Tool Team Limited v Tool Team 2010 Limited
[2017] NZHC 1381
•22 June 2017
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2015-485-822 [2017] NZHC 1381
BETWEEN TOOL TEAM LIMITED
Plaintiff
AND
TOOL TEAM 2010 LIMITED First Defendant
SHARON MARGARET GROVES Second Defendant
CHRISTOPHER PETER GROVES AND SHARON MARGARET GROVES
Third Defendants
Hearing: 7 - 13 February 2017 Counsel:
I R Millard QC for Plaintiff
M R Sherwood King and M A F Gilkison for DefendantsJudgment:
22 June 2017
RESERVED JUDGMENT OF ELLIS J
[1] On 23 June 2011 there was a fire in the Petone premises occupied by Tool Team 2010 Limited (TT10), a company owned by Christopher and Sharon Groves. A few months before the fire the Groves had done a stock-take which suggested that the company had much less stock than they had been led to believe when they purchased the business a year earlier. The business had previously been owned by Tool Team Limited (TTL), a company owned by Mr Wayne Gazley.
[2] TT10’s insurers, IAG, formed the view that the fire had been deliberately lit. TT10 sued IAG for refusing to pay out under its policy. But the proceedings ended prematurely when, during the trial, Mr Groves admitted to having made false statements to IAG about the value of the TT10’s stock. The value the company had
sought to recover equated to the price paid by Mr and Mrs Groves to Mr Gazley plus
TOOL TEAM LTD v TOOL TEAM 2010 LTD [2017] NZHC 1381 [22 June 2017]
or minus the value of items sold or restocked in the intervening period. The pre-fire stock-take, however, had suggested that the company had stock worth only about half that amount.
[3] These events have, unsurprisingly, been disastrous for the Groves. Mr Groves was sued by the owners of the Petone premises and is now bankrupt. And now, in these proceedings, TTL seeks to recover the outstanding purchase price for the business, which had been provided by TTL to TT10 by way of a 100 per cent vendor finance term loan. The loan was guaranteed by the Groves personally.
[4] It is not disputed that the bulk of the term loan remains unpaid. Rather, this judgment is concerned with matters of defence and counterclaim raised by TT10 and the Groves. They say that they should not be liable to pay the money because there has been a fundamental breach of warranty as to the value of the stock or that the representations made to them about that constituted misleading and deceptive conduct under the Fair Trading Act 1986 (the FTA).
[5] But before considering the merits of the defence and counterclaim it is necessary to say a little more about the background and the facts. The summary below is derived from the oral evidence given at the trial before me, the relevant documentation (such that it is) and aspects of the evidence from the earlier trial, which was put to various of the witnesses and was included in the common bundle.
The facts
[6] In 2006 Mr Gazley purchased two tool franchises from Toolshed Ltd (TSL), a company owned by Graeme and Wayne Giles, who are brothers. All TSL’s franchises operated under the name “Tool Shed”. TSL owned premises at 114 Hutt Road (Petone Tool Shed) and in Thorndon Quay (Wellington Tool Shed) and continued to lease these premises to TTL for the purposes of operating the two franchises.
[7] In 2008, TTL closed Wellington Tool Shed and moved all the stock from Thorndon Quay to Petone Tool Shed. And in 2009 Mr Gazley decided to withdraw completely from the Tool Shed franchise and began trading from the Petone
premises under the name “Tool Team”. Mr Gazley also told his accountant, Mr John Scutter, that he wished to get out of the tool business completely. He offered to sell the Petone Tool Shed business to the Giles brothers for between
$500,000 and $600,000, but they declined.
[8] Mr Scutter was also the Groves’ accountant. They told him that they were
interested in buying a business. Mr Scutter introduced them to Mr Gazley and, on
3 March 2010, the Groves told Mr Scutter that they wanted to purchase TTL. Agreement in principle was reached by 8 March 2010, and TT10 was incorporated two days later. Lawyers were instructed.
[9] Mr Scutter was engaged by TT10 in relation to the deal. In that capacity, he prepared a Special Report about TTL’s financial performance which included projections of financial performance for the 2011 and 2012 financial years.1 The Special Report was used by Mr Scutter when he applied to ASB for an overdraft on behalf of TT10.
