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Fumera v Pozzati [1998] TOLawRp 16; [1998] Tonga LR 109 (7 August 1998)

IN THE COURT OF APPEAL OF TONGA
Court of Appeal, Nuku’alofa

CA 17/97

Fumera

v

Pozzati

Burchett, Tompkins, Beaumont JJ
28 July 1998; 7 August 1998

Partnership ⎯ contemplated partnership ⎯ refund of contributions Contract ⎯ contribution to contemplated partnership ⎯refund

The appellants appealed against orders awarding damages and granting other relief in a civil action in the Supreme Court in a commercial dispute between several Italian citizens who planned to develop a beach resort in Tonga. The primary claim made at the trial by the plaintiff, Claudio Pozzati, the respondent on the appeal, was that he was entitled to a refund of contributions he made towards the project. The trial Judge upheld his claim and ordered that the sum of $90,746, plus interest, be refunded to the respondent. It was also ordered that the respondent be paid the sum $10,000, plus interest, by way of special damages. Other consequential orders were made. Two of the defendants, Luigi Fumera and Simonetta Maccio, appealed from these orders on the grounds that none of the orders made at first instance, that is, for refund of contributions, for special damages or the consequential orders (which purported to secure payment of the judgment debt) should have been made.

Held:

1. The trial Judge was correct to order the refund to the respondent of his contributions, however, a question arose as to the form of his Honour’s orders in this connection.

2. The Court varied the orders by setting the consequential procedural orders aside and reducing the claim for the airfare.

3. The respondent was substantially successful on the appeal but the court reduced the claim for air fares and discharged some of the procedural orders obtained by the respondent by way of security for the judgment debt. The respondent was awarded three-quarters of his costs on the appeal.

Cases considered:

Brown v Heffer [1967] HCA 40; (1967) 116 CLR 344; [1968] ALR 89

Curtain v Rudge [1949] NZGazLawRp 85; [1949] NZLR 752

Egan v Ross [1928] NSWStRp 101; (1928) 29 SR (NSW) 382

Jackson v Sterling Industries Ltd [1987] HCA 23; (1987) 162 CLR 612; 71 ALR 457

Keith Spicer Ltd v Mansell [1970] 1 WLR 333; [1970] 1 All ER 462 (CA)

Kennedy v Vercoe [1960] HCA 64; (1960) 105 CLR 521; 34 ALJR 310

McWilliam v McWilliams Wines Pty Ltd [1964] HCA 6; (1964) 114 CLR 656; 37 ALJR 435

York Air Conditioning and Refrigeration (Australasia) Pty Ltd v Commonwealth [1949] HCA 23; (1949) 80 CLR 11

Statutes considered:

Land Act Cap 132

Counsel for appellants: Mr Tu’utafaiva
Counsel for respondent: Mr Niu

Judgment

Introduction

This is an appeal from orders awarding damages and granting other relief in a civil action in the Supreme Court in a commercial dispute between several Italian citizens who planned to develop a beach resort in Tonga. The primary claim made at the trial by the plaintiff, Claudio Pozzati, the respondent on the appeal, was that he was entitled to a refund of contributions he made towards the project. The trial Judge upheld his claim and ordered that the sum of $90,746.00, plus interest, be refunded to the respondent. It was also ordered that the respondent be paid the sum $10,000.00, plus interest, by way of special damages. Other consequential orders were made. Two of the defendants at first instance, Luigi Fumera and Simonetta Maccio, now appeal from these orders.

In order to understand the issues dealt with in the learned primary Judge’s reasons for judgment, reference should first be made to the nature of the case pleaded by the respondent at first instance.

The Case Pleaded by the Respondent The essential allegations in the respondent’s statement of claim may be summarised as follows:

• A beach resort business, known as Kahana Lagoon Resort, was owned and carried on by Joe Tu’ilatai Mataele.

