Bradfields Limited v Brookwater Investments Limited fka Bradfield Marketing Limited
[2020] NZHC 935
•7 May 2020
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2017-409-000822
[2020] NZHC 935
BETWEEN BRADFIELDS LIMITED
First Plaintiff
MATTHEW PETER SULLIVAN
Second PlaintiffGABRIELLE LEE SULLIVAN
Third PlaintiffAND
BROOKWATER INVESTMENTS
LIMITED formerly named BRADFIELD MARKETING LIMITED
First Defendant
PAUL WILLIAM BRADFIELD
Second DefendantMALLEY & CO
Third Defendant
Hearing: 29 July 2019 – 9 August 2019 Appearances:
B M Russell and MDW King for Plaintiffs
M M Bell and R A Hearn for First and Second Defendants G N Galloway and W J Hamilton for Third Defendant
Judgment:
7 May 2020
JUDGMENT OF GENDALL J
This judgment was delivered by me on 7 May 2020 at 3:30 p.m. pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
BRADFIELDS LTD v BROOKWATER INVESTMENTS LTD [2020] NZHC 935 [7 May 2020]
Table of Contents
Introduction [1] Background facts [11] - History of the business [11] - Mr Bradfield’s experience with regulatory compliance issues [13] - Marketing of the business in 2014 [18] - The Information Memorandum [20] - Retainer of Malleys [22] - Concluding the business Purchase Agreement [25] - Due diligence phase [27] - Meeting on 21 November 2014 [29] - The client sales tour [30] - Product files held by business [31] - Settlement of the business purchase [32] - Plaintiffs made aware pet care products were non-compliant with regulations [34] - Response of BL [39] - The registration position [47] Plaintiff’s claims [52] General credibility and memory issues [61] First issue – Has Brookwater breached the express warranty in cl 6.1 of the Purchase
Agreement? (First cause of action)
[70] Second issue – Is there an implied term in the Purchase Agreement that the pet care products sold as part of the business were legally able to be manufactured and
sold? (First cause of action)
[106] Third issue – Did Brookwater make the pleaded representations and did they induce the plaintiffs to enter into the Purchase Agreement in terms of s 35 of the
Contract and Commercial Law Act 2017 (CCLA)?
[119] Fourth issue – Fair Trading Act 1986 – Have Brookwater and Mr Bradfield engaged in misleading and deceptive conduct in breach of s 9 of the Fair Trading Act 1986
(FTA)?
[139] - Contributory negligence [158] Fifth issue – Has Mr Bradfield aided and abetted a breach of s 9 of the Fair Trading
Act?
[171] Sixth issue – Have Malleys breached their duty to exercise reasonable skill and care
when providing the plaintiffs with legal services?
[174] - Contributory negligence [203] Seventh issue – Mitigation of loss [222] - Principles to be applied [226] - Conclusion on mitigation [239] Damages [240] - What is quantum of the loss? [240] - Diminution in value loss [248] - Wasted costs [262] · Lease costs [263] · Additional staff costs [274] · Marketing costs [277] · “Clipsell” cards [279] · Computer costs [280] · Experts’ fees [282] · Coghlan’s storage fees [285] · Malleys’ finance fees [286] - General damages [289] - Adjustment for mitigation and contributory negligence [292] - Allocation of responsibility between defendants [296] - Interest [301] Result [302] Costs [305]
Introduction
[1] The plaintiffs’ group, through their company, the first plaintiff, Bradfields Limited (BL), purchased a business which involved the manufacture and sale in New Zealand and Australia of natural pet care products and air freshener products from the first defendant, Brookwater Investments Limited (Brookwater). The pet care products which comprised approximately 45 per cent of the business were sold to pet care retailers in New Zealand and Australia. The separate arm of the business involving the sale of air fresheners to retailers such as service stations and the like comprised the remaining 55 per cent of the business.
[2] The total sale price for the business and its assets under the Agreement for Sale and Purchase between the parties entered into on 29 September 2014 (the Purchase Agreement) was $400,000. Settlement of the sale occurred in December 2014.
[3] BL, together with its directors the second plaintiff, Matthew Sullivan (Mr Sullivan), and the third plaintiff, Gabrielle Sullivan (Mrs Sullivan), say it was a condition of the contract for the sale of the business and represented to them throughout that the pet care products were being sold legally in New Zealand and Australia and did not require registration under applicable regulations in those countries.
[4] In April 2016 BL received notice from an Australian regulator, Australia Pesticides and Veterinary Medicines Authority (APVMA) that most of the pet care products were required to be registered with it under the relevant regulatory regime before they could be legally sold in that country. APVMA as the relevant authority in Australia then required BL to withdraw these pet care products from the market. Similarly, around this time the plaintiffs were told by equivalent New Zealand regulatory authorities that some of their pet care products also required registration in New Zealand.
[5] BL withdrew all the pet care products from sale in Australia and New Zealand. With the minor exception of only three products in New Zealand, none of the pet care products have since been reintroduced into Australia or New Zealand. BL and the
Sullivans contend in this proceeding they suffered a significant loss as a result and sue to recover damages for that loss.
[6] On 9 October 2014 Mr Sullivan and Mrs Sullivan retained the third defendant solicitors, Malley & Co (Malleys), to act on their behalf and on behalf of BL to be incorporated to represent them and to advise on the business purchase. This included to provide advice on the conditions included in the business purchase contract, first, as to solicitors’ approval and, secondly, as to general due diligence.
[7] BL and the Sullivans claim against Brookwater in contract and misrepresentation and against Brookwater and Mr Bradfield under the Fair Trading Act 1985 (FTA). They also bring a claim against Malleys in contract and negligence.
[8] The plaintiffs contend that Malleys are also liable for the loss they have suffered here through failing to advise them adequately in terms of, first, the solicitors’ approval clause and, secondly, as to exercising their right to carry out due diligence under the Purchase Agreement.
[9] The plaintiffs seek in this proceeding, first, the cost of registering the products in Australia and New Zealand which is estimated at nearly $11 million or, alternatively, losses allegedly suffered as a result of the pet care products not being registered, being an amount totalling around $500,000.
[10] Brookwater and Mr Bradfield, on the one hand, and Malleys, on the other, oppose all the claims against them.
Background facts
History of the business
[11] Mr Bradfield established and operated the business for some years having developed it from scratch. It was established and operated throughout under his name “Bradfields”. His counsel, Mr Bell, before me described the business as Mr Bradfield’s “baby”. He had built it from scratch and been intimately involved in
its development and in every aspect of the business for many years. Clearly, he was very proud of “his Bradfields” business.
[12] The pet care product arm of the business which I refer to at [1] above had been built up over the preceding few years. It involved the manufacture and sale of about 15 pet care products which were:
(a)“Neem” Soap
(b)“Don’t Bite My Ears”
(c)“Fragrance My Pet”
(d)“4 in 1”
(e)“Pet Calmer”
(f)“Gentle Ear Cleaner”
(g)“Glyco Omega Plus”
(h)“Anti-Itch Spray”
(i)“Dog Shampoo – Regular”
(j)“Dog Shampoo – Citrus”
(k)“Omega 3, 6, 9 Flax Seed Oil”
(l)“Sore Paw Balm”
(m)“Odour Neutraliser”
(n)“Flea and Tick Spray”
(o)Hygiene House Odour Neutraliser”
Mr Bradfield’s experience with regulatory compliance issues
[13] Over the years of the business’ operation it is clear too that Mr Bradfield had regular involvement with regulatory compliance issues, in particular, for the pet care products in New Zealand and Australia. A number of examples that follow illustrate aspects of this.
