JANUS NOMINEES LIMITED V FAIRHALL HC WN CIV 2005 085 679

JANUS NOMINEES LIMITED V FAIRHALL HC WN CIV 2005 085 679 26 May 2008IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY CIV 2005 085 679BETWEEN JANUS NOMINEES LIMITED Plaintiff AND TIMOTHY AND MARGARET FAIRHALL Defendants Hearing: 31 March and 1 April 2008 Counsel: I R Millard QC for plaintiff P R Jagose & E S K Dalzell for defendants Judgment: 26 May 2008RESERVED JUDGMENT OF DOBSON J Context of the dispute[1] This dispute relates to a liability for GST arising in connection with a contract for sale of the shares in a company, the essential asset of which was a residential property in Oriental Bay, Wellington. [2] A company called Courageous Holdings Limited ("Courageous") had acquired the property at 286 Oriental Parade, and was proposing to remove an existing dwelling and erect two substantial apartments on the site. In October 2002, agents introduced the defendants ("the Fairhalls") to the prospect of acquiring one of the proposed apartments by reference to plans that had been prepared for the proposed redevelopment. The agent arranged an initial meeting between the Fairhalls and a Mr Peter Savage. This led to a series of meetings between theFairhalls, as prospective purchasers, and Mr Savage and a business partner of his, Mr Graeme Cromie. The plaintiff ("Janus") held all the shares in Courageous on trust for family trusts with which Messrs Savage and Cromie, and Mr Savage's brother, were associated. [3] I will need to return to the evidence on the course of negotiations in more detail, but the dealings eventually led to an agreement that the Fairhalls would acquire the site in its undeveloped form, ie with the existing dwelling still in place. The vendor did not wish to have any commitment to sell prior to 31 March 2003, so the deal was initially structured as an option entitling Janus to call on the Fairhalls to purchase the property at any time after 3 April 2003. [4] This was then re-structured as an acquisition of all the shares in Courageous, giving title to the property, and access to the plans that had been prepared for its redevelopment. The total consideration for the shares was $2.65 million, with payment of $300,000 of that deferred for one year after settlement. [5] Unbeknown to the Fairhalls at the time they concluded the agreement to grant the option to Janus in February 2003, Courageous had been registered for GST and had claimed an input credit for the original acquisition price of the property. That had resulted in a GST refund paid to Courageous in November 2002 of $222,142.02 on its purchase price of $2,025,000. [6] Janus duly exercised its option to sell the Courageous shares in April 2003. At that time, Mr Fairhall discovered that Courageous was registered for GST and was accordingly alerted to the corresponding liability for an output tax in relation to the property. He promptly raised his concerns with Mr Savage. Discussions ensued but the matter remained unresolved when the $300,000 balance of the purchase price became payable a year later in June 2004. At around that time, the Fairhalls had crystallised the GST liability by selling 286 Oriental Parade out of Courageous, and into their family trust. That transaction was effected at $1.55 million, reflecting a Quotable Value valuation for the property which the Fairhalls had requested and received. That transaction triggered a GST liability of $172,778 which was paid to the Inland Revenue Department.[7] In July 2004, the Fairhalls paid $128,000 of the remaining $300,000 of the purchase price, withholding $172,000 on the basis that it represented the vendor's obligation to pay the GST output tax liability that offset the input credit earlier received. [8] Janus did not accept that it had any liability for the GST, and in June 2005 commenced proceedings for $172,000. Those proceedings began in the District Court, and initially summary judgment was sought. The summary judgment was not argued and the proceedings were subsequently transferred to this Court.Nature of counterclaims[9] The Fairhalls deny liability to pay the remaining $172,000 on four grounds that would operate to set off the liability they would otherwise have to pay the unpaid balance of the purchase price. At the hearing it was accepted that the Fairhalls would be liable for the unpaid balance if they did not make out one or more of those grounds, and consistently with assumption of that onus, the case for the Fairhalls was presented first. [10] The four causes of action in their counterclaim are: a) Breach of an express warranty that Courageous did not have any current tax liability of any kind, or any other debt or liability; b) Misrepresentation to the effect that the activities of Courageous were exempt from tax under the Goods and Services Tax Act 1985; c) Breach of the Fair Trading Act 1986, in reliance on the same representations as those alleged in the second cause of action; d) Seeking relief under the Contractual Mistakes Act 1977, alleging that the Fairhalls were materially influenced by their belief that Courageous undertook activities that were exempt from GST, and that Janus knew of such mistake.[11] On each of these counterclaims, the Fairhalls sought damages amounting to the extent of the GST output tax liability arising from transfer of the property by Courageous. Because the Inland Revenue Department has reopened their investigation as to the correct extent of that liability, a recent amendment to the pleadings sought a declaration that the plaintiff be liable for any additional GST that might be levied, beyond that assessed and paid in June 2004. [12] Evidence was called from Mr Fairhall, on his own and his wife's behalf, and from Mr Savage, in the formal sense on behalf of Janus, and in essence, on behalf of the family trusts who were the ultimate beneficiaries of the sale of shares in Courageous. [13] Mr Fairhall was for many years an audit partner in PricewaterhouseCoopers, a major accounting firm. Since 2002 he has been a lecturer at Victoria University of Wellington in auditing and financial accounting. In addition, he provides financial consultancy advice on accounting matters and financial reporting standards. In his evidence, he declaimed any expertise in GST.Dealings between the parties[14] The Fairhalls were invited to express interest in one of two units proposed for the site that were being marketed on the basis of plans prepared for Courageous. The original contact was made by representatives of real estate agents authorised by Courageous, and this led to an initial meeting between the Fairhalls and Mr Savage on 29 October 2002. [15] Mr Savage explained that he might purchase one of the two apartments himself. There was