ARCADIA HOMES LIMITED (IN LIQUIDATION) V MORE TO THIS LIFE LIMITED AND ANDREW

GEORGE CLARK AS TRUSTEES OF THE ULTIMATE LIFESTYLE TRUST CA149/2012, [2013] NZCA 286

[5 July 2013]

IN THE COURT OF APPEAL OF NEW ZEALAND

CA149/2012

[2013] NZCA 286

BETWEEN

ARCADIA HOMES LIMITED (IN

LIQUIDATION)

Appellant

AND

MORE TO THIS LIFE LIMITED AND

ANDREW GEORGE CLARK AS

TRUSTEES OF THE ULTIMATE

LIFESTYLE TRUST

Respondents

Hearing:

21 May 2013

Court:

Ellen France, Wild and Ronald Young JJ

Counsel:

G P Curry and R A Harrington for the Appellant

C S Withnall QC for the Respondents

Judgment:

5 July 2013 at 2.30 pm

JUDGMENT OF THE COURT

A The appeal is dismissed.

B In the event the respondents file a memorandum in terms of [81] of the

judgment, costs are reserved. If no such memorandum is filed, then the

appellant is to pay the respondents’ costs for a standard appeal on a band A

basis with usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Wild J)

Introduction

[1] By an agreement for sale and purchase, a company purchases a property

“subject to and conditional upon … approval of the directors”. Is that a condition

precedent effectively giving the purchasing company an option? Or is it a condition

subsequent in a binding agreement? If the latter, what if anything must the

purchasing company’s directors do to satisfy the condition?

[2] Those are the main issues on this appeal from a judgment delivered by

French J in the High Court at Dunedin on 16 February 2012.1 French J noted that it

appears this is the first time a “subject to directors’ approval” clause has come before

a New Zealand Court.2 Our own research confirms that.

3

Facts

[3] Shortly before Christmas 2007 Mr Andrew Guest travelled down from

Auckland to Wanaka to look at residential properties for his company Arcadia

Homes Ltd, the appellant (Arcadia). Mr Guest’s aim was to purchase a holiday

home for himself and his family.

[4] On 24 December 2007 Mr Guest entered into an agreement with the

respondents for the sale and purchase for $2 million of a residential property the

respondents owned at 21 Waimana Place, Wanaka. Below his signature for the

purchaser on the Agreement, Mr Guest added ‘Director’. We will refer to this as ‘the

Agreement’, and to the property as ‘the Waimana property’.

[5] The Agreement was in the standard REINZ/ADLS 8th Edition 2006 form

save in these three respects:

(a) On the first page of the Agreement, in the box giving details as to the

payment of the deposit of $200,000, the printed words had been

1 More To This Life Ltd v Arcadia Homes Ltd [2012] NZHC 165.

2 At [87].

3 We have located two cases featuring directors’ approval clauses: Tepe Holdings Ltd v The

Commissioner of Inland Revenue HC Wellington CIV-2010-485-489, 13 September 2010 and

Savill v Chase Holdings [1989] 1 NZLR 257 (CA). In neither of these cases was the

interpretation of the directors’ approval clause in issue.

altered so that the deposit was to be paid upon the confirmation of the

Agreement to “The Vendor Directly”.

(b) Clause 11 was altered so that the purchaser, not the vendor, paid the

agent’s charges.

(c) In the box making provision for further terms of sale there was this

clause:

15. THIS AGREEMENT IS SUBJECT TO AND

CONDITIONAL UPON Prime Approval of the

Directors of Arcadia Homes Ltd 4pm on 25th

January 2008 AND notifying the Vendor or the

Vendor’s Solicitor in writing that this condition has

been satisfied. This condition is inserted for the sole

benefit of the Purchaser.

[6] As relevant to this appeal, (standard) cl 8.7 of the Agreement provided:

8.7 If this agreement is expressed to be subject either to the above or to

any other condition(s), then in relation to each such condition the

following shall apply unless otherwise expressly provided:

(1) The condition shall be a condition subsequent.

(2) The party or parties for whose benefit the condition has been

included shall do all things which may reasonably be

necessary to enable the condition to be fulfilled by the date

for fulfilment.

…

[7] Having signed the Agreement Mr Guest made some inquiries. We will need

to consider these in detail.

[8] On 6 January 2008 Arcadia entered into an agreement to purchase another

residential property, at 49 Ridgecrest, Wanaka, for $1.4 million (the Ridgecrest

property). That agreement contained this further term of sale:

15.0 This agreement is conditional upon the Directors of Acadia [sic]

Homes Ltd approving all aspects of this purchase on or before January 18th

2008.

[9] On 9 January 2008 Arcadia’s solicitors faxed the vendor’s solicitors:

A G CLARK AND MORE TO THIS LIFE LIMITED – ARCADIA

HOMES LIMITED

21 WAIMANA PLACE, WANAKA

We act for Arcadia Homes Limited and have received a copy of the

Agreement for Sale and Purchase between our respective clients dated

24 December 2007. We are now advised by the directors of our client

company that following inspection, valuation advice and ancillary due

diligence investigations the directors are unfortunately not satisfied as to the

property purchase and accordingly the Agreement is at an end. Our client

has asked us to convey its thanks to your client for entering into the

conditional Agreement.

[10] The vendors did not accept that Arcadia was, in the circumstances, entitled to

avoid the Agreement. They served a settlement notice. When Arcadia refused to

settle the vendors cancelled the Agreement. The property was resold for $1.41

million on 7 November 2008.

High Court proceeding and judgment

[11] On 19 December 2008 the vendors sued Arcadia for the losses they had

sustained on that resale. That was the claim that came before French J. French J

held Arcadia was in breach of the Agreement. She awarded the respondents

damages of $632,000 plus contract interest (15 per cent on the sale price of

$2 million) to the date of resale, and interest under s 87 of the Judicature Act 1908

on the $632,000 from then to the date of judgment.