[14] Going back some years, in the evidence before me, it was established that on 5 February 2009 Mr Bradfield had printed off the glossary of common terms section of the Agricultural Compounds and Veterinary Medicines Standard for Prescription Animal Remedy Veterinary Medicines published on the New Zealand Food Safety Authority website. The glossary contained, among other terms, “Agricultural Compound” and its definition in terms of the New Zealand legislation. He also printed off the APVMA “Requirements and Guidelines for Veterinary Herbal Remedies” dated March 2009. He made some annotations on that document, including a statement that his products “do not meet (the definition of “Veterinary Chemical Product” (VCP))”.
[15] In April 2009 Mr Bradfield was advised (in relation to a product he says he did not proceed with attempting to register) that the cost of registration of VCPs could be “substantial” in terms of “toxicological, safety, and ecotoxicology reviews”.
[16] Later, in 2011 Mr Bradfield applied to have a pet care product known as “Gentle Ear Cleaner” sold in New Zealand. The application was rejected for a procedural reason. But Mr Bradfield chose not to pursue registration of the product in New Zealand in any event because of “registration issues and costs”.
[17] On 13 September 2013 Mr Bradfield had emailed the Veterinary Medicines Group of the APVMA in Australia about whether his company could use the words “antiseptic” or “antibacterial” on a non-registered product. On that occasion he was advised by the APVMA that using those words would constitute a therapeutic claim and this would make the product in question a VCP requiring registration.
Marketing of the business in 2014
[18] In 2014 Mr Bradfield decided to sell the business. He approached business brokers, Quality Business Sales, and was directed to Mr Damien Fahey who would act as the agent for the sale. Mr Fahey began the process of marketing the business for sale, and a detailed Information Memorandum was prepared.
[19] Mr Sullivan showed interest in response to an advertisement for the sale of the business and on 30 September 2014 Mr Fahey sent him the Information Memorandum regarding the business. It described in glowing terms the “business opportunity” provided by the sale of this business, a business described as the manufacture and distribution of air fresheners and pet care products in both New Zealand and Australia. The Information Memorandum noted that the pet care products accounted for 45 per cent of total sales but went on to say that they were “only launched two years ago and are likely to overtake fragrance (in the 2014/2015 financial year)”. It noted that this side of the business had been Mr Bradfield’s “primary focus” and that “it is growing at an impressive rate”.
The Information Memorandum
[20]The Information Memorandum said specifically that the vendor Brookwater:
(a)manufactured and distributed chemical-free pet care products (grooming and health products for dogs and cats) throughout New Zealand and via distributors in Australia;
(b)had sales of pet care products that comprised 45 per cent of its total business sales;
(c)expected pet care products to overtake the sales of fragrances in the 2014/2015 financial year;
(d)supplied pet care products through distributors to 300 Australian pet stores;
(e)operated its business under normal legislative and regulatory constraints open to all New Zealand and Australian business; and
(f)had regulatory compliance, which was included as an intangible asset of its business.
[21] On 7 October 2014, Mr and Mrs Sullivan met with Mr Fahey at the business premises. During this meeting Mr Sullivan says that Mr Fahey again emphasised the growth potential of the pet health care products arm of the business.
Retainer of Malleys
[22] On 9 October 2014, Mr Sullivan emailed Mr Price, a partner of Malley’s, enclosing a copy of the proposed business sale agreement. Mr Sullivan asked Mr Price to “please go over it and advise us where necessary”.
[23] The purchase contract included two particular conditions which the Sullivans say were relevant to the work to be undertaken by Malleys here:
(a)the due diligence clause;
(b)the solicitors’ approval clause (which stated that the contract was subject to “[Malleys] advice that the business is suitable for he Purchasers in all respects”.
[24] On 10 October 2014, Lucy Glausiuss (Ms Glausiuss of Malleys) sent an email to Mr Sullivan after reviewing the draft purchase contract, making a number of comments. These included comments that the sale was conditional on due diligence and on “our approval that the business is suitable for you in all respects”.
Concluding the business purchase contract
[25] On 13 October 2014, Mr and Mrs Sullivan sent to the agent their initial signed offer for the purchase of the business at a price of $385,000.
[26] On 22 October 2014, Mr Bradfield provided an email to Mr Fahey which was forwarded to Mr Sullivan where he explained he was declining the offer. Mr Bradfield’s email emphasised how fast the business was growing and, in particular, the pet care side and described the purchase as “an amazing opportunity”. Finally, he said he said he would sell the business at $400,000. On 29 October 2014, Mr and Mrs Sullivan submitted a new offer at that figure which was accepted by Mr Bradfield.
Due diligence phase
[27] The Purchase Agreement, as I have noted, was subject to a due diligence condition. On 13 November 2014, Mr Sullivan emailed the agent, Mr Fahey, listing a number of matters he considered should be addressed in the due diligence process. In his email, Mr Sullivan concluded:
No doubt our lawyers will want to add to this…
Although the email was addressed to Mr Fahey, Mr Sullivan copied in both Mr Price and Ms Glausiuss of Malleys.
[28] On 18 November 2014 Ms Glausiuss spoke to Mr Sullivan on the telephone. She recorded in a file note that they had discussed Mr Sullivan’s belief at the time that Brookwater was operating the Australian interests through a separate entity. Ms Glausiuss noted her recommendation that Mr Sullivan seek full disclosure from the vendor regarding that Australian entity to ensure the assets of that entity would transfer under the business sale contract. Later that day, she emailed Mr Sullivan with more detailed comments on the matters raised by Mr Sullivan in his 13 November 2014 email. In relation to her item described as “Australian interests” she confirmed:
Your due diligence will need to include consideration of the Australian entities’ contracts and assets.
Ms Glausiuss did not add to Mr Sullivan’s list of due diligence matters. There was no direct discussion of regulatory issues.
Meeting on 21 November 2014
[29] On 21 November 2014, Mr and Mrs Sullivan attended a meeting with Mr Bradfield at the business premises. There was a significant dispute about what was said at that meeting. Mr Sullivan was clear in his evidence that Mr Bradfield had confirmed that only the Gentle Ear Cleaner product required registration for sale in New Zealand and that the remaining products being sold in both New Zealand and Australia did not require registration and could continue to be sold in these markets. This was in line with precisely what was happening in the business at the time. Mr Bradfield provided a different response, however. He said that at the meeting he had explained to the Sullivans how regulatory compliance for the pet care products worked and that it was ultimately a matter of interpretation. He said he explained that it depended on the words used on the products and advertising, and based on his experience, issues could arise from time to time which normally were simply a matter of changing the wording to satisfy the authorities. Mr Bradfield says he confirmed at this meeting what he honestly believed to be the non-applicability of the regulatory regimes for the pet care products. But at trial before me he accepted that at the time of the sale to BL in November/December 2014, with the exception of the 4 in 1 product, the pet care products, as the experts agreed, did require registration in Australia. In evidence, Mr Sullivan, however, categorically denied that at this 21 November 2014 meeting or indeed otherwise, Mr Bradfield had explained how registration and regulatory compliance worked, despite Mr Bradfield having said that he had done this. Mr Sullivan strongly denied too that Mr Bradfield had told them that it all “came down to the wording”.
The client sales tour
[30] During the time that the Purchase Agreement was still conditional, being in the week of 1 December 2014, Mrs Sullivan accompanied Mr Bradfield on a sales tour of the North Island of New Zealand to meet with clients and customers of the business. The purpose of this was for her to observe the client care and sales process. Mr Bradfield in his evidence said that he discussed the potential registration issues with Mrs Sullivan during this sales tour and, in addition, certain retailers had also asked questions about registration at the time. He said he recalled confirming that the flea and tick product may require registration in Australia but that this would not be a
difficult task. Mrs Sullivan in turn denied this and said in her evidence that although the issue of registration may have come up during the sales tour, it was very limited and related only to the shampoos (as per the retailer’s manual) and the Ear Cleaner.
