Do Yay Ltd ((in Liquidation)) v WEI and Lodge Food Ltd
| Jurisdiction | New Zealand |
| Judge | Gault J |
| Judgment Date | 20 April 2020 |
| Neutral Citation | [2020] NZHC 759 |
| Court | High Court |
| Docket Number | CIV-2018-404-1886 |
| Date | 20 April 2020 |
IN THE MATTER of the District Court Act 2016
[2020] NZHC 759
Gault J
CIV-2018-404-1886
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA
TĀMAKI MAKAURAU ROHE
Contract, Fair Trading — appeal against decision awarding damages to the respondents for pre-contractual misrepresentation — appellant sold a café to the respondent — cross-appeal against the quantum of damages of turnover of the business — misrepresentation — inducement to enter contract — whether the representations were made to the respondent — damages on an expectation rather than reliance basis — Contract and Commercial Law Act 2017 — Fair Trading Act
M Lenihan for the Appellant
AJB Holmes and L E Steel for the Respondents
This judgment was delivered by me on 20 April 2020 at 4:00 pm pursuant to r 11.5 of the High Court Rules 2016.
Registrar/Deputy Registrar
Do Yay Ltd (in liquidation), formerly known as Café Brioche Ltd, appeals against the judgment of Judge G M Harrison dated 8 August 2018, 1 awarding damages against it for pre-contractual misrepresentation under the Contract and Commercial Law Act 2017 (the CCLA), 2 in the context of its sale of a café business in Takapuna. The Judge found it had misrepresented the turnover of the business, which induced Mr Wei to enter an agreement to purchase. The Judge awarded damages of $116,980 on a reliance basis ($93,647 to Mr Wei's nominee, Lodge Food Ltd, and $23,333 to Mr Wei personally).
Do Yay challenges the judgment in multiple respects, claiming the limited representations were substantially correct, there was no intent to induce, nor was the purchaser reasonably induced to enter the agreement.
The respondents support the judgment on other grounds, namely their alternative cause of action under the Fair Trading Act 1986 ( FTA), which the Judge found it unnecessary to consider.
They also cross-appeal against the quantum of damages, seeking increased damages on an expectation rather than reliance basis.
Café Brioche opened in February 2014. It was situated on the ground floor of a commercial building at 2 Fred Thomas Drive, in the Smales Farm Office Park in Takapuna, Auckland. Its customers were primarily employees from the surrounding businesses. It was open on weekdays only.
In January or February 2015 construction work commenced in a carpark adjacent to the café.
In August 2015 Mr Wei saw an advertisement for the sale of the business. It stated: “The Café has strong weekly sales of over $9,000 per week…”. The asking price was $220,000 plus stock.
On 3 August 2015 Mr Wei met with Ms Han of the vendor's business broking agents, who said that the original asking price had reduced. There was some doubt as to whether, at this first meeting, the agent said the asking price had reduced to $170,000 or $120,000 plus franchise, but nothing really turns on this given subsequent discussions. The agent gave Mr Wei her listing summary either at this meeting or subsequently before contract. She also said to Mr Wei that the weekly turnover had reduced from $9,000 to $6,500 due to construction taking place on an adjacent parking lot.
Mr Wei did not follow up, but the agent contacted him on 31 August 2015 asking if he was still interested as a prospective purchaser had fallen through because of dissatisfaction with the August sales figures. Mr Wei requested further information, which the agent sent to him on 1 September 2015. That included weekly sales for July (four weeks) and August (three weeks) averaging $8,489 per week, and an income statement for the earlier six month period from 1 October 2014 to 1 April 2015, showing total net sales of $259,560 (equivalent to $9,983 per week). The agent also said the asking price was now $170,000 sold as a non-franchise café.
In an email of 4 September 2015, the agent advised the construction work would be finished in February 2016.
Later in September 2015 Mr Wei was told by the agent that the vendor was asking for $120,000. Mr Wei offered to purchase for $110,000.
On 2 October 2015 Mr Wei and Café Brioche Ltd executed a conditional sale and purchase agreement for $115,100. The purchaser was Mr Wei “and/or Nominee”. The agreement did not include a warranty as to turnover. One condition, for the purchaser's benefit, was a three week due diligence condition.
