AAM Ltd v Exotica Enterprise Ltd
[2019] NZHC 1482
•28 June 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2016-404-2850
[2019] NZHC 1482
BETWEEN AAM LIMITED
First Plaintiff
MUMTAJ YUNUS AGARBATTIWALA
Second PlaintiffAND
EXOTICA ENTERPRISE LIMITED
First Defendant
DARIUS KARANI
Second DefendantMANUKA MASTERS LIMITED
Third Defendant
Hearing: 29 April, 1-3 May & 10 May 2019
(further submissions received 24 May and 7 June 2019)
Appearances:
F Pereira for First Plaintiff Second Plaintiff in person L Ponniah for Defendant
Judgment:
28 June 2019
JUDGMENT OF LANG J
This judgment was delivered by me on 28 June 2019 at 3.30 pm.
Registrar/Deputy Registrar Date……………
AAM LTD v EXOTICA ENTERPRISE LTD [2019] NZHC 1482 [28 June 2019]
Contents
The claims............................................................................................................. [4]
Approach.............................................................................................................. [6]
A The Plaintiffs’ claims................................................................................. [10]
First cause of action: pre-contractual misrepresentations by Mr Karani [10]
The scope and nature of the business to be sold [11]
The meeting on 22 August 2015 [15]
Due diligence [23]
The events of 28 August 2015 [26]
30 August – 2 September 2015 [33]
The scope and nature of products sold by Exotica [46]
UMF certified products [47]
Koura Bay wine [51]
Endorsement by Simon Gault [53]
Assignment of distribution rights and continuity of supply [55]
Exclusive distribution rights of premium brands [56]
Love Manuka Lozenges [62]
Sale of unlicensed products [65]
Non-Performance of contract (Restraint of trade) [69]
Promise to introduce buyers [71]
Net profit of $171,000 [78]Restraint of trade [83]
The scope and value of the tangible assets of the business [89]
Second cause of action: breach of turnover warranty................................. [100] Did AAM affirm the agreement for the sale and purchase of the business? . [101] Did the breach of the turnover warranty entitle AAM to cancel the agreement?
........................................................................................................................... [108]
Was the turnover warranty an essential term of the agreement? [109] Did breach of the term substantially reduce the benefit of the contract for the purchaser? [120]
What damages should be awarded for breach of the turnover warranty? [123]
Third cause of action: breach of s 9 of the FTA.......................................... [140]
The Exotica website [141]
Fourth cause of action: failure to deliver product........................................ [145]
Invoice 589 [146]
Invoice 609 [149]
The balance of $11,619.60 [151]
Fifth cause of action: failure to pay for goods taken on consignment [155]
Kauri table tops - $10,000 [156]
The remaining claims [160]
Invoice 555 - $6,480 [161]
Invoice 556 - $1,040 [165]
Invoices 557, 558, 561, 567 and 575 - $975.82 [168]
Invoice 559 - $79 [169]
Invoice 562 - $516 [171]
Invoice 563 - $532 [174]
Invoice 564 and 565 - $163 [176]
Invoices 566 and 572 - $9360 [177]
Invoice 574 - $815.40 [181]
Invoice 576 - $1,586 [182]
Invoice 577 - $1,772 [185]
Summary [186]
BThe counterclaim..................................................................................... [187]
Summary.......................................................................................................... [194]
Interest.............................................................................................................. [196]
Costs.................................................................................................................. [200]
[1] Mr Darius Karani is the shareholder and director of the first defendant, Exotica Enterprise Limited (Exotica). Exotica manufactures and distributes novelty food and beverage products including honey-based beverages and wines.
[2] In early September 2015 Mr Karani agreed to sell part of Exotica’s business to the second plaintiff, Ms Agarbattiwala. The purchase price was $475,000, of which Exotica agreed to leave the sum of $125,000 owing for a period of six months following the completion of the sale. The sale was ultimately completed by Ms Agarbattiwala’s nominee, AAM Limited (AAM), on or about 16 September 2015.
[3] The purchase proved to be a disaster for Ms Agarbattiwala and AAM. AAM never paid Exotica the balance of the purchase price in March 2016. It ultimately purported to cancel the agreement to purchase the business on 12 July 2018, and then re-sold the business in September 2018 for the sum of $75,000. By that stage the plaintiffs had issued this proceeding, in which they seek to recover the losses they say they have incurred as result of the conduct of both Exotica and Mr Karani.
The claims
[4] The current version of the amended statement of claim contains five causes of action.1 First, the plaintiffs contend they were induced to enter into the agreement to purchase the business by fraudulent misrepresentations made by Mr Karani about numerous aspects of the proposed sale of the business. Secondly, they contend Exotica breached a turnover warranty contained in the agreement. Thirdly, they say Exotica, Mr Karani and Mrs Karani breached s 9 of the Fair Trading Act 1986 (the FTA) by engaging in misleading and deceptive conduct after AAM had purchased the business. This claim is based on the fact that Exotica continued to include references to the business on its website. Fourthly, AAM alleges Exotica failed to supply product to AAM even though AAM paid for that product. Finally, AAM contends the defendants have failed to pay for stock taken by them on consignment and not returned.
1 At the commencement of the trial the statement of claim contained 14 causes of action. The plaintiffs were given leave to file the current version of the statement of claim after the evidence had concluded but before the defendants delivered their closing address.
[5] Exotica has filed a counterclaim containing two causes of action. First, it seeks recovery of the sum of $125,000 being the balance of the price payable for the purchase of the business together with interest. Secondly, Exotica seeks to recover the sum of $23,003.93 for product supplied to AAM but not paid for by it.
Approach
[6] There remains a degree of confusion in the statement of claim notwithstanding the numerous occasions on which it has now been amended. By way of example, the heading of the first cause of action suggests it comprises a claim under the Fair Trading Act 1986 (the FTA). The body of the claim, however, sets out several allegedly false pre-contractual representations and concludes with a statement that the plaintiffs seek relief under ss 43 and 49 of the Contract and Commercial Law Act 2017. No relief is sought under the FTA.
