Plumbco New Zealand Ltd v Plumbco Commercial and Civil Ltd
[2023] NZHC 690
•31 March 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-002550
[2023] NZHC 690
BETWEEN PLUMBCO NEW ZEALAND LIMITED
First Plaintiff
JASON PATRICK LALLY
Second PlaintiffAND
PLUMBCO COMMERCIAL and CIVIL LIMITED
First Defendant
MICHAEL JOHN GIBSON
Second Defendant
Hearing: 14–18, and 21–22 November 2022 Appearances:
C R Andrews and M C Staines for Plaintiffs M D Branch and L M Fischer for Defendants
Judgment:
31 March 2023
JUDGMENT OF EDWARDS J
This judgment was delivered by me on 31 March 2023 at 10.00 am pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
McVeagh Fleming, Auckland Harkness Henry, Auckland
PLUMBCO NZ LTD v PLUMBCO COMMERCIAL and CIVIL LTD [2023] NZHC 690 [31 March 2023]
TABLE OF CONTENTS
Relevant facts [8] Information Memorandum [16] Business Sale Agreement [21] Variation Agreement [30] Stocktakes [32] Consultancy Agreement [34] Stock Agreement [36] Settlement and post-settlement events [38] Claims and Counterclaims [45] Overview of the evidence [51] The Stock claim [65] What did the parties agree in relation to Stock? 16[69] Was there a joint stocktake? [81] Farm stock [82] Uponor and Flip Clip stock [104] On-Site stock [112] Conclusion [115] Was the agreement in relation to the Uponor and Flip Clip stock limited to stock committed to existing contracts? [116]
Is PNZ required to prove it owned the stock? [134]
What quantum should be awarded? [147]
Is PNZ liable to pay PCCL’s storage costs for stock? [152]
Did PNZ misrepresent the value of tangible assets? [153]
Meaning and scope [162]
Inducement and causation [173]
Breach and loss [192]
Conclusion [196]
Did Mr Lally repudiate the Consultancy Agreement? [197]
Result [223]
[1] In 2017, the first plaintiff (PNZ) sold its plumbing business to the first defendant (PCCL).
[2] The purchase price comprised a sum for tangible assets, intangible assets, and stock in trade. The director of PNZ, the second plaintiff (Mr Lally), also agreed to provide consultancy services to PCCL pursuant to the terms of a consultancy agreement.
[3] PNZ claims that PCCL has failed to make payment for stock, and has failed to make other payments also, including the final instalment of a vendor finance loan. Mr Lally claims PCCL has failed to pay his invoices for services performed in accordance with the consultancy agreement.
[4] PCCL admits that some payment is due for stock, and the final instalment of the vendor finance loan, and other payments are also due. However, it says it did not agree to pay for all the stock the subject of PNZ’s claim. It says that stock was not subject to a joint stocktake, was unusable, and PNZ did not own it at the date of possession.
[5] PCCL says Mr Lally repudiated the consultancy agreement and so no payments are due. It counterclaims against Mr Lally for a small overpayment made to him under the consultancy agreement.
[6] In addition, PCCL counterclaims for misrepresentations in relation to the value of the tangible assets the subject of sale. It also claims storage costs for the stock. Its counterclaims are asserted as a set-off to PNZ’s claims.
[7]Each of the claims and counterclaims are heavily contested.
Relevant facts
[8] Mr Lally is a qualified and registered plumber. He went into his own business in 1993, and incorporated Plumbco Ltd (Plumbco) in 2002. Plumbco is a predecessor to PNZ.
[9] In the following years, Mr Lally incorporated Hydraware Ltd, Hydraware Australia Ltd, and PNZ. Mr Lally was the sole director of all these companies, and the shares were owned by him, his wife, and the Lally Family Trust.
[10] Mr Lally was also the director of Plumbco PNG Ltd which was incorporated in Papua New Guinea as a wholly owned subsidiary of Plumbco. He was one of two directors of this company.
[11] By 2016, the work in Papua New Guinea had come to an end and Plumbco PNG’s operations were being wound down. The Hydraware operations were also winding down. Mr Lally was looking to sell his New Zealand business. He decided that it would be easier to transfer and consolidate the ongoing business and the bulk of its assets to a newly incorporated company. PNZ was incorporated in 2016 for that purpose.
[12] The Plumbco (and PNZ) business was commercial in nature. It was operated out of a head office in Albany, Auckland. Some stock was kept in this office, with the bulk of stock stored at a rural farm site in Silverdale (Farm site). Stock allocated to contracted jobs was held on the site of those jobs.
[13] Part of the business involved the use of two ranges of plumbing components manufactured in Europe. The first was the Uponor range manufactured in Germany. This included fittings, pipes, and connectors. The second was the Flip Clip range which was manufactured by an Italian company. Hydraware Ltd was incorporated in 2011 to be the New Zealand distributor and supplier of both ranges to the New Zealand market. Hydraware Australia Ltd was incorporated to do the same in Australia.
[14] PCCL was incorporated in 2015 and was formerly known as Commercial Hotel Te Awamutu Ltd. Mr Gibson is the sole director of PCCL. He is experienced in the construction industry, and has worked in a range of other industries, including the management of two event centres.
[15] In late 2016, Mr Gibson was looking for a new challenge. He began searching for a business to purchase, focusing on those within the wider construction industry. In April 2017, he became interested in purchasing PNZ’s business.
Information Memorandum
[16] Mr Lally listed the business for sale with Divest Ltd in 2016. Mr Tava is a director of Divest Ltd and gave evidence at trial.
[17] An Information Memorandum was produced by Divest Ltd on 11 December 2016 (IM). The sale price was listed as $2 million. This included “stock of approximately $100,000 + Uponor Stock of $150,000”.
[18] Tangible assets were described in the IM as the physical items within the business, plant, fixtures and fittings. Tangible assets were said to be “generally stated at the depreciated book value”. This representation is relied on by PCCL in its counterclaims for misrepresentation, and misleading and deceptive conduct.
[19] This IM was emailed to Mr Gibson on 21 April 2017. It was amended on 1 June 2017, but Mr Gibson does not recall receiving the amended version and it did not feature in this case.
[20] Mr Gibson made an offer for the business in May 2017. A period of negotiations between the parties followed. This included a meeting between Mr Lally and Mr Gibson in late June 2017 and a site visit to PNZ’s main offices in Albany where Mr Lally showed Mr Gibson the Hydraware stock and explained to him that it was almost entirely comprised of Uponor and Flip Clip products.
Business Sale Agreement
[21] Negotiations culminated in an agreement for sale and purchase dated 5 July 2017 (the Business Sale Agreement). That agreement is based on the standard ADSL form (Fourth edition 2008 (3)) and attaches several pages of further terms.
[22] The parties to the Business Sale Agreement were PNZ and Mr Gibson and/or nominee.
[23]The purchase price for the business was $2.1 million broken down as follows:
(a) TangibleAssets: $530,000 (b) IntangibleAssets:
$1,220,000
(c) Stock inTrade:
$350,000
[24]The possession date was on or before 2 October 2017.
[25]Payment was to be made as follows:
(a)$210,000 payable as deposit.
(b)$790,000 payable on settlement as part of total purchase price.
(c)$350,000 payable for stock as part of total purchase price.
(d)$423,000 payable as vendor finance as part of total purchase price.
(e)$327,000 payable as earnout as part of total purchase price.
[26] Clause 3.6 of the Business Sale Agreement provides for an interest rate of 10 per cent per annum.
[27]Other key clauses of the Business Sale Agreement include:
(a)Clause 5 applies to stock in trade. It confirms the stock figure is an estimate and provides a process (including a joint stocktake) by which the final figure is to be determined. Clause 5 is set out in full at [69] of this judgment.
(b)Clause 6.3 provides a vendor warranty that at the giving and taking of possession the assets and stock in trade are the unencumbered property of the vendor.
(c)Clause 18 is a due diligence clause. It provides that the agreement is conditional on the purchaser “carrying out a due diligence in respect of the business and the markets affecting the business and being satisfied to its absolute and sole satisfaction as to all matters arising out of such due diligence”.
(d)Clause 19 provides that the agreement is conditional on a management contract between the purchaser and Mr Lally being negotiated within 10 working days from the date of the Business Sale Agreement.
(e)Clause 20 also relates to stock and is set out in full at [74] of this judgment. It provides that the agreement is conditional upon an arrangement relating to the purchase of stock being negotiated within 10 working days from the date of the agreement.
(f)Clause 24 is a vendor finance clause.
(g)Clause 25 provides for an earnout based on the financial performance of the company.
[28] A schedule to the agreement lists PNZ’s assets and their assigned values. This schedule is set out at [159] of this judgment.
[29] Further information about the business was provided to Mr Gibson following execution of the Business Sale Agreement. Mr Lally took Mr Gibson and Mr Tava on a tour of the various business localities, including the Farm site where most of PNZ’s non-Uponor and non-Flip Clip stock was stored. Mr Lally also took Mr Tava and Mr Gibson to some project site locations which were current at that time.
Variation Agreement
[30] A variation to the Business Sale Agreement was signed on 14 July 2017 (Variation).
[31]The key terms were recorded as follows:
1.Deposit of $210,000 will be paid on or before 7th August 2017.
2.That Due Diligence clause 18, Management Contract clause 19, Payment for Stock clause 20 and Key Contracts clause 21 are satisfied in all respects and hence the agreement is unconditional.
3.That the earn out period will end early, and relevant amount become due, in any 12 month period following possession in which either the
$5 million turnover target or $1 million EBIT is reached.
4.$125,000 per annum is payable to the vendor for his role as a contracted consultant for the length of the earn out period agreed. This is based on the vendor working 20 hours per week and includes an allocation of $5000 for expenses such as fuel and phone related to his work.
5Lease on current terms for 12 months.
Stocktakes
[32] The day after the Variation was signed, Mr Lally and his wife headed overseas for several weeks. On their return, there were discussions between Mr Gibson and Mr Lally regarding the transfer of the business.
[33] For approximately three days towards the end of September and beginning of October,1 Mr Gibson and Mr Lally attended the Farm site where PNZ’s stock was stored. Stock was counted and recorded on sheets by both parties. There is a dispute as to whether this constituted a joint stocktake within the meaning of the Business Sale Agreement. There is also a dispute as to whether there was a joint stocktake of the stock held at the Albany office (comprising mainly Uponor and Flip Clip stock) and of the stock held on job sites.
1 Mr Lally and Mr Gibson differ in their recollections of the exact dates this occurred. Mr Lally says the dates were 29 September to 3 October 2017. Mr Gibson says the dates were 26 September to 28 September 2017.
Consultancy Agreement
[34] On 2 October 2017, PCCL and Mr Lally entered into an agreement for the provision of consulting services (the Consultancy Agreement). The Consultancy Agreement was structured as a subcontract agreement for works. The total sum payable was $125,000 plus GST with an average of 20 hours per week over two to three days per week for 48 weeks. Other terms of the Consultancy Agreement are set out at [198] of this judgment.
[35] Mr Lally began providing consulting services in October 2017. He rendered monthly invoices for November and December 2017 which were paid. However, PCCL refused to pay the remaining monthly invoices for January to September 2018. That was on the basis that PCCL had terminated the Consultancy Agreement in response to an alleged repudiation by Mr Lally.
