AUTO SOUNDS AND ALARMS LTD (IN RECEIVERSHIP AND LIQUIDATION) v CRONE [2013] NZHC 1227

AUTO SOUNDS AND ALARMS LTD (IN RECEIVERSHIP AND LIQUIDATION) v CRONE [2013] NZHC 1227 [28 May 2013]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYCIV-2011-404-007325[2013] NZHC 1227BETWEEN AUTO SOUNDS AND ALARMSLIMITED (IN RECEIVERSHIP ANDLIQUIDATION)First PlaintiffGRAEME WILLIAM MILLS ANDKAREN ANN MILLSSecond PlaintiffsAND STEPHEN CRONEFirst DefendantSCITUATE LIMITEDSecond DefendantHearing: 9-12, 16-19 and 22-23 April 2013Counsel: PJ Dale and LT Meys for PlaintiffsG Bogiatto and GS Aulakh for DefendantsJudgment: 28 May 2013JUDGMENT OF ASHER JThis judgment was delivered by me on Tuesday, 28 May 2013 at 3pmpursuant to r 11.5 of the High Court Rules.Registrar/Deputy RegistrarTable of ContentsPara NoIntroduction [1]The pleadings and issues [12]First part of claim – the misrepresentation allegations [13]Second part of claim – wrongful payment of $106,577.96 [18]Summary of findings [20]Approach to issues [25]The alleged representation as to audit and compliance [27]Representation as to audit – analysis [46]Representation as to compliance – analysis [61]The alleged representation that Ms Dobbie was the only importantemployee and Mr Dickie was inessential [80]Was the representation as to audits of CSS a misrepresentation? [91]Was the representation as to compliance a misrepresentation? [99]Mrs Mills' spreadsheet – my views [120]The accuracy of Mrs Mills' spreadsheet – other factors [129]Audits [130]Improved gross margin by ASA [132]Assessors involved in all transactions [134]Reasons for failure of ASA [136]Conclusion on compliance [144]The claim for $106,577.96 [147]Is the $3,462.79 recoverable from CSS? [174]Damages [181]Result [184]Costs [185]Introduction[1] The car repair business of the plaintiffs has failed. They consider that this isbecause of misrepresentations by and overpayments to the defendants. Graeme andKaren Mills, the purchasers, and their former company Auto Sounds and Alarms Ltd(in receivership and liquidation) bring the claim against Stephen Crone and hiscompany Scituate Ltd, the vendor. They claim that Mr Crone misrepresented thesales margins that his company was charging in respect of its most significant clientand also misrepresented the importance of a key employee. There is a further claimbased on an alleged overpayment in respect of apportioned work to Scituate Ltd.[2] The background circumstances are straightforward. In 1994, Mr Croneincorporated Car Stereo Systems Ltd (CSS), now Scituate Ltd. Mr Crone was theonly director and shareholder of CSS. The company was to specialise in the repairof damaged motor vehicles, not including panel work. Cars that had been brokeninto and had their stereos and alarms ripped out by thieves were a particular specialty. Mr Crone developed relationships with a variety of insurance companies, and CSS would do the repair work on the motor vehicles of their insureds. Mr Crone developed a particular relationship with State Insurance, which was later to become IAG New Zealand Ltd (IAG), previously the first defendant in this action. IAGbecame CSS's largest insurance customer. CSS also did work for non-insurance customers, and particularly the installation of stereos.[3] On 27 July 2007, CSS entered into a Motor Vehicle Repairer Agreement(MVRA) with IAG which recognised CSS's particular status as a repairer for thatcompany. By this time Mr Crone was interested in selling the business. Turnoverhad declined from $3,212,114 in the financial year ending 31 March 2005 to$2,131,352 in the financial year ending 31 March 2007 and was continuing todeteriorate. Mr Crone was suffering from diabetes and lost some interest in runningthe business. In 2007 he made some unsuccessful efforts to sell it.[4] In January 2008, Mr Crone placed CSS on the market at a reduced price of$750,000 using Barker Business Brokerage Ltd (BBB) as the agent. BBB issued asale memorandum that disclosed the declining position. It attracted the attention ofthe second plaintiffs, Mr and Mrs Mills. On 4 March 2008 there was a meetingbetween Mr Mills and Mr Brett Barker and negotiations followed.[5] Ultimately the parties signed a sale and purchase agreement on 14 March2008 for an overall sale price of $700,000, broken down as $30,000 for tangibleassets, $520,000 as intangible assets and $150,000 as stock in trade. It is commonground that the $520,000 can be regarded as goodwill. Settlement was to be on30 May 2008. It was a term of the sale and purchase agreement that there would bedue diligence. The due diligence proceeded on 20 March 2008. The Mills engagedtheir accountant Mrs Paula Kearns to do the task. There was a meeting on 28 March2008 between Mr and Mrs Mills and representatives of IAG, which Messrs Croneand Barker attended. The purpose was to introduce the Mills to IAG and discusstheir future relationship. On 14 April 2008, Mrs Kearns presented her due diligencereport. Two days later the agreement for sale and purchase became unconditionaland the deposit was paid.[6] There were then further meetings between Mr Crone and the Mills, inparticular in the two days prior to settlement, which included Mr Crone teachingMr Mills practical aspects of the business and the various systems used. On or about1 June 2008 the Mills, through their newly incorporated company Auto Sounds andAlarms Ltd (ASA), took over the CSS business.[7] On the day before the Mills took over, they informed the then manager ofCSS, Mr Sean Dickie, that his employment would not be continued.[8] ASA then proceeded to trade. In August 2008 it moved the premises from153 Wairau Road, Takapuna to smaller and cheaper premises at Sunnybrae Road.The MVRA had come to an end with the sale of the business. After a three monthtrial period ASA signed a one year service agreement on 24 September 2008 withIAG.[9] ASA's turnover dropped. On 31 March 2009 the ASA accounts showed salesrevenue of $923,885 and an operating deficit of $51,903. The accounts for 31 March2010 showed that the revenue of ASA declined further to $706,035 with an operatingdeficit of $145,847.[10] Mr Mills had at the time of purchase been managing his own company,Onehunga Car Clinic Ltd. He had after purchase taken over the management of ASApersonally. In mid-February 2009 he returned to the management of the OnehungaCar Clinic and Mrs Mills took over the management of ASA. Mrs Mills had been aschool teacher and since 2000 had been involved in education and trainingbusinesses.[11] In October 2010 IAG terminated its relationship with ASA. In February 2011ASA stopped trading. On 14 February 2011, it was placed in liquidation. On16 February 2011 receivers were appointed by the Bank of New Zealand to ASA.These proceedings were issued in November 2011. In the meantime the affairs ofCSS had been concluded and it had been struck off the Companies register. It hasnow been restored with the new name Scituate Ltd.The pleadings and issues[12] IAG was first defendant in these proceedings, but prior to trial the plaintiffsand IAG settled the proceeding on the basis of a payment of $195,000 with a denialof liability. The third amended statement of claim, filed after the settlement withIAG, contained a wide range of allegations of misrepresentation. Two causes ofaction arose out of these alleged misrepresentations. The first was that CSS wasguilty of misrepresentation. The second was that both CSS and Mr Crone hadbreached the Fair Trading Act in making various representations. The third andfourth causes of action related to a different claim, and were in conversion and formoney had and received in respect of apportionments carried out unfairly after thesettlement.First part of claim – the misrepresentation allegations[13] It became clear on opening that many of the Mills' misrepresentationallegations had fallen away. In relation to the misrepresentations Mr Dale for theplaintiffs, at my request, set out the key misrepresentations that were being pursuedin a memorandum of 10 April 2013 (Mr Dale's memorandum). He stated them asfollows, referring to the amended statement of claim (ASOC):(a) That IAG New Zealand Limited (IAG) and Car Stereo Specialists Limited (CSS) were contractually bound prior to August 2007 by the terms of the Motor Vehicle Repairer Agreement (ASOC 18(d)–(f)), and so by implication that the profit margins on the IAG work were 10% and 20%.(b) That Jackie Dobbie was the only important employee, and keen to workfor the new owners (ASOC 25(g)).(c) That Mr Dickie was not essential to the running of CSS' business, andthat he planned to get a charter boat and go fishing once leaving thebusiness (ASOC 25(h)).(d) That CSS' turnover and profit had been generated by charging correctmargins on parts and services (ASOC 56).(e) That CSS had been audited and was compliant with its contractualobligations to IAG (ASOC 41(a) & (b)).[14] In a ruling I made on 10 April 2013,1 I recorded that the effect of therestatement of the misrepresentations was that there were in fact two fundamentalmisrepresentation issues. The first was whether CSS and Mr Crone hadmisrepresented the position in relation to IAG having audited CSS's performance.That claim involves consideration of whether it was represented to the Mills thatCSS was contractually bound to IAG to adhere to profit margins referred to in theMVRA of 10 per cent on new parts and 20 per cent on used parts, whereas in factthose profit margins had been grossly exceeded.[15] The second alleged misrepresentation was that it had been asserted the office manager Ms Dobbie was the only important employee and keen to work for the newowners, and that the manager Mr Dickie was not essential to the running of thebusiness and planned to get a charter boat and go fishing once he had left.[16] It is claimed by the plaintiffs that these representations were untrue, as therehad been no audits as represented and the MVRA profit margins were not observedas required, and indeed had been grossly exceeded by CSS. It was also alleged thatcontrary to the misrepresentation, Ms Dobbie was not the only important employeeand Mr Dickie was essential to the running of the business.[17] It is claimed that as a consequence of these misrepresentations the plaintiffsare entitled to damages for their entire loss of capital, which is stated to have been$750,000, a trading loss of $315,000, interest and general damages.Second part of claim – wrongful payment of $106,577.96[18] The second part of the claim is pleaded on the basis that there was a work in progress clause in the agreement for sale and purchase providing for anapportionment on settlement.[19] It is pleaded that prior to settlement, the accounts manager Ms Dobbie onbehalf of CSS advised ASA and the Mills that all work commenced prior to the dateof settlement of 30 May 2008 had been invoiced to CSS, so that any monies received1 Auto Sounds and Alarms Ltd (In Receivership and Liquidation) v Crone HC Auckland CIV- 2011-404-7325, 10 April 2013 at [13].after the date of settlement were the property of ASA. It was pleaded that it was alsoagreed between ASA and Ms Dobbie on behalf of CSS that any outstanding warrantyclaims should be settled by ASA retaining any assessment fees that might have beenotherwise payable to CSS for work it had done prior to settlement. It was allegedthat in breach of this agreement, Ms Dobbie on behalf of CSS had paid to CSS thesum of $106,577.96, which were funds to which CSS had no entitlement. It isclaimed that CSS thereby converted the money to its own use, or alternatively thatthe monies paid were monies had and received by CSS which had to be refunded.Summary of findings[20] In this judgment I find that the plaintiffs have failed to establish the causes ofaction against the defendants, save in relation to $3,462.79 of the claimed$106,577.96 that it is claimed was mistakenly paid to CSS.[21] I find that Mr Crone by his silence was party to the representations as to audit and compliance with the CSS/IAG contract. Those misrepresentation allegationsturn on spreadsheets prepared by Mrs Mills, where she seeks to prove overchargingof IAG by CSS in the 2007 financial year. I have found her methodology to beneither accurate nor reliable. Further, it ignores the basis on which audio equipmentwas charged, which was in value the major type of componentry referred to in thespreadsheet. I find the criticism of her analysis by the CSS accounting experts,Mr Jordan in particular, to be sound and convincing, and I prefer their analysis tothat of the ASA experts. There were audits and there was compliance. Therefore, Ifind that the representations were true.