Coburn v Newport HC Wellington CP17/01
[2004] NZHC 1014
•6 August 2004
IN THE HIGH COURT OF NEW ZEALAND
WELLINGTON REGISTRY CP 17/01
BETWEENALAN COBURN & DALE MARGARET COBURN
First Plaintiffs
BETWEENINSTALLER SERVICES (MANAWATU) LIMITED
Second Plaintiff
AND DAVID A NEWPORT
First Defendant
ANDDEAN STEVEN CORRY & SELWYN HURSTWOOD JACKSON
Second Defendants
AND INSTALLER SERVICES LIMITED
Third Defendant
CP 18/01
BETWEENGEOFFREY OWEN JAMES LEEMING & SHARON TRACEY LEEMING
First Plaintiffs
BETWEENINSTALLER SERVICES (WELLINGTON) LIMITED (IN LIQUIDATION)
Second Plaintiff
AND DAVID A NEWPORT
First Defendant
ANDDEAN STEVEN CORRY & SELWYN HURSTWOOD JACKSON
Second Defendants
AND INSTALLER SERVICES LIMITED
Third Defendant
Hearing: 29-31 July; 1,2 August 2002; 5-9 August 2002; 12-13 August
2002; 2 – 6 September 2002; 31 March – 3 April 2003; 8 April
2003; 25 July 2003
Appearances: P T Finnigan for plaintiffs
J G Matthews for defendants (for part); R A McL Fraser for defendants (for part)
Judgment: 6 August 2004
JUDGMENT OF DURIE J
Contents
Paragraph Number
Introduction 1
The business of Installer Services Ltd 12
Franchise sales 21
The sale of the Wellington franchise and 25
claimed representationsOperation of the Wellington franchise 46
The contractual and other arrangements 46
The progress and nature of the ISW 54
business
Deteriorating relationships between the 63
parties
What representations were made? 82
Introduction 82
“The Christchurch figures” 83
Representations on “existing work capacity” and “contracts in place”
100
Representations on projected contracts 122
Income representations 123The promise of support 132
Conclusion on representations 133
Aspects of inducement, deception and causation
137
Were the representations true? 146
What losses were sustained and who can claim them?
158
Introduction 158
Loss of profits 163
Who can claim loss of profits? 169Trading losses 170
Who can claim the trading loss? 176
Capital loss 177
The counter-claim and other relief sought by plaintiffs
183
What losses are recoverable? 189
Introduction 189
The ISW claim under the Contractual Remedies Act
192
The ISW claim under the Fair Trading Act 193
The Leemings’ claim under the Contractual Remedies Act
The Leemings’ claim under the Fair Trading Act
From whom can the recoverable losses be claimed?
The Leemings’ claim under the Contractual Remedies Act
The claims of ISW and the Leemings under the Fair Trading Act
202
206
209
209
210
Exemplary damages 219
Judgment 228
Introduction to the sale and purchase of the franchise for Manawatu
229
Operation of the Manawatu franchise 231
What representations were made and were they true?
On witness credibility
260
260
“The Tauranga figures” 263
The representations 282
The truth of the representations, inducement and loss
295
Competence to claim 310
The ISM claim under the Contractual Remedies Act
311
The ISM claim under the Fair Trading Act 312
The Coburn claim under the Contractual Remedies Act
The Coburn claim under the Fair Trading Act
The Coburn claim against Mr Newport in negligence for the capital loss
313
314
315
The Coburn claim for exemplary damages 316
Rationalisation of claims 317
Losses 323
Loss of profits and trading losses 323
Mitigation 328
Final assessment of loss of profits and trading losses
334
The capital loss 336
Liability 340
The Coburn claim under the Contractual Remedies Act
The Coburn claim under the Fair Trading Act
340
341
The counter-claim 344
Other relief sought by plaintiffs 346
Summary 348
INTRODUCTION
[1] These cases concern the sale of franchises for the installation of electronic and other accessories in cars. In each case the first plaintiffs are directors of two companies holding the franchise in their respective districts. The second plaintiffs are their respective companies, Installer Services Wellington (“ISW”) and Installer Services Manawatu (“ISM”). The first and second defendants are respectively, the sales manager and the directors of the franchisor, the franchisor being the third defendant, Installer Services Limited (“ISL”). ISW and ISM were part of a nationwide network of installers.
[2] In each case the first plaintiffs contend that they purchased the shares in their companies upon joint and several representations of the defendants, which they claim to be untrue. Those representations are claimed to have been, in brief, that work from national retailers was in place such as would produce a given return. The plaintiffs claim that that work was not in fact in place and that the given returns were not in fact achieved, or were not achieved from the work said to have been in place with national retailers. Both plaintiffs in both cases claim to have suffered consequential losses and seek compensatory damages under the Contractual Remedies Act 1979 and the Fair Trading Act 1986. Exemplary damages are also sought and compensatory damages in negligence in respect of the first defendant, the sales manager. In each case the compensatory damages sought are for trading losses, capital loss and loss of profits, amounting to some $260,000 in the ISW case and
$180,000 in respect of ISM. One other suit is said to be pending in respect of a third district.
[3] ISL counter-claims against the plaintiffs for breaches of restraint of trade covenants, and, in the ISM case, for failing to account for licence fees.
[4] The ISW and ISM cases are separate proceedings heard together for convenience although there are significant differences of fact. A major point of similarity, which has complicated both proceedings, lies in the method of franchising
– the directors of ISL incorporating both ISW and ISM to assume the licence or franchise for their districts and effecting a sale of the franchise by a transfer of the company shares. This has resulted in two plaintiffs claiming substantially the same relief in each case, ISW and ISM on the one hand and their respective director- shareholders on the other. However, the method was not uniformly applied, ISW assuming its district licence before the sale of its shares and ISM doing so only after the share transfer. The method of franchising, and the different ways in which that method was applied, has substantially affected who may claim what relief.
[5] For example, could ISW have been induced or misled in completing the licence agreement when, at the time of completion, the alleged perpetrators, the directors of ISL, were also directors of ISW? Can the present directors claim on the basis of the licence agreement, under the Contractual Remedies Act, when the licence agreement was a contract with ISW alone? And if the directors’ claim under the Contractual Remedies Act is limited to their contract for the purchase of shares, are they then limited to a claim for the capital loss?
[6] On both cases, an exemplary damages claim arises from the supply of figures of the operations in other districts to support the representations that had been made. It is claimed that those figures were fabricated and were false. Indeed, it is claimed that in one case the trading figures related to a company that did not exist and to a business that had not in fact operated at the relevant time.
[7] The same allegations, of supplying false figures, and on different occasions, gave rise to several difficulties. In the first instance the alleged frauds were claimed to have become apparent only shortly before or during the course of trial, resulting in several adjournments, amendments to pleadings, applications for further discovery and the calling of additional witnesses. Secondly, it appeared to the plaintiffs that
false figures had also been supplied to other franchisees, leading to further evidence that it was sought to admit by way of similar fact. In the result, the claims became broken up to hearings in disjointed stages.
[8] The seriousness of the allegations called for a careful and detailed consideration of the relevant evidence that added not only to the length of the trial, but to the length of this judgment. The claims were strenuously contested with an inference that the fabrications might in fact be the art of disgruntled franchisees in an endeavour to bolster their arguments against the franchisor. In their evidence the defendants also challenged the honesty and integrity of the Wellington plaintiffs, and extensive evidence contending that the plaintiffs in both cases were the authors of their own misfortune through bad business management or through ulterior motives evidenced by their continuing in business under other guises. The latter is relevant to loss mitigation but the seriousness of the counter-allegations on honesty also added to the length of both the proceedings and this judgment.
[9] In the event that misleading or untruthful representations be proven, and be proven to have caused loss, the questions of law relate mainly to the application of the facts to the criteria of the Contractual Remedies and Fair Trading Acts, especially, as already mentioned, having regard to the multiplicity of plaintiffs and defendants due to the way in which the contracts were arranged. There are also two particular legal issues. The first is whether, under the Fair Trading Act, trading losses and loss of profits are both recoverable in the circumstances of these cases. The second concerns the propriety of an award of exemplary damages under the Fair Trading Act or Contractual Remedies Act, and, if such damages are appropriate, then the proper principles to apply in the case of multiple proceedings.
[10] Reverting to the factual background, there was no alternative but to accept as inevitable a submission for the defendants, in closing, that there could be no broad- brush approach in reaching a conclusion and that careful and detailed analysis was required. I then regret to counsel and the parties that, as closing submissions had necessarily to be slotted into an existing programme of commitments to the end of last year, and as arrangements were already in place for some leave in the first half
of this year, it was not possible to complete or attempt to complete until now the detailed analysis that was required.
[11] Mr Finnigan appeared for both plaintiffs in each proceeding. Mr Matthews appeared for each defendant but for two sittings Mr Fraser appeared in his stead. Mr Matthews appeared on closing submissions but Mr Fraser signed the written submissions. To avoid complications, reference is made to defence counsel without naming them, but with no disrespect intended.
THE BUSINESS OF INSTALLER SERVICES LIMITED
[12] The third defendant, ISL, of which the second defendants, Dean Corry and Selwyn Jackson, are directors and shareholders, was incorporated at Christchurch on 10 July 1997 to franchise, nationwide, the business of installing (and repairing) mobile electronic products in vehicles. Those products included stereophonic sound systems, band expanders, mobile phones and security alarms. At the relevant times the first defendant, David Newport, who operated from Auckland, was engaged by ISL as sales manager, initially on a commission basis, to locate suitable franchisees.
[13] Previously, Mr Corry, having established himself as a sole trader in Christchurch importing car sound systems, had concluded that only specially trained persons should generally effect their installation. He said there were major retailers of audio products who considered the same and that to meet the consequential demand in Christchurch he had begun an installation business there in partnership with another.
[14] In 1994 Mr Jackson joined Mr Corry’s importing business which was then incorporated as Tectonic (1994) Ltd (“Tectonic”). In 1996, Mr Corry’s installation partnership was dissolved; Mr Corry continued to provide an installation service when required but at the same time Mr Corry and Mr Jackson resolved to franchise the installation operation nationwide. The country was divided to a large number of districts and franchise sales began.
