Nutech Security Limited v Cgi Contracting Limited
[2012] NZHC 1427
•21 June 2012
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV-2010-419-496 [2012] NZHC 1427
UNDER the District Courts Act 1947
IN THE MATTER OF an appeal against the decision of the
District Court at Hamilton
BETWEEN NUTECH SECURITY LIMITED Appellant
ANDCGI CONTRACTING LIMITED First Respondent
ANDGRANT INGLIS Second Respondent
Hearing: 10 February 2012
Appearances: D M O'Neill for Appellant
W T Nabney for First and Second Respondents
Judgment: 21 June 2012
JUDGMENT OF PETERS J
This judgment was delivered by Justice Peters on 21 June 2012 at 4:30 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date: ...................................
Solicitors: Vosper Law, Cambridge: [email protected]
Garth Mathieson, Mt Maunganui: [email protected]
Counsel: D M O’Neill, Hamilton: [email protected]
W T Nabney, Hamilton: [email protected]
NUTECH SECURITY LIMITED V CGI CONTRACTING LIMITED HC HAM CIV-2010-419-496 [21 June
2012]
Introduction
[1] This is an appeal from a decision of a District Court Judge at Hamilton.[1] The proceedings arose out of a sale of various assets by GCI Contracting Limited (“GCI”) to Nutech Security Limited (“Nutech”) in December 2006. Nutech has appealed against the Judge’s decision and GCI and Mr Grant Inglis (“Mr Inglis”) have cross-appealed.
[1] GCI Contracting Ltd v Nutech Security Ltd DC Hamilton CIV-2008-070-175, 1 April 2010.
[2] The issues that arise on the appeal are:
(a) whether the Judge erred in finding that GCI had misrepresented the size of its customer base and that such misrepresentation induced Nutech to enter into the agreement;
(b)whether the Judge ought to have awarded a greater sum to Nutech by way of damages;
(c) whether the Judge erred in allowing a claim by Mr Inglis for damages for breach of clause 20.1 of the agreement; and
(d)whether the Judge erred in determining that the restraint of trade to which GCI and Mr Inglis were subject did not preclude them installing and servicing fire alarms and monitors.
Background
[3] At all material times, GCI (or Alarm Contracting and Installations Limited as it was formerly) and Nutech were in the business of installing and servicing security alarm systems to residential and business customers.
[4] In 2006, GCI offered to sell and Nutech agreed to purchase tangible assets, stock in trade and goodwill belonging to GCI. There is no dispute that the goodwill comprised lists and contact details of GCI’s residential and business customers.
[5] GCI required Nutech to execute a confidentiality agreement, which Nutech did, and thereafter GCI made the customer lists available to Nutech. A factual issue which arose at trial was what GCI, through its director and shareholder Mr Inglis, had given Nutech to understand as to the number of GCI’s active or current clients.
[6] The terms of the sale are recorded in the parties’ agreement for sale and purchase (“agreement”), executed in about November 2006. The relevant terms of the agreement are as follows:
(a) Nutech agreed to pay $200,000.00 for the assets, plus GST if any.
Nutech paid a deposit of $10,000.00 on the agreement becoming unconditional and $160,000.00 on 11 December 2006. Nutech was to pay the remaining $30,000.00 on 11 December 2007.
(b)The purchase price was apportioned as to $25,000.00 for Tangible Assets, $1,000.00 for Stock in Trade and $174,000.00 for Intangible Assets.
(c) Goodwill, being part of the Intangible Assets, included the use of various GCI trading names, contact details and databases of customer names. The agreement recorded the names of the databases and the number of customers listed in them, being the Access database (3,562); the ASI database (4,858); the Active Alarms database (180); and the ACI database (770).
(d)The agreement was conditional upon Nutech carrying out due diligence by 4 December 2006.
(e) GCI agreed to procure that Mr Inglis would work for Nutech as an independent contractor. There was and is a dispute regarding this provision, to which I refer below.[2]
[2] Agreement for sale and purchase, executed in about November 2006, cl 20.1.
(f) GCI entered into a restraint of trade and agreed to procure that
Mr Inglis would do likewise.
[7] The sale was settled on or about 11 December 2006.
[8] Nutech’s enquiries and experiences after settlement led it to believe that GCI
had overstated substantially the extent of its client base. Nutech did not pay the
$30,000.00 due on 11 December 2007 and cancelled the agreement on 19 May 2008.
[9] GCI and Mr Inglis commenced proceedings against Nutech. GCI sought an order requiring Nutech to pay the remaining instalment of $30,000.00. Mr Inglis alleged that the agreement required Nutech to engage him as an independent contractor for 12 months, but it had not done so, and he sought damages of
$53,760.00 plus GST.
[10] Nutech denied liability and counterclaimed for damages it alleged it had suffered as a result of GCI’s misrepresentation.
