BVR Limited v Otaki Tyre and Service Centre Limited (in Liq)
[2008] NZCA 575
•22 December 2008
IN THE COURT OF APPEAL OF NEW ZEALAND
CA37/2008
[2008] NZCA 575BETWEENBVR LIMITED
First AppellantANDBRIAN MCCARTHY AND VIVIENNE MCCARTHY
Second Appellants
ANDOTAKI TYRE AND SERVICE CENTRE LIMITED (IN LIQUIDATION)
First RespondentANDNOEL TEMPLETON AND SUZANNE WHITTAKER
Second Respondents
Hearing:4 September 2008
Court:William Young P, Ellen France and Baragwanath JJ
Counsel:J A Langford for Appellants
B A Corkill QC for Respondents
Judgment:22 December 2008 at 2.30 pm
JUDGMENT OF THE COURT
AThe appeal is allowed and the cross-appeal is dismissed.
BThe judgment of the High Court as to damages is set aside. The appellants must pay the first respondent $22,155.31. The appellants must pay the second respondents $10,214.19.
CThe appellants must pay the respondents interest on the sums in Order B at the following rates:
(a)from and including 1 June 2000 until and including 31 July 2002 at 11 per cent per annum; and
(b)from and including 1 August 2002 until and including 11 December 2007 at 7.5 per cent per annum.
DNo order as to costs.
REASONS OF THE COURT
(Given by Ellen France J)
Table of Contents
PARA NO
Introduction [1]
Background [4]
The procedural history [5]
The factual background [12]
The pleadings [18]
The High Court judgment [26]
Issues on appeal [31]
The “Misrepresentation/Fair Trading Act” claim [33]
The approach in the High Court [34]
The parties’ submissions [38]
Discussion [41]
Breach of restraint of trade [54]CLAIM UNDER THE CONTRACTS (PRIVITY) ACT [62]
Interest [68]
Result and costs [73]Introduction
[1] In 1999 BVR Limited (“BVR”), the first appellant, sold a small tyre sales and fitting business in Otaki to the first respondent, Otaki Tyre and Service Centre Limited (in liquidation) (“Otaki Tyre”). The second appellants, Brian McCarthy and Vivienne McCarthy, were the directors and shareholders of BVR. Noel Templeton and Suzanne Whittaker, the second respondents, were the directors and shareholders of Otaki Tyre.
[2] About 14 months after the sale, the business collapsed. The respondents issued proceedings against the appellants and against their accountant. The claim against the accountant was settled prior to trial. However, in late 2001, the McCarthys left New Zealand for Australia without leaving any instructions as to the conduct of the proceedings. Judgment was ultimately entered against them for a sum of over $1 million. It was not until 2006 that the McCarthys instructed counsel and took steps in relation to the proceedings. The end result was that in September 2006 the judgment as to quantum was set aside with the appellants accepting liability and the matter proceeded to trial on issues of quantum alone.
[3] After the quantum hearing under r 463 of the High Court Rules, McGechan J awarded damages against the appellants: HC WN CIV‑2001‑485-978 11 December 2007. The appellants appeal against aspects of the damages award and the respondents cross-appeal.
Background
[4] We first need to say something more about the unfortunate procedural history of this matter and then we briefly discuss the relevant factual background.
The procedural history
[5] The proceedings were issued in the Levin District Court on 25 November 1999. Subsequently, in January 2001 an order was made for further and better discovery. The proceedings were then transferred to the Wellington High Court.
[6] In April 2001 an amended statement of claim was filed and served, and an amended statement of defence and counterclaim subsequently filed.
[7] On 30 October 2001, an order was made that unless the further and better discovery order was complied with within 21 days, the statements of defence of the first and second defendants (the present appellants) would be struck out. There was no compliance with the discovery order.
[8] As we have said, it was around this time in late 2001 that the McCarthys moved to Australia without leaving any instructions as to the conduct of the proceedings. The next step was that, on 11 February 2002, there was a hearing as to quantum before Master Thomson under r 463. The Master gave judgment for Otaki Tyre against BVR, the McCarthys and Sunset Corporation Limited for the sum of $388,213. Judgment was given for Mr Templeton and Ms Whittaker against the same parties for $713,285. Costs and disbursements of $9,230 and $360 respectively were ordered. These amounts were not paid although enforcement attempts were made.