During the due diligence period in October 2015, the vendor or its agent gave Mr Wei further sales data. On 9 October 2015 Mr Wei was sent daily sales for the five week period from 31 August to 4 October 2015, which indicated average weekly sales of $8,483.
On 12 October 2015 Mr Wei was sent further copies of the information sent on 1 September plus an income statement from 1 February 2014 to 1 September 2015 showing net sales of $589,680 (not broken down over this 19 month period but averaging $7,162 per week).
During the due diligence period, Mr Wei was also given a printout of monthly sales for the period March 2014 to June 2015. This showed monthly sales in 2014 ranging from $36,860 to $57,504 (equivalent to $8,506 — $13,270 per week and averaging $10,464 per week) and then a downturn in 2015 with monthly sales to June 2015 ranging from $22,315 to $30,260 (equivalent to $5,149 — $6,983 per week and averaging $6,002 per week).
Lodge Food Ltd was incorporated on 22 October 2015.
On 27 October 2015 the purchaser's solicitor confirmed that the due diligence condition had been satisfied. The agreement went fully unconditional following the landlord's consent to assignment of the lease on 30 November 2015. Settlement occurred on 14 December 2015.
Following settlement Mr Wei found further sales data in a document under the till. He was able to ascertain actual sales records from the till and EFTPOS records. They indicated that sales were lower than represented. The vendor's sole director and shareholder claimed he had supplied this document prior to the agreement becoming unconditional.
The café did not perform to Mr Wei's expectation. The business ran at a loss and Lodge Food Ltd sold the café to a third party in August 2016 for $92,000.
The Judge accepted Mr Wei's evidence that he located the document under the till and that it had not been supplied earlier as claimed. As the figures recorded in the document did not accord with the representations Mr Wei had received, he had printed sales reports from the till. The sales shown in those reports matched the actual sales report and demonstrated that the various representations made about the turnover of the business were false. They showed that the actual sales figures had never achieved $9,000 or $6,500 per week, and that the construction had minimal effect on sales. After settlement, sales were consistent with those shown in the document.
The Judge rejected suggestions that the EFTPOS machine could have altered the till records and that the difference between the total sales recorded in the till and the EFTPOS sales represented cash sales.
A further explanation was that the difference between the till records and the turnover as represented was due to catering and online sales, but the Judge said the evidence could not substantiate this.
The Judge said that the plaintiffs' expert evidence from Mr White (a financial analyst) demonstrated a reasonably consistent turnover, particularly during the construction period when it had been represented to Mr Wei the turnover would improve once construction was complete.
The Judge accepted the plaintiffs' submission that the following representations were false:
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(a) that weekly sales of $9,000 had been reduced to $6,500 week due to construction;
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(b) that the café generated owner discretionary earnings of approximately $120,000 per year;
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(c) weekly sales figures for July 2015 and August 2015 totalled nearly $60,000;
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(d) net sales for the six months ending 1 April 2015 were nearly $260,000;
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(e) daily sales figures for 31 August to 4 October 2015 totalled $42,000;
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(f) net sales the period 1 February 2014 to 1 September 2015 were $589,680; and
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(g) monthly sales figures for the period March 2014 to June 2015 totalled almost $610,000.
The Judge also accepted that the misrepresentations induced Mr Wei to enter into the contract. He requested the financial statements — his only purpose was to be satisfied that the business was viable. His reasonable expectation would have been that the turnover as represented would have been maintained and increased at the completion of the construction period.
The Judge said it is not necessary that the defendant should have intended that Mr Wei rely upon the figures, citing Bonz Group Pty Ltd v Cooke. 3
As to damages, the Judge referred to the plaintiff's election between loss of profit and wasted expenditure, noting that projecting profit was a difficult exercise. On the other hand, the Judge considered reliance damages were relatively easy to calculate. The loss of capital on resale was $23,100, to which the Judge added trading losses of $70,547 and lost salary of $23,333, totalling $116,980. Of this, the Judge awarded $93,647 to Lodge Food Ltd and $23,333 to Mr Wei.
The issues are to be determined on the appeal are whether:
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(a) turnover was misrepresented;
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(b) Mr Wei was induced by any misrepresentation;
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(c) there was any intention to induce; and
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(d) it was reasonable for Mr Wei to have been induced.
On the cross-appeal, the issue to be determined is whether higher damages should have been awarded on an expectation basis.
This Court's approach on a general appeal is settled following the Supreme Court's...
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