Product files held by the business
[31] Certain folders were held by Mr Bradfield and Brookwater on products supplied by the business and Mr Bradfield said these confirmed information about each of the products and the applicable regulations and registration requirements. Mr Bradfield suggests these files were removed by someone from his office during the due diligence period and returned later. Amanda Moore (Ms Moore), an employee of both Brookwater and later BL, confirmed in her evidence, however, that during the times she was present at the business premises, she did not see anyone take the product files, nor did she know when or if they were allegedly taken. Mr Sullivan and Mrs Sullivan refute any inference that it was they who arrived at the premises during the due diligence period and removed the files in question. They state in evidence they did not know the product files existed and the first time they saw and reviewed them was after settlement and particularly in April 2016 following the letter from APVMA.
Settlement of the business purchase
[32] On 18 December 2014, on Mr Sullivan’s instructions Malleys advised Brookwater’s solicitors that the purchase contract was unconditional subject to completion of an executed Deed of Lease for the business premises.
[33] BL and the Sullivans as purchasers contend the conditions under the Purchase Agreement were confirmed in reliance on:
(a)the Information Memorandum;
(b)the advice of Malleys in relation to the draft Purchase Agreement and the terms of that contract generally;
(c)the statements made by Mr Bradfield in his email of 22 October 2014;
(d)the advice of Malley & Co and, in particular, that given on 18 November 2014 in relation to due diligence and Malley’s subsequent approval of the purchase of the business;
(e)the statements made by Mr Bradfield on 21 November 2014; and
(f)all the other statements made by, and the conduct of, Mr Bradfield throughout as well as all the contemporaneous documents provided.
Plaintiffs made aware pet care products were non-compliant with regulations
[34] On 28 April 2016, having operated the business it seems without major issue from January 2015, the Sullivans received a letter from APVMA alleging that four of their pet care products were being illegally sold in Australia. This was on the basis that the products in question required APVMA registration as Veterinary Chemical Products (VCP). Mr Sullivan received advice directly from Ms Joan Ashton of APVMA that, because the four products were unregistered VCPs and they were being supplied, advertised and imported into Australia, a breach of the Agricultural and Veterinary Chemicals Code Act 1994 had occurred. BL was advised to withdraw the products from sale and to remove any non-compliant information, or advertisements relating to them. As unregistered VCPs Ms Ashton said BL was also to confirm to all concerned that its products in question were not available for supply in Australia pending registration.
[35] Mr Sullivan then instructed Ms Ruth Davis (Ms Davis) of Redcap Solutions Pty Ltd to assess these issues over regulatory compliance of the Bradfield products.
[36] On 2 May 2016, Ms Davis emailed Mr Sullivan to advise that she agreed with the allegations of APVMA and she added that she thought an additional product “Don’t Bite My Ears” would also require APVMA registration. She went on to say, however, that some other products may be exempt from the need for registration but only if they met certain criteria. Additionally, Ms Davis gave a clear warning that in order for BL to comply with the relevant regulatory requirements:
…APVMA registration is extremely onerous and unlikely to be successful for natural products such as these. He would be looking at $200,000 plus per
product as a minimum and it could be quite a lot more. It would take one – two years to generate the necessary data to support the applications (efficacy, safety, stability etc). Once in the APVMA system they would then take about another 15 – 18 months to be evaluated.
[37] On 12 May 2016, Mr Sullivan emailed Ms Ashton and suggested that some of the products may come within the definition of cosmetic products if the advertising was amended.
[38] On 16 May 2016, Ms Ashton responded. She rejected this suggestion, stating that the products were still VCPs regardless of their advertising. She also noted BL had not removed information on its website as required relating to the promotion and sale of the products alleged to require registration.
Response of BL
[39] As a result of Ms Ashton’s reply BL took down its two websites. On 18 May 2016, BL advised its Australian customers of its decision to cease selling pet care products in Australia due to APVMA’s non-registration concerns.
[40] On 24 May 2016, BL through its solicitors contacted Mr Bradfield seeking details of any New Zealand class determinations made with respect to the relevant products and any registration permits or import licences. Mr Bradfield responded that class determinations were not necessary and that many competing products similar to those being sold by BL were sold legally in Australia without registration.
[41] On 14 June 2016, Ms Davis provided a formal opinion to BL. It stated that 10 of its 15 pet care products required registration in Australia and that one further product (Glyco Omega-Plus) might not require registration, but further evaluation would be required to determine this. This meant that BL had to assume 11 of its pet care products would require Australian registration.
[42] Eurofins SCEC Pty Ltd, an Australian company providing (amongst other services) scientific clinical trial services for the registration of agricultural and veterinary chemical products, in uncontested evidence before me, has estimated the total cost to register each of the products for the Australian market at AU$10,737,600.
[43] On 22 June 2016, in response to an enquiry, Mr Josh Leen of the New Zealand Ministry for Primary Industries (MPI) emailed Mr Sullivan to advise the regulatory class determinations of BL’s pet care products:
(a)three were not defined as “agricultural compounds” and did not require registration;
(b)five were defined as “agricultural compounds” but were exempt from the requirement for registration;
(c)seven required registration as non-exempt “agricultural compounds”.
[44] From the decisions BL took at the time, all its pet care products were withdrawn from the market in Australia on 18 May 2016 and from the New Zealand market on 23 June 2016.
[45]Also, in June 2016 BL made three of its staff redundant.
[46] Then, on 1 September 2016, the APVMA advised BL it would not be pursuing the non-compliance matter because BL had stopped supplying its pet care products in Australia and had provided adequate notice to re-sellers regarding the recall of the products.
The registration position
[47] The position taken by Brookwater and Mr Bradfield here is that registration requirements for the products could have been simply averted by making minor changes to the composition of the pet products in question, and to their labelling and advertising where required, and that this would have had no impact on the marketability or profitability of those products or of BL’s business. Malleys agree and the defendants overall say that the plaintiffs’ failure to do this was unreasonable.
[48] Further, the defendants say that the decision by BL and Mr and Mrs Sullivan not to challenge or dispute the stances taken by APVMA and NZACVM regarding both registration and the attendant Good Manufacturing Practice (GMP) requirements
(a somewhat expensive compliance requirement for manufacturing processes required where products defined in legislation as agricultural or veterinary chemical products are produced) was wrong and unreasonable.
[49] On this, there is relevant evidence before the Court both from Professor Reeve- Johnson, a qualified expert in this area, and also from a number of the Australian sales agents (which I accept is admissible evidence here, given that these agents are experts in their respective pet care sales fields). This seems to suggest that, if changes as to labelling and advertising recommended by Professor Reeve-Johnson had been made, and minor changes to composition of several products been undertaken, the need for registration would have been obviated and there would have been no discernible change to market demand for the products. Other evidence before the Court, however, including that from the plaintiff’s expert, Ms Davis, to some extent provides a contrary view.
[50] Even if, as seems to be the case, wording changes to the packaging and advertising were a possibility, the issue always remains what effect those changes would have on sales of the products.
[51] And, insofar as changes in the composition of some of the products is concerned, Mr Bradfield in his evidence suggests this is not a major issue and that particularly the one per cent citrus oil threshold for these offending products not to be exceeded could be met by a constituent replacement. He contends too this would not affect the effectiveness of the product. All this is strongly disputed, however, by Mr and Mrs Sullivan.
Plaintiffs’ claims
[52]The plaintiffs raise six causes of action in their statement of claim.
[53] The first cause of action is a claim against Brookwater only for damages for breach of contract. The pleaded claim is that Brookwater has:
(a)breached the express warranty in the contract in clause 6.1(1) which reads:
6.1The vendor warrants and undertakes that at the date of this agreement the vendor has not:
(1)received any notice or demand and has no knowledge of any requisition or outstanding requirement:
(a)from any local or government authority or other statutory body;
…
which adversely affects the business or the premises and which has not been disclosed in writing to the purchaser.