[7] When Mr Ponniah was presenting his closing submissions on behalf of the defendants there was some discussion as to whether I should amend the first cause of action to convert it to a claim under the FTA. Mr Ponniah objected to this on the basis that the plaintiffs had already had ample opportunity to amend their claim. I upheld Mr Ponniah’s objection and ruled that the statement of claim should remain in its existing form. As a result, there remains only one pleading that alleges breaches of the FTA, and then only in relation to very limited subject-matter.
[8] I granted the plaintiffs further time to file and serve written submissions having had the benefit of hearing the defendants’ submissions. When the plaintiffs filed their submissions, they referred to numerous issues not relevant to the pleadings. I do not address those submissions because the pleadings fix the boundaries of the case and there is no pleading to which such submissions can apply.
[9] The defendants also objected to the plaintiffs’ submissions because they say the submissions contain excerpts from documents that have never been discovered and were not referred to in evidence. In preparing this judgment I have only taken into account documents that were referred to during the trial.
A The Plaintiffs’ claims
First cause of action: pre-contractual misrepresentations by Mr Karani
[10] This cause of action alleges that during pre-contractual negotiations Mr Karani fraudulently misrepresented the following aspects of the proposed sale of the business:
(a)The scope and nature of the business to be sold.
(b)The scope and nature of products sold by Exotica.
(c)The ability of the purchaser to obtain distribution rights and continuity of supply.
(d)The fact that Exotica would abide by a restraint of trade provision following settlement.
(e)The scope and value of tangible assets included in the sale of the business.
The scope and nature of the business to be sold
[11] This issue is one of the central areas of dispute between the parties. Ms Agarbattiwala alleges Mr Karani led her to believe she was purchasing the whole of Exotica’s business other than its manufacturing operation. This comprised not only the retail shop but also the wholesale and export arms of the business. The defendants contend Ms Agarbattiwala knew she was only purchasing Exotica’s retail business, although she also had the right to sell product on a wholesale basis to any party including Exotica’s existing wholesale customers. In addition, she had the exclusive right to sell Exotica’s products both within New Zealand and India for a period of two years.
[12] In order to determine this issue it is necessary to set out the events that led to Ms Agarbattiwala entering into the agreement to purchase the business.
[13] Exotica had been trading since at least 2013. In or about 2014, however, it acquired the lease of shop premises situated at Unit 3, 1 Bishop Dunn Place in Botany. It used those premises to sell retail products that it manufactured itself under the Exotica label as well as products purchased on a wholesale basis from trade suppliers. Exotica named this retail business “New from Zealand”. In addition, but separately from the retail business, Exotica sold product on a wholesale basis to other retailers and it exported product overseas.
[14] Ms Agarbattiwala first learned that Exotica was selling its business from Mr Neville Choksi, a business broker engaged by Exotica to act as its agent on the sale of the business. Mr Choksi provided Mr Karani with an appraisal regarding the sale of the business and then began an advertising campaign to promote the sale. Mr Choksi listed the business for sale at $600,000. It is common ground that Ms Agarbattiwala did not see either the appraisal or the advertisements that Mr Choksi placed.
The meeting on 22 August 2015
[15] Mr Choksi introduced Ms Agarbattiwala to Mr and Mrs Karani at the shop on Saturday 22 August 2015. Mr Karani says he showed Ms Agarbattiwala around the shop and explained how the business worked. Ms Agarbattiwala contends Mr Karani made numerous representations during this visit that subsequently turned out to be false. In particular, she says he told her that the purchaser of the business would receive the right to distribute 14 premium brands of New Zealand products on settlement, and that the purchaser would also be guaranteed the ongoing supply of Exotica products for both retail and wholesale purposes.
[16] Ms Agarbattiwala also says she told Mr Karani that she had a son who was ill. As a result, she wanted to buy a business that would allow her to work from home or the hospital, and that did not require her to be physically present. She says Mr and Mrs Karani assured her that the business “was a wholesale and export business, perfectly suitable for my family needs”. She also says Mr Karani told her there was no need for her to be physically present at the shop, and that he and his wife closed the shop whenever they wanted so they could take holidays overseas. He also said the
wholesale and export business operation “was easy to operate remotely from any location and mainly done via email or over the phone”. This was because the shop was only a small part of the business and was mainly used as a place where visiting clients would come to taste products or buy gifts and souvenirs.
[17] Ms Agarbattiwala says Mr Karani told her he and his wife would only come to the shop when they had a client who wanted to visit or when they wanted to work from the shop. On those occasions they would only open the shop after they had dropped their children off at school and would then close it before school finished for the day. She says Mr Karani reiterated that most orders were placed online, and that it was not necessary for them to be present at the shop in order to carry on the business.
[18] Ms Agarbattiwala says Mr Karani also told her he was selling the business so he could focus on the development of new products under the Exotica label and the export of product to Europe. This meant he needed to find someone who could look after retail and wholesale distribution for both local and overseas markets.
[19] Mr Karani denies he made these representations on 22 August 2015. He points out that this was the first time he had met Ms Agarbattiwala and did not know whether she was genuinely interested in buying the business. For that reason he would not have descended into the kind of detail she says was discussed during the visit to the shop on that date. He also says he made it clear to Ms Agarbattiwala that Exotica was only selling the retail shop, including all stock and fittings in the shop. Furthermore, he told Ms Agarbattiwala that the purchaser of the business would need to approach suppliers to ensure they were happy to continue supplying product to be sold in the shop.
[20] Mr Karani says he recalls Ms Agarbattiwala asking whether she needed to be present at the shop every day. He told her that she need not be physically present provided she had appropriately trained staff and a reliable manager. He says he advised her, however, that she should come in to the shop daily and involve herself in the business.
[21] Mr Karani says Ms Agarbattiwala told him she was interested in purchasing the business and said she wanted to undertake due diligence for a two week period between 24 August and 6 September 2015.
[22] I have no hesitation in accepting Mr Karani’s version of events regarding the discussions that took place during Ms Agarbattiwala’s initial visit to the shop on 22 August 2015. First, I consider it inherently improbable that the discussion would have descended to the level of detail claimed by Ms Agarbattiwala on the first occasion the parties met. Secondly, Ms Agarbattiwala acknowledges she may be incorrect in her recollection that Mr and Mrs Karani were both present on this occasion. Thirdly, it is inherently improbable that Mr Karani would only have been at the shop when he needed to meet clients there.
