Colville v Colville
[2023] NZHC 2659
•22 September 2023
IN THE HIGH COURT OF NEW ZEALAND GREYMOUTH REGISTRY
I TE KŌTI MATUA O AOTEAROA MĀWHERA ROHE
CIV-2021-418-17
[2023] NZHC 2659
BETWEEN MATHEW ROBERT COLVILLE
Plaintiff
AND
ADAM KEITH COLVILLE
First Defendant
PETER JONATHON BLIGHT
Second Defendant
Hearing: 17–19 and 21 April 2023 Appearances:
A R B Barker KC and H P Short for Plaintiff First Defendant in Person
A D Marsh for Second Defendant
Date:
22 September 2023
JUDGMENT OF MANDER J
This judgment was delivered by me on 22 September 2023 at 3.30 pm pursuant to Rule 11.5 of the High Court Rules 2016
Registrar/Deputy Registrar Date: .
COLVILLE v COLVILLE [2023] NZHC 2659 [22 September 2023]
[1] The plaintiff, Mathew Colville (Mathew), and the first defendant, Adam Colville (Adam), are brothers who for a number of years owned and operated a G J Gardiner Homes franchise on the West Coast. After a breakdown in their relationship, Mathew, by mutual agreement with his brother, purchased Adam’s share of this business in October 2020. In accordance with the terms of that agreement, Adam executed a deed in restraint of trade (the restraint) that prevented him from competing with Mathew’s business. The second defendant, Peter Blight (Peter), is also a builder based on the West Coast. Adam, after selling his share in the G J Gardiner franchise, went to work for Peter as a builder’s labourer.
[2] In May 2021, Peter acquired a Stonewood Homes franchise for the West Coast area. Mathew claims that, in breach of the restraint, Adam was closely involved in the establishment and development of this new franchise and that Peter, who was aware of the restraint, knowingly induced and encouraged Adam to do so. Mathew sues Adam for the alleged breach of the restraint, claiming it has caused him loss, and Peter for having induced this breach of contract. Adam and Peter deny Mathew’s claims.
Factual background
[3] While this case requires the determination of various important factual issues, much of the preliminary background to the dispute is not in issue.
G J Gardiner Homes franchise
[4] In around 2003, Mathew went into business for himself as a builder. He and his stepfather incorporated a company for the purpose of engaging in property development and the construction of spec houses. Adam came to work for Mathew and completed his building apprenticeship while in his employ.
[5] Because of increasing competition from larger national home building franchises, the two brothers approached G J Gardiner Homes, one of the largest residential building companies in the country, wanting to secure a franchise for the West Coast. Mathew and Adam successfully purchased a franchise for this region in January 2013. They formed Housing West Coast Ltd (HWC) to own the franchise. The two brothers were equal shareholders in the company, and Adam the sole director.
[6] By using G J Gardiner Homes proprietary designs, systems and supply relationships, Mathew and Adam were able to develop a successful franchise business that over the years continued to grow.1 After some five years, Mathew and Adam formed a new company to house the commercial leases they had acquired and to keep the debt for the business separate from HWC. This company, Colville Developments Ltd (CDL), which was primarily a landholding company, was incorporated in April 2018. Both brothers were equal shareholders.
Dissolution of the brothers’ business relationship and the restraint
[7] Notwithstanding the success of the franchise, the relationship between Adam and Mathew began to deteriorate. By the middle of 2020, Adam’s personal difficulties attracted some publicity. These issues were believed to reflect poorly on the reputation of the franchise and came to the attention of G J Gardiner Homes’ head office. These developments resulted in Mathew buying out Adam’s interest in the business. Mathew agreed to purchase Adam’s 50 per cent share in HWC. A professional valuation was obtained that valued the shares of HWC as between $1.885 million to $2.215 million. The goodwill component was valued as between $1,543,734 to $1,783,734. On the basis of this valuation, Mathew purchased Adam’s shares for $1,062,000.2
[8] The agreement for the sale and purchase of Adam’s shareholding in HWC was signed on 19 October 2020, and Adam ceased being a director of the company. An explicit term of the agreement required Adam, upon receipt of the purchase price, to execute a Deed in Restraint of Trade in the form attached as an annexure to the agreement. The executed restraint relevantly provided:
OPERATIVE PART
1. THE Vendor covenants with the PURCHASER that he will not directly or indirectly be engage [sic], participate in or have any direct or indirect interest whether as an owner, partner, director, shareholder, officer, employee, agent, consultant, representative, contractor or sub-contractor or in any other capacity in the business detailed in the schedule in competition with Housing West Coast Limited.
1 The actual building work was carried out by another company, Colville & Hofman Builders Ltd. Mathew was the sole director and the brothers equal shareholders, together with another builder, Teunis Hofman, who joined them to oversee the franchise’s building work.
2 Mathew also purchased Adam’s shares in Colville & Hofman Builders Ltd for $40,000, although this agreement was not settled until late 2021. Adam and Mr Hofman are now equal shareholders in that company.
2. This restraint as outlined in point 1. above will relate to the area and until the end of the term detailed in the in the [sic] schedule and the schedule forms part of this deed.
3. Notwithstanding the restraint the Vendor is permitted to be employed as builder’s labourer and to build his own home.
SCHEDULE
BUSINESS the design, sales, marketing, management, accounting, estimating and construction of any houses, commercial or industrial buildings, units or duplexes.
AREA Buller, Grey and Westland Districts.
TERM from 19 October 2020 until 1 February 2023
[9] Prior to the execution of the restraint, Adam asked Mathew if he could be permitted to be employed as a builder’s labourer. This was agreed and provided for in the terms of the restraint.
[10] In March 2022, the brothers reached agreement regarding the sale of Adam’s 50 per cent shareholding in CDL. Mathew paid Adam $1,705,357 for his shares. There was no requirement to enter into a restraint of trade regarding that buyout as CDL was primarily a landholding company.
The Stonewood Homes franchise
[11] Peter had known both Mathew and Adam for many years. They were fellow builders and Mathew had completed his building apprenticeship under Peter’s direction in Hokitika before setting up his own building business. Between 2007 and 2014, Peter and his wife had owned and operated a Stonewood Homes franchise on the West Coast and thereafter, after its dissolution, ran his own building business.3 In January 2021, Peter became aware through a mutual friend that Adam had left HWC and was looking for work. Adam told him he had signed a restraint of trade but that he was allowed to work as a building labourer. It is Peter’s position that he engaged Adam in that capacity, in accordance with the terms of the restraint.
3 This earlier Stonewood Homes franchise had been owned by a company called Stonewood Homes West Coast Limited. About two years after the franchise was surrendered, Stonewood Homes New Zealand Ltd went into receivership. Peter’s building business was operated by Peter Blight Builders Limited.
[12] On 20 May 2021, Adam and Peter incorporated a company together called Hammer Down Developments Ltd (HDD). Adam was a director and 50 per cent shareholder and Peter also a director with a 25 per cent shareholding. The other 25 per cent was held by Peter’s wife. Adam and Peter maintain this company was formed to purchase and subdivide land for the purpose of sale, either solely as parcels of land or as a “land and build” package. Because HDD would not be building houses nor selling them, it was their understanding that the company’s activities would not breach the restraint.
[13] A week earlier, on 13 May 2021, Peter had incorporated another company, West Coast Residential Ltd (WCR), which he used to enter into a new franchise agreement with Stonewood Homes that covered the West Coast region. Peter and his wife each hold a 50 per cent shareholding in this company of which he is the sole director. Unlike his involvement in the activities of HDD, it is both Peter and Adam’s position that Adam has no business interest in WCR or the Stonewood Homes franchise, other than working for Peter as a builder’s labourer. The Stonewood Homes franchise was purchased by WCR on 18 May 2021 and the franchise fee paid on 9 June that year.
Mathew’s claims
[14] Mathew has brought two causes of action against Adam and Peter respectively. The first is a claim against Adam for breach of the restraint on the basis he failed to act in accordance with its terms. The second is a claim against Peter, that he knowingly induced or encouraged Adam to undertake the activities that constituted a breach of the restraint. Mathew maintains the activities in which Adam engaged in breach of the restraint and Peter’s intentional inducement and encouragement of Adam to do so caused him loss for which he seeks damages.
[15] The applicable legal principles as they relate to a claim in contract for damages for breach of a restraint of trade are not in issue. Nor is there any dispute regarding the elements of the tort of inducing a breach of contract that are required to be proved in order for such an action to succeed. However, should liability be established, an
issue arises regarding the correct approach to the assessment of any loss and the calculation of damages.
Restraint of trade
[16] A party seeking to enforce a restraint of trade carries an onus to demonstrate that such a restraint, which would otherwise be considered invalid, is no wider than is reasonably necessary to protect the legitimate interests it is intended to protect.4 The assessment of reasonableness requires weighing the interests and freedom in enforceability of contract against the wider public interest in preserving freedom of trade. The longer the period of the restraint and the wider the geographical area sought to be the subject of it, the greater the infringement on the public interest. However, regard must be had to the legitimate interests of the party at the time the restraint was entered into,5 and the context in which the contract was made which will be critical to the assessment of reasonableness. Relevant factors will include the scope of the restraint in terms of both its duration and coverage, whether there is a legitimate interest to protect, and what the person who is to be the subject of the restraint is acquiring in return.6
[17] In the present case, as in many cases involving the sale of a business, the restraint reflects a payment made for goodwill which is a legitimate interest to seek to protect. In Anderson v Davies, Paterson J described the “fundamental question” as being what restraints are required by the purchaser to obtain and retain the benefit, against the vendor, of the goodwill.7 Where a restraint has been entered into as part of a sale of a business, entry into a restraint can be viewed as the vehicle by which not only the purchaser can protect the value of the goodwill they have purchased, but also, the vendor can maximise the value of that asset.8
[18] While the validity of the restraint was formally put in issue on the pleadings, neither defendant sought to challenge its legitimacy at trial. The restraint was part of
4 Brown v Brown [1980] 1 NZLR 484 at 491 (CA); and Anderson v Davies [1997] 1 NZLR 616 (CA) at 620–621.
5 Mike Pero (NZ) Ltd v Heath [2015] NZHC 2040.
6 Telfer Electrical Nelson Ltd v Trotter [2020] NZHC 1152 at [79].
7 Anderson v Davies, above n 4, at 621.
8 At 621; see also Hugh Beale Chitty on Contract (34th ed, Sweet and Maxwell, London, 2021) at [18-140].
the sale and purchase agreement entered into for Adam’s shares in HWC, of which the goodwill comprised a significant part of the business’s value. Adam’s 50 percent share of the figure attributed to goodwill amounted to some $891,867.9 There is no dispute that Adam was an important part of the business. He was almost entirely responsible for its sales and acquiring business. In addition to the client relationships that Adam had developed, he also maintained strong relationships with contractors, suppliers and tradespersons. Furthermore, the value of the business was based on there being an adequate restraint in place. This was referred to in the valuation of the HWC shares as a “vendors not compete covenant”.
[19] The restraint applied to the “West Coast” region comprising the Buller, Westland and Grey Districts. This was a large geographical area, but one marked by a small population with a relatively small pool of contractors and tradesmen. All three men, Mathew, Adam and Peter, were well known builders with long relationships with professionals in the construction industry, including contractors, suppliers and other builders. The geographical area encompassed by the G J Gardiner West Coast franchise matched that of Peter’s Stonewood Homes franchise and covered the same area. The breadth of the restraint, not unreasonably, mirrored the boundary of the West Coast franchise which was no doubt reflected in its value. Insofar as the length of the restraint is concerned, two years and four months, there was no evidence to suggest this was viewed as an unreasonable period of time, and was consistent with comparable restraints of trade in a franchise context.10
[20] In the absence of any real challenge to the reasonableness of the restraint, I find that in the circumstances of this case, the restraint executed by Adam was valid.
