Kop-Coat New Zealand Limited v Incodo Limited
[2018] NZCA 430
•15 October 2018 at 10 am
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA692/2017 [2018] NZCA 430 |
| BETWEEN | KOP-COAT NEW ZEALAND LIMITED |
| AND | INCODO LIMITED |
| Hearing: | 3 and 4 July 2018 |
Court: | Winkelmann, Gilbert and Williams JJ |
Counsel: | A S Olney and O E Jaques for Appellants |
Judgment: | 15 October 2018 at 10 am |
JUDGMENT OF THE COURT
AThe appeal is allowed.
B The judgment entered in the High Court is set aside.
CJudgment is entered for the appellants on the respondent’s claim.
DThe respondent is to pay the appellants one set of costs for a standard appeal on a band A basis, increased by $7,136 by agreement, and usual disbursements. We certify for second counsel.
EAny issue as to costs in the High Court is to be dealt with in that Court.
____________________________________________________________________
Table of Contents
| Introduction | [1] |
| Background | |
| Kop-Coat Inc | [8] |
| Kop-Coat NZ | [9] |
| TRU-CORE® | [10] |
| Mobile TRU-CORE® application system in Australia | [12] |
| Prospect of mobile TRU-CORE® application system in New Zealand | [13] |
| Was a binding agreement reached? | |
| Contract negotiations | [14] |
| Execution of the agreement | [22] |
| Pleadings | [23] |
| High Court judgment | [24] |
| Kop-Coat NZ | [25] |
| Kop-Coat Inc | [27] |
| Submissions | [28] |
| Analysis | |
| No intention to be bound until agreement executed by all parties | [32] |
| Kop-Coat Inc | [36] |
| Kop-Coat NZ | [39] |
| Conclusion | [53] |
| Was there agreement on price? | [54] |
| Did Kop-Coat repudiate the agreement? | [62] |
| Did Incodo mitigate its loss? | [68] |
| Did the Judge err in his assessment of Incodo’s loss? | |
| Pleaded loss | [74] |
| Incodo’s evidence of loss | [75] |
| High Court judgment | [87] |
| Submissions | [93] |
| Analysis | |
| Proof of intended business model | [95] |
| Market size | [100] |
| Market share | [101] |
| Sales volumes Price assumption | [103] [105] |
| Inclusion of profits not available under the contract? Mr Leonard’s final assessment overlooked? | [107] [111] |
| Conclusion | [112] |
| Result | [113] |
REASONS OF THE COURT
(Given by Gilbert J)
Introduction
The appellants appeal against a judgment of the High Court finding them liable to pay damages to the respondent in the sum of $2,082,000 for lost profits resulting from their wrongful repudiation of an exclusive licence and supply agreement for a timber treatment system, TRU-CORE®, for a six-year term.[1] The licence and supply agreement was allegedly entered into on 22 May 2015.
[1]Incodo Ltd v Kop-Coat NZ Ltd [2017] NZHC 2737, [2018] NZCCLR 20 [High Court judgment].
The appellants advance five principal grounds in support of their appeal.
First, they contend the agreement was never validly executed by either appellant. The agreement was prepared on the basis that it would be executed by two directors signing for each of the three parties. The agreement was executed in that manner by the respondent, Incodo Ltd (Incodo). However, it was not signed by any director of the first appellant, Kop-Coat New Zealand Ltd (Kop-Coat NZ). Instead, its general manager, who was not a director, signed in the space above “signature of director” and printed his full name above the space where the other director or company secretary of Kop‑Coat NZ was to sign. The appellant contends that the general manager had no actual or ostensible authority to sign on behalf of Kop-Coat NZ. Further, no one signed or purported to sign the document on behalf of the second appellant, Kop-Coat Inc, a company incorporated in the United States which is the parent company of Kop‑Coat NZ and the owner of the intellectual property being licensed.
The appellants’ second ground of appeal is that there was no agreement on an essential term, namely the price payable by Incodo for the product to be supplied by Kop-Coat.[2] The basis for this argument is that there are irreconcilable errors in a schedule to the agreement where the input prices are set out with the result there was no certainty as to price.
[2]For convenience we refer to Kop-Coat NZ and Kop-Coat Inc collectively as “Kop-Coat”.
Third, the appellants argue that the Judge was wrong to find that they repudiated the agreement by insisting on a replacement agreement correcting errors in the original. They claim the parties mutually agreed to terminate the agreement recognising that Incodo had lost confidence in Kop-Coat and for that reason no longer wished to pursue any licence and supply agreement.
Fourth, they contend that the Judge ought to have found that Incodo failed to mitigate its loss by refusing to enter into the replacement agreement that was offered.
Finally, the appellants challenge the Judge’s assessment of the respondent’s loss.
Background
Kop-Coat Inc
Kop-Coat Inc is a subsidiary of RPM International Inc, a Fortune 500 company in the United States. RPM International, through its various subsidiaries, manufactures and markets high performance coatings, sealants and speciality chemicals. Kop-Coat Inc is part of RPM International’s specialty products group and manufactures and markets protection solutions for processed timber and manufactured wood through various subsidiaries including Kop-Coat NZ. Kop-Coat Inc is itself a significant entity. At the time of the events giving rise to the present claim it generated annual revenue of approximately USD80 million and had over 150 employees.
Kop-Coat NZ
Kop-Coat NZ is a subsidiary of Kop-Coat Inc and markets its timber protection solutions in New Zealand. At the relevant time, Kop-Coat NZ had an annual turnover of between $20 and $25 million and had 23 employees nationwide. Kop-Coat NZ had two primary business activities: manufacturing and distributing chemicals for the treatment of timber and timber products; and, through a subsidiary, manufacturing and distributing herbicides and other chemicals to the farming, forestry and horticulture industries.
TRU-CORE®
TRU-CORE® is a patented wood treatment process developed by Kop‑Coat Inc in 2003. The TRU-CORE® process has over 40 different variations allowing for use in factories and in the field. The application methods for use in the field are by brush, roll-on or spray. The processes are suitable for use with 20 standard and custom preservative systems to meet regulatory requirements in several countries including the United States, Canada, New Zealand, Australia and the United Kingdom. At the time of the negotiations with Incodo, TRU-CORE® was only used in New Zealand for treating timber in the factory, most commonly by very rapid pressure vacuum application.
The key advantages of the TRU-CORE® process are said to be:
(a)it penetrates to the core of the timber it is applied to, including heartwood;
(b)in most cases there is no need for any additional application of preservative;
(c)it is applied with water and does not contain volatile organic chemicals;
(d)water uptake is generally less than eight per cent whereas conventional water-based treatment methods usually introduce large amounts of water into the timber, typically 100–150 per cent by weight;
(e)the low water uptake greatly reduces or eliminates the need for costly re-drying after treatment and the associated effects water can have on wood such as grain raising, loss of dimensional stability and erosion of mechanical properties; and
(f)the low water uptake allows the wood to be penetrated in final shape and form in most cases, eliminating wasteful removal of wood through shaping, planing, or sanding and consequential landfill disposal issues.
Mobile TRU-CORE® application system in Australia
The TRU-CORE® process has been used as a mobile system in Australia. In August 2009 Kop-Coat Inc and its Australian subsidiary, Kop-Coat Australia Pty Ltd, entered into a licence and supply agreement with Boron Solutions Australia Pty Ltd. This agreement licensed Boron Solutions to use the TRU- CORE® system in the field employing mobile applicators. The Boron Solutions agreement was for a field spay program to be applied to all wooden parts of the structure of a newly-built house frame. The Boron Solutions program was rated for protection against termites as well as decay and rot.
Prospect of mobile TRU-CORE® application system in New Zealand
In December 2014 Kop‑Coat NZ engaged Timothy James as a sales and service contractor to manage three new venture programs, one of which was the field spray venture. Mr James was tasked with developing a strategic and business plan for each of these ventures with annual budgets and performance targets. In March 2015 Mr James identified Paul Probett as being a suitable candidate to become the first licensee for a mobile system in New Zealand targeting the market for remediation of buildings with weathertightness issues. Mr Probett is a building surveyor with 48 years of experience in the building industry. He and his wife are the directors and shareholders of Incodo, a company incorporated in September 2004 to provide inspection and building surveying consultancy services. At that stage, Mr Probett had been a weathertight homes assessor for 12 years and had reported on approximately 600 claims. Mr Probett was impressed by the TRU-CORE® system and was interested in becoming a licensee.
Was a binding agreement reached?
Contract negotiations
On 31 March 2015 Mr James introduced Mr Probett to Cameron Scott, the general manager of Kop-Coat NZ. Mr Scott approved of the prospect of Mr Probett becoming a licensee given his standing and reputation in the industry. However, Mr Scott was not, and never has been, a director of Kop‑Coat NZ. His 18‑year employment with Kop-Coat NZ was terminated because of the problems leading to the dispute with Incodo. This explains why Mr Scott was called as a witness for Incodo at the trial.