[10] I interpolate at this point that Mr Gazley adamantly denies that Mr Scutter was also instructed by him in relation to the sale. But my own impression of the evidence is that the lines were not so clearly drawn. In any event, it seems to me that Mr Scutter was, potentially, conflicted. He was not called as a witness by either side at the hearing before me. The terms of sale, including the purchase price, were negotiated towards the end of March and the Agreement for Sale and Purchase (the ASP), the Term Loan Agreement (the TLA) and the security agreement were all executed on the 31st. There is no real dispute that Mr Gazley was consistent about the price he wanted, and that was the price ultimately specified in the ASP. The lease of the Petone premises was also assigned to TT10 at a rent of $71,400 per annum exclusive of GST. That lease expiry date was 31 December 2011 with no
right of renewal.
1 Much was made by the defendants of this Special Report during the trial. It was suggested on their behalf that the report was misleading and that Mr Gazley had had some hand in it. However the report was not pleaded and can have no bearing on the matters presently at issue. In my view it is a red herring.
[11] The TLA itself is unremarkable. It had a five year term, and the Groves agreed with Mr Gazley that repayments of interest only would be required in the first year. Clause 15 of the TLA provided for the payment of default interest at a rate of the official cash rate (OCR) plus 10 per cent (compounding daily) and for the payment of indemnity costs by the borrower in the event that the lender had to take recovery action in relation to either the loan or the securities.
[12] The ASP was in the Auckland District Law Society standard form. On the first page it recorded that the $650,000 purchase price comprised:
(a) $500,000 for stock in trade;
(b) $101,309 for intangible assets; and
(c) $48,691 for tangible assets. [13] It then states:
Maximum percentage stock value adjustment (clause 5.3) 10%
[14] Clause 5 of the Agreement’s General Terms of Sale deals with stock in trade.
It provides:
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 the 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 of the law society for the district where the premises are situated 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 solicitor 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 dale pay into the purchaser's solicitor's trust account a sum equivalent to the total of the maximum percentage of the estimated stock value and shall procure the purchaser's solicitor 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.
[15] Clause 6 of the agreement’s general terms of sale sets out the vendor’s warranties and undertakings, but none refers or relates to the value of the stock in trade.
[16] The joint stock-take contemplated by cl 5.2 took place a few days prior to the execution of the ASP, on 27 March. It was undertaken by Mr Gazley, Mr and Mrs Groves and Mr Scutter. There is something of a dispute about exactly what methodology was used but it suffices for present purposes to note that stock was checked against the MYOB stock list which was contained on Mr Gazley’s computer
and that there was a degree of sampling employed.2 Mr Scutter had made it clear to the Groves that there was a choice between the sampling methodology and a full stock-take but that the sampling process would be cheaper. In any event, at the end of this exercise, which took all day, it was agreed that the $500,000 figure for the stock was accurate.
[17] On 31 March the Groves arranged for TTL’s financial records to be migrated to TT10’s MYOB system. The stock entered totalled $464,615.85 but with negative items totalling $52,853.32. TT10 began trading on 1 April 2010.
[18] Because the lease on the Petone premises would expire at the end of 2011, by
January 2011 TT10 had begun looking for new premises.
[19] On about 27 January a full physical stock-take was performed by the Groves, and two employees. The MYOB stocklist was printed out. It was about 300 pages long. The outcome of the stock-take suggested that the value of the stock on the premises was around $260,000.
[20] Mr Groves raised this with Mr Gazley by email on that day saying:
Also can Sharon I and John have a meeting with you in February. We have just compleated [sic] a full stocktake and there is a lot of stock on the system but is not here and there is no record of it coming in in the last two years.
[21] Mr Gazley responded the next day saying that he was happy to meet although it seems a specific meeting for that purpose never occurred.3 On 19 March Mr Groves sent Mr Gazley a spreadsheet with a sample from the stock-take, which appeared to show negative or missing items worth approximately $36,000. Mr Gazley responded, stating he would endeavour to look at the list in a “non
official capacity”.
2 There was a dispute as to whether the stock list was printed off and also about the extent of the sampling.
3 Mr Gazley was, nonetheless, a reasonably frequent visitor to 114 Hutt Rd. Relations be tween him and the Groves during this time were generally cordial and supportive.