Inducing breach of contract
[21] The elements of the tort of inducing a breach of contract are not in dispute. The requisite ingredients have been described as follows:11
9 Being 50 percent of the value attributed to goodwill of $1,783,734.
10 See for example Mad Butcher Holdings Ltd v Standard 730 Ltd [2019] NZHC 589 at [27]; and
Mike Pero (NZ) Ltd v Heath, above n 5, at [51]–[52].
11 OBG Ltd v Allan [2007] UKHL 21, [2008] 1 AC 1 (HL); Diver v Loktronic Industries Ltd [2012] 2 NZLR 388 (CA).
(a)there must be a legally enforceable contract in existence;
(b)the defendant must have engaged in conduct which in fact induced a breach of the contract;
(c)the defendant must have known that his or her conduct would induce the breach; and
(d)the defendant’s conduct, including the breach, must have caused loss or damage to the plaintiff.
[22] Inducing a breach of contract is an intentional tort requiring deliberate conduct by the defendant that was known would induce another person to breach, in this case, the terms of the restraint. It is not disputed Peter was aware that Adam was subject to the restraint. However, his position is that the restraint was not breached by Adam and that, if it was, it was not his intention to induce him to do so.
Issues for determination
[23] The case gives rise to significant factual issues that require evidential conflicts to be resolved and assessments made as to what can reasonably be inferred from those factual findings. The following issues need to be addressed in turn:
(a)Did Adam breach the terms of the restraint?
(b)Did Peter’s actions induce Adam to breach the restraint?
(c)If so, were his actions intentional in the sense that he knew at the time that his conduct would have that effect?
(d)Did Mathew suffer a loss as a result of the restraint being breached?
Did Adam breach the terms of the restraint?
[24]There are three aspects to this issue that must be individually addressed:
(i)What, if anything, does the evidence prove was the nature and extent of Adam’s involvement with WCR?
(ii)Did that involvement constitute a breach of the restraint?
(iii)Did Adam’s undisputed ownership and involvement in HDD breach the restraint?
[25] The primary breach of the restraint allegedly committed by Adam concerns his alleged involvement in WCR that was established to operate the Stonewood Homes franchise. The operation of the Stonewood Homes franchise by WCR was undoubtedly a business involving the design, marketing, sale and construction of residential houses on the West Coast in competition with the G J Gardiner Homes franchise run by HWC. It is necessary therefore, at least insofar as Mathew’s claim rests on proving Adam was involved in WCR, to demonstrate that this involvement breached the covenant not to directly or indirectly be engaged, participate in or have any direct or indirect interest in that company’s business in any capacity other than as a builder’s labourer.
[26] Mathew’s case relied upon drawing together various items of evidence which he submitted, when taken in combination, are sufficiently strong to conclude on the balance of probabilities that Adam breached the restraint. Adam and Peter maintain this evidence, when assessed together with their explanations and denials, is insufficient to prove Mathew’s claim. It is necessary therefore to review the evidence upon which Mathew relies to draw the conclusion that Adam engaged in activities that breached the terms of the restraint and demonstrate that Peter encouraged or procured Adam to do so.
What, if anything, does the evidence prove was the nature and extent of Adam’s involvement with WCR?
Initial engagement with Stonewood Homes NZ
[27] It is uncontroversial that Adam started work with Peter’s building company, Peter Blight Builders Ltd (PBB), ostensibly at least as a builder’s labourer, on 1 March
2021. Peter confirmed in his evidence that while working together with Adam they discussed various life, family, and work aspirations that included taking on a building franchise on the West Coast. Peter said this was something he had been discussing with his wife over the last few years.
[28] Adam sent Mathew a text on 3 March 2021, shortly after he commenced working at PBB, requesting him to remove the restraint. Adam referred in this text to someone “bringing or trying to bring” another housing company to the Coast and “let[ting] me do it” so as to “[scares] them off”. When asked by Mathew how he would stop them, Adam replied “start one myself if you would let me …”. Mathew submitted it was an odd coincidence this approach was made shortly after Adam commenced working for Peter and that its timing should be taken into account when considering Peter’s subsequent discussion with the national franchise owner, Stonewood Homes NZ Franchisor Ltd (Stonewood Homes NZ), regarding the establishment of a franchise on the West Coast that took place early in the following month.
[29] On 7 April, Peter sent the franchise manager of Stonewood Homes NZ an email stating he was in the process of completing the forms to apply for a Stonewood Homes franchise for the West Coast. Mathew relied on the following part of that email:
I trust that anything we say will also be treated with confidence.
The reason being my business partner is going through a business buyout and if news of a new venture got out it could jeopardise that settlement.
I trust you will understand this.
[30] It is accepted the “business partner” referred to in this email was Adam. However, both Peter and Adam maintained in their evidence that the business partnership being referred to in the email was the land subdivision business or company that Peter and Adam were planning to create that would later be housed in HDD, and that the business referred to as the subject of the buyout was CDL.
[31] When cross-examined about the email, Peter stated the franchise forms for Stonewood Homes required him to list all business interests and investments he currently held. Peter stated he asked Stonewood Homes’ franchise manager to keep
his business partnership with Adam confidential because he was concerned if Mathew found out about the potential new Stonewood Homes franchise he would draw the conclusion that Adam was working for him. This would delay settlement on CDL, which would impact on Adam’s ability to use funds from that settlement to invest in HDD to buy land.
[32] Mathew argued this explanation does not bear scrutiny. It was noted there had been no disclosure of the documents that were said to require reference to business partners other than those seeking to be involved in the franchise. Nor, it was submitted, was there at that time any formal business arrangement or agreement in existence between Peter and Adam regarding HDD. This company was not incorporated until 20 May 2021. It was Mathew’s case that the assurance Peter was seeking concerned Adam’s involvement as his business partner in the franchise being kept confidential because Peter knew that any involvement by Adam in the new franchise would constitute a breach of the restraint. Much emphasis is placed on this piece of evidence by Mathew.
[33] Peter, however, points to emails of early and mid-April between himself and Stonewood Homes NZ regarding the establishment of a new franchise on the West Coast, and evidence about his meeting during that month in Auckland with Stonewood Homes New Zealand. These only refer to his involvement in this period leading up to him signing the franchise agreement on 18 May 2021. He was the only signatory on behalf of WCR and the sole covenantor who signed the agreement in a personal capacity. Similarly, Peter emphasised emails from Stonewood Homes’ head office congratulating him (and him alone) on being their newest franchisee. One of those emails was sent by the Executive Director of Stonewood Homes NZ on 26 May, announcing that its vacant West Coast franchise was now occupied by its newest franchisee, Peter Blight.
Varying accounts of interaction with Stonewood Homes NZ
[34] Mathew asked the Court to draw adverse inferences from what he submitted was the confused evidence given by Peter about how his involvement with Stonewood Homes had developed. In his evidence at trial, Peter said he met with Stonewood
management by himself in April 2021. However, that evidence is contrasted with an earlier affidavit provided by Peter in relation to an interlocutory matter that referred to this meeting being in mid-May when he went to Auckland to meet with Stonewood Homes NZ to discuss him potentially taking on the West Coast franchise, and that Adam accompanied him to Auckland at this time. Adam also confirmed that was the case in an affidavit made in support of the interlocutory application.
[35] Adam’s own evidence at that time was that he had gone to explore opportunities that might be available for him to take up employment with Stonewood Homes because he was considering moving away from the West Coast to a different city. He said in this earlier affidavit that he subsequently decided to remain on the West Coast, but that he would have given his name and number to Stonewood Homes’ staff and that Peter was having more substantial discussions about acquiring a franchise for the West Coast at this time. Adam deposed that he recalled Peter mentioning he was working as a labourer for him and that they had started up a company, HDD, to hold land. In his affidavit for the interlocutory application Peter agreed with Adam’s account. He confirmed bringing Adam on this visit, but not because he was trying to get him involved in buying the franchise or for him to be part of those discussions. He stated the outcome of the visit and his discussions with Stonewood Homes at that time was that he decided to purchase the franchise.
[36] In a subsequent application for further and better discovery, Peter amended his evidence and said he travelled to Auckland on his own in mid-May to meet with Stonewood representatives, and that the visit to Stonewood Homes with Adam took place in June 2021. In his brief of evidence prepared for trial, Peter stated he flew to Auckland on 18 May 2021 to sign a Stonewood franchise agreement alone and that Adam’s only visit to Stonewood Homes’ head office was in June 2021. However, in his oral evidence, Peter stated he actually signed the franchise agreement in Hokitika and travelled to Auckland with Adam in late May on what he described was a social visit where they had dinner one night with people from Stonewood’s head office.
[37] Mathew submitted that Peter’s revised evidence only came after Adam had confirmed in cross-examination that a Snapchat message that included a photograph of Stonewood Homes’ offices with the narration “my new family” had been taken and
sent by him when he was in Auckland in May 2021. This was contrary to Peter’s written evidence and clearly established that Adam had attended Stonewood offices in Auckland in May 2021. Mathew argued that this changing narrative about these meetings and whether and when Adam had accompanied him undermined Peter and Adam’s attempt to minimise the extent of Adam’s involvement with Stonewood Homes NZ at this time and the reliance that could be placed on the accuracy of their claims about Adam’s non-involvement.
[38] In further support of that position, Mathew referred to an email of 4 June 2021 that was generated by Stonewood Homes’ head office to its preferred suppliers introducing the Stonewood Homes West Coast franchisee. The email commences, “We are delighted to welcome Peter & Adam as our newest Franchisee to the Stonewood family”. In an internal email, Stonewood Homes’ head office also made arrangements for Adam to have access to the West Coast franchise’s mailboxes within the Stonewood network including, together with Peter, him to be a user of the “accounts” mailbox within Stonewood’s systems. Mathew raised how Stonewood head office could have got the idea that Adam was one of the new franchisees or should have access to particular dedicated electronic mailboxes if he had not met with Stonewood Homes NZ representatives on the basis of being a person involved in the franchise itself or presented as a person with a central role in its operation.
[39] Similarly, in relation to a visit to Stonewood’s Auckland offices in June 2021 that included training in Stonewood’s systems it was submitted the evidence, while in some respects contradictory and unsatisfactory, was also revealing. Mathew argued that Adam had given conflicting accounts of his involvement in the training that had been organised for the new franchise. When initially questioned, he remembered going to Auckland for a meeting in June for this induction training. In cross-examination he denied attending. Peter and his office manager, Naomi Eyre, confirmed that Adam did attend this training. A later email sent by Stonewood Homes NZ to all three of them, which attached introduction guides to the franchise costing and pricing system, referred to their attendance at that training. On the following day of this June trip to Auckland, Adam, together with Peter, attended what was described as Stonewood’s national suppliers’ expo.
[40] Mathew submitted the importance of this evidence was that, notwithstanding the vagaries of what Adam did or did not do on this June trip to Stonewood Homes’ head office, it begged the question why he, together with the office manager Ms Eyre, was accompanying Peter and was present at all, when the purpose of the visit was familiarisation and training in specialist Stonewood Homes systems and attending Stonewood Homes’ exclusive franchisee’s suppliers’ expo if he had no interest or involvement in the franchise or was not understood by Stonewood to be part of the franchise’s operation. It was not credible, in Mathew’s submission, for him to have been attending simply out of interest or because he was on some type of holiday break.