some dialogue about the other developments that Messrs Savage and Cromie had undertaken. As the dialogue developed, the Fairhalls also explored getting all the internal fit-out of the proposed apartment done by their own builder. [16] However, by December 2002, the Fairhalls raised the alternative prospect of buying the entire property "as is". This was discussed at a meeting on 23 December 2002. The vendor indicated a price of $2.8 million, which was not acceptable to theFairhalls. In an email sent to Messrs Savage and Cromie on Christmas Day 2002, the Fairhalls reflected keen interest, without rejecting the $2.8 million figure. That email stated that should they not be able to agree a price for the freehold title, then the Fairhalls would want to conclude an offer for one of the apartments proposed for the site. [17] Mr Savage's evidence acknowledged two concerns in respect of a sale of the property in an undeveloped state. First, that the terms of Courageous' acquisition of the property could trigger an obligation to offer it back to the party who sold to Courageous, in the event that it was on-sold without development occurring, within a certain period. [18] Secondly, Mr Savage was wary of the prospect that profit on a simple resale might more readily be assessed for income tax. This is now cited as a further reason to push any transaction out beyond 31 March 2003. Accordingly, the vendor proposed that the transaction be structured as the grant of an option by the Fairhalls to purchase the property from Courageous, which option could be exercised by Courageous no earlier than 3 April 2003. [19] In early 2003, agreement was reached on the price. Then Mr Savage proposed that the transaction be effected by a sale, not simply of the land, but rather of all of the shares in Courageous. [20] The agreed bundle of documents included numerous drafts of the documents proposed for such a transaction. The first was a draft grant of option by the Fairhalls to Courageous, entitling Courageous to require the Fairhalls to purchase the property at 286 Oriental Parade. The price was left blank. A word processing endorsement dated the document 28 December 2002. [21] The second document is the first draft of the option document relating to all the shares in Courageous, rather than to the property itself. A word processing identifier at the foot of its pages, consistent with that on the first document, dates it at 23 January 2003.[22] Next there is a slightly altered draft with the word processing date endorsed in consistent form as 27 January 2003. Short letters from Mr J H J Crawford, then solicitor for Courageous, dated 23 and 27 January 2003, indicate that both drafts were referred to PricewaterhouseCoopers as accountants for Messrs Savage and Cromie, for that firm's advice. [23] Mr Fairhall's evidence was that the 27 January 2003 draft was the first document sent to him. A second copy of that draft was produced which had numerous handwritten alterations marked up, in what Mr Fairhall confirmed was his handwriting. [24] Particular attention focused on the changes in wording of a warranty in respect of Courageous' tax liabilities, and I will address the progression in the terms of that warranty when considering the second cause of action which claims a misrepresentation in relation to tax liabilities. [25] The final version of the grant of option document is endorsed with a word processing date of 3 February 2003. The document, as executed, is dated 12 February 2003. [26] Mr Fairhall accepted that he made no attempt to conduct any due diligence in respect of Courageous prior to settlement. It was submitted on behalf of the Fairhalls that it was unnecessary to undertake any due diligence where the warranties by the vendor covered the matters on which any due diligence might focus. [27] On settlement in April 2003, Mr Fairhall took possession of all the accounting and other records for Courageous. Those records revealed that Courageous had claimed and been paid a GST input credit shortly after it had acquired the property. Mr Fairhall immediately telephoned Mr Savage to record his discovery, and requested a meeting. Numerous discussions occurred. Mr Fairhall describes Mr Savage as not being surprised at Mr Fairhall's initial protest about the GST status. This lack of surprise accompanied an absence, during all the subsequent meetings, of any protest by Mr Savage that the Fairhalls must have known or anticipated that Courageous would be GST registered. On the basis of this lack of areaction, Mr Fairhall invites the inference that the vendor was conscious of the outstanding GST issue, and aware that the Fairhalls had not appreciated it when the terms of the transaction were concluded. [28] During the ensuing discussions, the vendor offered to reverse the transaction by buying the company back at the same price, but the Fairhalls were not prepared to do so.First counterclaim – breach of warranty as to tax liability[29] The tax warranty in clause 7.1.4 appeared in the agreement in the following context:7.1 The Grantee [Janus] warrants both as at the date of this Agreement and also upon settlement:- 7.1.1 that Courageous is the sole owner of the Property both at law and in equity; 7.1.2 that Courageous has no assets other than the Property; 7.1.3 that Courageous has never traded except only to acquire the Property; 7.1.4. that Courageous has no current tax liability of any kind or (following the capitalisation referred to in clause 1.2) any other debt or liability; 7.1.5 that all rates on the Property are paid[30] It was argued for the Fairhalls that the warranty in clause 7.1.4 extended to both current tax liabilities, and other liabilities that could include tax liabilities that were not current. However, the wording of the warranty cannot reasonably bear that meaning. It made no sense in drafting terms, to separately provide for tax liabilities (which are confined to those constituting current tax liabilities) and then to provide more generally for all liabilities which could extend to tax liabilities that are non- current. To read the latter part of that warranty in such a way would render the separate reference to current tax liability superfluous. [31] I find the warranty means that at both the date that the agreement was entered into (February 2003) and on the date of settlement (April 2003), Courageous had nocurrent tax liability of any kind. Nor, at either of those dates, did it have any other (non-tax) debt or liability. [32] Accordingly there would be a material breach if the GST liability to which the dispute related was a "current tax liability" in either February or April 2003. Mr Jagose sought to argue that this liability for GST was not at all uncertain, and