Wiig v Daken
[2016] NZHC 645
•12 April 2016
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2014-409-000644 [2016] NZHC 645
BETWEEN MURRAY EDWIN NIGEL WIIG
Plaintiff
AND
BRIAN MURRAY DAKEN First Defendant
AND
EUROPEAN WOODWORKS LIMITED Second Defendant
Hearing: 19-22 October 2015 Appearances:
G A Hair for Plaintiff
D M Lester for DefendantsJudgment:
12 April 2016
JUDGMENT OF DUNNINGHAM J
Introduction
[1] This is a claim arising out of the purchase, by the first defendant, Mr Daken, of the plaintiff’s business, European Woodworks Limited (EWL). EWL specialised in manufacturing timber and timber-aluminium windows and doors which complied with European regulations for weather tightness and thermal efficiency.
[2] What was to be an acquisition of the business assets of EWL evolved into a two stage acquisition of the shares in EWL by Mr Daken. The first tranche of shares was acquired in September 2013 at a total cost of $342,702.50. The remaining shares, which were owned by the plaintiff, Mr Wiig, were acquired in October 2013 under an agreement for sale and purchase of shares (the October agreement). The consideration for the October share purchase totalled $745,675. This comprised an immediate payment of $420,000, plus two subsequent payments totalling $325,675
which was to pay off Mr Wiig’s loan account with EWL.
WIIG v DAKEN [2016] NZHC 645 [12 April 2016]
[3] The proceedings commenced because Mr Daken failed to advance the further
$325,675 to EWL, so it could repay the loan from Mr Wiig as required under the
October agreement.
[4] Mr Wiig also claims he advanced a further sum of $20,000 to EWL in November 2013 which EWL has failed to repay. EWL says the payment was to meet accounts issued to the company relating to services provided directly to Mr Wiig, and so is not repayable.
[5] Mr Daken accepts it was a term of the October agreement that Mr Daken had to pay $325,675 to EWL so it could repay Mr Wiig’s loan account. However, he argues that there have been breaches of the warranties provided in that agreement and, as a consequence, he seeks judgment against Mr Wiig, quantified at $819,622, for losses he has suffered.
[6] Because the defendants have conceded that there was an obligation to repay Mr Wiig’s loan account of $325,675, the proceedings focused on Mr Daken’s counterclaim for losses arising out of the breach of warranty and misrepresentations. At issue therefore is:
(a) whether Mr Wiig breached any of the warranties contained in the October agreement regarding the accuracy of the financial information provided about EWL, or otherwise misrepresented the value of the share purchase, to cause Mr Daken loss; and
(b) whether the $20,000 advanced by Mr Wiig to EWL in November
2013 was a loan to be repaid by EWL, or was a payment to meet accounts issued to EWL for services provided directly to Mr Wiig.
Background
[7] On 30 April 2012, a company owned by Mr Wiig acquired a business which was trading in Dunedin as Eurotech Windoors, and which had been established by Christian Rampe and Sandra Habermann. The company then changed its name to European Woodworks Limited to reflect the newly acquired business. Mr Rampe
and Ms Haberman remained involved in the business and this was reflected in the shareholding of EWL after the purchase of the business, which was as follows:
(a) Murray Wiig – 875 shares; and
(b) Christian Rampe and Sandra Habermann (jointly) – 375 shares.
[8] The shareholders had loan accounts with EWL representing their investment in EWL as follows:
(a) Wiig – $325,670
(b) Rampe and Habermann - $150,000.
[9] The following year, the business was placed on the market for sale and it was in that process that Mr Daken was introduced to Mr Wiig. Between June and the end of August, Mr Wiig and Mr Daken met on several occasions and Mr Wiig provided Mr Daken with various financial information about the business. One of the meetings, on 25 July 2013, was also attended by EWL’s accountant. Mr Daken also visited the Dunedin premises of EWL in June 2013. This culminated in Mr Daken signing an agreement with EWL on 2 September 2013 to purchase the stock, plant and goodwill of the business for a total price of $1,200,000. The agreement was conditional upon finance and due diligence conditions, and it was signed by Mr Wiig as a director of EWL.
[10] On or about 17 September 2013, Mr Wiig advised Mr Daken that he could not get agreement with Mr Rampe and Ms Habermann as to the terms under which they, as shareholders, would consent to and approve of the sale of EWL’s business. That prompted a rethink about how a sale of the business could be effected.
[11] On 18 September 2013, Mr Wiig sent an email to Mr Daken making what he described as “a better proposal for the transfer of the business”. The new approach involved Mr Daken purchasing Mr Rampe and Ms Habermann’s shareholding in EWL, and later, separately purchasing Mr Wiig’s shares.
[12] In that email, Mr Wiig described the business in glowing terms, pointing out:
(a) growth in sales (plus 45 per cent at 31 March 2013 and projected further plus 35-40 per cent to year ended 31 March 2014);
(b) growth in the confirmed orders (currently nearly $800,000);
(c) the $250,000 in receivables being more than enough to cover the company current overdraft of $112,000, even after payment of the current month’s accounts.
[13] Although Mr Daken had earlier rejected a suggestion that he would purchase the shares, having said that “there were too many things that could go wrong”, he reluctantly agreed to consider a share purchase if it was on the same terms and outcome as the business purchase agreement.
[14] Mr Daken again visited the EWL premises on 20 September 2013 and met the staff. He was provided with further updated information, being a profit and loss statement for the six month period to September 2013-2014, showing a Year to Date EBITDASS1 calculation of $383,559. Mr Daken also met with Mr Wiig on
23 September and, as Mr Wiig was about to depart on an overseas holiday, he
introduced Mr Daken to the EWL accounts clerk who was advised to give Mr Daken whatever further assistance he needed. However, Mr Daken says that she did not allow him access to the company’s systems so he continued to rely on the information he got from Mr Wiig.
[15] Shortly afterwards, on 26 September 2013, Mr Daken entered into an agreement to purchase the shareholding of Mr Rampe and Ms Habermann in EWL, together with their shareholder loan account. Under that agreement Mr Daken agreed to pay:
(a) $180,000 for the Rampe and Habermann shares;
1 Earnings before interest, taxation, depreciation, amortisation and shareholder salaries.
(b) $152,702.50 for Rampe and Habermann’s shareholder loan account; (c) $10,000 for goodwill.
[16] Settlement of that agreement was completed on or about 1 October 2013 while Mr Wiig was still overseas and Mr Daken was then a 30 per cent shareholder in EWL.
[17] Negotiations continued for the purchase of Mr Wiig’s shares. On
15 October 2013, Mr Wiig emailed Mr Daken a further spreadsheet, being a profit and loss statement for the six months to September 2013, although noting it “is not accurate in that the stock figures have not been included”, and that certain other one-off costs needed to be taken into account.