Stonewood Homes NZ’s inclusion of Adam in arrangements for the running of the franchise
[41] A further aspect of the evidence upon which Mathew relied was Stonewood Homes NZ’s inclusion of Adam in arrangements for the running of the West Coast franchise business that indicated he was at least a part of its management. Reference has already been made to how the Executive Director of Stonewood Homes New Zealand requested that both Peter and Adam be set up as new users on the Stonewood Homes’ internal system and be given Stonewood Homes’ email addresses in late May 2021. Mathew emphasised they were the first two persons to be provided with that facility and that the office manager was not included until some six days later. As part of those arrangements, job titles and contact numbers were requested for Peter and Adam and, as noted, requests made for both Peter and Adam to have access to the central email box and the accounts’ email box for the West Coast franchise with Ms Eyre only being given access to the former. This, it was submitted, was indicative of Adam’s greater role within the West Coast franchise.
[42] From the end of May 2021, the evidence reveals that the West Coast franchise personnel who had apparently been identified to Stonewood Homes’ head office as requiring access to systems and software were Peter, Adam and Ms Eyre. Adam was copied in on numerous emails from Stonewood Homes NZ regarding Stonewood Homes’ business. Reference was also made by Mathew to the email sent on 3 June by Stonewood Homes NZ to “preferred suppliers” welcoming “Peter & Adam as our newest Franchisee to the Stonewood family”. On 8 June, Peter requested three Stonewood Homes’ laptops for the West Coast branch, being for himself, Adam and
Ms Eyre. It is submitted why would Adam, as a builder’s labourer, need to be set up with a laptop computer for Stonewood Homes. Nor is it apparent, in Mathew’s submission, that Peter had any difficulty with Adam’s apparent level of involvement.
[43] There is then the two-day attendance in Auckland in June which appears on the first day to have been for training on the “Coster system” which was designed by Stonewood Homes for the purpose of calculating the cost to build a Stonewood Homes house. Adam’s participation in this training was contested by him but it is apparent Adam’s involvement in this trip resulted in him being able to access Stonewood Homes’ proprietary material, and his inclusion in follow-up emails concerning this commercially confidential documentation was relied on by Mathew to show Adam’s level of involvement in the Stonewood Homes franchise, at least at this stage in late June and July 2021.
[44] The evidence was that only Peter attended a business planning meeting with the Stonewood Homes nationwide franchise manager during this June trip, but it is noted this person sent copies of the business planning documents created during that meeting to both Peter and Adam. These documents included the West Coast branch’s business plan, WCR’s initial financial budget, and a local marketing guide together with reports on the new housing market on the West Coast.
[45] It was submitted by Mathew that Adam and Peter’s explanation that Adam was sent these documents in error by Stonewood Homes does not explain how a person as well-placed as Stonewood Homes nationwide franchise manager would have come to understand that Adam was to be privy to such important business planning documents. The following day, Adam and Peter attended the Stonewood Homes national suppliers’ expo, which was not a public event. Only staff and suppliers of Stonewood Homes were invited. It was submitted, that in spite of Peter’s evidence that he took Adam along only as a valued friend and adviser, that Adam’s attendance was consistent with both men being part of Stonewood Homes’ West Coast franchise.
[46] Other examples of Stonewood Homes’ head office proceeding on the basis that Adam was an important part of the West Coast franchise was an email of 17 June 2021 from the marketing and communications co-ordinator at Stonewood Homes NZ to an
outside marketing firm that listed Adam as being in charge of sales for the purposes of the West Coast Stonewood Homes’ website and listed him, together with his contact details, as a “new home consultant”. It was submitted that Stonewood Homes’ understanding that Adam was responsible for sales could only have come from an outside source. Similarly, Adam’s at least initial inclusion on 24 June in an automated marketing notification system for Stonewood Homes (HubSpot) and as a user on the information sharing platform for Stonewood Homes’ franchisees (SharePoint) a few weeks later together with Peter and Ms Eyre, were submitted as not being consistent with Adam simply being a builder’s labourer but rather with him having a substantive role in the franchise.
[47] Adam and Peter’s explanation that Stonewood Homes must have been mistaken about Adam’s role and that they are at a loss as to how that misunderstanding came about was submitted by Mathew as not being credible. It was argued that Stonewood Homes NZ’s “error” could only have resulted from what Peter had represented about Adam’s role in the West Coast franchise. It was argued the “mistake” by Stonewood Homes was evident as early as 3 June 2021 when Stonewood Homes NZ had referred to “Peter & Adam as our newest Franchisee to the Stonewood family” in an email to preferred suppliers, at which time it was both Peter and Adam’s evidence that Adam had not had any substantive discussions with Stonewood Homes at all. Mathew submitted Stonewood Homes could only have got information regarding Adam’s involvement in the business from what Peter must have said regarding the role Adam was to play within the West Coast franchise.
The absence of evidence from Stonewood Homes NZ
[48] In relation to the issue of whether Stonewood Homes NZ was confused or mistaken in respect of their apparent understanding of Adam’s position or role within the West Coast franchise, Mathew submitted this could have been easily resolved or at least clarified by Peter calling a senior member of that organisation as a witness. A letter had been obtained from the executive director of Stonewood Homes NZ dated 29 October 2021 that was included in the common bundle. It stated that to its knowledge, Stonewood Homes West Coast was solely owned and operated by Peter and that Adam was not involved in the franchise. As proof of the statements contained
within it, the letter clearly constitutes inadmissible hearsay. In his evidence, Peter confirmed he had spoken to the executive director of Stonewood Homes NZ about being a witness in the case but considered he did not need to call her in light of the letter.
[49] That was an unsatisfactory position in which to leave the matter. I accept the submission made on behalf of Mathew, that if Adam and Peter wished to rely on Stonewood Homes NZ having been mistaken as to Adam’s position or role within the West Coast franchise they should have called a representative of that organisation to give that evidence. There was no apparent impediment to such evidence being called, and it remains unclear why that relatively straightforward step was not taken if Peter wished to rely on such evidence.
[50] Mathew invited the Court to draw an adverse inference from the fact a witness from the head franchisor had not been called to clarify its understanding of Adam’s position or the role he was to perform for the West Coast franchise. It was submitted the failure to do so should result in the conclusion that such evidence would not have been supportive or helpful of Peter and Adam’s stance that Stonewood had been mistaken about Adam’s involvement in the franchise.
[51] In that regard, reliance was placed on the approach that was outlined by the Court of Appeal in Perry Corporation v Ithaca (Custodians) Ltd:12
[153] … Neither is it helpful to refer to the “rule” in Jones v Dunkel. There is no rule. Rather, there is a principle of the law of evidence authorising (but not mandating) a particular form of reasoning. The absence of evidence, including the failure of a party to call a witness, in some circumstances may allow an inference that the missing evidence would not have helped a party’s case. In the case of a missing witness such an inference may arise only when:
(a)the party would be expected to call the witness (and this can be so only when it is within the power of that party to produce the witness);
(b)the evidence of that witness would explain or elucidate a particular matter that is required to be explained or elucidated (including where a defendant has a tactical burden to produce evidence to counter that adduced by the other party); and
(c)the absence of the witness is unexplained.
12 Perry Corporation v Ithaca (Custodians) Ltd [2004] 1 NZLR 731 (CA).
(footnote omitted)
[52] It was submitted on behalf of Mathew that each of these preconditions had been established. First, a head franchisor ought to be willing and able to give evidence on behalf of a franchisee; secondly, the evidence about its understanding of Adam’s involvement in the franchise would have been of potential importance having regard to the indications of its understanding he was to be involved in the business; and, thirdly, because of the clear inadmissibility of the letter upon which Peter sought to rely, in the absence of any reason why the head franchisor would not be willing to give evidence the absence of a representative from that organisation appearing as a witness remained unexplained.
[53] Care is required before drawing an inference from the absence of a witness who may otherwise have been thought to support a party’s case because such a step may invite the Court to speculate. However, in the present circumstances I am prepared to accept that, in the absence of evidence from a witness from Stonewood Homes NZ, Peter and Adam’s explanation of that organisation having simply been mistaken both in its correspondence and the steps it took to accommodate Adam’s participation in the West Coast franchise only remains a bare assertion. Without such evidence, the question of how that mistaken understanding or confusion could have arisen remains unexplained. It is an issue that no doubt would have been explored extensively in cross-examination of any witness from Stonewood Homes NZ who would also have been able to access the head franchisor’s own records. Such a prospect tends to underline the possible tactical reason why such a witness was not called, and to that extent I am prepared to draw the inference that such evidence is unlikely to have assisted Adam and Peter’s case.
Financial assistance
[54] A further important piece of evidence upon which Mathew placed considerable store was the financial assistance Adam provided to WCR. Peter accepted that taking on the Stonewood Homes franchise involved a significant financial commitment and that he himself did not have the money to do that. He needed someone to provide him with financial help and he accepted Adam had offered him that support prior to meeting with Stonewood in April 2021. Mathew argued that it was a critical piece of
evidence that but for Adam providing the finance the franchise could not have been established. Peter, however, maintained that had he not obtained the finance from Adam he would have got it from some other source and named an uncle as an example of another potential alternative source of funds.
[55] On 21 May, without notice to Mathew, Adam withdrew $300,000 from CDL’s bank account to which he still had access. Of that, $200,000 was transferred to WCR’s business current account. The narration on the documents recording the deposit states “Owner A Funds Introduced”. Mathew places considerable importance on this description because, on its face, it suggests there is more than one owner. Furthermore, because the undisputed source of those funds is a direct payment made by Adam into WCR’s account, it is submitted “Owner A” is a reference to Adam.
[56] The evidence is unclear who provided this narration but it was submitted that if it was neither Adam or Peter it must have been provided to the person who made the record, perhaps the company’s accountant, who must have got that information from a person associated with the business, in Mathew’s submission most likely Peter. These funds were used to pay the franchise fee of $50,000 to Stonewood Homes on 9 June 2021. Another $50,000 was transferred to PBB’s current account and used by that company for general operating costs. The remainder was used by WCR either to pay costs or as working capital for the franchise.
[57] Both Peter and Adam maintain the $200,000 transfer to WCR’s bank account was simply a personal loan from Adam to Peter done on a “handshake” because Peter needed operational funds for WCR. The loan is not documented in any way and Adam’s evidence was there was nothing unusual for him to lend or borrow money to and from family and associates without such formalities. Peter claimed a level or form of security had been provided for the loan because Adam was given access during its term to WCR’s accounts.
[58] Mathew observed that this arrangement whereby Adam was able to access WCR’s accounts was only revealed at trial and that it was unclear how Adam having access to those accounts provided security for the loan. To the contrary, it was argued this arrangement whereby Adam could access WCR’s accounts suggested the advance
provided by Adam gave him visibility over WCR’s financial position and enabled him to assert some control and influence over the company as a result of his investment. Mathew submitted the arrangement reflected Adam’s ownership role that he acquired as a result of his direct financial investment in the company that held the Stonewood Homes franchise.
[59] Mathew further argued that the credibility of Adam and Peter’s explanation of the transfer simply being a loan had to be considered against the background of Adam’s financial position at the time which he submitted was significantly strained as a result of the restraint, that only allowed him to work as a builder’s labourer. It was submitted that on Adam’s own evidence, his income was extremely limited and records of his personal bank accounts at this time revealed a very modest balance. Mathew submitted it was unrealistic in the circumstances for Adam to have lent
$200,000 to Peter without any security, without interest or any timeframe for repayment in return for nothing.
[60] Adam and Peter pointed to the $200,000 having been repaid to Adam in three instalments between October 2021 and February 2022 which, it was argued, accorded with its status as a loan. However, Mathew argued that the advance needs to be taken into account together with other circumstances and evidence of Adam’s involvement in the Stonewood Homes franchise. Even if categorised as a loan, it was submitted that these funds were evidence of a substantial financial interest that Adam had in WCR which, it was argued, would place Adam in breach of the terms of the restraint.
