NOEL RICHARD JOHNSON v ROBERT ARTHUR FELTON AND NORAH ISOBEL FELTON & ORS [2000] NZCA 384 (13 December 2000)

IN THE court of appeal of new zealand

ca32/00

	between	NOEL RICHARD JOHNSON
		First Appellant

	AND	ROBERT ARTHUR FELTON AND NORAH ISOBEL FELTON
		First Respondents

	and	JAMES GERRARD FLYNN AND MARION EDITH MAE FLYNN
		Second Respondents

	AND	DAVID RONALD LEESE
		Third Respondent

	and	COLIN GRAEME SMITH AND CHRISTINA DOROTHY SMITH
		Fourth Respondents

	AND	ALAN RAYMOND TUCKER AND MARION JUNE TUCKER
		Fifth Respondents

	AND	CLEAR-SHIELD CHRISTCHURCH LIMITED
		Sixth Respondent

Hearing:	27 and 28 November 2000
Coram:	Gault J McGrath J Penlington J
Appearances:	M I S Phillipps for Appellant D G Smith and A S Lai for First to Fifth Respondents
	M C Black for Sixth Respondent
Judgment:	13 December 2000

judgment of the court delivered by GAULT J

[1] This appeal is against the judgment of the High Court (Goddard J) delivered on 21 December 1999 in which she upheld claims in deceit against Mr Johnson whose misrepresentations induced the six respondent parties to purchase rights to the application of a glass treatment product.The product was imported and sold to the franchise holders to apply to glass to prevent dirt adhering to it.

[2] The product, although it had been successful in the United Kingdom and had received the Prince of Wales Award for Industrial Innovation and Production, proved uneconomic in New Zealand circumstances.In particular it is best applied to new glass which no longer is manufactured in New Zealand.The New Zealand market, therefore, was primarily for treatment of in situ glass, which had often deteriorated, and required significant effort in preparation for the application of the product.

Facts

[3] Since the appellant's grounds of appeal are directed largely towards certain factual findings of the Judge, it is necessary to set out the facts in some detail.

[4] In the mid 1980s Ritec (UK) Limited (Ritec (UK)) developed a product called Clear-Shield, a non-stick clear polymer coating which, when applied to glass, keeps it free from dirt and other contaminants.Following the success of the product in the United Kingdom, particularly after receipt of the Prince of Wales Award, Ritec (UK) established a network of licensed representatives.In 1990 Mr van Nooijen, the owner of a New Zealand company, Glass Relate Ltd, saw Clear-Shield demonstrated at a trade fair in Europe.He was very interested and in due course, with his friend Mr van Wijk, acquired a licence to import and sell the product in New Zealand.

[5] Subsequently, Mr van Wijk and Mr van Nooijen set up Ritec New Zealand Limited (Ritec (NZ)).After advertising for applicators, they were contacted by the appellant, Mr Johnson.He owned a business called Auckland Industrial Coatings Ltd, which engaged in painting buildings and other industrial sites around Auckland.Mr Johnson's company was appointed as an applicator and, by an employee, Mr Maunsell, worked with Ritec (NZ) to develop the market for the Clear-Shield product in Auckland.They demonstrated the product and contracted for trial applications for potential jobs at various locations such as the Aotea Centre, the air traffic control tower at Auckland International Airport, and a glass enclosure at Auckland Zoo.

[6] Mr van Nooijen and Mr van Wijk operated Ritec (NZ) for approximately ten months, with licensees in Hawke's Bay and Wellington, as well as Mr Johnson's company in Auckland.Both shareholders soon became concerned about the product.They tried applying the product to glass shower cabinets, but discovered that this was not particularly successful due to the "hostile environment".In order for the product to completely bond with the glass, the glass needs to be absolutely clean.The easiest and most effective applications are those made to new glass that has not been exposed to the elements.This is how the product is used in the United Kingdom, where it appears to have been very successful.Evidence given before Goddard J suggested that only one licensee had attempted to operate a Clear-Shield franchise in the United Kingdom applying Clear-Shield to glass in existing buildings and ships, and this had not been successful.Mr van Wijk approached the major glass importers, Smith & Smith Ltd, and Winstone Glass Ltd, but was unable to effect any arrangement with these companies.It seems that one or both companies had at one stage investigated the possibility of obtaining the New Zealand rights to Clear-Shield for themselves, but failed to do so.

[7] Mr van Nooijen and Mr van Wijk concluded that Clear-Shield was not a viable proposition and they sought to sell the company.Mr van Nooijen said that Mr Johnson was extremely keen to acquire it.He said that during negotiations all information was provided to Mr Johnson regarding the product and the amount of work obtained.Mr Johnson would have been aware of the defects in the product due to his involvement as a licensee almost from the inception of Ritec (NZ).Indeed, Mr Johnson was reluctant to pay the asking price of $100,000 because of the problems with the product.Eventually the parties agreed that Mr Johnson would pay $80,000 for the shares, in three instalments.This agreement was concluded on 28 June 1991.

[8] One week after purchasing the shares Mr Johnson, having divided the country into 26 territories, began advertising for franchisees at prices varying between $25,000 and $100,000.Of the six respondents, five replied to the advertisements, while the sixth, Mr and Mrs Flynn, were directly approached by Mr Maunsell for Ritec (NZ) as they were in the process of seeking a suitable business to purchase.However, the manner of approach had no effect on the overall findings of fact, as all negotiations followed substantially the same course from the point of initial contact.