[9] When the McCarthys began taking an active part in the proceedings in 2006, their first step was an application to set aside the judgment under r 486. The respondents opposed this application. However, they ultimately changed their position and on 28 September 2006 a joint consent memorandum was filed with the High Court. That memorandum read as follows:
1The Second [Appellants] (“the Applicants”) have applied to have the whole of the Judgment obtained by the First and Second [Respondents] (“the Respondents”) on 11 February 2002 set aside.
2For the purposes of the rehearing application, the Applicants are prepared to accept that they have a liability to the Respondents.
3The Respondents have agreed to accept an all obligations mortgage over property belonging to the Applicants by way of security for costs.
4The Respondents consent to have the part of the Judgment relating to quantum set aside, as soon as the mortgage referred to above becomes registered.
5The Parties request a fixture on the first available date for a rehearing on quantum. It is estimated that one day will be required.
[10] Once the judgment was set aside the appellants then filed an amended statement of defence. McGechan J treated that statement of defence as duly filed.
[11] Following an application for directions as to the scope of the evidence in terms of r 464, there was a ruling that the Court hear evidence as to causation: HC WN CIV 2001-485-0000977 29 October 2007. The hearing before McGechan J proceeded on that basis.
The factual background
[12] In 1999, BVR owned and operated a tyre and motor vehicle service business in Otaki. At the same time, Brian and Vivienne McCarthy owned and operated a motor vehicle service centre and auto electrical business nearby. That business was known as Otaki Motors and Auto Electrical (“Otaki Motors”). Otaki Motors did not sell or service tyres. BVR put the tyre and service centre business up for sale. Mr Templeton and Ms Whittaker were interested in buying the business. The parties ultimately reached an agreement that Mr Templeton and Ms Whittaker would purchase the business for the sum of $163,000 comprised of $53,000 for plant, fittings and fixtures, $70,000 for goodwill, and $40,000 (subject to valuation) for stock in trade.
[13] The parties’ written agreement of 10 March 1999 provided for settlement (possession) on 1 April 1999. The other salient features of the agreement were first, a vendor’s warranty as to a turnover figure (cl 6.1(7)). Second, provision for the vendor to be available on a consultation basis free of charge for the first year of the new business (cl 32). There was an associated undertaking for the vendor to attend throughout normal business hours for a 30-day working period after possession to give the purchaser the benefit of the vendor’s knowledge and experience in the conduct of the business (cl 6.1(10)). Third, cl 29 contained a personal guarantee by Brian McCarthy and Vivienne McCarthy of all vendor’s “warranties” expressed or implied in the agreement. Finally, there was a restraint of trade clause (cl 7).
[14] The restraint of trade clause made it plain it was envisaged that the Otaki Motors business would continue to operate. Clause 7.1 was a standard restraint of trade clause but was expressed to be subject to cl 7.3. There were two parts to cl 7.3. The first part provided that the “existing AA breakdown contract by the vendor” was excepted. The second part of cl 7.3 read as follows:
7.3The purchasers acknowledge the Vendors’ interest in the business known as Otaki Motors … .
The Vendors or their shareholders hereby agree that they will not either directly or indirectly be involved in the sales and service of car and truck tyres. Furthermore they will guarantee that Otaki Motors … will also not be involved in the same. The Vendors also will not be involved in any Fleet Tyre business.
The Vendors undertake not to increase the staff numbers at Otaki Motors ... relating to car servicing or employ any of the existing staff of Otaki Tyre … during the period of restraint. The Vendors also undertake not to actively compete with Otaki Tyre … on advertising of workshop services.
Brian McCarthy agrees:
(a)Not to sell his interest in Otaki Motors … during the restraint of trade period.
(b)Following the restraint of trade period to advise the purchaser of his intention to sell his interest in Otaki Motors … .
[15] The restraint period was two years after the possession date and operated within a 15 km radius of the premises. Brian and Vivienne McCarthy covenanted by a separate deed, dated 29 March 1999, to be bound by cl 7 personally.
