Grant v File [2005] CKHC 3; PLT 57 of 2003 (22 April 2005)

IN THE HIGH COURT OF THE COOK ISLANDS
HELD AT RAROTONGA
(CIVIL DIVISION)

PLT NO. 57/2003

BETWEEN

ROSS GRANT of Rarotonga,
Businessman
Plaintiff

AND

JONATHAN EDWARD FILE
of Rarotonga, Company
Director
Defendant

Mr Robinson for Plaintiff
Mr George for Defendant

Dates of hearing: 20 April 2005 and 22 April 2005
Date of Judgment: 22 April 2005

JUDGMENT OF NICHOLSON J

[1] The Plaintiff seeks damages from the Defendant of $15,000 and interest and costs. He has pleaded in his amended Statement of Claim two courses of action. The first is alleged breach of contract and the second is misrepresentation. I am somewhat unsure as to the juridical basis of the claim for misrepresentation, whether it is misrepresentation in contract or it is for the tort of deceit.

[2] Innocent misrepresentation which would be contract negligence and fraud which would be deceit. Misrepresentation is alleged on the basis of misrepresentation in contract, negligence and fraud which is misrepresentation in deceit.

[3] I have heard the evidence of the Plaintiff Mr Grant and the evidence of Mr File.

[4] In his Statement of Evidence Mr Grant said that in or about December 1999 Mr File offered him a 25% shareholding in Pacfruit and a position on the Board of Directors in consideration for his investment of $15,000 in the company. He further advised him that in addition to these benefits he could expect to receive a $40,000 financial return on his investment within the first year. He said that so far as he was concerned he was dealing with Mr File personally and he said that Mr File told him that in return for the $15,000 he would assign to him some of his own shares rather than the company allocating new shares and thereby diminishing the value of existing shares. He said that he wrote out a cheque for $15,000 and at Mr File’s request made the payee Pacfruit.

[5] In his oral evidence and particularly in cross examination Mr Grant said "I lent the money to Mr File, did not lend the money to the company. As far as I was concerned I lent Mr File $15,000." Asked whether "was it buying shares in the company or loaning Mr File $15,000, Mr Grant answered "I think originally it was lending him $15,000. When I gave him the cheque I thought I was making a loan to Mr File and in further discussions he said it was going to be invested."

[6] In cross examination he said "I accept my $15,000 was an investment which did not work."

[7] Mr File in evidence said that Mr Grant had approached him about September 1999 concerning a joint business venture with an ice cream machine but that when Mr File checked the machine out he thought it was not worth the price being asked and told Mr Grant that but some two weeks later he asked Mr Grant if he was interested investing in Pacfruit, the company that he had started. He said that Mr Grant asked him to furnish documents about projections which he did by giving him a handwritten document and later by giving a typed document, a copy of which has been produced to Court. It had Proposal For Joint Venture Fruit Planting Project. In that it is stated under the heading "For the Investor" for the introduction of $15,000 capital we will give a 25% shareholding in the company and the investor will be made a director. We don’t expect the director to be hands on but regular meetings will be held to discuss progress and to go over monthly results. The return to the investor in the first year of operation is expected to be $40,000 plus.

[8] Mr File said that after Mr Grant agreed to invest $15,000 he banked the cheque in the company’s bank account which is verified by the company’s bank statement and at a meeting of directors which was of himself and his wife on the 21st of December 1999. They passed a resolution resolving to appoint Mr Grant a director.

[9] That appointment appears to be invalid as appointment of directors is only by the shareholders although there’s an interesting point that as in fact Mr File and his wife were the major shareholders whether in fact they may have although using the wrong wording have effectively appointed him a director. However for the purposes of my decision I do not think that that is a relevant matter.

[10] Mr File said that at that stage the company was having liquidity problems because in the set up stage there had been a number of reversals and it’s intended business of shipping and selling pawpaws to New Zealand. However he felt that at that stage although the company owed considerable amount of money to its bankers the prospects were good and that in January a full container of fruit was sent to New Zealand and had it arrived in good condition and being sold, he expected that that would be the start of very significant cash flow and successful business.

[11] He said that unfortunately when the shipment arrived in New Zealand it was found that the bags had inflated and the whole shipment had to be written off. It was then referred to an expert and found that there was an enzyme that was causing the problem and that by sterilization of instruments the problem could be resolved.

[12] A further container was prepared and sent to New Zealand in April however the Department of Agriculture having being aware of the first shipment took interest in the second and while inspecting it, it was left on the tarmac in unsuitable heat and deteriorated so that the second shipment was also a failure.

[13] Thereafter there was another smaller shipment but unfortunately in Rarotonga end it was allowed to become too warm and it deteriorated. The consequence was that the company did not receive the anticipated cash flow and the bank pulled the plug on it by appointing a receiver on the 24th of July 2000. He said that he thereupon lost his investment in the company and having a personal guarantee for the company’s debts, he has since been in the position of paying off the debt in terms of a guarantee reducing the debt from some $60,000 to $49,000.

