Valda Video Limited v United Video Franchising Limited HC Auckland CP123/00 [2001] NZHC 773 (21 August 2001)

Last Updated: 13 November 2013

IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY CP123/00

BETWEEN VALDA VIDEO LIMITED
First Plaintiff

AND JOSEPH DARRYL KIRBY and VALERIE MARIE KIRBY
Second Plaintiffs

AND UNITED VIDEO FRANCHISING LIMITED
First Defendant

AND MURRAY DICKINS
Second Defendant

Hearing: 30 and 31 July 2001
1, 2 and 3 August 2001

Counsel: A F Grant for Plaintiffs
K F Gould for Defendants

Judgment: 21 August 2001

INTERIM RESERVED JUDGMENT OF RANDERSON J

Solicitors:
S Germann Law Office, DX CP20531, Auckland for Plaintiffs
K F Gould, DX CP20513, Auckland for Defendants

Introduction

[1] After many years in the advertising field, Mr and Mrs Kirby resolved to wind down their business and to acquire a retail franchise store. In the spring of 1996 they approached United Video Franchising Ltd and spoke with the new business manager Mr Dickins. He subsequently offered the Kirbys a franchise to operate a video store proposed for Whangaparaoa.

[2] The Kirbys eventually decided to proceed with the venture which involved the lease of a new building to be constructed on the site. Through their company Valda Video Ltd, the Kirbys entered into a franchise agreement and lease of the premises. Trading commenced in July 1998.

[3] The Kirbys allege that a number of representations were made to them by Mr Dickins prior to the purchase, the most important of which was a representation that Mr Dickins was confident the Kirbys “could do a turnover of $10,000 per week” at the Whangaparaoa store. Unfortunately, the turnover of the business was never more than $4000 to $5000 per week and the Kirbys say that, despite their best efforts, they were obliged to close the business on 23 August 2000 and cancel the franchise agreement. After disposal of the business assets, they sustained a considerable loss.

[4] The plaintiffs now claim damages from United Video and Mr Dickins under the Contractual Remedies Act 1979 and the Fair Trading Act 1986. The defendants deny responsibility and United Video counterclaims for a small sum for franchise fees. In essence, the defendants say that the critical representation as to turnover was no more than an estimate of possible future earnings and did not amount to a representation of fact. It is also alleged on behalf of the defendants that the documentation included a disclaimer clause and that it was the responsibility of the Kirbys to investigate the proposal themselves and to take appropriate advice prior to entering the transaction.

The issues

[5] The essential issues are:

[a] Did Mr Dickins materially misrepresent the business in a way which induced the Kirbys to enter the franchise agreement?

[b] Was there a disclaimer which would prevent the Kirbys from recovering?

[c] What losses were sustained as a result of any misrepresentation?

[d] Is there any basis for United Video’s counterclaim?

The detailed facts

[6] The Kirbys began looking for a franchise business in 1995. After investigating various different franchise opportunities, they contacted United Video in September 1996. United Video was then owned by a Mr W McPartland and had franchised a number of video stores throughout New Zealand. Franchisees were granted a franchise for specific premises together with a “territory”. United Video agreed not to establish any other franchise within the franchised territory. Franchise and advertising fees based on a percentage of turnover were payable to United Video which in turn provided advertising, consumer promotion, information, and various other forms of support.

[7] Around the time the Kirbys were introduced to Mr Dickins, they were given some promotional material describing United Video, its methods of operation and the support provided to its franchisees. This material contained the following statements:

“United franchisees are supported by the franchise company in all aspects of their business. Our exclusive national database allows us to collate and share a wide range of information on movie rentability and operation expenses. This provides all members of our group access to data and benchmarking information that allows them to gauge the performance and success of their business. . . .

We strongly believe that the over $20 billion world wide home entertainment industry is one of dynamic growth. With the strength of United Video and our planned expansion, we are well positioned to maximise further opportunities within the New Zealand market.”

