Pae (New Zealand) Limited v Brosnahan HC Wellington CIV 2005-485-843
[2008] NZHC 2566
•10 September 2008
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV 2005-485-843
BETWEEN PAE (NEW ZEALAND) LIMITED Plaintiff
ANDMARK BROSNAHAN, MICHAEL RALPH CARTER, WAYNE ALBANY PATTINSON
Defendants
Hearing: 10, 12 to 14, 17 to 20 September 2007
Further affidavit evidence filed on 28 September 2007
Closing submissions filed on 4 October 2007
Appearances: Mr Dewar with Mr Vincent for the Plaintiff
Mr Butler with Mr Palmer for the Defendants
Judgment: 10 September 2008 at 9 am
JUDGMENT OF MALLON J
PAE (NEW ZEALAND) LIMITED V MARK BROSNAHAN, MICHAEL RALPH CARTER, WAYNE ALBANY PATTINSON HC WN CIV 2005-485-843 10 September 2008
Contents
Introduction.......................................................................................................................................... [1] The witnesses and documents ............................................................................................................ [10] The evidence ...................................................................................................................................... [13] The parties..................................................................................................................................... [13] Housing New Zealand relationship ...............................................................................................[17] Electronic system (Joblink)........................................................................................................... [20] PAE’s interest in CPS and due diligence ...................................................................................... [25] Price negotiations .......................................................................................................................... [53] The Agreement.............................................................................................................................. [98] Post-settlement discussion .......................................................................................................... [100] PAE’s concerns ........................................................................................................................... [101] Housing New Zealand tender...................................................................................................... [135] Proceedings issued ...................................................................................................................... [136] Confidential document ................................................................................................................ [137]
Mr Carter leaves CPS.................................................................................................................. [139] Mr Loader’s investigations ......................................................................................................... [141] Mr Leonard’s investigations ....................................................................................................... [145] Information provided by defendants on discovery...................................................................... [155] Mr Carter’s response to the errors............................................................................................... [159] Duplication of invoices within Joblink – possible explanations ................................................. [163] Invoices received by Housing New Zealand? ............................................................................. [172] Other investigations – the backup data ....................................................................................... [174] Other investigations – Mr Carter’s desktop computer ................................................................ [176] Investigation of Mr Carter’s laptop ............................................................................................. [181] Review of data relied on by PAE ................................................................................................[189]
Pre-contractual statements about profitability ................................................................................. [197] The actual financial position as at 31 March 2004 .......................................................................... [199] Accounts payable (creditors) ...................................................................................................... [199] Accounts receivable (debtors)..................................................................................................... [200] Profit ........................................................................................................................................... [211] Fraudulent or innocent misrepresentations? .................................................................................... [213] Introduction................................................................................................................................. [213]
Mr Pattinson’s conduct ............................................................................................................... [215] Mr Carter’s pre-contractual statements ....................................................................................... [224] The errors in the accounts ........................................................................................................... [225] Post-Agreement conduct ............................................................................................................. [237] Conclusion on fraud .................................................................................................................... [248] Value of CPS ................................................................................................................................... [253] Mr Wearne’s valuation................................................................................................................ [254]
Mr Leonard’s valuation............................................................................................................... [255] Mr Vance’s valuation.................................................................................................................. [259] Assessment of value.................................................................................................................... [264] First cause of action: fraudulent misrepresentations ........................................................................ [269] Second cause of action: negligent misstatement .............................................................................. [275] What representations were made?............................................................................................... [275]
Who made the representations? .................................................................................................. [276]
Are they representations? ............................................................................................................ [279] Did the representations induce PAE to enter the contract ........................................................... [282] Is the Court precluded from inquiry? .......................................................................................... [292]
Third cause of action: warranty ....................................................................................................... [300] The issue ..................................................................................................................................... [300] The evidence ............................................................................................................................... [302] Submissions ................................................................................................................................ [303] My view ...................................................................................................................................... [310] Fourth cause of action: Fair Trading Act ......................................................................................... [318] Counterclaim.................................................................................................................................... [323] Introduction................................................................................................................................. [323] Renewal ...................................................................................................................................... [328]
No less favourable....................................................................................................................... [342] Result ............................................................................................................................................... [349]
PAE (NEW ZEALAND) LIMITED V MARK BROSNAHAN, MICHAEL RALPH CARTER, WAYNE ALBANY PATTINSON HC WN CIV 2005-485-843 10 September 2008
Introduction
[1] The plaintiff (PAE) purchased the shares in Central Property Services Limited (CPS) and a related company, A1 Electrical Services Limited (A1 Electrical). Before purchasing the shares, PAE received financial information and accounts for CPS. PAE says that it relied on those accounts and information in agreeing to the purchase at the price it did. It is now known that the financial information and accounts provided were highly inaccurate. PAE seeks damages of
$960,994 from the directors and shareholders of CPS (the defendants), which it says is the net overstatement of the assets of CPS.
[2] This loss is claimed on three alternative bases. The first of these (the first cause of action) is for fraudulent misrepresentation of the value of CPS. PAE says that exaggerated claims about CPS’ profitability were made in the pre-contractual negotiations. It says that to support these claims, the financial accounts were deliberately manipulated by or on behalf of the defendants who were selling their interest in CPS. Because of this fraud PAE says that an “entire agreement” clause in the agreement for sale and purchase (“the Agreement”), under which it was agreed that the Agreement superseded all prior representations, does not prevent the Court from inquiring into the question of loss arising from pre-contractual misrepresentations under the Contractual Remedies Act.
[3] The second basis on which the damages of $960,994 are claimed (the second cause of action) is for innocent or negligent misrepresentation of the value of CPS. PAE says that even if fraud does not exist, because the errors in the financial information and accounts were so great and the defendants had provided assurances that they were accurate, the Court should not be prevented by the “entire agreement” clause from nevertheless inquiring into the loss from pre-contractual misrepresentations under the Contractual Remedies Act.
[4] The third basis on which the loss from the misrepresentations is claimed is under the Fair Trading Act (the fourth cause of action). The misrepresentations
relied upon in the first two causes of action are said to be misleading and deceptive
PAE (NEW ZEALAND) LIMITED V MARK BROSNAHAN, MICHAEL RALPH CARTER, WAYNE ALBANY PATTINSON HC WN CIV 2005-485-843 10 September 2008
conduct in trade in breach of s 9 of that Act. It is said that the requirements of s 9 are mandatory so that the “entire agreement” clause does not apply. On this cause of action the damages claimed are the difference between the purchase price paid and what PAE says was the true value of CPS.
[5] In response to these alternative causes of action the defendants accept that the accounts misrepresented the financial position of CPS although not to the extent that PAE claims. The defendants say that the errors in the accounts were innocent and not fraudulent. As to the other pre-contractual claims about profitability, the defendants say that they were not “misrepresentations”. They also say that PAE can only succeed against any defendant who is proven to have made a misrepresentation. They say that the representations in the accounts were not made by the defendants. They further say that PAE was not induced by the misrepresentations to enter into the Agreement and the defendants did not intend that the misrepresentations would influence PAE’s decision to purchase CPS. On the Fair Trading Act cause of action they say that PAE was not misled by the defendants’ conduct, that it was not reasonable for PAE to have been misled and that any misleading conduct did not cause PAE’s loss.
