Gustav & Co Ltd v Macfield Ltd PDF

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Gustav & Co Ltd v Macfield Ltd full judgment...

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2 NZLR

Gustav & Co Ltd v Macfield Ltd

735

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Gustav & Co Ltd v Macfield Ltd

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Supreme Court of New Zealand SC 39/2007; [2008] NZSC 47 11 March; 20 June 2008 Elias CJ, Blanchard, Tipping, McGrath and Anderson JJ

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Equity – Unconscionable bargain – Conditional contract – Whether unconscionability to be assessed at time of entry into contract or time of confirmation – Meaning of “passive acceptance” by stronger party – Whether anything to act on conscience of stronger party. Gustav & Co Ltd was the vehicle of Mr Parkinson, an experienced property developer. Its shares were held by trustees for Mr Parkinson, including a Mr Jones, a solicitor. Macfield Ltd was a company owned by trusts representing Mr MacKenzie and another and by Mr Jones. Mr Parkinson was diagnosed with terminal cancer and told that he had six to nine months to live. As Mr Parkinson was terminally ill, he was entitled to an advanced payout from an insurance policy and Mr Jones handled this transaction. His diagnosis and treatment were known to his neighbour, an estate agent, Mr Thiele. Macfield owned a substantial city-centre building, the Union Centre in Christchurch. Macfield had tried to sell the Union Centre for $12m, but had not received any offers at that level. Mr Thiele was instructed to handle the sale of the Union Centre for Macfield and mentioned it to Mr Parkinson in conversation and Mr Parkinson took an interest in it. Gustav subsequently made an offer, eventually for the asking price. Payment of the deposit was conditional on factors such as due diligence. Valuers advised both parties that the price was above market value, but the total development project Gustav envisaged was worth in the order of $100m. After the contract was signed, Mr McKenzie became aware that Mr Parkinson was ill, but not of the prognosis. Gustav subsequently confirmed the purchase and paid the first instalment of the deposit. Mr Parkinson died shortly afterwards and was replaced as director of Gustav by Mrs Parkinson. Gustav then attempted to withdraw from the agreement and refused to pay any further instalments of the deposit. Macfield cancelled the contract and retained the deposit. Gustav initiated proceedings to recover the deposit paid, arguing among other things that Macfield had become aware before the contract became unconditional that Mr Parkinson was terminally ill and was undergoing treatment. At trial, evidence was given by a doctor that his judgment and mood would have been severely affected; but those who dealt with Mr Parkinson testified that he appeared in possession of his faculties. The High Court found against Gustav, having assessed the matter as at the date on which the contract was confirmed, but the Judge recognised that the more appropriate time might be when the agreement was made. Gustav unsuccessfully appealed to the Court of Appeal and then appealed to the Supreme Court.

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Held: 1 The question was whether the contract was unconscionable at the time it was entered into in the sense of becoming binding, whether conditionally or unconditionally. If at a later date the contract were varied to the detriment of the party claiming unconscionability, the question would be whether the variation made the contract unconscionable. The concept of “passive acceptance” applied 5 where the stronger party accepted the opportunity presented by the weaker party when there was something to affect the conscience of the stronger party. It did not mean that a party was required to make continuing inquiries after it was contracturally bound. Nor would the position have been any different if Gustav had obtained an option. Once Macfield had entered into the bargain, 10 whether as a conditional contract or as an option, there was nothing more for it to do which could have amounted to conduct on its part which could have rendered the contract unconscionable. Any duty to make further inquiries would imply a duty to put itself in breach if it came to the conclusion that the other party were disadvantaged (see paras [5], [6], [7], [15]). 15 Spiro v Glencrown Properties Ltd [1991] Ch 537; [1991] 2 WLR 931 adopted. O’Connor v Hart [1985] 1 NZLR 159 (PC) discussed. Contractors Bonding v Snee [1992] 2 NZLR 157 (CA) discussed. 2 The evidence fell well short of establishing that at the time of entry into 20 the contract Mr Parkinson had been suffering from any inability which rendered him unable to look after Gustav’s interests. Macfield had nominated its price but applied no pressure and there had been nothing acting on Macfield’s conscience requiring it to decline to accept Gustav’s acceptance of its price. The due diligence conditions had been framed so as to allow Gustav 25 considerable time and scope to assess the viability of the transaction and to make up its own mind with legal assistance whether it wished to proceed. The transaction fell significantly short of being unconscionable (see paras [23], [25], [35]). Result: Appeal dismissed. Other cases mentioned in judgment Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447. Elia v Commercial & Mortgage Nominees Ltd (1988) 2 NZBLC 103,296. Griffıth v Pelton [1958] Ch 205; [1957] 3 All ER 75. Helby v Matthews [1895] AC 471. Moffat v Moffat [1984] 1 NZLR 600. Nichols v Jessup [1986] 1 NZLR 226.

