Papakura Pharmacy 2006 v Parkfield Investment Limited HC Auckland CIV 2007-004-1850
[2010] NZHC 2050
•30 September 2010
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2007-004-1850
BETWEEN PAPAKURA PHARMACY 2006
LIMITED Plaintiff
ANDPARKFIELD INVESTMENT LIMITED First Defendant
ANDGURMEJ SINGH Second Defendant
Hearing: 28, 29 and 30 June 2010
Counsel: M H Benvie for Plaintiff
G Blanchard and M J W Lenihan for Defendants
Judgment: 30 September 2010 at 3:00pm
RESERVED JUDGMENT OF HUGH WILLIAMS J
This judgment was delivered by the Hon. Justice Hugh Williams on
30 September 2010 at 3:00pm.
pursuant to Rule 11.5 of the High Court Rules
……………………………………………..
Registrar/Deputy Registrar
A.The plaintiff is entitled to judgment against both defendants on liability for breach of warranties 1.1 and 1.2 in the agreement for sale and purchase with the first defendant and pursuant to ss 9 and 43 of the Fair Trading Act 1986.
B. The failure to disclose the two lost rest home contracts having been shown to have had no effect on the net profitability of the business purchased, the plaintiff’s claim against both defendants is dismissed as to quantum.
PAPAKURA PHARMACY 2006 LIMITED V PARKFIELD INVESTMENT LIMITED AND ANOR HC AK CIV-2007-004-1850 30 September 2010
C. Costs are to be dealt with in accordance with para [111].
CONTENTS
Paragraph Introduction [1] Narrative [5]
Discussion on liability [39]
1. Breach of contractual warranties [39]
2. Fair Trading Act claims [61] Quantum [72] Result [110]
Costs [112]
Introduction
[1] By an agreement entered into in September 2006 the plaintiff, Papakura Pharmacy 2006 Limited, contracted to buy the Dispensary First Papakura, a pharmacy owned by the defendant, Parkfield Investment Limited. The contract was subject to conditions precedent including due diligence, and contained warranties that information given by Parkfield to Papakura was true, complete and accurate and the defendants were unaware of any material circumstances not disclosed to Papakura which might reasonably be expected to affect the profitability of the business or be otherwise material.
[2] The contract settled on 16 November 2006. Papakura Pharmacy later discovered that two of four rest home supply contracts for pharmaceuticals had been cancelled shortly before the contract for sale was executed, though the income from those contracts had been included in the financial information given by Parkfield to Papakura Pharmacy. The latter pleaded cancellation of the contracts had not been disclosed.
[3] As a consequence, Papakura Pharmacy claimed against Parkfield that it paid a higher price for the Dispensary First Papakura business than would have been the
case had correct information been given. Calculated in a way which appears later, it sought to recover a loss of $247,132 (as amended in plaintiff’s opening) from Parkfield pursuant to s 9 of the Fair Trading Act 1986 with additional causes of action against both defendants for breach of the contractual warranties as to completeness and accuracy of information given to the plaintiff. It sought the same sum from Mr Singh, Parkfield’s director and second defendant, under s 43(1)(b)(d) of the Fair Trading Act 1986, asserting that he procured or was a party to Parkfield’s breach of s 9.
[4] Parkfield generally disputed the allegations, claimed it gave accurate information - though admitting the two rest home contracts were cancelled in July and August 2006 - and asserted positively that Mr Singh, in September 2006, twice notified a Mr Renwick, a broker acting in the matter, of the cancellation of those two contracts, assuming they were material and required disclosure.
Narrative
[5] Mr Singh and his wife, Ms Kaur, are directors and shareholders of Parkfield. They purchased the Dispensary First Papakura in 1998 and a pharmacy in Otahuhu in April 2000. For various business and personal reasons, they decided to sell both pharmacies in early 2006 and approached Mr Renwick to assist.
[6] Mr Renwick was the National Brokerage and Auckland Branch Manager of ProPharma, a trading division of Pharmacy Retailing (NZ) Limited. Though seemingly not paid by either party to this dispute and interested principally in obtaining the Dispensary First Papakura business for ProPharma, Mr Renwick was well known in the pharmacy business as one who acted as a pharmacy sales broker.
[7] Mr Singh’s approach to Mr Renwick was in about mid-August 2006. He was told there were buyers waiting. When they met about a week later, Mr Singh gave Mr Renwick the Dispensary First Papakura accounts for the years ended 31 March
2005 and 2006,1 together with other information such as the number of prescriptions
1 Unexplored during the hearing was whether Parkfield’s accounts for the 2005 and 2006 year related only to Dispensary First Papakura or covered both pharmacies owned by Mr Singh and Ms Kaur. The
dispensed per month. From that, Mr Renwick put together a spreadsheet and calculated what he called a “back of a sheet” valuation to set the selling price for the pharmacy. Depending on capitalisation rate, it gave a value of between $822,780 to
$1,028,475. This was no more than a rough indication of value. It was not a formal valuation and was based on the unverified information given by Mr Singh. Mr Renwick wrote “$900k” on his valuation as the selling price.
[8] Mr Singh said he gave Mr Renwick a deal of additional information including details of the pharmacy’s rest home contracts but Mr Renwick did not acknowledge that, and his “back of a sheet” value contained only global entries.
[9] Mr Singh also said that at that meeting he told Mr Renwick that Dispensary First Papakura had “recently lost a significant number of Webster Foil ... 28 day patients through the cancellation of two contracts”2 but Mr Renwick said the loss would not affect the value of Dispensary First Papakura.
[10] In that assertion, Mr Singh was supported by Ms Kaur. She worked in both pharmacies doing accounting and other office roles. She went overseas on
22 August 2006 returning on 18 September 2006 and said she and her husband met
Mr Renwick at the pharmacy later in the week of her return.
[11] As part of the discussion on that occasion she asked her husband if he had told Mr Renwick of the loss of the “Webster foil” patients and was assured he had. She said she later asked Mr Renwick whether the loss of the “Webster foil” patients would affect the sale price and was reassured on that score.
accounts themselves do not differentiate between the pharmacies owned by Mr Singh and Ms Kaur but Mr Renwick, retained to sell both pharmacies, said Mr Singh gave him the 2005 and 2006 accounts for the “pharmacies”. Mr Mehta’s – accountant for the plaintiff - reports says he was given the Parkfield 2005 and 2006 accounts but describes them as being the “Financial Statements of Dispensary First Papakura”. Mr Singh barely mentioned the accounts and, of the experts, Messrs White and Wilson (but not Mr Lazelle) were also given copies of the 2005 and 2006 Parkfield accounts. For the purposes of this judgment, it is assumed that Parkfield’s exhibited accounts for the
2005 and 2006 year related only to Dispensary First Papakura.
2 A “Webster foil” contract is a phrase given by Mr Singh to the way in which drugs were packaged and dispensed to 28-day prescription cycle patients in rest homes. The drugs are placed in a plastic mould with 28 compartments for individual doses and sealed with foil, with dosage instructions and the patient’s name, rest home, and start date on the rear.
[12] Mr Renwick, however, was adamant he was told nothing by Mr Singh or
Ms Kaur about the loss of the rest home or ”Webster foil” contracts. He said:
I had no knowledge and was not informed that there had been cancellations to two rest home supply contracts being supplied from Papakura Pharmacy and had made no statement or representation to any party that the cancellation of these contracts would not affect the value or the salability [sic.] of the pharmacy business to any party.