Representations made by Adam regarding his involvement in the franchise
[61] Mathew also relied on statements that Adam made to other people in April 2021 that he had bought a Stonewood Homes franchise. His mother, Kathleen Thorn, gave evidence of visiting Adam’s home and him telling her he wanted to talk to her about something. Adam told his mother he had bought two building companies, one of which was a Stonewood Homes franchise on the West Coast. When Ms Thorn reminded him that he was not allowed to get into a business like that because of the restraint and that he should just “wait out his time” and continue to work as a “hammer hand” for Peter, she said Adam got frustrated with her. Ms Thorn’s evidence was that
Adam said he did not care about the restraint and would be starting his new businesses anyway. Her evidence was that Adam said that he “doesn’t give a fuck about Mat and what he thinks of him”, and the conversation became heated before she decided it was best to leave.
[62] Adam’s ex-wife, Maria Brown, also gave evidence of visiting Adam’s home in April 2021. When she knocked on the front door, Adam opened it wearing a Stonewood Homes jacket. When she questioned him about the jacket, Adam told her he had purchased a Stonewood Homes franchise on the West Coast. She also related how a few days later Adam rang her and asked if she would do the accounts for Stonewood Homes, as she had done the same thing for Mathew and Adam in the early days of their business with G J Gardiner Homes.
[63] It was not disputed that Adam made these statements. However, he maintained that what he had said to these two witnesses and to other people around this time was incorrect and that he had lied. Adam claimed he was saying these things to get back at Mathew. He was hurt about the way his brother and the rest of his family had treated him as a result of his own personal difficulties and the breakdown of his business and personal relationship with his brother and he wanted to get back at him. These instances of Adam telling other people he had purchased a Stonewood Homes franchise were, on his account, examples of his erratic and unwise conduct around that time. Mathew, on the other hand, argued they provide insight into and are more likely a reflection of Peter and Adam having reached some agreement about establishing a Stonewood franchise on the West Coast together as business partners.
[64] In addition to these statements made by Adam to his mother and his ex-wife, Mathew also relied upon statements made by Adam to others; this time in a business context when he was enquiring whether persons either wished to work for Stonewood Homes or be a supplier to it. Mr Stephen Riley, a former branch manager of a building supply firm in Westport, gave evidence about Adam ringing him in early June 2021, confirming to him that he was setting up a new Stonewood Homes franchise on the West Coast and enquiring whether his firm would like to supply building materials to him and asking how he could ensure they got the best possible prices for materials.
[65] Similarly, Mr Paul Jeffreys, a roofing contractor, gave evidence of Adam calling him in mid-May 2021 to explain he had just restarted the Stonewood Homes franchise on the West Coast with Peter Blight. A third person, Cody Forsyth-Peterson, gave evidence that he called Adam in the middle of May and distinctly remembered Adam saying he had bought into the franchise and was starting up Stonewood Homes. Adam disputed that he phoned Mr Forsyth-Peterson, although he did believe he had texted him or “Snapchatted” at some stage. However, Mr Forsyth-Peterson was not challenged in cross-examination regarding the accuracy of his evidence.
[66] There was also the Snapchat message previously described, showing a photograph of the Stonewood Homes’ head office with the caption “my new family”, which Adam admitted he took in Auckland at the time of one of the meetings in mid-May 2021. In response to each of these pieces of evidence, Adam sought to explain his actions by maintaining he was lying about his involvement in the Stonewood Homes franchise in order to cause “hurt” to Mathew and was effectively “stirring things up” to get back at his brother as a result of the bad blood and ill-will that had arisen because of his personal difficulties that had resulted in him being bought out of the G J Gardiner’s franchise.
Other instances of Adam’s apparent involvement in the franchise
[67] In support of his case, Mathew also pointed to evidence of Adam’s actions in early 2021 which, it was submitted, went well beyond Adam’s role as a builder’s labourer. Mathew relied on records of communications of Adam being consulted by Peter about engaging contractors, such as at least on one occasion consulting him about a quantity surveyor who had sent his CV to Peter. Adam accepted that Peter sought his advice because of his experience that reflected the knowledge he had gained both as a builder and as a previous holder of a G J Gardiner franchise licence.
[68] A further example referred to in the evidence was an exchange of texts between Adam and Peter on 27 September 2021:
Peter: Do we just try to take on another couple of guys and the. Once we have a few jobs under our belt it might be more attractive to someone to join us?
Adam:Every is so busy that owns a company so I think we need to steel some employees and give them a shot
Peter: Yup I think that’s out best shot offer someone the opportunity to step up and then if its going well bring them on board
(emphasis added)
[69] In cross-examination, Adam accepted there were occasions when he approached builders to work for WCR and also contractors and suppliers on behalf of the company. A number of witnesses were called to confirm that type of activity. The roofing and painting contractor, Mr Jeffreys, spoke of being approached by Adam in mid-2021 and asked whether he would be interested in working with Stonewood Homes to do their gutter and fascia work. Mr Forsyth-Peterson also gave evidence of Adam offering him a job as a construction estimator for Stonewood Homes, although that was contested by Adam. However, other evidence that was not challenged included that of Mr Riley who said Adam approached him about establishing a Stonewood Homes account with the building supply firm he worked for.
[70] Mathew also referred to documentary evidence that recorded Adam approaching suppliers which it was submitted showed his involvement in other aspects of establishing and managing WCR. These included Adam on 4 June speaking to and receiving a credit application from a supplier of residential and commercial doors who was based in Christchurch. Four days later, Peter forwarded to Adam a quote for contract works insurance for WCR. In relation to both examples and the earlier instance of Peter forwarding the quantity surveyor’s CV to Adam, it was acknowledged by Peter that he wanted Adam’s views because of his past experience with G J Gardiner and to draw on his specialist knowledge as the former owner of a building franchise.
[71] Other examples relied upon included Adam being sent a price list on behalf of Stonewood Homes from a garage door manufacturer on 9 June, and in August 2021 Adam being added to an authorised buyers’ list in relation to a trading account held by WCR with Placemakers Christchurch in respect of which only Peter and the office manager were authorised buyers. Other, perhaps less noteworthy examples, included a tax invoice sent to WCR for a wastewater system for a proposed house marked for Adam’s attention and evidence given by Ms Eyre, the office manager, that Adam was
responsible for a team of builders employed by PBB contracted by the West Coast franchise to build a Stonewood Homes home.
[72] Mathew argued that these various instances of Adam’s conduct demonstrated he was engaged in a role that went beyond a mere builder’s labourer, and that when coupled with Adam’s access to Stonewood Homes’ (WCR’s) bank accounts indicated a level of engagement in the establishment and running of the Stonewood Homes franchise that went well beyond that expected of a person employed simply as a builder’s labourer or tradesperson.
Sales initiatives
[73] In addition to these instances of Adam’s apparent involvement in the running of the franchise’s operations, Mathew pointed to evidence that Adam was working with Peter in respect of potential sales of houses, in particular land and house packages, which would involve WCR building the houses. He referred to Adam being contacted by an associate on 12 May 2021 about land in a subdivision owned by CDL. It appears that person thought Adam was still with G J Gardiner Homes. Adam responded with details of the section, and that he was intending to build a house on the section and would rather do a house and land package instead of just selling the section by itself.
[74] Under cross-examination, Adam explained he was personally offering to do a house and land package for this person in the future, when the restraint had expired, and it would not have involved Stonewood Homes. In a further email to this person, Adam confirmed he could do a house and land package and would send through some floorplans. While Adam, in his evidence, maintained he had not been intending to refer the project to the Stonewood Homes West Coast franchise, it was submitted by Mathew that his explanation did not confront the difficulty that the offer made by Adam to this person to build a house not only breached the restraint but was long before the restraint was due to expire.
[75] A further example of Adam’s apparent continuing involvement in prospective sales of house and land packages was in mid-July when Peter texted Adam to inform him of the sale of one of the properties on Fitzherbert Street. This had been purchased
by HDD with the intention of building a show home and office for the franchise, and two houses as part of house and land packages. In response to this text, Adam texted “get it signed” to Peter and then told him about his other leads regarding sales. Adam denied these texts were evidence of discussions between himself and Peter about building houses and that they simply related to the sale of sections by HDD to Peter for Stonewood Homes to build a house on. He maintained HDD would not be involved in the construction work itself. However, Adam acknowledged in his evidence the sections were likely to be sold to a third party purchaser as Stonewood Homes house and land packages, which Mathew submitted would be in breach of the restraint. This is an issue which is returned to later when assessing HDD’s activities.
[76] Mathew also pointed to a further text exchange about a section that was for sale that occurred between Adam and Peter on 25 July 2021. For context, the text exchange needs to be set out in full:
Adam: Have u got anyone that wants to buy a land and house It will go for 100 to 120 if they know more offers on it The dig out will be about 15k and to clear in
So section you could sell for about 130 – 145 ready to build on
In land and house but we can’t afford it if we don’t have someone to bye it unless we go 97 or 101
Peter: Yup talked to Joel Ritchie this afternoon but he’s looking for something bigger
Adam: Its perfect for 2 bed 2 bath unit Great spot
What price u thinking
Its so hard cos if we buy it we will sell a house on it and make good money
We just do t have the cash flow though
Peter: Yup. I know that if we bought it we would be able to move it but we
need [cashflow] first 95 tops
Adam: Go 91.5 and if its ment to be we will get it (emphasis added)
[77] When cross-examined about this text, Adam maintained the text concerned HDD buying the land and selling the property to a potential customer and did not involve a prospective sale of a house and land package. However, Mathew submitted the content of the text exchange was self-explanatory.
[78] Reference was also made to a lengthy text in the middle of the following month in which Adam stated to Peter “I sold over six house[s] to people in the restaurant tonight and they will all build again with me/us”. When questioned about this text, Adam stated he was intoxicated when he sent it and denied it was evidence of him intending to sell houses to anyone. However, the following month, on 16 September, Peter sent Adam a text in which he stated, “Whoop whoop looks like we have just sold another one had a walk in today she walked out 1.5 hrs later with a house and land”. Adam replied, “Perfect keep that up”.
[79] Mathew submitted that these communications reveal Adam and Peter’s joint involvement in selling house and land packages together. The text exchange of 25 July was described as being a prime example of such activity. Moreover, it was submitted this evidence demonstrated the close business relationship between the two men that involved the construction and sale of residential houses as part of house and land packages which put Adam in competition with his brother.
[80] Reliance was also placed by Mathew on Adam’s involvement in the construction of a house by WCR, described as the “Houston house”. The Houstons were friends of Adam. In the period between mid-March and 23 April 2021, HWC had marketed G J Gardiner house designs to the Houstons as part of a house and land package. Ms Houston spoke to Adam and as a result, forwarded the G J Gardiner designs to Peter seeking a quote for a like house. A quote was forthcoming from Peter. His evidence was that he understood the Houstons were unhappy with the G J Gardiner price and that he and Ms Eyre dealt with the Houstons during the negotiations and building of the house. He said Adam’s only involvement in the project was as a builder’s labourer on site. In her evidence, Ms Houston referred to Adam as being a “middleman” through whom she forwarded the G J Gardiner quote to Peter to get another price. She accepted a building contract was signed with WCR in July 2021.
[81] For his part, Adam’s evidence was that he understood the Houstons were unhappy with the price G J Gardiner had quoted them and he introduced them to Peter to get a better deal. He said he did so only because the Houstons were close friends who he wanted to help and that he did not do it for any financial reward. He was not paid by anyone. His evidence was that his involvement in WCR obtaining a contract to build the Houstons’ home had only been as a friend to the Houstons and that he had no other involvement in the acquiring of contracts for Stonewood Homes builds. Notwithstanding that explanation, Mathew submitted Adam’s involvement with the Houstons regarding the building of their house by WCR of itself constituted a breach of the restraint as the job was channelled to WCR as a result of his involvement which was consistent with other evidence indicative of his engagement in the activities of that business.
