Meripa Investment Partnership v Kairua [1990] CKHC 2; Plaint No 10.1990 (29 August 1990)

IN THE HIGH COURT OF THE COOK ISLANDS
HELD AT RAROTONGA
(CIVIL DIVISION)
Plaint No. 10/90

BETWEEN

MURRAY ARTHUR HOARE,
JOHN WINIATA TAKITIMU PORTER,
STEPHEN JOHN EDWARD GOODHUE
and RISSA GOODHUE,
suing in the name of the firm
MERIPA INVESTMENT PARTNERSHIP
Plaintiff

AND

AKEAU KAIRUA
First Defendant

AND

MERIPA LIMITED
Second Defendant

Counsel: Mr BJ Gibson for Plaintiff
Mr A Manarangi for Defendants

Hearing: 26, 28, 29 and 30 May 1990
Judgment: 29 August 1990

JUDGMENT OF ROPER C.J.

Before stating the nature of this claim it is necessary to consider some background.

On 15 November 1989 the plaintiffs entered into a deed of partnership (the partnership) with its primary objects being:

"Purchasing shares in Meripa Limited; purchasing plant and equipment to enable the establishment of a pearl farming venture in the Cook Islands and for sale to Meripa Limited; and the making of loans to Meripa Limited."

Clause 7 of the deed defines "partnership capital" as follows:

"(a) THE capital of the Partnership shall be divided into Units of THIRTY THOUSAND DOLLARS ($30,000) each representing the amount contributed and/or to be contributed by the holder thereof to the capital of the Partnership;

(b) THE partners shall contribute to the capital of the partnership in proportion to the number of units owned by them;

(c) THE total capital of the Partnership shall be such amount as may from time to time be considered necessary by the partners."

According to the schedule annexed to the deed Hoare and Porter were each allotted one unit of $30,000 and the Goodhues one unit to be held jointly.

On the same day the first defendant Kairua entered into an agreement with the partnership. The recitals to the agreement read:

"WHEREAS

(1) The Developer (being Kairua) has access to certain expertise, labour and organisational skills together with certain rights to develop a Pearl Farm venture in Manihiki the Cook Islands and;

(2) The investor has access to certain investment capital and marketing structures and organisations and is willing to invest in the Pearl Farm venture and;

(3) The parties wish to commence a joint venture for the purposes of developing a Pearl Farm in Manihiki the Cook Islands to sell promote and market their product, splitting the profit in the manner hereinafter defined and;

(4) The Parties have formed a company Meripa Limited, ("the Company"), at Rarotonga, in the Cook Islands, for the purposes of carrying out the venture."

It is only by inference that the "investor" in para (2) can be identified as the partnership, and at that stage the Meripa company had not in fact been formed.

The following is a summary of the provisions in the agreement relevant to the present inquiry:

1. The Meripa company was to have a nominal capital of $100 in 100 shares of $1, with the shareholding to be held as to 70% by Kairua or his family and as to 30% by the partnership provided it loaned the company $299,990 by 5 January 1990 and subscribed for the 30 $1 shares by that date. In the event of the partnership not meeting that dead-line the partnership was to be entitled to three shares for each $29,997 loaned to the company. If the partnership took up fewer than 30 shares by 5 January Kairua, or his nominees, were entitled to subscribe for the balance.

2. The company was to have five directors of whom three were to be appointed by Kairua; and the secretary was to be a person nominated by the company's solicitor or a person agreed upon by all shareholders.

3. Clause 2 of the agreement deserves to be set out in full. It reads:

"The investors will provide the capital and funds required to set up the Company and to run it until such time as the Company is self sufficient such funding being to a minimum of $59,994.00 and to a maximum level of $299,997.00. The funding shall be by way of a loan to the Company such loan or part thereof to be repaid only on the unanimous decision of the directors of the Company exercised at their discretion, but otherwise shall not be repayable and shall not incur interest. In particular the loan shall not be reparable until such time (if over) as the profits of the Company enable repayment or part repayment to be made."

That clause is hard to reconcile with a later clause (16) which reads:

"The company shall execute in favour of the partners of the Partnership a first ranking debenture in the form attached hereto which shall be given as security for the advances to be made by the Partnership to the Company both for the purchase of the plant and equipment and otherwise."

4. Company profits are to be distributed at the discretion of the directors.

5. The company was to be run and conducted "in a spirit of mutual co-operation, helpfulness and understanding between the parties."

