NZLII Home | Databases | WorldLII | Search | Feedback

Court of Appeal of New Zealand
You are here:  NZLII >> Databases >> Court of Appeal of New Zealand >> 2014 >> [2014] NZCA 384

Database Search | Name Search | Recent Decisions | Noteup | LawCite | Download | Help

Auto Sounds and Alarms Limited (in receivership and in liquidation) [2014] NZCA 384 (14 August 2014)

Last Updated: 22 August 2014

     
IN THE COURT OF APPEAL OF NEW ZEALAND
BETWEEN
 First Appellant GRAEME WILLIAM MILLS AND KAREN ANN MILLS Second Appellants
AND
 First Respondent SCITUATE LIMITED Second Respondent
Hearing:
22 July 2014 (further submissions received on 30 July and 8 August 2014)
Court:
Harrison, Wild and French JJ
Counsel:
P J Dale and E Telle for Appellants G Bogiatto for Respondents
Judgment:


JUDGMENT OF THE COURT

  1. The appeal is dismissed.

  1. The appellants are to pay the respondents’ costs as for a standard appeal on a band A basis with usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Wild J)

Introduction

[1] The second appellants purchased from the respondents a motor repair business called Car Stereo Specialists Ltd (CSS). As the name of the business suggests, it specialised in installing stereo systems, but also other electronic equipment such as alarms and navigation systems, in motor vehicles. CSS’s main customer was IAG New Zealand Ltd (IAG) – about 25 per cent of its business. The work for IAG involved replacing stolen or damaged electronic equipment and doing associated interior repairs. The IAG business was done under a motor vehicle repairer agreement (MVRA) which limited the margins CSS could charge on replacement parts. They were 10 per cent on cost price for new parts; 20 per cent for used parts.
[2] In the pre-sale negotiations Mr Crone, the proprietor of CSS, represented to one of the second appellants, Mrs Mills, that CSS was:
[3] In the judgment under appeal, Asher J found both these representations were true.[1] Or, to be more precise in the case of the second of the two representations, that the appellants had failed to prove CSS was not complying with its contractual obligations to IAG in terms of the margins it charged on parts.
[4] In this appeal the appellants contend Asher J erred because the appellants had proved both representations were untrue. Accordingly, the issues for us are:

Facts

[5] CSS was a profitable business though the level of profit had dropped.[2] Mr Crone’s decision to sell the business was dictated by his health and age. After some unsuccessful attempts to sell the business in 2007, Mr Crone listed it with a business broker in January 2008 at a reduced price. The second appellants Mr and Mrs Mills expressed interest in buying the business. They were not the only potential buyers. The Mills owned a car repair business, Onehunga Car Clinic Ltd, which Mr Mills managed. Mrs Mills had been a school teacher, latterly involved in education and training businesses.
[6] In the course of negotiations, Mr and Mrs Mills met on 28 March 2008 with Mr Crone and two representatives of IAG. Mrs Mills was seeking information about CSS’s business relationship with IAG. Understandably, given the percentage of CSS’s business that came from IAG, Mrs Mills wanted to gauge whether the relationship would continue if she and her husband bought CSS. Mrs Mills had been provided with a copy of the MVRA which CSS had entered into in July 2007 for an initial term of three years.
[7] The MVRA contained this term:

9. Records

...

9.2 IAG NZ Audit: The Motor Vehicle Repairer will, whenever reasonably required by IAG NZ, allow IAG NZ and its representatives:

(a) to inspect and copy the Motor Vehicle Repairer’s accounts, records and documentation relating to the Services; and

(b) access to its premises, personnel, facilities, equipment, systems, data and software used by the Motor Vehicle Repairer in connection with the Services.

for the purpose of auditing the Motor Vehicle Repairer’s compliance with this agreement and the accuracy of its invoices.

