Turnover Limited v Buy Right Cars (2016) Limited
[2021] NZHC 2217
•27 August 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-003072
[2021] NZHC 2217
BETWEEN TURNOVER LIMITED
Plaintiff
AND
BUY RIGHT CARS (2016) LIMITED
Defendant
BRANDON ORLANDINI
Counterclaim Defendant
Hearing: 10-12 August 2020; 17-20 August 2020; 21-23 September 2020 Appearances:
D Bigio QC and D MacRae for the Plaintiff and Counterclaim Defendant
M Arthur, D Kalderimis and L Bercovitch for the Defendant
Judgment:
27 August 2021
JUDGMENT OF WALKER J
This judgment was delivered by me on 27 August 2021 at 3 pm Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
TURNOVER LIMITED v BUY RIGHT CARS (2016) LIMITED [2021] NZHC 2217 [27 August 2021]
Introduction [1]
Issues for determination [8]
Admissibility of expert evidence [10]
Background [20]
The Buy Right Cars business at acquisition [20]
Negotiations for the acquisition [30]
Overview of the APA [43]
Consideration [45]
Schedule 3 of the APA — the key to the dispute [51]
The mutual intention clause [54]
The restriction on proposed changes to the business [61]
Restrictions on employment and engagement [65]
The fundamental covenants [67]
Material events post settlement [72]
The May Variation [78]
Financial performance in EO1 [88]
Financial performance in EO2 [93]
Interpretation issues [101]
Principles of contractual interpretation [101]
Submissions on the interpretation controversy [107]
How should clause (f)(iv)(C)—the proposed change clause—be understood? [116]
The effect of the May Variation on the APA: when did the Orlandini interests
cede operational control of the Buy Right Cars business? [121]
Schedule 3(f)(iv)(B)(bb): a proscription on employing or engaging contractors[133]
Clause (f)(iv)(D)(bb)—distort or adversely impact—a fundamental covenant [140] Clause (f)(vi)(D): any change to the scope or nature of the business, or the manner in which the business is carried on [150]
Personnel decisions [156]
Does this allegation fail on procedural grounds due to lack of notice? [159]
What notice was given? [173]
Did the staffing decisions breach a fundamental covenant? [183]
Conclusion on alleged breach of fundamental covenants by personnel changes
[196]
Alleged stock composition breaches [199]
Summary of Turnover’s case [199]
Summary of BRC16’s case [214]
Discussion [216]
Conclusion on stock composition [228]
Stock management — a systematic policy of reducing aged stock? [229]
Discussion [237]
Counterclaims against Turnover and Mr Orlandini [254]
Alleged mismanagement of aged stock in EO1 [254]
The Dodge Hellcat [268]
Summary of result [278]
Costs [281]
Introduction
[1] This is a dispute between the seller and purchaser of a business which imports, certifies and sells used cars. The dispute is the product of a culture clash between an agile, entrepreneurial business and a disciplined corporation. The plaintiff, Turnover Ltd (“Turnover”), is the vendor along with an associated company called I&J Compliance Ltd.1 It is a closely held company owned by Brandon Orlandini together with family members and associates.2 The defendant, Buy Right Cars (2016) Ltd (“BRC16”), is the purchaser. It is a subsidiary of the Turners Automotive Group Limited (“Turners”), the listed parent company of a wholly New Zealand owned and operated automotive financial service group.3
[2] In this judgment, I refer to the business which was purchased as the Buy Right Cars business.
[3] The consideration payable for the business under the asset purchase agreement between the parties (“APA”) comprised a payment payable on completion (split between cash and shares) and deferred consideration, known as earn out consideration, calculated in two twelve month periods after acquisition. The earn out consideration payable (if any) was tied to the financial performance of the Buy Right Cars business. However, an acceleration clause in the APA required payment of the full amount of the earn out consideration if BRC16 breached a fundamental covenant as defined in the APA. In that event, and if the breach could not be or was not remedied, financial performance was no longer relevant—BRC16 was obliged to pay the full amount of the earn out consideration stipulated in the APA and Turnover did not need to prove causation or loss.
[4] There is a second significant outcome if a breach of a fundamental covenant is established. The restraints of trade will cease to apply. Mr Orlandini and the other
1 The plaintiff was formerly named Buy Right Cars Limited but changed its name to Turnover Limited following sale of the business. I&J Compliance Ltd operated the certification side of the business. It plays only a minor part in the events at issue. I refer to “seller” in the singular to refer to the plaintiff and “sellers” to refer to both the plaintiff and I&J Compliance Ltd.
2 A report by PWC before the acquisition records that the majority owner is the trustees of the Brandon Orlandini Lifestyle Trust with Qiuchee Wong a minority shareholder. The shareholding subsequently changed but the changes are immaterial for the purposes of this dispute.
3 At the time of the acquisition, Turners Automotive Group Limited was named Turners Limited.
key individuals associated with Turnover will not be restricted in any way from competing with BRC16.
[5] Turnover claims BRC16 has breached a fundamental covenant. It says that the full amount of the earn out consideration is payable. No conduct by BRC16 designed to suppress earnings to avoid payment of the deferred consideration is alleged. However, Turnover contends the purchaser has breached two of the five fundamental covenants in the APA by:4
(a)implementing changes to the scope or nature of the Buy Right Cars business, or the manner in which that business was carried on, without the prior written consent of Turnover;5 and
(b)directly or indirectly taking action or omitting to take any action that could distort or adversely affect the financial performance of the Buy Right Cars business without Turnover’s prior written consent.6
[6] BRC16 denies breach of any obligation under the APA, let alone of a fundamental covenant. Suffice it to say, the parties are at odds about the meaning of many of the terms of the APA and particularly of the fundamental covenants. Turnover says the fundamental covenants are expressed in broad and encompassing language which plainly says what it means. BRC16 argues the actions it took did not fall within the type of conduct contemplated by the fundamental covenants which were only intended to prevent material strategic or governance changes to the business. Consequently, the acceleration provision is not engaged.
[7] BRC16 also counterclaims. First, it contends that it overpaid earn out consideration for the first 12 month period after acquisition. It seeks to recover that overpayment. Second, it claims compensation from Mr Orlandini in respect of the purchase price of a Dodge Hellcat vehicle. It contends Mr Orlandini had BRC16 buy
4 The third amended statement of claim dated 23 July 2020 pleads the defendant had directly or indirectly taken actions and/or omissions that had the purpose of inhibiting the achievement, realisation or maximisation of the performance of the Buy Right Cars business to avoid or reduce the amount of any earn out consideration. Turnover did not pursue this allegation at trial.
5 Schedule 3(f)(vi)(D) of the APA.
6 Schedule 3(f)(iv)(D)(bb) of the APA.
this for his personal use and the vehicle is unable to be made compliant for registration in New Zealand.
Issues for determination
[8] The issues evolved during trial as is often the case. Some pleaded claims were not pursued. The issues are broadly:
(a)Whether any of the following actions by BRC16 breached a fundamental covenant:
(i)personnel changes during the relevant period;
(ii)changes in stock composition through the purchase of New Zealand-new vehicles and lower grade vehicles, reduction in European stock and ceasing to market for sale vehicles under
$10,000; and/or
(iii)the sell down of aged stock for reduced margins.