[13] Mr Renwick discussed the Dispensary First Papakura purchase with a possible buyer, a Mr Ram, who is a director of Papakura Pharmacy, and gave him financial information. He indicated to Mr Ram that the Dispensary First Papakura was worth about $900,000. Other possible buyers were also contacted by Mr Renwick.
[14] Ms Baker, the only director of Papakura Pharmacy who gave evidence, said she was looking to buy a pharmacy in 2006 and was contacted with the names of two possible partners to buy Dispensary First Papakura.
[15] Being interested, in September 2006 they instructed a Mr Mehta to provide a valuation of the Papakura purchase to assist in their negotiations. Mr Mehta was a partner in Markhams, the accountants for Papakura Pharmacy, and specialises in pharmacy sector accounting.
[16] The narrative becomes somewhat confused at this point as to the dates of contact between the parties and what took place in the conversations, but that lack of specificity does not affect the matters at issue in the claim.
[17] On 13 September 2006, Markhams produced an indicative valuation for the business based on Parkfield’s accounts for the years ended 31 March 2005 and 2006. That document recorded turnover and gross profit increases but warned that the “dispensing income ... will be difficult to maintain ... gross profit around 30% in the future”. Lease details were included and wages were noted at $210,000 p.a. Mr Mehta was “a little bit unsure about the proprietors’ wages” because he did not know the time put in by Mr Singh in the pharmacy, so allowed an annual salary of
$53,000 “based on the information provided to us in terms of the hours completed by the proprietor”. He assessed the company’s future maintainable profit at
$123,652 p.a. after tax, and valued the business at $772,825-$824,346 depending on capitalisation rate. The valuation said nothing about the lost rest home contracts.
[18] On 4 September 2006 Mr Renwick emailed Mr Singh with his list of standard pharmacy information requests. Its 11 categories included wages breakdowns and “details of rest home, or such”.
[19] At some stage Mr Mehta also sent Mr Singh his standard pharmacy information request. A copy may also have gone to Mr Renwick. The 17 requests included such things as lease details, wages breakdown, proprietors’ wages, whether Mr Singh was aware of future plans by nearby general practitioners that might affect the business, and requested he “briefly outline the strength and weaknesses of the business as you see in the future.”
[20] Mr Singh said he never received Mr Mehta’s request schedule and Mr Renwick was unsure whether his emailed list of requests to Mr Singh followed his receipt of Mr Mehta’s schedule.
[21] At all events, Mr Singh replied shortly afterwards answering each of Mr Renwick’s 11 points. In response to the rest home detail query, his memorandum said:
“44 and 20 bed rest home serviced daily – in Papakura and Manurewa – had contracts – I’m sure they will continue to deal with new proprietor”.
And that:
“the shop has potential for the following – more rest home and foils”
[22] In response to the wage breakdown request, Mr Singh’s reply said the wages were normal for a five-and-a-half day operation with “any x-cess [sic] work would be done by myself and wife”. The pharmacist allowance was only for 34½ hours.
[23] In early to mid-September Mr Singh said he gave Mr Renwick a handwritten list of staff, probably in reply to a request from him. It listed some six staff including one pharmacist and a pharmacy student, and said a new intern was to start in December that year. Mr Singh said:
“The list of staff was not meant by me to be a comprehensive list of all staff working at the pharmacy [but] it was intended ... to indicate ... who the full- time or significant part-time staff were at the time ... excluding family and locals.”
[24] Mr Mehta said he spoke to Mr Singh between the date of his first draft valuation and another he produced on 21 September (though erroneously still dated
13 September) and, as a result of those further discussions, amended certain details. He said Mr Singh asserted his 2006 $64,000 figure for rent included back rent so he adjusted his figure to $48,000 p.a. In that comment, Mr Mehta must be in error given $48,000 for rent appears in both draft valuations.
[25] Around the time of that conversation, Mr Singh sent him an employee payroll schedule on 20 September 2006 but he, Mr Mehta, found it did not correlate with the previous handwritten schedule Mr Singh had sent, not least because Mr Singh was himself omitted.
[26] The result of that was that Mr Mehta said he telephoned Mr Singh to discuss wages and was told that, because Mr Singh spent little time at his Papakura pharmacy, his wages should be zero. But after further discussion relating to the time Mr Singh spent at the Papakura Pharmacy – including management matters – Mr Mehta said Mr Singh agreed an allowance of no more than 16 hours per week could be made for his time. There were other discussions about staff and their wages, as a result of which Mr Mehta produced a file note dated 20 September
2006.3 The seven employees listed in the file note, including Mr Singh at 16 hours
per week and a schoolgirl assistant, totalled $201,908.
3 A date he insisted was correct even though the date looks as if it is “21/09/06”.
[27] Mr Mehta also made an allowance for locums of $4,800 as all pharmacies must have a registered pharmacist on duty when open and most accordingly employ locums to cover sickness, holidays and the like. 4
[28] Mr Singh’s evidence was that his first contact with Mr Mehta was on
19 September when the latter rang him about 9:00pm to discuss staffing, a topic he could not discuss during the business day when he was at the pharmacy. Mr Mehta acknowledges ringing Mr Singh some time after 5:00pm that day but said it was nowhere near as late as 9:00pm.
[29] Mr Singh says the conversation covered numbers of employees, wages, hours worked and the like. He told Mr Mehta he worked about three and a half days weekly at the Papakura Pharmacy and denied he told Mr Mehta his wages should be treated as zero. They did not discuss his handwritten staff list but, at Mr Mehta’s request, he faxed him a copy of a further employee payroll report the next day for the year to 31 March 2006. There are 19 employees on the list including Ms Kaur but not Mr Singh and the total pre-tax wage bill was shown as $246,719.63. The status of each employee was listed with movements in staff numbers. His omission from the list was because he was paid by the Otahuhu Pharmacy whilst his wife was paid by Papakura.
[30] Following those adjustments, Mr Mehta produced his further indicative valuation dated, as mentioned, 13 September but actually issued on or about
21 September. It assessed net profit after tax of $140,978 and a valuation range of
$854,412 to $881,112.
[31] All of this, it seems, was undertaken without any direct involvement by Ms Baker but she put in evidence the contract that was ultimately prepared and signed in early October. Of present interest, the contract provided for:
a) a price of $900,000 apportioned as to goodwill ($720,000), plant and equipment ($50,000), and stock (up to a maximum of $130,000);
4 Section 18 Medicines At 1981.
b)one of the conditions precedent made the agreement conditional on due diligence to the purchaser’s satisfaction;
c) the business contracts listed in Schedule 1 included “2 rest home contracts will be transferred to purchaser”;
d)there was yet another employee list in Schedule 2. It included seven names (including an intern ), six of whom appeared in the list Mr Singh faxed Mr Mehta on 20 September (though seven were mentioned in the accompanying fax).
[32] The warranties relevant to the present proceeding were:
1. Information and Material Circumstances
1.1All information which has been, or will prior to Completion be, given by or on behalf of The Vendor ... to the Purchaser or any director, agent, professional adviser or other representative of the Purchaser in respect of the Business ... was, or will be, when given true, complete and accurate in all material respects.
1.2The Vendor are [sic.] not aware of any material circumstance which has not been disclosed in writing to the Purchaser and which might reasonably be expected materially and adversely to affect the financial position or profitability of the Business ... or which might otherwise be material to a purchaser of the Business.