[9] Each of the parties received a standard letter containing standard information.Included were booklets entitled "Clear-Shield License Investment Opportunity" and "A Clear Path to Profit", and "An accounting model ... to demonstrate the operation and profitability of an average territory."There was also a copy of a promotional video which had been produced in part in the United Kingdom and in part in New Zealand, demonstrating the product and showing the presentation of the Prince of Wales Award.The financial projections predicted a turnover of $220,800 per annum, with a net profit before tax for the owner/operator of $113,716.The prospective franchisees were all invited to speak to an independent operator for confirmation of the viability of the franchise.They were referred to David Harley in Napier or Paul Wooton in Wellington.

[10] All but one of the franchisees spoke to Mr Harley, who was very positive about Clear-Shield.He commented to each to the effect that the product had great potential and that franchisees should be able to make a good living out of it.Mr Harley told them that he was doing well out of Clear-Shield, and was getting a lot of business from buildings and homes along Marine Parade in Napier, which faced the ocean.Mr Harley said he had a viable, profitable and growing business.Mr Wilson, the owner of the sixth respondent, Clear-Shield Christchurch Ltd, did not speak with Mr Harley but was provided by Mr Johnson with a reference from Mr Harley.From evidence given at trial it seems that Mr Wooton was not a franchisee or license holder, but was an employee of the license holder in the Wellington and Kapiti region.Mr Smith contacted Mr Wooton and was told that Clear-Shield was a good product.Mr Wooton also seems to have been an associate or relative of Mr Harley and gained his employment through Mr Harley's association with Mr Johnson.Mr Harley and Mr Johnson were said to be close associates.

[11] All respondents were invited to travel to Auckland to meet with Mr Johnson and to view the Ritec (NZ) premises.They were also shown a demonstration of the product on site.All were impressed by the vigour of Ritec (NZ) and by Mr Johnson's commitment to it.From evidence given it seems that the plant shown to the respondents did not belong to Ritec (NZ) at all, but belonged to Auckland Industrial Coatings Ltd, Mr Johnson's other business.

[12] All respondents entered into franchise agreements and paid amounts varying between $48,000 and $100,000.It is helpful to set out the names of the respondents, the date the franchise agreement was entered into, the amount paid, and the area covered by the franchise.

Respondent	Date of Agreement	Purchase Price	Area Covered
Mr & Mrs Felton	30 September 1991	$50,000	West Auckland
Mr & Mrs Flynn	2 September 1991	$48,000	Rotorua ($40,000) and Whakatane ($8,000)
Mr Leese	11 February 1992	$73,000	Palmerston North ($55,000) and Wanganui ($18,000)
Mr & Mrs Smith	4 May 1992	$55,000	Hutt Valley
Mr & Mrs Tucker	July 1993	$55,000	Kapiti-Mana area
Clear-Shield Christchurch Ltd (Mr Wilson)	26 February 1992	$100,000	Christchurch

[13] Respondents complained that they were not fully informed of the intended structure of the business with product supplies being made through a master franchise holder for each island.Further, Mr and Mrs Smith were not told that a previous license holder had operated in their areas.They were led to believe that the previous license holder had operated in the Wellington central region only.Moreover, the franchisees all said they were misinformed as to the level of productivity achievable, the mark-up on the product, and as a result, the level of profit reasonably obtainable.The franchisees claimed they were also assured that they would receive substantial support from Ritec (NZ) in marketing nation-wide and in obtaining business with national chains, such as service stations and supermarkets.Little support was provided, and no advertising or marketing was done until Mr Lennox-King organised a television campaign in 1993.

[14] Mr Lennox-King, whose evidence the Judge preferred to that of Mr Johnson, gave evidence under subpoena.He said he contacted Mr Johnson with a view to purchasing an interest in Auckland Industrial Coatings, but ultimately decided against this.Mr Johnson then suggested that he purchase shares in Ritec (NZ). Mr Lennox-King said he was provided with information that gave the impression that Ritec (NZ) was a profitable, successful business.He also spoke to Mr Harley and Mr Wilson (of the sixth respondent).Mr Harley told him that the business was very successful, but was too much for him to manage and he was dividing his area.Mr Harley said that Clear-Shield was a good product and had achieved great market acceptance.Mr Wilson told Mr Lennox-King that he had recently purchased his licence and had got a good response from the companies he approached.He was positive about the business. Mr Lennox-King entered into an agreement to purchase shares in Ritec (NZ) in July 1992.

[15] Shortly after he began working on Ritec (NZ) business, Mr Lennox-King became aware that things were not as promising as Mr Johnson had indicated. During a trip to the South Island he discovered that Mr Johnson had sold the licence for the South Island to Southland Glazing Ltd, who in turn had divided the South Island into areas and sold individual franchises.He also became aware of dissatisfaction among franchisees.Ritec (NZ) owed debts to various franchisees, and several franchisees had not received the promised training or received all equipment or product paid for.He heard similar complaints from Mr McCoomb, the North Island master licence holder, and other franchisees.He asserted in his brief of evidence that without exception the franchisees were dissatisfied with Mr Johnson and with the service given by Ritec (NZ). Franchisees who had purchased their business from Mr Harley were also disappointed and angry, as they had had to spend a considerable amount of time fixing jobs that they perceived had been performed inadequately by Mr Harley or his employees after complaints from the customers.These franchisees later became aware that the problems were caused by the longevity of the product, and not the application by Mr Harley or his employees.

[16] During 1993 the situation worsened for franchisees, as they were not achieving projected sales.Mr Lennox-King stated that it became obvious to him, within a matter of weeks, that the sales of product to franchisees was nowhere near the quantity needed to achieve the profit projection in the accounting model provided to prospective franchisees, including the respondents.The pricing structure represented to the respondents was false, and the profit margins and percentage mark-up on product were higher than represented.He ceased his involvement in Ritec (NZ) in April 1994.