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Appeal This was an appeal by Gustav & Co Ltd, the plaintiff, from the judgment of the Court of Appeal ([2007] NZCA 205) dismissing its appeal from the judgment 40 of John Hansen J (High Court, Christchurch, CIV 2004-409-1606, 15 July 2005) in favour of Macfield Ltd, the defendant, leave having been granted by the Supreme Court ([2007] NZSC 72), the approved grounds of appeal being: (1) (respondent’s ground) For the purpose of the doctrine of unconscionable bargain, should the respondent’s knowledge of the appellant’s 45 disability be assessed at the date on which the conditional contract was entered into or the date on which the appellant confirmed it and paid the deposit? (2) On that date, did the respondent have knowledge sufficient in the

2 NZLR

Gustav & Co Ltd v Macfield Ltd

737

circumstances to make it unconscionable for the respondent to proceed with the bargain? (3) If not, did the respondent have knowledge sufficient in the circumstances to require it to make further inquiry into the appellant’s position before proceeding with the bargain? 5

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S P Rennie for Gustav. J G Matthews and K W Clay for Macfield. Rennie for Gustav: The Court of Appeal correctly held at para [61] that Mr Parkinson suffered from a disadvantage. Macfield had notice of the overpricing. Borg-Warner Acceptance Corporation (Aust) Ltd v Diprose (1988) ANZ ConvR 57 requires understanding, not just the appearance of activity. On the first ground of appeal, the benefit was the completion of a contract for the sale of land with a very wide due diligence clause. When a contract is subject to such a clause, continuing judgment is required until confirmation. The conditions called for judgment as to the wisdom of the contract and Gustav could have extricated itself. No provision allowed Macfield to withdraw; it would have had to refuse to accept the deposit subject to the major transaction provisions of s 129 of the Companies Act 1993. Mr Jones, the trustee shareholder, not only knew that there was no special resolution, but was under a duty to know whether there was a special resolution. The principle in O’Connor v Hart [1985] 1 NZLR 159 (PC) is flexible enough to allow a requirement to exercise judgment to continue up until the benefit is received. Passive acceptance in unconscionable circumstances is wide enough to cover conditional contracts. The matter which should have affected the conscience was the meeting when it was obvious that Mr Parkinson was unwell, as well as the estate agent’s observations, which there is evidence he passed on to Mr McKenzie and Mr Butterfield. The vendor should have put the matter to the trustee shareholders of the purchaser. This was an unusual case with an unusual mixing of roles of advisers. This contract is near to an option as there was further judgment to be made by the purchaser. [BLANCHARD J referred to Hoffmann J in Spiro v Glencrown Properties Ltd [1991] Ch 537.] Mr Jones knew about the contract and should have notified the parties. The evidence is that Mr Jones advised Mr Parkinson to go to another solicitor. A gross overcharge can itself be evidence of disadvantage and unfair use of the situation (Blomley v Ryan (1956) 99 CLR 362 at pp 405 and 406 per Fullagar J and see Bowkett v Action Finance Ltd [1992] 1 NZLR 449 at p 461 per Tipping J). Any inference from the price is strengthened by the previous failure to raise interest at that price and by the vendor’s knowledge of Mr Parkinson’s condition. Mr Parkinson’s statement that he could absorb the difference in the context of a $100m development was made when he was already said to be unable to look after his affairs. He did nothing to pursue the joint venture and took no steps to arrange financing. There is no evidence that Macfield had express knowledge of Gustav’s financial position, but it did know that Mr Parkinson would have to raise finance from other sources. Mr Jones was a trustee shareholder of Gustav and a solicitor in a fiduciary relationship with Macfield. He knew that there was no joint venture agreement and this was not confidential information; he was therefore required to disclose it to Macfield and his knowledge is imputed to Macfield. Macfield knew there had been no s 129 resolution. Macfield would then be in the position of passively accepting a benefit in unconscionable circumstances. This issue was raised in the Court of Appeal, but there was no