Stock Agreement
[36] On 4 October 2017, PNZ and PCCL executed a Stock Agreement. The terms of the Stock Agreement have some importance in this case and are set out at [76] of this judgment.
[37] For present purposes it is sufficient to note that the Stock Agreement provided that 100 per cent of the Uponor and Flip Clip stock would be purchased at landed cost to PNZ. In addition, 100 per cent of the PNZ stock held at the Farm site would be purchased at an agreed percentage of the listed cost price to PNZ. A three-column table listing categories of stock, and a stock agreed percentage, then followed. Payment was required to be made in full and with no deductions or credits given. All stock remained the property of PNZ until paid in full, and storage was to be at PCCL’s cost. PCCL had full access and rights to use and sell the stock from 2 October 2017.
Settlement and post-settlement events
[38] The sale was settled on 4 October 2017, the same day the Stock Agreement was executed. PCCL paid the sum of $790,000 on this date. The deposit amount of
$210,000 had been paid earlier. PNZ transferred its business to PCCL. A deed of lease was executed, and PCCL took possession of the premises at Albany.
[39] Mr Lally proceeded to calculate the exact sum due for the stock. This involved taking the categories of stock agreed in the Stock Agreement, referring to the stock sheets for quantities, and ascertaining the price from the Databuild system. Databuild is a software application which PNZ used to access merchant pricing information for separate plumbing components
[40] On 20 November 2017, Mr Lally forwarded the final figure for stock. The final figure was more than the maximum allowed under the Business Sale Agreement. Mr Gibson declined to take the excess stock.
[41] Not long after this, Mr Gibson informed Mr Lally that he was not going to make payment for stock as he did not believe it was PNZ stock. Despite an exchange of emails and a revised claim by PNZ, no agreement was reached. PCCL has not made any payment for stock.
[42] The disagreement over stock led to a breakdown in the relationship between Mr Lally and Mr Gibson. On 9 January 2018, Mr Lally sent Mr Gibson an email indicating that he would review his final position on returning to PCCL when the stock issue had been resolved. PCCL relies on this email in support of its claim of repudiation and its terms are set out in full at [204] of this judgment.
[43] In early 2018, PCCL removed Mr Lally’s access to the information technology system. The last invoice for consultancy services paid by PCCL was in December 2017. Mr Lally rendered invoices for services from January to September 2018 which were not paid.
[44]PNZ and Mr Lally issued these proceedings in 2018.
Claims and Counterclaims
[45] PNZ claims: payment for stock; an unpaid instalment of vendor finance; interest on a late earnout payment; and retentions. Mr Lally claims for unpaid invoices issued under the Consultancy Agreement.
[46] Some of the claims are advanced against Mr Gibson as the named party under the Business Sale Agreement. Other claims are advanced against PCCL as the named party to the Stock Agreement.2
[47] The defendant counterclaims for misrepresentation (or misleading and deceptive conduct) as to tangible assets. It also claims storage costs for the stock it says it did not agree to buy, and overpayment on the Consultancy Agreement. Other claims are made for retentions; wrongful removal of furniture; failure to deliver Plant and Equipment; maintaining excessive levels of stock; and recovery of expenses incurred on behalf of PNZ.
[48] Aspects of these claims and counterclaims have been transferred to the Disputes Tribunal and no longer form part of the proceeding. Other claims and counterclaims were admitted, and others were abandoned prior to, or during, the trial.
[49] The quantum claimed by each party, taking into account the admitted claims, is as follows:
Plaintiffs’ Claims Stock $350,363.05 Loan instalment – admitted $70,500 Interest on late paid Earn Out – admitted $1,343.85 Consultancy claim $107,812.50 (incl GST) Retentions due by Defendant – admitted $39,413.67 Total
$569,433.07
2 The first defendant’s fourth counterclaim against the first plaintiff was referred to the Disputes Tribunal; the fifth counterclaim against the first plaintiff was not pursued. The second and third parts of the sixth counterclaim against the first plaintiff were not pursued, and the fourth part was referred to the Disputes Tribunal.
Less admitted counterclaims (retentions) $55,559.29 Net Claim
$513,873.78
Plus contractual interest on stock claim and loan instalment at 10% per annum $195,435.07 TOTAL
$709,308.85
Defendants’ Claims Misrepresentation/FTA $267,580 Storage (consequence on finding as to stock) $23,125 Overpayment on consultancy (dependent on finding as to repudiation by Mr Lally) $5,528.84 Retentions due by Plaintiff – admitted $55,559.29 Total
$351,793.13
Less admitted claim (retentions) $39,413.67 Less admitted claim (stock) $57,529.27 Less admitted claim (loan instalment) $70,500 Less admitted claim (interest on late paid Instalment) $1,343.85 Net Claim
$183,006.34
[50]Only the disputed claims are addressed in this judgment.
Overview of the evidence
[51] As the previous sections show, the claim and counterclaims advanced in this proceeding are factually dense. The counterclaim includes many threads, not all of which were followed through at trial. This has made the task of determining the issues in dispute difficult, and the judgment much longer than I would have liked.
[52] To assist in navigating this judgment, I record my general findings about the credibility and reliability of Mr Lally for PNZ and Mr Gibson for PCCL. These findings inform my conclusions on the key issues in dispute and should be read together with the more detailed reasons on each issue.
[53] As will be evident from this judgment, I generally preferred Mr Lally’s evidence to that of Mr Gibson. As an owner of the business, and a plumber of many years’ experience, Mr Lally had a better understanding of the stock, its usability, and the plant and equipment the subject of sale. Mr Lally’s evidence was comprehensive, presented in a coherent narrative, and generally consistent with the written record.
[54] There was apparent friction between some of the ex-PNZ staff who were called to give evidence under subpoena for PNZ, and Mr Lally. That may explain some of the discrepancies between their evidence and his as to the condition of the stock held on the Farm site, and when stocktakes of the stock held on job sites were undertaken. However, these discrepancies were not material to the disposition of this claim and did not ultimately detract from my overall findings. Similarly, while Mr Lally was somewhat prickly in the answers he gave during cross-examination, I found him to be generally honest and reliable in the account that he gave.
[55] In comparison, Mr Gibson was a newcomer to the business. Although he had commercial and construction experience, he was unfamiliar with the commercial plumbing business operated by PNZ. As a result, Mr Gibson was heavily reliant on Mr Lally. That reliance on Mr Lally was the impetus for the Consultancy Agreement. It also explains the different approaches Mr Gibson and Mr Lally took to the assessment of the usability of stock. Mr Lally was able to envision how certain stock would be used in the business going forwards; Mr Gibson could not.
[56] While I do not consider Mr Gibson was dishonest, there were several instances where his evidence was inconsistent with the documentary record and his explanations for those inconsistencies were self-serving. For example, Mr Gibson referred to an email he sent during the stocktake in which he said that he considered 10 per cent of the items at the farm are “not” stock. In his evidence in chief, he explained this was a typographical error and the email should have read that 10 per cent of the items “are”
stock. I found that explanation implausible for the reasons set out at [94] of this judgment.
[57] Similarly, Mr Gibson referred to an email sent to him by Mr Lally on 10 October 2017 in which Mr Lally confirmed where the plant and equipment were located and suggested Mr Gibson document those items received. Mr Lally listed some plant and equipment which were not included in the sale. Mr Gibson responded with a single word: “Great”. In his evidence in chief, Mr Gibson explained that he was being sarcastic. Clearly, sarcasm is not apparent from the face of the email exchange and nor was it apparent from the surrounding circumstances. Understandably, it was not interpreted by Mr Lally in that way.
[58] Other parts of Mr Gibson’s evidence were confusing, if not internally inconsistent. For example, Mr Gibson said in his evidence in chief that Mr Tava told him that an increase in the stock levels to $350,000 was due to the Uponor and Flip Clip stock required for contracts underway. This is consistent with PCCL’s position at trial that only the Uponor and Flip Clip stock required for committed contracts was purchased. But Mr Gibson goes on to say in his evidence that he also understood there to be an increase in the “highly likely” contracts which would mean more Uponor and Flip Clip stock would be required. He also refers to Mr Lally’s advice that Uponor would be used in 1,000 apartments, which supported the need for a high stock level.
[59] Mr Tava and Mr Lally disputed aspects of this evidence, but even if it is accepted at face value, it seems clear that Mr Gibson was in fact proceeding on the basis that Uponor and Flip Clip stocks would be required in the future. That provides a good incentive to purchase more than just the Uponor and Flip Clip stock committed to existing contracts, contrary to PCCL’s defence at trial.
[60] I do not doubt that Mr Gibson had genuine concerns about the stock, plant and equipment. Those concerns were reasonably held. Ultimately however, I consider Mr Gibson decided not to pursue those concerns, and instead placed his trust in Mr Lally. That approach was reflected in Mr Gibson’s evidence in chief. For example, Mr Gibson recalled how Mr Lally was dressed on the first day they met, and said he
considered Mr Lally to be a “reasonable guy”. Mr Gibson also said he was “comfortable” with Mr Lally and “relied on him in good faith” in negotiating the sale of the business.
[61] That somewhat casual approach to the assessment of risk was also reflected in Mr Gibson’s approach to the written agreements. For example, Mr Gibson signed the Variation Agreement on 14 July 2017 which recorded that, amongst others, the due diligence and the stock agreement clauses of the Business Sale Agreement were fulfilled. But, as Mr Gibson freely acknowledged in his evidence in chief, these clauses were not, in fact, fulfilled. Despite the clear wording of the Variation Agreement, Mr Gibson considered the due diligence period would continue and any remaining issues would be worked through with Mr Lally.
[62] Similarly, it appears that Mr Gibson was alive to the dispute resolution procedure set out in clause 5.2 of the Business Sale Agreement, as he mentioned the appointment of an independent valuer as a means of resolving any disputes regarding stock value. It is regrettable that he did not seek to enforce that clause. The clause 5.2 process is designed to avoid the very dispute that is the subject of this claim and it could have resulted in a significant time and cost savings for the parties and the Court.
[63] However, Mr Gibson elected not to pursue the independent valuer process at the relevant time and instead entered into a Stock Agreement in which the quantities of stock to be purchased and the price to be paid for the stock were agreed. As outlined further in this judgment, PNZ was entitled to assume that questions concerning the stock to be included in the sale were resolved by that Stock Agreement, and there was no need to appoint an independent valuer.
[64] Mr Gibson’s approach to the written agreements flowed through into the proceedings. My overall impression is that much of the defence to PNZ’s claim is an attempt to re-open matters already agreed and recorded in the Business Sale Agreement and Stock Agreement. Other arguments, such as the claim that PNZ must prove ownership to recover its debt, were technical (if not strategic) in nature and lacked a genuine grievance at their core.
The Stock claim
[65] PNZ’s claim for unpaid stock totals $350,363.05. That sum comprises separate claims for Farm stock, Uponor stock, Flip Clip stock, and stock held on-site for project jobs (On-Site stock).
[66] PCCL admits that payment is due for some categories of stock but says the total sum owing is $57,529.27. It withholds that sum by way of set-off.
[67]The table below captures the claims and admissions for each category of stock.
