Denaro Limited v Onyx Bar & Cafe (Cambridge) Limited HC Hamilton CIV 2010-419-777 [2011] NZHC 52 (7 February 2011)

Last Updated: 11 March 2011

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

_{CIV 2010-419-777}

BETWEEN DENARO LIMITED First Appellant

AND TREVOR WILSON Second Appellant

AND ONYX BAR & CAFE (CAMBRIDGE) LIMITED

Respondent

Hearing: 22 October 2010

Appearances: A Foster for appellants

P J Morgan QC for the respondents

Judgment: 7 February 2011

_{JUDGMENT OF ALLAN J}

In accordance with r 11.5 I direct that the Registrar endorse this judgment with the delivery time of 10 am on Monday 7 February 2011.

Solicitors:

Foster & Milroy, Hamilton [e-mail]

Welsh McCarthy, Hawera, [e-mail]

_{P J Morgan QC Hamilton} [e-mail]

DENARO LIMITED AND ANOR V ONYX BAR & CAFE (CAMBRIDGE) LIMITED HC HAM CIV 2010-

419-777 7 February 2011

Introduction

[1] This is an appeal from a judgment of Judge Maze[1] sitting in the Hamilton District Court. It raises a question as to the availability of damages in the context of an acknowledged deliberate breach of a vendor’s restraint of trade covenant, following the sale of a restaurant business, where the purchaser nevertheless achieved the warranted turnover.

Factual background

[2] The Onyx Bar and Cafe is a well established business in Cambridge. During

2007, it was owned and operated by the first appellant (Denaro). Denaro was controlled by the second appellant, Mr Wilson.

[3] By an agreement for sale and purchase dated 9 November 2007, the appellants agreed to sell the business to Kingston Investments Ltd and/or nominee (Kingston) a company controlled by Mr Barry Levings. The total purchase price was

$685,000, comprising $338,000 for tangible assets, $327,000 for intangible assets, and $20,000 for stock in trade. Possession was to be given and taken on 21 January

2008. The vendors warranted that the annual turnover of the business was not less than $1,371,270.

[4] The expression “intangible assets” for which the purchaser paid $327,000 was defined in the agreement as follows:

(8) “Intangible assets” means the intangible rights, licences and benefits owned or used by the vendor in respect of the business including:

(a) the vendor’s rights under all contracts relating to the supply of goods or services to the vendor in connection with the business which, at the settlement date, remain to be performed in whole or in part, and

(b) the vendor’s rights under any licence agreement or equipment lease entered into in connection with the business which, at the settlement date, remain to be performed in whole or in part, and

(c) all intellectual property rights and interests owned or held by the vendor, or used by the vendor in connection with the business, including without limitation, patents, trademarks, copyrights, software, registered designs, trade names, domain names, symbols, logos and trade secrets, and

(d) the goodwill of the business including where applicable, the benefit of the lease.

[5] The following restraint of trade covenant was incorporated into the agreement:

Both the Vendor and Trevor Wilson personally covenant with the Purchaser not to carry on a Restaurant, Cafe and Bar business either directly or indirectly within a 10 km radius of the Cambridge CBD, to also KW, FE and GD Wilson. This clause excludes the vendor’s licensed function centre and cafe at the Aquatic Centre in Cambridge.

[6] Kingston subsequently nominated the present respondent as the purchaser of the business.

[7] Settlement duly occurred on 21 January 2008; the business has been operated by the respondent thereafter.

[8] As its name implies, the Onyx Cafe and Bar offered a mix of bar and restaurant facilities. It was open throughout the day and into the evening. During negotiations, Mr Levings had noted a restaurant, Rossos, in the building immediately next door to the Onyx premises. He concluded that it provided little direct competition because it was an à la carte fine dining restaurant. Mr Wilson assured him of that. However, within two months of settlement, Rossos closed down and the building was significantly renovated. Mr Levings discovered that Mr Wilson was playing a central role in its refurbishment. Within a few months a new business opened there under the name “Stables Sports Bar” (Stables). The Stables business is a significant competitor and Mr Wilson’s role in the establishment of that business is not in dispute. Neither is it disputed that he was a pivotal figure in the running of the Stables business there once it opened.