Due diligence
[23] Ms Agarbattiwala returned to the shop on Monday 24 August 2015 and thereafter undertook due diligence of the business during the last two weeks of August 2015. During this period she spent a considerable amount of time in the shop observing how it ran. Mr Karani says he went through the business records with her and she undertook a check of stock and chattels in the shop.
[24] On 21 August 2015 Mr Choksi gave Ms Agarbattiwala a draft copy of Exotica’s draft financial statements for the year ended 31 March 2015. These recorded the business as having a turnover during that year of $1.184 million, and achieving a net profit of $170,000 before taking into account the salary paid to Mr Karani.
[25] Ms Agarbattiwala gave the draft financial statements to her accountant, Mr Lathigara. He was a close family friend of Ms Agarbattiwala and she relied on him for advice. In an email sent on 25 August 2015, Ms Agarbattiwala advised Mr Choksi that her accountant had some concerns about the draft 2015 financial statements and wanted the financial statements for the last three years or for such period as the business had been in operation. The email went on to say:
…
For bank proposal I need clear indication of tangible and intangible assets, stock and fixture etc to prove what comprises the asking price. Including rights, trademarks, accounts and business included in the price.
The events of 28 August 2015
[26] On 28 August 2015 Ms Agarbattiwala sent Mrs Karani two emails annexing a partly completed spreadsheet she had prepared using Exotica’s online product catalogue. She asked Mrs Karani to complete the spreadsheet setting out the products that Exotica sold from its existing suppliers. She told Mrs Karani she needed to provide the spreadsheet to her bank in support of her application for finance to enable her to purchase the business. Mrs Karani returned the completed spreadsheet three days later.
[27] On the evening of Friday 28 August 2015 Mr Karani agreed to meet Ms Agarbattiwala at the shop. Mr Lathigara and Ms Agarbattiwala’s son Rafael (known as Vicky) also attended this meeting. Mr Karani maintains that during this meeting he advised Mr Lathigara of the scope of the proposed sale as follows:
34. At this meeting, I explained to the accountant that only the New from New Zealand retail shop was for sale and it was only part of the EEL businesses. I also explained that the turnover in the EEL 2015 financial accounts represented the total sales for both the New from Zealand retail shop and EEL’s wholesale and export business. I explained that the financial statement gave a breakup of the NZ sales (with GST) and export sales (no GST) and that he was best to look at the GST returns which would reflect the sales of the retail shop. Later in this statement I respond in detail to Mr Lathigara affidavit of 21/03/2019 and alleged conversations with me.
[28] Mr Karani points out that the 2015 financial statements included income received from transactions that were zero rated for GST purposes. He says these related to product that was exported. He says he has always proceeded on the basis that goods exported from New Zealand are zero rated for GST purposes. He includes under this umbrella any goods sold to third parties for the purpose of export provided the goods are shipped overseas within 28 days after the date of supply. Mr Karani contends Mr Lathigara would therefore have known the financial statements contained a significant portion of income from exported product, and that this aspect of the company’s business was not for sale.
[29] Mr Lathigara disagrees with this summary. He says that, as Ms Agarbattiwala’s tax agent, he asked Mr Karani “several key questions” about the business and the way in which it operated. He sets these out, together with Mr Karani’s responses, in his brief of evidence. In short, Mr Karani told Mr Lathigara the business involved export and wholesale distribution. He said he was not selling the Exotica company because he wanted it to focus on manufacturing and exporting to Europe. He said he would be operating that business from premises above the retail shop. Furthermore, when asked what was included in the sale of the business, Mr Karani said that everything in the shop and in the financial statements was included in the sale. When Mr Lathigara asked where Exotica sourced its product from, Mr Karani said it had acquired distribution rights “from Nelson Honey and many other suppliers of New Zealand” in addition to Exotica’s own products.
[30] Mr Lathigara also says he asked Mr Karani if he was sure Ms Agarbattiwala could operate the business remotely, Mr Karani responded in the affirmative. He also said he would provide support to Ms Agarbattiwala because his office would be upstairs in the same building.
[31] I treat Mr Lathigara’s evidence about what was said in this meeting with considerable caution. First, he cannot realistically be regarded as an independent witness because of his close family association with Ms Agarbattiwala. Secondly, he conceded that Ms Agarbattiwala had prepared his brief of evidence. Thirdly, he acknowledged that he did not take any notes at the meeting. It is therefore both remarkable and inherently unlikely that he can now recall the discussion with Mr Karani in such detail, particularly when he appears to have little recollection of many other events that occurred around this time.
[32] I am nevertheless not prepared to accept Mr Karani’s evidence that he told Mr Lathigara the turnover in Exotica’s 2015 financial statements was that relating to the whole of its business, and that it would be advisable to ascertain the turnover of the shop from the company’s GST records. That aspect of the discussion is not reflected in any contemporaneous or subsequent document. Mr Lathigara also clearly proceeded throughout on the basis that both the turnover and net profit related to the business being sold. It also flies in the face of the fact that Mr Karani was subsequently
prepared to sign an agreement for the sale of the business containing a turnover warranty calculated on the basis of the turnover of the entire business.
30 August – 2 September 2015
[33] On the morning of 30 August 2015 Ms Agarbattiwala sent Mr Karani a text message commencing “Just to let you know I’m 100% in setup mind buying business. No doubt we have anymore”. The message went on to say that Mr Lathigara had come back with a few suggestions and there needed to be some negotiations on price. This obviously suggested Ms Agarbattiwaa was very interested in purchasing the business.
[34] On the evening of 30 August 2015 Ms Agarbattiwala sent the following email to Mrs Karani seeking information to be incorporated into an agreement for the purchase of the business:
Hi Homai,
Please provide following information to documented in sale and purchase agreement. I am meeting Neville jii [sic] tomorrow after lunch around 2pm.
1.List of items/products included in sale, their exclusive territory rights etc
2.List of wholesale/retail regular buyers thank I will continue business from the time I take over the business
3.List of suppliers, their agreement, sole distribution territory etc. All who has done business with you in last 18 months.
4.List of brands, dealership/wholesale/retail contracts
5.Anything that you both can think of is required for sale/purchase.
I want to make it smooth and easy for both of us so it will be good if we have everything included in the agreement.