[15] Good expectations for prospective franchisees were projected on Mr Corry’s perception that retailers were seeking specialist installers, that these retailers were generally operating nationwide, and that it would appeal to nationwide retailers to treat with a company which could offer a nationwide and specialist installation service. However, retailers were not the only customers to be anticipated. Mr Corry’s experience was that car retailers and dealers sought installation services prior to or at the point of car sales, and his projection was that companies with large vehicle fleets, locally or nationally, would likewise seek reliable installation, repair and upgrade services.
[16] Further expectations were founded on Mr Corry’s ability to secure agreements with major suppliers, on an increasingly nationwide basis, as district installation services became operational. His method, therefore, as he explained in his brief of evidence, was as follows:
We promoted the sales of franchises in the first two years on the basis that [the franchisees] would derive their work from their local market, and once we built up a nationwide network that there would be work coming to them as a consequence of nationwide installation contracts which we were endeavouring to put in place.
[17] He qualified that later by asserting that certain arrangements were in fact in place when the relevant franchise sales began, but, based on Mr Corry’s own evidence, the substantive source of work for franchisees was contingent upon ISL gaining the necessary contracts from national retailers.
[18] At the time that Mr Corry’s proposals were formulated, he was installing, locally, for Noel Leeming and Bond and Bond (of Pacific Retail Group). Both were national retailers and, while there was no written agreement, in Mr Corry’s evidence, he was under pressure from Noel Leeming to make the ISL service available to other Noel Leeming outlets. His evidence was also that in 1997 he secured local arrangements with Bell-South (now Vodafone) and Smiths City (operating only in the South Island). In his evidence, Mr Jackson referred also to there being an arrangement with Repco at that time.
[19] Accordingly, the defence evidence described as the first essential element of the ISL franchise strategy that franchisees would develop a business derived initially from canvassing the local market, mainly car dealers and individual retailers, with more major work coming to them in time as contracts with major retailers were put in place by ISL. This may be called, by way of shorthand, a “mutual reliance model” where the franchisee is expected to drum up local work and the franchisor is expected to provide, in time, the more substantial turnover from contracts with major retailers and corporates. All of this sounded very sensible, but a major issue in this case is whether the mutual reliance model was in fact conveyed to the plaintiffs when they acquired their franchises, or whether the plaintiffs were led to believe instead that the work was already there, waiting to be taken up.
[20] Two features of the ISL franchise operation were stressed by Mr Corry in evidence. The first, referred to in evidence as the “mobile installer model”, was that the franchisees were not to operate from workshops but from their own cars, travelling to the vehicles to be serviced, and using mobile telephones. He considered this would ensure a minimal overhead utilising a one person operation. Both of the franchisees who are plaintiffs in these cases, and also other franchisees who gave evidence, considered the model was impractical and they opened workshops. The impracticality appears to have been conceded by ISL. Indeed, the Christchurch franchise as operated by Mr Corry appears to have developed a workshop at an early stage.
[21] The second feature that was stressed was that franchisees were not to be involved in retailing products but would merely install. This was to secure the confidence of retailers. Mr Corry considered it necessary to undertake to retailers that ISL operators would not operate in competition through selling products themselves. There is no dispute that “no-retailing” formed part of the business strategy.
FRANCHISE SALES
[22] The first franchise sold was for the Auckland district, Mr David Johnson acquiring that franchise in July 1997. Installer Services Auckland Ltd (“IS
Auckland”) was incorporated for that purpose. The second sale gives rise to the proceeding first to be considered in this case. This was for the Wellington district, an agreement being completed with Geoffrey and Sharon Leeming in December 1997. ISW was incorporated to suit. Having regard to the complexity surrounding the record of franchise sales in other districts, Mr Finnigan did not attempt to adduce evidence of all the franchise sales, but the following sales were referred to in evidence as following after the Wellington sale. Martin Baltzer acquired the Gisborne franchise. Then, Installer Services Christchurch Ltd (“IS Christchurch”) was incorporated in December 1997 with Mr Corry and Mr Jackson as director- shareholders. Previously, as mentioned, Mr Corry had provided an installation service. In Mr Corry’s evidence, IS Christchurch did not begin operations until January 1998.
[23] Installer Services Nelson Ltd was then established with Mr Maitland as franchisee in July 1998, and Installer Services South Auckland Ltd, under Colin Hamilton, was established in September of that year. Also in that year Colin Wilson sought the franchise for the Hamilton district.
[24] The second proceeding to be considered in this case arises from the sale of the franchise for Manawatu to Alan and Dale Coburn in December 1998. The only subsequent franchise sales that became relevant in the hearings was the sale of Installer Services Bay of Plenty Ltd to Phillip Macquarie in July 1999 and of the Hutt Valley franchise to Sue and Andrew Colson in about September 1999.
THE SALE OF THE WELLINGTON FRANCHISE AND CLAIMED REPRESENTATIONS
[25] Mr and Mrs Leeming were introduced to the ISL business and the prospect of taking the Wellington franchise by an advertisement in the Business Listing Bureau on about 28 October 1997 as follows:
[26] When that advertisement was placed, Mr and Mrs Leeming were living in Palmerston North, where they owned a home and had a young family. However, they were interested in forming a new business and were willing to relocate if necessary. Earlier, Mr Leeming had been employed for five years in work that involved electrical wiring and components in vehicles, including radios and radio- telephones. He had since been mainly engaged as an owner-driver in the transport industry and had operated, part-time, a pest destruction business. Mrs Leeming had had some experience in managing office accounts.
[27] The Leemings were interested in the business as advertised and Mr Leeming promptly telephoned Mr Newport. As has been mentioned, IS Christchurch was not an operative franchise at that time, and the only previous franchise was that which Mr Johnson had taken up only a few months previously in Auckland.
[28] In Mr Leeming’s evidence Mr Newport made a number of representations about the proposed franchise which are now summarised as follows:
· That ISL had contracts in place for installation work with all major motor companies and nationwide suppliers;
· They needed a Wellington franchise because of all the business which was available;
· That it would not be a matter of getting the work in but of keeping up with the work;
· That ISL had major corporate deals happening every week based on exclusive contracts and guaranteed work; and
· Christchurch was turning over more than $500,000 and the Wellington franchisee could expect over $100,000 “in the hand”.
[29]The franchise cost was $50,000.
[30] Mr Newport denied each claimed representation, save to the extent of saying that someone was needed for Wellington because of the business there. He said he rather described the operation according to the “mutual reliance model” as outlined at para [19]. He denied mention of exclusive contracts or guaranteed work and admitted only to “arrangements” being in place with retailers. He denied knowledge of the Christchurch turnover and denied mentioning that which the Leemings might receive in the hand, but he did recall expressing an opinion that Mr Leeming could derive a turnover of $100,000 after a short time. In his view, a business generating
$100,000 in the hand would have sold at between $150,000 and $200,000. The figure of $100,000, as Mr Corry stated in evidence, had been given to Mr Johnson by Mr Corry, Mr Corry stating only that in his opinion that turnover was achievable after a short period.
[31] Shortly after, Mr Corry telephoned Mr Leeming. Mr Leeming asserts that Mr Corry then represented as follows:
· There was a heavy demand for an installer in Wellington and within six months Mr Leeming would have to employ at least two more staff to keep up with the work;
· Installer Services had major installation contracts in place with the likes of Repco, Vodafone, Noel Leeming and Dick Smith, and in Wellington there was no-one on the ground to do the work. These contracts were exclusive to ISL;
· That Christchurch was turning over half a million and there would be something wrong if Mr Leeming did not have $100,000 in the hand at the end of the year;
· That there were no real overheads, no stock and the charge-out rate of $75 per hour was a minimum; and
·That ISL had systems in place to manage the whole system.
[32] In support of that, according to Mr Leeming, Mr Corry stated to the effect that ISL had generated all the work for the Auckland franchisee, Mr Johnson, through retailers and national car importers, that Mr Johnson was run off his feet, and that the same would apply in Wellington.
[33] Mr Leeming added that Mr Corry also undertook to forward material on ISL subject to Mr Leeming first executing a confidentiality agreement.
[34] Mr Corry generally denied making the representations as alleged. While accepting that he would have referred to a “heavy demand”, he would not have envisaged extra staff, that being contrary to the sole-operator, mobile installer model that he said he had promoted. Mr Corry denied referring to contracts being in place and considered he would rather have outlined the mutual reliance model, described at para [19], the existing Noel Leeming arrangements and his contact with Repco and Dick Smith. Vodafone did not then exist (though Mr Leeming may have been intending to refer to its antecedent, Bell-South). Mr Corry said he did not represent that there were exclusive contracts but would have explained the intention to seek
such contracts. He denied estimating the Wellington turnover or referring to that of Christchurch, deposing that he did not discuss finances on the telephone with unknown persons. He recalled that finances were discussed with Mr and Mrs Leeming at a later meeting, on 14 November (to which reference is made at para 36). He considered he would have described the work fed to Mr Johnson from Kia Cars but would have described that Mr Johnson had also to build up his own work, and that he suggested contacting Mr Johnson only at the meeting of 14 November.
[35] It is mentioned that in the Leemings’ statement of claim no reliance is placed upon these alleged representations of Mr Corry by telephone, but they were relied on at the hearing. In the final analysis, which will follow shortly, the point is of marginal significance, but it does not appear that the defendants have been prejudiced by the lacuna in the pleadings. The evidence on this matter was disclosed in a brief given in advance of hearing and was answered in considerable detail.
[36] Mr and Mrs Leeming then met with Mr Corry at a café in Wellington on 14 November 1997. In Mr Leeming’s evidence, Mr Corry then stated:
· The work was in place in Wellington, someone was needed urgently to service it and as soon as the franchise was operating he would pump the work through;
· That he had agreements with Dick Smith, Noel Leeming and Pacific Retail Group for ISL to carry out their installation work exclusively;
· That he had contacts with big car importers, with the Kias and Fords and all the cars being built up in New Zealand; and
· That Christchurch had turned over $546,000 in the previous 12 months and that, as an importing port, Wellington could do as well.