[8] On the evidence he heard from those at the 28 March 2008 meeting, Asher J was satisfied that: “... in Mr Crone’s presence the IAG representatives confirmed in a general way there had been audits of CSS by IAG”. [3]
[9] Asher J held Mr Crone, by his silence on that point at the meeting, adopted the IAG representation.[4] The Judge also concluded the representation encompassed “the fact that CSS had not only been audited but found to be compliant with its obligations to IAG”.[5] None of those findings by the Judge is in issue on this appeal.
[10] About two weeks after the critical 28 March 2008 meeting, there were some exchanges of emails between Mrs Mills and the IAG representatives who had been at the meeting, and within IAG itself. In an email she sent to Mr Johnson of IAG on 11 April 2008 Mrs Mills asked these questions about IAG’s audit of CSS (the length of this quote is to give necessary context):

... In the meeting I asked if IAG had any issues with the way CSS had conducted the contract with IAG. I did ask you if it was okay to ask this question of you in front of Steve [Crone] and you both said it was fine. You said that there are absolutely no issues at all with CSS except they are not using [the On-Line Repair Management software] correctly. I need to satisfy myself that I didn’t put you on the spot. I know that you both have an extensive relationship with Steve and consider him a friend, I want to give you the opportunity to let me know if there are any issues at all that IAG may have, that you felt for whatever reason, unable to discuss in front of Steve.

This is really critical for us as I mentioned in the meeting we don’t want to inherit any bad practices of CSS that may result in having our contract terminated.

I know you say that all repairers are audited by IAG but I am still unclear on how IAG conduct the audits and what aspects of the repairers business are audited on. Are any reports issued to the repairer following the audits??? or is it secret squirrel stuff lol.

Steve [Crone] doesn’t seem to clear on the process either.

I know I hark on about my previous business but when we were audited by TEC and NZQA it was a really big deal.

[11] Mr Johnson did not reply to that email, but did telephone Mrs Mills to say he had forwarded Mrs Mills’ email to Mr Davie, who would respond when he was back in the country.[6] Mrs Mills did not receive a response from Mr Davie.
[12] The Mills had signed a conditional agreement to purchase CSS for $700,000 on 14 March 2008. One of the conditions was due diligence to be completed to the Mills’ satisfaction within 15 working days. There was nothing in the purchase agreement specifically about audits or contractual obligations or the performance of CSS, save for a warranty as to its turnover in the period 1 April 2006 to 31 March 2007.
[13] The due diligence was undertaken by the Mills’ accountant, Ms Kearns, who presented her due diligence report on 14 April 2008.
[14] The Mills made the agreement unconditional and paid the deposit on 16 April 2008.
[15] Following settlement, the Mills took control of the CSS business on 1 June 2008. The Mills formed the first appellant, Auto Sounds and Alarms Ltd (ASA), as their business vehicle.
[16] Under the Mills’ ownership, the business did not trade profitably. The following summarises what happened (as this is our own extraction and computation from the financial statements in the Case on Appeal, so we include it in the judgment E & OE):
Under Mr Crone’s ownership

2006
2007
2008
Sales
2,539,902
2,131,352
1,807,129
Gross margin on sales
42%
45%
47%
Operating surplus/(deficit)6
231,582
166,324
167,419
Under Mr and Mrs Mills’ ownership

2009[7]
2010
Sales
923,885
706,035
Gross margin on sales
53%
52%
Operating surplus/(deficit)[8]
(51,903)
(145,847)
[17] CSS stopped trading shortly before it was placed into liquidation on 14 February 2011. Two days later receivers were appointed by the Bank of New Zealand which by that point was owed over $700,000.[9]
[18] The appellants filed their proceeding in the High Court in November 2011. As a consequence of the misrepresentations they alleged, they claimed damages for their entire loss of capital of $750,000, trading losses of $315,000, unquantified interest on their borrowings, and general damages of $50,000 for each of Mr and Mrs Mills.

Did the Judge err in holding the appellants had not proved the alleged misrepresentation as to audit?

[19] Asher J emphasised several times that the representation as to audit was very general. He observed:[10]

The IAG representatives did not specify the nature of the audits or what had been done, or when they had occurred. There was just a general statement that there had been audits and the implicit confirmation that CSS was compliant.