[12] This appeal was filed on 15 March 2012.

Clause 15 – a condition precedent or subsequent?

[13] In the High Court Arcadia unsuccessfully sought rectification of cl 15 of the

Agreement by substituting the word “prior” for “prime” and by inserting the word

“by” before the time “4 pm”. Although French J declined rectification, she held that

the word “by” was implicit in the clause.4 There is no appeal against the refusal of

rectification, so the issue is whether the Judge erred in interpreting cl 15 as it

appeared in the Agreement, with the implicit addition of the word “by”.

4 More to This Life Ltd, above n 1, at [42].

[14] Approaching the interpretation task on the principles outlined by the Supreme

Court in Vector Gas Ltd v Bay of Plenty Energy Ltd, French J held that cl 15 was a

condition subsequent in a binding agreement for sale and purchase.5 She gave 11

reasons for that conclusion.6 They can be summarised thus:

(a) use of the REINZ/ADLS form of agreement, which includes above

the signature spaces:

WARNING ... This is a binding contract. Read the

information set out on the back page before signing.

(b) cl 8.7(1) which made cl 15 a condition subsequent “unless otherwise

expressly provided”;

(c) cl 15 itself referring to “This Agreement …”;

(d) the provision in cl 15 that it was for Arcadia’s sole benefit, entitling

Arcadia to bind the vendors by waiving cl 15;

(e) the words in cl 15 “subject to and conditional upon” being equally

consistent with either a condition precedent or a condition subsequent;

(f) the use as an adjective of the word “prime” in cl 15 – “main, or of first

importance”;

(g) the fact that the vendors would be free at any time to resell their

property to another buyer if cl 15 was a condition precedent;

(h) the phrasing of Arcadia’s solicitor’s letter of 9 January 2008 – “the

Agreement is at an end”, and conveying thanks to the vendors “for

entering into the conditional Agreement”;

(i) Arcadia’s solicitor’s correspondence throughout 2008 consistently

accepting that a conditional contract had come into existence;

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

6 At [84].

(j) Arcadia’s first statement of defence, admitting the existence of a

contract; and

(k) Mr Andrew Guest’s own evidence.

[15] Mr Curry took issue with this reasoning. He submitted cl 15 was a condition

precedent which effectively converted the Agreement into an option. Clause 15 did

not oblige the directors of Arcadia to do anything and, had they done nothing, the

Agreement/option would have lapsed at 4 pm on 25 January 2008. In the event,

Mr Curry contended the 9 January fax brought the Agreement/option to an end.

[16] Mr Curry categorised French J’s reasons (a)–(c) as “untenably circular”. As

cl 15 was a condition precedent, other clauses could have no bearing on its

interpretation. We reject this. It invites us to look at cl 15 and nothing else. That

begs the question of what cl 15 means in its context in the Agreement, which, in turn,

is to be set in “the commercial or other context in which [it] was made and [in the

context of] all the facts and circumstances known to and likely to be operating on the

parties’ minds …”.7 We consider the Judge’s reasons (a)–(c) support her conclusion.

[17] Mr Curry dealt with the Judge’s reasons (d) and (e) together, focusing on the

latter. If Mr Curry’s interpretation of cl 15 were correct it renders the words “this

condition is inserted for the sole benefit of the Purchaser” in cl 15 otiose, because

Mr Curry rightly accepted that they entitled Arcadia to waive cl 15. A party does not

need to waive an option. So French J was right to treat the inclusion of those words

as an indication that cl 15 was a condition subsequent in a binding agreement.

[18] As to the Judge’s reason (e), Mr Curry sought to equate cl 15 with the clauses

in issue in this Court’s judgment in BS Developments No 12 Ltd v PB & SF

Properties Ltd8 and in the High Court’s judgment in Prime Property Group v

Amtrust Pacific Properties Ltd.9 Both those cases involved an agreement on the

REINZ/ADLS form. It is not clear from the judgment what edition was used in

7 Vector Gas Ltd, above n 5, at [19] per Tipping J.

8 BS Developments No 12 Ltd v PB & SF Properties Ltd (2006) 7 NZCPR 603 (CA).

9 Prime Property Group Ltd v Amtrust Pacific Properties Ltd HC Wellington CIV-2003-485-208,

25 March 2004.

Prime Property. In BS Developments the form used was the seventh edition, July

1999.

[19] In Prime Property the purchaser had requested the addition of a clause

making the Agreement “conditional” upon it completing: 10

within 20 working days of confirmation of clause 15 entirely to its

satisfaction in all respects, a due diligence investigation of the property

including (without limitation) leases, certificate of title, valuation,

management contracts … [etc].

At issue in Prime Property was whether the notice given by the purchaser to the

vendor that the contract had become unconditional was effective and, if it was, what

remedies were available to the purchaser.

[20] The parties agreed, as did the Judge, that the combination of that clause and

cl 8.7(1) meant the purchaser effectively had an option subject to the vendor

cancelling the contract in writing.11

[21] The clause in the BS Developments case provided:12

14. Due Diligence

14.1 This agreement is conditional upon the purchaser being entirely

satisfied with the property as a suitable property investment at the

agreed purchase price following the Purchaser carrying out a due

diligence investigation of the property, including (but not limited to)

an investigation of the following:

(a) The proposed physical use of the property;

(b) The state of the title of the land;

(c) The overall financial suitability of the Purchaser’s proposed

investment in the property and business;

(d) The overall financial suitability and commercial viability of

the Purchaser’s proposed involvement of the property.