[22] I find there was no misrepresentation made that Ms Dobbie was the onlyimportant employee and that, to the contrary, Mr Crone emphasised Mr Dickie'simportance.[23] The claim of overpayments of $106,577.96 also turns on the correctness of spreadsheets prepared by Mrs Mills. I have found this analysis also to be neitheraccurate nor reliable. The only accountant to do a full analysis of her workings hasbeen the CSS expert Mr McDonald, and I found his evidence to be balanced andlogical. He found Mrs Mills' calculations to be flawed, save for $3,462.79. I preferhis views on Mrs Mills' spreadsheets to those of the ASA experts. I also find thatMs Dobbie of CSS did not tell Mrs Mills that all CSS work up to settlement wouldbe completed and costed by CSS. Thus, I do not accept the allegations of theplaintiffs of overcharging of IAG by CSS, and excessive payments to ASA aftersettlement, save for the $3,462.79.[24] I consider Mr Crone to have been an honest witness who conducted thebusiness of CSS broadly in compliance with its contractual obligations to IAG, andwho did not seek to have CSS unfairly profit from apportionments after settlement.Approach to issues[25] I will deal initially with the misrepresentations claims as to audit and compliance by considering whether in fact the pleaded representations were made. I will then go on to deal with the allegation of representation and misrepresentation inrelation to Mr Dickie. I will then turn to consider whether the representations madeconcerning audit and compliance were misrepresentations. When I have consideredthose issues I will then go on to determine the second part of the claim in relation tothe alleged wrongful overpayment. Finally, I will refer to the question of damages.[26] Ms Mills provided a 126 page witness statement where she set out her claims.Mr Mills' brief was 48 pages long. Mrs Mills claim as to non-compliance with the contractually agreed discounts between IAG and CSS was based on many volumesof supporting documents. There are numerous lengthy other witness statements.The alleged representations as to audit and compliance[27] After the Mills' initial contact with Mr Barker, there was a brief meeting on4 March 2008 between Messrs Mills and Barker where CSS was discussed. Mr andMrs Mills allege that there was then a meeting on either 10 or 11 March 2008 whereMr Mills asserts that Mr Crone set out certain background matters relating to thebusiness.[28] By this time the Mills would have received a business memorandum issuedby Mr Barker. It contained nothing in it directly relevant to the allegedmisrepresentations, although it did refer to reducing staff numbers and potentialsavings in staff costs. The asking price was $750,000. It referred to there being asupply contract with IAG.[29] There is total disagreement between Messrs Mills, Crone and Barker aboutwhether there was a meeting on 10 or 11 March 2008. Mr Mills asserts there was.Messrs Crone and Barker deny it. I do not think a great deal turns on whether such ameeting did occur. This is because assertions that Mr Mills claims Mr Crone madeabout there having been an IAG contract for three years, and about IAG beingroughly 60 per cent of the insurance work that amounted to 80 per cent of CSS'sbusiness, are not now pleaded misrepresentations at issue.[30] I do, however, record that I am not satisfied that such a meeting occurred.The alleged meeting would have been on a Saturday. Mr Barker appears to havekept a diary and there is no record of any such meeting in that diary. There is noextraneous material indicating that such a meeting occurred. Mrs Mills claimed thatMr Mills discussed this meeting with her upon his return home. However, I foundMr Barker's evidence on the point to be convincing. I am not satisfied there was anymeeting on 10 or 11 March 2008.[31] I record in relation to the turnover of the business that I do not accept theMills were ultimately under any impression that IAG made up 40 per cent of CSS'sbusiness as they have, on occasions, alleged. A business programme prepared byMrs Mills herself stated that 60 per cent of the CSS work came from insurancecompanies, and it is clear that IAG was less than half of that. It is not possible to beprecise, but it would seem that IAG's work constituted approximately 25 per cent ofCSS's total business.[32] I find that the first meeting between the parties was on 15 March 2007, asMr Crone asserted in his evidence. This meeting was held after hours on a Saturdaybecause the existence of the agreement for sale and purchase had not been revealedto the staff. Mr Barker came to the meeting and introduced the parties but then tookno further active part. Mr Crone showed the Mills around the office area and retailshop, and answered a variety of specific questions.[33] The Mills in their evidence stated that Mr Crone had indicated there weredifficulties between the office administrator Ms Dobbie and the workshop managerMr Dickie. They claim that Mr Crone emphasised the importance to the business ofMs Dobbie, but made negative comments about Mr Dickie to the effect that he hadbought a charter boat and would be doing his own thing. Mrs Mills, in particular,asserted that Mr Crone told her about difficulties faced with Mr Dickie and negativecomments about him and his lack of interest in the company.[34] As to the nature of the business, Mrs Mills stated that Mr Crone handed toher a copy of an unsigned 2004 MVRA. Mrs Mills had asserted that Mr Croneclaimed that the agreement had been signed, which Mr Crone denies. He alsostrongly denied making the negative comments about Mr Dickie. He asserts thatwhat he said was that both Ms Dobbie and Mr Dickie were the most important staffmembers.[35] I prefer Mr Crone's account of what happened at this meeting to that ofMr and Mrs Mills. Mrs Mills in particular made a number of assertions about whatMr Crone said at the meeting which, while they are no longer important, do not seemto me to be right. She claimed that she and Mr Mills believed that insurance workconstituted as much as 80 per cent of the turnover of the business. However, herown business plan prepared sometime after the meeting showed a figure of 60 percent. She said that Mr Crone explained that IAG-aligned panelbeaters werecontractually obligated to refer all interior repairs and replacement work to CSS.The evidence is quite clear that this was not so, and having seen Mr Crone I do notbelieve that he would have made this up.[36] I am satisfied that Mr Crone regarded Mr Dickie as an important employee ofthe business whose performance was satisfactory and indeed highly valued. Hethought Mr Dickie should be retained. The evidence from the IAG assessors andMs Dobbie was that Mr Dickie was good at his job. He managed the workshop andliaised closely with assessors of the various insurance companies including IAG.Although he always started work late at 9 am because of family commitments, heappears to have been able to carry out his duties well. It seems to me highly unlikelyMr Crone would have so misrepresented Mr Dickie's position.[37] Implicit in the Mills' case is that Mr Crone recognised that Mr Mills wantedto take over the management of the business and that this would be an importantreason for them settling the agreement for sale and purchase. It therefore wouldhave been in Mr Crone's interest to misrepresent the position. Having seenMr Crone in the witness box I do not think it at all likely that he would have beenguilty of such a Machiavellian plan.[38] For reasons that I will elaborate on further, Mr Crone struck me when hegave his evidence as a somewhat reticent but straightforward man, rather slow topush his own interests and certainly very careful about any remarks he would makeabout other people. For him to have so unfairly denigrated Mr Dickie would runentirely contrary to his character, as I perceive it having seen him in the witness box.[39] I therefore prefer his evidence to that of Mr and Mrs Mills in this area of theDickie representation. I do not believe there was any downgrading by Mr Crone ofMr Dickie's importance to the business at the 15 March 2008 meeting. I will returnto this topic.[40] Also Mr Crone indicated in his evidence that he did not at the initial meetingknow that Mr Mills intended to get rid of Mr Dickie, and I accept this is so. This isconsistent with the evidence of the IAG witnesses, which was that on 28 March 2008when they met with the Mills they were not told Mr Dickie would be going.[41] The meeting on 28 March 2008 was to enable the Mills to meet key IAG personnel. It is common ground that Messrs Crone and Barker, while there, did not materially participate in the discussion.[42] Mrs Mills' discussion of this meeting extends over some 10 pages of herwitness statement. There is a difference between the Mills and the IAG witnessesand Mr Crone about the level of detail discussed at this meeting. Mr Crone says itlasted for no more than 40 minutes, and the IAG witnesses say that the discussionwas very general. That was also Mr Barker's recollection. However, Mrs Mills'evidence indicates a longer, more detailed meeting.[43] Mrs Mills says that there was reference to IAG's right to audit repairers andthat Mr Johnson said he would be the first to know if there were any issues orproblems with CSS. She says she asked if CSS had been audited, and thatMr Johnson replied "all repairers are audited". She said that there was reference tothe use of a network known as "Parts Trader" that had been set up by IAG, wherebyparts were posted on an internet site and made available for bids by IAG repairers.She says there was a discussion about the fact that CSS was to use Parts Trader foritems of over $100 but did not have to if they were worth less than $100. She saidthat she was told that providing ASA could contribute the same level of service asCSS, there were no customer complaints, and the terms of the contract were adheredto, IAG representatives could see no reason not to continue the preferred supplieragreement with IAG.[44] In relation to Mr Dickie, she acknowledged that Mr Parberry said that IAGwould want to see the services of Mr Dickie retained. Mrs Mills says she toldMr Parberry that Mr Crone had said to them that Mr Dickie was not interested inremaining an employee of CSS should Mr Crone sell it. Mrs Mills asserted thatMessrs Parberry and Johnson said words to the effect that Mr Dickie was the mainperson they dealt with at CSS and he provided a good and quick service. Mrs Millssays she was surprised at the statements of Messrs Parberry and Johnson, but that shereasoned to herself that they were longstanding friends of Mr Dickie's and werelooking after him.[45] I accept that there would have been reference by the IAG representatives toIAG carrying out audits of CSS at this meeting. I also consider that the IAGrepresentatives would have indicated that they considered CSS to be a company thatperformed well and complied with its obligations to IAG. In relation to Mr Dickie, itseems to be common ground between all parties that Messrs Parberry and Johnsonemphasised that Mr Dickie was the main person they dealt with, and an importantperson within the company. I do not believe that it was clear to any of them thatMr Dickie was not going to be kept on by the Mills. I prefer the evidence ofMr Crone and the IAG witnesses to the effect that the meeting was general and notunduly long.Representation as to audit – analysis[46] The alleged misrepresentations must be seen in the context of the agreementfor sale and purchase. The agreement for sale and purchase is between CSS andGraeme Mills or his nominee and in the standard ADLS form. There is no wholeagreement clause. There is a specific warranty as to turnover of $2,131,352excluding GST covering the period from 1 April 2006 to 31 March 2007. There isno suggestion that this was inaccurate.[47] The specific clause relating to vendor's warranties and undertakings is in thestandard form part of the agreement, and nothing is said in relation to profitability orstaff. There is a "common employees" clause, and it is up to the purchaser as towhich employees are offered employment after settlement. There is a due diligenceclause making the agreement conditional upon the purchasers or their financialadvisers conducting a due diligence exercise on the "financial position of thebusiness to their complete satisfaction in all respects". The vendor has an obligationto provide the purchaser with full and complete access to all the books of thebusiness.[48] There is therefore no specific reference to audits or contractual obligations orthe performance of CSS, save for the turnover warranty. Nothing is said in theagreement about the importance of particular employees, although the purchaser hasthe discretion as to whether to keep them on in the new business.