• By written agreement dated 19 May 1993, Mr Mataele agreed to let the premises on which the business was conducted to Eduardo Frascati [the first defendant at the trial] and Mr Luigi Fumera for a term of 10 years, with an option to renew for a further 10 years, upon terms that Messrs Frascati and Fumera would manage the business and keep the profits.

• Messrs Frascati and Fumera then conducted the business in partnership.

• In January 1994, Messrs Frascati and Fumera invited Ms Maccio to become, and she did become, a partner.

• In February 1994, Messrs Frascati and Fumera represented to the respondent that they were willing to let him share 20% of the business if he contributed 80,000,000 lira [“ITL”].

• On 1 March 1994, the respondent met with Mr Frascati and agreed to the offer. The respondent paid Mr Frascati ITL 60,000,000 in order that Mr Frascati could purchase goods for the business.

• On 22 April 1994, the respondent paid ITL 7,242,000 into the bank account of the business, and ITL 7,250,000 on 3 May 1994. He contributed a further ITL 28,000,000 during June 1994. It was agreed that the respondent’s share in the partnership would be increased accordingly.

• In June 1994, inconclusive negotiations were conducted with Mr Mataele with a view to amending the tenancy agreement so as to permit Ms Maccio and the respondent to participate.

• On 4 July 1994, the respondent and Messrs Frascati and Fumera agreed: (1) that Messrs Frascati and Fumera would continue to negotiate with Mr Mataele ; (2) that Messrs Frascati and Fumera would form a company, to be called “Blue Dream”, the members of which were to be the four “partners”, to conduct the resort business; (3) that, based on the contributions made, the “partners’ “shares were –

Mr Frascati 33%

The respondent 31%

Mr Fumera 14%

Ms Maccio 14%

92%

• It was further agreed that the remaining 8% would be allocated in accordance with such further contributions of the “partners” as might be made as at the date of incorporation of the company.

• On 10 August 1994 and 21 September 1994, the respondent remitted the amounts of ITL 8,500,000 and 5,000,000 respectively to the business’s bank account, making a total contribution to the business of ITL 115,992,000 or T$90,746.

• In December 1994, Mr Fumera informed the respondent that he had lost his money, and that he should claim it from Mr Frascati. Mr Fumera and Ms Maccio disputed the respondent’s contributions to the business.

• The respondent met with Mr Frascati, who acknowledged the respondent’s contributions. They further agreed that Mr Frascati sell his share and entitlement to the respondent.

• No company was incorporated. Mr Fumera and Ms Maccio refused to allow the respondent to participate in the business, notwithstanding his 39% contribution and his entitlement to Mr Frascati’s 33% share; nor was any amendment made to the tenancy agreement.

• Since the defendants had not been able to fulfill their promise to give the respondent a share in the business proportional to his cash contribution, the defendants were liable to refund that contribution.

The Findings and Reasons of the Trial Judge

The learned primary Judge found that the background facts, in particular the making by the respondent of his contributions, occurred essentially as was alleged by the respondent in his statement of claim. Although there was a conflict in the evidence in some areas, his Honour preferred the version of the events given by the respondent and that given by Mr Frascati to Mr Fumera’s version. His Honour also rejected some special defences, to which reference will be made below.

His Honour said:

“3.1 The Partnership Agreement

The partnership agreement is a composite of oral and express agreements made between the parties. It is comprised of, in part Exhibit P100 executed 4 July 1994 at Nuku’alofa recording the share structure as being:-

Frascati 33 %

Pozatti 31%

Fumera 14%

Maccio 14%

It records that the intent of the parties is to resolve the balance of 8% of the shares on the day of constitution of a company which the parties intended should be incorporated but in fact never was. Pozzati says and I accept that he acquired those shares ultimately. [Emphasis added]

The partnership is further comprised of Exhibit P23-25 because it purports to record that all former agreements were avoided and that it would remain the definitive document until a Company could be incorporated in Tonga. Though Pozzati did not sign the document it is clear that he advanced the funds in two sums of ITL 60,000 [sic] and ITL 20,000 [sic] and the document specifies the sum of ITL 80,000 [sic] would be paid by him. Fumera says that the money should have come to him directly but concedes the payments were made. That is contrary to the terms of the document P23-25.