[20] As the Judge pointed out, the general nature of the representation is confirmed by Mrs Mills’ 11 April 2008 email, which we have set out in [10] above. The Judge was referring particularly to this part of the email:

I know you say that all repairers are audited by IAG but I am still unclear on how IAG conduct the audits and what aspects of the repairers business are audited on. Are any reports issued to the repairer following the audits??? or is it secret squirrel stuff lol.

Steve [Crone] doesn’t seem to clear on the process either.

[21] It is common ground that IAG, in August 2003, conducted a specific audit of CSS as to its charging. That was undertaken, or at least supervised, by Mr Davie of IAG and resulted in audit reports dated 19 and 21 August 2003. Asher J found there were no further such audits, because there were no further reports. But the Judge held:[11]

However, I am satisfied on the evidence I have heard from the IAG witnesses that there would have been occasional checks of specific jobs, which could be regarded as audits. Further, I have no doubt that there were through the relevant period specific general audits where matters of process were examined.

[22] Mr Bogiatto drew our attention to evidence from Messrs Johnson and Parbery of IAG that CSS’s quote for every repair job was checked by an IAG assessor before it was approved. He submitted there was therefore a continuing auditing process at this “assessor” level by representatives of IAG.
[23] Having looked at the evidence of those two witnesses, we accept Mr Bogiatto’s submission. In summary they say every claim quote was checked and approved by an IAG assessor before the job started. The assessors did this using the On-Line Repair Management (ORM) software and their own “very good understanding of parts prices”.[12] The two witnesses said an assessor could quickly spot any sign of excessive margins being charged.
[24] Mr Dale submitted the Judge erred because “audit” must be taken to have meant audit in the generally understood sense of “an official examination of accounts”. While accepting that IAG’s examination of CSS in 2003 was an audit in this sense, Mr Dale submitted that nothing subsequent was. Like Asher J we do not accept that. The representation as to “audit” must take its meaning from term 9.2 of the MVRA, set out in [7] above. That term obliged CSS to allow IAG to inspect its records and to have access to its premises, personnel and systems whenever reasonably required for the purpose of auditing CSS’s compliance with the agreement and the accuracy of its invoices. There is no stipulation as to the type or level or frequency of audit check that may be undertaken. Term 9.2 is consistent with the “very general” representation made at the 28 March 2008 meeting as to audit. As Mrs Mills recounted that representation in her 11 April 2008 email “... you say that all repairers are audited by IAG ...”.
[25] We accept Mr Bogiatto’s submission that the appellants, long after the event, are seeking to elevate and convert the representation as to audit into something it never was – effectively, into a representation that IAG had routinely done complete financial audits of CSS. That was precisely Asher J’s view because he observed:[13]

I consider that Mr Dale tried to make more of the representation than was warranted when he suggested that the lack of proof of specific audits of the costing margins of CSS in the several years prior to settlement proved a misrepresentation. Such a conclusion would involve considerably overstating the actual representation. ...

[26] We see no error on Asher J’s part in finding the alleged misrepresentation as to audit was not made out.

Did Asher J err in finding the appellants had not proved the alleged misrepresentation that CSS was compliant with the MVRA?

The Judge’s conclusion

[27] This was Asher J’s conclusion on the alleged misrepresentation as to compliance:

[144] The onus was on ASA and the Mills to show the margins charged by IAG were in excess of those agreed. They have failed to discharge that burden. Mrs Mills did not satisfy me that her methodology was accurate or consistent, and she has approached the charging of audio equipment in the wrong way. I think her results on an item by item basis were driven by her desire to prove overcharging. Further, the corroborative evidence of the audits, the improved gross margin, the background fact that it is in my view unlikely that such a significant tricking of experienced assessors was likely, and the reasons for the failure of the business, corroborate Mr Crone’s evidence and reinforce my view that Mrs Mills’ analysis is not to be relied on. In my assessment Mr Crone was not deliberately overcharging IAG.