that it was the inevitable consequence of Courageous having claimed an input credit. Reliance was placed on the House of Lords' decision in Winter v Inland Revenue Commissioners [1961] 3 All ER 855. There, the valuation of assets for death duty purposes recognised the prospect of offsetting certain categories of liabilities that might arise in connection with the assets being valued for death duties purposes. Relevant tax law recognised that if a trader claimed allowances in respect of the use of assets in trade, then the taxpayer would also have to return any excess of value when those assets ceased to be used in his trade. The House of Lords treated such conduct in ceasing business use, which triggered an obligation to later pay tax, as creating a liability on that person. This accordingly entitled that person to deduct the extent of the tax liability for the purposes of calculating the value of those assets for death duty purposes. Lord Reid observed:if I agree by contract to accept allowances on the footing that I will pay a sum if I later sell something above a certain price I have committed myself and I come under a contingent liability to pay in that event. This company did precisely that, but its obligation to pay arose not from contract but from statute. (858H)[33] Mr Jagose invited an analogy here, that the liability to pay output tax was triggered by the election to claim an input credit. Accordingly, there was a current tax liability to pay output tax, which would crystallise on the cessation of Courageous' present taxable activity. [34] Mr Jagose also cited the High Court and Court of Appeal decisions inCommissioner of Inland Revenue v Duncan (2006) 22 NZTC 19,961 (HC) and [2007] 3 NZLR 360 (CA), in which both Courts purported to adopt Lord Reid's reasoning to arrive at what appears to be an inconsistent outcome. In Duncan, the taxpayer was the sole trustee of a family trust that had undertaken property development, and claimed input credits for acquisition and development costs. Asits trustee, the taxpayer was liable for the tax payable by the trust, unless exempted from that by his bankruptcy which occurred before the output tax liability was triggered by the sale of developed property. [35] The Court of Appeal found that the liability did not arise before Mr Duncan's adjudication. At that date, he was under no commitment to pay the output tax liabilities that later came to charge, and there was thus no contingent liability as to output tax ([21]). The point of distinction between Duncan and Winter appears to be that in Winter, the claiming of deductions on the assets led inevitably, and as a matter of certainty, to the same taxpayer having a later liability on cessation of their use for trading purposes. In contrast, in Duncan, the claiming by one taxpayer of input credits for GST purposes did not inevitably lead to a corresponding liability on that same taxpayer for output tax. There were other ways of structuring the dealings with the trust's property that could lawfully have avoided the trust's (and therefore Mr Duncan's) liability for output tax. The Court of Appeal identified such alternatives as selling the development as a going concern, or if Mr Duncan had resigned as a trustee and notified the Commissioner before the output tax liabilities came to charge. [36] Despite the outcome in Duncan, it was submitted for the Fairhalls that New Zealand Courts have accepted Lord Reid's approach as being correct. This means that a "current tax liability" encompasses not only a crystallised and current liability to pay, but also a contingent liability to pay where the contingency has yet to be realised but the person subjected to the obligation is committed to meet it when it does. [37] I do not consider the phrase "current tax liability" can be given such a broad interpretation in the present circumstances. The natural and ordinary meaning of "current" in the context of such a warranty is in contrast to "future" liability, so that it related to existing liabilities which would arise whilst the vendor was responsible for the conduct of Courageous' business. [38] There is a clear distinction for commercial purposes between warranting the extent of tax liabilities arising from the vendor's own control of the company, andassuming the risk of whatever might arise as a result of changed governance of Courageous by the Fairhalls. For instance, such a vendor would be most unwise to expose itself to any risk for PAYE or FBT liabilities that might ensue from the Fairhalls resolving to employ themselves or members of their family. [39] As Mr Millard submitted, at least the tax aspect of the warranty has a strong temporal aspect. [40] Although the options were not canvassed in argument, there were at least theoretical alternatives to Courageous having to account for output tax, such as if the development proposals were advanced to some degree and the company was then on-sold as a going concern. This prospect aligns the facts here with those inDuncan, rather than the absolute certainty of liability on the same taxpayer, relied on in Winter. [41] In addition, the quantification of the likely GST liability that would later arise depended on circumstances entirely beyond the control of the vendor. If it was warranting there was no such liability and thereby assuming responsibility to meet any tax liability that did arise, it would sensibly have retained some means of controlling when, how and to what extent such a liability arose. [42] Accordingly, I reject the arguments that the liability for GST that was triggered by the Fairhalls' conduct in mid 2004 is to be treated as a "current tax liability" of Courageous in February or April 2003. [43] However, it was also argued for the Fairhalls that the warranty was breached because Courageous did, in fact, have other GST liabilities, both at the date of the agreement and upon settlement. Those were the GST liabilities in respect of rent paid by the tenants in the property. The documents included a GST return for the month of January 2003 completed on the same day as the contract on 12 February, and for payment on 28 February 2003, returning a GST liability of $486.07. The GST return for March 2003, on which any tax would have been payable at the end of April, was not included, but the return for the following month (payable at the end of May) records a refund due of some $32.49. Throughout the relevant period, therewas therefore a liability to account for GST on rental receipts, irrespective of whether in any month that was offset by greater expenses, resulting ultimately in an entitlement to a refund. [44] In the financial sense, no claim is pursued in respect of these liabilities for GST. That does not prevent