Stock category Plaintiffs’ claim
Defendants’ admission
Farm stock
$114,867.73
$ 6,913.85
Uponor stock
$171,149.28
$32,107.48
Flip Clip stock
$30,995.70
On-Site stock
$33,350.34
$18,507.94
TOTAL
$350,363,05
$57,529.27
[68] PCCL defends the stock claim on several grounds. It says the parties did not undertake a joint stocktake as required by clause 5 of the Business Sale Agreement, the stock was not useable, and PNZ must prove that it owned the stock as at the date of settlement. In relation to the Uponor and Flip Clip stock, it says that it only agreed to pay 100 per cent of the stock booked for existing contracts.
What did the parties agree in relation to Stock?
[69] The starting point is the Business Sale Agreement. Clause 5 of the Business Sale Agreement provides:
Stock In trade
5.1Where in this agreement the purchase price is stated as including a sum for stock in trade, that sum is the vendor’s estimate of the in-store cost of the stock in trade on the date the vendor executed this agreement and is referred to in this agreement as “the estimated stock value”.
5.2The actual value of the stock in trade as at the giving and taking of possession shall be determined by joint stock-take by the vendor and the purchaser or their appointees or, if required by either party, by an independent valuer if one can be agreed upon. Due allowance shall be made for obsolete or damaged stock in trade. If the parties cannot agree on an independent valuer, or in the event of any dispute concerning a joint stock-take, either party may serve on the other party notice in writing requiring that the question be determined by an independent valuer to be appointed by the president for the time being of the New Zealand Law Society and the party serving the notice may at any time thereafter refer the dispute for determination. An independent valuer acting under this clause shall act as an expert in determining any question concerning the stock in trade or the value of the stock in trade. The cost of such valuation shall be borne equally by the parties.
5.3If it is determined that the actual value of the stock in trade exceeds its estimated value by more than the maximum percentage stock value adjustment stated on the front page of this agreement (“the maximum percentage”) then the purchaser:
(1)shall elect whether or not to accept all or any part of such excess; and
(2)may choose which items of stock in trade the vendor shall retain in order to reduce the actual value to the estimated value increased by the relevant maximum percentage.
Unless the purchaser notifies the vendor of the purchaser’s choice of the excess stock in trade to be retained by the vendor within five (5) working days of the determination of the actual stock value the purchaser shall be deemed to have elected to accept all the stock in trade.
5.4The vendor shall procure the vendor’s lawyer to undertake to the purchaser to retain in trust from the moneys received on settlement a sum equivalent to the total of the maximum percentage of the estimated stock value which sum shall be applied to refund to the purchaser any deficiency in the actual values as compared with the estimated values and any balance shall be paid to the vendor.
5.5The purchaser shall on or before the possession date pay into the purchaser’s lawyer’s trust account a sum equivalent to the total of the maximum percentage of the estimated stock value and shall procure the purchaser’s lawyer to undertake to retain such sum in trust and it shall be applied in payment to the vendor of any excess of the actual
value over the estimated value. Any balance shall be refunded to the purchaser.
5.6In this agreement where reference is made to the value of stock in trade, such value shall be net of the GST content of any supply made to the vendor of or in relation to that stock in trade.
[70] The purchase price for the business included the sum of $350,000 for stock in trade. In accordance with clause 5.1, this was PNZ’s estimate of the in-store cost of the stock in trade on the date the Business Sale Agreement was signed and was referred to as the estimated stock value.
[71] The actual value of the stock in trade as at possession was to be determined by a joint stocktake in accordance with clause 5.2. That stocktake required due allowance to be made for obsolete or damaged stock in trade. A dispute resolution process was set out in clause 5.2 for any questions concerning the stock or its value.
[72] The maximum percentage stock value adjustment specified in the agreement was 25 per cent. In accordance with clause 5.3, if the actual value of the stock exceeded its estimated value by more than 25 per cent, the purchaser had an election to make, which had to be exercised within five working days of the determination of actual stock value.
[73] Clause 6.3(1) of the Business Sale Agreement provides a vendor warranty that, at the giving and taking of possession, the assets and the stock in trade are the unencumbered property of the vendor.
[74]Clause 20 of the Business Sale Agreement also relates to stock. It provides:
20PAYMENT FOR STOCK
20.1 This agreement is conditional upon an arrangement related to the purchase of stock being negotiated on terms and conditions agreeable to both parties within Ten (10) working days from the date of this agreement.
[75] This clause, along with others, was agreed to be satisfied in all respects in the Variation signed by both parties on 14 July 2017.
[76] The Stock Agreement was concluded on 4 October 2017. The key terms provide (except the table of which only part is set out):
1) 100% of Uponor Stock @ landed cost to PNZ 50% due on the 2nd of December 2017
50% due on the 2nd of March 2018
2) 100% of Gia Flip Clip @ landed cost to PNZ 50% due on the 2nd of December 2017
50% due on the 2nd of March 2018
3) 100% of Plumbco New Zealand Stock held in storage at 375 Whitehills Road, RD 1,
Silverdale, Auckland
Databuild Coct Center [sic] Item Stock Agreed Percentage
Costs Centres as listed in Plumbco’s Databuild
10 PVC Large 175mm + 25% DWV Small 40-150m 50% Pressure Class D 25% 20 Copper 50% 30 Flashing Deck tights 50% 40 MDPE Fittings 50% PE 100 HDPE 45% Galv Flanges 45% All Plumbco Dataduild [sic] Cost Centre Items are agreed to be purchased by Plumbco Commercial and Civil Ltd at the agreed and noted percentage of the listed cost price to Plumbco New Zealand Limited.
Payment in full will be made on or before the 1st of October 2018 Payment is in full and no deductions or credits will be given.
All stock remains the property of Plumbco New Zealand Limited until paid in full.
Storage of all stock is at Plumbco Commercial and Civil Ltd’s cost
Plumbco Commercial and Civil Ltd have full access and right to utilise and sell the stock as of the 2nd of October 2017
[77] There is an issue about what is meant by the first three terms of the Stock Agreement. I will return to that dispute shortly.
[78] The first column in the table refers to a “Databuild Cost Centre”. As already mentioned, Databuild is a software application which PNZ used to access merchant pricing information for separate plumbing components. The cost price data recorded in the Databuild database was used for PNZ’s tender pricing process. The application was customisable, and PNZ had assigned bespoke cost centre categories for classes of plumbing stock items and individual product codes for individual plumbing stock items. The first column of the table in the Stock Agreement referred to PNZ’s cost centre codes in the PNZ Databuild database.
[79] The Business Sale Agreement and the Stock Agreement were executed separately between apparently different parties (Mr Gibson under the Business Sale Agreement, and PCCL under the Stock Agreement).
[80] However, I consider the two agreements must be read and understood together. Both formed part of the agreement in relation to the purchase of stock which was a component of the total purchase price for PNZ’s business. Construed in context, PCCL, and not Mr Gibson, was the purchaser for the business, and it is that entity which is liable for any outstanding component of the purchase price.
Was there a joint stocktake?
[81] Mr Branch, for PCCL, submits that the obligation to purchase stock only arises when there has been a joint stocktake within the meaning of clause 5.2 of the Business Sale Agreement. He submits there was no joint stocktake of any of the stock because:
(a)There was a second stage to be undertaken in relation to the Farm stock;
(b)The Uponor and Flip Clip stock were not jointly counted; and
(c)There was no joint stocktake of the On-Site stock.
Farm stock
[82] There is no dispute that Mr Lally and Mr Gibson spent approximately three days at the Farm site counting the stock.3 Nor is there any dispute that the Stock Agreement was executed after this process had been completed. Nevertheless, PCCL contends that a further stage to the stocktaking process was intended whereby unusable stock was to be excluded in the final determination of value.4
[83] The difficulty with this argument is that it is at odds with an objective interpretation of the Stock Agreement. There is no clause in that agreement which anticipates a further stage to the joint stocktake, or a further review for usability. To the contrary, the Stock Agreement has all the hallmarks of a concluded agreement, including express clauses dealing with payment, the passing of risk, and storage of stock.
[84] A second stage to assess usability would also be inconsistent with the percentages recorded in the “stock agreed percentage” column of the table in the Stock Agreement. Those percentages suggest that an assessment of condition (usability) had already taken place.
[85] Mr Gibson said that the first time he saw these percentages was when Mr Lally gave him the Stock Agreement to look at. Mr Gibson said the percentages:
… did not really concern me because I did not think the bulk of it would qualify as stock. A 50 % discount on something that could not be used in the business was of no use to me and would mean paying 50 % too much for it, without even factoring in the costs of storing something of no value.
[86] On Mr Gibson’s approach, it is difficult to see the purpose of clause 3 and the table that follows in the Stock Agreement. There would be little point in nominating a percentage of Farm stock to be purchased (100%), the categories of stock to be
3 Mr Shepherd, a PNZ employee at the time, undertook a stocktake of the Fusiotherm stock located at the Farm site also. I do not understand this evidence to be contested.
4 PCCL originally approached this argument as a matter of interpretation of the terms “stock” and “stock in trade” under the Business Sale Agreement. However, by closing submissions, PCCL’s defence had narrowed to focus on what was, in fact, useable stock. For this reason, I do not address the parties’ submissions on the meaning of these terms.
purchased, and the discount from the list price to be applied, if there was an additional stage to the process.
[87] Similarly, it is difficult to see the purpose of attending the Farm site for several days to count and record stock if it was not to identify the stock to be included in the purchase of the business. That process necessarily involves an assessment of usability. A second stage of review would render the first a waste of time.
[88] Mr Lally says that both parties went back to PNZ’s office at the end of this process to discuss and agree percentage discounts to apply to the categories of stock items listed. These percentage adjustments reflected the age and condition of the stock and included an allowance for the inconvenience of staff needing to visit the Farm site to uplift the stock. The adjustments also reflected an allowance for some of the stock being in an unpackaged or incompletely packed state.
[89] I accept Mr Lally’s evidence. It is consistent with an email sent by Mr Gibson on 26 September 2017 in which he refers to Mr Lally mentioning “a number of items that are 50% value and unused taps etc at 20% value which is very generous”.
[90] In closing submissions, Mr Branch took me to the cross-examination of Mr Lally which he relied on as evidence of an agreement for a second stage review:
Q. Now well let’s take non-useable then, are you saying that the discounts that Mr – because of the discounts Mr Gibson had to buy that particular product even if it was non-useable?
A. No.
Q. So anything that was worthless or non-useable had to come out before the discount was applied, you accept that?
A. Correct.
Q. And do you say the same for anything that was damaged, that had to come out as well?
A.Now that’s a qualification of damage to the person that’s looking at that item with the correct qualification to call the shots on that, so this is where I’ve, and I don’t want to cover ground, explained Brendan’s brief and how that is incorrect and obviously I’ve explained previously again the durability of these products; HDPE, PVC, brass, copper, these products are manufactured for decades if not 100 years’
durability, so dust, minor marks, scuffs, are quite normal and acceptable.
Q.So well you just said you’d accept then that deciding whether a particular item is damaged or not is a matter of expert opinion, yes?
A. Correct, yes.
Q.So we will summarise that, so what about non-complied, if something 20 is non-compliant does that come out or is that covered by the discount?
A. If it’s non-compliant it would be – and it can’t be used in a plumbing installation as would normally be accepted, it’s not useable.
Q.And then what about not as new, do you accept that not as new also has to come out?
A. No.
Q.So I’ll just see if I’ve got this right, if it’s not useable which would cover worthless and not compliant, then you accept that should come out before any percentage is applied, yes?