[49] The assertion of the Mills that there were references by Messrs Parberry andJohnson to there having been audits of CSS in the course of the 28 March 2007discussion is not disputed in any specific way by Messrs Crone, Barker, Parberry orJohnson. Mr Crone did not recall a discussion about audit, but confessed that he didnot follow the interchanges between the IAG representatives and the Mills closely.Messrs Parberry and Johnson were prepared to accept that such a discussion did takeplace. There was reference to it in the email exchanges that followed the meeting.In an email on 11 April 2008, Mrs Mills asked Mr Johnson:I know you say that all repairers are audited by IAG but I am still unclear on how IAG conduct the audits and what aspects of the repairers business areaudited on. Are any reports issued to the repairer following the audits??? Or is it secret squirrel stuff lol.Steve doesn't seem clear on the process either [50] There is a specific clause in the MVRA dealing with audit which obliges therepairer to allow IAG to inspect its records and have access to its premises for thepurposes of auditing the repairers' compliance with the agreement and the accuracyof its invoices.[51] I do not believe that the discussion as to audit was detailed. Indeed,Mrs Mills' email of 11 April 2008 indicates its general nature, and that she had anumber of queries about the details of IAG audits.[52] While Mr Dale did not suggest that Mr Crone had made statements about the audits himself, he submitted that his silence at the meeting resulted in a representation. He relied on the statement of Elias J in Des Forges v Wright2 where it was stated:Silence may constitute misleading or deceptive conduct, but whether it does is to be objectively assessed in all the circumstances [53] It is necessary to consider this submission against the two causes of action,the first contractual misrepresentation, the second breach of the Fair Trading Act. Asa general proposition, the failure to disclose a material fact which might influencethe mind of a prudent purchaser does not give rise to a right to damages under acontract.3 There is no fiduciary relationship between a vendor and purchaser.However, once a party ventures to make a representation about a matter, thestatement must be full and frank. Half truths which leave a misleading impressioncan be contractual misrepresentations.4 Under the Fair Trading Act, conduct caninclude an omission.5 However, a cautious approach to finding deceptive andmisleading conduct to arise out of silence is proper in cases where there arecommercial dealings between parties at arm's length, and purchasers can be expected2 Des Forges v Wright [1996] 2 NZLR 758 (HC) at 764.3 Bell v Lever Brothers Ltd [1932] AC 161 (HL) at 227.4 See the discussion in John Burrows, Jeremy Finn and Stephen Todd Law of Contract in NewZealand (4th ed, LexisNexis NZ, Wellington, 2012) at 381.5 Fair Trading Act 1986, s 2(2).to specifically pursue matters on which they require information or assurances froma vendor.[54] The agreement for sale and purchase between CSS and Mr Mills makes noreference at all to whether there had been any audits by IAG of CSS. However, I amsatisfied that at the meeting of 28 March 2007 in Mr Crone's presence the IAGrepresentatives confirmed in a general way there had been audits of CSS by IAG. Isthat representation to be treated as a representation by Mr Crone? While the IAGrepresentatives were not there as CSS's or Mr Crone's agents, they were neverthelessengaging in the pre-sale process in Mr Crone's presence. The situation had somesimilarities to that which arose in Des Forges v Wright, where Affco as a third partywas involved in discussions between a vendor and purchaser relating to an Affcodistribution agreement. It was held that the vendor was not liable for misleading anddeceptive conduct on the sale of the business. Unbeknown to the vendor, Affco wasattempting to dispose of an operation, and this would undoubtedly affect the turnoverof the business to be sold. However, the vendor did not know of this and it was heldthat the conduct of the vendor did not mislead or deceive the purchaser.[55] However, when a vendor with an interest in a transaction hears a statementmade by a third party about the vendor's business which it knows is erroneous, anddoes not correct that fact, the silence of the vendor may amount to a representation.The vendor is privy to the representation and the purchaser could reasonably expectthe vendor to intervene if what was said was wrong. In my view, Mr Crone's silencecan be construed as an adoption of the IAG representation. Mr Crone was theshareholder and director of CSS and was in attendance in that capacity asrepresentative of the vendor. He knew the Mills wanted information about how hisbusiness worked with CSS.[56] If Mr Crone knew that the statements were false and failed to disclose this, he was in effect becoming party to the disclosure of a half-truth. The fact that the IAGwitnesses might not have been aware that the margins were not being maintained(the opposite of the position of the third party in Des Forges v Wright) does notpreclude the existence of an actionable misrepresentation by Mr Crone or misleadingand deceptive conduct. This is because he had the knowledge and was present whenthe representation was made, and would have been able to correct it because of hisparticular knowledge.[57] However, the representation went no further than an assertion that there hadbeen audits. There was clearly no detail provided of the nature of the audits, or whatthey meant.[58] Can IAG's comments and Mr Crone's silence go so far as to extend therepresentation to the fact that CSS had not only been audited but found to be compliant with its obligations to IAG? I have concluded that that must be so. Thewhole purpose of the discussion between the Mills and the IAG representatives wasto explain the relationship between CSS and IAG, and this was before the agreementbecame unconditional so as to give the Mills understanding and comfort as to thedetail of that relationship. It must have been obvious that if the audits had shown aserious non-compliance, that would be highly relevant and might well dissuade theMills from proceeding.[59] I consider, therefore, that the Mills have made out the pleaded representationas to audit. The representation was very general. The IAG representatives did notspecify the nature of the audits or what had been done, or when they had occurred.There was just a general statement that there had been audits and the implicitconfirmation that CSS was compliant. This is confirmed by Mrs Mills' email of11 April 2007. As she acknowledges, Mr Crone himself was not clear on what theaudit process had been. He had done no more than accept that there had been audits.[60] I consider below the parameters of the representation and whether it was amisrepresentation.6Representation as to compliance – analysis[61] Paragraph 5 of the MVRA sets out the service charges that a repairer willcharge IAG. The first two sections clearly have panelbeaters in mind. Indeed it wascommon ground that the form of agreement was predicated on the basis that the6 See [91]–[98].repairer would be a panelbeater. However, the agreement was signed by CSS andwhile CSS was not a panelbeater it is quite clear that it was a binding agreement.The provisions that can be sensibly applied to CSS as a repairer focussing on internalrepairs can be taken to have been intended to have contractual effect.[62] In relation to the service charges, the third section of paragraph 5 relates toparts. It is provided that service charges will be calculated on the applicable repairelements on all new and used parts required to complete the repair, including freight.It is stated that all parts are to be purchased using the Parts Trader parts procurementsystem or to be approved by IAG. It is stated:New and Replica parts – cost price (including all discounts and rebates) plus 10%.Used parts – cost price (including all discounts and rebates) plus 20%.[63] It is stated at paragraph 5.2:Costs of Service: the maximum cost of service to be charged by the MotorVehicle Repairer will be the amount specified in the Service Order as agreedby IAG NZ.[64] Under paragraph 5.5, the service charges plus GST will be the total amountpayable by IAG to the motor vehicle repairer for the relevant services, less anyspecified excess.[65] The MVRA was not referred to in the agreement for sale and purchase. TheMVRA form of agreement for 2004, unsigned and unfilled in, had been given toMrs Mills at the 15 March meeting. On a date before the 28 March 2008 meeting, acopy of the MVRA that had been entered into on 27 July 2007 had been forwardedto Mrs Mills.[66] Mrs Mills asserted, and I did not take Messrs Parberry and Johnson to disagree, that the IAG representatives stated at the 28 March meeting that all suppliers of IAG were contractually required to use Parts Trader unless given leavenot to do so by IAG. She accepts that she had been told by Mr Crone that CSS wasnot obliged to use Parts Trader for items under $100. Mr Crone stated that the cut-off figure was $120.[67] I do not consider that there was any discussion about service charges ormargins with IAG at any of the March meetings. I do find, however, that it was therepresentation of the IAG representatives and Mr Crone that CSS in its dealings withIAG was compliant with its contractual obligations. Those contractual obligations,and in particular the 10 and 20 per cent margins for non-audio parts, were clearlyexpressed in the MVRA. The existence of those margins was recognised byMr Crone in his evidence.[68] The representation went no further than that CSS was in general termscompliant with its contractual obligations. There was no specific discussion aboutthe MVRA or particular margins. The statement did not mean that on every occasionthe profit margins were warranted as being exactly the 10 and 20 per cent set out inthe MVRA. Nevertheless, if the represented margins were being significantlydisregarded I would regard that as a misrepresentation.[69] Margins were an important factor in achieving profit. Obviously theprofitability of CSS's business was of importance to the Mills. If that was onlybeing achieved by a significant non-compliance with the agreement by overchargingof IAG by CSS, that would be an important matter. Assuming that the Mills did notknow about the overcharging and would have therefore charged at the statedmargins, rather than the CSS margins, ASA would find itself running at aconsiderably lower profit than that expected.[70] There was one recognised variation to the obligation to charge the 10 and 20per cent that was discussed. This was in relation to stereo parts. Mrs Mills acceptedthat Mr Crone had communicated this exception to her. This exception to stereoparts was referred to in this way by Mrs Mills:[Mr Crone] told us that car audio parts were to be charged out at a 20%discount based on a 50% mark-up.[71] Mr Crone's evidence was that he had explained prior to settlement that themargin on audio equipment for IAG work was the recommended retail price less 20per cent. Of the various witnesses who spoke about the discount arrangement foraudio parts between IAG and CSS, the one who appeared to me to have the bestrecollection was the IAG area manager for assessing, Mr David Bright. He wasclear that the arrangement between IAG and CSS for audio equipment was retail less20 per cent. While some of the other IAG witnesses were more equivocal, I amsatisfied that was the arrangement. I am also satisfied that is what was expressed byMr Crone to Mrs Mills, without any particular gloss as to how the 20 per cent wasreached. I consider her claim that it was a 20 per cent discount based on a 50 percent mark-up was based on a pre-2000 document with AA Insurance that she foundon Mr Crone's computer. This document, which related to a different customer at adifferent time, has been wrongly adopted by her as indicating a misrepresentation.[72] Mr Crone accepted that generally for non-audio parts, a margin of costs plus10 per cent on new parts and costs plus 20 per cent on used parts was observed. I donot think that this aspect of charging was ever actually discussed between the parties,unlike the audio margin, which was. Nevertheless, in representing that CSS wascompliant with its contract with IAG, Mr Crone did in effect represent the MVRAmargins, save for audio equipment.