[6] They say that the “entire agreement” clause in the Agreement is effective and conclusive and so no liability can arise from any pre-contractual misrepresentations or misleading conduct. They say that even on PAE’s view of the extent of the misrepresentations in the accounts there was no loss because PAE’s purchase price remained appropriate on those figures.
[7] If the misrepresentation claim is not established under any of the three bases, PAE makes claim for breach of a warranty in the Agreement. The warranty was that all liabilities were disclosed in the financial accounts. Amongst other significant errors in the accounts, the accounts understated the liabilities. On this cause of action damages of $235,606 are claimed. The defendants accept that the warranty was breached but put in issue the quantum of damages claimed by PAE for the breach.
[8] There is also a counterclaim by the defendants for $350,000 being a component of the purchase price which PAE has not paid. Under the Agreement this sum was payable if a contract held by CPS was renewed. Whether the sum is payable depends on whether “renewal” in the Agreement means regaining the relevant contract through a tender process rather than being rolled-over and whether the renewed contract was on terms no less favourable than the existing contract.
[9] There are both factual and legal issues to be determined. I approach the task by first setting out who I heard from and what was before me. I then set out the evidence as to what occurred (starting with the business of CPS before PAE, PAE’s due diligence and the negotiations, PAE’s concerns after the Agreement was entered into and the ensuing investigations). I then assess the evidence to determine what was said by whom in the pre-contractual negotiations and what was the correct financial position of CPS as at 31 March 2004. I then deal with whether the accounts supplied to PAE during the due diligence were fraudulent, on which much of the evidence in the case centred. I then assess the evidence concerning the value of CPS in light of that financial position. I then determine each of the causes of action relied on by PAE. Lastly I determine the counterclaim.
The witnesses and documents
[10] PAE called evidence from the following witnesses:
a) Mr Peter Leslie – the CEO of PAE;
b) Mr Kevin Wearne – accountant and business consultant instructed by
PAE in the due diligence process leading to the purchase of CPS;
c) Mr John Leonard – a chartered accountant instructed by PAE to investigate the inaccuracies in the financial information provided to PAE during the negotiations;
d) Ms Kit Yi – the corporate services manager and financial controller at
PAE;
e) Mr Clyde Loader – an assistant accountant employed by PAE;
f) Mr Paul Watts – the Housing New Zealand contract manager employed by PAE;
g) Ms Lisa Turner – an investigator; and
h)Mr Jan Jorgensen – a forensic computer analyst instructed by PAE to give expert evidence.
[11] The defendants called evidence from the following witnesses:
a) Mr Michael Carter – one of the defendants;
b) Mr Wayne Pattinson – one of the defendants;
c) Mr David Vance – an accountant instructed by the defendants to give expert evidence;
d)Mr Michael Spence – a forensic computer analyst instructed by the defendants to give expert evidence; and
e) Mr Tony Potts – the creator of the accounting software system used by CPS instructed by the defendants to give expert evidence.
[12] Before me was also an agreed bundle of documents comprising 10 volumes. As a general approach, where there is a conflict in the recollection of witnesses I have relied on the documentation as being the more reliable evidence of what occurred where that is relevant to the conflict.
The evidence
The parties
[13] PAE is a facilities management company. Its head office is in Lower Hutt. It is a substantial company. At the time of the negotiations to buy CPS it held facilities
management contracts with a number of entities. It had approximately 400 employees and annual turnover of approximately twice that of CPS. Mr Leslie had been PAE’s CEO for around 10 years. PAE was also part of a global entity which had operations in some 20 countries. PAE had experience in other acquisitions before this one.
[14] Mr Brosnahan, Mr Carter and Mr Pattinson (the defendants) were CPS’ shareholders and directors. Mr Carter was also CPS’ general manager. CPS’ business was built up by the three defendants from around 1994. All three defendants had background experience in trades.
[15] CPS’ main business was repairs and maintenance work for Housing New Zealand houses. This was carried out pursuant to a contract between Housing New Zealand and CPS. CPS contracted with subcontractors to perform the work. CPS also carried out work for the New Zealand Defence Force but this only accounted for around $30,000 of CPS’ annual income, with most of CPS’ income coming from Housing New Zealand work.
[16] A1 Electrical held the fixed assets of CPS. It received a rental from CPS equivalent to the rate of depreciation and so did not, and was not intended to, generate a profit. The accounts of A1 Electrical are not relevant to the issues in this proceeding and so are not discussed further.
Housing New Zealand relationship
[17] CPS was established in Palmerston North and initially it tendered only for Housing New Zealand work in Palmerston North. It secured the Palmerston North work each year from 1994. In around 2000 it also tendered for and secured the work in Wanganui and after that all of Taranaki and the King Country.
[18] In 2002 Housing New Zealand sought tenders for a three year contract for the first time. It also indicated that it wished to contract with only one company for the Manawatu and Hawke’s Bay regions. As a result CPS formed a company, LMC Construction Limited (“LMC”), with Prestige Limited (which was not connected to
CPS) to tender for the Hawke’s Bay contract. CPS and LMC were successful in obtaining the contracts.
[19] This meant that at the time PAE became interested in purchasing CPS, CPS had a contract with Housing New Zealand for the greater Taranaki region. LMC held the contract for the Manawatu region on CPS’ behalf. The three year term of the contracts was due to expire on 30 June 2005.
Electronic system (Joblink)
[20] Mr Carter’s evidence is that on any given day CPS would receive several hundred job instructions (also referred to as work orders) from Housing New Zealand. These were received electronically from Housing New Zealand and needed to be passed on to CPS’ various contractors. Electronic accounting software was necessary and CPS used a system called Joblink. Joblink was developed by Mr Potts specifically for Housing New Zealand maintenance contracts. It was developed in 1999, and at the time relevant for this proceeding, it had been used by ten different contractors including CPS.
[21] Mr Carter’s evidence was that the invoicing cycle began when Housing New Zealand generated its work orders. These orders would be allocated a job number (also referred to as an invoice number) and then be faxed or emailed to the appropriate subcontractor. When the work was completed the subcontractor would fax or email the cost and a description of the work to CPS. The details would be entered on the system and go into a queue to be invoiced that day to Housing New Zealand.
[22] At a given point in the day the queued invoices would be sent to Housing
New Zealand. Housing New Zealand paid in three lump sums on the 10th, 20th and
30th of each month. Housing New Zealand paid electronically and would send through a Microsoft Excel spreadsheet recording each invoice being paid. These would be entered into Joblink by office staff. Joblink would match the job numbers and apply the payment.