A. Yeah, if it’s not useable and it’s non-compliant.
Q. Yes.
A. It wouldn’t be accepted as a chargeable item.
Q.Okay, and if it’s damaged then the discount may apply but it’s a matter of expert opinion as to whether that damage is sufficient to render it not useable, is that fair?
A.Yeah, correct, a percentage was applied to cover any forms of what you might call damage, dust, debris, where it needs to be white clean.
Q.And in fact you told Mr Gibson, didn’t you, that if it turned out later on that any item in the stocktake was non-compliant then you would take it out.
A.Correct and obviously perhaps you know there would be a washup later which in some cases did actually happen in late December ’17.
Q. Just going to that damaged stock point though, didn’t you say in your brief that no damaged stock qualifies as stock.
A.Now this is where I come back to who qualifies and what is qualified as damage.
Q. So looking at as new, Mr Gibson told you that in his opinion to be stocked the items had to be able to be sold as new, you recall that?
A.That may have been his terminology in whatever information that was sent on.
Q. Do you accept that term as new means more than just unused?
A. No.
Q.So if you had something that had been sitting around for 10 years never been used outside, would you still consider that as new?
A.That would depend on whether it had some damage, whether there was any other damage through storage or how it had been relocated, so that product would have to be quality assured before it was installed.
Q. Which is a further expense presumably?
A. Not really because any product coming from a merchant that is delivered directly to site is qualified in the same way. There is no reason to say that a product ordered from a merchant doesn’t have damage.
Q. So, Plumbco was in the business of new builds, wasn’t it?
A. Correct.
[91] There is no doubt that the parties agreed that unusable stock would not form part of the stock to be purchased by PCCL. Mr Lally’s answers in cross-examination confirm that position and it is consistent with his evidence in chief.
[92] However, I consider the review for usability and condition took place when both Mr Lally and Mr Gibson attended the Farm site. That is evident from Mr Gibson’s concerns raised in a letter dated 2 October 2017 which was sent by email to Mr Lally on 3 October 2017. As the letter is relied on by PCCL in relation to the claim for the Hydraware stock also, I set it out in full:
2 October 2017 Hello Jason,
Stock values and stock considerations
Since we have taken inventory of all the product at the farm I have some concerns on what is and what isn’t stock.
Plumbco is obviously a new build commercial plumbing company. I would therefore expect stock to be new or at least in clean as new condition.
I would expect stock to be, what has been purchased and is ready to be installed or fitted. There is some flexibility in underground materials however anything above ground I am expecting to be as new.
I have noted the following
1.There is a lot of Black pipe (thermoweld?) and fitting that when installed have to be clean and dry and obviously those items were left unpacked, left in the rain and mud and would therefore require cleaning before being fitted. The contractors would obviously not do it and therefore would make those items worthless.
2.There were off cuts from pipes that have come from sites which you have already been paid for and therefore shouldn’t be part of the stock
3.Many of the bigger items Valves etc look like they have been there for years as paint has been starched off, some of the items have rust and some the aluminium has oxidised. The items are not in packaging and my concern is that architects or Project managers may require these to be removed obviously adding expense to the job. These should not be included in the stock.
4.Pipe fittings especially some of the large items look as though they have been specifically formed for specific jobs and are standard items therefore would be hard to sell on, therefore should not be part of the stock.
5.There are a very large number of miscellaneous relatively low cost items that that have very low numbers that to collect from storage would not make it economical to include as stock.
6.There are many items such as rubber pipe connectors, fittings of all descriptions that are missing parts, and make them uneconomical to use and shouldn’t be included as stock.
7.Some items that can be used for site sheds, whiteboards etc, or items for temporary jobs that are old are worn should be included in stock.
I[n] summary, if the stock is not clean or new, if the item may not be used in the next 12mths, if the item requires parts or work to be done on it for to be used on a commercial site, if the cost of looking for the item and driving to the storage area make the item uneconomical, if the item is not packaged got an invoice or warrantee then these items should not be classified as stock.
To store these items has a cost of $4800/year for the containers and $10,000 to store them. Excluded is the time lost to drive 35mins each way to the farm and 30mins or more to track down the items at $50/hr
From my quick look at the office storage most of the products there are stock, and my opinion is that 10% of items at the farm are not stock.
Maybe we should look at the value put on the above items when they are valued and consider the cost to the business to use the products.
Alternatively we could get a Valuer in to assess the stock and what should or could be used by Plumbco. This will have a cost we can split 50/50.
The Uponor and Flip Clip stock you will recall were not required as part of stock due to you being the licensee for the product and it not being specified
by any project unless it can be sold it to them as a cost saving option. Foe [sic] us to take on the stock a 50% discount on purchase price was offered and accepted however if you feel you are best to keep the product I am happy for you to keep.
Kind Regards Mike
[93] Significantly, this letter shows that Mr Gibson was alive to the question of usability and condition at the time he attended the Farm site with Mr Lally. As set out in that letter, Mr Gibson made a broad assessment that 10 per cent of the items at the Farm were not stock. In his evidence in chief, Mr Gibson tried to explain that “not” was included in error, and what he meant to say was that 10 per cent of the items “are stock”.
[94] I do not accept the correction. Mr Gibson’s original statement makes sense of the Stock Agreement, signed a day after this letter was drafted, to purchase 100 per cent of the Farm stock at the discounted prices noted in the table under clause 3.
[95] There was no written reply to this letter sent by Mr Lally. Construed objectively, I consider Mr Gibson was raising concerns in this letter, which were then resolved and addressed in the Stock Agreement. If the Stock Agreement did not resolve Mr Gibson’s concerns about what was and was not stock, he should not have signed it.
[96] Mr Gibson’s initial response to Mr Lally’s quantification of the stock component of the purchase price is also inconsistent with a further stage of review still to come. Mr Lally sent the final stocktake figure to Mr Gibson on 20 November 2017. The sum then calculated was more than the maximum adjusted allowance. Mr Lally asked Mr Gibson what he wanted to do with the excess amount of product.
[97] Mr Gibson responded on 23 November 2017 that he was going to have a hard time selling the stock from the Farm. He said he did not “want any more stock from the farm” and Mr Lally could “either put it in with the rest or [Mr Gibson] could make a list of unrequired stock for [Mr Lally] to use/sell”. There was no indication of a further review in that email for usability or condition of the stock.
[98] An agreement about usability around the time of the stocktake also makes sense given Mr Lally’s ongoing involvement as a consultant to the business. I accept Mr Lally’s evidence that part of that role was to assist PCCL to utilise the stock in existing and upcoming jobs. Mr Lally was the one with plumbing expertise and could see value and use in the plumbing parts, which Mr Gibson could not.
[99] Seen in context, I consider Mr Lally’s assurances to Mr Gibson (as set out in the cross-examination passage above), that if it turned out later that any item in the stocktake was non-compliant then it would be taken out, were not indicative of a separate process to be completed. Nor were those statements intended to erode the agreement reached in the Stock Agreement. Rather, they were a pragmatic acknowledgement that despite best efforts, there could be some stock accidentally included that was not in fact usable, and on that basis should be excluded.
[100] Finally, although they were not pressed in closing argument, I deal briefly with two further arguments raised by PCCL regarding the joint stocktake.
[101] First, the fact that the final price had yet to be quantified does not mean there was not a joint stocktake. This case is distinguishable from Cox v Ball in which Holland J held that a joint stocktake requires actual value to be jointly determined.5 In that case there was no agreement on price or valuation.6 In this case there was an agreement on both quantity and price as set out in the Stock Agreement. The subsequent calculation of that price did not undermine the agreement reached.
[102] Second, I reject the submission that there could only be a joint stocktake in relation to those stock sheets which contained Mr Gibson’s handwriting. That submission belies the reality of counting large volumes of stock over three or four days. Mr Gibson was present at the Farm site and participated in the process which resulted in the quantity and condition of stock being ascertained.
5 Cox v Ball HC Christchurch CP 11/93, 7 March 1994 at 16.
6 At 16.
[103] When the circumstances of the stocktaking exercise and the execution of the Stock Agreement are considered in totality, I consider there was a joint stocktake of the Farm stock within the meaning of clause 5.2 of the Business Sale Agreement.
Uponor and Flip Clip stock
[104] It is common ground that Mr Lally and Mr Gibson did not undertake a joint stocktake of the Uponor and Flip Clip stock. Nevertheless, Mr Lally says this stock was counted by his staff and Mr Gibson agreed to that approach.
[105] PCCL’s initial position put in opening was that there was no joint counting of this stock within the meaning of clause 5.2 of the Business Sale Agreement. However, by the close of trial, the focus was not on whether a joint stocktake of this stock had occurred, but on whether the commitment to buy the Uponor and Flip Clip stock set out in clauses 1 and 2 of the Stock Agreement only applied to stock already committed to existing contracts.
[106] To the extent the joint stocktake argument is still pursued by PCCL, then I find that Mr Gibson agreed to this stock being counted by PNZ staff, and so waived any requirement for the stocktake to be joint. I say that for the following reasons.
[107] First, Mr Gibson had been taken to the office and shown the Uponor and Flip Clip stock in the downstairs area. Although the stock was not taken out and counted at that time, Mr Gibson was generally aware of the quantities of stock stored there.
[108] Second, and relatedly, in his letter to Mr Lally on 2 October 2017 (some of which is set out above), Mr Gibson said that from his “quick look at the office storage most of the products there are stock”. In other words, Mr Gibson had satisfied himself that the products at the office (which were mostly Uponor and Flip Clip stock) were “stock” as he understood that term.
[109] Third, agreement on the quantities of the Uponor and Flip Clip stock also makes sense of clauses 1 and 2 of the Stock Agreement. Those clauses provide that 100 per cent of the Uponor and Flip Clip stock was to be purchased at landed cost to
PNZ. For the reasons discussed in relation to the Farm stock, the designation of a percentage only makes sense if quantities of stock had been identified.
[110] Ms Vanessa Lynn was an administrative assistant employed by PNZ for many years. She gave evidence regarding her counting of the stock stored at the offices, including the Uponor and Flip Clip stock, on a date prior to handover of the business. She was assisted by Mr Boyd in this task. Sheets were produced in evidence showing the stock that was counted. Ms Lynn’s evidence was not challenged at trial.
[111] Accordingly, I find that Mr Gibson agreed to PNZ’s staff counting the quantities of the Uponor and Flip Clip stock and waived the requirement in clause 5.2 for the stocktake to be joint.
On-Site stock
[112] In opening submissions, Mr Branch stated that PCCL agreed to pay for stock that was on-site, and for other stock being used for current contracts.
[113] That concession removes the need to consider whether there was a “joint stocktake” within the meaning of clause 5.2 of the Business Sale Agreement in relation to the On-Site stock.
[114] For completeness, however, I indicate that I would have found that Mr Gibson waived the requirement for a joint stocktake in relation to this stock also. He was willing to pay for all stock already committed to contracted jobs and was no doubt content for PNZ staff members to do the actual counting. It was also apparent from the evidence adduced at trial that this stock was in fact counted and it forms the basis of this portion of PNZ’s claim.
Conclusion
[115] It follows that I consider the obligations in clause 5.2 have either been discharged or waived. Either way, they do not stand in the way of PNZ claiming that portion of the purchase price that relates to stock.