[16] Before the agreement for sale and purchase was signed, Brian McCarthy gave Mr Templeton and Ms Whittaker a handwritten profit and loss analysis. That analysis represented the business would earn income of $850,000 per annum making a gross profit of $408,000 per annum with expenses of $194,795 which included wages of $118,000.
[17] As McGechan J noted at [10], Otaki Tyre in fact took possession from 9 April 1999. Some of BVR’s employees stayed on, particularly, Bruce Chambers (the Manager) and Dion Hakaraia who looked after fleet services tyre dealing. BVR, trading under the Otaki Motors name, carried on business at the other premises. The respondents’ business “went downhill” over the next 14 months and was put into voluntary liquidation in May 2000: at [10].
The pleadings
[18] The first cause of action was for breach of contract, in particular, breach of the restraint of trade provision. The pleading was that in breach of that provision, BVR had operated a motor vehicle servicing business (Otaki Motors) within the 15 km radius of the respondents’ business and in doing so BVR had actively competed with Otaki Tyre in respect of workshop services. The claimed loss was for goodwill ($70,000), lost plant and stock ($52,000), loss of profit ($247,426) and liquidator’s costs ($18,787), together $388,213.
[19] The second cause of action was an allegation of breach of contract relating to the consultation provision in the agreement. Again, judgment in the sum of $388,213 was sought.
[20] The third cause of action was headed “Misrepresentation/Fair Trading Act”. This cause of action related to the handwritten profit and loss analysis. The pleading was that Mr Templeton and Ms Whittaker relied on the representation in entering into the agreement. The amended statement of claim relevantly read as follows:
18The said representations were misleading and deceptive, and did not have a reasonable basis; the business is wholly incapable of earning such income because:
18.1The Otaki community had, and continues to have, a declining economy, a fact known to [Brian McCarthy] at the time of making the representation;
18.2The business could only attain income at the level presented, or even at the level formerly attained, if [BVR] complied with the restraint of trade, which it has not done.
19The [McCarthys] aided and abetted (s 43, Fair Trading Act 1986) the misleading and deceptive conduct of [BVR] by the statements made by the making of the representation of its Director, [Brian McCarthy].
(Emphasis added.)
[21] BVR claimed it had therefore suffered loss as pleaded above.
[22] The next cause of action relied on the Contracts (Privity) Act 1982. Under this head it was pleaded that the earlier statements amounted to promises which confirmed a benefit as to the prospect of wages and that Mr Templeton and Ms Whittaker would not be required to make any payment as guarantors of the lease of the business premises on behalf of the company for the purposes of s 4 of the Contracts (Privity) Act. The pleading was that loss had been suffered relating to the rental payment made by Mr Templeton and Ms Whittaker as guarantors of the lease, lost wages, lost profit from investments and lost capital gain from investments. A total of nearly $800,000 by way of damages was sought.
[23] Next, under the Fair Trading Act 1986, Mr Templeton and Ms Whittaker said they had suffered loss for the purposes of s 43 of that Act. Judgment in the sum of nearly $800,000 was sought.
[24] The next pleading was that the appellants owed Mr Templeton and Ms Whittaker a “duty of care to take reasonable care in giving advice” in regards to the business. That duty had been breached in one or more of the following respects: the appellants did not consider and advise as to the declining economy of the Otaki community; and they did not consider and advise as to the consequence of the effect on revenue if Mr McCarthy did not comply with the restraint of trade provision. Again, nearly $800,000 was sought in damages.
[25] Finally, there were claims in negligence and under the Consumer Guarantees Act 1993 against the respondents’ accountant.
The High Court judgment
[26] McGechan J concluded that while there had been breaches of the restraint of trade and consultation clauses, only nominal damages were appropriate given the breaches had not made a “material contribution” to the loss: at [57] and [63]. Awards of $100 were made in relation to each of these two breaches.