[54] In addition, the alternative claim under this first cause of action is that Brookwater has breached an implied term in the contract that the pet care products were legally able to be sold in New Zealand and Australia.
[55] The second cause of action is also a claim against Brookwater only that it is liable to pay damages under s 35 of the Contract and Commercial Law Act 2017 (CCLA). Section 35 creates an entitlement to damages when a party to a contract has been induced to enter into it by a misrepresentation to the same extent as if the representation were a term of the contract that had been breached. The alleged representation here is that all the pet care products were being legally manufactured and sold in New Zealand and legally imported and sold into Australia and that could continue.
[56] The third cause of action is a claim against both Brookwater and Mr Bradfield that they have engaged in misleading and deceptive conduct in trade in breach of s 9 of the FTA. Here, the plaintiffs allege that Brookwater and Mr Bradfield engaged in misleading and deceptive behaviour by making the representations I have set out above and doing so with knowledge that the pet care products in question required or were likely to require registration.
[57] The fourth cause of action is against Mr Bradfield only. It is a claim that he has aided and abetted Brookwater’s breach and is also liable for damages under s 43(3)(f) of the FTA.
[58] The fifth cause of action is a claim against Malleys in negligence in that they did not exercise reasonable care and skill as they failed to advise Mr Sullivan and Mrs Sullivan:
(a)about the need to check that the relevant pet care products had the appropriate regulatory consents or permits; and
(b)that the business premises at Kaiapoi did not have a Code of Compliance Certificate.
[59] The sixth cause of action is also a claim against Malleys, this time in contract for breach of their retainer and the implied term to exercise reasonable skill and care as lawyers engaged by Mr and Mrs Sullivan relating to the matters noted above.
[60] Shortly I will turn to consider each of these six causes of action but, first, it is useful to address certain credibility and memory issues which were raised before me leading to what counsel have described as contested evidence issues.
General credibility and memory issues
[61] Before me, counsel for the various parties suggested that numerous credibility issues arose in this case. Counsel for Brookwater and Mr Bradfield maintained that the evidence of both Mr Sullivan and Mrs Sullivan was unreliable in what were said to be certain key areas. Counsel for BL and the Sullivans in turn suggested that Mr Bradfield’s credibility must be questioned as he acknowledged telling what he called “white lies” on several matters during his cross-examination. And counsel for Malleys also put forward contentions that certain matters arising from the evidence of both Mr Sullivan and Mrs Sullivan must affect their credibility here and aspects concerning their memory and general recall.
[62] On all of this, I accept that so far as the various individuals involved in this proceeding are concerned, their individual recollection of matters and their overall credibility are relevant to an extent in determining issues which are before this Court. This is not the end of the matter, however. If reliable contemporaneous documents are available which address issues in contention, then they become highly relevant to the
Court’s credibility assessment or the weight given to any individual’s recollection of events. In this case, there are a number of contemporaneous documents which are before the Court which, in many instances, fill this role.
[63] Memory issues were also raised. Before me, much was made by counsel for Malleys in particular as to the memories of Mr Sullivan and Mrs Sullivan here. The purpose of this seemed to be to suggest they were mistaken in their evidence about certain matters, a number of which however, in my view, might be seen as relatively minor.
[64] The suggestions made by counsel as to dishonesty on the part of the Sullivans and of Mr Bradfield over substantial matters, in my view, are also largely misplaced here.
[65] I find that although the evidence of both Mr Sullivan and Mrs Sullivan, and of Mr Bradfield, has been to some extent unreliable in certain areas, overall, they were largely truthful witnesses who endeavoured to set out matters as they saw them.
[66] There were clearly some inconsistencies in the evidence given by various witnesses in this case. As I have said, there have also been certain allegations made here concerning lies. Just because an inconsistency may have arisen, however, does not mean that the party concerned has not told the truth. It may be that they did not consciously lie but simply were mistaken or that their memory of events some time ago was somewhat clouded. What weight may be placed on the evidence of individual witnesses before me will become apparent later in this judgment. And, in any event, just because a particular witness may not have told the truth about a particular aspect of their evidence or may have been mistaken about one individual aspect, does not mean they are wrong or mistaken about other aspects.
[67] And, finally, I accept that human memory is, to an extent, fallible and decreases over time and, in any event, an honest witness can also be a mistaken witness.
[68] Here, as I have noted, the Court has the advantage of quite a considerable number of reliable contemporaneous documents which assist. And to the extent that
a proposition has been advanced before me that, on the one hand, Mr Bradfield and, on the other hand, Mr Sullivan and Mrs Sullivan, were not generally speaking honest witnesses, as I have already noted, I do not accept this. That their evidence in part, with respect to some matters, may not be wholly reliable, as I outline later in this judgment however, I agree. There are inconsistencies in the evidence which inevitably arise, and I accept that at times all these witnesses had a sense of having convinced themselves of the correctness of their position, rather than simply providing a proper recall of the events in question. But overall, in my judgment, no definitive credibility determinations are required here, in part due to the availability of reliable documentation that assists substantially.
[69] I now turn to consider each of the plaintiffs’ six causes of action raised in their statement of claim as outlined at paras [52] - [59] above.
First issue – Has Brookwater breached the express warranty in cl 6.1 of the Purchase Agreement? (First cause of action)
[70] Before turning to this first cause of action, it is useful to answer an initial question here which is:
Do the pet care products in question require registration before they can be legally manufactured in New Zealand and sold in New Zealand and Australia?
[71] From the evidence which was before me at trial presented by the parties’ various experts, one thing eventually seemed to be fully accepted. This was the fact that when the Purchase Agreement was signed and then became unconditional and settlement was achieved, first, all 15 of the pet care products marketed by the business at the time either required registration via APVMA, or needed steps to be taken to alter aspects of the products, and their labelling or marketing claims to avoid the need for such registration, before they could be imported into and sold in Australia and, secondly, of those 15 pet care products, seven similarly required registration with the New Zealand equivalent NZACVM body or alteration to be legally manufactured and sold in New Zealand.
[72] Issues did arise, however, between the parties over what modifications (if any) might be required to the product formulas, the labelling and marketing material for
each of the products in question, to potentially avoid the need for them to be registered. I will say more on this later. In the meantime, for present purposes, all the expert evidence before me accepted that on their face all the pet care products either required registration, or required modification of formulae, labelling and marketing claims to avoid registration requirements.
[73] In addition, the parties accepted that it is an APVMA requirement that veterinary chemical products which are imported and sold into Australia are only to be manufactured at sites that comply with the Australian Code of Good Manufacturing Practice (GMP). It does seem that the Bradfields manufacturing site did not, on its face, comply with the Australian GMP.
[74] Therefore, I answer the question posed at [70] above generally “yes”, subject to the matters I have outlined at [72].
[75] I turn now to the initial issue under this first cause of action which raises the question, has Brookwater breached the express warranty in cl 6.1 of the Purchase Agreement?
[76]Part of clause 6.1 is usefully repeated here. This states:
6.1The Vendor warrants and undertakes that at the date of this agreement the Vendor has not:
(i)received any notice or demand and has no knowledge of any requisition or outstanding requirement:
(a)from any local or government authority or other statutory body; or
…
(d) from any other party,
which adversely affects the business or the premises and which has not been disclosed in writing to the Purchaser; or
…
[77] In the plaintiffs’ pleading they contend specifically that Brookwater has breached cl 6.1 of the Purchase Agreement because Mr Bradfield and therefore
Brookwater, knew, prior to the Purchase Agreement being signed and did not properly disclose, that:
(a)the pet care products required registration from the APVMA before they could be legally imported and sold in Australia; and
(b)in New Zealand the seven pet care products which were non-exempt required registration with the NZACVM before they could be legally manufactured and sold in New Zealand.