(b)Whether Turnover is precluded from asserting breach of the fundamental covenants due to lack of compliance with notice requirements in the APA.
(c)Whether Turnover is in breach of the APA by failing to deal appropriately with aging stock and/or managing its stock properly in the first earn out period and, if so, the consequences.
(d)Whether Mr Orlandini is required to repay the purchase price of the Dodge Hellcat which the Buy Right Cars business paid for and which is unable to be made compliant for registration in New Zealand.
[9]Each issue in turn raises a host of sub-issues.
Admissibility of expert evidence
[10] Turnover sought leave to lead supplementary evidence which was served approximately three and a half weeks before trial. BRC16’s counsel described two of those briefs as “egregiously late”. In the end BRC16 did not object to late provision of two of those briefs, but maintained opposition to the application for leave to serve the brief of evidence of Jeffery Wesley.
[11] Mr Wesley’s evidence was described as expert industry evidence in reply to the expert evidence of David Vinsen to be led by BRC16. BRC16 argued that the late service of a purported expert brief was prejudicial. It challenged the admissibility of the proposed evidence relying on r 11 of the High Court Rules 2016, and s 25 of the Evidence Act 2006.
[12] By agreement of the parties, I heard oral argument immediately after Turnover opened its case. I granted leave to serve the brief late but heard the evidence provisionally, meaning I would determine admissibility in the context of all the evidence and after the fact.7 I indicated that BRC16’s expert would have an opportunity to supplement his brief during the trial to overcome any potential prejudice.
[13] Mr Wesley holds a Master of Business Administration from the University of Auckland. He spent eight and a half years as Chief Executive Officer of Turners Auctions Ltd during which time he oversaw, among other things, the importation of used cars from Japan to sell through dealers and at public auctions.8 Turners Auctions Ltd was the largest seller of used motor vehicles and largest auction house in New Zealand. He says that he visited Japan multiple times to attend vehicle auctions and meet vehicle exporters. He then spent approximately seven years as managing director of Turners & Growers Group, an integrated fruit and vegetable marketing company. In retirement, it appears he has been consulting on an ad hoc basis including to two businesses involved in New Zealand new vehicle sales. He states that he has maintained his interest in the industry, reads industry publications to keep his
7 Turnover Ltd v Buy Right Cars (2016) Ltd HC Auckland CIV-2017-404-3072, 12 August 2020 (Results).
8 At that time, Turners Auctions had no retail car yards. It was essentially a wholesale business.
knowledge generally current and has discussed industry issues with contacts in the industry.
[14] Mr Wesley’s brief of evidence records that he has read the Code of Conduct for expert witnesses contained in sch 4 of the High Court Rules and agrees to comply with it. Mr Wesley’s brief comments on various aspects of what he described as the Buy Right Cars business model, describes changes to the business in the second earn out period against the backdrop of the market and comments on the reduced profitability of the Buy Right Cars business during the relevant period.
[15] Mr Kalderimis challenged the admissibility of the brief. The challenge was on the basis that Mr Wesley’s evidence would not be substantially helpful to the fact finder in understanding the other evidence in the proceeding or ascertaining any fact that is of consequence to the determination of the proceeding. Objection was chiefly directed at the fact that Mr Wesley had not worked in the industry for 15 years. Without more recent experience, Mr Kalderimis submitted that the proposed evidence did not meet the relevance or substantial helpfulness thresholds in ss 7 and 25 of the Evidence Act.
[16] An assessment of substantial helpfulness under s 25 of the Evidence Act requires a consideration of the relevance, probative value and reliability of the evidence.9 The assessment is ultimately that of the trial judge, not the parties, and a court need not accept the opinion of an expert even where it is uncontradicted.10
[17] Mr Wesley acknowledged when he gave evidence that he had no experience running a retail car yard and that keeping up with trends in an industry is not the same as the experience of being engaged in the industry. He proffered the view that many things have changed in the industry but many things have not.
[18] Mr Wesley is an informed and astute observer but such evidence will not necessarily meet the s 25 threshold. After considering his evidence in context, I have concluded that his evidence meets the threshold in respect of some but not all areas
9 Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd [2016] NZCA 67, [2016] 2 NZLR 750 at [94] citing Mahomed v R [2010] NZCA 419 at [35].
10 Prattley, above n 9, at [94].
that he sought to address. I consider the question of his lack of more recent experience and direct involvement in the industry as matters going to weight. I admitted and read his evidence where that involved recasting (or re-presenting) data adduced by other witnesses to which he applied his specific business experience to draw conclusions or challenge conclusions reached by others. I put to one side observations which were generalised and impressionistic,11 referenced other used vehicle businesses without explanatory or evidential foundation,12 or drew conclusions in the absence of reliable data.13
[19] In short, I approach the question of admissibility of Mr Wesley’s evidence on an issue by issue basis, accepting that it reaches the requisite threshold on some issues but not on others, as identified in the relevant parts of this judgment.
Background
The Buy Right Cars business at acquisition
[20] Mr Orlandini is an entrepreneur who has spent his working life in the used car industry. He set up the Buy Right Cars business in around 1997 and was the sole director of Turnover from 2010. He built it into a highly successful venture which, by 2016, operated eight car yards across Auckland. It was one of the largest used car retailers in the Auckland market. In or around 2014, Mr Orlandini also set up I&J Compliance Limited. This company operated a compliance workshop to enable the imported vehicles to be registered in New Zealand after their arrival. This was a synergistic business with its profit dependent on the used vehicle importations of the related company.14 It was also acquired by BRC16.
11 An example is evidence in his brief relating to what “would have been known” in the market about the proportion of European stock in the Buy Right Cars business at relevant times and loss of competitive advantage if stock composition altered predicated on the observations of people driving past the front of a car yard.
12 Commentary about higher than typical proportions of old stock held in the pre-acquisition business.
13 Advancing a proposition about comparative market prices in the relevant periods without sufficient data for example.
14 I&J Compliance has since been struck off the Companies Register.
[21] The Buy Right Cars business attracted the attention of Turners in late 2015. Turners saw an opportunity consistent with its growth strategy. Turners engaged PWC to prepare a due diligence report.
[22] The general manager of the Buy Right Cars business at that time was Qiuchee Wong. Nicholai Orlandini, Mr Orlandini’s son, also had a management role in the business.15
[23] Mr Wong had been Turnover’s client manager at Westpac. He joined Turnover in 2014, initially on a contract basis. Mr Orlandini described Mr Wong’s role as primarily dealing with the financial side of the business. It is apparent from contemporaneous documents that he was integral to the management of the business in that he had oversight of—and brought necessary financial discipline to—all areas of the business. It is also apparent that Turners saw him as the ‘hands on’ operator of the business, albeit reporting to Mr Orlandini.
[24] Mr Orlandini on the other hand has a very different skillset. My impression from the evidence is that his entrepreneurial flair and instinct for buying and selling had been a main driver of the success of the Buy Right Cars business. However, he had little interest in business administration. He readily acknowledged that he seldom read or sent emails, a quirk that was well known to those at Turnover with whom he worked closely. Over the years he had developed working relationships with agents in Japan which he leveraged to maximise buying opportunities. Although Mr Orlandini and Mr Wong had different attributes and skillsets they worked together effectively enough until late 2016.
