Auto Sounds and Alarms Limited (in receivership and liquidation) v Crone
[2013] NZHC 1227
•28 May 2013
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2011-404-007325 [2013] NZHC 1227
BETWEEN AUTO SOUNDS AND ALARMS LIMITED (IN RECEIVERSHIP AND LIQUIDATION)
First Plaintiff
GRAEME WILLIAM MILLS AND KAREN ANN MILLS
Second Plaintiffs
AND
STEPHEN CRONE First Defendant
SCITUATE LIMITED Second Defendant
Hearing: 9-12, 16-19 and 22-23 April 2013 Counsel:
PJ Dale and LT Meys for Plaintiffs
G Bogiatto and GS Aulakh for DefendantsJudgment:
28 May 2013
JUDGMENT OF ASHER J
This judgment was delivered by me on Tuesday, 28 May 2013 at 3pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
AUTO SOUNDS AND ALARMS LTD (IN RECEIVERSHIP AND LIQUIDATION) v CRONE [2013] NZHC
1227 [28 May 2013]
Table of Contents
Para No
Introduction [1] The pleadings and issues [12] First part of claim – the misrepresentation allegations [13] Second part of claim – wrongful payment of $106,577.96 [18] Summary of findings [20] Approach to issues [25] The alleged representation as to audit and compliance [27] Representation as to audit – analysis [46] Representation as to compliance – analysis [61]
The alleged representation that Ms Dobbie was the only important
employee and Mr Dickie was inessential [80]
Was the representation as to audits of CSS a misrepresentation? [91] Was the representation as to compliance a misrepresentation? [99] Mrs Mills’ spreadsheet – my views [120] The accuracy of Mrs Mills’ spreadsheet – other factors [129] Audits [130] Improved gross margin by ASA [132] Assessors involved in all transactions [134] Reasons for failure of ASA [136] Conclusion on compliance [144] The claim for $106,577.96 [147] Is the $3,462.79 recoverable from CSS? [174] Damages [181] Result [184] Costs [185]
Introduction
[1] The car repair business of the plaintiffs has failed. They consider that this is because of misrepresentations by and overpayments to the defendants. Graeme and Karen Mills, the purchasers, and their former company Auto Sounds and Alarms Ltd (in receivership and liquidation) bring the claim against Stephen Crone and his company Scituate Ltd, the vendor. They claim that Mr Crone misrepresented the sales margins that his company was charging in respect of its most significant client and also misrepresented the importance of a key employee. There is a further claim based on an alleged overpayment in respect of apportioned work to Scituate Ltd.
[2] The background circumstances are straightforward. In 1994, Mr Crone incorporated Car Stereo Systems Ltd (CSS), now Scituate Ltd. Mr Crone was the only director and shareholder of CSS. The company was to specialise in the repair of damaged motor vehicles, not including panel work. Cars that had been broken
into and had their stereos and alarms ripped out by thieves were a particular specialty. Mr Crone developed relationships with a variety of insurance companies, and CSS would do the repair work on the motor vehicles of their insureds. Mr Crone developed a particular relationship with State Insurance, which was later to become IAG New Zealand Ltd (IAG), previously the first defendant in this action. IAG became CSS’s largest insurance customer. CSS also did work for non-insurance customers, and particularly the installation of stereos.
[3] On 27 July 2007, CSS entered into a Motor Vehicle Repairer Agreement (MVRA) with IAG which recognised CSS’s particular status as a repairer for that company. By this time Mr Crone was interested in selling the business. Turnover had declined from $3,212,114 in the financial year ending 31 March 2005 to
$2,131,352 in the financial year ending 31 March 2007 and was continuing to deteriorate. Mr Crone was suffering from diabetes and lost some interest in running the business. In 2007 he made some unsuccessful efforts to sell it.
[4] In January 2008, Mr Crone placed CSS on the market at a reduced price of
$750,000 using Barker Business Brokerage Ltd (BBB) as the agent. BBB issued a sale memorandum that disclosed the declining position. It attracted the attention of the second plaintiffs, Mr and Mrs Mills. On 4 March 2008 there was a meeting between Mr Mills and Mr Brett Barker and negotiations followed.
[5] Ultimately the parties signed a sale and purchase agreement on 14 March
2008 for an overall sale price of $700,000, broken down as $30,000 for tangible assets, $520,000 as intangible assets and $150,000 as stock in trade. It is common ground that the $520,000 can be regarded as goodwill. Settlement was to be on
30 May 2008. It was a term of the sale and purchase agreement that there would be due diligence. The due diligence proceeded on 20 March 2008. The Mills engaged their accountant Mrs Paula Kearns to do the task. There was a meeting on 28 March
2008 between Mr and Mrs Mills and representatives of IAG, which Messrs Crone and Barker attended. The purpose was to introduce the Mills to IAG and discuss their future relationship. On 14 April 2008, Mrs Kearns presented her due diligence report. Two days later the agreement for sale and purchase became unconditional and the deposit was paid.
[6] There were then further meetings between Mr Crone and the Mills, in particular in the two days prior to settlement, which included Mr Crone teaching Mr Mills practical aspects of the business and the various systems used. On or about
1 June 2008 the Mills, through their newly incorporated company Auto Sounds and
Alarms Ltd (ASA), took over the CSS business.
[7] On the day before the Mills took over, they informed the then manager of
CSS, Mr Sean Dickie, that his employment would not be continued.
[8] ASA then proceeded to trade. In August 2008 it moved the premises from
153 Wairau Road, Takapuna to smaller and cheaper premises at Sunnybrae Road. The MVRA had come to an end with the sale of the business. After a three month trial period ASA signed a one year service agreement on 24 September 2008 with IAG.
[9] ASA’s turnover dropped. On 31 March 2009 the ASA accounts showed sales revenue of $923,885 and an operating deficit of $51,903. The accounts for 31 March
2010 showed that the revenue of ASA declined further to $706,035 with an operating deficit of $145,847.
[10] Mr Mills had at the time of purchase been managing his own company, Onehunga Car Clinic Ltd. He had after purchase taken over the management of ASA personally. In mid-February 2009 he returned to the management of the Onehunga Car Clinic and Mrs Mills took over the management of ASA. Mrs Mills had been a school teacher and since 2000 had been involved in education and training businesses.
[11] In October 2010 IAG terminated its relationship with ASA. In February 2011
ASA stopped trading. On 14 February 2011, it was placed in liquidation. On
16 February 2011 receivers were appointed by the Bank of New Zealand to ASA. These proceedings were issued in November 2011. In the meantime the affairs of CSS had been concluded and it had been struck off the Companies register. It has now been restored with the new name Scituate Ltd.
The pleadings and issues
[12] IAG was first defendant in these proceedings, but prior to trial the plaintiffs and IAG settled the proceeding on the basis of a payment of $195,000 with a denial of liability. The third amended statement of claim, filed after the settlement with IAG, contained a wide range of allegations of misrepresentation. Two causes of action arose out of these alleged misrepresentations. The first was that CSS was guilty of misrepresentation. The second was that both CSS and Mr Crone had breached the Fair Trading Act in making various representations. The third and fourth causes of action related to a different claim, and were in conversion and for money had and received in respect of apportionments carried out unfairly after the settlement.
First part of claim – the misrepresentation allegations
[13] It became clear on opening that many of the Mills’ misrepresentation allegations had fallen away. In relation to the misrepresentations Mr Dale for the plaintiffs, at my request, set out the key misrepresentations that were being pursued in a memorandum of 10 April 2013 (Mr Dale’s memorandum). He stated them as follows, referring to the amended statement of claim (ASOC):
(a) That IAG New Zealand Limited (IAG) and Car Stereo Specialists Limited (CSS) were contractually bound prior to August 2007 by the terms of the Motor Vehicle Repairer Agreement (ASOC 18(d)–(f)), and so by implication that the profit margins on the IAG work were 10% and 20%.
(b) That Jackie Dobbie was the only important employee, and keen to work for the new owners (ASOC 25(g)).
(c) That Mr Dickie was not essential to the running of CSS’ business, and that he planned to get a charter boat and go fishing once leaving the business (ASOC 25(h)).
(d) That CSS’ turnover and profit had been generated by charging correct margins on parts and services (ASOC 56).
(e) That CSS had been audited and was compliant with its contractual obligations to IAG (ASOC 41(a) & (b)).
[14] In a ruling I made on 10 April 2013,1 I recorded that the effect of the restatement of the misrepresentations was that there were in fact two fundamental misrepresentation issues. The first was whether CSS and Mr Crone had misrepresented the position in relation to IAG having audited CSS’s performance. That claim involves consideration of whether it was represented to the Mills that CSS was contractually bound to IAG to adhere to profit margins referred to in the MVRA of 10 per cent on new parts and 20 per cent on used parts, whereas in fact those profit margins had been grossly exceeded.
[15] The second alleged misrepresentation was that it had been asserted the office manager Ms Dobbie was the only important employee and keen to work for the new owners, and that the manager Mr Dickie was not essential to the running of the business and planned to get a charter boat and go fishing once he had left.
[16] It is claimed by the plaintiffs that these representations were untrue, as there had been no audits as represented and the MVRA profit margins were not observed as required, and indeed had been grossly exceeded by CSS. It was also alleged that contrary to the misrepresentation, Ms Dobbie was not the only important employee and Mr Dickie was essential to the running of the business.
[17] It is claimed that as a consequence of these misrepresentations the plaintiffs are entitled to damages for their entire loss of capital, which is stated to have been
$750,000, a trading loss of $315,000, interest and general damages.
Second part of claim – wrongful payment of $106,577.96
[18] The second part of the claim is pleaded on the basis that there was a work in progress clause in the agreement for sale and purchase providing for an apportionment on settlement.
[19] It is pleaded that prior to settlement, the accounts manager Ms Dobbie on behalf of CSS advised ASA and the Mills that all work commenced prior to the date
of settlement of 30 May 2008 had been invoiced to CSS, so that any monies received
1 Auto Sounds and Alarms Ltd (In Receivership and Liquidation) v Crone HC Auckland CIV-
2011-404-7325, 10 April 2013 at [13].
after the date of settlement were the property of ASA. It was pleaded that it was also agreed between ASA and Ms Dobbie on behalf of CSS that any outstanding warranty claims should be settled by ASA retaining any assessment fees that might have been otherwise payable to CSS for work it had done prior to settlement. It was alleged that in breach of this agreement, Ms Dobbie on behalf of CSS had paid to CSS the sum of $106,577.96, which were funds to which CSS had no entitlement. It is claimed that CSS thereby converted the money to its own use, or alternatively that the monies paid were monies had and received by CSS which had to be refunded.