a finding that the warranty was breached, albeit in a technical or literal sense. The materiality of the breach is the contribution that the failure to acknowledge that liability had to the misunderstanding that the Fairhalls laboured under, namely that an absence of any current GST liability was because the company's activities were all exempt from GST. Accordingly, whilst there has been no breach of the warranty in relation to the later GST liability for output tax relative to the value of the property, there is a breach in respect of other ongoing GST liabilities for rental income. This can be taken into account in considering the subsequent claims.Second cause of action: Misrepresentation[45] The representation is pleaded in terms that Janus (acting by Messrs Savage and Cromie) represented that Courageous undertook activities that were exempt from GST. The pleading does not extend to a representation that Courageous was not registered for GST. Presumably, if the Fairhalls were told that it was registered, that would have triggered an enquiry as to what transactions it had returned for GST purposes. Rather, the allegation is slightly more confined, namely that the plaintiff represented the activities of Courageous as being exempt from GST. It is not alleged that words to that effect were ever used. Instead, that implication is alleged to have arisen from other things that were said. [46] The first indication of supposedly tax-exempt activities was a number of references to the prospect that one of the two apartments to be built on the site would be for Mr Savage's personal use. There was a difference of emphasis in the witnesses' recollection of how this point was discussed. Mr Fairhall treated the intention as a settled part of the developers' plans. Perhaps therefore when Mr Savage said he was looking to move to Oriental Bay "at a reasonable price", Mr Fairhall assumed that this development proposal represented that opportunity. Forhis part, when Mr Savage expressed a wish to acquire one of the properties if he could, at a reasonable price, he saw there as being numerous contingencies to be satisfied before that could be achieved. Accordingly, the prospect of acquisition was more qualified in his mind. It was apparent to Mr Fairhall that Mr Savage would have to buy the apartment from Courageous, and would have to deal with Mr Cromie to do so. [47] Although not a pleaded particular, the Fairhalls also relied in submissions on other impressions they were given that the company dealing with 286 Oriental Parade was doing so on behalf of trusts with which the principals were associated. These were to be distinguished from Messrs Savage and Cromie's business of property management work. Mr Savage agreed that he identified such a division of activities, which he recalled as arising in discussions over how best to handle a transaction involving the whole property, from the vendor's perspective. [48] There were connotations of a "private" element to the development, and that this was an initiative of the family trusts standing behind the vendor rather than Messrs Savage and Cromie's property business. These could lead persons in the Fairhalls' position further away from considering the prospect that a GST input had been claimed. On its own, however, it appears to be one step removed from a material element of any representation that all of Courageous' activities were GST exempt. [49] The second particular supporting the alleged representation was that Courageous had not traded, except in letting the property to residential tenants. That is somewhat different from the express warranty that "Courageous has never traded except only as to acquire the Property", and which is to be read with the preceding warranty "that Courageous has no assets other than the Property". Mr Fairhall's evidence was that Mr Savage assured him Courageous had "done nothing". The exception, acknowledged in the pleading but not in the warranty in the contract, for residential letting is an obvious one since it was abundantly apparent that there were tenants in the property, who in fact stayed on after settlement. The relevance of the company not having traded when its shares were being acquired would principally be to assure the purchaser that it was "clean" in the sense of not having any opportunityto incur liabilities that arose from activities other than those that were apparent in relation to the Oriental Bay property. [50] The extent of what Courageous had done in relation to 286 Oriental Parade was certainly apparent. Courageous was being acquired with all the plans and the product of surveyors' and engineers' preliminary work. Courageous' name was endorsed on the plans being used to promote the sale of the proposed apartments. As with the letting to tenants which was known but not noted as an exception to the "never traded" warranty, these preliminary development activities must be taken as implicitly falling outside what the parties treated as relevant "trading" for the purposes of the warranty. Consistency would also require that they be excluded from any representations attributed to the vendor. [51] It is reasonable that the Fairhalls would link "not traded" with an expectation that the company's activities were exempt from GST. It was the known exceptions of acquiring plans, conducting surveys and tenanting the property that need to be taken into account before evaluating whether what was conveyed on this aspect could contribute to a representation that the activities of the company were GST exempt. As to residential tenancies, Mr Fairhall had a general understanding that they were not automatically subject to GST and certainly do not trigger an obligation to register in the sense that a majority of private owners of domestic rental properties do not register and therefore do not charge GST. He assumed that to be the case here. [52] As to the costs of plans and surveys, if the company was not otherwise registered for GST, they do not trigger an obligation to do so. A theme of Mr Millard's cross-examination of Mr Fairhall was the likelihood of all property developers in fact electing to register for GST from the outset for cash flow reasons. Property development businesses involving sales of developed units will eventually trigger an obligation to account for GST. There is thus an incentive to register from the outset to take the cash-flow advantage of the input credits during the initial stages when a project involves more expenditure than receipts.