[9] Among the documents discovered by the appellants was a deed between Mr Wilson, his partner, a Mr Trevor Jans, and Stables, in which Mr Wilson’s obligations to the respondent under the restraint of trade covenant were recorded, and the other parties to the deed were indemnified by Mr Wilson against any claims or losses arising from a breach by him of that covenant.

[10] Having become aware of what was occurring, Mr Levings confronted Messrs Wilson and Jans and complained that they were acting in breach of the restrictions imposed by the covenant. He was simply ignored. Mr Morgan submits that the evidence discloses “... a clear, unequivocal, callous and deliberate breach of the terms of the restraint of trade”. Although highly coloured, that description might properly be thought to be reasonably accurate.

The District Court judgment

[11] The respondent issued proceedings in the Hamilton District Court. But it did not make a conventional claim for reimbursement of its losses. That was because Mr Levings, a very experienced and successful businessman, had been able to achieve the warranted turnover, despite the unexpected competition. Accordingly, the respondent instead claimed the return of part of the sum of $327,000 paid to Denaro in respect of intangible assets, which included goodwill.

[12] In reliance upon the evidence of the respondent’s forensic accountant Mr Burn, the respondent claimed $247,500 of the sum of $327,000, upon the basis that the former sum was the proportion of the intangible assets that represented goodwill. It abandoned the excess over $200,000 in order to bring the claim within the jurisdiction of the District Court and accordingly sought judgment for the latter sum.

[13] In her judgment of 1 June 2010, Judge Maze dealt with several questions, not all of which arise for consideration on appeal. There was a challenge on behalf of Stables (separately represented in the District Court) to the respondent’s status to sue. Judge Maze found in the respondent’s favour on that issue. She also found

Stables liable for inducing a breach of contract. Stables has not appealed and there is therefore no need to consider that finding in this judgment.

[14] Judge Maze dealt first with the question of whether the respondent had proved that it had suffered loss by reason of the breach, given that the warranted turnover figure had been achieved despite the breach. She found that the evidence established that from the outset neither of the appellants intended to honour the terms of the restraint of trade covenant and that it was “... difficult to imagine a clearer case of unjust enrichment by selling a promise not to trade in competition when that

promise was never intended to be kept”.[2] She further held that the appellant’s

argument ignored the role played by Mr Levings in ensuring that the warranted turnover was achieved, finding as a matter of fact that his hard work and experience were instrumental in producing a satisfactory financial return. In her view the respondent was entitled to damages in order to recognise the fact that it had paid for an asset (the right to trade without competition from the appellants) which proved to be worthless.

[15] Accordingly, she held that both appellants were liable to the respondent for damages for breach of contract calculated on a restitutionary basis, by which I understand her to mean that the respondent was entitled to recover that part of the goodwill payment that reflected the value of the restraint of trade covenant.

[16] Having considered the expert accounting evidence on either side, Judge Maze determined that the respondent had established its entitlement to recover the sum of

$200,000, and gave judgment for that sum against both appellants and Stables. She declined however to grant an injunction, on the grounds that to do so would amount in effect to double counting. Interest was awarded at 8.4% per annum on the amount of the judgment from the date of the filing of the proceedings to the date of payment.

The appellants’ argument

[17] As he did in the District Court, Mr Foster maintains that despite the appellants’ breach, the respondent is entitled to no damages at all, except, possibly for nominal damages. Restitutionary damages are not available, he maintains, for breaches of covenant in restraint of trade.

[18] Judge Maze rejected that submission. It is accordingly necessary to consider the current state of the law on the point.

Damages for restraint of trade breaches

[19] At the outset it is perhaps useful to refer to the damages classifications suggested by Tipping J in Premium Real Estate Ltd v Stevens:[3]

[102] Against that background I return to the terminology of damages. I leave aside nominal damages and exemplary damages, which have their own particular features. On that basis the three types of monetary relief with which the courts are concerned as a response to civil wrongs can be described as compensatory damages, disgorgement damages and restorative damages. Compensatory damages are loss based. Disgorgement damages are based on giving up a gain. Restorative damages are based on restoring to the plaintiff value transferred. As the Privy Council affirmed in Tang Man Sit, compensatory and disgorgement damages are generally, indeed almost always, inconsistent. An election is required between them. Compensatory and restorative damages are not necessarily inconsistent. Conceptually they are capable of being cumulative, even if they arise from the same wrong.