Thanks in advance.
[35] Matters moved quickly on 31 August 2015. In the early hours of that day Mr Choksi sent Ms Agarbattiwala an email attaching a draft agreement for the sale and purchase of the business for her to complete. This recorded a purchase price of
$475,000 made up of tangible assets ($275,000), intangible assets ($50,000) and stock in trade ($150,000). Later that morning Mr Choksi sent Mr Karani an email confirming that “after prolonged discussions” the purchasers had agreed to pay
$475,000 for the business including stock. Of this sum they would pay $300,000 on settlement and the balance of $175,000 six months later “as per a separate legal document acceptable to both”. Mr Choksi also asked Mr Karani to email him a copy of the lease, the stock list and the asset schedule.
[36] At 1.51 pm the same day Mr Choksi sent Ms Agarbattiwala an email attaching the stock list he had obviously received from Mr Karani. That evening Ms Agarbattiwala sent Mrs Karani a further email requesting the following information for inclusion in the agreement for the purchase of the business:
1.List of items/products included in sale, their exclusive territory rights etc
2.List of wholesale/retail regular buyers thank [sic] I will continue business from the time I take over the business
3.List of suppliers, their agreement, sole distribution territory etc. All who has done business with you in last 18 months.
4.List of brands, dealership/wholesale/retail contracts
5.Anything that you both can think of is required for sale/purchase.
[37] Ms Agarbattiwala and Mr Karani ultimately entered into the agreement for sale and purchase in its final form on 1 September 2015. The principal terms of the agreement were as follows:
1.The vendor was Exotica and the purchaser was Ms Agarbattiwala or her nominee.
2.The address of the business premises was Unit 3, 1 Bishop Dunn Place, Flat Bush, Auckland.
3.The description of the business was “Gift Shop Manukau [sic] honey food and beverage and wines products from New Zealand”.
4.The name of the business was “Exotica Enterprise”.
5.Purchase price was $475,000 made up as follows:
Tangible assets $275,000 Intangible assets (Goodwill)
$ 50,000
Stock in trade
$150,000
Total
$475,000
6.The possession date was to be 30 September 2015 or earlier by mutual agreement.
7.The vendor provided a warranty that the business had achieved a turnover of $1,184,848 (excluding GST) during the period from 1 April 2014 to 31 March 2015
8.The vendor agreed to provide the purchaser with assistance following settlement for two hours a day on two days each week for a period of 30 days.
9.The vendor agreed to a restraint of trade within New Zealand for five years after settlement.
[38] The agreement was conditional on Ms Agarbattiwaa obtaining her solicitor’s approval of the contract within one working day. It was also conditional on the parties obtaining the agreement of the landlord to the assignment of the lease to the purchaser within 14 working days from the date of the agreement. In addition, it was conditional on Ms Agarbattiwala obtaining finance in the sum of $475,000 from any suitable lender prior to 18 September 2015.
[39]The agreement contained the following special conditions:
20 A list of products their retail distribution rights and brand names will be provided and attached to this agreement, the Vendor agrees that he will ensure the continuity of supply and will not compete with the buyer in the retail market in New Zealand for a period of 5 years.
21 The Vendor agrees and undertakes that he will hand over all business contacts buyers and suppliers over a period of 30 days Vendor assistance.
22 The Vendor agrees that he will pass on all retail inquiries pertaining to items mentioned in clause 20 on a continuous basis.
23 The Vendor agrees to announce before possession date in all his marketing materials printed and on line that he has handed over the business of items specified in clause 20 to the buyer.
…
27 All distribution rights (sole, New Zealand wide and overseas) will be documented and signed prior to settlement date.
[40] On the following day Ms Agarbattiwala and Mr Karani signed a Memorandum of Understanding (MOU) prepared by Mr Karani in the following terms:
MOU between Mumtaj Agarbattiwala & Darius Karani for the Sale & Purchase of “New From Zealand”
Mumtaj Agarbattiwala is buying the retail business New from Zealand situation at Unit 3, 1 Bishop Dunn place, Flat Bush, Auckland, which is a
Liquor and Food Beverage store. Along with that she will also be getting the name, trademarks and intellectual property associated with “New FromZealand.”
She will also have sole distribution rights for all Exotica Enterprise Products in New Zealand and India for a period of 2 years. After that if mutually beneficial to both parties the contract will be renewed.
All intellectual property and the brand Exotica Enterprise Ltd remain the property of Darius Karani. Exotica Enterprise Ltd will continue trading under the Directorship of Darius Karani and no shares or portion of this company is being sold in this transaction.
Vender – New From Zealand Name – Darius Karani Signature (signed) 2/9/2015
Purchaser – Mumtaj Agarbattiwala or Nominee Signature (signed) 2/9/2015
[41] Mr Karani says this document was signed for two reasons. First, he wanted to ensure it was clearly understood that the agreement for sale and purchase did not include the shares in Exotica or the intellectual property and brands established by that company. Secondly, Mr Karani said Ms Agarbattiwala had told him she had many contacts in India and wished to build up an export market for Exotica products in that
country. He therefore agreed to grant her the sole right to distribute Exotica products in both New Zealand and India for a period of two years.
[42] I consider the meaning of the agreement for sale and purchase of the business to be plain. The subject matter of the agreement was the business described in the agreement and carried on by Exotica at Unit 3, 1 Bishop Dunn Place. This comprised a gift shop stocking manuka honey as well as other foods, wines and New Zealand beverages. The MOU signed on 2 September 2015 extended the ambit of the agreement by giving the purchaser the exclusive right to distribute products manufactured under the Exotica label in both New Zealand and India.
[43] The agreement for sale and purchase does not mention Exotica’s wholesale business. By comparison, the word “retail” is used in several places in the agreement. Furthermore, the only mention of the export business is in special condition 27, which relates to the documentation and execution of “sole, New Zealand wide or overseas” distribution rights prior to settlement. I consider this condition relates to the fact that Mr Karani had given Ms Agarbattiwala the exclusive right to distribute Exotica products within New Zealand and by way of export to India. There is no evidence that any other distribution rights were documented or signed prior to settlement. Special condition 27 was satisfied on 2 September 2015 when Mr Karani and Ms Agarbattiwala signed the MOU documenting the purchaser’s sole right to distribute Exotica’s product within New Zealand and to export it to India. The agreement for sale and purchase and the MOU did not give the purchaser any other rights to export product that would otherwise be exported by Exotica.
