KOP-COAT NEW ZEALAND LTD v INCODO LTD [2018] NZCA 430

KOP-COAT NEW ZEALAND LTD v INCODO LTD [2018] NZCA 430 [15 October 2018]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA692/2017[2018] NZCA 430BETWEEN KOP-COAT NEW ZEALAND LIMITEDFirst AppellantKOP-COAT INCORPORATEDSecond AppellantAND INCODO LIMITEDRespondentHearing: 3 and 4 July 2018Court: Winkelmann, Gilbert and Williams JJCounsel: A S Olney and O E Jaques for AppellantsD M Fraundorfer and T J Conder for RespondentJudgment: 15 October 2018 at 10 amJUDGMENT OF THE COURTA The appeal is allowed.B The judgment entered in the High Court is set aside.C Judgment is entered for the appellants on the respondent's claim.D The respondent is to pay the appellants one set of costs for a standard appealon a band A basis, increased by $7,136 by agreement, and usualdisbursements. We certify for second counsel.E Any issue as to costs in the High Court is to be dealt with in that Court.____________________________________________________________________Table of ContentsIntroduction [1]BackgroundKop-Coat Inc [8]Kop-Coat NZ [9]TRU-CORE® [10]Mobile TRU-CORE® application system in Australia [12]Prospect of mobile TRU-CORE® application system inNew Zealand[13]Was a binding agreement reached?Contract negotiations [14]Execution of the agreement [22]Pleadings [23]High Court judgment [24]Kop-Coat NZ [25]Kop-Coat Inc [27]Submissions [28]AnalysisNo intention to be bound until agreement executed by allparties[32]Kop-Coat Inc [36]Kop-Coat NZ [39]Conclusion [53]Was there agreement on price? [54]Did Kop-Coat repudiate the agreement? [62]Did Incodo mitigate its loss? [68]Did the Judge err in his assessment of Incodo's loss?Pleaded loss [74]Incodo's evidence of loss [75]High Court judgment [87]Submissions [93]AnalysisProof of intended business model [95]Market size [100]Market share [101]Sales volumesPrice assumption[103][105]Inclusion of profits not available under the contract?Mr Leonard's final assessment overlooked?[107][111]Conclusion [112]Result [113]REASONS OF THE COURT(Given by Gilbert J)Introduction[1] The appellants appeal against a judgment of the High Court finding them liableto pay damages to the respondent in the sum of $2,082,000 for lost profits resultingfrom their wrongful repudiation of an exclusive licence and supply agreement for atimber treatment system, TRU-CORE®, for a six-year term.1 The licence and supplyagreement was allegedly entered into on 22 May 2015.[2] The appellants advance five principal grounds in support of their appeal.[3] First, they contend the agreement was never validly executed by eitherappellant. The agreement was prepared on the basis that it would be executed bytwo directors signing for each of the three parties. The agreement was executed inthat manner by the respondent, Incodo Ltd (Incodo). However, it was not signed byany director of the first appellant, Kop-Coat New Zealand Ltd (Kop-Coat NZ).Instead, its general manager, who was not a director, signed in the space above"signature of director" and printed his full name above the space where the otherdirector or company secretary of Kop-Coat NZ was to sign. The appellant contendsthat the general manager had no actual or ostensible authority to sign on behalf ofKop-Coat NZ. Further, no one signed or purported to sign the document on behalf ofthe second appellant, Kop-Coat Inc, a company incorporated in the United Stateswhich is the parent company of Kop-Coat NZ and the owner of the intellectualproperty being licensed.[4] The appellants' second ground of appeal is that there was no agreement on anessential term, namely the price payable by Incodo for the product to be supplied byKop-Coat.2 The basis for this argument is that there are irreconcilable errors in aschedule to the agreement where the input prices are set out with the result there wasno certainty as to price.1 Incodo Ltd v Kop-Coat NZ Ltd [2017] NZHC 2737, [2018] NZCCLR 20 [High Court judgment].2 For convenience we refer to Kop-Coat NZ and Kop-Coat Inc collectively as "Kop-Coat".[5] Third, the appellants argue that the Judge was wrong to find that theyrepudiated the agreement by insisting on a replacement agreement correcting errors inthe original. They claim the parties mutually agreed to terminate the agreementrecognising that Incodo had lost confidence in Kop-Coat and for that reason no longerwished to pursue any licence and supply agreement.[6] Fourth, they contend that the Judge ought to have found that Incodo failed tomitigate its loss by refusing to enter into the replacement agreement that was offered.[7] Finally, the appellants challenge the Judge's assessment of the respondent'sloss.BackgroundKop-Coat Inc[8] Kop-Coat Inc is a subsidiary of RPM International Inc, a Fortune 500 companyin the United States. RPM International, through its various subsidiaries,manufactures and markets high performance coatings, sealants and specialitychemicals. Kop-Coat Inc is part of RPM International's specialty products group andmanufactures and markets protection solutions for processed timber and manufacturedwood through various subsidiaries including Kop-Coat NZ. Kop-Coat Inc is itself asignificant entity. At the time of the events giving rise to the present claim it generatedannual revenue of approximately USD80 million and had over 150 employees.Kop-Coat NZ[9] Kop-Coat NZ is a subsidiary of Kop-Coat Inc and markets its timber protectionsolutions in New Zealand. At the relevant time, Kop-Coat NZ had an annual turnoverof between $20 and $25 million and had 23 employees nationwide. Kop-Coat NZ hadtwo primary business activities: manufacturing and distributing chemicals for thetreatment of timber and timber products; and, through a subsidiary, manufacturing anddistributing herbicides and other chemicals to the farming, forestry and horticultureindustries.TRU-CORE®[10] TRU-CORE® is a patented wood treatment process developed byKop-Coat Inc in 2003. The TRU-CORE® process has over 40 different variationsallowing for use in factories and in the field. The application methods for use in thefield are by brush, roll-on or spray. The processes are suitable for use with 20 standardand custom preservative systems to meet regulatory requirements in several countriesincluding the United States, Canada, New Zealand, Australia and the United Kingdom.At the time of the negotiations with Incodo, TRU-CORE® was only used inNew Zealand for treating timber in the factory, most commonly by very rapid pressurevacuum application.[11] The key advantages of the TRU-CORE® process are said to be:(a) it penetrates to the core of the timber it is applied to, includingheartwood;(b) in most cases there is no need for any additional application ofpreservative;(c) it is applied with water and does not contain volatile organic chemicals;(d) water uptake is generally less than eight per cent whereas conventionalwater-based treatment methods usually introduce large amounts ofwater into the timber, typically 100–150 per cent by weight;(e) the low water uptake greatly reduces or eliminates the need for costlyre-drying after treatment and the associated effects water can have onwood such as grain raising, loss of dimensional stability and erosion ofmechanical properties; and(f) the low water uptake allows the wood to be penetrated in final shapeand form in most cases, eliminating wasteful removal of wood throughshaping, planing, or sanding and consequential landfill disposal issues.Mobile TRU-CORE® application system in Australia[12] The TRU-CORE® process has been used as a mobile system in Australia.In August 2009 Kop-Coat Inc and its Australian subsidiary, Kop-Coat AustraliaPty Ltd, entered into a licence and supply agreement with Boron Solutions AustraliaPty Ltd. This agreement licensed Boron Solutions to use the TRU- CORE® systemin the field employing mobile applicators. The Boron Solutions agreement was for afield spray program to be applied to all wooden parts of the structure of a newly-builthouse frame. The Boron Solutions program was rated for protection against termitesas well as decay and rot.Prospect of mobile TRU-CORE® application system in New Zealand[13] In December 2014 Kop-Coat NZ engaged Timothy James as a sales and servicecontractor to manage three new venture programs, one of which was the field sprayventure. Mr James was tasked with developing a strategic and business plan for eachof these ventures with annual budgets and performance targets. In March 2015Mr James identified Paul Probett as being a suitable candidate to become the firstlicensee for a mobile system in New Zealand targeting the market for remediation ofbuildings with weathertightness issues. Mr Probett is a building surveyor with48 years of experience in the building industry. He and his wife are the directors andshareholders of Incodo, a company incorporated in September 2004 to provideinspection and building surveying consultancy services. At that stage, Mr Probett hadbeen a weathertight homes assessor for 12 years and had reported on approximately600 claims. Mr Probett was impressed by the TRU-CORE® system and wasinterested in becoming a licensee.Was a binding agreement reached?Contract negotiations[14] On 31 March 2015 Mr James introduced Mr Probett to Cameron Scott,the general manager of Kop-Coat NZ. Mr Scott approved of the prospect ofMr Probett becoming a licensee given his standing and reputation in the industry.However, Mr Scott was not, and never has been, a director of Kop-Coat NZ.His 18-year employment with Kop-Coat NZ was terminated because of the problemsleading to the dispute with Incodo. This explains why Mr Scott was called as a witnessfor Incodo at the trial.