[73] I conclude therefore that Mr Crone's representation that CSS was compliantwith the MVRA involved the implicit representation that new parts had been chargedat cost plus 10 per cent, and used parts had been charged at cost plus 20 per cent.The MVRA did not relate to audio equipment where the charging regime wasrecommended retail less 20 per cent. I note that Mrs Mills observed in her evidencethat she was not sure there was much difference in practical terms between herformula and that which Mr Crone says he expressed. For reasons that I set outbelow,7 I believe there is a considerable difference in the two varying formulae.[74] I also observe that there was some variance between what Mr Crone said wasthe arrangement about Parts Trader (parts worth over $120) and that expressed byMrs Mills (parts worth over $100). The position of both received somecorroboration from the evidence of other witnesses.[75] I record that when there is a conflict of evidence between Mr Crone andMrs Mills I prefer the evidence of Mr Crone. I found Mrs Mills eager to be an7 See [121].advocate for her own cause, and my overall impression was that I could not always rely on her testimony. I give more detailed reasons for this later in the judgment. In contrast, I found Mr Crone to be frank, willing to concede points against him, and to be in general terms a reliable witness.[76] Mr Crone denied it was represented that discounts and rebates should bepassed on to IAG, contrary to the words of cl 5.1 of the contract. The evidence ofthe IAG witnesses was rather vague on this aspect of the arrangement, but I was leftwith a strong impression at the end that they did not expect rebates and discounts tobe passed on.[77] I am satisfied that this was the arrangement between IAG and CSS, and thatthe obligation to pass on rebates and discounts was waived by IAG. Although noparty gave specific evidence on the point, I consider it likely that Mr Crone wouldhave passed on this aspect of the arrangement to Mr Mills prior to settlement whenhe set out how the CSS costing systems worked. I have no specific evidence on howmuch the rebates and discounts amounted to per annum, but the impression I have isthat if audio equipment is excluded, the amount was small and de minimus.[78] In summary, I find that the statements set out in paragraph 4(a), (d) and (e) ofMr Dale's memorandum have been proven to have been made by Mr Crone andCSS. I deal with whether they were misrepresentations in the section after thatdiscussing Mr Dickie.[79] There is, however, as I have set out, a gloss to this. The profit margins onparts were costs plus 10 and 20 per cent, but in relation to audio parts the profitmargins were represented as being recommended retail less 20 per cent. I considerbelow whether those representations were misrepresentations or deceptive andmisleading.88 See [99]–[146].The alleged representation that Ms Dobbie was the only important employeeand Mr Dickie was inessential[80] This allegation had a curious history. It was not in the earlier versions of thestatement of claim, and was only inserted in the third amended statement of claim.Mr Dale explained its late arrival on the basis that it was a reaction to the assertionsin the defendants' briefs as to the importance of Mr Dickie. Mr Crone, Ms Dobbieand the IAG witnesses had indicated in their briefs that it was a serious mistake onthe part of the Mills to have dispensed with Mr Dickie's services. Mr Dale assertedthat if indeed Mr Dickie's departure was a cause of the business not succeeding, thenthe counter had to be that the importance of his position was misrepresented byMr Crone. I have struggled with this reasoning as Mr Crone did not assert in hisevidence that Mr Dickie's retention was essential, although he did emphasise theimportance of Mr Dickie to CSS.[81] I found Mrs Mills' evidence on the topic of the importance of Mr Dickie to bevague and contradictory. She asserted in her brief of evidence that Mr Dickie hadbeen described by Mr Crone as lazy and wishing to be on his boat, and thatMs Dobbie was the only important employee. However, she acknowledged that atthe meeting with the IAG representatives on 25 March 2007 it was made clear to herthat IAG valued its association with Mr Dickie and would be concerned if he was nolonger working for CSS. Thus, even if she did have the impression that Mr Dickiewas not important, that impression would have been dispelled prior to the agreementbeing declared unconditional by the specific statements of Mr Dickie's importanceby the IAG representatives.[82] In any event, I do not consider that Mr Crone made any representation aboutMr Dickie's lack of importance. As a matter of fact, there is no doubt that Mr Dickiewas an important employee. He was not necessarily an essential employee. Whilehe was good at his job and had an excellent relationship with the IAG assessors, andpresumably other assessors as well, the right replacement could presumably haveassumed the same work levels and association as Mr Dickie. It seems to me that allof this was entirely obvious to the Mills and confirmed by the IAG representatives.It does not make any sense for Mrs Mills to suggest that Mr Crone said Mr Dickiewas unimportant and then sat by while IAG emphasised that he was important.[83] I am satisfied that Mr Crone did not make statements seriously denigratingMr Dickie, or his importance to the business, and what Mr Crone heard from theIAG witnesses was consistent with what he had said to the Mills. Ms Dobbie who,for reasons that I set out below,9 I found to be a sound and reliable witness, alsoconfirmed that she and Mr Crone had emphasised the importance of Mr Dickie.[84] It is my perception having heard Mr and Mrs Mills that they were veryconfident about Mr Mills' ability to run the business without Mr Dickie. Mr Millswas running his existing car repair business, Onehunga Car Clinic, in a satisfactorymanner and he and Mrs Mills assumed that he would be able to do the same at CSS.In my view they either consciously or subconsciously put to one side the indicationsof Mr Dickie's importance because they wanted a business that Mr Mills could runhimself, and thought that he would be well able to do whatever it was that Mr Dickiewas doing. The Mills assert that they would not have purchased the business ifMr Dickie had to be retained. However, they wanted to buy the business andpersuaded themselves, contrary to the suggestions of Mr Crone, Ms Dobbie and IAGrepresentatives, that Mr Mills could immediately do his job.[85] In support of the plaintiffs' claim that it was represented Mr Dickie was notan important employee, reliance was placed on an email of 12 April 2008 thatpurports to be from Mr Barker to Mrs Mills. It contained this paragraph:From what Steve told me it is Jackie that has the most contact with the Assessors because Sean is so lazy and doesn't deal with things. Jackie isalways left to clean up the mess. I was surprised that Mike says Sean is theperson they deal with. Brendon is right it was pretty cheeky telling you IAGwould only approve the re-assignment if you keep Sean on. The old man ispretty sure that IAG cant make that a condition to get the contract. I thinkyou are right they are just looking after their mate with a boat.[86] Mr Barker in his initial brief accepted that he sent this email, but in asupplementary witness statement denied doing so. He annexed a copy of the sentitems printout from his computer which summarised all of his emails from theperiod. The index showed that no email was forwarded from his computer toMrs Mills on the date in question. Mr Barker made the point that he had no idea ofthe identity of certain persons referred to in the email. He thought that under no9 See [153]–[156].circumstances would he have made comments of the general kind contained in theemail.[87] Mr Dale cross-examined him with some force on the basis that he must havebeen asserting the email to be a forgery. Mr Barker responded that he did not wish tomake any such claim, but maintained his strong denial of having ever sent the email.[88] I am left in considerable doubt as to whether indeed Mr Barker did send thisemail. It seems to me to be expressing a strong view on a CSS employee that itwould not be expected that a sales agent would express. I accept Mr Barker'sassertion that he did not know a "Brendon" (who turned out to be Mrs Mills'lawyer).[89] Mr Barker seemed to me to be a competent and careful agent and I place weight on his assertions that he would not have made the sort of comment contained in the quoted paragraph. His computer does not show the email as having been sent. The email does not fit naturally into the sequence of correspondence and there wasno actual reply to it. In the end I am not satisfied that Mr Barker sent this email andI put it to one side.[90] Thus, I do not find the representation set out in paragraphs (b) and (c) ofMr Dale's memorandum to be made out. I will now consider whether therepresentation that CSS had been audited and was compliant with its contractualobligations has been shown to be a misrepresentation. It is convenient to considerthe two elements of audit and compliance separately.Was the representation as to audits of CSS a misrepresentation?[91] I have found that there was a representation by Mr Crone that CSS had been audited.[92] In my view this general representation was true. It was not amisrepresentation. There had been IAG audits of CSS. There was a specific audit ofCSS as to its charging by IAG in August 2003. There is a CSS audit report dated19 August 2003 signed by Mr Ray Davie of IAG. Clearly a number of files had beeninvestigated and the actual cost of parts to CSS checked. It was recorded that there was a lack of proof in relation to some valet charges. Accounts in relation to other items such as stereo items were checked. It was observed that on some occasions CSS would add a percentage amount onto retail prices and that there were some concerns about some brackets and other small items. It was also observed that in relation to some new parts purchased, a percentage of the discount was passed on to IAG. Also, on occasions mark-ups of less than the permitted 20 per cent on secondhand pricing were billed. In a further report of 21 August 2003 it was recommended that the status quo with CSS be maintained.[93] It became clear from the evidence of Mr Davie that although the 2003 auditwas not comprehensive, quite a number of invoices were checked as part of thatexercise to ensure that the proper margins were being observed by CSS, and thatthese were the 10 and 20 per cent margins already referred to. While there weresome minor issues, CSS was compliant.[94] Mr Parberry of IAG made it clear that non-compliance with the requiredmargins would not have been tolerated. There was a three strikes policy in place sothat after three instances of non-compliance there would be termination.[95] The 2003 audit was some five years before the agreement. There is nowritten evidence of another specific audit of this type in that intervening period.However, I am satisfied from the evidence I heard that there were ongoing auditscarried out by specific IAG audit teams. The evidence of the various IAG witnessesvaried rather as to when and how these audits were carried out, and it was difficult toget a clear picture. There were at various times specific audit teams employed inAuckland by IAG in the period following 2003. On occasions there would be auditsof invoices where the costs of parts were checked. Often, however, the audits wouldbe what were called "soft" audits, checking that the processes being carried out onsite by CSS repairers were satisfactory, rather than the charging margins.[96] Any full and formal audit would have been likely to have given rise to afurther written report and there were no other written reports other than the 2003reports. However, I am satisfied on the evidence I have heard from the IAGwitnesses that there would have been occasional checks of specific jobs, which could be regarded as audits. Further, I have no doubt that there were through the relevant period specific general audits where matters of process were examined.[97] The representation as to audit was uncomplicated. Messrs Parberry andJohnson stated that it was an aside in a meeting where many topics were touched onin a general way. It was that CSS had been audited with no specificity as to how orwhen, or whether the audits were of the invoicing or the repair processes. I considerthat Mr Dale tried to make more of the representation than was warranted when hesuggested that the lack of proof of specific audits of the costing margins of CSS inthe several years prior to settlement proved a misrepresentation. Such a conclusionwould involve considerably overstating the actual representation. That was no morethan that there had been audits. As Mrs Mills recorded at the time in her email of11 April 2008, Mr Crone was not clear on the nature or process of those audits. Hejust accepted that CSS had been audited by IAG (but not in any specific manner orfor any specific purpose). This was true.