IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV 2008-485-2530 [2012] NZHC 2209
BETWEEN SCOTT BARRIE First Plaintiff
AND ANITA WOOD Second Plaintiff
AND NATURE DISCOVERIES QUEENSGATE LIMITED Third Plaintiff
AND NADIS PORIRUA LIMITED Fourth Plaintiff
AND DAKARIS LIMITED Fifth Plaintiff
AND NADIS GLENFIELD LIMITED Sixth Plaintiff
AND SCOTT BARRIE AND ROBIN JAMES BARRIE AS TRUSTEES OF THE BARRICHES TRUSTS Seventh Plaintiff
AND NATURE DISCOVERIES LIMITED First Defendant
AND NATURE BY DESIGN LIMITED Second Defendant
AND NATURE FOUNDATION LIMITED Third Defendant
AND DOUGLAS PFLAUM Fourth Defendant
AND BLAXALL & STEVEN DISTRIBUTORS LIMITED Fifth Defendant
AND JOHN GARLICK Sixth Defendant
SCOTT BARRIE V NATURE DISCOVERIES LIMITED HC WN CIV 2008-485-2530 [30 August 2012] AND MARK CHAN Seventh Defendant
AND DANIEL GARRETT Eighth Defendant
Hearing: 30 April 2012
Counsel: G A Paine and J Kite for Plaintiffs H C Matthews and J A Frampton for First to Fifth and Eighth Defendants No Appearance for Sixth Defendant J P Forsey for Seventh Defendant
Judgment: 30 August 2012
JUDGMENT OF SIMON FRANCE J
Introduction
[1] This case concerns claims of misrepresentation prior to the plaintiffs purchasing four Nature Discoveries franchises.
Background to litigation
[2] In 2006 Mr Barrie, or entities associated with him, purchased and then operated four stores as part of the Nature Discoveries chain of stores. Each was run pursuant to a franchise agreement.
[3] Nature Discoveries stores involved a concept of interactive involvement of customers with the merchandise in the store. The general theme, as the name implies, was the science and wonders of the natural world, and the stores were fitted out with a rock wall, a waterfall, a cave and numerous goods and exhibits that customers were encouraged to handle and engage with. [4] The first Nature Discoveries store was opened in Christchurch by the founder of the chain, Mr Pflaum in 1996. There was next a store opened in Dunedin in September 1997 and then in Porirua, Wellington in October 1997. All three stores were “company stores”, run by Mr Pflaum under corporate entities he had established. This remained the case until 2003 when the Christchurch business was sold under a licensing arrangement. One month later the Dunedin store likewise changed hands, this time to the couple who had up until then been managing it.
[5] In the spring of 2005 Nature Discoveries advertised the availability of franchises in a Franchise trade magazine. Currently available were the Porirua store, and a new store about to be opened in Queensgate, Lower Hutt. Mr Barrie, who had previously had considerable success operating franchises under the “Subway” banner, saw the advertisement and was interested. He made contact with the real estate agent identified in the magazine (Mr Mark Chan, the seventh defendant) and matters went from there.
[6] Mr Barrie’s was a reasonably prolific and fast engagement with Nature Discoveries. Only six months elapsed between settling the first, Queensgate, and the last in Northlands, Christchurch. In between he also acquired Porirua and Glenfield.
[7] Mr Barrie operated his four stores throughout 2007. There were discussions about further shops, with considerable endeavour being put into opening a new store at Albany, Auckland. Eventually Mr Barrie did not proceed with that opportunity, and Nature Discoveries opened the store itself.
[8] It seems that towards the latter part of 2007 the trading figures for the four stores were not as Mr Barrie hoped and envisaged. There is correspondence suggesting unpaid accounts, and in the first part of 2008 things started to unravel. Eventually in May 2008 Nature Discoveries cancelled the four franchise agreements, and re-entered the three stores where it was still lessee. The litigation
[9] There are several different areas of challenge and claim. Various entities are involved but for the moment it is convenient to call the parties Mr Barrie on the one hand and Nature Discoveries on the other.
[10] The first two causes of action allege misrepresentation, and breaches of the Fair Trading Act 1986. The focus is first on the initial Disclosure Document provided to Mr Barrie, and then on statements made by Nature Discoveries during the course of discussions preceding the various purchases. The primary but not exclusive concern relates to statements about turnovers, and statements about the likely cost of goods.
[11] The next claim is for a breach of fiduciary duty, it being pleaded that there is a fiduciary relationship between franchisor and franchisee. The breaches alleged include opening a web based sales option in opposition to the rights of the franchisees, and also encompass the alleged misrepresentations in the Disclosure Document.
[12] There is next a claim for breach of contract. A term of two of the agreements for sale and purchase (Porirua and Christchurch) was that if the consent of the landlord to an assignment of the lease was not obtained, then settlement money was to be returned to the purchaser. Mr Barrie claims Nature Discoveries to be in breach of this condition. If the condition has been triggered, Mr Barrie must account to Nature Discoveries for profits made during the period of possession. Mr Barrie accepts this is so, but says there were no profits.
[13] The final claim is that Nature Discoveries induced Mr Barrie’s employees to breach their contract with him. This arose when Nature Discoveries retook possession of the stores. It offered the staff working there the opportunity to keep working, since it was Nature Discoveries intention to keep running the stores. Facts
Events preceding the first purchase of the first store at Queensgate
[14] Mr Barrie read the article/advertisement in the franchising magazine. It said there were two opportunities available. The contact person was:
Mark Chan Nature Discoveries [email protected]
The postal address was that of Mark Chan Realty.
[15] Mr Barrie contacted Mr Chan and was sent various documents. The information provided appears to have been the article/advertisement Mr Barrie had already seen, a similar earlier article, a business information profile which was a print out of an internet package for the business which had been posted on the Open2View website, and a Franchise Disclosure Document.
[16] The business profile contained information relevant to the claim against Mr Chan, but its contents essentially repeat material in the Disclosure Document and it can put to one side for the moment. It is the Disclosure Document that is central to the misrepresentation allegation. By way of background, shortly before Mr Barrie became interested, Mr Pflaum of Nature Discoveries had joined the Franchise Association of New Zealand. He had not been a member initially, but some of his franchisees had suggested he should be. The Disclosure Document prepared by Nature Discoveries followed the Franchise Association model.
[17] The front page contains various items of information and warning. It advises readers of the right to a cooling off period, and the wisdom of taking independent advice. Within the document itself, it should be noted that paragraph 9 of the document lists the current franchises. Seven stores are listed, two of which are described as company owned stores – Porirua which is described as having opened in 1997, and Queensgate which is described as having opened in 2005. Paragraph 10 is entitled “Financial Projections” and must be set out in its entirety: 10 FINANCIAL PROJECTIONS:
Note: These figures indicate the Gross profit margins and revenue expenses at stated turnover levels which have been experienced by the Franchisor in its own operations. There is no guarantee that you will achieve the same results, nor is it intended that you should rely on them as a guarantee.
Nature Discoveries Performance Projection: Proto-typical 120/130sq m Store Figures are GST Excl.
Socio-economic Medium High High Population Medium Medium High
Period 12 Months 12 Months 12 Months
Sales 650000 800000 950000 Cost of goods 341250 420000 498750 Gross Profit 308750 380000 451250
Expenses Accounting 1200 1250 1350 Marketing 7500 10,000 12500 Bank fees 200 250 300 Credit Card % 3900 4800 5700 Freight 1500 1650 1750 Insurance 1000 1200 1400 Operating Exp 1200 1400 1600 Phone 1800 1950 2150 Light & Power 3900 3900 3900 Rent & Op exp 95000 120000 145000 Repairs 500 500 500 Stationery 3000 3600 4300 Travel 500 500 500 Total Exp 121200 151000 180950
Net Profit 187550 229000 270300
Other Costs 4% service fee 26000 32000 38000
Surplus 161,550 197,000 232,300
The surplus shown above has been determined before any allowance has been made for depreciation, salary for the Franchise Owner, staff wages and the cost of any debt servicing.
TERRITORY OR SITE TO BE FRANCHISED:
Location:
The site to be franchised has not been subject to any trading activity within the previous five years by a Nature Discoveries store. [18] It is common ground that, at the time of the Disclosure Document, none of the stores had achieved turnovers of either $800,000 or $950,000, as perhaps suggested by the second and third columns. Further, the very last sentence of the extract is obviously inaccurate in that Queensgate had opened in November, and was in fact sold as a going concern.
[19] In addition to the information contained in the Disclosure Document, during discussions with Nature Discoveries, Mr Barrie was provided with the sales figures for the three months that the Queensgate store had been open. They were:
November $86,666 December $181,401 January $22,741
[20] By way of background comment, it can be noted that these months, standing alone, provide a false picture of the store’s annual turnover, or at least only hint at the true picture. The pattern of business at all Nature Discoveries stores shows that turnover is reasonably static from January through to October, and then there is a massive upswing for the two months prior to Christmas. December inevitably achieves a turnover several times higher than most months. The Queensgate figures above provide a stark illustration of the point.