[17] The Judge found that:

... common to all plaintiffs was the degree of unmitigated effort each put into their franchise businesses and the commitment they made to the product's success.Each set of plaintiffs brought to their respective franchises practical and business ability, commitment and an ethic of hard work.I am satisfied that all did their utmost to make their franchises work and that the failure of each plaintiff's franchise was not the result of their inability to create contacts or expose the product to sufficient people to make the Clear-Shield business viable.

[18] It appears that the respondents conducted their businesses for between eighteen months and three years.All trading had ceased by 1995.Ritec (NZ) was placed in liquidation on 6 December 1994.The respondents claimed damages against Mr Johnson personally, claiming in deceit and negligence.

The Respondents

[19] Goddard J set out the facts relating to the claim by each of the six plaintiffs.Some information has already been set out.Mr and Mrs Felton purchased the franchise for the West Auckland area after being provided with information concerning productivity and profit projections.These stated that a productivity level of four square metres per person per hour was achievable, based on six different jobs, relating to different glass surfaces, both new and old glass.It was also indicated that they could expect to earn at least $91,636 before tax, and that in addition as no 10% licence fee was being charged, that would increase the figures by some $22,000 per annum.

[20] When Mr and Mrs Felton began applications of the product, they discovered that it was only possible to apply the product efficiently to large areas of new or uncontaminated glass.They operated the franchise for three years, but eventually faced the realisation that the licence was worthless.They sought damages of $153,342.62, consisting of $50,000 for the licence fee, interest on a bank loan of $2,467.62, bank charges of $425, solicitor's fees of $450, and loss of income of $100,000.Mr and Mrs Felton also sought general damages of $50,000.

[21] The second respondents, Mr and Mrs Flynn, were approached by Mr Maunsell of Ritec (NZ) in 1991 when they decided to go into business together.They were then sent a copy of the accounting model, which forecast an annual net income for one franchisee of $113,716.The Flynns questioned Mr Johnson on the suitability of Clear-Shield in Rotorua, given the thermal activity, but were assured that the product had been successful in other geothermal areas around the world.Mr Johnson also told the Flynns that one application would last five years and that there would be nation-wide marketing.Initial marketing of the product engendered interest in the Rotorua area, but the Flynns encountered difficulties when they attempted to apply the product to the glass.The results were unsatisfactory and the application did not last five years.The time involved preparing the glass made the exercise uneconomical.

[22] Mr and Mrs Flynn sought damages of $108,888.72, consisting of $48,000 for the purchase price of the licence, $12,888.72 for initial set up costs, and $48,000 for interest on a bank loan from 30 August 1991 to 14 October 1995. The Flynns additionally sought general damages in the sum of $50,000.

[23] Mr Leese initially purchased the franchise for Palmerston North and Wanganui with his wife, though they subsequently separated.Mr and Mrs Leese were provided with the same accounting model and profit projections provided to the Flynns.The accountant consulted by them advised that the figures in the model were in order, provided the information upon which they were based was correct.Contrary to assurances provided by Mr Johnson, no nation-wide marketing campaign ever occurred, and Mr Leese spent a good deal of his time doing his own advertising.In the three years that he attempted to operate the franchise, he and his wife made losses of $8,700, $9,500 and $3,400 respectively.

[24] Mr Leese sought judgment for $127,876.63.This was made up of the $73,000 paid for the licences, general operating expenses of $4,876.63 and interest on the bank loan of $50,000.Mr Leese also sought general damages of $50,000.

[25] Mr and Mrs Smith, the fourth respondents, replied to an advertisement for Ritec (NZ) in April 1992.They received the standard information pack containing the accounting model with its net annual profit projection, before tax, of $113,716.Mr and Mrs Smith were interested in purchasing the franchise for the Hutt Valley area, and were led to believe that there had been no previous operator in this area.This information was wrong, as Mr Mudgway, the Wellington franchisee, had operated in Wellington, Hutt Valley, Kapiti-Mana and Wairarapa areas.Unbeknown to the Smiths, they purchased a sub-division of Mr Mudgway's area, sold by Mr Johnson on Mr Mudgway's behalf.During negotiations Mr and Mrs Smith were told that a new product would soon be available, called Ritecoat, that performed similarly to Clear-Shield, but was designed for paint and other like surfaces.They were told that they would be given the rights to Ritecoat without further charge.

[26] The Smiths consulted their accountant and were advised that provided the figures were based on fact they seemed to be in order.The Smiths prepared their own projected figures, and decided that they could operate at 60% of the projected turnover, which they considered a conservative safety margin.Soon after purchase of the Hutt Valley franchise the Smiths encountered difficulties in applying the product, due to the necessity to clean and prepare the glass surfaces prior to application.They also found that their area had been marketed previously, with detrimental repercussions.They attempted to negotiate the purchase of further areas to increase their market.When the Ritecoat product eventually became available, after a lengthy delay, the Smiths were told they would have to pay $6,000 for training, which the Judge referred to as "a clearly excessive and unsubstantiated figure".During the eighteen months they operated the franchise they became increasingly disenchanted and disheartened.After eighteen months they decided there was insufficient work to continue trading.In this period they had made a gross profit of $14,307, resulting in a net loss of $41,368.

[27] The Smiths claimed damages in the sum of $146,087, consisting of $55,000 for the purchase of the licence, $526 for their initial set up costs, $54,561 for loss of earnings, and interest on a mortgage of $36,000.They also sought general damages of $50,000.