Mr Scott stated that responsibility for drafting the terms of all contracts rested with Hans Ward of Pittsburgh, Pennsylvania. Mr Ward is a senior executive of Kop‑Coat Inc and a director of Kop-Coat NZ. He is also a director of Kop‑Coat Australia. Mr Ward was one of the two directors who signed the Boron Solutions agreement on behalf of Kop‑Coat Australia and separately on behalf of Kop-Coat Inc. Mr Scott said he had no authority to determine any of the terms of the licence and supply agreement. Mr Scott explained his role in these terms:
The drafting and terms of all contracts were handled by Mr Ward of Kop‑Coat Inc. Absolutely all changes to these contracts had to be checked off and agreed by Mr Ward.
…
My role here was to put the contract in front of the customer, negotiate the terms and get the contract signed, Kop-Coat NZ was never allowed to agree or disagree terms on its own volition. Not one word was to be changed without Kop-Coat Inc’s approval. That was not our place. Our role was more as an intermediary between Kop-Coat Inc and the customer.
Mr Ward’s evidence was to the same effect:
While [Mr Scott] was authorised to discuss business opportunities with potential customers, he was not authorised to enter into new contracts on behalf of Kop-Coat NZ. It was always clear to Mr Scott and other Kop-Coat NZ personnel that that could only be done by directors of Kop-Coat NZ. Usually I was the one who signed new contracts for Kop-Coat NZ in my capacity as a director of that company. It was and continues to be my role to develop those new contracts for Kop-Coat NZ. Occasionally, I gave [Mr Scott] express authority to sign routine standardized contracts on behalf of Kop-Coat NZ, but only after I had approved those documents in writing.
[Mr Scott] was not an officer or an employee of Kop-Coat Inc, and he did not have authority to say or do anything on its behalf.
On 13 May 2015 Mr Scott obtained a copy of the Boron Solutions agreement to use as the foundation for a licence and supply agreement with Incodo. The following day, Alison Armstrong, Kop-Coat NZ’s former administration manager, sent the Boron Solutions agreement with some modifications to Kop-Coat’s solicitors in New Zealand, Russell McVeagh.
On 18 May 2015, Mr Scott met with Mr Probett to discuss amendments to the draft agreement. Mr Probett said the changes Incodo was seeking were acceptable to Mr Scott. However, Mr Scott told Mr Probett the changes would have to be approved by Kop‑Coat Inc before the contract could be finalised.
Late on 19 May 2015 Russell McVeagh sent an email to Mr Scott with their suggested changes to the agreement and identifying further information that needed to be included in it. On 20 May 2015 Mr Scott sent Russell McVeagh’s advice to Ms Armstrong for her consideration. She replied later that day, noting in her email that Mr James had told her that Mr Probett was expecting to sign the agreement the next day.
On 21 May 2015 Mr Ward sent an email to Mr Scott, copied to Russell McVeagh, stating that he had not yet received a draft of the agreement. Russell McVeagh sent Mr Ward a copy of the draft at 8.43 am on 22 May 2015 noting that there were still some issues to resolve. Mr Ward replied at 8.51 am that he would have to discuss the draft with Mr Scott. He noted that the inputs and prices may be incorrect because they applied to the Australian program. He also said the financial controller in New Zealand would need to review the agreement. A short time later, at about 9.30 am, Mr Ward discussed the draft with Mr Scott and Ms Armstrong by telephone. There was a major conflict in the evidence about what was said during this discussion. We will return to this issue, including the Judge’s findings, when we address the contest about whether a binding agreement was reached.
Mr and Mrs Probett came to Kop-Coat NZ’s offices that afternoon to sign the agreement. They proposed some changes to the wording. Mr Scott agreed to these amendments. The changes were made and a fresh copy of the agreement was printed.
Execution of the agreement
The execution page of the agreement was drafted on the basis that each party, Incodo, Kop‑Coat NZ and Kop-Coat Inc, would execute the agreement by having two of its directors, or one director and the company secretary, sign the agreement on its behalf. Mr and Mrs Probett signed the agreement in their capacity as directors of Incodo in the two spaces provided above the lines “signature of director” and “signature of director/company secretary”. They also printed their full names in the spaces provided below their signature and above the lines “Name of director (print)” and “Name of director/company secretary (print)”. Mr Scott signed his name below the words “executed by Kop-Coat New Zealand Ltd” and above the line “signature of director”. However, rather than printing his name in the space provided below his signature “Name of director (print)”, Mr Scott printed his name in the space where the other director or company secretary was to sign to complete execution of the agreement by Kop‑Coat NZ. The spaces provided for execution of the agreement by Kop‑Coat Inc were left blank. Mr Scott confirmed in his evidence that he did not have signing authority for Kop-Coat Inc and he therefore left that part blank.
Pleadings
Incodo pleaded that it entered into a licence and supply agreement with Kop‑Coat NZ in May 2015. Incodo did not allege that Kop-Coat Inc entered into this agreement. It asserted only that Kop-Coat Inc was “listed as a party” to the agreement. In its third amended statement of claim, Incodo pleaded:
The Contract
5. The plaintiff (“Incodo”) and the first defendant (“Kop Coat NZ Ltd”) entered into a licence and supply agreement in May 2015 (“the Contract”), by which the Kop Coat NZ agreed to supply Incodo with its products, and provide the necessary licence for their use.
…
7.The second defendant (“Kop-Coat Inc”) was listed as a party to the Contract.
…
10. The Contract was signed by Incodo and Kop Coat NZ Ltd.
11. Kop Coat Inc did not sign the Contract.
12.Cameron Scott on behalf of Kop Coat NZ Ltd advised representatives for Incodo that Kop Coat NZ Ltd had the signing rights for Kop Coat Inc.
High Court judgment
The Judge considered that the question as to whether a binding agreement was reached ultimately turned on whether Mr Scott had actual authority to sign on behalf of both Kop-Coat NZ and Kop-Coat Inc or whether Incodo was entitled to rely on Mr Scott’s apparent authority to do so.[3]
Kop-Coat NZ
[3]High Court judgment, above n 1, at [56].
Mr Ward and Mr Scott were both clear in their evidence that Mr Scott did not have actual authority to sign the agreement on behalf of Kop-Coat NZ. The Judge appears to have proceeded on that basis. He approached the issue as being whether Mr Scott had ostensible authority to bind Kop-Coat NZ to the contract:
Authority to bind Kop-Coat NZ
[63] The first issue is whether or not Mr Scott had ostensible authority to sign on behalf of Kop-Coat NZ. The submission by the defendants is that he did not, because ostensible authority depends upon a prior representation by the principal (in this case, the Board of Kop-Coat NZ) of the authority to sign.
[64] The defence argument acknowledges Mr Ward could have authorised Mr Scott, but contends he did not.
[65] Ostensible authority cannot be confined in this way. Ostensible authority needs to be examined from the perspective of the persons dealing with the company. Essentially my view is that Mr Scott’s prominent position in Kop-Coat NZ established his ostensible authority upon which Incodo via its directors and particularly Mr Probett were entitled to rely.
The Judge acknowledged that Mr Scott’s representations as to his own authority were not sufficient to bind his principals.[4] However, the Judge found that Mr Ward permitted Kop-Coat NZ to represent that Mr Scott and Ms Armstrong had authority to conclude the agreement and it was reasonable for Mr and Mrs Probett to believe that Mr Scott had authority to bind Kop-Coat NZ. In the circumstances, the Judge found that Kop-Coat NZ could not assert that Mr Scott did not have authority to bind it to the contract:
[85] In context, I am persuaded that Mr Ward permitted it to be represented by Kop-Coat NZ that Mr Scott and Ms Armstrong had authority to conclude the deal on behalf of Kop-Coat NZ. They were left in charge of all negotiations in New Zealand. It was reasonable for the Probetts to rely on Mr Scott’s authority. He was a person who had the confidence of Kop-Coat NZ and in that sense, from the perspective of Mr and Mrs Probett, could be trusted to be acting on behalf and with the authority of Kop-Coat NZ.
[86] I therefore find Kop-Coat NZ cannot assert that Mr Scott did not have authority to bind it to the May 22 terms.
Kop-Coat Inc
[4]At [84].
The Judge noted Mr Scott’s evidence that he told Mr Probett the contract would be signed on behalf of Kop-Coat Inc at a later stage.[5] The Judge found that Mr Scott and Ms Armstrong thought that Mr Ward authorised them to conclude the agreement with Incodo on the terms discussed during the 22 May 2015 telephone conversation but they were incorrect about this. However, the Judge concluded that Kop-Coat Inc was nevertheless bound by the contract:
[5]At [88].
[89] … I have already made the finding of fact that neither Mr Scott nor Ms Armstrong would have deliberately contradicted or disobeyed Mr Ward. On the probabilities, and thus the facts, they thought that the conversation they participated in earlier on 22 May did finalise the agreement so that it was ready for execution.