[21] In addition to the sales figures for Queensgate, Mr Barrie was provided with the sale figures for the Porirua store, month by month, for the preceding eight years. These figures also clearly show the sales pattern just described.
[22] There were several email exchanges between Mr Barrie and Mr John Garlick, the CEO of the Nature Discoveries group. One exchange is the subject of particular focus. It began with Mr Barrie seeking the January sales figures for Queensgate, and the Porirua figures already referred to. Having received them, Mr Barrie then asked Mr Garlick:
Based on your experience, what do you think Queensgate will turnover annually? [23] Mr Garlick replied:
With regards to annual turnover, I would personally be disappointed if Queensgate did not do $800K + based on:
1) The demographics for this store are higher than other stores. Household income for this area is right up there.
2) Once it is a franchisee’s hands we know from History that turnover increases significantly.
3) Based on location it should exceed turnovers of every other store within the group.
On top of this Scott, we are just in the final stages of placing our first order direct from Hong Kong. The difference in cost of goods is significant and will we believe lower the cost of goods by at least 30%.
It is very exciting times for us.
Best regards
John
[24] Consequent on receiving Mr Garlick’s email, Mr Barrie prepared a budget for Queensgate, based on a turnover of $800,000. In doing the budget, Mr Barrie estimated the Cost of Goods sold to be 52.5 per cent, which was the same figure used in the tables in the Disclosure Document. Based on those sales, and with the cost of goods sold at that level, the projected profit was $117,000.
[25] Shortly after this email exchange, the Queensgate contract was made unconditional. It settled on 1 May 2006, and Mr Barrie commenced running the business.
Purchase of the second store – Porirua
[26] Mr Barrie commenced running Queensgate from 1 May. The Queensgate Sale and Purchase contract had included an option for him to purchase Porirua. Mr Barrie exercised the option. An agreement for sale and purchase of the business was signed 28 July and the purchase settled four days later on 1 August. [27] Obviously for this sale Mr Barrie had all the information that he had prior to making Queensgate unconditional. He also had updated Queensgate figures, including May, June and most of July during which period he had been running the shop. In addition, there was other information provided which it is necessary to detail.
[28] First, shortly after he started running Queensgate, Mr Barrie had asked Mr Garlick what he thought the cost of goods sold percentage could eventually come down to. Mr Garlick replied:
Scott – I take it this question is to assist with your financial projections.
It really depends on how much and what percentage of the store ends up being stock direct from China. I see the need to buy direct is paramount, especially when the likes of mall management companies continue to ask for more money and the ability to reduce other overheads is very limited.
It also depends on when you take this from – 6 months out? 18 months out? And the speed of which we take advantage of opportunities over in China i.e. from seeing a product to the product landing in New Zealand.
A number of these questions are as of yet unanswered – to be totally honest.
It is also a catch 22, in that I see the quickest way for us to take advantage of minimum order quantities in order to place an order with a supplier and to place more orders for other ranges, is store growth.
To add to this mix, is the opportunity I see that you will have if you own several stores, in that you will be able to either purchase sufficient volumes yourself ex China by the container load (with my assistance) or combine with other franchisees who have additional cashflow to buy extra items e.g. Stewart Whiteley.
If I had to put a figure on it, currently it is between 48–49%, my personal goal would be mid to late 30’s. This is a big ask – but I truly believe it can be achieved.
Scott – I will always see the need to buy from New Zealand and U.S.A. suppliers for exclusive lines e.g. Swiss Army Knives, Mancala etc will always be there and for those lines that are ‘fad’ lines – here today, gone tomorrow. I do not have a figure of what percentage this will end up at.
Obviously, stores also can’t have too high a proportion of funds tied up in stock overseas or on the water – so there is a balancing act. One thing is for sure is that both Doug and I want Nature Discoveries to be a success for everyone and buying goods at the lowest price has to be the key and we are keen to work with the likes of yourself to achieve this and have a win/win situation.
Cheers
John
[29] I have set out this reply in full because I consider it fairly reflects the tone and manner in which information was provided to Mr Barrie by Nature Discoveries. Projections are described as being that, and reasons for those projections are provided. It would be naive to ignore that Nature Discoveries is engaged in the process of selling a concept and trying to encourage a purchase, but at the same time there was throughout the exchanges a pattern of being open and proffering assistance.
[30] Returning to the narrative, another of the documents that Mr Barrie used was a 2005 year-end accounts summary for the Porirua store. He had in fact received this prior to declaring Queensgate unconditional, but Mr Barrie said that he only focussed on it once his attention turned to Porirua. Mr Barrie used the accounts summary to prepare a budget for Porirua, updating expenses as necessary to reflect current costs, and also to reflect the fact that he would be operating the store as a franchisee. The outcome was a projected loss of $20,000.
[31] Mr Barrie’s response to identifying a likely loss was to contact the real estate agent, Mr Chan. This was because Mr Chan’s advertising material had said Porirua was a profitable business. Mr Chan replied by sending another Porirua year-end accounts summary, this time for the year ending 2003. That account summary showed a profit of $135,114. (The 2005 summary had shown a profit of $28,000, off sales of $476,000.)
[32] Mr Barrie carried out a brief exercise on this 2003 budget summary. His notations show a profit of around $65,000, but he noted at the time that this figure made no provision for wages. Next in the sequence of information exchange was an email from Nature Discoveries which provided Mr Barrie with the year-end sales figures for all the Nature Discoveries stores. The sales levels achieved across the stores ranged from $400,000 to a high of $700,000.
[33] Mr Barrie then prepared a new budget for Porirua, this time using the preceding year’s actual sale figures of $425,559. He did three calculations, with the variable being the cost of goods sold figure. Changing this from 54 per cent, to 50 per cent and then to 45 per cent respectively, the outcome was a loss on each occasion: $50,000, $32,000 or $11,000. Mr Barrie sent these calculations to Nature Discoveries for comment.
[34] Mr Garlick replied:
10) Purchase Of The Porirua Store: We believe that the 46% margin (54% costs of stock) shown in your budget is too low and a projected turnover of $425,559 is also low, considering our average for the past 8 or more years is $473,562. There are a number of significant reasons for last years figure being so low, including the mall being disrupted for 2–3 months with alterations, it was an election year and most retail was down for a few months as a result, as a company we focused most of our energies into expansion and very little into optimizing our company stores, there was also a number of staff issues that affected our performance over this period.
If we obtained a t/o equal to an average year and got a margin of 52.5% the store would be back into profit. ($969)
Changing from a company store to a franchisee store we feel we can realistically expect an increase of 15–20% (based on past history) and if marketing activities were increased this could also provide a significant increase. Changes in our margins during the next year will also bring about increased returns.
I believe a turnover of $500k (previously we have achieved $538k) with a 55% margin is very realistic and this could generate a profit of $25k+. A turnover of $550k could generate a profit of $50k+
As we achieve more critical mass I believe a t/o of $750k is realistic (with 20 store National advertising) and this could generate a profit of up to $150k.
I see as a way forward for both parties – that we agree on the following:
i) A 50% deposit paid now for the Porirua store.
ii) The balance to be paid over an agreed period of time (interest free). This would ensure that you secure the site and retain a commanding control of the Wellington market, Ruth and yourself can start working straight away on getting the turnover up, training staff, additional marketing campaigns/local advertising and setting up the store during the quiet time – ready for the busier months.
[35] On 28 July both a sale and purchase agreement, and a franchise agreement, were signed, and the purchase was settled on 1 August 2006.
The third purchase
[36] Next, in the sequence is Glenfield which opened on 30 October 2006. This was a new store, and Mr Barrie entered into a lease directly with the mall owner. The misrepresentations alleged to have occurred in the lead up to the purchases of Queensgate and Porirua are claimed to be still operative as regards this purchase. No new misrepresentations are alleged, and so the facts are generally of little significance.
[37] What should be noted, however, is that the fit out costs were more than Mr Barrie expected, and arguably more that Nature Discoveries had predicted they would be. The dispute concerning this forms part of the breach of fiduciary duty claim to be considered later in the judgment.
The fourth purchase
[38] The fourth purchase was a store in the Northlands Mall in Christchurch. Again, there is little to note here. The store was an existing shop which Mr Barrie bought on 1 November 2006. There are no particular claims about this; the earlier narrative, including the same alleged misrepresentations, is relied upon.
The Albany store
[39] Finally, I note there was considerable endeavour devoted by both parties towards Mr Barrie opening the new store in Albany. There was evidence led about these events but there are no claims in relation to it. It can be said that eventually it was Nature Discoveries that opened the store, but otherwise it is unnecessary to consider the matter further.