14.2 The parties acknowledge that the condition in clause 14.1 above is

inserted for the absolute and sole benefit of the Purchaser and may at

any time prior to this agreement being avoided, be waived by the

Purchaser giving written notice of waiver to the Vendor.

10

At [22]. 11

At [32]–[33]. Clause 8.7(1) was in identical terms to that in the present agreement. 12

At [4].

14.3 The parties agree that satisfaction of the condition contained in

clause 14.1 shall be at the sole and absolute discretion of the

Purchaser and that if the condition is not fulfilled due to the

Purchaser not being satisfied with any aspect of the property, the

Purchaser shall not be obliged to state any reasons for the

Purchaser’s lack of satisfaction.

14.4 The date for satisfaction of the condition in clause 14.1 shall be the

date being 10 working days from the date of this agreement.

[22] Of that clause this Court observed:13

Clause 14 is worded in a way which makes the satisfaction or

non-satisfaction of that condition entirely a matter of the subjective

judgment of the purchaser. In that sense, it is not really a condition at all,

and the requirement of cl 8.7(2) that the purchaser “must do all things which

may reasonably be necessary to enable a condition to be fulfilled” seems

hollow. Read literally, it requires the purchaser to convince itself to be

satisfied. Read realistically, it provides little room for the vendor to criticise

the purchaser for failing to comply with cl 8.7(2).

[23] The Court noted that the clause was very similar to that considered in Prime

Property, and observed that the resulting undesirable uncertainty “could be avoided

if the arrangement were documented as an option”.14

On the appeal to this Court in

BS Developments, no issue was taken with the High Court Judge’s conclusion that

the agreement was voidable and not void at the end of the 10 day due diligence

period. This Court agreed with the High Court, calling the agreement “an effective

option”.15

This Court then went on to consider whether a particular fax had the

effect of avoiding the agreement – that was the core issue in BS Developments.

[24] We do not accept that cl 15 can be equated in its effect with the clauses in

Prime Property and BS Developments. Although the word “conditional” is also used

in cl 15, these two key aspects of the clauses in the other two cases are absent:

(a) a due diligence investigation of the property, unlimited in its scope;

and

(b) the purchaser being entirely satisfied with the property in all respects.

13

At [34]. 14

At [35]. 15

At [35].

[25] So the clause in the other two cases was directed to the purchaser

investigating and being satisfied about the property; cl 15 is directed to the

purchaser’s directors approving the Agreement. We refer in [58] and [68] to [72]

below to what we consider is the much more limited scope of cl 15.

[26] We agree with Mr Curry that the Judge’s reason (f) has no bearing on whether

cl 15 is precedent or subsequent. As to reason (g), we accept Mr Curry’s point that

Mr Clark did not state in evidence that he considered he was bound by the

Agreement. But that is the whole tenor of his evidence. For example, in a

10 January 2008 email to Arcadia’s solicitor he made this request, which is

consistent only with Mr Clark treating the Agreement as binding on both parties – as

obliging Arcadia to put the Agreement to its directors for their approval:

I would like a copy of the directors resolution from their meeting or a copy

of the letter sent to you.

[27] The Judge’s reasons (h) to (j) all involve evidence of Arcadia’s conduct. On

the approach taken by Tipping J in Vector Gas, such evidence is only admissible “if

it tends to establish a fact or circumstance capable of demonstrating objectively what

meaning both or all parties intended their words to bear” (our emphasis).16

[28] The Judge did not elaborate on her reason (k), but she obviously had in mind

passages such as the following in the evidence-in-chief of Mr Andrew Guest:17

Louise [Ms Louise Walker-Hughes, the real estate sales person] told me that

Andrew Clark was a property developer and I asked her to explain to the

vendor that I would not waste his time and that I was genuine with regard to

the purchase but that I had enquiries to make and that the deal would remain

conditional but I would try and make it unconditional as early as I could. I

assumed that the vendor would accept the clause in good faith.

I insisted that the deposit payable under the agreement was only to become

payable upon the agreement “becoming unconditional” and that the clause

was to state that it is inserted for the benefit of the purchaser and would

specify the date of which the condition is to be satisfied.

That evidence is consistent with a conditional agreement but not with an option.

16

At [31]. 17

Brief of Andrew Guest, 15 June 2011 at [30]–[31].

[29] To summarise, we agree with French J that cl 15 was a condition subsequent

in a binding agreement. The Judge’s reasons (a) and (b) are the most compelling. To

escape the operation of cl 8.7(1), cl 15 needed to provide expressly that it was a

condition precedent. It did not so provide.

Did Arcadia have more than one director?

[30] Clause 15 made the Agreement subject to and conditional upon approval of

the Directors of Arcadia (our emphasis). However, French J held:

[78] It follows that as at 24 December 2007 (and indeed at the time of the

purported avoidance) the correct position is that Arcadia had only one

director, and I so find. Mr Andrew Guest was in fact and in law the only

director. Mr Bill Guest may have agreed to become a director, but at the

relevant time he was not one.

[31] The Judge made those holdings against the following undisputed chronology

of events:

Date Event

November or

December 2007

Mr Andrew Guest asks his brother Bill Guest to be a director

of Arcadia. Bill verbally agreed.

On or after 25

January 200818

Mr Bill Guest signed a form consenting, pursuant to s 152 of

the Companies Act 1993, to appointment as a director of

Arcadia (for unexplained reasons the form was backdated

3 January 2008).

7 October 2009 By unanimous resolution of shareholders pursuant to s 177

of the Companies Act 1993, Mr Bill Guest is appointed a

director of Arcadia (such a resolution was required because

Arcadia had no constitution and so directors were required to

be appointed by ordinary resolution: s 153(2). As this had

not happened, the shareholders ratified the appointment by

unanimous resolution).