[15] Mr Scott stated that responsibility for drafting the terms of all contracts restedwith Hans Ward of Pittsburgh, Pennsylvania. Mr Ward is a senior executive ofKop-Coat Inc and a director of Kop-Coat NZ. He is also a director ofKop-Coat Australia. Mr Ward was one of the two directors who signed theBoron Solutions agreement on behalf of Kop-Coat Australia and separately on behalfof Kop-Coat Inc. Mr Scott said he had no authority to determine any of the terms ofthe licence and supply agreement. Mr Scott explained his role in these terms:The drafting and terms of all contracts were handled by Mr Ward ofKop-Coat Inc. Absolutely all changes to these contracts had to be checked offand agreed by Mr Ward.My role here was to put the contract in front of the customer, negotiate theterms and get the contract signed, Kop-Coat NZ was never allowed to agreeor disagree terms on its own volition. Not one word was to be changed withoutKop-Coat Inc's approval. That was not our place. Our role was more as anintermediary between Kop-Coat Inc and the customer.[16] Mr Ward's evidence was to the same effect:While [Mr Scott] was authorised to discuss business opportunities withpotential customers, he was not authorised to enter into new contracts onbehalf of Kop-Coat NZ. It was always clear to Mr Scott and other Kop-CoatNZ personnel that that could only be done by directors of Kop-Coat NZ.Usually I was the one who signed new contracts for Kop-Coat NZ in mycapacity as a director of that company. It was and continues to be my role todevelop those new contracts for Kop-Coat NZ. Occasionally, I gave[Mr Scott] express authority to sign routine standardized contracts on behalfof Kop-Coat NZ, but only after I had approved those documents in writing.[Mr Scott] was not an officer or an employee of Kop-Coat Inc, and he did nothave authority to say or do anything on its behalf.[17] On 13 May 2015 Mr Scott obtained a copy of the Boron Solutions agreementto use as the foundation for a licence and supply agreement with Incodo.The following day, Alison Armstrong, Kop-Coat NZ's former administration manager,sent the Boron Solutions agreement with some modifications to Kop-Coat's solicitorsin New Zealand, Russell McVeagh.[18] On 18 May 2015, Mr Scott met with Mr Probett to discuss amendments tothe draft agreement. Mr Probett said the changes Incodo was seeking were acceptableto Mr Scott. However, Mr Scott told Mr Probett the changes would have to beapproved by Kop-Coat Inc before the contract could be finalised.[19] Late on 19 May 2015 Russell McVeagh sent an email to Mr Scott with theirsuggested changes to the agreement and identifying further information that needed tobe included in it. On 20 May 2015 Mr Scott sent Russell McVeagh's advice toMs Armstrong for her consideration. She replied later that day, noting in her emailthat Mr James had told her that Mr Probett was expecting to sign the agreement thenext day.[20] On 21 May 2015 Mr Ward sent an email to Mr Scott, copied toRussell McVeagh, stating that he had not yet received a draft of the agreement.Russell McVeagh sent Mr Ward a copy of the draft at 8.43 am on 22 May 2015 notingthat there were still some issues to resolve. Mr Ward replied at 8.51 am that he wouldhave to discuss the draft with Mr Scott. He noted that the inputs and prices may beincorrect because they applied to the Australian program. He also said the financialcontroller in New Zealand would need to review the agreement. A short time later, atabout 9.30 am, Mr Ward discussed the draft with Mr Scott and Ms Armstrong bytelephone. There was a major conflict in the evidence about what was said during thisdiscussion. We will return to this issue, including the Judge's findings, when weaddress the contest about whether a binding agreement was reached.[21] Mr and Mrs Probett came to Kop-Coat NZ's offices that afternoon to signthe agreement. They proposed some changes to the wording. Mr Scott agreed to theseamendments. The changes were made and a fresh copy of the agreement was printed.Execution of the agreement[22] The execution page of the agreement was drafted on the basis that each party,Incodo, Kop-Coat NZ and Kop-Coat Inc, would execute the agreement by having twoof its directors, or one director and the company secretary, sign the agreement on itsbehalf. Mr and Mrs Probett signed the agreement in their capacity as directors ofIncodo in the two spaces provided above the lines "signature of director" and"signature of director/company secretary". They also printed their full names in thespaces provided below their signature and above the lines "Name of director (print)"and "Name of director/company secretary (print)". Mr Scott signed his name belowthe words "executed by Kop-Coat New Zealand Ltd" and above the line "signature ofdirector". However, rather than printing his name in the space provided below hissignature "Name of director (print)", Mr Scott printed his name in the space where theother director or company secretary was to sign to complete execution ofthe agreement by Kop-Coat NZ. The spaces provided for execution of the agreementby Kop-Coat Inc were left blank. Mr Scott confirmed in his evidence that he did nothave signing authority for Kop-Coat Inc and he therefore left that part blank.Pleadings[23] Incodo pleaded that it entered into a licence and supply agreement withKop-Coat NZ in May 2015. Incodo did not allege that Kop-Coat Inc entered into thisagreement. It asserted only that Kop-Coat Inc was "listed as a party" to the agreement.In its third amended statement of claim, Incodo pleaded:The Contract5. The plaintiff ("Incodo") and the first defendant ("Kop Coat NZ Ltd")entered into a licence and supply agreement in May 2015("the Contract"), by which the Kop Coat NZ agreed to supply Incodowith its products, and provide the necessary licence for their use.7. The second defendant ("Kop-Coat Inc") was listed as a party tothe Contract.10. The Contract was signed by Incodo and Kop Coat NZ Ltd.11. Kop Coat Inc did not sign the Contract.12. Cameron Scott on behalf of Kop Coat NZ Ltd advised representativesfor Incodo that Kop Coat NZ Ltd had the signing rights forKop Coat Inc.High Court judgment[24] The Judge considered that the question as to whether a binding agreement wasreached ultimately turned on whether Mr Scott had actual authority to sign on behalfof both Kop-Coat NZ and Kop-Coat Inc or whether Incodo was entitled to rely onMr Scott's apparent authority to do so.3Kop-Coat NZ[25] Mr Ward and Mr Scott were both clear in their evidence that Mr Scott did nothave actual authority to sign the agreement on behalf of Kop-Coat NZ. The Judgeappears to have proceeded on that basis. He approached the issue as being whetherMr Scott had ostensible authority to bind Kop-Coat NZ to the contract:Authority to bind Kop-Coat NZ[63] The first issue is whether or not Mr Scott had ostensible authority tosign on behalf of Kop-Coat NZ. The submission by the defendants is that hedid not, because ostensible authority depends upon a prior representation bythe principal (in this case, the Board of Kop-Coat NZ) of the authority to sign.[64] The defence argument acknowledges Mr Ward could have authorisedMr Scott, but contends he did not.[65] Ostensible authority cannot be confined in this way. Ostensibleauthority needs to be examined from the perspective of the persons dealingwith the company. Essentially my view is that Mr Scott's prominent positionin Kop-Coat NZ established his ostensible authority upon which Incodo viaits directors and particularly Mr Probett were entitled to rely.[26] The Judge acknowledged that Mr Scott's representations as to his ownauthority were not sufficient to bind his principals.4 However, the Judge found thatMr Ward permitted Kop-Coat NZ to represent that Mr Scott and Ms Armstrong hadauthority to conclude the agreement and it was reasonable for Mr and Mrs Probett tobelieve that Mr Scott had authority to bind Kop-Coat NZ. In the circumstances,the Judge found that Kop-Coat NZ could not assert that Mr Scott did not have authorityto bind it to the contract:[85] In context, I am persuaded that Mr Ward permitted it to be representedby Kop-Coat NZ that Mr Scott and Ms Armstrong had authority to concludethe deal on behalf of Kop-Coat NZ. They were left in charge of allnegotiations in New Zealand. It was reasonable for the Probetts to rely onMr Scott's authority. He was a person who had the confidence of Kop-CoatNZ and in that sense, from the perspective of Mr and Mrs Probett, could betrusted to be acting on behalf and with the authority of Kop-Coat NZ.3 High Court judgment, above n 1, at [56].4 At [84].[86] I therefore find Kop-Coat NZ cannot assert that Mr Scott did not haveauthority to bind it to the May 22 terms.Kop-Coat Inc[27] The Judge noted Mr Scott's evidence that he told Mr Probett the contract wouldbe signed on behalf of Kop-Coat Inc at a later stage.5 The Judge found that Mr Scottand Ms Armstrong thought that Mr Ward authorised them to conclude the agreementwith Incodo on the terms discussed during the 22 May 2015 telephone conversationbut they were incorrect about this. However, the Judge concluded that Kop-Coat Incwas nevertheless bound by the contract:[89] I have already made the finding of fact that neither Mr Scott norMs Armstrong would have deliberately contradicted or disobeyed Mr Ward.On the probabilities, and thus the facts, they thought that the conversation theyparticipated in earlier on 22 May did finalise the agreement so that it was readyfor execution.[90] This was a bona fide misunderstanding by both Mr Scott andMs Armstrong of Mr Ward's state of mind. They thought he had given themthe final terms. Accordingly, Kop-Coat Inc cannot disavow the conduct ofMr Ward, from which Mr Scott and Ms Armstrong inferred they had authorityto contract on those terms with Incodo.[91] From the totality of the evidence, in my judgment Mr Ward did notthink that he had completed and approved the final terms of the contract on22 May. However, I am also satisfied that Mr Scott and Ms Armstrongassumed to the contrary, albeit incorrectly, that their conference with Mr Wardon that day had settled the final details of this contract which, as we have seen,had a reasonably long gestation period.[92] After the phone call, Mr Scott and Ms Armstrong believed they hadauthority to get the agreement executed before the end of May.