[28] The fifth respondents, Mr and Mrs Tucker, decided in 1993 to purchase a business they could run together.In May 1993 they responded to the Ritec (NZ) advertisement and were provided with the standard information pack, containing the accounting model.The Tuckers were told that nation-wide contracts were being confirmed with major corporations, and there would be nation-wide marketing and ongoing support.The Tuckers purchased the Kapiti-Mana area, with funds raised by mortgaging their home.Mr Tucker immediately began marketing the product in the area, but received little interest.Mr Tucker found that some of the organisations that Mr Johnson had said were interested were not, and that applying Clear-Shield was uneconomical due to the difficulty in preparing the glass.There was no nation-wide marketing campaign and Ritec (NZ) provided little support.

[29] The Tuckers sought damages of $176,505.These special damages consisted of the purchase price of the licence of $55,000, initial set up costs of $19,564, solicitor's fees of $541, loss of earnings of $40,000 and interest on the mortgage of $61,400.In addition, they sought general damages in the sum of $50,000.

[30] Mr Wilson is the principal shareholder and director of the sixth respondent, Clear-Shield Christchurch Ltd.In November 1991 he replied to an advertisement for the Clear-Shield product, and was provided with the accounting model and reference from Mr Harley.Mr Wilson subsequently discovered that Mr Harley was a close acquaintance of Mr Johnson.Mr Johnson told Mr Wilson that two large New Zealand glass companies were intent on buying the New Zealand licence from Ritec (UK) but that they were unable to because Mr Johnson held the New Zealand licence.He was also told that Ritec (NZ) was charging only a 21% mark-up on the product sold to the franchisees.This subsequently proved false, as the mark-up was significantly higher than that represented.Mr Wilson, by his company formed for the purpose, purchased the Christchurch franchise for $100,000.Initial marketing received a good response, but sales soon decreased, largely due to price.Mr Johnson told Mr Wilson that Smith & Smith Glass had purchased a national licence, so the franchisees could sell to their outlets.No such agreement existed.

[31] Clear-Shield Christchurch Ltd claimed damages of $279,748, plus general damages of $100,000.The special damages claimed consisted of $100,000 for the licence, initial set up costs of $720, and loss of potential income by Mr Wilson as a shareholder over the three years of $179,028.

Decision of Goddard J

[32] Justice Goddard cited the decision of Hammond J in Gloken Holdings Ltd v CDE Company Ltd (1997) 6 NZBLC 102,272 where he set out the essential elements of the tort of deceit, which he noted was an intentional one.Those elements were that the plaintiff must prove that the defendant (i) made to the plaintiff a representation; (ii) of existing fact; (iii) which judged objectively was false at the time it was made; (iv) upon the truth of which the plaintiff relied, with resulting harm; (v) and that such representation was made either knowingly, or without belief in its truth, or recklessly, careless whether it was true or false.With respect to the standard of proof, Goddard J referred to "adequate authority to indicate that the requisite standard of proof is little less than proof beyond reasonable doubt".There was no argument on the appeal that the Judge applied incorrect legal principles in respect of the tort of deceit.

[33] Without examining separately the alleged misrepresentations attributed to Mr Johnson by each of the claimants and the circumstances in which they were made, the Judge's approach seemed to treat them all as having been made to each of the parties.Such an approach risks aggregating allegations unfairly against a defendant sued by multiple plaintiffs, but in this case we are satisfied the allegations central to each of the claims were in substance the same.The Judge reviewed the representations relied upon.One of these was an expectation that an annual net profit before tax of $113,416 (or $91,636 plus $22,000 in the case of the Feltons) could be earned in the first year.Another was that the productivity level of four square metres of glass per hour per man could be achieved, on average.Other representations relating to the accounting model included the statement that income of $7,200 per week could be expected, and that the forecast projections could be exceeded.

[34] Other representations were that rapid progress had been made in securing national contracts for Clear-Shield;that jobs described in the brochures represented normal contracts which had been obtained by Ritec (NZ), when in fact several contracts were simply trials, albeit paid trials;that (as the video suggested) the Carlton and Stamford Plaza hotels (as they are now known) had been Clear-Shielded;that the Clear-Shield product would work in Rotorua, without any problems;that one application would last five years;and that glass companies wanted to sell their customers Clear-Shield treated glass. Other representations were that a nation-wide advertising programme would be launched and that the Ritecoat product would be available at a specified date and the fourth respondents, the Smiths, would be able to sell it without further charge.Ultimately Goddard J made no finding on whether or not these latter representations were false, since it made no difference to the outcome of the case.

[35] Goddard J found that the appellant did make most of the representations complained of, and that they went further than simply opinions;the representations were of existing fact.In particular, the accounting model contained significant detailed particulars, making it more than merely an expression of opinion.The Judge did not reiterate all the representations she found to have been made, but stated that others were made.She did find to have been made representations to the effect that the contracts for the application of the product in places such as Auckland Zoo and the control tower at Auckland Airport were standard contracts. She also found that the appellant represented in the promotional video that the Carlton and Stamford Plaza hotels were Clear-Shielded.

[36] The third requirement addressed by the Judge was that the representations were false at the time they were made. She found that this was so in the case of a number of them.In particular, the accounting model was clearly false. The data on which it was based was not complete or entirely accurate.This, she said, included information derived from the United Kingdom.She found that in New Zealand, in the areas where the Clear-Shield business had been operating up to the time the projections were prepared, it did not look as if the turnover indicated in the model would ever be achieved.She stated that the figures available for this country seemed to have been manipulated.She said: "specifically, a productivity level of 4 square metres per person was based on tasks in which two people had in fact been engaged, thereby doubling the actual average productivity achieved.This was not made clear to prospective franchisees".The appellant submitted this view was wrong and we will return to it.

[37] Goddard J found that there was no information that Mr Johnson could credibly rely upon to support his representation that the projected figures could be exceeded.However, she concluded that this was simply a statement of opinion.