[98] Accordingly this misrepresentation is not proven.Was the representation as to compliance a misrepresentation?[99] The bulk of the evidence during the trial focussed on whether there wascompliance with the represented margins. Mrs Mills set out to prove thatconsiderably higher margins had been enjoyed by CSS than those represented. CSShad used the "Mind Your Own Business" business management software programme(MYOB). MYOB managed the purchase of parts for each job at cost price and thenthe individual invoice for that job to the customer. CSS used a purchasing systemcalled Parts Trader, and by 2008 was using a programme called ORM to report withIAG on jobs. ORM had a facility to automatically calculate margins on parts, andthis can be seen on some of the ASA invoices. The programme does not appear tohave been used by CSS and the margins are not shown on their invoices.[100] Mrs Mills claimed that for the first time in June 2010 she discovered unjustified or unauthorised transactions by CSS and decided to review the invoicingto insurance companies, and in particular to IAG. She has over the last few yearsused the information in CSS's MYOB records to create spreadsheets allegedlyshowing the difference between the cost of parts and services to CSS and theeventual price charged by CSS to its customers.[101] Mrs Mills initially chose invoices from the 2007 financial year.Approximately 3,500 invoices from various insurance companies CSS did work forwere reviewed by her in analysis that took about eight months, she says at 16 hoursper day, seven days a week. She claims that 800 of these invoices contained largeirregularities with inflated margins of up to 300 per cent or more, and another 400had lesser but still significant inflated margins. She then created an excelspreadsheet and began the process she says of auditing every CSS invoice to IAG forthe 2007 financial year. She audited a random selection of invoices from 2004 to2008 as well.[102] Mrs Mills claims that her analysis showed that parts charged by CSS in mostinstances showed well in excess of the 10 and 20 per cent margins. Also she assertedParts Trader had often not been used from 2004 through to 2008. She claimed thatCSS often made profits of well in excess of 100 per cent on car audio equipmentinstead of the 20 per cent. She was critical of the margins charged on vinyl repairsand the processes adopted for panelbeating, decodes for security systems, andinsurance excesses.[103] Mrs Mills, relying on her original spreadsheets, has given evidence that shecame up with a net margin of 52.3 per cent (including 100 per cent margin mark-upon each part or service charged for without a purchase order). In relation to thesecond spreadsheets, she asserts that if the default 100 per cent is not charged themargin was 44.2 per cent. Either way, she deposes that this is far more than the 10and 20 per cent margins.[104] The exact amount of the alleged overcharging has been left somewhatunclear. Mrs Mills originally alleged that there had been overcharging in 2007 of$138,179.07. Mr Hagan asserted in his evidence-in-chief that on Mrs Mills' latestcalculation, deleting the assumption of a 100 per cent mark-up where there was noproof of purchase of an item, the overcharging was $86,000 for the 2007 year.Mr Barry Jordon, a partner of DeLoitte called by Mr Crone, has contested this figure and says he is unable to understand how it has been reached. No explanation has been given to me as to how it has been calculated.[105] The five accountants have helpfully filed a joint memorandum on the issues.They agree that if CSS had been applying incorrect margins this would have directlyaffected its reported profit. They also agree that MYOB was not fully utilised nor ajob costing system.[106] Mrs Mills' spreadsheet analysis is supported by a Ms Tania Snowdon, anAuckland accountant who runs her own accounting practice and amongst otherservices provides accounting assistance to Mrs Mills' accountant Ms Paula Kearns.Ms Snowdon did work for Mrs Mills from July 2009. This year she was retained byMrs Mills to review the work that she had carried out on the spreadsheet, showingthe margins. Ms Snowdon has spent 37.4 hours checking 500 selected invoices forthe period 1 April 2006 to 31 March 2007. She has also spent further time workingwith Mrs Mills clearing queries and review points. She reviewed the sales invoice toIAG on the MYOB ledger, and then checked the cost of every related purchase orderto ensure they were recorded correctly. She set out in detail the further steps shetook to carry out the check. Ms Snowdon agreed with Mrs Mills' conclusions inmost cases as to the margin.[107] The Mills also called a chartered accountant, Mr John Hagan, who gaveevidence in support of Mrs Mills' spreadsheet analysis. He has reviewed a sample of100 invoices, selected by Mrs Mills. He has concluded that in every case there hasbeen evidence of overcharging. In nine examples he thought the errors relativelyminor, in 18 there were no purchase orders indicating that CSS had used parts instock, and in the other 73 he was satisfied that they were examples of seriousovercharging. He went through five specific examples explaining why he believedthey showed charging in excess of the 10 and 20 per cent margins.[108] Mr Hagan did not consider that the instances of overcharging could havereasonably been detected in the course of a due diligence exercise, as such anexercise would not have gone into sufficient detail.[109] I note that in relation to the 100 invoices that Mr Hagan analysed, all werechosen by Mrs Mills. She also wrote a preliminary analysis of the invoices forMr Hagan's assistance.[110] Mr Crone in his evidence rejected Mrs Mills' findings in her spreadsheet. Hemade initially some broad points. For the relevant period during the 2006/2007 year,the MVRA did not apply and Parts Trader was not used to source secondhand parts.The majority of the non-audio parts were less than the $120 required for Parts Traderto be used in any event. Generally in any invoice the most expensive item was theaudio part or parts, and in particular the CD player or stereo system.[111] In relation to stereo equipment, the highest priced item generally in theinvoices, it was the recommended retail price that set the benchmark against whichthe 20 per cent discount was calculated. Mr Crone asserted that Mrs Mills and theexperts have not appreciated this and have not correctly assessed the recommendedretail price for audio items. Mrs Mills' spreadsheets do not reflect the true position.[112] He went through various examples from Mrs Mills' spreadsheets pointing outcomplications that she has not picked up, such as the application of the insuranceexcess. He referred to examples where Mrs Mills has made the wrong assumption asto what part was used and the price paid for it, in relation to particular IAG jobs.[113] He pointed out that stereos were purchased frequently in bulk and not atretail. The price at which CSS was able to purchase the stereos in such instanceswas immaterial to the amount that CSS was allowed to charge IAG for thecomponents. He pointed to examples of Mrs Mills not realising that there had beenan adjustment made on the invoice where a client had chosen a different stereo tooffset the excess payable by the insured to IAG. He observed that Mrs Mills hadrelied on the MYOB system which averages the costs of a particular item. This,however, was not the formula adopted for the pricing of stereo units to insurancecompanies where the formula was the recommended retail price less 20 per cent.[114] In relation to the 100 invoices that have been examined by Mr Hagan,Mr Crone points out that 79 of those 100 were entered into prior to the introductionof the MVRA. Of the five invoices specifically analysed by Mr Hagan in his witness brief, he provided a detailed response, item by item, setting out what he says are misconceptions. Over some 22 pages Mr Crone analysed the spreadsheet and provided answers to points made by Mrs Mills and sets out what he claims are errors or misconceptions by her.[115] Mr Crone's accountant, Mr Callum McDonald, gave evidence but did notdeal in detail with the issue of margins. Mr Crone called two specialist accountants,Mr Dhananjay Basrur, a chartered accountant practicing on his own account whowas previously a partner of Ernst and Young (NZ) and Howarth PorterWigglesworth, and Mr Jordon.[116] Mr Basrur by a general comment observed that in the absence of recourse tothe original invoice for the purchase of parts and labour listed in the spreadsheet, itwas not possible to support the conclusions and assumptions made by Mrs Mills inher spreadsheet to support the allegations of overcharging. Mr Basrur consideredthat there were a number of errors in methodology adopted by Mrs Mills. Aparticular factor that he emphasised was that her analysis does not recognise thatmany of the parts could have been used from the stock held by CSS and weretherefore not purchased by CSS using a purchase order or entered on the MYOBsystem. Often it was not feasible to trace the cost of a part used in a job to anindividual source.[117] He claimed that it is not clear how Mrs Mills has matched the parts included in the purchase orders and the sales invoices. Stock had never been accuratelyentered into the CSS purchase order system and this had led to errors in analysis.Mr Basrur was critical of Mr Hagan's analysis, asserting that Mr Hagan had notindependently verified the evidence of Mrs Mills or undertaken his owninvestigation. He did not agree that there is clear evidence of CSS overchargingIAG.[118] Mr Jordon considered the spreadsheet prepared by Mrs Mills in its entirety,and conducted an analysis of a sample of approximately 35 of the 100 invoices thatwere supplied by Mrs Mills with the background information. On his analysis,Mrs Mills was alleging an overall mark-up on the invoices reviewed by her of 70.9per cent. He summarised what he considered to be the following inaccuracies inMrs Mills' analysis:(a) Inconsistent product descriptions. He asserted that Mrs Mills hasassumed that products were the same on both the sales invoices andpurchase orders when they had different descriptions and could notnecessarily be co-related.(b) Mrs Mills had used the "last purchase price" to determine costs wherethere was no purchase order for a specific item. The price that wasshown could have been recorded at any time, and there was no audittrail available as to who entered the last purchase price or when it wasentered.(c) Also, IAG has apparently not been charged for certain items, and has shown items that were invoiced to IAG at the same cost or less. Hefound this to be inconsistent with Mrs Mills claims that CSS wasfraudulently overcharging IAG and this made him doubt the reliabilityof the data used by Mrs Mills. It was not consistent that CSS wouldundercharge if it was carrying out a consistent overcharging policyand he gave examples.(d) He also pointed out that many of the purchase orders referred to byMrs Mills were for a date that was close to the invoice date, and thatsome were for dates several months earlier or even later than the dateof the invoice. He was not clear how it could be said that these wereappropriate purchase orders to apply to the invoice.(e) He observed that the assumptions that she made to establish discountswere often unjustified and it was not clear what percentage of totalsales the discount comprises.[119] Mr Jordon was also critical of Mr Hagan's analysis. Mr Hagan's instructionswere limited and he restricted his review to the 100 invoices and had not examinedthe source documents and financial statements or conducted his own financialanalysis. In his conclusion, Mr Jordon noted Mrs Mills assumed that she was able totrace the cost of items, when often they could not be traced. He said she should haveused an alternative methodology. She should have started at a higher level,comparing an average weighted cost for a particular period to the sales of the item toIAG for the same period and then determined the reason for the anomaly. He did notconsider that Mrs Mills' analysis established that IAG has been overcharged or thathigher mark-ups than those agreed have been applied.Mrs Mills' spreadsheet – my views[120] Mrs Mills in asserting that rather than being a straight 20 per cent off retail, stereo equipment was supplied based on a 50 per cent mark-up and then 20 per centoff that, was relying on documents she found on the CSS computers relating to AAInsurance, which contained that formula. However, there was no evidence that this1999 document, relating as it did to a different insurance company, had anyrelevance to the actual position with IAG. In my assessment she has seized on thisdocument to help justify a position that it was Mr Crone's fault that ASA failed. As Ihave set out,10 I prefer the evidence of Mr Crone, supported as it is by Mr Bright, onthe CSS margin on audio equipment supplied by IAG. It was 20 per cent offrecommended retail. I accept Mr Crone's evidence that this is what he toldMrs Mills.