[37] Mr Leeming’s evidence was that Mr Corry then handed him some written material about ISL.
[38] Again, Mr Corry denied saying that there were contracts in place with those named but considered that he would have mentioned the contacts he had and the mutual reliance model as already described. He denied that in the discussion on finances he made reference to a Christchurch turnover.
[39] Following Mr Corry’s suggestion, Mr Leeming telephoned Mr Johnson on 15 November. According to Mr Leeming, Mr Johnson said that he was having trouble keeping up with the business and work demand and that contracts were being fed to him. According to Mr Leeming, Mr Johnson also thought that he, Mr Johnson, had made a good move in purchasing his business and that he was looking to employ his brother. Mr Johnson, who gave evidence for the defendant, generally agreed that he would have commented along those lines. This was despite the fact that he had then been operating only four months and his accounts to 31 March 1998 showed quite a small turnover and a net loss. Mr Johnson, who was a friend and flatmate of the first defendant, Mr Newport, plainly exaggerated the position, but this proceeding is not against him.
[40] There is no dispute that before then, Mr Newport and Mr Corry had both promised to supply further information but only after completing a confidentiality agreement. Mr Newport had faxed a confidentiality agreement on 3 November 1997 to Mr Leeming’s accountant in Palmerston North, Dennis Portch. It was promptly signed and returned, that day. On 4 November, Mr Newport then faxed copies of papers that appear to have been taken from computer records, providing an overview of ISL’s operations. These papers represented that ISL provided a nationwide installation network. The material also represented that “currently” ISL did installation work for Noel Leeming, Kenwood, Dick Smith Electronics, Repco and Eurovox; and was in negotiation with Bond and Bond and Cellular Solutions. Soon afterwards, Mrs Leeming received further information, which she said was received by post from Mr Corry. The total material claimed to have been received from Mr Corry, either personally at the meeting of 14 November or later by post, as now described, comprised five pages, again as though they were extracts from a computer compilation. This represented that Installer Services group had, as customers, Dick Smith, Noel Leeming and Repco, and that ISL was “currently in advanced stages of
negotiation with Bond and Bond, Bell-South, Telecom and Prorack”. Several other businesses were referred to as potential customers.
[41] That leaves the most contentious item of evidence in the Leemings’ case. It concerns one of the pages claimed to have been sent, referred to in the proceedings as document 3.22. The first sentence on that page appears to link to another of the pages providing a price list for installing Uniden alarms. The page in contention read:
Enclosed is our current price lists for one of our major customers. Our charge out rate works out at $75.00 per hour. A top quality installer costs $15-$20 per hour to hire including bonuses. Below is a summary of business in 1996.
Installer Services Christchurch 1996
Sales
Labour $302,532
Band Expanders $ 87,429
Car Audio $ 46,974
Alarms $ 6,698
Repairs $102,862Total Sales
$546,495
Cost of Sales
Wages $148,778
Phones $ 13,922
Purchases
Band Expanders $ 13,909 Car Audio $ 29,914
Alarms $ 2,396
Total Cost of Sales
$208,919
At $75.00 per you need only be busy 20-30 per week to have a pretty good week. Your territories figures will vary from Christchurchs’ figures as the composition of the business you receive will not be exactly the same. In the first 4 to 12 weeks business will be slow as you are introduced to our customer base and they get accustomed to sending work to you. Remember existing customers are waiting for you to open your Installer Services business in their area.
[42] In Mr and Mrs Leeming’s evidence the whole of the material that has been described as coming from Mr Newport and Mr Corry, was before Mr Portch when Mr and Mrs Leeming met with him to discuss the proposed business. In Mr Portch’s evidence he wrote “12 mths” on a photocopy of the page now in question (also produced in evidence) after the Leemings had confirmed to him that the trading figures given in document 3.22 were for that period. Mrs Leeming said that she was sent the original of document 3.22 while Mr Portch held a photocopy. She added that she telephoned Mr Corry from Mr Portch’s office to check that the figures covered a 12 month period and that Mr Corry confirmed that they did.
[43] It is now accepted by all parties that the 1996 trading figures given for ISL Christchurch in document 3.22 are a complete and total fabrication. This is borne out in the following background. Subsequent to the dissolution of the partnership under which Mr Corry had previously operated an installation service in Christchurch, in 1996, Mr Corry said he had provided no more than a limited mobile service, commencing from about January 1997. Intending franchisees were not necessarily aware of that fact and that in truth there was no Installer Services operation in Christchurch in 1996. The independent business that Mr Corry managed from January 1997 grew in time but operated as part of Installer Services Ltd. The independent IS Christchurch Ltd was not incorporated until December 1997, and did not begin trading until January 1998. The extent of the deception may be gauged by comparing the false account of a 1996 revenue of $546,495 with that actually achieved under IS Christchurch after it opened in 1998. For the three months to 31st March 1998 the total revenue was but $14,332 (net profit $6,836) and to 31 March 1999 the revenue was $214,271 (net profit $5,127).
[44] Each defendant has denied responsibility for the 1996 Christchurch figures or knowledge as to how the Leemings came to possess them. Mr Corry accepted that the other material was sent. He also accepted that that he would have supplied the information in the preceding and succeeding paragraphs in document 3.22 but he denied that the page that was sent would have contained the trading figures which were given.
[45] The falsity of the Christchurch figures, according to their evidence, was not apparent to the Leemings until shortly before the hearing. As has been mentioned, this new awareness resulted in considerable hearing delays, a re-working of the case, a call for further discovery and the marshalling of other franchisees as witnesses to depose that they too had received the same or similar figures, all fictitious, from ISL, when franchises were sold to them.
OPERATION OF THE WELLINGTON FRANCHISE
The contractual and other arrangements
[46] The Leemings agreed to purchase the Wellington franchise for the asking price of $50,000. I find on the evidence that they were keen to purchase but on account of the representations made to them. To complete that purchase, they were prepared to uplift their family and shift to Wellington and to fund their purchase from borrowing. They had a home in Palmerston North, which they retained, but borrowed further to build in Wellington. On the evidence they were under- capitalised when they entered into the purchase. They were then to increase their indebtedness with money owed to Tectonic, now a subsidiary of ISL, which supplied to franchisees such products as band expanders, speakers, head units and parts.
[47] A debt also remained owing in respect of the purchase price. The Leemings paid a deposit of $20,000 on 11 December 1997 and $25,000 on 23 February 1998, leaving $5,000 owing and which remained owing for a considerable time.
[48] Mr Corry said he was not informed that the Leemings had borrowed to buy. He had rather the impression that the Leemings were funding the purchase from their own capital. It was important to him, he said, that, in assessing the suitability of a franchisee, the franchisee would not start with a debt overload.
[49] To give effect to the sale, Messrs Corry and Jackson, who were the directors of ISL, had incorporated ISW, on 10 December 1997. Messrs Corry and Jackson became the directors and shareholders of that company as well. A licensing agreement was then completed between ISL and ISW on 11 December 1997. Mr
Leeming undertook training, as arranged by ISL, and then on 23 December 1997 he and Mrs Leeming took a transfer of the shares in ISW for the consideration of
$50,000. This was payable to Messrs Corry and Jackson as transferees. Messrs Corry and Jackson resigned as directors of ISL at the same time and Mr and Mrs Leeming became directors in their stead.
[50] As earlier indicated (at para 4), a consequence of this arrangement is that ISW (now in liquidation) is a plaintiff in this case, as the franchisee and claims loss of profits and trading losses arising from the misrepresentation under both the Contractual Remedies Act and the Fair Trading Act. Under the former Act, ISW relies upon the licensing agreement that it has with ISL. As a further consequence, Mr and Mrs Leeming claim the same losses and also the capital loss, under the Contractual Remedies Act and Fair Trading Act. Under the former Act they rely upon their contract with Messrs Corry and Jackson for the sale and purchase of the ISW shares.
[51] Under the licence agreement, ISW was obliged to pay a royalty or fee of 5% per annum of the gross revenue as defined. ISL was obliged to provide initial and ongoing training in the ISL business system, support in marketing and administration, operating manuals, and system updates. ISW covenanted not to compete for one year from termination. On purchasing the shares the Leemings also entered into a separate covenant in restraint of trade with ISW, not to compete during the term of the licence or for two years afterwards, or to be concerned or interested in any capacity with a business conducted in competition with ISL or other licensee.
[52] In this proceeding ISL counter-claims that the Leemings have breached this covenant. ISL points out that although the covenant was made between the Leemings and ISW, it was expressly given for the benefit of ISL with the intent that ISL would be able to enforce it.
[53] As already indicated, Mr Leeming undertook two weeks training before Christmas 1997. This was not done in Christchurch but was completed with an independent operator in Dunedin. Mr Leeming’s evidence is that he understood the reason to be that the Christchurch operation was too busy and did not have the
facility to train. The defendants dispute so saying for they now admit, contrary to the representation in the fabricated Christchurch figures, that no workshop was operative in Christchurch at the time.
The progress and nature of the ISW business
[54] To describe the subsequent progress of the Wellington business is no easy task in view of the parties’ conflicting evidence on numerous aspects and since the credibility of the main players on both sides is doubtful. Mr Corry’s evidence must be taken with a large grain of salt on account of his hyperbole, some inconsistencies and because he was proven not to be credible in telling respects (covered later). However, there were also inconsistencies in Mr Leeming’s evidence and his integrity was affected by large liberties taken with ISL operational requirements. This included evidence of not sharing information with ISL, as required, and of leaving ISL to carry his debts, in excess of $30,000, while expanding his business (engaging up to four staff members). There is compelling evidence too that he engaged in trading outside his license area, failed to account for “cash jobs” (one for $4,000), made incomplete returns for royalty purposes, retailed and established ancillary businesses contrary to licence requirements, and changed telephone numbers to obscure his operations.
