Bashall v Meihana HC Wellington CIV-2008-485-742
[2008] NZHC 2565
•10 September 2008
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2008-485-742
UNDER Section 72 of the District Courts Act
IN THE MATTER OF an appeal against a decision of the District
Court at Lower Hutt dated 11 March 2008
BETWEEN STEVEN CHARLES BASHALL AND JILLIAN BASHALL
Appellants
ANDTHOMAS MOUTINI MEIHANA Respondent
Hearing: 28 August 2008
Counsel: J R Grace for Appellants
M Leggat for Respondent
Judgment: 10 September 2008
JUDGMENT OF GENDALL J
[1] This is an appeal against an award of damages of $36,495.94 entered in favour of the respondent by Judge J A Walker in the District Court at Lower Hutt on
11 March 2007.
[2] The appellants had claimed $14,855, being the balance of a franchise fee, and collection costs, arising out of a franchise agreement between Mr and Mrs Bashall and Mr Meihana. This failed.
[3] Mr Meihana made a counterclaim seeking damages on the basis that he was induced to enter into the franchise contract by the false representations and
misleading and deceptive actions of the Bashalls.
BASHALL V MEIHANA HC WN CIV-2008-485-742 10 September 2008
[4] After the defended hearing, the Judge dismissed the Bashalls’ claim and found for Mr Meihana in a reserved judgment of 10 July 2006. He found that the appellants had made misrepresentations, and breached the Fair Trading Act by making misleading and deceptive statements about the turnover and past financial viability of the business to be operated under the franchise. These deceived Mr Meihana and his wife and induced the purchase of the franchise.
[5] No issue is taken over the finding of liability. The appeal is concerned solely with the assessment of damages awarded by the Judge in a further reserved decision, after hearing argument from the parties.
Issue on appeal
[6] The issue is whether Judge Walker was wrong to award damages on the basis of Mr Meihana’s claim to reimbursement for “wasted expenditure”, without giving to the Bashalls’ alleged benefits that, it was argued, Mr Meihana received or should have received, but for his management of the business and his failure to mitigate loss.
Background facts
[7] These are set out in the liability judgment of Judge Walker of 10 July 2006. In summary, Mr and Mrs Bashall sold a franchise to Mr Meihana to enable him to purchase the right to operate a shop in Jackson Street, Petone known as “Cigarettes for Less”. An exclusion clause in the contract contained an acknowledgement by the purchaser that no representations were made by the vendors. The Judge found, and this is not disputed, that it was not fair and reasonable for such an exclusionary clause to be conclusive between the parties, especially because the vendors made specific representations as to turnover, or expected turnover, based upon the solid evidence of past performance of the shop, which were false and which they knew to be false.
[8] The Judge was satisfied that Mr Meihana relied on these representations when he decided to enter into the franchise agreement, and had he been told of the correct position of the background history of the business, the likelihood is that he would have looked elsewhere for an investment. The Judge also found that the cause of action under the Fair Trading Act, alleging misleading and deceptive conduct, was established.
[9] When the question of quantum of damages came to be determined under the counterclaim, Mr Meihana elected to claim damages only on the basis of “wasted expenditure”. That is, as the Judge said:
In essence, it is the Meihana’s case that the cost of entering into the franchise and the resulting costs of operating under the franchise for 12 months amounted to wasted expenditure.
[10] The claim included repayment of that portion of the franchise fee ($11,250)
which had been paid and other costs. Inclusive of GST, and as set out in the judgment, they comprised:
Franchise fee $11,250.00 Lease of premises $13,003.60 Eftpos rental $2,818.80 Eftpos service fee $135.00 Insurance premium $845.65 Fitting of security locks $167.50 Security monitor $803.25 Security grill $790.00 Signage $300.00 Purchase of safe $894.00 Carpeting $54.84 Telephone $982.25 Electricity $984.46 Repairs to Zip and carpet drying $46.59 Accountancy $2,700.00 Legal advice on franchise agreement $720.00
$36,495.94
[11] The Judge said it was inherent that purchase costs, and those essential to commencement and operation of the business, were costs flowing directly from the
purchase of the franchise. The Bashalls had contended that it was the ineptitude of Mr (and Mrs) Meihana which led to the failure of the operation through poor record keeping, goods sold on credit, and sales made below approved prices. The Judge then referred to argument, which predominantly was the subject of the appeal, namely that certain calculations and matters arising from the accounts ought to be factored into the quantum, so as to reduce any figure for the benefit of the Bashalls.
