Cunningham v European Interiors Limited (in liquidation)
[2024] NZHC 618
•20 March 2024
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2020-409-634
[2024] NZHC 618
BETWEEN KATE ELIZABETH SARAH CUNNINGHAM and BLAIR ROGER CUNNINGHAM
First Plaintiffs
KB KITCHENS LIMITED
Second PlaintiffAND
EUROPEAN INTERIORS LIMITED (in
liquidation)
First DefendantRONALD FREDERICK JOHN NEALE (in
bankruptcy) Second Defendant
KENDONS SCOTT MACDONALD LIMITED
Third Defendant
Hearing: 19 March 2024 Counsel:
K W Clay and S M Bevin for Plaintiffs No other appearance
Judgment:
20 March 2024
JUDGMENT OF OSBORNE J (FORMAL PROOF)
This judgment was delivered by me on 20 March 2024 at 4.00 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
CUNNINGHAM v EUROPEAN INTERIORS LTD (in liq) [2024] NZHC 618 [20 March 2024]
Introduction
[1] In 2019 there was an established business trading in New Zealand as “Palazzo Kitchens & Appliances” (Palazzo). It was owned by the first defendant, European Interiors Limited (European).
[2] European decided to sell the part of the business of Palazzo that related to the Canterbury area (business).
[3] On 4 February 2019 European entered into an agreement for sale and purchase of the business (agreement) with Kate Cunningham, the first-named plaintiff (“or nominee”).
[4] The agreement was subject to Ms Cunningham being entirely satisfied with a due diligence investigation of the business.
[5] European gave a turnover warranty in relation to the business for the period 1 April 2018 to 31 December 2018. The second defendant, Ronald Neale, who was European’s shareholder and director, signed the agreement both for European and as covenantor, giving all the warranties and undertakings of European under the agreement.
[6] European provided financial information relating to Palazzo and in particular the Canterbury business (the information).
[7] Ms Cunningham and her husband, Blair Cunningham, arranged for the third defendant, Kendons Scott MacDonald Limited (Kendons) to advise them in relation to the purchase.
[8] On the basis of the information (provided by European) and the advice subsequently received from Kendons, Ms Cunningham confirmed the agreement on 22 February 2019. KB Kitchens Ltd (KB Kitchens) was then incorporated and nominated as purchaser. KB Kitchens completed the purchase on 1 April 2019.
[9] The plaintiffs came to believe that the turnover warranty and the information were incorrect and misleading. By this proceeding, they sued the defendants for damages.
[10] Last week, on the eve of a trial of the plaintiffs’ claims against all three defendants, Kendons agreed to settle with the plaintiffs, with the claims against Kendons soon to be discontinued.
[11]That has left the claims against European and Mr Neale.
[12] European was in the course of this proceeding put into liquidation — the claim against European is proceeding with the consent of the liquidators.
[13] Mr Neale in the course of the proceeding was adjudicated bankrupt — the claim against him is proceeding with the consent of the Official Assignee.
[14] As European never filed a statement of defence and as there has been no active defence on behalf of Mr Neale since he was adjudicated bankrupt, the Court made directions for the plaintiffs’ evidence at this hearing to be by affidavit, with affidavits now filed by Ms Cunningham and by Craig Melhuish, who has provided the plaintiffs’ forensic accounting evidence.
Plaintiffs’ claims
[15] The plaintiffs plead the terms of the agreement. They then plead, with particulars, the due diligence investigation that the Cunninghams engaged Kendons to undertake.
[16] They plead that Kendons, having received the due diligence information, advised the Cunninghams they could rely on the turnover warranty in the agreement and advised them that the business was viable and suitable for purchase by the Cunninghams. They say, on that basis, Ms Cunningham confirmed the contract and subsequently settled the purchase of the business.
[17] The plaintiffs then plead the turnover warranty and information were incorrect and misleading. They say actual turnover for the business between 1 April 2018 and 31 December 2018 was $1,050,075 whereas the warranty in the agreement stated the turnover was $2,264,061.1 They say the information provided by European misrepresented business margins and the profit and loss information misrepresented matters relating to product cost price and the profitability of the business.
[18]The plaintiffs pleaded five causes of action:
(a)Ms Cunningham and KB Kitchens against European — first for breach of contract and secondly for misleading and deceptive conduct under the Fair Trading Act 1986;
(b)Ms Cunningham and KB Kitchens against Mr Neale — for breach of contract; and
(c)all plaintiffs against Kendons in two causes of action — first in negligence and secondly for breach of contract.