[90] This was a bona fide misunderstanding by both Mr Scott and Ms Armstrong of Mr Ward’s state of mind. They thought he had given them the final terms. Accordingly, Kop-Coat Inc cannot disavow the conduct of Mr Ward, from which Mr Scott and Ms Armstrong inferred they had authority to contract on those terms with Incodo.
[91] From the totality of the evidence, in my judgment Mr Ward did not think that he had completed and approved the final terms of the contract on 22 May. However, I am also satisfied that Mr Scott and Ms Armstrong assumed to the contrary, albeit incorrectly, that their conference with Mr Ward on that day had settled the final details of this contract which, as we have seen, had a reasonably long gestation period.
[92] … After the phone call, Mr Scott and Ms Armstrong believed they had authority to get the agreement executed before the end of May.
…
[94] At the time, Mr and Mrs Probett had no reason to query the ostensible authority of Mr Scott to sign, nor his representation that the parent company would sign in due course …
…
[96] Mr and Mrs Probett were not put on notice to suspect the signatures would not follow.
[97] I am thoroughly satisfied that Mr Scott and Ms Armstrong misconstrued the situation when getting the contract signed and thought they were carrying out their normal duties when executing the contract. I note that this line of reasoning is another support for my prior conclusion of ostensible authority, that being a judgment made from the point of view of Mr and Mrs Probett.
[98] I conclude that it is more probable than not that Mr Scott considered he had authority to execute the contract which would bind Kop-Coat Inc as well as the New Zealand subsidiary. …
[99] For these reasons I conclude that in fact Kop-Coat Inc had held out Mr Scott as having authority to act on its behalf in New Zealand so that Mr Scott had apparent or ostensible authority to bind it to the agreement.
Submissions
Mr Olney, for Kop-Coat, submits an objective assessment of the circumstances shows a mutual intention that the contract would not be concluded until each party had executed it in the manner envisaged in the document itself. He notes that this was a complex commercial transaction, the first of its kind for Kop-Coat NZ, and a new enterprise for Incodo. He points to the detailed terms of the agreement, the negotiation of precise wording changes, and the provisions allowing for execution by holders of power of attorney and in counterparts. He says no witness gave evidence of any agreement to dispense with the formal execution requirements envisaged in the document. Mr Olney submits that applying established legal principles the correct conclusion is that there was no concluded contract because neither Kop-Coat company executed the document in the manner required.
Mr Olney challenges the Judge’s finding that Mr Scott had apparent authority to bind Kop-Coat NZ and Kop-Coat Inc to the contract. Mr Olney says the thrust of Incodo’s pleaded case and evidence was that Mr Ward knew Mr Scott would conclude the contract on behalf of both Kop-Coat companies on 22 May 2015 and actually authorised him to do so. However, he says the foundations for the “actual authority” claim were contradicted during the trial and, as a result, Incodo’s case evolved into one of apparent authority. Mr Olney points out that Incodo’s pleading does not identify any representations by Kop-Coat NZ as to Mr Scott’s authority to conclude the contract on its behalf. As for Kop-Coat Inc, Mr Olney says there was similarly no pleaded representation of Mr Scott’s authority to conclude the agreement on its behalf, nor was there any evidence of this. In short, Mr Olney submits that the Judge’s conclusion that Mr Scott had ostensible authority to bind both companies to the contract is not supported by the pleadings or the evidence.
Mr Fraundorfer, for Incodo, says the plaintiffs closed their case in the High Court on the basis that Mr Scott had actual and apparent authority to bind both Kop-Coat NZ and Kop-Coat Inc. He agrees the Judge made no finding on actual authority but says this was not necessary given his finding that Mr Scott had apparent authority.
Mr Fraundorfer submits there was no clear distinction between the two Kop‑Coat companies. They were described in the contract as “together ‘Kop-Coat’” and he says Mr Scott purported to sign on behalf of “Kop-Coat”. Mr Fraundorfer submits it was taken for granted that Mr Scott had authority to do so and Mr Probett accepted this at face value. He argues that Mr Probett’s belief was reasonable in the circumstances, especially given Mr Scott himself believed he had that authority. In summary, Mr Fraundorfer supports the Judge’s analysis and conclusion on this issue. Alternatively, he submits the evidence justifies the conclusion that Mr Scott had the actual authority of both Kop-Coat companies to bind them to the contract.
Analysis
No intention to be bound until agreement executed by all parties
Whether a binding contract has been concluded must be assessed objectively. Here, commercial parties were negotiating the terms of a complex and detailed commercial agreement drafted by solicitors. The agreement was modelled on the Boron Solutions agreement and comprised 32 pages divided into 29 sections and three schedules. The agreement with Incodo was drafted on the basis that it would be formally executed in the same manner as the Boron Solutions agreement, by two directors, or one director and the company secretary, signing on behalf of each company. The agreement contained an “entire agreement” clause and provision for the agreement to be executed in counterparts with all counterparts taken together constituting one document. The agreement also contained a provision for persons holding a power of attorney for a party to execute the agreement on its behalf.
The closely detailed terms of the agreement and its formal execution requirements reflected the significance of the transaction for all parties. This was an entirely new and ambitious venture for Incodo which had virtually no capital and had to borrow the entirety of the initial start-up costs of $60,000. Incodo would be accepting an obligation under the contract as the exclusive licensee in the Auckland area to pay various fees and royalties and meet minimum sales thresholds in each year of the initial three-year term of the agreement, starting from scratch. It was also a new venture for Kop‑Coat NZ. This was to be the first licence for the mobile application of the TRU‑CORE® system in New Zealand. Kop-Coat NZ anticipated further licences being granted elsewhere in New Zealand with the Incodo agreement serving as a model. As Mr James observed, “the first licence was the most important to get right as it would set the standard for those that followed”. Kop‑Coat Inc was granting an exclusive licence to use its intellectual property in the designated area and committing to providing ongoing technical support to Incodo for the term of the agreement.
We consider the correct inference to be taken from these circumstances is that the parties did not intend to be bound until the agreement was executed by all of them. This Court’s decision in Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd supports the normal inference that commercial parties do not generally intend to be bound to a complex commercial agreement until it has been executed by all parties.[6] Cooke J, in giving the judgment of the Court, said:[7]
… the purpose of the negotiations was to have prepared by the manufacturer’s solicitors and executed by both parties an important commercial agreement of some complexity. In such circumstances we think the normal inference in New Zealand is that the parties do not intend to be bound before the agreement has been drawn up and executed on both sides.
[6]Concorde Enterprises v Anthony Motors (Hutt) Ltd [1981] 2 NZLR 385 (CA).
[7]At 388.
We conclude that until all three parties executed the agreement and communicated their acceptance to the others, the document amounted to nothing more than a revocable offer.[8] We now turn to consider whether the agreement was executed by all parties.
Kop-Coat Inc
[8]Richards v Hill [1920] NZLR 724 (SC) at 727.
We start with Kop-Coat Inc. The pleaded claim was that Mr Scott advised Mr and Mrs Probett that Kop‑Coat NZ Ltd had the signing rights for Kop-Coat Inc. The first problem with this allegation is that even if Kop-Coat NZ was authorised to sign for Kop-Coat Inc it did not purport to exercise that authority by doing so. A second difficulty is that there was no evidence to support the allegation. Mr Probett’s evidence was that he asked Mr Scott whether he was able to sign on behalf of Kop-Coat Inc and Mr Scott assured him he was. The Judge made no such finding and the assertion is contrary to the weight of the evidence. The Judge found that Mr Scott told Mr and Mrs Probett he would send the agreement to Kop-Coat Inc for execution by it.[9] This is not consistent with Incodo’s contention that Mr Scott had already signed the agreement on Kop-Coat Inc’s behalf. Further, even if Mr Scott had said he was authorised to sign on behalf of Kop‑Coat Inc, he did not purport to do so. Mr Scott was clear in his evidence that he was not authorised to sign on behalf of Kop‑Coat Inc and that is why he left that part of the execution page blank. Mr Ward confirmed that Mr Scott had no authority to say or do anything on behalf of Kop‑Coat Inc.
[9]High Court judgment, above n 1, at [48].
The agreement was plainly not executed by Kop-Coat Inc. Incodo realistically acknowledged this in its pleading — “Kop-Coat Inc did not sign the Contract”. The non-execution by Kop-Coat Inc cannot be disregarded as an irrelevancy. It was the owner of the intellectual property being licensed and has now been met with an award of damages of $2 million for breaching the contract. We conclude that because Kop‑Coat Inc did not execute the agreement, no binding agreement came into being. The parties did not intend to be bound to the agreement until all three parties had executed it. There is no suggestion that the agreement was ratified by Kop-Coat.
In view of this conclusion, it is not strictly necessary for us to consider whether the agreement was even executed by Kop‑Coat NZ given it was not signed by any of its directors. We nevertheless address this issue for completeness.