[18] On 18 October 2013, and while he was manning a stand at the Christchurch Home Show promoting EWL’s products, Mr Daken signed the agreement for sale and purchase of the 875 shares in EWL held by Mr Wiig. On the same day he was also appointed as a director of EWL. The October agreement had included a clause which provided for an adjustment in the purchase price if the overdraft exceeded
$115,000. That was explained by Mr Daken’s lawyer in a letter dated
18 October 2013 to Mr Wiig’s lawyer, to be required to ensure the overall cost to Mr Daken remained no more than $1,200,000. Mr Daken says that Mr Wiig advised the overdraft was not quite at that level but, after recovery of some debtors, it would be. He says, on the strength of that assurance, he agreed to delete that clause before signing the agreement. The October agreement was subsequently signed by Mr Wiig on 20 October 2013.
[19] The October agreement provided for a payment of $420,000 for Mr Wiig’s shares and for Mr Daken to also advance funds totalling $325,675 to EWL so it could repay Mr Wiig the amount of his loan account to EWL. On 23 October 2013, Mr Daken paid $420,000 for the purchase of Mr Wiig’s shares in EWL in accordance with the October agreement.
[20] To meet the balance of his purchase obligations Mr Daken had to await funds expected from the sale of his Christchurch accounting business, SBA. Mr Daken explains that he made a payment of $130,000 to the EWL bank account shortly after settlement. This was to be a payment on account of the funds to be repaid to Mr Wiig in respect of his loan account with EWL. The balance would be paid when he received further funds from the sale of his SBA business so that the repayment of Mr Wiig’s loan account with the company could be completed.
[21] However, Mr Daken says that at the time he made the payment to the EWL bank account, the overdraft was significantly higher than the $115,000 he expected it to be. He introduced a further $113,000 into the account on 24 October 2013 but said those funds were used up paying invoices and clearing the overdraft. He says that it was only from 28 October 2013 that he had access to the company bank accounts and the company’s computer system. At that point he says it became clear that there were errors in the information he received about profitability and cashflow and there were also a number of invoices that had not been paid by the company. These included invoices for goods from an overseas timber supplier that were critical to ongoing manufacturing.
[22] On 13 November 2013, Mr Wiig put a further $20,000 into the business. Mr Daken says this was to pay invoices from Ammon, a German hardware supplier, as well as for some glass from Germany. Mr Wiig says he provided it as a “goodwill loan” to help Mr Daken through a cashflow shortage because of a delay in Mr Daken receiving funds from the sale of his accounting business. Mr Wiig also says he organised the foreign currency transactions required to make these payments as he was experienced in doing this. Mr Daken also asked Mr Wiig to pay an invoice from Kyne Management Services for services in relation to the dispute Mr Wiig had had with the previous shareholders Mr Rampe and Ms Haberman. Mr Wiig agreed to pay this and another invoice totalling approximately $21,450, which related to the shareholder dispute.
[23] Mr Daken essentially says that the company’s position was so much worse than he had been led to believe it was, relying on the financial statements and other information provided to him by Mr Wiig, that the funds he introduced to the company could not be spared to repay the $325,675 loan account to Mr Wiig. Thus, although he and EWL accept that the terms of cl 1.2 of the October agreement have not been met, the claims he has for misrepresentation and/or breach of contractual warranties far exceed the claim Mr Wiig has for repayment of his loan account with the company.
[24] It is this set of circumstances which has led to the claims and counterclaims between Mr Wiig, Mr Daken and EWL.
The evidence
[25] The hearing itself was confined to evidence from Mr Wiig and Mr Daken, along with expert accounting evidence as to loss, which, as I will explain later, was of little assistance in the circumstances.
[26] I found both Mr Wiig and Mr Daken credible, and I consider that they approached the transaction in a spirit of co-operation and goodwill. Indeed, my impression was that it was that level of trust and co-operation which ultimately led to the misunderstandings that arose. Having heard their evidence, it seems that each was mistaken as to the level of understanding the other had. Mr Wiig had thought he had afforded Mr Daken full access to the company’s affairs, and assumed, as a consequence, that Mr Daken was privy to the details supporting the general statements Mr Wiig made, both in meetings and in emails. In fact, Mr Daken had either not had, or had not availed himself of, those opportunities. Similarly, Mr Daken had relied on general statements by Mr Wiig, without checking the detail and ensuring that he had a full understanding of the information supporting those statements.
[27] Unsurprisingly, each party seemed aggrieved that the other was challenging his business integrity and acumen through these proceedings. However, in the end, my decision does not turn on the motivation or integrity of either party, nor on their
subjective intentions and understandings. It turns on what, objectively, they had agreed to, and whether the terms of that agreement have been breached, causing loss.
The October agreement
[28] Both the claim for payment by Mr Wiig, and the counterclaim for breach of warranties, rely on the terms of the October agreement. This agreement was prepared by Mr Daken’s lawyer. The consideration for Mr Wiig’s shares was expressed in the following terms:
1.1Subject to the terms and conditions set out in this agreement, and on the basis of the representations, warranties, and agreements contained within it, the Purchaser agrees to purchase the Shares from the Vendor, and the Vendor agrees to sell the Shares to the Purchaser, for the sum of $420,000.
1.2The Purchaser will advance on settlement the sum of $230,000 to the Company that the company will immediately pay to the Vendor on account of the Vendor loan account with the Company. In the event the Company overdraft is still be [sic] utilised at settlement, the Vendor will allow the Company to retain the overdraft balance up to
$115,000 from the loan account recovery in consideration of the undertakings and indemnity in the following subclause 1.3.
1.3The Purchaser warrant [sic] and undertakes to the Vendor that in consideration of the foregoing agreement to cover the company overdraft at settlement he will arrange the payment of interest by the Company on the balance loan account due to the Vendor until it is repaid in full (a total of $325,675) and guarantees to the Vendor the repayment in full of the remaining loan account together with interest no later than [unspecified] and by way of the injection by the Purchaser into the Company of additional funds for that purpose.
[29] The October agreement also contained various warranties including the following:
9.1 The Vendor warrants with the Purchaser that: …
…
(c) other than normal trade credit, or as previously disclosed by the Vendor to the Purchaser, there are no amounts owing by the Company to any other person or company, and in particular, there are no amounts payable to the vendor
(d) the Company does not have any liabilities, actual, prospective or contingent, at the settlement date, other than those liabilities fully disclosed to the Purchaser
(e) the financial statements of the Company as disclosed to the Purchaser are complete and accurate in all respects and to the best of the Vendors [sic] knowledge and belief, all statements and matters in information given to the purchaser in relation to the Company and its financial affairs are true and correct in every material respect.
9.2The Vendor will indemnify and keep indemnified the Purchaser against any loss, damage, costs or expenses (including legal or other costs associated with the enforcement or realisation of this indemnity), suffered or incurred by the Purchaser arising directly or indirectly from any breach of, or inaccuracy in, any of the disclosures, representations, warranties, covenants or obligations pursuant to any provision in this agreement.