[23] Payments made by Housing New Zealand to LMC would be remitted back to CPS. For this to occur the payment advice slip from Housing New Zealand needed to be analysed so that amounts due to CPS (for work in the Manawatu region) could be separated out from amounts due to Prestige (for work in the Hawke’s Bay region).
[24] The Housing New Zealand CPS/LMC relationship functioned as follows:
Housing New Zealand
Wanganui/Taranaki jobs
Manawatu/Hawke’s Bay invoices
Manawatu/Hawke’s Bay jobs
CPS
Wanganui/Taranaki invoices
Manawatu jobs
Manawatu invoices
LMC
Hawke’s Bay jobs
Hawke’s Bay invoices
Prestige
PAE’s interest in CPS and due diligence
[25] The background to PAE’s purchase of CPS is as follows. On or about
22 October 2003 PAE’s general manager, Mr Peter Leslie, telephoned Mr Carter, having heard that CPS shareholders were interested in selling their shareholding. At this initial discussion, according to a filenote made by Mr Leslie at the time, Mr Carter informed Mr Leslie that CPS had a turnover of $11.8 million which yielded a profit after tax of 9%. Mr Carter also told Mr Leslie that he was keen to stay with CPS for three to four years. Mr Carter indicated that there was no time frame and CPS would look at offers. The note also records a “ball park figure of $2 million”. The note records other matters about the shareholders and CPS’ operations. The need for a confidentiality agreement was discussed (and this was signed on 28 October 2003).
[26] Mr Carter contacted Mr Pattinson, who confirmed that he was interested in meeting with Mr Leslie. Mr Carter says he was surprised by Mr Leslie’s approach and was not interested in selling CPS. CPS was providing him with a good income and he was reluctant to leave behind what he had achieved for someone else to reap the awards. He also says that he was reluctant to give too much information to
Mr Leslie because he saw PAE as a competitor. He says that he knew that Mr Pattinson was considering relocating to Australia and would be interested to hear of Mr Leslie’s call and this was why he contacted Mr Pattinson and had the confidentiality agreement signed. Mr Pattinson confirms that he was interested in selling CPL because he was relocating.
[27] Consistent with Mr Pattinson’s interest in selling CPS, prior to Mr Leslie’s approach to CPS Mr Pattinson had arranged to obtain a valuation of CPS from Kendons, chartered accountants. This valuation was provided on 29 October 2003. Based on the financial statements for CPS, Kendons indicated a valuation of
$811,302. Mr Carter wrote to Kendons complaining about the fee and the “presentation” of the valuation and requested that it be redone. Kendons did not redo the valuation but did reduce its fee.
[28] The first meeting between PAE and CPS took place on 7 November 2003. At the meeting were Mr Leslie, Mr Carter and Mr Pattinson. They are not in complete agreement about what was discussed about CPS’ profitability. Mr Leslie says that he was told at this meeting that the company had a turnover of around $9.6 million and a 9% profit margin. Mr Leslie’s filenote of this meeting records the $9.6 million but not the 9%. Mr Carter says he indicated CPS had a turnover of $11 million per year but that they were at pains to point out that the money CPS made each year could not be easily and accurately calculated because it depended on the work required in any one year. His evidence was also that:
While I tried to estimate CPS’ future profits for the purpose of my own internal management goals, I could not say with any certainty that we would make our profit expectations or not, and I told Mr Leslie that this is what I thought.
[29] Mr Pattinson says that he told Mr Leslie that profitability could be measured as a past figure but that it was nearly impossible to predict future profits with any real accuracy because of the nature of the work. The work involved providing “responsive services” and depended on Housing New Zealand needs for maintenance on any one day (eg. fixing toilets/lights/leaks and so on).
[30] As a result of these initial discussions the process of due diligence began. PAE contracted Mr Wearne to assist with the due diligence on its behalf. PAE personnel were also involved in the due diligence. This included Ms Yi (PAE’s financial controller) and Mr Black (a PAE employee assisting Ms Yi). Amongst other things Ms Yi provided Mr Leslie with an outline of the sort of information which PAE ought to review as part of its due diligence exercise and she was kept in the loop during the due diligence process. The detail of the due diligence follows.
[31] As a result of PAE’s information request, on 14 November 2003 Mr Carter forwarded some financial books and bank statements to PAE. This included CPS’ financial statements for the 2000, 2001, 2002 and 2003 years. Mr Leslie replied by email the same day with details of information sought by Ms Yi and stating:
When we first spoke you indicated turnover was $11.8m and NPAT was 9%. This is substantially more than shows up in the latest accounts. We need to reconcile those figures with the accounts.
[32] On 25 November 2003 Mr Carter replied to Mr Leslie enclosing a table of turnover figures (divided into projected, actual and variance) for the months April
2003 through to March 2004. He said:
This is the source of my comments regarding the turnover of 11.8m.
We are certainly aiming for a 9% profit figure, and on current figures will certainly achieve this. (NPBT).
[33] On 26 November 2003 Mr Leslie and Mr Pattinson discussed progress. At this time, as is recorded in a filenote made by Mr Leslie, Mr Pattinson said that it was important to the sale that Mr Carter had a future with CPS and Mr Leslie said that he was keen to keep him on. Mr Pattinson advised that Mr Carter was on a salary of $90,000 plus a $30,000 performance bonus. Mr Leslie considered this package to be reasonable. Mr Pattinson’s evidence is that his accountant had advised him that Mr Carter was doing a good job and should be paid a bonus. He says that he told Mr Leslie this because he appeared to be interested in Mr Pattinson’s view of Mr Carter. On this same day (26 November 2003) Mr Carter forwarded to Mr Leslie some further information including a list of employees and their salaries. Included in this list was Mr Carter’s salary said to be $110,000 and, his wife, Mrs Carter’s salary of $35,000 for her position as office manager.
[34] On 11 December 2003, following a request from Ms Yi, Mr Carter provided further information to Mr Leslie. In this response Mr Carter advised that CPS did not have weekly or monthly management accounts, this form of reporting having been dropped for cost/benefit reasons.
[35] On 15 December 2003 Mr Leslie discussed by telephone various matters with Mr Carter, including, as noted on Mr Leslie’s filenote, “forecast profitability vs history”. Alongside this note is a tick which Mr Leslie says indicates that he received a reassuring reply.
[36] On that same day Mr Leslie forwarded to Mr Wearne the information
Mr Leslie had received from Mr Carter. In the accompanying letter Mr Leslie said:
Mike Carter predicts a net profit after tax of $1m for the year ending 31
March 2004. As you will see from the 2003 Annual Accounts, the net profit after tax for the year ending 31 March 2003 was $270,000. Accordingly, there is a large difference, although Mike Carter’s predictions to date do seem to be correct, e.g. revenue targets. A major issue for your analysis will be to calculate the net profit for the year to date for the year ending
31 March 2004.
…
As I see it, the valuation of the company will be the profit until the end of the contracts, plus assets, less interest costs of the purchase and a risk margin.