Analysis
A. General comments
[40] It is convenient to consider the issues under the various causes of action, and the factual matters underpinning them. Before addressing those I make some general comments about the witnesses and their testimony.
[41] The factual witnesses of significance were Mr Barrie and Mr Pflaum. I do not consider either witness was being dishonest. However, concerning Mr Barrie, I do consider some of his testimony reflects an ex post facto rationalisation of events that occurred. He now testifies to relying on some matters which the overall pattern of events suggests is unlikely. But as I say, I do not suggest this is dishonesty; just a not unfamiliar phenomenon of looking back at things through eyes affected by all that has happened, and with a realisation it has all gone wrong.
[42] The description of events already given is enough to show that Mr Barrie attacked this enterprise with a surprising degree of haste. His own figures several times showed that Porirua was a doubtful proposition at best, yet he pressed on seemingly in the hope that suggestions for improvement would all occur. A further example of this approach is provided by the evidence of Mr Barrie Snr. He was a trustee of the Trust which held the shares in the corporate entities through which Mr Barrie bought the businesses. Mr Barrie Snr is an accountant. In cross-examination he accepted he neither worked on evaluating the business opportunities, nor was asked to provide input into the budgeting or financial projections:
they were run past me but not [for] my advice or direct input.
[43] The primary defence witness was Mr Pflaum, the man behind Nature Discoveries. The other key figure in the chain of events, the CEO Mr Garrett, did not testify. As noted, my general impression of the communications from Nature Discoveries is that they were open, and intended to be helpful. Almost always when a projection was given, the reasons underlying it were specified. Obviously throughout this process Mr Barrie was in a disadvantageous position as regards specific knowledge of the business, but he was an experienced and wealthy businessman with previous experience in running franchises. Against those observations I turn to the causes of action.
B. Causes of actions alleging misrepresentations – Contractual Remedies Act 1979, and Fair Trading Act 1986
(i) FIRST REPRESENTATION – NATURE DISCOVERIES STORES HAD PREVIOUSLY ACHIEVED TURNOVERS OF $800,000, AND $950,000
[44] The source of this alleged misrepresentation is the Disclosure Document, and in particular the table set out above at [17]. The table is headed Financial Projections, and the relevant lines are:
Socio-economic Medium High High Population Medium Medium High
Period 12 Months 12 Months 12 Months
Sales 650000 800000 950000
[45] Mr Barrie read this as saying that a Nature Discoveries store located in a high socio-economic, medium density population area had previously achieved sales of $800,000; and that a Nature Discoveries store located in a high socio-economic, high density population area had achieves sales of $950,000. It is common ground that no Nature Discoveries store had achieved such sales; was it reasonable for Mr Barrie to so read it?
[46] This paragraph of the Disclosure Document is headed “Projections”. At an initial glance one could accept the defendants’ position that the table is intended to convey the likely or possible profits, if there are sales of this level and expenses of this amount. Pivotal, however, is the wording of the Note that precedes the table: Note: These figures indicate the Gross profit margins and revenue expenses at stated turnover levels which have been experienced by the Franchisor in its own operations. There is no guarantee that you will achieve the same results, nor is it intended that you should rely on them as a guarantee.
[47] The wording is taken from a model provided by the Franchise Association. If the word “stated” were replaced by “projected”, and the words “at [projected] turnover levels” placed at the end of the sentence, then it would more accurately convey its intention. In other words, the sales figures are hypothetical, but the gross profit margins and expenses are based on actual experiences. So the theory of it was:
if you achieve sales of X, then based on our actual experience of costs as set out in the table, here is the profit you might make.
[48] Mr Barrie read it as being the:
stated turnover levels which have been experienced by the Franchisor in its own operations.
[49] The defendants contend that when you read the document as a whole it is plain that the table is a projection. However, I do not see anything else in the document that particularly influences the obvious reading, and none was proffered other than the heading of projections, and a paragraph to which I now turn.
[50] In the table, immediately below the italicised note, it reads:
Nature Discoveries Performance Projection : Proto-typical 120/130 sq m Store. Figures are GST excl.
It is argued by the defendants that this emphasises that the figures are hypothetical rather than relating to a particular store. There is merit in that, but I remain of the view that Mr Barrie’s reading of the extract is not unreasonable. Indeed, it is at least as obvious a reading, and probably the more obvious. In my view most would read it as saying that these are figures experienced by the franchisor in other stores.
[51] Accordingly, I find the Disclosure Document contained an unintended misrepresentation that unnamed Nature Discoveries stores had previously achieved turnovers of $800,000 and $950,000. It is to be noted, however, that it is not a representation that Queensgate had achieved that turnover, nor does the document itself purport to allocate Queensgate to any of the three columns.
(ii) SECOND REPRESENTATION – THE SITE TO BE FRANCHISED HAD NOT BEEN SUBJECT TO TRADING ACTIVITY WITHIN PREVIOUS FIVE YEARS
[52] The last line of section 10 of the Disclosure Document incorrectly said:
Territory or Site to be franchised
Location: The site to be franchised had not been subject to any trading activity within the previous five years by a Nature Discoveries store.
[53] Quite what is intended by this is unclear, since both options then up for sale were being sold as going concerns. The preceding section of the Disclosure Document had made that plain, in that it indicated that Queensgate had been opened in 2005, and Porirua in 1997. These were the only two franchises then available.
[54] There is no evidence that anyone was misled by this error, and given the stores were going concerns, they could not have been. Mr Barrie had the actual trading figures for the stores, so obviously he knew they had been operating. Mr Paine indicated that it was not being relied on as an actionable misrepresentation. It remains unclear to me why the error was included in the claim at all.
(iii) THIRD MISREPRESENTATION – AN ALLEGED MISREPRESENTATION BY MR GARLICK THAT THE SOCIOECONOMICS OF THE QUEENSGATE AREA WERE HIGH, THE POPULATION WAS MEDIUM, THAT THERE WOULD BE SALES OF $800,000, THAT THE COST OF GOODS SOLD WOULD BE $420,000 AND THERE WOULD BE A GROSS PROFIT OF $380,000. ALSO THAT EXPENSES WOULD BE $151,000, LEAVING A NET PROFIT OF $229,000. THIS ALLEGATION INCORPORATES A CLAIM THAT THE DISCLOSURE DOCUMENT PROJECTIONS HAVE NO REASONABLE BASIS.
[55] This allegation is poorly pleaded and needs clarification.1 In the email which contains some of these statements, Mr Garlick said he hoped Queensgate could achieve sales of $800,000. That is the only monetary figure mentioned. All the other figures set out above are uplifted from the middle column of the projections table in the Disclosure Document. So what is being said, although not pleaded that way, is that by predicting $800,000 Mr Garlick was thereby linking Queensgate to
1 Mr Paine confirmed the description of the alleged misrepresentation, and that it was sourced in paras [26], [30], [40] and [41] of the Fourth Amended Statement of Claim. the middle column of the Disclosure Document table, and predicting or asserting that the other figures would also be achieved.
[56] The only basis for claiming this link can be that in the text of the email Mr Garlick makes reference to the demographics and household income of Queensgate catchment area. This is a far cry from making any assertion about figures other than turnover, and the link just cannot be drawn. If there be a misrepresentation in Mr Garlick’s email, it is as to the sales figure only.
[57] Mr Garlick’s hope or expectation of a turnover of $800,000 is clearly a statement about a future event, as indeed is the sales figures of $800,000 in the Disclosure Document table, at least as the defendants intended it. It is common ground, and well established, that projections are not in themselves statements of fact and therefore are not actionable. However, it is equally settled that such statements may be read as containing implied statements of fact, usually at least that they are honestly held expressions of opinion, and that the maker of them has a reasonable basis for them. In the present situation Nature Discoveries has operated several stores and, as vendor of franchisees, was in a position of knowledge. Mr Matthews accepted that these two implied facts could be inferred given the circumstances.
[58] Accordingly, it is necessary to explore the basis for Mr Garlick’s prediction, and for the belief evidenced by the Disclosure Document that sales of $800,000, and $950,000 were possible.
[59] Mr Pflaum is the source of the projections, and he explained in evidence the process he followed. It will be recalled that the table consists of three columns, each with a different turnover figure – $650,000, $800,000 and $950,000. The first figure of $650,000 reflects the sales that had been actually achieved in the existing store in Dunedin. Its sales for the year ending March 2005 had been $670,000, and being conservative Mr Pflaum lowered this; he also increased some of the expenses set out in the table because as regards expenses, at the time of doing the projections, he was working off figures for the year ending 2003, and he anticipated there would have been some increases. [60] Mr Pflaum’s experience in this business over the years had led him to believe the key to turnover for his chain of stores was the wealth or discretionary income of the people living near the stores. In this regard he assessed Dunedin as being medium in terms of both population and socio-economic factors. It was the best performing of his stores but he considered that better placed stores would do better. He accordingly carried out projections if stores were located in better catchment areas.