[22] The apparent discrepancy was also discussed by Mr Groves with Mr Scutter. Mr Scutter put the discrepancy down to either an accounting or MYOB error.
[23] In March 2011, Mr Ben Shaw of Active Accounting Ltd (Active) took over responsibility for TT10’s accounts from Mr Scutter. He was asked to check the MYOB figures. The inventory value reconciliation on 31 March showed stock valued at $242,843.67. In its first year of trading TT10 made a $95,000 loss.
[24] On 20 or 21 June 2011 TT10 signed a lease for new premises at 419 Hutt Rd. The first six months were to be rent free.
[25] In the morning of 23 June 2011 TT10’s business records were downloaded and backed up onto a hard drive. At about 6 o’clock that evening, about 15 minutes after Mr Groves left work, a fire broke out, extensively damaging the premises at
114 Hutt Rd and TT10’s stock. The computer server was badly damaged by the fire.
[26] TT10’s insurers, IAG were notified. IAG appointed Mr Glen Wong as their loss adjuster. The morning after the fire Mr Groves told Mr Wong that the value of the stock was $490,000.
[27] After the fire TT10’s server and the backup hard drive were removed from the premises and taken away by the fire safety officer. Mr Groves said that he was subsequently given a CD with a copy of the backup on it and that he gave this to Mr Shaw on a flash drive but that this was corrupted.
[28] While Mr Groves was at the premises the day after the fire a woman pointed out to him that there was a computer hard drive on the ground by his car which was parked outside. He maintained that he had no recollection of removing it from the computer and neither he nor his computer person was able to see that anything was on the hard drive. A few days after the fire TT10 started operating out of new premises at 419 Hutt Rd.
[29] On 27 July 2011 Mrs Groves prepared a document which set out certain post-fire events. That document makes it clear that by this time the insurance investigator suspected that Mr Groves had started the fire. It also noted that the copy of the MYOB records the Groves had been given by the insurance investigator was corrupt.
[30] Later on in the same document Mrs Groves recorded that they had bought the business from Mr Gazley:
… for a cost of $650,000 made up of $500,000 worth of stock which is being disputed with Wayne Gazeley [sic] in February we did a stocktake amounted to $260,000 I think. This is a battle still to be fought with Wayne Gazeley [sic].
[31] During August 2011 there was correspondence between solicitors instructed by the Groves and by Mr Gazley in relation to TT10’s ability to make payments under the TLA prior to receiving any payout from the insurers. In that context the Groves’ lawyer, Mr Sullivan, referred to there being a “live issue as to the value of the stock purchased from your client and the warranties given my instructions are that Tool Team is meeting the instalments as they fall due”. The suggestion that there had been any breach of warranty was firmly rejected by Mr Gazley’s lawyer.
[32] During this period the loss adjuster, Mr Wong, had been attempting to assess the quantum of the stock and contents loss suffered by TT10 as a result of the fire. His attempt at a physical stocktake was not a success due to the number of items and the damage from the fire. He attempted to obtain the relevant monthly and annual accounts to ascertain the relevant stock levels. Mr Groves told him he would need to get that information from his accountant, Mr Shaw.
[33] On 16 and 19 September Mr Shaw emailed Mr Wong, saying that he had had a good deal of trouble accessing TT10’s MYOB files and downloading reports because the file was corrupt. Mr Shaw said:
Wow what a mission!
Ok what I have here is the last available full inventory list via a stock code and cost (purchase) price. A huge list had to be scanned into 3 separate parts.
As well as this I have attached a copy of the balance sheet for MYOB that shows this value as well.
Unfortunately for the 22nd of June the day we are not able to print out a specific stock code and list. We do however have a ledger balance showing the cost price of the stock at that day.
We haven’t given up on this but as the file is corrupt it isn’t looking good,
the reports are massive as you can see and they keep shutting down here.
[34] Mr Groves and Mr Sullivan were both copied into this letter. The attached balance sheets were dated 31 January 2011 and 22 June 2011 (ie the day before the fire). They showed stock figures of $494,421.06 and $483,589.79 respectively. Mr Wong then used those figures to calculate that TT10’s stock loss claim, if covered by the policy, would be somewhere between $420,000 and $450,000.
[35] On 9 October 2011 the Groves both signed an NZI claim form in relation to the damaged stock. In the space in which the value of the property lost or damaged was required to be specified, they wrote “Refer to assessor Glen Wong”.