Was the agreement in relation to the Uponor and Flip Clip stock limited to stock committed to existing contracts?
[116]Clauses 1 and 2 of the Stock Agreement provide:
1) 100% of Uponor Stock @ landed cost to PNZ 50% due on the 2nd of December 2017 50% due on the 2nd of March 2018 2) 100% of Gia Flip Clip @ landed cost to PNZ
50% due on the 2nd of December 2017 50% due on the 2nd of March 2018
[117] PCCL says that the parties agreed that it was only buying the Uponor and Flip Clip stock it needed to complete existing contracts. Accordingly, it says clauses 1 and 2 should be read as if the words “committed to existing contracts (which is usable and as new)” were inserted into each of the above clauses after the word “stock” and “clip”.
[118] In support of PCCL’s claim, Mr Branch relies on the final passage from the 3 October 2017 email set out at [92] above. For ease of reference, I set that passage out again here:
The Uponor and Flip Clip stock you will recall were not required as part of stock due to you being the licensee for the product and it not being specified by any project unless it can be sold it to them as a cost saving option. Foe [sic] us to take on the stock a 50% discount on purchase price was offered and accepted however if you feel you are best to keep the product I am happy for you to keep.
[119] Mr Branch submits that the statements in this passage should be construed as follows:
(a)“you being the licensee” is a reference to Hydraware Ltd holding the licence to wholesale the products to a variety of different businesses.
(b)“specified by any project” means that the Uponor and Flip Clips were already required to be used (specifically) on that project, so PCCL had to have that stock to complete the projects it was taking over.
(c)There is an agreement in place with Hydraware Ltd (not PNZ) to pay 50 per cent for the Hydraware stock.
[120] Accordingly, Mr Branch submits that when interpreting the Stock Agreement, the relevant factual matrix includes an agreement that Hydraware stock not specified by any project has a value of 50 per cent of cost price.
[121] I consider that construction of the email, and Stock Agreement, to be strained. It sits uncomfortably with the plain meaning of the relevant agreements, and is at odds with the wider factual matrix, as I now explain.
[122] Most obviously, the Stock Agreement does not include the additional words that PCCL would seek to read in. Clauses 1 and 2 simply identify “100%” of the Uponor and Flip Clip stock. There is no further qualifier added to the agreement making it clear that it is only stock committed to existing contracts that is being purchased.
[123] Further, there is no evidence of a separate agreement between PCCL and Hydraware Ltd. The terms of the email from Mr Gibson are not sufficient to constitute a separate and binding agreement to pay Hydraware for its stock at a 50 per cent discount. I consider it more likely that the reference to a 50 per cent discount is to the
$150,000 assigned as an estimated value for the Hydraware stock, being a component of the $350,000 stipulated for stock in the Business Sale Agreement. My reasoning for that conclusion is as follows.
[124] First, the IM provided to Mr Gibson stipulated that the asking price included stock of $100,000 plus $150,000 of Uponor stock. The asking price, including the stock component, subsequently changed, but significantly, the Uponor stock was ring- fenced as a separate purchase right from the outset.
[125] Second, during negotiations, Mr Gibson was forwarded further information about the stock and plant and equipment included in the sale. This information included a list prepared by Mr Lally in which the assets of the business had been divided between three entities: Plumbco, Hydraware, and the Lally Family Trust. The schedule included Flip Clip and Uponor stock with a value of approximately
$291,000. This stock was clearly marked as Hydraware stock, which was additional to the sale price for the PNZ business. The remaining stock was estimated at $200,000
and was included in the sale price. Mr Tava confirmed to Mr Gibson that the Hydraware stock was additional to the PNZ stock in an email dated 29 May 2017.
[126] Third, the stock value ultimately agreed and recorded in the Business Sale Agreement was $350,000. As Mr Tava explained in his evidence in chief, the reason for the increase in the stock and trade figure was due to the inclusion of
$150,000 of Uponor stock.7
[127] Fourth, Mr Tava confirmed in evidence that the $150,000 offered for the Uponor and Flip Clip stock was at an (almost) 50 per cent discount, being valued at
$291,000, and offered at $150,000.
[128] Fifth, in his evidence in chief, Mr Gibson stated that Mr Tava had explained to him that the increase in the stock figure to $350,000 was due to the inclusion of the Uponor and Flip Clip stock. Mr Gibson said that Mr Tava had advised that due to a long delivery time (the stock came from Europe), these items were needed to be stockpiled so they were available when required.
[129] Considering this entire exchange, I find that the reference to a 50 per cent discount in Mr Gibson’s email, is a reference to the figure of $150,000 (approximately 50 per cent of $291,000) which formed a component of the $350,000 estimated value figure for stock. It did not refer to a separate agreement with Hydraware Ltd to purchase Uponor and Flip Clip stock at a 50 per cent discount.
[130] Furthermore, while the sale was of PNZ’s business, it was always clear that the sale was to include the Uponor and Flip Clip stock. There was no misunderstanding that this stock was owned by a separate legal entity, Hydraware Ltd, but was nevertheless being sold as part of the PNZ sale. Mr Gibson understood that. Indeed, one of the offers made by Mr Gibson included the Uponor and Flip Clip stock. Mr Gibson’s explanation that this was simply for the Uponor equipment used for installing this stock lacked plausibility. I consider Mr Gibson intended to purchase this stock.
7 Mr Branch objected to this evidence on the basis that it was not put to Mr Gibson in cross- examination. However, I am not persuaded that the obligation to put this evidence arose and the objection is dismissed.
[131] There can be no real dispute that the overall purpose in purchasing the Uponor and Flip Clip stock was for use in the business. But that use was not limited to existing projects where that stock had already been committed. Additional stock was also to be kept for future projects. These included those which were anticipated either at the time the Business Sale Agreement was concluded, or at the time of the stocktake and execution of the Stock Agreement. The long lead time in obtaining the product, and the 50 per cent discount offered by Mr Lally, made it an attractive option for PCCL at that time.
[132] The reality was that legal ownership of the stock was of little importance to Mr Gibson. He said as much in his evidence. What mattered to Mr Gibson was the actual stock he was to purchase as part of the business. Identification of that stock was not by reference to legal owner but was to be determined by the joint stocktake process set out in clause 5.2 of the Business Sale Agreement. I have already found that Mr Gibson was content to rely on the counting of that stock by PNZ staff members, having been to the office and seen where it was stored himself.
[133] To sum up, if the Business Sale Agreement, Variation, and Stock Agreement are construed objectively, and in their proper factual matrix, I consider PCCL agreed to take 100 per cent of the Uponor and Flip Clip stock, which included that stock already committed to projects, and the other stock located at PNZ’s office.
Is PNZ required to prove it owned the stock?
[134] As part of its defence to PNZ’s stock claim, PCCL puts PNZ to proof on the question of ownership and usability of the stock.
[135] While both ownership and usability are raised, the focus of this argument is squarely on the former, and, specifically, on PNZ’s ownership of the Uponor and Flip Clip stock at the date of settlement. Accordingly, I focus only on the question of ownership in this section, although the principles apply equally to the usability argument.
[136] The ownership issue arises in an unusual way. PCCL does not counterclaim for breach of the warranty in clause 6.3 of the Business Sale Agreement as to
ownership of the stock. Nor does it complain that a third entity has made claim to the stock or that it has been deprived from using it due to ownership issues. Rather, PCCL says that PNZ must prove that it owned the stock at the time of settlement to recover the outstanding sum due.
[137] This defence raises issues concerning the burden of proof. The distinction between the “burden of proof”, the “evidential burden” and the “tactical burden” is described in Cross on Evidence and summarised by Fitzgerald J in Li v 110 Formosa (NZ) Limited as follows:8
[165] Cross on Evidence draws a distinction between the “burden of proof” in the ordinary sense, the “evidential burden” and the “tactical burden”. They may be summarised as follows:
(a)The burden of proof “is the burden of proving (or disproving) a fact in issue, or the question for trial as a whole to the required standard of proof.” As explained in Phipson on Evidence, “[a] party who fails to discharge [this] burden placed on him to the requisite standard of proof will lose on the issue in question.”
(b)The evidential burden “is the requirement to adduce, or point to, sufficient evidence to make an issue worth the consideration of the tribunal of fact.” An example of this burden arising in civil cases is the requirement for a defendant to a summary judgment application to provide an evidential foundation for the defence raised.
(c)The tactical burden is not legal but is rather practical. It is the burden placed on a party in circumstances where “the party stands to lose on an issue unless it produces some more evidence.”
(footnotes omitted).
[138] Applying those principles to this case, I am not persuaded that PNZ must prove it owned the stock to discharge its burden in this case.
[139] In the absence of a counterclaim for breach of clause 6.3, ownership is not an issue in this case. It cannot be made so by simply raising it in the pleadings or adducing evidence on that issue. There must be a connection between the ownership issue and the claim (or defence) as pleaded. In this case, that connection is missing.
8 Li v 110 Formosa (NZ) Limited [2018] NZHC 3418 at [165]. Affirmed in Li v 110 Formosa (NZ) Ltd [2020] NZCA 492.
[140] PNZ’s claim is advanced in causes of action for debt and breach of contract. Ownership is not an element of either cause of action in this case and it is not a pre- requisite to recovering the unpaid purchase price for the stock. PNZ does not need to prove ownership to prove its claim.
[141] Moreover, ownership issues do not constitute a defence to PNZ’s claim in this case. Breach of clause 6.3 is not alleged or asserted by way of counterclaim or set- off. PCCL does not contend that it has suffered any loss by virtue of PNZ not owning the stock. Nor could it, given it has received (and even used) the stock it agreed to purchase, but has not paid for. Even if PNZ did not own the stock at settlement, that does not relieve PCCL of its obligation to pay for the stock as at the date of settlement.
[142] Mr Branch submits that a vendor cannot force a purchaser to take stock that a vendor does not own. But that is not what occurred here. In this case, the stock the subject of sale was identified and quantified. Through Mr Gibson, PCCL agreed that it would purchase that stock and the price for that stock was also agreed. This was not a case of additional stock owned by a different entity being added at the last minute without PCCL’s consent.
[143] Whether PNZ or some other entity owned the stock at settlement is only relevant to PCCL if it impinges on its rights in relation to that stock. There was no (and is no) impingement of those rights in this case. Indeed, Mr Gibson was always aware that stock was owned by other entities but was not particularly concerned about which entity owned the stock. He said so explicitly in his brief of evidence. Mr Gibson remained unconcerned at the date of settlement, and immediately after the dispute over stock erupted. The first time the ownership issue was raised by Mr Gibson was on 5 February 2018. This underscores the technical and unmeritorious nature of the argument made in this case.
[144] In sum, I do not consider PNZ must prove it owned the stock to recover the component of the purchase price relating to stock. This conclusion makes it unnecessary to address the evidence directed towards ownership. It also makes it unnecessary to address whether PCCL has done enough to discharge the evidential or tactical burden.
[145] For completeness, however, I record that even if PNZ was required to establish ownership of the stock to prove its claim, I would have found that, on the balance of probabilities, ownership had transferred to PNZ by the date of settlement, or by 5 February 2018 at the latest. Any defence to the claim by PCCL on this basis could not be maintained beyond this date.9
[146] To conclude, PNZ is not required to prove ownership to establish its claim and PCCL cannot avoid its obligation to pay for stock on this basis.
