Tasman Liquor Company limited v Nine Paddocks Limited and Jones

[2009] NZCA 593

IN THE COURT OF APPEAL OF NEW ZEALAND

CA492/2009
[2009] NZCA 593

BETWEENTASMAN LIQUOR COMPANY LIMITED

Appellant

ANDNINE PADDOCKS LIMITED

First Respondent

ANDSTANLEY WILLIAM JONES

Second Respondent

Hearing:19 November 2009

Court:Ellen France, Gendall and Harrison JJ

Counsel:N F Flanagan for Appellant

A D G Hitchcock for Respondents

Judgment:14 December 2009 at 2.30 pm 

JUDGMENT OF THE COURT

A            The appeal is dismissed.

BThe appellant must pay the First Respondent’s costs for a standard appeal on a Band A basis plus usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Gendall J)

Introduction

[1]        Tasman Liquor Company Ltd (Tasman) purchased a liquor distribution business from Nine Paddocks Ltd but withheld $222,948 on the amount required under the Agreement for Sale and Purchase because it contended that the vendor had breached a warranty in the Agreement.  The warranty related to disclosure of all material contracts.  Tasman brought a counterclaim for that amount but this was dismissed.  Consequently, the vendor’s claim for the balance of the purchase price succeeded: HC INV CIV-2008-425-000354 24 July 2009 Fogarty J. 

[2]        Tasman appeals against the Judge’s dismissal of the counterclaim.

Background

[3]        The historical narrative is somewhat complicated but for our purposes can be summarised as follows.

[4]        The wholesale liquor distribution business which was sold involved the supply of liquor products to bars in the South Island.  The business was originally owned by Mr R Quirk.  He had also operated 28 bars in the South Island, which were supplied by his separate liquor distribution business. 

[5]        A number of those bars had received development assistance from Lion Nathan (Lion), a substantial liquor company which manufactures alcoholic and other beverages.  The bars were subject to Outlet Supply Agreements (OSA).  These agreements, common in the liquor outlet industry, arose where a brewer such as Lion provided funds for outfitting and developing a bar in return for an undertaking that only its products could be sold at the bars and they had to be purchased direct from Lion.  Purchase through an intermediary wholesaler liquor outlet, such as Mr Quirk’s distribution business, was not permitted to qualify for a rebate in the absence of a specific agreement by Lion. Lion had agreed to Mr Quirk’s business supplying the bars, reflecting the fact that it did not have a ready means of distribution in the relevant area of the South Island.

[6]        The wholesale liquor business was sold by Mr Quirk to Mr S W Jones’ company (Edge Distribution (2004) Ltd) which was owned by Nine Paddocks Ltd. 

[7]        In 2005 Nine Paddocks lent Mr Quirk’s bar operation business, CEA, $250,000 and concluded a distribution agreement which required the bars to purchase all liquor products from Nine Paddocks for ten years.  When Nine Paddocks sold the distribution business to Tasman the distribution and loan agreements were assigned to Tasman. 

[8]        The consideration in the sale agreement of $1.85 million had allocated goodwill at $719,615.  Warranties were given by Nine Paddocks, supported by Mr Jones, including:

13.1The Vendor and the Covenantor have disclosed to the Purchaser details of all material contracts which relate to the Business or to which the Vendor is a party in relation to the Business.

....

14.1The Vendor and the Covenantor warrant that:

....

(d)The CEA Distribution Agreement and the Term Loan Agreement contain the entire agreement between the parties relating to the subject matter of this CEA Distribution Agreement and the Term Loan Agreement [the agreements referred to in [7] above] respectively and there have been no variations or amendments thereto.

[9]        After the sale of the business to Tasman, Lion withdrew its waiver or concession to the terms of the OSA, that it had afforded to Mr Quirk.  So the bars were no longer able to receive direct supplies from the intermediary liquor distribution company, but were required to adhere to the OSAs and purchase direct from Lion.

The claim and counterclaim

[10]       Tasman did not make all payments required under the agreement, withholding a sum in excess of $269,000.  It contended there had been a breach of warranty or misrepresentation on the part of Nine Paddocks through Mr Jones.  When Nine Paddocks claimed for the outstanding amount, Tasmani counterclaimed on the basis that Mr Jones did not disclose a material contract, namely, an agreement that existed between Lion and the companies which operated the bars, to the effect that Lion:

(a)would waive its right to exclusively supply liquor to the bars and/or allow them to purchase Lion products by buying through Nine Paddocks, and not directly from Lion;  and

(b)that the existence of such agreement, namely Lion’s waiver of its rights to require direct purchase from it of its products, on conditions, was not disclosed in breach of the warranty in clause 13.1.

[11]       The counterclaim also contended that there was a breach of the warranty in clause 14.1 by Nine Paddocks because the allied Distribution Agreement and Term Loan Agreement did not “contain the entire agreement between the parties”.  No argument was advanced that the warranty in clause 14.1 had relevance for the disposal of the issues on this appeal.

[12]       The counterclaim for $222,948 was founded on the basis that the goodwill to be paid was greater than otherwise would have been agreed to.

Judge’s factual findings

[13]       The critical factual findings of Fogarty J were:

·     Mr Jones/Nine Paddocks did not know of the restrictive OSA between Lion and the bars.  

·     Mr Jones/Nine Paddocks did not know of any waiver of that agreement or its consequences. 

·     When Mr Jones acquired the contract to supply as distributor to the bars, he knew and obtained an assurance of continuity of supply from Mr Quirk.  He was not put on notice that Lion might intervene, or would be able to do so by reason of any OSA and nor was there any further duty of enquiry on his part.