[19] As Kendons is settling the claims against it, I now focus only on the claims against European and Mr Neale.
[20] In relation to their losses, the plaintiffs plead had the turnover warranty been correct, KB Kitchens and Ms Cunningham would have recovered profits of
$2,308,000 (in excess of what was recoverable as the business truly existed). Alternatively, they say the true value of the business at the date of settlement was
$194,986 — they therefore (in the alternative) claim $1,085,014 being the difference between the purchase price ($1,280,000) and the true value. In the alternative claim they also claim direct consequential trading losses of $278,479 for the financial years ending 2020, 2021 and 2022. In total, therefore, the alternative claim amounts to
$1,363,493.
1 All the turnover figures referred to in this judgment are exclusive of GST.
[21] It is unnecessary to identify the relief claimed under the Fair Trading Act as I find KB Kitchens and Ms Cunningham must succeed on their primary cause of action in contract.
[22] Ms Cunningham and KB Kitchens claim against Mr Neale, pursuant to his guarantee, the same sums as claimed against European (above at [20]).
[23] Finally, on all causes of action, the plaintiffs expressly seek interest under s 10 Interest on Money Claims Act 2016 on the judgment sum from 1 April 2023 to the date of payment — this is a claim for interest calculated by means of the online calculator administered by the Ministry of Justice under s 13 for the purpose of the interest calculation under s 12.
The evidence
[24] Ms Cunningham’s affidavit evidence incorporated two extensive briefs provided by Ms Cunningham for the purposes of the trial, being her initial brief and a lengthy reply brief, which had responded to all the briefs of evidence provided by Kendons before Kendons settled the claim against it.
[25] Ms Cunningham’s evidence fully supports the allegations made in the statement of claim in relation to the agreement, the information, (as provided by European) the steps taken by the Cunninghams by way of due diligence, and what Ms Cunningham subsequently found in relation to the business.
[26] The forensic accounting evidence of Mr Melhuish was extensive. His affidavit for this formal proof hearing incorporated four briefs of evidence he had completed over the period from February 2023 to February 2024. Both his initial brief and then his brief in response to that of Kendons’ expert, Marnus Beylfeld, were comprehensive. There had then followed a court-directed conferral and reporting by the experts. Mr Melhuish then provided a further lengthy brief on five identified issues and, upon receipt of Mr Beylfeld’s own brief, Mr Melhuish provided a reply brief in relation to that, again dealing with the same five issues.
[27] The progress of Mr Melhuish’s opinion evidence over the course of the year clearly benefitted from his engagement with Mr Beylfeld. He was able to take into account the independent opinions of Mr Beylfeld, which led to Mr Melhuish reassessing (downwards) his loss of profits figure. Mr Melhuish’s opinion as to the loss of capital value and as to direct consequential trading figures as to the loss of capital value and the direct consequential trading loss remained the same.
Assessment of evidence
[28] The evidence of Ms Cunningham is appropriately detailed, straight-forward and coherent. Where documents were involved her evidence is supported by the documents. Where she refers to oral discussions, particularly with Mr Neale and his wife, the evidence fits consistently with other evidence and stands uncontradicted.
[29]I accept Ms Cunningham’s evidence as reliable.
[30] I similarly find Mr Melhuish’s evidence reliable. He is well-qualified to express the opinions provided. The opinions are based on extensive and careful reviews of the documentary records. He had the benefit of also reviewing the extensive differing opinions provided by Mr Beylfeld and of conferring with Mr Beylfeld on the valuation issues that arose. He then provided his final tranches of briefed evidence, which included his amended calculation as to loss of profits.
[31] I am satisfied that the basis upon which Mr Melhuish reached his conclusions is reliable and that the calculations he has provided represent fair and reliable opinions in relation to the sums involved. His opinions stand uncontradicted.
Legal basis of claim
[32] On their breach of contract causes of action, the plaintiffs must be put as nearly as possible into the position they would have occupied if the agreement had been performed.2
2 Marcus Pawson and the Hon Justice W L Young (ed) Laws of New Zealand Measure of Damages: Breach of Contract (online ed, LexisNexis) at [58].