[8] United Video accepts it was represented to the Kirbys at an early stage either by Mr Dickins or through the advertising material that United Video was a prosperous company with a bright future which was expanding and was in a position to expand further. It is also accepted that United Video represented that its and staff were competent, well organised, experienced, and expert in all relevant aspects of the video hire business and franchising of video hire businesses. United Video would provide support in all aspects of their business including training, marketing informations, initiatives and the benefit of a well organised and effective franchise system. It was also represented that United Video was a member of the Franchising Association of New Zealand and that United Video was subject to the Code of Ethics of that association. In evidence, Mr Dickins accepted that it would be reasonable for a prospective franchisee to assume that United Video’s staff would know what the were doing and that they would have the ability to locate stores in places where they could be successful.

[9] From the outset, the Kirbys told Mr Dickins they were looking for a retail outlet which would provide to them earnings of between $120,000 and $150,000 per annum. In a Franchise Enquiry Form which the Kirbys completed and gave to Mr Dickins on 11 September 1996, they indicated that their “Desired Financial Range” was even higher at levels between $150,000 and $600,000 per annum. They understood those figures to relate to net profit before interest or tax. Mr Dickins said he believed the figures in the enquiry form were for turnover. I reject that evidence as improbable. Turnover as low of $150,000 could not possibly have produced an acceptable annual income for the Kirbys.

[10] The Kirbys would have preferred an existing video store in a good location and considered two possibilities. One was at Grey Lynn and the other at Birkenhead. Neither of those proposals proceeded but Mr Dickins later indicated that United Video was investigating the possibility of establishing a store on Whangaparaoa Rd, next to a liquor outlet. Another new outlet mentioned was a proposal at Botany Downs. The store proposed for Whangaparaoa was to have an area of 4000 ft2 and Botany Downs was to be 3000 ft2.

The discussions in August 1997

[11] It is not disputed that in August 1997, in discussions at the Kirbys’ home about the two new stores proposed, Mr Dickins gave them two documents which lie at the centre of this case. These documents (both dated 18 August 1997) were headed “Estimated Store Operating Costs”. One related to the Whangaparaoa proposal and the other to Botany Downs. Each set out figures for weekly turnover, cost of sales, gross profit, operating expenses, and net profit before interest and tax. In the case of Whangaparaoa, the weekly turnover figure inclusive of GST was shown as $10,000. That figure was then broken down into turnover from the hire of movies and games, and the sale of confectionery. The cost of sales was also broken down into dollar figures derived from a percentage of turnover, as were the operating expenses. The amount shown for wages was $83,200 per annum representing 18% of turnover. The net profit figure was $117,174.44 per annum. The shop size (400 m2 or 4000 ft2) was shown as well as the proposed annual rental of $60,000.

[12] The document relating to Botany Downs was in the same format but the shop size was shown as 300 m2, the weekly turnover at $8000, and the net profit at just over $76,000 per annum.

[13] The total turnover figure in the documents was critical because all or most of the other figures derived from percentages of the turnover.

[14] Mr Dickins maintained that he gave the Kirbys certain other documents at or about the same time. First, he said he gave the Kirbys similar financial projections but at turnovers of $4000, $6000, and $8000 per week. Mr Dickins said he would have generated these figures from the computer but no documentary evidence of those figures has ever been produced. As well, Mr Dickins acknowledged in cross-examination that, particularly at the lower levels of turnover, there would have been a very substantial loss given the proposed rental for the premises of some $60,000 per annum. I accept the evidence of the Kirbys that the only turnover figures given to them were at a level of $10,000 per week for Whangaparaoa and $8000 for Botany Downs.

[15] The second document which Mr Dickins claimed he gave to the Kirbys was a disclosure document said to have been issued pursuant to the Franchising Code of Practice of the Franchise Association of New Zealand. A version of this document was produced in evidence. It contained a disclaimer relating to financial projections provided by the franchisor. The disclaimer stated that there was no guarantee that the prospective franchisee would achieve the figures projected which should not be relied upon as a guarantee. Prospective franchisees were urged to make independent inquiries and it was stated that United Video would not be held responsible for any losses based on the projections provided.

[16] In his evidence in chief, Mr Dickins maintained that he gave Mr Kirby a copy of the disclosure document which appeared in the bundle of documents produced for the purpose of the hearing. However, in cross-examination he was obliged to concede that the version contained in the bundle of documents was one produced at a later time and that he must have given an earlier version to Mr Kirby. He was forced to make this concession because the version produced in evidence referred to certain staff who were not employed by United Video (or not in the capacities stated) when the critical discussions with the Kirbys took place. No earlier version was ever produced and there is no reliable evidence that it contained a disclaimer in the same or similar form to the one in the bundle of documents. Mr and Mrs Kirby were firm in their evidence that they were never given such a document and I accept their account.