[78] On these aspects, I accept from all the evidence before me that throughout, Mr Bradfield had specific and detailed knowledge, amongst other things, of the registration requirements for pet care products in Australia and New Zealand and potential problems that could arise over these. This conclusion is supported by a number of matters that became apparent throughout the hearing in this case. Up to the time of the sale to BL, Mr Bradfield clearly had a hands-on day to day involvement in all aspects of his business. In his evidence, Mr Bradfield said he was always researching everything he could in relation to his products and, indeed, in the recent past he had also been in consultation with pet product industry consultants such as Professor Lloyd Reeve-Johnson. The evidence included an email from Professor Reeve-Johnson to Mr Bradfield dated 15 April 2009 regarding registration requirements for a particular product which, as I understand it, Mr Bradfield had later decided to abandon. Clearly, Mr Bradfield would have been aware throughout that composition of the products and the claims made on the labels of his various pet care products and their associated advertising might mean that registration was attracted.
[79] Also, at the time, in April 2009, Mr Bradfield received an email from an industry consultant, Barbara Douglas, that stated amongst other things, that:
As discussed, your products [depending on certain criteria] will most likely require registration.
[80] Mr Bradfield did argue in his evidence that this particular email related to one potential product only, although it is clear the email referred to “products” in the plural.
[81] Mr Bradfield said that Ms Douglas’ email related only to a flea shampoo which was a “new product” (that he did not proceed with) that contained D-Limonene.1 What does seem to be clear, however, is that one of the other products Mr Bradfield continued with in his business was “Citrus Dog Shampoo”, being a flea shampoo that also contained D-Limonene.
[82] Further, in her evidence before the Court, Amanda Moore, who had worked as an employee for both Mr Bradfield and also for a short time the Sullivans, confirmed2 that she was aware of the products needing registration. In her evidence Ms Moore, in response to the Court’s question: “Did you understand what registration was all about?” stated:3
A. Well, yes, I did because I was aware about the products needing registration, you know, I was aware how that business ran and the possible [sic] of the products, about the rewording of products if that came up so – and I was just a worker, but I was aware of possible – because I was looking at, you know, maybe if I’d had the money, would have wanted to purchase the business myself, so I was – yeah, so I was well aware of the registration of products, possibly.
…
Q.And how were you aware of that – who – did you have a discussion with someone about that or who told you, or did you read about it or?
A.Well, Paul [Mr Bradfield] obviously because he taught me about the, you know, the business, the background of the business, the products, the requirements for the products and also I used to do all the shipping to Australia which required declarations of the products, the ingredients list, everything, so because it used – the products sometimes used to get audited in Australia and checked and tested and also labels checked, wording checked and it used to go – yeah.
[83] And, on 12 September 2013, an email Mr Bradfield had received from the APVMA indicated that the words antiseptic or antibacterial on the label of a product would bring that product into the definition of a veterinary chemical product which required registration. The email went on to advise:4
Where any recognised ingredient in the product is known to have a therapeutic effect, whether or not it is shown on the label, the product will fall under the
1 See Notes of Evidence (NOE) at 421, lines 9 – 25
2 See NOE, p 483 paras 1-5.
3 See NOE, p 483 lines 1 – 8 and lines 14 – 20.
4 See ABD 1450.
definition of a veterinary product. For example, essential oil products, which are known to have some antiseptic and insect repellent effects, require registration when their directions for use result in more than 1% of total essential oils being applied to an animal’s skin, regardless of the product representations.
[84] Relevant to this aspect, the parties accept the pet care products “Fragrance My Pet” and “Citrus Dog Shampoo” did have a percentage of total essential oil which exceeded the maximum allowed one per cent level and on this basis would have required registration. That essential oil was orange oil which, as I understand it, contains more than 90 per cent D-Limonene. This is an active constituent with known insecticidal properties and thus at certain percentage levels it requires to be approved by APVMA.
[85] Indeed, the retailer’s manual prepared by Mr Bradfield at the time went on to acknowledge and claim:
The Citrus Shampoo contains pure orange oil (D-Limonene), pressed from the orange peel. This shampoo works very similarly to the regular shampoo in helping to keep pets pest-free.
[86] And, by way of further example, another product, “Pet Calmer”, on its label listed an ingredient that it said had a recognised “therapeutic effect in that they reduced anxiety, fear and nervousness and coping with stress”. Further, in the retailer’s manual for this product it listed specific ingredients that it also said had a therapeutic effect, for example, lavender. The retailer’s manual claimed this had a calming and balancing effect and restored harmony. All of this, in terms of the claims made, would have meant that at the time this product also required registration.
[87]That 12 September 2013 email from APVMA to Mr Bradfield had also stated:
…Medicated shampoos, conditioners, emollients and essential oils when represented or used as an antimicrobial, antiseptic or insect repellent product,
will require registration.
(Emphasis added)
[88] I accept from all this that at least a number of Brookwater’s products at the time and particularly from September 2013, because of either the percentage of total essential oils they contained or claims made on either the product brochure or the
retailer’s manual, did require registration in Australia with APVMA, and that this was not obtained.
[89] Returning to the warranty clause in cl 6.1 of the Purchase Agreement, Brookwater as vendor had warranted and undertaken that it and Mr Bradfield had “no knowledge of any…outstanding requirement…from…a statutory body…which adversely affects the business…and which has not been disclosed in writing to the purchaser.”
[90] On the first question as to whether they had knowledge of what constituted an adverse outstanding requirement, and given the matters I have referred to above, I have no doubt that in the context of this business sale this test was met. A major selling feature for the business was the pet care product arm represented repeatedly as having significant growth potential. The Information Memorandum, which Mr Bradfield no doubt had been instrumental in preparing for Brookwater to promote the sale of the business, represented that it and the business had “regulatory compliance”. Significantly too, this “regulatory compliance” was even listed as an intangible asset of the business which was part of the sale.
[91] A major aspect of the sale without question related to the ability to sell all the pet care products in Australia and, in particular to promote growth of the sales in that jurisdiction. Any suggestion that they may be caught by Australian registration requirements (requirements which could involve significant delays and cost substantial amounts to meet) would, of course, go to issues over a fundamental aspect of the business sale.
[92] The last aspect arising under cl 6.1 before the warranty in this clause is to take effect is the stipulation that the outstanding requirement in question “has not been disclosed in writing to the purchaser”. On this aspect, there are conflicting suggestions before me. As I understand his evidence, Mr Bradfield contended that he had informed both Mr Sullivan and Mrs Sullivan on several occasions of registration requirements in particular imposed by the AMVMA. He says he made it clear to them that from time to time certain changes to particular products, their labelling and advertising requirements might be needed to ensure that a need for registration was not triggered.
[93] These claims are strongly disputed by Mr and Mrs Sullivan. An issue does arise over the individual product files which Mr Bradfield says contain some registration information and which he states he made available to the Sullivans during the due diligence process. Those files, it is said, sat on Mr Bradfield’s desk in the business premises for a few days at one point, but the Sullivans both maintain they did not see the files until post-settlement. There is no evidence they were handed to the Sullivans or specifically drawn to their attention at any time.
[94] No final determination on that particular issue, as I see it, is required however. What is apparent from the evidence is that, first, registration issues going to the ability to legally sell the pet care product range here were critical factors to this business sale and that, secondly, no outstanding requirement or need for product compliance or registration with APVMA or otherwise was disclosed in writing to BL or Mr and Mrs Sullivan here.