Summary of findings
[20] In this judgment I find that the plaintiffs have failed to establish the causes of action against the defendants, save in relation to $3,462.79 of the claimed
$106,577.96 that it is claimed was mistakenly paid to CSS.
[21] I find that Mr Crone by his silence was party to the representations as to audit and compliance with the CSS/IAG contract. Those misrepresentation allegations turn on spreadsheets prepared by Mrs Mills, where she seeks to prove overcharging of IAG by CSS in the 2007 financial year. I have found her methodology to be neither accurate nor reliable. Further, it ignores the basis on which audio equipment was charged, which was in value the major type of componentry referred to in the spreadsheet. I find the criticism of her analysis by the CSS accounting experts, Mr Jordan in particular, to be sound and convincing, and I prefer their analysis to that of the ASA experts. There were audits and there was compliance. Therefore, I find that the representations were true.
[22] I find there was no misrepresentation made that Ms Dobbie was the only important employee and that, to the contrary, Mr Crone emphasised Mr Dickie’s importance.
[23] The claim of overpayments of $106,577.96 also turns on the correctness of spreadsheets prepared by Mrs Mills. I have found this analysis also to be neither accurate nor reliable. The only accountant to do a full analysis of her workings has been the CSS expert Mr McDonald, and I found his evidence to be balanced and logical. He found Mrs Mills’ calculations to be flawed, save for $3,462.79. I prefer
his views on Mrs Mills’ spreadsheets to those of the ASA experts. I also find that Ms Dobbie of CSS did not tell Mrs Mills that all CSS work up to settlement would be completed and costed by CSS. Thus, I do not accept the allegations of the plaintiffs of overcharging of IAG by CSS, and excessive payments to ASA after settlement, save for the $3,462.79.
[24] I consider Mr Crone to have been an honest witness who conducted the business of CSS broadly in compliance with its contractual obligations to IAG, and who did not seek to have CSS unfairly profit from apportionments after settlement.
Approach to issues
[25] I will deal initially with the misrepresentations claims as to audit and compliance by considering whether in fact the pleaded representations were made. I will then go on to deal with the allegation of representation and misrepresentation in relation to Mr Dickie. I will then turn to consider whether the representations made concerning audit and compliance were misrepresentations. When I have considered those issues I will then go on to determine the second part of the claim in relation to the alleged wrongful overpayment. Finally, I will refer to the question of damages.
[26] Ms Mills provided a 126 page witness statement where she set out her claims. Mr Mills’ brief was 48 pages long. Mrs Mills claim as to non-compliance with the contractually agreed discounts between IAG and CSS was based on many volumes of supporting documents. There are numerous lengthy other witness statements.
The alleged representations as to audit and compliance
[27] After the Mills’ initial contact with Mr Barker, there was a brief meeting on
4 March 2008 between Messrs Mills and Barker where CSS was discussed. Mr and Mrs Mills allege that there was then a meeting on either 10 or 11 March 2008 where Mr Mills asserts that Mr Crone set out certain background matters relating to the business.
[28] By this time the Mills would have received a business memorandum issued by Mr Barker. It contained nothing in it directly relevant to the alleged
misrepresentations, although it did refer to reducing staff numbers and potential savings in staff costs. The asking price was $750,000. It referred to there being a supply contract with IAG.
[29] There is total disagreement between Messrs Mills, Crone and Barker about whether there was a meeting on 10 or 11 March 2008. Mr Mills asserts there was. Messrs Crone and Barker deny it. I do not think a great deal turns on whether such a meeting did occur. This is because assertions that Mr Mills claims Mr Crone made about there having been an IAG contract for three years, and about IAG being roughly 60 per cent of the insurance work that amounted to 80 per cent of CSS’s business, are not now pleaded misrepresentations at issue.
[30] I do, however, record that I am not satisfied that such a meeting occurred. The alleged meeting would have been on a Saturday. Mr Barker appears to have kept a diary and there is no record of any such meeting in that diary. There is no extraneous material indicating that such a meeting occurred. Mrs Mills claimed that Mr Mills discussed this meeting with her upon his return home. However, I found Mr Barker’s evidence on the point to be convincing. I am not satisfied there was any meeting on 10 or 11 March 2008.
[31] I record in relation to the turnover of the business that I do not accept the Mills were ultimately under any impression that IAG made up 40 per cent of CSS’s business as they have, on occasions, alleged. A business programme prepared by Mrs Mills herself stated that 60 per cent of the CSS work came from insurance companies, and it is clear that IAG was less than half of that. It is not possible to be precise, but it would seem that IAG’s work constituted approximately 25 per cent of CSS’s total business.
[32] I find that the first meeting between the parties was on 15 March 2007, as Mr Crone asserted in his evidence. This meeting was held after hours on a Saturday because the existence of the agreement for sale and purchase had not been revealed to the staff. Mr Barker came to the meeting and introduced the parties but then took no further active part. Mr Crone showed the Mills around the office area and retail shop, and answered a variety of specific questions.
[33] The Mills in their evidence stated that Mr Crone had indicated there were difficulties between the office administrator Ms Dobbie and the workshop manager Mr Dickie. They claim that Mr Crone emphasised the importance to the business of Ms Dobbie, but made negative comments about Mr Dickie to the effect that he had bought a charter boat and would be doing his own thing. Mrs Mills, in particular, asserted that Mr Crone told her about difficulties faced with Mr Dickie and negative comments about him and his lack of interest in the company.
[34] As to the nature of the business, Mrs Mills stated that Mr Crone handed to her a copy of an unsigned 2004 MVRA. Mrs Mills had asserted that Mr Crone claimed that the agreement had been signed, which Mr Crone denies. He also strongly denied making the negative comments about Mr Dickie. He asserts that what he said was that both Ms Dobbie and Mr Dickie were the most important staff members.
[35] I prefer Mr Crone’s account of what happened at this meeting to that of Mr and Mrs Mills. Mrs Mills in particular made a number of assertions about what Mr Crone said at the meeting which, while they are no longer important, do not seem to me to be right. She claimed that she and Mr Mills believed that insurance work constituted as much as 80 per cent of the turnover of the business. However, her own business plan prepared sometime after the meeting showed a figure of 60 per cent. She said that Mr Crone explained that IAG-aligned panelbeaters were contractually obligated to refer all interior repairs and replacement work to CSS. The evidence is quite clear that this was not so, and having seen Mr Crone I do not believe that he would have made this up.
[36] I am satisfied that Mr Crone regarded Mr Dickie as an important employee of the business whose performance was satisfactory and indeed highly valued. He thought Mr Dickie should be retained. The evidence from the IAG assessors and Ms Dobbie was that Mr Dickie was good at his job. He managed the workshop and liaised closely with assessors of the various insurance companies including IAG. Although he always started work late at 9 am because of family commitments, he appears to have been able to carry out his duties well. It seems to me highly unlikely Mr Crone would have so misrepresented Mr Dickie’s position.
[37] Implicit in the Mills’ case is that Mr Crone recognised that Mr Mills wanted to take over the management of the business and that this would be an important reason for them settling the agreement for sale and purchase. It therefore would have been in Mr Crone’s interest to misrepresent the position. Having seen Mr Crone in the witness box I do not think it at all likely that he would have been guilty of such a Machiavellian plan.
[38] For reasons that I will elaborate on further, Mr Crone struck me when he gave his evidence as a somewhat reticent but straightforward man, rather slow to push his own interests and certainly very careful about any remarks he would make about other people. For him to have so unfairly denigrated Mr Dickie would run entirely contrary to his character, as I perceive it having seen him in the witness box.
[39] I therefore prefer his evidence to that of Mr and Mrs Mills in this area of the Dickie representation. I do not believe there was any downgrading by Mr Crone of Mr Dickie’s importance to the business at the 15 March 2008 meeting. I will return to this topic.
[40] Also Mr Crone indicated in his evidence that he did not at the initial meeting know that Mr Mills intended to get rid of Mr Dickie, and I accept this is so. This is consistent with the evidence of the IAG witnesses, which was that on 28 March 2008 when they met with the Mills they were not told Mr Dickie would be going.
[41] The meeting on 28 March 2008 was to enable the Mills to meet key IAG personnel. It is common ground that Messrs Crone and Barker, while there, did not materially participate in the discussion.
[42] Mrs Mills’ discussion of this meeting extends over some 10 pages of her witness statement. There is a difference between the Mills and the IAG witnesses and Mr Crone about the level of detail discussed at this meeting. Mr Crone says it lasted for no more than 40 minutes, and the IAG witnesses say that the discussion was very general. That was also Mr Barker’s recollection. However, Mrs Mills’ evidence indicates a longer, more detailed meeting.
[43] Mrs Mills says that there was reference to IAG’s right to audit repairers and that Mr Johnson said he would be the first to know if there were any issues or problems with CSS. She says she asked if CSS had been audited, and that Mr Johnson replied “all repairers are audited”. She said that there was reference to the use of a network known as “Parts Trader” that had been set up by IAG, whereby parts were posted on an internet site and made available for bids by IAG repairers. She says there was a discussion about the fact that CSS was to use Parts Trader for items of over $100 but did not have to if they were worth less than $100. She said that she was told that providing ASA could contribute the same level of service as CSS, there were no customer complaints, and the terms of the contract were adhered to, IAG representatives could see no reason not to continue the preferred supplier agreement with IAG.
[44] In relation to Mr Dickie, she acknowledged that Mr Parberry said that IAG would want to see the services of Mr Dickie retained. Mrs Mills says she told Mr Parberry that Mr Crone had said to them that Mr Dickie was not interested in remaining an employee of CSS should Mr Crone sell it. Mrs Mills asserted that Messrs Parberry and Johnson said words to the effect that Mr Dickie was the main person they dealt with at CSS and he provided a good and quick service. Mrs Mills says she was surprised at the statements of Messrs Parberry and Johnson, but that she reasoned to herself that they were longstanding friends of Mr Dickie’s and were looking after him.
[45] I accept that there would have been reference by the IAG representatives to IAG carrying out audits of CSS at this meeting. I also consider that the IAG representatives would have indicated that they considered CSS to be a company that performed well and complied with its obligations to IAG. In relation to Mr Dickie, it seems to be common ground between all parties that Messrs Parberry and Johnson emphasised that Mr Dickie was the main person they dealt with, and an important person within the company. I do not believe that it was clear to any of them that Mr Dickie was not going to be kept on by the Mills. I prefer the evidence of Mr Crone and the IAG witnesses to the effect that the meeting was general and not unduly long.