[53] Mr Fairhall was vague as to a general awareness of this practice and I accept that he did not turn his mind to it in the present context because of the overriding impression that this was a private transaction from the vendor's perspective. [54] Again measured solely on its own, the effect of all the vendor's conduct as to the non-trading status of Courageous might well contribute to a representation that its activities were GST exempt, but is hardly sufficient on its own to justify the attribution of that representation to them. [55] A third particular involved Mr Savage advising that Courageous was a shelf company acquired simply to own the property. That certainly adds to the impression that it has no other business or assets, and was used solely as the vehicle for owning 286 Oriental Parade. Such ownership carried with it the activity of developing the site into two new apartments. The representation conveys additional assurance that Courageous was devoid of other activities or assets, and in that sense might strengthen the impression the Fairhalls gained that its activities were exempt from GST. As a representation standing alone, it does not convey anything in respect of the GST status of Courageous. [56] The last particular arises from the exchanges as to the terms of the tax warranty in the formal agreement. It was pleaded that the plaintiff's implication that Courageous undertook activities that were exempt from GST was contributed to by the absence of any response, on behalf of the plaintiff, to the Fairhalls' request for wording in the warranty that Courageous had "no tax liability of any kind". Because it is also relevant to the third counterclaim considered below, it is appropriate to set out the history of the warranty from the very outset. [57] In the first draft, being that dated 23 January 2003, the vendor's solicitor included:7.1.4 That Courageous has no present or contingent liability for tax or any other obligation other than GST.[58] Initial consideration of that draft on behalf of the vendor led to a suggestion that such a warranty should be deleted entirely, and one of the copies of that drafthas the words "contingent liability for tax" and "other than GST" underlined in handwritten additions. There is also a question mark at the end of the proposed warranty, and a second handwritten ruling out of the whole clause. Confirmation of the proposed deletion is found in Mr Crawford's letter conveying the second, 27 January 2003, draft to PricewaterhouseCoopers, which advised:Subsequent to our meeting Graeme Cromie asked me to reinstate clause 7.1.4 but in a modified form referring only to current liability.[59] That second draft specified:7.1.4 That Courageous has no current liability for income tax or (following the capitalisation referred to in clause 1.2) any other debt.[60] That was the first draft referred to the Fairhalls for their comment. They proposed that clause 7.1.4 be amended to read:That Courageous has no tax liability of any kind or (following the capitalisation referred to in clause 1.2) any other debt or liability.[61] The rejoinder by the vendor was to qualify the reference to tax liability with the word "current", and that simple change was reflected in the final agreement. [62] On the basis of the exchanges on the 27 January draft and thereafter, the Fairhalls claim that the absence of comment on their expectation, conveyed by the requested wording of "no tax liability of any kind", contributed to the representation that the activities of Courageous were exempt from GST. [63] The negotiation of the wording of express warranties between legally advised parties arises in a somewhat different context to the more informal dialogue that often occurs directly between the parties before and during a settling of formal contractual terms. In the context of negotiation of formal contractual terms, reasons for proposed changes to wording may be offered by the lawyers, but cannot be expected. Legal advisers are taken to discern such reasons, largely from the consequences that they predict as following from one set of words as against another. Here, the vendor's inclusion of "current" would signal that the warranty excluded any non-current tax liabilities. GST is a relevant form of tax and is among those reflected in "tax". Rejection of the Fairhalls' unqualified wording means that thevendor was not prepared to give the extent of warranty they sought. The rejection, without saying anything more, does not amount to a representation by the vendor in any wider terms than the qualified warranty reflected in its response. [64] What the vendor's final wording does convey is that there would not be any current liability for GST either at the date of the contract, or on the date of settlement. GST is a liability that frequently arises. Most people with a vague awareness of how the GST regime operates would reasonably consider that a vendor of all the shares in a company could only claim to have no current liability for GST if the company was not registered to pay it, or was in a period of complete inactivity. A variant on that assumption, is that a company warranting it had no current GST liability could only be undertaking activities that were exempt from GST. However, that is a criticism that arises from the final wording of the warranty being incorrect. Nothing further by way of contribution to a misrepresentation could arise from the silence in which it was proposed. [65] I consider the combined effect of all of those particulars to be sufficient to draw the Fairhalls' minds away from considering the need to contemplate GST. I am satisfied that the Fairhalls had no idea, when they committed to the contract, that the property was going to cost them $2.65 million plus an unidentified liability for GST output tax. The Fairhalls were not looking for a GST problem. They wanted the deal to work. They were drawn away from any concerns about any GST liability by the combination of all of what was put to them by the vendor. [66] For his part, Mr Savage appreciated that this GST liability would arise, and that structuring the transaction as a sale of shares would avoid triggering the collection and return of GST on the extent of the sale price of the property. The cumulative effect of the dealings between the parties led to that stark difference in understanding as to the consequences of the transaction at the time it was entered into. [67] A misrepresentation for the purposes of the Contractual Remedies Act 1979 may arise out of a course of conduct, or the combined effect of a number of statements. Here, the words and conduct by Messrs Savage and Cromie thatcontributed to the Fairhalls' misunderstanding are relatively diffuse. Importantly, even when drawing them all together, the contribution that each of the particulars makes to the Fairhalls' misunderstanding also requires an assumption on their part. Each statement is somewhat removed from the proposition that