[94] At the time, Mr and Mrs Probett had no reason to query the ostensibleauthority of Mr Scott to sign, nor his representation that the parent companywould sign in due course [96] Mr and Mrs Probett were not put on notice to suspect the signatureswould not follow.[97] I am thoroughly satisfied that Mr Scott and Ms Armstrongmisconstrued the situation when getting the contract signed and thought theywere carrying out their normal duties when executing the contract. I note that5 At [88].this line of reasoning is another support for my prior conclusion of ostensibleauthority, that being a judgment made from the point of view of Mr andMrs Probett.[98] I conclude that it is more probable than not that Mr Scott consideredhe had authority to execute the contract which would bind Kop-Coat Inc aswell as the New Zealand subsidiary. [99] For these reasons I conclude that in fact Kop-Coat Inc had held outMr Scott as having authority to act on its behalf in New Zealand so thatMr Scott had apparent or ostensible authority to bind it to the agreement.Submissions[28] Mr Olney, for Kop-Coat, submits an objective assessment of the circumstancesshows a mutual intention that the contract would not be concluded until each party hadexecuted it in the manner envisaged in the document itself. He notes that this was acomplex commercial transaction, the first of its kind for Kop-Coat NZ, and a newenterprise for Incodo. He points to the detailed terms of the agreement, the negotiationof precise wording changes, and the provisions allowing for execution by holders ofpower of attorney and in counterparts. He says no witness gave evidence of anyagreement to dispense with the formal execution requirements envisaged inthe document. Mr Olney submits that applying established legal principles the correctconclusion is that there was no concluded contract because neither Kop-Coat companyexecuted the document in the manner required.[29] Mr Olney challenges the Judge's finding that Mr Scott had apparent authorityto bind Kop-Coat NZ and Kop-Coat Inc to the contract. Mr Olney says the thrust ofIncodo's pleaded case and evidence was that Mr Ward knew Mr Scott would concludethe contract on behalf of both Kop-Coat companies on 22 May 2015 and actuallyauthorised him to do so. However, he says the foundations for the "actual authority"claim were contradicted during the trial and, as a result, Incodo's case evolved intoone of apparent authority. Mr Olney points out that Incodo's pleading does not identifyany representations by Kop-Coat NZ as to Mr Scott's authority to concludethe contract on its behalf. As for Kop-Coat Inc, Mr Olney says there was similarly nopleaded representation of Mr Scott's authority to conclude the agreement on its behalf,nor was there any evidence of this. In short, Mr Olney submits that the Judge'sconclusion that Mr Scott had ostensible authority to bind both companies tothe contract is not supported by the pleadings or the evidence.[30] Mr Fraundorfer, for Incodo, says the plaintiffs closed their case inthe High Court on the basis that Mr Scott had actual and apparent authority to bindboth Kop-Coat NZ and Kop-Coat Inc. He agrees the Judge made no finding on actualauthority but says this was not necessary given his finding that Mr Scott hadapparent authority.[31] Mr Fraundorfer submits there was no clear distinction between the twoKop-Coat companies. They were described in the contract as "together 'Kop-Coat'"and he says Mr Scott purported to sign on behalf of "Kop-Coat". Mr Fraundorfersubmits it was taken for granted that Mr Scott had authority to do so and Mr Probettaccepted this at face value. He argues that Mr Probett's belief was reasonable inthe circumstances, especially given Mr Scott himself believed he had that authority.In summary, Mr Fraundorfer supports the Judge's analysis and conclusion on thisissue. Alternatively, he submits the evidence justifies the conclusion that Mr Scott hadthe actual authority of both Kop-Coat companies to bind them to the contract.AnalysisNo intention to be bound until agreement executed by all parties[32] Whether a binding contract has been concluded must be assessed objectively.Here, commercial parties were negotiating the terms of a complex and detailedcommercial agreement drafted by solicitors. The agreement was modelled on theBoron Solutions agreement and comprised 32 pages divided into 29 sections andthree schedules. The agreement with Incodo was drafted on the basis that it would beformally executed in the same manner as the Boron Solutions agreement, by twodirectors, or one director and the company secretary, signing on behalf of eachcompany. The agreement contained an "entire agreement" clause and provision forthe agreement to be executed in counterparts with all counterparts taken togetherconstituting one document. The agreement also contained a provision for personsholding a power of attorney for a party to execute the agreement on its behalf.[33] The closely detailed terms of the agreement and its formal executionrequirements reflected the significance of the transaction for all parties. This was anentirely new and ambitious venture for Incodo which had virtually no capital and hadto borrow the entirety of the initial start-up costs of $60,000. Incodo would beaccepting an obligation under the contract as the exclusive licensee in the Aucklandarea to pay various fees and royalties and meet minimum sales thresholds in each yearof the initial three-year term of the agreement, starting from scratch. It was also a newventure for Kop-Coat NZ. This was to be the first licence for the mobile applicationof the TRU-CORE® system in New Zealand. Kop-Coat NZ anticipated furtherlicences being granted elsewhere in New Zealand with the Incodo agreement servingas a model. As Mr James observed, "the first licence was the most important to getright as it would set the standard for those that followed". Kop-Coat Inc was grantingan exclusive licence to use its intellectual property in the designated area andcommitting to providing ongoing technical support to Incodo for the term ofthe agreement.[34] We consider the correct inference to be taken from these circumstances is thatthe parties did not intend to be bound until the agreement was executed by all of them.This Court's decision in Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltdsupports the normal inference that commercial parties do not generally intend to bebound to a complex commercial agreement until it has been executed by all parties.6Cooke J, in giving the judgment of the Court, said:7 the purpose of the negotiations was to have prepared by the manufacturer'ssolicitors and executed by both parties an important commercial agreement ofsome complexity. In such circumstances we think the normal inference inNew Zealand is that the parties do not intend to be bound before the agreementhas been drawn up and executed on both sides.[35] We conclude that until all three parties executed the agreement andcommunicated their acceptance to the others, the document amounted to nothing morethan a revocable offer.8 We now turn to consider whether the agreement was executedby all parties.6 Concorde Enterprises v Anthony Motors (Hutt) Ltd [1981] 2 NZLR 385 (CA).7 At 388.8 Richards v Hill [1920] NZLR 724 (SC) at 727.Kop-Coat Inc[36] We start with Kop-Coat Inc. The pleaded claim was that Mr Scott advisedMr and Mrs Probett that Kop-Coat NZ Ltd had the signing rights for Kop-Coat Inc.The first problem with this allegation is that even if Kop-Coat NZ was authorised tosign for Kop-Coat Inc it did not purport to exercise that authority by doing so.A second difficulty is that there was no evidence to support the allegation.Mr Probett's evidence was that he asked Mr Scott whether he was able to sign onbehalf of Kop-Coat Inc and Mr Scott assured him he was. The Judge made no suchfinding and the assertion is contrary to the weight of the evidence. The Judge foundthat Mr Scott told Mr and Mrs Probett he would send the agreement to Kop-Coat Incfor execution by it.9 This is not consistent with Incodo's contention that Mr Scott hadalready signed the agreement on Kop-Coat Inc's behalf. Further, even if Mr Scott hadsaid he was authorised to sign on behalf of Kop-Coat Inc, he did not purport to do so.Mr Scott was clear in his evidence that he was not authorised to sign on behalf ofKop-Coat Inc and that is why he left that part of the execution page blank. Mr Wardconfirmed that Mr Scott had no authority to say or do anything on behalf ofKop-Coat Inc.[37] The agreement was plainly not executed by Kop-Coat Inc. Incodo realisticallyacknowledged this in its pleading — "Kop-Coat Inc did not sign the Contract".The non-execution by Kop-Coat Inc cannot be disregarded as an irrelevancy.It was the owner of the intellectual property being licensed and has now been met withan award of damages of $2 million for breaching the contract. We conclude thatbecause Kop-Coat Inc did not execute the agreement, no binding agreement came intobeing. The parties did not intend to be bound to the agreement until all three partieshad executed it. There is no suggestion that the agreement was ratified by Kop-Coat.[38] In view of this conclusion, it is not strictly necessary for us to consider whetherthe agreement was even executed by Kop-Coat NZ given it was not signed by any ofits directors. We nevertheless address this issue for completeness.9 High Court judgment, above n 1, at [48].Kop-Coat NZ[39] Once Incodo executed the document in the manner contemplated it became anoffer capable of acceptance. The offer specified how the other parties were to expresstheir acceptance, namely by each party having two directors or one director andthe company secretary sign it on its behalf. The specified requirement for formalexecution was no doubt intended to avoid the very debate that has now arisen aboutwhether a person purporting to sign on behalf of a party had actual or ostensibleauthority to do so. Clearly, Kop-Coat NZ did not execute the agreement in the mannerprescribed in the offer. Incodo would have been entitled to insist on the stipulatedmanner of execution thereby avoiding any uncertainty about Mr Scott's authority tobind Kop-Coat NZ.10 However, Incodo accepted Mr Scott's signature on the documentas a sufficient acceptance on behalf of Kop-Coat NZ. In so doing, we consider Incodowaived its right to object to the manner of acceptance by Kop-Coat NZ and the issuebecomes whether Mr Scott in fact had actual or ostensible authority to sign forKop-Coat NZ.