The Court of Appeal has released its judgement in the appeal by investors against a High Court finding that they did not validly cancel agreements for sale and purchase that they had entered into with developers of apartments.
Now, lest this all get a bit confusing, these aren’t the sales by Bluechip of Bluechip properties (usually houses purchased in bulk from a developer).
They were of three types, one a joint venture to own an apartment together, another type was like “normal” Bluechip products in that the purchaser took ownership, with finance arranged by Bluechip through GE Finance and others, Bluechip leased for four years and at the end of four years the purchaser could require Bluechip to buy back.
The last type was an “underwrite” of a sort where Bluechip could exercise an option to take over the purchase and paid an “option fee” for that right (in reality just giving a little bit of the purchaser’s money back to them). Some of the purchasers seem to have taken the view that they themselves neither should nor could ever be required to settle; an exceedingly odd view because what then would be the point of a developer entering into such agreements? There was also the minor difficulty of a clause specifically stating that the purchaser would be required to settle if BlueChip didn’t exercise its option.
I am aware that I am grossly over-simplifying here, and I am inevitably going to continue to do so. The Court of Appeal judgment goes to 165 pages and I could not possibly summarise even a fraction of the arguments and findings without a 20-30 page post. You really have to read it carefully yourselves if you want the full picture.
In any event, the High Court ruled on quite narrow grounds that they could not cancel (they were arguing that the real estate agents for the developers knew or ought to have known of Blue Chip’s misrepresentations or were essentially acting as Blue Chip’s agents, and/or that the whole underwrite transaction was tainted for non-compliance with the Securities Act by Bluechip).
The appeal mainly argued that Bluechip should have provided prospectuses, and this failure tainted the subsequent underwrite apartment purchases. The purchasers wanted to introduce some new grounds of attack but were not allowed to do so.
The defence was that either the Blue Chip involvement did not require a prospectus – relying on exemptions where the end result of a transaction is a certificate of title in land and where the transaction does not form part of a contributory scheme – or, even if it did, the developers agreement for sale and purchase was severable.
Paragraph 293 begins an interesting discussion on whether and when real estate transactions fall under the ambit of the Securities Act
At para 303-4, the High Court’s determination that taking a share in joint venture nominee companies with Blue Chip was not an equity security but rather a bare trustee for the parties in acquisition of land, was overturned…for a moment. Form beats substance in this instance….the purchaser acquired shares in the nominee company and was therefore potentially investing in an equity security under the Securities Act.
It was submitted on behalf of the investors that the JVAs constituted an offer of both equity securities (in the company to be incorporated) and debt securities. The Judge did not accept the submission that the acquisition of shares in the joint venture company would constitute an equity security. In essence, he found that the underlying substance of the joint venture was the purchase of an interest in land and that the company to be incorporated was no more than a vehicle to hold the land as bare trustee for the joint venture partners.
 The appellants submitted that a substance over form approach was not available in determining whether the shares were equity securities. We agree that it was not open to the Judge to overlook the company structure and focus on the purpose of the company as a bare trustee for the respective interests of the joint venturers in the purchase of the apartment and associated chattels. The shares in the company fall squarely within the definition of equity security.
Sadly for the purchasers, this didn’t avail them long. The Court of Appeal’s following conclusion was nevertheless:
that there was no offer to the public for subscription in terms of s 33. The [joint ventures] provided that the investor was entitled to all the shares in the company to be incorporated and to appoint the directors of the company. The shares were not purchased from Blue Chip or issued by a company that was offering them to the public for subscription. They were issued to the investor by a company incorporated by the investor himself or herself.
In short, it is not enough to be taking shares in a nominee company that the joint venture partners themselves establish. The partners would in effect be promoting and issuing the shares to themselves. There would be little point in cross-suing each other for any resulting breach!
The argument that these were alternatively debt securities failed, as:
consistently with our conclusions in relation to the JVAs, there was no obligation by Blue Chip to repay money or money’s worth contributed by the investors
In addition, two types of Blue Chip structure fell with the Securities Act exemption for transactions resulting in a separate certificate of title.
Finally, the Court of Appeal held that the Blue Chip side of things was sufficiently independent to the developer vendor side of things that no tainting would have occurred anyway:
The SPAs between the developers and the investors are independent contracts and are not tainted by any illegality in relation to the Blue Chip agreements since the SPAs were not entered into for the purpose of assisting or promoting any illegal transactions and because the developers did not have any knowledge of any illegality in respect of those transactions.
About as heavy a loss for the appellant purchasers as they could have received. It was always going to be hard work attributing failings of Blue Chip to third party commercial entities.
As an aside, reading through a couple of decisions in the last few weeks it has been notable that the Courts place reasonably heavy emphasis on what people might otherwise consider “fine print”…for example a clause stating that the parties disclaim any representations made by the other side and that the signed agreement is the be-all and end-all of their agreement.
The moral is that if you consider there were promises and conditions represented to you which don’t seem to be set out explicitly in an agreement, get them in before you sign. Later on is too late. Courts do retain power to look behind such a clause but not:
if the court considers it is fair and reasonable that the provision should be conclusive between the parties…
to quote from the present judgement at para 265. It is too easy sometimes to assume that a Judge will go past the fine print paying it no heed at all. Not always so.