Kop-Coat NZ
Once Incodo executed the document in the manner contemplated it became an offer capable of acceptance. The offer specified how the other parties were to express their acceptance, namely by each party having two directors or one director and the company secretary sign it on its behalf. The specified requirement for formal execution was no doubt intended to avoid the very debate that has now arisen about whether a person purporting to sign on behalf of a party had actual or ostensible authority to do so. Clearly, Kop-Coat NZ did not execute the agreement in the manner prescribed in the offer. Incodo would have been entitled to insist on the stipulated manner of execution thereby avoiding any uncertainty about Mr Scott’s authority to bind Kop-Coat NZ.[10] However, Incodo accepted Mr Scott’s signature on the document as a sufficient acceptance on behalf of Kop-Coat NZ. In so doing, we consider Incodo waived its right to object to the manner of acceptance by Kop-Coat NZ and the issue becomes whether Mr Scott in fact had actual or ostensible authority to sign for Kop‑Coat NZ.
[10]Richards v Hill, above n 8; Mountain Road (No 9) Ltd v Michael Edgley Corp Pty Ltd [1999] 1 NZLR 335 (CA) at 338; and Corrick v Silich [2018] NZCA 221 at [42]–[44].
The pleadings do not address the issue of Mr Scott’s alleged authority to sign the agreement on behalf of Kop-Coat NZ. As noted, Mr Olney’s recollection is that the thrust of Incodo’s case originally was that Mr Scott had actual authority to bind Kop-Coat NZ but in its closing Incodo placed sole reliance on Mr Scott having apparent authority. Mr Fraundorfer does not accept this. We therefore proceed on the basis that both avenues were relied on by Incodo.
We start by considering whether Mr Scott had actual authority to execute the agreement on behalf of Kop‑Coat NZ. Mr Scott was the general manager and senior employee of the company in New Zealand. Nevertheless, he was quite clear in his evidence that all terms of the agreement had to be approved by Mr Ward as the director ultimately responsible for it. He said “[n]ot one word was to be changed without Kop-Coat Inc’s approval”. Mr Scott understood that Mr Ward approved the final terms of the agreement during the telephone conference on 22 May 2015. Ms Armstrong’s evidence was to similar effect. However, the Judge found that both were mistaken about this. Further, neither Mr Scott nor Ms Armstrong stated that Mr Ward specifically authorised Mr Scott to execute the agreement. It follows that Mr Scott was not actually authorised to bind Kop-Coat NZ to the agreement on 22 May 2015. This explains why the Judge correctly focused his analysis on the question of whether Mr Scott had apparent authority to sign on behalf of Kop‑Coat NZ. We turn now to address that issue.
Section 18 of the Companies Act 1993 relevantly provides:
18 Dealings between company and other persons
(1) A company … may not assert against a person dealing with the company or with a person who has acquired property, rights, or interests from the company that—
…
(c) a person held out by the company as a director, employee, or agent of the company—
…
(ii) does not have authority to exercise a power which a director, employee, or agent of a company carrying on business of the kind carried on by the company customarily has authority to exercise.
(d) a person held out by the company as a director, employee, or agent of the company with authority to exercise a power which a director, employee, or agent of a company carrying on business of the kind carried on by the company does not customarily have authority to exercise, does not have authority to exercise that power.
…
Unless the person has, or ought to have, by virtue of his or her position with or relationship to the company, knowledge of the matters referred to in any of the paragraphs … (c), (d) … as the case may be.
A prerequisite under s 18(1)(c) and (d) is that the company held out the agent as a person authorised to exercise the relevant power on its behalf. The holding out must be made by someone who has actual or apparent authority to make it on behalf of the company.[11] The third party dealing with the company must also show that it knew of the holding out and reasonably relied on it.[12] The burden of proving these matters is on the party seeking to enforce the right or interest against the company.[13]
[11]Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 (CA) at 503; Savill v Chase Holdings (Wellington) Ltd [1989] 1 NZLR 257 (CA) at 304; and Cromwell Corp Ltd v Sofrana Immobilier (NZ) Ltd (1992) 6 NZCLC 67,997 (CA) at 68,005.
[12]Levin Meats Ltd v Perfect Packaging Ltd (2011) 10 NZCLC 264,950 (HC) at [45].
[13]Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand (2nd ed, LexisNexis, Wellington, 2016) at 324.
No holding out by Kop-Coat NZ was pleaded by Incodo. Nor did it give any evidence of a holding out. The only evidence it adduced on the topic came from Mr Probett, but this related to Kop-Coat Inc. Mr Probett said he asked Mr Scott whether he was able to sign the agreement on behalf of Kop-Coat Inc and Mr Scott assured him he was. However, that evidence was contradicted by both Mr Scott and Mr Ward and it was not accepted by the Judge.
It is common ground that Mr Ward, the Kop-Coat NZ director responsible for the agreement, did not communicate at any stage with Mr or Mrs Probett prior to them signing the agreement. There was therefore no holding out to Incodo by Mr Ward or any other director of Kop-Coat NZ that Mr Scott could sign the agreement on its behalf. We agree with the Judge that Mr Scott’s representation as to his own authority could not bind his principal, Kop-Coat NZ.[14]
[14]High Court judgment, above n 1, at [84].
The Judge nevertheless found that Mr Ward, who had actual authority on behalf of Kop-Coat NZ, authorised Mr Scott to represent to Incodo that he had authority to conclude the agreement on Kop-Coat NZ’s behalf:[15]
[85] In context, I am persuaded that Mr Ward permitted it to be represented by Kop-Coat NZ that Mr Scott and Ms Armstrong had authority to conclude the deal on behalf of Kop-Coat NZ. They were left in charge of all negotiations in New Zealand. It was reasonable for the Probetts to rely on Mr Scott’s authority. He was a person who had the confidence of Kop-Coat NZ and in that sense, from the perspective of Mr and Mrs Probett, could be trusted to be acting on behalf and with the authority of Kop-Coat NZ.
[15]At [85].
While we hesitate to disagree with the experienced commercial Judge, we have been persuaded that this finding cannot be sustained on the evidence and the Judge’s own findings. Mr Scott said he had no authority to change the agreement in any way without Mr Ward’s approval. Mr Ward did not authorise Mr Scott and Ms Armstrong to conclude “the deal” or sign the agreement on behalf of Kop-Coat NZ. The Judge found that Mr Scott “thought he had authority to sign” after speaking to Mr Ward during the teleconference on 22 May 2015.[16] But the Judge found that Mr Scott and Ms Armstrong were mistaken in thinking that Mr Ward had given them the final terms of the agreement.[17] The Judge was “thoroughly satisfied” that Mr Scott and Ms Armstrong “misconstrued the situation” in thinking “they were carrying out their normal duties when executing the contract”.[18]
[16]At [65].
[17]At [90].
[18]At [97].
It is therefore plain that no one with actual authority on behalf of Kop‑Coat NZ held out to Incodo that Mr Scott was authorised to sign the agreement on Kop‑Coat NZ’s behalf. Mr Ward did not do so. Mr Ward did not authorise Mr Scott to do so. Without such authorisation, Mr Scott had no actual authority to do so.
Mr Scott said that he often signed contracts on behalf of Kop-Coat NZ which he described as “usual contractors’ contracts or employment agreements”. This does not assist Incodo for two reasons. The licence and supply agreement could not be categorised as a usual contract with a contractor or employee. Further, there was no evidence that Mr Probett was aware of this practice.
That leaves only one other possibility — that the holding out arises from Mr Scott’s position as general manager. Does the general manager of a company carrying on a business of the kind carried on by Kop‑Coat NZ have customary authority to sign an agreement of this type? There was no evidence about this. However, even if that were the case, the agreement itself does not contemplate that Mr Scott would sign on behalf of Kop-Coat NZ as its general manager. Kop‑Coat NZ’s solicitors, Russell McVeagh, prepared the agreement in accordance with their instructions, including the formalities of execution requiring two directors to sign on behalf of each party. This amounted to a representation by Kop-Coat NZ that this was how it intended to execute the agreement and become bound by it. In our view, this displaced any holding out that might otherwise have existed that execution of this agreement was within the customary authority of Mr Scott as Kop‑Coat NZ’s general manager.
Moreover, Mr Scott did not purport to sign the agreement in exercise of his customary authority as general manager of Kop‑Coat NZ, for example by signing “for and on behalf of Kop-Coat NZ by its general manager and duly authorised agent Cameron Scott”. Instead, he signed as if he was one of its directors and printed his name in the space where the second director was to sign. When asked about this at the trial, Mr Scott said he was surprised when it was brought to his attention he had done this:
It was only when it was brought to my attention it actually had the word “director” there. I realised I’d signed it as a director and I even surprised myself in that. ‘Cos I never ever claimed through my whole career that I was a director of Kop-Coat Inc or New Zealand.