The evidence as to turnover

[17] I proceed on the basis that the only figures given to the Kirbys in respect of the Whangaparaoa store were those showing a turnover figure of $10,000 per week. There was a marked discrepancy in the evidence about that figure. The Kirbys said Mr Dickins told them United Video had a formula, based on its research of the location at Whangaparaoa. They said Mr Dickins told them a 4000 ft2 store was expected to earn $10,000 per week while a 3000 ft2 store was expected to produce revenue of about $8000 per week. Those figures would correspond to the square footage and turnover for the Whangaparaoa and Botany Downs stores. The Kirbys said Mr Dickins told them they would need 4000 ft2 to produce the $10,000 per week which, in turn, would produce the kind of income they had told him they wanted.

[18] The Kirbys also stated that Mr Dickins told them the store at Whangaparaoa was to be “the flagship store” and he was confident they could obtain a turnover of $10,000 per week. This last evidence was in Mr Kirby’s written brief but in cross-examination he said the representations were even firmer. Mr Kirby said Mr Dickins informed him they “would” obtain a turnover of $10,000 per week. Asked if he was given a guarantee, his response was “just about”. Mrs Kirby was equally clear that the representations were made in the manner described.

[19] It is common ground that Mr Dickins gave the Kirbys population figures for the Whangaparaoa district. They gave evidence that Mr Dickins advised them that the Whangaparaoa area (as well as Botany Downs) was experiencing rapid population growth and United Video had every confidence both stores would be highly successful.

[20] In answer to questions from me, Mr Dickins acknowledged that he felt “up-beat” about the prospects for Whangaparaoa and that he had conveyed that optimism to the Kirbys in his dealings with them. He maintained, however, that he did not represent to the Kirbys that they could or would achieve a turnover of $10,000 per week at the Whangaparaoa store. He denied the assertion that there was a discussion along the lines claimed by the Kirbys about the relationship of store size to turnover and emphasised that the figures provided were only estimates of store operating costs based on United Video’s computer programme which provided average direct costs incurred by franchisees throughout the network. He accepted that generally, the computer model reflected accurately the costs a franchisee could expect to incur both for trading and establishment costs.

[21] As to the turnover figures, Mr Dickins said the figures provided to the Kirbys were chosen at random in order to give a range of figures. In that respect, he was referring to his evidence that there had been four different sets of projections for Whangaparaoa based on varying turnover levels. He said there would be an expectation that the store could potentially earn up to the levels indicated but that would not happen immediately. In a new business, the expectation would be for turnover to increase over time. He maintained it was very difficult to predict what a store would earn as there were a number of variable factors such as the population, catchment areas, competing outlets, traffic flows and demographic factors.

[22] With regard to predictions of turnover for a new video outlet, the evidence of Mr W B Barton is instructive. He was called to give evidence for United Video. He has been a franchisee of United Video for approximately ten years and during that time has owned some nine video stores. Currently, he has four in the Auckland area and is accepted as an experienced operator. His evidence was that he would have expected the Whangaparaoa store to achieve an initial turnover of $4000 to $5000 per week, increasing within twelve months to about $7000 to $8000 per week. It could possibly have reached $10,000 per week turnover in time. He had himself considered acquiring the Whangaparaoa store prior to the time it was established by the Kirbys. However, when the opportunity arose to acquire it after the Kirbys ceased trading, he did not do so.

[23] Of interest to the present inquiry, is Mr Barton’s evidence as to how he would go about assessing likely turnover. He said he would obtain population figures and examine the location, including traffic flows, competition, and demographic considerations. He would then calculate the potential earnings in the area based on his assessment of expected earnings per household, using the figures achieved by his other outlets. He had undertaken such evaluations with United Video and he expected they would have the necessary expertise to undertake an exercise of that kind in a similar way. That evidence supports the acknowledgment made by Mr Dickins to similar effect.

