and [63] where the Supreme Court said:
[60] Given the issues in the case, it is not necessary that we discuss the approach to contractual interpretation in any detail. It is sufficient to say that the proper approach is an objective one, the aim being to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”. This objective meaning is taken to be that which the parties intended. While there is no conceptual limit on what can be regarded as “background”, it has to be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning.
...
[63] While context is a necessary element of the interpretive process and the focus is on interpreting the document rather than particular words, the text remains centrally important. If the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant. But the wider context may point to some interpretation other than the most obvious one and may also assist in determining the meaning intended in cases of ambiguity or uncertainty.
2 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147 at [60]- [63].
[21] The proper approach to interpretation of a contractual term is an objective one.3 The words used “must be set in the landscape of the instrument as a whole”4 and considered against all the background knowledge reasonably available to the parties including “the commercial purposes of the contract which in turn presupposes knowledge of the genesis of the transaction, the background, the context, the market in which the parties are operating.”5
[22] In Vector Gas v Bay of Plenty Energy, Blanchard J noted that the court does not need to find ambiguity before considering the background to a contract to assist in interpreting the language used. The law does not require the court to attribute to the parties an intention which they plainly could not have had.6
Discussion
[23] The plaintiffs’ case rests upon what they say is the plain and natural meaning of the words of cl 5. In their view, there is no ambiguity in the words used. The plaintiffs argue that the defendants’ contention, that their entitlement under cl 5 to a share in the proceeds of sale of Highly Recommended only arises upon the extinguishment of their nomination rights, is erroneous because it makes interdependent the plaintiffs’ entitlement to nominations and to a share of the sale proceeds. They contend there is no such interdependence as what they acquired under the lifetime nomination agreements were, first, the right to nominations, and, second, a contingent right to a share of the sale proceeds of Highly Recommended. Considered in this way, cl 5 does not make their entitlement contingent upon the loss of their nomination rights. Furthermore, as their nomination rights last for the lifetime of Highly Recommended should, by reason of a sale, such nomination rights be no longer available to them they are entitled to be compensated in damages.
4 Charter Reinsurance Co Ltd v Fagan [1997] 1 AC 313, 384
[24] A good starting point in analysing the strength of these submissions is what the nomination agreements say the plaintiffs were acquiring. The first page of the agreement states, “Yes, I would like to purchase a lifetime nomination to Highly Recommended (AUS)...”. The conditions to the agreement are headed “Lifetime ‘Nominations’ to HIGHLY RECOMMENDED (AUS) (2008 B H Fastnet Rock- Suggestive) for $10,000 plus GST.” Clause 1 of the terms of the lifetime nomination agreements (that are set out in paragraph [8] above) identifies that the plaintiffs were acquiring five service rights in the first three stud seasons commencing 2013 and one service right for each stud season commencing 2016 while Highly Recommended is standing at Stud. There is no mention that the plaintiffs were also acquiring a share of the sale proceeds of the stallion. These wordings do not support the plaintiffs’ view that what they purchased was both the nomination rights to Highly Recommended and a share of its sale proceeds.
[25] Clause 5 needs to be considered in the context of the commercial purposes of the lifetime nomination agreements. Those commercial purposes were to confer rights to lifetime nominations upon the plaintiffs, regulate the exercise of those rights and, most importantly in the present context, allocate the risk of circumstances arising that prevented the plaintiffs from exercising those rights.
[26] Stallions are put to stud to produce successful progeny. The sale of lifetime nominations may be used (as was the case here) to finance the purchase of a stallion. It is a recognised alternative to selling shares in the stallion. The sale of lifetime nominations also connected the defendants with potential access to a number of mares for breeding purposes. The success of any progeny might increase the value of the stallion as well as the fee commanded for its services. The defendants retained ownership of the stallion and there is nothing in the lifetime nomination agreements preventing them from selling it. As owners, the defendants were responsible for the costs of maintaining the stallion and the costs of marketing its services.
[27] As far as the plaintiffs were concerned, for a relatively small investment they received breeding access to Highly Recommended and the prospect of substantial financial gain should this produce valuable progeny. They might also gain from the
sale (should they choose) of their transferable nomination rights, but they did not obtain an ownership interest in the stallion.
