Raikos Holdings Ltd v Porche Enterprise Ltd [2012] PGNC 101; N4776 (24 August 2012)

N4776

PAPUA NEW GUINEA
[IN THE NATIONAL COURT OF JUSTICE]

OS NOS 616 & 924 OF 2006

RAIKOS HOLDINGS LIMITED
Plaintiff

V

PORCHE ENTERPRISE LIMITED
Defendant

Madang: Cannings J
2012: 16 February, 9, 16, 21, 23 March, 24 August

CONTRACT – breach of contract – proof of breaches pleaded – whether contract lawfully terminated in accordance with terms of the contract as to termination – effect on enforceability of a contract executed on behalf of a company by persons who lacked actual authority to bind the company.

The plaintiff, a timber permit holder, and the defendant, a logging contractor, entered into a written contract called a logging and marketing agreement, under which the defendant was to develop the timber resources on the plaintiff's timber rights purchase area and pay levies, remuneration and other benefits to the plaintiff. Thirteen months after commencement of the agreement the plaintiff, under the hand of persons describing themselves as its chairman, deputy chairman and managing director, issued a 14-day notice to show cause to the defendant, specifying various alleged breaches of contract. The defendant failed to respond and a month later the plaintiff gave notice of termination of the contract. In the meantime there was a dispute amongst various persons connected to the plaintiff as to shareholdings and directorships in the plaintiff. During the period of that dispute the plaintiff and the defendant entered into a second logging and marketing agreement, this one being approved and executed by a different group of the plaintiff's shareholders and directors. That dispute was eventually resolved by a court order in separate proceedings declaring that the group that had approved and executed the first logging and marketing agreement (and issued the notice to show cause) had legitimate ownership and control of the plaintiff. In those circumstances the plaintiff has maintained the action for breach of contract against the defendant, relying on six alleged breaches of contract, and seeking a declaration that it had lawfully terminated the first logging and marketing agreement and that the defendant was liable in damages for breach of contract. The defendant denied any breach of contract and argued that the notice to show cause pursuant to the first logging and marketing agreement was defective and further, by a cross-claim, that the plaintiff was guilty of a breach of contract in relation to both logging and marketing agreements, making it liable for damages. The trial was on the issue of liability only.

Held:

(1) The defendant breached the first logging and marketing agreement in four respects.

(2) The first logging and marketing agreement was not lawfully terminated by the plaintiff; it was, however, terminated upon expiry of the timber permit.

(3) The second logging and marketing agreement was executed by unauthorised persons; and the defendant, having knowledge of the dispute as to ownership and control of the plaintiff, would reasonably be expected to know of the reasonable possibility that those persons were in fact unauthorised. Therefore the second logging and marketing agreement was a nullity.

(4) The defendant failed to prove that the plaintiff was in breach of either of the logging and marketing agreements. The cross-claim failed.

(5) Though it failed to take proper steps to validly terminate the agreement the plaintiff was entitled to damages for losses sustained as a result of the proven breaches of contract.

Cases cited

The following cases are cited in the judgment:

AGC (Pacific) Ltd v Woo International Pty Ltd [1992] PNGLR 100
Gawan Kuyan v Andrew Sallel (2008) N3376
Kui Valley Business Group Inc v Kerry Wamugl (2009) N3667
New Ireland Development Corporation Ltd v Arrow Trading Ltd (2007) N3240
Raikos Holdings Ltd v Tony Tai Tung Chi & Ors OS No 924 of 2006, 23.01.07
Royal British Bank v Turquand [1856] EngR 470; (1856) 119 ER 886
Sangara (Holdings) Ltd v Hamac Holdings Ltd (In Liquidation) [1973] PNGLR 504

STATEMENT OF CLAIM

This was the trial of an action for breach of contract.

Counsel

T Anis, for the plaintiff
S Toggo, for the defendant

24 August, 2012

1. CANNINGS J: The main question in this case is whether either of the parties to a contract has committed a breach of contract giving rise to liability to pay damages. The plaintiff, Raikos Holdings Ltd, a timber permit holder, and the defendant, Porche Enterprise Ltd, a logging contractor, entered into a written contract on 25 February 2005 called a logging and marketing agreement. The plaintiff agreed to make available its timber resources and the defendant was obliged over ten years to develop the resources on the plaintiff's timber rights purchase area in the Rai Coast District of Madang Province and pay levies, remuneration and other benefits to the plaintiff.