Conclusion on turnover representation

[24] Having seen and heard the witnesses, I accept the evidence of Mr and Mrs Kirby that Mr Dickins spoke to them in optimistic terms about the Whangaparaoa store and that the only figures he gave them for that store were those showing a turnover of $10,000 per week and a net profit before interest and tax of just under $120,000 per annum. I also accept the evidence of Mr and Mrs Kirby that Mr Dickins told them that, based on United Video’s research, a store of 4000 ft2 such as that proposed at Whangaparaoa could achieve a turnover of $10,000 per week and that he had every confidence it would be achieved.

[25] While I accept that the Kirbys were experienced in business, they were entitled to rely on United Video’s knowledge and expertise in video franchising and to expect that it would have a proper substratum of fact to back the representations made. Necessarily, the representations were predictions of the future performance of a business not yet established. But as Barker J put it in New Zealand Motor Bodies Ltd v Emslie [1985] 2 NZLR 569, 593, Mr Dickins was effectively representing that the “present facts are such that the future forecast follows logically”. To put it another way, the Kirbys were entitled to expect that Mr Dickins had undertaken an exercise of the kind described by Mr Barton and that United Video had a proper basis in fact for making the representations of future turnover and profitability.

[26] Having reached those conclusions, however, it was not reasonable in the circumstances for the Kirbys to conclude that they were being given a guarantee (or something close to it) that turnover of $10,000 per week would be achieved from the outset and would continue at that level. Viewed objectively, but from the perspective of the Kirbys, they must have been aware that a newly established business such as that proposed would not necessarily achieve a figure of $10,000 turnover per week from the outset. Mr Kirby must also be taken to have been aware from his own business background that predictions of future turnover are subject to normal commercial risks and may not be fully realised.

[27] In summary, United Video represented through Mr Dickins that there was a proper factual basis to conclude that turnover at a level within reasonable proximity of $10,000 per week could confidently be expected. They had no basis for supposing that a prediction of turnover at that level would be inaccurate by a factor of 50% or more.

Subsequent events

[28] Following the critical meeting in August 1997, the Kirbys studied the calculations given to them for Whangaparaoa and Botany Downs, inspected the two proposed sites, studied maps of each area to assess the competition from other stores, and then informed Mr Dickins they had decided to accept the proposal for Whangaparaoa. I find that the Kirbys relied on the representations as to turnover and that they were a material factor in persuading them to sign the franchise agreement and the agreement to lease the property.

[29] There was criticism that the Kirbys did not obtain advice from their accountant (a Mr N C Patel) even though they had consulted him in connection with earlier proposals, including the proposed purchase of the Birkenhead franchise. I am not satisfied that there is any valid basis for this criticism. The Birkenhead franchise was an existing store for which there would have been financial and accounting records ordinarily calling for expert examination before purchase. The position was quite different with the Whangaparaoa store which had no trading history. United Video had provided the Kirbys with figures for Whangaparaoa and it is unlikely that Mr Patel could have provided any further advice which would have assisted the Kirbys. It was not suggested that he had any particular expertise in video franchise businesses. I am satisfied that the Kirbys took such steps as were reasonably available to them to satisfy themselves that there was a reasonable basis for relying on Mr Dickins’ representations.

[30] There was no pleading by the defendants of contributory conduct. In response to questions I raised, Mr Gould for the defendants expressly limited any allegation of contributory conduct to the alleged failure to obtain accounting advice. In view of my finding in that respect, there is no basis for any finding of contributory conduct on the part of the Kirbys.

[31] Immediately after the Kirbys accepted the Whangaparaoa proposal, Mr Dickins wrote to the owners of the property to obtain an agreement to lease. In his letter of 30 August 1997, Mr Dickins advised the landlord’s representative that “a United Video Franchise on this site would be extremely advantageous for all parties”. There was to be a six year franchise agreement which Mr Dickins advised would give the Kirbys “sole rights to trade under the United Video branch on the peninsula’’. He gave an assurance that the Kirbys would be sound lessees and that they had an extensive business background in their own highly successful advertising business.

