Ipsofactoj.com: International Cases [2001] Part 1 Case 4 [NZCA]




- vs -





13 NOVEMBER 2000


 McGrath J


  1. I differ from the judgment of the majority in one important respect. It concerns the alleged misrepresentation that there was no basis for claiming that the business opportunity would generate returns to the plaintiffs of $150,000 annually. (Paragraph 7.4 statement of claim). My view is that on the affidavit evidence of the parties this allegation is made out to the standard required in summary judgment proceedings. I shall briefly set out why.

  2. The newspaper advertisement asserted:

    Huge demand with a projected income of $150K + pa PROVEN.

    The meaning of those words, in my opinion, is that empirical data exists reliably indicating that an income of that level can reasonably be achieved by a person who takes up the proposal in response to the advertisement. The advertisement is a representation to that effect.

  3. The respondentsí evidence is that they asked Mr. Lehmann for accounts and figures justifying that the business would generate $120,000 annually. This indicates the importance they attached to the representation. In response, according to the respondents, Mr. Lehmann did not address whether there was an empirical basis for the representation in the advertisement, other than to say he could not provide any accounts. Instead he is said to have asserted to the respondents that the income of $120,000 (not $150,000) was "realistic". However that oral assertion is not the representation with which the Court is concerned. The representation which I consider is shown to be false is the representation which the majority of the Court accepts was made, namely that there was a reasonable empirical basis for the projections of future earnings.

  4. The respondentsí evidence is that Mr. Lehmann went on to discuss calculations and projections. In hindsight it can be seen these ultimately turn on Mr. Lehmannís assumptions of the number of weekly orders for applications that would be obtained rather than any trading data drawn from other franchise businesses. However that is highly unlikely to have been apparent to persons in the position of the respondents at the meeting. Mr. Lehmann did not dispute this part of the respondentsí evidence which indicates his response to the request for justification of the representation was evasive. In all the circumstances I infer that the respondents went ahead and signed the distribution agreement on the basis that Mr. Lehmann had reiterated and supported the accuracy of the terms of the representation in the advertisement, albeit at the figure of $120,000 per annum.

  5. The apparently evasive response in itself suggests there was no empirical data from existing equivalent businesses that supported the representation. Mr. Lehmannís own affidavit evidence relevant to the point was no more than that there was interest in a franchise from other prospective agents in Tauranga or Wellington. From this and the overall circumstances of the meeting the transaction is rightly characterised by the majority as suspicious. To my mind the logical inference at this point is that there were no actual franchise or "distribution" businesses in existence at the time of Mr. Lehmannís meeting with the respondents which could or did provide an empirical basis for the representation in the advertisement that induced the respondents to go ahead.

  6. The appellant did not provide any evidence of an empirical basis for the financial projections in a situation where on the state of the evidence it was incumbent to do so to defeat the application for summary judgment. MacLean v Stewart (1997) 11 PRNZ 66, 69 CA. In light of that the overall evidence that is before the Court in my opinion leads to the inevitable inference no empirical basis for the financial projections existed. The representation in the advertisement was untrue both as published and at the reduced figure conveyed to the respondents at the meeting. Because it induced the respondents to enter the contract this was a sufficient basis for cancellation of the contract under s 7(3)(c) and 7(4) of the Contractual Remedies Act without having to have regard to the other alleged misrepresentations as to which I do not differ from the majority. It follows that in my opinion on the affidavits before the Court there is no defence to this allegation of misrepresentation.

  7. Accordingly I would dismiss the appeal. However, in accordance of the views of the majority, the judgment of the Court will be as stipulated in the judgment delivered by McGechan J.

    McGechan J

    (delivered a judgment in which Salmon J joined)


  8. This is an appeal against entry of summary judgment in the sum of $120,000 plus costs and interest against both first named and second named appellants. Only the first named appellant appeared in support in this Court. Counsel for first named appellant advised second named appellant abided outcome. For convenience we will refer to the first named appellant as "Mr. Lehmann" and the second named appellant as "Waco".


  9. Certain facts are not in dispute.

  10. On 1 May 1999 the following advertisement appeared in the Evening Post, Wellington:

    Golden Opportunity


    This business comes with a well established agency dealing with waterproofing, building resurfacing etc. Has a long and very successful history. Ideal husband and wife cash business. Huge demand with a projected income of $150K+ pa PROVEN. Well priced at $120,000. Genuine cash buyers only phone Accountant 025-946-819

    (The full stop after "pa" which is pleaded does not appear in the advertisement exhibited).