[44] In addition, the agreement for sale and purchase contained a restraint of trade provision. This prohibited the vendor of the business from operating a retail business in competition with the business being sold for a period of five years within New Zealand. This demonstrates that Exotica was selling its retail business and not the whole of its business other than manufacturing as Ms Agarbattiwala alleges.
[45] It follows that I reject the plaintiffs’ submission that the agreement for the sale and purchase of the business extended to the entire wholesale and export business operated by Exotica at the time of the sale. The purchaser of the business was free to
sell product on a wholesale basis and to export product overseas as it saw fit but the only distribution rights that came with the sale to AAM were those relating to the sale and export of Exotica’s products.
The scope and nature of products sold by Exotica
[46] This aspect of the first cause of action is based on allegations that Mr Karani falsely claimed that products sold by Exotica were UMF certified products, that Exotica’s Manuka Honey Liqueur had been endorsed by the well-known chef Simon Gault and that Exotica owned the Koura Bay wine label.
UMF certified products
[47] The plaintiffs contend Mr Karani assured Ms Agarbattiwala that lozenges marketed by Exotica under the Manuka Honey label had UMFHA (UMF) certification and were popular in China.2 They say this gave Manuka Honey products enhanced status and credibility in the marketplace. Ms Agarbattiwala also says she observed labels on bottles of lozenges in Exotica’s stock that displayed the UMF trademark, and produced photographs of these as an exhibit. AAM subsequently acquired some of this stock on settlement.
[48] Ms Agarbattiwala says she subsequently checked with UMF and discovered that Exotica had no authority to use the trademark in relation to the lozenges. In addition, Ms Agarbattiwala says Mr Karani accosted her during a promotion AAM conducted at the Sylvia Park shopping mall over the Easter weekend in 2016. She says that when he saw she was displaying Love Manuka lozenges in bottles displaying the UMF trademark he told her she had to remove them or she would face legal proceedings from the UMFHA. She was therefore forced to withdraw the lozenges from sale and suffered loss as a result.
[49] Mr Karani denies there were any discussions about these issues. He also says their pre-contractual negotiations would never have descended to this level of detail.
2 UMFHA refers to the Unique Manuka Factor Honey Association, which oversees the use of the UMF trademark.
[50] It is not necessary to resolve this factual dispute because I do not consider the representations, if they were made, played any part in Ms Agarbattiwala’s decision to buy the business. The lozenges were just one of numerous product lines that Exotica was selling through the shop. Furthermore, Ms Agarbattiwala has not said UMF accreditation was a factor in her decision to buy the business. Nor has AAM made any attempt to quantify the stock in question or the losses it says it has suffered. This aspect of the claim fails as a result.
Koura Bay wine
[51] Ms Agarbattiwala says that, when Mr Karani was showing her around the shop on 22 August 2015, he pointed to a vineyard poster on the wall and said he was one of the owners of the Koura Bay wine brand and that Exotica was sole distributor of that brand. She later discovered this was not true.
[52] I do not accept Ms Agarbattiwala’s evidence on this point because I do not consider Mr Karani would have made a representation that was so demonstrably false. Even a cursory check of the situation would have revealed that Mr Karani did not own shares in the company that produced wine under the Koura Bay brand. Nor would it make commercial sense in any event for a winemaker to appoint a single entity like Exotica as the sole distributor of its products. In addition, there is nothing in the evidence to suggest Koura Bay wines formed a significant proportion of Exotica’s wine sales. Furthermore, Ms Agarbattiwala did not raise this issue following settlement. Instead she appears to have concentrated on creating her own wine label after she took over the business. Finally, she does not explain how the prospect of distributing Koura Bay wines affected her decision to acquire the business. This aspect of the claim fails for these reasons.
Endorsement by Simon Gault
[53] Ms Agarbattiwala says that, when Mr Karani showed her around the shop on 22 August 2015, he told her the “Manuka Gold” liqueur that was for sale in the shop had been endorsed by the well-known chef Simon Gault. The statement of claim also alleges that this endorsement recognised the liqueur “as the world’s best Manuka honey liqueur”. Mr Karani acknowledges there was a photograph of Simon Gault in
the shop but denies making the representations contained in this part of the statement of claim.
[54] Ms Agarbattiwala has not explained how the endorsement by Mr Gault of one of Exotica’s products was of any importance in her decision to purchase the business. Furthermore, if Mr Karani made such an observation it is likely to have been a throwaway comment. If the issue was of any importance to Ms Agarbattiwala she would surely have made further enquiries about it prior to settlement or raised the issue again after settlement. There is no evidence she ever raised the issue again after 22 August 2015. I consider there is no substance to this aspect of the plaintiffs’ claim.
Assignment of distribution rights and continuity of supply
[55] The next aspect of the cause of action based on misrepresentation relates to statements allegedly made by Mr Karani regarding the assignment of distribution rights to and continuity of product supply for the purchaser.
Exclusive distribution rights of premium brands
[56] The statement of claim alleges the defendants represented that Exotica had “exclusively [sic] distribution rights of premium brands of New Zealand like Nelson Honey, Clean Paleo etc” that would be assigned to the purchaser on settlement. This turned out to be false because Exotica had no authority to assign or transfer such rights to the purchaser.
[57] Mr Karani denies he or his wife made these representations. He says he told Ms Agarbattiwala she would need to enter into her own arrangements with Exotica’s suppliers but that he would assist by introducing her to them.
[58] I accept Mr Karani’s evidence on this point for several reasons. First, it accords with common sense and commercial practice. Suppliers would obviously need to make their own decisions as to whether they should continue to sell product to the purchaser of the business and, if so, on what terms. In particular, they would need to decide whether to extend credit arrangements to the purchaser.
[59] Secondly, I have already referred3 to the fact that Clause 27 of the agreement for sale and purchase required the transfer of any distribution rights to be documented and signed prior to settlement. This related to the fact that Mr Karani had agreed to grant Ms Agarbattiwala the sole right to distribute Exotica’s products within New Zealand and by way of export to India. If Ms Agarbattiwala’s evidence is correct, however, she would have required evidence on settlement that Exotica had assigned all of its distribution rights to AAM. There is no evidence Ms Agarbattiwala sought any such assurance on settlement.