Mr and Mrs Probett knew that the agreement had been prepared by Kop‑Coat’s solicitors who had specified the manner of execution by two directors. Mr Scott was not a director of Kop-Coat NZ and Incodo could not reasonably rely on his signature as fulfilling the requirement that two directors sign on behalf of the company.
Conclusion
We conclude that Incodo has failed to prove that the agreement was executed by Kop-Coat NZ or Kop-Coat Inc. The agreement was executed only by Incodo. It follows that no binding agreement was reached and the appeal must be allowed. Nevertheless, in case the matter goes further, we go on to address the other grounds of appeal.
Was there agreement on price?
Kop-Coat contends the agreement contains manifest pricing errors such that no consensus was reached on an essential term and therefore there was no enforceable contract. This argument is based on errors in sch 3 of the agreement where input prices payable by Incodo are set out. The relevant part of the schedule is as follows:
SCHEDULE 3 – EQUIPMENT AND INPUT PRICING
1Equipment
…
2 Input Prices to Incodo Solutions
2.1 Base prices (excluding DOT)
Input
Terms and conditions
NZ$ per Litre Price
Mix
(litres)
Mix Cost
(NZ$)
Gamma 900(1)
Concentrate
A
$35.00
21.00
$175.00
Propylene(2) Glycol
B
$4.58
20.00
$91.52
Synthetic Pyrethroid Concentrate(3)
B
$100.00
1.00
$100.00
Timber (DOT) Borate Powder(4)
B
$3.52
1.00
$3.52
Bazooka Concentrate(5)
A
$40.20
2.00
$80.40
Red Dye Concentrate(6)
B
$29.80
0.05
$1.49
Water
-
-
Note: as required to make up a 450 kg of solution
-
Note: Subtotal of inputs and water without Disodium Octaborate (DOT) Material is NZ$451.93 for a 450 kg mix. The cost of the DOT must be added. 450 kg is the batch size required for these applications to a single house frame to achieve the target retentions and penetration.
See Section 2.2 for DOT options.
(1) TRU-CORE® Process Concentrate also containing KLI tracer material. Manufactured by Kop-Coat.
(2) Industrial Grade Propylene Glycol.
(3) Liquid Concentrate approved for use in Process.
(4) Note: Synthetic Pyrethroid type and mix rate approved for use may be changed as required.
(5) Liquid Concentrate approved for use in Process.
(6) Note: Powder Concentrate approved for use may be substituted as required.
The first error is obvious and appears in the first line. 21 litres of Gamma 900 Concentrate at $35 per litre equals $735, not $175. We do not consider this error would defeat the agreement if it were otherwise binding. There is no difficulty discerning what the parties’ consensus was on this issue, namely to pay $35 per litre for this input. The Court would have no difficulty giving effect to the agreement either by rectifying the document or by interpreting $175 as having been intended to mean $735.[19]
[19]Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 (HL) at 774; Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] AC 1101; and Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.
The second error is not quite so straight forward. The uncorrected mix costs in the table total $451.93. The note appearing immediately below the table states that $451.93 is the cost of the inputs without Disodium Octaborate (DOT) for a 450 kg mix. The note also records that a 450 kg batch is required for a single house frame to achieve target retentions and penetration. Finally, the note directs attention to section 2.2 for “DOT options”. There are a number of problems with this. First, there is no section 2.2. Second, DOT is shown in the table as Timber Borate Powder whereas the mix quantity is expressed in litres. Third, the mix quantity is shown as one litre at a cost of $3.52. The total mix cost of $451.93 includes this amount; the note is therefore not strictly correct in stating that DOT has been excluded from the calculation. Fourth, and more significantly, the quantity of DOT to be added to a 450 kg batch is around 80 kg, not one kg or one litre. Correcting for these errors, the input cost of a 450 kg batch including DOT would be approximately $1,289. However, because not all of the timber framing would be treated, only the salvageable parts, a batch of this size would not typically be needed.
These errors remained because Mr Ward had not had an adequate opportunity to carefully review the draft agreement before it was signed by Incodo on 22 May 2015. Mr Ward only received the draft that morning and he did not know that Incodo was intending to sign it that day. Mr Ward did not find out that the agreement had been signed until July 2015.
The Boron Solutions agreement upon which the New Zealand agreement was based was designed for the application of product to the entire frame of a new house to provide protection against termites whereas the New Zealand agreement was intended for the treatment of salvageable parts of the framing of existing houses requiring remediation for weather tightness defects. The schedule of input prices in the agreement had not been adapted for New Zealand conditions, no doubt because the product mix had not been formulated by the time Incodo signed the agreement. It was not until 23 May 2015, after the agreement was signed, that Mr Ward sent an email to Dr Ron Clawson, global technical director for Kop-Coat Inc, asking him to prepare a formulation suitable for New Zealand conditions.
Nevertheless, we are satisfied that these errors would not be fatal to the agreement if it were otherwise binding. The Court will strive to give effect to the parties’ contractual intention by clarifying or rectifying express terms or implying terms. As Blanchard J said in giving the judgment of the majority of this Court in Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd:[20]
If the Court is satisfied that the parties intended to be bound, it will strive to find a means of giving effect to that intention by filling the gap. …
…
It will be a matter of fact and degree in each case whether the gap left by the parties is simply too wide to be filled. The Court can supplement, enlarge or clarify the express terms but it cannot properly engage in an exercise of effectively making the contract for the parties by imposing terms which they have not themselves agreed to and for which there are no reliable objective criteria.
[20]Fletcher Challenge Energy Ltd v Electricity Corp of New Zealand Ltd [2002] 2 NZLR 433 (CA) at [60] and [63].
The critical point is that there is no error in the unit price of the stipulated inputs in the agreement. While DOT is stated as being $3.52 per litre, this was plainly intended to be $3.52 per kg being the correct measure for that input which was to be supplied in powder form. It is clear from the note that DOT must be added to the batch so the fact the correct quantity is not stated is not fatal. The amount of DOT required for each batch can be objectively assessed and would depend on the appropriate formulation to achieve compliance with the relevant New Zealand standards set out in the agreement. To the extent that the quantity of DOT per batch has not been specified, a term would be implied that the quantity is the amount required to be added to a batch to enable it to achieve compliance with relevant standards.[21]
[21]BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283; and Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2016] AC 742 at [16]–[21].
We conclude that if the agreement was otherwise binding, the Court would give effect to the parties’ contractual intent by correcting the errors as a matter of interpretation of the agreement or by way of rectification of it and by implying any term required to give the agreement business efficacy. The agreement would not fail for lack of certainty as to price. This ground of appeal fails.
Did Kop-Coat repudiate the agreement?
Not knowing that Incodo had already signed the agreement, Mr Ward sent an email around midnight New Zealand time on 22 May 2015 asking Russell McVeagh to send him the updated draft of the agreement. He sent a copy of this email to Mr Scott and Ms Armstrong. Russell McVeagh was also unaware at that stage that the agreement had been signed by Incodo. It was immediately after sending this email that Mr Ward sent his email to Dr Clawson asking him to formulate the product for New Zealand conditions.
On 26 May 2015 Russell McVeagh sent an email to Mr Scott and Ms Armstrong confirming their availability for a telephone conference to progress the agreement. On 27 May 2015 Ms Armstrong emailed a copy of the updated licence agreement to Russell McVeagh, copying in Mr Ward. This copy did not contain any signatures and Ms Armstrong did not disclose that it had been signed. Over the course of the next month, Mr Ward, Ms Armstrong and Mr Scott worked with Russell McVeagh to develop the agreement. On 1 July 2015 Ms Armstrong sent an email to Mr Ward and Mr Scott attaching a further draft of the agreement with amendments made by Russell McVeagh and seeking “your input and confirmation to get this contract finalised”. Ms Armstrong advised that Claire Coker, Mr Scott’s daughter and a contractor to Kop-Coat NZ, would be meeting with Mr and Mrs Probett on 3 July 2015 and they “would really like the contract by then as they keep telling us they want to start making money money money!”. Ms Armstrong concluded her email by saying “Please get back to me as soon as possible with your comments, amendments or approval”.
On 2 July 2015 Mr Ward sent an email to Ms Armstrong setting out his final recommended changes to the agreement and providing instructions for execution by Incodo following which he would execute it on behalf of the Kop-Coat companies. This email reads:
Please see my final recommended changes in the attached agreement. You caught some very important errors that I have addressed. I also corrected a few more areas that contained errors or were unclear. Please contact me if you have any questions. We do not need to go back through [Russell McVeagh]. [Russell McVeagh] has provided a good base for us to finish.
Please execute as follows:
1. Ask [Mr Scott] to confirm the prices for the chemicals.
2. Advise [Mr Scott] that I have added an equipment use royalty to make it very clear that the equipment is not owned by the licensee. I also changed wording in the Equipment sections to fortify this fact. I am happy to have further discussion, but please do not make changes without my approval.
3. Make a final PDF and provide [Ms Coker] with two printed copies for the licensees to initial every page and sign on the signature page.