Representation as to audit – analysis
[46] The alleged misrepresentations must be seen in the context of the agreement for sale and purchase. The agreement for sale and purchase is between CSS and Graeme Mills or his nominee and in the standard ADLS form. There is no whole agreement clause. There is a specific warranty as to turnover of $2,131,352 excluding GST covering the period from 1 April 2006 to 31 March 2007. There is no suggestion that this was inaccurate.
[47] The specific clause relating to vendor’s warranties and undertakings is in the standard form part of the agreement, and nothing is said in relation to profitability or staff. There is a “common employees” clause, and it is up to the purchaser as to which employees are offered employment after settlement. There is a due diligence clause making the agreement conditional upon the purchasers or their financial advisers conducting a due diligence exercise on the “financial position of the business to their complete satisfaction in all respects”. The vendor has an obligation to provide the purchaser with full and complete access to all the books of the business.
[48] There is therefore no specific reference to audits or contractual obligations or the performance of CSS, save for the turnover warranty. Nothing is said in the agreement about the importance of particular employees, although the purchaser has the discretion as to whether to keep them on in the new business.
[49] The assertion of the Mills that there were references by Messrs Parberry and Johnson to there having been audits of CSS in the course of the 28 March 2007 discussion is not disputed in any specific way by Messrs Crone, Barker, Parberry or Johnson. Mr Crone did not recall a discussion about audit, but confessed that he did not follow the interchanges between the IAG representatives and the Mills closely. Messrs Parberry and Johnson were prepared to accept that such a discussion did take place. There was reference to it in the email exchanges that followed the meeting. In an email on 11 April 2008, Mrs Mills asked Mr Johnson:
I know you say that all repairers are audited by IAG but I am still unclear on how IAG conduct the audits and what aspects of the repairers business are
audited on. Are any reports issued to the repairer following the audits??? Or is it secret squirrel stuff lol.
Steve doesn’t seem clear on the process either …
[50] There is a specific clause in the MVRA dealing with audit which obliges the repairer to allow IAG to inspect its records and have access to its premises for the purposes of auditing the repairers’ compliance with the agreement and the accuracy of its invoices.
[51] I do not believe that the discussion as to audit was detailed. Indeed, Mrs Mills’ email of 11 April 2008 indicates its general nature, and that she had a number of queries about the details of IAG audits.
[52] While Mr Dale did not suggest that Mr Crone had made statements about the audits himself, he submitted that his silence at the meeting resulted in a representation. He relied on the statement of Elias J in Des Forges v Wright2 where it was stated:
Silence may constitute misleading or deceptive conduct, but whether it does is to be objectively assessed in all the circumstances …
[53] It is necessary to consider this submission against the two causes of action, the first contractual misrepresentation, the second breach of the Fair Trading Act. As a general proposition, the failure to disclose a material fact which might influence the mind of a prudent purchaser does not give rise to a right to damages under a contract.3 There is no fiduciary relationship between a vendor and purchaser. However, once a party ventures to make a representation about a matter, the statement must be full and frank. Half truths which leave a misleading impression can be contractual misrepresentations.4 Under the Fair Trading Act, conduct can
include an omission.5 However, a cautious approach to finding deceptive and
misleading conduct to arise out of silence is proper in cases where there are commercial dealings between parties at arm’s length, and purchasers can be expected
2 Des Forges v Wright [1996] 2 NZLR 758 (HC) at 764.
3 Bell v Lever Brothers Ltd [1932] AC 161 (HL) at 227.
4 See the discussion in John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New
Zealand (4th ed, LexisNexis NZ, Wellington, 2012) at 381.
5 Fair Trading Act 1986, s 2(2).
to specifically pursue matters on which they require information or assurances from a vendor.
[54] The agreement for sale and purchase between CSS and Mr Mills makes no reference at all to whether there had been any audits by IAG of CSS. However, I am satisfied that at the meeting of 28 March 2007 in Mr Crone’s presence the IAG representatives confirmed in a general way there had been audits of CSS by IAG. Is that representation to be treated as a representation by Mr Crone? While the IAG representatives were not there as CSS’s or Mr Crone’s agents, they were nevertheless engaging in the pre-sale process in Mr Crone’s presence. The situation had some similarities to that which arose in Des Forges v Wright, where Affco as a third party was involved in discussions between a vendor and purchaser relating to an Affco distribution agreement. It was held that the vendor was not liable for misleading and deceptive conduct on the sale of the business. Unbeknown to the vendor, Affco was attempting to dispose of an operation, and this would undoubtedly affect the turnover of the business to be sold. However, the vendor did not know of this and it was held that the conduct of the vendor did not mislead or deceive the purchaser.
[55] However, when a vendor with an interest in a transaction hears a statement made by a third party about the vendor’s business which it knows is erroneous, and does not correct that fact, the silence of the vendor may amount to a representation. The vendor is privy to the representation and the purchaser could reasonably expect the vendor to intervene if what was said was wrong. In my view, Mr Crone’s silence can be construed as an adoption of the IAG representation. Mr Crone was the shareholder and director of CSS and was in attendance in that capacity as representative of the vendor. He knew the Mills wanted information about how his business worked with CSS.
[56] If Mr Crone knew that the statements were false and failed to disclose this, he was in effect becoming party to the disclosure of a half-truth. The fact that the IAG witnesses might not have been aware that the margins were not being maintained (the opposite of the position of the third party in Des Forges v Wright) does not preclude the existence of an actionable misrepresentation by Mr Crone or misleading and deceptive conduct. This is because he had the knowledge and was present when
the representation was made, and would have been able to correct it because of his particular knowledge.
[57] However, the representation went no further than an assertion that there had been audits. There was clearly no detail provided of the nature of the audits, or what they meant.
[58] Can IAG’s comments and Mr Crone’s silence go so far as to extend the representation to the fact that CSS had not only been audited but found to be compliant with its obligations to IAG? I have concluded that that must be so. The whole purpose of the discussion between the Mills and the IAG representatives was to explain the relationship between CSS and IAG, and this was before the agreement became unconditional so as to give the Mills understanding and comfort as to the detail of that relationship. It must have been obvious that if the audits had shown a serious non-compliance, that would be highly relevant and might well dissuade the Mills from proceeding.
[59] I consider, therefore, that the Mills have made out the pleaded representation as to audit. The representation was very general. The IAG representatives did not specify the nature of the audits or what had been done, or when they had occurred. There was just a general statement that there had been audits and the implicit confirmation that CSS was compliant. This is confirmed by Mrs Mills’ email of
11 April 2007. As she acknowledges, Mr Crone himself was not clear on what the audit process had been. He had done no more than accept that there had been audits.
[60] I consider below the parameters of the representation and whether it was a misrepresentation.6
Representation as to compliance – analysis
[61] Paragraph 5 of the MVRA sets out the service charges that a repairer will charge IAG. The first two sections clearly have panelbeaters in mind. Indeed it was
common ground that the form of agreement was predicated on the basis that the
6 See [91]–[98].
repairer would be a panelbeater. However, the agreement was signed by CSS and while CSS was not a panelbeater it is quite clear that it was a binding agreement. The provisions that can be sensibly applied to CSS as a repairer focussing on internal repairs can be taken to have been intended to have contractual effect.
[62] In relation to the service charges, the third section of paragraph 5 relates to parts. It is provided that service charges will be calculated on the applicable repair elements on all new and used parts required to complete the repair, including freight. It is stated that all parts are to be purchased using the Parts Trader parts procurement system or to be approved by IAG. It is stated:
New and Replica parts – cost price (including all discounts and rebates) plus
10%.
Used parts – cost price (including all discounts and rebates) plus 20%.
[63] It is stated at paragraph 5.2:
Costs of Service: the maximum cost of service to be charged by the Motor Vehicle Repairer will be the amount specified in the Service Order as agreed by IAG NZ.
[64] Under paragraph 5.5, the service charges plus GST will be the total amount payable by IAG to the motor vehicle repairer for the relevant services, less any specified excess.
[65] The MVRA was not referred to in the agreement for sale and purchase. The MVRA form of agreement for 2004, unsigned and unfilled in, had been given to Mrs Mills at the 15 March meeting. On a date before the 28 March 2008 meeting, a copy of the MVRA that had been entered into on 27 July 2007 had been forwarded to Mrs Mills.
[66] Mrs Mills asserted, and I did not take Messrs Parberry and Johnson to disagree, that the IAG representatives stated at the 28 March meeting that all suppliers of IAG were contractually required to use Parts Trader unless given leave not to do so by IAG. She accepts that she had been told by Mr Crone that CSS was not obliged to use Parts Trader for items under $100. Mr Crone stated that the cut- off figure was $120.
[67] I do not consider that there was any discussion about service charges or margins with IAG at any of the March meetings. I do find, however, that it was the representation of the IAG representatives and Mr Crone that CSS in its dealings with IAG was compliant with its contractual obligations. Those contractual obligations, and in particular the 10 and 20 per cent margins for non-audio parts, were clearly expressed in the MVRA. The existence of those margins was recognised by Mr Crone in his evidence.
[68] The representation went no further than that CSS was in general terms compliant with its contractual obligations. There was no specific discussion about the MVRA or particular margins. The statement did not mean that on every occasion the profit margins were warranted as being exactly the 10 and 20 per cent set out in the MVRA. Nevertheless, if the represented margins were being significantly disregarded I would regard that as a misrepresentation.
[69] Margins were an important factor in achieving profit. Obviously the profitability of CSS’s business was of importance to the Mills. If that was only being achieved by a significant non-compliance with the agreement by overcharging of IAG by CSS, that would be an important matter. Assuming that the Mills did not know about the overcharging and would have therefore charged at the stated margins, rather than the CSS margins, ASA would find itself running at a considerably lower profit than that expected.
[70] There was one recognised variation to the obligation to charge the 10 and 20 per cent that was discussed. This was in relation to stereo parts. Mrs Mills accepted that Mr Crone had communicated this exception to her. This exception to stereo parts was referred to in this way by Mrs Mills:
[Mr Crone] told us that car audio parts were to be charged out at a 20%
discount based on a 50% mark-up.
[71] Mr Crone’s evidence was that he had explained prior to settlement that the margin on audio equipment for IAG work was the recommended retail price less 20 per cent. Of the various witnesses who spoke about the discount arrangement for audio parts between IAG and CSS, the one who appeared to me to have the best
recollection was the IAG area manager for assessing, Mr David Bright. He was clear that the arrangement between IAG and CSS for audio equipment was retail less
20 per cent. While some of the other IAG witnesses were more equivocal, I am satisfied that was the arrangement. I am also satisfied that is what was expressed by Mr Crone to Mrs Mills, without any particular gloss as to how the 20 per cent was reached. I consider her claim that it was a 20 per cent discount based on a 50 per cent mark-up was based on a pre-2000 document with AA Insurance that she found on Mr Crone’s computer. This document, which related to a different customer at a different time, has been wrongly adopted by her as indicating a misrepresentation.