[20] Adopting Tipping J’s analysis, the Court is here concerned with restorative damages involving the restoration to a plaintiff of value transferred to a defendant. The principal authorities (and Judge Maze) use the term “restitutionary damages” to denote the same type of remedy.

[21] In Wrotham Park Estate Co v Parkside Homes[4] the plaintiffs sought a mandatory injunction for the removal of certain houses, on the basis that they had been constructed in breach of building covenants. Brightman J refused the injunctions, but considered that the plaintiff was entitled to damages. There was

evidence that the value of the plaintiffs’ property had not been reduced by the construction of the non-complying dwellings. Nevertheless, Brightman J awarded damages, questioning whether:[5]

... it is just that the plaintiffs should receive no compensation and that the defendants should be left in undisturbed possession of the fruits of their wrongdoing.

[22] He considered that the proper approach was to award damages in lieu of a mandatory injunction, calculated at the figure that might reasonably have been demanded as a quid pro quo for the relaxation of the covenant.[6]

[23] The Courts returned to the topic in Attorney-General v Blake,[7] litigation concerning the Russian spy George Blake. The proceedings were somewhat complicated. They centred upon attempts by the Crown to recover from Mr Blake the fruits of his publications, in which certain Crown information was revealed in breach of his contractual obligations to the Crown as his former employer. Although claims based upon breach of fiduciary duty and misuse of confidential information were unsuccessful, the Court of Appeal itself raised and considered the Crown’s entitlement to restitutionary damages for breach of contractual obligation. The Court concluded that restitutionary damages were available, although accepting that it had

not received the benefit of full argument on the point.[8] The House of Lords did not

disagree with the Court of Appeal but held that an account of profits was available for breach of contract.[9]

[24] More recently still, the Court of Appeal reaffirmed its conclusions in Attorney-General v Blake when it delivered its judgment in Experience Hendrix LLC v PPX Enterprises Inc.[10] In that case the defendants had, in breach of contract, granted sub-licences of master titles from which recordings of the late Jimmi Hendrix were made. The trial Judge granted an injunction against further licensing, but dismissed claims for damages and for account of profits, because the claimant was unable to show that it had suffered any financial loss as a result of the breach.

Mance LJ engaged in a very detailed analysis of the judgment in Attorney-General v Blake, the Court ultimately deciding that the case, although not sufficiently exceptional to justify an account of profits, nevertheless fell within that class of case in which it was appropriate to award damages measured by reference to the benefits gained by the wrongdoer from the breach.[11]

[25] Notably, both Mance and Peter Gibson LLJ regarded the Wrotham Park decision as an authority which extended beyond cases involving infringements of property rights.

[26] The foregoing decisions, and in particular Wrotham Park and Experience Hendrix, provide substantial support for the availability of restorative (or restitutionary) damages for breach of contract. It is however appropriate to mention the very recent decision of the Court of Appeal in WWF World Life Fund for Nature v World Wrestling Federation Entertainment Inc,[12] in which Chadwick LJ, having considered Wrotham Park and Attorney-General v Blake, decided that, the earlier decisions notwithstanding, the proper approach to the award of damages for breach of contractual covenant was compensatory rather than restitutionary. The WWF judgment has received heavy criticism in McGregor on Damages[13] on grounds which appear to me to be sound. In my view, the earlier decisions are to be preferred.

[27] In his judgment in the Court of Appeal in Attorney-General v Blake, Lord Woolf MR discussed three particular situations in which he believed that restitutionary damages could be considered. His second category was concerned with cases in which a defendant had profited from doing the very thing which he had promised not to do. That was a consideration in Experience Hendrix where the breach was deliberate and the claimant had had a legitimate interest in preventing the

defendant’s profit-making activity.[14]

[28] In my view the approach adopted in Wrotham Park, Attorney-General v Blake (CA) and Experience Hendrix is to be preferred to the restrictions which the WWF case sought to reimpose. There is no reason in principle why the Court should not be free to award restitutionary or restorative damages where they are called for. Such cases will of necessity be fairly rare. The present case is an example. In most cases, a plaintiff who sues for breach of a restraint of trade covenant will do so in the context of demonstrable losses suitable for the assessment of compensatory damages.

[29] Here, the respondent paid a substantial sum for intangible assets, including goodwill. The benefit of the restraint of trade clause was part of that goodwill, so it has paid for something it did not get (a competitive environment without the appellants) and which, on the evidence, the appellants never had any intention of providing.