6. Kairua (or his nominee) "as soon as possible following execution of the agreement" was to purchase the necessary equipment, ship it to Manihiki and take all steps necessary to obtain licences to farm pearl shell. The Meripa company was duly formed and registered although it appears from its Memorandum of Association that the only business it probably couldn't carry on was pearl farming.

The Plaintiffs' Claim

There are three heads of claim and the first is alleged breach by Kairua of the agreement of the 15th November in that in a number of respects he did not run the company "in a spirit of mutual co-operation, helpfulness and understanding" as required by Clause 4 of the agreement. The second ground is that the agreement was unfair, harsh and unconscionable and should be set aside; and the third, which was something of an afterthought and is contained in an amended claim filed the day before the hearing (without objection) alleges misrepresentation.

The Plaintiffs seek to recover all moneys they paid towards setting up the pearl farming venture. Counsel are agreed that equipment purchased by the Plaintiffs at present stored in Rarotonga and having a value of about $42.500 is the property of the Plaintiffs Porter and Goodhue. The following sums are in issue:

$8.000.00 in the Westpac Bank, Rarotonga.

$2,000.00 withdrawn by Kairua from the Westpac Bank Account and used partly for his own use and partly for the pearl farming venture.

$7,176.09 Freight on equipment shipped to Rarotonga.

$620.00 insurance on freight.

$5,923.55 Legal fees.

$60.00 Miscellaneous maps and plans.

$2,133.00 Air fares for Kairua, his wife and daughter's de facto husband.

$5.000.00 Advanced to Kairua and used mostly for living expenses for himself and his family in Rarotonga while awaiting shipping to Manihiki.

The Facts

Kairua who is now 60, was born in Manihiki and left there in 1948. He has returned for periods of up to three or four years until he left for New Zealand in 1975. He dived for pearl shell in Manihiki but his last season was in 1974. It appears that he was interested in pearl farming on his own account and in 1985 went to Tahiti for some months to observe farming. He also went to Western Australia.

He said that he met the Plaintiff Hoare in about 1987 and a Mr Curd, whose role in this affair is a real mystery, some time later. It appears that he discussed his pearl farming plans with them. While on a business trip overseas Hoare made some inquiries about markets for black pearls and the prices to be expected. Hoare and Curd then set about finding investors for the pearl farming venture, although it seems that Curd was the more active for it was he that approached Porter and Goodhue who were then both friends of his, but no longer. Porter is an insurance consultant and I understand Hoare and Curd were in the same line of business. Goodhue described himself as a shopkeeper.

Porter said that when he was first approached by Curd he was shown a cash flow chart, which was apparently prepared by Goodhue (who was presumably recruited first) on information supplied by Curd. It is not clear who was the primary source of the information but Goodhue presumed it came from Kairua. The cash flow chart is truly a remarkable document. It provides for a capital outlay of about $220,000 over the period September 1989 to March 1990 and thereafter monthly expenditure of about $2,900 for wages and salary, resulting, according to the chart, in an income of $83,200 in March 1991 and no less than $8 million in September 1991. Porter and Goodhue seemed to take this cash flow chart at face value although Curd and Hoare obviously didn't because they did not invest. The idea was that there were to be ten investors each providing $30,000 but in the result only Porter and Goodhue contributed $30.000 and in return each received three shares in Meripa.

After seeing the cash flow chart Porter met Kairua who confirmed that $8 million could be expected from the first pearl harvest. Goodhue gave evidence to the same effect.

Porter said that at a meeting of the 12th November 1989 Kairua promised Goodhue and himself the 24 shares in Meripa which had not been taken up, with no more money payable at that stage.

On the 15th November the documents earlier referred to were executed in the office of a solicitor, Mr Holmes, in Auckland. All the documentation had been prepared by Holmes but who instructed him to do so is a mystery. I think it can be accepted that neither Porter nor Goodhue did and Kairua denied that he did. Kairua said that his understanding was that Hoare and Curd had instructed Holmes and that it was they, together with some person called Paul, who introduced him to Holmes.

Plant and equipment for the pearling venture was purchased and shipped to Rarotonga on or about the 6th December, and at about the same time an argument developed between Kairua and Hoare but what that was about I do not know. Porter acted as mediator and apparently peace was restored.

Kairua went to Rarotonga in early December to look after the equipment and arrange its shipment to Manihiki. His air fares and those of his wife and a diver were paid for out of the $60.000 contributed by Porter and Goodhue, as was the freight and insurance on the equipment.