[27] The Judge dealt with the claim styled “Misrepresentation/Fair Trading Act” in two parts. In terms of the misrepresentation based on the profit and loss analysis, McGechan J considered he was bound by the acceptance of liability, namely, that the business was “wholly incapable” of earning the projected income because of the two enumerated factors: at [67]. However, McGechan J said, he was satisfied that the business would have collapsed because of other “supervening” factors and would not have lasted beyond 14 months if the representations had been true: at [70]. Damages for loss of profits were calculated on that basis at $129,822.
[28] Turning then to the Fair Trading Act claim, McGechan J concluded it would be unjust to allow full recovery under this head given the inevitable collapse of the business for reasons largely attributable to Otaki Tyre. Fair Trading Act compensation at 20 per cent of the “lost value of the business” was allowed in the amount of $28,158: at [76] and [77].
[29] The Judge awarded a sum of $42,018 in relation to the Contracts (Privity) Act claim for lost management wages. No award was made with respect to the claim by Mr Templeton and Ms Whittaker personally under the Fair Trading Act as the Judge identified a number of problems with the claim. Finally, an award of $7,425 was made for the claim by Mr Templeton and Ms Whittaker which related to the payment they made as guarantors to the lessor of the business premises.
[30] Simple interest was awarded from and including 1 June 2000 at 11 per cent per annum until and including 31 July 2002, and at 7.5 per cent per annum from and including 1 August 2002 down to the date of the judgment. There was no interest on the $200 awarded by way of nominal damages or on the sum reflecting the payment by the respondents under the guarantee to the landlord, ie, $7,425.
Issues on appeal
[31] In general terms, the appeal and cross-appeal raise the following issues:
(a)The approach to be taken to the cause of action headed “Misrepresentation/Fair Trading Act”;
(b)How the claim based on breach of the restraint of trade provision was to be assessed;
(c)The appropriate measure of damages for the claim by the respondents personally; and
(d)The treatment of the settlement sum.
[32] The cross-appeal also included a challenge to the basis on which the claim based on breach of the consultation provision was to be assessed. That was not pursued in submissions. In any event, the approach we take to the restraint of trade clause is equally applicable.
The “Misrepresentation/Fair Trading Act” claim
[33] We take first the approach to the claim styled as the “Misrepresentation/Fair Trading Act” claim.
The approach in the High Court
[34] McGechan J at [64] treated the pleading on this as “unsurprisingly clarified” in submissions as invoking the Contractual Remedies Act 1979 as well as the Fair Trading Act.
[35] In dealing with the Contractual Remedies Act claim, the Judge observed at [65] that the respondents did not claim that the business was “inherently” incapable of earning the forecasted income. Rather, the claim of incapacity was based on the two particular factors, that is, the declining economy in Otaki and the need for compliance with the restraint of trade. McGechan J continued:
[66] At this point, I am thrust into an artificiality. If the matter was purely one of fact, I would find those two particular factors did not produce such incapacity to earn. I refer to previous findings in relation to breach of restraint of trade. It did not materially contribute to business collapse. The evidence of a “decline” in the Otaki community is slender at best. I distinguish an ongoing “decline” from merely temporary ups and downs as occur regularly in business cycles. I certainly do not regard the opening of other tyre businesses as a “decline”: if anything, that tends to show the opposite. …
[67] However, the matter is not purely one of fact. The admission of liability in terms of the pleading carries with it admissions – right or wrong – that the business was “wholly incapable” of meeting represented figures; and that such incapacity was on account of non-compliance with restraint of trade obligations and on account of the decline in the Otaki economy.
[36] Although assuming that the business was wholly incapable of producing the stated figures and that the business collapsed after 14 months, the Judge said the initial available inference that the incapacity caused the collapse was open to rebuttal by intervening or supervening causes. McGechan J was satisfied that before long the business would have collapsed in any event because of a variety of other supervening reasons.
[37] The Judge said that the most that could be said was that if the representations as to income and so on had been true, with the business in fact being capable of earning those figures, more money would have come in before “the inevitable collapse” caused by other factors: at [72]. McGechan J asked for how long and what amount? On this the Judge concluded at [72]:
What we do know is that the business lasted slightly under 14 months. During that 14 month period it went steadily downhill. In an area where no more than approximation is possible, I am satisfied that the business would not have lasted beyond that 14 months if the representations had been true. I will accept the claim for loss of profits over that 14 month period, but no further.