[145] It follows that the plaintiffs have failed to prove that there were misrepresentations made by the defendants in relation to contractual compliance with IAG and the profit margins.

The evidence at trial and the Judge’s view of it

[28] There were three aspects to the appellants’ case at trial on this second alleged misrepresentation. First and foremost, the appellants relied on a spreadsheet prepared by Mrs Mills. It was presented to Asher J in an electronic form which proved problematic. Asher J did not accept the accuracy or reliability of the spreadsheet for the reasons he summarised in [144] of his judgment, set out in [27] above. As Mr Dale is not relying on Mrs Mills’ spreadsheet in support of this appeal, we put it to one side.
[29] Next was the evidence of Mr Hagen, one of the appellants’ two accounting experts. Asher J found Mr Hagen’s evidence unpersuasive. Mr Hagen had reviewed a sample of 100 invoices selected by Mrs Mills, who had also written “a preliminary analysis of the invoices for Mr Hagen’s assistance”.[14] In the passage we have set out in [31] below, Asher J expressed concerns that Mrs Mills had fed Mr Hagen the invoices he was to check. In his evidence Mr Crone provided detailed answers in respect of the five invoices (that is, five out of the 100 reviewed) specifically analysed [15] Mr Hagen.15 And Mr Crone also pointed out that 79 of the 100 invoices reviewed by Mr Hagen pre-dated the MVRA, although he accepted the MVRA formalised CSS’s existing charging practices at least[16]ince 2004.16 Given Asher J placed little if any weight on Mr Hagen’s evidence and given Mr Dale seemed to accept the force of the Judge’s reservations about it, we also put Mr Hagen’s evidence to one side.
[30] Third, there was the evidence of Ms Snowdon, an Auckland accountant who had done work for Mrs Mills and had also provided accounting assistance to Mrs Mills’ accountant, Ms Kearns. Ms Snowdon spent about 38 hours checking 500 invoices from a list provided by Mrs Mills.[17] Ms Snowdon’s conclusion, as she described it in her evidence, was: “In most cases I agreed with Mrs Mills’ conclusions that the contractual margins had been increased”.[18] These points emerged from an exchange between the Court and Mr Dale about Ms Snowdon’s conclusion:
[31] Asher J preferred the opinions expressed by the respondents’ accountants, Messrs Jordan and Basrur, to those of Mr Hagen and Ms Snowdon. The Judge explained:

[126] As to the evidence of the four accountants who dealt with the issue, I prefer the opinions expressed by Messrs Jordan and Basrur to those of Mr Hagen and Ms Snowdon. I confess that I have concerns that Mrs Mills has fed the accountants she retained the invoices that they were to check (although I appreciate that this may not have occurred in relation to Ms Snowdon). I do not have confidence that they have been given or found truly representative invoices or material to work with. ... Further, Mr Hagen and Ms Snowdon did not address the fact that the spreadsheets worked off cost plus margins, while the audio equipment mark-ups should have been calculated on recommended retail less 20 per cent.

[32] The last point the Judge makes in that passage requires explanation. Audio equipment was an exception to the margins stipulated in the MVRA and set out at [1] above. CSS charged IAG 20 per cent off recommended retail for audio equipment. Mrs Mills’ spreadsheet was based on cost price plus 20 per cent for audio equipment. Asher J accepted Mr Crone’s evidence on two scores. First, that he had told Mrs Mills it was 20 per cent off recomme[20]ed retail.20 Second, that there is a significant difference between a calculation based on recommended retail less 20 per cent, as against a calculation based on cost plus [21] per cent.21 In short, Mrs Mills used the wrong charging formula for audio equipment when preparing her spreadsheet. Ms Snowdon’s conclusion was similarly marred because she also applied the wrong charging formula for audio equipment.
[33] For those reasons Asher J also put Ms Snowdon’s evidence to one side. Essentially, he regarded it as a review of a fundamentally flawed spreadsheet by a person he was not satisfied was independent from Mrs Mills and who shared with Mrs Mills significant misunderstandings, for example as to the mark-up charged by CSS on audio equipment. We can see no error in that view, with the result that Ms Snowdon’s evidence also cannot be called in aid of this appeal.