[60] Thirdly, the evidence demonstrates that Mr Karani went to considerable lengths prior to settlement to introduce Ms Agarbattiwala to Exotica’s suppliers. Ms Agarbattiwala also took steps herself to make contact with suppliers both prior to and following settlement. There would have been no need for either Mr Karani or Ms Agarbattiwala to take those steps if Exotica was required to assign distribution rights on settlement.
[61]This claim therefore fails on the facts.
Love Manuka Lozenges
[62] The statement of claim alleges that, rather than continue to supply AAM, Exotica immediately discontinued its manufacture of Love Manuka Lozenges following settlement and Mrs Karani began producing lozenges under her Manuka Masters brand.
[63] Ms Agarbattiwala relies for this claim on an email she received from Mrs Karani on 2 June 2016, some nine months after AAM had purchased the business. The email read as follows:
Hi Mumtaj,
Darius has asked me to get in touch with you regarding pricing for the lozenges.
My company Manuka Masters is now making the lozenges and we have changed the packaging.
3 At [43].
Please see attached image of the new box.
These are available in 180 gm packs, all with 100+ MGO Manuka honey. There are 2 varieties available
One with Strawberry, Cherry & Blackcurrant Flavour and the other box with Lemon, Ginger & Mint Flavour
Wholesale price to you will be $8+ GSt per 100 gm pack
Do let me know if you are interested in purchasing any or if you need any further assistance.
Regards
[64] The important feature of the email is that it confirms Manuka Masters had taken over the manufacture of the lozenges and was prepared to supply them to AAM. It follows there is no factual basis for AAM’s claim that Exotica or Mr Karani breached any pre-contractual assurance that they would ensure continuity of supply to the business following settlement. The only difference was that as from June 2016 Manuka Masters would be manufacturing and supplying the lozenges rather than Exotica as had formerly been the case.
Sale of unlicensed products
[65] This aspect of the plaintiffs’ claim is contained in the following paragraph of the statement of claim:
(iii) As provided for in the Agreement first the Defendants knowingly sold their stock of unlicensed products to Plaintiffs for on sale and distribution. Six months after settlement the Defendants knowing the risk of selling unlicensed products and that they would be implicated in such a sale, bullied the Plaintiffs into destroying the unlicensed stock products they had sold to the AAM, without compensation and insisted that the Plaintiffs buy the new products from third defendants on cash basis.
[66] The document relied on under this head is the following email Ms Agarbattiwala sent to Mr Karani at 10.48 am on 2 June 2016:
All lozenges have passed BB [best before] in May. I have stock that cannot be sold anymore due to BB. Unpackaged stock yet to be packaged, waiting you to packet them.
Considering selling of lozenges is couple of packets each month please advise what stock you can offer and pricing.
Thanks and kind regards,
[67]Mr Karani responded as follows:
…
As too [sic] the lozenges please note Exotica lozenges are still there I am just not doing them in pouches anymore and am in the process of new packaging for it.
I am sure if you tell the customer that the packaging has changed he / she will not have a problem with that, they are more interested in the product, till the new packaging is ready, Homai just offered you the option of her product.
[68] The reference to Mrs Karani offering to supply AAM with her product relates to the email set out above.4 The emails suggest that by 2 June 2016 some of the lozenges AAM acquired on settlement had passed their “best before” date. It therefore needed to replace them with new stock. In response to Ms Agarbattiwala’s enquiry about this issue Mr and Mrs Karani both responded with suggestions about future supply. Their responses demonstrate that continuity of supply was not an issue in relation to the lozenges originally supplied by Exotica. It follows that there is no factual substance to the plaintiffs’ claim under this head.
Non-Performance of contract (Restraint of trade)
[69]This aspect of the plaintiffs’ claims contains the following pleadings:
(i)The Defendants falsely promised to introduce buyers and promised a net income of $171,000 to AAM
(ii)Post settlement the defendants continued the business as usual contrary to the restrain [sic] of trade clause in the agreement and refused to hand over orders and corporate contracts. Plaintiffs repeatedly requested the defendants to introduce clients, but defendants avoided and ignored and neglected to give their support as promised.
[70] The first pleading contains two separate allegations. The first is that the plaintiffs falsely promised to introduce buyers and the second is that they promised the business would produce a net income of $171,000.
4 At [63].
Promise to introduce buyers
[71] It is difficult to discern from the evidence what the plaintiffs’ real complaint under this head comprises. The principal means by which buyers would come into contact with the retail business was by visiting the shop. The vendor had no control over this aspect of the business following settlement. In addition, Mr Karani says he introduced Ms Agarbattiwala to customers who came into the shop whilst she was conducting due diligence. He also says that following settlement he referred all retail enquiries that Exotica received to AAM. In addition, Mr Karani says that when Exotica received enquiries from customers who wished to buy its products he would refer the enquiry to Ms Agarbattiwala. He also forwarded emails Exotica received from potential customers to AAM, or he would provide the sender with AAM’s contact details.
[72] Mr Karani’s evidence on this point is supported by an email he sent to Ms Agarbattiwala on 2 June 2016. In that email he responded to a number of issues Ms Agarbattiwala had obviously raised. His response contained the following statement:
…
You keep saying that you have sole rights for Exotica for 2 years and its been 8 months and we have seen no sale from you for any product.
We have provided all leads that come to us and there has been no result from your end.
Just as you need results we too need to see results for sale of our products.
…
[73] Following settlement Mr Karani says he would see Ms Agarbattiwala on a daily basis because she would visit him in the premises Exotica continued to rent above the shop. During this period Mr Karani says he introduced her to regular clients of the store. He says she also sat in on meetings with Exotica’s customers or potential customers, especially those who were interested in dealing with the shop or the sale of product to India. Ms Agarbattiwala did not dispute this aspect of Mr Karani’s evidence.
