Ipsofactoj.com: International Cases [2002] Part 7 Case 3 [NZCA]


COURT OF APPEAL, NEW ZEALAND

Coram

Kinsman

- vs -

Cornfields Ltd

GAULT J

HERON J

GENDALL J

13 DECEMBER 2001


Judgment

Heron J

(delivered judgment of the court)

  1. This is an appeal from a judgment of McGechan J given on 1 December 2000, awarding damages under S.9 of the Fair Trading Act 1986 against a director of a company which had gone into liquidation.

  2. The case is about the sale of a franchise known as "Gourmet Burgers". That franchise had been successfully initiated by the appellant and operated as a limited liability company. The appellant through his company operated the business in Lower Hutt before franchising it. He then offered a franchise to the respondents to operate in Palmerston North. The respondents comprise the trading company which ran the franchise, and its directors and shareholders.

  3. The defendants in the court below comprised the company that operated the franchise, its director, Mr Kinsman, and a company operating as property consultants and registered valuer's. Only Mr Kinsman appeals as judgment was not entered against any party other than Mr Kinsman. However trading losses by the respondent company, and individual losses suffered by the directors and shareholders, were separately awarded. A 25% reduction for contribution for not having checked the subject information was allowed.

  4. The appellant’s company had operated successfully for approximately three years at Lower Hutt, and during that time had offered franchises to other parties who had started business in other parts of the North Island. By the time that the respondents became interested in starting the Palmerston North business, the Lower Hutt business had then been sold. At the heart of the findings of breaches of the Fair Trading Act, are representations that pro forma profit and loss projections for a typical franchise site, sent to one of the directors of the respondent company, contained figures, stating average monthly sales for a typical Gourmet Burger outlet were $50,000, based on what had been achieved by the appellant during trading, prior to the sale of the franchise and which continued on thereafter.

  5. The respondents had the figures checked by their accountant, and he made certain adjustments based on his experience, which had the effect of reducing the level of profitability, but at the heart of the assumptions that the respondents made, was that the average monthly sales of $50,000 were being maintained following the franchise at Lower Hutt where the appellant’s former business continued.

  6. The respondent’s case quite plainly was that in October and November 1997 when they discussed with the appellant the pro forma profit and loss projections, the appellant made it clear that those projections represented the current performance of the Lower Hutt Gourmet Burger Franchise, and it was in response to that, that the respondents entered into the agreement to buy the business, and to operate the franchise.

  7. It was further alleged that in December 1997 the respondents accountant discussed the projections with the appellant. Likewise it was claimed, that in those discussions, the average monthly sale figures of $50,000 represented an accurate representation of the current average monthly sales from the Lower Hutt Gourmet Burgers and Bistro franchise outlet. This representation is important also because it was the basis on which the accountant gave certain advice to the respondents, which was instrumental in their entering into the business.

  8. The Judge having reviewed the evidence said this:

    Drawing together these threads, I find as follows. The turnover figures contained in the pro forma projections in fact were out of date, but appeared on their face to be current. They had been advanced by the Third Defendants as current. Second Defendant did say to the Plaintiffs on at least two occasions at Eketahuna that the projections were accurate and were current, although at the same time stating that the new franchisee had made changes at least to hours. Those changes were not said by Second Defendant to be material to the turnover stated in the projections. Second Defendant did not tell Plaintiffs’ accountant Mr Walshe there had been changes in hours of operation, and while Second Defendant could not give verification of turnover for the period which followed his own proprietorship he did not signal to Mr Walshe that any reason existed for turnover projections to be reduced. To the contrary, Second Defendant continued to endorse the pro forma projections as both correct and current.

  9. The Judge went on then of course, to indicate that the projections were no longer correct and current. The Judge concluded that the Lower Hutt franchise figures, over the critical period were very substantially less than the pro forma projections. Consequently in this appeal, the appellant is faced with a finding of fact of representation made to the respondents, as can be seen from the paragraph in the judgment quoted above. The Judge also said, that in terms of the Fair Trading Act, a misrepresentation had been made to the accountant. Having again reviewed the evidence, in respect of the conversations between the accountant Mr Walshe and the appellant he found liability under s9 and s43 Fair Trading Act 1986 to have been established.

  10. Accordingly there are two factual findings of misleading conduct which incontestably could fall within S.9 of the Fair Trading Act, and which had been given to the parties on the one hand, and their accountant on the other. There is no doubt that to the accountant the representations were less explicit or direct but misleading, the Judge found, nonetheless. On appeal, Mr Dewar wished to have this court set aside those essential findings.

  11. The appellant acknowledges that the essence of the plaintiff’s case was that the pro forma budget was a representation as to the current trading figures of an existing Lower Hutt franchise. Mr Dewar reviewed that evidence and the fact that the appellant said he was unable to give up to date figures.

  12. Essentially the appellant says that this is a case in which the Court might analyse the findings of fact against the second defendant to determine whether the conclusions drawn are reasonably drawn. The appellant relies on the evidence that the prospective purchasers were encouraged to make their own enquiries, and that there were express disclaimers in the proforma profit and loss document.