Also as discussed, I would like to structure the deal so that if the contracts are extended for a further 18 months, then a further payment is made at this time.
In addition, I would wish to have an arrangement with Mike Carter, in that a further payment is made on successful winning of contracts in approximately
3 years from now. Mike Carter advised me today that Housing Corporation intend to extend the contract for a further 18 months.
[37]
Mr Wearne replied to Mr Leslie by letter dated 18 December 2003.
He
agreed that there was a need to understand why the directors’ profit estimate substantially exceeded the 2003 performance when turnover was predicted to increase by only 20%. He set out a list of information he thought should be reviewed at an intended site visit Mr Wearne was to make at CPS. Mr Wearne’s evidence was that he knew, as in any acquisition, that the level of profit and the ability of the business to maintain profit was the key to determining value.
[38] On 6 January 2004 Mr Wearne met with Mr Carter at CPS’ offices in Palmerston North. Mr Wearne’s evidence is that Mr Carter was forthcoming with information but considered that, at this stage of the process, questions of the external accountant (Mr Watson) should be asked via Mr Carter. Mr Wearne’s evidence is that at this meeting: there was a discussion about employment contracts and an outstanding leave report as at 6 January 2004 was provided; Mr Carter assured Mr Wearne that the Housing New Zealand contract due to expire on 30 June 2005 would continue for a further year; the debtors ledger and the reliability of reporting was discussed; and Mr Wearne gained the impression that Mr Watson was involved in CPS’ operations in some depth. Mr Wearne formed the view that the only way to verify the outstanding invoices was to go to the customer, but because many thousands of invoices were generated each month it was not realistic to ask Housing New Zealand to verify the data that Mr Carter had provided.
[39] Mr Carter confirms that a meeting took place on this day. Mr Carter says that the meeting lasted from about 9.30 am to 3.30 pm during which time Mr Wearne had access to anything he was interested in inspecting. He recalls, amongst other things, explaining how Joblink worked, showing Mr Wearne how to produce the report for leave owing as at 6 January 2004 and how work in progress was valued. He says that he told Mr Wearne he could meet with Mr Watson as the deal progressed. He says they discussed the Housing New Zealand contract and he showed Mr Wearne the provision in the contract that it was to expire on 30 June 2005. He says that he explained that, although the contract was for three years, in previous years they had tendered for and received one year contracts. He also recalls mentioning rumours he had heard about the 2002 contract continuing until 2006 to coincide with the anniversary of the procurement contracts, but that he expected the contract to finish on 30 June 2005 and to be retendered.
[40] Mr Carter’s evidence is that at this meeting he discussed an intended pay rise for Mrs Carter. He says that in late 2003 he and Mr Pattinson discussed increasing her salary because CPS was losing another staff member and Mrs Carter would therefore be shouldering a heavier workload. He says that it was agreed that her income would be increased to $42,000 per annum but this was to be deferred until the 2004 income year. Mr Wearne says that there was definitely no discussion about
a salary increase for Mrs Carter at the 6 January 2004 meeting. He says that this would have impacted on the budgets he prepared and would have increased the holiday provision.
[41] Mr Wearne initially reported to Mr Leslie on this meeting by telephone. Mr Leslie’s filenote records that Mr Carter had “let slip that 3 people did due diligence between Xmas and New Year”. In respect of the Housing New Zealand contract Mr Leslie’s note records “1 year rollover – didn’t see a problem”.
[42] By letter dated 13 January 2004 Mr Wearne formally reported to Mr Leslie on his review of the information and his site visit. The letter covers various matters, a number of which are not presently relevant. Amongst other things this letter noted that monthly statements of financial position had been discontinued on the basis that they were costly and unnecessary. The letter further states:
Mike claims to know how the company is performing, but this is not supported by his estimate of profit, which appears to be grossly inflated. It is important that CPS provide year to date financial statements as Mike is unlikely to believe our assessment. Furthermore, my calculations are based upon data Mike provided and it may be that further significant balance day adjustments are necessary.
…
Mike predicts a net before taxation and his salary of 9%. I am doubtful about this in the light of previous performance and my projections. I estimate that full year performance may only equate to 6% before taxation and Mike’s salary. It is, therefore, in my view, essential that CPS’ Accountant produces year to date results which will either disprove my estimates, or convince Mike that he has under-estimated costs and over- estimated gross margins.
The substantial increase in turnover projected for the current year arises from Wanganui being included in the review. CPS did not previously have his [sic] work.
[43] Various employment matters are covered in the letter. This includes a list of current rates of pay for staff and included two salaries of $35,000 per annum for office staff. It also refers to accrued annual leave totalling $19,179.16. This is the total figure in the leave owing report as at 6 January 2004 which Mr Wearne obtained from Mr Carter at the meeting on that day. That report showed an amount of 22.81 days owing to Mrs Carter at a daily rate of $134.62 (consistent with a salary
at the $35,000 level) equating to a total accrued amount of $3,070.68. The letter also refers to the need to keep Mr Carter for one year and that Mr Carter had indicated a willingness to remain for three years. It does not refer to any discussion about an intended pay rise for Mrs Carter.
[44] The letter also refers to continuation of the Housing New Zealand contract as follows:
Housing NZ have indicated that the Contract will be extended to 30 June
2006 to co-ordinate with material supply contracts already in place. Your offer should be conditional upon proof of the contract extension, rather than an additional payment if the extension is secured.
The renewal until June 2009 is a possibility, but is entirely dependent upon government policy and Housing NZ strategy in 2006. As discussed, a further instalment of the purchase consideration could be linked to a favourable outcome of the 2006 negotiations.
[45] Mr Wearne advised that financial statements to 31 December 2003 would need to be provided and agreed as reliable before an offer could be formulated.
[46] Following this, at PAE’s request financial statements for the period ended 31
December 2003 were prepared and provided to PAE on or about 14 January 2004. These accounts (management statements) were compiled by CPS’ accountant (Mr Watson, from Thompson Watson) from information provided by Mr Carter. They were unaudited and contained a disclaimer of liability by Thompson Watson. Mr Leslie says that on receiving these accounts he calculated the profit margin on the net profit before tax to be 6% (based on sales of $7,269,735 and a profit before tax of
$439,975).
[47] Mr Wearne had some questions about the accounts. He raised them with Mr Carter who in turn reported by email dated 15 January 2004 that he had discussed these questions with Mr Watson. Mr Wearne did not discuss his queries directly with Mr Watson.
[48] One of the questions Mr Wearne asked was whether there were any significant balance day adjustments required for the management accounts as at
31 December 2003 to be fully compliant with Financial Reporting Standards.
Mr Carter’s response to this question was to advise Mr Wearne that Mr Watson had replied “no”. Another question was whether the accounts were prepared in accordance with generally accepted professional practices, consistently applied, and particularly whether there was confidence that costs and revenue were matched. Mr Carter’s response to this question was to advise Mr Wearne that Mr Watson had replied “yes”.