[25] Mr Orlandini, while acknowledging Mr Wong was his “right hand man”, insisted that it was he who oversaw the business, including managing the cost of vehicles, overall margins and discounting. His evidence was that his managers at the car yards had only limited authority to discount to achieve sales. Any discount beyond “on-road” costs or add-ons (such as new stereo devices) had to be referred up to him
15 Nicholai Orlandini was also known as Nicholai Waara. I will refer to him in this judgment as Nicholai to distinguish him from his father.
for approval. As vehicles were ‘priced to the market’ in the first place, he had only a few requests each day for discounting.16
[26] This account of the discounting practices was largely consistent with other witnesses such as Nicholai and Vipul Bhatnagar, a manager who worked for Turnover between 2004 and July 2016 and then in the business under BRC16’s ownership. However, it transpired there were various ways in which the retail price of vehicles was adjusted from time to time and the term “discounting” incorporated different practices. A discount from the sticker price was only one method. Other methods were sometimes termed “re-pricing” or “special” pricing. Mr Bhatnagar accepted that Mr Orlandini would reprice cars “quite a lot”. Pricing adjustment was one of the factors considered in constantly monitoring stock levels.
[27] I pause to note the challenge to the reliability of Mr Bhatnagar’s evidence in two respects. First, he now works for Nicholai Orlandini. Second, he accepted he was loyal to Mr Orlandini as a result of a long and close working relationship and wanted to help him out. Third, some of his observations related to events after the relevant periods in question. In my assessment, Mr Bhatnagar was an honest witness but one whose evidence was impressionistic rather than based on any of the contemporaneous data. The reliability of his evidence was uneven in consequence.
[28] Mr Orlandini’s evidence was that in 2016 almost all of the stock of the Buy Right Cars business was imported from overseas. The exception was a small number of trade-in vehicles. About 98 per cent of the imports were from Japan, with the rest from the United Kingdom. Around 30 to 35 per cent of the total stock imported comprised European models. Mr Orlandini described this stock make up as one of the key attributes of the business, along with the quality of the imported vehicles. He says that the imported cars from Japanese auction houses were predominantly graded 4 to 4.5, based on a Japanese auction grading system, and competitively priced. He further says that his business never had any policy of prioritising sale of “aged stock”. According to BRC16’s expert, David Vinsen, as an industry standard, stock that is 120 days or older would be considered extremely old stock.
16 Discounting in this context means negotiated reductions from the sticker price on the vehicle rather than periodic adjustments of price or other forms of price adjustment.
[29] Mr Orlandini said his business was self-funded—meaning it did not use credit facilities through buying agents. This, he said, meant less external pressure to sell existing stock. It appears that the Buy Right Cars business had a higher risk approach in relation to aged stock than was typical in the industry.
Negotiations for the acquisition
[30] From the outset, the challenge was determining the value of the Buy Right Cars business. This challenge was the genesis of the earn out model which saw part of the purchase price deferred and dependent on actual profitability over a defined period. This model had many advantages for BRC16. It incentivised the Orlandini interests to remain in the business for the period of the earn out. It introduced an element of self-funding to the acquisition. Most importantly, it was a mechanism for ascertaining price or value when, from BRC16’s perspective, there was uncertainty over future profitability.
[31] Mr Wong was a key player in negotiating and concluding the sale to Turners. He acted as the ‘go between’ and represented Mr Orlandini’s interests. He was also a minority shareholder in the Buy Right Cars business at that stage. Although Mr Wong’s role in the narrative was instrumental, he did not give evidence at trial. His absence was not explained but I infer that Mr Wong has fallen out with Mr Orlandini.
[32] For Turners, Paul Byrnes and Campbell Smith drove the acquisition negotiations. Mr Byrnes was then Group CEO of Turners and Mr Smith was General Manager Sales and Channel Development for the Group. Todd Hunter of Turners became responsible for the implementation of the acquisition, having taken on the role of CEO of Turners Automotive Group Ltd.
[33] Overall, the negotiations were protracted and volatile. In hindsight that was a harbinger of what was to come. Negotiations faltered more than once. Finally, Turners, BRC16 as purchaser, I&J Compliance Limited and Turnover as vendors entered into the APA on 12 July 2016.17 Three covenantors—Mr Orlandini, Mr Wong
17 At the time of entering into the APA, Turnover was still formally Buy Rights Cars Ltd.
and Nicholai—were also parties. Under the APA, the sellers sold the Buy Right Cars business together with related assets. The acquisition was valued at more than $37 million, of which approximately $22 million was for the purchase of inventory (subject to adjustments).
[34] BRC16 paid an upfront sum of $9.18 million in cash and shares as completion consideration. Inventory consideration was also paid on settlement subject to a small sum held in escrow. The balance (notionally $6.12 million) was to be paid over the course of two one-year “earn out” periods. Each earn out period had a target profitability measure which had been the subject of negotiation. The first period target of $4 million sat between the two FY2017 forecasts recorded in the due diligence report prepared by PWC. The second period profit target was $4.2 million. The earn out consideration payable in respect of each period depended on the ratio of actual profit to that target measure according to a non-linear scale.
[35] The first earn out period ran from 29 July 2016 to 28 July 2017 (“EO1”). The second ran from 29 July 2017 to 28 July 2018 (“EO2”).
[36] Materially, the APA provided that the three covenantors (collectively “the Orlandini interests”) would continue to have day-to-day responsibility for operation of the Buy Right Cars business during the two year earn out period. Nicholai and Mr Wong would be employed by BRC16, while Mr Orlandini’s services would be provided through a contractor’s agreement.
[37] Following settlement, Nicholai and Mr Wong entered into employment agreements with BRC16. On 12 July 2016, Mr Orlandini signed a contractor’s agreement as required under the APA. It stipulated his obligation to provide advice and expertise to Turners in return for an annual contracting fee of $100,000. He was required to work at least one day per week on average to provide the services. Either party was entitled to terminate the agreement on 14 days’ notice. The duration was indefinite. The contracting period was to remain in force until terminated by either party in accordance with its terms.
[38] The key part of the contractor’s agreement was the nature of the services to be performed by Mr Orlandini, expressed in these terms:
The Contractor will:
·participate in advisory board meetings;
·provide advice on the establishment of new car yards;
·provide expertise, know-how, contacts relating to purchasing vehicles from Japan; and
·do such other things reasonably requested by the Company that are reasonably incidental to the above services.
[39] On the eve of settlement, Mr Orlandini communicated to Turners that he did not want to be bound by the contractor’s agreement. Turners agreed to waive the requirement and terminated the contractor’s agreement. In an email setting out Turners’ position, Paul Byrnes wrote:
I know we will continue to have your full support and the advantage of your advice, expertise and know-how on all matters relating to the business. I’m sure there will be an appropriate opportunity to recognise your valued input when we celebrate delivery of the 2 year earn-out performance milestones.
[40] The inventory in the Buy Right Cars business was categorised and valued to determine its inclusion in the acquisition. Turners says it expected the stock level at settlement to be around $22 million with an upper limit of $25 million. Between the categorisation and valuation exercise and signing of the APA, Mr Orlandini purchased additional stock, outside the inventory included in the acquisition. The value is disputed. Turners consider it was nearly $6.8 million of additional stock bought in a “last-minute buying spree”. Mr Orlandini said he bought this stock at a time when the acquisition was off the table. How to deal with the additional stock caused some friction early on.