[36] On 28 October Mr and Mrs Groves signed off the Annual Accounts for TT10 for the year ending 31 March 2011. The closing stock value was stated in the Accounts to be $485,674.
[37] On 15 November Mr Sullivan raised the issue of the stocktake again with
Mr Gazley’s lawyer, suggesting a meeting. He said:
With respect to the stock count, my instructions are that issues were raised with your client which have not been satisfactorily resolved. I have been forwarded emails from Mr Groves to your client raising the stock concerns dating back to December 2010. Once again, this issue will need to be addressed in due course but in light of recent events it is not a priority at this stage. Instead I simply reserve the rights and remedies of Tool Team (2010) Ltd and the guarantors.
[38] IAG refused to pay out TT10’s insurance claim. In March 2012 TT10 issued proceedings against IAG claiming, for stock, $494,421.06 (before salvage).
[39] On 5 April 2012 the landlord of the Hutt Rd premises (in reality IAG) sued the Groves and TT10 for the cost of building reinstatement, loss of rent and consultancy costs. Arson was alleged. IAG’s defence to TT10’s claim was pleaded in similar terms.
[40] In May 2012 Mr Groves was interviewed by Police and asked about the document that Sharon had prepared in July the previous year in which she had referred to the stock being worth only about $260,000. In a statement signed by Mr Groves he said:
I believe the stocktake we did in February was incorrect. This was based on different methods of doing stocktakes. To fix this I planned to do another complete stocktake when we moved.
I believe the accountant said the stocktake wasn’t correct and also Wayne said it wasn’t correct.
[41] On 14 June 2012 Mr and Mrs Groves signed the Annual Accounts for TT10 for the year ending 31 March 2012. The opening stock value was recorded shown as
$485,674.
[42] On 14 January 2013 the Groves’ litigation lawyer, Mr Andrew Hooker, wrote to Mr Gazley advising him that the Court proceedings were continuing and saying:
Chris and Tool Team have instructed me to ask whether you would consider suspending payments to yourself until the end of the litigation. Obviously interest would continue to accrue and once the case is at an end, if successful, you will be paid in full. Obviously this depends on winning the case, which is not a certainty, however the simple fact is that Chris has neither the income nor the assets to continue to pay you anyway. This is in reality the only way anyone is going to be paid.
[43] Although there is a dispute as to whether Mr Gazley formally agreed to the deferral it seems clear that he took no steps to demand payment.
[44] On 27 March 2013 Mr Gazley provided Mr Groves with a brief of evidence supporting the original stock figure.
[45] By this time the two sets of court proceedings had been amalgamated. IAG sought, and was granted leave, to amend its defence to include the allegation of a false claim in relation to stock. The reason for this was explained in a supporting affidavit sworn by Mr Wong. Mr Wong said that Mr Roger Taylor, a financial consultant, had been instructed by IAG’s solicitors to undertake a forensic analysis of TT10’s business, including the MYOB records. Mr Taylor had found that that:
(a) he was easily able to open the records, download reports and navigate through the accounts;
(b) in February 2011 the stock was written down from $495,000 to
$244,000 and that between March and June 2011 the stock figures ranged between $240,000 and $260,000 (and the June figure was
$246,364).
[46] The hearing of the two sets of proceedings began on 9 February 2015. IAG opened its case first and called a fire expert, whose evidence was that the fire had been deliberately lit.
[47] Mr Graeme Giles gave evidence. When asked what he would expect the value of the stock held at 114 Hutt Rd to be, he said “I would say 260 to 300,000”. Mr Giles based his opinion on having run a ToolShed business from the same premises himself between January 2002 and April 2006 and his general knowledge derived from his ownership of some 14 ToolShed franchises.
[48] Put simply, Mr Giles said that the Petone premises were not big enough to hold a greater amount of stock than that. He was doubtful, for example, that the
premises could have held all the stock from the Thorndon Quay premises.4
4 Mr Giles repeated his evidence about these matters before me. Mr Gazley indirectly confirmed the last point when he said that much of the Thorndon Quay stock had had to be placed outdoors on its removal to 114 Hutt Rd.