In late February 1990 Kairua returned to New Zealand, at which time the equipment was still sitting in Rarotonga and indeed is there to this day. In March there were discussions between Kairua, Porter and Goodhue concerning additional finance and the transfer of the 24 shares to Porter and Goodhue.

On the 3rd March the Directors of Meripa, Kairua, Porter and Goodhue passed the following resolution:

"1. That $10,000 be paid to (a) cover shipping costs for equipment and personnel of Meripa Ltd from Rarotonga to Manihiki (b) for setting up costs of pearl farm in Manihiki.

2. A further $30,000 be paid in June 1990, (transferred to Westpac Bank, Rarotonga) for maintenance and living costs of pearl farm personnel through to June 1991.

3. That Akeau Kairua, the Developer, in terms of the agreement of 15 November 1989, agreed to the transfer of the balance of shares in Meripa Ltd (24%) equally to John Winiata Takitimu Porter and Stephen John Goodhue."

Although it is not all that clear from the resolution itself the intention was that the $10,000 and $30,000 were to be paid by Porter and Goodhue. The $10,000 was duly paid into the Westpac Bank in Rarotonga on the 12th March by which time Kairua had returned to Rarotonga. On or about the 15th March Kairua wrote to the Westpac Sank advising that he would be travelling to Manihiki on the 17th March, and on the 16th he withdrew $2,000 from the account. Neither the equipment nor Kairua sailed for Manihiki on the "MOANA" on the 17th and in mid - April Kairua returned to New Zealand ostensibly to obtain medication for gallstones which was not available in Rarotonga. This suggestion that Kairua was not as physically fit as they believed concerned Porter and Goodhue for Kairua was to be the main diver. That is surprising because Kairua presented as a grossly overweight unfit individual.

In Kairua's absence in Rarotonga Porter and Goodhue had tried to arrange the transfer to them of the 24 shares, but Kairua's daughter, who apparently had authority to act for her father, would do nothing about it.

At a meeting on the 23rd April Porter and Goodhue were told by Kairua that Curd and Hoare (who were present at the meeting) were to be made shareholders and directors of Meripa and that they, Porter and Goodhue, would not receive the 24 shares. Porter told Kairua he wanted to withdraw from the arrangement. The next day Kairua rang Porter in some distress and indicated that he wanted to resolve their differences. Porter suggested a meeting in Holmes' office on the 26th April but Kairua said he had to return to Rarotonga. Porter offered to pay an extra air fare if Kairua delayed his departure because a meeting was essential. Porter thought a meeting was arranged but later discovered that Kairua had left New Zealand on the 25th.

That, so far as Porter and Goodhue were concerned, was the end of the pearl farming venture. It appears that it was the failure to transfer the shares and the appointment of Hoare and Curd as shareholders, when they had provided no capital, which influenced Porter and Goodhue to withdraw. Goodhue felt that he had been betrayed by Hoare and Curd and blamed himself for any loss suffered.

The Plaintiffs' Allegations

Unconscionable Bargain

Mr Gibson submitted that the partners' agreement with Kairua was unfair, harsh and unconscionable and should be set aside. The facts on which he relied (and my comments thereon) can be summarised thus:

1. Holmes was not Porter's or Goodhue's lawyer and they received no independent legal advice nor were advised to do so. (There is real doubt as to whose lawyer Holmes was. I believe there was a suggestion that he was the lawyer to Hoare and Curd. Be that as it may, Porter and Goodhue went through the document and it was read to them by Holmes. Porter said he thought he understood it. If they did not understand it, it was open to them to seek independent advice. They are both businessmen.)

2. Neither Porter nor Goodhue had any knowledge of pearl - farming. (There was no reason why they should. They were simply investors, who thought they were on to a good thing, and may well have been if the venture had not been entered into in such frantic haste and undercapitalised.)

3. That the terms of the agreement itself were onerous in certain respects. (There is no doubt that the terms favoured Kairua but that must have been obvious to any prudent businessman and there is no suggestion that Porter or Goodhue were in need of special protection.)