[61] Mr Pflaum was concerned to check that his projections were valid, so he carried out various cross-checks. First, he selected a series of locations, being both existing stores and possible future sites for stores. At this point, the possible future sites were Queensgate and the new Sylvia Park complex in Auckland. Mr Pflaum obtained, from a company specialising in such information, household income data, and information on the number of households in relevant suburbs surrounding these sites. Using Dunedin as the base of 1.0, Mr Pflaum carried out a comparative exercise on the other locations comparing the household number and income information pertaining to Dunedin with these other sites. For the existing stores the figures projected by this exercise were very much in line with what he knew to be their actual turnovers, particularly as regards the stores in Christchurch and Porirua. This led him to conclude his assessments were correct and that the predictions for better located stores were valid. The projections for Queensgate and Sylvia Park were $827,000 and $991,000 respectively.
[62] Reaching projections for each site had required a decision to be made about which suburbs to include in a particular catchment area. The plaintiffs are critical of Mr Pflaum choices as to which suburbs he took into account, but there is nothing in the evidence to suggest to me such debatable allocations as were made had any measurable difference on the resultant figures.
[63] Another source of cross-checking information available to Mr Pflaum was his knowledge of how well competitors’ stores were doing. In particular, around this time Mr Pflaum was involved in discussions to purchase two other companies trading in the same area – the New Zealand Nature Company Ltd, and Natures Windows Ltd. Across those two companies there were stores in Taupo, Hamilton (x2), Milford, St Lukes and Auckland Airport. Mr Pflaum’s analysis of what he learned during this process about the turnover of those stores in the different areas confirmed his assessments of what his stores could achieve. In particular, he knew that Auckland based stores were capable of turning over $1 million in sales.
[64] There was limited other evidence about the validity of the process Mr Pflaum followed. Mr Munro, the accounting expert called by the defendants, said that, based only on a high level review of what Mr Pflaum had done, he considered the assumptions underlying the projections to be reasonable. Mr Hulstone, the plaintiffs’ accounting expert, did not address the topic. Mr Barrie offered some observations.
[65] Against that background I turn to a fuller consideration of the relevant principles. The law is clear that projections and opinions will not usually be the basis for a successful claim of misrepresentation. Sometimes, however, when the person stating the opinion is a superior position of knowledge in relation to the facts underlying the opinion, the law has held that there may be implied representations underlying the expression of opinion. For example, it has been held to be implicit in a prediction of future earnings that the company to which the prediction related was presently in a financial position that would support the making of the prediction.2
[66] In Dillon Holdings Ltd v Stirling Sport Franchising Ltd,3 William Young J formulated the inquiry as being whether there was a proper factual basis for the estimates. In Valda Video Limited v United Video Franchising Limited,4 the representation in relation to a new store was that it could do a turnover of $10,000 per week. The Court held that the franchisor had not undertaken the type of exercise one would expect prior to expressing that sort of opinion. The Court was assisted to reach this assessment by evidence from another franchisee of United Video, who set out what matters he would expect to have informed the assessment, none of which seem to have been considered.
2 New Zealand Motor Bodies Ltd v Emslie [1985] 2 NZLR 569 (HC). 3 Dillon Holdings Ltd v Stirling Sport Franchising Ltd HC Invercargill CP 10/00, 28 March 2002. 4 Valda Video Limited v United Video Franchising Limited HC Auckland CP 123/00, 21 August 2001. [67] Both these cases illustrate that the inquiry is fact specific. It is important to keep in mind the actual projections in issue. Here, there are two – the tables in the Disclosure Document, and Mr Garlick’s email projecting $800,000 for Queensgate.
[68] The tables represent projections that stores in this type of area might achieve sales of this level, and if they do, that they will incur outgoings of the type specified.5 The only aspect of the tables which is challenged is the reasonableness of the link between the characteristics of the catchment area and the resultant predicted sales level.
[69] Mr Pflaum is experienced at running these stores. He had a belief as to what was pivotal in achieving turnover. He took steps to confirm that belief. The system he used to test his predictions produced outcomes that were consistent with the known outcomes being achieved in existing stores. The predictions were in turn reinforced by knowledge he had about what competitors were achieving in similar areas.
[70] Whilst no doubt there were other ways to do it, the evidence left me satisfied that Mr Pflaum’s analysis was reasonable. Further, there was a dearth of evidence from the plaintiffs to say otherwise. Neither of these two propositions could be made of the evidence in Valda Video and so I see the cases as quite different. I accordingly reject the proposition that the projections in the Disclosure Document were not honestly held and had no reasonable basis.
[71] The second source of the alleged misrepresentation is Mr Garlick’s email. This is different in nature in that it specifically predicts an $800,000 turnover for Queensgate. The reasons given by Mr Garlick in support were that the demographics are higher than other stores, the turnover will improve with franchisee ownership and ultimately it should exceed turnovers of every other store. There is no evidence to say he was wrong about the demographics being higher than other stores, or about the improvements owner operators achieve.
5 Depending upon their floor area. [72] Concerning the statement about the turnover being higher than all other stores, Mr Barrie notes that, based on the misrepresentation in the Disclosure Document, he took $800,000 to be a conservative prediction because according to the Disclosure Document some store had already achieved $950,000, and here Mr Garlick was saying Queensgate could do better.6 This evidence of Mr Barrie is, I consider, an example of a point being made after the event. Based on his earlier evidence that he had an expectation of $800,000, and also evidence of written budgets he prepared at the time which used a turnover figure around $600,000, I consider the most Mr Barrie ever expected was $800,000. There might have been a hope of eventually doing even better than this, but nothing that, in my view, amounts to actual reliance.
[73] Mr Pflaum’s prediction process, already discussed, had produced a potential sales figure of $827,000 for Queensgate. Therefore, Mr Garlick’s predicted turnover $800,000 was, in my view, reasonable for the same reasons. The demographics for Queensgate were apparently better than for their existing stores. One of those stores in a less advantageous spot had achieved a turnover of $700,000, so again there was a proper basis for a prediction of $800,000.
[74] Accordingly, I conclude that the email represented an opinion honestly held; the basis for it was clearly articulated; and it was a reasonable opinion based on the information available to the maker. It is not therefore actionable, even if it was materially wrong. Whether it was materially wrong is a matter I will touch on in the next section. Likewise the Disclosure Document predictions were honest and reasonably held opinions.
6 Of course, from Mr Garlick’s viewpoint, a projection of $800,000 was already a prediction that Queensgate would do better than any other store. As discussed, although I have held the Disclosure Document to suggest these high turnovers had been achieved in the past, they had not. And Nature Discoveries had not intended to suggest they had. It was an error. So Mr Garlick would make this statement against the actual knowledge that around $700,000 was the best any had done up to now. (iv) FOURTH MISREPRESENTATION – MISREPRESENTATION IN THE DISCLOSURE DOCUMENT THAT QUEENSGATE WOULD ACHIEVE THE FIGURES SET OUT IN THE MIDDLE COLUMN OF THE TABLE
[75] This is a variation on the last misrepresentation. It is a claim that the Disclosure Document itself represented that Queensgate could achieve the outcomes set out in the middle column of the table.7 The only answer one can give is that it does not. I was not pointed to anywhere in the document that it links Queensgate to anything, and my own reading of it has not identified such a link. So the allegation never gets off the ground.
[76] There are other problems as well. The table set out in the Disclosure Document is premised on a hypothetical store of 120/130 m2. Queensgate is 25 per cent smaller. The expert evidence at trial indicated this difference in size was significant, as intuitively one would expect it to be. Adjustments to reflect a smaller shop are not linear – because Queensgate is 25 per cent smaller, one cannot say all these figures should be proportionately adjusted. But the reality is that smaller stores have less stock and so, when the same goods are being sold, the significantly smaller store will almost inevitably achieve a lesser turnover.
[77] It should also be observed that one could not reasonably read the expenses in the table as being other than projections that will inevitably need adjustment depending on the particular circumstances. The franchise document is clear that no promises are being made, and one is entitled to expect a reader will bring a degree of reality to it, as well as undertake their own analysis.
[78] All that said, there is room for genuine dispute about whether the outcomes Mr Barrie actually achieved at Queensgate are materially different from what he expected to achieve. Mr Barrie’s evidence was that, off expected sales of $800,000, he calculated a profit of $117,000. A different written budget, similar to the Porirua exercise he did with three tables representing different percentages for the costs of goods sold, had worked off sales of $600,000, and calculated profits between $58,000 and $108,000. So the most he was hoping for was at best a profit figure of around $120,000, and sales between $600,000–$800,000.