The appellants’ argument to us

[34] That means that none of the three evidentiary planks on which the plaintiffs’ case rested at trial can be resorted to in support of this appeal. Confronted with that, Mr Dale submitted four things in combination demonstrated Asher J had erred in holding the representation as to compliance had not been proved.
[35] First, there were what Mr Dale termed “the documents themselves”. This describes two bundles of documents Mr Dale placed before this Court. The first is headed “Invoice examples with supporting documents Part 1” and comprises 259 pages numbered 10004 to 10263. The second is similarly headed but is “Part 2”. It comprises 188 pages (numbered 10264 to 10452). In all, 447 pages.
[36] In answer to questions from the Bench Mr Dale explained that the documents in these two volumes had been before Asher J, but only as part of the electronic spreadsheet to which we refer in [28] above. In other words, they were not before the Judge in this form. Mr Dale also confirmed to us that the examples in the two volumes had been selected by Mrs Mills. In his post-hearing memorandum dated 6 August replying to Mr Dale’s of 30 July, Mr Bogiatto pointed out that “the 17 volumes of hard copies of the invoices were not referred to in evidence at trial”. He submitted, we think correctly, that they did not therefore form part of the trial evidence or the record for the purposes of the appeal.
[37] Mr Dale sought to explain to us how each example worked. That is, how we could use the documents comprising each example to see or calculate the mark-ups charged by CSS on the new and used parts invoiced. Mr Dale invited us to make our own assessment of the examples in the two bundles.
[38] To his memorandum filed on 30 July, following the hearing, Mr Dale attached two schedules. Schedule 1 listed the 17 invoices Mr Dale identified as those referred to in evidence at trial. Schedule 2 contained 38 examples of invoices Mr Dale had selected from the two volumes mentioned in [36[22] above.22 Mr [23]le stated:23

They make the appellants’ point. Other than a painstaking one at a time analysis of the kind undertaken by Mrs Mills, there is no other way to answer the question identified by Mr Hagen. The fact that the respondents chose not to challenge the line by line job analysis should not count against the appellants.