[30] The October agreement also contained an “entire agreement” clause which is relied on as a defence to claims based on representations which were not contained in the agreement itself.
16.1This agreement constitutes the entire agreement between the parties and supersedes all prior agreements, understandings, negotiations, representations, and discussions, whether oral or written, of the parties.
The defendants’ claims
Breaches of warranties
[31] Mr Daken’s claims against Mr Wiig are based on breaches of the warranties in:
(a) clause 9.1(e) (in relation to the accuracy of the financial statements disclosed and of other information provided about the company and its financial affairs); and
(b)clause 9.1(c) (as to whether there are any other amounts owing by the company aside from normal trade credit).
Misrepresentations
[32] Mr Daken also asserts that there were misrepresentations by Mr Wiig as to what the net cost of the October agreement would be to Mr Daken when compared with the earlier proposal for sale and purchase of the business assets, and as to the
extent of the overdraft at settlement. Because the overdraft exceeded $115,000 by a considerable margin, and there were accounts to pay which Mr Daken was not expecting, the effective cost of the share purchase exceeded $1,200,000 which Mr Daken says he was led to believe would be the net cost of the share purchase.
Was there an actionable misrepresentation?
[33] I will address the alleged misrepresentations first as, to the extent any claim made by Mr Daken relies on a representation by Mr Wiig, Mr Wiig refers to the entire agreement clause at s 16.1 to exclude liability. Mr Daken, in reply, points out that s 4 of the Contractual Remedies Act 1979 permits the Court to ignore such a clause if it is in the interests of justice to do so.
[34] Section 4(1) of the Contractual Remedies Act 1979 provides:
If a contract, or any other document, contains a provision purporting to preclude a court from inquiring into or determining the question –
(a) whether a statement, promise, or undertaking was made or given, either in words or by conduct, in connection with or in the course of negotiations leading to the making of a contract; or
(b) whether, if it was so made or given, it constituted a representation or a term of the contract; or
(c) whether, if it was a representation, it was relied on –
the court shall not, if any proceedings in relation to the contract, be precluded by that provision of inquiring into and determining any such question unless the court considers that it is fair and reasonable that the provision should be conclusive between the parties, having regard to all the circumstances of the case, including the subject matter and value of the transaction, the respective bargaining strength of the parties, and the question whether any party was represented or advised by a solicitor at the time of the negotiations or at any other relevant time.
[35] The purpose of an entire agreement clause has been explained by the Court of
Appeal as follows:2
2 PAE (New Zealand) Ltd v Brosnahan [2009] NZCA 611 at [15].
An entire agreement clause, however, is not absolute or conclusive. Section 4(1) recognises a wide judicial discretion to determine whether it is
“fair and reasonable that the provision should be conclusive”. While the issue is to be determined “having regard to all the circumstances of the
case”, the specified criteria focus the enquiry on an assessment of the relative positions of the parties in their access to independent legal advice. Its apparent purpose is to protect one party’s relative vulnerability from
another party’s power to impose an exemption from liability which is
contrary to the factual reality or an existing legal obligation and is thus unreasonable and unfair. Section 4(1) is a mechanism for striking balances,
both individually between the parties and conceptually between freedom of
contract and unfair or unreasonable commercial conduct.
[36] In the present case, I have not been directed to any circumstances which would justify this Court going behind the entire agreement clause. The parties were both capable businessmen who had legal advisers to assist them in drawing up the October agreement. They negotiated the terms of the acquisition of EWL over several months and with the benefit of regular updates on the financial state of the company. Furthermore, Mr Daken’s background as a trained and qualified accountant makes it difficult for him to suggest he was at some form of disadvantage in negotiating this transaction.
[37] While Mr Daken says it was his understanding that the net cost of the share purchase would equal the net cost of acquiring the business assets as was initially negotiated, the evidence that Mr Wiig made such a representation was lacking. I accept, however, that this was Mr Daken’s intention during negotiations. For example, he told Mr Wiig that when the purchase of the business assets was to be replaced with a share purchase, he expected the terms and outcome to be the same as for the business asset purchase which had been negotiated. His lawyer also recorded Mr Daken’s desire to cap the total cost at no more than $1,200,000, in a letter provided with a draft of the contract on 18 October 2013.
[38] However, a unilateral intention by Mr Daken does not equate to a representation by Mr Wiig that the share purchase would have the same net cost as the earlier agreement. While Mr Daken points to the fact that on
27 September 2013, Mr Wiig sent an email saying “I definitely want it all to proceed at the already verbally agreed rates/contents etc.”, that statement was made when Mr Daken had just purchased Mr Rampe and Ms Haberman’s shares but was still to purchase Mr Wiig’s shares. I consider it was no more than a statement of present
intention that Mr Wiig was still committed to selling his shares on the general terms negotiated to that point. It did not amount to a representation about the effect of the October agreement which had yet to be drafted. It is critical in my view that cl 1.4, as to the overdraft level, was removed with Mr Daken’s agreement even though his lawyer had expressly included this clause to provide some certainty as to the overall cost of the share purchase.
[39] Thus irrespective of the entire agreement clause, this first representation as to the net cost of the share purchase is not established on the evidence. There was no representation by Mr Wiig that the October agreement, as finalised, would have the same net cost as the business assets purchased. This seems to have been no more than an assumption made by Mr Daken, which was not, in the end, brought down into the terms of the October agreement through the negotiation process.
[40] The other representation Mr Daken claims was made is that the overdraft level would be no more than $115,000 at settlement. In my assessment, this is also not sustained on the evidence. As already noted, Mr Daken agreed to delete the contractual provision as to the extent of the overdraft at the time of settlement, despite his lawyer inserting it into the draft contract for the express purpose of controlling the overall cost of the purchase, and despite Mr Wiig telling him that the company had extended its overdraft facility to $240,000 prior to settlement. Mr Daken also accepted in cross-examination that there was no agreement between him and Mr Wiig about what the overdraft would be at settlement, with him confirming that Mr Wiig “couldn’t tell me what that number was and who the debtors were”.
[41] In light of this evidence, I do not accept that Mr Wiig made any representations as to the exact extent of the overdraft, and therefore as to the overall cost of the October agreement. If he had, it would have been logical to retain clause
1.4 which warranted exactly that. Instead, removing this provision is consistent with Mr Wiig’s evidence that he was not prepared to commit to the exact level of the overdraft, and Mr Daken’s acceptance that he did not know what the overdraft would be at settlement.
[42] In any event, given the relative sophistication of the parties, the fact they were legally represented, and the fact there was no disparity in respect of bargaining strengths, I am satisfied that it is fair and reasonable that cl 16.1 should be conclusive between them even if representations had been made. As a result, any claim that is founded on an alleged representation (as opposed to being statements or information coming within the terms of the contractual warranties) must fail.
[43] I therefore turn to the claims founded on breach of the contractual warranties.