[49] Mr Wearne also noted that based on earnings to date, “annual profit could increase to say $607,000” (if turnover increased by 10% in the final quarter). Mr Wearne said:
This is less than you expected but is consistent with the figures I extracted. Please advise if you believe this projection is realistic, or give data to support any significant variation.
[50] Mr Carter replied:
On past performance it would be correct, however we expect that the final package of “modernisation” projects will lift this higher. As we showed you during your recent visit the margins on this type of work are much higher than on the normal day to day works we carry out.
[51] Mr Carter’s evidence is that when he received Mr Wearne’s email he passed it on to Mr Watson. Mr Carter says that he also had a discussion with Mr Watson in which Mr Watson suggested that due diligence should involve consultation with Housing New Zealand to verify the information provided by CPS. There is a fax from Mr Carter dated 16 January 2004 which passes on this suggestion although Mr Leslie does not recall ever receiving this fax. In this fax Mr Carter says that he is sure Housing New Zealand would be happy to run reports and discuss issues with PAE and that he would be happy to get in contact with Housing New Zealand to set this up.
[52] Mr Wearne reported to Mr Leslie on these matters in a memorandum dated
16 January 2004. In relation to turnover Mr Wearne said that a revised estimate of
$10.8 million was realistic. He noted that CPS had not commented on expected profit before tax other than to predict turnover and to indicate that gross profit would increase in the fourth quarter due to the nature of the working being undertaken.
Price negotiations
[53] On 22 January 2004 Mr Leslie, Mr Wearne and Ms Yi met with Mr Carter to make an indicative offer. The offer was to pay a purchase price of $1.5 million, with an additional payment to the directors of $300,000, if the Housing New Zealand contract was renewed for a further three years from 1 July 2006. Mr Carter would also receive a one-off bonus of $100,000. Mr Carter indicated that the offer would need to be discussed with Mr Pattinson and Mr Brosnahan. Mr Carter produced a filenote of this meeting in discovery. Mr Leslie disputes the genuiness of the filenote because it refers to the bonus being payable as soon as the Housing New Zealand contract was awarded, which Mr Leslie says was not the case.
[54] Mr Pattinson’s evidence is that he received a call from Mr Carter reporting on the meeting. He says that Mr Carter was disappointed with the purchase price, particularly that part of the payment was contingent on winning the Housing New Zealand contract, and that if this was PAE’s final offer then the deal was off. Mr Carter’s evidence is consistent with Mr Pattinson’s. He says he was expecting a figure closer to $2 million and commented to Mr Leslie that the offer was too low. He says he telephoned Mr Pattinson that if this was PAE’s final offer then the deal was off. He also wanted the purchase price paid up front in case the 2005 Housing New Zealand contract was not rewon at tender when it ended on 30 June 2005.
[55] Mr Leslie prepared a draft Heads of Agreement and a draft employment contract for Mr Carter. Mr Leslie forwarded the draft Heads of Agreement to Mr Pattinson by email dated 1 February 2004. At this stage the purchase price was left blank. At around this time Mr Leslie met with Mr Pattinson to discuss a price and amendments to the agreement. Mr Pattinson says that at the meeting he put to Mr Leslie that PAE could purchase CPS for $1,700,000 upfront. He says he made this counter offer to win Mr Carter over to the idea of selling CPS and so that they would all get their money at settlement rather than waiting until 2005 for a portion of it.
[56] The employment contract referred to the Housing New Zealand contract expiring on 30 June 2006 at which time the employment contract also terminated. It
also provided for a one-off bonus of $100,000 “on a successful retention of the existing Housing New Zealand contracts at the retender in 2006”. This was also subject to achieving a minimum 5% profit margin. Mr Leslie says that following discussions with Mr Pattinson he agreed to include a clause that if Mr Carter was dismissed or made redundant prior to 30 June 2006 he would still be entitled to the
$100,000 bonus provided the criteria for its payment were satisfied.
[57] Mr Leslie reported on this meeting to Mr Wearne by email dated
1 February 2004. In this email Mr Leslie stated that Mr Pattinson had said that his advice was that CPS was worth between $1.4 million and $1.9 million, which Mr Leslie commented was “probably fair enough” but would depend on the brief given. (The only evidence of valuation obtained by Mr Pattinson during the negotiations is the valuation obtained from Kendons on 29 October 2003 referred to above ([27]).) Mr Leslie said that Mr Pattinson would accept $1.7 million but indicated he could settle for something closer to $1.6 million with no part of the payment to the shareholders being contingent on the Housing New Zealand contract renewal after 1 July 2006 except a bonus to Mr Carter of $100,000.
[58] Mr Wearne prepared for Mr Leslie a report to the PAE board of directors dated 2 February 2004 in which he recommended a counter offer of $1,650,000 together with a one-off bonus to Mr Carter of $100,000 “upon the successful negotiation of the Housing New Zealand contract for three years from 1 July 2006 on terms acceptable to PAE”. Mr Wearne said that the major risk with the acquisition was if CPS failed to retain the Housing New Zealand contract after 30 June 2006. But even in that case PAE would not suffer a loss in capital (because of cash, debtors and the value of the plant and equipment).
[59] Mr Leslie’s accompanying report to the board of directors recommended the purchase. The report referred to revenue of $11 million per annum. In his report he noted that the Housing New Zealand contracts were due to finish on 30 June 2005. He said:
CPS has been advised by Housing New Zealand that these contracts will be rolled over to 30 June 2006. Confirmation of this in writing and a satisfactory meeting of PAE with HNZ management concerning on going work levels etc are a condition of settlement.
[60] In response to this report PAE directors noted the risk of a single client company. An email says “[w]hilst the HNZ contract is being rolled over to 30 June
2006, there is substantial risk in rewinning the contract”. The email said “[g]iven the reliance on basically what is a single client and there being only one year of the contract left, it would appear that the goodwill element is over valued”. The email asked whether the relationship with Housing New Zealand was good and whether it was known how Housing New Zealand might rebid the contract.
[61] Mr Leslie asked Mr Wearne to respond to the query on the basis that, on a worse case scenario assuming that profit levels continue at present rates, “we will still make a small amount of money”. Mr Wearne’s response was that the offer was subject to the contract being extended until 30 June 2006 on terms not less favourable than those currently prevailing. He said that in a worse case scenario of the contract not being continued after 30 June 2006 PAE would have recouped its initial investment together with a small return on investment. Mr Wearne said that previous experience suggested that the contracts are normally retained by the incumbent.
[62] PAE’s directors raised a number of other issues. They also asked about the quality of the financial data and how independent and reliable the accountants who had prepared the 31 December 2003 accounts were. In response to those queries Mr Wearne said:
While I did not conduct an audit, I was able to confirm the reliability of the systems and financial results were consistent with the expectations arising from a review of margins on subcontractors’ work. In my view, a more detailed examination of the financial records is unlikely to offer any greater assurance of reliability. Furthermore, the financial strength of the companies offer further confirmation of reported profitability.