What quantum should be awarded?
[147] It follows that I reject PCCL’s defences to PNZ’s stock claim and judgment shall be entered in favour of PNZ.
[148] I accept PNZ’s evidence regarding the calculation of the quantum due for the stock. Mr Lally explained the comprehensive steps taken to calculate the sums due and the sources of information used in his brief of evidence. Mrs Lally also filed a brief explaining the steps she took to calculate some of the sums said to be due. Her evidence was not challenged. The process used to calculate the price is in accordance with the terms of the Stock Agreement.10
[149] This evidence is to be preferred to that put forward by PCCL. The approach adopted by PNZ reflects the method agreed to determine the final quantum. Mr Lally’s superior knowledge of the products and Databuild system mean the plaintiffs’ calculations are likely to be more accurate than any of the alternatives put forward by Mr Gibson.
[150] The interest rate stipulated in the Business Sale Agreement is 10 per cent. Mr Branch submits that interest does not run until the value of the stock has been determined by this Court. I disagree. The price was calculated in accordance with the Stock Agreement, and PCCL was obliged to pay the stock component of the purchase
9 The argument that ownership had transferred by 5 February 2018 at the latest was raised in closing submissions. PCCL objected to this argument being raised at that late stage, so PNZ sought leave to raise it. I would have granted leave to PNZ to make this argument on the basis that there was no prejudice to PCCL in doing so.
10 PCCL conceded in closing arguments that the Databuild system could be used to determine price.
price on the due date. The Stock Agreement also provides that payment was required to be made in full without any deductions or credits given. Interest runs from the date payment fell due. With the exception the start date, PNZ’s calculations of interest were not challenged by the defendants and accordingly interest will be awarded as claimed.
[151] Finally, judgment for the unpaid stock component of the purchase price shall be entered against PCCL, as opposed to Mr Gibson. Although Mr Gibson is the named party to the Business Sale Agreement, it is evident that PCCL was his nominated purchaser. There is no real dispute that PCCL took on liability to purchase the business, including the stock, and is the entity properly liable for that part of the purchase price.
Is PNZ liable to pay PCCL’s storage costs for stock?
[152] The consequence of my findings on PNZ’s claim for stock is that PCCL was obliged to pay for the stock at the Farm site and there is no basis to claim against PNZ for storage costs.
Did PNZ misrepresent the value of tangible assets?
[153] PCCL says that PNZ misrepresented the value of the tangible assets sold as part of the Business Sale Agreement. The tangible assets include Plant and Equipment, Vehicles, Excavators and Loaders.
[154] The claim is advanced in two causes of action. The first is a claim for misrepresentation which I treat as arising under s 35 of the Contract and Commercial Law Act 2017 (CCLA). The second cause of action is pleaded under the Fair Trading Act 1986 (FTA), which I treat as a claim under ss 9 and 43 of that Act. Although the causes of action are not pleaded in the alternative, I treat them as such given the representation relied on is the same in each case, as is the claim for damages.
[155] The pleaded misrepresentation relied on by PCCL comprises statements made in the IM provided to Mr Gibson on 21 April 2017, and the schedule annexed to the Business Sale Agreement which lists the tangible assets and their assigned values.
[156]The IM provided financial information on the business, and an asking price of
$2 million. That price was broken down into key items including “the assets of Plumbco as a going concern”, and “Fixed Assets at $100,000”.
[157]On a separate page, under the heading “Tangible Assets”, it was stated:
Tangible Assets are made up of the physical items contained within the business, and are best descried as Plant and/or Fixtures & Fittings. This includes the office furniture, computers, leasehold improvements etc used within the business and being sold with the business. Tangible Assets are generally stated at the depreciated book value.
(emphasis added)
[158] There were various disclaimers contained on the front page of the IM. These included no representation clauses and a direction that all recipients were obliged to rely on their own investigation and judgment in determining whether to enter a contractual relationship. Neither party drew my attention to these disclaimers, and they were not relied on by PNZ in defending the claim. For that reason, I have not taken them into account in reaching my conclusions on reliance and causation, although they are clearly relevant to those aspects of PCCL’s counterclaim.
[159] The fixed asset component of the purchase price did not remain at $100,000, and the overall asking price changed. The final sum stipulated in the Business Sale Agreement was $530,000. This was broken down in the schedule which provided:
Plumbco Business Assets
Stock
Plumbing Stock, est.11 $ 230,000 Fixed Assets
Plant & Equipment Power Tools $ 27,000 Scaffolding, Ladders $ 20,000 Hand Tools $ 10,000 Lasers & Specialist Equipment $ 50,000 HDPE Welders, Generators $ 30,000 Draingage [sic] Equipment $ 40,000 Office Equipment, Computers $ 25,000
11 The parties agree that the stock figure of $230,000 was an error. The correct sum is $350,000 as provided on the front of the Business Sale Agreement.
Warehouse equipment, 8x Containers $ 20,000 Site Office $ 8,000 Total Plant & Equipment $ 230,000 Vehicles
Mitsubishi Triton JSK308
$ 30,000
Mitsubishi Triton KAR598 $ 30,000 Holden Rodeo CMU443 $ 8,000 Toyota Camry CQR375 $ 6,000 2x Mitsubishi L300 Vans $ 16,000 Total Vehicles $ 90,000 Excavators & Loader
Kobelco 5 Tn Excavator SK50SR-3
$ 35,000
Kobelco 4 Tn Excavator SK40SR-2 $ 32,000 Yanmar 2 Tn Excavator VIO20 $ 18,000 Komatsu Loader WA40-3EO $ 45,000 Kobelco 13.5 Tn Excavator $ 80,000 Excavators & Loader TOTAL $ 210,000 TOTAL
$ 530,000
[160] PCCL says that there was a representation that $530,000 of tangible assets would be transferred “generally” at “depreciated book value”.
[161] The claim was not defended on the basis that the statement in the IM was not an actionable representation and I did not hear argument on that point. I proceed on the basis that the statement was an actionable representation and turn to consider its meaning and scope.
Meaning and scope
[162] The word “generally” requires separate comment. Mr Branch submits that “generally” means that PNZ was required to identify which items were not at book value. Without that advice, he submits that book value “would be assumed and required”.
[163] I do not agree that the representation in the IM imposed any obligations on PNZ in terms of identification of those assets that were transferred at book value and those which were not. The obligations on PNZ in terms of the sale and purchase of the business were as set out in the Business Sale Agreement, Variation, and Stock
Agreement. None of those agreements contain a positive obligation on PNZ to identify which assets were transferred at book value and which were not.
[164] Mr Andrews, for PNZ, submits that the word “generally” qualifies the statement regarding value. I agree. The word introduces an element of equivocality into the representation. It also introduces a degree of ambiguity. The representation could either mean that each of the tangible assets was offered in the general range or vicinity of the depreciated book value figure for that asset, or that the global value assigned to the tangible assets was generally in accordance with depreciated book value. That is, one asset might be well above depreciated book value, and another well under, but those overs and unders would level out so that the total asset value was generally in accordance with the total depreciated book value of all assets.
[165] The representation was that tangible assets were generally at “depreciated book value”. When cross-examined about the obligation to transfer assets at book value, Mr Lally stated that he believed market value was the measure used, not book value. PCCL accepted this evidence, and in closing submissions Mr Branch proceeded on the basis that the represented value was “market value”.
[166] That approach was adopted as a means of simplifying the claims. However, it has implications for the inducement, reliance, causation, and loss elements of each cause of action. Most significantly, I consider the concession suggests that Mr Gibson was not relying on the representation in the IM at all. Rather, he assumed the values in the schedule were market values and proceeded on that basis. My reasons for reaching that view are explained further below.
[167] As to the scope of the representation, Mr Andrews submits that it only relates to $100,000 of tangible assets as that was the sum mentioned in the IM. I do not consider the representation to be capped at $100,000. The representation in the IM is in relation to tangible assets offered for sale by PNZ, rather than the total value of those assets offered at that time.
[168] However, I do not consider the representation applies to the Vehicles, Excavators and Loaders. Those assets were all owned by the Lally Family Trust. They
did not form part of the pool of assets offered for sale in the IM but were instead offered for sale in an email from Mr Vernon Tava (Mr Tava’s son) to Mr Gibson on 18 May 2017. The email attached a list of Plant and Equipment. In his covering email, Mr Vernon Tava explained:
You’ll see in the stock, plant and equipment list attached that the vendor has divided the assets between three entities: Plumbco (which is on sale), Hydraware and the Lally Trust.
An estimated $200k of stock and $230k worth of the listed equipment will be included in the sale price of Plumbco NZ Limited. The Hydraware and Lally Trust items are additional to the sale price.
[169] The list highlighted those assets which were owned by the Lally Family Trust. Values were listed next to each asset. These are the same Vehicles, Excavators and Loaders, and the same associated values, found in the schedule to the Business Sale Agreement. It was clear from the email and list that these assets were being offered in addition to the PNZ items for sale.
[170] Mr Gibson’s offer dated 28 May 2017 followed this email. It included an offer for the Excavators and Loaders (mistakenly recorded as having a value of $449,000) at a 20 per cent discount from the stated price. Mr Tava responded to this offer in an email dated 29 May 2017 pointing out the error and explaining the change in the asking price and the fixed assets included in the sale. Mr Tava stated that the asking price had increased to “circa $2.7 million ($2.54 million with optional purchases)”. Included in that asking price was fixed assets of $450,000 including vehicles and excavators, but not including a 13.5 ton excavator. The 13.5 ton excavator was offered for sale at $80,000.
[171] Properly construed, I consider the list attached to the email of 18 May 2017 constituted an offer of sale of those items at the price listed in the schedule. It was an offer independent of any representations in the IM which only related to the PNZ assets then offered for sale. Any representation as to value contained in that IM did not affect the additional assets offered for sale. PCCL’s counteroffer to purchase those assets at a 20 per cent discount suggests that Mr Gibson construed the offer for those assets in that same way. Ultimately, PCCL accepted the offer to buy the Lally Family Trust
assets at the values stated in the email of 18 May 2017 when Mr Gibson executed the Business Sale Agreement.
[172] In summary, to the extent that there is an actionable misrepresentation arising out of the IM, I consider it only captures those tangible assets offered for sale by PNZ. The exclusion of the Vehicles, Excavators and Loaders means any claim is limited to the Plant and Equipment as listed in the schedule. The remainder of the analysis is focused on those categories of assets.
Inducement and causation
[173] To prove a claim for misrepresentation under s 35 of the CCLA, PCCL must show that the misrepresentation induced entry into the contract. That is, PCCL must show that the misrepresentation was relied on, and was one of the reasons why the contract was concluded.
[174] To establish entitlement to relief under s 43 of the FTA, PCCL must show that the misleading and deceptive conduct was the cause, or an effective cause, of any loss. If one of the effective causes of loss was the claimant’s own conduct in failing to take reasonable care to look after their own interests, the Court may exercise its discretion as to whether the full amount of the loss should be recoverable.12
[175] As previously noted, I consider the evidence suggests that Mr Gibson did not rely on the representation in the IM when entering into the Business Sale Agreement. I rely on the following strands of evidence in reaching that conclusion.