Further the partnership terms include those recited in Exhibit P20-22. It describes the partnership responsibilities of the four partners and Exhibit P156 is the purported transfer of Frascati’s shares.”

In expressing his conclusion on the primary claim, his Honour said:

“I have intimated that I have found that Frascati is to be treated as a continuing partner and that this court must resolve the difficulties as between the parties. I do not accept the submission of the repudiation of Frascati bringing the partnership which I find existed, to an end. In my opinion the state of the evidence at the end of the day shows that just as counsel for the plaintiff put it -‘the defendants promised they would give the plaintiff shares in the business if the plaintiff paid his contributions. The plaintiff paid his contributions. The first and second defendants refused to give the shares to the defendant.’” [Emphasis added]

With respect to the claim for special damages, his Honour said:

“As to sums spent by the Plaintiff on air fares Italy — Tonga return. The claim is not a contractual one. I consider it to be appropriately expressed as special damages flowing from breach of agreement. I am satisfied that the head of claim arises only by virtue of the behaviour of the second and third defendants towards the plaintiff whose visits to Tonga were necessitated by the refusal of the defendants to meet their obligations. I would award damages on a proper proof of the travel expenses.”

The Grounds of Appeal

The appellants now appeal on the grounds that none of the orders made at first instance, that is, for refund of contributions, for special damages or the consequential orders (which purported to secure payment of the judgment debt) should have been made.

Conclusions on the Appeal

It will be convenient to deal separately with the several aspects of the appeal that arise.

(a) The Respondent’s Primary Claim for Refund of his Contributions

On behalf of the appellants it is submitted that, insofar as this claim depended upon a finding by the trial Judge that the defendants were in breach of a promise to give the respondent his proportionate share of the business, no such finding was made. On the contrary, the argument runs, in the passage cited above dealing with “Partnership Agreement”, his Honour actually found that the respondent did “acquire” his interest. It will be recalled that, after stating that the company had not been incorporated, his Honour had said –

“Pozzati says and I accept that he acquired those shares ultimately”. [“Those shares” were the balance of 8%, in addition to his existing 31% entitlement.]

We have difficulty accepting the appellants’ argument.

In the first place, his Honour clearly did not, and could not, find that any shares in a company proposed to be incorporated were allotted to the respondent: it is common ground that a company was never incorporated. Rather, when read in context, his Honour’s acceptance of the respondent’s statement should be understood as no more than an acceptance of the respondent’s belief that, by virtue of his additional contributions, he was then entitled to a 39% interest. There is nothing at all inconsistent with accepting this, on the one hand, and finding, as his Honour did, that the appellants then denied that the respondent had contributed funds to the business, thus denying that the respondent had any entitlement to participate in the business, on the other.

Moreover, as we read his Honour’s reasons, they proceed upon the footing, which was clearly open, that the whole arrangement between the parties was, in truth, executory rather than executed. That is to say, this was a case of no more than a contemplated, rather than an actual, partnership.

As Lindley on the Law of Partnership [15th Ed] says [at 19]:

“Persons who are only contemplating a future partnership, or who have only entered into an agreement that they will at some future time become partners, cannot be considered as partners before the arrival of the time agreed upon.”

Lindley goes on to say [at 23]:

“Subscribers to inchoate companies not partners

It is a necessary result of the principles established above that persons merely associated for the purpose of forming a company are not partners.

Keith Spicer Ltd v Mansell [1970] 1 WLR 333; [1970] 1 All ER 462 (CA) is cited as authority for this proposition and, in relevant respects, its facts are similar to the present case. It was there held that no partnership existed, but one was merely contemplated.

