Focus Construction Interiors Ltd v Spaceworks Design Group Ltd

• Jurisdiction: New Zealand
• Judge: Goddard J
• Judgment Date: 01 July 2020
• Neutral Citation: [2020] NZCA 269
• Court: Court of Appeal
• Docket Number: CA515/2019
• Date: 01 July 2020

Between

Focus Construction Interiors Limited

Appellant

and

Spaceworks Design Group Limited

Respondent

Elizabeth Mary Charlotte Hines (nee Whaley)

Second Respondent

[2020] NZCA 269

Court:

Goddard, Ellis and Katz JJ

CA515/2019

IN THE COURT OF APPEAL OF NEW ZEALAND

I TE KŌTI PĪRA O AOTEAROA

Contract — appeal against a High Court decision that the respondent had not breached its obligations under an agreement that it would use reasonable endeavours to refer work to the appellant — good faith — interpretation of contract

Counsel:

B P Henry and A R Kenwright for Appellant

M C Harris for First and Second Respondents

• A The appeal is dismissed.

• B The appellant must pay costs to the respondents for a standard appeal on a band A basis with usual disbursements.

JUDGMENT OF THE COURT

Table of contents

	Para No
Introduction	[1]
Background	[8]
High Court judgment	[11]
Period within which Spaceworks was required to refer work to Focus	[11]
Negotiated tender work	[13]
The obligations imposed on Spaceworks to refer work	[14]
Allegations of breach by Spaceworks	[15]
Causation and loss	[19]
Issues on appeal	[20]
The obligation imposed on Spaceworks	[24]
Appellant's submissions	[24]
Analysis	[29]
Did Spaceworks breach the Agreement?	[36]
Appellant's submissions	[36]
Analysis	[43]
Result	[49]

REASONS OF THE COURT

(Given by Goddard J)

Introduction

1 The appellant, Focus Construction Interiors Ltd (Focus), is a construction company which provides interior fitout construction, joinery and project management services. The first respondent, Spaceworks Design Group Ltd (Spaceworks), is a commercial interior design company. The second respondent, Ms Whaley, is the owner, sole director and chief executive officer of Spaceworks. We will refer to both respondents as “Spaceworks”, except where it is necessary to make specific reference to the position of Ms Whaley.

2 In February 2010 Focus and Spaceworks entered into an agreement which required Spaceworks to make reasonable endeavours, acting in good faith, to refer work to Focus with a total gross value of $3 million 1 (the Agreement). Only work actually carried out by Focus would count towards this total.

3 Over the next four and a half years Spaceworks provided a number of opportunities to Focus to undertake work with a potential value of around $6.5 million, mostly involving opportunities to participate in competitive tenders for projects managed by Spaceworks. Focus carried out work with an aggregate value of $1,252,255.96. Focus declined to tender for some projects, and unsuccessfully tendered for a number of other projects.

4 Focus formed the view that Spaceworks was failing to use reasonable endeavours and act in good faith in seeking to refer work to Focus. In July 2016 Focus notified Spaceworks that it would no longer tender for any more of Spaceworks' projects. Focus then brought proceedings claiming that Spaceworks had breached its obligations under the Agreement. The claim was unsuccessful in the High Court. Gault J found that Spaceworks had met its obligations under the Agreement. 2

5 Focus appeals to this Court, arguing that:

• (a) The Judge erred in his interpretation of the Agreement. He set the bar too low for Spaceworks' obligation to use reasonable endeavours, acting in good faith, to refer work to Focus. In particular, the Judge was wrong to find that Spaceworks was free to decide not to refer certain projects to Focus where it was not in Spaceworks' commercial interests to do so.

• (b) Spaceworks failed to meet its obligations under the Agreement, properly interpreted.

6 We agree with the Judge's interpretation of the Agreement. We also agree with the Judge that Focus has not established that Spaceworks failed to use reasonable endeavours, acting in good faith, to refer work to Focus. Spaceworks sought to refer a significant number of projects to Focus, with a value in excess of $6.5 million. Spaceworks provided explanations for the decisions it made not to refer other projects to Focus. Focus was not able to identify any projects or classes of project where the

reasons given by Spaceworks for not referring the project to Focus were not genuine, or were unreasonable. Whether one looks at the aggregate picture, or at specific projects, the evidence did not establish a breach by Spaceworks