7 Confirmed by Mr Paine to be found in paras [27], [41], [42], [44] and [59] of the Fourth Amended Statement of Claim. [79] The accounting expert for the defendants was of the opinion that Mr Barrie had achieved a surplus of $131,000 off actual sales of $700,000. He reached this assessment by using the relevant company’s accounts for the tax year. These accounts had indeed been used for tax purposes, and disclosed a surplus of only $60. However, the witness noted that this figure was reached only after deduction of a management fee of $108,900, and an interest payment of $15,000. Neither of these payments had been included in Mr Barrie’s budgets. So when the witness wrote these two figures back in, so that one was then comparing apples to apples, the surplus achieved was actually 12 per cent higher than Mr Barrie had budgeted for. And this was off sales of $700,000 rather than the targeted level of $800,000.
[80] In my view no answer was provided by the plaintiffs to this evidence. The accounting expert for the plaintiffs did not comment on it. Mr Barrie in oral evidence tried to contradict it by making a claim that the annual accounts that were being used were not an accurate representation of the situation. This was unconvincing, and the accounts were a proper basis for the defendants’ expert to do his calculations. I consider, therefore, that the plaintiffs would have had a difficult task to establish any loss as a result of the misrepresentation.
(v) FIFTH MISREPRESENTATION – MISREPRESENTATION BY SILENCE, IN THAT MR BARRIE WAS NEVER INFORMED THAT THE MONTHLY SALES FIGURES FOR QUEENSGATE, FOR NOVEMBER AND DECEMBER, WERE NOT REPRESENTATIVE OF THE WHOLE YEAR
[81] This claim can be shortly dealt with. There is indeed no evidence that this was ever expressly explained to Mr Barrie. However, he cannot reasonably have thought otherwise. The first figures he had available were for November, December and then, a short time after, January. January was already eight times lower than December. Further, November and December combined, if replicated through the year, would represent an annual turnover of $1.6 million, twice what Mr Barrie expected. It must have been obvious these two months were not representative. Further, the breakdown for Porirua, disclosing as it did eight years of sales on a month by month basis, made the trend obvious. [82] Mr Barrie did not expressly testify that he believed the figures for November and December were indicative. That is not surprising to me because I have no doubt he did not think it. He is an experienced businessman and would have known otherwise. It is an omission with no causative effect, and need not be considered further.
(vi) SIXTH MISREPRESENTATION – MISREPRESENTATIONS CONCERNING THE COST OF GOODS SOLD IN RELATION TO PORIRUA STORE, AND THEN GENERALLY AS REGARDS HOW LOW THE COST OF GOODS SOLD MIGHT GO
[83] Again I am obliged to observe that this claim is clutching at straws. There is simply no evidential basis for it.
[84] It has been noted that the Disclosure Document, in its projection table, set the cost of goods sold at 52.5 per cent. The plaintiffs’ own accounting expert calculated the actual cost of goods sold for all the stores in which Mr Barrie was involved. He arrived at an average cost of 46.82 per cent. Further, he accepted under cross-examination that the figure was somewhat skewed upward by specific issues arising in 2007. Without those, the figure achieved would be lower again.
[85] Faced with this, the plaintiffs focussed on various statements by Mr Garlick that he hoped to get the figure lower. Central to his thinking was the purchasing avenues that were opening up in China. At all times the opinions he expressed were clearly that, and were clearly heavily contingent on various factors. One could not reasonably rely on them as having any degree of likelihood, or regard them as some sort of commitment by the defendants. They were simply goals, with perfectly valid reasons set out for why they were held. They do not carry any implied assertions of current fact, other than as regards matters which are not disputed. For example, it is not disputed that China presented opportunities.
(vii) CONCLUSIONS ON MISREPRESENTATION
[86] There was one misrepresentation. It was unintended but made nevertheless. It is that at some time in the past a Nature Discoveries store or stores had achieved sales turnovers of $800,000, and $950,000. I do not consider there were any other misrepresentations, express or implied. All opinions expressed were always accompanied by reasons, a fact which supports a conclusion of which I have no doubt at all – all opinions were genuinely given and honestly held.
[87] The opinions that were given had a reasonable basis. Where a projection or goal included a greater level of speculation, this was always very clear to the reasonable reader. In my view no false assurances were ever given. If enthusiasm ever rolled over into undue optimism, the reasons for it were always given and able to be scrutinised by any reasonable business person.
C. Was the misrepresentation relied upon by Mr Barrie?
[88] I am of the view that although the misrepresentation was a matter Mr Barrie gave consideration to, it was not in the end something he relied upon in deciding to purchase Queensgate. I conclude that other factors led him to purchase first Queensgate and then the other stores. This is not to say that Mr Barrie did not have it in mind that the better positioned stores he set up or bought into might not achieve turnovers towards a million dollars. However, his belief that some other unknown store had achieved sales of $800,000, and $950,000, was not an operative cause of the specific purchases he made.
[89] The first purchase was Queensgate. My view, already expressed, is that Mr Barrie thought it could achieve a turnover of $800,000 and it was that expectation that governed his actions. The source of this expectation, on Mr Barrie’s own evidence, was Mr Garlick’s email of 16 February. It was only a short time after receiving that email that Mr Barrie set out in writing the basis on which he would proceed to make the Queensgate agreement unconditional.
[90] Mr Barrie’s subsequent actions reinforce my assessment. He was, I consider, enthused by the project and committed to a grand scale project. He was aware that various projections omitted inevitable costs, such as staff wages, yet was undeterred. He purchased Porirua despite all his own projections that a loss was likely. This is not to be critical; Mr Barrie was a successful businessman and entitled to act as he considered appropriate. It is simply to observe there was an enthusiasm, and objectively a degree of haste, that leaves me far from convinced that the misrepresentation in the Disclosure Document was relied upon.
[91] Further, there is nothing in the contemporaneous material to suggest otherwise. There is no inquiry by him about these figures, and no request for information about which store. One would envisage, if it were at all pivotal in his thinking, that some attempt would have been made to relate Queensgate’s circumstances to the other successful stores. This lack of inquiry continued even when Mr Barrie was provided with the latest annual turnover figures of all the other stores. The highest any of them had achieved was $700,000; the next was $600,000 and the others all in the $400,000 range. Surely if the misrepresentation in the Disclosure Document was in any way a significant factor in Mr Barrie’s thinking, these figures would have raised alarm. Mr Barrie, when tasked with this proposition in evidence, said it did not concern him because the next part of the email which contained these results went on to project million dollar turnovers in Auckland, and that was his interest. In my view, that is a telling answer in terms of the role that the misrepresentation was playing – namely, little or indeed none.
[92] In reaching this conclusion, I have had regard to the fact that the receipt of information by Mr Barrie was obviously a progressive process. It is important for a fair analysis to have regard to what was available at the time particular decisions were taken. Working backwards in terms of purchases, I consider that it can be definitely said that the proposition that the misrepresentation in the Disclosure Document influenced even the purchase of Porirua, let alone any of the subsequent stores, is not sustainable.
[93] Porirua itself was only ever in the $500,000 range at best. By the time Mr Barrie committed to its purchase, the actual information he had must have overwhelmed the Disclosure Document. Mr Barrie had not only the actual figures for Porirua from its opening up to the date when he offered to buy it, he also had all the information on Queensgate, and these last annual turnover figures for all the stores. [94] Mr Barrie’s budgets, and the subsequent questions he raised, were all based on this other information. There is nothing in the documentation or correspondence to suggest the Disclosure Document was playing a role, and no reference at all to the proposition that other stores had achieved much higher sales.
[95] Nor was there evidence to suggest the Disclosure Document misrepresentation played a role in Mr Barrie opening Glenfield, or purchasing the existing store in Northlands. I recognise that Glenfield was an Auckland store, and that generally the common perception was that Auckland would be the big turnover market. However, again there is no reference in the contemporaneous documents to the predictions in the Disclosure Document. So many things had occurred since that document was first viewed, it is simply unrealistic to think it was part of the decision process.
[96] That then leaves the initial Queensgate purchase. In reaching my conclusions, I have been careful to identify the information available to Mr Barrie at the date when the agreement went unconditional, namely 8 March 2006. By then, Mr Barrie had the Queensgate figures for November, December and January, and the eight years of Porirua figures. He also had the Porirua year end accounts summary for 2005, and he was using that to make comparisons with likely Queensgate expenses.