2. On 20 March 2006, the plaintiff, under the hand of persons describing themselves as its chairman, deputy chairman and managing director, issued a 14-day notice to show cause why the contract should not be terminated to the defendant, specifying numerous alleged breaches of contract. The defendant failed to respond and on 6 April 2006 the plaintiff gave notice of termination of the contract.

3. On 30 November 2006, the plaintiff's timber permit, No 12/18, expired, and this had the effect under clauses 6 and 22.4 of the logging and marketing agreement of the agreement being terminated on the same date. A declaration to that effect was made in an earlier ruling on various motions relating to the present proceedings (Raikos Holdings Ltd v Tony Tai Tung Chi & Ors OS No 924 of 2006, 23.01.07).

4. In the meantime there was a dispute amongst various persons connected to the plaintiff as to shareholdings and directorships in the plaintiff. During the period of that dispute the plaintiff and the defendant entered into a second logging and marketing agreement, dated 31 January 2007, this one being approved and executed by a different group of the plaintiff's shareholders and directors. The dispute between the different factions of the plaintiff was resolved by a court order on 26 May 2008 in separate proceedings declaring that the group that had approved and executed the first logging and marketing agreement (and issued the notice to show cause) had legitimate ownership and control of the plaintiff (Gawan Kuyan v Andrew Sallel (2008) N3376). The defendant continued to conduct timber operations on the Rai Coast TRP until September 2011.

5. In those circumstances the plaintiff has maintained the action for breach of contract against the defendant, relying on six alleged breaches of contract. It seeks an order that the defendant is liable in damages to it for breach of contract and a declaration that it lawfully terminated the first logging and marketing agreement. The defendant denies any breach of contract and argues that the notice to show cause pursuant to the first logging and marketing agreement was defective and further, by a cross-claim, that the plaintiff is guilty of breach of contract in relation to both logging and marketing agreements, making it liable for damages. The trial was on the question of liability only. The following issues arise:

1. Was there any breach of the first logging and marketing agreement by the defendant?
   
2. Was the first logging and marketing agreement lawfully terminated by the plaintiff?
   
3. What is the status of the second logging and marketing agreement?
   
4. Has there been any breach of contract by the plaintiff?
   
5. What declarations and orders should the court make?
   

1 WAS THERE ANY BREACH OF CONTRACT BY THE DEFENDANT?

6. The plaintiff alleges that the defendant breached the following terms of the first logging and marketing agreement:

• clause 10.1, which obliged both the plaintiff and the defendant to comply with the provisions of various Acts of the Parliament;
  
• clause 11, which obliged the defendant to arrange public liability insurance within 30 days of an approval date;
  
• clause 16.2, which obliged the defendant to pay to the plaintiff an amount calculated at the rate of K10.00 per cubic metre of logs by which the actual volume sold failed to meet the minimum volume prescribed by schedule 2 of the agreement;
  
• clause 18, which obliged the defendant to prepare and submit returns to the PNG Forest Authority and to provide monthly reports to the plaintiff on any deviation from the forest working plan, details of the sale of logs and sawn timber and changes in trade conditions;
  
• clause 20, which obliged the defendant after consultation with the plaintiff to submit a training and localisation plan to the Department of Labour and Employment for approval and to give preference to suitably qualified personnel from the permit area;
  
• clause 21, which obliged the defendant on behalf of the plaintiff to lodge a bank guarantee with the PNG Forest Authority in accordance with the timber permit.
  

7. I find that there is sufficient evidence of breaches of clauses 11, 18, 20 and 21 in the oral testimony of the plaintiff's managing director, Andrew Sallel. Both the affidavits and oral testimony of the defendant's managing director, Chua Han Hwee, confirm that the defendant failed to arrange public liability insurance, provide monthly reports to the plaintiff, submit a training and localisation plan and lodge a bank guarantee in accordance with those clauses. The alleged breaches of clauses 10.1 and 16.2 have not been adequately particularised and there is insufficient evidence to support these claims.

8. I conclude that the defendant committed breaches of contract in that it breached clauses 11, 18, 20 and 21 of the first logging and marketing agreement and that these breaches continued for the duration of the agreement.