[39] As we made clear to Mr Dale at the hearing on 22 July, we are not prepared to make our own assessment of the examples in the two bundles. The selection of “hard copy” examples in the two bundles was not before Asher J. Consequently, the Judge made no findings on what is now said to be decisive evidence. The documents comprising these two bundles were but part of the electronic spreadsheet presented at trial, which Mr Dale accepted proved impractical. Indeed, we gained the impression it was something of a forensic disaster.
[40] Further, we do not have the benefit of evidence from Mr Crone and the accounting experts, tested under cross-examination, on the selection of examples in these two bundles. What, for example, might Mr Jordan say about the selection of examples overall, or about any particular example? We do not know. That was a further point made by Mr Bogiatto in his 6 August 2014 memorandum. Mr Bogiatto noted Mr Dale’s concession that the invoices analysed in Schedule 2 had not been canvassed by the appellants when cross-examining the respondents’ witnesses at trial.
[41] What Mr Dale was effectively inviting us to do was re-try this part of the appellants’ case, using documents presented in a format that perhaps the appellants now wish they had adopted at trial but did not. And we are being invited to do that without the assistance of evidence on the documents from Mr Crone and the experts. We would not even have the assistance of counsel, because Mr Dale accepted he could only guide us through a few examples in the time available, leaving the Court to attempt to analyse the remainder.
[42] All of that is distinctly not the task of an appellate court. It is not this Court’s function to make findings in a vacuum on untested evidence. That is why we made it clear to Mr Dale at the hearing that we were not prepared to undertake that task. And we reiterate that we are not, notwithstanding the further invitation implicit in Mr Dale’s post-hearing memorandum.
[43] Second, Mr Dale relied on admissions he claimed he had obtained from witnesses in the course of cross-examination. When Mr Dale elaborated, it became clear he was referring only to Mr Crone. First, Mr Dale submitted that Mr Crone had accepted CSS had not been operating in accordance with the margins stipulated in the MVRA. Having read the pages in the notes of evidence which Mr Dale referred us to[24] and the surrounding evidence, we do not accept Mr Crone was saying that.
[44] Mr Dale posed to Mr Crone the hypothetical example of CSS purchasing a Toyota Corolla fascia from Sam’s Second Hand Parts for $150. He put it to Mr Crone that CSS should invoice that part to IAG at $180 ($150 + 20%). Mr Crone responded that what happened was that the part arrived from Sam’s followed by an invoice giving CSS a discount of between 20 and 15 per cent, generally 20 per cent. So the cost to CSS was (adopting the 20 per cent discount) $120. CSS charged that part to IAG at Sam’s list price of $150. Mr Crone explained that CSS got the 20 per cent discount because it had preferred suppliers of second-hand parts. He also explained that CSS invoiced in this way for administrative convenience and speed – “to expediate [he obviously means expedite] the claims, keep the clients happy ... and ... IAG on the other side”.[25] While the invoicing Mr Crone explained may not have been strictly in accordance with the MVRA, he was surely right to say the difference is “just a couple of dollars here or there”.[26] On the example we have referred to the difference between Mr Crone’s invoicing and the MVRA seems to be $6 ($120 + 20% = $144, against $150).
[45] In terms of admissions by Mr Crone, Mr Dale referred to Mr Crone admitting that, on invoice 41826 put to him by Mr Dale, CSS had charged a mark-up of 47.6 per cent on sundry parts (cost $85; invoiced at $125) and 55.29 per cent on a stereo console (cost $106.25; invoiced at $165).[27]
[46] To summarise, as best we can understand what came out of Mr Dale’s very lengthy cross-examination of Mr Crone, the Judge was entitled to conclude “Mr Crone’s evidence [was] that CSS observed the IAG margins”.[28] We accept Mr Crone admitted CSS had charged excessive margins for two items on one job. Asher J did not overlook that. This is what the Judge said about Mr Crone’s evidence generally, and that admission in particular:

[125] I compare Mrs Mills’ responses to those of Mr Crone. With the responses of Mrs Mills it was my perception that she was being an advocate for a particular position, namely that the agreed discounts had been considerably exceeded. With Mr Crone I did not get the sense that he was pushing any particular position. My perception was that he was struggling with the accounting detail, but answering as best he could. On occasions when pressed he would readily concede a point. On the other hand he remained adamant that as a matter of general principle the IAG margins were maintained and despite concessions on a few specific instances where the margins appeared to be over 20 per cent, I found his evidence to be believable. The fact is that when reconstructing small transactions that took place approximately seven years ago, involving the application of parts that would often come from a large and uncatalogued inventory of stock, precision was impossible. There was nothing in Mr Crone’s answers that led me to doubt his honesty, or the general thrust of his point by point detailed refutation of the invoice evidence.

[47] Third, Mr Dale submitted Ms Snowdon’s evidence established error on Asher J’s part in finding the compliance representation not proved. We have already explained why we agree with Asher J that Ms Snowdon’s evidence needed to be put to one side.
[48] The fourth matter Mr Dale relied on was the memorandum dated 18 April 2013 signed by the parties’ accounting experts, Mr Hagen, Ms Snowdon, Mr Jordan, Mr Basrur, and Mr McDonald.[29] This memorandum was the outcome of the Judge’s direction to the accountants to meet with a view to narrowing areas of disagreement on the issues in the case. These are the relevant parts of the memorandum:

2 The issues are:

(a) Do the experts agree on the methodology that has been applied to the spread sheet, and if not what are the points of differences between them?

We have a common understanding of the basic methodology followed by Mrs Mills in analysing the 15,000 odd lines of data. 90% of the data in the spreadsheet is pre July 2007 with that MVRA taking effect from 1 August 2007.