[55] In the result much of the evidence from both sides has been discounted and it has been necessary to turn more to that which could be supported by other evidence, especially written material.
[56] The Leemings commenced operations in January or early February 1998 with Mr Corry visiting Wellington on 10 February to introduce the Leemings to customers. This gives rise to the first issue on which a finding is required as it informs on the extent to which the business had actually been arranged in advance and the support that was given to the franchisee to access it.
[57] Mr Leeming deposed that Mr Corry’s visit was unannounced, was for a half day only and involved only a visit to Noel Leeming and a Bond and Bond outlet. Those spoken to proclaimed they had no knowledge of ISL. Mr Corry gave detailed
and lengthy evidence that there were extensive visits “to potential sources of work”, to retailers, cell-phone companies and car dealers – over four days (initially represented as being for one week). However, it was established from credit card records that Mr Corry could not have been in Wellington for more than one day on that occasion. This is one of several instances when Mr Corry was caught out. His rejoinder was that he was mistaken as to the week but I cannot accept his evidence that he introduced Mr Leeming to extensive customers. Other evidence showed that arrangements were not in fact in place with national retailers at the commencement of the business and that Mr Leeming built up most of the work himself, by himself canvassing retailers and car dealers.
[58] That is not to say that Mr Leeming received no work from ISL sources. That will be considered later.
[59] A singular feature of this case is that a reasonable turnover was in fact achieved in the sense that, if all that was represented was a turnover of $100,000 per annum, that turnover was exceeded. Mr Leeming put this down to his own, untiring efforts. Having seen and heard him I have no doubt that he would have been most active in hunting down custom, with energy and directness, even to the point of bluntness. Mr Corry himself acknowledged, in one communication to Mr Leeming “When it comes to hard work and prospecting you are a hard act to match”. The Wellington turnover also exceeded the turnover of other franchise areas, including Christchurch at one stage. There is real difficulty, however, in apportioning turnover to that self-generated and that arising from arrangements or agreements between retailers and ISL, or that which resulted from the general ISL goodwill or the arrangements that they had in place for a telephone call centre and for a repair service.
[60] More particularly, company accounts show the continuing increase in sales: for about two months to 31 March 1998 - $6,668.00; to 31 March 1999 - $168,332; and to 31 March 2000 - $258,734. In his brief of evidence Mr Leeming referred to sales for the four months to August 2000 as being $89,709, which represents a further increase in sales over previous performance. The figures are not broken
down to months but the Leemings evidence is that the turnover was slow for most of the first year.
[61] It is not disputed that the mobile installer model was put up to Mr and Mrs Leeming before the contract was signed. Nonetheless, the Leemings appeared to have had no compunction in obtaining workshop lease premises very soon after their business began. The premises had been located by 10 February 1998 when, according to the Leemings evidence, Mr Corry’s approval was sought on the occasions of his visit that day, before the lease was executed. Mr Corry emphatically denied that such approval was given, although that was rather difficult to reconcile with the fact that Mr Corry also claimed credit for obtaining a reduced rental for the Leemings under a local authority business incentive scheme. However, Mr Corry was (justly) critical that the Leemings had not given the mobile installer model a proper run. I am of the view, from the evidence of other franchisees, that the mobile installer model was not entirely practical and that workshops were necessary, but those were early days and it is difficult to accept Mr Leeming’s evidence that business was slow for some time when the Leemings were willing to commit to extra overheads so early in the piece. In any event, any representations which may have been made as to profitability had now to be qualified by the fact that the Leemings were no longer following the original ISL model on which profitability had been addressed.
[62] That was not all. Notwithstanding the initial conception of the ISL franchises as being run by a sole operator, as early as about the beginning of March 1998 the Leemings engaged Steve Aldridge as a staff member (incurring in the process a recruitment fee of $2,500). Again, the engaging of staff would later become common amongst franchisees, but this again demonstrated the Leemings’ willingness to increase their indebtedness and overheads from very early in the piece. The Leemings’ response is that the figures showing a substantial turnover were due to having an extra staff member. However, the sales attributable to Mr Aldridge are not given and the whole does not sit comfortably with the Leemings’ complaints of slow business at first.
Deteriorating relationships between the parties
[63] From the Leemings point of view their confidence to take on a workshop and staff member followed the defendants’ representations as to profitability and most especially the representation that the business was there and waiting. Further support for the Leemings having had that expectation is the early and extensive emails to ISL commencing 9 March 1998. The first email complained that Mr Leeming and Mr Aldridge were having to conjure up the work themselves from wherever they could. While the complaints tended to focus on the Leemings own difficulty in meeting their debts and cost of living expenses, at heart was a complaint that the promised work was not there. It is also evident from those emails that the Leemings had canvassed those retailers who operated in Wellington and with whom ISL claimed to have contracts. They also canvassed several other businesses besides and were creative in sounding out the prospect of new types of work in new areas. The responses from ISL are as telling as the complaints. Rather than moving to establish a firm link between the franchisee and the so-called existing customer base, or the clients who were said to be waiting, the replies from Mr Corry, and to a lesser extent from Mr Newport and Mr Jackson, focused upon the work which might be anticipated. Increasingly it was evident that the work was more envisaged or hoped for than actually in place, as will be referred to later.
[64] In July 1998, an email from Mrs Leeming detailed complaints about lack of support and communication and made a particular complaint about the lack of an ISL presence to introduce the Leemings to Bell-South. This is one of the companies with which ISL claimed to have an existing contractual relationship. Mr Leeming said that he telephoned Mr Corry to say that when he approached Bell-South the staff said they had never heard of ISL which was contrary to what Mr Corry had earlier advised the Leemings. Mr Corry replied by suggesting that a barbecue function be held with Bell-South personnel, which Mr Corry would attend in order to make the introductions. Needless to say, Mr Leeming and Mr Corry gave entirely different accounts of the social, Mr Leeming contending that it showed that there was no arrangement at all with Bell-South and Mr Corry contending for the opposite. No conclusion is possible on the nature of the verbal exchanges save to the extent that Mr Corry acknowledged that he went to Wellington to have the Bell-South commercial arrangements put in place. But the evidence has significance in another respect as well. Based upon the Leemings own evidence it ought to have been
apparent to them, from the date of that function, 18 September 1998, that the existing customer base was a great deal less than that which the Leemings claimed to have been represented to them.
[65] Nonetheless, the Leemings carried on. As Mr Finnigan submitted, they had not the financial ability or business experience to simply walk away. They had financial commitments. In addition their turnover was still increasing and so they had cause to hope that a greater profit could be achieved in time. The complaint at that time was essentially that the greater part of the work they were generating was due, by far, to their own efforts and not to any arrangements that ISL may have secured. In view of their financial position, however, they retained their hope that the effervescent Mr Corry would secure new contracts, regularly posited as on the horizon, that would bring more work to them.
[66] In addition, two other matters should not be overlooked. In April 1998, ISL had advanced $4,000 interest free to assist the Leemings and was prepared to leave unsecured, certain amounts that the Leemings owed to them and to Tectonic. The second is that the Leemings did not receive their accounts for the first full year of trading, until August 1999 and accordingly, they did not have an adequate overview of their financial progress.
[67] The next event, again contentious, is relevant, credibility issues aside, only for the reason that as a result of it, the plaintiffs considered that from that point, 27 July 1999, their rather hopeful trust in Mr Corry could no longer be sustained. The short background is that upon completing the Wellington purchase, in December 1997, it was understood, by oral arrangement, that the Leemings could operate as well in the area of Hutt Valley, which was deemed to include Kapiti Coast, and would have an option to purchase the Hutt Valley franchise when later, it was put up for sale. I am inclined to accept the assertions of Mr Newport and Mr Corry that the option was for a limited period which had expired at the relevant time, as the option was not relied upon by the Leemings in their subsequent, acrimonious electronic messages to ISL. However, until the Hutt franchise was finally sold, Mr Leeming’s work in the Hutt Valley area had mutual advantages – an increased turnover for the Leemings and for ISL the development of goodwill.
[68] In March 1999 Mr Corry proposed the division of the Hutt franchise to two parts, one for sale, the other to be sold on the basis that the purchaser would hold it in equal partnership with Mr Leeming, Mr Leeming paying nothing but undertaking to manage the area. Presumably this was to compensate Mr Leeming for the goodwill he had developed there. However, Mr Corry changed his mind and without reference to Mr Leeming he sold that district to Andrew Colson, on about 21 June 1999. It may well be that a purchaser could not be found under a partnership arrangement, but Mr Leeming was not informed of the decision by Mr Corry, until 27 July 1999.
[69] This was another event that questioned Mr Corry’s integrity, notwithstanding his voluble attempts at explanations, but for other purposes its relevance is only that from this point, the ephemeral trust in Mr Corry’s promises finally evaporated. However, the Leemings still carried on in business.
[70] The Leemings had cause to feel aggrieved over the lack of communication on the Hutt franchise sale but that cannot excuse Mr Leeming’s subsequent trading in the Lower Hutt area at Mr Colson’s expense. That Mr Leeming did so trade is evident from such material as that supplied to Mr Corry by Mr Colson, the dispatch of advertising material to Lower Hutt businesses and the content of emails from ISL to which there is no record of any, or any adequate replies.
[71] There can be no doubt that the defendants also had cause to feel aggrieved about the Wellington operation. Apart from the poaching, the evidence is that the Leemings had large sums owing unsecured as a result of materials supplied by Tectonic, repair work sent for completion at ISL, unpaid royalties, an interest free loan made in 1998 to assist, and the balance owing on the franchise purchase. At one point, that owed was about $39,000. Nonetheless Mr Leeming had continued to expand his business, engaging more staff and had also borrowed to build a new house.
[72] Subsequently, the Leemings proposed to sell the business. This provides further background and informs of the parties’ credibility. It was resolved to sell through Mr Newport as it suited both ISL and the Leemings to present a united front
to prospective purchasers. Initially, on 3 January 2000, Mr Corry had sought to have the Leemings stay, attributing the Leemings’ lack of profit to management shortcomings having regard to the Christchurch turnover and net profit, despite the large salaries that Christchurch paid. However, Mr Corry’s figures were plainly inflated when compared with those later appearing in the Christchurch accounts. The manager, Charles Porter noted in evidence, that his salary, as recorded in the expenses, was considerably inflated as well.