[32] Mr Curry submitted the Judge erred because Mr Bill Guest was a de facto

director of Arcadia throughout. He submitted that the relevant date for assessing

who was a director of Arcadia was 25 January 2008 (the date by which cl 15 was to

be satisfied) and not 24 December 2007 (the date of the Agreement). That seems an

unnecessary submission, because Arcadia’s position is that Mr Bill Guest became a

18

In [71] of her judgment, French J stated “It was not disputed that the consent form had been

prepared on 25 January 2008”.

de facto director of Arcadia as soon as he agreed to accept appointment back in

November or December 2007.

[33] Mr Curry submitted that s 126(1)(b) of the Companies Act 1993 expressly

provides that “director” includes a de facto director in defined circumstances. Those

circumstances include the prohibition in s 136 on a director agreeing to the company

incurring an obligation unless the director believes the company will be able to

perform the obligation when required to do so. Mr Curry submitted “by extension,

this clause contemplates that a de facto director is empowered to agree to the

company incurring an obligation”.

[34] We do not accept this argument. First, s 126(1)(b) has the aim of treating as a

director of a company a person who acts in the ways set out in s 126(1)(b) for the

purposes of the sections of the Act specified in s 126(1)(b). To understand that aim it

is necessary to set out the relevant part of the section.

126 Meaning of director

(1) In this Act, director, in relation to a company, includes—

…

(b) for the purposes of sections 131 to 141, 145 to 149, 298,

299, 301, 383, 385, 386A to 386F, and clause 3(4)(b) of the

Schedule 7,—

(i) a person in accordance with whose directions or

instructions a person referred to in paragraph (a) of

this subsection may be required or is accustomed to

act; and

(ii) a person in accordance with whose directions or

instructions the board of the company may be

required or is accustomed to act; and

(iii) a person who exercises or who is entitled to exercise

or who controls or who is entitled to control the

exercise of powers which, apart from the

constitution of the company, would fall to be

exercised by the board.

[35] The sections specified include the provisions about directors’ duties (s 136 is

one of those sections),19

the provision which makes directors liable on liquidation

for transactions for inadequate or excessive consideration,20

the provision allowing

securities and charges granted in favour of directors to be set aside on liquidation,21

the provision allowing orders to be made against directors for repayment of money

or return of property,22

disqualification of directors,23

and prohibitions on certain

people from managing companies.24

So the purpose of s 126(1)(b) is to hold liable,

or treat as a director, a person who comes within its provisions, not to invest that

person with directorial authority. Section 126(1)(b) is not intended to cut across the

steps set out in the Act for the appointment of a director. The “extension” part of

Mr Curry’s argument is a misconceived attempt to constitute Mr Bill Guest a director

– to “empower” him to act as a director – for the purposes of cl 15 of the Agreement.

[36] Secondly, the evidence does not establish that Mr Bill Guest was a person

caught by s 126(1)(b), at least not in respect of the Agreement. French J made these

findings about Mr Bill Guest’s involvement in the Agreement:

[110] I also gained the strong impression from the evidence that any

consultation with the de facto director, Mr Bill Guest, was perfunctory. It

consisted of little more than Mr Andrew Guest verbally advising his brother

that he had had second thoughts,25

and Mr Bill Guest rubber-stamping that

decision.

[37] That finding was based on this evidence-in-chief from Mr Andrew Guest:

35. I did not have to consult Bill too greatly on the conditional purchase

of the Waimana house before getting to a point where the additional

valuation evidence … I had received along with my concerns with

regard to obstruction of the view by the new building in south front

of the house presented too much risk to Arcadia and a loss of

confidence in that purchase and as a result we felt that Arcadia

should not (and in fact then must not) proceed with the purchase.

Bill considered that unless there was some huge relief of the

uncertainty on those issues I should not proceed and he offered

assistance on the assessment of any further properties that may come

up. We agreed that this deal was to be brought to an end.

19

Companies Act, ss 131—141 and ss 145—149. 20

Section 298. 21

Section 299. 22

Section 301. 23

Section 383. 24

Section 385. 25

Their discussion(s) was never minuted, and there was no resolution.

[38] Under cross-examination Mr Andrew Guest added:26

… I know the process I went through with my brother in terms of the

assessment, I know I spoke to him for almost an hour for January the 9th and

that wasn’t to talk about the weather …

…

… I also, ah, I also had sent him two pix texts earlier in the day with

photographs, um, and ah spoke to him for just under an hour on the 8th of

January.

[39] Mr Bill Guest’s evidence-in-chief was:

13. In respect of the purchase of a property in Wanaka by Arcadia

Homes Ltd, Andrew described the key attributes of the properties he

had seen, including the Clark property. Although I did not visit

Wanaka myself and see the properties, it was clear to me that

Andrew had, after investigation, formed the view that the Clark

property had problems from his perspective. I listened to his

analysis, and as I had no reason to suggest any further investigation,

I supported a decision not to proceed with the purchase of the Clark

property.

[40] The cross-examination of Mr Bill Guest ended with this exchange in relation

to the purchase of the respondents’ property:

Q And so you say, “I listened to his analysis and as I had no reason to

suggest any further investigation I supported a decision not to

proceed with the purchase of the Clark property?”

A Yes

Q So Andrew made the decision and you saw no reason to disagree

with it?

A Correct.