Peter and Adam’s response
[82] In response to Mathew’s case that relied on these various strands of evidence to draw the conclusion that Adam was involved with WCR’s franchise building business, both Adam and Peter sought to emphasise what they submitted was the absence of evidence of any initial involvement by Adam with Stonewood Homes NZ in the period leading up to Peter signing the franchise agreement. Adam was not a director or shareholder of WCR, nor was he described as having any interest in that company in the 2022 financial statements. Adam’s uncontradicted evidence was that he had never seen those accounts. It was noted the invoice for the payment of the franchise fee on 9 June 2021 had been directed to Peter and there was no evidence of Adam having received any form of income from the West Coast franchise or WCR. Peter’s evidence was that Adam had no financial interest in the company and that as far as Ms Eyre, WCR’s office manager was aware, Adam had no interest in the business. It was submitted by both Adam and Peter that, given her involvement in the business and knowledge of the finances of the franchise, she was well placed to know whether Adam had any financial involvement or not.
[83] It was acknowledged that Stonewood Homes New Zealand was to some degree confused in relation to Adam’s part in the business, but it was submitted any misunderstanding on behalf of Stonewood Homes’ head office did not safely translate
into Adam having actually engaged or participated in the West Coast franchise. It was submitted that it was only Peter who had dealt directly with Stonewood Homes NZ’s franchise manager, and that it was only Peter who had attended separate planning meetings by himself without Adam. It was accepted that Adam was copied into some emails, but it was argued it was notable that such communications were addressed directly to Peter, whose evidence was that in any event he would have discussed their content or the attached documents with Adam as he valued his input and advice.
[84] Insofar as Adam’s representations to other people regarding his ownership of the franchise is concerned, Peter’s evidence was that Adam’s representations were (as Adam himself has admitted) simply wrong. While Peter cannot speak to Adam’s motivation for these statements, and it is conceded on behalf of Peter that Adam’s false statements impact on his credibility, it was argued there was no documentation that would support Adam’s false assertions. In this regard, reliance was placed on the signed franchise agreement, the company records and its financial statements.
[85] Regarding the approaches that Adam made to contractors and other people in the building trade, it was also submitted on behalf of Peter that he was unaware of Adam’s activities. It is not denied that Adam took steps to source possible employees or suppliers for WCR’s business, but Peter submitted that should not be interpreted as Adam having any interest in or having been engaged or participated in the franchise’s business beyond being a builder’s labourer employed by PBB. It is also acknowledged that Adam may have been trying to assist Peter and was clearly supportive of what Peter wanted to achieve, but it was submitted that neither those unilateral voluntary initiatives taken by Adam nor Peter’s approaches to Adam for advice and opinion were prevented under the terms of the restraint.
[86] It was emphasised that, in any event, these unauthorised steps taken by Adam had largely ended by the end of July 2021 by which time Adam’s Stonewood Homes’ email address had been terminated and the incorrect reference to him being a “sales consultant” on the Stonewood Homes’ contact website removed. It was submitted there was a dearth of evidence that Adam took part in the WCR business from this time onwards.
Mathew’s reply
[87] In response to Adam and Peter’s explanations of the evidence upon which Mathew relies to draw the inference as to Adam’s participation in WCR, it was submitted the cumulative effect of this evidence overwhelms any innocent explanation. It was argued that reliance on the absence of Adam’s name on formal documentation including Companies Office documents, financial statements or the franchise agreement for WCR are no more than would be expected in respect of a surreptitious venture where it is known that Adam’s involvement would amount to a breach of the restraint and is entirely predictable in the alleged circumstances.
[88] In reply to the submission that whatever evidence there is regarding Adam’s alleged involvement with the West Coast franchise it was only limited to a period between April and July 2021, Mathew submitted it was not accepted there were no breaches after that period but that in any event the diminution in evidence of Adam’s involvement with Peter is unsurprising. On 11 June, both men were put on notice of Mathew’s knowledge of alleged breaches of the restraint and proceedings were issued on 6 July, after which the use of Adam’s Stonewood Homes’ email account largely stopped. It was argued that Adam and Peter became more guarded in their conduct and written communications ceased from this point onwards.
Inadequate discovery
[89] Mathew also seeks to have adverse inferences drawn from the adequacy of the disclosure of material by Peter and Adam which is said to have been incomplete. It was argued there was an appreciation by Adam and Peter of the reasonably indiscreet nature of their communications over the May/June 2021 period, when it is argued the restraint had little impact on their activities other than an appreciation of the need to keep matters confidential (notwithstanding Adam’s representations to a number of persons regarding his involvement in the Stonewood Homes franchise). As noted, it was suggested that once Adam and Peter had been put on notice regarding potential legal action, that stopped. Mathew argued that adverse inferences should be drawn from a lack of full disclosure from Adam and Peter.
[90] It was submitted, in particular, that no copies of emails sent from Adam’s Stonewood Homes’ address could be obtained and that it had not been possible to extract texts from Adam’s iPhone for the period 1 – 5 January 2022, although it is unclear what the significance of that relatively short period is. It is acknowledged there are texts in the discovery from this device but it is complained that it is unknown whether the records from this source are complete. Adam claimed he lost this particular device on a fishing trip in Haast only a few weeks after an application was made to search such devices. Emails from the gmail account Adam shared with his partner were also unable to be recovered. Apparently this account was deleted by Adam the day after Mathew’s solicitors requested further discovery from Adam and Peter. It was therefore submitted the full factual position has not been able to be put before the Court.
[91] I accept these discovery difficulties reflect poorly on Adam, who denies any wrongdoing on his part for the loss of the iPhone and the deletion of what might otherwise have been considered to be an irrelevant household email account. The loss of the iPhone on a fishing trip appears improbable or at the least represents an extraordinarily coincidental occurrence as does the timing of the deletion of the gmail account. However, care is required before drawing an adverse inference against Adam. The circumstances are suspicious but, in light of potentially lost material having been obtained from alternative sources, it is difficult to gauge the effect these circumstances should have on the overall assessment of Adam’s evidence. Overall, I accept it tends to add to the reservations that arise about Adam’s credibility as a result of his own admissions (on his own case) of having made contradictory and untruthful statements to others for his own personal objectives. However, I am not prepared to draw anything more beyond that.
Conclusion as to Adam’s involvement
[92] On my analysis of the evidence, I am satisfied Adam and Peter at some stage in March 2021 decided to move forward in business together with a view to establishing a land and building operation comparable to the operation Adam had run with Mathew as a G J Gardiner franchise. Both men were aware of the limitations placed on Adam’s activities by the terms of the restraint which they sought to avoid
by structuring their business relationship in a certain way. They attempted to silo Adam’s involvement in Stonewood Homes franchise, at least to the outside world, from the balance of their joint venture by limiting Adam’s formal business relationship with Peter to HDD.
[93] HDD, insofar as it operated as a straight land purchase and subdivision business, would not run foul of the restraint. This company’s activities and Adam’s involvement in them is examined later in this judgment. However, for the purposes of the present issue regarding the nature and extent of Adam’s involvement with WCR, it is apparent this company was to operate in tandem with HDD as is evident from the way land owned by HDD was to be utilised for the purposes of an office and show home for the Stonewood Homes franchise and to provide properties upon which houses were to be built by the Stonewood Homes franchise as part of land and house packages.
[94] The reference in the email sent by Peter on 7 April 2021 to Stonewood Homes NZ’s franchise manager asking for matters to be treated with confidence because his business partner was going through a business buyout is likely to be a reference to the unconcluded negotiations regarding CDL because a settlement had already been reached regarding HWC back in October 2020. However, the reference by Peter to his “business partner”, who it is accepted was Adam, clearly indicates the two men were in business together. I do not consider their shared business interests can be held to have been confined to HDD.
[95] While I do not think it can simply be inferred from that email that Adam was being put forward as a co-owner of the new franchise, I am satisfied that was the likely intention once Adam had completed the process of de-merging his old business interests from his brother and the restraint had expired. Adam’s co-ownership of HDD, his visits to Stonewood Homes NZ’s head office in Auckland, the representations he made to family members and trade associates regarding his ownership of the new Stonewood Homes franchise, and the initiatives he took regarding relationships with suppliers and the engagement of contractors demonstrate how he was intended to be an integral part of the West Coast Stonewood Homes
franchise and likely its co-proprietor. The way Adam and Peter communicated with each other also tends to confirm this was the position.
[96] It is apparent any official involvement in the franchise was to await the expiry of the restraint. The absence of Adam’s name from formal documentation relating to WCR is unsurprising given both Adam and Peter’s awareness of the restrictions on his involvement in activities associated with a building business beyond simply being a builder’s labourer. However, I consider there is sufficient evidence, particularly as it relates to the provision being made for Adam’s involvement in the franchise, as is apparent from the interaction and arrangements with Stonewood Homes NZ and Peter and Adam’s documented exchanges, that the inference can be drawn Adam was to have a significant role in what appears to have been intended would be a joint business.
[97] The deployment of funds by Adam to allow Peter to proceed with the securing of the West Coast franchise and the timing of this advance is also telling. Whether categorised as a loan or viewed as an investment by Adam in a new business, the provision of this money at a time that is broadly contemporaneous with Adam’s joint venture with Peter in HDD supports the proposition that their commercial plans went wider than simply buying and subdividing land together. I consider the subsequent apparent confusion within Stonewood Homes NZ concerning Adam’s role and status in the new franchise was indicative of the deliberately opaque way in which Peter and Adam had to proceed in the circumstances and a strong indication that Adam was to play an important role in this new business.
[98] The necessity to maintain an appearance of compliance with the restraint necessitated Peter taking a lead role, and that need meant Adam’s intended joint managerial or proprietorial role had to be cloaked. Having regard to Adam’s situation, Peter was more than willing and capable of taking the lead with Stonewood Homes NZ. However, I consider there is sufficient evidence to conclude that, at least until Adam’s activities came to the attention of Mathew, the initial intention the men shared was that this would be a joint business venture supported by Adam who had considerable experience of having successfully run a building franchise.
[99] However, while I am satisfied this was Peter and Adam’s intentions when they embarked on the Stonewood Homes project, there is a paucity of evidence to suggest this joint business initiative, at least insofar as the Stonewood Homes franchise business undertaken by WCR was concerned, survived much beyond Mathew’s legal intervention. It appears that neither Adam nor Peter thought the former’s involvement with HDD put them at great risk of breaching the restraint.
[100] Having arrived at these conclusions on the evidence, it is necessary to determine whether what was shown to be Adam’s involvement constituted a breach of the restraint.
Did Adam’s involvement constitute a breach of the restraint?
[101] Mathew approached this issue on the basis there could be no dispute the business of WCR fell within the definition of the term “Business” as defined in the schedule to the restraint, being “the design, sales, marketing, management, accounting, estimating, and construction of any houses, commercial or industrial, buildings, units or duplexes”. This was not contested so it therefore followed, on Mathew’s case, that any involvement by Adam beyond the work of a builder’s labourer constituted a breach of the restraint.
[102] Peter, on the other hand, argued that Adam’s “involvement” of itself in such a business was insufficient. He focused on the words of the restraint that prohibited Adam from “directly or indirectly” engaging, participating in or having any direct or indirect interest in the type of business described in the restraint. In relation to the term “interest”, Peter referred to a number of decisions of this Court that emphasised that the term “interested in” in respect of a business meant a “proprietary or pecuniary interest”.13 It was submitted that simply being a creditor, without more, is not sufficient to be “interested in” the business of the debtor. However, I do not consider these arguments greatly assist the defendants in the circumstances of this case. As noted by Mathew, the restraint extended to bar Adam from indirectly participating in the defined business in any capacity, other than as a builder’s labourer.