In our opinion, when his Honour’s reasons are read as a whole, his conclusion that the appellants were in breach of their promise to the respondent to promote a company to take over and conduct the business, and to issue to the respondent his due proportion of shares in the company, was plainly open. The documentation in evidence, to which his Honour referred, supported his finding. Moreover, as has been noted, his Honour had rejected the testimony of Mr Fumera when in conflict with the version given by the respondent. There is no challenge to his Honour’s assessment of the credit of the witnesses.

Once that finding of breach is accepted, it must follow, in our view, that it was open to his Honour to make an award of damages for the breach which included, as a head of damages, the amount of the respondent’s contributions. They were never repaid and the respondent received no other benefit, nor any advantage from his investment.

We would add, for completeness, that even if his Honour had not found a breach of contract, the respondent would, in any event, have been entitled to recover his contributions in quasi-contract, as money had and received, having been paid on a consideration that totally failed; or as paid provisionally and not finally, but not ultimately applied to its mutually contemplated purpose, that is, within the structure of the proposed corporate joint venture; or, alternatively, under the modern law of restitution or unjust enrichment [see York Air Conditioning and Refrigeration (Australasia) Pty Ltd v Commonwealth [1949] HCA 23; (1949) 80 CLR 11; Halsbury’s Laws of England 4th ed Vol 9 at 454].

It is next submitted for the appellants that the respondent’s claim should have been rejected because the appellants did not misuse the respondent’s contributions by personally misappropriating them; rather, it is said, the appellants applied the respondent’s funds quite properly in the conduct of the business. But, in our view, this can be no proper answer to the respondent’s claim, upheld at first instance, that the appellants had breached their promises to promote the proposed company and to ensure (a) that it took over the business and (b) that shares in the company were allotted to the respondent in proportion to his contributions.

Then it is submitted for the appellants that, given his status as a partner, the respondent could not seek to recover his contributions without an order for the dissolution of the partnership first being made and without accounts thereupon being taken. But, as has been said, the parties’ arrangements were, in truth, no more than executory. No more happened than a contemplated partnership, in the form of the proposed corporate joint venture. Moreover, the appellants were guilty of anticipatory breach when the respondent was excluded by the appellants from participation in the existing business. Even the making of his contributions was disputed by the appellants. In those circumstances, where the existence of a partnership with the respondent is, as his Honour held, repudiated by the appellants in anticipation, it was not open to them to insist that the respondent first apply for the taking of partnership accounts. Instead, it was open to the respondent to accept that repudiation and sue for damages.

On behalf of the appellants, it is further submitted that his Honour should have upheld their defences of illegality by statute, upon the footing that the arrangements sued upon constituted either (a) an agreement relating to the use or occupation of a holding or (b) the occupation of land by an alien - in each case without the Minister’s consent under s 13 or s 14 or s 15 of the Land Act, as the case may be, and thus prohibited by those provisions. But the subject arrangements were, as has been said, merely executory, and the respondent was not seeking specific performance in any event.

Even if the arrangements had been executed, there would ordinarily have been implied a condition that their performance was, subject to the grant of any necessary Ministerial consent, and only a limited, conditional order for specific performance could have been made. As Barwick CJ, McTiernan, Kitto and Owen JJ said in Brown v Heffer [1967] HCA 40; [1967] 116 CLR 344 at 350; [1967] HCA 40; [1968] ALR 89:

“The specific performance which will be granted before the Minister’s consent has been obtained is not specific performance of the obligation to convey or transfer, for that obligation has not yet arisen: McWilliam v McWilliams Wines Pty Ltd [1964] HCA 6; (1964) 114 CLR 656 at 661; [1964] HCA 6; 37 ALJR 435. As Harvey CJ in Eq made clear in Egan v Ross [1928] NSWStRp 101; (1928) 29 SR (NSW) 382, at p 388, the decree that will be made will go no further than directing that the proper steps be taken for the purpose of obtaining the Minister’s consent and, ‘if that is obtained’, to transfer the land to the purchaser: see also the more explicit form of order made by this Court in Kennedy v Vercoe [1960] HCA 64; (1960) 105 CLR 521 at pp 530, 531; [1960] HCA 64; 34 ALJR 310. Accordingly until the consent has been obtained the purchaser’s interest, being ‘commensurate only with what would be decreed to him’, does not extend to ownership of the land and the interest of the vendor is not yet converted into a right to receive money in place of the land. Many authorities on the topic are discussed in the valuable judgment of Callan J in Curtain v Rudge [1949] NZGazLawRp 85; [1949] NZLR 752.”