[95] Mr Bradfield’s knowledge of those registration requirements, as I see it, was substantial. He acquired it over a number of years during which he carefully conducted his business. I am satisfied here of two things: first, Mr Bradfield was on notice that a number of his products, because of their constituent requirements or their labelling or advertising claims, did require either registration with the APVMA or significant amendment to avoid registration, and secondly, that he was required to disclose this to the plaintiffs in writing. He did not.
[96] Mr Bradfield in his evidence was at pains to claim he at no time wished to “deceive” anyone. Notwithstanding this, I am satisfied an inference can be drawn from all the evidence in this case that Mr Bradfield clearly knew the ins and outs of his pet care products intimately, and all aspects concerning his labelling and advertising claims. From his own evidence, he knew too that these might at any time attract the need for registration of the products without some significant change or modification.5 The evidence before me is that none of this was disclosed “in writing” to the purchasers.
5 See NOE, p 457, lines 15 – 26.
[97] In McLennan v Livaja6 the Court of Appeal recently has noted comments in a United Kingdom decision relating to parties’ different states of knowledge as a guide to determining whether a person’s conscience may be affected in certain situations. In that United Kingdom case, Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA Gibson J formulated five different states of knowledge:7
(a)actual knowledge;
(b)wilfully shutting one’s eyes to the obvious;
(c)wilfully and recklessly failing to make such enquires as an honest and reasonable person would make;
(d)knowledge of circumstances which would indicate the facts to an honest and reasonable person; and
(e)knowledge of circumstances which would put an honest and reasonable person on enquiry.
[98] In line with this, I accept here that Mr Bradfield can properly be said to have had knowledge. This was in the sense that his evidence, which in part suggested he had a “belief” about his pet care products not requiring registration, can properly be categorised at best as no more than a claim from someone in the major process of selling this business who had either wilfully and recklessly failed to make such recent enquiries from the appropriate authorities as an honest and reasonable person would make, or who had wilfully shut their eyes to the obvious. But in any event, in considering the documentary evidence before me, and including the evidence of Amanda Moore and Professor Reeves-Johnson, I am satisfied that objectively Mr Bradfield had actual knowledge at the date the Purchase Agreement was signed and right up to settlement that at least some of his products as they were being sold and advertised were potentially requiring registration with ACVM in New Zealand
6 McLennan v Livaja [2017] NZCA 446 at [41] – [42].
7 Baden v Société Générale pour Favoriser le Développement du Commerce et de l’Industrie en France SA [1993] 1 WLR 509 (CH) at [250].
and APVMA in Australia or significant amendment, and that this had not been obtained.
[99] That knowledge which Mr Bradfield had was not disclosed in writing to the plaintiffs. Therefore, that important part of the warranty contained in cl 6.1 of the Purchase Agreement, in my view, has been breached by Brookwater. And that cl 6.1 warranty was clearly considered by the parties to be a material term of the contract reduced to writing in the Purchase Agreement. This meant each party regarded this as an important term of their bargain and they were to be bound by it.
[100] It is useful here for completeness to turn once again to consider the response to this advanced on behalf of Brookwater and Mr Bradfield. This is their claim that there was no breach on their part of either limb of cl 6.1 of the Purchase Agreement. As an aside, they do note quite properly that, in terms of this clause 6.1, at the operative time there was no actual “notice or demand” issued by a Government Authority or other statutory body here which Brookwater or Mr Bradfield had received, as this phrase might be construed in the context of the Purchase Agreement.
[101] They go on in an endeavour to maintain, however, that there was also no “knowledge” on the part of either Brookwater or Mr Bradfield of any “outstanding requirement” relating to these matters. Mr Bradfield suggested in his evidence that he was not aware that registration of the pet care products in question was required and indeed his genuine belief was that registration in this case was not required. Thus, he contended for himself and on behalf of Brookwater that there was in fact no “outstanding requirement” as this is intended to be read in terms of the Purchase Agreement.
[102] For the reasons I have outlined above, I do not accept this second argument advanced for Brookwater and Mr Bradfield. As I have emphasised above, throughout Mr Bradfield had an intimate knowledge of the requirements for and the operation of his business, a business described as his “baby”. I accept the contention advanced on behalf of the plaintiffs that Mr Bradfield can properly be said to have had knowledge of what were continuing requirements for his pet care products. These required either that the products in question were registered or that steps were taken such that
registration was in fact not required. It can be said in this case that Mr Bradfield did have knowledge of an important outstanding requirement for his pet care business and this was not disclosed in writing to BL or the Sullivans. I repeat, therefore, that Brookwater has breached the express warranty and undertaking it gave at cl 6.1 of the Purchase Agreement.
[103] As noted above, the Purchase Agreement was conditional on due diligence. It is a necessary requirement for liability for breach of contract here to establish that the breach (in this case of the cl 6.1 warranty) caused BL’s loss. Here the breach again was failure to disclose the outstanding matter in terms of cl 6.1. Brookwater and Mr Bradfield before me contended that because of this due diligence clause in the contract, BL and the Sullivans did not rely on the cl 6.1 warranty or indeed any statements or representations made by Mr Bradfield or on behalf of Brookwater. Inducement here needs to be gauged when BL and the Sullivans decided to declare the Purchase Agreement unconditional. It is true also that in some cases a purchaser’s independent enquiries may bring reliance to an end so negating, for example, the effect of a misrepresentation – but that need not be so as Attwood v Small noted.8
[104] I accept in this case for all the reasons I have outlined above, first, that BL and the Sullivans did rely on both the cl 6.1 warranty and (as I will find later) misrepresentations made by Mr Bradfield and Brookwater, secondly, that these induced BL to enter into the Purchase Agreement and declare it unconditional and, thirdly, that the presence of the due diligence clause neither brought that reliance to an end nor negated the effect of the cl 6.1 warranty or the misrepresentations. I confirm again that Brookwater has breached the cl 6.1 warranty in the Purchase Agreement and remains liable for this.
[105] Given my finding on this breach of the cl 6.1 warranty aspect of the first cause of action, strictly speaking there is no need to determine BL’s alternative claim under its first cause of action noted at [54] above or its subsequent second cause of action against Brookwater noted at [55] above. But, for completeness, I will now go on to address these issues.
8 Attwood v Small (1838) 7 ER 684 (HL) at 730 – 731.
Second issue – Is there an implied term in the Purchase Agreement that the pet care products sold as part of the business were legally able to be manufactured and sold? (First cause of action)
[106]I turn now to the second aspect in BL’s first cause of action against Brookwater.
[107] In this, specifically the plaintiffs plead that Brookwater has breached an implied term that the pet care products being sold as part of the business were legally able to be sold in Australia and New Zealand.
[108] Before a contractual term can be implied into a contract the requirements are that, amongst other things, it must be necessary to give business efficacy to the contract, it must be so obvious it goes without saying, and it must not contradict any express terms in the contract itself.9 It is true also that this Court has suggested there is less room for the implication of terms in detailed written contracts which are entered into between experienced commercial parties.10
[109] In turning to consider the context surrounding the Purchase Agreement here, I accept from the evidence that both the purchaser and vendor parties knew of the existence of the regulatory regimes for veterinary and pet care products in New Zealand and Australia and also knew that one of those products, “Gentle Ear Cleaner” was non-compliant. BL and the Sullivans maintain, however, that they had no knowledge that any of the other pet care products in fact did require registration at the time nor that required registration had not occurred.
[110] As I note above, the Purchase Agreement did contain a comprehensive due diligence clause and a solicitors’ approval clause. Brookwater and Mr Bradfield contend that BL and the Sullivans had all the relevant material during the due diligence in order to make an informed judgment on the question of regulatory compliance. This included product recipes and files they say. The plaintiffs contend, however, these were not available to them and they say they were not able to consult any such material during the due diligence period.