[97] It was at this stage, around mid-February, that Mr Barrie wrote to Mr Garlick seeking his input into likely Queensgate turnover. And of course he received the $800,000 prediction which seems to have been the catalyst. It is the timing of these matters, the focus on the actual turnover figures, the use of the Porirua budget, and the absence of any reference to the tables in paragraph 10 of the Disclosure Document, that have led me to conclude that the misrepresentation was not relied upon. I am also influenced by what I see as a passion in Mr Barrie to press on with the idea, something which I consider is reflected most obviously in his next decision to purchase Porirua despite it being obviously marginal at best. [98] Accordingly, I am of the view that whilst there was a misrepresentation, it played no role in the decision to purchase the stores. It follows that the claims based on misrepresentation, and under the Fair Trading Act 1986, must fail.
Breach of contract
[99] The settlements for Porirua, and Northlands (Christchurch) were on the following terms:
Settlement is on the basis if Landlord consent to Assignment of Lease is not obtained within a reasonable period of time that settlement funds will be reimbursed to the purchaser and net profits earned from settlement date will be paid to the vendor.
[100] In neither case was the landlord’s consent obtained, and it is necessary to review how this came to be.
Porirua
[101] Settlement occurred on 1 August. It had originally been intended to sub-lease but the defendants changed their mind and preferred an assignment. On 26 September 2006, the landlord (Kiwi Income Property Trust) wrote setting out the requirements in order for them to approve assignment of the lease:
(a) the assignee, Mr Barrie, was to provide a personal guarantee and an unconditional bank guarantee for an amount equal to six months occupancy costs ($65,383.74);
(b) the assignor (Nature Discoveries) was to provide audited accounts, and a statement of advertising expenditure. Also various payments were required, and the preparation of legal documents was to fall on the assignor.
[102] This letter was sent by the landlord to Nature Discoveries’ lawyer. It was forwarded on by him one month later on 25 October 2006 to Mr Barrie’s lawyers, with advice that Nature Discoveries had attended to all its requirements. [103] Mr Barrie did not provide the documents required of him. On 30 January 2007, Nature Discoveries’ lawyer wrote again to their equivalent enquiring where the documents were. The response was that the letter had been forwarded to Mr Barrie. The matter seems to have again been left until late March 2007 when there is an email exchange between the landlord and Mr Pflaum. In this email the landlord was following up on Nature Discoveries’ lack of compliance with the steps it had to take which, notwithstanding the lawyer’s letter of 25 October 2006, had not all been done. However, Mr Pflaum immediately addressed what was needed, and then emailed Mr Barrie asking for him to complete his part. Mr Barrie replied on 16 March (some three weeks after Mr Pflaum contacted him) that:
BNZ have approved bonds. Just need to get them prepared etc. Hope to have completed in next couple of days. I will forward a copy when done.
[104] However, despite this, three months later on 14 June 2007, seemingly in response to a request from Mr Barrie, the landlord sent Mr Barrie a template to use for the BNZ Bank Guarantee. Then, in July 2007, there is evidence of an email discussion between Mr Garlick and Mr Barrie, the tenor of which is that Mr Barrie has financial issues and is seeking refinancing.
[105] Next, in August 2007 the landlord again emailed Mr Pflaum noting that the assignment of lease had not been approved because Mr Barrie had not yet provided the bank guarantees. Mr Pflaum followed up on it, and on 12 August Mr Barrie advised Mr Pflaum that obtaining the bonds was a high priority. He advised that BNZ had initially approved, on the basis of him using equity in other buildings, but then declined. Mr Barrie was pursuing other routes. Mr Barrie was never able to provide the bonds.
[106] Throughout this period Mr Barrie had been paying the rent directly to the landlord. Obviously due to the lack of any formal assignment, Nature Discoveries remained liable for it, but it seems all were content to proceed as if it had occurred. However, in March 2008 Mr Barrie failed to make rent payments. The landlord looked to Mr Pflaum, and matters snowballed quite quickly from there. On 19 March 2008 Mr Barrie’s lawyers wrote, stating that the settlement condition had not been fulfilled and return of settlement money was now required. The letter said it appended letters from Mr Barrie’s two banks declining the bonds, but I have not seen those.
Northlands (Christchurch)
[107] Settlement occurred on 1 November 2006, the same day as the agreement for sale and purchase was signed.
[108] On 5 March 2007 the landlord set out its requirements for assignment. The requirements on Nature Discoveries were the same as for Porirua. As regards Mr Barrie, there was required:
(a) a personal guarantor. The letter expressly noted that Mr Barrie was acceptable for this purpose;
(b) a bank guarantee for six months occupancy costs (being $64,647.90);
(c) evidence of public liability insurance cover for $5 million.
This was sent to Mr Barrie on 12 March 2007 with a request that he action it.
[109] On 13 March 2007, Mr Garlick emailed Mr Barrie about various matters and noted the landlord was wanting the lease assignment matters dealt with “ASAP”. On 16 March 2007 the landlord emailed Mr Barrie directly, saying all that was needed was the bank guarantee and the Public Liability Insurance certificate. They were not, however, provided and much later, on 20 June 2007, the landlord confirmed to Mr Pflaum that assignment had not occurred because it was still waiting on Mr Barrie. Nature Discoveries referred this email on to Mr Barrie with a request it be given high priority because it was affecting their reputation. Mr Barrie replied that BNZ were in the process of executing the guarantees and they should be ready soon. He also said the insurance certificate had been sent, but he would resend it. [110] In October the landlord again contacted Mr Pflaum, who in turn again asked Mr Barrie what was happening. Mr Barrie replied essentially requesting a meeting, the inference being he was having difficulties. Thereafter matters progressed in a similar way to Porirua.
Relevant principles
[111] Both agreements for sale and purchase were on the standard Law Society form, clause 8 of which provides:
Conditions and terms of securities Particular conditions
8.2 If a lease is to be assigned to the purchaser then this agreement is subject to a condition that on or before the date for the landlord’s consent stated on the front page of this agreement:
(1) The landlord shall at the vendor’s cost consent in writing to the assignment to the purchaser of the vendor’s interest as tenant. (2) The purchase shall prepare, at the purchaser’s own expense, a deed of assignment of the lease. (3) The deed of assignment shall be executed by the purchaser as assignee and tendered to the vendor or the vendor’s solicitor within a reasonable time before settlement. (4) The vendor shall seek the landlord’s consent to the assignment of the lease and the purchaser shall provide the vendor with all reasonable assistance in this regard, including providing full and prompt responses to the landlord’s reasonable requests for information concerning the purchaser and procuring such guarantees of the proposed assignee’s obligations as the landlord may reasonably require.
Operations of conditions
8.3 If this agreement is expressed to be subject either to the above or to any other condition(s), then in relation to each such condition the following shall apply unless otherwise expressly provided:
(1) The condition shall be a condition subsequent (2) The party or parties for whose benefit the condition has been included shall do all things which may reasonably be necessary to enable the condition to be fulfilled by the date for fulfilment.
[112] From this it can be seen that Mr Barrie was under a duty to provide Nature Discoveries with all reasonable assistance, including the procuring of such guarantees as the landlord may reasonably require. It is also provided that the settlement condition was a condition subsequent, with an obligation falling on the party for whose benefit the clause exists to do
all things which may be reasonably necessary to enable the condition to be fulfilled.
[113] The law is settled that a party cannot rely on non-fulfilment of a condition such as this where the non-fulfilment lies at that party’s door.8 In assessing whether Mr Barrie is responsible for the non-fulfilment, the facts are to be assessed with due allowance being given for the benefit of hindsight.9
[114] The burden of proof here lies on the plaintiff. The clause is inserted for the benefit of both parties since each will take benefit from it. It is the purchaser who is now suing for return of the purchase money, such claim being based on non-fulfilment of this condition. There being no dispute that the condition is not fulfilled, in my view initially an evidential onus lies on the vendor (Nature Discoveries) to put in issue fault on the part of the purchaser as regards non-fulfilment of the condition. If that evidential onus is discharged, the legal onus then rests with the purchaser/plaintiff who seeks to rely on the non-fulfilment to bring the contract to an end.10
[115] Steele v Serepisos is of assistance.11 There the fulfilment of a condition, namely the obtaining of a drainage consent, lay with the vendors. They took the steps necessary to obtain the consent but were unable to do so, at least on terms that fell within the contemplation of the contract. Accordingly, the vendors cancelled the contract on the basis that the condition had not been fulfilled. To this extent the case is similar to what occurred here when on 19 March 2008 the lawyer for Mr Barrie wrote cancelling the contract because the condition was not fulfilled.
8 Connor v Pukerau Stores Ltd [1981] 1 NZLR 384 (CA). 9 Ansley v Prospectus Nominees Ltd [2004] 2 NZLR 590 (CA), at [50]. 10 Ansley, at [47]. 11 Steele v Serepisos [2006] NZSC 67, [2007] 1 NZLR 1. [116] Serepisos primarily involved the issue of whether the vendors were required to give notice before cancelling the contract. It was held they were not, because there was no point to giving notice. The obligation lay with the vendors. They had done their best, but could not obtain the consent. There was nothing the purchaser had to do, so the vendor could cancel the contract without notice.
