Closurepac NZ Ltd v WS 2014 Ltd
[2015] NZHC 1587
•8 July 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-1397 [2015] NZHC 1587
BETWEEN CLOSUREPAC NZ LIMITED
Plaintiff
AND
WS 2014 LIMITED First Defendant
AND
DAVID NIGEL DALE Second Defendant
AND
JANENA NENE CORLETT Third Defendant
AND
DAVID NIGEL DALE AND JANENA NENE CORLETT
Fourth Defendants
Hearing: 11 - 15 May 2015 Appearances:
H L Thompson for the Plaintiff
A Maclean for the defendantsJudgment:
8 July 2015
JUDGMENT OF THOMAS J
This judgment was delivered by me on 8 July 2015 at 3.00 pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date:………………………….
Solicitors:
McMahon Butterworth Thompson, Auckland. Alistair Maclean, Auckland.
CLOSUREPAC NZ LIMITED v WS 2014 LIMITED [2015] NZHC 1587 [8 July 2015]
Introduction
[1] The plaintiff, Closurepac NZ Ltd (Closurepac), is a company carrying on business as a converter and supplier of wadding closures and seals to the packaging industry.
[2] Closurepac purchased the business of the defendant company, The Wadding Shop (2007) Ltd since renamed WS 2014 Ltd (The Wadding Shop), in January 2013. Closurepac brings proceedings against The Wadding Shop, as well as Mr David Dale and Ms Janena Corlett (Mrs Dale) in their personal capacity as directors and shareholders of The Wadding Shop.
[3] Closurepac’s case is that it purchased The Wadding Shop business and assets (the Business) based on misrepresentations made to Mr Ralph, Closurepac’s director, on two occasions. It seeks damages under the Contractual Remedies Act 1979 and compensation under the Fair Trading Act 1986.
Background
[4] In December 2013, Mr Ralph entered into a sale and purchase agreement (the Agreement) with The Wadding Shop to buy the Business for $820,000. Mr Ralph then nominated Closurepac1 as purchaser under the Agreement and settlement occurred on 31 January 2014. The plaintiff says the Agreement was entered into by Mr Ralph for the benefit of Closurepac.
[5] On 3 February 2014, the first day on which the Business was operating under Closurepac’s ownership and management, Mr Ralph was contacted by Mr Dale. He was told that a major customer of the business, VIP Packaging (VIP), had been advised of quality control issues by its own substantial customer, Comvita. The problems relating to the closures which had been lined by The Wadding Shop included:
(a) contamination of closures with loose shards of wadding material;
1 The plaintiff was then called Kilsheelan Investments Ltd but was subsequently re-named
Closurepac Ltd.
(b) elliptically cut and therefore ill-fitting wads; and
(c) imprecisely cut wads with ragged or torn edges, particularly when
using a wadding product known as Lift ‘n’ Peel T Max (Lift n Peel).
[6] As a result, Comvita rejected a large quantity of closures supplied to it by VIP which had been lined by The Wadding Shop. Despite various damage control measures, VIP withdrew some work from Closurepac.
[7] Closurepac’s case is that it purchased the Business as a result of representations contained in an Information Memorandum (the Memorandum) which was provided to Mr Ralph by Three Sixty Capital Partners Ltd (Three Sixty) as well as oral representations made to Mr Ralph by Mr Dale. Closurepac says that, as a result of the problems revealed to it on 3 February 2014, it became apparent that the representations made to Mr Ralph were false.
[8] The plaintiff claims the Memorandum included representations that:
(a) The Wadding Shop commanded a dominant market position supported by modern efficient plant with spare capacity which would support future growth;
(b)since 2007 The Wadding Shop had invested in plant and equipment, systems and technology to stay ahead of market demands;
(c) The Wadding Shop had excellent plant and equipment and guaranteed quality and compliance;
(d)the key assets of The Wadding Shop were modern as investment in new technology and equipment had been made consistent with the need to remain competitive and to meet changing customer requirements for bottle styles and designs;
(e) there was one other company in New Zealand doing the same as The
Wadding Shop but it had smaller capacity and narrower capability;
(f) there was little risk of a new competitor being set up because the practicality and investment required to set up a new factory and attract customers would be challenging and unfeasible;
(g)The Wadding Shop had a substantial customer base with the top five customers contributing two thirds of the sales revenue; and
(h)as a result of re-organisation, the structure of the Business was efficient and required little management input on a daily basis.
[9] In addition to the representations in the Memorandum, the plaintiff claims
Mr Dale told Mr Ralph (the oral representations) that:
(a) The Wadding Shop accounted for 90 per cent of the New Zealand wadding market outside of Fonterra and Coke;
(b)wadding has a finite shelf life, thereby precluding importation of pre- lined closures from overseas;
(c) the barriers to entering the New Zealand wadding industry were high as The Wadding Shop was the only local supplier with machinery capable of running multiple cap sizes and, to achieve the same capability, a competitor would need to invest in several different machines at considerable cost;
(d)VIP could not take its business elsewhere because The Wadding Shop’s main competitor did not have capacity to cope with the volume; and
(e) lids or closures of all bottles or jars containing food products for export from New Zealand must be wadded and legislation was on its way to make wadding compulsory in relation to all food product packaging in New Zealand.
[10] Closurepac says the representations made to it were false because, as a result of further inquiries, it ascertained that:
(a) the plant and equipment purchased from The Wadding Shop is outdated and approaching the end of its useful life. Closurepac says that the equipment is unable to cut modern wadding materials, particularly the increasingly prevalent and popular Lift n Peel, with consistent accuracy and precision;
(b)the top three customers of The Wadding Shop contribute approximately 95 per cent of its revenue, with approximately 70 per cent by VIP;
(c) The Wadding Shop’s main competitor has similar capacity and
capability to The Wadding Shop;
(d)no investment in plant and equipment had been made by The Wadding Shop in recent times, with the exception of a positive-pressure “clean- room” which was incomplete and unsealed;
(e) customers of The Wadding Shop had complained on several occasions about contamination problems with closures wadded by The Wadding Shop;
(f) given the state and age of the equipment, Closurepac says substantial management input and additional human resources will be required to control quality so as to achieve error rates at a level reasonably acceptable to customers of the business;
(g)modern wadding plant and equipment is readily available internationally and it would have been possible to establish a wadding business in New Zealand with new and modern equipment in competition with the Business for a lower overall cost than the plaintiff paid for the Business;
(h)there is no need for investment in a machine per cap size because modern wadding machines are capable of cutting wads in multiple cap sizes;
(i)The Wadding Shop did not attract 90 per cent of the New Zealand wadding market outside of Fonterra and Coke;
(j)stocks of pre-lined caps and closures are capable of being imported into New Zealand and this regularly occurs; and
(k)there are no laws or regulations requiring the wadding of lids for containers of food products for export from New Zealand and no legislation is in the pipeline to that effect or to make wadding compulsory in relation to all food product packaging in New Zealand.
Defendants’ position
[11] The defendants deny the oral representations except to the extent that Mr Dale did represent that The Wadding Shop was the only local supplier and, for a competitor to achieve the same capability as The Wadding Shop, it would need to invest in several different machines at a considerable cost.
[12] The defendants say they had no knowledge about the post-settlement issues to which Closurepac refers but admit that:
(a) modern wadding machines are capable of cutting wads in multiple cap sizes without the need for investment in a machine per cap size;
(b)The Wadding Shop did not command 90 per cent of the New Zealand wadding market outside of Fonterra and Coke;
(c) stocks of pre-lined caps and closures are capable of being imported into New Zealand and this is a regular occurrence; and
(d)there are no laws or regulations requiring exported bottles or jars to be wadded and there is no incoming legislation to make wadding compulsory in relation to all food product packaging in New Zealand.
[13] The defendants acknowledge the existence of quality control issues but say that, before the sale of the Business, Mr Ralph was given a folder containing correspondence about quality control issues The Wadding Shop had experienced between 1 May 2009 and 21 January 2014.
Claims
[14] Closurepac pursues two causes of action against the defendants.
Contractual Remedies Act 1979 (CRA)
[15] Closurepac alleges there has been a breach of s 6 of the CRA. Section 6 relevantly provides:
6 Damages for misrepresentation
(1) If a party to a contract has been induced to enter into it by a misrepresentation, whether innocent or fraudulent, made to him by or on behalf of another party to that contract—
(a) he shall be entitled to damages from that other party in the same manner and to the same extent as if the representation were a term of the contract that has been broken; and
(b) he shall not, in the case of a fraudulent misrepresentation, or of an innocent misrepresentation made negligently, be entitled to damages from that other party for deceit or negligence in respect of that misrepresentation.