[72] Mr Crone accepted that generally for non-audio parts, a margin of costs plus
10 per cent on new parts and costs plus 20 per cent on used parts was observed. I do not think that this aspect of charging was ever actually discussed between the parties, unlike the audio margin, which was. Nevertheless, in representing that CSS was compliant with its contract with IAG, Mr Crone did in effect represent the MVRA margins, save for audio equipment.
[73] I conclude therefore that Mr Crone’s representation that CSS was compliant with the MVRA involved the implicit representation that new parts had been charged at cost plus 10 per cent, and used parts had been charged at cost plus 20 per cent. The MVRA did not relate to audio equipment where the charging regime was recommended retail less 20 per cent. I note that Mrs Mills observed in her evidence that she was not sure there was much difference in practical terms between her formula and that which Mr Crone says he expressed. For reasons that I set out
below,7 I believe there is a considerable difference in the two varying formulae.
[74] I also observe that there was some variance between what Mr Crone said was the arrangement about Parts Trader (parts worth over $120) and that expressed by Mrs Mills (parts worth over $100). The position of both received some corroboration from the evidence of other witnesses.
[75] I record that when there is a conflict of evidence between Mr Crone and
Mrs Mills I prefer the evidence of Mr Crone. I found Mrs Mills eager to be an
advocate for her own cause, and my overall impression was that I could not always rely on her testimony. I give more detailed reasons for this later in the judgment. In contrast, I found Mr Crone to be frank, willing to concede points against him, and to be in general terms a reliable witness.
[76] Mr Crone denied it was represented that discounts and rebates should be passed on to IAG, contrary to the words of cl 5.1 of the contract. The evidence of the IAG witnesses was rather vague on this aspect of the arrangement, but I was left with a strong impression at the end that they did not expect rebates and discounts to be passed on.
[77] I am satisfied that this was the arrangement between IAG and CSS, and that the obligation to pass on rebates and discounts was waived by IAG. Although no party gave specific evidence on the point, I consider it likely that Mr Crone would have passed on this aspect of the arrangement to Mr Mills prior to settlement when he set out how the CSS costing systems worked. I have no specific evidence on how much the rebates and discounts amounted to per annum, but the impression I have is that if audio equipment is excluded, the amount was small and de minimus.
[78] In summary, I find that the statements set out in paragraph 4(a), (d) and (e) of Mr Dale’s memorandum have been proven to have been made by Mr Crone and CSS. I deal with whether they were misrepresentations in the section after that discussing Mr Dickie.
[79] There is, however, as I have set out, a gloss to this. The profit margins on parts were costs plus 10 and 20 per cent, but in relation to audio parts the profit margins were represented as being recommended retail less 20 per cent. I consider below whether those representations were misrepresentations or deceptive and misleading.8
The alleged representation that Ms Dobbie was the only important employee and Mr Dickie was inessential
[80] This allegation had a curious history. It was not in the earlier versions of the statement of claim, and was only inserted in the third amended statement of claim. Mr Dale explained its late arrival on the basis that it was a reaction to the assertions in the defendants’ briefs as to the importance of Mr Dickie. Mr Crone, Ms Dobbie and the IAG witnesses had indicated in their briefs that it was a serious mistake on the part of the Mills to have dispensed with Mr Dickie’s services. Mr Dale asserted that if indeed Mr Dickie’s departure was a cause of the business not succeeding, then the counter had to be that the importance of his position was misrepresented by Mr Crone. I have struggled with this reasoning as Mr Crone did not assert in his evidence that Mr Dickie’s retention was essential, although he did emphasise the importance of Mr Dickie to CSS.
[81] I found Mrs Mills’ evidence on the topic of the importance of Mr Dickie to be vague and contradictory. She asserted in her brief of evidence that Mr Dickie had been described by Mr Crone as lazy and wishing to be on his boat, and that Ms Dobbie was the only important employee. However, she acknowledged that at the meeting with the IAG representatives on 25 March 2007 it was made clear to her that IAG valued its association with Mr Dickie and would be concerned if he was no longer working for CSS. Thus, even if she did have the impression that Mr Dickie was not important, that impression would have been dispelled prior to the agreement being declared unconditional by the specific statements of Mr Dickie’s importance by the IAG representatives.
[82] In any event, I do not consider that Mr Crone made any representation about Mr Dickie’s lack of importance. As a matter of fact, there is no doubt that Mr Dickie was an important employee. He was not necessarily an essential employee. While he was good at his job and had an excellent relationship with the IAG assessors, and presumably other assessors as well, the right replacement could presumably have assumed the same work levels and association as Mr Dickie. It seems to me that all of this was entirely obvious to the Mills and confirmed by the IAG representatives. It does not make any sense for Mrs Mills to suggest that Mr Crone said Mr Dickie was unimportant and then sat by while IAG emphasised that he was important.
[83] I am satisfied that Mr Crone did not make statements seriously denigrating Mr Dickie, or his importance to the business, and what Mr Crone heard from the IAG witnesses was consistent with what he had said to the Mills. Ms Dobbie who, for reasons that I set out below,9 I found to be a sound and reliable witness, also confirmed that she and Mr Crone had emphasised the importance of Mr Dickie.
[84] It is my perception having heard Mr and Mrs Mills that they were very confident about Mr Mills’ ability to run the business without Mr Dickie. Mr Mills was running his existing car repair business, Onehunga Car Clinic, in a satisfactory manner and he and Mrs Mills assumed that he would be able to do the same at CSS. In my view they either consciously or subconsciously put to one side the indications of Mr Dickie’s importance because they wanted a business that Mr Mills could run himself, and thought that he would be well able to do whatever it was that Mr Dickie was doing. The Mills assert that they would not have purchased the business if Mr Dickie had to be retained. However, they wanted to buy the business and persuaded themselves, contrary to the suggestions of Mr Crone, Ms Dobbie and IAG representatives, that Mr Mills could immediately do his job.
[85] In support of the plaintiffs’ claim that it was represented Mr Dickie was not an important employee, reliance was placed on an email of 12 April 2008 that purports to be from Mr Barker to Mrs Mills. It contained this paragraph:
From what Steve told me it is Jackie that has the most contact with the Assessors because Sean is so lazy and doesn’t deal with things. Jackie is always left to clean up the mess. I was surprised that Mike says Sean is the person they deal with. Brendon is right it was pretty cheeky telling you IAG would only approve the re-assignment if you keep Sean on. The old man is pretty sure that IAG cant make that a condition to get the contract. I think you are right they are just looking after their mate with a boat.
[86] Mr Barker in his initial brief accepted that he sent this email, but in a supplementary witness statement denied doing so. He annexed a copy of the sent items printout from his computer which summarised all of his emails from the period. The index showed that no email was forwarded from his computer to Mrs Mills on the date in question. Mr Barker made the point that he had no idea of
the identity of certain persons referred to in the email. He thought that under no
9 See [153]–[156].
circumstances would he have made comments of the general kind contained in the email.
[87] Mr Dale cross-examined him with some force on the basis that he must have been asserting the email to be a forgery. Mr Barker responded that he did not wish to make any such claim, but maintained his strong denial of having ever sent the email.
[88] I am left in considerable doubt as to whether indeed Mr Barker did send this email. It seems to me to be expressing a strong view on a CSS employee that it would not be expected that a sales agent would express. I accept Mr Barker’s assertion that he did not know a “Brendon” (who turned out to be Mrs Mills’ lawyer).
[89] Mr Barker seemed to me to be a competent and careful agent and I place weight on his assertions that he would not have made the sort of comment contained in the quoted paragraph. His computer does not show the email as having been sent. The email does not fit naturally into the sequence of correspondence and there was no actual reply to it. In the end I am not satisfied that Mr Barker sent this email and I put it to one side.
[90] Thus, I do not find the representation set out in paragraphs (b) and (c) of Mr Dale’s memorandum to be made out. I will now consider whether the representation that CSS had been audited and was compliant with its contractual obligations has been shown to be a misrepresentation. It is convenient to consider the two elements of audit and compliance separately.
Was the representation as to audits of CSS a misrepresentation?
[91] I have found that there was a representation by Mr Crone that CSS had been audited.
[92] In my view this general representation was true. It was not a misrepresentation. There had been IAG audits of CSS. There was a specific audit of CSS as to its charging by IAG in August 2003. There is a CSS audit report dated
19 August 2003 signed by Mr Ray Davie of IAG. Clearly a number of files had been
investigated and the actual cost of parts to CSS checked. It was recorded that there was a lack of proof in relation to some valet charges. Accounts in relation to other items such as stereo items were checked. It was observed that on some occasions CSS would add a percentage amount onto retail prices and that there were some concerns about some brackets and other small items. It was also observed that in relation to some new parts purchased, a percentage of the discount was passed on to IAG. Also, on occasions mark-ups of less than the permitted 20 per cent on secondhand pricing were billed. In a further report of 21 August 2003 it was recommended that the status quo with CSS be maintained.
[93] It became clear from the evidence of Mr Davie that although the 2003 audit was not comprehensive, quite a number of invoices were checked as part of that exercise to ensure that the proper margins were being observed by CSS, and that these were the 10 and 20 per cent margins already referred to. While there were some minor issues, CSS was compliant.
[94] Mr Parberry of IAG made it clear that non-compliance with the required margins would not have been tolerated. There was a three strikes policy in place so that after three instances of non-compliance there would be termination.
[95] The 2003 audit was some five years before the agreement. There is no written evidence of another specific audit of this type in that intervening period. However, I am satisfied from the evidence I heard that there were ongoing audits carried out by specific IAG audit teams. The evidence of the various IAG witnesses varied rather as to when and how these audits were carried out, and it was difficult to get a clear picture. There were at various times specific audit teams employed in Auckland by IAG in the period following 2003. On occasions there would be audits of invoices where the costs of parts were checked. Often, however, the audits would be what were called “soft” audits, checking that the processes being carried out on site by CSS repairers were satisfactory, rather than the charging margins.
[96] Any full and formal audit would have been likely to have given rise to a further written report and there were no other written reports other than the 2003 reports. However, I am satisfied on the evidence I have heard from the IAG
witnesses that there would have been occasional checks of specific jobs, which could be regarded as audits. Further, I have no doubt that there were through the relevant period specific general audits where matters of process were examined.