[41] Sections 126(b)(i) and (ii) catch those people who are often referred to as

“nominator” or “shadow” directors: that is, those people who direct or have the

power to direct the actions of the appointed director or directors.27

The evidence

outlined above at [37] to [40] clearly establishes that Mr Andrew Guest was in no

26

Case on Appeal at 328. 27

An example of where these subsections may be engaged is where an employee is nominated by

their employer to be a director on a particular board in order to represent their employer’s

interests on that board. If the employee is required to or accustomed to act on the directions or

instructions of their employer, the employer may be classed a director for the purposes of

s 126(1)(b).

way, in terms of s 126(b)(i) and (ii), “required to or accustomed to act” in accordance

with the directions or instructions of Mr Bill Guest. Section 126(b)(iii) catches those

people who are not directors but who have managerial powers conferred on them by

the company constitution. That subsection has no application in this case because

Arcadia did not have a constitution.28

It therefore cannot be said, therefore, that

Mr Bill Guest was a person who acted in any way which resulted in him being

caught by s 126(b) of the Companies Act.

[42] It follows that we agree with the conclusions of French J set out in [30]

above. The two steps necessary formally to appoint Mr Bill Guest a director of

Arcadia were not complete until 7 October 2009. He was thus not a de jure director

at any of the times that could have any relevance to the Agreement, and in particular

its cl 15. The last of those times was 4 July 2008 when, by written notice, the

respondents cancelled the Agreement, after Arcadia had refused to settle the

transaction. Furthermore, for the reasons just outlined, Mr Bill Guest was not at any

time a director in terms of s 126(1)(b) of the Companies Act.

How did the fact that Arcadia had only one director affect the operation of

cl 15?

[43] French J viewed cl 15 as a third party approval clause. She explained:29

… The purpose of this clause, as represented to Mr Clark and confirmed by

its wording, was to accommodate the purchaser’s need to consult with third

party directors who would not be able to consider the contract until after the

Christmas vacation. The word “approval” only makes sense in the context

of an intention to refer the merits of the contract to other directors. The

clause implies that there were third party directors who could approve the

contract.

28

In Fatupaito v Bates [2001] 3 NZLR 386 (HC) at [46]–[47], O’Regan J held that the phrase

“which apart from the constitution of the company would fall to be exercised by the board”

implies a requirement that, for s 126(1)(b)(iii) to apply, there needs to be a provision in the

constitution giving that person powers which would have otherwise been exercised by directors.

We note that recently in Britton Built Ltd v Managh [2012] NZHC 2949, Gendall AJ said, in the

context of an interlocutory application to have liquidation proceedings struck out, “it is not really

contested here that Mr Bruce Greville could be considered a de-facto or deemed director

pursuant to s 126(1)(b)(iii) Companies Act 1993, if he is found to have exercised powers akin to

those of directors of the Company, even if that was not provided for in the Company’s

constitution.” 29

At [91].

[44] The Judge was satisfied that the word “directors” in cl 15 meant directors

lawfully appointed and able to act at the time the Agreement was made.30

The Judge

then stated:

[93] It follows that at the time the contract was formed, there was in fact

no one else whose approval was required. Mr Andrew Guest was the only

director, and it was he who signed the document in his capacity as director,

having personally selected the property and negotiated the terms of the

purchase. It was he who offered the price of $2m. As sole director, he had

the power to enter into a contract binding on the company. He had already

communicated his approval by signing a formal written agreement.

…

[100] There being no other directors, and Andrew Guest having already

approved the agreement, I accept Mr Withnall’s further submission that the

conditions necessary for cl 15 to operate according to its terms were never

present. Clause 15 was, in the circumstances, never operative. It was for

Arcadia’s sole benefit, and is severable from the balance of the contract,

leaving an unconditional contract. That contract remained on foot until

cancelled for repudiation by Arcadia in refusing to settle.

[45] Mr Curry advanced several arguments in an effort to expose this reasoning as

erroneous. First, he argued that the reference to “directors” in cl 15 should be

interpreted as encompassing Arcadia’s sole director, if there was only one. This

argument invoked s 127 of the Companies Act which provides that the terms “board”

and “board of directors”, in relation to a company, mean the company’s director if it

has only one director. We do not follow that argument. The Judge was not

concerned with the meaning of either of the two terms defined in s 127. They are not

used in cl 15.

[46] Secondly, Mr Curry argued that French J was not justified in implying into

cl 15 a term that the words “other than Mr Guest” were required after the reference

to Arcadia Homes Ltd. We do not follow this argument either. It is directed to [91]

of the judgment, which we have set out in [43]. What the Judge was saying in the

last sentence of that paragraph is that cl 15 conveyed to a person reading it that

Arcadia had directors other than Mr Andrew Guest because:

(a) the clause used the plural – “directors”; and

30

At [92].

(b) Mr Andrew Guest had signed the Agreement and added the word

“director” after his signature.

[47] The Judge was not implying a term, nor any words, into cl 15. She was

merely interpreting the words that were in the clause, in the light of the fact that

Mr Andrew Guest had signed the Agreement as director.

[48] Thirdly, Mr Curry submitted French J had conflated Mr Andrew Guest and

Arcadia, treating them as the same entity and overlooking that company law

specifically allows for a company to have only one director. This criticism was

directed to paragraphs [95], [98], [99] and [100] of the judgment. To take [98],

Mr Curry argued the conflation was in the wording:

It would involve attributing to Mr Guest an intention to require Mr Guest to

seek his own approval for something he had already done.

(Mr Curry’s emphasis.)

[49] We should immediately point out that what the Judge in fact said in that part

of [98] was:

It would involve attributing an intention to them [the parties] to require

Mr Guest to seek his own approval for something he had already done …

[50] Unlike the previous two arguments, we follow this third one, but we do not

accept it. In the paragraphs criticised by Mr Curry French J focuses, in relation to

the operation of cl 15, on the fact that Mr Andrew Guest was the only director of

Arcadia. It was, after all, the directors of Arcadia who were to approve the

Agreement. Arcadia as a legal entity separate from Mr Andrew Guest does not

feature in the Judge’s reasoning because it has no relevance to it.