[16] Closurepac claims damages under s 6(1)(a). It seeks damages on a “cost of cure” basis, being the cost of acquiring a new wadding machine (the Lamfi) as well as consequential losses to cover lost revenue and additional quality control costs, as follows:
(a) the cost of procuring the Lamfi from Italy (NZD equivalent of 138,
949 euro);
(b)the amount paid by Closurepac to VIP to reimburse it for costs it incurred re-working caps and in related activities resulting from the faults which arose on or about 3 February 2014 and subsequently ($29,605.05);
(c) the cost incurred by Closurepac in respect of a trip by Mr Ralph to Canada and Italy to investigate and procure new machinery, resulting in the acquisition of the Lamfi ($13,800.18);
(d)the cost of unscheduled maintenance and adjustments to the plant and equipment purchased from The Wadding Shop incurred with a tooling company called Timely Tools ($4,383.89);
(e) the cost of engaging additional quality control staff following discovery of the faults ($31,200); and
(f) the gross margin on lost work relating to 83 mm caps supplied by VIP
for its customer Comvita ($111,150).
The Fair Trading Act 1986 (FTA)
[17] Closurepac’s second cause of action is that there has been a breach of s 9 of the FTA. The defendants, it is claimed, were at all times acting “in trade” for the purposes of s 9 of the FTA in their efforts to sell the Business. Section 9 of the FTA provides:
9 Misleading and deceptive conduct generally
No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
[18] Closurepac relies on the same representations relied on in the first cause of action.
[19] Closurepac seeks reliance based damages under s 43 of the FTA as well as interest and costs. Its position is that, had Mr Ralph known the true state of the Business, he would not have entered into the Agreement or would only have been
prepared to contract on a basis which discounted the price by the cost of acquiring a new machine. If the misrepresentations were not made, Closurepac says, it would not have incurred the costs of implementing the additional quality control measures required by VIP.
[20] Closurepac claims the same damages as those under the first cause of action except for lost revenue.
Issues in dispute
[21] The issues under the CRA are:
(a) Were there misrepresentations?
(i) Did the Memorandum contain misrepresentations? (ii) Were any misrepresentations made orally?
(b) What is the effect of the disclaimer in the Memorandum?
(c) In any event, does Closurepac have a cause of action when the representations were not made it to and it purchased the Business as nominee under the Agreement?
[22] The issues under the FTA are:
(a) Were the representations made to Closurepac misleading or deceptive?
(b)Is there a causal link between the misleading conduct and loss or damage?
The evidence
[23] The second defendant, Mr Dale, is a director and shareholder of the first defendant. He is a qualified engineer with over 37 years of experience as a
mechanical engineer. He is currently a director of Die Casting Solutions (NZ) Ltd, a die casting company supplying parts to the global market.
[24] Mr and Mrs Dale purchased the Business in 2007 for $685,000. Almost immediately, they were required to install a purpose built clean room at a cost of just under $100,000. They also installed a monitoring system called ASPECT, which shows details of production at all times, allowing full traceability and accountability, at a cost of just under $50,000. Computer systems and monitors for each wadding machine were introduced at a cost of $20,000.
[25] In 2008 Mr and Mrs Dale travelled to Europe and looked at new wadding machines, including one made by Lamfi. They decided the cost of a new machine was not justified because the machines in the Business were underutilised, being at between 12 and 23 per cent of capacity.
[26] Mr Dale estimates they spent about approximately $220,000 on purchasing new equipment plus $80,000 on engineering fees for the improvements to the Business between 2007 and 2013. The factory operated a four-day week schedule, allowing Fridays and the Christmas holiday period for maintenance and improvements. Mr Dale carried out most of the maintenance, repairs and improvements himself. He sharpened the dies used in the wadding machines (the machines) and made any die and punch sets which were required.
[27] In early 2013 Mrs Dale was diagnosed with a serious health problem
resulting in Mr and Mrs Dale’s decision to sell the Business.
[28] Mr Dale engaged the business broker, Three Sixty, who, after discussion with Mr Dale, produced a draft Memorandum (amended and approved by Mr Dale). A valuation of the plant and equipment dated 3 November 2008 and valuing it at
$922,600 was attached to the Memorandum. Mrs Dale also approved the
Memorandum.
[29] The same valuer provided a new valuation on 28 November 2013 valuing the plant and equipment at $1,000,070 excluding GST.
[30] Mr Ralph was approached by Three Sixty as a result of feelers he had put out amongst business brokers and investment bankers that he was looking for new business opportunities. After signing a confidentiality agreement, he was provided with the Memorandum on 27 November 2013. On the basis of his review of it, he made an offer to purchase the Business for $720,000. The offer was subject to due diligence, visiting the Business and consultation with the vendor.
[31] After a meeting with Mr Dale and representatives of Three Sixty, Mr Ralph increased his offer. He then accepted a counter offer of $820,000 and entered into the Agreement which was subject to purchaser’s due diligence. The Agreement was declared unconditional on 15 January 2014, the plaintiff was nominated as purchaser on 30 January 2014 and settlement occurred on 31 January 2014.
Joins
[32] Either just before or just after settlement of the sale Mr Ralph was provided a folder recording correspondence between Mr Dale and VIP covering the period from April 2009 to February 2014 and which related to various issues.
[33] There were two issues which were apparent immediately after settlement. The first concerned cutting wads for VIP from Lift n Peel. Mr Dale’s evidence was that, where the sheets of wadding material overlapped, the taped join created a thicker section of material which made it difficult for the punch in the machine to cut through. Only one of the machines at the factory had sensors attached to it which could detect the presence of the join. Even then, it could detect the join only if the material was a certain way up which was not always the case. It appears that measures were put in place to deal with the situation.
[34] Mr Ralph accepted it was possible to fit sensors to the machines to detect the joins at a relatively low cost.
[35] Mr Dale accepted that modern equipment has sensors fitted which would be able to detect joins.
Quality control/inspection
[36] Mr Ralph was informed of the second, and major, issue on or around
3 February 2013. One of VIP’s main customers, Comvita, had discovered quality
problems with the caps lined with wadding supplied by The Wadding Shop to VIP.
[37] There was extensive evidence concerning this issue and whether the contamination was a result of shards of wadding being in the lids or because the lids supplied to The Wadding Shop were already contaminated or, as seemed to be indicated in the evidence of Ms Puna Keresoma, a long time employee of The Wadding Shop, a combination of the two.
[38] Remedial measures were explored. Air knives were installed to reduce the contamination rate. Mr Ralph also instituted a system whereby every wadded cap was hand-checked by operators. This was a more labour intensive process but necessary, in his opinion, to keep error rates at a manageable level. He did not consider it was a long term solution because the annual additional wage cost was approximately $31,200.
[39] In any event, the immediate problem appeared to have been resolved to the satisfaction of both Comivta and VIP.
[40] Eventually, VIP required the Business to follow a quality control process. It was the first time VIP had stipulated any such requirements.
[41] Ms Keresoma’s evidence was that the new rules insisted on by VIP in February 2013 resulted in better quality control. Her evidence was that VIP had not previously complained about small shavings of wadding material in the caps. This evidence, therefore, supports the defence position that additional quality control measures were as a result of VIP’s increased requirements.
[42] I accept that the quality control requirements were a measure introduced by VIP and are simply costs of business required to adapt to changes in the operating environment.
Ability to cut Lift n Peel
[43] The crux of the plaintiff’s case is that the machines were not as they were represented, that is, in excellent condition and able to meet changing customer requirements and this was evident by the difficulties in cutting Lift n Peel. The defence position is that, in the same way as Mr Dale had made new die sets to cope with the material previously used by Comvita, the machines were quite capable of coping with Lift n Peel but new die sets were required.
[44] The Lift n Peel used by Comvita was specific to Comvita. The Wadding Shop had been dealing with Comvita Lift n Peel for 45 mm sized caps since November 2012; 83 mm caps since June 2013; 63 mm caps since August 2013; and
58 mm caps since September 2013. The Wadding Shop sold 2.3 million wadded caps to VIP during this period.
[45] In January 2014 The Wadding Shop was cutting a new batch of Lift n Peel material which was thicker than that cut previously and which was more difficult to cut.
[46] By February 2014 Comvita was complaining about pieces of wadding in the caps. Mr Ralph said that, despite only a very small percentage of caps having shards of wadding in them, it remained an unacceptably small percentage and he was told that by both VIP and Comvita. VIP told Mr Ralph that, unless production quality improved, Closurepac would permanently lose VIP’s business, approximately 45 per cent of turnover.
[47] Mr Ralph met the New Zealand Representative of Selig, the manufacturer of Lift n Peel, who recommended setting up the machines so they cut with tighter tolerances (the gap between the punch and die). Mr Ralph also initiated a programme of sharpening the dies more regularly. In his opinion, while those measures were helpful, they were “trying to extract every last bit of life out of some aging machinery” in an effort to keep up with the challenges presented by Lift n Peel. Lift n Peel comprised approximately 40 per cent of the total cap volumes which the Business produced for VIP and Visy, another customer.