4. Please advise [Ms Coker] that any marks, notes, cross outs, changes etc by the Licensee makes the agreement invalid and it will not be accepted.
5. Please scan the final signed agreement and send to me by email. I will sign, scan and send back to you by email to provide them with a printed copy.
On 3 July 2015 Ms Armstrong and Ms Coker went to Incodo’s offices and dropped off the redrafted agreement. Mr Probett said they advised him that Incodo should sign the new contract but gave no other explanation. The Judge found that Mr Probett and his son, who was going to assist in the new business, did not react well to this:
[45] Mr Paul Probett and his son took the request to sign this new draft badly. They thought Kop-Coat was reneging on the earlier signed agreement, which to them was a binding contract. The Probetts’ understanding of the 3 July version was set out on 11 July in a six-page memorandum entitled: “Kop-Coat Inc’s unilaterally proffered replacement contract”.
The Judge succinctly described what happened next:
[46] In late July, Mr Ward came out to New Zealand and endeavoured to renegotiate a contract, but by this point it was a lost cause. The relationship between Incodo and both Kop-Coat NZ and Kop-Coat Inc ceased. Within Kop-Coat NZ, Mr James and Mr Scott lost their jobs, and Ms Armstrong resigned.
It is common ground that some of the terms of the 3 July 2015 draft agreement significantly departed from those in the 22 May 2015 agreement and were not acceptable to Incodo. For example, apart from the pricing changes, the July agreement removed Incodo’s right to exclusivity in the designated area. Mr Ward said that Kop‑Coat would simply not agree to grant Incodo an exclusive licence. Kop-Coat disavowed the 22 May 2015 agreement and made it clear to Incodo that it was not prepared to honour the terms of it. We agree with the Judge that this was a repudiation of that agreement, assuming it had been properly executed and was binding.[22] Incodo plainly accepted that repudiation and sought damages to compensate for the breach of contract. We do not consider there is any merit in this ground of appeal.
Did Incodo mitigate its loss?
[22]Mersey Steel and Iron Co Ltd v Naylor, Benzon & Co (1884) App Cas 434 (HL) at 443.
Kop-Coat did not plead that Incodo failed to mitigate its loss. Kop-Coat nevertheless contends that the Judge should have reached that conclusion arguing that Incodo should have accepted the agreement proffered on 3 July 2015 (amended as to price following further discussions between Mr Ward and Mr Probett). The issue was formulated by the Judge as being whether Incodo effectively caused its own loss by refusing to proceed with the July agreement.[23] The same issue can be considered as a failure to mitigate loss. Losses that could have been avoided by a plaintiff taking reasonable steps in mitigation are not recoverable.[24] What steps ought reasonably to have been taken to avoid the loss is a question of fact and degree and depends on all the circumstances.[25]
[23]High Court judgment, above n 1, at [124].
[24]British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd (1912) AC 673 (HL) at 689.
[25]Payzu Ltd v Saunders [1919] 2 KB 581 (CA) at 588.
The Judge noted Mr Probett’s evidence as to his reaction to the 3 July 2015 contract being left on his desk without explanation:[26]
Sir, things changed so much from the 3rd of July. We had a signed contract. We thought we were in a fantastic relationship. We were in the honeymoon period. On the 3rd of July we felt, to be blunt, we thought we were married to Godzilla. It had changed that quickly. It changed in 10 minutes when the new contract was dropped on our desk with no explanation, no contact, we had a [dearth] of anything, we had one brief meeting with [Mr Scott] when he uttered his expletive deleted comment about what had gone, been gone on and that was basically the end of it. We thought this is going really pear-shaped and if we pursue this we gonna get chewed.
[26]High Court judgment, above n 1, at [127].
The Judge found that Incodo misunderstood some of the changes in the July agreement, including as to price. He considered that Incodo’s review of the July agreement revealed “a tendency to suspect ill-intent from Kop-Coat”.[27] The Judge noted that Mr Ward offered to amend the July agreement to allow for fees, royalties and minimum payments as provided for in the May agreement.[28] He found that by this time Incodo had lost confidence in Kop-Coat and was no longer willing to go into business with it.[29] The Judge concluded that Incodo was entitled to take that view in all the circumstances.[30]
[27]At [128]–[129].
[28]At [133].
[29]At [137].
[30]At [144].
We are not persuaded that Incodo was required to enter into the July agreement to mitigate its losses had Kop-Coat wrongfully repudiated the 22 May agreement. Assuming the 22 May agreement was binding, we agree with the Judge that Incodo was justified in losing confidence in Kop-Coat when it refused to honour the agreement so soon after it was signed. This was intended to be a comparatively long‑term and mutually beneficial arrangement requiring a major commitment to the business from Incodo which would be reliant on ongoing technical support from Kop‑Coat. The mutual trust and cooperation that would be key to the success of the venture had gone.
Further, even if the fees, royalties and minimum sales thresholds were adjusted to conform with the May agreement, the July agreement was still not an adequate substitute. Importantly, it did not provide Incodo with exclusivity in the contracted region. Acceptance of that agreement would therefore leave Incodo vulnerable to potentially unconstrained competition in its territory but still required to meet the minimum sales thresholds set out in the agreement.
We reject Kop-Coat’s submission that Incodo failed to mitigate its loss. In our view, Incodo did not act unreasonably in all the circumstances in declining to accept the substitute performance offered by Kop-Coat under the July agreement. This ground of appeal fails.
Did the Judge err in his assessment of Incodo’s loss?
Pleaded loss
Incodo initially claimed reliance losses being wasted set up costs of $136,104. However, in its third amended statement of claim, Incodo pleaded that as a result of Kop‑Coat’s breach in failing to honour the agreement, it suffered expectation losses in the sum of $7,470,000. This ambitious claim was calculated as the net profit expected from the treatment of 17,200 houses over six years generating revenue of $64,500,000. Anticipated direct costs of $26,199,206 were then deducted together with overhead expenses of $6,549,350 and allowances for amortised capital expenditure of $1,000,000 and tax. A discount rate of 26.8 per cent was applied to reflect uncertainty and risk.
Incodo’s evidence of loss
In his original brief of evidence, Mr Probett said “Incodo has lost the profits that would have been obtained under the May Contract” but he did not elaborate. He said nothing about loss in his reply brief or in his evidence at the trial.
Incodo did, however, produce a detailed business plan that it submitted to Westpac on 11 May 2015 in support of its application for a loan of $60,000 to meet initial start-up costs including $10,000 to purchase a second-hand vehicle to tow the mobile sprayer the company intended to start with. Incodo offered security for the advance over a vacant residential section owned by Mr and Mrs Probett’s family trust in Tauranga. It was envisaged that this would be a family business with Mr Probett, his two sons, daughter and son-in-law all involved in various capacities.
The business plan included a profit and loss forecast which estimated revenue in the first year of $450,000 rising to $500,000 in the second year using a single sprayer. The first-year revenue was calculated on the basis that 100 homes would be treated at an average cost to the owner of $4,500. Annual costs were estimated at $90,000 leaving net profits of $360,000 in the first year and $410,000 in the second. At that stage, Incodo was expecting an exclusive licence for the top half of the North Island rather than just Auckland as eventuated.
Incodo engaged John Leonard, an expert forensic accountant, to quantify its losses. Mr Leonard envisaged a much more sizeable undertaking from that described in the business plan Mr Probett submitted to the bank. In his initial brief of evidence and without the benefit of having seen the business plan, Mr Leonard assumed there would be four sprayers operating in the first year, eight in the second, 12 in the third and 14 in each of the fourth, fifth and sixth years. He assumed that each of these trailer units would operate at capacity for 45 weeks a year. This allowed for statutory holidays, annual leave and one week for repairs or sick leave. Mr Leonard assumed that the average house would be treated at a cost of $3,750. Based on these assumptions Mr Leonard made the following gross revenue projections:
| Year | Number of Houses | Gross Revenue |
| 1 | 500 | $1,875,000 |
| 2 | 1,850 | $6,937,500 |
| 3 | 3,050 | $11,437,500 |
| 4 | 3,800 | $14,250,000 |
| 5 | 4,000 | $15,000,000 |
| 6 | 4,000 | $15,000,000 |
Direct costs of sales were assessed at $1,252,109 in year one rising to $8,685,693 in years five and six. These included direct labour costs of $297,440 in the first year rising to $1,525,323 in years five and six. Indirect costs were estimated at $915,112 in year one including other staff costs of $549,000. By year five, total variable costs were estimated to rise to $1,320,433 including other staff costs of $776,514.
These projections left a loss after tax of $262,788 in the first year but profits of $1,282,882 in year two rising to $3,211,895 by year five. Based on these projections, Incodo would have to meet capital costs of $540,000 in year one and further capital costs of $200,000 in each of years two and three. Further capital of $100,000 would be required in year four. These capital costs totalling $1,040,000 would be amortised over the six-year term. Mr Leonard projected that Incodo would face a cash deficiency of $702,788 in the first year of operation but would be cashflow positive after that. He applied a discount rate of 22.5 per cent per annum to the after‑tax profits and on this basis calculated the net present value of the future cashflow as being $5,140,000.