[30] As it turned out, the respondent was able, largely through Mr Levings’ experience and hard work (together it seems with the partial failure of an important second competitor), to achieve a turnover which exceeded the warranted turnover. But that is largely irrelevant. The Court is entitled to infer that the respondent must have lost considerable turnover simply by reason of the fact that the former owner of Onyx had set up in business immediately next door. Actual loss was inevitable.[15]

[31] The appellants failed to provide any consideration at all for that part of the intangible assets reflecting the value of the restraint of trade clause. To that extent the respondent was entitled to recover such sum as could properly be attributed to the covenant. Judge Maze thought that the plaintiffs had made out their claim to the whole of the $200,000 sought in the District Court. In reaching that conclusion, she preferred the evidence of Mr Burn to that of Mr Dickey, called by the appellants as an expert accounting witness.

[32] Mr Burn identified and calculated the value ($79,000) of a number of items that fell within the purview of the term “intangible assets”, including those falling within the definition of that term as it appears in the agreement for sale and purchase.

Having deducted the allocated values of those components from the total paid for intangible assets, he was left with a figure of $247,500, which he considered had to be allocated to the availability of the restraint of trade clause. That was because he considered that no purchaser would pay more than the lower figure of $79,500 in the absence of such a clause.

[33] Mr Dickey rejected that approach, which he regarded as unduly subjective. He considered it was not possible to separate out each component of the intangible assets, and to attach a meaningful value to each. He did not however, suggest an alternative methodology; he simply regarded the whole exercise as too difficult. He considered that the respondent had failed to provide acceptable evidence of loss in the District Court. Mr Foster pressed that argument upon Judge Maze but it was rejected by her. The appellants’ argument as to quantum was not renewed in this Court, counsel agreeing that the outcome of the appeal must turn in its entirety upon the availability of restitutionary or restorative damages for breach of contract in circumstances such as the present. I have determined that question in the respondent’s favour.

The position of Mr Wilson

[34] Mr Foster argued that, even if Denaro’s appeal failed, that of Mr Wilson must succeed by reason of the state of the respondent’s pleadings in the District Court. As I understand it, his argument turns on the fact that the respondent pleaded in that Court that Denaro had been enriched by the failure of the appellants to comply with the restraint of trade covenant (without any similar reference to Mr Wilson), and that the relevant cause of action was headed “restitution cause of action against first defendant”, again without any reference to Mr Wilson. However, unusually, the prayers for relief appear at the end of the statement of claim, after all of the separate causes of action had been pleaded; no distinction is made in the prayer for relief between the separate appellants.

[35] Mr Foster’s argument, if raised in the District Court, could have been met by a simple amendment to the pleading, and is entirely lacking in merit. As a

covenanter, Mr Wilson is jointly and severally liable with Denaro for the amount of the judgment.

Result

[36] For the foregoing reasons, the appeal is dismissed. The respondent is entitled to costs, calculated in accordance with category 2B.

C J Allan J

---

[1] Onyx Bar & Cafe (Cambridge) Ltd v Denaro Ltd DC Hamilton CIV-2009-019-194, 1 June 2010.

[2] At [17].
[3] _{Premium Real Estate Ltd v Stevens [2009] 2 NZLR 384 (SC) at [102]. (footnotes omitted).}
[4] Wrotham Park Estate Co v Parkside Homes [1974] 1 WLR 798 (Ch D).
[5] _{At 812H.}
[6] _{At 815D.}
[7] _{Attorney-General v Blake [2001] 1 AC 268 (HL).}
[8] _{Attorney-General v Blake [1998] Ch 439 at 456D, 458F-459B.}
[9] At 284H.

[10] _{Experience Hendrix LLC v PPX Enterprises Inc [2003] 1 All ER (Comm) 830 (CA).}
[11] _{See in particular the judgment of Peter Gibson LJ at [58].}
[12] WWF World Life Fund for Nature v World Wrestling Federation Entertainment Inc [2008] 1 WLR _{445 (CA).}
[13] _{McGregor on Damages (looseleaf ed, Thomson Reuters) at [12-030].}
[14] See [36] and [58].

[15] Goldsoll v Goldman [1914] 2 Ch 603 at 615.