[48] On 9 March 2014 Mr Ralph received a report from Selig (the Review) concerning its review of punched samples produced by The Wadding Shop as well as a document entitled “Liner Punch Tooling Best Practice”.
[49] The Review recommended tighter tolerances, the need for the punch to be central to the die and for the linear bearings and posts to be in good condition. Both Selig and Timely Tools (a business used to maintain the tools) emphasised how critical it was to ensure the correct alignment of the tools. Mr Ralph received similar advice from Mr Kassel, a businessman in America who supplies wadding machines.
[50] Mr Dale’s opinion was that the problem was caused by the material. Even though the Wadding Shop cut Lift n Peel for Comvita in 2013, it was not using die sets specifically manufactured for that material because Comvita was satisfied with the product. Mr Dale considered that the solution was for him to make a set of new dies specifically for Comvita Lift n Peel which could meet the required tighter cutting tolerances. There was considerable cross examination about this, principally because of an email Mr Dale sent to his wife at the time which referred to the need to make new dies and then said, “I would be surprised if the machines will cut at these tolerances”. Mr Dale explained that he was referring to the dies rather than the machines themselves.
[51] Mr Dale made new die sets for the 63 mm and 83 mm sized caps. He was advised by Ms Keresoma on 12 March 2014 that the new dies were cutting Lift n Peel without problems.
[52] Mr Ralph said that while the Review recommendations were complied with, that did not fix the problem. He rejected the proposition that the issues concerned only the ability of the machines to cut 83 mm caps, saying that the machines have problems with Lift n Peel generally and cannot do the job that they were purported to do. He accepted he did not obtain new tools for the other cap sizes because, he said, by that stage he had already researched other machines. Mr Ralph accepted he did not lose any sales except in respect of the 83 mm caps. In April 2014, VIP withdrew all work for 83 mm Comvita caps and sent it to the plaintiff’s major competitor where that work remains, with a resulting loss of revenue to Closurepac.
[53] Mr Ralph ceased involving Mr Dale, with whom he had a maintenance contract to repair, maintain and manufacture parts and equipment, as from
27 February 2014. Mr Dale’s evidence was that Mr Ralph chose not to take advantage of Mr Dale’s skill and experience. Instead, Mr Ralph decided to purchase the Lamfi. While that was a decision open to him, it did not mean it was necessary as the machines were capable of doing the job, said Mr Dale.
[54] Mr Ralph accepted he did not take any advice other than from Mr Kassel. The only other technical assistance he received was when a technical engineer from VIP helped at the Business for about a week when the air knives were installed. Furthermore, he accepted that he formed a view that the machines were not able to be fixed when he had owned the Business for less than a month and was not an expert. His decision to buy the Lamfi was prompted by having been called to a meeting by VIP and effectively given an ultimatum, he said.
[55] Ms Keresoma’s evidence confirmed that the Lamfi has many features the machines do not have, such as senses which automatically detect and reject faulty caps and which detect joins in rolls of Lift n Peel. There is no error rate from the Lamfi which was installed in 2015. However, Ms Keresoma’s evidence was that in
2014 the machines were running well and there were no breakdowns. She had no problems setting up alignments.
[56] Between February 2014 and January 2015 the machines cut over $3 million worth of wadding for Comvita. Mr Ralph’s evidence was, however, that there were unacceptable rejects and extra costs had been occurred in order to achieve the quality of production, including individual inspections and the installation of air knives.
[57] The fact is that, with the measures put in place by Closurepac, the Business has cut large quantities of Lift n Peel (excluding the 83 mm cap size) in the past year using the machines and at higher quantities than those cut prior to the sale.
The Lamfi
[58] By 25 February 2014 Mr Ralph began to investigate whether investing in newer equipment might be the best solution to the problem. He received the best
practice guidelines for Lift n Peel on 27 February and the Review on 9 March. By this time Mr Ralph was on his way to Canada and Italy and ordered the Lamfi from Italy in March 2014.
Observations on the machines
[59] The fact that both VIP and Visy were effusive in their praise of the Business when Mr Ralph met with them on 14 January 2014 during the due diligence period confirms that, at that stage, no one considered any problems with Lift n Peel were anything other than minor.
[60] Mr Ralph’s major issue is his belief that the machines are unable to cut modern materials. The Lamfi cuts wads of different styles and types without failure in contrast to the machines which Mr Ralph described as dating from last century and unable to cut new material.
[61] Mr Craig Sloan gave expert evidence. He was requested to comment on the references in the Memorandum to modern efficient plant, investment in plant and equipment, excellent plant and equipment, and guaranteed quality and compliance. He estimates most of the machinery is at least 30 years old with a high percentage of repairs, maintenance and modifications having been done and, therefore, in his opinion, “modern” is not an appropriate description. He referred to several photographs showing obvious makeshift repairs such as duct tape around an electrical box, strapping and loading straps on the machines, use of a G clamp. He saw no evidence of recent investment in production line plant and equipment. While he considered the facility to be relatively clean and tidy, he described it as old and dated. Mr Sloan also questioned the description “guaranteed quality and compliance”. He observed wear-and-tear having resulted in excessively worn equipment which produced faulty and inaccurate product. Although some of the measures referred to by Mr Sloan may have been implemented after the sale, it is obvious that some matters, for example, use of duct tape and bailing twine, were in place before the sale. Mr Sloan revisited the factory in March 2015 when the Lamfi was operating and described a considerable difference.
[62] Mr Sloan’s observations were a result of his visual inspection. He undertook no technical assessment. He accepted, therefore, that his observations would have been apparent should anyone have looked at the machinery.
[63] In his email of 27 February 2014 to Mr Kassel, Mr Ralph said:
We have had some excellent results with all the air knives we have added to our machines over this week and our rate of contamination right off the machine has dropped significantly. Phew! We will continue to make what mods [sic] we can to eliminate. Im [sic] now well aware of the age and limitations of the machines I have tho [sic]!
[64] Mr Kassel replied saying that he recommended customers who process a good amount of Lift n Peel to have a separate set of tooling for that material being punches and dies with tight tolerances.
[65] Mrs Keresoma has worked in the business for more than 27 years and said that most of the machines date from that time. She accepted that it is difficult to cut Lift n Peel. The punches need to be set at tight tolerances and need to be sharpened more often.
[66] The 83 mm caps were technically able to be wadded by both the number 5 and the number 6 machines. Mr Dale’s unchallenged evidence was that those two machines were manufactured in 2004 and, therefore, less than ten years old at the time of sale.
[67] Mr Dale was the only witness who addressed the technical aspects of the machines. He said most wadding machines work on the same principle and there has been no significant change to the basic design for many years. A punch and die is used to cut the wadding material. The most important factors affecting the machines’ ability to cut precisely are the condition of the bearings, the alignment of the punch and die and the tolerance. These parts can be easily replaced. The machines can be adjusted and modified to cut more precisely if necessary.
[68] Mr Dale’s evidence was that the machines are not outdated although he did describe them as “adequate”. They have a long working life and have not been made obsolete by any new technical advances. The Business’ main competitor uses similar
machines. Furthermore, in his evidence the machines were not approaching the end of their useful life. The machines consist of a chassis with replaceable moving parts. It is therefore possible to keep the machines working efficiently for many years by replacing parts as they become worn.
[69] The point was emphasised by the photographs of the “tool library” at the Business. They showed the array of different cutting tools at the Business. The tool library contains approximately 300 punch and die sets. As Mr Dale explained, the Business had several different punches for the same size of cap because the tool to be used depends upon the particular wadding material involved. Different caps styles are also relevant.
[70] Mr Dale did not accept that the machines are unable to cut wadding materials, noting they cut 8.4 million wads in the ten months before the sale, including 2.37 million Lift n Peel wads for Comvita. Closurepac continued to use the machines in the 2014 year and continued to cut 45 mm, 58 mm and 63 mm Lift n Peel wads for Comvita.
[71] Even allowing for the fact that Comvita Lift n Peel was introduced in 2013, the plaintiff cut 1,950,040 more Lift n Peel wads in its first year of operation in comparison with The Wadding Shop over the corresponding period the previous year, a 49 per cent increase. This is supported by the invoices showing the purchase of Lift n Peel for Comvita.
[72] The defence submitted a list of eight questions on the basis they were the key factual issues to be determined in respect of the capacity of the machines to cut Lift n Peel. In considering whether and how to respond to those questions, the immediate difficulty I face is that there was no engineering or other technical evidence to show that the machines were not capable of cutting Lift n Peel satisfactorily. The only technical evidence was that of the defence. There were clearly issues with cutting Comvita Lift n Peel but the contributing factors to those issues were identified in the Review. I am, therefore, left in the position where I must accept the defendants’ evidence and, indeed, I am persuaded by it. That is, the machines, with appropriate adjustments, could satisfactorily cut Comvita Lift n Peel.