[12] In the quantum judgment, Judge Walker said:
Mr Bashall in his evidence detailed an apparent difficulty in the accounts which showed the cost of purchases at $233,405 and the proceeds of sales at
$208,594, a difference of $25,000. Such a difference could only be explained by the sale of cigarettes below cost, which is unlikely, or the loss of stock or inaccuracy in the recording of purchases and/or sales in the
accounts.
[10] The inexperience of the Meihanas in matters of business and retailing in particular is very apparent. If there was a claim for trading losses then this may have been considered as contributing to any such loss and factored in accordingly. But this is not a claim for trading losses.
[11] The Meihanas purchased a franchise to enable them to operate a cigarette business in Petone when unbeknown to them the previous business operated under the franchise in that location had failed. With their inexperience in attempting to operate in the same market under the same system, they were bound to fail. It does not matter if their accounting practices were inadequate, or they were selling on credit, or that Mr Meihana was not a person comfortable in the role of retailer. These factors may have contributed to a greater loss, but business success was unlikely.
[12] [Counsel] submitted that the capital expenditure was not wasted because the expenditure gave the Meihanas an opportunity to trade. The point is, however, that it did not give them an opportunity to attain the projected turnover as represented and so the expected profit.
[13] The Judge declined to award Mr Meihana general damages for stress. He concluded that the case could be dealt with on a wasted expenditure basis as a remedy in contract, and said:
The remedy under the Fair Trading Act in the circumstances of this case would be calculated in the same way. I am satisfied that the amounts expended by the Meihanas to operate the business for the 12 month term of the lease was wasted expenditure arising out of entering into the franchise agreement with the Bashalls.
[14] After entering judgment for the respondent on the counterclaim, the Judge awarded interest of 7.5% per annum on the franchise fee of $11,250 from the date of
its payment and on the balance of the award from the date of closure of business on
24 November 2003 to the date of judgment.
Counsel’s argument on appeal
[15] The essence of Mr Grace’s submissions on behalf of the Bashalls is that Judge Walker erred by disregarding Mr Meihana’s alleged contribution to any loss, and his failure to accurately account for stock or proceeds of sale. Counsel said this could be “a cause of wasted expenditure just as it can be a cause of trading losses or any other form of reliance loss”. He argued that although the Judge had to consider the extent to which Mr Meihana’s losses should be attributed to the actions of the Bashalls, he also had to consider the actions of Mr Meihana. It was argued that the benefits received had to be balanced against the expenditure incurred, and consideration given to whether Mr Meihana’s loss was caused or contributed to by his own fault, and a failure to mitigate.
[16] Mr Grace contended that the Judge failed to consider what portion of the wasted expenditure was attributable to the appellants and what portion was attributable to the respondent. He relied upon the principles set out in Newmans Tours Ltd v Ranier Investments Ltd [1992] 2 NZLR 68, to which I will return.
[17] It was submitted that the misrepresentations made by the Bashalls, had no causal connection to the manner in which Mr Meihana operated the business or accounted for his stock. The misrepresentations simply resulted in the business being commercial, after acquisition of the franchise. A failure to account for sales and stock, whether sold on credit or taken for one’s own use (if that was actually the case), counsel argued, would have led to a loss in any business, irrespective of its turnover. He said that Mr Meihana received, or ought to have received, benefit from stock that he or others of his family used for themselves (if that did in fact happen).
Discussion
[18] Judge Walker dealt with the argument on the basis that the claim was not one for damages arising out of trading losses or loss of expectation of future profits or gain. Whilst Mr Meihana’s counterclaim was an action for damages for breach of contract, what was sought was restitution in the form of relief under s 9 of the Contractual Remedies Act 1979, upon cancellation of the contract. The Court is required under s 9(4), when considering the terms of any order it proposes to make under the section, to have regard to, amongst other things:
(c) any expenditure incurred by a party in or for the purpose of the performance of the contract; and
….