[97] The representation as to audit was uncomplicated. Messrs Parberry and Johnson stated that it was an aside in a meeting where many topics were touched on in a general way. It was that CSS had been audited with no specificity as to how or when, or whether the audits were of the invoicing or the repair processes. I consider that Mr Dale tried to make more of the representation than was warranted when he suggested that the lack of proof of specific audits of the costing margins of CSS in the several years prior to settlement proved a misrepresentation. Such a conclusion would involve considerably overstating the actual representation. That was no more than that there had been audits. As Mrs Mills recorded at the time in her email of
11 April 2008, Mr Crone was not clear on the nature or process of those audits. He just accepted that CSS had been audited by IAG (but not in any specific manner or for any specific purpose). This was true.
[98] Accordingly this misrepresentation is not proven.
Was the representation as to compliance a misrepresentation?
[99] The bulk of the evidence during the trial focussed on whether there was compliance with the represented margins. Mrs Mills set out to prove that considerably higher margins had been enjoyed by CSS than those represented. CSS had used the “Mind Your Own Business” business management software programme (MYOB). MYOB managed the purchase of parts for each job at cost price and then the individual invoice for that job to the customer. CSS used a purchasing system called Parts Trader, and by 2008 was using a programme called ORM to report with IAG on jobs. ORM had a facility to automatically calculate margins on parts, and this can be seen on some of the ASA invoices. The programme does not appear to have been used by CSS and the margins are not shown on their invoices.
[100] Mrs Mills claimed that for the first time in June 2010 she discovered unjustified or unauthorised transactions by CSS and decided to review the invoicing to insurance companies, and in particular to IAG. She has over the last few years
used the information in CSS’s MYOB records to create spreadsheets allegedly showing the difference between the cost of parts and services to CSS and the eventual price charged by CSS to its customers.
[101] Mrs Mills initially chose invoices from the 2007 financial year. Approximately 3,500 invoices from various insurance companies CSS did work for were reviewed by her in analysis that took about eight months, she says at 16 hours per day, seven days a week. She claims that 800 of these invoices contained large irregularities with inflated margins of up to 300 per cent or more, and another 400 had lesser but still significant inflated margins. She then created an excel spreadsheet and began the process she says of auditing every CSS invoice to IAG for the 2007 financial year. She audited a random selection of invoices from 2004 to
2008 as well.
[102] Mrs Mills claims that her analysis showed that parts charged by CSS in most instances showed well in excess of the 10 and 20 per cent margins. Also she asserted Parts Trader had often not been used from 2004 through to 2008. She claimed that CSS often made profits of well in excess of 100 per cent on car audio equipment instead of the 20 per cent. She was critical of the margins charged on vinyl repairs and the processes adopted for panelbeating, decodes for security systems, and insurance excesses.
[103] Mrs Mills, relying on her original spreadsheets, has given evidence that she came up with a net margin of 52.3 per cent (including 100 per cent margin mark-up on each part or service charged for without a purchase order). In relation to the second spreadsheets, she asserts that if the default 100 per cent is not charged the margin was 44.2 per cent. Either way, she deposes that this is far more than the 10 and 20 per cent margins.
[104] The exact amount of the alleged overcharging has been left somewhat unclear. Mrs Mills originally alleged that there had been overcharging in 2007 of
$138,179.07. Mr Hagan asserted in his evidence-in-chief that on Mrs Mills’ latest calculation, deleting the assumption of a 100 per cent mark-up where there was no proof of purchase of an item, the overcharging was $86,000 for the 2007 year.
Mr Barry Jordon, a partner of DeLoitte called by Mr Crone, has contested this figure and says he is unable to understand how it has been reached. No explanation has been given to me as to how it has been calculated.
[105] The five accountants have helpfully filed a joint memorandum on the issues. They agree that if CSS had been applying incorrect margins this would have directly affected its reported profit. They also agree that MYOB was not fully utilised nor a job costing system.
[106] Mrs Mills’ spreadsheet analysis is supported by a Ms Tania Snowdon, an Auckland accountant who runs her own accounting practice and amongst other services provides accounting assistance to Mrs Mills’ accountant Ms Paula Kearns. Ms Snowdon did work for Mrs Mills from July 2009. This year she was retained by Mrs Mills to review the work that she had carried out on the spreadsheet, showing the margins. Ms Snowdon has spent 37.4 hours checking 500 selected invoices for the period 1 April 2006 to 31 March 2007. She has also spent further time working with Mrs Mills clearing queries and review points. She reviewed the sales invoice to IAG on the MYOB ledger, and then checked the cost of every related purchase order to ensure they were recorded correctly. She set out in detail the further steps she took to carry out the check. Ms Snowdon agreed with Mrs Mills’ conclusions in most cases as to the margin.
[107] The Mills also called a chartered accountant, Mr John Hagan, who gave evidence in support of Mrs Mills’ spreadsheet analysis. He has reviewed a sample of
100 invoices, selected by Mrs Mills. He has concluded that in every case there has been evidence of overcharging. In nine examples he thought the errors relatively minor, in 18 there were no purchase orders indicating that CSS had used parts in stock, and in the other 73 he was satisfied that they were examples of serious overcharging. He went through five specific examples explaining why he believed they showed charging in excess of the 10 and 20 per cent margins.
[108] Mr Hagan did not consider that the instances of overcharging could have reasonably been detected in the course of a due diligence exercise, as such an exercise would not have gone into sufficient detail.
[109] I note that in relation to the 100 invoices that Mr Hagan analysed, all were chosen by Mrs Mills. She also wrote a preliminary analysis of the invoices for Mr Hagan’s assistance.
[110] Mr Crone in his evidence rejected Mrs Mills’ findings in her spreadsheet. He made initially some broad points. For the relevant period during the 2006/2007 year, the MVRA did not apply and Parts Trader was not used to source secondhand parts. The majority of the non-audio parts were less than the $120 required for Parts Trader to be used in any event. Generally in any invoice the most expensive item was the audio part or parts, and in particular the CD player or stereo system.
[111] In relation to stereo equipment, the highest priced item generally in the invoices, it was the recommended retail price that set the benchmark against which the 20 per cent discount was calculated. Mr Crone asserted that Mrs Mills and the experts have not appreciated this and have not correctly assessed the recommended retail price for audio items. Mrs Mills’ spreadsheets do not reflect the true position.
[112] He went through various examples from Mrs Mills’ spreadsheets pointing out complications that she has not picked up, such as the application of the insurance excess. He referred to examples where Mrs Mills has made the wrong assumption as to what part was used and the price paid for it, in relation to particular IAG jobs.
[113] He pointed out that stereos were purchased frequently in bulk and not at retail. The price at which CSS was able to purchase the stereos in such instances was immaterial to the amount that CSS was allowed to charge IAG for the components. He pointed to examples of Mrs Mills not realising that there had been an adjustment made on the invoice where a client had chosen a different stereo to offset the excess payable by the insured to IAG. He observed that Mrs Mills had relied on the MYOB system which averages the costs of a particular item. This, however, was not the formula adopted for the pricing of stereo units to insurance companies where the formula was the recommended retail price less 20 per cent.
[114] In relation to the 100 invoices that have been examined by Mr Hagan, Mr Crone points out that 79 of those 100 were entered into prior to the introduction
of the MVRA. Of the five invoices specifically analysed by Mr Hagan in his witness brief, he provided a detailed response, item by item, setting out what he says are misconceptions. Over some 22 pages Mr Crone analysed the spreadsheet and provided answers to points made by Mrs Mills and sets out what he claims are errors or misconceptions by her.
[115] Mr Crone’s accountant, Mr Callum McDonald, gave evidence but did not deal in detail with the issue of margins. Mr Crone called two specialist accountants, Mr Dhananjay Basrur, a chartered accountant practicing on his own account who was previously a partner of Ernst and Young (NZ) and Howarth Porter Wigglesworth, and Mr Jordon.
[116] Mr Basrur by a general comment observed that in the absence of recourse to the original invoice for the purchase of parts and labour listed in the spreadsheet, it was not possible to support the conclusions and assumptions made by Mrs Mills in her spreadsheet to support the allegations of overcharging. Mr Basrur considered that there were a number of errors in methodology adopted by Mrs Mills. A particular factor that he emphasised was that her analysis does not recognise that many of the parts could have been used from the stock held by CSS and were therefore not purchased by CSS using a purchase order or entered on the MYOB system. Often it was not feasible to trace the cost of a part used in a job to an individual source.
[117] He claimed that it is not clear how Mrs Mills has matched the parts included in the purchase orders and the sales invoices. Stock had never been accurately entered into the CSS purchase order system and this had led to errors in analysis. Mr Basrur was critical of Mr Hagan’s analysis, asserting that Mr Hagan had not independently verified the evidence of Mrs Mills or undertaken his own investigation. He did not agree that there is clear evidence of CSS overcharging IAG.
[118] Mr Jordon considered the spreadsheet prepared by Mrs Mills in its entirety, and conducted an analysis of a sample of approximately 35 of the 100 invoices that were supplied by Mrs Mills with the background information. On his analysis,
Mrs Mills was alleging an overall mark-up on the invoices reviewed by her of 70.9 per cent. He summarised what he considered to be the following inaccuracies in Mrs Mills’ analysis:
(a) Inconsistent product descriptions. He asserted that Mrs Mills has assumed that products were the same on both the sales invoices and purchase orders when they had different descriptions and could not necessarily be co-related.
(b)Mrs Mills had used the “last purchase price” to determine costs where there was no purchase order for a specific item. The price that was shown could have been recorded at any time, and there was no audit trail available as to who entered the last purchase price or when it was entered.
(c) Also, IAG has apparently not been charged for certain items, and has shown items that were invoiced to IAG at the same cost or less. He found this to be inconsistent with Mrs Mills claims that CSS was fraudulently overcharging IAG and this made him doubt the reliability of the data used by Mrs Mills. It was not consistent that CSS would undercharge if it was carrying out a consistent overcharging policy and he gave examples.
(d)He also pointed out that many of the purchase orders referred to by Mrs Mills were for a date that was close to the invoice date, and that some were for dates several months earlier or even later than the date of the invoice. He was not clear how it could be said that these were appropriate purchase orders to apply to the invoice.
(e) He observed that the assumptions that she made to establish discounts were often unjustified and it was not clear what percentage of total sales the discount comprises.
