Turnover Ltd v Buy Right Cars (2016) Ltd

• Jurisdiction: New Zealand
• Judge: Walker J
• Judgment Date: 27 August 2021
• Neutral Citation: [2021] NZHC 2217
• Docket Number: CIV-2017-404-003072
• Court: High Court

Between

Turnover Limited

Plaintiff

and

Buy Right Cars (2016) Limited

Defendant

Brandon Orlandini

Counterclaim Defendant

[2021] NZHC 2217

Walker J

CIV-2017-404-003072

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA

TĀMAKI MAKAURAU ROHE

Contract — claim for breach of fundamental covenants in an Assert Purchase Agreement — sale of business which imported and sold used cars business — whether changes to personnel and stock constituted changes to the nature or scope of the business or the manner in which the business was operated

Appearances:

D Bigio QC and D MacRae for the Plaintiff and Counterclaim Defendant

M Arthur, D Kalderimis and L Bercovitch for the Defendant

JUDGMENT OF Walker J

This judgment was delivered by me on 27 August 2021 at 3 pm

Pursuant to Rule 11.5 High Court Rules

Registrar/Deputy Registrar

Introduction	[1]
Issues for determination	[8]
Admissibility of expert evidence	[10]
Background	[20]
The Buy Right Cars business at acquisition	[20]
Negotiations for the acquisition	[30]
Overview of the APA	[43]
Consideration	[45]
Schedule 3 of the APA — the key to the dispute	[51]
The mutual intention clause	[54]
The restriction on proposed changes to the business	[61]
Restrictions on employment and engagement	[65]
The fundamental covenants	[67]
Material events post settlement	[72]
The May Variation	[78]
Financial performance in EO1	[88]
Financial performance in EO2	[93]
Interpretation issues	[101]
Principles of contractual interpretation	[101]
Submissions on the interpretation controversy	[107]
How should clause (f)(iv)(C)—the proposed change clause—be understood?	[116]
The effect of the May Variation on the APA: when did the Orlandini interests cede operational control of the Buy Right Cars business?	[121]
Schedule 3(f)(iv)(B)(bb): a proscription on employing or engaging contractors	[133]
Clause (f)(iv)(D)(bb)—distort or adversely impact—a fundamental covenant	[140]
Clause (f)(vi)(D): any change to the scope or nature of the business, or the manner in which the business is carried on	[150]
Personnel decisions	[156]
Does this allegation fail on procedural grounds due to lack of notice?	[159]
What notice was given?	[173]
Did the staffing decisions breach a fundamental covenant?	[183]
Conclusion on alleged breach of fundamental covenants by personnel changes	[196]
Alleged stock composition breaches	[199]
Summary of Turnover's case	[199]
Summary of BRC16's case	[214]
Discussion	[216]
Conclusion on stock composition	[228]
Stock management — a systematic policy of reducing aged stock?	[229]
Discussion	[237]
Counterclaims against Turnover and Mr Orlandini	[254]
Alleged mismanagement of aged stock in EO1	[254]
The Dodge Hellcat	[268]
Summary of result	[278]
Costs	[281]

Introduction

1 This is a dispute between the seller and purchaser of a business which imports, certifies and sells used cars. The dispute is the product of a culture clash between an agile, entrepreneurial business and a disciplined corporation. The plaintiff, Turnover Ltd (“Turnover”), is the vendor along with an associated company called I&J Compliance Ltd. 1 It is a closely held company owned by Brandon Orlandini together with family members and associates. 2 The defendant, Buy Right Cars (2016) Ltd (“BRC16”), is the purchaser. It is a subsidiary of the Turners Automotive Group Limited (“Turners”), the listed parent company of a wholly New Zealand owned and operated automotive financial service group. 3

2 In this judgment, I refer to the business which was purchased as the Buy Right Cars business.

3 The consideration payable for the business under the asset purchase agreement between the parties (“APA”) comprised a payment payable on completion (split between cash and shares) and deferred consideration, known as earn out consideration, calculated in two twelve month periods after acquisition. The earn out consideration payable (if any) was tied to the financial performance of the Buy Right Cars business. However, an acceleration clause in the APA required payment of the full amount of the earn out consideration if BRC16 breached a fundamental covenant as defined in the APA. In that event, and if the breach could not be or was not remedied, financial performance was no longer relevant—BRC16 was obliged to pay the full amount of the earn out consideration stipulated in the APA and Turnover did not need to prove causation or loss.