The equitable jurisdiction to set aside unconscionable bargains is not a paternal jurisdiction protecting or assisting those who repent of foolish undertakings. Whether a transaction is or is not unconscionable depends on the particular facts of the case. In Hart v. O'Connor (P.C.) [1985] UKPC 1; 1985 1 A.C. 1000 Lord Brightman said at p. 1024:

"In the opinion of their Lordships it is perfectly plain that historically a court of equity did not restrain a suit at law on the ground of 'unfairness': unless the conscience of the plaintiff was in some way affected. This might be because of actual fraud (which the courts of common law would equally have remedied) or constructive fraud, i.e. conduct which falls below the standards demanded by equity, traditionally considered under its more common manifestations of undue influence, abuse of confidence, unconscionable bargains and frauds on a power. (cf. Snell's Principles of Equity, 27th ed. (1973). pp. 545 et seq.) An unconscionable bargain in this context would be a bargain of an improvident character made by a poor or ignorant person acting without independent advice which cannot be shown to be a fair and reasonable transaction. 'Fraud' in its equitable context does not mean, or is not confined to, deceit; it means an unconscientious use of the power arising out of these circumstances and conditions' of the contracting parties; Earl of Aylesford v. Morris [1873] UKLawRpCh 28; (1873) L.R. 8 Ch. App. 484, 491. It is victimisation, which can consist either of the active extortion of a benefit or the passive acceptance of a benefit in unconscionable circumstances.

Their Lordships have not been referred to any authority that a court of equity would restrain a suit at law where there was no victimisation, no taking advantage of another's weakness, and the sole allegation was contractual imbalance with no undertones of constructive fraud."

I am of the opinion that put at its highest there is nothing in the facts of this case to suggest anything more than a measure of imbalance. I therefore reject the Plaintiffs' claim under this head.

Misrepresentation

The basis for this allegation is what Kairua is alleged to have told Porter and Goodhue concerning the financial future of the venture, it being alleged in the amended statement of claim that Kairua represented that the partnership would make approximately $8 million within a two year period from a 20,000 pearl shell farm and $80 million from a 300,000 pearl shell farm.

I note that the cash flow chart prepared by Goodhue refers in fact to an $8 million profit from 60,000 pearls. A further difficulty is that there is uncertainty as to who provided these outrageous figures. Curd certainly had a hand in it and Hoare, who was alleged to have inquired into pearl prices on visits overseas.

Porter did acknowledge that he would have become involved in the venture if the profit had been only $1 million. Porter and Goodhue entered into this venture in the belief that a handsome profit would be made, as may well have been the case if the venture had been handled carefully, but I cannot accept that their expectations were anything like the profit figures that were bandied about. I cannot imagine they would have withdrawn from the venture with such haste if they had really believed that such enormous fortunes were to be made.

I therefore reject the allegation of misrepresentation.

Breach of Contract

The basic allegation here is that Kairua failed in his obligation under Clause 4 of the agreement to run and conduct the Meripa company "in a spirit of mutual co-operation, helpfulness and understanding". There are a number of sub-allegations under this head which in my opinion do not call for consideration, such as whether the Secretary of the company was properly appointed, whether too many directors were appointed, whether accounts were provided, and whether the company cheque book was operated in terms of the agreement. The real crux of the matter, and what influenced Porter and Goodhue to withdraw, was the alleged failure to transfer the 24 shares and the appointment of Hoare and Curd as directors. As to the appointment of Hoare and Curd, that was within Kairua's power, who, in terms of clause 1(e) of the agreement, had power to appoint three directors including himself. Kairua's daughter Noare was appointed as an alternate to Kairua.

As for the 24 shares there is not much doubt that Kairua promised them to Porter and Goodhue but Mr Manarangi submitted that the transfer in terms of the resolution of the 3rd March 1990, was subject to the payment by Porter and Goodhue of a further $40,000 and only $10,000 was actually paid. However, $30,000 of that sum was not to be paid until June 1990, and it was on the 23rd April that Kairua informed them that they would not be getting the shares.

I am satisfied that Porter and Goodhue were justified in withdrawing from the scheme and treating their agreement with Kairua as at an end, but I am not prepared to award the full damages as claimed and for this reason. There is every indication that this venture failed because of the influence and intervention of Curd and Hoare (who is in the curious situation of being a plaintiff). Porter accepted that one reason why the venture turned sour was Hoare's intervention; and Goodhue went further and said "I was betrayed by Curd and Hoare."

I therefore make the following orders:

1. The goods and equipment, having an approximate value of $42,500, at present stored in Rarotonga is the property of Porter and Goodhue.

2. The $8,000 in the Westpac Bank in Rarotonga is the property of Porter and Goodhue.

3. There will be judgment for Porter and Goodhue against the First Defendant for the sum of $2,000 withdrawn from the deposit of $10,000 in the Westpac Bank.

4. Porter and Goodhue are awarded costs and disbursements against the First Defendant to be fixed by the Registrar.

ROPER CJ