13 Bramwell Scaffolding Dunedin Ltd v Brazier HC Dunedin CP53/97, 1 July 1999; GSE Group Ltd v Walters Supplies Ltd HC Auckland CIV 2005-404-3045, 16 July 2008, citing Smith v Hancock [1894] 2 Ch 377.
[103] The role of a “builder’s labourer” was variously described by each of the parties when giving their evidence and by Mr Hofman, an experienced builder. Mathew considered a builder’s labourer to be someone who helps around the building site with general everyday building but would not be running the job. Mr Hofman described such a person as being engaged in more labour-intensive work “rather than the thinking behind the construction of buildings” who would assist another builder. Adam said a builder’s labourer was someone who was working for someone else and not receiving a profit but did not accept he would be an assistant to another builder, while Peter described a builder’s labourer as a person who does labouring work on a building site and generally would not be qualified as a builder. Whatever the parameters of a builder’s labourer’s job description, it is clear such a person would have no managerial role or involvement at an executive level in the running of the business or operational oversight.
[104] Accepting for the purposes of this issue that it was insufficient for Adam to simply be “involved” in the business as it clearly would not be if just performing the duties of a builder’s labourer, the focus must be on the words of the restraint and whether he directly or indirectly was engaged in or participated in WCR’s business. I am satisfied he was so engaged and did participate in this company’s franchise business. Leaving to one side whether in the circumstances any clear demarcation can be made overall between the business objectives and activities of HDD and WCR, I am satisfied Adam participated in the acquisition or establishment of the Stonewood Homes West Coast franchise. His investment in that business may not alone have been sufficient to meet the threshold of participation or engagement in the business, but coupled with the initiatives he took to create business relationships, engage with contractors and develop sales it demonstrates he sought to perform a role on behalf of this business in furtherance of its establishment and development.
[105] It is apparent from his accompaniment of Peter on trips to Auckland to meet with representatives of the head franchise and Stonewood Homes NZ’s engagement with him as part of the West Coast franchisee “team” he was engaged in that business at a level that was at the very least comparable to that performed by Ms Eyre as the office manager. Such lower managerial functions in this type of business would constitute a breach of the restraint. Adam’s engagement was at a considerably higher
or more senior level. His role was far more central to the overall direction of the business, with the irresistible inference from both his conduct and other evidence being that he was effectively in partnership with Peter. As already noted, it is likely this arrangement was not intended to formally crystallise until the restraint had been completed but I consider the balance of the evidence favours the conclusion that internally Adam was carrying out managerial and strategic functions which involved him, together with Peter, jointly discussing and making decisions about how the business was to be advanced. This conclusion is reinforced by the way HDD was to operate in support of WCR’s business.
Did Adam’s undisputed ownership and involvement in HDD breach the restraint?
[106] There was no dispute about Adam’s ownership and participation in the activities of HDD. Both Adam and Peter took the position that the function of this company was limited to holding land and was therefore outside the terms of the restraint. It was accepted by Mathew that a company conducting the business of purchasing land for the purpose of subdivision and sale would not constitute a breach of the restraint. However, as observed earlier in this judgment, the role of HDD and its activities has to be assessed in the context of its relationship with WCR’s business of building houses and in particular selling house and land packages that, as with all large building companies, was a core part of its commercial activities.
[107] The interrelationship between HDD and WCR is illustrated by the use to which Peter and Adam put, or intended to put, parcels of land situated in Fitzherbert Street, Hokitika. On one plot of land, the Stonewood Homes franchise’s office was to be built; on neighbouring land the franchise’s show home was to be constructed; and two other lots were designated for house and land packages. HDD also had two large plots of land situated at Golf Links Road and Kaniere Road which were intended for subdivision.
[108] Peter and Adam took the position that the construction of any buildings on this land owned by HDD would not constitute a breach of the restraint because the building would be undertaken by the Stonewood Homes franchise owned by WCR. It was argued that even the sale of house and land packages that would have included a
condition to use Stonewood Homes to build the houses on the land would not involve a breach of the restraint. Furthermore, it was submitted that because of the considerable time required to develop and complete the subdivision of land, any marketing and construction of houses would not take place until well after the restraint had lapsed. It was submitted the only building that had actually been started before Adam retired from HDD was the commercial office building. The show home that was to be constructed on the other Fitzherbert Street site had not by then been commenced and neither of the residential sections had been sold as either sections or house and land packages.
[109] I accept for the purposes of Mathew’s claim that HDD’s ownership of land situated at Golf Links and Kaniere Roads, which was earmarked for development and subdivision, is largely irrelevant to the question of whether Adam’s involvement in HDD breached the restraint. The period of time that would likely have had to elapse before sections were able to be marketed would probably mean the intended use of that land to build houses was too remote. However, the various ways that Adam and Peter approached the use of the Fitzherbert Street properties involved actual breaches of the restraint and demonstrated the way in which HDD’s activities were inextricably tied to the building franchise’s business. This in turn shows how Adam’s active involvement in HDD also constituted a breach.
[110] There was evidence that on 20 August 2021, Peter asked Adam for his views on the consent drawings for the Stonewood Homes office to be built on land owned by HDD on Fitzherbert Street. Adam’s response is not one expected of a person whose role is limited to solely being the vendor of the land upon which a building that he has no interest, is to be constructed by a different entity. Among his comments in reply are “think we could do better than French doors at entrance”, and “Can they not draw up our car parks and wheel chairs parks onsite will save us heaps …”. Six days later, Peter sent Adam updated Hokitika office consent plans.
[138] I accept the openness with which Adam and Peter incorporated HDD and sought to use that company as a vehicle for property development is capable of demonstrating how Peter honestly believed the two men could structure their business affairs to avoid Adam infringing the restraint. I am prepared to extend that benign view to Peter’s belief that the use of HDD to acquire and subdivide land for the purpose of providing land and house packages for marketing by the newly established franchise was a genuinely held understanding of the legal position notwithstanding the, at least, indirect way that would involve Adam participating in the marketing and construction of houses.
[139] However, it is less apparent how Peter could not have known that his joint venture with Adam in HDD for the design and construction of a commercial office building either for lease to the Stonewood Homes franchise or another entity did not breach the restraint. Similarly, how the deployment by HDD of a neighbouring parcel of land it owned for the purpose of constructing a show home for the franchise would not amount to Adam’s participation or engagement directly or indirectly in the design, sale and marketing of houses. Peter’s pleaded ignorance of a lack of appreciation of this being the consequence of Peter and Adam’s joint commercial venture is not credible but is all that has been offered by Peter in explanation for allowing Adam to engage in this activity effectively, as I have said, in partnership with him.
[140] As is apparent from my earlier observations and conclusions set out in this judgment, I do not accept that Peter was unaware of the extent of Adam’s involvement in WCR’s business. To the contrary, his participation was by design and part of a
longer-term business plan the two men had entered into together. While, as I have acknowledged, I am prepared to accept that initially Peter may have believed that matters could be arranged in a way that did not breach the restraint, I do not consider, given how matters developed and the level of Adam’s participation, Peter could for very long have but failed to appreciate that allowing Adam to be involved to the extent he was and to be so actively engaged did not breach the restraint. Notwithstanding that knowledge, and despite being in a position where Peter retained the ability to prevent Adam’s continued participation, it is apparent Peter was prepared to allow Adam’s continued involvement and engagement at a level that went well beyond that of a builder’s labourer for the purpose of establishing and developing the building franchise.
[141] It also appears to have been the case that once Mathew became aware of Adam and Peter’s joint venture and gave notice of that knowledge, the extent of Adam’s involvement in the franchise tapered. It appears, at least for a time, there remained sufficient confidence in the separate corporate personality of HDD to allow Adam’s continued involvement in that company, but insofar as Adam’s involvement in the franchise was concerned, it is not apparent there was any belief that Adam’s involvement could continue in the way he had previously been engaged in that business in the face of Mathew’s legal challenge.
[142] While the reduction in Adam’s involvement may have been the result of Peter choosing to adopt a precautionary approach having regard to that turn of events, there is also an inference available that he must have been aware that Adam’s ongoing participation in the development of that franchise was in breach of the restraint, and that could no longer be allowed to continue. That points to prior knowledge of his complicity in permitting Adam to have been so involved in the running of the building business.
[143] Having regard to all these matters, I am satisfied that Peter’s actions in permitting and facilitating Adam’s breach of the restraint were wilful and that his ongoing encouragement of Adam to do so was intentional.
Did Mathew suffer a loss as a result of the restraint being breached?
[144] In order for Peter to be liable of the tort of inducing breach of contract it is necessary that his conduct caused loss or damage to Mathew. Peter submitted that no loss has been suffered by Mathew as a result of any of his actions should it be found he induced or encouraged Adam to breach the restraint. He argued the evidence demonstrated that Mathew’s business did better after Adam sold his shareholding and that he cannot point to any actual losses arising from the alleged breaches of the restraint. Adam made the same argument.
[145] The issue of whether there has been a loss is important not only because it is an essential ingredient of establishing an actionable tortious claim against Peter but it also goes to whether Mathew is entitled to an award of damages against either or both defendants. Mathew’s position is that, while it is difficult to quantify the harm he has been caused, he maintains he has undoubtedly suffered a loss as a result of the breach of the restraint by Adam and from Peter’s actions in inducing Adam to breach the contract. To address these issues it is necessary to review the evidence that was adduced relating to the question of the calculation of loss and the law relating to the approach to be taken to the measure of damages in a breach of restraint of trade case.
The identification of any loss
[146] Mathew submitted that ordinarily the assessment of loss would involve an examination of whether the plaintiff’s business was adversely impacted by the actions of the defendant in breaching the restraint. However, it may be difficult in an individual case to calculate that loss. Mathew argued the circumstances of Adam’s breach is a case in point. It is suggested that in a relatively small market in a close community such as the West Coast, with a limited number of clients, any business that is secured by one building company can reasonably be viewed as having been obtained at the expense of another. Accordingly, it was argued that Adam’s involvement in the establishment of the Stonewood Homes franchise in breach of the restraint, being a business in direct competition with HWC, will have inevitably resulted in harm to HWC’s business.
[147] Mathew relied on the expert evidence of an accountant, John Dobson, who has expertise in the valuation of businesses. His evidence was that while he was satisfied a loss had accrued to HWC’s business as a result of the competition arising from the entry of the Stonewood Homes franchise in the West Coast housing construction market, it was difficult in the circumstances to make any meaningful or accurate assessment of that loss as a result of the increased competition created by the new franchise. In particular, he pointed to a significant expansion or “boom” in the building market following Mathew’s purchase of Adam’s shares in HWC, with the number of building consents for new housing issued in the West Coast region almost doubling between the year ended January 2021 and for the same period the following year. This, it was submitted, has had the effect of disguising the detrimental effect on Mathew as a result of Adam’s breach.
[148] However, Peter and Adam argued that Mathew was simply not able to show that HWC had lost sales to Stonewood Homes or that any housebuilding contracts secured by the Stonewood Homes franchise would otherwise have been obtained by it. Despite having at least some knowledge of those particular building projects, Mathew did not comment in his evidence on whether they would otherwise have been G J Gardiner customers. Adam and Peter point to information compiled by the other expert accounting witness, Simon Carey, which showed that G J Gardiner Homes’ builds increased from 28 houses for the year ended January 2021 to 54 houses for the next year ending January 2022. Mr Carey’s evidence was that the EBITDA of HWC’s business would have increased markedly from $600,000 as calculated at the time of the buyout of Adam based on the estimated annual sale of approximately 26 to 28 homes over the following years.19 It was argued these figures do not indicate that any lost goodwill as a result of a breach of the restraint translated into any impact on WCR’s business.