Mr Leonard revised his projections downwards in his reply brief, assessing the net present value of the future cashflows over a six-year term as being $3,470,000.
After the experts on both sides completed giving their evidence, they were directed to confer and submit a joint statement of the matters on which they agree or disagree. The experts duly met and provided a joint statement to the Court dated 9 June 2017 with their respective further revised projections. Mr Leonard’s further revised assessment of the net present value of the future projected cashflow over a six‑year term was reduced to $2,130,000 applying a discount rate of 28.8 per cent. His revised projection of gross revenue was as follows:
| Year | Number of Buildings | Gross Revenue |
| 1 | 468 | $1,755,000 |
| 2 | 702 | $2,632,500 |
| 3 | 936 | $3,510,000 |
| 4 | 1,030 | $3,862,500 |
| 5 | 1,092 | $4,095,000 |
| 6 | 1,092 | $4,095,000 |
This revised projection produced a net after-tax profit of $222,327 in year one rising to $1,381,795 in year six. The business would have negative cashflow of $62,673 in year one but would be cash positive thereafter.
Mr Leonard produced a revised assessment based on a three-year term. Using the same discount rate of 28.8 per cent, he arrived at a net present value of $980,000.
Kop-Coat’s accounting expert, Bruce Wattie of PricewaterhouseCoopers, modelled his projections on Incodo’s business plan, particularly the number of buildings likely to be treated:
| Year | Number of Houses | Gross Revenue |
| 1 | 100 | $375,000 |
| 2 | 111 | $416,250 |
| 3 | 122 | $457,500 |
| 4 | 134 | $502,500 |
| 5 | 147 | $551,250 |
| 6 | 161 | $603,750 |
Mr Wattie agreed with Mr Leonard that the business would suffer a cashflow deficiency in year one (which he calculated to be $94,181) but would be cash positive thereafter. Mr Wattie forecast a small net after-tax loss of $6,542 in year one and a modest profit of $25,526 in year two rising to $136,674 in year six. Using Mr Leonard’s discount rate of 28.8 per cent, Mr Wattie assessed the net present value of the future cashflows over a six-year period as being $87,200. Applying the same assumptions over a three-year term, Mr Wattie assessed the business as having no value.
High Court judgment
The Judge approached the damages assessment by adopting a loss of chance analysis.[31] He carried out his analysis by addressing three topics — the size of the overall market, Incodo’s prospects of taking market share from the incumbents and the value of the lost chance.[32]
[31]High Court judgment, above n 1, at [172].
[32]At [185]–[186].
The Judge rejected the evidence of the experts called for Kop-Coat that the market was small and declining based on data available from the Weathertight Homes Resolution Service.[33] He preferred Mr Leonard’s reply evidence as to the size of the market.[34] The Judge accepted that the market was sufficiently large to deliver the sales he contended for.[35]
[33]At [204] and [256].
[34]At [221].
[35]At [205]–[224].
The Judge understood that the incumbent products, FrameSaver and Metalex, can only be applied by brush whereas the TRU-CORE® product can also be sprayed on.[36] The Judge found that TRU-CORE® offered significant cost and convenience advantages because of the speed it could be applied by spraying.[37] Given these competitive advantages and the absence of any evidence that FrameSaver had an equivalent pedigree, the Judge was not persuaded by the experts called for Kop‑Coat that Incodo would not be able to gain more than 50 per cent of the Auckland market.[38]
[36]At [226].
[37]At [226].
[38]At [245].
In assessing the value of the lost chance, the Judge considered whether the damages should be calculated over a three or a six-year term noting that the agreement did not confer on Incodo a right of renewal following expiry of the initial three-year term.[39] The Judge took the view that if Incodo was successful in the first three years, it was unlikely that Kop-Coat would not renew the term and instead look for a replacement licensee.[40] He therefore assessed the losses over a six-year term.
[39]At [255].
[40]At [255].
The Judge noted that whereas Incodo had claimed $7,470,000, Mr Leonard supported a lesser figure in his original brief of $5,140,000 and proposed an even lower figure of $3,470,000 in his reply brief.[41] The Judge understood that “Mr Leonard’s lower estimates were made after he had the benefit of hearing the evidence of [Kop-Coat’s experts] and being tested in cross-examination”.[42] In fact, Mr Leonard advanced his assessment of $3,470,000 in his reply brief, prior to his evidence being tested in cross‑examination. The Judge appears to have overlooked the further revised opinion Mr Leonard expressed in the joint statement of the experts filed after the cross-examination was completed. In that statement dated 9 June 2017, Mr Leonard assessed the losses based on a six-year term as being $2,130,000 and $980,000 for a three‑year term.
[41]At [263].
[42]At [264].
The Judge assessed the lost chance at 60 per cent. Adopting what he understood to be Mr Leonard’s final figure of $3,470,000, he arrived at $2,082,000 as the value of the lost chance.[43]
Submissions
[43]At [270].
Mr Olney makes three broad challenges to the damages assessment. First, he contends the Judge erred by not focusing on what Incodo proved it would have done if the agreement had not been repudiated. Mr Olney submits that the Judge took the wrong legal approach by assessing the damages with reference to a model that bore no relationship to Incodo’s intended business. Secondly, Mr Olney argues that the Judge erred in his assessment of the evidence in five key respects — the size of the market, Incodo’s likely market share, likely sales volumes, likely sale price and by including profits from sales outside the Auckland area and beyond the contractual entitlement of a three-year term. Thirdly, Mr Olney says the Judge was mistaken in relying on the figure of $3,470,000 from Mr Leonard’s reply brief rather than his revised opinion expressed in the joint statement of the experts that the correct figure should be $2,130,000. This alone would reduce the damages to $1,278,000, assuming no other changes were made.
Mr Conder, who was not trial counsel, handled this aspect of the argument for Incodo. He supports the Judge’s analysis and conclusion arguing that Incodo demonstrated on the balance of probabilities that a valuable chance was lost. Mr Conder says there was sufficient evidence to support the Judge’s findings as to the value of that chance and there is no proper basis for this Court to interfere.
Analysis
Proof of intended business model
There is room for debate about whether this is truly a loss of chance case because the contingencies and chances arise only in quantifying the loss and are not relevant to whether loss has been caused.[44] However, we consider nothing turns on this in the present case because of the approach taken by the Judge. Assuming there was a contract, Incodo proved on the balance of probabilities that Kop-Coat wrongfully repudiated it thereby depriving Incodo of the benefit of the rights it was to acquire under the licence and supply agreement. The normal measure of damages is the value of those rights assessed at the date of the breach and taking account of the price payable including any other opportunity foregone. The value of the rights would reflect the present-day value of the expected profits from being able to exercise those rights over the term of the agreement. The quantification would need to take account of relevant contingencies and risks. That is broadly how the Judge approached his assessment of the damages and we see nothing wrong with this general approach.
[44]James Edelman McGregor on Damages (20th ed, Sweet & Maxwell, London, 2018) at [10–049].
The object of the award of damages is to place Incodo in the same position it would have been in had the contract not been repudiated. The onus is on Incodo to prove what it would have done in that event and provide the factual foundation for the expert’s calculation of the loss. We accept Mr Olney’s submission that merely because contingencies must be assessed, this does not relieve Incodo of its obligation as plaintiff to prove its loss. As Brennan J stated in Sellars v Adelaide Petroleum NL:[45]
A plaintiff seeking to prove the amount of a loss does not obtain the right to argue for a possibility by refraining from adducing evidence of the fact.
[45]Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 368.
As noted, Mr Probett said nothing in his evidence about the likely scale of the business he would have established including his estimate of likely sales levels, sale prices or costs. The best evidence of this came from the contemporaneous business plan he prepared and submitted to the bank on 11 May 2015. The business plan forecasted that 100 houses would be treated in the first year using a single sprayer at an average price of $4,500 producing revenue of $450,000. By contrast, Mr Leonard’s initial assessment was based on four sprayers working at capacity treating 500 houses at an average price of $3,750 generating revenue of $1,875,000. The discrepancy was even more pronounced in the second year. Mr Probett’s business plan forecasted second year revenue of $500,000, whereas Mr Leonard’s initial assessment was nearly 14 times that figure at $6,937,500.
The difficulty with Mr Leonard’s evidence is that it is based on what a licensee might have been able to achieve assuming the licensee had the requisite appetite for risk, sufficient business acumen and freedom from capital constraint. This type of analysis, speculating on what may have been possible, is not relevant unless it is tethered to the plaintiff’s likely business model, including sales levels, pricing and costs as established by the evidence. We intend no criticism of Mr Leonard. He may well have assumed that the facts underpinning his analysis would be proved by other witnesses.