We would reject these special defences of illegality. In our opinion, the trial Judge was correct to order the refund to the respondent of his contributions.

However, a question arises as to the form of his Honour’s orders in this connection, which were made in these terms:

“1. The defendants do refund to the plaintiff the sum of $90,746.00 plus interest thereon at 10% per annum from l/10/94 to date of these orders, being the sum of $30,882.36, making a total of $121,628.36.

2. The defendants do pay to the plaintiff special damages for airfares as claimed by the plaintiff in the sum of $10,000 plus interest thereon at 10% per annum from the date of the statement of claim, 28/5/96, to the date of these orders, being the sum of $1,340.55, making a total of $11,340.55.

3. The defendants do pay to the plaintiff the costs of these proceedings to be taxed or agreed.

4. Interest at 10% per annum be charged and be paid by the defendants to the plaintiff upon the sums ordered in orders 1, 2 and 3 above from the date of these orders until payment of the same”.

It will be recalled that the defendants included Mr Frascati, so that taken literally, Order 1 could be read so as to extend to Mr Frascati. But when his Honour’s reasons are read as a whole, it appears that, given his findings, first that the appellants repudiated and breached their contract, and secondly, that the evidence of Mr Frascati should be preferred to Mr Fumera, it appears that his Honour’s intention was that the appellants, but not Mr Frascati, should be held responsible. We would read down his Honour’s orders accordingly. To put the matter beyond doubt, we propose to vary the orders made so that they will refer only to the appellants.

We should add that, although Mr Frascati was not made a party to the appeal, we were informed that his legal representatives were advised of the appeal, and were provided with a copy of the notice of the appeal by the appellants’ legal representatives. Mr Frascati did not seek to be joined as a party to the appeal. In the circumstances, since he could not be adversely affected by the orders we propose to make, it is not necessary that he be joined.

(b) The Claim for the Airfares

Although the trial Judge awarded special damages on this account, the claim is we think, more appropriately viewed, in principle, as a claim for expenditure claimed by way of mitigation of loss, whether the primary claim is grounded in contract, quasi-contract or restitution. That being so, the question arises as to what should be allowed as a reasonable amount in this connection. In our view, it was reasonable for the respondent to visit Tonga twice for the purpose of mitigation of his losses. We will allow the cost of two airfares accordingly and reduce this award from T$10,000 to T$5,000.

(c) The Adjectival Orders Securing the Judgment Debt

Before referring to the terms of these orders, it should be mentioned by way of background that at the commencement of the trial, on the application of the respondent and Mr and Mr Frascati, his Honour granted a Mareva injunction that –

“... the [appellants] ... are hereby restrained from selling or purporting to sell or divesting themselves of any fixtures [fittings] plant and machinery situated at the Kahana Lagoon Resort or of any materials [bought] for the renovation of the said Resort until the further order of this Court.”

The Mareva injunction is still in force. The appellants have not moved to discharge it.

At the final hearing, in addition to the orders for refund of contribution and for special damages, the trial Judge made the following final, albeit conditional, orders:-

“5. Subject to the plaintiff complying with the terms and conditions of Exhibit P1 - P5 the Tenancy Agreement, the Plaintiff be at liberty forthwith to enter upon the premises of the resort business and take full control of the management of resort business unless he is paid in full, or otherwise as agreed, the sums ordered in orders 1, 2, 3 and 4 above.