[149] Mathew maintained the evidence did suggest a negative impact on HWC’s business that coincided with the actions of Adam and Peter which ought not be allowed to be obscured by the overall increase in building activity across the market over this period. It was acknowledged that in the year immediately after the sale of Adam’s
19 Earnings before interest, taxes, depreciation and amortisation – being a measure of company profitability and an indicator of a business’s value.
shares in HWC the company enjoyed a busy and successful year. However, as already noted, this was said to have largely been the result of increased activity in the residential housebuilding sector. Mathew emphasised that despite the total number of builds on the West Coast for the period ended January 2021 doubling over the course of the same period for the following year, HWC’s market share increased by only 2.3 per cent, from 24.7 per cent to 27 per cent. Moreover, it was submitted the impact of Peter and Adam’s actions that resulted in the establishment of the Stonewood Homes franchise only commenced towards the middle of 2021, and the impact of this new competition would only have been effectively felt in 2022 because of the lead-in period needed to establish that business and the “lag” in the recording of consented new house builds.
[150]In the next year, 2022, it was observed that HWC’s market share dropped to
14.8 per cent and, in respect of the market share of houses built by housing companies on the West Coast, diminished from 78.26 per cent to 47.95 per cent in the 2022 year with the new Stonewood Homes franchise recorded as having acquired a 14.6 per cent share of that market. Since that was the first period in which the Stonewood Homes franchise was recorded as having any market share, Mathew argued G J Gardiner Homes significantly reduced share for the same year was attributable to the Stonewood Homes franchise’s entry into the market and illustrated the adverse impact on HWC’s business as a result.
[151] Mr Carey’s evidence was that, on the basis of the figures for consented sales of new houses, he could not see where financial loss had been caused through lost sales activity over the period after the sale of Adam’s HWC shares to Mathew when compared with the valuation of that company for the purposes of that transaction and previous years’ consented sales figures. However, that does not appear to take into account the favourable market conditions that applied following the sale of Adam’s shares or the additional potential sales HWC may have acquired if the Stonewood Homes franchise had not entered into competition with it. The point Mr Dobson made was that there are too many variables to work out in an expanding housebuilding market to be able to accurately assess the effect of the breach of the restraint based on a comparative analysis of HWC’s building performance after Stonewood Homes started operating as a competitor.
[152] I accept it is insufficient, as Mr Carey sought to do, to simply compare HWC’s trading performance with the figures used at the time the company was valued for the purpose of the buyout without taking into account changing factors in the market. Equally, however, as Mr Dobson opined, these variables make it very difficult to identify the impact or to quantify the likely harm to HWC as a result of the breach of the restraint which Stonewood Homes’ presence on the market represents.
[153] I consider it inevitable that the introduction of a new competitor in the marketplace, which has successfully secured business that it is otherwise reasonable to assume would have potentially been obtained by a competitor be it HWC or another building company, must be considered to be to the detriment of that business and represents a form of harm or loss. In the present case, the evidence was that the Stonewood Homes franchise secured 11 new house builds for the 2022 calendar year. It is reasonable to assume that some of those builds would otherwise have been business that HWC could have obtained. Mr Dobson was satisfied there had been a loss to the business of HWC and Mr Carey accepted that, at least in 2022, Stonewood Homes’ building activity must have impacted on the local housebuilding market.
[154] As is apparent from this review of the available statistics concerning the number of consented new house builds and the market share of the building companies operating on the West Coast, particularly in the context of an expanding building market, it is difficult to assess what loss may have accrued to HWC’s business as a result of the entry of the Stonewood Homes franchise. There are too many factors in a rapidly growing housebuilding market to accurately be able to assess the impact of another building company competitor. Because of that difficulty, Mr Dobson took the view the appropriate approach in assessing likely harm caused to HWC’s business as a result of the impact of the breach of the restraint was to examine the value of the restraint that Adam had effectively sold to Mathew and which Mathew paid for when purchasing Adam’s share but did not receive.
[155] This was of some importance, not just as an alternative approach to measuring any loss suffered by HWC but in seeking to determine the actual financial loss suffered by the plaintiff himself, Mathew, as opposed to HWC, as a result of the breach of the restraint. While loss of business as a consequence of the breach would affect the value
of HWC as a trading entity, it was submitted that it was Mathew who had directly suffered a loss for having paid a certain price for the value of Adam’s shares which included the value of the goodwill and that Mathew was the plaintiff who was seeking redress. The worth of the goodwill as an intangible asset purchased by Mathew included the value of the restraint that prevented Adam utilising the goodwill Mathew had acquired when purchasing Adam’s share of HWC. Mathew argued that valuing the difference between the worth of the goodwill that was accompanied by a restraint and its value without such a contractual requirement was an appropriate and legitimate means by which to measure Mathew’s loss.
How may loss be measured in a breach of restraint of trade case?
[156] This Court has previously observed that in restraint of trade cases it may generally not be possible to determine what loss has been caused by a breach of a restraint but that, notwithstanding such a difficulty, it will “not shirk from making awards”.20 Mathew relied on the evidence of Mr Dobson, who undertook the exercise of assessing what Mathew paid for Adam’s shares in WCR and what he actually ended up receiving, given Adam’s failure to comply with the restraint and the fact the value of the company would have been less without it. Essentially Mathew submitted he should be compensated for not receiving the value of the restraint which had enhanced the value of the goodwill that was such an important component of the price he paid when buying Adam’s 50 per cent share in WCR and which had been valued on such a basis.
[157] In Denaro Ltd v Onyx Bar and Cafe (Cambridge) Ltd Allan J held that, in a claim for breach of a restraint of trade, the Court may award “restorative” damages to a plaintiff for the lost value transferred to a defendant.21 The Court further stated:
[28] … There is no reason in principle why the Court should not be free to award restitutionary or restorative damages where they are called for. Such cases will of necessity be fairly rare. The present case is an example. In most cases, a plaintiff who sues for breach of a restraint of trade covenant will do so in the context of demonstrable losses suitable for the assessment of compensatory damages.
20 Anderson v Davies [1997] 1 NZLR 616 (HC) at 11.
21 Denaro Ltd v Onyx Bar and Cafe (Cambridge) Ltd HC Hamilton CIV-2010-419-777, 7 February 2011 at [20].
[29] Here, the respondent paid a substantial sum for intangible assets, including goodwill. The benefit of the restraint of trade clause was part of that goodwill, so it has paid for something it did not get (a competitive environment without the appellants) and which, on the evidence, the appellants never had any intention of providing.
[30] As it turned out, the respondent was able … to achieve a turnover which exceeded the warranted turnover. But that is largely irrelevant. The Court is entitled to infer that the respondent must have lost considerable turnover simply by reason of the fact that the former owner of Onyx had set up in business immediately next door. Actual loss was inevitable.
(footnote omitted)
[158] In support of this approach to the assessment of damages, Mathew argued that awarding restorative damages for what he did not receive from Adam is consistent with more general principles relating to the assessment of damages for breach of contract. To illustrate that approach, Mathew referred to the Privy Council’s judgment in Lion Nathan Ltd v CC Bottlers Ltd where the purchase price of shares paid by a company had been based on a forecast of expected profits that was found to have been significantly overstated.22 In addressing the quantification of damages in that case the Board observed:23
… The forecast, though prepared with reasonable care, may on account of unknown or unforeseeable factors turn out to be substantially inaccurate. It therefore does not warrant that the company has any particular quality. The prima facie rule for breach of a warranty of quality of goods cannot be applied. One must therefore return to the general principle of which that rule is only one example, namely that damages for breach of contract are intended to put the plaintiff in the position in which he would have been if the defendant had complied with the terms of the contract. … If the vendor had made a forecast in accordance with the terms of the warranty, he would have produced a lower figure and the price would have been correspondingly lower. The damages are therefore the difference between the price agreed on the assumption of NZ$2.223m earnings and what the price would have been, using the same method of calculation, if the forecast had been properly made.
[159] Essentially this is the approach contended for by Mathew in the present case. Adam should pay damages for breach of contract that will put him in the position he would otherwise have been if Adam had complied with the terms of the restraint.
22 Lion Nathan Ltd v CC Bottlers Ltd [1996] 2 NZLR 385 (UK PC).
23 At 388.
[160] This general principle was also articulated by Elias CJ in Marlborough District Council v Altimarloch Joint Venture Ltd, who noted that where property transferred under a contract is not as represented, the usual measure of the purchaser’s loss is by deduction of the actual value of the property from its value as represented.24 This was described as the usual measure applicable to land and goods, but whether it will be the appropriate measure in any particular case will depend on the circumstances because, as has frequently been emphasised, quantum of damage is a question of fact and this general principle can only be a guide.25
[161] In further support of this approach, an analogy was drawn with how damages were awarded in cases involving breaches of turnover warranties, where a purchaser has received a substantially reduced benefit under a contract. In Dangerous Goods Compliance Ltd v Farquhar Lelean Holdings Ltd (in liq), Muir J held a measure of damages for breach of a turnover warranty will be the difference between the value of the business if the turnover was as warranted and its value given its actual warranty.26 In support of such an assessment of damages, the Judge in that case cited the English authority of MDW Holdings Ltd v Norvill, where it was held by Newey LJ that in contract, application of the principle will involve asking what position the innocent party would have been in had the contract been performed:27
… The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed. …
It is on this basis that damages for breach of a warranty given on a sale of shares are determined by comparing the actual value of the shares with the value they would have had if the warranty had been true.
[162] Similarly, in AAM Ltd v Exotica Enterprise Ltd, Lang J observed in respect of the question of damages:28
24 Marlborough District Council v Altimarloch Joint Venture Ltd [2012] NZSC 11, [2012] 2 NZLR 726 at [24].
25 Radford v De Froberville [1977] 1 WLR 1262 (ChD) at 1270–1271.
26 Dangerous Goods Compliance Ltd v Farquhar Lelean Holdings Ltd (in liq) [2022] NZHC 3041 at [226].
27 MDW Holdings Ltd v Norvill [2022] EWCA Civ 883, citing Robinson v Harman (1848) 1 Ex 850 at 855.
28 AAM Ltd v Exotica Enterprise Ltd [2019] NZHC 1482 at [131].
… the only realistic approach the Court can take to the assessment of damages at this stage is to determine the price [the plaintiff] would have been prepared to pay had she been aware of the true position regarding the turnover and net profit derived by the business she was buying.
The claim against Adam
[163] I accept Mathew’s submission the proper approach to the calculation of damages resulting from Adam’s breach of the restraint is to assess what Mathew paid for Adam’s shares in WCR and what he actually received. Specifically, what he paid Adam to secure his undertaking not to engage in competition with him in a rival business and what he actually received in return for that payment. By that means, Mathew’s personal loss can be calculated on the basis of the value of the restraint he paid Adam but did not receive the benefit from.
[164] Mr Dobson was able to calculate Mathew’s actual financial loss because of the valuation exercise that had been undertaken at the time the two brothers entered into the sale and purchase of Adam’s 50 per cent shareholding in HCW, in particular the valuation of the goodwill of the company’s business. Mr Dobson relied on the calculations made at the time the shares were valued and proceeded on the basis, as had been acknowledged in the valuation itself, that the assessment of value assumed there was an adequate restraint in place. To place a value on the restraint involved him valuing the business without a restraint. The difference between that figure and the price paid for the goodwill would, on his analysis, represent the value of the restraint.