[51] Fourthly, Mr Curry submitted that Mr Andrew Guest had signed the

Agreement as the authorised signatory of Arcadia. He pointed out that the Judge

accepted this because she stated “[the Agreement] was signed on behalf of Arcadia

by Mr Guest …”.31

That is surely correct. But it does not follow that Mr Guest did

not sign the Agreement in his capacity as a director of Arcadia or, as the Latin

31

At [14].

succinctly puts it, qua director. As we pointed out in [4] above, before his signature

Mr Guest added ‘Director’. The correct position is that Mr Andrew Guest signed the

Agreement both as the director of Arcadia and as its authorised signatory.

[52] Whether cl 15 had any practical effect given that Mr Andrew Guest had

signed the Agreement and was Arcadia’s only director is a nice question. On the one

hand, there is force in French J’s view that it made no sense to interpret cl 15 as

affording Mr Andrew Guest an opportunity to approve what he had agreed to. The

Judge’s interpretation is supported by the post-agreement conduct of both parties.

What each did is consistent only with an interpretation that cl 15 envisaged approval

by a board of at least two directors. Arcadia’s conduct comprised its attempts to

formalise, with retrospective effect from 3 January 2008, the appointment of Mr Bill

Guest as a director. On the respondent’s part, on 10 January 2008 Mr Clark emailed

Arcadia’s solicitors making this request:

I would like a copy of the directors resolution from their meeting or a copy

of the letter sent to you.

That was Mr Clark’s initial response on receiving the 9 January fax from Arcadia’s

solicitors advising the Agreement was at an end.

[53] The alternative view – and the one we prefer – is that cl 15 did operate to

give Mr Andrew Guest a month to consider whether he should approve the

Agreement on behalf of Arcadia. That involves drawing a distinction between

Mr Andrew Guest signing the Agreement as director, and his approving it as director.

The approach envisages Mr Andrew Guest making or commissioning inquiries or

investigations, or obtaining reports or information, and resulting consideration of the

Agreement in the light of that, all of which had not been possible – or at least had not

been undertaken – when the Agreement was signed.

[54] If this alternative approach is accepted, then the question arises, what sort of

investigations or inquiries or information gathering by Mr Andrew Guest did cl 15

permit? Or, put more shortly, what did Arcadia’s director need to do to satisfy cl 15?

Against the event that she was wrong in saying that cl 15 had no legal effect,

French J did consider this further question. We now turn to it.

What did Arcadia’s director need to do to satisfy cl 15?

[55] French J answered this question in the following passage in her judgment

(though she does so on the assumption – which she had rejected – that Mr Bill Guest

was also a director of Arcadia):

[102] Clause 8.7 of the agreement required Arcadia to do all things that

may be reasonably necessary to enable the condition to be fulfilled by

25 January 2008.

[103] In the circumstances, that means in my view as follows.32

First, that

Mr Andrew Guest was obliged to report to his fellow director in good faith

on the details of the transaction to which he had conditionally committed the

company. His briefing would be required to objectively provide sufficient

information and background for the director(s) to be able in turn to make a

bona fide independent decision on the merits based on objective

consideration. As Mr Withnall acknowledged, the scope of the matters able

to be considered by them would be broader than say the matters which a

solicitor is able to take into account under a “subject to solicitors’ approval”

clause.33

Nevertheless, the consideration must still be within the confines of

their role as director. The sorts of matters to be taken into account must be

the sorts of matters which directors usually take into account when

considering the acquisition of a major asset.

[56] In considering the “sorts of matters” the Judge referred to at the end of her

[103], a good starting point is to look at the matters Mr Andrew Guest himself had in

mind when he inserted cl 15 into the draft Agreement. We say that, not only because

Mr Andrew Guest put the clause in, but because what he said at that stage has

cogency, given his credentials. We first outline what those credentials were.

[57] Mr Andrew Guest said in evidence that he had been admitted as a barrister

and solicitor in 1999, and had held a practising certificate for the last 11 years. He

said he had been involved in property investment and management for the past

25 years. He was an executive director of the Viranda Group of companies. He

agreed that:

… Among the services that Group offers to its clients are research, the

property investment market, selecting those propositions that best suit the

client requirements.

32

Relying by analogy on decisions such as Provost Developments v Collingwood Towers Ltd

[1980] 2 NZLR 205 (CA) and Lerner v Schiehallion Nominees Ltd [2003] 2 NZLR 671 (HC). 33

Mr Withnall acknowledged, for example, that if the directors were to obtain a registered

valuation that was significantly lower than the purchase price, then that was capable of being a

valid reason for withholding approval.

He said that Viranda had a staff of 10 and managed 400 buildings. He was a director

of “close to 100 companies” and – we think describing the Viranda Group’s asset

base – stated “the wider estate’s worth a bit over $10 million”.

[58] When the Agreement was being drawn up by the estate agent,

Ms Walker-Hughes, of Professionals Real Estate in Wanaka, Mr Andrew Guest told

her that he wanted a “subject to directors’ approval” clause put in the Agreement,

and dictated cl 15 to her over the telephone. He said he outlined to

Ms Walker-Hughes the inquiries Arcadia would need to make before its directors

were in a position to consider approving the Agreement. They were these:34

(a) asking its lawyer to “look at the title issues”;

(b) “enquiries with regard to the title on the empty Lot in the front of the

property … whether it was one Lot or two potentially resulting in the

potential of either one house or two which might obstruct views to the

lake”;

(c) “to look at the plans for the house that was starting to be constructed

on the Lot to the south;

(d) “to see if I could also negotiate the purchase of chattels from the

vendor”;

(e) “to check on financing from the bank as bridging finance would be

required pending the sale of the Queenstown apartment”; and

(f) “to be quite sure that the selling figure that the vendor was expecting

represented true value and could be supported”.