6. If the plaintiff does exercise his right under order 5, he shall manage the business in a professional and business-like manner, and he shall keep proper books of account from the date he so commences management. He shall render an audited financial account of the business at the end of each 3 month period to the Registrar Supreme Court of Tonga and to the defendant.

7. If at the end of 6 months from the date of these orders the sums ordered have not been paid by the defendants to the plaintiff, the plaintiff may advertise and sell the management of the business for the best possible price. The purchaser shall (subject to his complying with the terms and conditions of the Tenancy Agreement Exhibit P1 - P5) thereupon have the entire right to management of the resort business for the remainder of the term of tenancy hitherto held by the defendants. The defendant shall be entitled to any surplus of the proceeds of sale after deduction of their debts to the plaintiff and the necessary costs of the sale. Otherwise the defendants shall remain jointly and severally liable for the balance of their debts to the plaintiff.

8. The plaintiff shall be entitled to the net profit of the business at the end of each year (of his management) the sum of which shall be credited towards the debts of the defendants to him, unless for business reason and prudence the net profit or part thereof is again used in the business in the following year.”

The effect of these orders is to elevate the status of the respondent from that of an unsecured judgment creditor to that of a secured one in respect of the assets of the business. This order is made in a context where, as his Honour had held, the respondent was not a partner in that business, even if a partnership had earlier been contemplated. We have difficulty with such elevation as a matter of principle. We note in this regard, by way of analogy, that it is usually inappropriate to invoke the remedy of a Mareva injunction for the purpose of conferring security upon a potential judgment creditor with an attendant preferential status vis-à-vis other unsecured creditors (see Jackson v Sterling Industries Ltd [1987] HCA 23; (1987) 162 CLR 612; 71 ALR 457).

There are practical considerations to be taken into account as well. We were informed by counsel that, after his Honour’s orders were made, Mr Mataele resumed occupation of the resort premises, and is now conducting the business jointly with Mr Frascati. In these circumstances, Orders 5 - 8 could not, in practice, operate as his Honour intended.

We also note that the Mareva injunction, which is in orthodox terms, is still in place. It should provide the respondent with adequate protection as an unsecured judgment creditor.

We propose therefore to vary the orders made at first instance by setting these consequential procedural orders aside.

Costs

The respondent has been substantially successful on the appeal, but allowance should be made for the fact that we have reduced the claim for the airfares and discharged some of the procedural orders obtained by the respondent by way of security for the judgment debt. In all the circumstances, the respondent should have three-quarters of his costs of the appeal.

We do not propose to disturb the order made for the costs of the trial.

Orders

We make the following orders:

1. Vary the orders made at first instance on 22 September 1997 as follows:

(a) by inserting the words “second and third” before the words “Defendants” in Orders 1, 2, 3 and 4.

(b) by substituting in Order 2 the amounts of $5,000; $670.27; and $5,670.27 for the amounts of $10,000; $1,340.55; and $11,340.55 respectively.

(c) by setting aside Orders 5, 6, 7 and 8.

2. Appeal otherwise dismissed.

3. Order that the appellants pay three-quarters of the respondent’s costs of the appeal, such costs to be taxed or agreed.

The orders made at first instance, as varied by our orders, will then read:

“1. The [second & third] defendants do refund to the plaintiff the sum of $90,746.00 plus interest thereon at 10% per annum from 1/10/94 to date of these orders, being the sum of $30,882.36, making a total of $121,628.36.

2. The [second & third] defendants do pay to the plaintiff special damages for airfares claimed by the plaintiff in the sum of $5,000 plus interest thereon at 10% per annum from the date of the Statement of Claim, [28/5/96] to the date of these orders [ie 22 September 1997] being the sum of $670.27 making a total of $5,670.27.

3. The [second & third] defendants do pay to the plaintiff the costs of these proceedings to be taxed or agreed.

4. Interest at 10% per annum be charged and be paid by the [second & third] defendants to the plaintiff upon the sums ordered in orders 1, 2 and 3 above from the date of these orders [ie 22 September 1997] until payment of the same”.