The external accountant is a chartered accountant in public practice and is, therefore, ethically bound to exercise an independent view and be objective about the data provided. It is evident that he applies quantitative checks to the client provided data, as he recently discovered a GST error. Furthermore, I understand that the non-executive shareholders view his involvement as adding to the reliability of financial reporting.
Mike advised that the external accountant has been involved in policy development and major decisions.
[63] Mr Leslie and Mr Wearne decided to request another set of accounts from CPS. Mr Leslie made this request of Mr Pattinson at one of the meetings that took place in the middle of February 2004. Mr Leslie says he made this request because the accounts to 31 December 2003 did not accord with the profit projections that had been given, although this rationale for the request is not recorded in Mr Leslie’s notes at this time as having been conveyed to Mr Pattinson. At one of the February meetings Mr Pattinson’s evidence is that he and Mr Leslie agreed on $1.6 million as the purchase price. This is confirmed by Mr Leslie’s note of a discussion with Mr Pattinson on 19 February 2004 which records “price agreed” and the $1.6m figure. The note also records that Mr Carter “is apprehensive because it’s his baby”. In respect of the Housing New Zealand contract Mr Leslie’s note records “rollover” and “looking in the eye”.
[64] Management statements for the period ended 31 January 2004 were provided on or about 24 February 2004. Again these statements were compiled from information provided by Mr Carter, were unaudited and contained a disclaimer of liability by Thompson Watson. In these accounts cash at the bank was shown as
$316,190 (current account) and $106,195 (call account), accounts receivable was shown as $659,096, accounts payable was shown as $521,044 and the gross trading profit was shown as $687,875.
[65] The first draft Heads of Agreement had been signed but with the price left blank. On or about 24 February 2004 a further Heads of Agreement was signed. Under this agreement a purchase price of $1.6 million was to be paid on 22 March
2004 with the offer being conditional on documentary evidence that the Housing New Zealand contract had been extended until 30 June 2006 on terms and conditions not less favourable to current terms.
[66] By email dated 25 February 2004 the directors of PAE raised further questions with Mr Leslie which had come from “our legal advisors”. These questions included:
(1) The break even analysis assumes that all current assets including
“Debtors [accounts receivable] and WIP [work in process] of over
$900,000 will be collected in full. How realistic is this assumption?
Is WIP unfinished work such as painting? Can a contractor expect to be paid for unfinished work?
(2)The Heads of Agreement should include a provision guaranting [sic] a minimum amount of net working capital (ie. cash and collectable accounts receivable) [obscured] WIP.
[67] Mr Leslie asked Mr Wearne to respond to these questions which he did by letter dated 1 March 2004. In this letter Mr Wearne refers to how WIP is calculated. He also says that CPS has not experienced any bad debts and, given that the only significant debtor is Housing New Zealand, the debtors ledger is considered to be collectible. He said that the quantum of working capital was addressed in the Heads of Agreement by precluding any unusual transactions, capital expenditure and one- off payments to shareholders; the requirement for possession to be given and taken as at 1 January 2004; and by financial statements being requested for the period ending 31 January 2004, “thereby offering further assurance of the reliability of the
31st December 2003 reports”.
[68] Meanwhile due diligence continued. Ms Yi and Mr Black met with Mr Carter on 1 March 2004 to inspect Joblink (the software system used by CPS) and to discuss how work in progress was calculated because that was a key component of the profitability of CPS. Mr Black reported to Mr Leslie on 2 March
2004 advising that work in progress was not generated by the system but was calculated manually. He said that this meant there was a potential for the work in progress to be manipulated to overstate the profit. He said that there was a significant difference between the starting and ending work in progress and that this needed to be fully investigated as this figure was being used to value the company.
[69] Mr Wearne provided a comparison of the financial position as at 31 January
2004 with the position as at 31 December 2003. Mr Wearne said that the profit for the month was approximately $28,000 below expectations. He recommended seeking an explanation of the poor January performance from Mr Carter and said that, given these results, CPS may struggle to achieve the annualised results PAE had hoped for. He said that if Mr Leslie was unduly concerned about the January result the only remedy was to produce reports for the period ended 29 February 2004.
[70] On 2 March 2004 PAE directors and Mr Leslie met with Mr Carter where a number of matters were discussed. Mr Leslie’s filenote of the meeting records in relation to the Housing New Zealand contract:
Contract Rollover
Background to proposed contract rollover. Housing New Zealand made a mistake on procurement – year out of kilter. Now want to bring procurement and maintenance contracts into phase. Means extend maintenance contract for 1 year.
…
Tender Process
MC advised tender process last time. Advised that three tenderers for Manawatu area. Other two were Opus and Fulton Hogan. In Taranaki, no other competitors. Went through pre-qualification stage, then bank and accounting checks as well as staff capability.
[71] Mr Leslie explained his understanding of the contract rollover referred to. His evidence was that Mr Carter had indicated to Mr Wearne that the contract would be extended to 30 June 2006 because supply contracts with other parties expired at different times. An extension to 30 June 2006 would enable Housing New Zealand to co-ordinate the contracts. Mr Wearne advised Mr Leslie of this in a letter dated
15 January 2004. Mr Leslie also said that there were other discussions with Mr Carter and Mr Pattinson in which they told Mr Leslie that it was a given that the contract would be rolled-over to 30 June 2006.
[72] Mr Carter said that he attended this meeting so that he was able to be introduced to the PAE directors. He recalled referring to the rumours amongst the sub-contractors and lower level Housing New Zealand staff that Housing New Zealand might allow the 2002 contract to continue until 2006 to bring the contract into line with the anniversaries of the supply contracts. (Under the maintenance contracts the contractor agreed that materials would be sourced from designated suppliers.) He said that he distinctly recalled saying that this was only the word of the sub-contractors and that he was treating the 2002 contract as ending in 2005 at which point it would be re-tendered as usual. He said that this was consistent with what he had previously told Mr Wearne.
[73] On 3 March 2004 Mr Wearne received a report from PAE about the software system at CPS based on Mr Black and Ms Yi’s investigations. Mr Wearne’s evidence is that he agreed with them that their findings about the system for valuing work in progress was not consistent with the demonstration Mr Carter had given him on 6 January 2004. Work in progress was to be raised again with Mr Carter.
[74] On 8 March 2004 Mr Leslie emailed Mr Carter with further requests including an updated set of accounts as at 29 February 2004. Mr Leslie said “[c]an you also ask your accountant to explain the error in the January 2004 accounts and what the monthly profitability would be for January as a result of this correction.” This was a reference to an error in the January accounts that Ms Yi had picked up.
[75] On 11 March 2004 Mr Carter wrote a note to Mr Pattinson which Mr Pattinson supplied to Mr Leslie. Attached to the note is a schedule of figures for December 2003 to February 2004 showing a margin of 7%. In the note Mr Carter says:
As discussed I have spoken with HNZC re this also I am aware that three of the other major contractors have indicated that only a 3 year rollover would be acceptable to them. I personally do not want to stick out for the 12 months if 36 is going to be the norm. I suggest this subject is put on the backburner at the moment.