[38] In relation to the video and brochures, Goddard J found that they were prepared in such a way as to show that Ritec (NZ) had already obtained work on substantial sites, when this was simply not true.At most, Ritec (NZ) had conducted a paid trial on some of the sites.Further, she found that rapid progress had not been made in securing national contracts.While she found that Ritec (NZ) and Mr Johnson did have a good relationship with Smith & Smith Glass, Smith & Smith had decided at an early stage that Ritec (NZ) did not have the infrastructure in place to enable them to work together nationally in the application of Clear-Shield.Further, the statement that large glass companies were interested in selling the product was objectively false.The most that could be said was that a glass company had initially sought the New Zealand licence rights.

[39] Goddard J found the statements relating to the Auckland Zoo and some "larger" jobs such as the control tower and the QEII liner were not false. While the Judge considered that there was an element of experimentation in the jobs, she did not accept that they were simply trials and did not find the statements to be untrue in the context of the tort of deceit.In relation to the statement that the product would work in Rotorua, Goddard J found that Mr Johnson had made inquiries as to whether the product would work in geothermal areas, so this was not made falsely or recklessly.However, the representation that the product would last for five years was false.The "after-care" that was intended to ensure that the product did last for five years was simply re-application according to Mr Maunsell.

[40] Goddard J found the other requirements of the tort fulfilled.The respondents had all relied upon the misrepresentations, and the misrepresentations were made for the purpose of encouraging or inducing the recipients to purchase Clear-Shield franchises.In respect of the mental element, Goddard J found that the representations made in the accounting model must have been made, at the least, recklessly as they were not based on any New Zealand data.Goddard J also found in relation to the other misrepresentations that these were made by the appellant, knowing that he was only portraying half the truth.At the least he was reckless as to whether the information was true or not.The plaintiffs therefore succeeded in their action in deceit. The Judge found it unnecessary to decide whether the appellant was also liable in negligence.The respondents were awarded the full amounts of special damages claimed, but no claim for general damages was allowed.

The appeal

[41] For the appellants a wide-ranging attack was made on factual findings in the judgment.It was contended that the Judge "palpably misused" the advantage of seeing and hearing the witnesses, made findings inconsistent with facts uncontrovertibly established by other evidence, wrongly and unfairly admitted the evidence of Mr Lennox King and wrongly accorded credibility to Mr van Nooijen.

[42] In argument we were taken to evidence bearing upon some twenty factual or credibility findings said in the grounds of appeal to be erroneous.Not all of them were material to the Judge's decision.This was done notwithstanding the clear acknowledgement in the appellant's written submissions of the difficulty on appeal in overturning such findings.

[43] There can be little doubt that underlying the whole franchising exercise was the recognition that success for the business would depend upon attracting and completing sufficient work to make the investment of money and time financially viable.That in turn required successful products and systems and a pricing structure to attract custom.The price to customers depended upon the cost of the product and the work involved in application.This is why the initial claims relating to the product and the accounting model and projections were so important.

[44] We viewed the video.Those parts made in the United Kingdom emphasised the merits of the product, the award, and the treatment of large glass viewing windows on the ship QEII.There was no suggestion that the product could not be successfully applied to old glass provided it was first suitably cleaned. That part of the presentation made in New Zealand conveyed the impression of successful treatment of in situ glass in a range of applications.An animal enclosure at Auckland Zoo, ferry and pilot boat windscreens, windows in the Aotea Centre, and the control tower at Auckland International Airport were depicted as having been successfully treated without any suggestions of difficulties.Views of the exterior of the two leading Auckland hotels were accompanied by commentary that:

Clear-Shield has applications everywhere and at Auckland's Pan Pacific and Regent Hotels it is standing up to rigorous testing.

[45] The accounting model was introduced with reference to overseas awards received for the product and the claim that Ritec (UK) had "established a world-wide network of licensed representatives".Although no date is given it was said that,"To date licensees have been appointed for Auckland and Hawkes Bay".The document must have been prepared between the date Mr Johnson acquired the shares in Ritec (NZ) in June 1991 and the licensing of the first respondents in September of that year.By the time he acquired the shares Ritec (NZ) and his own company Clear-Shield Auckland had had about 10 months experience in promoting and applying the product in New Zealand conditions. The introduction to the accounting model continues:

In setting up the Auckland region, Clear-Shield Auckland have carried out in excess of $22,000.00 worth of paid contracts.(To December 1990).

This work has provided the basis for our subsequent costings and quotes.

An accounting model has been prepared to demonstrate the operation and profitability of an average territory.This is based on a two-man team comprising an owner-operator together with a trained assistant.The forecasts suggest that an owner-operator could reasonably expect to earn in excess of $110,000 per annum (before interest charges and taxation.

...

The enclosed information has been prepared in conjunction with our accountants, Jackson, Green, Chartered Accountants, of P O Box 9350, Newmarket, Auckland. It is based on our estimates and productivity achieved.Accordingly we cannot guarantee that these results will be achieved by any other party, but it is our belief that it could be exceeded.

[46] The annual profit projection was of contract income based on 7,360 square metres of glass treated at $30 per square metre, amounting to $220,800 which, after operating expenses and overhead costs, would give net profit before tax and loan servicing for the owner-operator of $113,116.

[47] Under a heading "Productivity" there were set out "productivity standards achieved in the UK" broken down into categories of work with the lowest of three categories shown as:

Large glass panes with staining by substances such as limescale, metal oxides, hydrocarbon pollution etc.10M2/hr

[48] The document then states:

All above standards are based on a two-man team operating on single level access reached with a stepladder or scaffolding without frequent changing of levels.

For multi-level access requiring frequent movement of men and equipment the standard achieved would be reduced by 50%.

Based on a local sample involving six assorted jobs with an inexperienced crew, a productivity level of 4sq m/hr per man is considered to be reasonable with the opportunity to improve as the level of competence increases.

