NINE PADDOCKS LIMITED V TASMAN LIQUOR COMPANY LTD HC INV CIV 2008-425-000354

NINE PADDOCKS LIMITED V TASMAN LIQUOR COMPANY LTD HC INV CIV 2008-425-000354 24 July 2009IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY CIV 2008-425-000354BETWEEN NINE PADDOCKS LIMITED Plaintiff AND TASMAN LIQUOR COMPANY LTD Defendant AND BETWEEN TASMAN LIQUOR COMPANY LTD Defendant AND NINE PADDOCKS LTD Plaintiff AND STANLEY WILLIAMS JONES Counterclaim Defendant Hearing: 7 & 8 July 2009 (Heard at Christchurch) Appearances: ADG Hitchcock for Plaintiff and Counterclaim Defendant N F Flanagan for Defendant Judgment: 24 July 2009JUDGMENT OF FOGARTY J Introduction[1] Nine Paddocks sold a liquor wholesale and distribution business to Tasman company, already in the same business. Nine Paddocks at that time had the registered name Edge Distribution (2004) Ltd. It had two warehouses, one in Christchurch, and one in Queenstown. About half of its turnover came from supplying a company called CEA which was managed by Mr Ricky Quirk.[2] At the time of sale CEA was obliged by contract to purchase all its liquor products from Edge (2004) until February 2012. [3] Tasman products purchased the business of Edge (2004) in December 2007 for $1.85 million paying about $700,000 for goodwill. In January 2008 Lion Nathan exercised its rights under outlet supply agreements (OSA) that it had with CEA requiring them to buy their Lion Nathan product directly from them. In turn, Tasman Liquor withheld about one-third of the goodwill leaving a shortfall on the purchase price of $222,948. This is a sum which it says reflects the reduction in value of the business consequent upon the loss of CEA's custom. That figure is not disputed. [4] Nine Paddocks has sued to recover this sum and been met with a counterclaim by Tasman against Nine Paddocks and its covenantor, Mr Stan Jones, alleging that Tasman were entitled to make the deduction. Tasman says this is so because Mr Jones had failed to disclose that there was an agreement between Lion Nathan and CEA whereby Lion Nathan allowed direct supply of Lion product by purchase from Edge. Mr Flanagan submits that this knowledge is sufficient to trigger breach of warranties of disclosure but goes on to argue that Mr Jones knew more and knew that OSAs were in place. [5] The OSAs relied upon by Lion Nathan were not produced in evidence. However, the trial proceeded with the parties in common agreement as to the usual character of OSAs. They are a mechanism to incentivise an outlet to purchase product. Typically the supplier of product will advance funds for the fit-out of the retail outlet and offer a rebate on the sale of its products purchased directly from the supplier for retailing, which rebate is applied in reduction of the loan. Naturally in such an arrangement there is incentive for the supplier to eliminate or minimise margins obtained by any middle men in the distribution of the product to the retail outlet. I understand that in OSAs in the liquor industry typically a bar is allowed to purchase any product from any other supplier but where that product is Lion product it will not qualify for the rebate in the absence of a specific agreement by Lion.[6] The principal issue of fact in this trial is whether or not Mr Jones knew that CEA had OSAs with Lion Nathan. [7] Independently of this issue of fact, Mr Flanagan argues that in any event that it was sufficient fact to breach warranty 13.1, that Mr Jones knew and did not disclose that Lion Nathan had told Mr Ricky Quirk that it would allow direct supply of Lion products from Edge to his bars. The bars of CEA are for these purposes the bars of Mr Ricky Quirk. [8] The two relevant warranties in the agreement are warranties 13.1 and 14.1(d) both of which I set out:13.1 The Vendor and the Covenantor have disclosed to the Purchaser details of all material contracts which relate to the Business or to which the Vendor is a party in relation to the Business. 14.1 The Vendor and the Covenantor warrant that: (d) The CEA Distribution Agreement and the Term Loan Agreement contain the entire agreement between the parties relating to the subject matter of this CEA Distribution Agreement and the Term Loan Agreement respectively and there have been no variations or amendments thereto.Issues1. What did Mr Jones know about the relationship between CEA (and its predecessors) and Lion, in regards to supply of Lion product to CEA by Edge Distribution (2004) Limited? 2. Did the CEA distribution agreement and term loan agreement, between Edge Distribution (2004) Limited and CEA "contain the entire agreement between the parties" (warranty 14.1(d))? 