…
I have set out on the attached sheet the sales to date for the month of DEC and FEB. Also shown is the % margin. As discussed these are probably the two worst months to look at, in December we basically close up on 21st Dec and only essential maintenance is done until everything cranks up again on
12th January (these are HNZC rules not mine). Therefore you really need to look at the end of year figures to get a true picture, even February will still
reflect this.
[76] On 12 March 2004 Mr Leslie reported to a director of PAE on the various questions the director had raised. Amongst other things Mr Leslie notes that the financial accounts are unaudited, that they were produced by the independent external accountants and that Mr Wearne considered that it was evident that Mr Watson applied quantitative checks to the client provided data. The report referred to Mr Carter having mixed feelings about selling but that the other directors wished to sell.
[77] On 15 March 2004 Mr Wearne reported to Mr Leslie on the impact of proceeding with the purchase on the assumption that the Housing New Zealand contract terminated on 30 June 2005 and the consideration was reduced to $1.2 million, with an additional $400,000 if an extension to 30 June 2006 was secured, but no further compensation would be payable if the contract was extended to
30 June 2008. Mr Wearne’s calculations showed that the net result of termination in
2005 was better than termination in 2006 given the price reduction.
[78] On or about 15 March 2004 PAE received management statements for CPS for the period ended 29 February 2004 prepared by Thompson Watson. Again these were based on information provided by Mr Carter, were unaudited and contained a disclaimer of liability. In these accounts the cash was shown as $92,630 (current account) and $176,452 (business call account), the accounts receivable were shown as $794,302 and the accounts payable were shown as $548,741. The gross trading profit was shown as $775,726. This was an improvement on the January 2004 accounts but profitability was still below the 9% Mr Carter had previously stated.
[79] On 17 March 2004 Mr Carter emailed Mr Leslie attaching worksheets for the February work in progress and said “I have personally checked each one of these to ensure accuracy”.
[80] On 18 March 2004 Mr Leslie met with Mr Pattinson. Mr Leslie’s note of that meeting records that it was discussed that if profit before tax fell below 7% then there would be a further discussion about price. The note records that Mr Pattinson said that Mr Carter wanted $700,000 (for his share) and that Mr Pattinson would be taking the price reduction. It was also agreed that another set of accounts as at 31
March 2004 would be obtained. Another agreement was to be signed. There is a second filenote of this meeting which is similar except that it adds that the new agreement was to be for $1.2 million plus $400,000 “roll-over or tender again”. Mr Pattinson confirms that Mr Leslie raised the idea of a further discussion on price if the profit figure fell below 7% and also that PAE was proposing $1.2 million upfront and a further $400,000 if PAE “won the 2005 Housing New Zealand contract at tender”. (The difference between a “rollover” and winning at tender is relevant to the counterclaim – see [322] to [341] below.)
[81] On 19 March 2004 Mr Wearne provided Mr Leslie with some projections based upon a downgraded profit forecast. He considered that the purchase remained viable provided PAE was satisfied with the work in progress calculations. He said that Mr Leslie “could argue for a price reduction of say $50,000” but that would “run the risk of alienating Mike [Mr Carter] and perhaps losing the deal”.
[82] On 22 March 204 Mr Pattinson telephoned Mr Leslie to advise that another party was again interested in buying CPS but that PAE would have first right of refusal. Mr Pattinson’s evidence is that this arose by chance. He had met the second-in-charge at Vector while on holiday in Taupo at this time. He was told that Vector were looking at purchasing an electrical company in Wellington and were looking for businesses to compliment Vector’s operations. He said that Vector should get in contact with Mr Carter. Mr Pattinson also says that there were other parties interested in purchasing CPS, one of which was Spotless.
[83] On 24 March 2004 Mr Leslie reported to the PAE directors. Amongst other things they discussed the profitability of CPS as indicated by the accounts. In this report Mr Leslie advised that “[a]ssuming the previously stated profit levels are achieved a payment of $1.6 million would be made at the time of settlement and a further payment of $400,000 would be paid when the rollover was achieved”. The further payment would remain the same whether the rollover was for one or three years. (The reference to $1.6 million is a mistake and is meant to be $1.2 million as confirmed by Mr Leslie in an email to Mr Wearne on 30 March 2004.)
[84] On 26 March 2004 Mr Black and Ms Yi visited CPS’ offices to discuss the work in progress valuation. They also met with Mr Watson this day. Ms Yi’s evidence is that they stressed that the financial statements ending 31 March 2004 were very important to PAE. She says they went through how work in progress ought to be calculated. She says that he confirmed that he would check this when he prepared the 31 March 2004 accounts. Mr Carter confirms that Ms Yi and Mr Black came to CPS’ office on 26 March 2004. He says that Ms Yi and Mr Black looked at the CPS system from nine until around midday and that after lunch they met with Mr Watson. He says that at this meeting they agreed a format for the calculation of work in progress for the next report.
[337] Initially the bonus was payable “[s]hould the contracts be further rolled-over or re-won at tender”. When it became clear that there was to be no rollover in 2005 it was amended so that it became payable on the “successful retention” of the contract “at the retender in 2006” but “subject to achieving a minimum 5% profit margin”. When Housing New Zealand advised CPS that it had won the re-tender for a further three years, Mr Carter emailed Mr Leslie that day asking for confirmation that the $100,000 in his employment contract would be paid. Mr Leslie says that he was surprised by the request for an immediate payment because there had not been sufficient time to see whether the 5% profit margin would be achieved. Mr Carter applied to the Employment Relations Authority for the bonus. It was subsequently agreed that the bonus could still be paid if the 5% margin was achieved after a reasonable period of time.
[338] In my view the 2006 references may have been an error (reflecting the terms of the Heads of Agreement where it was contemplated that it would be conditional on an extension of the Housing New Zealand contract) – that is consistent with PAE
amending the contract so that the bonus was payable in 2005. Alternatively the 2006 references may have been deliberate and may have reflected a confidence that the contracts would be rolled over. Either way, in the event of a re-tender PAE apparently wanted to incentivise Mr Carter to secure the re-tender. Unlike the employment contract which referred to a rollover or a re-winning at tender, the contract referred to “renewed”. Overall, I find the employment contract and what occurred in relation to the bonus inconclusive either way as to the meaning of clause 5.2.
[339] Both parties refer to the business or commercial reality. In terms of the relevant factual matrix, that is what a reasonable person having all the background would know, the contract was coming to an end at 30 June 2005, there was some possibility that it might be extended for a year to bring it into line with the supply contracts, Housing New Zealand’s stated present intention was to re-tender, and there was no certainty about what would occur – a rollover and a re-tender were both possible outcomes and the term might be for one or three years.