[41] Ultimately, the parties resolved this issue by two side letter amendments to the APA dated 29 July 2016 and 29 August 2016. The first side letter created a new concept of “additional excess inventory”. This was the amount by which the total inventory exceeded the cap in the APA. Turners agreed to pay this amount to Turnover 180 days after completion with Turnover funding it for the first 180 days. The second side letter obliged Turnover to pay Turners an amount equivalent to the holding cost
if Turners’ funding exceeded the cap in the APA. As it turned out, the working capital commitments did not exceed the cap and so the payment on account of interest cost was not required.
[42] The two side letters do not play a major role in the issues for determination save that they are part of the factual matrix which led to a level of distrust between the parties. Mr Orlandini in particular was upset when he learned that he would essentially be funding the additional stock which he saw as “handing back some of the purchase price” and Mr Wong misconstrued the potential obligation to pay Turners the holding cost. All of this is to say that tensions were rising at an early stage.
Overview of the APA
[43] I will begin with an overview of the APA before analysing the competing interpretations of its key provisions.
[44] Among other things, the background recitals state Turnover would sell and Turners, through BRC16, would purchase the business and assets on the terms set out. The covenantors are described as shareholders or senior employees of Turnover who had given certain undertakings to the purchaser. The business is defined as the business known as “Buy Right Cars” owned and operated by Turnover until completion.
Consideration
[45]The purchase price is provided for in cl 3 of the APA. Clause 3.1 reads:
3.1 Consideration
The consideration for the Business and the Assets is:
(a)the Completion Consideration, plus any Earn Out Consideration (Purchase Price);
(b)the assumption of the Assumed Liabilities; and
(c)the payments to be made in accordance with clauses 3.3(c), 3.3(d), 3.3(e) and 3.3(f).
[46] The Completion Consideration is defined as the sum of $7,344,000 cash plus the cash sums payable to the sellers under cl 3.3(c)(i) and 3.3(c)(ii) plus the issue of shares in Turners at a stipulated price.
[47]The Earn Out Consideration is defined as:
Earn Out Consideration means the payment of cash by the Purchaser, and the issue and allotment of shares in [Turners] to be made by [Turners], in each case to the Sellers in accordance with clause 3.3(g) and Schedule 3.
[48] Clause 3.3(g) stipulates that BRC16 “will procure that the Earn Out Consideration is satisfied in accordance with Schedule 3”.
[49] The APA sets out a mechanism for determining inventory amounts which broadly involved allocating each item of inventory at the valuation date into one of three categories. BRC16 would pay full carrying value for stock units that were assessed by an independent valuer as realisable for more than the carrying value (Category A); pay realisable value for stock units valued lower than carrying value but within $3,000 of it (with the difference held in escrow) (Category B); and not purchase stock units where the realisable value was more than $3,000 lower than carrying value (Category C). BRC16 characterises this mechanism as one which provided it with no real choice about the individual vehicles it purchased as part of the acquisition.
[50] Clause 16 provides for restraints of trade for ten years from the completion date in respect of Mr Orlandini, and three years for each of Nicholai and Mr Wong. Turnover expressly acknowledges in the APA that the restraints are material to the purchaser’s decision to enter into the APA. The APA includes boiler plate clauses in relation to waiver, rights and remedies and an entire agreement clause.
Schedule 3 of the APA — the key to the dispute
[51] A series of schedules completes the APA. The material schedule for the purposes of this dispute is headed “Schedule 3: Earn Out”. It sets out the obligations of the parties during the earn out periods. It also describes the mechanism for calculation of the earn out consideration. Nothing turns on the actual mechanism, however, to provide some context the key provisions of the mechanism are:
(a)the earn out consideration in each period is an applicable percentage of
$3,060,000;
(b)the applicable percentage is a percentage of the “performance percentage” achieved in each earn out period;
(c)the performance percentage is the percentage of the actual net profit before tax in relation to the target net profit before tax—the target being
$4 million for EO1 and $4.2 million for EO2;
(d)as the performance percentage increases, the applicable percentage of
$3,060,000 increases but the performance percentage needs to be more than 65 per cent before earn out consideration is payable; and
(e)if the performance percentage is above 120 per cent, the amount to be paid is calculated on a 3:1 ratio up to the cap, being a maximum aggregate earn out consideration of $27.5 million.
[52] Clause (f) of sch 3 sets out certain agreed exclusions and adjustments to the net profit before tax (“NPBT”) calculation. It reads in part:
Matters affecting NPBT
(f)For the purpose of this Schedule 3, the Sellers and the Purchaser agree as follows:
(i)The NPBT for each Earn Out Period will be determined from the consolidated statement of financial performance of the Purchaser for the Business for the relevant period, to be prepared in accordance with GAAP, after:
…
(C) excluding the following, except where such matter is approved by the Sellers or two Covenantors in writing:
(aa) Anyadditional governance costs implemented by the Purchaser (which, for the avoidance of doubt, does not include any costs incurred under the Contractor’s Agreement or remuneration for other management employed by the Purchaser).
(bb) The effect of any difference in the capital structure of the Purchaser on or following Completion which affects the NPBT (including a change in the degree of external leverage or Interest rate(s) payable merely as a result of the change in ownership of the Business) compared to the capital structure of the Sellers in the 12 months prior to Completion (being the average equity value Implicit in the Business of $8.5 million), the intent of the parties being that the NPBT for such periods shall be calculated as if such change in the capital structure had not occurred (i.e. the Sellers shall be given interest relief on the amount of $8,500,000).
…
(dd) The effect of any voluntary change in the cost structure or margin structure of the Business implemented by the Purchaser between Completion and the end of the Earn Out Periods which reduces the NPBT (excluding any costs associated with complying with GAAP (other than any audited costs which are dealt with above) or implementing any risk management policies (including insurance costs) that are reasonable for the nature of the Business at market based pricing, which will be taken into account when calculating NPBT), the intent of the parties being that the NPBT for such periods be calculated as if such change in the Business had not occurred.
[53] The effect of these carve outs is that the NPBT for the earn out periods is to be calculated as if those changes in the business had not occurred, unless “such matter” is approved by Turnover or two of the three covenantors in writing.18 In context, “such matter” is best construed as referring to the changes, differences or additional costs referred to in the sub-paragraphs. In short, the parties anticipated BRC16 might wish to make changes to the cost or margin structure of the business and agreed to this practical response. This tells against the proposition that any and all changes in cost structure or margin structure breached the APA.
18 Different provisions in the APA record the necessary consents in different terms. Some require the consent of at least one covenantor. Others require the consent of Turnover or two covenantors. Turnover argues that this is an indicator of the hierarchy of covenants.
The mutual intention clause
[54] Clause (f)(ii) is described by the purchaser as analogous to a purpose provision in a statute. It addresses the inherent tension in an earn out between the longer-term interests of BRC16 as purchaser of the business and Turnover’s interest to maximise profit in the short term. It reads:
(ii)The mutual intention of the Sellers and the Purchaser is to enhance the custom and goodwill of the Business, and to maximise its future earnings and profitability in a manner consistent with good commercial practice. Consistent with this mutual intention, the Sellers and the Purchaser agree that they will each act reasonably and in good faith to one another in relation to any matter, decision, act or omission that could adversely affect:
(A)the NPBT for the Earn Out Periods; or
(B)the custom, goodwill, or future earnings or profitability, of the Business.