3. Did Mr Jones breach warranty 13.1 by failing to disclose either:i. That Lion had agreed that Edge be the distributor; or ii. Because warranty 13.1 makes the vendor and the covenantor guarantors to disclose all material contracts, so that any failure to disclose will breach the clause whether or not the vendor and/or the covenantor know they have failed to disclose. iii. Whether Mr Jones ought to have known the details of the variation of the OSAs between CEA and Lion and therefore is in breach of warranty 13.1 for failing to have disclosed these details he ought to have known?Issue 1[9] This issue arises in the context of the counterclaim which pleads:12 There existed an agreement between Lion, CEA and the Plaintiff [Edge (2004)]("CEA Trading Agreement") that Lion would waive its right to exclusively supply liquor to CEA, and allow CEA to purchase Lion products by buying them through [Edge (2004)] and not from Lion directly. 13 The existence of the CEA Trading Agreement was not disclosed to the Defendant, in breach of warranty 13.1. 14 The CEA Distribution Agreement and Term Loan Agreement did not contain the entire agreement between the parties relating to its subject matter in breach of warranty 14.1(d), because of the existence of the CEA Trading Agreement.[10] As can be seen these paragraphs do not plead the extent of knowledge of Mr Jones. [11] Mr Flanagan relies first on paragraph 61 of Mr Jones' written brief where he says:I was simply advised by Ricky Quirk that he had an arrangement with Lion Nathan to allow direct supply of Lion products from the plaintiff's business to his bars.[12] In his written evidence Mr Jones denies that he knew anything more of any significance. He thought the arrangement simply reflected an understanding he had acquired from Ricky Quirk:[T]hat prior to the plaintiff [Edge (2004)] purchasing the business a verbal arrangement was entered into between Lion and Quirk whereby the business was able to supply Lion product direct to Quirk's bars principally because Lion had difficulty in reliably supplying its product in Central Otago. That was all I knew.[13] Mr Jones was challenged in cross-examination by Mr Flanagan seeking to obtain an admission that he must have known that Mr Quirk's bars were receiving the benefit of an outlet support agreement (OSA) from Lion. [14] He did it by way of challenging Mr Jones that he must have known from his involvement in the industry that OSAs were commonplace, that Mr Jones had initially excluded the CEA business from the sale and only put it on the table when it was clear there would be no deal with Tasman otherwise. [15] Mr Flanagan also questioned Mr Jones to the effect that he must have known about the arrangements between CEA and Lion because they were central to his business' ongoing viability. [16] These contentions take place in the context where Tasman is asserting breach of covenants and has the legal burden of proof on the balance of probabilities. In this context Tasman has the burden to prove on the balance of probabilities, the extent and relevance of his knowledge. [17] Essentially, Mr Flanagan's questions were challenging the credibility of Mr Jones, submitting that he was not being candid in his answers to the Court. Issues as to credibility need to be examined in context.Context[18] Mr Jones' Edge (2004) liquor distribution business had been started by Mr Ricky Quirk in 1998, trading on his own account, using the trade name EdgeDistribution. In 2002 Mr Quirk set up and began to operate a number of bars throughout Otago via his entity Otago Hospitality Limited. His business, Edge Distribution, supplied the bars. A few months after setting up Otago Hospitality Limited Mr Quirk incorporated his liquor distribution business as Edge Distribution Ltd. [19] During 2003 and onwards Otago Hospitality entered into a number of outlet supply agreements (OSA) with Lion Nathan. Lion Nathan allowed the purchases by the bars of Lion's products from Edge Distribution to count as direct purchases from Lion. [20] As Mr Quirk's bar business grew he wanted to raise capital by selling his liquor distribution business. Before he sold the liquor distribution business, some time in early 2004, he reached an agreement with Lion whereby Otago Hospitality would still get its rebates under the OSA from the purchase of Lion's products from Edge, if the business of Edge was sold to Mr Jones. [21] Mr Hinton, now a Regional Director for Lion, said that the arrangement was one of allowing the Edge business (he did not distinguish Edge Distribution from Edge (2004)) to supply outlets that were otherwise contracted to purchase directly from Lion. It was verbal (made between himself and Mr Quirk), was on an ad hoc basis and was terminable at any time by either party. There was no discussion between Mr Jones and any Lion representative as to the consequences of an assignment of this arrangement