Prior to the commencement of the trial Kop-Coat gave notice in accordance with r 9.11 of the High Court Rules 2016 challenging the admissibility of Mr Leonard’s evidence. Kop-Coat contended that Mr Leonard’s analysis was based on factual matters outside his general body of knowledge comprising his area of expertise. We consider that this objection was well made in terms of s 25(3) of the Evidence Act 2006. It follows that the award would have to be modified to reflect the factual premises that were proved and upon which an appropriate forecast of profitability could be made.
Market size
The Judge received considerable evidence about the overall size of the available market. We are far from persuaded that he erred in concluding that the market for the TRU-CORE® product was sufficiently large to support the level of sales he ultimately accepted could have been made over a six-year term. In any event, this issue largely falls away given our acceptance, as we come to, that the projected sales should be more in line with the business model described in the business plan prepared by Mr Probett.
Market share
The Judge considered that TRU-CORE® had significant competitive advantages over the incumbent FrameSaver product and could achieve market share in Auckland exceeding 50 per cent during the forecasted period.[46] Mr Olney contends the Judge made two errors in making this assessment. First, the Judge concluded that TRU-CORE® had significant cost and convenience advantages because of the speed at which it can be applied.[47] Mr Olney says the evidence shows that the FrameSaver product could also be applied by spraying but applicators did not see this as offering advantages over applying the product by paintbrush. Secondly, the Judge considered that FrameSaver did not have an equivalent pedigree to Kop-Coat Inc, which was a subsidiary of a Fortune 500 company.[48] Mr Olney says this proposition did not feature in the evidence and was not put to any witness at the trial. He says the evidence established that the active ingredient in both products, glycol borate, has been used for decades in similar products globally. Further, FrameSaver has been the subject of extensive long-term durability in New Zealand by Scion, a Crown research institute focused on forestry and wood products. Mr Olney says the evidence was that FrameSaver is widely accepted in the industry, including by Auckland Council, and is available in most building products stores.
[46]High Court judgment, above n 1, at [245].
[47]At [226].
[48]At [245].
This issue also falls away given our conclusion that forecast sales should be based on the business model and projections set out in Incodo’s business plan. We consider that the evidence as to the size of the overall market and the competitive advantages of the TRU-CORE® product and system justify confidence in those sales projections being attainable.
Sales volumes
The best evidence of what Incodo would have done had the 22 May 2015 agreement proceeded comes from the business plan which Mr Probett put together for submission to the bank 11 days earlier. We accept that Mr Probett’s projections in the business plan were intended to be conservative. Nevertheless, his projections at that stage were that Incodo would treat 100 buildings in the first year and 111 in the second. Those projections may be compared with the agreed minimum sales thresholds in the 22 May 2015 agreement of 50 buildings being treated in year one, 75 in year two and 100 in year three. The 3 July 2015 agreement that was not acceptable to Incodo proposed an increase in these thresholds to 100 in year one, 150 in year two and 200 in year three. In the position paper Incodo prepared and sent to Kop-Coat in response to the 3 July agreement, these minimum sales and their associated turnover thresholds were described as “crippling”.
This contemporaneous evidence from Incodo helps place in perspective Mr Leonard’s original projections of 500 in year one, 1,850 in year two and 3,050 in year three. Even his final projections in the joint statement — 468 in year one, 702 in year two and 936 in year three — appear aggressive when one considers that Incodo regarded minimum thresholds set at 21–28 per cent of these levels as crippling.
Price assumption
Both parties accepted that to be competitive Incodo would need to charge the same price per square metre as FrameSaver. Mr Leonard assumed that this price was $25 per square metre. Mr Olney says that the $25 price is the amount typically paid by a building owner whereas Incodo’s likely market would be with the head contractors who would pay significantly less. He says the only evidence at trial was that the price typically paid by contractors for the FrameSaver product came from Geoffrey Bayley, a quantity surveyor called by Kop-Coat. Mr Bayley said that the price paid by head contractors was in the order of $10–$12 per square metre. Mr Olney says that the Judge overlooked this significant price differential when accepting Mr Leonard’s assessment of loss. This illustrates the problem of projections that are based on facts not established by the evidence.
Mr Conder accepts that the Judge did not resolve the pricing issue. He submits that Mr Bayley’s evidence supporting a price to contractors of $10–$12 per square metre sets the bottom of the appropriate range but does not exclude the possibility of higher prices being achievable, including where Incodo might contract directly with an owner. We are satisfied, based on Mr Bayley’s evidence, that Mr Leonard’s projections were overstated in assuming that a price of $25 per square metre would be an appropriate average to adopt. The average price achievable was likely to be towards the middle of the range from $12–$25 per square metre.
Inclusion of profits not available under the contract?
Mr Olney argues that any assessment of loss should be restricted to three years, not six, because that was the extent of the contractual entitlement. Any additional term was dependent on a further agreement being reached between the parties. Mr Olney also submits that projected sales outside the contracted territory should have been disregarded.
Damages for breach of contract are concerned with compensating a plaintiff for losses caused by the defendant’s breach of an obligation under the contract. It is not enough for the plaintiff to show that it is likely to have achieved the claimed benefit if the contract had been performed; there must be a contractual obligation to confer that benefit. As Diplock LJ said in Lavarack v Woods of Colchester Ltd, “the assumption to be made is that the defendant has performed or will perform his legal obligations under his contract with the plaintiff and nothing more”.[49] It is also to be assumed that the defendant will perform the contract in the manner most beneficial to itself.[50]
[49]Lavarack v Woods of Colchester Ltd [1967] 1 QB 278 (CA) at 294.
[50]Paula Lee Ltd v Robert Zehil & Co Ltd [1983] 2 All ER 390 (HC) at 393; Lion Nathan Ltd v C‑C Bottlers Ltd [1996] 1 WLR 1438 (PC) at 1446; and Paper Reclaim Ltd v Aotearoa International Ltd [2007] NZSC 26, [2007] 3 NZLR 169 at [23].
Applying these principles, Incodo is not entitled to damages based on forecasted sales outside the territory described in the agreement. To the extent that the forecasts are based on sales outside this area in the upper North Island, these must be excluded in carrying out the loss assessment.
We consider the Judge was correct to find that the agreement did not confer a right of renewal on Incodo for a further three-year term. The agreement provides that the parties “will hold discussions and endeavour to agree” to extend the term or enter into a new agreement. This is an agreement to agree and is not enforceable.[51] Again, applying the principles referred to above, damages must be assessed on the basis that Kop-Coat would perform nothing more than their legal obligations under the agreement in the manner most beneficial to them. On that basis, Kop-Coat would not agree to extend the term or enter into a new agreement. We consider that the damages ought to have been assessed on the basis that this was an agreement having a term of three years, not six.
Mr Leonard’s final assessment overlooked?
[51]Willets v Ryan [1968] NZLR 863 (CA) at 866–867.
It seems clear that the Judge intended to adopt Mr Leonard’s final projections in the joint statement of accounting experts dated 9 June 2017. The Judge said:
[264] I have taken into account that Mr Leonard’s lower estimates were made after he had the benefit of hearing the evidence of Mr Wattie and Mr [Bayley] and being tested in cross-examination. What impressed me about Mr Leonard’s evidence is that in the course of the trial he moved significantly in his estimates reacting to the criticisms and points made of his original report.
The only estimates given by Mr Leonard following completion of his cross‑examination and after hearing the evidence of Messrs Wattie and Bayley, were those set out in the joint experts’ report. The Judge formed the view that it would be “irrational” to go below the lower of Mr Leonard’s estimates. The Judge cannot have meant that it would be irrational to accept Mr Leonard’s final estimate of loss which was $2,130,000 for a six-year term. Had the Judge adopted $2,130,000 instead of $3,470,000, the loss would have been $1,278,000. If the Judge had chosen Mr Leonard’s final assessment based on a three-year term of $980,000, the loss would have been assessed at $588,000 applying the Judge’s discount of 40 per cent.
Conclusion
Adopting the Judge’s approach, but confining the assessment to a three-year term, the recoverable loss would be $588,000. However, further adjustments are needed to reflect the overstatement of forecast revenue (volume of sales and pricing). These adjustments would require consequential adjustments to direct and indirect costs. We do not have sufficient information to complete this exercise. Accordingly, if the appeal on liability had not been allowed, we would have remitted the assessment of damages to the High Court for determination in accordance with this judgment if the parties were unable to agree on the consequential adjustments required.
Result
The appeal is allowed.
The judgment entered in the High Court is set aside.
Judgment is entered for the appellants on the respondent’s claim.
The respondent is to pay the appellants one set of costs for a standard appeal on a band A basis, increased by $7,136 by agreement, and usual disbursements. We certify for second counsel.
Any issue as to costs in the High Court is to be dealt with in that Court.
Solicitors:
Russell McVeagh, Wellington for Appellants
Holland Beckett, Tauranga for Respondent
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