[73] Equally, there were shortcomings in the material sent to Mr Newport by the Leemings to support their proposed sale. I refer to the representation as to new contracts with retailers having been signed and to details of projected turnover and anticipated expenses (wages and purchases) in the financial forecast. These could not be justified as projections from preceding trading accounts. Significantly, the trading accounts themselves were not supplied to prospective purchasers.
[74] In March 2000 the business was advertised for sale at $175,000, on the Leemings’ instruction, and was later reduced to $150,000. No sale eventuated. Mr Newport stated that a deposit for his fee was required, of $2,500, of which he received $2,000.
[75] At the same time as the sale was being considered the Leemings were considering other business opportunities. Mrs Leeming incorporated Striping Solutions Limited on 22 February 2000 to do car decoration work but which, in its publicity material, listed alarm, hands-free kits and car audio installations as amongst the services it would provide. The Leemings deny that such work was undertaken in fact and there is no evidence to say otherwise.
[76] Once it was apparent that a sale was unlikely the Leemings planned to continue the business independently of ISL, but retailing as well. They did so initially as Capital Car Audio. This was later changed to Audio and Security Specialists Limited (“ASSL”) which was incorporated on 18 July 2000.
[77] At the same time Mr Leeming was involved in setting up a meeting of 15 July 2000 of ISL franchisees. The defendants sought to draw the inference that Mr
Leemings purpose was to take other franchisees with him. However, that purpose was not recorded in the minutes of the meeting, which were produced, including the minute of what Mr Leeming had to say. In fact the meeting merely set out 10 points on which answers were sought from ISL. The minutes themselves were not sent to ISL for comment.
[78] The Leemings operated their new business from their existing premises and continued to use their ISW telephone number. ISL was not aware of this until about 17 August 2000 when legal action was threatened in reliance on the covenant in restraint of trade, as considered at para [52]. Soon after, ISL managed the Wellington franchise itself. On 5 September 2000 ISL purported to terminate the licence for a range of alleged breaches and to exercise its option of purchasing the ISW business at a value to be determined.
[79] Based on certain GST returns of ISW in 1999 and ASSL in 2000-2001, ASSL suffered a significant drop in sales, up to half in some cases.
[80] ISL commenced proceedings on 24 October 2000 based upon breaches of the licensing agreement. The plaintiffs commenced the present proceedings on 27 October 2000, after earlier advice of their intention to do so. In the first proceeding, and in response to an interlocutory injunction application, the Leemings undertook “to maintain [the ASSL business]”. Notwithstanding the undertaking, the ASSL business was sold – for $35,000 in February 2002. ISW went into liquidation on the application of ISL on 27 November 2000 with debts owing to ISL.
[81] Having described the operation of the Wellington franchise by way of background, reference is now made to the major issues in this case.
WHAT REPRESENTATIONS WERE MADE?
Introduction
[82] It is first necessary to come to a conclusion on the representations which, more probably than not, and bearing in mind the burden of proof borne by the plaintiffs, were made by Mr Newport and Mr Corry to the Leemings prior to the
franchise purchase. There is considerable difficulty in comparing the demeanour of the two principal witnesses as a basis for determining what oral representations are likely to have been made since it was shown that neither Mr Leeming nor Mr Corry was entirely honest and upright in their dealings. This affected the credibility of their evidence in Court. It therefore seems best to start with the written representations, beginning with the crucial issue over the authenticity of document
3.22 containing the admittedly false figures of Christchurch trading for 1996.
“The Christchurch figures”
[83] The Leemings’ position is that false representations were made as to the extent of business already in place with national retailers and that the page containing the Christchurch figures was dispatched as compelling evidence in support. The defendants admit that a page like that in document 3.22 was sent but not with the figures that now appear upon it from which it would follow that the document has been fabricated by other than the defendants. The conclusion to which I have come is that the plaintiffs have established, to a standard more stringent than a balance of probabilities (as necessary where fraud is alleged) that the document containing the Christchurch figures was posted to Mr and Mrs Leeming by Mr Corry in the pre-contractual period in the form in which it was put in, in evidence. I am also satisfied that Mrs Leeming telephoned Mr Corry, from her accountant’s office and was advised by him that the trading figures covered a 12 month period throughout 1996. The reasons for those conclusions follow.
[84] Initially, Mr Corry admitted the authorship and dispatch of all the material posted to the Leemings save for the page in question, that being document 3.22 as printed above at paragraph [41]. However, when questioned about the intent of the last paragraph he replied that that part had been “deliberately put into the document” for the reason that he gave, and so he was bound to concede that that paragraph had been sent by him. He then conceded that the first paragraph would have been sent. This seemed obvious by its reference to enclosing a certain price list that had in fact been despatched with the papers. That left only the trading figures themselves, in the middle paragraph, leaving defence counsel to argue, as it was put, “the document itself went but not with those figures on it”.
[85] Mention has already been made of the evidence of Mr and Mrs Leeming that the page in question was included in the material sent by Mr Corry, that Mrs Leeming telephoned Mr Corry from Mr Portch’s office, that Mr Corry confirmed the trading period as being for 12 months, and the evidence of Mrs Leeming and Mr Portch that Mr Portch then annotated a photocopy of the page to that effect. I accept the evidence of Mrs Leeming and Mr Portch on those matters as honest and reliable. The annotated photocopy was put into evidence.
[86] It must then be noted that Mr Corry was alerted to the document 3.22 when Mr Leeming referred to it in his written statement of evidence. Mr Corry gave a detailed response to that evidence but omitted any reference to the Christchurch figures as being false (the falsity of those figures being unknown to the plaintiffs at that time). His explanation, that at that time, no fraud had been alleged, was unconvincing given that he knew, and later admitted, that the figures were, as he put it, “a stunning misrepresentation”. A normal response would have been an immediate claim that the document put in, in evidence, was a fabrication of the document that he had sent. But he made no mention of the matter.
[87] Consistent with that, the defendants also did not disclose the annual accounts or prime records of IS Christchurch during discovery processes and indeed, these were not produced until during the trial.
[88] Defence counsel’s arguments left only the speculative possibility that Mr Leeming, or someone for him, had reshaped the document. Mr Jackson, when pressed in cross-examination, would not rule out that Mr Leeming had concocted the Christchurch figures and the page on which they appear in order to support his case and then to spread the figures amongst disgruntled franchisees aligned to his cause. However, quite apart from a font consistency over most parts of all the pages in the material dispatched, any suggestion to the effect described was conclusively ruled out, in my view, by similar fact evidence that was admitted for the purpose of alleging a consistent mode of operating in Mr Corry’s dealings with intending franchisees.
[89] There was considerable evidence on the subsequent dispatch of the Christchurch figures to other intending franchisees – for in each case, dispatch of the figures was denied. The admission of this and other evidence to which reference will later be made, was challenged. To the extent that it was put in as evidence of similar fact, Mr Finnigan relied on Cook v Evatt [1992] 1 NZLR 673 and Mood Music Publishing Co Ltd v De Wolfe Ltd [1976] 1 All ER 763 which is cited in the former case. In Cook v Evatt (supra) Fisher J expressed the principle that in a civil case evidence of similar fact will be admitted if it is logically relevant in determining a matter in issue before the Court, provided it is not oppressive or unfair to the other side and the other side has fair notice of it and is able to deal with it. In this case, the main concern was the first point, as to whether it was logically relevant. I am satisfied as to the relevancy of that evidence as demonstrative of a consistent pattern of conduct in the sale of franchises.
[90] Returning now to the evidence of other franchisees. In closing addresses there was no argument from the defendants’ counsel in opposition to the plaintiffs’ assertion that Mr Corry sent the same Christchurch figures to Mr Hamilton when, in 1998, Mr Hamilton sought a franchise for South Auckland. I have reviewed the evidence and accept the testimony of Mr Hamilton that he received that information from Mr Corry, in the form produced in evidence, when Mr Hamilton’s accountant sought better particulars. As has been said, it was an exact replica of the figures claimed to have been given to the Leemings, although they had been incorporated into a text honed to Mr Hamilton’s circumstances. I add that the page on which the figures appear, as indicated by staple marks, presents as part of a package of information. That material also indicates the author, by reference to Mr Corry’s personal telephone numbers (“If your accountant requires more information ask him to call me on [phone numbers]”) and includes information of which only ISL would have been aware.
[91] Likewise, there was no argument, in the defence closing, in relation to the supply of fictitious Christchurch figures when Mr Macquarrie acquired the shares in IS Bay of Plenty in 1999. In that case, that purportedly given was Christchurch trading figures from 1997. These were simply an adjustment of the fabricated 1996 figures by re-arranging the digits while other figures (the cost of wages, telephone
and alarm sales) remained untouched. These figures were also acknowledged to be false but again, Mr Corry denied that the document produced was the document that he sent. He could not have claimed that nothing at all was sent since a covering letter from Mr Corry referred to enclosing amongst other things “the sale figures for Installer Services in Christchurch”. An accompanying page also noted “the figures for Christchurch are for a workshop with four installers and the population for Christchurch is 230,000”. The page containing the figures was also personalised – “These figures are to be read in conjunction with the confidentiality agreement between you and I” and “I now have very little to do with the running of the Christchurch workshop”. Mr Corry’s position, that the page containing the Christchurch figures was not the page he sent would require that Mr Macquarrie should be privy to a talented deception, but having heard him, I have no reason to believe that Mr Macquarrie was other than honest and I accept and prefer the evidence that he gave.
[92] Paul Redman deposed that he too received the 1996 Christchurch figures in the material supplied when buying the franchise for North Shore in June 1999. However, he was unable to produce the document and no weight can be given to his evidence.