[40] The pleadings do not address the issue of Mr Scott's alleged authority to signthe agreement on behalf of Kop-Coat NZ. As noted, Mr Olney's recollection is thatthe thrust of Incodo's case originally was that Mr Scott had actual authority to bindKop-Coat NZ but in its closing Incodo placed sole reliance on Mr Scott havingapparent authority. Mr Fraundorfer does not accept this. We therefore proceed on thebasis that both avenues were relied on by Incodo.[41] We start by considering whether Mr Scott had actual authority to executethe agreement on behalf of Kop-Coat NZ. Mr Scott was the general manager andsenior employee of the company in New Zealand. Nevertheless, he was quite clear inhis evidence that all terms of the agreement had to be approved by Mr Ward asthe director ultimately responsible for it. He said "[n]ot one word was to be changedwithout Kop-Coat Inc's approval". Mr Scott understood that Mr Ward approvedthe final terms of the agreement during the telephone conference on 22 May 2015.Ms Armstrong's evidence was to similar effect. However, the Judge found that both10 Richards v Hill, above n 8; Mountain Road (No 9) Ltd v Michael Edgley Corp Pty Ltd[1999] 1 NZLR 335 (CA) at 338; and Corrick v Silich [2018] NZCA 221 at [42]–[44].were mistaken about this. Further, neither Mr Scott nor Ms Armstrong stated thatMr Ward specifically authorised Mr Scott to execute the agreement. It follows thatMr Scott was not actually authorised to bind Kop-Coat NZ to the agreement on 22May 2015. This explains why the Judge correctly focused his analysis on the questionof whether Mr Scott had apparent authority to sign on behalf of Kop-Coat NZ. We turnnow to address that issue.[42] Section 18 of the Companies Act 1993 relevantly provides:18 Dealings between company and other persons(1) A company may not assert against a person dealing with thecompany or with a person who has acquired property, rights, orinterests from the company that—(c) a person held out by the company as a director, employee, oragent of the company—(ii) does not have authority to exercise a power which adirector, employee, or agent of a company carryingon business of the kind carried on by the companycustomarily has authority to exercise.(d) a person held out by the company as a director, employee, oragent of the company with authority to exercise a powerwhich a director, employee, or agent of a company carryingon business of the kind carried on by the company does notcustomarily have authority to exercise, does not haveauthority to exercise that power.Unless the person has, or ought to have, by virtue of his or her positionwith or relationship to the company, knowledge of the matters referredto in any of the paragraphs (c), (d) as the case may be.[43] A prerequisite under s 18(1)(c) and (d) is that the company held out the agentas a person authorised to exercise the relevant power on its behalf. The holding outmust be made by someone who has actual or apparent authority to make it on behalfof the company.11 The third party dealing with the company must also show that it11 Freeman & Lockyer v Buckhurst Park Properties (Mangal) Ltd [1964] 2 QB 480 (CA) at 503;Savill v Chase Holdings (Wellington) Ltd [1989] 1 NZLR 257 (CA) at 304; and Cromwell Corpknew of the holding out and reasonably relied on it.12 The burden of proving thesematters is on the party seeking to enforce the right or interest against the company.13[44] No holding out by Kop-Coat NZ was pleaded by Incodo. Nor did it give anyevidence of a holding out. The only evidence it adduced on the topic came fromMr Probett, but this related to Kop-Coat Inc. Mr Probett said he asked Mr Scottwhether he was able to sign the agreement on behalf of Kop-Coat Inc and Mr Scottassured him he was. However, that evidence was contradicted by both Mr Scott andMr Ward and it was not accepted by the Judge.[45] It is common ground that Mr Ward, the Kop-Coat NZ director responsible forthe agreement, did not communicate at any stage with Mr or Mrs Probett prior to themsigning the agreement. There was therefore no holding out to Incodo by Mr Ward orany other director of Kop-Coat NZ that Mr Scott could sign the agreement on itsbehalf. We agree with the Judge that Mr Scott's representation as to his own authoritycould not bind his principal, Kop-Coat NZ.14[46] The Judge nevertheless found that Mr Ward, who had actual authority on behalfof Kop-Coat NZ, authorised Mr Scott to represent to Incodo that he had authority toconclude the agreement on Kop-Coat NZ's behalf:15[85] In context, I am persuaded that Mr Ward permitted it to be representedby Kop-Coat NZ that Mr Scott and Ms Armstrong had authority to concludethe deal on behalf of Kop-Coat NZ. They were left in charge of allnegotiations in New Zealand. It was reasonable for the Probetts to rely onMr Scott's authority. He was a person who had the confidence of Kop-CoatNZ and in that sense, from the perspective of Mr and Mrs Probett, could betrusted to be acting on behalf and with the authority of Kop-Coat NZ.[47] While we hesitate to disagree with the experienced commercial Judge, we havebeen persuaded that this finding cannot be sustained on the evidence and the Judge'sown findings. Mr Scott said he had no authority to change the agreement in any waywithout Mr Ward's approval. Mr Ward did not authorise Mr Scott and Ms ArmstrongLtd v Sofrana Immobilier (NZ) Ltd (1992) 6 NZCLC 67,997 (CA) at 68,005.12 Levin Meats Ltd v Perfect Packaging Ltd (2011) 10 NZCLC 264,950 (HC) at [45].13 Peter Watts, Neil Campbell and Christopher Hare Company Law in New Zealand(2nd ed, LexisNexis, Wellington, 2016) at 324.14 High Court judgment, above n 1, at [84].15 At [85].to conclude "the deal" or sign the agreement on behalf of Kop-Coat NZ. The Judgefound that Mr Scott "thought he had authority to sign" after speaking to Mr Wardduring the teleconference on 22 May 2015.16 But the Judge found that Mr Scott andMs Armstrong were mistaken in thinking that Mr Ward had given them the final termsof the agreement.17 The Judge was "thoroughly satisfied" that Mr Scott andMs Armstrong "misconstrued the situation" in thinking "they were carrying out theirnormal duties when executing the contract".18[48] It is therefore plain that no one with actual authority on behalf of Kop-Coat NZheld out to Incodo that Mr Scott was authorised to sign the agreement onKop-Coat NZ's behalf. Mr Ward did not do so. Mr Ward did not authorise Mr Scottto do so. Without such authorisation, Mr Scott had no actual authority to do so.[49] Mr Scott said that he often signed contracts on behalf of Kop-Coat NZ whichhe described as "usual contractors' contracts or employment agreements". This doesnot assist Incodo for two reasons. The licence and supply agreement could not becategorised as a usual contract with a contractor or employee. Further, there was noevidence that Mr Probett was aware of this practice.[50] That leaves only one other possibility — that the holding out arises fromMr Scott's position as general manager. Does the general manager of a companycarrying on a business of the kind carried on by Kop-Coat NZ have customaryauthority to sign an agreement of this type? There was no evidence about this.However, even if that were the case, the agreement itself does not contemplate thatMr Scott would sign on behalf of Kop-Coat NZ as its general manager.Kop-Coat NZ's solicitors, Russell McVeagh, prepared the agreement in accordancewith their instructions, including the formalities of execution requiring two directorsto sign on behalf of each party. This amounted to a representation by Kop-Coat NZthat this was how it intended to execute the agreement and become bound by it.In our view, this displaced any holding out that might otherwise have existed that16 At [65].17 At [90].18 At [97].execution of this agreement was within the customary authority of Mr Scott asKop-Coat NZ's general manager.[51] Moreover, Mr Scott did not purport to sign the agreement in exercise of hiscustomary authority as general manager of Kop-Coat NZ, for example by signing"for and on behalf of Kop-Coat NZ by its general manager and duly authorised agentCameron Scott". Instead, he signed as if he was one of its directors and printed hisname in the space where the second director was to sign. When asked about this atthe trial, Mr Scott said he was surprised when it was brought to his attention he haddone this:It was only when it was brought to my attention it actually had the word"director" there. I realised I'd signed it as a director and I even surprisedmyself in that. 'Cos I never ever claimed through my whole career that I wasa director of Kop-Coat Inc or New Zealand.[52] Mr and Mrs Probett knew that the agreement had been prepared by Kop-Coat'ssolicitors who had specified the manner of execution by two directors. Mr Scott wasnot a director of Kop-Coat NZ and Incodo could not reasonably rely on his signatureas fulfilling the requirement that two directors sign on behalf of the company.Conclusion[53] We conclude that Incodo has failed to prove that the agreement was executedby Kop-Coat NZ or Kop-Coat Inc. The agreement was executed only by Incodo.It follows that no binding agreement was reached and the appeal must be allowed.Nevertheless, in case the matter goes further, we go on to address the other grounds ofappeal.Was there agreement on price?