The parties’ submissions
[38] The appellants contend that in the approach to this part of the claim, the Judge has erred in the following ways:
(a)In allowing, effectively, an amendment to the statement of claim to add the Contractual Remedies Act claim; and
(b)In ignoring the factual finding that the two pleaded factors would not have produced an incapacity to earn and that there were other supervening factors which led to the failure of the business.
[39] The respondents say their pleadings did encompass claims under both the Contractual Remedies and Fair Trading Acts and, in any event, this was the basis on which the quantum hearing under r 463 proceeded. They also submit the appellants are bound by their admission of liability. Further, the respondents contend that the Judge did take into account the supervening factors.
[40] The respondents also say the Judge was wrong to find that the supervening factors had an impact on the business from day one. Finally, the respondents in their cross-appeal challenge the decision to award a sum representing only 20 per cent of loss suffered in relation to the Fair Trading Act claim.
Discussion
[41] These issues illustrate the problems caused by the procedural history of this matter. Unsurprisingly, given the admission of liability, it appears that there has not been as great a focus on the detail of the pleadings on both sides as might otherwise have been expected. The end result is, as McGechan J observed, that the matter has proceeded on a somewhat artificial basis.
[42] Further, even if it is accepted that both types of claims were pleaded as the respondents contend, it is inconsistent to have awarded damages under both the Contractual Remedies Act head and under the Fair Trading Act. That is because the damages under the Fair Trading Act reflect the hypothesis that if the respondents had known the truth, they would not have gone into business (ie compensation for what they lost) whereas Contractual Remedies Act damages are, usually at least, calculated on an expectations basis (ie by reference to how much better off would the plaintiff have been if the representations were true).
[43] How then are the various matters raised on the appeal and cross-appeal to be resolved?
[44] In our view, given the muddle that has resulted from the procedural history, the appropriate course for us to take is a practical one. We mean no disrespect to the careful argument of counsel (including matters raised on the cross-appeal) nor of course to the Judge in adopting such an approach.
[45] The broad effect of the admission of liability given the ambiguities in the pleadings is that the respondents have purchased something of a “lemon”, although given the Judge’s findings, it was not entirely worthless. Subject to what we say shortly about causation, the respondents should recover under this head of their claim what they lost (their initial investment (goodwill plus lost plant and stock) together with the liquidator’s costs) less allowances for their recoveries and the true value of the business. We are not really in a position to assess the last item with any precision and in the peculiar circumstances of the case think that we have to make a broad assessment (constrained artificially at least to some extent by the admission of liability) of the extent to which short-comings in the way in which Mr Templeton and Ms Whittaker ran the business contributed to its eventual collapse.
[46] The Judge in assessing loss under this head has operated on the basis that the admission of liability removed some questions of causation. With respect, we take a different view.
[47] We consider that the parties’ agreement at the time the initial judgment was set aside and the associated admission of liability leaves in play issues as to the extent of the misrepresentation and materiality. We say that because in our view the parties’ agreement does not displace the ordinary principles applicable to a hearing as to quantum under r 463: Morahan v Stubbs (1993) 7 PRNZ 178 at 180 (HC). The respondents do not point to anything in the terms of the order setting aside the initial judgment that might displace those principles.
[48] The effect of our approach is that the appellants’ acceptance of liability is an admission of a misrepresentation and that it is of a particular degree. However, that does not mean that causation is no longer at large. Because the appellants gave an incorrect forecast it does not follow that this in itself caused the categorical decline or contributed to it and indeed if the Judge had looked at this matter afresh he would have found that there was little evidence of this.
[49] It is then necessary to factor in those other matters that have contributed to the failure of the business. When this is done, we consider the damages award should be reduced by 50 per cent to reflect the role played by factors other than those for which the appellants have to take responsibility.
[50] In this context, the Judge noted that this was a small business in a small town which had been run by locals. While it was a solid business, a “good deal” of its success was personal to the McCarthys: at [52]. The Judge said that against this background, Mr Templeton and Ms Whittaker came in as outsiders. Further, while both were intelligent and competent administrators in an office type situation the Judge saw some relevance in the absence of small workshop, trades or sales experience in their backgrounds. The Judge concluded that Mr Templeton was not physically capable of carrying out the full range of fleet tyre service work and that once the responsible employee left, “that side was doomed”: at [53].