(e)any benefit or advantage obtained by a party by reason of anything done by another party in or for the purpose of the performance of the contract; and
(f) such other matters as it thinks proper.
[19] If Mr Meihana obtained any “benefits” in operating the business, they were more than offset by losses that arose from a business that was bound to fail. Such benefits would not arise through anything done by the Bashalls. The “benefit” obtained under the contract was the acquisition of a franchise, which was sold on the basis of false representations. If benefits arose or were obtained through the acquisition of stock, that occurred through Mr Meihana himself spending money to acquire it. He and his wife made net losses, despite taking only minimal drawings of significant amounts during their trading period. He did not claim for those losses, as Judge Walker observed. It follows that any benefits that they may have acquired through (if such occurred) retaining stock, would not in any event have outweighed accumulated losses.
[20] Mr Grace argued that a sum in excess of $28,000 “would have been received” if the respondent had accounted for all stock. Even if that be correct, which I add Mr Meihana contests vigorously, he would still have made losses which he could have claimed, if he wished, for the misrepresentation. He chose to claim for wasted expenditure. He was entitled to do so.
[21] There is a distinction between a restitution interest, a reliance interest and an expectation interest, when assessing different types of losses; see Newmans Tours Ltd v Ranier Investments Ltd. A reliance interest is the right to compensation for loss due to steps taken by the innocent party in reliance on the existence of the contract. Its object is to restore the innocent party to the position that he or she would have occupied had the contract not been made. That was the situation in this case, and a claim for trading or expectation losses was not sought.
[22] An expectation interest is the right to compensation for loss of the bargain, the object being to restore the innocent party to the position he or she would have occupied had the contract been performed. In this case, it was not a question of the contract being “performed” but that it would not have been made but for the false representations of the Bashalls. The distinction is discussed in Blanchard (ed) Civil Remedies in New Zealand (2003) at para 10.2.4, and does not need extensive analysis or repetition in this judgment.
[23] Expectation loss commonly includes profit a plaintiff would have made if the contract had proceeded. But the difficulty may arise that it is so speculative that it is unclear whether any profits would ultimately have been made. Even if that were the case, it would not mean that a plaintiff suffered no loss because he may have relied on a defendant honouring the contract, and incurred expenditure which was wasted as a result. An example of this can be seen in Anglia Television Limited v Reed [1971] 3 All ER 690 (CA). There, a plaintiff could not find a replacement actor for an abandoned film project, where the contracted actor had repudiated. It was not possible to tell whether the unmade film would have been a success. The plaintiff did not seek loss of profits but rather an award for the money it spent in preparation of finding actors, engaging script writers and the like. The plaintiff was able to choose the basis upon which to quantify its loss, but could not claim both expectation and reliance losses.
[24] As to the argument that the respondent failed to “mitigate his loss”; the fact is that he endeavoured to make some profit (despite being wrongly induced to acquire the franchise) but was unable to do so. Even if it was the case, (assuming for the
sake of argument) that some stock had been retained by him or his family, he had purchased this separately.
[25] Judge Walker’s approach was entirely proper. He did not err in rejecting the argument made on behalf of the Bashalls in his quantum judgment. He correctly stated that the claim was not for trading losses. The inexperience of the respondent in matters of business and retailing, although it may have been factored into a claim for trading losses, was not relevant to a claim for wasted expenditure arising out of a franchise agreement which, but for the false representations, would not have been entered into.
[26] Under s 9 the Court’s ultimate duty is to produce a just result. Judge Walker endeavoured to do so in the way in which he approached the claim for wasted expenditure and, subject to the small adjustments I propose to make, he was correct.
[27] Of course, when determining the ultimate entitlement of a cancelling party any benefit received pursuant to a contract must be set off against restitution, reliance or expectation claims advanced on its behalf. As Fisher J said in Newmans Tours Ltd v Ranier Investments Ltd, (at page 95):
So far as the expectation loss is concerned, benefits received are an inherent feature of determining the net “loss” for which the cancelling party may claim compensation. But the same allowance must be given in the case of restitution and reliance claims. The object of the relief is merely to protect the cancelling party against the detrimental consequences of the cancellation, not to allow the cancelling party to profit from it.