[14] The first factual matter to be decided arising out of the evidence is whether there was a contract between Mr Grant and Mr File and if so what were the terms of the contract.

[15] I find proof on the evidence on the balance of probabilities that there was a contract of the nature as proven to by the Plaintiff and acknowledged by the Defendant in his Statement of Defence.

[16] In paragraph 3 of the original Statement of Claim which is repeated verbatim and the amended Statement of Claim, it is alleged that in or about December 1999 the Defendant offered the Plaintiff a 25% shareholding in the company and a position on the Board of Directors in consideration for the Plaintiff investing $15,000 in the company. The Statement of Defence admitted those allegations. However there’s a reservation that Mr File in doing so acted on behalf of Pacfruit Limited.

[17] I find from the evidence that in fact the contract was that Mr File, as he said in his evidence contracted to sell his shares or 25% of the shares in the company which he had to Mr Grant. That that was a personal contract of sale of shares between Mr File and Mr Grant.

[18]] I find that there was a breach of that contract, namely that it was not performed in that the shares were not transferred to Mr Grant and Mr Grant was not appointed as a director of the company. That in my finding was not due to any deliberate act on the part of Mr File. I find that he genuinely believed that the steps which he and his wife took were sufficient to in effect achieve the transfer of a 25% interest in the shareholding of the company to Mr Grant and appoint him as a director. He may have been naïve in that but he didn’t act with any form of deceit or wish to do other than what he had said would be done.

[19] It is said that it was a term of that contract that Mr Grant could expect a $40,000 financial return on his investment. The actual term I find was that as stated in the written proposal namely the return to the investor in the first year of operation is expected to be $40,000 plus. That was not a term of commitment that there would be a $40,000 return plus, it was merely a statement of expectation and it was not breached because I find that that was indeed Mr File’s expectation at the time and the expectation of the company. But it was not a term in effect to say you will receive at least $40,000.

[20] So I find that there was no performance of two terms of the contract to transfer shares and appoint as director. That being so, what are the damages from that breach by non performance.

[21] Mr Robinson submits that the damages should be a refund of the $15,000. He in effect argued that there should be full restitution.

[22] I do not find that this is a situation of restitution but rather one of damages as claimed. What are the damages that flow from the breach that Mr Grant did not receive 25% of the shares and was not appointed a director. If he had been then what would his position have been? His position would have been as it turned out that those shares were worthless and being a director would have in my view have had no effect upon the outcome because he was not going to be, never anticipated to be in effect an executive director. It is hardly likely by being a director he would have turned the fortunes of the company around. So he was in the same position as any investor who invests in shares and finds that they do not reap the rewards hoped. Undoubtedly if the business had succeeded and the shares had not been transferred there would be an action seeking the damages for the value of the shares and any income which they may have earnt meantime.

[23] I find that there was a breach of the two terms about transfer of shares and appointment as director but that there were no monetary damages suffered as a consequence of that breach. Therefore I will not enter judgment for the Plaintiff on the first cause of action. Indeed I will enter judgment for the Defendant.

[24] The second cause of action alleges misrepresentation. The misrepresentation alleged is that Mr Grant will receive a 25% shareholding in the company and a position on the board of the directors of the company. There was such a representation but it was not a misrepresentation in the sense that I find that it was the full intention of Mr File to honor that. It was in fact the term of the contract to transfer the shares and appoint as a director. So I find that there was a representation but it was not a misrepresentation. It was not false, it was not untrue, it was not incorrect. It was the intention.

[25] The next representation, a projected return of his investment in the first year. I find that there was no such representation. All that was stated was the return to the investor in the first year is expected to be $40,000 plus. That is an expectation, not a statement in effect of guarantee or undertaking that that would be the case. I find that there were no misrepresentations alleged.

[26] Counsel has referred me to the decision of Justice Thorp in Jagwar Holdings Limited and to the decision of the Court of Appeal in the Henry case and two extracts from Morrison’s Company Law.

[27] I find that at all stages Mr File acted honestly without deceit; that he genuinely believed that although the company was suffering liquidity problems, it was on the verge of making a breakthrough and being a successful and profitable company.

[28] In light of the history up to then of him persevering with the company I find that he genuinely believed that was the case and had grounds in believing that was the case. It was unfortunate that circumstances conspired to not permit that to happen. It was not a position of deceit, nor fraud. It was a case of optimism and hope which proved to be misplaced in the end result.

[29] Therefore I do not find that misrepresentation has been proved in either contract, deceit or fraud. The second cause of action fails and I enter judgment for the Defendant on both causes of action.

[30] Costs will lie where they fall.

C M Nicholson J