The reality is that Closurepac has been satisfactorily doing so throughout the whole of 2014 because the Lamfi did not arrive until 2015. This emphasises the difficulty with the plaintiff’s case.
[73] Mr Ralph, perhaps for understandable business reasons, made an early decision to investigate purchasing a new machine. He did so before ascertaining whether implementing the recommendations in the Review would be successful. The fact that Closurepac has successfully cut Lift n Peel throughout 2014 demonstrates that the decision to purchase the Lamfi was premature. The plaintiff claims the cost of the Lamfi on a “cost of cure basis”. In order to do so, it must establish that the machines could not be modified to cut the thicker 83 mm Lift n Peel and that it was therefore necessary to purchase a new machine to “cure” the problem. It has not done so.
[74] Whether the machines could cut Lift n Peel is, however, not the end of the matter although it is highly relevant to the claimed misrepresentations.
Oral representations
[75] Following Mr Ralph’s initial offer of $720,000, Mr Ralph met with Mr Dale and Mr Jeffs from Three Sixty at The Wadding Shop’s premises. It was a long meeting, discussing a wide range of matters about the business. It was at that meeting that the alleged oral representations were made.
[76] Mr Jeffs from Three Sixty was present at the meeting and his evidence generally supported Mr Dale’s recollections. He recalled some discussions about the wadding market but not the detail. His only other relevant recollections were that Mr Dale mentioned a number of machines would be required to facilitate all of the capabilities of the Business and that this would involve a high capital cost. VIP were reluctant to give work to The Wadding Shop’s main competitor because of a commercial conflict. Discussion about regulations was, in his recollection, confined to the Federal Drug Administration (FDA) compliance requirements for food products being exported to the USA. He did recall Mr Dale talking about his understanding of the development of food laws in Australia which would likely follow in New Zealand.
[77] On balance, I am not satisfied that the representation regarding limited shelf life of wadding was made. On my analysis, Mr Ralph’s conclusion was a result of a misunderstanding as to what Mr Dale said. Mr Ralph appeared to rely on the fact that some wadding was stored outside. I accept, however, Mr Dale’s evidence that the wadding dated from the previous owners of The Wadding Shop. Furthermore, that Mr Dale would not have made the statement because indeed it is not true.
[78] Likewise, I do not accept Mr Dale told Mr Ralph that any new entrant into the market would need to invest in several machines because a machine could cope with one cap size only. Again, that was clearly not the case, even with the existing equipment.
[79] Mr Ralph accepted that Mr Dale told him at the meeting of 7 December 2013 that one of the issues preventing The Wadding Shop’s main competitor taking more business from VIP was because there was a conflict of interest.
[80] I accept Mr Dale’s evidence that any comments about regulatory requirements was in the context of telling Mr Ralph about use of FDA approved material.
[81] For these reasons, I am not satisfied that the alleged oral representations were made and I put them to one side.
Did the Memorandum contain misrepresentations?
[82] Misrepresentation has three elements:
(a) a statement of past or present fact; (b) that is false; and
(c) which induced the plaintiff to enter into the contract.
Were the statements of past or present fact?
[83] The bulk of the evidence and focus of the submissions concerned representations pleaded in paragraph 4 (a)–(d) of the statement of claim which, for ease of reference, are set out again below:
(a) The Wadding Shop commanded a dominant market position supported by modern efficient plant, with spare capacity, which would support future growth;
(b)since 2007, The Wadding Shop had invested in plant and equipment, systems and technology to stay ahead of market demands;
(c) The Wadding Shop had excellent plant and equipment and guaranteed quality and compliance;
(d)the key assets of The Wadding Shop were modern as investment in new technology and equipment had been made consistent with the need to remain competitive and to meet changing customer requirements for bottle styles and designs;
[84] The plaintiff ’s case is that machines vital to the operation of the Business were unable to perform a key function and therefore were not modern, efficient and excellent as represented. Furthermore, the Business could not guarantee quality of its product or compliance with its customers’ requirements.
[85] I am satisfied that the statements were about the quality and attributes of the equipment. They were not forecasts, projections, estimates or opinions, nor were they representations of future performance.
[86] The material statements can be divided into two categories. Statements (b) and (d) were factual statements about historic investment in plant and equipment for the Business. The defendants gave detailed evidence about the investment which had been made in the Business. There was no challenge to this evidence or any evidence to show it was untrue. It was suggested in cross-examination that the
defendants had exaggerated the amount spent on improvements but it went no further than that.
[87] The statements in paragraph 4(a) related to market position: that the plant was efficient and that there was spare capacity to support future growth. There was no evidence that the Business did not have a dominant market position as one of two independent suppliers of scale to the market. The evidence showed that the Business was efficient. It produced 11 million wads in the previous financial year with a staff of three; producing revenue of $829,496 with a gross surplus of 46 per cent. The plaintiff's sales at $956,151 have exceeded that. Mr Dale’s unchallenged evidence was that the equipment was operating at between 12 to 23 per cent of capacity.
[88] Whether the equipment was modern requires more detailed consideration and is dealt with below together with the statement about excellence.
[89] The statements in paragraph 4(c) related to guaranteed quality and compliance and that the plant and equipment was excellent. The defence refers to the evidence that no Lift n Peel products were rejected because of poorly cut wads and that The Wadding Shop had complied with its customers’ quality expectations. The biggest customers, VIP and Visy, endorsed the quality and compliance in the due diligence meeting.
[90] The tighter quality control requirements were not required at the time of the representations. It is always open to a customer to seek to impose more stringent requirements on a supplier. The statement in the Memorandum as to quality control must be considered in that light.
[91] Reference to the ASPECT Programme is also relevant to the statement as to quality and compliance. There was no suggestion that the ASPECT system could not achieve what Mr Dale represented to Mr Ralph, that is, each wad cut could be traced to the machine used, who the operator was, which batch of material was used, when it was cut, and into which box the wadded cap had been packed. The ASPECT system also showed tool setting times and production stoppage. It demonstrated that the machines were not being used to any extent of their full capacity.
[92] The plaintiff alleges that the plant and equipment it purchased was “outdated, approaching the end of it useful life and unable to cut modern wadding materials” rather than modern and excellent, as the Memorandum said.
[93] These statements are, in the defendants’ submission, too general and imprecise to be statements of fact. Words like “modern”, “efficient” and “excellent” are incapable of precise definition, says Mr Maclean. They are akin to “uncommonly rich water meadow” or “fertile and improvable” which have been held to be non-actionable puffs rather than representations of fact.2 A mere puff is not a statement of fact and will have no legal effect because some language used in marketing is not intended to, and could not sensibly, be taken literally.3
[94] In Hieber v Barfoot & Thompson, it was accepted that the word “magnificent” may be classified as classic puffery.4 In that case, a real estate brochure described the property as having “magnificent sea and city views”. It could be said that the word “excellent”, like the words “magnificent” or “splendid”, does not convey any precise information about characteristics and is therefore puffery.
[95] The Oxford English Dictionary defines excellent as:5
1. Of a person or thing: That excels or surpasses in any respect; preëminent, superior, supreme. Of qualities: Existing in a greater, or an exceptionally great, degree.
[96] Arguably, the word “excellent” followed by “plant and equipment” is not a description capable of being taken literally because it does not specify the context in which the equipment excels. The defendants’ case must be that the equipment was correctly represented as excellent because it was and is able to be modified and renovated to meet changing market needs. While the machines might not look
pretty, as Mr Dale said, for example because of the use of binding twine, the
2 GH Treitel Law of Contracts (9th ed, Sweet & Maxwell, London, 1995) at [9-003].
3 Sales puffery is not, in itself, exempt from the operation of the Fair Trading Act. The Court of Appeal in Body Corporate 202254 v Taylor [2008] NZCA 317 at [89] has said that if the language is intended to influence decision-making, then it may properly be regarded as being subject to the Fair Trading Act.
4 Hieber v Barfoot & Thompson (1997) ANZ ConvR 162 (HC).
5 Oxford English Dictionary Online (Oxford University Press, June 2015, online ed).
machines themselves and tools used in them were, given their age and state, excellent.6
[97] Whether a statement is a mere puff or an actionable representation depends largely on the surrounding circumstances.7 Regard must be had to “the position in life, experience, and skill of the person to whom the representation was made.”8
Mr Ralph was an experienced salesman. It is relevant too that the representations were not contained in the Agreement as a warranty. Indeed, although this issue was not explored, it is questionable whether any party would agree to give a contractual warranty in such broad and imprecise terms.