The accounting model is based on 48sq m/day for a team of 2 x men working together and producing 6 productive hours per day.In general two men together unless the job is of a small or confined nature such as shower boxes.

[49] Under the heading "Sales Forecast" it was stated:

The optimum level of contract income would be $1,440 per day (48sq m x $30). This would amount to $7,200 p.w. based on 6 productive hours per day.

It is recognised that a build-up must occur during the initial months and for this reason the level of productivity commences at 40% and builds up over three months.

[50] The claim there was that "paid contracts" up to December 1990 of value "in excess of $22,000" provided the basis for the costings and quotes.The information provided was based on "our estimates and productivity achieved" and that the productivity on which the castle was built was "Based on a sample involving six assorted jobs" which was said to support the level of four square metres per hour per man.

[51] That respondents were induced to take their licences by these representations was not disputed except in one case in which it was argued that they relied also on other advice - but that could hardly destroy the causative impact of these initial claims.

[52] In an effort to get to the heart of the case we asked counsel for the appellants to take us to the evidence showing which six jobs formed the basis for the productivity assessment and the evidence of how those jobs supported the figure put forward.That proved less than straightforward.We were told that the evidence did not establish unequivocally which six jobs were considered.However, we were taken to a document listing some information about six specified jobs.It was not clear whose document it was, nor exactly when it was prepared.The evidence indicated that most likely it was prepared by Mr Johnson from information given to him by Mr Maunsell.As typed, this document (which seems to be the best the appellant could point to) did not contain any record of the time taken per man for the work.It did state the area treated and the total time involved.We were told that the time record was for two-man teams.If this is correct, the productivity per man was nowhere near four square metres per hour.Other evidence suggested that more than two men were involved on occasions and that some jobs took days rather than hours.So there are questions surrounding even the times actually recorded on this document.

[53] Of significance are hand-written notes on the side of the document - said to have been made by Mr Johnson.Opposite each of the six jobs is noted an area per hour.If those areas then are averaged the result is approximately four square metres per hour.But if the notes are meant to show the time spent per man on each job they are a quarter of what they should be.For example the Aotea Centre job is recorded as involving treatment of 41.5 square metre and a time taken of 15 hours.That means the two-man team's productivity was 2.77 square metres per hour.The per man rate therefore was 1.385 square metres per hour.The hand-written figure appearing alongside is 5.4 square metres per hour and it is that figure averaged with the corresponding figures for the other jobs which gives the productivity rate of four.The per hour rate for the two-man team seems to have been doubled instead of halved in noting the per man rate.

[54] Therefore, as a foundation for the claimed productivity level of four square metres per hour per man this document does not withstand analysis. Rather it shows that in the experience of Mr Johnson and his company they did not come near to establishing the viability of the process of applying the product to old glass in situ in New Zealand conditions.In the judgment Goddard J wrote:

It seems that the figures that were available in this country had been manipulated.Specifically, a productivity level of 4 square metres per person was based on tasks in which two people had in fact been engaged, thereby doubling the actual average productivity achieved.This was not made clear to prospective franchisees.

[55] On the evidence reviewed that finding was incorrect.It did not take account of the fact that the manipulation (it was not claimed that there was simply an arithmetical mistake) involved doubling the two-man rate rather than halving it.However, even if, contrary to what we were given to understand, the time recorded in the job summary is the total time taken for the job in man hours, and the gross profit calculations suggest this may be the case, the hand-written productivity figures are still wrong.The hand-written figures double the actual productivity rates achieved on the jobs.On this analysis Goddard J's conclusion is correct though the result would not then, as she said, have as its basis tasks on which two people had been engaged.

[56] Mr Phillipps relied on opinion evidence given by others that the productivity level put forward was achievable but that is not what was represented.The claim was that the figure was based on productivity achieved.

[57] There is some validity in the criticism of the Judge's reference to the productivity projections having been based on what was achieved overseas.The financial projections document did refer to figures provided by Ritec (UK) and they might reasonably have been believed by Mr Johnson.But the document was clear.It asserted that the productivity level used was based on six assorted local jobs.The Judge may have intended to convey that to the extent that Mr Johnson did rely on the figures received from Ritec (UK) in fixing what he regarded as a reasonable level of productivity, he could not, on the local experience then gained, have believed that it could be achieved in the New Zealand market.

[58] Similar considerations can be applied to the "Sales Forecast", also put forward as being based on paid contracts carried out.In 10 months, and much longer by the time the projections were presented to some of the respondents, Ritec (NZ) and its licensees had never approached sales to the level proposed nor generated demand suggesting it could be reached.Of this the Judge said:

Neither does it avail the defendant to argue that the model was never intended as a turnover warranty.It was presented to prospective franchisees to induce them to purchase franchises.It was presented in such a fashion to suggest to those reading it that it was accurate and could be relied upon.It was, from an objective viewpoint, false.

[59] This was abundantly supported by the evidence.Mr Maunsell stated that while the maths works, a turnover of $220,000 was not realistic as not enough work was being received.This is supported by Mr Bulman, the South Island master franchisee, in his brief, where he stated that while the figures used by Mr Johnson were accurate, the product could have been more successful if they were able to obtain new glass work as this was where the real profits were made.Mr Bulman stated that it was too difficult to obtain work in the existing glass market and do it profitably.Mr Johnson was aware of these problems prior to advertising for franchisees, as is clear from the evidence given by Mr Maunsell, Mr van Nooijen and Mr Lennox-King.

[60] It is also relevant to note that Mr Johnson stated that $22,000 worth of work was achieved, in "setting up the Auckland region".From these figures, generated over ten months or more, Mr Johnson extrapolated that it would be possible to achieve sales of $220,000 per annum.His explanation that over the first months they were learning how to use the product stands in contrast to his allowance of only three months for licensees to build up to the full projected level of business.