·     When Mr Jones acquired the distribution business from Mr Quirk he was told that Lion had “allowed” supply of products to the bars, but that such advice was readily understandable given that Lion did not have a warehouse facility in Central Otago from which the products could be distributed.

·     It did not follow that any such knowledge or belief meant that Mr Jones knew anything more about the underpinning restriction or the waiver of it.

Counsel’s submissions

[14]       On behalf of Tasman, Mr Flanagan advanced two propositions.  First, he challenged the factual findings of Fogarty J on the basis that they were unsupported by, and contrary to, the evidence.  Secondly, that a proper interpretation of the contract between Tasman and Nine Paddocks meant that the warranty required disclosure of any material contract whether known or not to Mr Jones. 

[15]       Counsel described the waiver or concession given by Lion to the bars as being a “side agreement”.  Mr Flanagan said the evidence was that Mr Jones had deposed he was aware of this “side agreement” but had not disclosed it to Tasman because Mr Quirk had done so.  However, counsel argued that Mr Quirk’s evidence was that he had not disclosed the “side agreement”.  Counsel was critical in this respect of the Judge’s factual finding that, despite proving Mr Jones knew that Lion “allowed” the supply of Lion products from Nine Paddocks, Tasman had not proved that Mr Jones knew or ought to have known that this reflected an agreement of materiality.  So counsel contended that Fogarty J was wrong to conclude as he did that Mr Jones did not know that there was a “specific agreement between Lion and [the bars].”

[16]       As to the interpretation of the warranty, Mr Flanagan argued that the obligation was absolute.  He pointed out that the clause in issue, clause 13.1, is not limited by any reference to actual knowledge.  That is contrasted with the warranty in clause 13.2 which refers:

To the Vendor and Covenator’s knowledge, the Vendor is not in breach of any material contract to which it is a party, which relates to the business.

[17]       It was also submitted that commercial efficacy can only be given to the contract by not limiting it to matters known to the vendors.

Discussion

[18]       The appellants did not contend or take issue on appeal with Fogarty J’s finding of fact that Mr Jones did not know of the existence of the OSA between Lion and Mr Quirk’s company. 

[19]       It is clear from the evidence, as noted by Fogarty J, that Mr Jones understood that when he acquired the distribution business from Mr Quirk he had the ability to supply Lion products direct to Mr Quirk’s bars.  He would not otherwise have made a loan of $250,000 to Mr Quirk’s interests or entered into the distribution agreement had he known that the distribution business was in a vulnerable position, subject to the whim of Lion.  But Mr Jones only knew that there could be direct supply by the distribution company.  That would always have been the case unless some restriction had been imposed upon the bars by an OSA.  But being unaware of the OSA, Mr Jones could not be aware of any variation of it.  Such variation or waiver was not a “side arrangement” or “side agreement” as described by Mr Flanagan.  As Mr Hitchcock submitted it was simply a waiver of the terms of the existing agreement between Mr Quirk and Lion, about which Mr Jones did not know.  The reasons the Judge gave for those conclusions are supported by the evidence. 

[20]       We do not see it as material that Mr Jones said Mr Quirk had told Tasman about the ability to supply and that Mr Quirk denied that.  Mr Jones was not talking there about a formal “side agreement” of the sort that would engage clause 13.1.  The evidence supports the Judge’s reasoning that even if Mr Jones knew that direct supply was “allowed”, this was insufficient to engage the warranty disclosure obligation.  Nor was there some obligation on Mr Jones to enquire because he had been put on notice, and such enquiry would have led to a disclosure obligation falling upon him.  Further, Lion’s ability to change the arrangement derived from an agreement of which Mr Jones was not aware.

[21]       We consider the Judge’s findings in favour of Mr Jones on those points were justified.  The person, on whom the duty to disclose is imposed in terms of the warranty provision, must not only know of the agreement but of its materiality. The material agreement was the OSA about which Mr Jones did not know and so could not have disclosed.  Fogarty J correctly concluded that the warranty contained in clause 13.1 did not require disclosure of contracts, material or otherwise, in respect of which Mr Jones was not aware. 

[22]       Where the warranty requires disclosure of material contracts there has to be a knowledge of the contracts (with the materiality being a separate matter for objective assessment), before the duty to disclose arises.  It is not possible to say that someone must disclose that of which they are unaware.  Here, earlier contracts existed not as between Mr Jones and a third party, because if so he would have been well aware of them.  But the Judge found on the facts that the arrangement under the OSA existing between Lion and Mr Quirk and his bar outlets was not something to which Mr Jones was privy. He could not have breached any duty imposed upon him in clause 13.1.

[23]       As Fogarty J noted, the intent of the warranty in clause 13.1 is that it includes any and all contracts of materiality to the business and not simply contracts to which the vendor and/or covenantor are parties.  That is not the position with clause 13.2 and the requirement of knowledge in that clause does not aid the appellant in its argument that its absence  from clause 13.1 must mean the clause 13.1 obligation is absolute.  The crucial words in clause 13.1 are “have disclosed” and we agree with Fogarty J that there cannot be disclosure without there being knowledge of that which should be disclosed.

Result

[24]       The factual findings reached in the judgment in the High Court dismissing the counterclaim were open to Fogarty J on the evidence, and those findings were not inconsistent.  There is no error in the Judge’s approach to the interpretation of clause 13.1.  The appeal is dismissed.

[25]       The appellant must pay the first respondent’s costs for a standard appeal on a Band A basis plus usual disbursements.

Solicitors:

Meredith Connell, Auckland for Appellant

AWS Legal, Invercargill for Respondents