Courageous' activities were exempt from GST. [68] The stance implicit in both Mr Savage's evidence, and Mr Millard's submissions, was that this was a classic caveat emptor situation. The Fairhalls did not ask and did not conduct due diligence that would have revealed the contingent liability. They asked for a warranty that would have covered the position, and the vendor declined to provide it. Mr Millard submitted that rejection of their preferred wording "should have raised alarm bells". Alternatively, as Mr Millard put it, the Fairhalls simply did not turn their minds to the prospect of GST, so that a material misrepresentation on the topic simply did not arise. [69] Can the pleaded circumstances in which the Fairhalls were misled constitute actionable misrepresentation? In the end, I find this claim is not made out, essentially for two related reasons. First, the representations do not convey the essence of the alleged misrepresentation. To achieve that, assumptions or a certain extent of inferring what the statements convey is required. The inevitability of drawing such inferences, or making such assumptions, cannot be attributed to what was said by the vendor. Secondly, the requirement that the representation should induce entry into the contract carries with it some measure of purpose on the part of the representor that such inducement should follow. See generally, Burrows Finn & Todd Law of Contract in New Zealand, 3rd edition, p 345 and Savill v NZI Finance Ltd [1990] 3 NZLR 135 at 145. The evidence does not establish that these particulars were raised on behalf of the vendor, to induce entry into the particular form of contract because there would be no GST consequences. [70] I am mindful that when the exchanges over the wording of the tax warranty are added to what had gone before, unequivocal denial of any current GST liability did misrepresent the position. However, absence of any current liability for GST was not pleaded as an element of the misrepresentation cause of action. It arises instead as one aspect of the breach of warranty claim. The silence in which thealtered wording of that warranty was conveyed cannot come within the exceptions to the general rule that silence cannot amount to a misrepresentation, as specified inMarch Construction Ltd v Christchurch City Council (1995) 6 TCLR 394.Third counterclaim: breach of the Fair Trading Act 1986[71] On this head, the Fairhalls claim that Janus, in trade, conducted itself in a way that was misleading or deceptive, or likely to mislead or deceive, in breach of s 9 of the Fair Trading Act. In AMP Finance Ltd v Heaven (1997) 8 TCLR 144, the Court of Appeal approached the question of whether s 9 has been breached in three steps. First, whether the conduct was capable of misleading. Secondly, whether the claimants were misled by the relevant conduct, and finally whether it was reasonable for them to have been misled. [72] As ever, context is everything. The unusual form of the transaction was undertaken at the vendor's request, to obviate problems it might otherwise have, but which had no bearing on the Fairhalls. From the time when a sale of the shares, instead of a straight property transaction, was requested, it was implicit that the different form of transaction was intended to produce the same substantive outcome. [73] I find the evolution of the tax warranty critical on this cause of action. Its first iteration (not seen by the Fairhalls) specified GST as an exception to the absence of tax liabilities, so that a positive GST liability was certainly within the contemplation of the draftsman. Messrs Savage and Cromie contemplated not offering a tax warranty at all, but then offered a warranty that Courageous had no current liability for income tax, thereby avoiding any warranty in respect of GST liabilities. They dealt with the Fairhalls' proposal to make that a comprehensive warranty as to the absence of all tax liabilities, by confining it, without explanation, to "current" tax liabilities. All of this dialogue occurred in the context of the vendor's proposed alternative form for the transaction to sell 286 Oriental Parade to the Fairhalls. The series of warranties in clause 7.1 would reasonably have given the Fairhalls comfort that the vendor's preferred form of transaction involving a sale of shares would not have any different consequences, from their own original proposal to simply acquire the property.[74] The vendor's wish to restructure the form of the transaction arose where the Fairhalls intended the differences in form to be immaterial to the substance of the transaction, but where in fact there was a material difference. The vendor's failure to identify that material difference when negotiating the "fine print" of the tax warranty was capable of misleading the Fairhalls. First, the transaction related to the shares in a company that could well have been exempt from GST. Secondly, a warranty that it had no current liability for GST was capable of misleading the recipient of that warranty into believing that the company was indeed only undertaking activities which were exempt from GST. An acknowledgement of any GST liability, however modest, would have transformed the expectation of GST-exempt status that had evolved in the Fairhalls' minds. Any acknowledgement of GST liability on the rentals received could reasonably be expected to trigger a train of enquiry about all the GST records. It would certainly disabuse the assumption that the company's activities were GST exempt. [75] That aspect is enough on its own to make out conduct that is capable of misleading. It becomes even more likely when assessed in the context of other aspects of the dealings, such as characterisation of Courageous as a "clean" company in the sense that the vendors had used a shelf company which had not otherwise traded, and that it had no other assets. When there were no other "triggers" that might alert the Fairhalls to at least enquire about GST, with evident reliance on the warranties in substitution for any due diligence of the records of Courageous, the prospect of this conduct being capable of misleading is clearly made out. I have already found that the Fairhalls were misled by the cumulative impression of all this conduct into completing the contract on the assumption that acquisition of the shares would not expose them to any output tax liability on the value of the property. [76] Mr Millard argued, on both the misrepresentation and on the Fair Trading Act claims, that a person of Mr Fairhall's experience and expertise could not claim to be ignorant of all prospects of GST liability or the practice of property developers using GST for positive cash flow advantages, and accordingly could not