[98] While all these factors undermine Closurepac’s case, in all the circumstances I am not satisfied that the use of the word excellent, in this context, was mere puffery. I am satisfied that the statements were descriptive of the plant and machinery and can be categorized as statements of fact. However, these words cannot be considered in isolation. The context in which they are used must be taken into account. This issue is considered next.
Were the representations false?
[99] The defendants rely on the content of the Memorandum in full. They say that the statements cannot be confined to a single sentence or paragraph and any allegedly misleading content has to be read in the context of its inclusion in the Memorandum.
[100] The Memorandum began with a full page entitled “Confidentiality and
Disclaimer”. The disclaimer, in relevant part, provided:
No recipient or any other person shall have any claim, whatsoever, against the Vendor or any of their respective directors, officers, shareholders, owners, affiliates or agents arising out of or relating to the sale other than as parties to a definitive sale agreement in accordance with the terms thereof.
6 Nevertheless, it is difficult to accept that the machines could be described as excellent because even if the makeshift measures relate to appearance only, that contributes to the overall excellence.
7 Easterbrook v Hopkins [1918] NZLR 428 (HC).
8 Easterbrook v Hopkins, above n 7, at 442.
… All recipients must rely on their own investigation and judgment in determining whether or not to enter into a contractual relationship and shall be deemed to have made their own investigation and judgment.
[101] The Memorandum said it was provided for information purposes to assist prospective purchasers in their analysis of the opportunity to purchase the Business. It was, however, provided subject to the disclaimer. The disclaimer made it clear that a recipient of the Memorandum was not to rely on the accuracy or otherwise of the representations being made. The effect of the disclaimer is considered in more detail below but I refer to it at this stage because it is important to the underlying context in which the statements were made.
[102] In my assessment, the statements on which the plaintiff relies have been carefully extracted and taken in isolation. For example, the reference to “modern efficient plant” is put in the introduction section under the heading “Strategic Value” which emphasised the value of the Business as one of two independent suppliers of scale to the market. In full, the statement read:
As a result TWS commands a dominant market position supported by modern efficient plant, with spare capacity, which will support future growth.
[103] When plant capability is specifically addressed, the Memorandum stated that the key assets were modern, “as investment in new technology and equipment had been made consistent with the need to remain competitive and to meet changing customer requirements for bottle style and designs.” Importantly, the next sentence, which is not referred to in the statement of claim, said:
Key equipment includes;
§ New Pressure Positive Clean Room (FDA Approved)
§ State of the art monitoring and management systems. (ASPECT Live
Manufacturing program)
§ MYOB & PAYE accounting software
[104] The context qualifies the way in which the representation is to be read. It is strongly arguable that, in this section anyway, the statement that key assets were modern was not referring to the machines.
[105] Furthermore, the Memorandum included an asset valuation report dated
3 November 2008 which showed that the machines were well over five years old and valued at less than one million dollars (whereas their modern equivalent was estimated to be $3.8 million). One machine was estimated to be approximately
80 per cent under the market value. It was clear, therefore, that the machines were not new and their value had been depreciated over a long period. Any representation as to the quality of the machines must be read in light of their disclosed age and value.
[106] Finally on this point, under the heading “Strengths, Weaknesses, Opportunities and Threats”, the phrase “excellent plant and equipment” is listed under Strengths but under “Weaknesses” the Memorandum identified the following:
Level and return of investment that may be required for new technologies to meet customer demands.
[107] In conclusion on this aspect therefore, given the nature of the statements and the context in which they were made, with the possible exception of the description of excellence, I am not satisfied on the balance of probabilities that the representations were false.
Was the plaintiff induced to enter into the Agreement as a result of misrepresentations?
[108] Section 6 of the CRA requires that the misrepresentation induced the plaintiff to enter into the contract.
[109] For there to be inducement, the representation must be causative. In other words, the representation must be one of the factors which led the plaintiff to enter into the contract. In Buxton v The Birches Time Share Resort Ltd, it was held that there can be no inducement if:9
… before he acted upon it, the representee is made aware of the true position. If he nonetheless chooses to proceed, it is not the representation that leads him to do so, but his own deliberate decision.
9 Buxton v The Birches Time Share Resort Ltd [1991] 2 NZLR 641 (CA) at 657.
Where there has been a misrepresentation, and it is asserted that it has been rectified, there is an onus on the representator to show that the truth was plainly brought to the attention of the representee. It is not enough that he could have discovered it had he searched; or even that he was invited to verify the position from a source that was made available to him: Redgrave v Hurd (1881) 20 ChD 1.
Even if there were misrepresentations, were they corrected or qualified by subsequent events?
[110] Mr Dale became aware of Mr Ralph’s interest in the Business when Three Sixty presented him with an offer from Mr Ralph to buy the Business for $720,000. The offer was rejected but there was then a meeting attended by Mr Jeffs and Mr Fraei of Three Sixty, Mr Dale and Mr Ralph at The Wadding Shop factory on 7
December 2013.
[111] Mr Ralph said the Business was attractive to him because, as a result of the Memorandum and his discussions with Mr Dale, he understood it required relatively little day-to-day management input; commanded a dominant market position with high barriers to entry; the equipment and systems were robust, fool-proof and modern; and the customers were happy with the product quality and service levels. Mr Ralph had a background in sales and believed his experience in that area would enable him to grow the Business. He was focused on purchasing a business with opportunities for growth. Knowledge of competitors and the risks to the Business were therefore very important to him. He described himself as being reliant on the information he received.
[112] There was no challenge to Mr Dale’s evidence that, although the factory was not working on 7 December 2013, Mr Dale showed him the plant and equipment and Mr Ralph took pictures of the machines on his phone. Mr Dale showed him the ASPECT system and explained how it worked.
[113] Mr Dale’s evidence was that Mr Ralph told him he wanted to update the Business and might buy a new machine as the plant looked quite old and that this statement was made before the Agreement was entered into. Mr Ralph denied making this statement. He did, however, accept that he knew the machinery had
been purchased from the original owners of the Business and therefore was more than six years old.
[114] The question is whether the actual state of the machinery was brought to Mr Ralph’s attention prior to signing the Agreement. I am satisfied it was. Mr Jeffs attended the meeting of 7 December 2013. Mr Jeffs said that, during the tour of the factory, Mr Dale was “open about the machines being what they were”. He explained to Mr Ralph that the machines were old but that they were adaptable. Mr Dale told Mr Ralph that, when he had purchased the Business, he considered purchasing new Lamfi machines but decided it was unnecessary because there had been no significant changes to the basic design for many years. He said the machines were capable of servicing the market, though maintenance and modifications were required from time to time.
[115] Even if the machines were misrepresented in the Memorandum to be modern and excellent, Mr Ralph was put on notice during that discussion as to the true position: that the machines were old and required maintenance and modification in order to meet changing requirements.
[116] Mr Sloan gave expert evidence on the machinery and equipment. Although Mr Sloan visited the site under the ownership of Closurepac, it is clear that his observations speak to the state of the equipment even prior to the sale. Mr Sloan’s assessment was not from a technical perspective. He accepted that what he noticed would have been apparent to anyone looking at the machinery. The obvious nature of any makeshift repairs must, therefore, have been apparent to Mr Ralph during the factory tour. They were certainly obvious in the photographs produced in evidence. This is particularly so given what was said to Mr Ralph about the machines at the meeting.
[117] Mr Ralph accepted he saw the valuation dated 29 November 2013 before he signed the Agreement. The Asset Register 2013 was annexed to the Agreement. It itemised the assets and stated the gross current replacement cost in total was
$3,821,700 and the optimised depreciated cost was $1,071,600.
[118] The Memorandum included a section entitled “Market Appraisal”. It valued
the Business at $1,772,600, attributing $922,600 to fixed assets on the basis of the
2008 valuation, $70,000 to stock in hand and $780,000 to goodwill. Mr Ralph’s first offer for the Business was $720,000, more than $1 million less than the market appraisal contained in the Memorandum. It is, therefore, difficult to conclude that Mr Ralph placed great weight on what was contained in the Memorandum and was induced to buy the Business in reliance on it. While I accept that the sum attributable to fixed assets in the Agreement can be influenced by tax concerns, the fact that the Agreement allocated $250,000 to tangible assets is further evidence which undermines the plaintiff’s case. Had the equipment indeed been considered excellent and modern then it is difficult to accept that its value would have been downgraded as it was.
[119] Following the meeting of 7 December, Mr Ralph made a new offer for the Business at an increased price of $810,000, $90,000 more than the original offer made prior to the meeting of 7 December. Mr Ralph accepted the vendor’s counter offer of $820,000.
[120] Given these circumstances, I am satisfied that any misrepresentations were corrected by subsequent events. It was Mr Ralph’s deliberate decision to enter into the Agreement rather than it being the representations in the Memorandum which led him to do so.