[54] Kop-Coat contends the agreement contains manifest pricing errors such thatno consensus was reached on an essential term and therefore there was no enforceablecontract. This argument is based on errors in sch 3 of the agreement where input pricespayable by Incodo are set out. The relevant part of the schedule is as follows:SCHEDULE 3 – EQUIPMENT AND INPUT PRICING1 Equipment2 Input Prices to Incodo Solutions2.1 Base prices (excluding DOT)Input Terms andconditionsNZ$ per Litre Price Mix(litres)Mix Cost(NZ$)Gamma 900(1)ConcentrateA $35.00 21.00 $175.00Propylene(2)GlycolB $4.58 20.00 $91.52SyntheticPyrethroidConcentrate(3)B $100.00 1.00 $100.00Timber (DOT)BoratePowder(4)B $3.52 1.00 $3.52BazookaConcentrate(5)A $40.20 2.00 $80.40Red DyeConcentrate(6)B $29.80 0.05 $1.49Water - - Note: as requiredto make up a 450kg of solution-Note: Subtotal of inputs and water without Disodium Octaborate (DOT)Material is NZ$451.93 for a 450 kg mix. The cost of the DOT must be added.450 kg is the batch size required for these applications to a single house frameto achieve the target retentions and penetration.See Section 2.2 for DOT options.(1) TRU-CORE® Process Concentrate also containing KLI tracermaterial. Manufactured by Kop-Coat.(2) Industrial Grade Propylene Glycol.(3) Liquid Concentrate approved for use in Process.(4) Note: Synthetic Pyrethroid type and mix rate approved for use may bechanged as required.(5) Liquid Concentrate approved for use in Process.(6) Note: Powder Concentrate approved for use may be substituted asrequired.[55] The first error is obvious and appears in the first line. 21 litres of Gamma 900Concentrate at $35 per litre equals $735, not $175. We do not consider this errorwould defeat the agreement if it were otherwise binding. There is no difficultydiscerning what the parties' consensus was on this issue, namely to pay $35 per litrefor this input. The Court would have no difficulty giving effect to the agreement eitherby rectifying the document or by interpreting $175 as having been intended to mean$735.19[56] The second error is not quite so straight forward. The uncorrected mix costsin the table total $451.93. The note appearing immediately below the table states that$451.93 is the cost of the inputs without Disodium Octaborate (DOT) for a 450 kgmix. The note also records that a 450 kg batch is required for a single house frame toachieve target retentions and penetration. Finally, the note directs attention to section2.2 for "DOT options". There are a number of problems with this. First, there is nosection 2.2. Second, DOT is shown in the table as Timber Borate Powder whereas themix quantity is expressed in litres. Third, the mix quantity is shown as one litre at acost of $3.52. The total mix cost of $451.93 includes this amount; the note is thereforenot strictly correct in stating that DOT has been excluded from the calculation.Fourth, and more significantly, the quantity of DOT to be added to a 450 kg batch isaround 80 kg, not one kg or one litre. Correcting for these errors, the input cost of a450 kg batch including DOT would be approximately $1,289. However, because notall of the timber framing would be treated, only the salvageable parts, a batch of thissize would not typically be needed.[57] These errors remained because Mr Ward had not had an adequate opportunityto carefully review the draft agreement before it was signed by Incodo on22 May 2015. Mr Ward only received the draft that morning and he did not know thatIncodo was intending to sign it that day. Mr Ward did not find out that the agreementhad been signed until July 2015.19 Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 (HL) at 774;Chartbrook Ltd v Persimmon Homes Ltd [2009] UKHL 38, [2009] AC 1101; and Vector Gas Ltdv Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.[58] The Boron Solutions agreement upon which the New Zealand agreement wasbased was designed for the application of product to the entire frame of a new houseto provide protection against termites whereas the New Zealand agreement wasintended for the treatment of salvageable parts of the framing of existing housesrequiring remediation for weather tightness defects. The schedule of input prices inthe agreement had not been adapted for New Zealand conditions, no doubt becausethe product mix had not been formulated by the time Incodo signed the agreement.It was not until 23 May 2015, after the agreement was signed, that Mr Ward sent anemail to Dr Ron Clawson, global technical director for Kop-Coat Inc, asking him toprepare a formulation suitable for New Zealand conditions.[59] Nevertheless, we are satisfied that these errors would not be fatal tothe agreement if it were otherwise binding. The Court will strive to give effect tothe parties' contractual intention by clarifying or rectifying express terms or implyingterms. As Blanchard J said in giving the judgment of the majority of this Court inFletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd:20If the Court is satisfied that the parties intended to be bound, it will strive tofind a means of giving effect to that intention by filling the gap. It will be a matter of fact and degree in each case whether the gap left by theparties is simply too wide to be filled. The Court can supplement, enlarge orclarify the express terms but it cannot properly engage in an exercise ofeffectively making the contract for the parties by imposing terms which theyhave not themselves agreed to and for which there are no reliable objectivecriteria.[60] The critical point is that there is no error in the unit price of the stipulated inputsin the agreement. While DOT is stated as being $3.52 per litre, this was plainlyintended to be $3.52 per kg being the correct measure for that input which was to besupplied in powder form. It is clear from the note that DOT must be added to the batchso the fact the correct quantity is not stated is not fatal. The amount of DOT requiredfor each batch can be objectively assessed and would depend on the appropriateformulation to achieve compliance with the relevant New Zealand standards set out in20 Fletcher Challenge Energy Ltd v Electricity Corp of New Zealand Ltd [2002] 2 NZLR 433 (CA)at [60] and [63].the agreement. To the extent that the quantity of DOT per batch has not been specified,a term would be implied that the quantity is the amount required to be added to a batchto enable it to achieve compliance with relevant standards.21[61] We conclude that if the agreement was otherwise binding, the Court would giveeffect to the parties' contractual intent by correcting the errors as a matter ofinterpretation of the agreement or by way of rectification of it and by implying anyterm required to give the agreement business efficacy. The agreement would not failfor lack of certainty as to price. This ground of appeal fails.Did Kop-Coat repudiate the agreement?[62] Not knowing that Incodo had already signed the agreement, Mr Ward sent anemail around midnight New Zealand time on 22 May 2015 asking Russell McVeaghto send him the updated draft of the agreement. He sent a copy of this email toMr Scott and Ms Armstrong. Russell McVeagh was also unaware at that stage that theagreement had been signed by Incodo. It was immediately after sending this emailthat Mr Ward sent his email to Dr Clawson asking him to formulate the product forNew Zealand conditions.[63] On 26 May 2015 Russell McVeagh sent an email to Mr Scott andMs Armstrong confirming their availability for a telephone conference to progressthe agreement. On 27 May 2015 Ms Armstrong emailed a copy of the updated licenceagreement to Russell McVeagh, copying in Mr Ward. This copy did not contain anysignatures and Ms Armstrong did not disclose that it had been signed. Over the courseof the next month, Mr Ward, Ms Armstrong and Mr Scott worked withRussell McVeagh to develop the agreement. On 1 July 2015 Ms Armstrong sent anemail to Mr Ward and Mr Scott attaching a further draft of the agreement withamendments made by Russell McVeagh and seeking "your input and confirmation toget this contract finalised". Ms Armstrong advised that Claire Coker, Mr Scott'sdaughter and a contractor to Kop-Coat NZ, would be meeting with Mr and Mrs Probett21 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 at 283; andMarks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72,[2016] AC 742 at [16]–[21].on 3 July 2015 and they "would really like the contract by then as they keep telling usthey want to start making money money money!". Ms Armstrong concluded her emailby saying "Please get back to me as soon as possible with your comments,amendments or approval".[64] On 2 July 2015 Mr Ward sent an email to Ms Armstrong setting out his finalrecommended changes to the agreement and providing instructions for execution byIncodo following which he would execute it on behalf of the Kop-Coat companies.This email reads:Please see my final recommended changes in the attached agreement.You caught some very important errors that I have addressed. I also correcteda few more areas that contained errors or were unclear. Please contact me ifyou have any questions. We do not need to go back through[Russell McVeagh]. [Russell McVeagh] has provided a good base for us tofinish.Please execute as follows:1. Ask [Mr Scott] to confirm the prices for the chemicals.2. Advise [Mr Scott] that I have added an equipment use royalty to makeit very clear that the equipment is not owned by the licensee. I also changedwording in the Equipment sections to fortify this fact. I am happy to havefurther discussion, but please do not make changes without my approval.3. Make a final PDF and provide [Ms Coker] with two printed copies forthe licensees to initial every page and sign on the signature page.4. Please advise [Ms Coker] that any marks, notes, cross outs, changesetc by the Licensee makes the agreement invalid and it will not be accepted.5. Please scan the final signed agreement and send to me by email. I willsign, scan and send back to you by email to provide them with a printed copy.