[33] Mr Singh said a reduction of up to $30,000 from the $900,000 asking price was requested by Ms Baker’s business partner and Mr Mehta. but he was “not prepared to drop below the offer that had been made”. Ms Baker said $900,000 was the “minimum that the vendor would accept”.
[34] The plaintiff employed Markhams to conduct the due diligence for which the contract provided and on 17 October Mr Mehta faxed Mr Singh a due diligence schedule. Amongst other things it required an analysis of sales to date by customer, month and product category, payroll details plus general financing and management details.
[35] Mr Singh, as requested, supplied some of the information before Markhams’
employees arrived. Due diligence took place over several hours the following day
and a deal of information obtained. Markhams’ due diligence report noted the absence of Mr Singh’s wages from the Papakura accounts. Of the rest home business, the report said:
The client advised that approximate 10% of their work comes from rest homes in the area, with which he currently has a supply agreement in place. He confirmed that he did not expect any issues with the transfer of this rest- home work, provided the same service and pricing structure was retained by the new owner. We did not attempt to confirm the portion of total income generated by the rest-homes.
[36] The contract was declared unconditional on 25 October and settled on
16 November following a request four days earlier for copies of the rest home contracts. Mr Singh said he gave those to his solicitor who sent them to the plaintiff’s solicitors but they were not put in evidence.
[37] Ms Baker said it was only in February 2007 that she discovered from staff that two rest home contracts had been cancelled in mid-2006. The first was with Idea Services which operated an IHC facility with approximately 100 residents, and the second was the Selwyn Oaks retirement village with about 65 residents.
[38] The plaintiff’s solicitors gave notice of claim rising out of non-disclosure of the cancellation of those contracts on 28 March 2007 and, in time, these proceedings resulted, originally in the District Court.
Discussion on liability
1. Breach of contractual warranties
[39] Although appearing as the second pair of claims by the plaintiff, it is convenient first to discuss the defendants’ possible liability under the contractual warranties earlier recounted.
[40] The obligation under Schedule 5 cl 1.1 was for Parkfield to provide information which was materially “true, complete and accurate”. Since this contract was not signed until early October, it is pertinent to note the warranty extends to information “which has been, or will prior to completion” be given.
[41] The cl 1.2 warranty was that the first defendant was not aware of any “material circumstances ... which might reasonably be expected materially and adversely to affect the financial position or profitability” of Parkfield or might otherwise be material to a purchaser.
[42] The retrospective reach of the cl 1.1 warranty is important because the plaintiff’s principal assertion of breach is that neither it nor its representatives were told of the mid-2006 cancellation of the two rest home contracts. But if, as Mr Singh asserts, the defendants disclosed the information to Mr Renwick, such disclosure occurred well before the contract was signed. Although Mr Renwick seems to have been mainly acting on Parkfield’s behalf, the parties, it seems, assumed for the purposes of this claim that disclosure of the loss of the two rest home contracts to Mr Renwick would have been the equivalent of their disclosure to the plaintiff.
[43] The critical questions in relation to the warranty claims are accordingly whether the information given the buyer was materially true, complete and accurate and whether the plaintiff can prove an undisclosed material circumstance which might affect Parkfield’s financial position or profitability or might otherwise be material to the plaintiff, coupled, of course, with whether disclosure was made of the contracts’ loss.
[44] Mr Singh downplayed the materiality of the cancellations and the profitability of rest home contracts generally. He said there was “no real benefit” in fulfilling the 28-day prescription cycles required once labour and other circumstances were taken into account. He said rest home contracts were unprofitable and their only benefit was in keeping staff busy in slack periods. He did not say when, relevant to this claim, he reached that view but that was why he did not think he needed to disclose the cancellations to purchasers.
[45] Mr Renwick disagreed. He was perhaps the witness most experienced in the pharmacy business and, in particular, in their sales and purchases. His view was that the rest home contracts were significant to pharmacies and the cancellations should have been disclosed. Although he was unaware of the profitability of such contracts, the following exchange is pertinent:
Q. One of the witnesses giving evidence for the defendants in this case is Tom Wilson. In his opinion the sorts of contracts, the types of contracts that these two contracts were are effectively not profitable because they are labour intensive and the labour costs cancel out the gross margin from the, from having the contracts. Would you not agree that because these contracts are not particularly profitable and don’t contribute to the profitability of the business, that the loss of them is not significant?
A.I don’t know enough about the contracts and the remuneration coming from those to answer that question. At the end of the day a lot of pharmacies do rest home dispensing. It must be profitable for somebody.
Q. The other expert who will be called by the defendants says that there are, I think you would colloquially describe the contracts as “stocking fillers”. They don’t greatly contribute to the performance of the business but they keep, they can keep, people busy ..., but they are not particularly sought after. You wouldn’t agree with that or you wouldn’t be able to comment?
A.Well in terms of them not being sought after I can assure you that there is a lot of competition out there for this type of business so, again, I suggest that there must be some profit in it.
[46] Ms Baker, naturally, asserted the cancelled contracts were material to the plaintiff. Whatever their profitability, she made the point such contracts are valuable to pharmacies because of their repeat business and the fact that, adding them to a pharmacy’s general dispensing business gives buyers additional leveraging with pharmaceutical companies in relation to such things as discounts. On the other hand, the defendants’ experts detailed why they regarded them as of low profitability, principally given the costs of servicing them.
[47] The Court has little difficulty in concluding that the two rest home contracts were material to the picture of Parkfield’s business as disclosed to the plaintiff and their loss was a circumstance which might reasonably have been expected materially and adversely to affect the pharmacy’s financial position or profitability. The reasons for reaching that view include what follows.
[48] Although – as will be seen – much else concerning the contracts was in dispute, there was general agreement on the part of all witnesses, lay and expert, that the two rest home contracts were together worth in the range of $55,000-$60,000 p.a. by way of gross profit. In a business which, as at 31 March 2006, achieved dispensary sales of $1,242,086 and a trading surplus before direct costs of $520,721, reductions in those figures of approximately 4.7 per cent and approximately 11 per
cent respectively must be regarded as material. That is particularly the case when
Markhams’ due diligence report said the remaining rest home contracts yielded
10 per cent of the pharmacy’s business. In light of that, without disclosure, the accounts supplied by Parkfield to the plaintiff as a basis for any calculations of future business and profitability – and, therefore, of sale price - were inaccurate, at least to that extent.
[49] Secondly, the Court accepts Mr Renwick’s view that, whatever the profitability of rest home contracts, many pharmacies compete for them and operate them for lengthy periods. Parkfield had kept the contracts on foot for four years or more. Since altruism in business is not widespread, the desirability of such contracts is the likely reason. They must be such that pharmacies want them.
[50] All those factors contribute to the finding that the loss of these two contracts was material and might reasonably be expected to have adversely affected Parkfield’s financial position or profitability. There is the further fact that the purchaser regarded their loss as material, and the criterion under cl 1.2 is subjective.
[51] The next question is whether the loss of these two contracts was disclosed by Mr Singh and Ms Kaur prior to the contract being executed and whether the information given was true, complete and accurate.
[52] As a first step, the information given by Mr Singh and Ms Kaur concerning the remaining two rest home contracts seems to have been true and accurate. There was no suggestion they positively misrepresented the position by asserting the two cancelled contracts were in fact in force.