Effect of due diligence
[121] The Agreement was conditional on Mr Ralph carrying out due diligence to satisfy himself about the condition of the Business. The due diligence clause expressly included the “mechanical inspection of equipment”.
[122] On 10 December 2013 Mr Ralph sent Three Sixty an email about due diligence. Mr Ralph listed the information he required being 25 items together with a questionnaire containing 32 questions. He said:
Two lists follow. Information required and a questionnaire. I would like the questionnaire back in writing and warranted (i.e. reference in SPA that they have told me everything and truthfully).
[123] Item 7 of the information required was:
The most recent fixed asset register detailing the cost, provision for depreciation, book value, taxation value and age of fixed assets.
[124] Mr Ralph was, therefore, fully alive to the possibility of inserting warranties in the Agreement (there can be no doubt that the reference to “SPA” is the Agreement (the sale and purchase agreement)).
[125] The defence points to the opportunity during the due diligence period for the plaintiff to have examined the condition of plant and equipment. On
11 December 2013 representatives from Three Sixty met with Mr Ralph and Mr Dale at the factory to discuss the information. Mr Ralph was asked in evidence about his observations of the equipment at that meeting. He does not recall some of the obvious issues such as the use of strapping or tape, saying he did not look that closely. He said, in any event, he did not know what he was looking at and was more focused on the risks and opportunities associated with the Business. Mr Dale gave evidence that Mr Ralph did not ask any questions about the performance of the machines or ask for any technical information pointing out that, had Mr Ralph had any doubts, he could have engaged his own engineer. He said Mr Ralph made a video of one of the machines in operation to show his wife.
[126] On 20 December 2013, Andrew Williams at Bowden Williams and Associates Ltd (BWCA) emailed Three Sixty with some enquiries including, under the heading “Fixed Asset Write-Offs”, the query was “all the Plant & Equipment in good working order?” It is not entirely clear what role BWCA played but obviously it was acting for Mr Ralph.
[127] The reply from Kevin Fraei at Three Sixty was:
Plant & Equipment – all of the items on the schedule are in working order and as the vendor has discussed with Chris there are a number of machines currently not in use (and not in the schedule) that Chris could have included in the offer price and both parties have agreed to go through this prior to settlement.
[128] The due diligence process continued and, on 14 January, Mr Ralph, David
Dale and Mr Fraei from Three Sixty attended a meeting with the general manager of
Visy followed by meeting the chief executor of VIP. They both gave Mr Ralph positive feedback and told him nothing which caused alarm. Mr Fraei said that following those meetings, Mr Ralph confirmed he was satisfied and would proceed to completion. He made a contemporaneous file note which recorded:
Chris told David Dale he was “going to buy the business” based on what he had heard that morning.
[129] The following day, Mr Ralph formally confirmed that the Agreement was unconditional.
[130] The evidence satisfies me that Mr Ralph accepted the state of the equipment as he saw it and as it was described to him or he chose to ignore the true position. Either way, he broke the chain of causation.
The requirement of reasonableness
[131] While there is no explicit requirement in s 6 that the reliance on the representation must be reasonable, the courts have decided that there is such a requirement.10 A representation will not be actionable if it such of a kind that no reasonable person in the position of the plaintiff would have relied on it.
[132] I am not satisfied that Mr Ralph relied on the representations reasonably. The representations must be considered in light of the context in which they were made. The representations contained in the Memorandum were subject to a non-reliance provision and the Agreement itself was conditional upon Mr Ralph completing due diligence.
[133] While the general position is that the claimant’s failure to take independent
advice is not enough to abrogate inducement, I am satisfied that, in the circumstances of this case, it was not reasonable to rely on the representations.
10 Vining Realty Group Ltd v Moorhouse [2010] NZCA 104 at [46].
What is the effect of the disclaimer in the Memorandum?
[134] The Memorandum stipulated that the information was provided on the basis that the recipient agreed:
No recipient or any other person shall have any claim, whatsoever, against the vendor or any of their respective directors, officers, shareholders, owners, affiliates or agents arising out of or relating to the sale other than as parties to a definitive sale agreement in accordance with the terms thereof.
The vendor has no legal obligation of any kind whatsoever with respect to any sale by virtue of this document or other written or oral expression with respect to such sale.
No representation or warranty is made as to the accuracy or completeness of such forecasts, projections, estimates or opinions, or as to the basis upon which they are formulated, nor do the vendors or TSC accept any responsibility with regard to.
All recipients must rely on their own investigations and judgment in determining whether or not to enter into a contractual relationship and shall be deemed to have made their own investigation and judgment.
[135] There was no entire agreement clause in the Agreement itself.
[136] Although the disclaimer in the Memorandum does not use the wording of an entire agreement provision, the question is whether it has that effect.
[137] The wording and structure of the disclaimer is poor. However, I do not accept Mr Thompson’s strained interpretation of it. He broke the disclaimer into separate elements, without considering its effect as a whole. For example, Mr Thompson says that the disclaimer referred to representations of forecasts, projections, estimates or opinions and did not extend to statements of facts. He also says that it is the authors of the Memorandum rather than the vendors who are protected. However, the disclaimer made it clear that the protection was not limited in this regard: “No recipient or any other person shall have any claim, whatsoever, against the Vendor…” The words “whatsoever” and “vendor” defeat the submission.
[138] Nor do I agree that Mr Ralph was invited to rely on the Memorandum as part of his “own investigation”. The disclaimer was not subject to what was said in the introduction section (that the purpose of the Memorandum was to “assist prospective purchasers in their analysis of this opportunity”). Mr Thompson essentially says that
what is contained in the subsequent parts of the Memorandum limited the scope of the disclaimer. That cannot be right. In any event, the words “own investigation” implies independent inquiry on the part of the recipient, different from what is being presented to him. That, in essence, is a non-reliance clause. My interpretation is reinforced by the fact the disclaimer also made it clear that the Memorandum was not a warranty.
[139] Mr Thompson says that the disclaimer, at best, purports to exclude liability for the representations contained in the Memorandum which is distinct from denying that the representations were in fact made. As I understand it, Mr Thompson’s point is that its application would be inconsistent with the defendants’ case that no such representations were made in the first place. The defendants’ case, however, is that, even if the statements were misrepresentations, the disclaimer precludes the Court from inquiring whether the plaintiff relied on the alleged representations. This is essentially an exercise under s 4(1) of the CRA, which provides:
4 Statements during negotiations for a contract
(1) If a contract, or any other document, contains a provision purporting to preclude a court from inquiring into or determining the question—
(a) whether a statement, promise, or undertaking was made or given, either in words or by conduct, in connection with or in the course of negotiations leading to the making of the contract; or
(b) whether, if it was so made or given, it constituted a representation or a term of the contract; or
(c) whether, if it was a representation, it was relied on—
the court shall not, in any proceedings in relation to the contract, be precluded by that provision from inquiring into and determining any such question unless the court considers that it is fair and reasonable that the provision should be conclusive between the parties, having regard to all the circumstances of the case, including the subject matter and value of the transaction, the respective bargaining strengths of the parties, and the question whether any party was represented or advised by a solicitor at the time of the negotiations or at any other relevant time.
[140] I reject the proposition that the disclaimer is of no effect because it did not form part of the Agreement. Section 4 makes it clear that the relevant provision may
be contained in the contract or “any other document”. The Memorandum falls into
the latter category.
[141] The correct approach is to read the disclaimer as a whole. That is consistent with the wording of s 4 which requires that the Court is to have regard to “all the circumstances”. Read as a whole, I am of the view that the disclaimer was, in effect, an entire agreement clause. The effect of the disclaimer is that the recipient should not have relied on the information contained in the Memorandum and that the “definitive” contract constituted the entire agreement. The intention of the disclaimer was to preclude the Court from inquiring into whether a representation was in fact made and whether it was relied on.
Should the disclaimer be deemed conclusive in precluding the Court from inquiring into whether Mr Ralph relied on the alleged representations?
[142] The question is then whether the Court should look beyond such a provision.
[143] The Court of Appeal in PAE (New Zealand) v Brosnahan set out the purpose of an entire agreement clause in these terms:11
[15] An entire agreement clause, however, is not absolute or conclusive. Section 4(1) recognises a wide judicial discretion to determine whether it is “fair and reasonable that the provision should be conclusive”. While the issue is to be determined “having regard to all the circumstances of the case”, the specified criteria focus the inquiry on an assessment of the relative positions of the parties and their access to independent legal advice. Its apparent purpose is to protect one party’s relative vulnerability from another party’s power to impose an exemption from liability which is contrary to the factual reality or an existing legal obligation and is thus unreasonable and unfair. Section 4(1) is a mechanism for striking balances, both individually between parties and conceptually between freedom of contract and unfair or unreasonable commercial conduct. (See also Dawson and McLauchlan The Contractual Remedies Act 1979 (1981) at 36-40.)