[49] On 11 February Mr Groves was called and gave his evidence in chief. His cross-examination began the following day. On 13 February the Judge was told that admissions would be made that would bring the case to an end. On 18 February a joint memorandum was filed which relevantly stated:
1This memorandum follows the admissions of claim made by Tool Team (2010) Limited (Tool Team) and Christopher Peter Groves (Mr Groves), as communicated by counsel to the Honourable Justice Collins on 13 February 2015.
2In CIV-2013-404-600, Tool Team and Mr Groves consented to judgment in favour of IAG NZ Limited and to judgment on IAG NZ Limited’s counterclaim for false statements/fraud with costs payable to IAG NZ Limited. Tool Team and Mr Groves did not admit liability in respect of the claim that they deliberately set fire to Tool Team's premises.
3In CIV-2012-485-703, Tool Team and Mr Groves consented to judgment in favour of the plaintiffs but with a denial of liability in respect of the claim that they deliberately set fire to Tool Team's premises and with costs payable to the plaintiffs.
[50] Mr Groves’ bankruptcy followed soon afterwards.
[51] On 29 October, the current claim was filed by TTL. The statement of defence and counterclaim filed on 21 December 2015 raised, for the first time, the cancellation of the ASP.
Issues for determination
[52] As noted earlier, it is not disputed that there has been a default by the defendants on the Term Loan Agreement. Nor is there a dispute as to the amount that is (subject to the defence and counterclaims) owing.
[53] The defence is pleaded as follows:
15.The Term Loan Agreement referred to in paragraph 1 of the Statement of Claim documented a loan from the Plaintiff to the First Defendant for the total purchase price of a business being sold by the Plaintiff to the First Defendant, which sale occurred on 31 March
2010.
16. The sale and purchase agreement for the business, also dated
31 March 2010, included stock with a value of $500,000.00 which the Plaintiff expressly or impliedly warranted was on the premises of
the business at 114 Hutt Road, Petone.
PARTICULARS
(a) The express or implied warranty was given to Tool Team
2010 Limited and Christopher Peter Groves.
(b) The express or implied warranty was given on 31 March
2010.
(c) The Plaintiff communicated the express or implied warranty: (i) in writing by Wayne Gazley for and on behalf of
himself and the Plaintiff by signing the sale and purchase agreement for the business dated 31 March
2010;
(ii) orally by Wayne Gazley representing to Tool Team
2010 Limited and Christopher Peter Groves for and on behalf of himself and the Plaintiff that the value
of the stock was $500,000 during the negotiations
leading up to the signing of sale and purchase agreement for the business dated 31 March 2010.
17.Contrary to the Plaintiff's warranty referred to in paragraph 16 above the stock belonging to the business was not worth $500,000.00. The best assessment the Defendants can make of the value of the stock is
$260,000.00.
18.The Plaintiff’s breach of warranty regarding the value of the stock amounted to a fundamental breach of the contract between the Plaintiff and the First Defendant and accordingly the First, Second and Third Defendants are not liable to the Plaintiff under the Term Loan Agreement or at all.
[54] Two alternative counterclaims are also pleaded. The first is as follows:
19. The Plaintiff's breach of warranty regarding the value of the stock of the business caused the First Defendant to make losses beyond the level it had been calculated would occur during the initial years of the business.
20. The First Defendant's best estimate of the amount of the losses down to
23 June 2011, being the date of the fire at the business premises, was
$100,000.00
WHEREFORE THE FIRST DEFENDANT SEEKS:
(a) a declaration that the term loan agreement and the associated agreement for sale and purchase of a business is cancelled;
(b) an order that the Plaintiff repays the sum of $55,000.00 being the principal re-paid to the Plaintiff by the First Defendant;
(c) a declaration that the Defendants are not liable in any sum to the Plaintiff;
(d) damages in a sum to be determined in advance of hearing representing the loss of profits and/or additional losses suffered by the First Defendant;
(e) interest and costs.
[55] And in the alternative:
21.At all material times the Plaintiff was in trade within the meaning contained in the Fair Trading Act 1986.
22.The making of the warranty referred to in paragraph 16 above was misleading or deceptive conduct in breach of section 9 of the Fair Trading Act 1986.
23.By reason of the conduct referred to in paragraph 22 above, the Plaintiffs have contravened the provisions of Part 1 of the Fair Trading Act 1986.