[51] McGechan J accepted the evidence of Mr Chambers and to a lesser extent, that of Mr Hakaraia that the new owners lacked the relevant skills to run this particular business. Hence, at [54] the Judge said:
It is not surprising, in that light, that a considerable sector of the customer base taken over by [Otaki Tyre] migrated to [Otaki Motors] over the 14 month period … . It is the less surprising given that [Otaki Motors’] business was quite close down the road. Customers tend to follow the tradesman they know and trust, unless it is too inconvenient. Locals like to deal with locals they know, not with persons still regarded as outsiders.
[52] The end result of the Judge’s analysis is a finding that the respondents’ management of the business has contributed to its failures. We accept our reduction of 50 per cent is a fairly rough and ready assessment of where the responsibilities lie but that is the best assessment that can be made in the circumstances. That approach also has the effect of recognising that the business was not completely worthless.
[53] Finally, we need to explain why we would not award any sum for loss of profits under this head. The calculation of damages on a detriment basis assumes that without the representation, the purchase would not have gone ahead. As well, there was some evidence of an immediate drop off in sales so indicating that even if the representations were true it is unlikely that the respondents would have made a profit for other reasons. For that reason, we confine the award under this head to $70,893.50. That figure reflects half of the total of the initial contribution ($123,000 once the sum of approximately $40,000 recovered from the sale of the assets in the course of the liquidation is taken into account) and the liquidator’s costs of $18,787.
Breach of restraint of trade
[54] The cross-appeal on the restraint of trade provision relates to the finding of McGechan J about the effect of the appellants’ failure to discover some of the invoices relating to BVR’s trading after 6 April 1999. The respondents argued in the High Court that the Judge should have applied Lord Mansfield’s principle enunciated in Blatch v Archer (1774) 1 Cowp 63 at 65; 98 ER 969 at 970 (KB). McGechan J put the argument this way at [48]:
The thrust of the Mansfield principle is that where evidence on a point lies in the power of one side only, then if that side is not forthcoming the point can be taken as proven against it. The doctrine is not a relic, as the recent judgment of the Court of Appeal in Accident Compensation Corporation v Ambros [[2008] 1 NZLR 340] demonstrates; although as the Court (per Glazebrook J at [60]) makes clear, there is a need for a plaintiff to offer “some evidence with regard to the facts in question, although very slight evidence will often suffice”. No shift in the legal burden of proof is involved, but merely a shift in the evidential (tactical) burden.
[55] In rejecting the application of this approach, McGechan J said at [49]:
Judging by information obtained and scheduled from [BVR] invoices which were, in fact, disclosed, the withheld (or perhaps simply missing) invoices would not assist in answering the question whether advertising (or indeed, any other particular factor) caused the customers so invoiced by [BVR] to go to [BVR] in the first place. Moreover, as I note shortly, there are other factors in evidence which point strongly in a different direction.
[56] The missing information the respondents say would have assisted them were invoices post-December 1999 (settlement having occurred on 9 April). They did receive some invoices for the period from April 1999 to December 1999. They did not get any invoices for the period from January 2000 and following. Further, while they obtained the paid invoices, they did not receive the unpaid ones. This was in a critical period when the restraint of trade provision was in force.
[57] The respondents say they were therefore hampered in establishing the extent to which customers were transferring to Otaki Motors and whether they were doing so as a result of the offending advertising. More invoices could have shown that there was a stronger inference that customers went to Otaki Motors because of the unlawful advertising. Since the appellants did not lead evidence on this point, the respondents submit that they should have the benefit of the finding that there was a significant breach which was the primary cause of the loss.