[121] Mrs Mills and the accounting witnesses were all cross-examined extensivelyon the spreadsheets and individual examples. Mrs Mills had not applied the formulaof 20 per cent off recommended retail for audio equipment. She said that it madelittle difference to the end result. I do not accept this. I agree with Mr Crone thatthere is a significant difference between a calculation based on recommended retail,less 20 per cent, as against a calculation based on cost plus 20 per cent. There is acapacity for a much greater degree of profit where the charge is 20 per cent off retail,as a recommended retail price can be expected to be considerably more than 20 per10 See [61]–[76].cent above cost. The difference is even greater when compared to the price of new parts at 10 per cent above cost. It seemed to me that Mrs Mills did not understand the difference and was generally unable to reliably identify the retail cost of stereo units. This was a considerable deficiency in her approach.[122] Under cross-examination there were indications that Mrs Mills reached conclusions that a particular part was used for a particular job on evidence that wasfar from definitive, and where there were alternative explanations. It also becameclear under cross-examination that there had been considerable changes to herspreadsheets during the process of gestation. I developed an overwhelmingimpression that throughout her investigation she was not being objective in hersearch for a connection between a part and an invoice. She sought the explanationwhich best suited her theory that there were mark-ups well in excess of those agreed.This was seen, for instance, in her initial spreadsheets where she attributed 100 percent mark-up where she could not determine a cost. At the hearing she dropped thispart of the claim. Under cross-examination she conceded that she had put in priceswhen she did not know what particular model of item was used. Often it seemed tome she would just make an assumption of a connection between a part and aninvoice because it suited her theory of the case. This was not always the case. Someconnections between invoice number and date, and part number and type weredemonstrated. But I was left with no confidence that this was consistently the case.Also when a connection was shown, the margins were often not significantlydifferent from the 10 per cent and 20 per cent of retail margins that were the agreedmargins.[123] Mrs Mills was shown under cross-examination to have on occasions madeassumptions about the cost of a part and failed to realise that in terms of the invoiceto IAG there were additional parts as well that had to be included and were part ofthe charge. Where she could not find a source document, she made an assumptionthat there had been an outsourced job which should be in the system, and reached theconclusion that there was an excessive margin. I did not find this reasoning at allconvincing. There were also occasions when Mrs Mills had not taken into accountthe fact that a particular part had to have outwork for which there was a charge.[124] She was shown to have wrongly assessed the recommended retail price foraudio equipment. It became clear to me in cross-examination of Mrs Mills that shegenerally did not know what the recommended retail prices of the particular stereoitems were. Yet this did not stop her from making assessments of margins that shesimply could not make without that information. Instead, she would try to form anassessment based upon what particular items had cost, which might have little to dowith the recommended retail price.[125] I compare Mrs Mills' responses to those of Mr Crone. With the responses ofMrs Mills it was my perception that she was being an advocate for a particularposition, namely that the agreed discounts had been considerably exceeded. WithMr Crone I did not get the sense that he was pushing any particular position. Myperception was that he was struggling with the accounting detail, but answering asbest he could. On occasions when pressed he would readily concede a point. On theother hand he remained adamant that as a matter of general principle the IAGmargins were maintained and despite concessions on a few specific instances wherethe margins appeared to be over 20 per cent, I found his evidence to be believable.The fact is that when reconstructing small transactions that took place approximatelyseven years ago, involving the application of parts that would often come from alarge and uncatalogued inventory of stock, precision was impossible. There wasnothing in Mr Crone's answers that led me to doubt his honesty, or the general thrustof his point by point detailed refutation of the invoice evidence.[126] As to the evidence of the four accountants who dealt with the issue, I preferthe opinions expressed by Messrs Jordon and Basrur to those of Mr Hagan andMs Snowdon. I confess that I have concerns that Mrs Mills has fed the accountantsshe retained the invoices that they were to check (although I appreciate that this maynot have occurred in relation to Ms Snowdon). I do not have confidence that theyhave been given or found truly representative invoices or material to work with. Incontrast, I found the analysis of Mr Crone's accountants, and in particular the pointsmade by Mr Jordon which I have set out, to be cogent and persuasive. Further,Mr Hagan and Ms Snowdon did not address the fact that the spreadsheets worked offcost plus margins, while the audio equipment mark-ups should have been calculatedon recommended retail less 20 per cent.[127] I record that I do accept an aspect of Mr Dale's submissions on the evidenceof Mr Crone and the accountants. Mr Basrur (and on occasions Mr Crone) appearedto me to erroneously place weight on the fact that the MVRA was signed on 27 July2007, and prior to that there was no written contract between CSS and IAG. I agreewith Mr Dale's submission that this is irrelevant, as both IAG and CSS saw theMVRA as no more than confirming the existing arrangements and the major terms ofthe MVRA were by oral agreement in force and effect between CSS and IAG in theyears prior to 2007. However, I emphasise that the MVRA did not refer to thearrangement in relation to the supply of audio equipment, which was for the chargeto be recommended retail less 20 per cent.[128] Mr Dale was critical of Mr Crone and CSS for failing to have completerecords. I consider that criticism unjustified. Mrs Kearns in her due diligenceassessment was not critical of the record keeping of CSS. Nor were the otheraccountants. I have no doubt that when CSS was operating Mr Crone was able torespond effectively to queries of an audit nature, and indeed appeared to do so in2003 and to Ms Kearns. It is understandable that his record keeping was notdesigned for audits long after the event.The accuracy of Mrs Mills' spreadsheet – other factors[129] There were a number of other factors which support Mr Crone's claim thatCSS observed the IAG margins.Audits[130] I have already found that there was a 2003 audit by IAG of CSS invoicing,11and other checks on occasions, although it would be going too far to say they werefull audits. In the 2003 audit, CSS was found to be generally compliant. There arelikely to have been other checks carried out. There was also, as part of the duediligence process, a check by Ms Kearns on 13 invoices chosen at random in 2008,as part of the due diligence process. The invoices were for the month of February11 See [27]–[45].2008, and it can be expected that her checks were rigorous, given that she acted for the Mills. She found the margins to be compliant with those set out in the MVRA.[131] It would be surprising if both the random audits of IAG and Ms Kearns hadnot revealed overcharging of the level alleged by Mrs Mills, if in fact there was suchovercharging. She is alleging systematic and extensive overcharging. It would havebeen a most unlikely coincidence in relation to those undoubtedly independentchecks, that it just so happened in respect of each such audit CSS had used the rightmargins. The IAG and Kearns checks are therefore independent evidence thatcorroborate Mr Crone's evidence that CSS observed the IAG margins. I cannotreconcile them with Mrs Mills' claim of consistent overcharging.Improved gross margin by ASA[132] Further, it is clear that after ASA took over the business from CSS the grossmargin in on its sales actually improved. The gross margin increased eight per centfrom 45 per cent to 53 per cent. This is inconsistent with CSS having being grosslyovercharging IAG and other insurers. If CSS had been grossly overcharging, itwould have been expected that when ASA took over and commenced chargingcorrectly, it would have suffered a drop in margins. The opposite happened. Thefailure of the business did not have any apparent connection to a drop in margins. Itarose from a severe drop in turnover.[133] Mr Hagan suggested that a possible explanation for the improvement inmargins by ASA was that the poor stock records of CSS had meant that there was agood deal of unrecorded stock which enabled CSS to enjoy the increased margin. Ido not accept this explanation. I do not think it likely that CSS would have allowedits stock to be significantly understated and therefore undervalued on sale. Further,the level and consistency of the improved margins is not consistent with thisexplanation. The improving gross margin continued right through until 2010. It isalso significant that for a period after settlement the level of ASA's turnoverattributable to IAG remained the same.Assessors involved in all transactions[134] Further, I consider it highly unlikely that the assessors, of whom there were aconsiderable number, could have not realised that IAG was so grossly overchargedand thus tricked for so long. After all, part of the assessor's function was to ensurethat CSS was charging IAG in compliance with its contractual obligations. Theywere experts in the cost of repairing cars. Although they would not have known theactual cost of every part, it would have been part of their job to have a generalknowledge of the prices of car parts. The fact that on occasions when under cross-examination particular IAG witnesses may have not given the correct informationabout car parts does not dissuade me from my view that by and large the assessorscould be expected to be experts in the price of parts. It is not surprising that after sixor seven years it would be difficult to recall the price of a particular part at aparticular time. In any event, it was my general impression that as a whole theassessors had a good understanding of the cost of parts. I think it highly unlikelythat all the assessors could have been fooled for all of the time.[135] Four IAG witnesses involved in assessing were called by CSS. It is correctas Mr Dale has pointed out that there were many other assessors who had directexperience in dealing with IAG, who were not called. However, I heard enoughfrom the four persons from IAG who were all involved in the assessment process inone capacity or another, to convince me that IAG employed careful and soundassessors who took their duties seriously. I reject the possibility (not in fact raised byMr Dale) that the assessors might have been privy to and compliant withovercharging to the detriment of IAG. That does not seem to me at all likely giventhe quality of the IAG witnesses called before me, and the number of them.Reasons for failure of ASA[136] In my view the failure of ASA had nothing to do with the alleged misrepresentations and overpayments. I consider that there were four reasons for itscollapse.