JEREMY WALTER CLAXTON v SMITHS CITY (SOUTHERN) LIMITED (IN RECEIVERSHIP) [2022] NZCA 173

JEREMY WALTER CLAXTON v SMITHS CITY (SOUTHERN) LIMITED (IN RECEIVERSHIP) [2022]NZCA 173 [10 May 2022]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA647/2021[2022] NZCA 173BETWEEN JEREMY WALTER CLAXTONApplicantAND SMITHS CITY (SOUTHERN) LIMITED(IN RECEIVERSHIP)RespondentCourt: Miller and Collins JJCounsel: K T Dalziel for ApplicantR L Towner and J L Libbey for RespondentJudgment:(On the papers)10 May 2022 at 11.00amJUDGMENT OF THE COURTA The application for an extension of time is granted.B The application for leave to appeal is declined.C The applicant must pay costs for a standard application on a band A basis.____________________________________________________________________REASONS OF THE COURT(Given by Miller J)[1] This judgment responds to an application for leave to appeal against anEmployment Court judgement on the ground that there is a question of law which byreason of general or public importance ought be submitted to this Court for decision.The application focuses on an award of damages for breach of his employmentcontract.[2] Mr Claxton also seeks an extension of time to appeal an earlier interlocutorydecision of the Employment Court, in which he sought a stay of proceedings on theground that the respondent was receiving financial support to pursue the litigationfrom another company, Smith's City (2020) Ltd, which had recently purchased therespondent. The delay has been explained and the application is not opposed. Weaccordingly grant the extension of time to seek leave to appeal under r 16A and turnto the merits of the application for leave.[3] Mr Claxton was an employee of the respondent, which sued him (and anotheremployee who has since abandoned his appeal) for breach of his employment contract.The employer alleged that over a substantial period Mr Claxton had used his role torun his own business in competition with it.[4] Before the hearing in the Employment Court, it was discovered that therespondent was receiving financial support to pursue the litigation from Smith's City(2020) Ltd, which had acquired the business including the benefit of claims againstMr Claxton and his fellow employee. Mr Claxton argued that it was an abuse ofprocess to fail to disclose the litigation funding arrangement, further that there hadbeen an illegal assignment of the employer's rights to which he had not consented.These claims were dismissed in the interlocutory judgment.[5] In the substantive judgment Judge Smith found for the respondent, rejecting adefence that Mr Claxton had its permission. The Judge fixed damages at $732,399.[6] Mr Claxton submits that the Employment Court erred in law by: finding therewas no abuse of process to the late disclosure of litigation funding; finding thatMr Claxton did not have the consent of the respondent to operate a competingbusiness; and finding that the respondent had proved loss attributable to the breach.The respondent replies that these are alleged errors of fact not law, and they are not ofsufficient importance to justify leave.[7] With respect to the litigation funding question, Mr Claxton claims that thelitigation funding arrangement amounted to an assignment of the claim which shouldhave been disclosed and was not, resulting in an abuse of process. This claim raises aquestion of law but we do not consider that it has reasonable prospects of success. Asthe Supreme Court held in Waterhouse v Contractors Bonding Ltd, a stay for abuse ofprocess should be granted only where (relevantly) the funding arrangement constitutesthe assignment of a cause of action to a third party in circumstances which such anassignment is not permissible. In this case the judge found there was an effectiveassignment and that it ought to have been disclosed, but he was not satisfied that therewas an abuse of process and he found that the arrangement was lawful. The contractbetween the respondent and Smith's City (2020) was an orthodox business sale andpurchase transaction.[8] With respect to the question of consent to run a competing business,Mr Claxton argues that the judge erred in his approach to the evidence, treating hisdefence as an implied permission claim rather than one of consent manifested throughinaction by managers who knew of his activities. We see this as almost entirely aquestion of fact. The defence of consent was the crux of the case, as the Judge put it.It failed essentially because Mr Claxton engaged in subterfuge to conceal the size andgeographical extent of his competing business, indicating that he knew he did not havehis employer's permission. He was also found to have been in breach of his duty offidelity as a senior employee.[9] With respect to compensation, the respondent sought an account of profits.Mr Claxton did not make full disclosure of his accounts, so the respondent's expertwitness used what she had to estimate his profit (revenue less direct costs). The Judgerejected an argument that compensation should be assessed by deducting the costs thatthe respondent would have incurred on the same transactions, so arriving at the profitit would have made. Mr Claxton claims that the objective should have been to restorethe respondent to the position it would have been in but for the breach. Only ifdamages could not be calculated on that basis would it be appropriate to turn to unjustenrichment principles.[10] We accept that this raises a question of law. However, the information beforethe Judge was the best available. Mr Claxton was responsible for any deficiency in it.It appears the experts agreed that it would not have been practical to calculate damageson an alternative basis. We observe that there was in the end a substantial measure ofagreement between the expert witnesses about quantum. The amount ultimatelyawarded was a substantial sum, but that is because Mr Claxton carried on his businessfor a long time and on a significant scale. A number of adjustments were made inMr Claxton's favour. The Judge found the resulting sum a reasonable assessment ofthe loss actually suffered. That is the ultimate objective of damages. In thecircumstances, we are not persuaded that there is a reasonable prospect that a differentoutcome would result on appeal.[11] With respect to loss, Mr Claxton also says that any debt had been satisfied bySmith's City (2020), in the form of consideration for the respondent's loss. We findthis claim difficult to follow and observe that the Judge found there was no evidencethat the receivers had in some way received compensation for the subject matter of thelitigation. On the face of it, the sale of the respondent's business appears to haveincluded its right to compensation as against Mr Claxton for past breaches of hisemployment agreement. The Judge found that the transaction did not amount to animpermissible assignment of a contract for personal service.[12] The application for leave to appeal is declined. Mr Claxton must pay costs fora standard application on a band A basis.Solicitors:Cook Morris Quinn, Auckland for Respondent