[65] On 3 July 2015 Ms Armstrong and Ms Coker went to Incodo's offices anddropped off the redrafted agreement. Mr Probett said they advised him that Incodoshould sign the new contract but gave no other explanation. The Judge found thatMr Probett and his son, who was going to assist in the new business, did not react wellto this:[45] Mr Paul Probett and his son took the request to sign this new draftbadly. They thought Kop-Coat was reneging on the earlier signed agreement,which to them was a binding contract. The Probetts' understanding of the3 July version was set out on 11 July in a six-page memorandum entitled:"Kop-Coat Inc's unilaterally proffered replacement contract".[66] The Judge succinctly described what happened next:[46] In late July, Mr Ward came out to New Zealand and endeavoured torenegotiate a contract, but by this point it was a lost cause. The relationshipbetween Incodo and both Kop-Coat NZ and Kop-Coat Inc ceased.Within Kop-Coat NZ, Mr James and Mr Scott lost their jobs, andMs Armstrong resigned.[67] It is common ground that some of the terms of the 3 July 2015 draft agreementsignificantly departed from those in the 22 May 2015 agreement and were notacceptable to Incodo. For example, apart from the pricing changes, the July agreementremoved Incodo's right to exclusivity in the designated area. Mr Ward said thatKop-Coat would simply not agree to grant Incodo an exclusive licence. Kop-Coatdisavowed the 22 May 2015 agreement and made it clear to Incodo that it was notprepared to honour the terms of it. We agree with the Judge that this was a repudiationof that agreement, assuming it had been properly executed and was binding.22Incodo plainly accepted that repudiation and sought damages to compensate for thebreach of contract. We do not consider there is any merit in this ground of appeal.Did Incodo mitigate its loss?[68] Kop-Coat did not plead that Incodo failed to mitigate its loss. Kop-Coatnevertheless contends that the Judge should have reached that conclusion arguing thatIncodo should have accepted the agreement proffered on 3 July 2015 (amended as toprice following further discussions between Mr Ward and Mr Probett). The issue wasformulated by the Judge as being whether Incodo effectively caused its own loss byrefusing to proceed with the July agreement.23 The same issue can be considered as afailure to mitigate loss. Losses that could have been avoided by a plaintiff takingreasonable steps in mitigation are not recoverable.24 What steps ought reasonably tohave been taken to avoid the loss is a question of fact and degree and depends on allthe circumstances.2522 Mersey Steel and Iron Co Ltd v Naylor, Benzon & Co (1884) App Cas 434 (HL) at 443.23 High Court judgment, above n 1, at [124].24 British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Co ofLondon Ltd (1912) AC 673 (HL) at 689.25 Payzu Ltd v Saunders [1919] 2 KB 581 (CA) at 588.[69] The Judge noted Mr Probett's evidence as to his reaction to the 3 July 2015contract being left on his desk without explanation:26Sir, things changed so much from the 3rd of July. We had a signed contract.We thought we were in a fantastic relationship. We were in the honeymoonperiod. On the 3rd of July we felt, to be blunt, we thought we were married toGodzilla. It had changed that quickly. It changed in 10 minutes when the newcontract was dropped on our desk with no explanation, no contact, we had a[dearth] of anything, we had one brief meeting with [Mr Scott] when heuttered his expletive deleted comment about what had gone, been gone on andthat was basically the end of it. We thought this is going really pear-shapedand if we pursue this we gonna get chewed.[70] The Judge found that Incodo misunderstood some of the changes inthe July agreement, including as to price. He considered that Incodo's review ofthe July agreement revealed "a tendency to suspect ill-intent from Kop-Coat".27The Judge noted that Mr Ward offered to amend the July agreement to allow for fees,royalties and minimum payments as provided for in the May agreement.28 He foundthat by this time Incodo had lost confidence in Kop-Coat and was no longer willing togo into business with it.29 The Judge concluded that Incodo was entitled to take thatview in all the circumstances.30[71] We are not persuaded that Incodo was required to enter into the July agreementto mitigate its losses had Kop-Coat wrongfully repudiated the 22 May agreement.Assuming the 22 May agreement was binding, we agree with the Judge that Incodowas justified in losing confidence in Kop-Coat when it refused to honour theagreement so soon after it was signed. This was intended to be a comparativelylong-term and mutually beneficial arrangement requiring a major commitment to thebusiness from Incodo which would be reliant on ongoing technical support fromKop-Coat. The mutual trust and cooperation that would be key to the success ofthe venture had gone.[72] Further, even if the fees, royalties and minimum sales thresholds were adjustedto conform with the May agreement, the July agreement was still not an adequate26 High Court judgment, above n 1, at [127].27 At [128]–[129].28 At [133].29 At [137].30 At [144].substitute. Importantly, it did not provide Incodo with exclusivity in the contractedregion. Acceptance of that agreement would therefore leave Incodo vulnerable topotentially unconstrained competition in its territory but still required to meet theminimum sales thresholds set out in the agreement.[73] We reject Kop-Coat's submission that Incodo failed to mitigate its loss. In ourview, Incodo did not act unreasonably in all the circumstances in declining to acceptthe substitute performance offered by Kop-Coat under the July agreement.This ground of appeal fails.Did the Judge err in his assessment of Incodo's loss?Pleaded loss[74] Incodo initially claimed reliance losses being wasted set up costs of $136,104.However, in its third amended statement of claim, Incodo pleaded that as a result ofKop-Coat's breach in failing to honour the agreement, it suffered expectation losses inthe sum of $7,470,000. This ambitious claim was calculated as the net profit expectedfrom the treatment of 17,200 houses over six years generating revenue of $64,500,000.Anticipated direct costs of $26,199,206 were then deducted together with overheadexpenses of $6,549,350 and allowances for amortised capital expenditure of$1,000,000 and tax. A discount rate of 26.8 per cent was applied to reflect uncertaintyand risk.Incodo's evidence of loss[75] In his original brief of evidence, Mr Probett said "Incodo has lost the profitsthat would have been obtained under the May Contract" but he did not elaborate.He said nothing about loss in his reply brief or in his evidence at the trial.[76] Incodo did, however, produce a detailed business plan that it submitted toWestpac on 11 May 2015 in support of its application for a loan of $60,000 to meetinitial start-up costs including $10,000 to purchase a second-hand vehicle to tow themobile sprayer the company intended to start with. Incodo offered security for theadvance over a vacant residential section owned by Mr and Mrs Probett's family trustin Tauranga. It was envisaged that this would be a family business with Mr Probett,his two sons, daughter and son-in-law all involved in various capacities.[77] The business plan included a profit and loss forecast which estimated revenuein the first year of $450,000 rising to $500,000 in the second year using a singlesprayer. The first-year revenue was calculated on the basis that 100 homes would betreated at an average cost to the owner of $4,500. Annual costs were estimated at$90,000 leaving net profits of $360,000 in the first year and $410,000 in the second.At that stage, Incodo was expecting an exclusive licence for the top half ofthe North Island rather than just Auckland as eventuated.[78] Incodo engaged John Leonard, an expert forensic accountant, to quantify itslosses. Mr Leonard envisaged a much more sizeable undertaking from that describedin the business plan Mr Probett submitted to the bank. In his initial brief of evidenceand without the benefit of having seen the business plan, Mr Leonard assumed therewould be four sprayers operating in the first year, eight in the second, 12 in the thirdand 14 in each of the fourth, fifth and sixth years. He assumed that each of these trailerunits would operate at capacity for 45 weeks a year. This allowed for statutoryholidays, annual leave and one week for repairs or sick leave. Mr Leonard assumedthat the average house would be treated at a cost of $3,750. Based on theseassumptions Mr Leonard made the following gross revenue projections:Year Number of Houses Gross Revenue1 500 $1,875,0002 1,850 $6,937,5003 3,050 $11,437,5004 3,800 $14,250,0005 4,000 $15,000,0006 4,000 $15,000,000[79] Direct costs of sales were assessed at $1,252,109 in year one rising to$8,685,693 in years five and six. These included direct labour costs of $297,440 inthe first year rising to $1,525,323 in years five and six. Indirect costs were estimatedat $915,112 in year one including other staff costs of $549,000. By year five, totalvariable costs were estimated to rise to $1,320,433 including other staff costs of$776,514.[80] These projections left a loss after tax of $262,788 in the first year but profitsof $1,282,882 in year two rising to $3,211,895 by year five. Based on theseprojections, Incodo would have to meet capital costs of $540,000 in year one andfurther capital costs of $200,000 in each of years two and three. Further capital of$100,000 would be required in year four. These capital costs totalling $1,040,000would be amortised over the six-year term. Mr Leonard projected that Incodo wouldface a cash deficiency of $702,788 in the first year of operation but would be cashflowpositive after that. He applied a discount rate of 22.5 per cent per annum to theafter-tax profits and on this basis calculated the net present value of the future cashflowas being $5,140,000.[81] Mr Leonard revised his projections downwards in his reply brief, assessingthe net present value of the future cashflows over a six-year term as being $3,470,000.