2 WAS THE FIRST LOGGING AND MARKETING AGREEMENT LAWFULLY TERMINATED BY THE PLAINTIFF?

9. The plaintiff argues that the first logging and marketing agreement was terminated on 6 April 2006 when it gave notice in writing of the termination to the defendant. The defendant counters by arguing that the agreement was not terminated then as (a) it had not committed any breach of contract, (b) the notice to show cause and the notice of termination were each defective as neither was issued in accordance with a decision of the plaintiff's board of directors and (c) the provisions of clause 22 of the logging and marketing agreement were not complied with.

10. I reject argument (a) as I have already determined that, in fact, the defendant committed four breaches of contract.

11. I reject argument (b) as the oral testimony of Mr Sallel and three members of the plaintiff's board, Batteng Puto, Usam Mai and Gawan Kuyan, is sufficient evidence that the decisions to issue the notice to show cause and the notice of termination, being major transactions, had board approval for the purposes of Section 110 (major transactions) of the Companies Act.

12. I uphold argument (c) as the termination notice was issued prematurely and failed to adequately specify the grounds on which the agreement was being terminated. The plaintiff relied on clause 22.1(a) which relevantly states:

The parties hereto agree that in any of the following events namely:

(a) If:

• (i) The permit holder of the contractor [sic] makes default in due observance or performance of any of the terms and conditions of this agreement; and
  
• (ii) Such default is material and goes to the root of the fundamental undertakings of the permit holder or the contractor as contained in this agreement; and
  
• (iii) Such default is not remedied within sixty (60) days after notice specifying the default is given to the permit holder of the developer [sic] ...
  

then the other party not in default may by notice in writing given to the other party terminate this agreement upon the expiration of thirty [sic] in default and upon expiration of the said period the agreement shall be terminated unless the parties by writing otherwise agree I [sic] in the meantime.

13. The clause is loosely drafted and contains a number of typographical errors but it is reasonably clear that it is intended to operate as follows:

• if one of the parties is in material default of a fundamental term of the agreement the other party may gave a notice specifying the default;
  
• the defaulting party then has 60 days to remedy the default;
  
• if the defaulting party does not remedy the default within 60 days the innocent party then has 30 days within which to give notice in writing of termination of the agreement.
  

14. Here, the defendant can properly be regarded as being in material default of fundamental terms (clauses 11, 18, 20 and 21) of the agreement. However, the plaintiff's notice to show cause, issued on 22 March 2006, allowed the defendant only 14 days to remedy the default when 60 days should have been allowed; and the notice of termination was issued prematurely on 6 April 2006 when it should have been issued in the period 60 to 90 days after 22 March 2006, ie in the period from 22 May to 20 June 2006.

15. The requirements of a notice of termination were prescribed by clause 22.2, which stated:

The notice of termination to be given by a party pursuant to this clause shall specify the nature of the default or other grounds to entitling the party to exercise such right of termination.

16. Here, the notice of termination referred to the "non compliance of the terms and conditions of the logging and marketing agreement" but failed to specify the clauses alleged to be breached. It was not a proper notice of termination.

17. I conclude that the first logging and marketing agreement was not lawfully terminated by the plaintiff on 6 April 2006 or at any other time. The agreement was, however, terminated on 30 November 2006 under clause 6 upon expiry of the timber permit.

3 WHAT IS THE STATUS OF THE SECOND LOGGING AND MARKETING AGREEMENT?

18. This agreement was executed on behalf of the plaintiff by Gawan Kuyan on 31 January 2007, at a time when Mr Kuyan (who the evidence shows is a person who has shifted his allegiance at various times between the two competing factions of the plaintiff) held himself out as chairman of the plaintiff. I find that the decision to enter into the agreement had the approval of the body which at the time held itself out as the board of directors of the plaintiff. However, it was subsequently established by the decision in Gawan Kuyan v Andrew Sallel (2008) N3376 that that board was unlawfully appointed. It had no actual authority to approve the entry into the second agreement. It follows that Mr Kuyan had no actual authority to execute the agreement.