[55] The two elements in subparagraphs (A) and (B) represent those different interests. Enhancement of custom and goodwill and maximising future earnings and profitability in a manner consistent with good commercial practice represents BRC16’s interest in sustainable profitability over the longer term. Turnover’s interests are represented in the obligation to act reasonably and in good faith to one another in relation to any matter, decision, act or omission that could adversely affect NPBT.
[56] Both parties had an interest in earnings in the earn out periods. Turnover’s interest was to maximise earn out consideration. Mr Byrnes and Mr Hunter, both senior Turners’ executives, gave evidence that BRC16 and Turners were also focused on ensuring profitability to demonstrate value to shareholders.19 This perspective was not challenged on cross-examination. But common sense suggests that demonstrating value to shareholders may not be as sharp as Turnover’s interest in maximising performance. This is seen most acutely when, post-acquisition, the business was faced with the problem of selling aged stock. BRC16 had two options: address the problem in EO2 or over a longer time period. The latter course would likely exacerbate losses as stock continued to age but crystallise those losses outside the earn out periods. This
19 A second aspect of profitability over an earn out period is that it means the acquisition is self- funding to the extent of the profitability.
illustrates the perennial tension in any earn out and particularly this earn out. The mutual intention clause was the drafter’s attempt to resolve the tension.
[57] Clause (f)(vii) in sch 3 is an important clause providing that the covenantors would continue to have day-to-day responsibility for operation of the business during the two year earn out period. It states:
(vii) The covenantors will:
(E)continue to have day-to-day responsibility for the operation of the Business from Completion to the end of the Earn Out Periods in accordance with the terms of the Contractor’s Agreement and their employment contracts, except as required by this agreement or where the Purchaser consents otherwise in respect of any specific matter; and
(F)use reasonable endeavours to ensure that the Business trades and operates in the usual and normal course of business consistent with past practice.
[58] The effect of this clause was to give a wide degree of operational autonomy to the Orlandini interests, the only limits being past practice and the employment and contractor’s agreements. It meant that operational decisions were their preserve and Turners would be separated from day-to-day operations. This clause reflects a key feature of the bargain and the commercial context.
[59] Schedule 3 sets out two kinds or classes of obligations: fundamental and ordinary covenants. The ordinary covenants were for the mutual benefit of the parties. The fundamental covenants were inserted for the benefit of Turnover.
[60] The class is also differentiated by the remedial response. Breach of an ordinary covenant either has a stipulated consequence short of triggering the acceleration clause or, in theory, contractual damages are available. Breach of a fundamental covenant triggers the acceleration provision in sch 3(i), once the preconditions are met.
The restriction on proposed changes to the business
[61]The key ordinary covenant for present purposes is (f)(iv)(C):
[T]he Purchaser will not make any proposed change to the Business during the period between Completion and the end of the Earn Out Periods that
(except where such change is made in accordance with good commercial practice to achieve the parties’ mutual intentions set out in paragraph (f)(ii) is likely to (other than in an immaterial way) adversely affect the achievement of the Earn Out Consideration or result in the Sellers otherwise failing to maximise the Earn Out Consideration (including, but not limited to, the integration or imposition of extra costs or accelerated capital expenditure), must not be implemented during such period unless with the prior written consent of the Sellers or a Covenantor; and …
[62] There are drafting errors in the clause. BRC16 describes these as minor syntactical issues and argues that its meaning can be fairly discerned. While all counsel accept that ‘red ink’ is needed, they differ on the nature and extent of the proposed corrections. The result of their endeavours on this score provides fundamentally different constructions. I return to this issue later.
[63] If any party considers that any matter in sch 3(f)(i), (ii), (iii) or (iv) is not being complied with, sch 3(g) requires that:
… it will promptly provide written notice of that belief to the other parties and then, unless the parties reach agreement on the matter (either agreeing that the relevant requirement is being complied with, or agreeing an adjustment to the NPBT to reflect such matter) within 20 Business Days the matter in dispute will be referred by either the Sellers or the Purchaser for Expert Determination.
[64] Curiously, the process in (g) is, on its face, available in respect of both ordinary covenants and some of the fundamental covenants. I say curiously since there is the tailored remedy for breach of a fundamental covenant—namely the acceleration provision is triggered.
Restrictions on employment and engagement
[65]Schedule 3(iv)(B)(bb) of the APA provides:
[T]he Purchaser will not employ or engage any new person to work in the Business without the prior written consent of the Sellers, provided that Brandon Pino Orlandini complies with the requirements of the Contractor’s Agreement …
[66] The respective obligations are interdependent. The prohibition on employing or engaging new persons without consent is subject to the express proviso— Mr Orlandini’s compliance with the contractor’s agreement. I apprehend the
commercial reason to be that if BRC16 could not rely on Mr Orlandini, it would need to employ management in the business.
The fundamental covenants
[67] There are five fundamental covenants restricting BRC16’s autonomy. By closing submissions, only two were relied on by Turnover. As the meaning of these covenants is informed by their immediate context, I reproduce the relevant paragraphs below. The fundamental covenants are identified with italics and those relied on in bold italics:
(iii)During the Earn Out Periods:
(A)the Sellers will use reasonable endeavours to utilise the finance, capital and insurance provided by other members of the Purchaser’s group, where possible, subject to the fees and commissions to be provided by the Purchaser not financially disadvantaging the Sellers by adversely affecting the NPBT of the business during the Earn Out Periods;
(B)the Purchaser will procure that the Business has sufficient working capital to continue to carry on the Business in its current form and at its current level of turnover, including procuring that Inventory levels are maintained within a range [of] $22,000,000 to $25,000,000, except where otherwise agreed in writing by the parties;
(C)NPBT will continue to be calculated on the basis of current arrangements for fees and commissions in place with current providers.
(iv)Without limitation to paragraphs (f)(i) and (ii), except as the Sellers or at least two Covenantors may approve in writing:
…
(D)the Purchaser will not, and it will procure its Representatives do not, in relation to the conduct of the Business, directly or indirectly take any action, or omit to take any action, that:
(aa) has the purpose of inhibiting the achievement, realisation or maximisation of the Earn Out Consideration;
(bb) could distort or adversely affect the financial performance of the Business;
(cc)divert or redirect any trading, business opportunities or revenues or any customer, client or supplier away from the Business; or
(dd)has the purpose of avoiding or reducing the amount of any Earn Out Consideration.
…
(vi)The Purchaser will not, without the Sellers’ prior written consent:
(A)declare, make or pay a dividend or distribution between Completion and the end of the Earn Out Periods without the prior written consent of the Sellers (not to be unreasonably withheld, and such consent will not be considered unreasonably withheld if the Sellers reasonably believes that such dividend or distribution will have a negative impact on NPBT);
(B)sell, transfer or otherwise dispose of all or any part of the Business;
(C)cease to carry on all or any material part of the Business; or
(D)implement any change to the scope or nature of the Business, or the manner in which the Business is carried on.