9 BP Refinery (Westernport) Pty v Shire of Hastings (1977) 180 CLR 266 (PC); Mobil Oil NZ v Development Auckland Ltd [2017] 1 NZLR 48.
10 Pernod Ricard New Zealand Ltd v Lion Beer Spirits and Wine (NZ) Ltd [2012] NZHC 2801 at [94].
[111] In Ware v Johnson,11 recently confirmed by the Court of Appeal in Overton Holdings Limited v APN New Zealand Limited,12 it was recognised that terms in Sale and Purchase Agreements were able to be implied especially where the circumstances would otherwise result in the purchase of a business that was fundamentally different from what was contracted to be purchased.
[112] In the present case, BL and the Sullivans purchased a business for the ongoing manufacture and sale of pet care products and air fresheners. It goes without saying that that was the basis for the purchase, and linked to this was the obvious assurance that sales of pet care products could properly continue. It was on this basis that BL and the Sullivans contracted their purchase and finally declared the Purchase Agreement as unconditional.
[113] As it transpired, the business was manufacturing and selling the majority of its pet care products, at least in a technical sense, in breach of requirements that they be registered. As will appear later, Brookwater and Mr Bradfield contend that only minor changes to the ingredients of some products and claims made in the labelling and marketing material were required for compliance to be achieved, but those are matters I will address in detail shortly. The pet care health aspect of the business the plaintiffs were purchasing, as represented to them, was therefore fundamentally different to the one they contracted to purchase. On this, the value of the pet care portion of the business the parties accept was $174,859. This was significant in the context of a total purchase price which amounted to $469,413. It was over one third of the total purchase price.
$139,887. This takes into account the fact that BL to this day still sells three pet care products in New Zealand, that it was able to operate and have the benefit of the pet care business for nearly 18 months after the settlement date, and also that a few assets of some value remained and these might have a continuing usefulness over and above lost goodwill.
[261] It is this figure of $139,887 which I accept is the diminution in value figure to be used as a starting point in calculating the loss of BL and the Sullivans incurred in this case.
Wasted costs
[262] Next, BL and the Sullivans make a claim for what is described as “wasted costs”. These amount to around NZ$178,451 plus AU$28,628.
[263] On this, counsel for Brookwater and Mr Bradfield acknowledge there is no dispute that Brookwater can claim costs which it can prove as having been wasted as a result of misrepresentations or fault on the part of Brookwater and Mr Bradfield.
[264] Certain of those claimed wasted costs here are not disputed. These undisputed amounts are:
(a) Lease costs $12,900.00 (b) Electricity $1,207.00 (c) Website costs $521.74 (d) Marketing costs $3,931.00 (e) Inventory on hand $56,081.00 (f) Inventory costs $729.00 Plus AU$8,503.00 (g) Office fit out $657.00 (h) Malley & Co lease costs $567.00 Total $76,593.74 Plus AU$8,503
[265]The amounts claimed for wasted costs that are disputed, however, are:
(a) The balance of all the lease
payments made for the premises
(b) “Clipsell” cards $19,129.00 (c) Experts’ fees AU$17,359.00 and $6,491.00 (d) Staff costs/redundancy $8,765.00 (e) Coghlan’s storage fees AU$2767.00 (f) Malley & Co finance fees $1,756.00
[266] On all the wasted costs the claim, BL and the Sullivans contend that if they had been aware their pet care business was not regulatory compliant they would not have incurred the costs because they would not have entered into the Purchase Agreement. That comment, however, must be considered in light of the fact that the major part of the business purchase (the air freshener arm), on a pro rata basis, as I understand it, is continuing to be operated by BL.
[267] I now turn to consider the disputed balance of wasted costs claimed by BL and the Sullivans in light of what seemed to be disagreement on these aspects by the respective accounting experts.
Lease costs
[268] Following its purchase of the business, BL entered into two leases of units in Kaiapoi, being Units 2 and 5, 9 Stone Street. Both leases were due to terminate on 22 December 2019. The starting date for Unit 2 was 22 December 2015 and the monthly rental $1,250. The claim for loss on this unit totalled $60,000. As to Unit 5, the commencement date for this lease was 1 February 2016 with monthly rental of
$900. The total claim for this lease was $42,039.
[269] This made an overall total claim for wasted lease costs of $102,039. The parties and their experts agree that $12,900 of these lease costs were wasted but the balance of the claim is disputed.
[270] The additional lease costs claimed, as I understand it, are based on a full lease term extending beyond the end of what was a trial period for each unit. As I understand it from the evidence, the Sullivans have confirmed that the premises are still largely in use. In addition, it appears that little real attempt has been made to re-let any part of the premises which may be vacant in order to mitigate the loss claimed to be suffered. It seems that this last aspect has been acknowledged by Mr Grace at para 51(d) of his original brief of evidence.
[271] On this lease costs issue, Ms Smart in her evidence claimed that her experience as a liquidator suggested it is usual for terminated leases to be re-let within a period of some six months. The defendants submit, therefore, that only six months’ lost rental should be allowable here, which equates to the $12,900 agreed to. They say that BL either had productive use of the premises in question in particular prior to the registration issues arising or they acted unreasonably in failing to even attempt to mitigate their loss by re-letting the premises after the six-month period. The figure noted above of $12,900 agreed for wasted lease costs represents total rent for the two units from say June 2016 to December 2016.
[272] On this aspect, Mr Russell contends that BL and the Sullivans should be given any residual doubt in their claim for these wasted lease costs here, as BL would not have incurred these extra lease costs, if it had not gone ahead with the business purchase. Mr Russell also maintains alternatively that, evidence before me suggests that, in any event, there was also only limited ability to re-let these premises after June 2016.
[273] Weighing up all those matters, it is my view here that a reasonable claim for wasted lease costs in this case is in fact the six months’ rental from June 2016 referred to in Ms Smart’s evidence. No additional wasted lease cost figure here is to be allowed.
Additional staff costs
[274] After initially noting a sum said to be for the cost of hiring additional sales and production staff amounting to something over $34,000 was sought, Mr Grace in a reply brief of evidence revised this claim figure down to $21,933. This was said to be based on an analysis completed by the plaintiffs of costs relating to the hiring of staff in sales roles for the business. This claim for redundancy of three staff it has been said includes at least one Margaret Thompson who it does seem, however, was employed after the registration issues arose.
[275] Also, before me little unequivocal evidence was provided on behalf of BL and the Sullivans to show that the other redundancies said to be incurred were indeed wasted costs.
[276] On this, I have no alternative but to conclude that BL and the Sullivans, on the balance of probabilities, have not been able to make out their claim for these lost staff costs and, therefore, the adjusted claim of $21,933 is not allowed.
Marketing costs
[277] The lost marketing costs claimed are outlined in his evidence by Mr Grace as follows:
(a) Marketing material postage costs $2,243.00 (b) Photographic costs for website $289.00 (c) Printing of “Clipsell” cards with
pet care advertisement
$19,129.00 (d) Cost of stock sent to grooming
conference
$1399.00 Total $23,060.00
[278] Of that $23,060 claim Ms Smart, for the defendants, accepts that $3,931 is properly claimed for wasted costs, this representing the amounts outlined above as (a),
(b) and (d). This leaves in dispute the $19,129 claimed by BL, being the cost of the “Clipsell” cards.
“Clipsell” cards
[279] Both Mr Sullivan and Mrs Sullivan separately confirmed in their evidence that the cards claimed as a wasted cost are still being utilised in New Zealand for advertising purposes, although at a reduced level. This was also conceded by Mr Grace, except for a potential cost which might be incurred, it was said, in redesigning the cards to incorporate a pet care logo. No evidence is before me as to the cost of this however. And, in any event, given that the cards are still in use in New Zealand where some of the pet care products continue to be sold, there is to be no allowance here for the “Clipsell” cards claim or for printing of the cards.