Has there been any breach of the warranty as to the accuracy of the financial statements?
Clause 9.1(e)
[44] The key warranty relied on is that at cl 9.1(e). It has two tiers of stringency. The first tier applies to “the financial statements of the company” as disclosed to Mr Daken. They must be “complete and accurate in all respects”. This is a rigid obligation. The second tier applies to “all statements and matters and information given to the purchaser in relation to the company and its financial affairs”. The second tier is less rigid. It does not require the warranty to be absolute, but only “to the best of the vendor’s knowledge and belief”. Further, the information is warranted to be correct “in every material respect” and not in all respects.
[45] In relation to the second part of the warranty in cl 9.1(e), I accept Mr Daken’s submission that if he can point to “statements and matters and information” in relation to the company and its affairs, as being incorrect, the onus then shifts to Mr Wiig to demonstrate that, nonetheless, to the best of his knowledge and belief these statements were true and correct.
[46] The submissions for Mr Daken assume the first part of the warranty covers not just the formal financial statements produced at the end of the company’s financial year, but the other financial information supplied from EWL’s internal accounting system, MoneyWorks, and in particular, the profit and loss statements. In this case, as no final set of accounts for the last financial year was provided prior to the contract being signed, just the unsigned draft, Mr Daken says the profit and loss
statements which were provided must have been intended to be caught by the first part of the warranty.
[47] Mr Wiig, however, says the reference to “the financial statements of the company” in the first part of this warranty must be understood as applying to the annual financial statements prepared for tax and financial reporting purposes given the greater degree of accuracy and rigour they will have through the input of chartered accountants. All other financial information provided falls within the second part of the warranty.
Profitability and EBITDASS
[48] Mr Daken took an understandable interest not just in the financial statements of the company, including the draft financial statements for the year ended
31 March 2013, but in the subsequent reports as to profit and loss provided in each of the four months prior to settlement of the October agreement.
[49] Mr Daken says he is now aware that the profit and loss statements contained a substantial error in respect of the profit. Although the financial statements prepared by Grant Thornton for EWL record that, as at 31 March 2013, the stock figure was $220,259 and the work in progress (WIP) was $486,176, the profit and loss statements provided by Mr Wiig exclude the opening stock of $220,259 and instead record, under the descriptor “opening stock/WIP”, a figure of $486,176. In other words, what appears to be the combined value of stock and WIP, in fact only takes into account WIP. That error is duplicated in the profit and loss statements provided by Mr Wiig for the periods ended June 2013, July 2013, August 2013 and September 2013.
[50] Because the profit and loss statement provided by Mr Wiig excludes the opening stock of $220,259, Mr Daken’s expert accountant explains this has a direct flow-on effect to the overstating of EBITDASS by the same amount. Mr Daken points out that Mr Wiig’s accountant, Mr Lowe, agreed that, unless there was another error which cancelled out that error, the profit and loss statements contained a substantial error in respect of the profit.
[51] I accept the submission for Mr Daken that the warranty overtakes all issues of due diligence and also the fact that Mr Daken is an accountant. There is nothing in the October agreement to suggest that any of the information provided was excluded from the warranty, nor that the warranty was subject to any qualification if the error could have, or should have, been identified by the purchaser.
[52] While Mr Wiig, in cross-examination, belatedly sought to suggest that the term “opening stock/WIP” meant simply “opening stock of WIP”, that seemed improbable. Indeed, even Mr Keenan, EWL’s accountant seemed to understand that the figure of $486,176 was a combination of inventory and WIP. In a meeting on
25 July 2013, he explained that WIP was approximately $250,000 and inventory
$200,000, making a total of $450,000.
[53] I also accept that the qualifications that Mr Wiig provided in some of his emails as to the provisional nature of certain figures in the information he was providing,3 did not extend to the figures for “opening stock/WIP”.
[54] Mr Wiig counters by submitting that the profit and loss statements and other documents produced by the company’s internal accounting system MoneyWorks, are not “the financial statements of the company” covered by the first part of the warranty. That phrase is intended to refer to the company’s annual financial statements prepared for tax and financial reporting purposes as signed by the directors and which have been prepared with the input of chartered accountants. The financial information produced in the form of management reports from MoneyWorks should, instead, fall within the second tier of cl 9.1(e) and thus, so long as to the best of his knowledge and belief Mr Wiig considered that that material was true and correct in every material respect, he could not be liable under the warranty.
[55] The first question to resolve is whether the profit and loss reports produced using the internal software accounting package of EWL, comprised a financial
statement of the company for the purpose of the warranty at cl 9.1(e).
3 For example, on 15 October 2013, Mr Wiig sent an email to Mr Daken attaching the profit and
loss year to date figures to September and noted that “this result is not accurate”.
[56] As the term “the company’s financial statements” is not defined within the agreement, it needs to be construed using the usual principles of contractual interpretation. McGechan J in Pyne Gould Guiness Ltd v Montgomery Watson (NZ) Ltd summarised these as follows:4
The best way to understanding a document is to read the words used, and to ascertain their natural and ordinary meaning in the context of the document as a whole. One then looks to the background– to “surrounding circumstances” – to cross–check whether some other or modified meaning was intended. Apart from that is a previous negotiation and matters of purely subjective intention as to meaning, both excluded on policy grounds, one looks at everything logically relevant. At some extremes, background can be compelling. If background shows natural and natural meaning flouts commonsense, natural and ordinary meaning very probably must give way.
[57] This approach was adopted by the majority of the Supreme Court in Vector
Gas Ltd v Bay of Plenty Energy Ltd.5 As the Court of Appeal explained:6
[32] The majority of the judges in Vector adopted the approach in Investors Compensation whereby the language the parties have used must be read in the context of the document as a whole and the surrounding circumstances. Under that approach, the wider background and circumstances should always be considered even if there is no ambiguity or other interpretive difficulty with the words used by the parties. Evidence of background circumstance is not, however, relevant if it does no more than tend to prove what individual parties objectively intended or understood their words to mean or to prove that a parties’ negotiating stance may have been at a particular time.
[58] Bearing this approach in mind, but looking at the context of the document itself, the term “the financial statements of the company” must have been intended to be differentiated from other “statements and matters and information given … in relation to the company and its financial affairs”. Logically then, the mere fact that a profit and loss statement is a statement or information about the company’s financial affairs, does not of itself make it a financial statement of the company, as that would make the second category of the warranty redundant. The term used in the first part of the warranty must have been intended to apply to a more discrete category of
document.
4 Pyne Gould Guiness Ltd v Montgomery Watson (NZ) Ltd [2001] NZAR 789 (CA) at [29].
5 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5.