24.The Defendants have suffered or are likely to suffer loss or damage by reason of the Plaintiff's conduct in contravening Part 1 of the Fair Trading Act 1986.
WHEREFORE THE FIRST DEFENDANT SEEKS:
(a) an order pursuant to sections 43(3)(a)(i) declaring the Term Loan Agreement to be void and to have been void at all times from the date thereof;
(b) an order that the Plaintiff repays the sum of $55,000.00 being the principal re-paid to the Plaintiff by the First Defendant;
(c) damages in a sum to be determined in advance of hearing representing the loss of profits and/or additional losses suffered by the First Defendant;
(d) costs[.]
[56] It seems to me that the following principal issues require determination in relation to the defence and counterclaim:
(a) Was there an express or implied warranty that the stock had a value of
$500,000.00? (b) If so:
(i) was that warranty breached; or
(ii)did it constitute misleading or deceptive conduct in breach of section 9 of the FTA?
[57] If the answers to those questions are “yes” then a number of consequential
questions would arise about remedies, recoverable loss, estoppel and affirmation.
Was there an express or implied warranty that the stock was worth $500,000?
[58] In my view the defence and counterclaim falls at this, first, hurdle. That is because the relevant parts of the ASP (which I have set out above) makes it quite clear in its terms:
(a) the estimated stock value was $500,000;
(b) the actual value was to be determined by a joint stock-take;
(c) if there was a dispute about the stock-take or the value of the stock in trade it would be resolved by an independent valuer;
(d)if it was determined that the actual value of the stock in trade exceeds its estimated value by more than 10 per cent then the purchaser could choose:
(i) whether or not to accept all or any part of such excess; and/or
(ii)which items of stock in trade the vendor shall retain in order to reduce the actual value to the estimated value;
(e) if it was determined that the actual value of the stock in trade was below the estimated value by 10 per cent or less, then TT10 would be entitled to a refund in the relevant amount out of monies which were to be held in trust for that purpose by TTL’s solicitors.
[59] This is, of course, precisely the process that was followed here, except that the stock-take occurred a few days prior to the execution of the contract. So if the outcome of that stock-take had been that the actual value of the stock in trade was below the estimated value by more than 10 per cent (a possibility for which the contract does not expressly provide) the reality is that TT10 could, presumably, simply have declined to sign the agreement. And if a large negative discrepancy had been found after the contract had been executed, there is a dispute resolution clause (cl 13) requiring the parties to endeavour to resolve any dispute between themselves and, failing that, for the appointment of a mediator. Presumably, however, remedies under s 7 of the Contractual Remedies Act 1979 could be pursued in the event that the cl 13 process did not resolve matters.
[60] The contract itself does, therefore, effectively provide a warranty as to stock value. The warranty could be expressed in more than one way. On one analysis it is that the value of the stock is the estimated value, as adjusted in light of the outcome of the joint stock-take. A slightly different way of looking at it would be that the warranty is that the value of the stock is the estimated value, with specified remedies that flow if that estimate is determined by the joint stock-take to be wrong.
[61] In either event, I agree with Mr Millard QC that there is simply no room for a warranty of the sort contended for by the defendants here. To suggest that there is a further warranty that, regardless of the outcome of the stock-take, the stock has a value of $500,000 would cut directly across cl 5.
Misleading and deceptive conduct?
[62] For the same reasons, there cannot have been any relevant misleading or deceptive conduct here either. That proposition is necessarily belied by the contract itself. There is, for example, no suggestion that Mr Gazley told the Groves to ignore what the contract said because he was separately guaranteeing that the stock was worth $500,000 regardless of the outcome of the stock-take. That he would do so is not supported by any evidence and defies common sense. On the contrary, Mr Gazley was an active participant in the contractual stock-take process and agreed with the Groves on its outcome.
If there was a warranty, was it breached?
[63] Strictly speaking, the conclusion reached above suffices to dispose of the defence and counterclaim. But in case I am wrong about the law, I go on to express a view on the key factual matter, which is whether the stock that was bought by TT10 in 2010 was, in fact, worth around $500,000 or whether it was worth considerably less.