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evidence in the High Court as to whether there was a s 129 resolution. [Reference also made in printed case to: Bradley West Solicitors Nominee Co v Keeman [1994] 2 NZLR 111; Attorney-General for England and Wales v R [2002] 2 NZLR 91 (CA); Nichols v Jessup (No 2) [1986] 1 NZLR 237; Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1992] 4 All ER 161; Bank of Credit and Commerce International (Overseas) Ltd (in liq) v Akindele [2000] 4 All ER 221; Contractors Bonding Ltd v Snee [1992] 2 NZLR 157; Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447; Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144; Fry v Lane (1888) 40 Ch D 312; Wilkinson v ASB Bank Ltd [1998] 1 NZLR 674 (CA); Clark Boyce v Mouat [1993] 3 NZLR 641 (PC); and El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685.] Matthews for Macfield: The cases all support the proposition that the disability should be assessed at the date the contract was entered into, starting with Earl of Aylesford v Morris (1873) 8 Ch App 484 at p 490; Blomley v Ryan; Moffat v Moffat [1984] NZLR 600 at p 606; Bowkett v Action Finance at pp 450 and 459; and Contractors Bonding v Snee at p 174 per Richardson J (see also R Bigwood, Exploitative Contracts (2003), pp 134 – 135). Sentences from O’Connor v Hart have been taken out of context (see the whole passage at p 171, starting at l 7). “Passive acceptance” refers to the assent of the weaker party being accepted, not the performance of the contract (see Nichols v Jessup [1986] 1 NZLR 226 at p 235 per Somers J; Elia v Commercial & Mortgage Nominees Ltd (1988) 2 NZBLC 103,296 at p 103,304 per Gault J; and Commercial Bank of Australia v Amadio at p 464 per Mason J and at p 474 per Deane J). Mr Parkinson appeared frail but sound to all the witnesses who dealt with him. He appeared quite different from the way he was described by Associate Professor Robinson. Over the six days between the initial offer and signing the contract the only people who saw Mr Parkinson and gave evidence were his wife and the estate agent. Only Associate Professor Robinson thought he was disadvantaged and Mr Parkinson had no contact with any medical personnel during those six days. He emailed Mr McKenzie in January and the email indicated that he was actively engaged in the transaction and acting in a business-like manner. So even if Macfield had made inquiry, it would have found that Mr Parkinson was mentally fine. The timing issue could cause great uncertainty. This was not a one-person company, but where the owner of a one-person company became ill or died during the period before the contract was confirmed, the other party would be in great difficulties. Had Macfield objected to the mental state of the director of Gustav, the trustee shareholders could have replaced the director and carried on. Macfield did not accept the valuation and would have kept the land if it could not get the price it was asking. An option is a conditional contract so far as the vendor is concerned. It is accepted that there was a premium on the price but the Court of Appeal accepted that this made sense in the context of a long-term development which was what Mr Parkinson had in mind. It is accepted that if a contract were varied seriously to a party’s detriment, that party’s ability to accept the variation would be an issue but this does not apply to a later valuation on which it had been agreed the price depended. Any conditions under which equity will intervene by reference to a date after the entry into the contract need to be clearly spelled out in the interests of commercial certainty. Both the Court of Appeal and the High Court have found

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2 NZLR

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Gustav & Co Ltd v Macfield Ltd

that there was no unconscionable conduct. Unconscionability requires actual disadvantage and knowledge. Hansen J in the High Court imputed the knowledge of Mr Jones and the estate agent to Macfield but was not satisfied Mr McKenzie had been told. Even if they knew of the terminal cancer, the real issue was the effect of the medication which was known only to a few. The value issue is irrelevant without actual knowledge of disability on the part of the stronger party (see N Enonchong, Duress, Undue Influence and Unconscionable Dealing (2006), p 209). This case stops a long way short of Crowe v Ballard (1790) 1 Ves 215. The s 219 of the Companies Act point was not mentioned in the High Court, although the trustee shareholders were called as witnesses: we do not know whether there was a special resolution or not. It is not even certain Gustav would have been the purchasing entity. Mr Parkinson had several companies, one for each development, and he had the $1m cash from the early settlement of the insurance policy. There was no evidence as to the net worth of Mr Parkinson’s interests as a whole. The estate agent thought the joint venture was going ahead and Mr Jones did not know the details of it at all. Rennie replying: Offers do not represent the market price, it is unconditional offers after due diligence that represent market price. The only value that matters is the market value assessed at $8.3m. There is a question whose conscience has to be affected: that of the company or the operators? Macfield shares were owned by Mr Jones and an accountant but Mr Jones was not a director. Cur adv vult