19. What effect does that have on enforceability of the agreement? This depends on whether the rule in Turquand's case (Royal British Bank v Turquand [1856] EngR 470; (1856) 119 ER 886) applies. Where a person dealing with a company acts in good faith and with no notice of reasonable grounds for suspicion of irregularity or impropriety, he is not affected by any actual irregularity or impropriety in a matter of internal regulation. It is incumbent on a person seeking the protection of this rule to prove absence of reasonable grounds for suspicion of irregularity or impropriety (Sangara (Holdings) Ltd v Hamac Holdings Ltd (In Liquidation) [1973] PNGLR 504, AGC (Pacific) Ltd v Woo International Pty Ltd [1992] PNGLR 100, New Ireland Development Corporation Ltd v Arrow Trading Ltd (2007) N3240, Kui Valley Business Group Inc v Kerry Wamugl (2009) N3667). The defendant has failed to discharge that onus. It was aware of the dispute as to ownership and control of the plaintiff as it and its then managing director, Tony Tai Tung Chi, were parties to the proceedings regarding disputed ownership and control of the plaintiff. The defendant was reasonably expected to know of the reasonable possibility that the persons who approved and executed the agreement were in fact unauthorised. It cannot in these circumstances gain the protection of the rule in Turquand's case.

20. I conclude that the second logging and marketing agreement was and is a nullity.

4 HAS THERE BEEN ANY BREACH OF CONTRACT BY THE PLAINTIFF?

21. In its cross-claim the defendant pleaded that persons connected with the plaintiff prevented the defendant performing its obligations under both logging and marketing agreements and therefore the plaintiff committed a breach of contract. To the extent that it is alleged that it was the first logging and marketing agreement that was breached the allegations are not particularised and are unsupported by any credible evidence. To the extent that it is alleged that it was the second logging and marketing agreement that was breached the allegations are without substance as that agreement has been found to be a nullity, and cannot support a cause of action in breach of contract.

22. I conclude that there has been no breach of contract by the plaintiff. The cross-claim fails.

5 WHAT DECLARATIONS OR ORDERS SHOULD THE COURT MAKE?

23. Though it failed to take proper steps to validly terminate the agreement the plaintiff is entitled to damages for losses sustained as a result of the proven breaches of contract. However, as this trial was confined to the issue of liability, no assessment of damages will be made. This raises the question of how damages should be assessed. There are at least three options available to the court: (1) order a trial on assessment of damages or (2) let the parties resolve the matter or (3) order mediation.

24. Under the ADR Rules the National Court is empowered by Rule 5(2), of its own motion, to order mediation for a resolution of any part of any proceedings provided that at the time of considering whether to order mediation it has regard to the factors prescribed by Rule 5(3). I have had regard to those matters. I consider that: (a) mediation will not result in prejudice to the rights of either party; (b) it is reasonably within the ability and power of both parties to comply with a mediation order; (c) mediation will not entail substantial work for either party; (d) the nature of the relief sought lends itself to mediation; (e) a mediation at Madang can be set up very soon and this should be convenient to both parties; (f) neither party has expressed opposition to the prospect of mediation; (g) mediation has not yet been attempted and it should be attempted at least once before consideration is given to setting down a trial; (h) neither party loses the right to have the assessment of damages tried in court; and (i) it is in the interests of justice to attempt mediation as a method of resolving disputes such as this. I conclude that option (3) is the most appropriate as it is the option that has the greatest prospect of finally and quickly determining the dispute. I will therefore make an order for mediation.

25. As to costs, the general rule is that costs follow the event, ie the successful party has its costs paid for by the losing party on a party-to-party basis. In this case the plaintiff has only partially succeeded and the costs order will reflect that.

ORDER

(1) The defendant is liable in damages to the plaintiff in respect of the breaches of clauses 11, 18, 20 and 21 of the logging and marketing agreement dated 25 February 2005.

(2) It is declared that the logging and marketing agreement between the plaintiff and the defendant dated 25 February 2005 was not lawfully terminated by the plaintiff on or about 6 April 2006 or at any other time; but was terminated on 30 November 2006 under clause 6 upon expiry of the timber permit.

(3) It is declared that the logging and marketing agreement between the plaintiff and the defendant dated 31 January 2007 is a nullity.

(4) The defendant's cross-claim is refused entirely.

(5) The question of assessment of damages shall under Rule 5(2) of the ADR Rules, on the court's own motion, be referred for mediation pursuant to a separate mediation order under Rule 5(4) of the ADR Rules.

(6) The defendant shall pay 50% of the plaintiff's costs of the proceedings to date, on a party-party basis, which shall if not agreed be taxed.

(7) Time for entry of this order is abridged to the time of settlement by the Registrar, which shall take place forthwith.

Ordered accordingly.
____________________________
Bradshaw Lawyers: Lawyers for the Plaintiff
Daniels & Associates Lawyers: Lawyers for the Defendant