[340] Against this background the defendants say that it does not make sense that PAE would only be required to pay the $350,000 if there was a rollover but not if there was a re-tender. Mr Pattinson says that never to his knowledge has a Housing New Zealand contract continued without a tender. The value to PAE arose if the contract with Housing New Zealand continued and regardless of how that continuation was achieved. PAE says that if a rollover occurred then PAE had more certainty and hence a payment of $350,000 made sense. If there was no rollover, then PAE had the risk and cost of going through that process. Mr Leslie’s evidence was that a “typical PAE tender” can cost $100,000. He says that if PAE had to bear this risk and cost there would be no basis to pay the defendants the $350,000 because they had not “delivered” the new contract. The new contract would be obtained in part through CPS’ history with Housing New Zealand but also Housing New Zealand’s view of PAE and the work done by Mr Carter, which PAE was paying for, in securing the tender.
[341] I agree with the defendants that the value to PAE arose whether the contract was rolled-over or re-tendered. Either way PAE secured the business and part of the
reason for that was likely to be CPS’ history with Housing New Zealand, particularly because Mr Carter was to be retained as a manager. Although there was greater cost to PAE in a tender, that cost was less than the $350,000 agreed to be paid to the defendants and a three year term was secured. It also seems unlikely that the defendants would have been prepared to forgo $350,000 of the purchase price if the contract was renewed by re-tender rather than by way of a rollover. I therefore consider that the business reality matches the ordinary meaning of the words. The
$350,000 was payable if the Housing New Zealand contracts were secured for a period beyond 30 June 2005 of not less than one year on terms no less favourable than the existing contracts – that would amount to a renewal. If PAE had intended that the money was to be paid only if there was a rollover without a re-tender then it needed to have made its intentions more plain in the words that were used.
No less favourable
[342] PAE submits that the two contracts are completely different. It refers to the following differences:
a) The 2002 contract covered Taranaki/King Country whereas the 2005 contract covers Taranaki/Manawatu and Wanganui;
b)The 2005 contract is a performance based contract, whereas the 2002 contract was not. Under the 2005 contract Housing New Zealand is entitled to hold back up to 7.5% of revenue dependent on the contractor meeting timeliness and quality standards;
c) There are 31 pages of special conditions added to the general conditions in the 2005 contract;
d)The 2005 contract was used to introduce the “CIMS” project by which the xml functionality of Joblink was introduced (refer [173] above) and pursuant to which obligations were placed on contractors to use particular forms.
[343] PAE refers to these differences solely by reference to a comparison of the two contracts which are in evidence. Certainly, a comparison between the two contracts shows that there are some differences – they are not the same document. However it is not apparent on the face of them whether the differences are material. Counsel for PAE said in opening that the geographical alteration made no difference in terms of the quantity of work. No witnesses for PAE gave evidence as to whether the contract was on less favourable terms. In his reply brief Mr Leslie simply notes that NZS 3910 applies to a wide range of contracts and that this does not imply that the contracts will be very similar. He also refers to the changed regions without commenting on whether that made the 2005 contract less favourable.
[344] The defendants’ evidence that the contract was no less favourable came from Mr Carter. Mr Carter said that the 2002 and 2005 contracts were “slightly different” but both were based on the NZS 3910 formulation. He said that the “mechanics” of the contracts (for example the specifications) and the standards required of the contractor (such as delivery time and various other quality controls) were very similar. He said that there were two points of distinction. They were:
a) The 2005 contract contained performance incentive provisions.
Although the 2002 and 2005 contracts required similar standards of compliance, there was no financial incentive for the contractor to meet those standards under the 2002 contract;
b)The 2002 contract was for three years and contained no right of renewal or any process whereby it could be extended or rolled-over. The 2005 contract was for three years but included a discretion whereby Housing New Zealand could opt to extend the contract for one or two years.
[345] Mr Carter was not cross-examined about this except in respect of PAE seeking to demonstrate that Mr Carter understood the difference between a rollover and re-tender. Mr Carter considered the performance incentives were advantageous because there was a financial gain if the contractor performed. He said that the 2005 contract had “numerous advantages” over the earlier one.
[346] On balance I consider that, in the absence of cross-examination of Mr Carter and any direct evidence from Mr Leslie challenging Mr Carter’s evidence, the defendants have established on the balance of probabilities that the contracts were on terms no less favourable than the existing contracts. The defendants have established their counterclaim. Interest is payable on the $350,000 sum.
[347] The defendants pleaded in the alternative claims of mistake and rectification. However they did not advance submissions in favour of these alternatives preferring to rest their counterclaim on the meaning of the words of clause 5.2 in their context. I therefore do not address the alternatives.
[348] The defendants claim increased costs on the counterclaim on the basis that the Housing New Zealand contract had “so clearly been renewed … that the plaintiff’s refusal to pay is borne out of ill-will towards the defendants”. I do not accept this submission.
Result
[349] The first cause of action fails. PAE has not established that fraudulent misrepresentations were made. However, after the Agreement was entered into deliberate attempts were made to conceal the errors in the accounts (and this may be relevant to costs).
[350] The second cause of action fails. In the absence of “the entire agreement” clause, PAE would have established that innocent or negligent misrepresentations were made and that PAE was induced to enter into the Agreement at the price it did on the basis of those misrepresentations. However it is not fair and reasonable to inquire into this and to award relief in view of the respective bargaining strengths of the parties, PAE’s access to accounting, legal and business advice, and the opportunity PAE had to make whatever inquiries it considered appropriate in making this not insignificant investment. The scale of the inaccuracies and the defendants’ lack of care (or even recklessness) in allowing them to occur is not a sufficient basis on which to interfere with the bargain the parties struck – under which there was no warranty as to the accounts receivable or the profitability of CPS. For completeness,
I note that if this cause of action had been made out then the damages claimed are the overstatement of debtors (which I have found to be $713,025) on the basis that the understatement of the liabilities is recoverable under the third cause of action.
[351] The third cause of action succeeds. The warranty was as to the amounts that, from an accounting perspective, should have been included in the 31 March 2004 accounts. The damages are $235,606 (763,314.21 + 10,831 – 538,539) but from this is to be deducted the GST component (1/9th) on the difference between the amount stated in the accounts ($538,539) and the $235,606.21. Interest is payable on this sum.
[352] The fourth cause of action fails. The terms of the Agreement and the ability for PAE to make its own inquiries meant that the defendants’ conduct viewed as a whole was not misleading and deceptive conduct and/or PAE’s loss was not caused by such conduct.
[353] The defendants succeed on their counterclaim and are accordingly entitled to payment of $350,000 under clause 5.2 of the Agreement. They are also entitled to interest.
[354] If the parties are unable to agree interest calculations or costs, they may submit memoranda within 30 days of the date of this judgment.
Mallon J
Solicitors:
G Dewar, Thomas Dewar Sziranyi Letts, PO Box 31-240, Lower Hutt, phone: 04 570 0442, fax: 04 569 4260
A S Butler, Russell McVeagh, PO Box 10-214, Wellington, phone: 04 499 9555 fax: 04 499 9556
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