[93] It was the alleged dispatch of the 1996 Christchurch figures to Craig Wilson, when considering the Hamilton franchise in 1998, that was disputed in defence counsel’s closing. In this instance Mr Wilson claimed that Mr Newport had sent him the same Christchurch figures said to have been given to the Leemings. The figures were included in a five page letter transmitted by facsimile, dated 29 January 1998, addressed to “Dear Craig” and purporting to come from “Dave Newport, National Sales Manager” but not signed by him. The thrust of the letter was to provide general information on the ISL operation and to present a forecast of sales for the Hamilton area based upon districts averages and the claimed Christchurch figures for 1996. Certain material in the category of general information was either an exact copy, or was very similar in wording and format, to the general information provided to the Leemings. The same suggested, along with changes in font size in this instance, that the letter was partly built up by cutting and pasting from existing texts on personal computers.
[94] A significant feature of the claimed communication with Mr Wilson was that it would strongly tend to refute the prospect of latter day fabrication by a clique of disgruntled franchisees who may have been able, in the cases already cited, to remove and substitute single pages. I have already considered the unlikelihood of that having happened in those cases, but in this instance the Christchurch figures had been so incorporated into a single narrative in one continuous letter, as to negative that possibility. Moreover, the whole was contained in a continuous fax, received on thermal paper, with each page marked as to date and time.
[95] Mr Newport admitted that he had been in discussions with Mr Wilson and Mr Wilson’s parents on the proposed franchise sale at about the time in question, but he denied having sent the facsimile. His evidence was that he did not have access to a fax machine from December 1997, when the business of another of his employers closed, until early March 1998, when he sent facsimiles through the computer of his friend, Ben Riddler.
[96] However, during the trial the plaintiffs obtained and produced a Telecom search which showed that a fax was in fact sent from a number listed to Mr Riddler to a number then listed to Mr Craig Wilson’s parents, on 29 January 1998 at 10.16
a.m. This corresponds (with one exception) with the date and time on the several faxed pages. The Telecom record of transmission duration also approximates the time shown in the page headers although precision is not possible as the first page, presumably a coversheet, was not retained. The exception presents a difficulty which was not explained, in that one page, not that which contains the Christchurch figures, is outside the time sequence. It also bears a pink line to one side showing paper depletion in the receiver’s machine. The line is not repeated on succeeding pages. This suggests that this page was delayed in transmission by over an hour and was received last. There are other difficulties with regard to that possibility relating to the Telecom record of transmission times, but while, as a result, no complete explanation can be given, I do not think it overly detracts from the other convincing evidence of the documents’ due transmission.
[97] Defence counsel then submitted that particular words in the text were also so anomalous as to cast doubt on authenticity but each claimed anomaly is not without
a plausible explanation. Putting together the content and style of the document, similarities of content and wording with the documents relayed to other franchisees by Mr Corry (including the Leemings), the realities of computer technology and the telephone-facsimile records of Telecom, I am satisfied beyond the standard civil test for proof, that the facsimile of 29 January 1998, as produced in evidence and addressed to Mr Wilson, was transmitted to Mr Wilson’s parents, by Mr Newport, utilising information relayed by Mr Corry.
[98] Then, having regard to the similar fact evidence as a whole and the matters mentioned at paragraphs [84] to [87] I am satisfied that document 3.22, which set out amongst other things the fictitious trading figures for Christchurch, was posted to Mr and Mrs Leeming by Mr Corry and was not in fact a fabrication of Mr Leeming or other franchisees.
[99] It does not follow that Mr and Mrs Leeming were induced to contract as a result of those figures. To consider the question of inducement it is necessary to look at the representations as a whole and to reach a conclusion on which, if any, representations the Leemings have established as more probable than not.
Representations on “existing work capacity” and “contracts in place”
[100] In giving meaning to individual representations as claimed, Mr Finnigan relied upon the synergism of several statements so that even if one statement was innocuous in itself, it gained potency when juxtaposed with others. As mentioned, some of those representations were said to have been made orally. For obvious reasons, claimed oral statements must be treated circumspectly, not least for the tendency of recollections, of events five years before in this case, to be influenced by later, unfortunate outcomes. It is then important to recall that the plaintiffs bear the onus of proof.
[101] However, one need not stray beyond the written material when considering the first claimed representation on the existing work capacity. The advertisement stated – “Guaranteed installation work in place with major suppliers, and on- sellers. Exceptional turnover”. The first sentence on its own is neutral as to the
quantity of work guaranteed, but when coupled with “exceptional turnover” it infers, for a business which has yet to be formed, that the quantity of work which is guaranteed is such as will provide a turnover of the kind described. As will later be seen, the uncertain meaning of “exceptional turnover” was later cured by representations as to what that turnover was likely to be.
[102] The next written statement, which may be set alongside the advertisement, is in the material supplied by facsimile by Mr Newport – “We are the only nation-wide installation network in New Zealand. We currently do installation work for the following companies: Noel Leeming, Kenwood, Dick Smith Electronics, Repco, Eurovox”. The second sentence on its own, may be justified were it shown that installation work was being done for those companies in Christchurch alone; but when both sentences are read together, and then in the context that the material, like the advertisement, was given for the purpose of a specific sale of a franchise for Wellington, the inference is that the work would flow from nation-wide contracts which were operative in Wellington. That is how I think the ordinary reader in Mr Leeming’s shoes would read it – and that I think, is the message which was intended to be conveyed.
[103] That interpretation has further and stronger support from written material supplied by Mr Corry. By combination of table and narrative this material represented that Installer Services Group had as customers, Dick Smith, Noel Leemings and Repco with installation sales nation-wide.
[104] The reference to nation-wide sales, when in fact, a nation-wide network of franchisees had still to be established, was explained in evidence by Mr Jackson, that in the early days, work was done all over the country whenever it was required, even in Stewart Island, and no work was ever turned away because there was no local, franchise holder. However, the main inference to be drawn from the material, given that franchises had still to be established in most districts, is not that sales were already being effected nation-wide, but that customers were waiting nation-wide for the franchises to become operative.
[105] That which is yet more compelling, in the material from Mr Corry, is this paragraph, with emphasis now added, and made with reference to Wellington: “In the first 4 to 12 months business will be slow as you are introduced to our customer base and they get accustomed to sending work to you. Remember existing customers are waiting for you to open your installer services business in their area.” At very least the material from Messrs Newport and Corry, reinforced, by reference to customers, that which the advertisement may be interpreted to have said.
[106] Standing back and viewing the written material as a whole, and the cited passages in particular, I consider there was a clear representation – that guaranteed installation work was in place within the Wellington franchise area, such as would provide an exceptional turnover. The “work in place” would flow from contracts which ISL had with the likes of Noel Leeming, Kenwood, Dick Smith Electronics, Repco and Eurovox.
[107] The question then is whether oral representations have been proven which add to that description. Mr Newport denied making statements in his telephone conversation with Mr Leeming to the effect that because of demand it would not be a case of getting in the work in Wellington, or of there being contracts in place with all major motor companies and suppliers. However, he acknowledged that he said that ISL wanted a franchise in the Wellington area because of the business which was available, and claimed that that was true.
[108] I have carefully considered the evidence of Mr Newport. In many respects his evidence was not credible. Contrary to his assertion, I accept that he sent the fax to Mr Wilson (as described at paragraphs [93] – [94]) and in fact had access to a facsimile machine. Further, his responses in cross-examination on that matter were unconvincing. He had also read and implicitly approved the advertisement with its reference to “guaranteed installation work in place with major suppliers” while accepting in cross-examination that it was poorly worded. On the other hand, I have difficulty in accepting Mr Leeming’s recall, he himself appearing to be less than honest, but in particular having regard to the time lapse and the self-serving nature of this part of his evidence. In the end it comes down to the burden of proof and I do not think the Leemings have established that Mr Newport said precisely that for
which Mr Leeming contended. I have no doubt, however, that Mr Newport represented to the effect that a heavy demand existed in Wellington and that customers were waiting. He was clearly prepared to put a strong complexion on matters. Indeed, in evidence, he justified the advertised statements of “sensational opportunity” by reference to there being at that time “successful franchises in Christchurch and in Auckland” when he knew, or ought to have known, since he lived with the Auckland franchisee and had been to Christchurch, that the success of Auckland was then far from proven and Christchurch was at best in an embryonic stage. But for the reasons given, I cannot attribute to him, in describing the existing work capacity, anything more than that to which I have alluded.
[109] If Mr Newport was of a positive disposition, Mr Corry was even more so. It was apparent from his demeanor, and from the material which he acknowledged he had written, that his “positive personality” to use his own term for himself, was of a kind which could lead him to present exciting potentialities as current facts. I refer especially to his characterisation of a nation-wide business in the material which he authored, when in truth, it was mainly in the offing, and to the existence of contracts which in fact had still to be completed.
[110] For the most part I come to the same conclusions with regard to Mr Corry as I did with Mr Newport, and for the same reasons. On balance I do not think it can be found that Mr Corry stated that within six months Mr Leeming would have to employ at least two more staff to keep up with the work (which he is said to have stated by telephone). That was contrary to the sole operator, mobile unit concept that I am satisfied, he espoused at that time and passed on. However, Mr Corry admitted he would have said that there was a heavy demand for an installer in the Wellington area and I accept that at the meeting of 14 November, he would have added that he needed someone in place to service the existing customers. I accept it because it simply elaborates on that which he stated in the written material, although no doubt, in light of his witness box performance, it was said with gusto. If in fact he added more it would certainly not surprise, but in my view, more is not established in the manner that the law requires.
[111] It is also not proven that Mr Corry represented the Wellington franchise as a turnkey business. His position was rather as set out in his written material that “In the first 4 to 12 weeks business will be slow as you are introduced to our customer base and they get accustomed to sending work to you”.
[112] What was not said is also significant in the case of both Mr Corry and Mr Newport. In their evidence, both portrayed a plan for operations described in para
[19] as a mutual reliance model – that the franchisee would drum up local work but over time, the franchisor would provide the more substantial turnover from contracts with major retailers and corporates. Mr Newport, and even more-so Mr Corry, asserted that this ethic was most fully conveyed to Mr and Mrs Leeming. But the same evidential rule applies save that the roles are reversed for he who asserts must prove.