[68]The acceleration clause in (i) reads:
Acceleration
(i)If the Purchaser breaches any Fundamental Covenant, and such breach is:
(i)not capable of remedy by the Purchaser or, if capable of remedy, not remedied by the Purchaser within 20 Business Days of being specifically required to do so in writing by the Sellers; or
(ii)confirmed by the Expert to be a material breach after having followed the Expert Determination Procedure, and either not capable of remedy by the Purchaser or, if capable of remedy, not remedied by the Purchaser within 20 Business Days of being specifically required to do so in writing by the Sellers,
then, notwithstanding any provision to the contrary in this agreement:
(iii)the full amount of the Earn Out Consideration shall be immediately due and payable by the Purchaser to the Sellers for each Earn Out Period regardless of whether or not any applicable performance targets have been met at the time; and
(iv)clause 16 shall not apply, with the effect that the Covenantors shall not be restricted in any way from competing with the Business.
[69] Thus the seller is entitled to an immediate or accelerated payment of the full amount of the earn out consideration in the case of an unremedied breach of a fundamental covenant regardless of whether the business is on target. There is no requirement to establish that the breach caused loss or that the performance percentage would have been reached but for the breach.
[70] The parties have different perspectives on the purpose and meaning of the accelerated payment clause. BRC16 describes it as a provision which displaces the agreed earn out mechanism—disqualifying BRC16 from relying on actual profit results to determine the value of the business. Thus it has the characteristics of a penalty. Only an action which significantly and fundamentally compromises Turnover’s ability to fairly satisfy the conditions for the earn out payment or fairly value the purchase price was intended to be caught.
[71] Turnover on the other hand characterises the acceleration clause as a mechanism allowing BRC16 to change and even transform the business by two routes. One with the consent of Turnover. The other by paying to exit. The provision recognises that BRC16 may want to more quickly align the business with the values of Turners Group for longer term benefits but would have to pay a price to do so within the earn out periods.
Material events post settlement
[72] Monthly Advisory Board meetings were the main formal reporting channel for the Buy Right Cars business to communicate with Turners. Each month, Mr Wong would prepare a formal report and representatives would then meet to discuss the report. The reports included a summary of the monthly financial position. Reports were prepared for each calendar month and distributed early the following month. Usually Mr Byrnes, Mr Smith and Turner’s CFO would attend on behalf of Turners. Mr Wong, Nicholai Orlandini and Steven Orlandini attended on behalf of the seller. Mr Orlandini himself did not attend those meetings.
[73] Everyone expected Mr Wong would carry on as general manager through the earn out periods. However, in November 2016 Mr Wong told Mr Orlandini that he had decided to resign from the business. After discussion, it was agreed he would
reduce his commitment to the business to two days a week. Mr Wong emailed Mr Hunter on 24 November 2016. He confirmed “changes in management”. He said he would step down as general manager. He explained that his role would now involve foreign exchange management, cash flow management and reporting to the Advisory Board each month. He indicated Nicholai would step into the operational and human resources part of Mr Wong’s former role and Mr Orlandini would take a more active role in buying again to fill the gap. Asked by Mr Hunter who was the overall “boss”, Mr Wong responded: “Brandon is and I will be there to give him the info he needs to make decisions.”
[74] The extent of Mr Wong’s role in the business from that time is disputed. Turners says that, from its perspective, Mr Wong continued carrying out his duties as general manager notwithstanding this communication. As stated, Mr Wong was not called by either party to give evidence. Contemporaneous documents authored by Mr Wong suggest that he carried on with the same or broadly similar role for some time thereafter, regardless of what he had written to Mr Hunter or even what he had intended. In the absence of Mr Wong, this is not a conflict which I can, or need, to resolve.
[75] In late 2016 or early 2017, Turners proposed the Buy Right Cars business establish a new car yard on a site owned by Turners in Gavin Street, Penrose. Discussions proved fruitless.
[76] In March 2017, the Buy Right Cars business, under the control of the Orlandini interests, engaged Doug Rogers as sales trainer.
[77] In April/May 2017, Mr Orlandini went on a buying trip to Japan. He bought a significant number of vehicles. He says he bought approximately 273 in April and 41 in May. Turners says Mr Orlandini bought 433 vehicles. Tension within the relationship increased.
The May Variation
[78] The outcome of the increasing tension was that the parties negotiated a variation to the APA in May 2017 (“the May Variation”). BRC16 argues this was a
critically important development because under this agreement, the Orlandini interests ceded operational and day-to-day control of the Buy Right Cars business to Turners from the commencement of EO2.
[79] Mr Orlandini instigated the discussions. In March 2017 he spoke with Mr Hunter and indicated he wanted payment of the full earn out consideration in return for Turners taking control of the Buy Right Cars business. Mr Hunter would not agree to that proposal but countered with a proposal for a non-refundable $1 million advance of the final earn out consideration in return for release of control by the covenantors.
[80]The key terms of the May Variation were:
(a)The clauses in sch 3 of the APA continued to apply in respect of EO1 and the calculation of EO1 consideration.
(b)BRC16 agreed to make a non-refundable advance payment to Turnover in respect of EO2 consideration and a further progress payment calculated in accordance with a formula stipulated in the May Variation.
(c)Subject to payment of the advance payments, and to Mr Wong’s employment by BRC16 from 1 August 2017 to 31 July 2018 for two days a week on his then terms and conditions of employment (pro- rated), cl (f)(vii) of sch 3 would cease to apply in respect of EO2.20
(d)Except as set out, sch 3 would continue to apply in respect of EO2 and the calculation of the consideration in EO2.
(e)If the NPBT actually achieved by the business for both Earn Out Periods met or exceeded the relevant target NPBT, BRC16 would, promptly, provide to Turnover two new Rolex Daytona Platinum watches (model 116507 or equivalent).
20 This was the provision stipulating that the covenantors were to have day-to-day control of the business.
(f)Except as varied by the May Variation, the terms of the APA were confirmed and continued in full force and effect.
[81] In June 2017, the business trialled a roster for reduced staffing on the car yards on Sundays and Alan McCarrison was engaged by the business as a consultant. On 26 June 2017, Mr Wong advised that he was resigning from the business. That led to discussions between Mr Hunter and Mr Wong on a plan going forward. Turners decided that the business would start recruiting for a new general manager immediately; Mr Wong would work out a notice period of about eight weeks; Mr Rogers would no longer have any involvement and Mr McCarrison would limit his focus to buying instead of involving himself in sales or sales management. The decisions relating to Mr Rogers and Mr McCarrison form part of Turnover’s claims around personnel changes.
[82] Nicholai and Mr McCarrison re-priced all stock held to meet the market in late June 2017. By this time, Turners had real concerns about stock levels going into EO2. Mr Hunter announced that all buying decisions were to be reviewed by Mr Smith to manage overall volumes. On 13 July 2017, Mr Smith emailed managers and senior management advising that the Buy Right Cars business would implement a sales incentive scheme for stock that was 300 or more days old. He stated:
… I have spoken with Brandon directly to clear this campaign with him, and he is in full support.
[83] Mr Orlandini disputes this. His evidence was that no details of the scheme were conveyed to him and he was led to believe it was only a short term arrangement.