Mrs Mills has begun with an invoice and extracted the sale price – she has traced cost where she could in MYOB and calculated the mark up. She then compared that to the alleged standard of 10% and 20% for new and second–hand goods.

...

(d) Is the stock price identified in MYOB and if not, should it be?

MYOB averages all data that is captured in stock and items that are purchased but taken direct to cost of sales are not included. Ideally all stock items should be identified but in businesses of this size it would be unusual. In this case much of the purchases were outside of the stock system. CSS did not have a computerised job costing system.

...

(j) What shortcomings, if any, are there in respect of the spread sheet and if so:

(i) What are those shortcomings?

The accuracy of the spreadsheet is dependent upon the reliability of MYOB. If MYOB is okay then the methodology followed is acceptable. There are however other ways to do the testing of the margin accuracy. This would include tracing back to source documents (invoices and job sheets).

There are issues that are debatable over the treatment of rebates and payment discounts and whether those should be included or not.

There appears to be no reference to the manual job cards – possibly because they were not available to Mrs Mills.

The IAG witnesses say that the 20% margin did not apply to stereos (where it was 20% off retail price), whereas the spread sheets assume that the 20% mark up on cost applies.

(ii) Is it nevertheless possible to say that the profit for CSS was unaffected by incorrect margins being applied?

It seems to be clear that the profit of CSS would be directly affected by any incorrect margins applied.

[49] We read these answers not as demonstrating error on Asher J’s part, but as supporting his conclusion that the appellants had not proved the alleged misrepresentation as to compliance by CSS with the MVRA. One point warrants emphasis. In the answer to issue 2(j)(i), the accountants stated:

There are however other ways to do the testing of the margin accuracy. This would include tracing back to source documents (invoices and job sheets).

Subject to one important qualification, that is exactly the task described in [35] to [42] above, which we have declined to undertake on this appeal. The important qualification is that the two bundles of examples we were invited to analyse have been selected by Mrs Mills. They have not been selected randomly by an independent expert. So the same lack of objectivity that marred Mr Hagen’s evidence mars the selection of the examples contained in the two bundles.

Other evidence supporting Asher J’s conclusions

[50] Three other pieces of evidence support Asher J’s view that the appellants had not established breach of the representation as to compliance. Each is “freestanding”, in the sense that it does not arise from the evidence given at trial by Mrs Mills, Mr Crone and the parties’ accounting experts. First, there is the evidence of an analysis carried out by Ms Kearns as part of the appellants’ due diligence completed before they made the purchase agreement unconditional. Ms Kearns was the appellants’ accountant. She selected, at random, 14 invoices and checked them for compliance with the margins stipulated in the MVRA. Ms Kearns deposed “I certainly had no reason to believe that margins ... in excess of what was in the MVRA had been charged”.[30] Mr Dale did not confront that evidence, which is difficult indeed to reconcile with Mrs Mills’ evidence based on her spreadsheet.
[51] Secondly, there is the evidence that CSS’s quote for each repair job it undertook for IAG was checked by assessors who well knew the cost of new and used parts. The appellants’ claim of “systematic and extensive overcharging” by CSS is also difficult to reconcile with the fact that CSS’s pricing of every job had been checked and approved by an assessor.[31] Again, beyond submitting this was not “auditing”, Mr Dale did not confront this evidence.
[52] Last, but by no means least, is the fact that the gross margins achieved by the business rose by 7.8 per cent from an average (over the three years 2006 to 2008) 44.7 per cent to an average 52.5 per cent post-acquisition. If, presale, the business had been grossly exceeding the MVRA margins, but complying with them postacquisition, then the expected outcome would be a drop in the gross margins achieved. The increase in gross margins is impossible to reconcile with the appellants’ claim.

Conclusion

[53] To summarise, the appellants have not established error on Asher J’s part in holding that the appellants had not established breach of the representation that CSS had complied with the margins stipulated in the MVRA.

Did any misrepresentations cause the appellants’ loss?