[53] The next question is whether the loss of the contracts was disclosed.
[54] Mr Singh and Ms Kaur’s position is somewhat contradictory. In the first place Mr Singh said he did not disclose the contracts’ loss because they were unprofitable but, on the other hand, said he disclosed their loss to Mr Renwick. Both Ms Singh and Ms Kaur said they discussed the contracts’ loss with Mr Renwick.
[55] As mentioned, Mr Renwick was adamant the loss of the contracts was never disclosed to him, that he would have remembered if the loss had been disclosed and would have found it significant in his assessment of the proposed pharmacy sale price. Of material importance is that Mr Renwick’s information request schedule of
4 September 2006 sought details of “rest home, or such”. He would scarcely have asked a question in those terms if the loss of the two rest home contracts had been disclosed to him. And, the question having been expressly posed, were the evidence of Mr Singh and Ms Kaur as to disclosure correct, it might reasonably have been expected that the recent loss of the two contracts would have been expressly referred to in Mr Singh’s reply detailing the two remaining contracts.
[56] There was a suggestion – only faintly pursued – that Mr Renwick may have been less than impartial in the evidence he gave because at one stage in this claim Parkfield joined ProPharma as a third party.5 The Court declines to take that view. Mr Renwick was a skilled adviser in the pharmacy brokering business and was largely independent of both buyer and seller. His concerns were, first, to facilitate the sale and, secondly, to ensure the buyer continued the pharmacy’s association with ProPharma. His independent evidence strongly militates towards accepting the views he expressed.
[57] Further, it is noteworthy that Mr Singh nowhere suggests he disclosed the loss of the contracts to Mr Mehta or anyone else associated with the plaintiff when, had he been concerned to ensure the information given was complete, disclosure would have been an important part of their discussions as the accounts, which were the foundation of everybody’s calculations, had become inaccurate. Mr Singh, knowing of the accounts’ inaccuracy, was under an obligation, when speaking with Messrs Ram and Mehta, to make the correct position plain, particularly after signing a contract binding him in the terms of cll 1.1 and 1.2. His failure so to do is telling, particularly when he, on Parkfield’s behalf, clearly discussed the pharmacy’s rest home business with Markhams’ employees during due diligence, yet discussed only the then position not the position as it was prior to the contracts’ cancellation.
5 It later discontinued the claim.
[58] Of significant importance is that warranty 1.1 required the information given by Parkfield to be “true, complete and accurate in all material respects”. It is to be recalled that copies of Parkfield’s 2005 and 2006 accounts were provided to Mr Renwick and to Mr Mehta, and their contents were the basis of the calculations which led, first, to the calculation of the asking price, secondly, underpinned Mr Mehta’s calculations of the worth of the business and its future maintainable profit for the buyer and, thirdly, must be regarded as a material factor in the parties’ agreement on the amount at which the business was sold. Even if the loss of the contracts may, depending on staffing and other overheads relating to them, have resulted in no, or no large sum of net profit, the fact they were part of Dispensary First Papakura’s business at the end of the 2006 financial year and not part of that business by the time the calculations of the asking, sale and purchase prices were made, must mean the financial information given was inaccurate, especially in the circumstances where the pharmacy’s expenses were not reduced by the cost of servicing the lost contracts. That means the information given was also neither true nor complete.
[59] The Court’s conclusion is accordingly on an assessment of the evidence that Mr Singh and Ms Kaur are incorrect in what they say and the loss of the contracts was never disclosed by Mr Singh to Mr Renwick in their initial and any other discussion and not confirmed in the later discussion when Ms Kaur was present. Neither the plaintiff nor anybody acting on its behalf, or Mr Renwick, was told of the loss of the two rest home contracts until well after settlement, and then not by Parkfield. The plaintiff is accordingly entitled to judgment against the first defendant on liability for breach of warranties 1.1 and 1.2.
[60] Clause 12.1 of the agreement for sale and purchase said that “in consideration of the purchaser entering into this agreement, the covenantor gives the warranties to the purchaser”. In addition to being Parkfield’s director, Mr Singh was the “covenantor” in the contract. The plaintiff is accordingly entitled to judgment on liability against Mr Singh for breach of contractual warranties 1.1 and 1.2.
2. Fair Trading Act 1986 claims
[61] In light of the foregoing it is, strictly, unnecessary to discuss liability in relation to the pair of claims brought against the defendants under ss 9 and
43(1)(b)(d) of the Fair Trading Act 1986 but, for completeness and against the possibility this judgment comes under review, some relatively brief discussion of those claims is appropriate.
[62] The approach to s 9 claims was as set out by the Court of Appeal in AMP Finance NZ Limited v Heaven6. In Heaven the Court of Appeal said:
We consider that the question whether there was a breach by AMP of s 9 should be addressed in three steps. The first step, which focuses on the conduct in question, is to ask whether that conduct was capable of being misleading. The second step is to consider whether the Heavens were in fact misled by the relevant conduct. This step focuses on the effect of the relevant conduct on the Heavens’ minds. The third step requires consideration of whether it was, in all the circumstances, reasonable for the Heavens to have been misled. This is where, as with the first step, the objective dimension comes in. It is not enough for the Heavens to show they were misled if reasonable people in their shoes would not have been misled.
In considering whether it was reasonable for the Heavens to have been misled, the Court must bear in mind both the actual knowledge they possessed of the events leading up to the misleading conduct, and the knowledge possessed by their agents, which for present purposes, is to be imputed to them.
[63] Amending that test, the Supreme Court said in Red Eagle Corporation v
Ellis:
Breach of s 9 and its consequences
[26] Section 9 enacts a prohibition on engaging in misleading or deceptive conduct “in trade”. Section 43 begins to operate only when a breach of s 9 (or some other provision of the Act) has been proved. It enables a court to provide a remedy for any existing or future consequence of the breach, where someone has suffered or is likely to suffer loss or damage. It is preferable to deal consecutively with the requirements of each section. We do not understand the Court of Appeal in Heaven to have intended that its formulation would apply in all situations to which those sections may reach. It is not desirable to attempt to formulate a methodology to be applied prescriptively by a court whenever the application of these provisions is in issue, for the circumstances are too variable. The approach to be taken in a particular case will depend upon the type of situation under scrutiny ...
6 AMP Finance NZ Ltd v Heaven (1997) 8 TCLR 144 at 152 as explained by the Supreme Court in
Red Eagle Corporation v Ellis [2010] 2 NZLR 492, 502-504 at [26]-[29].
[27] The following approach commends itself in a relatively simple case like the present where there is no doubt about what was said or about its meaning and all of the loss arose from the same event, namely the advancing of the money. The loss did not have different components.
[28] It is, to begin with, necessary to decide whether the claimant has proved a breach of s 9. That section is directed to promoting fair dealing in trade by proscribing conduct which, examined objectively, is deceptive or misleading in the particular circumstances. Naturally that will depend upon the context, including the characteristics of the person or persons said to be affected. ... The question to be answered in relation to s 9 in a case of this kind is accordingly whether a reasonable person in the claimant’s situation – that is, with the characteristics known to the defendant or of which the defendant ought to have been aware – would likely have been misled or deceived. If so, a breach of s 9 has been established. It is not necessary under s 9 to prove that the defendant’s conduct actually misled or deceived the particular plaintiff or anyone else. If the conduct objectively had the capacity to mislead or deceive the hypothetical reasonable person, there has been a breach of s 9. If it is likely to do so, it has the capacity to do so. Of course the fact that someone was actually misled or deceived may well be enough to show that the requisite capacity existed.