Computer costs
[280] Computer lease costs totalling $9,119 are claimed. Again, little persuasive evidence regarding this aspect is before me. In any event, issues over whether such arrangements can be terminated and the possible use of a leased computer for the continuing business are matters that have not been explored.
[281] I conclude, therefore, that BL has also been unable to make out this claim for wasted computer lease costs.
Experts’ fees
[282] Experts’ fees that are in dispute here are from Redcap, Ms Davis’ company, Eurofins, Mr Wheatley, and Kilford & Kilford.
[283] Mr Russell for BL explains that these are fees which would not have been incurred had the plaintiffs known the true position in relation to the pet care products and not purchased the business. He says they are not expert witness costs. Rather, they are fees genuinely incurred to understand the true position as to the regulatory compliance requirements for the pet care products. As such, Mr Russell contends and the BL expert confirms too that these costs should properly be categorised as wasted costs. They relate to attempts by BL and the Sullivans to understand the proper position with respect to registration issues. This, it is said, is entirely warranted and reasonable here. I agree.
[284] These experts’ fees, as I understand it, amount to AU$17,359 and NZ$6,491, in my view, in all the circumstances here, they are reasonable and properly claimed. These amounts are to be allowed.
Coghlan storage fees
[285] An amount of AU$2,767 is claimed for what are said to be fees paid to Coghlan for storage of inventory in Australia. On this, however, there is little evidence before the Court to show that these fees were indeed wasted costs. As I have noted, they relate to storage of inventory in Australia but, on the evidence before me, it would appear that the amounts in question are a fixed charge and would be incurred to store air freshener products in any event. Again, there was no clarity before me with respect to this claim. I disallow it.
Malley & Co finance fees
[286] The plaintiffs’ last claim for wasted costs relates to some $1,756 paid to Malleys for legal fees on arranging finance. Again, the evidence before me with respect to this matter seemed rather limited. I have only been able to conclude here that on the balance of probabilities the plaintiffs have not been able to satisfy the
obligation on them to show that this claim to costs paid to Malleys is properly recoverable here. The claim is also disallowed.
[287] In conclusion, the wasted costs properly payable to BL and the Sullivans here, therefore are:
(a) Lease costs $12,900.00 (b) Electricity $1,207.00 (c) Website costs $521.74 (d) Marketing costs $3,931.00 (e) Inventory on hand $56,081.00 (f) Inventory costs $729.00 Plus AU$8,503.00 (g) Office fitout $657.00 (h) Malley & Co lease costs $567.00 (i) Experts’ fees AU$17,359.00 (j) Experts’ fees $6,491.00 Total NZ$83,084.74 AU$25,862.00
[288] This total for wasted costs is to be added to the diminution in value figure I have outlined at para [261] above, totalling $139,887. Overall, therefore, the total losses incurred by way of diminution in value and wasted costs come to NZ$222,971.74 and AU$25,862.
General damages
[289] In their claim against Brookwater and Mr Bradfield, BL and the Sullivans advance a general damages claim seeking $50,000 each. The purpose of general damages is to compensate for losses that cannot objectively be quantified in monetary terms. Generally they cover matters such as pain and suffering, stress, humiliation, mental distress and indignity.
[290] Before me, however, there was little if any particular evidence as to distress or anguish or emotional exhaustion which the Sullivans may have suffered here. In their evidence there was nothing to indicate that they found the process in this case any more distressing than any other participant.
[291] Their claim for general damages is not made out here. I am not prepared to make any award under this head. The general damages claim is dismissed.
Adjustment for mitigation and contributory negligence
[292] For all the reasons I have outlined above, I have found that BL and the Sullivans must bear a significant responsibility here because of their failure to mitigate their loss or, put another way, because of contributory negligence on their part in each case following the events of May/June 2016. BL and the Sullivans could have limited their loss in this case. I have found this could have occurred by progressively taking steps to change the composition of offending products, and to relabel, to amend various product claims where required with the assistance of professional advice. This over time should have obviated the need in most cases for products to require registration which because of the cost and delay was something to be avoided. Although it is possible that these changes may have resulted in some alteration to market demand for BL’s pet care products once discernible changes were made, the predominance of evidence before me confirmed that this was likely to have been minor. The failure of BL and the Sullivans to commence a process to take these steps in mitigation of their loss must, to an extent, count against their claim here.
[293] In my view, it is reasonable in all the circumstances here for BL and the Sullivans to bear 50 per cent of the responsibility for the loss they have suffered because of this failure to mitigate (or otherwise because of contributory negligence on their part) following the events of May/June 2016.
[294] That said, then they must bear one half of the total diminution in value of the pet care aspect of the business together with one half of the wasted costs outlined above. These amounts total NZ$222,971.74 and AU$25,862.00.
[295] The amounts to be awarded, therefore, by way of damages to BL and the Sullivans are, therefore, NZ$111,485.87 and AU$12,931.
Allocation of responsibility between defendants
[296] For the reasons outlined above, on the one hand the first and second defendants have been held liable together here along with, on the other hand, the third defendant. It is necessary, therefore, that the Court determines the apportionment of liability between these defendants.
[297] On this, Mr Galloway for Malleys suggests that it would not be just and equitable for his client to bear any portion of the diminution in value award made here. He contends that, given that it was Mr Bradfield who gave assurances to the effect that the pet care products could be sold legally, it would be unjust if Mr Bradfield was effectively able to recover an amount in excess of the true value of the business via what is a contribution from Malleys.
[298] I do not accept this argument, however. It is a reasonable position to reach in this matter that the loss occasioned here to BL and the Sullivans has arisen from actions equally undertaken by both Mr Bradfield for himself and on behalf of Brookwater and Malleys in their failure to advise BL and the Sullivans in accordance with their obligations as professional experts here.
[299]Similarly, as I see it, the wasted costs in this case should be shared equally.
[300] I find, therefore, that the damages awarded here to BL and the Sullivans are to be apportioned equally between the two sets of defendants.
Interest
[301] The parties before me appeared to accept that interest at the appropriate prescribed rate should be payable on any damages awarded and that an appropriate starting date should be 28 April 2016, which is when the registration issues arose. I agree this is appropriate. I accept too that the starting date of 28 April 2016 is the proper date. I say this, given particularly that BL was able to commence and continue operation of its pet care business aspect right up to that time. Interest is to be awarded in these terms.
Result
[302] For the reasons I have outlined above, the claims brought by BL and the Sullivans here against Brookwater and Bradfield on the one part and Malleys on the other succeed but only to a more limited extent than was sought. Total damages to be awarded in favour of BL and the Sullivans here are to be shared and are to be apportioned equally between the two sets of defendants.
[303] BL and the Sullivans, therefore, are entitled to judgment which is now entered on their damages claims:
(a)against Brookwater and Mr Bradfield jointly and severally in the sums of NZ$55,742.94 and AU$6,465.50;
(b)against Malleys in the sums of NZ$55,742.94 and AU$6,465.50
[304] In addition, BL and the Sullivans are entitled to interest at the appropriate prescribed rate on the amounts specified in [303] from 28 April 2016 up to the date of final payment.
Costs
[305] Before me, counsel requested that costs be reserved in order that further submissions could be made. Costs are so reserved.
[306] In the event that counsel are unable to agree between them the issue of costs, then they may file memoranda sequentially (with each a maximum of six pages) and, in the absence of any party indicating they wish to be heard on the matter, I will decide the question of costs based on the memoranda filed and all other material before the Court.
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Gendall J
Solicitors:
Lane Neave, Christchurch
Corcoran French, Christchurch Chapman Tripp, Christchurch
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