  13. The appellant says that the words that had been uttered as to turnover, were accurate in that they were truly based on turnover figures achieved at the Lower Hutt outlet, albeit for a period of 18 months earlier than the date of enquiry. Having regard to the conversation with the respondent’s accountant, the inference the court drew was not reasonable, Mr Dewar said, and further that against the context of disclaimers and urgings that the respondents make their own enquiries a finding that the appellant misled the respondents, was unreasonable.

  14. We have considered that matter carefully and have read the evidence, but we are satisfied that the Judge was entitled to find expressly that there had been a representation of the kind made to the contracting parties themselves, but also that there were misleading statements made by the appellant in relation to the way in which the earlier turnover figures could be used. At the end of the day it was a matter of assessing the witnesses and as the appellant’s counsel acknowledged there were some factors in respect of the appellant’s evidence which went directly to his credibility.

  15. The Judge found that the misleading conduct towards the accountant was more in the way in which information was withheld, and what was not said rather than what was said, was the critical consideration. That it seems to us, is a nuance based on listening to the evidence and observing the witnesses and we are not prepared to interfere with that assessment which is primarily a factual one in respect of which there was evidence for the Judge to prefer and select. See Rae v International Insurance Brokers (Nelson Marlborough) Ltd [1998] 3 NZLR 190 CA.

  16. The second point on appeal, was that at all times the appellant had acted on behalf of his company, the first defendant, and he was not accordingly "in trade" for the purposes of S.9 of the Fair Trading Act. The Judge held liability could be attached to a company director acting in the circumstances such as the case here, but Mr Dewar’s submissions was that the Fair Trading Act presented an easy path to a dissatisfied purchaser to target the agents and officers, where the party in trade was plainly a limited liability company.

  17. S.9 is as follows:

    No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

  18. S.45(1) and (2) provide as follows:

    (1)

    Where, in proceedings under this Part of this Act in respect of any conduct engaged in by a body corporate, being conduct in relation to which any of the provisions of this Act applies, it is necessary to establish the state of mind of the body corporate, it is sufficient to show that a director, servant or agent of the body corporate, acting within the scope of that person's actual or apparent authority, had that state of mind.

    (2)

    Any conduct engaged in on behalf of a body corporate—

    (a)

    By a director, servant, or agent of the body corporate, acting within the scope of that person's actual or apparent authority; or

    (b)

    By any other person at the direction or with the consent or agreement (whether express or implied) of a director, servant, or agent of the body corporate, given within the scope of the actual or apparent authority of the director, servant or agent—

    shall be deemed, for the purposes of this Act, to have been engaged in also by the body corporate.

  19. The use of the word "also" suggests liability under the act for both director and company where the director is acting within his actual or apparent authority.

  20. Mr Dewar relies on Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517, which is not a case under the Fair Trading Act, but he says that the appellant should not be regarded as having assumed personal responsibility in a situation such as this. It was Mr Dewar says, an arms-length business transaction between two companies. One of those had undertaken the business of franchising a restaurant concept, the other had entered into a contract to take up that venture. One was franchisor and one was franchisee. He says that Mr Kinsman was accordingly not a person in trade, acting as he was at the time on behalf of his company.

  21. The Judge said:

    An interesting question arises as to how Second Plaintiff’s misrepresentation can be characterised as "in trade", as is required for liability under s9 Fair Trading Act 1986. There is room for a view in principle that a director of a company, which company is in trade, is not himself thereby "in trade" despite the extended definition given in s2. However, for present purposes I follow the approach taken in Gloken Holdings Ltd v The CED Co Ltd (1997) 8 TCLR 278, 286 equating directors who are the alter-ego of a company with the company itself so far as being "in trade" is concerned. While that finding is based merely on contention any other view is "unrealistic", it does gather support from the policy underlying the Act, which extends beyond ordinary contract and corporate law. Indeed, while the point was not argued, it might well be said that liability would fall upon the Second Defendant pursuant to s43(1)(d) and (2)(d) irrespective of whether Second Defendant was so "in trade". There is nothing in a pleading point raised for Second Defendant. While there is no express pleading that Second Defendant was so "in trade", the factual pleadings as to his involvement are a sufficient foundation without such express reference. Certainly, Second Defendant has not been in the slightest disadvantaged by the form of the pleadings, and an amendment would be made even at this stage if such were necessary, which it is not.

    Likewise, there is no basis for excluding Second Defendant from liability simply because he was functioning as a director or corporate officer, rather than in a personal capacity. It suffices to refer to s43 and Smythe v Bayleys Real Estate Ltd (1993) 5 TCLR 454, 470, Thomas J. It is not necessary to show acceptance of personal responsibility. I do not accept that the corporate veil is to be lifted or left in place according to the seriousness of the allegations made against the officer. That is not an approach mandated by the legislation or practicable in a Fair Trading Act context. I do not accept the policy driven approach to the contrary advanced in recent NZLS seminar writings.