reasonably be misled about it. Mr Millard also argued that the prospects of misrepresentation, or of the purchasers being misled, were much reduced where they had skilled legalrepresentation. This goes to the third step, namely whether it was reasonable for the Fairhalls to be misled. [77] I accept Mr Fairhall's evidence that his professional training did not alert him to the prospect of any outstanding GST liability. The vendor may have considered it was relieved of any obligation that would otherwise arise to identify the GST situation because of Mr Fairhall's particular skill set. However, it certainly should have been disabused of any such assumption when it learned that the final refinement to the wording of the tax warranty was accepted without Mr Fairhall questioning what was involved in that change. [78] The second point raises the contribution that could reasonably be expected of competent lawyers, to the analysis of consequences of what the vendor did not explicitly disclose, when a conveyancing transaction for residential property was structured in this unusual way. When advising on the specific consequences of changes to the terms of proposed warranties, the vendor could reasonably expect the purchasers' advisers to identify what was included, and what was excluded. Accordingly, the last change to the tax warranty could reasonably be expected to result in the Fairhalls being advised that any non-current tax liabilities were not covered. However, that does not trigger an analysis of whether there had been GST input credits claimed, for which a reciprocal output tax liability should subsequently be expected to arise. To the contrary, the tax warranty was literally incorrect, when there was a current liability for GST. That misstatement could reasonably deflect skilled conveyancers away from a consideration of potential GST liabilities that might arise from acquisition of Courageous. The involvement of legal advisers did not remove the prospect of the vendor's conduct misleading the Fairhalls. I find it was reasonable for them to have been misled. [79] Mr Millard argued for Janus that its participation in the transaction did not occur "in trade" as is required by s 9 of the Fair Trading Act. He was inclined to concede that Mr Savage's participation would constitute conduct "in trade", but argued that Mr Savage would need to have been separately sued for that to become relevant.[80] I do not accept that Janus can avoid any potential liability arising under the Fair Trading Act on this ground. Both Courageous and Janus were links in the chain back to a series of family trusts with which Messrs Savage and Cromie were associated, and which stood to gain from the profit made on the transaction. Whether Janus participated by directing the affairs of Courageous, or by negotiating a sale of the shares it held in that company, it was in practical terms dependent on the expertise of Messrs Savage and Cromie, or others retained by them. None of Janus' participation in the whole transaction occurred other than through the conduct of Messrs Savage and Cromie. In these circumstances, the conduct of Mr Savage is readily attributable to Janus, for the purposes of assessing its participation as being "in trade" for the purposes of the Act. [81] I find that Janus conducted itself, in trade, in a way likely to mislead or deceive in relation to the potential GST liabilities, and accordingly this cause of counterclaim is made out.Fourth cause of action: contractual mistake[82] The last claim invokes the Contractual Mistakes Act, pleading that the Fairhalls were materially influenced in their decision to enter into the contract by their mistaken belief that Courageous undertook activities that were exempt from tax under the Goods and Services Tax Act. Further, it was pleaded that Janus knew of the existence of the mistake. This awareness is pleaded as arising from knowledge that the Fairhalls intended to build their own home on the property, which would entail the cessation of taxable activity. [83] It is clear that the Fairhalls treated the contract as the equivalent of a straight property purchase that they had proposed. They were certainly materially influenced in their decision to enter into this contract by the mistaken belief that its substantive outcome would be the same as the transaction they had proposed. [84] I also find the vendor was aware of the mistake. The Fairhalls' proposed version of the tax warranty signalled an expectation that they would not be inheriting any tax liabilities, and the vendor amended that to avoid the GST output tax liabilitywhich Mr Savage was aware of. Mr Fairhall's unchallenged evidence was that there was a complete lack of any protest by Messrs Savage and Cromie that Mr Fairhall had surely factored GST in, or had thought about it. I would not find this evidence sufficient to fix the vendor with knowledge of the mistake on its own, but it is consistent with the vendor having appreciated the mistake when their confined version of the tax warranty was accepted. [85] The Fairhalls have also to make out that the mistake resulted in a substantially unequal exchange of values. The result of the mistake is that, thus far at least, they have paid 6.5% more than they bargained for. Mr Millard argued that this did not constitute a substantially unequal exchange of values, and cited the decisions in New Zealand Refining Company v The Attorney-General (1991) 14 NZTC 9,006 (HC) and (1993) 15 NZTC 10,038 (CA). Neither the High Court nor the Court of Appeal in those proceedings was prepared to find that an arbitrator had erred when determining that a nine percent mistake over GST liability had not resulted in a substantially unequal exchange of values. However, a bald comparison of percentages between that multi-million dollar contract between a large refining company and the government, and the present private contract, essentially for a sale and purchase of residential property, is likely to be misleading. [86] Here, Mr Savage stated that Janus would not have sold at this price, if it had to meet the GST output liability. There is really no way of testing that. On the other hand, the Fairhalls were offered to reverse the transaction by simply selling the shares back for the price they had paid, and declined to do so. They must be deemed to have made that decision in light of at least some degree of risk that they would ultimately have to meet the GST liability. Electing to adhere to a contract notwithstanding the prospect of having to absorb the adverse side of the unequal exchange of values does not necessarily render the extent of that inequality less than "substantial", however it is a material pointer in that direction. [87] Mr Jagose