[54] The appeal must also fail for another reason. As Mr Dale acknowledged, the appellants did not seek damages for the alleged misrepresentations on the orthodox measure of the difference between the value of the business as it was and its value had the representations been true. Instead they claimed damages equating to all they had invested in purchasing the business plus all they had lost while operating it.
[55] To succeed in that claim the appellants would have had to prove both the misrepresentations and that those misrepresentations caused the claimed loss. Asher J found directly against the appellants on the second and equally critical element of causation. He was satisfied the appellants’ losses were not caused by any representations made by Mr Crone, but by four factors which combined to lead to the failure of the business under the Mills’ management.
[56] Those four factors were:
[57] Asher J was quite blunt about the reasons for failure of the business. He stated: “In my view the failure of ASA had nothing to do with the alleged misrepresentations and overpayments ...”.[32] The appellants have not challenged this finding, which is independently decisive against their appeal.

Result

[58] As neither limb of the appeal has succeeded, it is dismissed.
[59] The appellants are to pay the respondents’ costs as for a standard appeal on a band A basis with usual disbursements.



Solicitors:
Neilsons Lawyers Ltd, Auckland for Appellants

[1] Auto Sounds and Alarms Ltd (in rec and liq) v Crone [2013] NZHC 1227 [High Court judgment].

[2] Refer to the schedule set out in [16] below.

[3] At [54].

[4] At [55].

[5] At [58].

[6] The email quoted in [10] above was sent to an incorrect email address so Mr Johnson never received it. The email he had forwarded was another email Mrs Mills had sent earlier on 11 April 2008 to his correct email address.

[7] For the 10 months ended 31 March 2009.
[8] Before shareholders’ salaries and tax.

[9] Asher J recorded at [137] of the High Court judgment that the Mills had borrowed the entire purchase price of $700,000 at an interest rate varying between 11.3 and 10.68 per cent. The financial statements of the Mills’ business (Auto Sounds and Alarms Ltd) as at 31 March 2010 record the BNZ term loan standing at $716,981, down from $727,000 a year earlier.

[10] High Court judgment, above n 1, at [59].

[11] At [96].

[12] Witness statement of Michael John Parberry at [37]; witness statement of Kirk William Johnson at [32].

[13] High Court judgment, above n 1, at [97].

[14] At [109]. We were not, at the hearing, able to get to the bottom of what Asher J was referring to. If it was the typed-out analysis which appears at the beginning of each of the samples contained in the 10 “Hagen” bundles, then it appears the Judge may have been wrong in attributing that analysis to Mrs Mills.

[15] Statement of evidence of Steven Crone at [126]–[130].

[16] Statement of evidence of Steven Crone at [124].

[17] Notes of evidence at 594/27–595/3 [NoE].

[18] Statement of evidence of Tania Snowdon at [22].

[19] This increased margin is referred to in [103] of the High Court judgment. It is the figure yielded by Mrs Mills’ second set of spreadsheets, after she had removed the incorrect default 100 per cent mark-up for each part or service charged for without a purchase order.

[20] High Court judgment, above n 1, at [120].

[21] At [121].

[22] At the close of the hearing on 22 July we gave Mr Dale leave to file, within seven days, a supplementary memorandum no more than five pages in length “referring us to any document or documents with evidence references that can address the fundamental concerns we have raised” about the way in which the appeal relating to the second of the alleged misrepresentations had been presented.

[23] Mr Dale’s supplementary memorandum dated 29 July 2014 at [11].

[24] NoE at 419–422.

[25] NoE at 420/11–14.

[26] NoE at 420/1.

[27] NoE at 477/1–478/18.

[28] High Court judgment, above n 1, at [131].

[29] Mr McDonald was the accountant for Mr Crone and CSS (later Scituate Ltd) from 2001 until 2009.

[30] Statement of evidence of Paula Anne Kearns at [24].

[31] The words we have quoted are those used by Asher J in [131] of the High Court judgment.

[32] At [136].

NZLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback
URL: http://www.nzlii.org/nz/cases/NZCA/2014/384.html