[113] In his evidence Mr Corry stressed that he had told Mr Leeming that Mr Leeming would have to drum up work and that the ISL contracts which would provide the substantive revenue source, would come only in time. He described a principle as having been relayed that “If we build it, they will come”. However, while Mr Leeming acknowledged that he was advised to develop his own customers, his evidence was that it was not for the reason that the ISL work had still to be arranged, but because this work would expand on the business which was available and would assist over the initial, slow, startup phase. I accept Mr Leeming’s evidence on this point. The fact that this essential criterion on the parties’ relationship, as said to have been seen by ISL, was not mentioned at all in the ISL pre-contractual literature, is strong support for the view that it was not orally conveyed either. If the model was as important as Mr Corry claimed, one would expect it to have been in the written material. In fact the literature tended to quite the opposite position. The most that can be seen to have been said then, is that initially the work would be slow, as described in the paragraphs cited, but then only for the reason which the paragraph recites – “until you are introduced to our customer base”.
[114] There can be no doubt that Mr Corry made such a representation. It was integral to the business scheme that ISL would make the necessary introductions. In
fact, once the Leemings began operations, in January 1998, Mr Corry went to Wellington for that purpose, as previously had been arranged.
[115] In conclusion of this part, I am satisfied on the balance of probabilities that Mr Newport and Mr Corry, severally, represented that there was, in Wellington, a heavy demand for installation services and that customers were waiting for the IS franchise to open. Although further, positive statements as to the existing work capacity are not proven, I am also satisfied that it was not put to Mr and Mrs Leeming that they would need to drum up business themselves, but only that there would be a slack, initial period pending introduction to the customer base and procedural familiarity. I am also satisfied from the evidence that it was understood that ISL would make those introductions, linking the franchisee to the customers said to be waiting, and that this was a central part of the promised “support”.
[116] The next question is whether Mr Corry orally added to the list of contracts with national retailers as represented in the literature. I consider it is not proven that he did so. Mr Leeming claimed that Mr Corry added Vodafone and Pacific Rental Group to that list. However, Vodafone did not then exist and its antecedent, Bell-South, was listed in the written material as a company with whom ISL was then in negotiation. Pacific Retail Group was comprised of Noel Leeming, listed in the written material as a retailer with whom there was an existing contract, and Bond and Bond, listed in the literature as a retailer with whom ISL was then in negotiations.
[117] The further question is whether, as Mr Leeming claimed, Mr Newport and Mr Corry went on to assert that the contractual arrangements that were in place with national retailers provided for their sales to be installed exclusively by ISL. There seems little doubt from the evidence of several franchisees that Mr Newport and Mr Corry regularly spoke of exclusive contracts and used the term “exclusive” in some of the written material, but I consider it is not proven that either Mr Newport or Mr Corry represented that the particular contracts specified in the Leeming literature provided for the installation of retailer sales to be done exclusively by ISL. The position appears to be rather that Mr Corry either had or was working towards the completion of contracts with various retailers, including those named in the
literature, and that he saw those contracts or arrangements as exclusive to ISL in the sense that no other installer had sought similar arrangements at that time. It is not proven that he went on to say that the contracts themselves provided for the work to be undertaken by ISL exclusively.
[118] Mr Hamilton, Mr Coburn and Mr Macquarrie all gave evidence that Mr Corry referred to exclusive contracts or arrangements with retailers when franchises were sold to them in August 1998, December 1998 and July 1999 respectively. However, an analysis of the evidence of Mr Hamilton and Mr Macquarrie suggested that Mr Corry was referring to arrangements with Noel Leeming, Bond and Bond, Repco and Vodafone which were exclusive to ISL at that time in the same sense as that earlier described, that no other installer had secured a similar arrangement.
[307] Moreover, if something more by way of outgoing personality was in fact required, ISL had a duty to other franchisees, and to Mr Coburn, to make its own assessment of Mr Coburn’s suitability, and to do so before the contract was entered
into, not afterwards. If it failed to do so, it cannot fairly question Mr Coburn’s suitability at this stage. More particularly, ISL had as much interest in assessing Mr Coburn, at the time of contracting, as Mr Coburn had in assessing ISL, for ISL was bringing Mr Coburn into a network where franchisees depended on each other for new growth. That too was part of the ISL scheme.
[308] Third, it was argued that the cause of loss was the negative attitude that Mr Coburn held in relation to the business and his apparent refusal to submit to the ISL ethic, as was necessary for success. Ms Gaynor of ISL and others gave evidence that Mr Coburn removed himself from ISL, referring to “my work” and “yours” and the like. However, this evidence of disposition must be seen in an appropriate chronological sequence. The comments attributed to Mr Coburn came late in the piece and after the Repco arrangement. Viewed in that context his attitude is entirely explicable. There is no evidence that Mr Coburn had adopted that attitude before. Rather, it appears from the evidence that a negative attitude is unlikely to have developed at all had the business been available from the start in the manner in which it had been represented.
[309] It was also submitted that losses were sustained by establishing a workshop and engaging staff contrary to the ISL model. However, the conclusion that I come to on the evidence is that this was not in fact contrary to the ISL model as it had developed on the ground amongst franchisees, including ISL Christchurch, without formal demurrer by ISL, and that the expense was justified in the circumstances. Some evidence that a staff was contemplated is in the advertisement itself in stating “Full training will be given to the successful application (sic) and their staff” (emphasis added).
[310] The final matter raised was based upon a comparison of Manawatu and Tauranga trading, but that is of no real assistance in this case because of the range of variables involved. I rather understood that to be conceded by Ms Davidson in the cross-examination of her evidence on this point.
[311] Having determined the representations that were made, that those representations were untrue, and that there had been an inducement and losses as a
result, it is now necessary to consider who can claim what loss under the various claim headings.
COMPETENCE TO CLAIM
[312] The legal issues affecting the competence of ISM and the Coburns to claim under the Contractual Remedies Act and Fair Trading Act were considered in the Leeming judgment. The position in relation to the Coburns can therefore be summarised.
The IS Manawatu claim under the Contractual Remedies Act
[313] The licence agreement between ISM and ISL was completed after the Coburns had taken a transfer of the ISM shares and had become its directors. The situation is therefore different from that which applied in the Leemings case. As a result there appears to be no reason why in this case, ISM should not be able to proceed in its claim under the Contractual Remedies Act upon the grounds that through its directors it was induced to enter into the Licence Agreement by the representations that were made. It may then recover any trading loss or loss of profits that may be proven but not a capital loss insofar as it was the Coburns who expended the capital in the purchase of the ISM shares.
The ISM claim under the Fair Trading Act
[314] For the reasons given in the Leeming case, each of the defendants was “in trade” at the time of the conduct complained of. I am satisfied that that conduct, in the form of representations, was misleading or deceptive or was likely to mislead or deceive in that the representations were untrue and were supported by falsified trading figures. For the further reasons considered in the Leeming case, ISM cannot recover any loss of profits under this heading, but can recover any trading loss caused by the conduct concerned. Under this heading ISM may recover against all those defendants who were involved in the conduct that gave rise to the loss.
The Coburn claim under the Contractual Remedies Act
[315] The Coburns are competent to claim from Messrs Corry and Jackson under the Contractual Remedies Act on the basis of their agreement with them to purchase their shares in ISM. They may recover the capital loss represented in the purchase price. In the alternative (or arguably, in addition) they may recover any loss of profits or trading loss suffered by ISM and which would have passed to them as shareholders.
The Coburn claim under the Fair Trading Act
[316] Under the Fair Trading Act, the Coburns are competent to claim from all such defendants as were involved in the conduct complained of, for any proven trading or capital loss.
The Coburn claim against Mr Newport in negligence for the capital loss
[317] Insofar as the Coburns may succeed in obtaining judgment against Mr Newport for any capital loss under either of the above Acts, there is no need to consider the Coburns’ separate claim against Mr Newport in negligence.
The Coburn claim for exemplary damages
[318] Given the finding in the Leeming case, there is now no need to consider further the Coburns’ claim for exemplary damages.
Rationalisation of claims
[319] Mr Finnigan submitted that both plaintiffs, ISM and the Coburns, are entitled to claim separately and independently under the Contractual Remedies and Fair Trading Acts for the losses each has sustained. While that may be so it does not follow that each can claim for the same losses, as is assumed in the statement of claim. For example if ISM is able to recover any loss of profits then, as that filters through for the benefit of the Coburns, it cannot be said that the Coburns have suffered an independent loss.
[320] The question then is whether relief should be given in reliance on the ISM claim or the Coburn claim. I should think the answer depends on that which provides the most effective recovery. In this case, unlike that of the Leemings, there has been no suggestion that ISM has debts owing (apart from the ISL claim for outstanding licence fees as now sought by way of counter-claim) and there seems to be no reason why any loss of profits should not be assessed under the Coburns’ claim in terms of the Contractual Remedies Act. As mentioned that claim would be against Messrs Corry and Jackson as the other party to the contract for the sale of shares. That also seems to provide the most propitious avenue for the plaintiffs.
[321] For the same reason it appears that any claims for trading or capital losses should be considered in terms of the Coburn claim under the Fair Trading Act insofar as that expands upon the persons from whom recovery may be made. In the exercise of the discretion conferred by that Act, no separate claim would then be entertained from ISM.
[322]It is now necessary to quantify the losses sustained.
LOSSES
Loss of profits and trading losses
[323] In this case the evidence as to loss of profits assumed a representation that the plaintiffs would have the benefit of a net income of $100,000 per annum. It has been found that all that was represented was that there would be a turnover of that amount. Mr Hagen, who gave that evidence, considered that an alternative assessment of loss based on a representation as to turnover, was feasible. Further accounting evidence is now needed to complete that assessment. For the moment I am concerned to identify what other matters might be brought into account when that is done.