[144] The policy grounds for the courts’ reluctance to look behind entire agreement clauses in commercial transactions without a finding of fraud are, first, commercial people acting in good faith when entering into substantial transactions should be able to achieve certainty by agreeing to exclude liability for prior statements; and,
secondly, it is desirable that written contracts should be drawn to state all the terms
11 PAE (New Zealand) v Brosnahan [2009] NZCA 611.
of the intended bargain, thereby avoiding the uncertainties which arise from allegations of verbal misrepresentations.
[145] In deciding whether it is fair and reasonable that the disclaimer should be conclusive, I take the following factors into account:12
(a) The Agreement arose out of a commercial transaction involving the sale of the assets of a business for approximately three quarters of a million dollars.
(b)There was no disparity between the respective bargaining strengths of the parties. There was a due diligence process13 which was extended.14
Although Mr Ralph was not an expert in the area of specialist machines, he was nonetheless an experienced business person. He could have engaged his own engineer for advice before declaring the Agreement unconditional.
(c) There was no evidence as to what, if any, legal advice was taken by either party. However, the Agreement was conditional on the purchaser’s satisfaction as to all matters arising out of due diligence. There was therefore time to involve lawyers and other experts and to require the provision of warranties as to the quality of machinery if Mr Ralph regarded them as sufficiently important. Mr Ralph was alive to that possibility.15
(d)To deny the natural meaning of an entire agreement clause in this context would have two contrary effects:16
First, it would resurrect or reinstate a representation which the parties had agreed was inoperative or of historical importance. Second, it would convert the alleged representations … into an implied warranty when they were expressly excluded.
12 See generally, Herbison & Goodyear v Papakura Video Ltd [1987] 2 NZLR 527 at 540-541;
Bird v Bicknell [1987] 2 NZLR 542 at 552.
13 It is not a defence to say, where a person wrongfully represents information, that the other party could have discovered it by seeking independent advice or asking the right questions. The emphasis here is on the circumstances and context of the disclaimer.
14 From 19 December 2013 to 20 January 2014.
15 See [124] above.
16 Brosnahan, above n 11, at [22].
(e) Mr Ralph did not seek to include express warranties in the Agreement. The effect of the disclaimer is that any implied warranties are excluded. It is reasonable for commercial parties to stipulate that any important matter covered in pre-contractual negotiations will be incorporated into the contract and not be separately actionable. In Brownlie v Shotover Mining Ltd, the Court of Appeal upheld a no reliance clause to similar effect as the disclaimer
in this case.17
[146] On balance, I am of the view that it is fair and reasonable to hold the parties to the disclaimer contained in the Memorandum. In all the circumstances, the disclaimer should be given effect and be conclusive as between the parties.
[147] The result is that Mr Ralph is not entitled to relief in respect of any statements in the Memorandum, even if they were misrepresentations.
In any event, does Closurepac have a cause of action when the representations were not made it to and it purchased the Business as nominee under the Agreement?
[148] Even if Mr Ralph were induced to enter into the Agreement on the basis of misrepresentations and the disclaimer was of no effect, a plaintiff must show it was induced to enter the contract by the alleged misrepresentations as a prerequisite to obtaining relief under the CRA.18
[149] The Agreement was between the first defendant and Mr Ralph “or nominee”.
[150] This issue caused the plaintiff to seek leave to file an amended statement of claim. The plaintiff’s position is that the misrepresentation induced Mr Ralph to enter into the Agreement and:
The Agreement was for the benefit of the Plaintiff as Mr Ralph’s nominee and the misrepresentations were to be treated as if they were a term of the Agreement.
17 Brownlie v Shotover Mining Ltd CA 181/87, 21 February 1992. In that case the clause was in the contract itself.
18 Savill v NZI Finance Ltd [1990] 3 NZLR 135 (CA).
[151] The plaintiff relies on s 4 of the Contracts (Privity) Act 1982 which provides:
Deeds or contracts for the benefit of third parties
Where a promise contained in a deed or contract confers, or purports to confer, a benefit on a person, designated by name, description, or reference to a class, who is not a party to the deed or contract (whether or not the person is in existence at the time when the deed or contract is made), the promisor shall be under an obligation, enforceable at the suit of that person, to perform that promise:
provided that this section shall not apply to a promise which, on the proper construction of the deed or contract, is not intended to create, in respect of the benefit, an obligation enforceable at the suit of that person.
[152] In Laidlaw v Parsonage, the Court of Appeal held that the description “and/or nominee” was sufficient to bring a nominee within s 4.19 This approach was upheld by the Supreme Court.20
[153] While s 4 of the Contracts (Privity) Act gives a nominee the benefit of a promise contained in a deed or contract, the representations on which Closurepac relies were not contained in a deed or contract. The issue is whether a nominee is able to rely on s 4 of the Act to claim damages on the basis that the misrepresentations inducing the Agreement may be enforced as though they were broken terms of the Agreement.
[154] Conflicting authorities were referred to. The defendants rely on the decision of Cashmore v Sands wherein Clifford J considered a case involving a sale and purchase agreement recording the purchaser as “C R Cashmore and/or nominee” where the property was purchased by the Cashmore Family Trust.21 The issue in that case concerned representations made prior to the contract being entered into. Clifford J considered two questions. Was the family trust in the position to bring a claim under s 6 of the Act which requires a claimant to be a party to the contract in
question? Secondly, even if it could, could the trust be said to have been induced to enter into the contract by the alleged misrepresentations in a context where it was not until after the contract was signed that the decision had been made for the trust to be
nominated as purchaser?
19 Laidlaw v Parsonage [2009] NZCA 291, [2010] 1 NZLR 286.
20 Laidlaw v Parsonage [2009] NZSC 98, [2010] 1 NZLR 286.
21 Cashmore v Sands HC Wanganui CIV-2004-483-7, 7 February 2007.
[155] The factual context is, therefore, very similar to this case. There has been no evidence that, at the time the Agreement was entered into, the decision had been taken for Closurepac to be nominated as purchaser.
[156] Clifford J considered the wording of s 4 of the Contracts (Privity) Act counted against the trust being able to rely on it. Even it could, he did not consider the trust could have been induced to enter into the contract.
[157] The plaintiff relies on the Pragma Holdings Ltd v Great South 507 Ltd decision where Faire AJ (as he then was) said in the context of a strike out application:22
Although there is no specific statement of intent contained within the Contracts (Privity) Act 1982 itself, there is a reasonably clear intent from the general context. This intent is to provide the ability for third parties, for whose benefits contracts are made, to enforce such contracts. In short, its purpose is to give those parties a remedy. Its purpose would simply not be met if a person, who should benefit from a representation inducing the entry into contract, is left without a remedy.
[158] Faire AJ discussed the views of various commentators and concluded that a liberal interpretation of s 4 and the use of the word “contained” suggest that s 4 applies beyond simply the stated terms of the contract.23 He expressed the view that the Contracts (Privity) Act 1982 is a deliberate relaxation of the strict privity rules for people who are in situations where it would be essentially inequitable for privity of contract to exclude them from relief.
[159] That case is different from the present one in that there were four occasions when it was alleged a representation was made, both before and after contract. Factually, therefore, Pragma is easily distinguishable from the current case and from the Cashmore decision. The comments of Faire AJ must be seen in context.
[160] Mr Thompson endorses Faire AJ’s approach. In this case, the plaintiff, a company of which Mr Ralph is a director and shareholder, should be able to benefit
from representations made to Mr Ralph, in his submission.
22 Pragma Holdings Ltd v Great South 507 Ltd CIV-2005-404-1931, 30 August 2006 at [41].
23 Above n 22, at [40].
[161] The Memorandum noted that it was provided “at the request of the recipient”
and:
The information is confidential and is made available to the recipient on the basis of the confidentiality undertakings that have already been given to the recipient. Accordingly, this information (together with any information made available in connection with further investigation, if any) and the fact that the vendors or TSC are holding discussions with the recipient concerning the business must be held in complete confidence. Furthermore this document may not be disclosed or distributed to any other person without the prior written consent of TSC.
[162] There was no evidence that Mr Ralph obtained the prior written consent of Three Sixty to disclose the Memorandum to Closurepac. There was no evidence that Closurepac knew about the material statements in the Memorandum before it purchased the Business or that these statements had a material influence on its decision to buy the Business.
[163] In its commentary on s 4, Gault on Commercial Law addresses the issue saying:24
Note that these words do not included an inducing misrepresentation; in a contract between A and B for the benefit of C there is no remedy available to C against A if B entered into the Contract in reliance on A’s misrepresentation.