should Mr Jones sell the business. [22] In his evidence Mr Hinton confirmed that this arrangement suited Lion at the time because service offered by Edge (the business) was superior to that which Lion Nathan could offer. Edge had a warehouse facility in Queenstown facilitating the distribution of product to Central Otago bars. Lion did not have such a warehouse in Queenstown. [23] On 11 May Mr Jones, as an agent, entered into an agreement to purchase the assets (plant and stock) of Edge Distribution. Edge (2004) was formed to be thepurchaser. On 14 May the solicitors for the vendor wrote a letter to his solicitors saying:The purchaser confirms clause 15 on the basis that: 1. Ricky Quirk has undertaken to the Purchaser to be the exclusive supplier to the Vendor and the Vendor's associated bars in Christchurch and Wanaka for a period of 10 years from settlement date. The basis of that agreement is to be cost plus 5%.[24] Mr Quirk said in his evidence:34. I gave that undertaking and later entered into an exclusive supply agreement between CEA and Edge because I was aware that it was extremely unlikely that Lion would try to invest to extend its distribution infrastructure in Central Otago. Lion was at that time pulling out of the distribution side of the business in a number of provincial areas. Various Lion personnel had expressed satisfaction with the job that Edge was doing. I was comfortable that there would be no difficulty with the direct supply situation continuing in the medium term.[25] Later in May the plaintiff was incorporated and took over the contract. In September 2004 the Otago Hospitality bars were either wound up or were transferred to a new entity, New Zealand Hospitality Ltd, still under the control of Mr Quirk. [26] On 22 March 2005 Otago Hospitality Ltd and Edge (2004) entered into a term loan agreement whereby Otago Hospitality acknowledged a loan of $250,000. At the same time another agreement was executed called the Liquor Product Supply Agreement providing for Otago Hospitality to purchase all its liquor products from Edge (2004) for a term of ten years. [27] On 18 April 2005 Lion Nathan wrote to Mr Stan Jones and "Edge Distribution" (which was strictly Edge (2004)) to formalise a current verbal agreement that had been in place for three years, that is, before Mr Jones purchased the business from Mr Quirk. The terms of this letter are:Dear Stan As per our recent discussions I would concur that we should formalise our current verbal agreement to pay Edge Distribution the freight costs covering the movement of stock from Christchurch and Dunedin Breweries through to Queenstown.Edge Distribution has been purchasing large volumes of keg and pack beer stocks from Lion Breweries for many years for the purpose of their own third tier distribution operation in Queenstown. Three years ago we agreed to pay Edge Distribution the cartage costs associated with these movements in line with the existing rates that we pay to our other transport contractors. The payments were applicable to all beer stocks picked up by Edge Distribution from the Speight's Brewery in Dunedin and the Canterbury Brewery in Christchurch, where Edge provided their own truck suitable for the purpose of such cartage. This arrangement has worked seamlessly for the last three years to both Lion's and the Edge's satisfaction. We would like to confirm a continuation of this arrangement for a three year term commencing 1st April 2005 on the assumption that Edge Distribution remains in business performing this service during that time. At the end of this period an extension of the agreement for a further term would be considered through a mutual review process. If, through this period Edge Distribution were to sell their business, Lion would reserve the right to determine whether the new owner was suitable to receive a transfer of this arrangement but it would not be automatically transferable. The rates paid by Lion for the cartage of these goods will be reflective of the rates paid to the carrier networks that currently provide a contracted transport service for our cartage and end deliveries.