[28] Mr Jackson submitted that lifetime nominations are like a ticket in the lottery. There is some truth in that analogy. Should Highly Recommended produce successful progeny both the plaintiffs and the defendants would benefit. However, there is, and never was, any certainty as to how long the plaintiffs would be able to exercise their nomination rights. Circumstances that might arise that would prevent them from doing so included the infertility, ill-health or early death of the stallion, the relocation of the stallion or its sale to a third party.
[29] The lifetime nomination agreements allocate these risks as between the defendants and the plaintiffs in several ways. As far as the risk of infertility is concerned, the plaintiffs had the option of taking out arranged insurance including congenital infertility extension insurance.
[30] The Further Terms provided the defendants could, at their discretion, reduce the number of service rights that might be exercised due to the age or health of Highly Recommended.
[31] Clause 5 of the nomination agreement also concerns the allocation of risk and must be interpreted in that context. There was nothing to stop the defendants from relocating Highly Recommended. The first sentence of cl 5 provides that if Highly Recommended was relocated the lifetime nomination remains valid. The effect is to allocate to the plaintiffs the risk that additional costs will be incurred to exercise nominations if Highly Recommended was relocated.
[32] The second sentence of cl 5 deals with the sale of Highly Recommended. It should be borne in mind that a sale of the stallion might foreseeably occur under a variety of circumstances. The stallion might be voluntarily sold by the defendants or by the holder of a security interest following a default, or, as the nomination agreement contemplates, by the insurer upon payment of a claim under the congenital infertility extension insurance. In the usual course, the sale of Highly Recommended could be expected to defeat the plaintiffs’ nomination rights. Such rights are personal and
enforceable by action against the defendants but, prima facie, not against a third-party purchaser. In such circumstances, cl 5 allocates the risk of the plaintiffs’ loss upon sale to the defendants but such loss is by agreement quantified as a percentage of the sale price of the stallion.
[33] Related to this, it is significant in my view, that while the first sentence of cl 5 states that upon the relocation of Highly Recommended “the lifetime nomination will remain”, there is no such statement in the second sentence dealing with the sale of the stallion. That makes perfect sense if it is contemplated that the nomination rights will be extinguished upon sale; that is, that the plaintiffs’ entitlement to share in the sale proceeds and the extinguishment of their entitlement to nominations was indeed interdependent.
[34] The plaintiffs’ contention that they are entitled to a share of the sale proceeds of Highly Recommended as well as their nomination rights and, in addition, the right to sue the plaintiffs for damages should such rights not be recognised by a third-party purchaser is not commercially sensible. The defendants sold a share of the stallion, but the plaintiffs’ nomination rights are unaffected. The plaintiffs have lost nothing at all by the sale. It is hard to believe that the defendants acting rationally would have entered into an agreement on such terms.
[35] As an additional matter, the lifetime nomination agreements are concerned with a specific practise peculiar to the bloodstock industry. It is a feature of the evidence that the plaintiffs have produced nothing to suggest that their interpretation is consistent with the way such agreements are applied in the industry. There is, however, evidence from the first-named defendant, Edwina Wynyard Morris, as to industry practice that suggests to me the plaintiffs’ approach to the interpretation of the agreement is not correct.
[36] At trial it will be open to the plaintiffs to call further evidence as to the background circumstances of the parties entering into the lifetime nomination agreements, and as to the usual needs, understandings and practises in the bloodstock industry which may inform an interpretation of the lifetime nomination agreements.
In a summary judgment context, I am not required to make any final determination on the matter.
[37] The conclusion I have reached is that the interpretation of cl 5 advanced by the defendants is certainly tenable. The plaintiffs have not satisfied me that the defendants have no defence to their claim and their application for summary judgment for a share of the sale proceeds of Highly Recommended must be dismissed.
[38] Given this finding, it is not appropriate to make declarations in the terms sought by plaintiffs either.
Result
[39] The plaintiffs’ application for summary judgment is dismissed.
[40] It is usual in such cases that costs should be reserved. If any party considers that there is reason to depart from the ordinary rule they may file a memorandum within 7 days with 7 days for any reply. Submissions should be no longer than 4 pages. It should not be thought that I am encouraging any party to apply for costs.
[41] The case will be called for first teleconference at 3.30pm on 17 December 2019. Counsel should file preferably a consent memorandum at least 2 workings days before the conference addressing all the sch 5 matters.
O G Paulsen Associate Judge
This judgment was delivered by me on 4 December 2019 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date:
Solicitors:
Corcoran French, Christchurch
Maciaszek Brown Law (Mark Brown), Christchurch
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