[58] In dealing with the breach of the restraint of trade claim, the Judge first analysed the extent of the restriction imposed by the relevant clause, cl 7. The second question addressed was the extent to which breach of the restraint of trade obligations may have occurred. McGechan J then analysed the various aspects including tyres and non-tyre workshop services including advertising. In considering the position in relation to sale of tyres, the Judge said at [30] that the evidence as to breach was “slender” at best. The Judge considered the “strongest” evidence was Mr Templeton’s analysis based on the BVR invoices to previous customers: at [30]. While noting the analysis was incomplete because of BVR’s incomplete discovery, McGechan J said at [30] that it would be “surprising” if further discovery were to show any “significant difference”. The reality of that conclusion is demonstrated by the fact the invoices available showed only eight cases out of 226 in breach of restraint of trade.
[59] In the context of considering whether the advertisements made a “material contribution” to the collapse of the business, the Judge found that there were other credible explanations for the collapse of the business, namely, the supervening factors we have set out above. Hence, the Judge concluded at [57]:
I am not satisfied that it is more likely than not that the advertising in breach of the restraint of trade clause made a material contribution to the collapse of the business and losses which followed. [The respondents] have not established a right to more than nominal damages. I award $100.
[60] Assuming, without deciding, that Lord Mansfield’s principle applies to the present case, we consider that McGechan J has approached this in a logical way. Further, the Judge had sufficient information to reach the conclusion that he did. There is nothing to suggest that any different sort of pattern might have emerged with the provision of further material and plainly there were other factors which came into the picture. In these circumstances, we see no merit in the cross-appeal on this point.
[61] In any event, as the appellants say, they did lead some evidence from Mr McCarthy and from two staff members (Mr Chambers and Mr Hakaraia) as to why the business had collapsed. The cross-appeal on this point is dismissed.
Claim under the Contracts (Privity) Act
[62] The Judge interpreted the admission of liability under this head as relating to the statement that the business would produce management wages at the level of $118,000. However, because the admission of liability did not carry an admission of causation of damage, McGechan J considered the issue of causation. On this, the Judge said that the statement did not go further than saying there were present good grounds for the assessment. But the Judge said the effect of the admission of liability was an acceptance that those good grounds did not exist at the date of the contract. It was the case though that Otaki Tyre would not have been able to pay these wages “before very long and for quite extraneous reasons largely related to [Mr Templeton] and [Ms Whittaker] themselves”: at [82]. Hence, the Judge said that “[a]t most, if the notional term had been true at the outset, that supervening factor would have been delayed in its effects”: at [82]. Again, the 14-month initial allowance was seen as appropriate.
[63] McGechan J did not see recovery under this head as double counting because the claim as between Otaki Tyre and the vendors was for loss of profits after allowance for management wages. This was an item in relation to those wages. The Judge worked on the basis that proprietor’s wages (management wages) of $60,000 for Mr Templeton and $35,000 for Ms Whittaker were appropriate. However, in calculating the amount of the award the Judge in fact took the same figure for each, that is, $60,000. Once the income received was deducted from that amount, the Judge awarded $21,009 each, making a total damages award of $42,018 under this head.
[64] The appellants make four points in relation to these damages:
(a)The award of the full deficit for the full 14-month period without any discounting for the supervening factors was against the weight of the evidence;
(b)There was ample evidence, including that of Mr Templeton, that the business began to decline from day one. The Judge accepted that this was largely due to the supervening factors;
(c)That if any reasonable discount was made for the gradual although immediate influence of the supervening factors, there would have been a nil award. The appellants emphasise that Mr Templeton and Ms Whittaker continued to take wages from the company virtually until the day it closed; and
(d)At the very least, the Judge used the wrong starting point for the calculation of the award to Ms Whittaker.
[65] The respondents say that the Judge’s approach was appropriate given the 14 months reflected a discount from what the Judge saw as the appropriate higher starting point. They say that the period in issue should have been 24 months. It is conceded that the wrong starting point was adopted for Ms Whittaker’s wages.
[66] Subject to the point about Ms Whittaker’s wages, we agree with the Judge’s approach to this issue. In adopting the 14-month period, McGechan J has taken into account the supervening factors and the time at which their effect began to be felt. Any longer period, as contended for by the respondents, would lead to the problems identified by the appellants.
[67] We confirm the award of $21,009 made in relation to Mr Templeton and substitute an award of $4,342 in respect of Ms Whittaker. We add that in the calculation of the award the Judge has used 366 as the relevant number of days in the particular financial year. It appears the figure should have been 365 but we make no adjustment for this factor given neither party takes issue with this aspect.