[117] The effect of this on the present case is that Mr Barrie’s lawyer’s letter of 19 March 2008 would be effective to cancel the agreements for sale and purchase without notice, so long as the party with the obligation to fulfil the condition had done, as in Serepisos, what was reasonably required of them.
[118] It is clear from the present facts that on both occasions the landlord was willing to consent to assignment as soon as Mr Barrie provided the documents. The requirement on him in relation to this obligation was, in accordance with the agreement for sale and purchase, to do all things that may reasonably be necessary to enable the condition to be fulfilled. The discussion which follows applies to the events surrounding both stores unless otherwise stated.
[119] I am first satisfied that the evidence establishes that there is a live issue as to whether Mr Barrie met this obligation. It is plain that in 2006 he was a person of considerable means, with a net value of several million dollars. Then, in May 2007 (Porirua) and June 2007 (Northlands) Mr Barrie advised Nature Discoveries that BNZ had approved the issuing of the guarantees and he expected to have them shortly. Against that background, I do not consider Mr Barrie can rely upon non-fulfilment of the condition as a basis to cancel the contract and recover settlement money unless he shows he has done all things reasonably necessary in the circumstances to satisfy the condition.
[120] Consideration of whether Mr Barrie has discharged his onus is straight-forward, since the plaintiffs have not provided the Court with any evidence as to why it was not possible to obtain the bonds. There are email exchanges with various people from which it can be inferred that Mr Barrie and his entities were at some point encountering financial difficulties, but there is no direct evidence on it. In his evidence-in-chief Mr Barrie confirms that he first sought approval from ANZ and then from BNZ. He says he had approval from the latter but that
in May–July 2007 and February 2008 the BNZ withdrew their earlier in principle agreement to provide the necessary bonds.
[121] I consider much more evidence is required to show that the “defaulting” party has done all that is reasonably necessary.
[122] The initial efforts in this case to obtain the landlord’s consent are characterised on both sides by a somewhat lukewarm interest, at least in the early stages. Requests from the lawyers, or Mr Pflaum, would be made; sometimes there was a response, other times not. Whether there was a response, or not, it was not then followed up on. This changed in mid-2007 when Mr Pflaum started to apply more urgency.
[123] Mr Barrie refers to, but does not elaborate on, earlier requests to the ANZ in 2006 to obtain the bonds. That was the year when Mr Barrie was purchasing these businesses, and apparently had net assets of several million dollars. All that was needed were bonds for $60,000. In order to rely on an unsuccessful request to the bank at that point as demonstrating the taking of all reasonable steps, evidence is required as to why it was unsuccessful. So too in 2007 with the BNZ, especially since approval was given by the bank in principle. It is plain that Mr Barrie had other business interests, and there is no evidence given as to the choices he made and whether those choices represent taking all reasonable steps in relation to this obligation.
[124] I note for completeness that there was no focus in evidence, or submissions, on the time within which the condition had to be satisfied. The condition itself provided that it was to be done within a reasonable period of time. Objectively one would think that that a reasonable time had expired by May 2008 when the relationship between the parties ended. However, it is plain that timing was not of the essence for either party, and neither party made it so. Both parties continued to act as if the contractual arrangements existed, and the clause was still capable of fulfilment. Accordingly, I consider the contract was still in existence. [125] The position, therefore, is that the plaintiffs have failed, by a wide margin, to show that, when they purported to cancel the contract in March 2008, they had taken all reasonable steps to fulfil the condition. They were not entitled to cancel, and are not subsequently entitled to invoke the condition and seek repayment of settlement money. The evidence is plain that, from reasonably early on, the ability to satisfy completion of the condition rested solely with Mr Barrie, and his lack of endeavour to satisfy it prevents reliance on it as a basis for terminating the contract. This aspect of the claim, therefore, fails.
Breach of fiduciary duty
[126] The proposition advanced here is that fiduciary duties existed over and above the obligations arising from the franchise agreement. In Chirnside v Fay it was recognised that a relationship which is contractual in nature may give rise to fiduciary as well as contractual relations.12 Fiduciary relations will arise most often in relationships which are inherently fiduciary in nature. Examples often given are solicitor-client, and trustee-beneficiary. Joint ventures have also placed in this category.13
[127] The second category where fiduciary obligations will be recognised involves situations where an examination of the particular characteristics of the relationship support the recognition in that particular case of fiduciary obligations. One of the matters that may point to this is when the relationship is such as to give rise to an expectation that one party will not use his or her position in a way adverse to the other. Another factor which is considered is whether the relationship gives rise to a reasonable expectation of trust and loyalty.
[128] In Maruha Corporation v Amaltal Corporation Ltd,14 parties to a partnership had decided to change the nature of that relationship by incorporating a joint company through which they would in the future undertake their endeavours. The Supreme Court rejected the proposition that the nature of the overall relationship
12 Chirnside v Fay [2006] NZSC 68, [2007] 1 NZLR 433, per Tipping J at [72], [74]. 13 Arklow Investments Ltd v Maclean [2000] 2 NZLR 1 (PC), at p 4. 14 Maruha Corporation v Amaltal Corporation Ltd [2007] NZSC 40, [2007] 3 NZLR 192. between the parties remained fiduciary. Rather, the parties had chosen to commit to a corporate structure, and to subject their relationship to the internal and external rules applicable to such enterprises. There was no warrant generally to impose fiduciary obligations on the parties that would arise over and above that agreed framework. However, as regards one aspect, the accounting and tax obligations, it could be said that a fiduciary obligation of loyalty still arose. That was because there was an arrangement between the parties on this particular aspect that extended beyond the corporate structure.
[129] In the present case the plaintiffs primarily pitched their submission on the basis that the relationship of franchisor and franchisee is inherently fiduciary in nature. Mr Paine accepted he had no authority to support such a proposition, something which might be thought to be telling when one is talking about such a commonly found relationship.
[130] I do not accept the proposition. The franchisor/franchisee relationship is not one which engenders expectations of trust, loyalty and confidence, and an expectation that the franchisor will not act out of self-interest. The plaintiffs seek to elevate the existence of mutual benefits that will flow from a successful franchise into a situation of fiduciary obligation. However, there are many circumstances of contractual arrangements which arise within the context of an on-going relationship. One cannot rule out that particular aspects of the franchise arrangements may attract fiduciary obligations. Where, for example, a franchisor controls supply and has the sole power to negotiate the purchase of goods from a supplier, one can imagine fiduciary obligations to franchisees could arise. It will inevitably by a fact specific inquiry. But it is to go too far to suggest the whole relationship is inherently fiduciary.
[131] Mr Paine appeared to draw support for the imposition of fiduciary obligations from the fact that the parties are in a position of unequal knowledge. However, that should not be overstated. As this case illustrates, a franchisee can obtain considerable information. Mr Barrie at various times received the complete turnovers for two stores, year-end accounts summaries for one, and the latest annual turnovers for all stores in the chain. I do not see any particular or unusual inequality component that merits placing the franchise relationship within the ranks of the inherently fiduciary.
[132] Further, in the present case the submission that the whole relationship is fiduciary must fail in the face of the contractual agreement itself, which provides:
43 No joint venture
43.1 Independent proprietor
The Franchisee agrees to conduct the business as an independent proprietor in its own name. Nothing in this agreement makes the Franchisee an agent, partner, joint venture, subcontractor, agent or employee of the Franchisor. All invoices, letters and other papers used in the Franchisee’s business must clearly indicate the Franchisee’s independent proprietorship and state that the business is carried on under licence from the Franchisor in such manner as the Franchisor from time to time requires.
[133] It is appropriate, however, to consider whether there are particular features of this relationship that mean the parties owe fiduciary obligations to each other. I note that there is no submission that Mr Barrie’s status as multiple franchisee of itself creates one. The particular aspects most focussed on by the plaintiff as amounting to a breach of fiduciary duty were:
(a) non-disclosure in the Disclosure Document that the sales projections were projections and not actually achieved turnovers;
(b) the costs over-run on the step up for the Glenfield store, although this did not feature in the closing submissions; and
(c) the establishment of a website to compete with the franchisees.
[134] Concerning non-disclosure in the Disclosure Document, that matter has previously been addressed. The inaccuracy in relation to turnovers is a misrepresentation, a point which illustrates that other areas of the law (here, the Fair Trading Act 1986 and the Contractual Remedies Act 1979) provide redress where appropriate. I do not consider it has been shown Nature Discoveries at this point owed fiduciary obligations to Mr Barrie, an prospective purchaser. [135] Turning next to Glenfield, I am unsure whether this argument is maintained. However, out of caution I address it. There was considerable discussion between the parties prior to the establishment of Glenfield as to the likely set up costs. The complaint is that ultimately it cost $148,000, when the nearby Sylvia Park store, which was larger, had only cost $142,000. Before me there was some debate about the actual costs but I do not regard this as relevant. What is more significant is that plaintiffs never showed how the overrun, if there be one, was the product of a breach of fiduciary duty. Sometimes, undertakings just cost more than is expected, and much more is needed before there is a breach.