[137] The first was that it was undercapitalised, and faced overheads that were unrealistically high. The Mills borrowed the entire purchase price of $700,000 onthe basis that it was to be repaid within five years and at an interest rate of between11.3 per cent and 10.68 per cent. On a one year fixed rate of 11.3 per cent perannum, the monthly principal and interest payments on this borrowing alone came to$15,327.62, or approximately $183,000 a year. That sum alone was more than theentire surplus before depreciation of the business for the preceding year ending April2007 of $177,468. Mrs Mills' business plan assumed total sales of $2,400,000 and anet cashflow of $1,274,373. That involved an increase in turnover and a colossalincrease in profitability. I consider that Mrs Mills miscalculated ASA's ability toexpand the business. CSS had been in my view well run by Mr Crone, with the helpof Mr Dickie and Ms Dobbie. It would not be easy to improve its performance.ASA commenced its operation with overheads that it could not realistically meet.[138] The second reason the business failed is that in my assessment, having heardcompeting views put forward by a number of witnesses called by both sides, anumber of the decisions made by the Mills were unsound. I am satisfied that CSShad well developed goodwill both in the insurance industry and with its generalcustomers and the public. The change of name derogated from this. That damagewas then compounded by the change of premises from a known and high profile siteto a smaller new site off the main road.[139] A third reason was the loss of an efficient and harmonious working team. Having heard the IAG witnesses and Mr Crone and Ms Dobbie, I have no doubt that CSS worked generally in a harmonious and efficient way. It had good staff. It didnot help ASA that Mr Dickie was not retained. However, other key staff were alsolet go as ultimately was Ms Dobbie. The Mills were not successful in maintaining ahappy efficient working team, or in building a new one.[140] Mr and Mrs Mills do not seem to me to have been successful in establishing agood rapport with the assessors for the insurance companies. I doubt whether theypresented such an appealing face to the public as did the CSS staff. In my viewMrs Mills by charging insurance companies for very small parts, such as screws, andby her very assertive general manner of dealing with third parties, did not endearherself to assessors and the public. Mr Mills also would not have been as successfulas Mr Crone and Mr Dickie at providing a relaxed and empathetic service. Insummary on this aspect, the Mills by their poor staff management, diminished the goodwill.[141] The fourth reason for the drop in turnover was the 2008 global financial crisis, which unfortunately for the Mills coincided with their takeover. I have no doubt that the trading environment became harder than before.[142] The net result of these four factors was that ASA's turnover, rather thanincreasing as anticipated by Mrs Mills, dropped. Sales for the 2007 financial year for CSS were $2,131,000 and for 2008 $1,807,000. Sales for the 2009 financial year for ASA were $928,885 and for 2010 $706,035. While, as I have observed, the gross margin improved under ASA, the catastrophic drop in turnover led to the actual gross profit diminishing from $813,000 for CSS in 2008 to $592,000 for ASA in 2009, and $364,000 in 2010. Clearly such plummeting gross profits, coupled with the yearly loan overhead of $183,000 of ASA (of which, for comparison, CSS had none) were unsurvivable. There were significant operating deficits. This is why ASA failed.[143] This works against Mrs Mills' assertions that CSS had been chargingexcessive margins to IAG, and that this stopped when the Mills took over. Marginsactually improved when the Mills took over, and the difficulties experienced by ASAwere due to the three factors I have referred to, which cannot be blamed on CSS orMr Crone.Conclusion on compliance[144] The onus was on ASA and the Mills to show the margins charged by IAGwere in excess of those agreed. They have failed to discharge that burden.Mrs Mills did not satisfy me that her methodology was accurate or consistent, andshe has approached the charging of audio equipment in the wrong way. I think herresults on an item by item basis were driven by her desire to prove overcharging.Further, the corroborative evidence of the audits, the improved gross margin, thebackground fact that it is in my view unlikely that such a significant tricking ofexperienced assessors was likely, and the reasons for the failure of the business,corroborate Mr Crone's evidence and reinforce my view that Mrs Mills' analysis isnot to be relied on. In my assessment Mr Crone was not deliberately overcharging IAG.[145] It follows that the plaintiffs have failed to prove that there weremisrepresentations made by the defendants in relation to contractual compliancewith IAG and the profit margins.[146] Therefore, the part of the claim alleging misrepresentations fails.The claim for $106,577.96[147] The apportionment of payment for ongoing work is always a challenging issue on the sale of a service providing business. There was a specific clause in theagreement for sale and purchase dealing with the problem:On settlement, an apportionment shall be made for all work completed bythe vendor but not yet invoiced. The value of this work in progress shall becalculated by the aggregated cost price of labour and materials, and on eachinvoice job and shall be paid by the Purchaser to the Vendor on settlement.The Purchaser shall be entitled to invoice each such job on its completionand retain all moneys in respect of the same.[148] It is common ground that there was no such apportionment. There are,however, very different perspectives given by both sides as to what should havehappened.[149] Mrs Mills in her evidence asserted that her solicitor Mr Wood asked her howmuch work in progress there was at the time of settlement. She said that she hadtaken the call from her lawyer in Ms Dobbie's office, and that she told Ms Dobbiethat Mr Wood needed to know what the work in progress total was. She said thatMs Dobbie responded that "everyone has worked so hard and all the jobs completedhave been invoiced out". She said that this statement by Ms Dobbie is confirmed bya note in Ms Dobbie's outlook diary: "Akk (sic) work charged (sic) by end of day".Mrs Mills asserted that all work completed by CSS and invoiced out by settlementwas CSS income. She stated that it was also agreed that any work assessed by CSSand not yet approved by the insurance companies, or not started by settlement date,would result in CSS being entitled to the $50 assessment fee if CSS assessed the job.That was the only CSS entitlement for work after settlement. There was no need for any apportionment given that all CSS work had been completed and invoiced out.[150] Ms Dobbie denied that any such discussion took place. It is her evidence thatthe apportionment of work in progress in respect of jobs commenced but not yetcompleted, or parts allocated to those jobs, and the reimbursement to CSS for moniesreceived by ASA in relation to work billed by CSS before settlement, was to becarried out after settlement. She asserted she discussed the issue of apportionmentwith both Mr Crone's accountant Mr McDonald and the Mills' accountantMs Kearns. As part of this ongoing apportionment process, she faxed invoices toMs Kearns and Mr McDonald and sought directions from them as to whether shewas carrying out apportionment correctly.[151] She said that at one stage Mrs Mills indicated that she was carrying out the apportionment wrongly. She had been crediting CSS the profit of the parts supplied by CSS. She accordingly made an adjustment resulting in a crediting of $30,000 into the bank account of ASA from CSS. She created invoices for each job for eachcompany to reflect that recalculation. She said that she showed samples of theseapportionment transactions to Mrs Mills when she was doing them, but thatMrs Mills was happy to leave it to her.[152] Both Mrs Mills and Ms Dobbie were cross-examined at length on thesealleged overpayments. Ms Dobbie was asked about the reference to "Akk completedwork being charged out", it being suggested that this should have read "Allcompleted work ...". Ms Dobbie denied that she had put this in her diary and deniedthat it had the meaning suggested to her. She pointed out that anyone could have puta note in her diary and she had no recollection of doing so herself. She observed thatMrs Mills had a computer and could have put in anything that she liked.[153] I formed the view that Ms Dobbie was an honest witness. Although she hadobvious feelings of loyalty and respect towards Mr Crone, and had ultimately hadher employment with ASA terminated, I did not sense any bias on her part againstMrs Mills. She had no direct financial interest in the outcome of the proceedings.Mrs Mills' impression of her over the initial period of employment was a favourableone and she was kept on by ASA until its financial position became dire. She seems to have been respected by the IAG personnel and I can see why. She was obviously hard-working and sensible, and prepared to work long hours on matters of detail. She answered questions under cross-examination in a detailed and frank manner. I thought she was truthful.[154] I have already set out reservations that I have about the accuracy of some ofMrs Mills' evidence. I consider it most unlikely that Ms Dobbie would have taken itupon herself to tell Mrs Mills that everything was invoiced by CSS up to settlement.This had not happened. It would have been untrue. Ms Dobbie is in my view acareful person and she would not have made such a comment. Further, it is clear tome that she is a person who fully understands her position as an employee, and itslimitations. She would not take it upon herself to have made any representation inrelation to the sale process. That was for Mr Crone.[155] Ms Kearns, who is clearly a competent accountant, denied having knowledgeof the apportionment process or being sent invoices as stated by Ms Dobbie.However, I attribute the difference in their positions to the fact that Ms Kearns had abusy professional practice involving many clients. I have concluded that she hasforgotten about her exchange with Ms Dobbie on this topic. I note also thatMr McDonald confirmed that he was aware that Ms Dobbie invoiced all completedjobs as at the settlement date, but that there were no invoices rendered in respect ofincomplete jobs which were in progress at the time. His evidence provides somecorroboration of Ms Dobbie's evidence.[156] Thus, I do not accept that there was any arrangement whereby there would beno apportionment after settlement.[157] This, however, leaves open the question of whether in any event theapportionment carried out by Ms Dobbie was carried out correctly. It is commonground that Ms Dobbie invoiced insurance companies in the name of CSS aftersettlement, and paid the proceeds to CSS. She then created invoices between CSSand ASA paying part of the job to ASA.[158] Mrs Mills believes that there were many unauthorised or unjustifiedpayments that were made. She has again prepared a spreadsheet setting out herconclusions. Her original claim under this head was $182,538.08. This has nowbeen reduced to $106,577.96. She asserts that there were 101 invoices invoiced toinsurance companies by CSS after June 2008, and a further 173 purchases by CSSconducted by way of cash or trade sales from ASA.[159] Ms Snowdon gave evidence that she had spent nine hours reviewing thespreadsheet. She concluded that there appeared to be several invoices that wereinvoiced to the end customer by CSS incorrectly, as goods were purchased and jobswere undertaken by ASA after the date of takeover. She also found invoices on thespreadsheet that appeared to have been treated correctly by CSS. She accepted thatCSS paid some funds back to ASA. She acknowledged that the entire quantumsought by Mrs Mills in her spreadsheet was not payable, although she consideredthat there were some monies payable to ASA under this head. She does not claim tohave carried out her own independent assessment of the various invoices. It is myassessment that her evidence when viewed in the round rather works against anacceptance of the accuracy of Mrs Mills' calculations.[160] Mr McDonald has analysed Mrs Mills' spreadsheet item by item. He hasreviewed her latest calculations. He has not been able to complete the analysis as onoccasions the plaintiffs have been unable to supply the original jobsheet assessments.Using her spreadsheet he has prepared his own analysis and comments setting outwhen he believes the claim was substantiated. His conclusion is that ASA has onlysubstantiated a claim for recovery from CSS under this head of $3,462.79.