[29] Then, with breach proved and moving to s 43, the court must look to see whether it is proved that the claimant has suffered loss or damage “by” the conduct of the defendant. The language of s 43 has been said to require a “common law practical or common-sense concept of causation”. The court must first ask itself whether the particular claimant was actually misled or deceived by the defendant’s conduct. It does not follow from the fact that a reasonable person would have been misled or deceived (the capacity of the conduct) that the particular claimant was actually misled or deceived. If the court takes the view, usually by drawing an inference from the evidence as a whole, that the claimant was indeed misled or deceived, it needs then to ask whether the defendant’s conduct in breach of s 9 was an operating cause of the claimant’s loss or damage. Put another way, was the defendant’s breach the effective cause or an effective cause? Richardson J in Goldsbro spoke of the need for, or, as he put it, the sufficiency of, a “clear nexus” between the conduct and the loss or damage. The impugned conduct, in breach of s 9, does not have to be the sole cause, but it must be an effective cause, not merely something which was, in the end, immaterial to the suffering of the loss or damage. ...
[30] Another operating cause of loss or damage may perhaps have been the claimant’s own conduct in failing to take reasonable care to look after his or her own interests. The court should therefore ask itself whether the claimant’s carelessness, if there were any, should be regarded as the sole or a contributory operative cause of the loss. The fact that the claimant may have contributed by carelessness to his or her own downfall does not disqualify the claim.
[64] The question whether what has been held to be Mr Singh’s silence was capable of being misleading raises the vexed question as to when, under s 9, a failure to speak can breach the statute.
[65] The possibilities in that regard are summarised in Fair Trading: Misleading or Deceptive Conduct7where the following appears:
Clearly, in some circumstances, saying nothing can create a false impression:
1. Where what is said amounts to a half-truth.
2. Where what is said is literally true, but conveys a false impression.
3. Where what is said is true at the time, but the maker of the statement then becomes aware of different circumstances and does not pass this information on.
4. Where there is a particular relationship requiring utmost good faith.
5. Where the silence can be seen as confirming a wrong belief of one party that is known to the silent party.
6. Where there is a failure to reveal information the other party feels should be revealed.
[66] The view must be that what has been held to be Mr Singh’s silence on the rest home contract cancellation question, when set against the provision of Parkfield’s 2005 and 2006 accounts, conveyed a half-truth. The accounts amounted to a representation that the business’ turnover would be maintained – indeed, Mr Singh told Mr Mehta it was likely to increase – but in fact the loss of the two contracts meant the turnover from them was bound to disappear.
[67] Alternatively this could be seen as a situation where, having provided the accounts to Mr Renwick and Mr Mehta, Mr Singh was aware of different circumstances which had arisen since their preparation and failed to pass on that information. Ms Baker and Mr Renwick take the view the information should have been revealed.
[68] The conclusion is that, objectively assessed, Mr Singh’s silence was deceptive and misleading; that the plaintiff and Mr Mehta were misled by Mr Singh’s failure to disclose the position as it obtained at the relevant time; and, in those circumstances, it was reasonable for the plaintiff and its advisors to have been
7 Trotman and Wilson Fair Trading: Misleading or Deceptive Conduct (2006) para 4.8 p 94, and see the same authors’ “Stairway from Heaven: s 9 FTA” [2010] NZLJ 310.
misled as reasonable persons would have been. A breach of s 9 has accordingly been established both in fact and applying the policy of the Act to proscribe conduct in trade which is other than fair.
[69] The plaintiff is accordingly entitled to judgment on liability against Parkfield for breach of s 9.
[70] As far as Mr Singh is concerned, he was a director of Parkfield, it was he who conducted the information-sharing exercise and such negotiations as there were with, first, Mr Renwick, and latterly with the plaintiff. It was he who failed to disclose the cancellation of the rest home contracts and accordingly any proved loss
– discussed later – was caused by his actions. The plaintiff is accordingly also entitled to judgment on liability against Mr Singh for breach of the Fair Trading Act
1986.
[71] The Court accordingly turns to quantum, a topic rather more strenuously contested than liability in the circumstances of this case.
Quantum
[72] The plaintiff’s claim, as pleaded, was that it had suffered a loss because it bought Dispensary First Papakura at a higher price than it would have paid had Parkfield disclosed that the accounts and the financial information supplied included that from the two cancelled rest home contracts. It particularised that claim in the following way:
Actual price paid for business $900,000
Less Assessed value adjusted for loss of resthome contracts
(capitalisation of NPAT approach):
Markhams’ projected EBIT $210,414
Less Annual gross profit from the two cancelled
Resthome contracts: (60,000) EBIT adjusted for cancelled contracts $150,414
Less Tax (33%) (49,637)
Adjusted NPAT 100,777
Multiplied by Markhams’ capitalisation rate 16%
Value of business before premium 629,859 Add Premium (2.1%)
13,227
Assessed adjusted value of business $643,086
Loss (excluding interest) $256,914
[73] In opening, the Mr Benvie for the plaintiff, said the claim would be reduced to $247,132 but offered no explanation either in opening or closing for that reduction and called no evidence to clarify the issue other than a re-working of those figures once an allowance for locums of $2288 was taken into account by Mr White, the plaintiff’s expert accountant. That gave a “calculated value of business but for breach” of $652,868 which Mr White rounded to $650,000 giving a loss of
$250,000.
[74] Two observations must be made about the parties’ approach.
[75] The first – and less important – is that a significant proportion of the evidence was misdirected and did not bear on the correct legal basis for the claim. That lack of clarity was exacerbated by the fact much of the expert (and other) evidence was devoted to criticising other expert evidence and the methodology others employed. Examples of that were criticisms of the level of due diligence which the plaintiff required of Markhams, disputes over the correct capitalization rate, what was called the “unlinking” issue, extensive evidence as to the labour required to operate the entire pharmacy – which ranged over the number of staff required, the hourly rates to be paid, the allowance for Mr Singh and Ms Kaur’s salaries - and a host of other factors. The parties focus on issues other than the correct legal basis for the plaintiff’s loss and the ad hominem nature of much of the evidence lengthened the
hearing and complicated the issues.8
[76] The second and more important observation is that the pleadings, the parties, counsel and most of the witnesses failed to identify the correct legal basis for the
plaintiffs’ claim. That comment requires elaboration.
8 All of which required a full analysis before the true basis and measure of the plaintiff’s loss was discerned and contributed significantly to delay in delivery of this judgment.
[77] The principal reason is that the plaintiff’s claim was that its purchase price for Dispensary First Papakura would have been approximately $250,000 less than it paid had the rest home contracts’ cancellation been disclosed.
[78] However, more rigorous analysis would have shown that not to be the correct legal basis for any loss suffered by the plaintiff.
[79] The Court’s view of the correct measure of the plaintiff’s loss is to recognise the plaintiff bought Dispensary First Papakura on the basis of Parkfield’s 2005 and
2006 accounts and certain other data supplied prior to the contract being signed.