submitted that the present case is distinguishable from those cases dealing more generally with how "substantial" GST mistakes are. No cases at all were cited for the Fairhalls on this point. The New Zealand Refining Company case was the only one cited for Janus. Perhaps unsurprisingly, there are decisionssuggesting that a mistake as to GST liability arising out of a transaction is both sufficiently substantial, and inadequate to result in a substantially unequal exchange of values. In the former category is Denning v Tri-Star Customs & Forwarding Ltd(1996) 17 NZTC 12,618, where it was held that an option price of $720,000 less GST was substantially different to a price of $720,000 simpliciter; the $80,000 difference led to a substantially unequal exchange of values. The decision was reversed on appeal, but the question of the relative extent of inequality in the exchange of values was not addressed. In Clements v Singh (2002) 20 NZTC 17,851, the Court considered an application for relief under the Contractual Mistakes Act relating to the vendors of a farm who maintained they had intended the price to be GST exclusive, but subsequently found it to be GST inclusive. The claim failed on other grounds, but Doogue J observed that the circumstances of the case on relatively how substantial the inequality of values were, was more similar toDenning than to the New Zealand Refining Company case. [88] Most recently is Westerman Realty Ltd v McKinstry HC ROT CIV 2007 463 000075 20 June 2007. Fogarty J at [5] made reference to the finding in the District Court that there was no substantially unequal exchange of values where the difference was 7.67-7.95% "and so below the rough benchmark of 10-15% difference in value". His Honour did not make any comment on the appropriateness of any such benchmark. [89] There are other cases in addition to New Zealand Refining Company that reach the contrary conclusion, but an analysis of them shows that they are driven by the facts in each case. To that extent, I accept Mr Jagose's submission that each case must be considered within its own context. [90] I am not persuaded that the extent of the difference to the overall bargain here causes a substantially unequal exchange of values. I am reinforced in that view by the Fairhalls' election to continue with the bargain, after discovering the mistake and being afforded an opportunity to reverse it. [91] Accordingly, I find that the Fairhalls' fourth counterclaim does not meet the criterion of a substantially unequal exchange of values, and must fail.Quantum of damages[92] On the misleading conduct claim, s 43(d) of the Fair Trading Act empowers the Court to order payment by a party in breach, inter alia, of s 9 of the Act, to pay to the party suffering the loss the amount of that loss. The loss flowing from the misleading conduct is essentially the extent of the GST liability. The Fairhalls took steps to crystallise that, and did so at a little more than $172,000 in June 2004. They elected to withhold that extent of the unpaid remainder of the purchase price. They have recently sought a declaration that they are entitled also to indemnity from any greater liability for GST that might subsequently arise. [93] If any liability was to be established, Mr Millard argued that the vendor ought not to be liable for the mode in which Mr Fairhall has elected to deal with Inland Revenue. In 2004, Mr Fairhall chose to deal with it in a particular way and should assume responsibility for the consequences of doing so. Any adverse decisions in conducting dealings with Inland Revenue should not now be visited on the prior owners of the company. Mr Millard cited the Court of Appeal decision in McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39 for the proposition that Janus should not in any event be liable for more than a fair and just amount. In considering different approaches to the assessment of damage flowing from solicitors' negligence, the Court did give some encouragement to an approach to quantum that is flexible to fit the circumstances of particular cases. The context of the loss arising in McElroy Milne is obviously very different from the circumstances of loss for misleading conduct, but the end point of achieving a quantification that is a fair and just amount can equally apply. The judgment of Cooke P included:It is clear at least that reasonable foresight or contemplation, which appear to be interchangeable terms, are always an important consideration. I doubt whether they are the only consideration. Factors including directness, "naturalness" as distinct from freak combinations of foreseeable circumstances, even perhaps the magnitude of the claim and the degree of the defendant's culpability, are not necessarily to be ignored in seeking to establish a just balance between the parties. In the end it may be best, and may achieve more practical certainty in the New Zealand jurisdiction, to accept that remoteness is a question of fact to be answered after taking into account the range of relevant considerations, among which the degree of foreseeability is usually the most important.[94] And a similar reflection in the judgment of Hardie Boys J:It is I think better to concentrate on achieving a result that is just to both plaintiff and defendant, for that is always the ultimate objective.[95] I consider the concern to cap the quantum at the level resulting from the action taken by the Fairhalls in 2004 is a valid point. The quantum of loss flowing from Janus' misleading conduct should reflect the consequences of how it was dealt with at the time. Any cause for that to be belatedly revisited by Inland Revenue is at the very least contributed to by the manner in which Mr Fairhall dealt with it in 2004. [96] Accordingly, on the counterclaims, the Fairhalls have made out an entitlement to the $172,000 they withheld. No submissions were addressed to the formal terms of any judgment, and in particular the application of rr 534 to 536 of the High Court Rules. There does not appear to be any issue as to the solvency of either party, and the claim and counterclaim arise very much out of the same dispute. In these circumstances, I order that the liability for the outstanding part of the purchase price is to be set off against the Fairhalls' entitlement to damages of the same amount. Except for costs, no money should change hands.Conclusion[97] The third counterclaim succeeds. The quantum of damages is fixed at $172,000.Costs[98] The defendants having succeeded are entitled to costs on the 2B scale, together with disbursements which, if necessary, are to be fixed by the Registrar. _________________Dobson JSolicitors: Langford Law, Wellington for plaintiff Chapman Tripp, Wellington for defendants