[11] The Judge decided that:
(a) GCI had misrepresented the number of its current clients;
(b)Nutech was induced to enter into the agreement by the misrepresentation.
(c) Nutech had suffered a loss of $130,000.00, and was entitled to retain the outstanding $30,000.00 and to damages of $100,000.00;
(d)Under the agreement Nutech was bound to engage Mr Inglis as an independent contractor. The Judge ordered Nutech to pay $52,480.00 plus GST to Mr Inglis.
(e) GCI and Mr Inglis had breached the restraint of trade and there should be an enquiry as to the damage that Nutech had suffered as a result.
[12] The issues on appeal concern each of these findings.
Misrepresentation and reliance
[13] GCI challenges the findings referred to in [11](a) and [11](b) above.
[14] I do not consider the Judge erred in these findings of fact. They depended in large part on the Judge’s assessment of evidence that Mr Inglis and Mr Margan, one of Nutech’s principals, gave at trial regarding discussions that they had prior to execution of the agreement. In her decision the Judge said that she accepted
Mr Margan’s evidence as more reliable and credible than Mr Inglis’.[3]
[3] GCI Contracting Ltd v Nutech Security Ltd DC Hamilton CIV-2008-070-175, 1 April 2010 at [15].
[15] The Judge also found that GCI’s execution of the agreement was a misrepresentation, given the form of the agreement. GCI challenges this finding. It submits that Nutech’s solicitors prepared the agreement and inserted the client numbers shown on each database, and refers also to Mr Inglis’ evidence to the effect that he did not pay attention to this part of the agreement when the document was executed. However, given that GCI executed the agreement it cannot be heard to say now that it did not read it or pay attention to its contents.
[16] In respect of the Judge’s finding that GCI’s misrepresentation induced Nutech to enter the agreement, GCI submits that Nutech had sufficient time to investigate the databases before declaring the contract unconditional and that it was open to Nutech to ask GCI for additional information if Nutech wished.
[17] Again, I see no basis for interfering with the Judge’s finding on this issue. The fact that Nutech might have made further enquiry of GCI or examined the databases more closely is irrelevant if in fact Nutech did not do so.
[18] I should mention however that I do not agree with the Judge’s view that in
executing the agreement GCI (mis)represented the value of the goodwill being sold.[4]
In my view no more can be taken from the purchase price than that it was the sum for which GCI was willing to sell and Nutech was willing to buy.
Damages
[4] Ibid, at [17].
[19] On appeal Nutech contends that the Judge erred in awarding damages of only
$130,000.00. The ground of appeal on this point is that the Judge did not accept in its entirety the evidence of an expert that Nutech called as to the measure of loss.
[20] Nutech’s case at trial was that it should be awarded $174,000.00 damages, to be met by allowing Nutech a set off of the remaining instalment of the purchase price of $30,000.00 and an order that GCI repay to Nutech $144,000.00.
[21] In support of its case, Nutech called evidence from a Mr Peter Bridges,
chartered accountant of Hamilton. Mr Bridges’ evidence was that the sum of
$174,000.00, being the part of the purchase price attributed to goodwill in the agreement, would have been a reasonable price for a willing buyer and seller to agree if the customers shown on the database had been current clients of GCI.
[22] The Judge accepted this evidence but she did not accept Mr Bridges’ evidence that, in fact, the goodwill had no value and that Nutech had suffered a complete loss in this respect. Nutech contends the Judge erred in this conclusion.
[23] Mr Bridges’ assessment was that Nutech would earn revenue of $35,000.00 per annum from the customers in the lists who were current or active clients of GCI at the time of sale. However, he considered that the overhead cost of servicing the work would be $46,000.00 per annum. This cost included $45,000.00 salary to a
technician formerly employed by GCI. Nutech seems to have taken on this employee but it was under no contractual obligation to do so. Regardless, Mr Bridges’ evidence assumed that this overhead cost would continue for three or more years.
[24] It is implicit in the Judge’s decision that she rejected Mr Bridges’ evidence that Nutech would incur overhead costs exceeding revenue over an extended period. In my view, the rejection of that evidence was appropriate. Nutech would not have persisted with a loss making proposition but would have arranged its affairs to ensure that did not occur.
[25] It was apparent from Mr Bridges’ evidence that Nutech had obtained some clients and, of course the benefit of the restraint of trade. The Judge took the view that the number of clients obtained coupled with the restraint equated to approximately a quarter of the anticipated goodwill and that Nutech should pay one quarter of the value, namely $44,000.00. On that basis the Judge determined that Nutech’s loss was $130,000.00.
[26] On appeal, counsel for Nutech submitted that the Judge’s approach was in error as it overlooked the fact that, of the clients obtained, only a percentage would take up the services of the purchaser, Nutech. With respect to counsel that submission is not correct. Mr Bridges assessed the value of the goodwill as represented at $174,000.00 having already taken into account the inevitable fact that only some customers would use Nutech in place of GCI. Mr Bridges’ evidence was that $174,000.00 was fair value given the number of customers who could be expected to transition.