[119] Mr Jordon was also critical of Mr Hagan’s analysis. Mr Hagan’s instructions were limited and he restricted his review to the 100 invoices and had not examined the source documents and financial statements or conducted his own financial analysis. In his conclusion, Mr Jordon noted Mrs Mills assumed that she was able to trace the cost of items, when often they could not be traced. He said she should have used an alternative methodology. She should have started at a higher level, comparing an average weighted cost for a particular period to the sales of the item to IAG for the same period and then determined the reason for the anomaly. He did not consider that Mrs Mills’ analysis established that IAG has been overcharged or that higher mark-ups than those agreed have been applied.
Mrs Mills’ spreadsheet – my views
[120] Mrs Mills in asserting that rather than being a straight 20 per cent off retail, stereo equipment was supplied based on a 50 per cent mark-up and then 20 per cent off that, was relying on documents she found on the CSS computers relating to AA Insurance, which contained that formula. However, there was no evidence that this
1999 document, relating as it did to a different insurance company, had any relevance to the actual position with IAG. In my assessment she has seized on this document to help justify a position that it was Mr Crone’s fault that ASA failed. As I have set out,10 I prefer the evidence of Mr Crone, supported as it is by Mr Bright, on the CSS margin on audio equipment supplied by IAG. It was 20 per cent off recommended retail. I accept Mr Crone’s evidence that this is what he told
Mrs Mills.
[121] Mrs Mills and the accounting witnesses were all cross-examined extensively on the spreadsheets and individual examples. Mrs Mills had not applied the formula of 20 per cent off recommended retail for audio equipment. She said that it made little difference to the end result. I do not accept this. I agree with Mr Crone that there is a significant difference between a calculation based on recommended retail, less 20 per cent, as against a calculation based on cost plus 20 per cent. There is a capacity for a much greater degree of profit where the charge is 20 per cent off retail,
as a recommended retail price can be expected to be considerably more than 20 per
10 See [61]–[76].
cent above cost. The difference is even greater when compared to the price of new parts at 10 per cent above cost. It seemed to me that Mrs Mills did not understand the difference and was generally unable to reliably identify the retail cost of stereo units. This was a considerable deficiency in her approach.
[122] Under cross-examination there were indications that Mrs Mills reached conclusions that a particular part was used for a particular job on evidence that was far from definitive, and where there were alternative explanations. It also became clear under cross-examination that there had been considerable changes to her spreadsheets during the process of gestation. I developed an overwhelming impression that throughout her investigation she was not being objective in her search for a connection between a part and an invoice. She sought the explanation which best suited her theory that there were mark-ups well in excess of those agreed. This was seen, for instance, in her initial spreadsheets where she attributed 100 per cent mark-up where she could not determine a cost. At the hearing she dropped this part of the claim. Under cross-examination she conceded that she had put in prices when she did not know what particular model of item was used. Often it seemed to me she would just make an assumption of a connection between a part and an invoice because it suited her theory of the case. This was not always the case. Some connections between invoice number and date, and part number and type were demonstrated. But I was left with no confidence that this was consistently the case. Also when a connection was shown, the margins were often not significantly different from the 10 per cent and 20 per cent of retail margins that were the agreed margins.
[123] Mrs Mills was shown under cross-examination to have on occasions made assumptions about the cost of a part and failed to realise that in terms of the invoice to IAG there were additional parts as well that had to be included and were part of the charge. Where she could not find a source document, she made an assumption that there had been an outsourced job which should be in the system, and reached the conclusion that there was an excessive margin. I did not find this reasoning at all convincing. There were also occasions when Mrs Mills had not taken into account the fact that a particular part had to have outwork for which there was a charge.
[124] She was shown to have wrongly assessed the recommended retail price for audio equipment. It became clear to me in cross-examination of Mrs Mills that she generally did not know what the recommended retail prices of the particular stereo items were. Yet this did not stop her from making assessments of margins that she simply could not make without that information. Instead, she would try to form an assessment based upon what particular items had cost, which might have little to do with the recommended retail price.
[125] I compare Mrs Mills’ responses to those of Mr Crone. With the responses of Mrs Mills it was my perception that she was being an advocate for a particular position, namely that the agreed discounts had been considerably exceeded. With Mr Crone I did not get the sense that he was pushing any particular position. My perception was that he was struggling with the accounting detail, but answering as best he could. On occasions when pressed he would readily concede a point. On the other hand he remained adamant that as a matter of general principle the IAG margins were maintained and despite concessions on a few specific instances where the margins appeared to be over 20 per cent, I found his evidence to be believable. The fact is that when reconstructing small transactions that took place approximately seven years ago, involving the application of parts that would often come from a large and uncatalogued inventory of stock, precision was impossible. There was nothing in Mr Crone’s answers that led me to doubt his honesty, or the general thrust of his point by point detailed refutation of the invoice evidence.
[126] As to the evidence of the four accountants who dealt with the issue, I prefer the opinions expressed by Messrs Jordon and Basrur to those of Mr Hagan and Ms Snowdon. I confess that I have concerns that Mrs Mills has fed the accountants she retained the invoices that they were to check (although I appreciate that this may not have occurred in relation to Ms Snowdon). I do not have confidence that they have been given or found truly representative invoices or material to work with. In contrast, I found the analysis of Mr Crone’s accountants, and in particular the points made by Mr Jordon which I have set out, to be cogent and persuasive. Further, Mr Hagan and Ms Snowdon did not address the fact that the spreadsheets worked off cost plus margins, while the audio equipment mark-ups should have been calculated on recommended retail less 20 per cent.
[127] I record that I do accept an aspect of Mr Dale’s submissions on the evidence of Mr Crone and the accountants. Mr Basrur (and on occasions Mr Crone) appeared to me to erroneously place weight on the fact that the MVRA was signed on 27 July
2007, and prior to that there was no written contract between CSS and IAG. I agree with Mr Dale’s submission that this is irrelevant, as both IAG and CSS saw the MVRA as no more than confirming the existing arrangements and the major terms of the MVRA were by oral agreement in force and effect between CSS and IAG in the years prior to 2007. However, I emphasise that the MVRA did not refer to the arrangement in relation to the supply of audio equipment, which was for the charge to be recommended retail less 20 per cent.
[128] Mr Dale was critical of Mr Crone and CSS for failing to have complete records. I consider that criticism unjustified. Mrs Kearns in her due diligence assessment was not critical of the record keeping of CSS. Nor were the other accountants. I have no doubt that when CSS was operating Mr Crone was able to respond effectively to queries of an audit nature, and indeed appeared to do so in
2003 and to Ms Kearns. It is understandable that his record keeping was not designed for audits long after the event.
The accuracy of Mrs Mills’ spreadsheet – other factors
[129] There were a number of other factors which support Mr Crone’s claim that
CSS observed the IAG margins.
Audits
[130] I have already found that there was a 2003 audit by IAG of CSS invoicing,11 and other checks on occasions, although it would be going too far to say they were full audits. In the 2003 audit, CSS was found to be generally compliant. There are likely to have been other checks carried out. There was also, as part of the due diligence process, a check by Ms Kearns on 13 invoices chosen at random in 2008,
as part of the due diligence process. The invoices were for the month of February
11 See [27]–[45].
2008, and it can be expected that her checks were rigorous, given that she acted for the Mills. She found the margins to be compliant with those set out in the MVRA.
[131] It would be surprising if both the random audits of IAG and Ms Kearns had not revealed overcharging of the level alleged by Mrs Mills, if in fact there was such overcharging. She is alleging systematic and extensive overcharging. It would have been a most unlikely coincidence in relation to those undoubtedly independent checks, that it just so happened in respect of each such audit CSS had used the right margins. The IAG and Kearns checks are therefore independent evidence that corroborate Mr Crone’s evidence that CSS observed the IAG margins. I cannot reconcile them with Mrs Mills’ claim of consistent overcharging.
Improved gross margin by ASA
[132] Further, it is clear that after ASA took over the business from CSS the gross margin in on its sales actually improved. The gross margin increased eight per cent from 45 per cent to 53 per cent. This is inconsistent with CSS having being grossly overcharging IAG and other insurers. If CSS had been grossly overcharging, it would have been expected that when ASA took over and commenced charging correctly, it would have suffered a drop in margins. The opposite happened. The failure of the business did not have any apparent connection to a drop in margins. It arose from a severe drop in turnover.
[133] Mr Hagan suggested that a possible explanation for the improvement in margins by ASA was that the poor stock records of CSS had meant that there was a good deal of unrecorded stock which enabled CSS to enjoy the increased margin. I do not accept this explanation. I do not think it likely that CSS would have allowed its stock to be significantly understated and therefore undervalued on sale. Further, the level and consistency of the improved margins is not consistent with this explanation. The improving gross margin continued right through until 2010. It is also significant that for a period after settlement the level of ASA’s turnover attributable to IAG remained the same.
Assessors involved in all transactions
[134] Further, I consider it highly unlikely that the assessors, of whom there were a considerable number, could have not realised that IAG was so grossly overcharged and thus tricked for so long. After all, part of the assessor’s function was to ensure that CSS was charging IAG in compliance with its contractual obligations. They were experts in the cost of repairing cars. Although they would not have known the actual cost of every part, it would have been part of their job to have a general knowledge of the prices of car parts. The fact that on occasions when under cross- examination particular IAG witnesses may have not given the correct information about car parts does not dissuade me from my view that by and large the assessors could be expected to be experts in the price of parts. It is not surprising that after six or seven years it would be difficult to recall the price of a particular part at a particular time. In any event, it was my general impression that as a whole the assessors had a good understanding of the cost of parts. I think it highly unlikely that all the assessors could have been fooled for all of the time.
[135] Four IAG witnesses involved in assessing were called by CSS. It is correct as Mr Dale has pointed out that there were many other assessors who had direct experience in dealing with IAG, who were not called. However, I heard enough from the four persons from IAG who were all involved in the assessment process in one capacity or another, to convince me that IAG employed careful and sound assessors who took their duties seriously. I reject the possibility (not in fact raised by Mr Dale) that the assessors might have been privy to and compliant with overcharging to the detriment of IAG. That does not seem to me at all likely given the quality of the IAG witnesses called before me, and the number of them.
Reasons for failure of ASA
[136] In my view the failure of ASA had nothing to do with the alleged misrepresentations and overpayments. I consider that there were four reasons for its collapse.
[137] The first was that it was undercapitalised, and faced overheads that were unrealistically high. The Mills borrowed the entire purchase price of $700,000 on
the basis that it was to be repaid within five years and at an interest rate of between
11.3 per cent and 10.68 per cent. On a one year fixed rate of 11.3 per cent per annum, the monthly principal and interest payments on this borrowing alone came to
$15,327.62, or approximately $183,000 a year. That sum alone was more than the entire surplus before depreciation of the business for the preceding year ending April
2007 of $177,468. Mrs Mills’ business plan assumed total sales of $2,400,000 and a net cashflow of $1,274,373. That involved an increase in turnover and a colossal increase in profitability. I consider that Mrs Mills miscalculated ASA’s ability to expand the business. CSS had been in my view well run by Mr Crone, with the help of Mr Dickie and Ms Dobbie. It would not be easy to improve its performance. ASA commenced its operation with overheads that it could not realistically meet.