6 Trustee Executive Ltd v QBE Insurance (International) Ltd [2010] NZCA 608 at [32].
[59] Given that these were men of business, concluding a reasonably substantial transaction with the help of legal advisers, I consider the technical definition of “financial statements” which applied at the time, is relevant. In the Financial Reporting Act 1993, financial statements are defined to mean, “a statement of financial position for the entity as at the balance date; and … in the case of – an entity trading for profit, a statement of financial performance for the entity in relation
to the accounting period ending at the balance date; …”.7
[60] Clearly, the previous end of year financial statements for EWL, which were provided with the information memorandum about EWL given to Mr Daken when he first enquired about purchasing EWL, are such financial statements. They are formal statements of the company’s financial performance, prepared by EWL’s accountants and including explanatory notes, for the relevant financial years. In my view, it is obvious that such documents were intended to be captured by the rigorous warranty at the beginning of cl 9.1(e).
[61] The real issue is whether the various internally produced reports as to profit and loss provided by Mr Wiig through the negotiations qualify as “the financial statements of the company”, given that statements of profit and loss are included in the end of year financial statements.
[62] For various reasons I do not consider they do. The fact the term “financial statements” is prefaced by the word “the” suggests that these are a single, specific and identifiable category of documents. In my view, given the context of the agreement and the knowledge of the parties, they are the formal financial statements produced at the end of the company’s financial year with the input of accountants.
[63] I am supported in that conclusion by the fact that, on each occasion, the internally produced profit and loss reports were provided, they came with qualifications which made it clear that they were not documents to which the same
reliability can be attached as the end of year financial statements.
7 Financial Reporting Act 1993, s 8(1).
[64] For example, in the initial correspondence between Mr Daken and Mr Wiig on 4 June 2013, Mr Daken says:
Having got a rough understanding of the business yesterday, the next step is to get some rough financials. They don’t need to be perfect as I can make my own allowances and won’t be holding you to those numbers as I know they are “draft”. I just need to get something a little more up to date than Aug 11 so that I can start to formulate a plan.
[65] When Mr Wiig responds to this email, he provides an internally produced report with some estimated projections, or what he calls a “dynamic budget”. In his email he explains that not all the figures are actual as he has not yet reconciled “the larger supplier accounts and the freight account in particular”. Nor has he completed the journals for the wage accruals for the last couple of months of the 12 month period. He had concluded by saying “trust this is what you were wanting. Don’t hold me to it”.
[66] Similarly, a month later on 23 July, Mr Wiig emails Mr Daken attaching:
… [The] latest figures for the March end year together with some mostly actuals for the April month. I have had to estimate the sale because I have not had time to review the WIP so could be on the conservative side. I have also left the value of the items in the Hardware category the same as we started so we have not upgraded the value to equate to the imparted cost. It is playing with figures because if we included an up to date value then we would need to reduce the cost of freight inwards in future budgets … As you can see if the abnormal items were not there the $400000 EBITDASS was for all intense (sic) and purposes achieved.
[67] Later that same evening Mr Wiig sent another email providing further explanations to the figures.
[68] Again, on 22 September, Mr Wiig sends an email to Mr Daken attaching “the
draft result from MoneyWorks”. Again he qualifies the result saying:
You can see that we have entered all the materials usage etc. for September but if I am allowed to estimate some of the numbers then I am sure that by the time we do a stocktake at [month’s] end (expect that we will need to write the stock up say $80,000), make an adjustment for WIP down on the last figure of two months ago, do the wage accruals or not depending what we want to do, enter the materials receipts, we will in my estimate be pretty close.
[69] Again, on 23 September, Mr Wiig says:
I can advise from the attached P and L you will note that there is a very real possibility that we are close to the threshold we are wanting to achieve. I obviously can’t do the stock thing because it is not the end of September yet but if I’m allowed to guess then see the yellow cells with my estimates.
[70] Finally, the profit and loss report to September, which was sent under an email dated 15 October 2013, was again provided with qualifications to the information, saying “you will remember that this result is not accurate in that the stock figures have not been included”.
[71] For all these reasons, I am satisfied that the profit and loss reports and the dynamic budget spreadsheets were in the nature of information provided under the second arm of the warranty in cl 9(1)(e). It was information which Mr Wiig was required to consider as being correct to the best of his knowledge and belief but which was not captured by the stringent warranty in the first part of cl 9.1(e). I hold that the stringent test in the first part of 9.1(e) applied only to the formal end of year financial statements such as were provided with the information memorandum Mr Daken received in June 2013.
[72] Having determined that the profit and loss statements provided between June and mid-October are not “the financial statements of the company”, but are statements and information regarding the company’s financial affairs, I need to consider whether, to the best of Mr Wiig’s knowledge and belief, that information was true and correct in every material respect.
[73] In this regard I am satisfied that he did. I accept that whenever he provided this information he always qualified it and pointed out where he believed the figures to be potentially subject to change. I am satisfied that when he provided this information, he genuinely believed it to be accurate, except where he pointed out that it may be unreliable for some reason.
[74] It is also clear from the questioning of him that he had no idea that the inclusion of the figure of $468,000 as being “opening stock/WIP” may have been in error. Furthermore, no witness could say conclusively that, in fact, the apparent error had a material effect on EBITDASS. For example, Mr Franks’ expert evidence for
Mr Daken, accepted that, depending on the closing stock figure, there may have, in fact, been no effect on EBITDASS.
[75] Nevertheless, whether or not the error had the result of overstating EBITDASS, it is clear that Mr Wiig was not aware of that error. He provided the profit and loss figures in good faith, believing them to be correct and intending to assist Mr Daken by providing additional, and more up to date, financial information. Accordingly, I conclude there has been no breach of the warranty at cl 9(1)(e) and therefore no loss can flow from this.
Has there been a breach of the warranty in relation to the claims about forward orders?
[76] Another of Mr Daken’s allegations was that Mr Wiig had, on several occasions, represented that the company had confirmed orders of upwards of
$800,000. For example, in his 18 September 2013 email, Mr Wiig referred to “growth in the confirmed orders. (Currently nearly $800,000)”. Mr Daken also says that Mr Wiig had given him the “impression” that this work was needed to be completed by 31 March 2014, because of his references to the business having to “gear up” and “get more staff”.
[77] Mr Daken says that when he took over the company and analysed the forward sales, the picture was not nearly as rosy. He says the orders relied on by Mr Wiig to make this claim included some jobs where there was no signed confirmation of the order or where the required deposit had not been paid. Furthermore, where deposits had been paid, they had, at settlement, been expended on work and so he considers these amounts should not have been included in the value of the forward orders. Mr Daken also says that some of the work was not ready to be undertaken until after March 2014 and this adversely affected cash flows in the first few months of business.
[78] In his analysis, the value of sales to the end of March 2014 was only
$258,539 plus GST. He calculates this amount by excluding the deposits that had been received by the company before he took over, because those had been
expended, and excluding work where no deposit had been received, even if this work subsequently proceeded.
[79] Mr Wiig’s response is that his statement was based on the list of forward orders which were contained in his MoneyWorks sales order list, plus one additional job that he had received verbal confirmation of. He says, adding all the jobs together, the total, including GST, was $958,290 so he was justified in quoting the
$800,000 in his email of the 18th of September.