[161] In his initial report on Mrs Mills' summary of 6 August 2012 Mr McDonaldhighlighted a number of errors in her calculations. On occasions she debited CSS foramounts rightly owed to CSS by debtors where the debts had arisen prior to thetakeover. On other occasions Mrs Mills double-counted transactions. She debitedCSS with payments concerning transactions known as the Hagermeyer and Monarcorebate claims, which in fact belonged to CSS as they related to the purchases of pastyears. Mrs Mills in her initial calculations failed to take into account the fact thatCSS had itself corrected earlier errors of payment and credited ASA in respect ofthose payments. He noted a basic difficulty that there were not jobsheets availablefor all the relevant transactions.[162] Mr Dale cross-examined Mr McDonald on his conclusions. He focused onseveral examples and he understandably did not take Mr McDonald through eachitem. He referred to statements by Mr McDonald such as "claim not proven" andsuggested to him that he was requiring proof without a doubt, rather than on thebalance of probabilities in respect of the overpayments.[163] Although Mr McDonald made some comments which could indicate he wasapplying a high standard, my overall impression was that he was a fair witness andwilling to give ASA credit where it was due. If, however, he was not satisfied thatMrs Mills' attribution was correct then he would not allow the deduction. I do notthink he applied a stand higher than more likely than not.[164] I have been through Mr McDonald's notes on each individual allegedoverpayment. By and large his criticisms of Mrs Mills' individual calculations ofmonies mistakenly paid to CSS appear to me to be valid. On occasions he found heranalysis of the particular transaction to be correct and allowed a credit. Where hecould not determine whether ASA or CSS was entitled to a sum he assumed that thepayment to CSS was correct. This seems to me to have been a correct approach andin accordance with an assumption that the burden of proof was on ASA and the Millsto establish a wrongful payment on the balance of probabilities.[165] I note that when an overpayment by ASA to CSS of $30,000 was discoveredthis was corrected.[166] I have had sets of submissions on a number of particular transactions, and Iillustrate why I cannot accept the careful submission of Mr Meys, junior counsel forthe Mills, that close analysis reveals shortcomings in Mr McDonald's conclusions. Irefer to one particular invoice that has been the subject of evidence and extensivesubmissions.[167] Job number 42995 was started by CSS and completed by ASA in June 2008.It related to an installation of a Navman S90 and Navman software. There had beeninitially an overpayment by ASA to CSS in respect of this transaction by Ms Dobbieof the profit of $148.91 on the Navman unit that had been installed. However, thiserror was accepted by Mr McDonald and it is part of the monies that he agrees isowing.[168] However, Mrs Mills in her calculation has also claimed for the cost of thesoftware. I do not find her claim to be persuasive. There is a purchase documentwhich shows the date of the transaction as 28 July 2008, while the repair job wasactually invoiced to the insurer, AMI Insurance, on 12 June 2008. Although therelevant job number is shown, it seems highly unlikely that the Mills would havepaid for this part on visa almost two months after the job was done. Credit cardpurchases are billed on the day of purchase.[169] There is also a claim that the credit allowed by Mr McDonald understates theposition by approximately $8.00. However, I accept Mr McDonald's view that thisappears to be the courier fee. It was submitted to me that ASA was deprived of thebenefit of GST. However, I accept Mr Bogiatto for the defendant's submission thatthe GST treatment adopted by Ms Dobbie on behalf of ASA appears to have beenGST neutral for both companies.[170] This particular job is only an example of course, but in the end I did notconsider that Mrs Mills' analysis was correct, and preferred Mr McDonald'sapproach. I did not discern, in considering the details of his reasoning, that he wasapplying a standard higher than the balance of probabilities.[171] Mr McDonald impressed me as a careful and fair witness. Although he is notindependent in the sense that he acted for CSS and acts for Mr Crone, I accept theaccuracy of his observations. For reasons that I have already outlined, I have doubtsabout Mrs Mills' objectivity when it comes to this sort of analysis. Ms Snowdon hasnoted her comments on each invoice or entry, but I have found her analysis to bemore in the nature of an overview and it indicates that there are problems withMrs Mills' spreadsheet analysis. Mr McDonald's analysis is much more thoroughthan that of Ms Snowdon, and I have confidence in his conclusions. The fact is that he is the only accountant to have done a full analysis of Mrs Mills' spreadsheet, andhe seems to me to have done that fairly.[172] Thus, I accept Mr McDonald's evidence and conclude that there was anoverpayment of apportioned invoices from ASA to CSS, but the amount of thatoverpayment was $3,462.79.[173] This claim was alternatively put by the plaintiffs as a claim in conversion.That claim does not succeed. CSS received the monies with the consent of ASA.There is no conversion if goods are obtained lawfully, with the consent of theowner.12 Moreover, the receipt of an electronic transfer of cash, as distinct frominterfering with goods, is not conversion.13 Neither CSS nor Mr Crone convertedthose funds to their own use.Is the $3,462.79 recoverable from CSS?[174] Mr Dale did not seek to recover this sum from Mr Crone, but submitted that it was payable on the basis of monies had and received from or converted by CSS.CSS has since ceased trading, and indeed has had to be reinstated on the register.[175] Mr Bogiatto argued that no judgment should be entered against CSS. Hemaintained that in general terms a claim for monies had and received could notsucceed. He relied on Barclays Bank Ltd v W J Simms Son & Cooke (Southern)Ltd14 for the proposition that the recovery of monies paid by mistake is not availableif the payee intended to pay the money whether the fact was true or not. In thepresent case ASA, through its employee Ms Dobbie, clearly intended to pay CSS themonies received. He also argued that where the payee has relied uponrepresentations and then acts to its detriment the monies are not recoverable, relyingon Thomas v Houston Corbett & Co.15 Here CSS had in good faith and without12 J S Brookbank & Co (Australasia) Ltd v EXFTX [2009] NZCA 1221, (2009) 10 NZCLC 264,520 at [39].13 Lipkin Gorman v Karpnale Ltd [1991] 2 AC 548 (HL) at 559.14 Barclays Bank Ltd v WJ Simms Sons & Cooke (Southern) Ltd [1980] 1 QB 677 (QB). That decision was followed by their Lordships in Lipkin Gorman, above n 13, as applied in Martin v Pont [1983] 3 NZLR 25 (CA).15 Thomas v Houston Corbett & Co [1969] NZLR 151 (CA) at 164.wrongdoing changed its position in that the money, together with all the funds of thecompany, had been distributed to creditors and shareholders. He also relied onNational Bank of New Zealand v Waitoki International Processing,16 and submittedthat there was no evidence that the amount received from CSS was ultimately paid toor received by Mr Crone. In any event he asserted that CSS has not been unjustlyenriched.[176] If a person pays money to another under a mistake of fact, and that mistakecaused the person to make the payment, that person who paid is prima facie entitledto recover the money.17 I have no doubt that ASA paid the money through its agentMs Dobbie on the supposition that a specific fact was true, namely that the moneywas owed to CSS, and that in respect of $3,462.79 that fact was not true, as themoney was not owed. If Ms Dobbie had known that the money was not in factowed, she would not have made the payment. The plaintiff of course cannot recovermoney it would have paid regardless of the mistake. However, I have formed theview that Ms Dobbie was an honest person who acted with the best intentionsthroughout.18 The payments of $3,462.79 by her to CSS would not have been madeif she had not wrongly assumed that CSS was entitled to the apportionment.[177] It is not any change of position that disentitles a party to a claim. Under s 94B of the Judicature Act 1908, the discretion to order repayment can turn on a person altering their position and reliance on the validity of a payment, to such an extent that in the opinion of the Court it is inequitable to grant relief. The commonlaw defence of change of position operates in parallel with s 94B.19 The Court willlook at the equities from both sides. It will be unjust to allow restitution where aninnocent defendant's position has so changed that that person will suffer an injusticeif called upon to repay, and the injustice of requiring that repayment outweighs theinjustice of denying the restitution.2016 National Bank of New Zealand v Waitoki International Processing [1999] 2 NZLR 211 (CA) at 219, 227 and 237.17 Barclays Bank Ltd v W J Simms Sons & Cooke, above n 14, at 695.18 See [153]–[154].19 National Bank of New Zealand Ltd v Waitoki International Processing (NI) Ltd [1999] 2 NZLR 211 (CA) at 232.20 Lipkin Gorman, above n 13, at 579 applied in Martin v Pont, above n 14, at 30.[178] The mere expenditure of the money received will not constitute a change ofposition for the purposes of the defence.21 A payment to creditors by the recipient ofthe funds has been rejected as an automatic basis for invoking the defence.22[179] Mr Bogiatto's objections to CSS being obliged to refund the money itreceived, but was not entitled to, are lacking in any detail. He asks that detriment beassumed because of the fact of receipt of the money and CSS subsequently ceasingto trade. I am not satisfied that it would be inequitable to order repayment. Thereare no facts before me which indicate that this would be an injustice to CSS. It mayhave distributed the funds, but it did not embark on any new course of conduct orsignificantly change its position in reliance on the payment. I accept Mr Dale'ssubmission that CSS having received and benefitted from the monies should repaythem. If the funds had been distributed to Mr Crone, and CSS is at a later point ableto recover that money back from Mr Crone, that is not an unjust scenario.[180] I therefore propose entering judgment for the sum of $3,462.79 against CSS.Damages[181] The plaintiffs claim that they are entitled to a full refund of the purchase pricepaid, together with their trading losses. Mr Bogiatto strongly resisted thiscontention. He maintained that even if misrepresentations had been established theywere not causative of loss as the business was in any event doomed to failure. Hesubmitted that if the plaintiffs succeeded any losses would be properly met by anaward of damages that reflected any reduction in the value of the goodwill of thebusiness. From this figure there would have to be a number of further deductionsincluding the $195,000 received by ASA in its settlement with IAG.[182] These submissions were not fleshed out in submissions during the hearingand further submissions have been filed on the topic. These have been put in writingand are very detailed. They contain lengthy submissions on the facts and onoccasions touch on the areas of contention already covered. They presuppose the21 Lipkin Gorman, above n 13, at 580.22 Scottish Equitable plc v Derby [2001] 3 All ER 818 (CA) and RBC Dominion Securities Inc v Dawson [1994] 111 DLR (4th) 230 (NFLD CA).findings of misrepresentations by Mr Crone and that these caused the failure of thebusiness. There is also an assertion by Mr Dale that even if the only cause of actionthat succeeds is for the $106,557.96 had and received, that the loss of those fundswas causative of the failure of the business.[183] If possible I would have provided a decision on damages on the assumptionthat the plaintiffs had been successful. I have decided that this is not a case wheresuch a course is practical. That is because my findings of fact have been firmly infavour of the defendants on all material matters. The assessment of damages willrequire a detailed assessment of matters of fact, and it would be artificial to try toreverse my findings and then flesh out what they might have been. I conclude that itis not possible to carry out that exercise as part of this judgment.Result[184] The plaintiffs fail on their first and second causes of action. They succeed onthe fourth cause of action relating to money had and received against the seconddefendant Scituate Ltd in the sum of $3,462.79. Judgment is entered against CSS forthat amount.Costs[185] If the parties are unable to resolve costs issues, the defendants are to filesubmissions on costs within 14 days, the plaintiffs within a further 14 days, and withthe defendants having a further seven days in which to reply...Asher J