4 There is a second significant outcome if a breach of a fundamental covenant is established. The restraints of trade will cease to apply. Mr Orlandini and the other

key individuals associated with Turnover will not be restricted in any way from competing with BRC16

5 Turnover claims BRC16 has breached a fundamental covenant. It says that the full amount of the earn out consideration is payable. No conduct by BRC16 designed to suppress earnings to avoid payment of the deferred consideration is alleged. However, Turnover contends the purchaser has breached two of the five fundamental covenants in the APA by: 4

• (a) implementing changes to the scope or nature of the Buy Right Cars business, or the manner in which that business was carried on, without the prior written consent of Turnover; 5 and

• (b) directly or indirectly taking action or omitting to take any action that could distort or adversely affect the financial performance of the Buy Right Cars business without Turnover's prior written consent. 6

6 BRC16 denies breach of any obligation under the APA, let alone of a fundamental covenant. Suffice it to say, the parties are at odds about the meaning of many of the terms of the APA and particularly of the fundamental covenants. Turnover says the fundamental covenants are expressed in broad and encompassing language which plainly says what it means. BRC16 argues the actions it took did not fall within the type of conduct contemplated by the fundamental covenants which were only intended to prevent material strategic or governance changes to the business. Consequently, the acceleration provision is not engaged.

7 BRC16 also counterclaims. First, it contends that it overpaid earn out consideration for the first 12 month period after acquisition. It seeks to recover that overpayment. Second, it claims compensation from Mr Orlandini in respect of the purchase price of a Dodge Hellcat vehicle. It contends Mr Orlandini had BRC16 buy

this for his personal use and the vehicle is unable to be made compliant for registration in New Zealand

Issues for determination

8 The issues evolved during trial as is often the case. Some pleaded claims were not pursued. The issues are broadly:

• (a) Whether any of the following actions by BRC16 breached a fundamental covenant:

  • (i) personnel changes during the relevant period;

  • (ii) changes in stock composition through the purchase of New Zealand-new vehicles and lower grade vehicles, reduction in European stock and ceasing to market for sale vehicles under $10,000; and/or

  • (iii) the sell down of aged stock for reduced margins.

• (b) Whether Turnover is precluded from asserting breach of the fundamental covenants due to lack of compliance with notice requirements in the APA.

• (c) Whether Turnover is in breach of the APA by failing to deal appropriately with aging stock and/or managing its stock properly in the first earn out period and, if so, the consequences.

• (d) Whether Mr Orlandini is required to repay the purchase price of the Dodge Hellcat which the Buy Right Cars business paid for and which is unable to be made compliant for registration in New Zealand.

9 Each issue in turn raises a host of sub-issues.

Admissibility of expert evidence

10 Turnover sought leave to lead supplementary evidence which was served approximately three and a half weeks before trial. BRC16's counsel described two of those briefs as “egregiously late”. In the end BRC16 did not object to late provision of two of those briefs, but maintained opposition to the application for leave to serve the brief of evidence of Jeffery Wesley.

11 Mr Wesley's evidence was described as expert industry evidence in reply to the expert evidence of David Vinsen to be led by BRC16. BRC16 argued that the late service of a purported expert brief was prejudicial. It challenged the admissibility of the proposed evidence relying on r 11 of the High Court Rules 2016, and s 25 of the Evidence Act 2006.

12 By agreement of the parties, I heard oral argument immediately after Turnover opened its case. I granted leave to serve the brief late but heard the evidence provisionally, meaning I would determine admissibility in the context of all the evidence and after the fact. 7 I indicated that BRC16's expert would have an opportunity to supplement his brief during the trial to overcome any potential prejudice.

13 Mr Wesley holds a Master of Business Administration from the University of Auckland. He spent eight and a half years as Chief Executive Officer of Turners Auctions Ltd during which time he oversaw, among other things, the importation of used cars from Japan to sell through dealers and at public auctions. 8 Turners Auctions Ltd was the largest seller of used motor vehicles and largest auction house in New Zealand. He says that he visited Japan multiple times to attend vehicle auctions and meet vehicle exporters. He then spent approximately seven years as managing director of Turners & Growers Group, an integrated fruit and vegetable marketing company. In retirement, it appears he has been consulting on an ad hoc basis including to two businesses involved in New Zealand new...