[59] We interpolate here that Ms Walker-Hughes recalled Mr Andrew Guest

mentioning to her (b) and (c) and also that “the purchaser wanted to check into the

34

These are drawn from paragraph 20 of Mr Andrew Guest’s brief of evidence.

zoning and that … also … he had to figure out if the internal layout would work for

him”. She did not recall Mr Andrew Guest mentioning (a), (d), (e) or (f).

[60] In the course of cross-examination, Mr Guest was asked about most of these

matters. As to (a) he agreed that he had never requested either a LIM or a guaranteed

title search. He explained – twice – “it wasn’t required”. As to (b), he agreed that he

had not done that either. He stated “I didn’t need to make those enquiries”.

Similarly with (c), he stated “I didn’t need to do that, no”. He agreed he had

commenced a process to see if he could purchase the chattels – (d). As to (e), he

agreed that he needed substantial bridging finance because the Queenstown

apartment property sold for $690,000, but intimated that bridging finance was not an

issue. It was at that point that he mentioned Viranda’s $10 million plus asset base.

Somewhat out of the blue in the course of re-examination he stated “I contacted my

bank about Waimana”. Finally, on (f), he agreed that he had not consulted a valuer at

any stage in relation to the property. Again he stated “I didn’t need to”.

[61] In re-examination Mr Andrew Guest was asked why he had not obtained a

title search for the Waimana property. He answered:

Because the information that I was receiving about valuation, other

transactions that had gone on in the district, what potentially could happen

on the very sizeable lot to the west of the subject property and the extent of

the building platform on the house being built to the south told me that this

property had considerable risk associated with it. It certainly wasn’t worth

that figure.

Then, asked why he did not need to consult a valuer, he explained:

Because I had sufficient evidence from the discussions with the agents, the

discussions with the particular vendor’s agent in this case and more research

being in Wanaka on the transactions that had taken place. The, the property

was well under that, that sum which I now know is confirmed by Mr Clark’s

own valuation the following month. So my assessment was correct and it

was detailed, you know, barring the odd social occasion, this was the project

for this break. I, I took it seriously. Not frivolously. …

[62] Also in re-examination he explained for the first time that he had obtained

some information from the Internet:

Ah, one was Google [E]arth searching so that I could take a, ah,

topographical view of the house, the lines to the lake, the distances to the

lake, measurements and the size of the lot in front to see if it was

subdividable as of right, which it is. And the size of the building platform on

the – what I now know to be the very substantial house to the southwest. I

also did searches with regard to, um, Terralink.co.nz to find how long Mr

Clark had owned the place which would be fairly standard for me. Can’t

recall the information but he’d owned it for some time. I also did, ah,

TradeMe and real estate agency type site to get a comparison so I could

determine a comparison between rate per square metre of freehold land, rate

per square metre of building cost, because a relevant factor in valuation is

the comparison between replacement cost and second-hand value. So I put a

lot of information together and it wasn’t a, a labour of burden, it was a

labour of love. I was enjoying this process.

[63] To summarise thus far, of the six matters set out in [58] above, Mr Andrew

Guest accepted under cross-examination that he had only embarked on (d). In

re-examination he attempted to counter that in respect of (b), (c) and (e). We note

that French J made the following credibility findings about Mr Andrew Guest:

“I did not find Mr Guest a particularly credible witness.”35

“I also found other aspects of Mr Guest’s evidence inherently implausible.”36

[64] In the passage in his evidence-in-chief set out in [37] above, Mr Andrew

Guest referred to “additional valuation evidence” he had received. Under

cross-examination it emerged that this comprised an email sent to Mr Guest by

Ms Cecily Anderson of Professionals Real Estate in Wanaka (Ms Walker-Hughes’

firm) on the afternoon of Saturday 5 January 2008. That is the day before

Mr Andrew Guest signed the Agreement to purchase the Ridgecrest property. The

content can be summarised thus:

it advised she would need to check with the Council on Monday about the

set-backs in Waimana Place, as the zoning is rural residential and the district

plan “isn’t that clear”;

it advised no properties had sold in Waimana Place in 2005 or 2007;

35

At [50], repeated at [54]. 36

At [53].

it gave the sale prices of three sales in Waimana Place in May and August

2006;

it advised that Ms Walker-Hughes had spoken to Mr Clark “re the furniture

and we should have a decision by Monday”.

[65] It was put to Mr Andrew Guest that the 5 January email contained sale

figures for three other properties in Waimana Place over a year earlier, and was not

valuation evidence relating to 21 Waimana Place. He did not accept that, although

he did accept that the content of the email was “not conclusive”. Mr Andrew Guest

agreed that the Wanaka property market had been very buoyant between the dates of

the three 2006 sales recorded in the 5 January email and the end of 2007. There

followed this cross-examination:

Q Okay, what other valuation evidence did you have apart from this?

A From the 18th of December I’d embarked on quite an extensive

exercise visiting five agencies, making comparisons of 12 properties

and I’d carried out as much Internet research as I could. And when

you look at, ah, the area of freehold lots, when you look at

comparable sales, even ones 12 months beforehand, and when you

have discussions with other agencies collectively who have all of the

listings in Wanaka, you can form a competent view about value.

Q All right. And you had done all that on the 19th, the 18

th and the 19

th

of December hadn’t you?

A No.

Q You had had all those discussions with agents on your 24 hour visit?

A No. That’s absurd. How would I have set up those meetings if I

hadn’t been in contact with the agents beforehand? My interest in

having a property down there, um, was born really in about

November and from that point it was probably in the forefront of my

mind over my lifestyle move, my family’s lifestyle move in Central

Otago. The idea of arriving on the 18th and embarking on the

exercise is nonsense. I embarked on a considered, careful, research

exercise to locate a suitable property.