  11. The respondent Mr. Jackson telephoned the number given and spoke to Mr. Lehmann.

  12. Some days later the respondents travelled to Auckland and met Mr Lehmann. Mr Lehmann made a sales presentation, in course of which he conveyed certain information, answered questions, and showed the respondents various brochures and other documents.

  13. It is alleged the advertisement, these discussions, and certain of the documents shown at the time constituted representations which induced the Jacksons to enter into the transactions now in issue. It is said certain of the alleged representations were false.

  14. The outcome of the meeting was that the respondents signed an agreement to purchase shares in what was at that stage a shelf company, that company in turn entering into a distribution agreement with Waco. Respondents appear to have signed the distribution agreement also. They did not have legal advice at the time. Respondents, on request, handed Mr Lehmann a cheque for the purchase price of $120,000, at his request made payable to cash. The meeting closed on the basis they would be contacted further.

  15. Over the immediately following weekend the respondents developed doubts. Those doubts were increased when they contacted a person in Dunedin whom they had been told would undertake their training, and did not receive information they considered satisfactory.

  16. Within a day or so they sought to withdraw. Mr Lehmann was not agreeable. Exchanges followed between solicitors, with the proceedings under appeal ultimately issued.


  17. The statement of claim after alleging the initial advertisement and telephone contact pleads as follows:


    On 7 May 1999 the plaintiffs met with the first defendant in Auckland who advised:


    That he was the accountant for Waco Coatings & Chemicals Limited (the second defendant).


    That the second defendant was the supplier and manufacturer of roofing products called "RB80" and "Thermobond".


    That "RB80" and "Thermobond" were well known in the building industry, and enjoyed an excellent reputation.


    That there would be no difficulty in selling and distributing "RB80" and "Thermobond".


    That "RB80" and "Thermobond" was endorsed by well known celebrities and personalities such as:

    - Andy Haden

    - Kerry Smith

    - Lana Coc-Kroft


    That if the plaintiffs purchased the rights to sell and distribute "RB80" and "Thermobond" they would receive marketing training from a Mr Paul Cropper of Dunedin.


    That the opportunity to purchase the rights to sell and distribute "RB80" and "Thermobond" provided an excellent business opportunity with returns of $150,000 per annum.


    Relying upon the representations set out above the plaintiffs:


    Signed a document described as a "Distribution Agreement". A copy of the "Distribution Agreement" is annexed as a schedule to the statement of claim. The "Distribution Agreement" records certain terms and conditions upon which the plaintiffs purchased the right to sell and distribute "RB80" and "Solar Glaze" (the "Distribution Agreement" makes no reference to "Thermobond") within the "Wellington Central area of distribution. (The "Wellington Central" area of distribution is not defined).


    Handed the first defendant a cheque in the sum of $120,000 drawn in favour of Waco Coatings & Chemicals Limited. At the first defendants request the plaintiffs endorsed the cheque as payable in cash.


    The representations made by the first defendant which induced the plaintiffs to enter into the "Distribution Agreement" were false in that:


    The products described as "RB80", "Thermobond" and "Solar Glaze" are not well known in the building industry and do not have an excellent reputation.


    Mr A Haden, Ms K Smith and Ms L Coc-Kroft did not endorse "RB80", "Thermobond" or "Solar Glaze". In fact on at least three occasions Mr A Haden had told the first defendant that he (Mr Haden) does not endorse "RB80", "Thermobond", "Solar Glaze" or any other product promoted by the first defendant.


    When contacted by the plaintiffs, Mr Paul Cropper of Dunedin professed he did not know that he was to train the plaintiffs in marketing "RB80", "Thermobond" or "Solar Glaze" and he had not had contact with the first defendant for some considerable time.


    There was no basis for claiming that the business opportunity would generate returns to the plaintiffs of $150,000 per annum.

    The statement of claim then alleges cancellation by respondents on 8 June 1999, but refusal by appellants to refund the $120,000 paid.

  18. The statement of claim then pleads fraudulent misrepresentations. The particulars of fraud given align closely with the allegations of falsity in preceding para 7:


    Particulars of fraud relied upon are:


    There was no basis upon which the first defendant could honestly claim that the business opportunity he was selling would generate returns to the plaintiffs of $120,000 per annum (or even come close to that amount).