[74] Ms Agarbattiwala also acknowledges that Mr Karani introduced her to the landlord of the shop prior to settlement. Exotica had been selling gift packs to the landlord using the Bartercard system in exchange for a credit against the rental payable for the shop. Mr Karani says, and Ms Agarbattiwala does not appear to dispute, that Ms Agarbattiwala agreed to the landlord’s request that Exotica be permitted to continue to supply the gift boxes following settlement. Exotica went on to purchase some of the items for the gift boxes from AAM following settlement.
[75] Similarly, Ms Agarbattiwala does not appear to dispute Mr Karani’s evidence that he put her in touch with Mr Lal, the owner of a nearby liquor centre, prior to settlement. Mr Lal was interested in an arrangement under which he would acquire products from the shop on a wholesale basis for onsale in his shop.
[76] So far as the export side of the business is concerned, Mr Karani had agreed to give the purchaser the sole right to export Exotica products to India because Ms Agarbattiwala said she had numerous business contacts in India. Ms Agarbattiwala said that she was working with Nelson Honey to expand the export of Exotica’s products to India but I did not take her to claim that Mr Karani told her he would put her in touch with buyers in India. There is no dispute that Mr Karani introduced Ms Agarbattiwala to the owners of Nelson Honey before she purchased the business.
[77] These aspects of the evidence persuade me that, to the extent Mr Karani may have told Ms Agarbattiwala he would assist her in making contact with potential customers, he made good on that promise. This aspect of the claim fails as a result.
Net profit of $171,000
[78] Several factors combine to persuade me that Mr Karani never gave Ms Agarbattiwala an unequivocal assurance that the business would make a net profit of $171,000 after she assumed control of it.
[79] First, it would have been a very foolhardy prediction for Mr Karani to make. The viability of the business following settlement obviously depended on numerous factors, many of which depended on the manner in which the purchaser conducted it.
These included the ability of the purchaser to cultivate and maintain good relationships with staff, suppliers and customers. The profitability of the business was also subject to factors beyond the control of the proprietor. In particular, it was derived from the sale of products that were luxury items rather than basic necessities. This meant the profitability of the business was vulnerable to downturns in the economy caused by local or global events.
[80] More importantly, Mr Karani knew the net profit Exotica had achieved in the 2015 year depended to a significant extent on the income it had derived from export and wholesale activities that were not included in the proposed sale. I consider it inherently unlikely that he would have given Ms Agarbattiwala an assurance that she would be able to earn a greater profit than he had been able to achieve from the business that he was selling.
[81] Finally, the turnover warranty that was ultimately included in the agreement for the sale of the business did not contain any reference to net profit or to the turnover the business would achieve following settlement. It was instead restricted to the turnover the business had been able to achieve during the 2015 year.
[82]For these reasons I reject this aspect of the plaintiffs’ claim.
Restraint of trade
[83]This claim is based on the following pleading:
(i) Post settlement the defendants continued the business as usual contrary to the restrain [sic] of trade clause in the agreement and refused to hand over order and corporate contracts. Plaintiffs repeatedly requested the defendants to introduce clients, but defendants avoided and ignored and neglected to give their support as promised.
[84] This claim appears to allege the defendants breached the restraint of trade clause in the agreement for sale and purchase. It therefore differs from the remaining claims contained in the first cause of action, all of which are based on allegations of pre-contractual false representations.
[85] During the hearing at which Mr Ponniah presented his closing submissions on behalf of the defendants, and in answer to a question from me, Mr Pereira confirmed the plaintiffs had abandoned their claim based on alleged breach of the restraint of trade provision. Given this concession I do not consider that issue remains before the Court for determination. In case I am wrong, however, I will deal with it briefly.
[86] The starting point is that the agreement for the sale of the business contained a clause prohibiting the defendants from conducting a retail business anywhere in New Zealand that was similar in nature to the business being sold to AAM. The prohibition was to remain in force for a period of five years following settlement.
[87] I considered Mr Pereira’s concession was properly made because by the end of the trial, with some very limited exceptions, there was no evidence the defendants had sold competing products on a retail basis anywhere in New Zealand. The exceptions related to a few one-off transactions having negligible value. There is certainly nothing in the evidence to suggest Exotica or Mr Karani set up another retail store or online retail business selling the same kind of items as those sold by AAM.
[88] The claim based on alleged breach of the restraint of trade provision in the agreement for the sale of the business cannot succeed on the evidence.
The scope and value of the tangible assets of the business
[89] Under this head the plaintiffs contend Mr Karani told Ms Agarbattiwala that the business to be sold owned tangible assets having a total value of $275,000. This was false because the tangible assets that AAM acquired on settlement were worth no more than $98,000.
[90] The plaintiffs say the assurances given to them by Mr Karani led them to value tangible assets at $275,000 in the agreement for the sale and purchase of the business. They say this reflected the fact that the 2015 financial statements included tangible assets valued at $218,457. In addition, Mr Karani told Ms Agarbattiwala that Exotica had carried out structural alterations to the shop premises after 31 March 2015. This led her to assess tangible assets as having a total value of $275,000.
[91] It now appears to be common ground that AAM acquired tangible assets having a value of no more than $98,000. There are two reasons for this. First, the 2015 financial statements included a Mercedes motor vehicle valued at $120,000. Mr Karani says Exotica had sold this vehicle in May 2015, and it was never intended to be acquired by the purchaser of the business. Secondly, there is no evidence that Exotica made structural alterations to the premises between 1 April 2015 and the date on which Ms Agarbattiwala agreed to buy the business.
[92] When Ms Agarbattiwala showed the 2015 financial statements to Mr Lathigara, he told her she needed to check the current value of the vehicle because AAM had not been claiming depreciation on it. There is no evidence Ms Agarbattiwala ever followed this advice, but the plaintiffs say Mr Lathigara’s advice demonstrates that both he and Ms Agarbattiwala proceeded on the basis that the business being sold included the tangible assets listed in the 2015 financial statements.
[93] Ms Agarbattiwala also says she agreed to allow Mr Karani to retain the vehicle following settlement as a form of security for the outstanding balance of the purchase price. She then asked when she would receive the vehicle in March 2016 after Mr Karani began asking her when she would be paying the balance of the purchase price.
[94] Mr Karani denies he retained the vehicle as a form of security for the simple reason that he no longer had it in his possession. He also says he told Ms Agarbattiwala at an early stage that the vehicle had already been sold, and that it would not be included in the assets acquired by the purchaser on settlement.