[28] But that is only relevant when the positive benefit achieved exceeds the losses. In this case, even if retention of some stock may have provided some notional “benefit”, it was never enough, as the Judge indicated, to offset what was always going to be, and as was established by the accounts, certain loss.
[29] I think however, the amounts awarded for wasted expenditure include three items which, although expended properly, fall under trading expenses (rather than “upfront” wasted costs). They are:
Telephone $982.25 Electricity $984.46 Repairs to Zip and carpet drying $46.59
$2,013.30
[30] The insurance premium of $845.65 was, in my view, properly included as wasted expenditure as it had to be incurred for the purpose of protecting the assets of the business acquired through the franchise.
[31] But the three items of expense above were incurred in trading and are not what could be properly described as expenditure necessary in order to take up and preserve the franchise. To that extent, the damages award requires a small adjustment.
[32] Mr Grace contended the accountancy fees of $2,700 were not recoverable. He submitted that the authority of Herbison v Papakura Video Ltd (No. 2) [1987] 2
NZLR 720 precluded this expense being included in the damages award. That was the case where a sum in excess of $26,000, comprising accountancy and legal fees arose in connection with the litigation. Henry J observed that that claim was not really one for wasted expenses because they were not expenses rendered futile by the breach, nor did they come under the head of recovery relating to expenses caused by the breach. The Judge said they were expenses incurred in enforcing an entitlement to damages and that to hold otherwise would make solicitor/client costs recoverable as damages for breach of contract as a matter of principle.
[33] The present case is distinguishable on the facts. The $2,700 accountancy fees were wasted expenditure incurred in the accountants having to prepare necessary financial statements and accounts for the years ending 31 March 2003 and 2004. They had to be incurred for the purpose of operating the franchise. The evidence of Mrs Meihana at the quantum hearing was that the total of $2,700 was inclusive of GST. Those figures, before GST, are shown in the statement of financial performance for the year ended 31 March 2004. They do not relate to solicitor/client costs, and the statement of defence and counterclaim was issued on 31 March 2004.
[34] The factual position is quite different to that where legal or accountancy fees are incurred in the course of enforcing an entitlement to damages. I am satisfied that the Judge was correct in allowing the accountancy fees as wasted expenditure, properly arising out of entry into the franchise agreement.
[35] It follows that the appeal fails in substance, apart from a reduction in the quantum of the counterclaim sum of $34,482.64 awarded. The interest awarded in para [20] of Judge Walker’s decision is confirmed. The judgment, together with interest, of course, carries interest as a judgment debt under s 65A of the District Courts Act 1947 until payment.
Costs
[36] The question of costs was reserved in the District Court. I was told that the appellants were then, and for the purposes of this appeal, legally aided. They have essentially failed in their appeal despite the small adjustment I have made in relation to quantum. In the District Court they failed on both claim and counterclaim. In normal circumstances, costs would follow the event. Mr Meihana in the District Court, and in this Court, would be entitled to costs and disbursements.
[37] No order for costs may be made against an aided person in a civil proceeding unless the Court is satisfied that there are “exceptional circumstances”: s 40(2) Legal Services Act 2000. That is not the case here.
[38] But orders for costs would have been made against the aided appellant in this Court and the District Court if that section had not affected his liability. Section 41 of the Legal Services Act 2000 may apply if the respondent in this Court is prejudiced by the operation of s 40. In terms of s 40(5), I direct that, because no order for costs is made against the aided persons only as a result of s 40, an order for costs in the sum of $1,500 would have been made against the appellants in respect of this appeal if that section had not affected liability.
[39] The question of costs in the District Court must remain reserved, given the
Bashalls’ then legally aided status. If any further orders are to be sought in that
Court, the parties should file memoranda in that Court, in accordance with the direction of Judge Walker.
“J W Gendall J”
Solicitors:
Ord & Lillico, Wellington
Michael Leggat, Wellington
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