[82] After the experts on both sides completed giving their evidence, they weredirected to confer and submit a joint statement of the matters on which they agree ordisagree. The experts duly met and provided a joint statement to the Court dated9 June 2017 with their respective further revised projections. Mr Leonard's furtherrevised assessment of the net present value of the future projected cashflow over asix-year term was reduced to $2,130,000 applying a discount rate of 28.8 per cent.His revised projection of gross revenue was as follows:Year Number of Buildings Gross Revenue1 468 $1,755,0002 702 $2,632,5003 936 $3,510,0004 1,030 $3,862,5005 1,092 $4,095,0006 1,092 $4,095,000[83] This revised projection produced a net after-tax profit of $222,327 in year onerising to $1,381,795 in year six. The business would have negative cashflow of$62,673 in year one but would be cash positive thereafter.[84] Mr Leonard produced a revised assessment based on a three-year term.Using the same discount rate of 28.8 per cent, he arrived at a net present value of$980,000.[85] Kop-Coat's accounting expert, Bruce Wattie of PricewaterhouseCoopers,modelled his projections on Incodo's business plan, particularly the number ofbuildings likely to be treated:Year Number of Houses Gross Revenue1 100 $375,0002 111 $416,2503 122 $457,5004 134 $502,5005 147 $551,2506 161 $603,750[86] Mr Wattie agreed with Mr Leonard that the business would suffer a cashflowdeficiency in year one (which he calculated to be $94,181) but would be cash positivethereafter. Mr Wattie forecast a small net after-tax loss of $6,542 in year one and amodest profit of $25,526 in year two rising to $136,674 in year six.Using Mr Leonard's discount rate of 28.8 per cent, Mr Wattie assessed the net presentvalue of the future cashflows over a six-year period as being $87,200. Applying thesame assumptions over a three-year term, Mr Wattie assessed the business as havingno value.High Court judgment[87] The Judge approached the damages assessment by adopting a loss of chanceanalysis.31 He carried out his analysis by addressing three topics — the size of theoverall market, Incodo's prospects of taking market share from the incumbents andthe value of the lost chance.32[88] The Judge rejected the evidence of the experts called for Kop-Coat that themarket was small and declining based on data available from the Weathertight HomesResolution Service.33 He preferred Mr Leonard's reply evidence as to the size of themarket.34 The Judge accepted that the market was sufficiently large to deliver the saleshe contended for.3531 High Court judgment, above n 1, at [172].32 At [185]–[186].33 At [204] and [256].34 At [221].35 At [205]–[224].[89] The Judge understood that the incumbent products, FrameSaver and Metalex,can only be applied by brush whereas the TRU-CORE® product can also be sprayedon.36 The Judge found that TRU-CORE® offered significant cost and convenienceadvantages because of the speed it could be applied by spraying.37 Given thesecompetitive advantages and the absence of any evidence that FrameSaver had anequivalent pedigree, the Judge was not persuaded by the experts called for Kop-Coatthat Incodo would not be able to gain more than 50 per cent of the Auckland market.38[90] In assessing the value of the lost chance, the Judge considered whether thedamages should be calculated over a three or a six-year term noting that the agreementdid not confer on Incodo a right of renewal following expiry of the initial three-yearterm.39 The Judge took the view that if Incodo was successful in the first three years,it was unlikely that Kop-Coat would not renew the term and instead look for areplacement licensee.40 He therefore assessed the losses over a six-year term.[91] The Judge noted that whereas Incodo had claimed $7,470,000, Mr Leonardsupported a lesser figure in his original brief of $5,140,000 and proposed an evenlower figure of $3,470,000 in his reply brief.41 The Judge understood that"Mr Leonard's lower estimates were made after he had the benefit of hearing theevidence of [Kop-Coat's experts] and being tested in cross-examination".42 In fact,Mr Leonard advanced his assessment of $3,470,000 in his reply brief, prior to hisevidence being tested in cross-examination. The Judge appears to have overlookedthe further revised opinion Mr Leonard expressed in the joint statement of the expertsfiled after the cross-examination was completed. In that statement dated 9 June 2017,Mr Leonard assessed the losses based on a six-year term as being $2,130,000 and$980,000 for a three-year term.36 At [226].37 At [226].38 At [245].39 At [255].40 At [255].41 At [263].42 At [264].[92] The Judge assessed the lost chance at 60 per cent. Adopting what heunderstood to be Mr Leonard's final figure of $3,470,000, he arrived at $2,082,000 asthe value of the lost chance.43Submissions[93] Mr Olney makes three broad challenges to the damages assessment. First, hecontends the Judge erred by not focusing on what Incodo proved it would have doneif the agreement had not been repudiated. Mr Olney submits that the Judge took thewrong legal approach by assessing the damages with reference to a model that boreno relationship to Incodo's intended business. Secondly, Mr Olney argues thatthe Judge erred in his assessment of the evidence in five key respects — the size ofthe market, Incodo's likely market share, likely sales volumes, likely sale price and byincluding profits from sales outside the Auckland area and beyond the contractualentitlement of a three-year term. Thirdly, Mr Olney says the Judge was mistaken inrelying on the figure of $3,470,000 from Mr Leonard's reply brief rather than hisrevised opinion expressed in the joint statement of the experts that the correct figureshould be $2,130,000. This alone would reduce the damages to $1,278,000, assumingno other changes were made.[94] Mr Conder, who was not trial counsel, handled this aspect of the argument forIncodo. He supports the Judge's analysis and conclusion arguing that Incododemonstrated on the balance of probabilities that a valuable chance was lost.Mr Conder says there was sufficient evidence to support the Judge's findings as to thevalue of that chance and there is no proper basis for this Court to interfere.AnalysisProof of intended business model[95] There is room for debate about whether this is truly a loss of chance casebecause the contingencies and chances arise only in quantifying the loss and are not43 At [270].relevant to whether loss has been caused.44 However, we consider nothing turns onthis in the present case because of the approach taken by the Judge. Assuming therewas a contract, Incodo proved on the balance of probabilities that Kop-Coatwrongfully repudiated it thereby depriving Incodo of the benefit of the rights it was toacquire under the licence and supply agreement. The normal measure of damages isthe value of those rights assessed at the date of the breach and taking account of theprice payable including any other opportunity foregone. The value of the rights wouldreflect the present-day value of the expected profits from being able to exercise thoserights over the term of the agreement. The quantification would need to take accountof relevant contingencies and risks. That is broadly how the Judge approached hisassessment of the damages and we see nothing wrong with this general approach.[96] The object of the award of damages is to place Incodo in the same position itwould have been in had the contract not been repudiated. The onus is on Incodo toprove what it would have done in that event and provide the factual foundation forthe expert's calculation of the loss. We accept Mr Olney's submission that merelybecause contingencies must be assessed, this does not relieve Incodo of its obligationas plaintiff to prove its loss. As Brennan J stated in Sellars v Adelaide Petroleum NL:45A plaintiff seeking to prove the amount of a loss does not obtain the right toargue for a possibility by refraining from adducing evidence of the fact.[97] As noted, Mr Probett said nothing in his evidence about the likely scale of thebusiness he would have established including his estimate of likely sales levels, saleprices or costs. The best evidence of this came from the contemporaneous businessplan he prepared and submitted to the bank on 11 May 2015. The business planforecasted that 100 houses would be treated in the first year using a single sprayer atan average price of $4,500 producing revenue of $450,000. By contrast, Mr Leonard'sinitial assessment was based on four sprayers working at capacity treating 500 housesat an average price of $3,750 generating revenue of $1,875,000. The discrepancy waseven more pronounced in the second year. Mr Probett's business plan forecastedsecond year revenue of $500,000, whereas Mr Leonard's initial assessment was nearly14 times that figure at $6,937,500.44 James Edelman McGregor on Damages (20th ed, Sweet & Maxwell, London, 2018) at [10–049].45 Sellars v Adelaide Petroleum NL (1994) 179 CLR 332 at 368.[98] The difficulty with Mr Leonard's evidence is that it is based on what a licenseemight have been able to achieve assuming the licensee had the requisite appetite forrisk, sufficient business acumen and freedom from capital constraint. This type ofanalysis, speculating on what may have been possible, is not relevant unless it istethered to the plaintiff's likely business model, including sales levels, pricing andcosts as established by the evidence. We intend no criticism of Mr Leonard. He maywell have assumed that the facts underpinning his analysis would be proved by otherwitnesses.