[32] On 4 December 1997 Mr Dickins sent to the Kirbys heads of agreement for the franchise for a six year term commencing no later than 1 May 1998. In terms of the agreement, a franchise fee of $25,000 was payable. The agreement was expressed to be conditional upon the Kirbys entering into an agreement to lease the store by 23 December 1997 or such later date as the parties should agree. A territory map was addressed to the franchise agreement which, from the outset, excluded the Red Beach area but covered the whole of the Whangaparaoa Peninsula to the east. Within that area the Kirbys acknowledged they were aware there was a small video store at Manly and another one a short distance away at the Plaza shopping centre. They were also aware there was a small video store at Red Beach. However, given that the proposed store would be located on the only major road serving the peninsula and the assurances of United Video, they had no concerns in that respect.

[33] Although the evidence is not explicit on the point, I infer that the Kirbys signed the heads of agreement around December 1997.

The Red Beach store

[34] In mid to late February 1998, Mr Kirby noticed an advertisement for the sale of the video store at Red Beach within a few kilometres of the Whangaparaoa store. He immediately contacted Mr Dickins who was aware the store was for sale. Mr Kirby said he was most surprised to learn from Mr Dickins that United Video planned to open a new store at Red Beach and that United Video had an option to take space in a new complex to be built there. However, Mr Dickins assured him he had nothing to be concerned about. He said the Red Beach store was targeted mainly at residents of Red Beach and Orewa and the Kirbys’ store would remain the flagship store for the peninsula. Although the Kirbys considered acquiring the Red Beach franchise themselves and made inquiries with the real estate agents, they decided in the end not to do so. They made that decision, partly as a result of Mr Dickins’ assurances about the effects on the Whangaparaoa store and partly because they realised the Red Beach store could not be run by a manager.

[35] Mr Dickins’ account of events surrounding the Red Beach store differs in a number of respects. But it is common ground that the Red Beach area was outside the Kirbys’ proposed territory and although they had the opportunity to acquire it before becoming bound to proceed with the Whangaparaoa store, they did not do so. It must have been evident to the Kirbys that the proposal to establish a new United Video store at Red Beach would inevitably have some effect on their turnover. I am satisfied on the evidence that the Kirbys were aware of the proposals at Red Beach, made their own inquiries, and proceeded thereafter with the Whangaparaoa purchase on the basis of their own judgment. A new and larger store under the United Video banner was later established at Red Beach and opened in January 1999 but the extent of its impact on the Kirbys’ store was not established on the evidence.

[36] On 23 February 1998, the Kirbys’ solicitors sent an executed agreement to lease to the landlord’s solicitors, conditional upon the Kirbys entering into a franchising agreement for Whangaparaoa by 9 March 1998. The Kirbys signed an amended heads of agreement with United Video for the franchise on 10 March 1998. It is common ground that they then became bound to proceed both with the franchise agreement and with the agreement to lease the store once built.

Events after commencement of trading

[37] Trading commenced in July 1998. It was apparent from an early stage that the business was not achieving a turnover anything like that represented. At no stage did the turnover exceed approximately $4000 to $5000 per week. A turnover of that level was in accordance with Mr Barton’s later assessment of the likely initial turnover of the business which suggests that United Video ought to have made a similar prediction if proper inquiries had been made to support their representation as to turnover. The Kirbys maintained they were not able to obtain any worthwhile assistance from United Video personnel in managing the business but they did receive helpful advice from other franchisees. Instead of having a manager in the business as they intended, they had to work in the business themselves, putting in very long hours.

[38] In September, they attended a regional meeting of franchisees and were surprised to find there was a real sense of anger and frustration amongst franchisees about United’s management. The main focus of attention was the advertising fund to which franchisees contributed. There were criticisms of the way the fund was being operated and of certain advertising and promotion schemes which were said to have been unsuccessful. The Kirbys pleaded that these difficulties were concealed from them but it is unnecessary to explore that issue in view of my findings on the turnover issue.

[39] In January 1999, the Kirbys complained to the newly appointed northern regional manager of United Video, Ms J Manuel. She visited the store and the Kirbys expressed to her major concerns about the turnover levels and what they perceived to be United Video’s lack of concern about the poor performance of the store. Mr Kirby’s evidence was that Ms Manuel had no contribution or assistance to offer. Although the defendants had intended to call Ms Manuel to give evidence, she did not do so. I accept Mr Kirby’s evidence that he complained to a senior executive of United about the low turnover levels in January 1999.