[136] I have observed previously, and repeat, that I consider Nature Discoveries, Mr Pflaum and Mr Garlick were at all times honest in their dealings. The fact that there is a dispute about whether a claimed management fee for supervising the set up was properly payable to Nature Discoveries, and the fact that Nature Discoveries itself supplied some of the fit out without obtaining a quotation from a third party, does not of itself point to a breach of fiduciary duty, even if such a duty existed. The former is solely a matter of contract construction, and no breach is pleaded. The latter has not been shown to involve any untoward profit or untoward conduct. Indeed, Mr Pflaum’s evidence was that Nature Discoveries only provided the fit out because the contractor they had previously used went out of business. Nor was there any evidence presented that the costs of the fit out were out of line. Accordingly, had fiduciary obligations existed, I would not have found a breach.
[137] Concerning the website, Mr Pflaum established a site whereby some Nature Discoveries products could be ordered and purchased on-line. If this were a breach, it would be a breach that applied to all franchisees. The website customers that theoretically would be lost to the retail shops might have come from any part of New Zealand, and not necessarily from Mr Barrie’s catchment area.
[138] There are, I consider, interesting issues as to whether the establishment of the website breached the exclusivity provisions of the franchise agreements. However, the case was not pleaded that way, and on the evidence, damages would anyway be negligible. As regards an alleged breach of fiduciary duty, again I do not consider a case has been made out for breach, even if there was a duty. The matter was discussed at a meeting of franchisees, Mr Pflaum believes there was general agreement to the idea, and the intention was to plough all profits back into advertising for the benefit of all franchisees. As it happens there were no profits.
Interference with contractual relations
[139] When Nature Discoveries re-entered the stores, they offered existing staff the opportunity to continue working. This is claimed to be an interference with the contractual relations between the particular plaintiff entity running the shop, and the employee.
[140] I expressed dissatisfaction at the trial with the presentation of this claim, and time has not improved my perception of it. The plaintiffs presented no evidence of the contractual relationships that existed between them and their staff. It is not known if the employees had a right to terminate. And more frustratingly, there is absolutely no effort to identify or quantify loss. The plaintiffs made some vague claims to being denied the opportunity to set up another store and in that capacity to use the staff, but this idea is frankly fanciful. There is no evidence of any capacity to set up another store. In evidence Mr Barrie accepted he did not have the necessary cash. Further, the franchise agreements contained restraint of trade clauses that would have presented obstacles to establishing a similar type of store. Nor is there evidence other staff might not have been available, or that these retail staff possessed particular qualities that could not be readily obtained at short notice.
[141] The claim lacks merits and is rejected.
Conversion
[142] The final cause of action alleges conversion of the plaintiffs’ property at the time of re-entry. Again, it is not apparent that the plaintiffs still pursue this claim as it is not addressed in either the written opening, nor in written or oral closing submissions. However, there is no formal abandonment of it. [143] The pleading alleges unlawful termination of the franchise agreement. As noted, no arguments were addressed on why the circumstances that had arisen did not allow the franchisor to exercise its rights under the franchise agreement. Whilst, Mr Barrie in his evidence records the history of breach and termination notices, and the re-entry, he does not challenge the legitimacy of these acts. By contrast, Mr Pflaum in his evidence sets out the basis for the notices. He was not cross-examined on this evidence.
[144] Accordingly, I conclude for the record that there was no evidence on which I could hold that the termination of the franchise agreements, and the re-entry following such termination, to be invalid.
[145] The other issue underlying this cause of action appeared to be the absence of any credit to Mr Barrie or his entities for stock sold that belonged to Mr Barrie. During evidence, Mr Pflaum indicated that he accepted a credit was due. Before doing so, he had been waiting on advice that the goods were not subject to other security interests which might have given other parties an interest in the proceeds. However, following a break in the trial, counsel advised me this matter had now been resolved. Then, at the end of the hearing, as part of the respondents’ closing, amended amounts for the counter-claim were provided. As I understand it, the changes reflect this agreement, and Mr Paine did not address the issue in his reply submissions.
[146] In the absence of a formal abandonment, but with the explanation just given, I formally dismiss this claim.
Summary on claims
[147] In relation to the plaintiffs’ claims, each is dismissed. I have found there to be one misrepresentation but consider that it was not causative of Mr Barrie entering into either the initial Queensgate contract, or any of the subsequent store purchases. The claims under the Fair Trading Act 1986 and Contractual Remedies Act 1979 both fail for lack of reliance on the one misrepresentation. The only store where there was a possible argument that the misrepresentation might have been relied upon was Queensgate, which was the first store bought. However, for the reasons given I am of the view it was not a matter that influenced the purchase. I record that I consider there were formidable hurdles for the plaintiff in anyway establishing loss consequent on the misrepresentation.
[148] Concerning breach of contract, there was beyond dispute a condition of settlement that was never satisfied in that the landlord’s consent to assignment of the leases for Porirua and Northlands was never obtained. The evidence established that the only impediment to the obtaining of the consent was the failure of the relevant Barrie entity, and in reality Mr Barrie, to provide the necessary bank guarantees and public liability insurance certificate. In my view the defendants successfully put in issue whether the plaintiffs had taken all reasonable steps to fulfil the condition. Then, upon inquiry, I concluded that the evidence of the plaintiffs fell well short of satisfying me that reasonable endeavours had been taken. Refusals by banks to provide guarantees were relied upon, but at the relevant times the available evidence suggested Mr Barrie should have been financially able to satisfy the bank. Why this was not able to be done was not the subject of evidence, and accordingly the plaintiffs could not establish reasonable endeavours. That in turn meant it was not open to them to seek to cancel the contract for non-fulfilment of this condition.
[149] Finally, there were claims for breach of fiduciary duty, inducing breach of contract and conversion. For the reasons given in the judgment I do not consider any of them to be seriously arguable and they too are dismissed.
[150] It has not been necessary to differentiate between the various entities involved in the proceeding. The reason for some of the plaintiffs being parties has never been clear since the claims were based on the agreements for sale and purchase, and the parties to those agreements were properly the ones who could claim.
[151] The franchise agreements were entered into between Nature by Design Ltd, trading as Nature Discoveries Ltd (franchisor), and whichever “Barrie entity” had entered the agreement for sale and purchase. Again, they were the correct parties, depending upon the store in issue. The status of Mr and Mrs Barrie as plaintiffs is unclear, as it is with Mr Barrie Snr who is a trustee of the trust that owns the shares in the companies that entered the agreements. None of these people could sue on the causes of action pleaded.
[152] These findings also mean it is unnecessary to consider the separate position of Mr Chan, Mr Garlick and Mr Garrett (the sixth, seventh and eighth defendants respectively). The actions of each were taken on behalf of Mr Pflaum and Nature Discoveries, and Mr Pflaum indicated that he stood in their shoes. As it happens, no liability having been established against Mr Pflaum and Nature Discoveries, the same outcome necessarily applies to these separate defendants.
Counterclaims
[153] The counterclaims relate to unpaid accounts for goods supplied. In his evidence-in-chief Mr Pflaum provided summaries of these. He was not challenged on the specifics.
[154] During closing, as previously noted, Nature Discoveries provided an updated claim which reflected developments during the hearing. The changes reflect credit being given in respect of the stores for stock, fittings, petty cash and lay-by payments taken over by the franchisor. As I understand it, these changes resolve the challenges between the parties over the quantums.
[155] The sums claimed, and not disputed, are:
Nature Discoveries Queensgate Ltd – $115,310.71 Nadis Porirua Ltd – $68,880.81 Dakoris Ltd – $150,791.12 Nadis Glenfield Ltd – $131,182.69
[156] Judgment for those amounts is appropriate. However, as regards each total some is owing to the first defendant and some to the fifth defendant. I am unaware of the adjusted amounts applicable to each. Memoranda may be filed if the parties cannot agree. Costs
[157] The plaintiffs have failed on their claim, and the defendants have succeeded on their counterclaim. Costs should follow the event. Mr Chan was separately represented and is entitled to his costs. At this point I see no basis for anything other than scale costs and reasonable disbursements, but memoranda may be filed if there are other matters of which I am unaware, and on which the parties wish to be heard.
______Simon France J
Solicitors: G A Paine, Barrister, Palmerston North, email: [email protected] H C Matthews, Partner, White Fox & Jones, Christchurch, email: [email protected] J P Forsey, Duncan Cotterill, Christchurch, email: [email protected]