[80] For the purpose of this claim, it is important to recognise that information included the income and the gross and net profit to Parkfield of four rest home supply contracts. That is what Parkfield contracted to sell and the plaintiff contracted to buy. However, what the plaintiff received on settlement was a business including only the income and the gross and net profit of two rest home supply contracts. The measure of the plaintiff’s loss is accordingly the difference between the income, and the gross and net profit of a business including the four rest home contracts and a business including only two such contracts. The plaintiff received everything else it contracted to buy.
[81] To show why the suggested differences in the purchase price with and without the two rest home contracts is not the correct measure of the plaintiff’s loss, it is first noteworthy that Messrs Renwick and Mehta both worked off the same material – that is, both were ignorant of the cancellation of the two rest home contracts – to calculate the worth of the business and each reached figures not too different from the other’s. Mr Renwick’s range was $822,780-$1,028,475 with an asking price of “$900k” while Mr Mehta’s ultimate range was $854,412-$881,112.
[82] Had both Mr Renwick and Mr Mehta been aware of the contracts’ loss, they would doubtless have amended their calculation of the worth of the business to incorporate that factor but, given both would then still have been using identical material and the same methodology, it is highly probable the calculations would
again have resulted in figures very close in amount, almost certainly within negotiating range.
[83] Thus, whether the offer and contract prices were calculated with or without knowledge of the rest home contracts’ loss, the figure at which the parties would have agreed to buy and sell Dispensary First Papakura would have been either the contract price or some lesser figure, but the difference would have been nowhere near the figure claimed by the plaintiff.
[84] The fallacy in the plaintiff’s claim is that it assumes the asking price for the business of Dispensary First Papakura would continue to be calculated in ignorance of the rest home contracts’ loss, but the correct price for the Dispensary First Papakura business should be calculated as if the rest home contracts’ loss was known.
[85] Not only does that demonstrate that the scenario on which the plaintiff’s claim was based failed to compare like with like, it overlooks the likely result if both advisors had known of the contracts’ loss and also overlooks the fact that a contract price was highly unlikely to be agreed if Parkfield continued to insist on an asking price of $900,000 while the plaintiff, correctly advised, would only have been prepared to offer in the region of $650,000. A gap of over 27 per cent between asking and offer prices would have been unbridgeable. As Ms Baker said, the plaintiff would never have agreed to buy the business in that event.
[86] Further, what needs to be kept firmly in mind is that the contract was for the sale and purchase of the whole of the business of Dispensary First Papakura, but Parkfield’s breach was confined to the failure to disclose the cancellation of two rest home contracts, contracts which were material to the calculation of the gross profit of the business but were of much less moment to net profitability.
[87] Accordingly, this claim, properly seen, is about first principles in the assessment of damages: the plaintiff is entitled, to the extent money can do it, to be compensated by being placed in the same position as if its contract had been performed in accordance with its terms and the accounts on which the price was
based, that is to say, if it received the two lost rest home contracts Parkfield’s accounts represented it had and which Parkfield contracted to sell.
[88] Noting the inapplicability of the Contractual Remedies Act 1979,9 the correct legal approach is as appears in New Zealand Land Development Company Limited v Porter10where the following relevant passages appear:
1. The objective of damages for breach of contract is to put the injured party as nearly as possible, and so far as money can do it, into the position he would have been in if the contract had been performed. There are many authorities for this elementary proposition including Stirling v Poulgrain [1980] 2 NZLR 402, Johnson v Agnew [1980] AC 367, Williams v Kirk [1988] 1 NZLR 452, 463, and 42 Halsbury's Laws of England (4th ed) para
271. The result is that an appropriately calculated sum of money must take the place of the promised benefit which the contract breaker has failed to provide.
2. As a general rule damages will be assessed at the date of breach. This is the well-known breach/date rule which will often achieve the objective of contractual damages but not always. As well as the cases mentioned above, the following authorities can be noted in support of this general rule: Miliangos v George Frank (Textiles) Ltd [1976] AC 443, Johnson v Perez (1988) 63 ALJR 51 and Asamera Oil Corp Ltd v Sea Oil & General Corp (1978) 89 DLR (3d) 1.
3. `While recognising the general rule, it is nevertheless important to bear in mind that in the end the assessment of damages is a question of fact and should not be trammelled by rigid rules. Justice to both sides in the individual case is what is to be aimed for: see the speech of Lord du Parcq in Monarch Steamship Co Ltd v Karlshamns Oljefabriker (A/B) [1949] AC 196, 232-233 adopted by Cooke J in Stirling v Poulgrain at p 419. As His Honour said, rules capable of meeting all cases are unlikely to be devised; he cited from Wilde B (see Gee v The Lancashire and Yorkshire Railway Company (1860)
6 H & N 211) "it will probably turn out that there is no such thing as a rule, as to the legal measure of damages, applicable in all cases".
4. There will be cases in which the application of the general rule, ie the breach/date rule, will not do justice because assessment at the date of breach will not achieve the objective of contractual damages, ie to compensate the innocent party for the loss of the value of the promised performance: Johnson v Agnew, Stirling v Poulgrain, Johnson v Perez and Williams v Kirk.
[89] That such an approach is appropriate and, in particular, that the assessment of damages for breach of contract should be flexibly approached and not hampered by
9 Because the plaintiff did not cancel the contract.
10 New Zealand Land Development Company v Porter [1992] 2 NZLR 462, 466.
rigid rules appears from a number of cases in this country. For example, in McElroy
Milne v Commercial Electronics Limited11 Cooke P said:
... in the end assessment of damages is a question of fact: ... there is no such thing as a rule, as to the legal measure of damages, applicable to all case; and that the ultimate question as to compensatory damages is whether the particular damage claimed is sufficiently linked to the breach of a particular duty to merit recovery in all the circumstances.
(See also Thomson v Rankin).12
[90] For the purposes of this part of this judgment, that approach requires further refinement and in that regard it is helpful to refer to a “famous” article13 namely Fuller and Perdue: The Reliance Interest In Contract Damages.14 It was summarised in Newmans Tours Limited v Ranier Investments Limited15 but for the purposes of this case it is preferable to cite from the original:
It is convenient to distinguish three principal purposes which may be pursued in awarding contract damages. These purposes, and the situations in which they become appropriate, may be stated briefly as follows:
First, the plaintiff has in reliance on the promise of the defendant conferred some value on the defendant. The defendant fails to perform his promise. The court may force the defendant to disgorge the value he received from the plaintiff. The object here may be termed the prevention of gain by the defaulting promisor at the expense of the promisee; more briefly, the prevention of unjust enrichment. The interest protected may be called the restitution interest. ...
Secondly, the plaintiff has in reliance on the promise of the defendant changed his position. For example, the buyer under a contract for the sale of land has incurred expense in the investigation of the seller’s title, or has neglected the opportunity to enter other contracts. We may award damages to the plaintiff for the purpose of undoing the harm which his reliance on the defendant’s promise has caused him. Our object is to put him in as good a position as he was in before the promise was made. The interest protected in his case may be called the reliance interest.
Thirdly, without insisting on reliance by the promisee or enrichment of the promisor, we may seek to give the promise the value of the expectancy which the promise created. We may in a suit for specific performance
11 McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39, 41.
12 Thomson v Rankin [1993] 1 NZLR 408 at 410 per Cooke J.
13The encomium is that of Burrows Finn & Todd Law of Contract in New Zealand (3rd ed, 2007) at
670 para 21.2.2).