[64] I record at the outset that there was no pleading of fraud or dishonesty on Mr Gazley’s part and nor was such an allegation put to him. Although references were made in submissions that the Groves were somehow “duped” by him, that submission verged on the improper. If fraud is to be alleged it must be clearly signalled and pleaded. And although in hindsight it might be thought that a better stock-take process could and should have been adopted, the “sampling” methodology used was chosen by the Groves, on the advice of Mr Scutter, who was also present.
[65] In the end, this seems to me to be one of those rare cases where the answer to a factual question turns on the burden of proof. As Lord Brandon said:5
... the Judge is not bound always to make a finding one way or the other with regard to the facts averred by the parties. He has open to him the third alternative of saying that the party on whom the burden of proof lies in relation to any averment made by him has failed to discharge that burden. No Judge likes to decide cases on burden of proof if he can legitimately avoid
5 Rhesa Shipping Co SA v Edmunds; The “Popi M” [1985] 1 WLR 948 at 955 (HL).
having to do so. There are cases, however, in which, owing to the unsatisfactory state of the evidence or otherwise, deciding on the burden of proof is the only just course for him to take.
[66] Here, the evidence is simply too unclear to form a firm view one way of the other. There are pointers in both directions.
[67] In favour of the defendants’ position, I have no doubt that the initial stock-take process was flawed and imprecise, although I struggle to see how even using the abbreviated sampling method, the results could have been quite so wrong as is now alleged. Nonetheless I also accept that the second, more thorough stock-take did appear to suggest a significant discrepancy. And I do accord some weight to Mr Giles’ evidence that the Hutt Rd premises would not have accommodated $500,000 worth of stock
[68] Against that, however, is the absence of any foundation for an allegation of deliberate deception by Mr Gazley. And in the absence of any such deliberate deception it is difficult to see how or why his own MYOB records (which were simply transferred across to TT10) could possibly overstate TTL’s stock in trade effectively by 100 per cent.
[69] That said, however, the MYOB records that were in evidence before me were chaotic and impossible to understand. While there is no disputing the results thrown up by them (which is simply the outcome of the application of a computer program to the raw data), the numerous negative items, the apparent repetition of other items and the inconsistency in the way in which stock identification numbers were recorded, give me no confidence that any output (whether the higher, 2010, or much lower, 2011, figure) is correct. The data yielded by the system can be no better than the inputs. And Mr Scutter’s view post the 2011 stock-take – that there was either something wrong with the system itself or the inputs – can be noted.
[70] The fact that Mr Groves admitted, in the previous proceedings, that he had overstated the stock value for the purposes of the insurance claim, is neither here nor there. I have little doubt that Mr Groves was as unclear as I am about the actual stock value. The contention that the stock was worth only around $250,000 was
almost wholly predicated on the accuracy of the data in TT10’s MYOB records.6 As
I have said, I am unable to have much confidence in that data.
[71] The burden of proof was on the defendants. In my view, the above matters are evenly balanced. I am not therefore persuaded, on the balance of probabilities that the value of the stock at the time TT10 purchased TTL’s business was significantly less than the price contracted for.
Ancillary matters
[72] Given my conclusion that both the principal issues must be decided against the defendants, it is not necessary to consider the matters of relief raised by the defence and counterclaim or the further matters of defence raised by the plaintiff. Suffice it to say that even had I been required to deal with those things the defendants would have faced considerable obstacles. In particular:
(a) even if the defendants could establish a breach of warranty which entitled them to cancel the ASP, it seems to me that the debt under the TLA would still be owing;
(b)there is a strong argument that the defendants knew about any such breach and affirmed the ASP anyway;
(c) there is a potential limitation defence in relation to the FTA
counterclaim; and
(d) on the facts, there would be tenable estoppel arguments to be made on
the plaintiff’s behalf.
6 The only other supporting “evidence” in that regard was Mr Giles’ opinion.
Conclusion
[73] The defence and counterclaims must fail for the reasons I have given. There is no dispute that the money owing under the TLA has not been paid, nor that interest and costs are payable in accordance with its terms. The defendants are liable to pay to the plaintiff:
(a) $595,000;
(b) interest at a rate 5 per cent per annum from 15 January 2013 to 18
February 2015, totalling $60,271.23;
(c) interest on $655,271.23, running from 18 February 2015 at the OCR
plus 10 per cent compounded daily;
(d) costs on an indemnity basis.
Rebecca Ellis J
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