[40] By March 1999, the Kirbys had been trading for about eight months. Although the business was not producing the revenues they had anticipated, other franchisees encouraged them to persevere. No-one suggested they should abandon the business. There was little opportunity to dispose of it in any event because the trading figures showed they were making a loss. As well, they were committed to a six year lease with rent to pay of over $60,000 per annum and could not abandon the site. They considered they had little option but to carry on, an assessment which I accept.

[41] The Kirbys signed the formal franchise agreement in late February 1999, formalising the arrangements between Valda Video and United Video. Although Mr Gould was critical of this step in view of the Kirbys’ knowledge that the turnover was not as anticipated, they cannot reasonably be criticised in the light of the findings already made and bearing in mind that they were already bound by the heads of agreement, as well as the agreement to lease.

[42] In May 1999, Mr and Mrs B M Simcox took over ownership of United Video from Mr McPartland. Mrs Simcox accepted there appeared to have been mismanagement of the advertising fund but did not consider that had any impact on the Kirbys’ business. She acknowledged there was concern expressed by some franchisees. Three of them withdrew and four or five in the Auckland area re-negotiated their franchise agreements. However, there is no evidence that any mismanagement of the advertising fund had any quantifiable effect on the Kirbys turnover or profitability.

[43] Around the time the Simcox took over the business, a meeting was arranged by the Kirbys with Ms Manuel and another executive of United Video, Mr C Osborne. The Kirbys told Ms Manuel they had come to the realisation that the store had fundamental problems and that no amount of marketing skills would ever make it a store which would generate $10,000 per week. They raised the issue of the representations made by Mr Dickins and their concerns about the opening by United Video of the enlarged outlet at Red Beach. They said they were considering taking legal advice and were proposing to limit their lease commitments by reducing the size of the store to approximately 2200 ft2 by finding a tenant for the remaining 1800 ft2. A meeting was arranged with a view to establishing some measure of co-operation with the owners of the United Video store at Red Beach. A mail drop was also arranged. Despite the last two steps, there was no material improvement in turnover.

Disposal of the business

[44] On 15 September 1999 the Kirbys wrote to Mr and Mrs Simcox advising they intended to sell the Whangaparaoa store and leave the franchise on or before 15 December 1999. They called upon United Video to purchase their store at a price equivalent to the establishment costs. They also invited United Video to begin negotiations with Eagle Boys Ltd (a pizza chain) with a view to reducing the size of the store. As well, the Kirbys asked United Video to waive payment of the franchising and advertising fees pending the sale of the business. They drew attention to “serious misrepresentations” which had cost them dearly. The Kirbys met with Mr and Mrs Simcox around the same time but the meeting was inconclusive. Although Eagle Boys were initially considering taking a portion of the premises, they subsequently lost interest and the proposal did not proceed.

[45] By letter of 13 October 1999, solicitors acting for the Kirbys wrote to United Video covering issues similar to those already raised by the Kirbys themselves. Shortly afterwards a solicitor was instructed for United Video. Liability was denied and demand was made for franchise fees then outstanding.

[46] At a meeting on 24 November 1999, Mr Simcox advised that United Video was not able to take over the lease nor to buy the store. As a consequence, the Kirbys placed the business in the hands of real estate agents for sale in January 2000. There were difficulties in obtaining tenants for the store but by July 2000, arrangements were concluded to assign the lease to the franchisee of the Civic Video store in the nearby Plaza shopping centre. Other assets were disposed of to best advantage and the Kirbys closed the store on 23 August 2000. On the same day the Kirbys wrote to United Video giving notice of cancellation of the franchise agreement. United Video’s lawyers responded shortly afterwards, denying there was any valid basis for the cancellation notice.

Misrepresentation

[47] On the basis of my factual findings, I conclude there was a material misrepresentation as to the turnover and profitability of the business which was relied upon by the Kirbys and which induced them to enter into the franchise agreement and lease through their company Valda Video. They were entitled to expect that there was a proper factual foundation for the representation that the business could achieve a turnover at or close to $10,000 per annum with resulting net profit in the order of $120,000 per annum before interest and tax. As the results actually achieved were only of the order of $4000 to $5000 turnover per week, there were very substantial trading losses throughout the period from the opening of the store in July 1998 until its closure just over two years later on 23 August 2000.