    The products described as "RB80", "Thermobond" and "Solarglaze" are not well known in the building industry and do not have an excellent reputation.


    Mr A Haden, Ms K Smith and Ms L Coc-Kroft did not endorse "RB80" " Thermobond" or Solarglaze". On at least three occasions Mr A Haden had told the first defendant that he (Mr Haden) did not endorse any product promoted by the first defendant.


    No arrangements had been put in place for Mr Paul Cropper of Dunedin (or any other person) to train the plaintiff in marketing "RB80", "Thermobond" or "Solarglaze"

  19. The statement of claim then pleads as a second and alternative cause of action and under a subheading "Contractual Remedies Act 1979" as follows:


    The plaintiffs were induced to enter into the contract by negligent misrepresentations. The misrepresentations are those set out in paragraph 7 above. The misrepresentations were made by the first defendant in circumstances where he could reasonably have known that the representations in question were incorrect.

  20. As amplified in this Court, it was intended para 12 be construed as an allegation of negligent misrepresentation under Hedley Byrne principles as against Mr Lehmann, and as a misrepresentation having effect as a contractual term under the Contractual Remedies Act 1979 as against Waco, both being pursued.

  21. Finally, the statement of claim under the subheading "Contractual Mistakes Act 1977" alleges:


    The distribution contract is invalid for uncertainty because there is no explanation as to what the distribution area is. The words "Wellington Central" are vague and imprecise. It could refer to an area as small as the central business district Wellington central or an area encompassing the lower half of the North Island.

  22. It is not stated whether the third cause of action is cumulative or alternative. It was accepted in this Court that despite reference to the Contractual Mistakes Act 1977 the plea essentially is that the contract is void for uncertainty.

  23. No statement of defence has been filed to this stage. A notice of opposition denies that representations were made as claimed, denies fraud, denies inducement by negligent misrepresentations, and asserts the distribution area was as agreed and no mistake was made.


  24. The Masterís judgment was prepared under some difficulties and pressure, and it is not criticism to say it is not entirely easy to distil. Essentially, however, the Master held that Mr Lehmann was an agent of Waco, and represented that the products concerned were well known in the building industry and had a long and successful history. That conclusion, against Mr Lehmannís denial, was founded at least in part on the terms of the advertisement. The Master accepted evidence from an independent expert Mr Sharman that the product (RB80) did not enjoy a reputation for being well established and well known. The Master also found that on the evidence Mr Lehmann had not spoken to Mr Cropper. The Master further found that the endorsement by Mr Haden had been handed over despite unanswered evidence from Mr Haden of a warning not to use his name. The Master found that the definition of territory as "Wellington Central" was not clearly defined, and the contract was to be regarded as entered into on a basis of mistake.

  25. The Master then proceeded to these conclusions:


    At the end of the day I made my decision on the material on file. I am satisfied that there was misrepresentation, that there was a genuine mistake, that the misrepresentations made were negligent and that there was certainly collusion, if not fraud, over the events which took place


    I am satisfied that the plaintiffs are entitled to judgment herein on the first, second and third causes of action as sought ....


  26. As the Master rightly noted, decision is to be approached in terms of Pemberton v Chappell [1987] 1 NZLR 1. It is for the respondents to show appellants do not have an arguable defence: MacLean v Stewart (1997) 11 PRNZ 66, 69; read with Greenbank NZ Ltd v Haas [2000] 3 NZLR 341, 346-7 In considering that question there is room for an approach in terms of Bilbie Dymock Corp Ltd v Patel [1987] 1 PRNZ 84 mandating a "robust and realistic attitudeÖwhen that is called for by the particular facts of the case". Along with that, of course, the Court must avoid any oppressive rush to judgment: Doyles Trading v Westend Services (1986) 1 PRNZ 677, 680 per Casey J.


  27. We can confine ourselves to those representations alleged in para 7 of the statement of claim to have been false.

  28. Misrepresentation that the three products were "well known in the building industry, and enjoyed an excellent reputation". As to "well known," the difficulty for the respondents is that there is no proof the words "well known" were used at all. The respondentsí affidavit does not go further than asserting Mr Lehmann said the product had been around for several years, and their "phone wouldnít stop ringing". Mr Lehmannís affidavit does not go further than asserting a statement that the product had been around for several years, with RB80 first used in 1983 and Thermobond more recently. While the terms of the appellantsí advertisement are predictably laudatory, it requires considerable liberties with the text to extract representations in the pleaded terms. We are unable to find that representations in the pleaded terms are established. In that light, it is not necessary to determine whether if such words were used they were wrong. If it were, consideration would be needed as to the weight which could be given to Mr Sharmanís affidavit stating from his position in BRANZ that he had never heard of the products concerned. Some justifiable criticisms were made by counsel for appellants as to his particular expertise and the nature of the data on which he relied for those views. However, we need not say more. There is an arguable defence.