[27] Given the above, I consider that the Judge was entitled to conclude that
Nutech should recover a sum equivalent to 75 per cent of the value of the goodwill.
Damages to Mr Inglis
[28] Nutech appeals against the finding of the Judge referred to in [11](d) above. The relevant provision of the agreement reads as follows:
20.1The Vendor agrees to procure that its director [Mr] Inglis will work as an independent contractor for the Purchaser for a period of not less than twelve months from [11 December 2006] for a minimum average of thirty two (32) hours per week at a rate of $40.00 plus GST per hour plus reimbursements of travel expenses at 40 cents per kilometre.
[29] Other parts of clause 20 provided that Mr Inglis’ hours of work would generally be four days per week between 8:30 am and 4 pm and that if Mr Inglis was to be unavailable he was to give two weeks’ notice except in exceptional circumstances.
[30] Nutech provided some work to Mr Inglis prior to March 2007, for which GCI invoiced Nutech, but not thereafter. Nutech proposed a variation to the agreement but it was not acceptable to Mr Inglis, and so no more need be said about it. Mr Inglis sued, alleging Nutech had breached clause 20.1.
[31] In considering this cause of action, the Judge determined that clause 20.1 required Nutech to provide not less than 40 hours work per week to Mr Inglis, that Nutech had failed to do so, was in breach of clause 20.1, and that Mr Inglis was entitled to sue to enforce the obligation pursuant to s 4 Contracts (Privity) Act 1982 (“Act”).
[32] On appeal Nutech’s contends that the Judge erred in these findings. It is not necessary for me to consider each point Nutech has taken on clause 20.1, for the following reason.
[33] Nutech submits that clause 20.1 did not impose an obligation on Nutech to engage Mr Inglis as an independent contractor. Nutech submits that clause 20.1 imposed an obligation on GCI alone, to procure that Mr Inglis would be available for work, subject to times when he would be unavailable, but that it did not impose an obligation on Nutech to make work available.
[34] I accept that submission. I am not satisfied that clause 20.1 imposed an obligation on Nutech to engage Mr Inglis as an independent contractor. Given that, I do not consider that Nutech breached clause 20.1 in failing to provide 32 hours’ work per week to Mr Inglis. It follows that I do not consider that clause 20.1
contains a promise by Nutech, let alone one which confers or purports to confer a benefit on Mr Inglis, and as a result, s 4 of the Act can have no application.
[35] Having reached that view, I propose to set aside the Judge’s order that Nutech
should pay damages to Mr Inglis of $52,480.00 plus GST if any.
Restraint of trade
[36] Clause 7 of the agreement provides as follows:
7.0 Restraint of trade
7.1In consideration of the purchase price the vendor hereby agrees with the purchaser that the vendor will not during the vendor’s restraint of trade period stated on the front page of this agreement either directly or indirectly carry on or be interested either alone or in partnership with or as manager, agent, director, shareholder, financier or employee of any other person in any business similar to the business within the radius from the premises stated on the front page of this agreement.
7.2If the vendor is an incorporated company it will on or before the possession date procure its shareholders and its directors, other than any shareholders or directors specifically excluded from this provision in terms of Schedule 2 to this agreement, to enter into a deed of covenant with the purchaser binding themselves to like effect, such deed of covenant to be prepared by and at the expense of the purchaser and tendered to the vendor or the vendor’s solicitor for execution a reasonable time for settlement.
[37] It is common ground that GCI and Mr Inglis acted in breach of the restraint, and that there should be an enquiry as to damages. The only issue which arises is as to the scope of work covered by the restraint. The Judge determined that the restraint covered any work in the security alarm business but not installing fire alarms, because the evidence showed that GCI did not engage in such work prior to
the sale.[5]
[5] GCI Contracting Ltd v Nutech Security Ltd DC Hamilton CIV-2008-070-175, 1 April 2010 at [37].
[38] The restraint precludes GCI and Mr Inglis carrying out work that is “similar” to “the business”. “Business” is defined in the agreement as “the business described on the front page of the agreement, including the assets”.
[39] On the front page of the agreement the Business was described as Alarm
Services & Installation.
[40] On their face those words are broad enough to encompass fire alarms. In my view, however, the Judge was correct to construe them in the context of the business being sold, namely a business for the installation and servicing of security alarms. A restraint given in the context of a commercial transaction is not to be construed more broadly than is necessary to protect the goodwill of the purchaser. Given that, I do not propose to vary the Judge’s finding in this respect.
Result
[41] I allow the appeal in respect of the Judge’s order that Nutech should pay to Mr Inglis $52,480.00 plus GST for breach of clause 20.1 of the agreement. I set that order aside.
[42] In all other respects the appeal and cross appeal are dismissed. Costs are to lie where they fall.
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M Peters J
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