Was there a disclaimer?

[48] I find against the defendants on this point in accordance with my earlier factual determinations.

The extent of the losses

[49] The plaintiffs claim losses under three principal headings:

[a] Trading losses.

[b] The loss of profit which they could reasonably have been expected to earn if the business had performed as represented.

[c] The capital loss being the value of the business as represented less its actual value.

[50] Under the Contractual Remedies Act, any damages are those appropriate to a breach of contract. In terms of s 6(a) of the Act, damages are to be assessed as if the representation were a term of the contract that has been broken. The plaintiffs are to be put in the position they would have been in if the contract had been performed. In this context, that means putting the plaintiffs where they would have been if the representation had been true: New Zealand Motor Bodies Ltd v Emslie (above); Ellmers v Brown (CA.112/89, 19 July 1990); and Emslie and Walsh v Kerr [1989] 1 NZLR 490. I have not found it necessary to consider the Fair Trading Act cause of action in relation to Valda Video’s losses.

[51] It is common ground that the plaintiffs may recover under the Contractual Remedies Act both lost profits and trading losses (see for example, Imagine It (No.1) Ltd v Nexus Waikato Ltd (High Court, Hamilton, CP.88/00, 17 May 2001, Glazebrook J). However, it is agreed that the plaintiffs may not recover both loss of profits and loss of the capital value of their business: Herbison v Papakura Video Ltd [1987] 2 NZLR 720, 732. That is because it will generally be necessary to expend capital in order to achieve the anticipated profits. To permit recovery of both loss of profits and capital value would amount to a double recovery.

[52] In the present case, Valda Video seeks to recover the trading losses as well as the capital loss. In doing so, it recognises it cannot also recover loss of the anticipated profits.

Trading losses

[53] Under this heading, the agreed quantum is $255,793. This sum includes trading losses strictly so called, as well as losses sustained on the sale of assets. Allowance is made for recoveries of approximately $75,000 on disposal of the assets and just over $40,000 has been deducted representing legal expenses relating to the present action which, it is agreed, are not recoverable as damages.

[54] In addition to the sum of $255,793, the plaintiffs seek the sum of $93,960 representing the value of the time which Mr and Mrs Kirby were obliged to spend in the business and for which they were not remunerated. The quantum of this sum is not in dispute. It represents approximately $45,000 per annum for each of the two years trading which is accepted as equivalent to a reasonable salary for a manager for this type of business. I am satisfied that Valda Video is entitled to recover the trading losses of $255,793 and that the Kirbys personally are entitled to recover the sum of $93,960.

Loss of profits

[55] I propose to consider the claim by Valda Video for loss of profits notwithstanding Valda Video’s purported election to recover damages on the alternative basis of loss of capital value. I do so because, for reasons which I later elaborate, I am not satisfied that loss of capital value is an appropriate measure of damages in the circumstances of this case. The Court must retain a discretion to assess damages appropriate to the circumstances of the case as well as in accord with principle and any relevant authorities.

[56] The expert accounting witnesses for the plaintiffs and defendants respectively were Mr D R Appleby and Mr J C Hagen. Initially, each assessed loss of profits on the basis of turnover of $10,000 per week. Mr Appleby produced “sensitivity alternatives” based on $9000 and $11,000 per week. During the hearing, I asked for alternative calculations on the basis of turnover of $8000 per week. I did so because I am satisfied that it is appropriate to assess damages for loss of profit, taking into account the representations made but allowing for contingencies. I have in mind factors such as the ordinary vicissitudes of the economy and the market, the prospect of subsequent changes in competitive operators, as well as my conclusion that the Kirbys were not entitled to expect a guarantee of turnover of $10,000 per week. As well, I take into account the likelihood that turnover at the outset would likely be at a lower level, not building to the anticipated levels for some months after the business opened.

[57] Bearing these factors in mind, I am satisfied that loss of profits should be assessed on the basis of turnover of $8000 per week which represents a discount of the order of 20% below the represented level.