[80] While Mr Daken assumed the statement as to forward sales meant there were confirmed orders with $800,000 in cash still to receive, Mr Wiig says that was not the case, nor did he suggest it was. He explains that the deposits received for such orders were not held separately, but used to help with cashflow, and Mr Daken should not confuse the value of confirmed orders with the amount of money still to be received. Mr Wiig also says he never represented that there was a timeframe in which the work would come in. While he acknowledges there was approximately six months work on the books, that was not the same as suggesting the work would all be completed in the next six months.
[81] Mr Wiig also says that there were further jobs for which deposits were received in mid-November, and EWL’s sales orders as at 1 November 2013 totalled
$1,158,268, so Mr Daken should have had good workflows. However, in his view, Mr Daken did too little follow up work on these jobs to ensure that they were done in the timeframes anticipated.
[82] In summary, based on the evidence of confirmed orders, plus orders where the deposit had not been received but where Mr Wiig had verbal confirmation they would proceed, there was $958,290 worth of work as at 18 September 2017. He therefore felt comfortable describing this as nearly $800,000 worth of forward orders as at that date, as shown in the following table:
Name Net Total
Deposit Paid
Comment
Bosworth
$57,0000
$85 (or $100)
Mr Daken says the normal deposit had not been paid and there was no signed order, and job did not proceed.
Magides
$302,519
$46,750
Mr Daken deducts the deposit figure as that had been received and expended prior to purchase of the Wiig shares.
Davis
$19,604
$1,960
Mr Daken deducts the deposit figure as that had been received and expended prior to purchase of the Wiig shares.
Kumerich
$242,216
$46,750
Mr Daken deducts the deposit figure as that had been received and expended prior to purchase of the Wiig shares.
Pritchard
$1,906
Deposit was advised as received on
18 September. However, Mr Daken says that as the payment had been received and the job completed by 10 October, it should not have been included in a WIP analysis.
Ashton
$95,000
Mr Daken says as there was no order confirmation or deposit at 25 October 2013, it should not have been included. The work did however, proceed.
Knowles
$240,000
Mr Daken says as there was no order confirmation or deposit as at
25 October 2013, this figure should not have been included. The job did however proceed the following year.
Total
$958,245
[83] Other unconfirmed sales orders, which were not included in the estimated
$800,000 worth of work, were confirmed subsequent to Mr Daken taking over, and the work did proceed, albeit at later dates.
Discussion
[84] The allegation is that Mr Wiig’s emailed statement as at 18 September 2013, and his subsequent verbal statements to Mr Daken as the value of confirmed orders, were not correct and that constituted a breach of the warranty at 9(1)(e) causing loss.
[85] The starting point is what is meant by a confirmed order. Mr Wiig accepts in his evidence that an order was not confirmed until the customer had signed an order confirmation and the deposit was paid. Thus, a potential sales order only became a confirmed order at that point.
[86] Mr Wiig provided the information to Mr Daken in his 18 September email after soliciting information from Ms Carol Percy, who was presumably an EWL employee, as to the forward orders where there were “confirmed deposits”.
[87] In respect of the jobs relied on to make his statement to Mr Daken on
18 September 2013, it is clear that Mr Wiig had just been advised by Ms Percy that the Knowles and Ashton jobs (comprising some $335,000 worth of work) did not have a deposit paid, and the job for Bosworth only had a $100 deposit paid, not the full deposit paid. Thus, on Mr Wiig’s own explanation of what comprised a confirmed order, he knew there was only $565,000 of confirmed orders. To that extent, the statement he made about the value of confirmed orders did breach the warranty as it was not correct to say there was nearly $800,000 worth of confirmed orders, and Mr Wiig knew that was the case.
[88] However, in calculating the value of confirmed orders, I do not accept that Mr Daken was entitled to deduct the deposit that had already been paid to reduce the value of the confirmed orders. There was no representation about what had been done with the deposit and, to qualify as a confirmed order, a deposit had to have already been paid.
[89] In summary, there was a breach of the warranty as to information about confirmed orders. At the point Mr Wiig represented there was nearly $800,000 worth of confirmed orders, there was in fact only about $565,000 worth of confirmed orders. While the other orders were likely to proceed, Mr Wiig was aware from the advice Ms Percy had supplied him, that deposits have not been received on those jobs, so he could not correctly describe them as confirmed orders.
Has there been a breach of a warranty that there were no outstanding liabilities except as disclosed?
Clause 9.1 (c)
[90] The other warranty relied on is the warranty at cl 9.1(c) that, other than normal trade credit, or as disclosed by the vendor, there are no amounts owing by the company.
[91] Mr Daken says that there was approximately $75,000 in unpaid accounts which should have been paid by 20 October 2013, shortly before settlement, but were not. Mr Wiig says this warranty was not breached as the words “other than normal trade credit” refer to the “characterisation of the credit”, not the terms of the credit and the only accounts not paid were of this type. Even if it referred to terms of credit, the normal practice for this company was to pay its creditors by the 28th of the month following invoice, and Mr Daken should have known this, so there was no breach.
[92] It was not until 28 October 2013, when Mr Daken met with Mr Wiig, that Mr Daken says he was able to have full access to the company’s computer systems and records. The woman in charge of the company accounts and computer systems, Ms Baillie, had decided to leave because of the change of ownership. Mr Daken says it was only at this point that she showed Mr Daken the log-ons for the company’s bank account, its accounting system MoneyWorks, and its payroll system, and that he saw the extent of the overdraft. Furthermore, he says that at the end of that meeting, Mr Wiig handed him a bundle of September and October shareholder dispute invoices with the remark that they were more than he expected, and that “we may need to talk about it”.
[93] Mr Daken also found in the following days that timber that had been ordered in September from an overseas supplier, Holz Schiller, and that had been invoiced to EWL on 7 October 2013, had not been paid for. Those invoices totalled a little under
$42,500. The timber would not be sent until it was paid for, and he says the delay in payment affected workflows in the business after he took over because jobs could not be completed until the timber arrived.
[94] Mr Daken also established following settlement that the bank overdraft was standing at $173,000 overdrawn before GST owing of $14,776 had been paid. In total Mr Daken says there were unpaid invoices which totalled $75,928. He considers that this was in breach of the warranties at cl 9.1(c) of the October agreement.