[138] The second reason the business failed is that in my assessment, having heard competing views put forward by a number of witnesses called by both sides, a number of the decisions made by the Mills were unsound. I am satisfied that CSS had well developed goodwill both in the insurance industry and with its general customers and the public. The change of name derogated from this. That damage was then compounded by the change of premises from a known and high profile site to a smaller new site off the main road.
[139] A third reason was the loss of an efficient and harmonious working team. Having heard the IAG witnesses and Mr Crone and Ms Dobbie, I have no doubt that CSS worked generally in a harmonious and efficient way. It had good staff. It did not help ASA that Mr Dickie was not retained. However, other key staff were also let go as ultimately was Ms Dobbie. The Mills were not successful in maintaining a happy efficient working team, or in building a new one.
[140] Mr and Mrs Mills do not seem to me to have been successful in establishing a good rapport with the assessors for the insurance companies. I doubt whether they presented such an appealing face to the public as did the CSS staff. In my view Mrs Mills by charging insurance companies for very small parts, such as screws, and by her very assertive general manner of dealing with third parties, did not endear herself to assessors and the public. Mr Mills also would not have been as successful as Mr Crone and Mr Dickie at providing a relaxed and empathetic service. In
summary on this aspect, the Mills by their poor staff management, diminished the goodwill.
[141] The fourth reason for the drop in turnover was the 2008 global financial crisis, which unfortunately for the Mills coincided with their takeover. I have no doubt that the trading environment became harder than before.
[142] The net result of these four factors was that ASA’s turnover, rather than increasing as anticipated by Mrs Mills, dropped. Sales for the 2007 financial year for CSS were $2,131,000 and for 2008 $1,807,000. Sales for the 2009 financial year for ASA were $928,885 and for 2010 $706,035. While, as I have observed, the gross margin improved under ASA, the catastrophic drop in turnover led to the actual gross profit diminishing from $813,000 for CSS in 2008 to $592,000 for ASA in 2009, and
$364,000 in 2010. Clearly such plummeting gross profits, coupled with the yearly loan overhead of $183,000 of ASA (of which, for comparison, CSS had none) were unsurvivable. There were significant operating deficits. This is why ASA failed.
[143] This works against Mrs Mills’ assertions that CSS had been charging excessive margins to IAG, and that this stopped when the Mills took over. Margins actually improved when the Mills took over, and the difficulties experienced by ASA were due to the three factors I have referred to, which cannot be blamed on CSS or Mr Crone.
Conclusion on compliance
[144] The onus was on ASA and the Mills to show the margins charged by IAG were in excess of those agreed. They have failed to discharge that burden. Mrs Mills did not satisfy me that her methodology was accurate or consistent, and she has approached the charging of audio equipment in the wrong way. I think her results on an item by item basis were driven by her desire to prove overcharging. Further, the corroborative evidence of the audits, the improved gross margin, the background fact that it is in my view unlikely that such a significant tricking of experienced assessors was likely, and the reasons for the failure of the business, corroborate Mr Crone’s evidence and reinforce my view that Mrs Mills’ analysis is
not to be relied on. In my assessment Mr Crone was not deliberately overcharging
IAG.
[145] It follows that the plaintiffs have failed to prove that there were misrepresentations made by the defendants in relation to contractual compliance with IAG and the profit margins.
[146] Therefore, the part of the claim alleging misrepresentations fails.
The claim for $106,577.96
[147] The apportionment of payment for ongoing work is always a challenging issue on the sale of a service providing business. There was a specific clause in the agreement for sale and purchase dealing with the problem:
On settlement, an apportionment shall be made for all work completed by the vendor but not yet invoiced. The value of this work in progress shall be calculated by the aggregated cost price of labour and materials, and on each invoice job and shall be paid by the Purchaser to the Vendor on settlement.
The Purchaser shall be entitled to invoice each such job on its completion and retain all moneys in respect of the same.
[148] It is common ground that there was no such apportionment. There are, however, very different perspectives given by both sides as to what should have happened.
[149] Mrs Mills in her evidence asserted that her solicitor Mr Wood asked her how much work in progress there was at the time of settlement. She said that she had taken the call from her lawyer in Ms Dobbie’s office, and that she told Ms Dobbie that Mr Wood needed to know what the work in progress total was. She said that Ms Dobbie responded that “everyone has worked so hard and all the jobs completed have been invoiced out”. She said that this statement by Ms Dobbie is confirmed by a note in Ms Dobbie’s outlook diary: “Akk (sic) work charged (sic) by end of day”. Mrs Mills asserted that all work completed by CSS and invoiced out by settlement was CSS income. She stated that it was also agreed that any work assessed by CSS and not yet approved by the insurance companies, or not started by settlement date, would result in CSS being entitled to the $50 assessment fee if CSS assessed the job.
That was the only CSS entitlement for work after settlement. There was no need for any apportionment given that all CSS work had been completed and invoiced out.
[150] Ms Dobbie denied that any such discussion took place. It is her evidence that the apportionment of work in progress in respect of jobs commenced but not yet completed, or parts allocated to those jobs, and the reimbursement to CSS for monies received by ASA in relation to work billed by CSS before settlement, was to be carried out after settlement. She asserted she discussed the issue of apportionment with both Mr Crone’s accountant Mr McDonald and the Mills’ accountant Ms Kearns. As part of this ongoing apportionment process, she faxed invoices to Ms Kearns and Mr McDonald and sought directions from them as to whether she was carrying out apportionment correctly.
[151] She said that at one stage Mrs Mills indicated that she was carrying out the apportionment wrongly. She had been crediting CSS the profit of the parts supplied by CSS. She accordingly made an adjustment resulting in a crediting of $30,000 into the bank account of ASA from CSS. She created invoices for each job for each company to reflect that recalculation. She said that she showed samples of these apportionment transactions to Mrs Mills when she was doing them, but that Mrs Mills was happy to leave it to her.
[152] Both Mrs Mills and Ms Dobbie were cross-examined at length on these alleged overpayments. Ms Dobbie was asked about the reference to “Akk completed work being charged out”, it being suggested that this should have read “All completed work ...”. Ms Dobbie denied that she had put this in her diary and denied that it had the meaning suggested to her. She pointed out that anyone could have put a note in her diary and she had no recollection of doing so herself. She observed that Mrs Mills had a computer and could have put in anything that she liked.
[153] I formed the view that Ms Dobbie was an honest witness. Although she had obvious feelings of loyalty and respect towards Mr Crone, and had ultimately had her employment with ASA terminated, I did not sense any bias on her part against Mrs Mills. She had no direct financial interest in the outcome of the proceedings. Mrs Mills’ impression of her over the initial period of employment was a favourable
one and she was kept on by ASA until its financial position became dire. She seems to have been respected by the IAG personnel and I can see why. She was obviously hard-working and sensible, and prepared to work long hours on matters of detail. She answered questions under cross-examination in a detailed and frank manner. I thought she was truthful.
[154] I have already set out reservations that I have about the accuracy of some of Mrs Mills’ evidence. I consider it most unlikely that Ms Dobbie would have taken it upon herself to tell Mrs Mills that everything was invoiced by CSS up to settlement. This had not happened. It would have been untrue. Ms Dobbie is in my view a careful person and she would not have made such a comment. Further, it is clear to me that she is a person who fully understands her position as an employee, and its limitations. She would not take it upon herself to have made any representation in relation to the sale process. That was for Mr Crone.
[155] Ms Kearns, who is clearly a competent accountant, denied having knowledge of the apportionment process or being sent invoices as stated by Ms Dobbie. However, I attribute the difference in their positions to the fact that Ms Kearns had a busy professional practice involving many clients. I have concluded that she has forgotten about her exchange with Ms Dobbie on this topic. I note also that Mr McDonald confirmed that he was aware that Ms Dobbie invoiced all completed jobs as at the settlement date, but that there were no invoices rendered in respect of incomplete jobs which were in progress at the time. His evidence provides some corroboration of Ms Dobbie’s evidence.
[156] Thus, I do not accept that there was any arrangement whereby there would be no apportionment after settlement.
[157] This, however, leaves open the question of whether in any event the apportionment carried out by Ms Dobbie was carried out correctly. It is common ground that Ms Dobbie invoiced insurance companies in the name of CSS after settlement, and paid the proceeds to CSS. She then created invoices between CSS and ASA paying part of the job to ASA.
[158] Mrs Mills believes that there were many unauthorised or unjustified payments that were made. She has again prepared a spreadsheet setting out her conclusions. Her original claim under this head was $182,538.08. This has now been reduced to $106,577.96. She asserts that there were 101 invoices invoiced to insurance companies by CSS after June 2008, and a further 173 purchases by CSS conducted by way of cash or trade sales from ASA.
[159] Ms Snowdon gave evidence that she had spent nine hours reviewing the spreadsheet. She concluded that there appeared to be several invoices that were invoiced to the end customer by CSS incorrectly, as goods were purchased and jobs were undertaken by ASA after the date of takeover. She also found invoices on the spreadsheet that appeared to have been treated correctly by CSS. She accepted that CSS paid some funds back to ASA. She acknowledged that the entire quantum sought by Mrs Mills in her spreadsheet was not payable, although she considered that there were some monies payable to ASA under this head. She does not claim to have carried out her own independent assessment of the various invoices. It is my assessment that her evidence when viewed in the round rather works against an acceptance of the accuracy of Mrs Mills’ calculations.
[160] Mr McDonald has analysed Mrs Mills’ spreadsheet item by item. He has reviewed her latest calculations. He has not been able to complete the analysis as on occasions the plaintiffs have been unable to supply the original jobsheet assessments. Using her spreadsheet he has prepared his own analysis and comments setting out when he believes the claim was substantiated. His conclusion is that ASA has only substantiated a claim for recovery from CSS under this head of $3,462.79.
[161] In his initial report on Mrs Mills’ summary of 6 August 2012 Mr McDonald highlighted a number of errors in her calculations. On occasions she debited CSS for amounts rightly owed to CSS by debtors where the debts had arisen prior to the takeover. On other occasions Mrs Mills double-counted transactions. She debited CSS with payments concerning transactions known as the Hagermeyer and Monarco rebate claims, which in fact belonged to CSS as they related to the purchases of past years. Mrs Mills in her initial calculations failed to take into account the fact that CSS had itself corrected earlier errors of payment and credited ASA in respect of
those payments. He noted a basic difficulty that there were not jobsheets available for all the relevant transactions.