[58] On that basis, Mr Grant for the plaintiffs accepts Mr Hagen’s calculations of loss of profit over the trading period of $203,237 before tax. As I understand it, that figure allows for wages at a level of 18% of turnover as adopted by United Video in the figures given to the Kirbys at the outset. That would amount to $66,560 which would be sufficient to cover all wages whether a manager or owner operator situation applied. In that respect, the Kirbys maintained they intended to operate the store with a manager. Mr Dickins denied their evidence that they told him this but as it would not make any difference to the loss calculation, I need not determine the issue. On that basis, the amount which Valda Video should recover for loss of profits is $203,237. However, in case I have made any error in the calculations, I will reserve leave for counsel to make further submissions on any matter of arithmetic.

Capital losses

[59] On the basis of turnover of $8000 per week, Mr Appleby assessed the capital loss of the business at $381,688 while Mr Hagen assessed it at $337,220. From both those sums, the recovery made upon the sale of assets on termination of $75,000 would need to be deducted. This would give a net capital loss of $306,000 on Mr Appleby’s calculations and just over $260,000 on Mr Hagen’s calculations.

[60] As indicated, I do not consider it is appropriate to assess the plaintiff’s damage in this case on the basis of the loss of capital value of the business. Mr Appleby’s calculations assumed that the franchise would have continued for six years and would have been renewed for a further six years thereafter. Mr Hagen’s calculations proceeded on the basis that the business would have continued in perpetuity. In each case, they applied a discount to arrive at the net present value of the business. The discount rates varied widely. Mr Appleby adopted a rate of 8% while Mr Hagen applied one of 18%.

[61] I regard the assessment of damages for the capital loss of the business on this basis as artificial and speculative in the circumstances prevailing. This was a new business with no prior history. Its start-up costs were the $25,000 franchise fee, the cost of fixtures and fittings, and stock. Nothing was paid for goodwill other than the franchise fee. The business traded at a low level for two years and carried very substantial losses during its short history. At termination, there was no goodwill to realise and any remaining assets, including stock, were disposed of. Whether the business would otherwise have continued for as long as six years with the franchise then renewed for a similar period is unclear and would have depended on a range of factors not necessarily connected to the turnover representations. As well, the plaintiffs will, in any event, recover the loss on the sale of the stock in the trading losses, both experts agreeing that the cost of the stock of videos and games should be treated as an expense in view of the very high rates of depreciation applying (up to 75% per annum).

[62] I am satisfied that the plaintiffs will be adequately and properly compensated on the normal contractual measure if they recover their operating losses (including loss on sale of stock), anticipated loss of profits over the trading period, and compensation for their unremunerated time spent in the business.

Counterclaim

[63] By reason of the serious misrepresentation as to turnover, I am satisfied that Valda Video was entitled to cancel the franchise agreement. The burden of the contract for the plaintiffs was substantially different from that represented. It follows that United Video has no foundation for its counterclaim for franchise fees. In any event, there was no satisfactory evidence before the Court to support the quantum claimed.

Interest and costs

[64] I award interest on the damages at the rate of 6% per annum from the date of cancellation of the franchise agreement (23 August 2000) down to the date of judgment. The rate of 6% is equivalent to the average rate of return achieved by the Kirbys on surplus monies held on deposit. I adopt that rate in preference to their borrowing costs on mortgage of around 8.95%. I do so on the basis that it is more likely the funds invested in the business would otherwise have been placed on deposit.

[65] The plaintiffs are entitled to one set of costs assessed on a 2B basis.

Summary

[66] I am satisfied that the plaintiffs are entitled to recover damages for the misrepresentation as to turnover, which damages should be assessed as follows:

[a] Trading losses $255,793

[b] Value of Mr and Mrs Kirby’s time $93,960

[c] Loss of profits $203,237

$552,990

[67] Counsel are agreed that judgment should be entered against the first defendant, United Video Franchising Ltd, alone. Strictly speaking, Valda Video Ltd is entitled to recover damages for items [a] and [c] above while compensation for the time spent by the Kirbys should be recovered by them personally as second plaintiffs. It may be they will need to rely on the Fair Trading Act to recover for that purpose. As this issue was not addressed by counsel during the hearing and to allow for any further submission to be made as to the mathematics of the loss calculations, this judgment is issued on an interim basis and with leave reserved for counsel to file memoranda on those issues. Any such memoranda should be filed within one month of the date of issue of this judgment. Counsel may also make submissions on the calculation of interest and costs if agreement cannot be reached.