[95] The unpaid invoices comprised the overseas supplier invoices, the invoices relating to the shareholder dispute, and unpaid trade accounts from September totalling over $38,000. The unpaid trade accounts are set out in the following table:
Creditor Invoice Date
Amount Owing
21 October
2013
Payment Terms
Autocare Workshop
2 - 21/8/2013
$1,427.12
20th of the month
Cachet De Software Ltd
30/9/2013
$330.62
20th of the month
Cartridge World
19/9/2013
$140.00
20th of the month
Dunedin Powdercoaters
30/9/2013
$292.56
Glue Guru Ltd
11/9/2013
$214.48
20th of the month
Jac Jay Ltd
13 - 30/9/2013
$734.48
Murray Lobb Woodwork Supplies Ltd 23 - 24/9/2013
$240.20
20th of the month
McArthur & Symons Electrical Ltd
20/9/2013
$140.13
20th of the month
Metro Glass Tech
12 - 30/9/2013
$18,223.26
20th of the month
Prices Packers and Movers
5 - 30/9/2013
$2,951.25
20th of the month
Respond IT Services
25/9/2013
$349.32
Ricoh Consulting
30/9/2013
$1,597.70
20th of the month
Robertson and Sinclair Ltd
6 - 27/9/2013
$778.51
Romco Tools
6/9/2013
$147.04
Roslyn Storage
30/9/2013
$5,795.90
Southern Steel Fabrication
30/9/2013
$941.16
Cash on delivery
Timber Specialists Ltd
26/9/2013
$3,957.44
Ullrich Aluminium Co Ltd
6 - 19/9/2013
$618.91
20th of the month
Total
$38,880.08
[96] While Mr Daken had raised a concern about the company paying invoices relating to the dispute Mr Wiig had with the former shareholders of EWL, in cross-examination Mr Daken did not pursue the claim that those invoices comprised part of the claim for unpaid invoices. Rather his concern was that they “shouldn’t have been a company expense in the first place”.
[97] In any event, Mr Wiig paid two of the last invoices relating to the shareholder dispute (being invoices of $17,073.59 and $4,867.50) on 14 November 2013. It seems the other invoices rendered to the company in 2013 for costs related to the
shareholder dispute were paid by the company before settlement of the share purchase. For this reason, I consider this issue is irrelevant to Mr Daken’s claims unless the invoices were paid by the company after settlement of the share purchase, and outside normal trade credit terms.
Discussion
[98] The question of whether there has been a breach of warranty 9.1(c) depends, first, on what is meant by amounts owing by the company pursuant to “normal trade credit”.
[99] I do not accept Mr Wiig’s submission that this warranty refers to amounts owing to “normal trade creditors”, rather than amounts owing on normal trade credit terms. Were this to be the case, there would be no obligation on the vendor to have paid any trade creditors in the period leading up to settlement of the share purchase, so passing a significant and unexpected liability on to the purchaser.
[100] In my view, “normal trade credit” must refer to payment of invoices from the company’s creditors on the terms under which that trade credit is offered. As can be seen from the table at [95] above, virtually all of the invoices which were unpaid at the time of settlement, required payment on or before the 20th of the month following invoice. That is unsurprising, as, in the absence of more specific terms, that is standard practice for New Zealand businesses. Unless any of the creditors in relation
to the unpaid September accounts had agreed on more lenient payment terms (and there is no evidence that they did), then Mr Daken could have expected all the September invoices to have been paid by 20 October 2013, before settlement of the share purchase. That was not done.
[101] It is no answer that Mr Wiig resigned as a director on 18 October 2013. Given the terms of the warranty, he should still have ensured payment of these invoices by the 20th, or he should have disclosed to Mr Daken that there would be outstanding unpaid liabilities.
[102] I also do not think that Mr Wiig’s alternate argument, which is that the normal practice for EWL was to pay creditors on the 28th of the following month,
satisfies the terms of this warranty. In my view, normal trade credit is credit agreed on standard terms between the creditor and debtor. In this case, it is clear that, at least in most cases, trade credit was extended on terms requiring payment by the 20th of the month following invoice of the purchase. I do not consider that normal trade credit can be unilaterally altered as a result of the vendor’s internal practices, and certainly not when that has not been explained to the prospective purchaser. Accordingly, I am satisfied that there was a breach of the warranty at cl 9.1(c) in respect of the September invoices, which had not been paid by the
20th of October 2013.
[103] In respect of the Holz Schiller invoices for timber, it was accepted that payment was not required until EWL received an order confirmation from the German company. Order confirmations had been sent on 7 October 2013, but payment had not been made by settlement of the October agreement. I do not consider this was in breach of the warranty. While it was desirable to pay as soon as the order confirmation came through, as the wood would not be sent until payment was made, I do not consider a failure to have paid by 23 October 2013 was in breach of the requirement to have no liabilities save for normal trade creditors.
Has there been loss as a result of the breach of warranties?
[104] The next question to determine is what damages arise as a consequence of the breaches of warranty I have identified. Contract damages are intended to restore a party to the position they would have been in if the contract had been performed.8 In the case of these warranties, Mr Daken, is entitled to be put in the position he would have been in if the statements had been true.
Loss resulting from lack of confirmed orders at $800,000
[105] I have found that there was a breach of the warranty at cl 9.1(e) in respect of the assertion that there were confirmed orders of around $800,000, when in fact there was only about $565,000 worth of confirmed orders based on Mr Wiig’s own
definition of what comprised a confirmed order.
8 Robinson v Harman (1848) 1 Exch 850.
[106] The real issue, though, is whether this breach of warranty converts to a loss, given that the unconfirmed orders which Mr Wiig relied on to make this claim did, in fact, proceed. Indeed, looking at the confirmed and potential sales orders as at
18 September 2013, the work which proceeded had a value well in excess of
$800,000 and this was accepted by Mr Daken. Mr Wiig’s submission is that, post-settlement, the company received the benefit of orders in excess of $800,000 which were initiated during Mr Wiig’s tenure, and so the company and Mr Daken did not suffer any direct loss.
[107] Mr Daken’s real concern seems to be that some of the jobs took a lot longer to come to fruition or to complete than he expected and so, in the first few months after he took over EWL, there was a cashflow problem which would not have eventuated if the orders were ready to go at the point he took over the business. However, on this point, there is simply insufficient evidence to suggest that the assertion as to the forward orders available also contained with it enforceable representations about the time in which that work would come to fruition. I cannot conclude that a loss of earnings in the first few months was as a consequence of the fact that the orders described as confirmed orders in September were not confirmed until after the contract settled. It could just as well have been as a result of Mr Daken’s management of the new business, delays in supplies arriving, or some other factor which was beyond Mr Wiig’s control.
[108] Given these uncertainties, and the fact that the company did in fact receive the benefits of $800,000 in orders which had been initiated prior to settlement, I am not satisfied that the defendants have established that any loss flows from this breach of warranty.
Loss resulting from unpaid accounts
[109] I have also found that there was a breach of the warranty at 9(1)(c) that there were no accounts owing by the company other than normal trade credit.
[110] However, this does not necessarily translate to a recoverable loss. I need to consider the position Mr Daken would have been in had the warranty not been breached against the position he was in as a consequence of the breach of warranty.