[61] On the accounting model and projections alone the findings in favour of each respondent party against Mr Johnson are justified.Other matters are peripheral and can be dealt with more concisely.

[62] It was submitted that the Judge erred in finding that the brochures and video contained misrepresentations.The Judge said:

It is not necessary to reiterate the evidence of these, but significant representations were to the effect that the contracts pertaining to the application of the product in places such as Auckland Zoo and the control tower at Auckland airport were standard contracts.I also find that the defendant did represent in the promotional video that the Carlton and Stamford Plaza (as they now are) were "Clear-Shielded".That is the plain and unequivocal impression intended to be conveyed by the video.

[63] A review of the evidence indicates that a number of the jobs relied on to suggest broad commercial acceptance of the product in New Zealand were trials, though many were paid for.The treatment of the glass in an enclosure at Auckland Zoo seems to have been in that category.On the other hand the Auckland Airport control tower may have been treated on a commercial basis. That "prestige" job generated income of only $4,600 however.The claim that Clear-Shield was standing up to rigorous testing at the two hotels, when taken with the visual images in the video, plainly was misleading as it suggested the exterior of the buildings had been treated and were proving successful, whereas we were told that in fact a trial treatment of one shower box in each hotel was the only work done.

[64] Evidence of the fact that many trials were undertaken but work did not result was given by Mr van Nooijen.He stated that they tried Clear-Shield on a cabin of a crane for the Ports of Auckland, but the job did not go ahead; they completed application to one enclosure at Auckland Zoo but did not receive any further order.The control tower at the Auckland Airport was treated, but no other glass was treated, despite a trial on the glass of the main terminal. The Pan Pacific Hotel had 280 shower cubicles under negotiation, but no order was ever received.

[65] There were also trials at one, or possibly two, Foodtown supermarkets, but no orders, and a McDonalds outlet had one small contract performed but there were no more orders.It seems, however, that some orders must have been completed after Mr van Nooijen sold the business, as he refers to a trial at the Aotea Centre, and it seems that further trial work was done there.The Fullers ferry company also had work done on ferries.Mr van Nooijen stated that to his knowledge only Raychem Industries and the control tower were proper jobs, but it seems that the ferries and the Aotea Centre might also be added to that.However, Mr van Nooijen said that they were told they could apply Clear-Shield to the whole Aotea Centre if the trial was successful, and this job never eventuated.

[66] Of course, if the jobs done had established the claimed productivity rate or had generated sales supporting the stated forecast, it would not have mattered that some were only trials.But the impression conveyed, when taken with the projections, is unmistakable.

[67] The appellant next submitted that the Judge erred in finding, contrary to express representations made by Mr Johnson to prospective franchisees, that "rapid progress had not been made in securing national contracts".The evidence supports the inference that Mr Johnson had attempted to obtain work with some nation-wide companies, such as McDonalds, Foodtown, Smith & Smith and the Fletcher companies.However, despite Mr Johnson's efforts, rapid progress had not been achieved.Of the companies approached, some requested trials, but no work was obtained.With the Smith & Smith situation, Mr Johnson had established a good relationship with Mr Sage, who was at that time the technical manager for Smith & Smith, but it seems that the negotiations were not successful in securing work.It appears that Ritec (NZ) had insufficient national coverage to secure any profitable arrangement.No contract eventuated and Smith & Smith merely notified its branches of the availability of the treatment from licensees.There is evidence by Mr Smith, that "contrary to Noel Johnson's comments about Smith & Smith and Winstone, these glass companies when approached advised that they had not made any arrangement to offer their customers Clear-Shield glass and were not interested in doing so".Mr Johnson suggested that the Rylock contract demonstrates that he was working towards achieving national contracts, but this arrangement was facilitated by a franchisee, and subsequently negotiated by Mr Lennox-King, after the franchisees had purchased their licences.It certainly provided no basis for representations of the existence of, or rapid progress towards, national contracts with a list of named major companies. Such representations were continuing even in May 1993 when Mr Johnson wrote to Mr Tucker saying:

Clear-Shield is at an exciting stage of development in New Zealand with several national companies having agreements with us for the conversion of their glass to Clear-Shield Easy Clean Glass.

[68] These too contributed to the misleading picture presented.

[69] The next submission was that the Judge erred in finding that the appellant materially concealed from the respondents the introduction of the master franchisees for the North and South Islands and concealed from Mr and Mrs Smith and the Tuckers the true nature of the master licensees after they had been introduced.

[70] The licence agreement with the Tuckers, although signed long after the master licensees were introduced, was with Ritec (NZ).This suggests at least some confusion in the structure.Similarly, the North Island master licensee, Mr McCoomb was introduced to the Smiths as the North Island Manager.The licences in favour of the Feltons and Flynns pre-dated the master licences and the impact on their licences seemingly was not investigated.Overall, however, it may have been overstating the matter to refer to "material concealment" by Mr Johnson in this respect.But this was mentioned by the Judge only as a background factor, and she must have been correct in referring to the consequent increase in the product costs with provision for another layer of income for the master licensees.

[71] The appellant argued that the Judge erred in stating that Ms Waghorn, the liquidator, had said that $686,052 had been "taken from the company and unaccounted for".In fact, most of the money received by Ritec (NZ) was accounted for, apart from two discrepancies.Ms Waghorn (from the liquidator's office) stated that $686,052 had been drawn from the company.Probably the Judge was merely commenting on the lack of justification for such a large sum being drawn from the company.In his evidence Mr Johnson explained the drawings.He said that $240,000 was withdrawn as consultancy fees for Auckland Industrial Coatings, as that company had provided much of the capital for the company.From this money Mr Johnson took $100,000 as consultancy fees.During the period April 1992 to July 1992 when Mr Lennox-King started, Mr Johnson withdrew $61,500 and paid drawings of $70,000 to a partnership of himself and his wife.Whether the wording used by the Judge on this point was strictly accurate is not material to the claims in deceit.