Q So you’d done all that before you arrived in Wanaka on the 18th?

A I had. It wasn’t conclusive or 100% but it was as much time as I

could allocate and I felt I had a reasonable knowledge.

[66] The somewhat obvious point about that “other valuation evidence” is that

Mr Andrew Guest had all of it by the time he entered into the Agreement on

24 December 2007.

[67] French J noted that Mr Andrew Guest had also sought advice from two

Wanaka property owners.37

This refers to the following part of an answer

Mr Andrew Guest gave on 7 October 2009 to an interrogatory. Mr Guest deposed:

Between 24 December 2007 and about 5 January 2008:

…

9.2 I showed the property to my brother, Michael Guest, a Wanaka

property owner, and sought his opinion of the value of the property.

9.3 I also showed the property to a friend and long-time Wanaka

resident, Mr John Laidlaw, and sought his opinion of the value of the

property.

…

[68] In relation to cl 15, cl 8.7(2) of the Agreement obliged Arcadia to “do all

things which may reasonably be necessary to enable the condition to be fulfilled by

the date for fulfilment”.

[69] In Lerner v Schiehallion Nominees Ltd Potter J considered whether the words

“satisfactory to the purchaser” in a contractual clause imported a subjective or

objective test.38

Having considered the views expressed in the leading texts and a

number of decided cases, Her Honour held:39

… A party will be bound by the contract to which he has committed unless

on the basis of a fair and reasonable decision in terms of a condition

subsequent inserted in the contract for the benefit of the party seeking to rely

upon it, he is entitled to be relieved of his obligations under the contract.

[70] In order to make “a fair and reasonable decision” under cl 15 as to whether or

not to approve the Agreement, we consider Mr Andrew Guest needed to have at least

a guaranteed title search for the Waimana property, a LIM and a valuation from a

registered valuer. He did not have any of those three things.

37

At [108]. 38

Lerner v Schiehallion Nominees Ltd [2003] 2 NZLR 671 (HC). 39

At [38].

[71] It is significant – indeed quite telling – that on Monday 7 January 2008 he

contacted his solicitor to arrange an urgent LIM and a guaranteed title search for the

Ridgecrest property he had purchased conditionally the previous day.

[72] Mr Andrew Guest claimed for the first time in re-examination that he had

done some searching on the Internet but there had been no discovery, nor was there

anything else, to substantiate that. The only “hard” information Mr Andrew Guest

obtained after signing the Agreement was the sales information in the 5 January 2008

email summarised above in [64].

[73] In their 9 January 2008 fax to the respondents’ solicitors (set out at [9]),

Arcadia’s solicitors stated:

We are now advised by the directors of our client company that following

inspection, valuation advice and ancillary due diligence investigations the

directors are unfortunately not satisfied as to the property purchase and

accordingly the Agreement is at an end.

[74] When questioned about that letter Mr Andrew Guest stated “They’re his [the

solicitor’s] words but they’re my instructions”. He said he had not used the words

“inspection or valuation advice” but “very likely” had, in instructing his solicitor,

mentioned “due diligence”.

[75] French J observed:

[109] My general impression from the evidence was that any further

enquiries undertaken between 24 December 2007 and 9 January 2008 were

limited.40

That impression, if anything, understates the position.

[76] What actually happened or did not happen emerges fairly clearly from all the

evidence. Having signed the Agreement, Mr Andrew Guest took few of the steps he

had himself said would be necessary to enable him to comply with cl 15. And he

took none of the important steps. To be fair to him, there were only seven working

days between the signing of the Agreement on Christmas Eve and the solicitor’s

40

The evidence does not support the claim in Arcadia’s solicitors’ letter of 9 January 2008 that the

decision not to approve was made following valuation and due diligence.

letter of 9 January 2008. On 6 January he purchased a different property

conditionally, and immediately set about taking proper steps to enable him to make

this other agreement unconditional. Three days later on 9 January he purported to

terminate the Agreement. What French J concluded in the following passage in her

judgment is well justified:

[95] It is an inescapable inference from the evidence that Mr Guest

employed cl 15 as a device to lock the plaintiffs into holding the property

over the critical summer period without providing any consideration, while

he looked around to see if he could find something better.41

In effect, what

was to all outward appearances a third party approval clause was in reality a

cover to obtain an option which he must have known Mr Clark would be

unlikely to give having regard to the time of year.

[77] The evidence also well supports French J’s conclusion:

[111] On anyone’s view of it, that is not what was contemplated by cl 15.42

[78] We agree. If cl 15 operated at all, it was breached by Arcadia because it did

not comply with cl 8.7(2) as it related to cl 15.

Result

[79] The appeal is dismissed.

Costs

[80] Mr Withnall invited us to award costs against the liquidator personally, on the

basis that he is indemnified by the funder of this appeal. Mr Withnall did not

elaborate.

[81] If Mr Withnall wishes to pursue that request, then he is to file and serve a

memorandum by 19 July 2013. The memorandum should provide us with details of

the funding arrangement, and refer us to any authorities Mr Withnall relies on. Any

memorandum in response is to be filed by 2 August.

41

As to the effect of which, see La Rosa v MacEnnovy Trust Ltd (2011) 11 NZCPR 930 (HC). 42

By “it”, French J was referring to Mr Bill Guest rubber-stamping Mr Andrew Guest’s decision,

which was made on the basis of only a few of the inquiries Mr Andrew Guest himself

contemplated making at the time he inserted cl 15 into the Agreement.

[82] In the event that Mr Withnall does not file a memorandum in terms of [81],

then our order is that the appellant is to pay the respondents’ costs for a standard

appeal on a band A basis with usual disbursements.

Solicitors: McVeagh Fleming, Auckland for the Appellant Lucas & Lucas, Dunedin for the Respondents