[111] Had EWL paid all the September accounts before 20 October 2013 then the overdraft would have been significantly higher. However, if that was still within the company’s disclosed overdraft limit of $240,000, then Mr Daken’s position would have been no different. This is because I have found there was no contractual term or actionable representation, requiring the overdraft to be limited to $115,000.
[112] If the outstanding accounts which should have been paid totalled $38,000 (as appears to be the case from the table at [95] above), then, adding that amount to the overdraft of $173,000 as at settlement, the company would still have been within its overdraft limit as disclosed by Mr Wiig to Mr Daken shortly before settlement.
[113] The only circumstances in which I consider there could be a claim for loss is if, as a consequence of all outstanding invoices from September being paid by the
20th of October, the overdraft limit exceeded the $240,000 limit which was disclosed
to Mr Daken prior to settlement. If that were the case, I consider that would be a breach of the warranty at cl 9.1(d), as it would constitute a liability of the company which had not been fully disclosed to the purchaser before settlement.
[114] In other words, if all the debts had been paid by the 20th of the month following invoice and that would have meant that the company’s overdraft exceeded the disclosed overdraft limit of $240,000 then, to the extent of the exceedance, I consider that the purchaser has suffered an actionable loss, as he cannot be taken to have agreed to pay the amount negotiated for shares in a company which had liabilities that exceeded those disclosed.
Quantification of loss
[115] The parties each adduced some expert accounting evidence as to the quantification of loss. Unfortunately, that evidence was of no real assistance as it reflected each party’s view of liability, and not the findings set out in this judgment.
[116] Mr Daken’s expert Mr Franks, was asked to consider whether the
EBITDASS claimed by Mr Wiig [was] accurate and, given EWL’s circumstances, was it reasonable for Mr Wiig to assert that EWL was able to maintain the EBITDASS for the remainder of the year based on EWL’s performance to date.
Mr Franks conclusions, based on information given to him by Mr Daken, were that
Mr Wiig’s spreadsheet projections overstated EWL’s financial performance from
31 March 2013 to 25 October 2013, while WIP had declined in that time. He then calculated Mr Daken’s loss based on the assumption that the share purchase was to cost approximately the same net amount as the business assets purchase, that is,
$1,200,000.
[117] In his view, the loss comprised $589,662 for the reduction in the assets and the increase in the liabilities that Mr Daken acquired at the time of purchase on
25 October 2013, plus the sum of $230,000 which he ascribed as goodwill, which would not have been paid had Mr Wiig correctly understood the financial position.
[118] That evidence, in my view, was of little assistance, as it proceeded on a number of incorrect assumptions, including that the parties had agreed to the net value of the transaction being approximately $1,200,000, with the sum of $230,000 ascribed to goodwill.
[119] The expert evidence for Mr Wiig was given by Mr Michael Lowe, another accountant. He accepts there may have been “errors in the stock workings” but says Mr Daken was provided with subsequent inventory balances which do not appear erroneous. In any event, he observes that there is no mechanism in the agreement for sale and purchase to ensure that the total value of the share purchase is $1,200,000, or any other fixed price. He therefore considers that no loss has arisen to Mr Daken.
[120] I have explained above that the only loss which I consider is established as a consequence of breaches of cl 9.2 of the agreement is the total of the unpaid accounts which pre-date 1 October 2014, and then only to the extent they would have placed the company beyond its disclosed overdraft limit if they had been paid prior to settlement.
[121] Because I have not heard evidence directly on point which enables me to calculate with certainty the quantum of loss, I reserve that issue for further consideration. If the parties are unable to agree on quantum (if any), I reserve the right for them to return to the Court to have the question of quantum determined.
Was the $20,000 paid by Mr Wiig on 13 November 2013 a loan which is repayable?
[122] The final issue to determine is whether EWL is liable to repay the $20,0000 which Mr Wiig put in EWL’s bank account on 13 November 2013.
[123] Mr Wiig explains that the $20,000 was advanced on a “goodwill basis” as he wanted to assist Mr Daken with a short term cashflow problem, which he understood arose because there was a delay in Mr Daken receiving the balance of the money from the sale of his accounting business. He says he did this because he “saw no sense in destroying a company that might have a short term cashflow shortage”.
[124] Mr Daken’s evidence simply records that Mr Wiig introduced $20,000 into the business to pay invoices from two overseas suppliers. Mr Daken says that the accounts from the two German suppliers should have been paid before settlement of the sale of the business and so he did not consider that this was a loan which was repayable.
[125] There is no written record of the basis on which the funds were advanced. However, in the absence of any circumstances to suggest that the payment was made in acknowledgement of an obligation to pay it, it is prima facie a debt repayable on demand. There was no evidence to suggest Mr Wiig was paying it to meet a personal debt or obligation and therefore I consider the contribution of $20,000 made on 30 November 2013 to EWL’s account is simply a loan. Demand was made for its repayment on 20 June 2014, but repayment was not made and Mr Wiig is entitled to judgment in this sum.
Conclusion
The plaintiff ’s claims
[126] In respect of the plaintiff ’s claims against the defendants, I find as follows: (a) the first defendant is liable to the plaintiff in the sum of $325,675; (b) the second defendant is liable to the plaintiff in the sum of $20,000.
[127] Although on both claims interest under the Judicature Act 1908 was sought from 22 October 2013, the evidence does not support those sums being due and payable on those dates. Clause 1.3 of the October agreement afforded some flexibility as to when the $325,675 was to be repaid and it is not clear what was finally agreed. In respect of the $20,000 loan that was not advanced until
13 November 2013 and no repayment terms were specified.
[128] In my view, therefore, the appropriate course of action is to have interest run from 20 June 2014, which is the date that formal demand of repayment of both sums was made. Accordingly, each defendant is to pay interest on the judgment sum to the plaintiff at the prescribed rate under the Judicature Act from 20 June 2014 to the date of this decision.
The first defendant’s counterclaims
[129] In respect of the first defendant’s counterclaims, I have found that the plaintiff breached the contractual warranties in the October agreement for the purchase of his shares in two material respects. However, I found that no loss arises from the breach of cl 9.1(e), but I have reserved the issue of what loss (if any) arises from the breach of cl 9.1(c).
[130] In the event the parties are unable to determine what loss, if any, arises from the breach of cl 9.1(c), the parties may bring that matter before the Court by filing a memorandum. If such a memorandum is filed, a telephone conference will be convened to determine the most appropriate way in which to progress the determination of the outstanding issues.
Costs
[131] Costs on both the claims and counterclaims are reserved. If the matter comes before the Court again pursuant to the leave reserved above, then costs can be dealt with at the end of that process.
[132] Alternatively, if the parties do not require the Court’s further assistance on quantifying loss, but costs cannot be agreed, the party, or parties, seeking costs, should file cost submissions no later than 27 May 2016, with any submissions in response to be filed by 10 June 2016. I will then determine costs on the papers unless I require the assistance of counsel.
Solicitors:
Malley & Co., Christchurch
Cameron & Co, Christchurch
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