7 The appeal must therefore be dismissed.

Background

8 Focus and the precursor business of Spaceworks had a working relationship dating back to 2002. In 2004 Ms Whaley joined Spaceworks' precursor as an employee. In mid-2006 the then owner wished to sell the business. Ms Whaley was interested in buying the business. She suggested to the owner and managing director of Focus, Mr Plumpton, that they should purchase it together. They agreed to do so. The purchase took place in October 2006. Mr Plumpton acquired a one-third interest in the newly incorporated Spaceworks through an entity called Franklin Investment Holdings Ltd (Franklin). Ms Whaley purchased a two-thirds interest in Spaceworks. Ms Whaley and Franklin entered into a shareholders' agreement dated 7 September 2007, which included a provision in relation to Focus:

9.1 [Spaceworks] has for many years used the expertise of Focus in relation to many interior fitout contracts. It is anticipated that [Spaceworks] will continue to work with Focus wherever possible in relation to interior design fitouts, and continue to foster the business between Focus and [Spaceworks].

9 In 2008 the relationship between Mr Plumpton and Ms Whaley broke down. The parties disagree about the cause. Referral work from Spaceworks to Focus diminished. In 2009 Focus alleged that Ms Whaley was in breach of the shareholders' agreement. Mr Plumpton was concerned about the lack of referral work and the use of other contractors. Letters were exchanged between solicitors. Following a mediation in November 2009, in February 2010 the parties (and Franklin) entered into the Agreement. The Agreement provided that it was entered into as a full and final settlement of the differences between the parties. Franklin agreed to transfer its shares in Spaceworks to Ms Whaley. The consideration for the transfer of those shares included a cash payment, an adjustment of shareholder accounts, and a commitment by Spaceworks in relation to referrals of work to Focus. The relevant provisions read as follows:

3. Spaceworks and [Ms Whaley] shall make reasonable endeavours, acting in good faith, to refer work to Focus having a total gross value of $3 million (excluding GST), it being anticipated that this can be achieved over a period of four years from the date of this agreement.

4. Spaceworks, [Ms Whaley] and Focus shall make reasonable endeavours and act in good faith towards one another to achieve the referral of work as set out at clause 3 above. To this end, Spaceworks and Focus shall each appoint a liaison person acceptable to the other to liaise between them. In the event that any issues arise, Spaceworks and Focus shall negotiate in good faith to resolve them.

5. For the purposes of clauses 3 and 4 above:

• (a) ‘work’ shall consist of hard fitouts including subcontractors except where Spaceworks' clients require otherwise;

• (b) ‘work’ shall be considered to have been referred to Focus only when it is actually undertaken by Focus or its subcontractors (for example it shall not include work for which Focus is invited to tender but does not undertake);

• (c) Spaceworks, [Ms Whaley] and Focus shall make reasonable endeavours and act in good faith to put in place mutually acceptable invoicing and payment arrangements for each job, recognising Focus's wish either to contract directly with the client (where that is acceptable to the client) or to be properly secured for payment (whether by advance payment or otherwise);

• (d) Spaceworks, [Ms Whaley] and Focus shall make reasonable endeavours and act in good faith to achieve referral work that is of a negotiated tender nature where Spaceworks invites only Focus to provide a quote for the work, subject always to the requirements of the client; and

• (e) ‘work’ shall only be accounted for in terms of clause 3 above when it is paid for by the client or Spaceworks as the case may be and shall not include bad debts.

6. Spaceworks shall report annually to Focus regarding the work that Spaceworks has undertaken and what part of that work has been referred to Focus. This obligation shall continue until the $3 million figure set out in clause 3 above has been achieved.

10 Focus became dissatisfied with the volume and nature of the work referred to it by Spaceworks. As noted above, in July 2016 Focus notified Spaceworks that it would not tender for any more Spaceworks projects. Shortly afterwards Focus filed proceedings against Spaceworks alleging breach of the referral provisions in the Agreement.

High Court judgment

Period within which Spaceworks was required to refer work to Focus

11 In the High Court Focus argued that cl 3 of the Agreement required Spaceworks to seek to achieve the target of $3 million of referred work within the period of four years referred to in cl 3. Spaceworks denied that there was a requirement to meet the $3 million target within four years, saying that it was clear from cl 3 and other provisions of the Agreement that although the parties expected that this amount of work could be referred within a four-year period, that was simply an expectation and not an obligation.

12 The Judge accepted Spaceworks' approach, finding that there was no obligation to seek to refer $3 million of work within a four-year period. 3

Negotiated tender work

13 Focus also argued that the Agreement required Spaceworks to make reasonable endeavours to refer work with a value of $3 million...