[176] In assessing reliance and inducement, I have taken into account the context in which the representation was made. The statement as to tangible assets was only a small part of a raft of financial information set out in the IM. As already noted, the representation itself had a degree of equivocality, and the specific tangible assets the subject of the sale were not listed. There was an exchange of further information, and the offer changed, in the months between Mr Gibson receiving the IM and the conclusion of the Business Sale Agreement. Most notably, this included the offer of
12 Fair Trading Act 1986, s 43; Red Eagle Corp Ltd v Ellis [2010] NZSC, 20, [2010] 2 NZLR 492 at [30]; see also Shabor Ltd v Graham [2021] NZCA 448 at [27].
additional assets (the Vehicles, Excavators and Loaders), not owned by PNZ, and which I have found, were offered (and accepted) at a stipulated price.
[177] Mr Gibson conceded in his evidence in chief that he “did not expressly proceed on the basis that every item would be transferred to PCCL at depreciated Book Value”. I accept that this concession could mean that Mr Gibson was working on the basis that the total value of the assets to be delivered would be generally in accordance with book value (the second meaning of “general” at [164]). However, when weighed together with the other evidence called at trial, I consider it to be a concession that Mr Gibson was not really relying on the representation as to book value when deciding to proceed with the purchase. Mr Gibson’s main concern was whether the values listed in the schedule were market values for those assets.
[178] That finding is substantiated by the fact that Mr Gibson said he was seeking valuations of the Plant and Equipment prior to executing the Business Sale Agreement. The purpose in doing so was to verify the values in the schedule. When cross- examined about his attempts to obtain valuations during the due diligence period, Mr Gibson said:
A.No. I did ask for valuations on numerous occasions, there were I think probably May, June and possibly, well May and June, I’d asked for plant lists and I was told that couldn’t provide a plant list because items were coming back from Papua New Guinea, you know, there was negotiations going on and there was, what was included, what wasn’t included, Jason was going on holiday, there were some items, the two items, plant list and the stock point of due diligence that we were supposed to sort out in 10 days, there wasn’t time to do that so there was –
Q.What do you mean “wasn’t time to do it”? Couldn’t you get a valuer on the weekend to go and organise it, did you try?
A.No, I didn’t, we were talking just a few days and I didn’t try, though, but I did put a lot of reliance on honesty and it wasn’t that, there wasn’t a definite obligation for me to get a valuation, it was my own wish so that I could have, if I was told that a digger was worth 80,000 and it was worth 80,000 then, okay, well I’m happy with all the digger prices. If I was told that a digger was 40,000 and it was 20,000 well then I wouldn’t be happy. If it was sold at 40 and it was worth 60 then I'd be happy so for me it was trying to limit risk. I wanted to, I’m buying a business and it’s a substantial business in an area where there’d be a lot of reliance on people other than myself and so that the value of the materials if it all went bad I would have a sum $530,000, that I know that I could, you know, retrieve.
Q. So they’re very important, why didn’t you try harder to get the valuation, that’s my proposition to you.
A. Well as I said, you know I maybe foolishly put two [sic] much reliance on vendor honesty and for that matter, what I was being told from, Ivan was what was been told to him from Jason I’m assuming, and if all the plant isn’t there, then you can’t get the valuation for the plant. I needed a plant list to at least have an idea of what was coming, so I put a lot of reliance of the values that was stated in the plant stocklist for the sale and purchase agreement.
Q. Do you accept that it can’t have been complete reliance or you wouldn’t have bothered trying to get the valuation in the first place and asking for them. Do you accept that?
A. To a degree I would, because there is a difference – for me there is a difference having faith that you’ve been told the truth and having, questioning whether you have told a lie.
Q.Be precise please. What truth are you talking about and what lie are you talking about?
A.If somebody says to me: “That digger is worth $80,000,” I expect it to be $80,000.
Q.Isn’t that naïve? You’re an experienced commercial businessman. People have asking prices all the time, they can pitch high, couldn’t they?
A. Yes they could but in I’m, it said it was at the depreciated value.
[179]There are three points to be made about this passage.
[180] First, it is evident that Mr Gibson wanted valuations to verify the figures. The purpose of doing so was to verify the market value of the assets stated in the schedule. That was important to Mr Gibson (and PCCL) because if the business failed, PCCL could at least recover the market value of those assets on any re-sale.
[181] Second, in the absence of any valuations of these assets, Mr Gibson was placing trust in Mr Lally that the values in the schedule were accurate. In other words, despite what he says in the final lines of this passage, Mr Gibson was not relying on the accuracy of the representation as to depreciated book value, but the integrity of Mr Lally in assigning market values to the assets listed in the schedule.
[182] Third, and relatedly, Mr Gibson’s main concern was with the value of the Vehicles, Excavators and Loaders. That is understandable given these were the highest
value items he was purchasing. As I have already found, however, these items were not captured by the representation in the IM but were offered for sale at a specified price. Mr Gibson’s concern was to check the market value of these items, rather than check whether they were being offered at the depreciated book value.
[183] I reject any suggestion that Mr Lally did not provide Mr Gibson with the information sought and prevented him from completing due diligence. The documentary record shows that Mr Gibson sought, and was provided with, further information prior to entering into the Business Sale Agreement. There is no reason to suggest that information required to verify the figures in the schedule would not have been provided if requested.
[184] After the Business Sale Agreement was signed, and during the due diligence period, Mr Lally says that Mr Gibson had full access to the business. Those rights of access were secured to Mr Gibson under clause 18.1 of the Business Sale Agreement which governed due diligence. There was no complaint at the time, or subsequently, about access to the business or the relevant records during the due diligence period.
[185] Events after the Business Sale Agreement was declared unconditional are also relevant. It seems clear that Mr Gibson still intended to obtain valuations of the Plant and Equipment after the Business Sale Agreement was executed, and even after the due diligence clause had been declared satisfied in the Variation signed on 14 July 2017. That intention was evidenced in an email Mr Gibson sent to his lawyer on 24 August 2017. I also accept that it seems likely that there was a discussion about obtaining valuations at some point in time, although there is insufficient evidence to find that there was an agreement between the two men to this effect.
[186] Even if there was agreement, however, I am satisfied that Mr Gibson subsequently changed his mind. Mr Lally’s evidence on this point was as follows:
During the stocktake at Whitehills Road farm in late September 2017, Mr Gibson told me that he would review items of plant and equipment stored at the farm once we were done counting the plumbing stocks. We finished counting the plumbing stocks on the afternoon of 28 September 2017, and on 29 September 2017, Mr Gibson told me that he was over the stocktake; that he was satisfied with the items of plant and equipment and would not proceed with the recording and valuation process; and that he was happy with the
purchase price under the agreement for sale and purchase dated 5 July 2017. In other words, he was happy to ‘move on’.
[187] I accept Mr Lally’s evidence. His account is consistent with Mr Gibson’s general approach to the negotiations and stocktake at that time. Mr Lally’s evidence also explains why Mr Gibson did not mention the need for valuations in his correspondence sent on 3 October 2017 or at any time after.
[188] The fact that Mr Gibson had an opportunity to check the figures himself does not, Mr Branch submits, relieve PNZ of any liability for misrepresentation. I agree. The inclusion of a due diligence clause in the Business Sale Agreement, and the fact that it was conducted poorly (or not at all), will not relieve a party of liability for misrepresentation.13 But the steps that Mr Gibson took to verify the values in the Business Sale Agreement, and what he ultimately relied on in going ahead with the sale, is relevant to the assessment of reliance, inducement, and causation. Those assessments are to be made as a matter of fact.14
[189] When this evidence is weighed in its entirety, I consider it tends to suggest that Mr Gibson was not relying on the representation made in the IM when he entered into the Business Sale Agreement. Rather, he had decided to rely on independent valuations of the assets. The focus of his concern was to check that the values in the Business Sale Agreement were market values, rather than depreciated book values as represented. Later, Mr Gibson decided to simply accept that the figures stated in the Business Sale Agreement were market values and he reposited trust in Mr Lally that this was the case. This is consistent with the approach PCCL took at trial to this cause of action, which was to simply accept Mr Lally’s evidence that the assets were to be transferred at market value, rather than depreciated book value, and proceed on that basis.
[190] Based on this evidence, I am not satisfied that PCCL can show that it was induced by the representation in the IM to enter into the Business Sale Agreement.
13 Best of Luck Ltd v Diamond Bay Investments Ltd HC Auckland CIV-2017-404-2043, 11 October 2007 at [132].
14 See Shabor Ltd v Graham [2021] NZCA 448 at [49] in relation to the assessment under s 43 of the FTA.
Even if there was inducement, the evidence suggests there was no causal link between the representation and any subsequent loss.
[191] This is fatal to both the claim for misrepresentation under s 35 of the CCLA and the claim for relief under s 43 of the FTA. For completeness, I record that if I am found to be wrong in those conclusions, then, at the very least, Mr Gibson’s conduct would warrant a discount in any damages awarded.15
Breach and loss
[192] Although my findings set out above are sufficient to dispose of the counterclaim, I can indicate that PCCL would also have faced difficulties in persuading me that there had been a breach in relation to the Plant and Equipment which had caused it loss. Mr Branch described this aspect of the claim as “messy”. I consider that to be an understatement.
[193] PCCL concedes that, in relation to the Plant and Equipment, it is not possible to identify what individual assets were supposed to be transferred, and so the book value of those assets cannot be calculated. As an alternative, PCCL says it has determined the book value of what it says was delivered, and then calculated the shortfall in value, taking into account those items of Plant and Equipment where the value is not challenged.16 The value of the items delivered and not challenged are calculated by PCCL to be $98,985. On this basis, PCCL seeks $130,015 being the sum required to bring the represented value to $230,000.
[194] I do not consider this alternative approach to be appropriate for the assessment of damages. Even if it were, it is not supported by the evidence. The approach relies on a joint stocktake of Plant and Equipment undertaken by Mr Gibson and an ex-PNZ employee as to what was delivered. I accept Mr Lally’s evidence that Mr Gibson’s list appears to be incomplete or includes items that were not charged as part of the sale. I prefer Mr Lally’s evidence and a list he prepared at the beginning of 2018. The list was comprehensive and captured items used in the business. Mr Lally knew more
15 As I did not receive submissions on this point, I decline to indicate the level of discount I would have otherwise awarded.
16 Scaffolding, office equipment, warehouse equipment, containers, and site shed.
about the business than Mr Gibson and the ex-employee, and his list of assets is likely to be more reliable. Given this evidence, I would not be confident that PCCL’s calculations of loss were based on an accurate assessment of what had been delivered as part of the sale.
[195] PCCL blames PNZ for this evidential vacuum. But I consider this blame to be misplaced. I am not satisfied that PCCL has done enough to require PNZ to produce evidence to show that the Plant and Equipment was transferred at depreciated book value. Indeed, to blame the vendor for not providing the information required to show the representation relied on was breached, and loss has been suffered as a consequence, rather undermines the integrity of the misrepresentation claim.
Conclusion
[196] In sum, to the extent there was an actionable representation, it only related to the Plant and Equipment and did not capture the Vehicles, Excavators and Loaders. This representation did not induce PCCL to enter the Business Sale Agreement, or if it did, it was not an effective cause of any loss. The evidence also falls short of proving breach and loss in relation to the Plant and Equipment category of assets. For these reasons, I am not satisfied that PCCL can establish its claim in misrepresentation. The claim is accordingly dismissed.