Interest
[68] As we have noted, the respondents also claimed against their accountant in the same amount as claimed in relation to the appellants. The claim against the accountant was settled for $71,500 (net of costs). McGechan J decided at [97] that the “just” solution was to apply this $71,500 towards the interest rather than against the judgment sum. His Honour did that because he said at [97]:
All [respondents] have been kept a long time out of their money, and the items for which they have now received judgment should continue to bear interest rather than be further reduced.
[69] McGechan J said at [97] that he had not “overlooked” that the respondents would have been receiving interest or other income benefits from the earlier settlement. But, “given the long delay” in payment by the appellants, the Judge let that benefit lie with the respondents: at [97].
[70] The appellants accept they should not benefit from running away from the case and not defending it. However, Mr Langford says, they should not be penalised, except in costs.
[71] The respondents say that the Judge’s approach was within the discretion and is not plainly wrong.
[72] We agree that it is not appropriate to penalise the appellants in this way. The Judge’s approach does mean there is a double recovery for the respondents. The correct way of dealing with the delays is by the award of interest and a costs award against the appellants as was made in the High Court.
Result and costs
[73] For these reasons, the appeal is allowed and the cross appeal is dismissed. The judgment of the High Court as to damages is set aside. We award damages in the amount of $103,869.50 as set out below:
(a) First respondent against appellants
(i) First cause of action
(Breach of contract) 100.00
(ii)Second cause of action
(Breach of contract) 100.00
(iii)Third cause of action
(Misrepresentation/Fair Trading Act) 70,893.50
TOTAL $71,093.50
(b)Second respondents against appellants
(iv)First cause of action
(Contracts (Privity) Act)
Mr Templeton 21,009.00
Ms Whittaker 4,342.00(v)Second cause of action
(stayed)
(vi)Third cause of action
(payment of rental as guarantors) 7,425.00
TOTAL $32,776.00
[74] Following on from our decision above, the settlement sum of $71,500 already paid to the repsondents is to be credited against the judgment sums. When apportioning this sum against the interest, McGechan J noted that all three respondents had succeeded in obtaining a settlement of the causes of action. His Honour said that the $71,500 was to be applied as between the respondents in the ratio of judgments recovered on which interest is awarded. We apply the same approach but with the necessary adjustment to reflect the fact the sum of $71,500 is to be applied against the damages awarded to each respondent. Accordingly, we apportion the settlement sum as between the first and second respondents using ratio of 142,187:65,552 (ie 71,093.50:32,776 to reflect the relative success of the first and second respondents in their claim for damages). This means that the appellants must pay the respondents as follows:
(a)First respondent against the appellants
Damages as above 71,093.50
lessApportioned settlement sum 48,938.19
TOTAL$22,155.31
(b) Second respondents against the appellants
Damages as above 32,776.00
less Apportioned settlement sum 22,561.81
TOTAL $10,214.19
[75] Interest is payable on these outstanding sums on the basis provided for in the judgment under appeal, that is, from and including 1 June 2000, interest is awarded at 11 per cent per annum until and including 31 July 2002 and at 7.5 per cent per annum from and including 1 August 2002 down to the date of judgment (11 December 2007). McGechan J did not award interest on the two items of nominal damages ((i) and (ii) above) or on the payment under the guarantee to the landlord ((vi) above). However, given that we have applied the settlement sum to the damages awards and not to interest, as the Judge did, we order the appellants to pay interest on the whole of the damages awards set out at [74] above. This is appropriate given the sums involved and the length of time the respondents have been out of pocket. Further, interest on the total judgment debt is payable under r 538 of the High Court Rules following judgment and is accruing on a daily basis.
[76] The appellants acknowledge they can expect to be penalised in terms of costs. Accordingly, although they have succeeded in this Court we consider they should carry their own costs in this Court. For the same reason, we do not consider any adjustment should be made to costs in the High Court.
Solicitors:
Langford Law, Wellington for Appellants
Ball & Co, Paraparaumu for Respondents
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