[84] By late June/early July 2017, the relationship between the parties had deteriorated to such a level that, on 24 July 2017, Mr Hunter emailed Mr Orlandini and others in these terms:
(a)Mr Smith had been appointed acting general manager after discussion with Mr Orlandini who lent his support;
(b)the business had initiated a recruitment process to appoint a permanent general manager;
(c)Turners no longer required or wanted any involvement from Mr Orlandini in the business on a day-to-day basis;
(d)Mr McCarrison would assist for one month to help Nicholai procure Japanese commercial stock; and
(e)Turners still wanted to try and agree a lease deal on 622 Great South Road.
[85] It is fair to say that Mr Orlandini’s frustrations with the turn of events boiled over. He sent a number of abusive and offensive text messages to Turners’ representatives. Although he subsequently apologised, this confirmed in their minds that his erratic behaviour justified the actions they took. BRC16 deny this was part of a scheme by Turners to “strong arm” itself into the business. Rather, it characterises the communication to Mr Orlandini as a measured response which clearly set out his future involvement in the Buy Right Cars business in accordance with good commercial practice.
[86] Mr Wong left the business around the end of EO1 and Mr Smith assumed the interim general manager role. The June 2017 Advisory Board report relating to the May period recorded that Mr Smith had been filling the role of “head of BRC as QW will be moving on”. It went on to record Mr Orlandini (and Mr Wong) believed it was in the best interests of the business for Mr Smith to continue filling this role for the foreseeable future.21 Mr Orlandini denied in his evidence that this report accurately represented his views on the matter.
[87] In his evidence, Mr Orlandini contended that Mr Smith took over Mr Wong’s specific role in the business which, by this time, was limited only to financial and foreign exchange matters. Mr Smith was thus only responsible for these functions. This was not however Turners’ understanding. Nor was it consistent with the contemporaneous records authored by Mr Wong. While I do not doubt that Mr Orlandini chose to see Mr Wong’s role as limited, the reality was that he simply
21 I accept this report was prepared by Mr Wong. He was still with the business at that stage and had always had the responsibility of preparing the reports to the Advisory Committee. There was no evidence to suggest it had been authored by someone else.
did not appreciate the full extent of Mr Wong’s involvement. On cross-examination he equivocated, described the situation as confusing and had to concede that Mr Wong was involved in stock issues including sending “stop buy” notices. He suggested the full scope of Mr Wong’s work on stock management “flew under the radar” because he did not pay much attention to Mr Wong’s emails.22
Financial performance in EO1
[88] The first earn out period ended on 28 July 2017. The Buy Right Cars business achieved 113 per cent of the performance target in the APA. On 31 August 2017, an earn out payment of over $3.4 million was made after a short period of discussion and final agreement on the calculation for EO1. The non-refundable advance of $1 million for EO2 was paid at the same time.
[89] Thereafter, Advisory Board meetings shifted to informing the seller about the trading performance of the Buy Right Cars business. Responsibility for preparing the reports also shifted from Mr Wong to Mr Smith. The last report prepared by Mr Wong was the July 2017 report.
[90] Sometime in August/September 2017, the lease at the Papatoetoe yard was terminated by the landlord. The business established a new yard at Lambie Drive, Manukau. This was regarded as an inferior site in terms of display opportunity and location. The yard focused on lower value vehicles.
[91] After a recruitment process run by external consultants, Julian Stone was appointed to the role of general manager in November 2017.
[92] In February 2018 stink bugs, a biosecurity threat, were discovered on vessels carrying cars into New Zealand. This caused an initial blockage of cars into New Zealand and then an influx once the problem was resolved.
22 I doubt that Mr Wong’s role by the end of EO1 is particularly relevant to the analysis. Turners says the appropriate reference point is what the Buy Right Cars business looked like at acquisition.
Financial performance in EO2
[93] It is not disputed that financial performance in EO2 was poor, particularly when compared with EO1. BRC16 argues it was the financial performance in the financial year ending 2016 (“FY16”) which is more relevant since it was the business represented by the FY16 result which was acquired and which the earn out provisions were designed to keep in place.
[94] BRC16 relied on expert evidence from Grant Graham to show the comparative financial performance and other financial aspects of the Buy Right Cars business. Mr Graham is a chartered accountant and partner of Calibre Partners with specialist expertise in valuation, litigation, insolvency and financial restructuring.
[95] The data relied on by Mr Graham came from the inventory and sales management software then used by the Buy Right Cars business, known as ‘TopGear’. TopGear is an integrated vehicle stock management, sales processing and accounting system designed for motor vehicle dealerships.
[96] Some of the data had been extracted, collated and analysed by James Kerin, a software consultant who developed TopGear. He provided evidence of his data analysis in various categories.
[97] Helpfully, Mr Graham and Mr Kerin, produced a joint expert’s report for trial resolving discrepancies in data.23 The joint report addressed analytical differences across seven issues, of which five remained in contest during the trial—aged stock sales, New Zealand new vehicles, lower grade vehicles, European vehicles and under
$10,000 vehicles.
[98] Mr Graham compared the profit and loss statements of Turnover and then BRC16 across five periods to provide some financial context. His comparison showed, among other things:
23 For the most part, Mr Kerin’s evidence was factual rather than proffering opinion on the data extracted. To the extent that any opinion evidence was given, he confirmed compliance with the Code of Conduct.
(a)EO2 sales were higher than FY16 but lower than EO1. Sales were down $3.1 million or 5.3 per cent in EO2 as compared to EO1.
(b)EO2 commission income was higher than FY16 but almost identical to EO1.
(c)EO2 gross profit was very similar to FY16 (it was $302,000 lower) but lower than EO1 by $2 million.
(d)EO2 overheads were higher than in each of FY16 and EO1 (with year on year increases of approximately $1 million). The largest contributor to the increases was staff costs.
$417,904. Reducing the NPBT by that amount leads to correspondingly different inputs to the earn out formula and an alleged overpayment of $319,723.
[258] Consistent with Turnover’s case on its claims, both the seller and Mr Orlandini admit only that the stock held by the business was monitored and priced to market. They deny there was any historical practice to maintain manageable levels of aged
76 There was a slight numerical discrepancy in the evidence in respect of these stock numbers. Exhibit 1 produced by Mr Kerin refers to 83 units of stock aged 300 days or older at the beginning of EO1. Mr Hunter’s evidence refers to 78 units of stock. Mr Hunter’s evidence was that there were 198 such stock units at the beginning of EO2 and Exhibit 1 refers to 199. The parties agree that the differences in these figures are modest and immaterial.
stock. They also deny focussing on selling high margin, newer stock during EO1 and raise a number of contractual and notice issues as impediments to the counterclaim.
[259]In my assessment, there are fatal flaws with this counterclaim.
[260] First, Mr Orlandini has no personal liability under the APA except in respect of specific undertakings as covenantor. There can be no claim against him personally for breach of the mutual intention clause because it does not create a personal obligation. Only the “Sellers” are bound. The “Sellers” are defined as the companies, Buy Right Cars Limited (now Turnover) and I&J Compliance Limited.
[261] Second, there is a contractually prescribed remedy for breach of the mutual intention clause in cl (g) of sch 3 which I read as mandating prompt provision of written notice of a belief that it is not being complied with and referral for expert determination if there is no agreed adjustment to the NPBT assessment. There is no suggestion notice was given under this clause. Nor is there any suggestion that BRC16 referred the issue for expert determination despite being aware of the aged stock issue at the commencement of EO2. The mandatory language signals that this is the prescribed and only remedy for breach of the clause in the first instance.