[165] As noted earlier in this judgment, the price paid for Adam’s shares largely comprised the value of the goodwill which the restraint acted to protect. Mr Dobson identified the components of the goodwill and those particular factors that would be impacted upon to a medium or high level should Adam compete in the new housing market. Based on his analysis, Mr Dobson valued the restraint at $840,000. He accordingly calculated the loss to Mathew for Adam’s non-compliance as $420,000, that being the value Mathew paid for the restraint when he purchased 50 per cent of the shares in the company from his brother for which, it was submitted, he received no value. That figure was put forward as an appropriate measure of Mathew’s loss. The methodology by which Mr Dobson calculated this figure was not significantly challenged by Mr Carey, who, having reviewed the trading figures of HCW in
subsequent years, maintained the position that Mathew had not incurred a loss. However, he did not venture an alternative means by which damages for breach of the restraint could be assessed.
[166] I accept Mr Dobson’s approach to the calculation of the value of the restraint as valid. It provides an appropriate means by which to restore to Mathew the value he paid for the restraint but did not receive as the result of Adam’s breach. However, the figure calculated by Mr Dobson assumes the restraint has been entirely ineffective in preventing Adam from participating or engaging in a rival business over its full term of two years and four months. The Stonewood Homes franchise continued to operate over this period, but care is required not to equate the existence of this rival building company with the ambit of Adam’s breach of the restraint.
[167] Mathew’s claim, based on Mr Dobson’s calculation of his loss resulting from Adam’s breach, is premised on the restraint having been entirely ineffective and Mathew not receiving any benefit from the restriction the restraint placed on Adam’s ability to engage in a business in competition with HWC. I will return to this issue after considering Peter’s liability for the loss I am satisfied Mathew suffered as a result of Adam’s breach of the restraint, and which I have also determined Peter encouraged and induced by permitting Adam to participate in the development of HWC and the use to which the two defendants put HDD in support of the Stonewood Homes franchise.
Peter’s liability
[168] Because of my findings as to how Adam came to breach the restraint and that he could only have done so with the co-operation of Peter and by the two men communicating and co-ordinating their steps to advance the establishment and development of the Stonewood Homes franchise, it is implicit that Peter’s conduct contributed to the loss caused to Mathew as a result of Adam’s failure to comply with the restraint. His actions, which effectively encouraged and induced Adam to breach his contract, I have found caused Mathew damage. However, Peter’s liability for Mathew’s loss as a result of the breach is the product of his tortious conduct and the
approach to be taken to the value of an award of damages requires separate consideration.
[169] The approach to the assessment of damages in respect of an action for inducing breach of contract was reviewed by the authors of McGregor on Damages:29
Although damage is the gist of the action, little exact detail can be given as to the measure of damages, as the courts have consistently endorsed Lord Esher MR.’s pronouncement in Exchange Telegraph Co v Gregory, the endorsement appearing on many occasions over the next half century, that “it is not necessary to give proof of specific damage” because “the damages are damages at large”. Nevile J in Goldsoll v Goldman stated the position in somewhat more detail. “The damage”, he said, “may be inferred, that is to say, that if the breach which has been procured by the defendant has been such as must in the ordinary course of business inflict damage upon the plaintiff, then the plaintiff may succeed without proof of any particular damage which has been occasioned to him.
(footnotes omitted)
[170] For the purposes of the tort, it is not therefore necessary to provide proof of specific damage. It will be sufficient to show that the defendant’s actions were likely to harm the plaintiff, in which case the damages are at large.30 So long as the Court is confident the damage has been done by the carrying on of a rival business in breach of a restraint, it is not necessary to be able to accurately estimate what losses have been caused or provide proof of specific damage.31
[171] Damages at large by definition are not capable of precise measurement, but it is a means of address that is applicable to several torts including inducing breach of contract. This was recognised by the House of Lords in Rookes v Barnard:32
It must be remembered that in many cases of tort damages are at large, that is to say, the award is not limited to the pecuniary loss that can be specifically proved …
29 James Edelman (ed) McGregor on Damages (21st ed, Sweet and Maxwell, London, 2020) at [48.005].
30 Exchange Telegraph Co Ltd v Gregory and Co [1896] 1 QB 147 (CA) at 118.
31 Goldsoll v Goldman [1914] 2 Ch 603 (EWHC) at 615–616.
32 Rookes v Barnard [1964] AC 1129 (HL) at 1221, proved in Siemer v Stiassny [2011] NZCA 106, [2011] 2 NZLR 361 at [51].
It is apparent therefore that where a claim for inducing a breach of contract has been sustained the Court will have a broad discretion to assess the appropriate level of damages to remedy the harm that has resulted.
[172] Peter disputed whether any actual loss could be attributed to his actions when regard is had to how HWC continued to trade successfully and, indeed, enjoyed increased sales. In the absence of being able to point to any actual losses in terms of trading profits or loss in value of the business, it was submitted he suffered no apparent damage from Adam’s breach nor therefore from Peter’s involvement. However, this is an issue that has already been traversed. I have found that Stonewood Homes’ entry into the marketplace on the West Coast would likely have had a detrimental effect on HWC. Moreover, I have accepted that the assessment of loss is not to be limited to a calculation of the trading impact of the entry of a new competitor in breach of a restraint. The loss suffered by Mathew was as a result of paying what proved to be an unjustified premium for Adam’s shares in HWC based on the restraint of trade. Because the calculation of the value of goodwill was considerably less without the restraint that protected that intangible asset, Mathew suffered a form of harm when he did receive its benefit for which he is entitled to be compensated.
[173] The legitimacy of that approach was confirmed by the Supreme Court in Marlborough District Council v Altimarloch Joint Venture Ltd to which I have earlier referred.33 The contractual claim made against the vendor was accompanied by a claim by the purchaser of the property against the council in tort for negligent misstatement based on an inaccurate LIM it provided at the time of purchase. The land had been bought on the basis it had the benefit of certain water rights when it did not. The property was valued as being $125,000 less than what was paid for it without the water rights. The Supreme Court held the appropriate measure of damages was the difference between what was paid for the property and what it was worth without the represented water rights. Elias CJ held:34
The tortious measure is however the measure applicable to Altimarloch’s claim against the Council. It depends on identification of the loss resulting from the Council’s negligence. The measure of the loss for which the Council is liable in negligence is therefore distinct from the measure under s 6 of the
33 Marlborough District Council v Altimarloch Joint Venture Ltd, above n 24.
34 At [47]–[48].
Contractual Remedies Act which applies to the vendors. It depends on there being a net contractual loss. And its measurement is a question of fact. This is not to give primacy to contract over tort. It is to recognise that where misrepresentation induces entry into the contract, the loss occasioned is consequential on the net position under the contract.
Here, actual damage was suffered by Altimarloch when, in reliance on the Council’s negligent misinformation, it paid more for the land than it was worth. …
(footnote omitted)
[174] The analogy to be drawn with the present case is stark. Mathew paid more for the shares of HWC because of the value of the restraint that accompanied the transaction and increased the value of the goodwill. He did not receive the benefit of the restraint as a result of Adam’s breach and Peter’s conduct which encouraged and induced the breach. I am satisfied that because the restraint was part of the sale and purchase transaction, the loss arising to Mathew as a result of paying for something he did not receive is the most relevant and appropriate way of approaching the assessment of not only Adam’s breach but additionally Peter’s tortious conduct.
Assessment of damages
[175] Mathew claims the level of the award that should be made to him is the entry of judgment against Adam for $420,000 and Peter for a similar amount. However, as observed earlier in relation to Mr Dobson’s calculation of the loss incurred by Mathew, the claim for that level of damages is premised on the restraint having completely failed and that over the two-year-four-month period it remained extant Mathew received no benefit. I do not consider that to be the case.
[176] As I have already observed, the restraint was not designed to prevent Peter or any other person or entity from establishing a Stonewood Homes franchise or any other like building company in competition with G J Gardiner Homes. Peter claims that, notwithstanding Adam’s involvement, he would have in any event progressed this business initiative himself without Adam, indeed as he has ultimately done, and that should be taken into account. That may have been the case, but it is a difficult counterfactual to assess for the purpose of ascertaining Mathew’s loss as a result of the breach of the restraint. However, what appears to be reasonably apparent is that
Adam’s active involvement in the franchise at a level beyond that of a builder’s labourer appears to have diminished after these proceedings were issued in July 2021.
[177] It is difficult to discern the extent to which Mathew’s formal legal intervention curbed or brought the commission of the breach to an end. In October 2021, Peter paid a first instalment in repayment of the $200,000 Adam had advanced to him the remaining $170,000 from WCR’s bank account in February the following year. It appears that by this point Adam and Peter’s joint plans for the Stonewood Homes franchise had been abandoned. Because of an interim injunction Mathew filed in August 2022 against Adam and Peter that effectively severed any scope for a continued business relationship, there is no basis upon which any loss or damage could have accrued to Mathew from their actions beyond that point in time. The injunction was granted by consent on 2 November 2022. By this time Adam’s involvement or connections with HDD had been severed as he had ceased to be a director or a shareholder in September 2022.
[178] The term of the restraint was from 19 October 2020 until 1 February 2023. There is no evidence of a breach, or of Peter becoming involved with Adam regarding a new franchise until Adam came to work for him in early March 2021. As I have concluded, thereafter Adam and Peter co-operated in the establishment and development of a rival building franchise, at least until such time as their activities together appear to have been arrested as a result of formal legal action taken by Mathew in July 2021. The Stonewood Homes franchise, of course, continued to operate thereafter. Its successful establishment and ongoing business from that point remained the product of the previous conduct of Adam and Peter in the nascent period of the franchise’s development, as I have found, when they co-operated in a manner that breached Adam’s contractual obligations. That said, it is not apparent that Adam was ever, at least to any material degree, able to engage in any overt behaviour that involved acquiring new business or making sales that were his acknowledged strengths when he was in partnership with his brother in the G J Gardiner’s franchise. Nor is there evidence of Adam having acquired any significant financial reward from the breach of the restraint.
[179] To the extent Adam’s active participation at a level beyond that of a builder’s labourer in the Stonewood Homes franchise may have ceased around this time, his continued participation in HDD (until the interim injunction towards the latter part of 2022 was obtained) also constituted a breach although not, as far as it can be ascertained, at a level of equivalent flagrancy. It was one which appears to have been limited to his involvement in the Fitzherbert Street properties, as I have previously outlined. Peter’s conduct in facilitating both direct and indirect participation by Adam in a rival building business through their shared interests in HDD and its various activities as a result, is also to be assessed in those terms.
[180] Weighing these factors, which include the nature of Adam and Peter’s conduct over this period, its duration, the degree to which their activities constituted or contributed to Adam’s breach of the restraint, or represented encouragement and inducement of that breach by Peter, I assess the loss Mathew incurred as a result of Adam and Peter’s actions as being the equivalent of some 60 per cent of the value he paid for the restraint for which he did not receive the benefit. That amounts to
$252,000. That being the loss incurred by Mathew, he is required to be compensated by both Adam and Peter. I have considered whether each defendant should be jointly and severally liable for that sum. However, I have concluded the better course, given the nature of their common design, that they should bear liability for Mathew’s loss in equal measure. Accordingly, they are each required to pay the sum of $126,000 to Mathew.
Interest
[181] Mathew is entitled to interest on the sums awarded against both Adam and Peter at the prescribed rate. Interest will run from the closest date their liability crystallised, 18 May 2021, being the date WCR signed the franchise agreement with Stonewood Homes NZ and became the franchisee for the West Coast.
Result
[182] There will be judgment in the sum of $252,000 payable by Adam and Peter in equal amounts ($126,000 each) together with interest at the prescribed rate, to be calculated in accordance with [181].
Costs
[183] As the successful party, Mathew is entitled to recover his costs on a 2B basis which are to be paid equally by Adam and Peter.
Solicitors:
Malloy Goodwin Harford, Auckland
Copy to:
A Barker QC and J Palairet, Barristers, Auckland Anthony Harper, Auckland
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