  29. Misrepresentation that the products were endorsed by well known celebrities and personalities including Mr Andy Haden. The difficulty for respondents is Mr Lehmannís claim that the so-called "endorsements" were handed over as examples of the type of advertising which could be undertaken, and were not passed over as a representation that the product was currently so endorsed. That explanation has some prima facie credibility, given evidence as to reference in discussions to need for advertising, and the vintage of the Haden endorsement. appellants have shown an arguable defence.

  30. Available marketing training from Mr Paul Cropper of Dunedin, Mr Cropper professing he did not know he was to train the respondents and had not had contact with Mr Lehmann for some considerable time. Respondents again encounter a difficulty through Mr Lehmannís evidence. Mr Lehmann says Mr Cropper had given training on other occasions, and he had spoken to Mr Cropper within one month prior, although he had not spoken to him specifically in respect of training the respondents. The case is not helped by the absence of an affidavit from Mr Cropper himself. It cannot be said there is no arguable defence on the point.

  31. This leaves the alleged representation that this was an excellent business opportunity with returns of $150,000 per annum said to be false and fraudulent through being without basis. This last requires close examination.

  32. The advertisement in question does refer to "projected income of $150K+ pa". The word "PROVEN" then follows. We consider the word "PROVEN" in the advertisement reads naturally as referring back to that representation. We do not think it can be linked solely to the nature of the product, as opposed to cash potential. The respondentsí affidavit qualifies the potential effect of the $150,000 figure by acknowledging Mr Lehmann said in the course of discussions that $120,000 would be "realistic". Respondents are in some difficulty in asserting, in that light, that they were induced by the advertisements at $150,000.

  33. However, whichever figure is taken, respondents have at least that much evidence of a representation that an income at those levels was achievable. Clearly, within the reference to $150,000 plus per annum (or the subsequent reference to $120,000 as "realistic") there was an implicit representation as pleaded that a basis existed for such statements. They were made from a position of apparent informed knowledge to respondents who were without that knowledge or the ability at that time to obtain it.

  34. Have appellants shown that the implied representation as to the existence of that basis was incorrect?

  35. There are some pointers in that direction. Significantly, Mr Lehmann does not provide much if at all by way of evidential substantiation. His affidavits simply deny any claim the business would realise $150,000 per annum, a position somewhat difficult to reconcile with the advertisement, as the Master observed, and also deny reference to the $120,000 subsequently. Perhaps curiously, there is nothing in the way of financial information as to the business set up of Waco, let alone a business history or accounts over the years during which Waco has been running. There is a surprising silence instead of evidence which might be expected if in fact the figures could be justified.

  36. Further, there is some room to draw adverse inferences from Mr Lehmannís response to the respondentsí request during their meeting for accounts and figures justifying the $120,000. On their evidence, Mr Lehmann said he could not provide accounts, but proceeded to an attempted justification by calculations based on the number of roofs which could be treated weekly multiplied by a derived profit per roof. While, as discussed shortly, this cannot be shown actually to be wrong, it could be regarded as a hypothetical and evasive response, tending to demonstrate there was no empirical basis available for claims made. To like effect, there is room for an adverse inference that no business in fact currently existed from which a basis for the figures could be extracted.

  37. These adverse inferences gain heightened significance when some prima facie suspicious circumstances are added. It is a matter of concern that this transaction took place on the basis of an anonymous advertisement, with response only through a mobile phone number, followed by a meeting in a hotel room, at which brochures containing endorsements were presented in circumstances which could (at best) be misunderstood, with the meeting finalised by an unusual demand for payment by cheque made payable in cash. A sales pitch conducted with some pressure, part of which was a reference to training by an individual which had not yet been arranged, does not increase confidence. Some less than balanced later correspondence from Mr Lehmann has similar effect. We take no notice of matters surrounding a charging order following the judgment now under appeal, but even with that put to one side there is considerable justification for treating Mr Lehmannís evidence, and lack of evidence, with suspicion.