[33] Where a turnover warranty is breached, it is common to approach the calculation of the plaintiffs’ loss by reference to its loss of profits.3 In other words the innocent party has an expectation interest which the law requires to be fulfilled, by financially restoring that party to the position they would have occupied if the contract had been performed.4
[34] The appropriate income period from which to assess damages arising from loss of profits is a matter for professional judgement. In this case the Court has the uncontradicted opinion of Mr Melhuish that the three-year period commencing with the financial year ending 2020 is reasonable. There is no reason not to adopt that assessment.
Outcome on damages
[35] I am satisfied the turnover warranty provided by European was materially incorrect and that KB Kitchens and Ms Cunningham by that breach suffered damages in the amounts claimed.
Costs
[36] Counsel for the plaintiffs provided the Court with calculations of the plaintiffs’ costs (on a 2B basis), and details of disbursements incurred.
[37]The plaintiffs’ cost calculations are appropriate with one exception.
[38] One aspect of the plaintiffs’ costs calculation is overstated. Under the High Court Rules, sch 3, item 33B allows one day’s preparation for each of the first five days of a hearing. The trial in this proceeding was allocated a five-day hearing because Kendons was defending the plaintiffs’ claims. The required time for a formal proof hearing of the claims against European and Mr Neale was no more than one half day (as allocated last week). The appropriate allowance, based on category 2, is $1,195 and not the $11,950 claimed.
3 Herbison v Papakura Video Ltd (No 2) [1987] 2 NZLR 720 (HC).
4 Stephen Todd and Matthew Barber Burrows Finn and Todd on the Law of Contracts in New Zealand at 21.2.2.
[39] Consequently, the plaintiffs’ claim for their costs will be allowed in the reduced sum of $44,215.00.
Disbursements
[40] The plaintiffs’ smaller disbursements (such as filing fees) are straightforward. By far the largest disbursements were for Mr Melhuish’s fees. Counsel provided verification of those fees through the production of invoicing records and supplementary information as to charge-out rates. The plaintiffs in total have incurred
$230,322.97 (including GST) in fees charged by Mr Melhuish in connection with the proceedings as a whole. Mr Clay has estimated in relation to the two sets of fees charged:
(a)for fees up to February 2023 ($143,327.77) 70 per cent is related to the proceedings as they involved the first and second defendants; and
(b)for fees from February 2023 ($86,995.20) 30 per cent is related to the proceedings as they involved the first and second defendants.
[41]The plaintiffs claim in total $230,322.97 on account of Mr Melhuish’s fees.
[42] Having regard to the nature of the claims against all defendants those apportionments appear reasonable, as do the overall fee levels. The accounting issues were complex, requiring an extensive analysis and reconstruction of financial records, and requiring analysis of losses of alternative bases. There was clearly very substantial time involved as the experts also worked through the issues both individually and together.
[43] One aspect of the plaintiffs’ claim for the disbursements in relation to Mr Melhuish’s fees — relating to the GST content — is unjustified. The invoices provided by Mr Melhuish are all GST inclusive. The courts approach matters of idemnification (whether as to costs or disbursements) on the basis a party seeking to recover the GST content has the onus of informing the Court of its inability to recover
GST.5 The Court has not been informed that KB Kitchens (to whom the invoices were addressed) is unable to recover GST. The disbursement claim for Mr Melhuish’s fees is accordingly overstated by $16,490.60 — the recoverable disbursement is
$109,937.40.
[44]With that adjustment, I find the plaintiffs’ recoverable disbursements total
$115,403.66.
Order
[45] There is judgment for the first-named first plaintiff and the second plaintiff against the first and second defendants (jointly and severally) in the sum of $2,308,000 together with interest on the said sum of $2,308,000 to today’s date pursuant to s 10 Interest on Money Claims Act 2016 in the sum of $123,224.14, together with costs fixed in the sum of $44,215.00 and disbursements fixed in the sum of $115,403.66.
Osborne J
Solicitors:
Cavell Leitch, Christchurch (for First and Second Plaintiffs) Parker Cowan, Queenstown (for Third Defendant)
Copy to counsel:
K W Clay, Barrister, Christchurch (for First and Second Plaintiffs)
Copy to: BDO Christchurch (as liquidators of the First Defendant) Official Assignee, Christchurch (for Second Defendant)
5 New Zealand Venue and Event Management Ltd v Worldwide NZ LLC [2016] NZCA 282, (2016) 23 PRNZ 260.
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