14 Fuller and Perdue The Reliance Interest in Contract Damages (1936) Yale LJ 52, 53-55.
15 Newmans Tours Limited v Ranier Investments Limited [1992] 2 NZLR 68 at 86.
actually compel the defendant to render the promised performance to the plaintiff, or, in a suit for damages, we may make the defendant pay the money value of this performance. Here our object is to put the plaintiff in as good a position as he would have occupied had the defendant performed his promise. The interest protected in this case we may call the expectation interest.
It will be observed that what we have called the restitution interest unites two elements: (1) reliance by the promisee, (2) a resultant gain to the promisor. It may for some purposes be necessary to separate these elements. In some cases a defaulting promisor may after his breach be left with an unjust gain which was not taken from the promise (a third party furnished the consideration), or which was not the result of reliance by the promisee (the promisor violated a promise not to appropriate the promisee’s goods). Even in those cases where the promisor’s gain results from the promisee’s reliance it may happen that damages will be assessed somewhat differently, depending on whether we take the promisor’s gain or the promisee’s loss as the standard of measurement. Generally, however, in the cases we shall be discussing, gain by the promisor will be accompanied by a corresponding and, so far as its legal measurement is concerned, identical loss to the promisee, so that for our purposes the most workable classification is one which presupposes in the restitution interest a correlation of promisor’s gain and promisee’s loss. If, as we shall assume, the gain involved in the restitution interest results from and is identical with the plaintiff’s loss through reliance, then the restitution interest is merely a special case of the reliance interest; all of the cases coming under the restitution interest will be covered by the reliance interest, and the reliance interest will be broader than the restitution interest only to the extent that it includes cases where the plaintiff has relied on the defendant’s promise without enriching the defendant.
[91] Before leaving the article, it is noteworthy in the circumstances of this case that the learned authors, in concluding their discussion on whether the expectation interest should set the limit of recovery, conclude (at 79):
We will not in a suit for reimbursement for losses incurred in reliance on a contract knowingly put the plaintiff in a better position than he would have occupied had the contract been fully performed.
[92] In Newmans Tours16 (adopted in Thomson at 410) Fisher J summarised Fuller and Perdue’s restitution, reliance and expectation interest definitions, by subdividing reliance interest into:
“... reliance performance losses being expenditure and other losses incurred in or for the purpose of performing the contract itself and extraneous reliance losses being those losses which had nothing to do with the innocent party’s performance of the terms of the contract, but which were incurred by
16 At 86.
the innocent party in the ultimately vain expectation that the defaulting party would perform his or her side of the bargain.
[93] In short, in Fuller and Perdue terms, the measure of the plaintiff’s loss in this case is to “give the promise the value of the expectancy which the promise created”.
[94] Returning to the evidence in this case and dealing first with the gross profit of the two lost contracts, the one point of near unanimity between the various witnesses was the figure for the annual gross profit derived from them.
[95] Ms Baker’s calculation of the gross profit lost from the two contracts was
$58,420 which she rounded up to $60,000. It is pertinent to start by reproducing
Ms Baker’s calculations based on the three months January-March 2006:
_
Jan.2006 Feb. figures Mar 2006 Total_
Selwyn Oaks:
Patient-paid revenue ($) 1,109 2,579 2,394
Government-paid revenue ($) 8,483 5,558 6,388
Total Revenue ($) 9,591 8,137 8,782
Less GST (1,066) (904) (976)
Gross monthly revenue ($) 8,526 7,233 7,807
Gross Profit margin (%) 25.1% 27.5% 25.5%
Gross Profit ($) 2,140 1,989 1,991
Add Pack fees 272 205 270
Total monthly Gross Profit 2,412 2,194 2,261 6,867 (incl. Pack Fees)
Annualising factor 4.0
Total annual Gross Profit Selwyn Oaks (est.) $27,467
Idea Services:
Patient-paid revenue ($) 252 833 1,107
Government-paid revenue ($) 8,430 6,908 9,972
Total Revenue ($) 8,682 7,741 11,079
Less GST (965) (860) (1,231)
Gross monthly revenue ($) 7,717 6,881 9,848
Gross Profit margin (%) 25.1% 27.5% 25.5%
(per monthly dispensary report)
Gross Profit ($) 1,937 1,892 2,511
Add Pack fees 354 536 508
Total monthly Gross Profit
(incl. Pack fees) 2,291 2,428 3,019 7,738
Annualising Factor 4.0
Total annual Gross Profit – Idea Services (est.) $30,953
Total annual Gross Profit- $58,420
Selwyn Oaks & Idea Services (est.)
Say $60,000
[96] A substantially similar result was arrived at by Mr Wilson, a defence expert accountant and a person of extensive business experience particularly – up to 2007 – running Radius Health Group which owned 42 pharmacies, 19 Medical centres plus Radius Residential with 22 rest homes, hospitals and two retirement villages.
[97] Notwithstanding the similarity of his result, it is pertinent to reproduce his calculations to note the components of his calculation. They are:
Gross Revenue Calculation - Selwyn Oaks Number of Patients Foiled items – monthly Foiled items – 3 monthly Non foiled items
Patient paid revenue
Gov. paid revenueLess GST
Net of GST gross monthly revenueGross Profit % monthly dispensary report
Gross Profit
Add pack Fees
(Number of patients x 4 per month x .89 Fee)
Gross Profit per monthTotal gross profit – three months
JAN ‘06 FEB ‘06 MAR ‘06 64 60 59 321 346 312 36 13 13 111 119 $ $ $ 388.26 104.09 2533.80 6721.99 6838.23 6512.96 7110.25 6942.32 9046.76 790.03 771.37 1005.20 6320.22 6170.95 8041.13 25.10 27.50 25.50 1586.38 1697.01 2050.13 170.88 160.20 157.53 $1,757.26 $1,857.21 $2,208.13 $5,822.60 Total gross profit – twelve months $23,290.40 Notes:
Patient Numbers and dispensing details – confirmed from source records.
Selwyn Oaks:
Foils are prepared and dispensed monthly
(although with four wards, one ward is prepared and dispensed each week). Assumed that each person receives three foils.
Pack fees - $1 per foil GST inclusive (= 89 cents exclusive).
Gross Revenue Calculation – Idea Services Number of Patients Foiled items – monthly Foiled items – 3 monthly Non foiled items
Patient paid revenue
Gov. paid revenueLess GST
Net of GST gross monthly revenue
Gross Profit % monthly dispensary report
Gross Profit
Add pack Fees
(Number of patients x 4 per month x .89 Fee)
Total gross profit – three months
Total gross profit – twelve months
JAN ‘06 FEB ‘06 MAR ‘06 86 81 98 250 221 267 6 7 18 44 44 75 $ $ $ 269.34 839.45 1009.36 9982.10 8338.62 10096.42 10251.44 9178.07 11105.78 1139.05 1019.79 1233.98 9112.39 8158.28 9871.80 25.10 27.50 25.50 2287.21 2243.53 2517.31 306.16 288.36 348.88 $2,593.82 2,531.89 2,866.19 $7,991.90 $31,967.60 Notes:
Patient Numbers and dispensing details – confirmed from source records.