[262] Third, cl 10.4 of the APA provides that “[t]he Sellers have no liability for any Claim unless the relevant Claim is notified in writing to the Sellers … before 29 July 2019.” The counterclaim, as advanced at trial, was only notified after 4 December 2019 when counsel for BRC16 on this date sent written notice of its intention to ‘amend’ the counterclaim. Although the new counterclaim bore a relationship to the subject matter of the original counterclaim, it cannot fairly be characterised as merely an amendment. Thus, this time bar is engaged.77
[263]Fourth, cl 10.5 of the APA excludes specified types of liability. It reads in part:
The Sellers will not be liable to the Purchaser for any Claim to the extent that:
77 “Claim” is defined in the APA in broad terms: “a reference to a claim means a claim, demand, action or proceeding however arising and whether present, unascertained, immediate, future or contingent” unless the context otherwise requires.
(a)the right to make such Claim arises as a direct or indirect result of anything done, or omitted to be done, by the Sellers under any provision of this agreement;
(b)it would not have arisen or occurred but for any voluntary act, event, default, omission, transaction or arrangement after Completion by the Purchaser, [Turners] or any person connected with the Purchaser;
…
[264] Fifth, there is insufficient evidence about Turnover’s actual aged stock holding levels before EO1 on which to make any assessment. Mr Arthur submitted that all that matters is the figure at the commencement of EO1. But this did not necessarily reflect typical stock inventory for Turnover since that level was affected by the inventory process under the APA.78 It has to be remembered that the obligation on the covenantors was to use reasonable endeavours to ensure the business traded and operated in the usual and normal course of business consistent with past practice.
[265] Sixth, it is unlikely Mr Orlandini would have deliberately adopted a strategy of accumulating aged stock in the first year of a two year earn out unless he had always intended to force an exit and bring the earn out period to an early end. There is no evidence of this. The contemporaneous documents indicate the discussions which led to the May Variation only started in around March 2017.
[266]Finally, I have doubts about the broad brush calculation approach.
[267]Accordingly, I dismiss this counterclaim.
The Dodge Hellcat
[268] BRC16 pleads that in around April 2017, Mr Orlandini agreed to buy a Dodge Challenger Hellcat for his own personal use. After learning it did not comply with New Zealand regulations and could not be made compliant, he caused BRC16 to purchase and pay for the car. BRC16 contends this was not the kind of vehicle the business would have imported for sale in the ordinary course and Turnover and/or
78 BRC16 was not obliged to purchase Category C vehicles as part of the acquisition. It can reasonably be assumed this category comprised older stock but the actual stock numbers by age in Category C did not feature in the case. The PWC due diligence report recognised the business held high levels of aged stock.
Mr Orlandini have breached obligations under the APA. The vehicle is unable to be sold and is sitting in storage. BRC16 alleges that it has incurred a loss of $113,899. It claims interest and costs on that sum.
[269] The counter-claim as pleaded does not identify the particular clause of the APA relied on. In its evidence, BRC16 identified the vehicle by a stock number “30053” based on contemporaneous documents extracted from the internal inventory software of the business in which the vehicle is described as a “Challenger 6.2L SRT8 Hellcat”.
[270] BRC16 principally relies on an email dated 13 April 2017 to Mr Wong in which Mr Orlandini wrote:
I bought a dodge 2016 for myself
For 7 mill don’t pay for it till rate goes back Up to close to 80.
[271] The email was in a chain in which Mr Wong had earlier stated “[j]ust to confirm, we are now on a stop buy until at least the 18th of May when we will reassess.”
[272] The purchaser also relies on the cross-examination of Nicholai. I reproduce the exchange in full:
Q.And can I ask you to turn two pages along and you’ll find a page number that’s numbered 1564.1 and this also is a Dodge isn’t it?
A. Yes.
Q. Is this the orange Dodge that you’re talking about?
A. No, this is Dodge Hennessey not a [Dodge] Hellcat.
Q.And this one is clearly not the one being referred to in the email is it because it’s a 2011 version?
A. Yes.
Q.And if you can see the price there that it was sold for $57,000 that’s considerably lower than the price we’ve just been looking at?
A. Correct.
Q.So I suggest to you that the white Dodge on page 1564 is the vehicle that Brandon Orlandini had decided to buy for himself?
A. It’s the one that he’s talking about, yes.
[273] Mr Orlandini’s evidence in chief was that he decided to fund the purchase personally to assist with cash flow because the price of the vehicle was significantly above the average price the business paid for other vehicles. He said he had no intention of keeping the Dodge for himself as he owned an almost identical vehicle at
the time. However, he knew this was a good deal and there was a reasonable profit to be made by selling it in New Zealand. The Buy Right Cars business advertised the vehicle within two weeks of its arrival, knowing it was not compliant. For this reason, any sale would be subject to compliance. He explained these types of vehicles can only be ‘complied’ when owned by a New Zealand resident and that the business did this from time to time, typically with no issues.
[274] More materially, he says the Buy Right Cars business had an existing arrangement with its supplier that if any vehicle could not comply within six months of arrival, it could be returned to the supplier for a full refund. He says the first he learned of the compliance issue was on or about 3 July 2018 when BRC16 counter- claimed, well after the period in which it could be returned.
[275] Mr Arthur referred in closing to cl (f)(ii) of sch 3—the mutual intention clause—as the clause of the APA relied on. He emphasised the obligation for Turnover and BRC16 to each act reasonably and in good faith to one another in relation to any matter, decision, act or omission that could affect NPBT or the custom, goodwill, or future earnings or profitability of the business. But, as discussed, Mr Orlandini has no personal obligations under the APA except as a covenantor and none of his obligations as covenantor are here relied on. This provides a defence to the claim for breach of the APA against him personally.
[276] In my assessment, this counterclaim is also flawed for the same or similar reasons given in relation to the first counterclaim. Most importantly, the evidence does not establish a breach on the balance of probabilities. Nicholai’s answers on cross-examination are equivocal and do not establish any evidential foundation. Although the email from Mr Orlandini on its face is ambiguous, I accept that it was likely to be a shorthand explanation in response to the “stop buy” direction to Mr Wong.
[277]I dismiss this counterclaim.
Summary of result
[278] In the end, Turnover was understandably disappointed by the bottom line performance of the Buy Right Cars business in EO2. The explanations for that performance are many and varied. The financial performance may or may not have been the same had the Orlandini interests been responsible for the business. But, as BRC16 argued, this is not a breach of duty case or a negligence case and Turnover’s grievances do not translate into breaches of a fundamental covenant.
[279] I dismiss Turnover’s claims for breach of fundamental covenant against the defendant. Consequently I find the acceleration clause in the APA has not been triggered by any of the pleaded claims.
[280]I further dismiss the counterclaims against the counterclaim defendants.
Costs
[281] I reserve the question of costs. In the ordinary course BRC16 is entitled to costs on the claims it defended and the counterclaim defendants are entitled to costs on the counterclaims they successfully defended. If the parties are unable to agree costs, they may file memoranda of no more than five pages plus schedules within 28 working days of this judgment.
[282] Finally, I commend all counsel for the quality of their written and oral advocacy.
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Walker J
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