Did Mr Lally repudiate the Consultancy Agreement?
[197] Mr Lally on the one hand, and PCCL on the other, make claims under the Consultancy Agreement.
[198] The Consultancy Agreement was drafted as a subcontract agreement between PCCL as the contractor and Mr Lally as the subcontractor. The agreement was for “Plumbing, Gasfitting and Drainage Consultancy” from 2 October 2017 to 1 October 2018. It recorded the sum of $125,000 (plus GST) as the “Subcontract Sum”. Mr Lally was obliged to carry out the “subcontract works” in accordance with the terms of the Consultancy Agreement, and the annexed schedule which provided:
The subcontractor is to assist and Consult [sic] the Contractor to maintain all Plumbco Commercial and Civil Ltd company procedures as documented in
the company files. The term is for 12 months with an average of 20 hours per week over 2 – 3 days per week for 48 weeks of consultancy as mutually agreed by the Subcontractor and Contractor.
Payments will be the 20th of each calendar month for works achieved to that date in that month. Monthly progress claims from the Subcontractor will be approved by the Contractor and paid to the Subcontractor on GST invoice submitted by the Subcontractor.
[199] Mr Lally seeks judgment against PCCL in the sum of $107,812.50 (incl GST), being the sum of unpaid invoices for consulting fees issued by Mr Lally from January 2018 to September 2018.
[200] PCCL admits that it has not paid Mr Lally consulting fees. It defends the claim on the basis that Mr Lally repudiated the Consultancy Agreement by ceasing to provide services from 9 January 2018 and cancelling the Agreement thereafter.
[201] The determination of both claim, and counterclaim, turns on whether Mr Lally repudiated the Consultancy Agreement.
Section 36 of the Contract and Commercial Law Act 2017 provides:
36 Party may cancel contract if another party repudiates it
(1)A party to a contract may cancel the contract if, by words or conduct, another party (B) repudiates the contract by making it clear that B does not intend to—
(a)perform B’s obligations under the contract; or
(b)complete the performance of B’s obligations under the contract.
(2)This section is subject to the rest of this subpart.
[203] As s 36 indicates, repudiation may occur by words or conduct. What amounts to repudiation is a question of fact and must be determined objectively, from a consideration of all the circumstances.17 Repudiation will not be lightly inferred, and the evidence must show an “unequivocal intention not to perform the contract”.18
17 Devonport Borough Council v Robbins [1979] 1 NZLR 1 (CA); Starlight Enterprises Ltd v Lapco Enterprises Ltd [1979] 2 NZLR 744 (CA); Forslind v Bechely-Crundall 1922 SC (HL) 173; and Mt Pleasant Estates Co Ltd v Withell [1996] 3 NZLR 324 (HC).
18 Kumar v Station Properties Ltd [2015] NZSC 34 at [58].
[204] PCCL relies on an Mr Lally’s email dated 9 January 2018 to Mr Gibson as evidence that Mr Lally did not intend to perform his obligations under the contract. That email provides:
Hi Mike
Your recent emails have required some time to respond to due to the holiday period and the obvious conflict to our Sale and Purchase Agreement. Please see my response in red below.
The process you have chosen on stock has less than impressed me, and I will review my final position on returning to Plumbco CC when this has been resolved. At this time, I will not be returning to Plumbco Commercial and Civil Limited.
My lawyers have been advised of the current situation are not available until after the 15th of January 2018 and I don’t believe much more can be done or commented upon without their advice.
Jason Lally
[205] Mr Lally included comments in red ink in response to the various points made by Mr Gibson in his email dated 28 December 2017.
[206] When the content of this email is assessed in light of the high threshold for a finding of repudiation, I am not satisfied it constitutes sufficient evidence of an unequivocal intention not to perform the contract. I say that for the following reasons.
[207] First, the timing of the email is significant. It was sent on 9 January 2018 and was in response to an email sent by Mr Gibson on 28 December 2018. This was during the summer holiday period, which Mr Lally referred to in the opening line of his email. In that context, Mr Lally’s statements about returning to PCCL could be interpreted as returning to the office after the holiday break. That is, he would continue working for PCCL, but not from PCCL’s workplace in Albany. There is nothing in the Consultancy Agreement which makes the place of work an essential condition.
[208] Second, the email does not state that Mr Lally will not return to work at all. Rather, Mr Lally indicates that he will “review” his “final position” on returning when the dispute over stock has been resolved. There is equivocality in that expression. The last paragraph of Mr Lally’s letter also makes it clear that he is unable to progress matters until his lawyers return on 15 January 2018 and he has an opportunity to take
their advice. That is inconsistent with an unequivocal intention not to continue to provide consultancy services under the terms of the Consultancy Agreement.
[209] Third, Mr Gibson does not appear, at least initially, to have interpreted Mr Lally’s email as a repudiation. On the day after Mr Lally sent his email, 10 January 2018, Mr Gibson responded to Mr Lally saying, “ok that is fine I shall wait until I hear further from your people”.
[210] Fourth, Mr Lally’s conduct after sending this email is also inconsistent with an unequivocal intention not to perform the contract. On 10 January 2018, Mr Lally wrote to a prospective client in respect of a large apartment project. I accept his evidence that he continued to answer phone calls from clients and PCCL staff. He continued to assert his intention to work even though PCCL removed his access to his work email address and the PCCL database. On 2 February 2018, Mr Lally wrote to Mr Gibson seeking to have his email reinstated and said, “irrespective of email access, I intend to carry on my role under that contract until it ends”.
[211] Fifth, an adverse inference cannot be drawn from the removal of furniture from the office after it had closed for the summer break. There is no dispute that Mr Lally removed certain items of furniture from PNZ’s office during the holiday break. He also took personal effects. Mr Lally says the removal and replacement of furniture had been previously agreed to by Mr Gibson. By agreement, the removed furniture was replaced with items belonging to the Lally Family Trust. Mr Lally says that he timed the removal of furniture so that it did not impact on work and coincided with when he was moving house.
[212] I prefer Mr Lally’s evidence on this point. It is substantiated by a letter from Mr Gibson to Mr Lally dated 3 October 2017 in which Mr Gibson states that he is happy for Mr Lally to “take the office desks, cupboards and chair but if you could replace with similar so not to disrupt work”. Removing these items during the summer break minimised any disruption to work. Considering this prior agreement, it cannot be inferred from the removal of the furniture that Mr Lally was evincing an intention not to comply with the terms of his Consultancy Agreement.
[213] Sixth, the letter Mr Lally wrote on 20 February 2018 to Mr Gibson does not offer much assistance. In that letter, Mr Lally referred to his unpaid invoice for January and states that he would need to consider notifying relevant authorities that his Gasfitting Certifier’s licence had not been eligible for council inspections and project certification since 8 January 2018. Mr Lally says in the letter that he will hold off making this notification until 23 January 2018 (presumably, February) otherwise Mr Gibson would need to employ another certified plumber and gasfitter. Mr Lally subsequently informed the Plumbing and Drainage Board that he was no longer certifying for PCCL.
[214] I do not consider this strand of evidence assists in determining Mr Lally’s intention at the time he sent the email on 9 January 2018. By the time the 20 February 2018 email was sent, Mr Lally had been prevented from accessing his work email and databases. This had disabled him from certifying work. Mr Lally said he wanted to ensure that his certifying number was not being used improperly. Whatever Mr Lally’s motivation for contacting the Plumbing and Drainage Board, it does not support an inference of an unequivocal intention not to perform the Consultancy Agreement.
[215] Similarly, reliance on a report by the Plumbing and Drainage Board about a complaint dated 30 January 2019 does not alter the conclusions. The complaint was made by third party (another registered plumber) against two PCCL employees, including the certifier that replaced Mr Lally. The complaint was in relation to an apartment in Auckland.
[216] Mr Lally was interviewed as part of the investigation into the complaint. The report notes Mr Lally stating that the business was sold before the relevant apartment complex was completed, and that while Mr Lally was contracted to stay on with the new company for 12 months, he left in December 2017. It goes on to report that Mr Lally had nothing more to do with the business from mid-December 2017.
[217] Mr Lally says that the report writer must have misinterpreted what he was saying. He says he told the Board when he last performed certifying duties for PCCL and that the reference to leaving in December 2017 was to “leaving” on holiday. There
is nothing to contradict Mr Lally’s evidence about what he would have said to the investigator, and there is no reason to doubt his evidence.
[218] There are also obvious difficulties in relying on this report. The statements recorded are an interpretation of what Mr Lally said and the report writer was not called to give evidence. The investigation was about a complaint made in August 2018, and the report itself was dated 2019. This was well after the 9 January 2018 email relied on by PCCL.
[219] In light of the high threshold for finding repudiation, I do not consider this evidence is sufficient to tip the balance.
[220] To recap, I find that Mr Lally did not evince an intention not to perform or complete the Consultancy Agreement on 9 January 2018 or at any time thereafter. PCCL’s purported termination of the Consultancy Agreement was itself a repudiation of the agreement, and the failure to pay his invoices was in breach.
[221] The quantum sought by Mr Lally was not disputed. Nor was the interest claimed on each of the monthly instalment dates from the dates they fell due. In the absence of any opposition, damages and interest will be awarded to Mr Lally as claimed.
[222] Mr Lally’s claim for the payments due under the Consultancy Agreement is allowed. PCCL’s counterclaim is dismissed.
Result
[223] The plaintiffs have been wholly successful in their claim. Except for those counterclaims admitted by PNZ, the defendants are unsuccessful in their counterclaims.
[224]The first defendant shall pay the first plaintiff the following sums:
(a) $350,363.05 for stock;
(b)$70,500 for the vendor finance loan instalment;
(c)$1,343.85 for interest on the late earnout payment;
(d)$39,413.67 for retentions;
(e)Interest on (a) and (b) above at 10 per cent per annum from the dates set out in the memorandum of counsel for the plaintiffs dated 22 November 2023. This award is made pursuant to cl 3.6 of the Business Sale Agreement and s 22 of the Interest on Money Act 2016.
[225] The first defendant shall pay the second plaintiff $93,750 plus GST being the total of monthly instalments of $10,416.67 plus GST for payments due under the Consultancy Agreement.
[226]The plaintiff shall pay the first defendant the sum of $55,559.29 for retentions.
[227] The first plaintiff’s claim for interest under s 10 of the Interest on Money Act 2016 on the sum in [224(d)] requires clarification given the contractual context in which the claim arises. The parties’ claim for interest on the sums in [225] and [226] under s 24 of the Interest on Money Act 2016 do not comply with s 25(2)(a) of that Act in that the interest rate is not specified. The parties are granted leave to file memoranda within 10 working days of receipt of this judgment addressing these issues.
[228] The plaintiffs’ claims and the defendants’ counterclaims are allowed to the extent of the above orders but are otherwise dismissed.
[229] PNZ is the successful party and is otherwise entitled to an order of costs. I urge the parties to take a reasonable and proportionate approach to costs. The costs principles applicable under the High Court Rules 2016 are settled. They provide guidance to the parties to assist in the quantification of costs in a cost-effective way.
[230] If costs cannot be agreed, the plaintiffs shall file a memorandum in support of the claim for costs within 10 working days of delivery of this judgment, and the defendants shall file a memorandum in response five working days thereafter. Costs memoranda shall be no longer than five pages in length.
Edwards J
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