  38. On the other hand, and importantly, there is no direct evidence at all, as opposed to suspicion, that the $150,000 figure or $120,000 figure were wrong or were without basis. There is no direct evidence Mr Lehmannís projections based on numbers and rates were wrong, or were without basis at least in reason or experience. There is not, for example, an affidavit from another or a former disgruntled franchise holder stating the figures were unattainable, or baseless. There is no trade or other admissible evidence countering Mr Lehmannís projections or tending to point towards absence of basis.

  39. Respondents bear the onus of proving Mr Lehmann and Waco have no arguable defence on the point. Respondents must prove there was no basis for the income projections pleaded. As already noted, there are circumstances of a suspicious nature surrounding Mr Lehmann and Wacoís activities, and Mr Lehmannís affidavit evidence is to be approached with caution accordingly. It is a situation where, within proper limits, a robust and realistic approach is justified.

  40. However, even with those allowances made, there simply is not enough to enable the Court to find there is no arguable defence on the financial projections basis point. The representations at $150,000, $120,000, and the oral projections made during discussions in the end may or may not be shown to be correct or at least to be well based, but it cannot be said at this summary judgment stage that the respondents have shown there is no arguable defence open.

  41. There is also a question as to proof of inducement.

  42. The $150,000 figure was reduced by Mr Lehmann during discussions to $120,000. When respondents asked for accounts or figures justifying the $120,000, Mr Lehmann made his numbers and rates projections. Respondents did not pursue the advertisementís $150,000 figure or the $120,000 figure further with him. They immediately went ahead. There is room for inference that respondents went ahead on the basis ó right or wrong ó of those oral justifications. There is room for inference, accordingly, that the $150,000 or $120,000 representations did not in the end induce the respondents; but the respondents acted on the oral numbers and rates statements made during discussions, not shown to this stage to be wrong or without basis. Respondents have not shown there is no arguable defence in relation to this inducement aspect.



  43. Independently of that finding, summary judgment for fraud cannot stand. Fraud requires proof to a high standard. The submission in the Court below appears to have been that the Master "could or could not" find fraud. The Masterís finding was correspondingly tentative, speaking in the first instance of ".... collusion, if not fraud, ....", although the ultimate finding on the first cause of action was affirmative. We think this caution was justified in the absence of oral evidence and cross-examination but should have gone further. We do not consider fraud has been established to the requisite standard. It involves knowing dishonesty. Those inferences and circumstances which point to a misrepresentation do not necessarily go so far. Any misrepresentation, while suspicious, could have been through no more than negligence. Respondents have not shown there is no arguable defence to fraud.



  44. Counsel for respondents accepted in course of argument that the Contractual Mistakes Act was not applicable, and the question in truth was whether the agreement was void for uncertainty in relation to territorial description. Mr Lehmannís evidence was that parties agreed the description "Wellington Central" was to be taken as meaning an area "bounded by Porirua South in the North and to the bottom of the North Island". That evidence has not been answered. There are some difficulties with it. There will be questions under the parol evidence rule, although admissibility problems might be overcome by treating the evidence as setting the partiesí own dictionary. More significantly, even this oral definition has some elements of uncertainty. It would not, however, be appropriate to make a determination at this stage, and in the absence of trade or other local usage evidence, that the agreement necessarily would be void on that account. Respondents have not shown there is no arguable defence on this cause of action.


  45. In the result, the appeal must be allowed.


  46. First-named appellant will have costs of $3,000 plus disbursements and any travelling and accommodation expenses, to be fixed if necessary by the Registrar, against respondents.


MacLean v Stewart (1997) 11 PRNZ 66, 69 CA; Pemberton v Chappell [1987] 1 NZLR 1; MacLean v Stewart (1997) 11 PRNZ 66; Greenbank NZ Ltd v Haas [2000] 3 NZLR 341; Bilbie Dymock Corp Ltd v Patel [1987] 1 PRNZ 84; Doyles Trading v Westend Services (1986) 1 PRNZ 677


Contractual Remedies Act 1979: s.7(3)(c), s.7(4)

Contractual Mistakes Act 1977


J R Eichelbaum and M R Lander for Appellants (instructed by Warburtons, Auckland)
D B Collins QC and P S Davidson for Respondents Instructed by Southall & Associates, Wellington)

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