[162] Mr Dale cross-examined Mr McDonald on his conclusions. He focused on several examples and he understandably did not take Mr McDonald through each item. He referred to statements by Mr McDonald such as “claim not proven” and suggested to him that he was requiring proof without a doubt, rather than on the balance of probabilities in respect of the overpayments.
[163] Although Mr McDonald made some comments which could indicate he was applying a high standard, my overall impression was that he was a fair witness and willing to give ASA credit where it was due. If, however, he was not satisfied that Mrs Mills’ attribution was correct then he would not allow the deduction. I do not think he applied a stand higher than more likely than not.
[164] I have been through Mr McDonald’s notes on each individual alleged overpayment. By and large his criticisms of Mrs Mills’ individual calculations of monies mistakenly paid to CSS appear to me to be valid. On occasions he found her analysis of the particular transaction to be correct and allowed a credit. Where he could not determine whether ASA or CSS was entitled to a sum he assumed that the payment to CSS was correct. This seems to me to have been a correct approach and in accordance with an assumption that the burden of proof was on ASA and the Mills to establish a wrongful payment on the balance of probabilities.
[165] I note that when an overpayment by ASA to CSS of $30,000 was discovered this was corrected.
[166] I have had sets of submissions on a number of particular transactions, and I illustrate why I cannot accept the careful submission of Mr Meys, junior counsel for the Mills, that close analysis reveals shortcomings in Mr McDonald’s conclusions. I refer to one particular invoice that has been the subject of evidence and extensive submissions.
[167] Job number 42995 was started by CSS and completed by ASA in June 2008. It related to an installation of a Navman S90 and Navman software. There had been initially an overpayment by ASA to CSS in respect of this transaction by Ms Dobbie of the profit of $148.91 on the Navman unit that had been installed. However, this error was accepted by Mr McDonald and it is part of the monies that he agrees is owing.
[168] However, Mrs Mills in her calculation has also claimed for the cost of the software. I do not find her claim to be persuasive. There is a purchase document which shows the date of the transaction as 28 July 2008, while the repair job was actually invoiced to the insurer, AMI Insurance, on 12 June 2008. Although the relevant job number is shown, it seems highly unlikely that the Mills would have paid for this part on visa almost two months after the job was done. Credit card purchases are billed on the day of purchase.
[169] There is also a claim that the credit allowed by Mr McDonald understates the position by approximately $8.00. However, I accept Mr McDonald’s view that this appears to be the courier fee. It was submitted to me that ASA was deprived of the benefit of GST. However, I accept Mr Bogiatto for the defendant’s submission that the GST treatment adopted by Ms Dobbie on behalf of ASA appears to have been GST neutral for both companies.
[170] This particular job is only an example of course, but in the end I did not consider that Mrs Mills’ analysis was correct, and preferred Mr McDonald’s approach. I did not discern, in considering the details of his reasoning, that he was applying a standard higher than the balance of probabilities.
[171] Mr McDonald impressed me as a careful and fair witness. Although he is not independent in the sense that he acted for CSS and acts for Mr Crone, I accept the accuracy of his observations. For reasons that I have already outlined, I have doubts about Mrs Mills’ objectivity when it comes to this sort of analysis. Ms Snowdon has noted her comments on each invoice or entry, but I have found her analysis to be more in the nature of an overview and it indicates that there are problems with Mrs Mills’ spreadsheet analysis. Mr McDonald’s analysis is much more thorough
than that of Ms Snowdon, and I have confidence in his conclusions. The fact is that he is the only accountant to have done a full analysis of Mrs Mills’ spreadsheet, and he seems to me to have done that fairly.
[172] Thus, I accept Mr McDonald’s evidence and conclude that there was an overpayment of apportioned invoices from ASA to CSS, but the amount of that overpayment was $3,462.79.
[173] This claim was alternatively put by the plaintiffs as a claim in conversion. That claim does not succeed. CSS received the monies with the consent of ASA. There is no conversion if goods are obtained lawfully, with the consent of the owner.12 Moreover, the receipt of an electronic transfer of cash, as distinct from interfering with goods, is not conversion.13 Neither CSS nor Mr Crone converted those funds to their own use.
Is the $3,462.79 recoverable from CSS?
[174] Mr Dale did not seek to recover this sum from Mr Crone, but submitted that it was payable on the basis of monies had and received from or converted by CSS. CSS has since ceased trading, and indeed has had to be reinstated on the register.
[175] Mr Bogiatto argued that no judgment should be entered against CSS. He maintained that in general terms a claim for monies had and received could not succeed. He relied on Barclays Bank Ltd v W J Simms Son & Cooke (Southern) Ltd14 for the proposition that the recovery of monies paid by mistake is not available if the payee intended to pay the money whether the fact was true or not. In the present case ASA, through its employee Ms Dobbie, clearly intended to pay CSS the monies received. He also argued that where the payee has relied upon representations and then acts to its detriment the monies are not recoverable, relying
on Thomas v Houston Corbett & Co.15 Here CSS had in good faith and without
12 J S Brookbank & Co (Australasia) Ltd v EXFTX [2009] NZCA 1221, (2009) 10 NZCLC 264,520 at [39].
13 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL) at 559.
14 Barclays Bank Ltd v WJ Simms Sons & Cooke (Southern) Ltd [1980] 1 QB 677 (QB). That decision was followed by their Lordships in Lipkin Gorman, above n 13, as applied in Martin v Pont [1983] 3 NZLR 25 (CA).
15 Thomas v Houston Corbett & Co [1969] NZLR 151 (CA) at 164.
wrongdoing changed its position in that the money, together with all the funds of the company, had been distributed to creditors and shareholders. He also relied on National Bank of New Zealand v Waitoki International Processing,16 and submitted that there was no evidence that the amount received from CSS was ultimately paid to or received by Mr Crone. In any event he asserted that CSS has not been unjustly enriched.
[176] If a person pays money to another under a mistake of fact, and that mistake caused the person to make the payment, that person who paid is prima facie entitled to recover the money.17 I have no doubt that ASA paid the money through its agent Ms Dobbie on the supposition that a specific fact was true, namely that the money was owed to CSS, and that in respect of $3,462.79 that fact was not true, as the money was not owed. If Ms Dobbie had known that the money was not in fact owed, she would not have made the payment. The plaintiff of course cannot recover money it would have paid regardless of the mistake. However, I have formed the
view that Ms Dobbie was an honest person who acted with the best intentions throughout.18 The payments of $3,462.79 by her to CSS would not have been made if she had not wrongly assumed that CSS was entitled to the apportionment.
[177] It is not any change of position that disentitles a party to a claim. Under s 94B of the Judicature Act 1908, the discretion to order repayment can turn on a person altering their position and reliance on the validity of a payment, to such an extent that in the opinion of the Court it is inequitable to grant relief. The common law defence of change of position operates in parallel with s 94B.19 The Court will look at the equities from both sides. It will be unjust to allow restitution where an innocent defendant’s position has so changed that that person will suffer an injustice
if called upon to repay, and the injustice of requiring that repayment outweighs the
injustice of denying the restitution.20
16 National Bank of New Zealand v Waitoki International Processing [1999] 2 NZLR 211 (CA) at
219, 227 and 237.
17 Barclays Bank Ltd v W J Simms Sons & Cooke, above n 14, at 695.
18 See [153]–[154].
19 National Bank of New Zealand Ltd v Waitoki International Processing (NI) Ltd [1999] 2 NZLR
211 (CA) at 232.
20 Lipkin Gorman, above n 13, at 579 applied in Martin v Pont, above n 14, at 30.
[178] The mere expenditure of the money received will not constitute a change of position for the purposes of the defence.21 A payment to creditors by the recipient of the funds has been rejected as an automatic basis for invoking the defence.22
[179] Mr Bogiatto’s objections to CSS being obliged to refund the money it received, but was not entitled to, are lacking in any detail. He asks that detriment be assumed because of the fact of receipt of the money and CSS subsequently ceasing to trade. I am not satisfied that it would be inequitable to order repayment. There are no facts before me which indicate that this would be an injustice to CSS. It may have distributed the funds, but it did not embark on any new course of conduct or significantly change its position in reliance on the payment. I accept Mr Dale’s submission that CSS having received and benefitted from the monies should repay them. If the funds had been distributed to Mr Crone, and CSS is at a later point able to recover that money back from Mr Crone, that is not an unjust scenario.
[180] I therefore propose entering judgment for the sum of $3,462.79 against CSS.
Damages
[181] The plaintiffs claim that they are entitled to a full refund of the purchase price paid, together with their trading losses. Mr Bogiatto strongly resisted this contention. He maintained that even if misrepresentations had been established they were not causative of loss as the business was in any event doomed to failure. He submitted that if the plaintiffs succeeded any losses would be properly met by an award of damages that reflected any reduction in the value of the goodwill of the business. From this figure there would have to be a number of further deductions including the $195,000 received by ASA in its settlement with IAG.
[182] These submissions were not fleshed out in submissions during the hearing and further submissions have been filed on the topic. These have been put in writing and are very detailed. They contain lengthy submissions on the facts and on
occasions touch on the areas of contention already covered. They presuppose the
21 Lipkin Gorman, above n 13, at 580.
22 Scottish Equitable plc v Derby [2001] 3 All ER 818 (CA) and RBC Dominion Securities Inc v
Dawson [1994] 111 DLR (4th) 230 (NFLD CA).
findings of misrepresentations by Mr Crone and that these caused the failure of the business. There is also an assertion by Mr Dale that even if the only cause of action that succeeds is for the $106,557.96 had and received, that the loss of those funds was causative of the failure of the business.
[183] If possible I would have provided a decision on damages on the assumption that the plaintiffs had been successful. I have decided that this is not a case where such a course is practical. That is because my findings of fact have been firmly in favour of the defendants on all material matters. The assessment of damages will require a detailed assessment of matters of fact, and it would be artificial to try to reverse my findings and then flesh out what they might have been. I conclude that it is not possible to carry out that exercise as part of this judgment.
Result
[184] The plaintiffs fail on their first and second causes of action. They succeed on the fourth cause of action relating to money had and received against the second defendant Scituate Ltd in the sum of $3,462.79. Judgment is entered against CSS for that amount.
Costs
[185] If the parties are unable to resolve costs issues, the defendants are to file submissions on costs within 14 days, the plaintiffs within a further 14 days, and with the defendants having a further seven days in which to reply.
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Asher J
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