  22. Mr Dewar sought to distinguish Gloken Holdings Ltd on the basis that there the director concerned had held himself out as having knowledge and skill personally upon which the other party might reasonably rely. We do not accept there is very much difference between the two factual situations. In Gloken the individual was the current manager of the hotel business to be sold. In the present case, Mr Kinsman whilst not currently involved in the business was receiving royalties based on the business which had once been his, but which had since been franchised off. There was no doubt that in so far as his company was concerned, Mr Kinsman was its alter ego and the only person who could effectively act on its behalf.

  23. Co-existing liability under the Fair Trading Act 1986 for representation in a brochure as to the composition of vitamin tablets was considered by Tipping J in Megavitamins Laboratories (NZ) Ltd and Stewart v Commerce Commissions [1995] 6 TCLR 231.

  24. In considering the position of one of the defendants Dr Stewart, a director and shareholder of the company Tipping J said:

    The company undoubtedly made representations about the composition of each tablet by means of the brochure. The key question is whether Dr Stewart personally also made the same representations. If he did then clearly he did so in trade and in connection with the supply or possible supply of goods, or indeed in connection with the promotion of the supply of goods. With respect to the Judge, I do not think it can possibly be argued that whereas the company was in trade Dr Stewart was not. Of course the company and Dr Stewart were different persons; but that does not stop Dr Stewart being in trade as well as the company.

    Dr Stewart was a shareholder in the company. That capacity does not of itself put him in trade. He was, however, in addition an employee of the company and its agent. In carrying out those roles I do not think there an be any doubt that, for the purposes of the Fair Trading Act, Dr Stewart must be regarded as being in trade. An employed solicitor can properly be regarded as being in law just as much as a principal. The definition of the word "trade" in the Act is a deliberately wide one, including as it does concepts of trade, business, industry, profession, occupation, activity of commerce, and so on. The fact that someone is paid a wage or a dividend for what they do does not prevent them from being engaged in trade or in business or in an activity of commerce. It is what they do which matters.

    The only debatable point, so far as Dr Stewart’s liability for the brochure is concerned, is whether the representation made by means of the brochure was a representation made not only by the company but also by Dr Stewart himself. As I shall mention later, the charges against Dr Stewart were not brought on the basis that he had committed the offence himself as a principal offender. Having gone this far I propose to defer stating my conclusions on this aspect of the case until after I have considered the related points arising on the case stated appeal.

  25. And further

    Subsections (2) and (4) of s 45, noted earlier, make it clear that in some circumstances the conduct of a director, servant, or agent of a company can be regarded as the conduct of both that person and the company as principals. An example in the field of false representations would be the case of a director of a car sales company who personally said to a prospective purchaser that a vehicle was a 1990 model when it was only a 1988 model. In such a case the director has himself made the representation and is therefore liable as a principal as well as the company.

  26. It is necessary in this context to repeat again what was said in Goldsbro v Walker [1993] 1 NZLR 394 where Richardson J said:

    Section 9 requires that the conduct that is misleading be that of the person charged, here McVeagh Fleming. It is not sufficient to attract liability that the communication simply purports to pass on information ostensibly provided by a third party. In such a case any misleading conduct is that of the third party not of the intermediary. The Australian authorities draw a similar distinction under the corresponding provisions of the Trade Practices Act 1974 (Yorke v. Lucas (1985) 158 CLR 661; The Saints Gallery Pty Ltd v. Plummer (1988) 80 ALR 525; Angy v. Blunts (1990) ATPR 41-015; and Mackman v. Stengold Pty Ltd (1991) ATPR 41-105).

    The test under s9 is objective and on which side of the line a particular case falls turns on an assessment of what was conveyed. Was it a representation by the person charged or was it the passing on of information for what it was worth to the receiver without any inference that the person charged was vouching for it?

  27. There is nothing in the facts of this case to suggest that the utterances of Mr Kinsman should be taken as those only of his company or that he was a mere conduit. We think that the Judge’s approach in finding personal liability was the appropriate one. It will be a rare case where a director who participates directly in negotiations as to his or her company’s business will be able to avoid S.9 liability simply on the basis that he was acting only on the company’s behalf. The Fair Trading Act is intended in our view to cast its net wider than that and in the circumstances of this case the representations made by Mr Kinsman must be regarded as "in trade".

  28. It follows that the appeal must be dismissed. There will be costs to the respondents in the sum of $3000.00 together with all disbursements.


Cases

Rae v International Insurance Brokers (Nelson Marlborough) Ltd [1998] 3 NZLR 190 CA

Trevor Ivory Ltd v Anderson [1992] 2 NZLR 517

Gloken Holdings Ltd v The CED Co Ltd (1997) 8 TCLR 278

Megavitamins Laboratories (NZ) Ltd and Stewart v Commerce Commissions [1995] 6 TCLR 231

Goldsbro v Walker [1993] 1 NZLR 394

Legislations

Fair Trading Act 1986: s.9, s.45

Representations

D G Dewar for Appellant (instructed by Thomas Dewar Sziranyi Druce, Lower Hutt)

S W B Foote for Respondents (instructed by Russell McVeagh, Auckland)


all rights reserved