[95] I do not accept Ms Agarbattiwala’s version of events regarding the motor vehicle for two reasons. First, the evidence establishes conclusively that Exotica sold the vehicle in May 2015. It was therefore never available to be transferred to the purchaser of the business or to be used as security for the balance of the purchase price. Secondly, if Ms Agarbattiwala’s version of events is correct the terms on which Mr Karani was to retain the vehicle following settlement would have been set out in
either the agreement for the sale of the business or in the email correspondence that passed between the parties prior to settlement. The issue is never mentioned in either.
[96] For the same reasons I also accept that Mr Karani told Ms Agarbattiwala the vehicle was not included in the tangible assets before she signed the agreement to buy the business. That is the only rational explanation for the fact that she never asked any questions about the vehicle prior to settlement. It is also likely that she raised the subject for the first time in March 2016 to deflect Mr Karani’s enquiries at that time asking when she proposed to pay the balance of the purchase price.
[97] This raises an obvious question as to why Ms Agarbattiwala would have been prepared to pay a significantly inflated price for the tangible assets of the business. In my view the answer to this question lies in the approach Ms Agarbattiwala took to the acquisition of the business. The evidence suggests she decided to buy the business on or about 30 August 2015, as is demonstrated by the text message she sent to Mr Karani on that date.5 It then became a matter of reaching agreement with Mr Karani regarding the purchase price. I consider Ms Agarbattiwala ultimately decided to pay the sum of
$475,000 to buy the business because that was what she believed it was worth. The true value of the fixed assets to be acquired on settlement therefore assumed little significance.
[98] This also explains why Ms Agarbattiwala appears to have made no effort to ascertain the value of the structural alterations she says Mr Karani told her about. I consider she took no steps to investigate this issue because the discussion with Mr Karani never occurred. Rather, Ms Agarbattiwala was prepared to ascribe an arbitrary value of $275,000 to tangible assets as part of the total purchase price she was prepared to pay for the business.
[99]This aspect of the plaintiffs’ claim fails as a result.
5 See [34].
Second cause of action: breach of turnover warranty
[100] As I have already observed, the agreement for the sale of the business contained a warranty that the business had achieved a turnover of $1,184,848 during the year ended 31 March 2015. It is now common ground that this was incorrect because that figure, taken from the 2015 financial statements, included income derived from the export arm of the business that was not for sale. The actual turnover of the business being sold was between $600,000 and $700,000. It follows that the plaintiffs have established this cause of action. Exotica therefore breached the turnover warranty in the agreement.
Did AAM affirm the agreement for the sale and purchase of the business?
[101]Section 38 of the Contract and Commercial Law Act 2017 (CCLA) provides:
38 No cancellation if contract is affirmed
A party is not entitled to cancel the contract if, with full knowledge of the repudiation, misrepresentation, or breach, the party has affirmed the contract.
[102] In the present case AAM did not purport to cancel the agreement until July 2018, well after it commenced the present proceeding. By that stage it had operated the business for approximately two years and nine months. An issue therefore arises as to whether, by its actions between October 2015 and July 2018, AAM affirmed the agreement in full knowledge that Exotica had breached the turnover warranty. If that is the case, s 38 precluded it from cancelling the contract in July 2018 and its remedy will lie in damages for the breach.6
[103] As Hammond J explained in Crump v Wala, affirmation has its origins in equity.7 It rests on the principle that the innocent party must elect between cancelling the contract and continuing to perform it. Those are fundamentally different rights. A party will be taken to have affirmed an agreement if, with full knowledge of the facts, the innocent party makes it clear by words or conduct that he or she does not accept the breach as a discharge of the contract. Importantly, however, that party must be
6 Neither party addressed this issue in closing submissions. The principles to which I now refer are taken from Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand (6th ed, Lexis Nexis, Wellington, 2018) at 18.3.2.
7 Crump v Wala [1994] 2 NZLR 331 (HC) at 336.
shown to have “committed irrevocably to one of two inconsistent courses of action”.8 That issue must be determined objectively and regardless of the innocent party’s actual intention or subsequent rationalisation.9
[104] The issue of whether an innocent party has affirmed a contract will necessarily be fact and case specific.10 The question the Court will be required to determine is whether there has been “a real and genuine affirmation in the circumstances of the case”.11
[105] One of the circumstances the Court may take into account in this context is the delay between the innocent party learning of the breach and the election to cancel the contract. Delay without more will not be sufficient to prove affirmation but when considered together with other circumstances it may indicate the innocent party affirmed the contract.12
$6904.50 under the fourth and fifth causes of action respectively.
[195] Exotica has failed in its counterclaim against AAM for the balance of the purchase price but is entitled to judgment on its counterclaim for $23,003.90, being the balance owing for goods supplied to AAM and not paid for.
Interest
[196] This proceeding commenced in 2016. Any issues relating to interest must therefore be determined in accordance with the transitional provisions of the Interest on Money Claims Act 2016, and in particular Clause 2 of the First Schedule to that Act. This means s 87 of the Judicature Act 1908 continues to apply to the present proceeding.
[197] I award interest to AAM on the damages of $25,000 at the prescribed rate under s 87 of the Judicature Act 1908 as from 16 September 2015, being the date on which AAM completed the purchase of the business from Exotica.
[198] AAM is also entitled to interest at the prescribed rate on the amounts for which judgment is entered under the fourth and fifth causes of action. In each case interest is to run from the 20th day of the month following the month in which the invoices were issued.
[199] Exotica is entitled to interest on the sums claimed in its counterclaim for stock supplied but not paid for. Interest will again be payable in accordance with the prescribed rate on each of those sums as from the 20th day of the month following the issuing of the relevant invoice.
Costs
[200] Each party would ordinarily be entitled to costs on the successful claims. Costs on the plaintiffs’ claim would ordinarily be calculated based on a category 2 Band B basis whilst category 1 Band A would apply to the counterclaim given its simplicity. If the parties cannot reach agreement on costs they should file brief memoranda (ie no more than five pages in length) and I will determine that issue on the papers.
Lang J
Solicitors:
Corban Revell, Auckland Counsel:
Pereira Law, Auckland Copy to:
Plaintiff
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