[99] Prior to the commencement of the trial Kop-Coat gave notice in accordancewith r 9.11 of the High Court Rules 2016 challenging the admissibility ofMr Leonard's evidence. Kop-Coat contended that Mr Leonard's analysis was basedon factual matters outside his general body of knowledge comprising his area ofexpertise. We consider that this objection was well made in terms of s 25(3) ofthe Evidence Act 2006. It follows that the award would have to be modified to reflectthe factual premises that were proved and upon which an appropriate forecast ofprofitability could be made.Market size[100] The Judge received considerable evidence about the overall size of theavailable market. We are far from persuaded that he erred in concluding that themarket for the TRU-CORE® product was sufficiently large to support the level ofsales he ultimately accepted could have been made over a six-year term. In any event,this issue largely falls away given our acceptance, as we come to, that the projectedsales should be more in line with the business model described in the business planprepared by Mr Probett.Market share[101] The Judge considered that TRU-CORE® had significant competitiveadvantages over the incumbent FrameSaver product and could achieve market sharein Auckland exceeding 50 per cent during the forecasted period.46 Mr Olney contends46 High Court judgment, above n 1, at [245].the Judge made two errors in making this assessment. First, the Judge concluded thatTRU-CORE® had significant cost and convenience advantages because of the speedat which it can be applied.47 Mr Olney says the evidence shows that the FrameSaverproduct could also be applied by spraying but applicators did not see this as offeringadvantages over applying the product by paintbrush. Secondly, the Judge consideredthat FrameSaver did not have an equivalent pedigree to Kop-Coat Inc, which was asubsidiary of a Fortune 500 company.48 Mr Olney says this proposition did not featurein the evidence and was not put to any witness at the trial. He says the evidenceestablished that the active ingredient in both products, glycol borate, has been used fordecades in similar products globally. Further, FrameSaver has been the subject ofextensive long-term durability in New Zealand by Scion, a Crown research institutefocused on forestry and wood products. Mr Olney says the evidence was thatFrameSaver is widely accepted in the industry, including by Auckland Council, and isavailable in most building products stores.[102] This issue also falls away given our conclusion that forecast sales should bebased on the business model and projections set out in Incodo's business plan.We consider that the evidence as to the size of the overall market and the competitiveadvantages of the TRU-CORE® product and system justify confidence in those salesprojections being attainable.Sales volumes[103] The best evidence of what Incodo would have done had the 22 May 2015agreement proceeded comes from the business plan which Mr Probett put together forsubmission to the bank 11 days earlier. We accept that Mr Probett's projections in thebusiness plan were intended to be conservative. Nevertheless, his projections at thatstage were that Incodo would treat 100 buildings in the first year and 111 in the second.Those projections may be compared with the agreed minimum sales thresholds in the22 May 2015 agreement of 50 buildings being treated in year one, 75 in year two and100 in year three. The 3 July 2015 agreement that was not acceptable to Incodoproposed an increase in these thresholds to 100 in year one, 150 in year two and 20047 At [226].48 At [245].in year three. In the position paper Incodo prepared and sent to Kop-Coat in responseto the 3 July agreement, these minimum sales and their associated turnover thresholdswere described as "crippling".[104] This contemporaneous evidence from Incodo helps place in perspectiveMr Leonard's original projections of 500 in year one, 1,850 in year two and 3,050 inyear three. Even his final projections in the joint statement — 468 in year one, 702 inyear two and 936 in year three — appear aggressive when one considers that Incodoregarded minimum thresholds set at 21–28 per cent of these levels as crippling.Price assumption[105] Both parties accepted that to be competitive Incodo would need to charge thesame price per square metre as FrameSaver. Mr Leonard assumed that this price was$25 per square metre. Mr Olney says that the $25 price is the amount typically paidby a building owner whereas Incodo's likely market would be with the headcontractors who would pay significantly less. He says the only evidence at trial wasthat the price typically paid by contractors for the FrameSaver product came fromGeoffrey Bayley, a quantity surveyor called by Kop-Coat. Mr Bayley said that theprice paid by head contractors was in the order of $10–$12 per square metre.Mr Olney says that the Judge overlooked this significant price differential whenaccepting Mr Leonard's assessment of loss. This illustrates the problem of projectionsthat are based on facts not established by the evidence.[106] Mr Conder accepts that the Judge did not resolve the pricing issue. He submitsthat Mr Bayley's evidence supporting a price to contractors of $10–$12 per squaremetre sets the bottom of the appropriate range but does not exclude the possibility ofhigher prices being achievable, including where Incodo might contract directly withan owner. We are satisfied, based on Mr Bayley's evidence, that Mr Leonard'sprojections were overstated in assuming that a price of $25 per square metre would bean appropriate average to adopt. The average price achievable was likely to be towardsthe middle of the range from $12–$25 per square metre.Inclusion of profits not available under the contract?[107] Mr Olney argues that any assessment of loss should be restricted to three years,not six, because that was the extent of the contractual entitlement. Any additional termwas dependent on a further agreement being reached between the parties. Mr Olneyalso submits that projected sales outside the contracted territory should have beendisregarded.[108] Damages for breach of contract are concerned with compensating a plaintifffor losses caused by the defendant's breach of an obligation under the contract. It isnot enough for the plaintiff to show that it is likely to have achieved the claimed benefitif the contract had been performed; there must be a contractual obligation to conferthat benefit. As Diplock LJ said in Lavarack v Woods of Colchester Ltd,"the assumption to be made is that the defendant has performed or will perform hislegal obligations under his contract with the plaintiff and nothing more".49 It is alsoto be assumed that the defendant will perform the contract in the manner mostbeneficial to itself.50[109] Applying these principles, Incodo is not entitled to damages based onforecasted sales outside the territory described in the agreement. To the extent thatthe forecasts are based on sales outside this area in the upper North Island, these mustbe excluded in carrying out the loss assessment.[110] We consider the Judge was correct to find that the agreement did not confer aright of renewal on Incodo for a further three-year term. The agreement provides thatthe parties "will hold discussions and endeavour to agree" to extend the term or enterinto a new agreement. This is an agreement to agree and is not enforceable.51Again, applying the principles referred to above, damages must be assessed on thebasis that Kop-Coat would perform nothing more than their legal obligations underthe agreement in the manner most beneficial to them. On that basis, Kop-Coat would49 Lavarack v Woods of Colchester Ltd [1967] 1 QB 278 (CA) at 294.50 Paula Lee Ltd v Robert Zehil & Co Ltd [1983] 2 All ER 390 (HC) at 393; Lion Nathan Ltd vC-C Bottlers Ltd [1996] 1 WLR 1438 (PC) at 1446; and Paper Reclaim Ltd v AotearoaInternational Ltd [2007] NZSC 26, [2007] 3 NZLR 169 at [23].51 Willets v Ryan [1968] NZLR 863 (CA) at 866–867.not agree to extend the term or enter into a new agreement. We consider that thedamages ought to have been assessed on the basis that this was an agreement havinga term of three years, not six.Mr Leonard's final assessment overlooked?[111] It seems clear that the Judge intended to adopt Mr Leonard's final projectionsin the joint statement of accounting experts dated 9 June 2017. The Judge said:[264] I have taken into account that Mr Leonard's lower estimates weremade after he had the benefit of hearing the evidence of Mr Wattie andMr [Bayley] and being tested in cross-examination. What impressed me aboutMr Leonard's evidence is that in the course of the trial he moved significantlyin his estimates reacting to the criticisms and points made of his originalreport.The only estimates given by Mr Leonard following completion of hiscross-examination and after hearing the evidence of Messrs Wattie and Bayley, werethose set out in the joint experts' report. The Judge formed the view that it would be"irrational" to go below the lower of Mr Leonard's estimates. The Judge cannot havemeant that it would be irrational to accept Mr Leonard's final estimate of loss whichwas $2,130,000 for a six-year term. Had the Judge adopted $2,130,000 instead of$3,470,000, the loss would have been $1,278,000. If the Judge had chosenMr Leonard's final assessment based on a three-year term of $980,000, the loss wouldhave been assessed at $588,000 applying the Judge's discount of 40 per cent.Conclusion[112] Adopting the Judge's approach, but confining the assessment to a three-yearterm, the recoverable loss would be $588,000. However, further adjustments areneeded to reflect the overstatement of forecast revenue (volume of sales and pricing).These adjustments would require consequential adjustments to direct and indirectcosts. We do not have sufficient information to complete this exercise. Accordingly, ifthe appeal on liability had not been allowed, we would have remitted the assessmentof damages to the High Court for determination in accordance with this judgment ifthe parties were unable to agree on the consequential adjustments required.Result[113] The appeal is allowed.[114] The judgment entered in the High Court is set aside.[115] Judgment is entered for the appellants on the respondent's claim.[116] The respondent is to pay the appellants one set of costs for a standard appealon a band A basis, increased by $7,136 by agreement, and usual disbursements.We certify for second counsel.[117] Any issue as to costs in the High Court is to be dealt with in that Court.Solicitors:Russell McVeagh, Wellington for AppellantsHolland Beckett, Tauranga for Respondent