[72] The same can be said of the finding that the appellant made a false representation that the product would last for five years.It appears that while this representation was false, there was evidence that Ritec (UK) made similar, though perhaps less specific, claims.Ritec (UK) stated that the product would last for years, with only "topping up" required.This topping up is re-application to specific parts of the glass where the Clear-Shield may have been worn away.However, the warranty provided by Ritec (NZ) stated that "for the exterior of most domestic and commercial glazing, topping up should not be necessary for five years or more, provided the above cleaning products are used as recommended".There was evidence upon which Goddard J could have based her finding that the representation was false, as Mr van Nooijen stated that the product did not last very long, particularly in shower situations. However, he also stated that the product had lasted for about 8 or 10 years on his windows.Other evidence included that of Mr Maunsell who stated that he told Mr Johnson prior to his purchase of Ritec (NZ) shares of his concerns over the longevity of the product.At least two franchisees, the Smiths and the Flynns, stated that the product did not last as long as claimed.While the statement might have been false, it is perhaps less clear that Mr Johnson made it knowing it to be false, or reckless whether it was false.

[73] The appellant next submitted that the Judge erred in finding that Ritec (NZ) provided little assistance to the Rotorua franchisees in dealing with problems in Rotorua.While there is evidence that both Mr Maunsell and Mr McCoomb made trips to Rotorua to assist the Flynns, this finding is not crucial, because the Judge found that Mr Johnson was not reckless in what he told the Flynns and in his efforts to assist.

[74] We were invited to find error by the Judge in her treatment of the evidence given by Mr Harley.However, there was no finding that Mr Harley was an active participant in Mr Johnson's representations so his credibility is immaterial to the outcome of the case.The evidence directed to the volume and quality of the work he did is perhaps equivocal.We are not disposed to analyse it in detail

[75] Having reviewed the evidence in light of the submissions, we are satisfied that there is ample basis for the critical findings of the Judge.On some points selected by the appellant from a lengthy judgment there may have been a degree of inaccuracy.But the overall case for knowing or reckless misrepresentations to induce the licence agreements is overwhelming.When the general message conveyed is clear, it achieves nothing to point to statements which, out of context, might pass as not strictly false or as what the Judge described as "half truths".Taken together material information communicated was misleading and when provided Mr Johnson knew of the falsity or was reckless as to its truth.

[76] We do not accept that the Judge misused the advantage of seeing and hearing the witnesses.Nor do we accept that the Judge's interventions in the course of argument were unfair.No Judge is required to listen, without comment, to wholly incredible evidence, and every Judge is expected to ensure he or she correctly understands the evidence given.

[77] We were also asked to overturn findings of credibility based on the evidence of Mr van Nooijen.We were taken to points on which his evidence was shown to be inconsistent with contemporary documents.That would have demonstrated to the Judge less than total recall of events years earlier.But that does not erode the Judge's assessment of his credibility.She saw and heard him and, notwithstanding his faulty recall of some matters, preferred his evidence to that of Mr Johnson.That was open to her.

[78] The appellant submitted that the Judge should not have allowed Mr Lennox-King to give evidence.It appears that Mr Lennox-King had previously initiated proceedings against Mr Johnson.These proceedings were subsequently settled and as part of the settlement Mr Lennox-King agreed to not voluntarily give evidence against Mr Johnson in any trial.He was therefore subpoenaed. The appellant was notified on 6 August that he was to give evidence, and he gave his evidence on 16 August.Further, the brief supplied was a shortened version of that given in another set of proceedings, which presumably Mr Johnson was involved in, so that the general tenor of the evidence cannot have surprised him.The evidence was not inadmissible.We can well understand the Judge not excluding it because of the circumstances or the late notice.

[79] It was argued by Mr Phillipps that his difficulty in preparing to deal with the evidence was added to by the fact that after he objected to it being given the Judge did not give a formal ruling until the Friday before the witness was called on the following Monday.It seems the Judge may have thought counsel could agree on the scope of the evidence.In any event, counsel had the weekend to prepare his cross-examination and we have not been persuaded that the matter gave rise to unfairness such as would warrant interference on appeal with a discretionary ruling.

[80] At one point in the course of the hearing a question arose as to the extent to which representations to Mr and Mrs Tucker were to be attributed to Mr Johnson.In the end, however, we were satisfied that there was no issue in this respect which, in any event, had not been raised by the appellant.On the facts his responsibility for the intentional tort of deceit was established.

[81] Initially two matters were raised concerning the damages awarded to the sixth respondent.One was not pursued on behalf of the appellant, the other was conceded by Mr Black for the respondent.We are satisfied an award of damages in favour of a company cannot include an amount for potential loss of income by a shareholder.We are also satisfied that the sum awarded was fixed erroneously by reference to figures in the statement of claim rather than those given (and not disputed) in evidence.We, therefore, allow the appeal against the award in favour of the sixth respondent, and vary the amount to exclude the lost shareholder income but to include sums for interest claimed but not awarded and proved trading losses.That judgment sum is fixed at $171,765 accordingly.

[82] In all other respects the appeal is dismissed.

[83] Any questions of costs can be the subject of memoranda.

Solicitors

Wells & Co, Auckland, for Appellant

Cairns Slane, Auckland, for First to Fifth Respondents

Anthony R Thomas, Auckland, for Sixth Respondent