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The reasons of the Court were given by TIPPING J. [1] This appeal concerns an agreement for the sale and purchase of substantial commercial premises in Christchurch. Both the High Court1 and the Court of Appeal2 refused the purchaser’s application to set the agreement aside as an unconscionable bargain. The purchaser appeals to this Court. The agreement, which is dated 3 November 2003, was entered into between the appellant, Gustav & Co Ltd, as purchaser, and the respondent, Macfield Ltd, as vendor. The person who negotiated the agreement for Gustav was its sole director, Mr David Parkinson. At the time he was suffering from terminal liver cancer. He died on 15 February 2004. The price payable under the agreement was $12.35m. Gustav claims that this figure was substantially in excess of fair market value. Its contention that the contract represents an unconscionable bargain rests essentially on Mr Parkinson’s ill health and what Gustav claims to be the excessive price it agreed to pay. [2] The first issue which must be addressed arises on Macfield’s cross-appeal. It concerns the time as at which the court determines whether a transaction is unconscionable. The point arises because the agreement between the parties was conditional upon Gustav performing due diligence in respect of the premises which were the subject of the agreement. A series of detailed conditions had to be satisfied in this respect. Whereas the contract was entered into on 3 November 2003, it was not declared unconditional by Gustav until 23 January 2004. On that date, Gustav also paid to Macfield the sum of 1 2

Gustav & Co Ltd v Macfield Ltd (High Court, Christchurch, CIV 2004-409-1606, 15 July 2005, John Hansen J). Gustav & Co Ltd v Macfield Ltd [2007] NZCA 205.

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$500,000 by way of part payment of the deposit. The question is whether the court should assess the unconscionability of the contract as at the date it was entered into or as at the date it was declared unconditional. Both the High Court and the Court of Appeal decided that the appropriate date was the later one, namely when the contract was declared unconditional. Macfield challenges that 5 conclusion. It is appropriate to deal with this point before considering Gustav’s appeal and its contention that this Court should hold that the contract was unconscionable and should be set aside and a consequential order made for the refund of the sum paid by way of deposit. The time issue 10 [3] The Judge in the High Court said he was prepared to examine the matter as at the date the contract was declared unconditional, in spite of the fact that it would be possible to argue that “contractually the benefit arose when the parties reached agreement that was documented”.3 His Honour did not discuss the timing issue any further, probably on the pragmatic basis that he was going 15 to hold that the contract was not unconscionable, even if the issue was examined at the later date. [4] The Court of Appeal held that “[i]n the circumstances of this case” the High Court had been right to take the date of confirmation as the appropriate one. 4 The Court of Appeal’s reasoning is best set out in the Court’s own words. 20 Their Honours said that their conclusion was based on two interrelated reasons: “[47] First, there is support for this approach in the authorities. In O’Connor v Hart Lord Brightman, delivering the reasons of the Privy Council, said that victimisation can consist ‘either of the active extortion of a benefit or the passive acceptance of a benefit in unconscionable 25 circumstances’: at p 171. In Contractors Bonding Ltd v Snee (at p 173) Richardson J highlighted the latter alternative (passive acceptance) and said (at p 174): ‘At the end of the day equity will intervene to deprive parties of their contractual rights where they have unconscionably obtained benefits 30 or have accepted benefits in unconscionable circumstances. That is where they would be acting unconscientiously in receiving or retaining their bargain.’ (Emphasis added) [48] Secondly, this approach best reflects the reality of the contractual position in this case. The due diligence clause in the contract was a wide 35 one. It identified a range of matters that Gustav was entitled to examine prior to confirmation and gave Gustav considerable scope to withdraw from t...