Foils are prepared and dispensed monthly
One foil per person per week
Pack fees - $1 per foil GST inclusive (= 89 cents exclusive)
[98] The evidence contained no reconciliation as to why Mr Wilson’s patient revenue was much lower than Ms Baker’s while his Government revenue was much higher. But, given Ms Baker was the person operating the pharmacy (admittedly not for the months listed in any of the schedules) and Mr Wilson’s pharmacy experience was not as a pharmacist but as running a pharmacy business quite different in nature and extent from Dispensary First Papakura, the Court takes Ms Baker’s gross profit loss of $60,000 from non-disclosure of the two rest home contracts as the more persuasive.
[99] In light of that near unanimity and the Court’s finding on the reduced annual gross profit from the cancellation of the two contracts, the next major aspect of
assessing the plaintiff’s loss is what annual net loss accrued to the plaintiff from the contracts’ cancellation.
[100] Few witnesses addressed that question, but one who did was Mr Wilson. He recognised that most of the costs of servicing the two lost contracts – e.g. heat, light, power, rent – were constants and did not affect the contracts’ net profitability. He therefore assessed the contracts’ net profitability only by debiting the labour costs of servicing the contracts to the gross profit. That led him to the view that the costs of servicing the rest home contracts were higher than the gross profit derived from them, higher to the point where the contracts were not profitable at all and their only benefit to a pharmacy was in keeping the staff busy and the other factors mentioned
by Ms Baker. His calculations were:
Idea
Services
Selwyn Oaks
Total
Gross Profit $31,967.30 $23,290.40 $55,258.00 Less: DirectWages – PharmacistCost $(45,582.72) Direct Wages – Pharmacist Assistant/Intern Cost $(17,902.08) TotalWages Costs $(63,484.80) Gross lossfromRHCs $(8,226.80) Impairmentto business value $NIL
[101] Helpfully, he provided a breakdown of his overall totals in the following
schedule:
Wages Analysis
Jan ’06 Feb ’06 Mar ‘06
Total Foils 613 587 610
Average foils per month 603
(a) Pharmacist cost
Pharmacist salary $65,000pa
Plus annual leave, statistic, ACC 11%
$72,150.00
Hourly rate $34.69
(i) Preparing medicines
Pharmacy Guild – safe dispensing practice,
10 items per hour
Allow: 15 items per hour
603 items/15 per hour = 40.2 hours @ $34.69 = $1,394.54
(ii) Checking and signing completed foils
Allow:
Idea Services – 1 day per week (8 hours) Selwyn Oakes – 1 day per week (8 hours)
69.3 hours @ $34.69 $2,404.02
Total pharmacist cost per month (i) and (ii)
$3,798.56
x 12
Per annum cost $45,582,72
(b) Pharmacy Assistant/Pharmacy Intern cost
Pharmacy Assistant (Intern) hourly base rate $12.00
Plus annual leave, statistic, ACC 11% Hourly Rate $13.32
Allow:
45 foils per day (8 hours) per staff member
603 foils/45 = 13.4 days per month
Delivery Time = 0.6 days per month
14.0 days x 8 hours = Total hours: 112 hours
x $13.32
$1,491.84
x 12
$17,902.08
[102] Accordingly, the question then becomes whether Mr Wilson’s wage costs are correct.
[103] Mr Wilson’s pharmacist’s hourly rate figures seem accurate. Thirty-five dollars per hour was the sum for a pharmacist allowed by Mr Mehta. Ms Wilson, a qualified pharmacist employed by Parkfield, worked 35 hours p.w. and was paid
$59.045.59 in the year to 31 March 2005 which, for a 48 week year, equates to an hourly rate of $35.15. Her salary for the six months to 30 September 2006 was
$33,294.80 which, on the same basis, equates to an hourly rate of $36.63. So it would appear that an hourly rate of $35.00 for a pharmacist was appropriate.
[104] There was a deal of evidence as to the labour costs in running the whole of the Dispensary First Papakura business, especially as far as pharmacists and interns were concerned. But the cost of running the entire business is not the measure of the cost of servicing the two lost contracts and, even though Ms Baker successfully managed the business and was able to reduce the cost of the pharmacist resource, the cost of running any dispensing pharmacy such as Dispensary First Papakura
inevitably runs up against the necessity for there to be a pharmacist on the premises the entire time the business is open whether fulfilling rest home contracts orders or engaged in general dispensing.
[105] As to the intern rate of $12 per hour, since that was the figure actually paid and used by Mr Mehta that, too, seems accurate.
[106] Mr Wilson said the Pharmacy Guild prescribes 10 foils per hour as a safe dispensing practice. He, in his calculations, allowed 15 foils per hour. That reduces the wage costs for servicing the two lost contracts. As Ms Baker herself said, servicing such contracts is “very labour-intensive” and the cost of servicing them is “not insignificant”.
[107] Mr Wilson appropriately allowed for management input in checking and signing the completed foils.
[108] On that basis, all Mr Wilson’s figures seem accurate and the conclusion must be that the plaintiff has therefore proved no loss accruing to it from the fact the business it bought lacked two rest home contracts incorporated in the accounts for the business on which the transaction between the parties was based. Indeed, if anything, on Mr Wilson’s figures, the plaintiff would have suffered an annual net loss of $8226.80 had the contracts been included in the business on settlement. Even taking the lost gross profit at $60,000 p.a., Mr Wilson’s wage analysis shows the plaintiff would still have suffered a loss had Parkfield transferred to it the whole of the business for which it contracted.
[109] As a postscript, even if the measure of the plaintiff’s loss from non-disclosure of the two lost contracts had been the difference in purchase price between businesses including or lacking those contracts, the plaintiff would still have been unable to prove loss.
[110] Working off the calculation of the plaintiff’s claim earlier recounted, had the true net value of the lost contracts been factored into the calculation, the $60,000 would have disappeared from the calculation, the EBIT, the figure for tax and the
NPAT figures would all have been subject to minor adjustment but when Mr Mehta’s capitalisation was then applied the resultant adjusted net value of the business would appear to have been very close to the contract price, certainly within the negotiating range. And in that regard it is to be remembered that Mr Singh was unyielding on price and the plaintiff was keen to purchase the business.
Result
[111] In the result, the plaintiff is entitled to judgment against both defendants on liability for the reasons set out in this judgment but, no loss to the plaintiff having been proved from the defendants’ failure to disclose the loss of the two rest home contracts, the plaintiff’s case is dismissed as to quantum.
Costs
[112] Both parties having succeeded on one part of the claim and failed on the other, the Court’s inclination is that the costs of the proceeding should lie where they fall. If either party wishes to endeavour to persuade the Court to a different conclusion then memoranda (maximum five pages) may be filed, with that from the defendants being due within 28 days of delivery of this judgment and that from the plaintiffs being due within 35 days of delivery, with the parties certifying, if they consider it appropriate so to do, that all issues of costs can be determined by the Court without further hearing.
[113] Hugh Williams J having been compelled to retire on 23 September 2010, delivery of this judgment is validated by s 88A of the Judicature Act 1908 but any Judge can deal with outstanding costs issues.
.................................................................
HUGH WILLIAMS J.
Solicitors:
Palmer and Associates, P O Box 74062 Market Road, Auckland 1543, for plaintiff’ Lamb Bain Laubscher (Sam Laubscher) P O Box 412 Te Kuiti 3941, for defendants
Copy for:
Mark H Benvie, P O Box 3886 Shortland Street, Auckland 1140. Greg Blanchard, P O Box 1235 Shortland Street, Auckland 1140.
Case Officer: [email protected]
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