[324] One matter raised by defence counsel concerned the losses sustained for the period after 31 March 2000 to 9 October 2000, when the business closed, based upon the accounts for ISM as now produced in evidence. Defence counsel pointed to a number of items of expenditure that appeared on the face of the accounts to be
irregular and for which Mr Coburn had no satisfactory explanation. The matters raised were such that I consider that the losses should be assessed for that period by projecting forward the accounts for the year ending 31 March 2000.
[325] There are two matters of qualification with regard to the accounts generally. The first is that I accept Mr Coburn’s evidence that advertising costs would not have been what they were if the representation that the business was in place with customers waiting had been true. He should have the benefit of a reduction of those costs by half.
[326] The other matter is that an allowance should be made, for the defendants’ benefit. for a slow start at commencement for about seven weeks to coincide with the start of a new financial year. However, Mr Coburn should have the benefit of having that assessed on a near equivalent to the first seven weeks of trading as indicated to him in the “Tauranga figures” that he received from Mr Coburn and which are set out at para [271].
[327] With regard to both of those matters there are questions as to how they should be factored in or indeed, whether in all the circumstances they should or need to be factored in at all. They are therefore left to the assessor’s discretion. The position may then be reviewed after hearing counsel further.
Mitigation
[328] The next question is whether the Coburns did all they could to mitigate their loss and looked to sell the business or stop trading as soon as was reasonable. The burden is on the defendants of proving that the plaintiffs have failed in their duty of mitigation. It has been said before that that is not a light burden where, as here, positive action is demanded of the one most innocent of blame. However, if a failure to mitigate is proven, the defendants are not liable for losses subsequent to the point at which the plaintiffs should have mitigated. The question is one of fact.
[329] One matter that the defendants relied on was that the plaintiffs did not sell when ISL offered to buy the business at valuation; but instead carried on and then
transported the business to Red Fox. That matter is dealt with below under the Coburns’ claim for capital losses. For the present it need only be said that the plaintiffs had good reason not to mitigate at that point. That is simply because they would not have received a fair price if they did. The past trading performance, on which a valuation would be based, would produce little or nothing by way of value and yet, the low past performance is something for which the plaintiffs were not to blame. The low performance was due to contracts not being in place as promised so that the defendants would get the benefit of their own wrong. Further, the plaintiffs acted reasonably in considering that the business could be rescued and made profitable if released from ISL. Any capital gain to the plaintiffs in transferring the business to Red Fox is something to be brought into account when considering the plaintiffs’ claim for a capital loss.
[330] The other argument relied on by the defendants was that the plaintiffs ought to have seen much earlier that the business should close as sales were not being achieved, overheads were too high and the losses were not being addressed. It was argued that at very least the plaintiffs should have closed on 31 March 2000. I accept Mr Finnigan’s response that the Coburns would not have known the true position until the accounts to 31 March 2000 were available, which was at some time after the date of those accounts, 29 September 2000.
[331] Further, there was more to the representations than a claim (falsely made) that the business was already in place. It was also projected that new arrangements or agreements were in the pipeline or could be expected. It is not suggested that these were actionable misrepresentations but only that they were made in fact and were often repeated in subsequent ISL material to franchisees so that they must have had an influence on the decision which the Coburns had to make.
[332] Mr Coburn had cause to be dubious (as he increasingly was) but his concerns and complaints were directed to the main grievance, that the business was not there. He said and I accept, that for most of the time he blamed himself, thinking he was “dragging the chain”. He was not aware that that might not be so until the franchisees’ meeting of 15 July 2000, when others said they were experiencing the same problem. What is important to identify is that the franchisees were focussing on
the main grievance – of the work not being in place. Their 10 point list of concerns so suggests. What has also to be identified is that they nonetheless went on to express, by formal resolution, their faith in the ISL concept. That could only refer to a continuing faith or hope that more business would be coming, as had been represented and that success would eventually be assured. I think it unlikely that Mr Coburn was not similarly influenced, and so held on, as Mr Finnigan argued, until after the accounts for the first year of trading had been received.
[333] The defendants have not established, in my view, that reasonably, the Coburns should have mitigated sooner than they did.
Final assessment of loss of profits and trading losses
[334] As mentioned at para [323] further expert evidence is needed to determine the final assessment of loss of profits and trading losses in the light of the present findings. Those findings would be reflected in an assessment based upon the following criteria (if relevant):
· There were no cash drawings. It was conceded that there was no evidence of any.
· The losses were the result of the misrepresentation and were not due to business mismanagement.
· The Coburns did all that they could to mitigate.
· The relevant period is from 10 February 1999 to 9 October 2000.
· The period 31 March 2000 to 9 October 2000 is to be assessed by projecting forward the accounts for the year ending 31 March 2000.
· (At discretion) For the benefit of the Coburns, their advertising costs in the applicable accounts should be reduced by half.
· (At discretion) A slow period in about the first seven weeks should be allowed based upon an equivalent in “the Tauranga figures” at para [271]
· The salary to be allowed for is $35,000.
· A discount of 22% is appropriate (no allowance is made for the SSS factor, as risk is determined as at breach and has not the benefit of hindsight).
[335]A decision is reserved on this aspect. All rights of counsel are reserved.
The capital loss
[336] Mr Finnigan submitted that at the time of purchase the business had a zero value as the representations were untrue, and that in any event, the shares would not have been purchased were the falsities known. He sought recovery of the whole capital invested.
[337] Defence counsel argued that there was no capital loss. Even were the representations untrue the business had a value through its link to the ISL scheme and the Coburns gained the full benefit of the ISL experience when continuing the business as Red Fox utilising the same premises and the ISL equipment, technical information, clothing, tools and contact telephone numbers. Counsel relied also on the ISL offer to buy the business at valuation but as has been mentioned, this was refused for good reason.
[338] There are two questions for the Court – what capital loss if any, was actually suffered and was that loss caused by the conduct complained of. To determine the capital loss regard is first had to whether any capital compensation is included in the claims for trading losses and loss of profits. In my view, none is so included. Those claims are limited to the profit lost and the unproductive time expended on the investment that had been made. The corollary however is that the investment or capital represented in the shares still remained. No doubt the shares would have been worth very little having regard to the state of the trading account at the end of operations. On the other hand, the business training and the experience gained must
have had some value for the Coburns when they continued in business under another name. I am satisfied that the Coburns did not lose the whole of the value of their investment in ISM when considered in the light of those facts but suffered a diminution in value as a result of the business having been sold on the basis of representations which proved to be untrue. I consider the capital loss to be about half the original investment or $25,000. I am satisfied that that loss was caused by the misrepresentation as to the availability of business from ISL sources.
[339]The next question relates to who is liable under the two claim headings.
LIABILITY
The Coburns’ claim under the Contractual Remedies Act
[340] The Coburns’ claim under the Contractual Remedies Act for loss of profits is made in reliance on the agreement for the sale and purchase of the shares in ISM and is made against Messrs Corry and Jackson as the other party to that contract. Mr Corry is undoubtedly liable as the maker of the representations. Mr Jackson is liable as Mr Corry’s misrepresentations must be seen as having been made on behalf of Mr Jackson as well in effecting the sale of shares. Mr Jackson is also liable as the independent conveyor of misrepresentations in his letter and enclosures to Mr Coburn of 4 November 1998.
The Coburns’ claim under the Fair Trading Act
[341] Mr Corry is liable under the Fair Trading Act claims on account of the representations that he made. So also is Mr Jackson. Even were it true, as was contended, that the information that he conveyed was taken from Mr Corry’s computer, he adopted that information as his own. He was no mere messenger or conduit. His letter, including the hyperbole “we are forming new business relationships almost weekly” captured the style and tenor of the overview itself, showed his identification with its content and was demonstrative of adopting it.
[342]ISL is liable as its directors made the representations.
[343] Mr Newport is liable. His role had increased within ISL so that he was more intimately involved in both sales and support. His participation in this transaction was still limited but nonetheless in meeting with Mr Coburn, along with Mr Corry, he endorsed and reinforced the contents of the overview, which contents were misleading. It is telling in this respect that Mr Coburn had the overview in front of him at the time that the interview took place, as Mr Newport confirmed.
The counter-claim
[344] The counter-claim recites two causes of action. The first seeks from ISM an account of turnover from 1 June 2000 to termination of the licence on 3 November 2001 for the purpose of recovering licence fees, ISM having failed to supply GST and annual returns. Having regard to the findings of misrepresentations that claim must now fail. The licence agreement was premised on certain work being available that was not available.
[345] The second claim seeks injunctions against the Coburns for breach of a covenant in restraint of trade. The Coburns do not appear to be a party to a covenant in restraint of trade and in terms of the licence agreement (were it now valid) there is no evidence that the directors of ISM were required to enter into such a covenant following completion of the licence agreement.
Other relief sought by plaintiffs
[346] The plaintiffs are entitled to cancellation of the licence under s 43(2)(a) of the Fair Trading Act and on completion of this decision there will be an order declaring the licence void.
[347] The Coburns are entitled to a declaration cancelling the share transfer under s 7 of the Contractual Remedies Act.
SUMMARY
[348] Upon completion of the assessment and judicial determination of loss of profits, orders will be made on CP 17/01 under the Contractual Remedies Act in
favour of the first plaintiffs (Mr and Mrs Coburn) against the second defendants (Messrs Corry and Jackson) with interest at 6% from 9 October 2000 to judgment.
[349] Upon completion of the assessment and judicial determination of trading losses, orders will also be made on CP 17/01 under section 43 Fair Trading Act in favour of the first plaintiffs against the first, second and third defendants (that is all defendants) in respect of trading losses and in respect of a capital loss of $25,000, with interest at 6% from 9 October 2000 to judgment.
[350] Other relief will be ordered as moved in the statement of claim for cancellation of the licence and of the share transfer under the Contractual Remedies Act.
[351] With regard to the assessment still to be done, all rights of counsel as to further hearing are reserved.
[352] Counsel may wish to be heard on costs, and memoranda may be filed, but otherwise costs to the first plaintiffs would be at category 2 band B.
[353] Pending consideration of the assessment to be made the decision is further reserved.
“Durie J”
Signed at 11.30 am this 6th day of August 2004
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