[164] That must be the case. Section 4 is focused on a situation where a deed or contract confers or purports to confer a benefit on a person who is not a party. In this case, the representations were not in a deed or contract. Alternatively, if the plaintiff claims that the Memorandum could be construed as a contract whereby information was disclosed in consideration of the confidentiality undertaking, then there was no mention at the time any such contract was formed that it was for the benefit of a third party. Indeed, the confidentiality provisions specifically suggest otherwise.
[165] I am not at all persuaded that, because Mr Ralph is the director and shareholder of the plaintiff, Closurepac should be able to rely on representations
made to Mr Ralph. Closurepac is a separate legal entity. There was no suggestion
24 Thomas Gault (ed) Gault on Commercial Law (online looseleaf ed, Brookers) at [CP4.01].
that the representations were made to Mr Ralph in his capacity as a director of Closurepac. Mr Ralph’s status as a director does not of itself entitle Closurepac to claim his knowledge should be imputed to it. The knowledge of a director is not automatically imputed to the company and has to be proved.25 It can be inferred that Closurepac purchased the Business because it was a limited liability company and it sought the advantages of limited liability. With the advantages come the
disadvantages. A party cannot have it both ways and seek the benefits of limited liability but claim the company and the individual are one and the same when it suits.
[166] An additional hurdle is the basis on which the representations were made: the disclaimer. Pursuant to its proviso, s 4 of the Contracts (Privity) Act does not apply to a promise which is not intended to create an obligation enforceable at the suit of the third party. That is clearly the case here because the disclaimer states that the Memorandum cannot be disclosed or distributed to any other person without consent. There is no evidence of any such consent.
Agency
[167] The only basis on which Mr Ralph’s knowledge of the Memorandum could be imputed to Closurepac is if he were acting as its agent at the time he was given it. A principal is not imputed with knowledge possessed by its agent where the agent obtained information before the commencement of the agency.26 The evidence supports the proposition that Mr Ralph was acting in his personal capacity as an investor until he nominated Closurepac as the purchaser on 30 January 2014. There was no evidence that Mr Ralph was acting as the plaintiff ’s agent for the purpose of its purchase of the Business. The onus is on the plaintiff to establish that he was its
agent at the time he received the Memorandum.
[168] The fact the Agreement provided for a nominated purchaser indicates that
Closurepac’s involvement was not known at that time. If it had been contemplated
that Closurepac would buy the Business then the Agreement would have been in its
25 El Ajou v Dollar Land Holdings Plc [1993] EWCA Civ 4 per Hoffman LJ at 705.
26 Hickman v Turn and Wave Ltd [2011] NZCA 100, [2011] 3 NZLR 318 cited in John Burrows, Jeremy Finn and Stephen Todd Law of Contracts in New Zealand (4th ed, LexisNexis, Wellington, 2012) at 649-650.
name. Furthermore, the confidentiality undertaking Mr Ralph gave in respect of the Memorandum is inconsistent with an agent's duty to communicate information to his principal. That Mr Ralph had bound himself not to disclose the information to anybody supports the conclusion that no agency existed at the critical time.
[169] The consequences for Closurepac are that its claim under the Act must fail. Closurepac cannot come within the requirement for damages under s 6 because it was not induced to enter into the Agreement by a representation made to it.
Effect of disclaimer
[170] Even if Closurepac were entitled to rely on the Memorandum, it must also accept the terms on which it was disclosed. The disclaimer would therefore have effect with the result that Closurepac is not entitled to relief in respect of any misrepresentations in the Memorandum.
The Fair Trading Act
Were the representations made to the plaintiff objectively misleading?
[171] Section 9 is directed at promoting fair dealing in trade by proscribing conduct which, objectively speaking, is deceptive or misleading. The Supreme Court in Red Eagle Corporation Ltd v Ellis said the answer to that question will naturally depend upon the context, including the characteristics of the person or persons said to be
affected. The Court explained:27
Conduct towards a sophisticated businessman may, for instance, be less likely to be objectively regarded as capable of misleading or deceiving such a person than similar conduct directed towards a consumer or, to take an extreme case, towards an individual known by the defendant to have intellectual difficulties.
[172] The question is whether a reasonable person in Mr Ralph’s situation – based on the characteristics known to the defendants or of which the defendants ought to have been aware – would likely have been misled or deceived. If so, a breach of s 9
has been established.
27 Red Eagle Corporation Ltd v Ellis [Red Eagle] [2010] NZSC 20, [2010] NZLR 492 at [28].
[173] To answer that question, it is necessary to again inquire into the relevance of the disclaimer contained in the Memorandum.
[174] If the conduct, as a matter of fact, was misleading and deceptive, then the presence of an entire agreement clause cannot alter its character. A party cannot contract out of the s 9 prohibition on misleading or deceptive conduct. The policy is aimed at consumer protection.
[175] However, the Court of Appeal in David v TFAC Ltd held that the policy consideration has less force in the context of commercial transactions which involve independently advised parties negotiating from positions of equality.28 The Court said it is difficult to see why, in those circumstances, parties should not be permitted to allocate risks between them by contracting out of the FTA.29 That case concerned a franchise agreement which contained a clause stating that the purchasers of the franchise should obtain independent legal and accounting advice. The High Court decided it was unreasonable to give weight to the independent legal advice and acknowledgment clauses as the effect would be to defeat the purpose of the FTA. In a judgment delivered by Arnold J, the Court of Appeal disagreed, saying:
[65] While we hesitate to disagree with the Judge on an assessment of this type, we consider that the Judge was wrong to discount the effect of the independent advice requirement and acknowledgement clauses in the way that he did. The JHS documentation was consistent in saying clearly and repeatedly that those considering taking up a JHS franchise should obtain independent legal, accounting and business advice from people with experience in franchising. The documents made it clear that JHS would assist those independent advisors by providing information and such like. Far from being downplayed or ‘buried’, this advice was placed to the forefront.
[66] We accept that the failure to take independent advice in the face of a recommendation or requirement to take it will not excuse conduct that is misleading or deceptive. Where a person wrongfully conceals information for example, it is no defence to say that the other party could have discovered it by seeking independent advice or asking the right questions. But here the purpose of emphasising the need for advice from experienced independent advisors was so that those advisors could assist potential franchisees, particularly those without experience, by advising on the legal, financial and business aspects of the proposed franchise arrangement. Clearly the JHS people were unwilling to provide such advice themselves, but were willing to provide relevant information to independent advisers
28 David v TFAC Ltd [2009] NZCA 44, [2009] 3 NZLR 239.
29 Above n 28, at [61].
[176] As I have concluded above, this was a commercial transaction involving no disparity in the bargaining strengths of the parties.
[177] Section 9 cannot be elevated to the status of a general warranty. Elias J (as she then was) in Des Forges v Wright explained:30
Some caution is perhaps proper in cases of commercial dealings between parties at arm’s length. Section 9 is not to be turned into a general warranty by the vendor of the expectations of the purchaser …
The Fair Trading Act is not designed to provide a guarantee to purchasers who fail to look after their own interests in a manner which is reasonable in the circumstances.
[178] The position then “returns in circular fashion” to the conclusion that there should be no general or implied warranties and that only any express warranties are of operative force.31
[179] Relevant also are the considerations discussed earlier as to the context and correction or qualification of any misrepresentations the Memorandum may have contained.
Is there a causal link between the misleading conduct and loss or damage?
[180] Even if the breach is proved under s 9, the next question is whether it can be proved that Closurepac has suffered loss or damage “by” the conduct of the defendants. That inquiry triggers the practical or common-sense concept of causation.32 The Supreme Court has said that the impugned conduct does not have
to be the sole cause but it must be an effective cause.33
[181] The purpose of the disclaimer was to prevent reliance on the information it contained.34 There was therefore no causation as required by s 43 of the FTA.
[182] The operating cause of loss or damage was not the representations. Rather, it was arguably insufficient due diligence and/or the decision to buy the Lamfi in
30 Des Forges v Wright [1996] 2 NZLR 758 (HC) at [765].
31 Brosnahan, above n 11, at [44].
32 Red Eagle, above n 27, at [29].
33 Red Eagle, above n 27, at [29].
34 Brosnahan, above n 11, at [46].
preference to adapting the existing machines. I stress I do not criticise the decision to buy the Lamfi for business reasons but am not satisfied, on the evidence, that it was required as the plaintiff contends. Although a claimant’s own carelessness does not preclude a claim under the FTA, it can nevertheless be a bar to action if the conduct of the claimant is such as to destroy the causal connection between
contravention and loss or damage.35
Conclusion
[183] For these reasons, the FTA claim cannot succeed.
Result
[184] For the reasons given, the plaintiff’s claims fail.
[185] If costs cannot be agreed, the defendants have leave to file a memorandum within 28 days of the date of this decision and any response from the plaintiff is
required 14 days thereafter.
Thomas J
35 Red Eagle, above n 27, at [30].
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