[28] In February 2007 New Zealand Hospitality sold the bars business to CEA Trading Ltd and on 15 February the same agreements were re-executed between the plaintiff and CEA with the exception that the term of the period of exclusive supply was reduced to five years. [29] The negotiations for the sale of the business of Edge (2004) began in April 2007 and the first email communication exhibited is of 12 April, when Mr Jones provides Mr Paul Everard general sales figures divided into the Christchurch and Queenstown/Wanaka areas. They appear to be the total sales figures for the whole business. He was asked for a breakdown in detail and agreed to provide it after a confidentiality agreement was reached. [30] On Monday, 30 April, he provided trading figures over the past financial year but excluded the expenditure by bars controlled by Ricky Quirk. The explanation he gave at the time was:Dwayne [Quirk] is returning from Wanaka today and back in the office in the morning. He will dig out Ricky's expenditure for the last 12 months and I shall get that to you tomorrow.This was in the email of 30 April. In evidence he said that he wanted to exclude from the turnover from Ricky's bars that part attributable to the large volumes of keg and package beer as he knew that if he were to sell his business Lion would reserve the right to determine whether the new owner was suitable to receive a transfer of this arrangement as it would not be automatically transferable. He was referring to the advice by a letter of 18 April 2005 from Lion Nathan, set out above. [31] Some executives in Tasman Liquor thought that originally Mr Jones was not offering the business to CEA for sale. However, these emails corroborate Mr Jones' evidence that he was always intending to sell the whole of the business but had good reasons for being careful about his use of the turnover from CEA because of the reservation of Lion Nathan about continuing the terms of the keg and package beer sales, as set out above. This seems to be a more probable explanation as to why the data was retained initially as against the belief by some Tasman executives that the CEA business was not originally up for sale, because Mr Jones had good reason to fear it was not saleable at the time he began the negotiations in mid April. The email of 13 April reflected discussions with a Tasman executive, Mr P Everard, who was the addressee and who was not called as a witness. The views of the Tasman executives called Mr Hughes and Mr Simpson were at least second-hand. [32] As warranty 14.1 records, the CEA distribution agreement and the term loan agreement were disclosed during negotiations. They, of course, reveal the five year commitment of CEA to buy all its product from Edge (2004) and the indebtedness of CEA. [33] It is not clear from the evidence whether the understanding about key prices was fully disclosed prior to the sale. Prior to the sale at a meeting on 21 November Mr Philip Hughes met with Mr Jones and Mr Ricky Quirk and the cost of kegs was discussed. Mr Hughes said in that regard:I specifically recall discussing the cost of the kegs we would supply, because the pricing details for them (and as a consequence, whether we would maintain supply) was all that was uncertain. The issue was that CEA had an unusual arrangement with Edge for keg beer at a price we could not match, and because the deliveries were to places like Wanaka and Nelson the cost of delivery was high. Accordingly, Tasman had already concluded that wewould likely give away that side of the business, unless we could get a better keg price from Lion.[34] That narrative suggests that he thought it would be up to Tasman whether or not they would keep up that side of the business rather than appreciating that independently Lion Nathan had reserved: the right to determine whether the new owner was suitable to receive a transfer of this arrangement but it would not be automatically transferable.[35] The pricing of kegs was discussed again in early December between the same people and possibly Mr Grant Simpson was on the line. He is the general manager of Tasman and was overseeing the whole sale. At this meeting Tasman told Mr Quirk that they would not be able to buy the kegs at the same price but discussed a transition whereby they would supply kegs at the same price for January and thereafter if they could not work out a good price from Lion would allow CEA to get them from Lion directly. [36] The substance of these conversations have not been disputed by Mr Quirk or Mr Jones. The difference between the witnesses who were party to these conversations is one of emphasis. Messrs Hughes and Simpson for Tasman say the discussions were confined to the pricing of keg beer and general comments which were made to the effect that the ability to supply Lion product direct to CEA was one the defendant would sort out later were made in the context of sorting out the pricing of kegs. On the other hand, Mr Quirk and Mr Jones contended that Mr Quirk had sought generally assurances by Tasman of the ability to supply Lion product to CEA and that this concern of his had been brushed off by Tasman saying they would sort out matters with Lion after settlement of the purchase. Mr Jones' evidence supported that version of Mr Quirk's. Indeed Mr Jones went on to say that Mr Ricky Quirk was quite pointed about that matter but that Mr Hughes missed it. In context, Mr Jones was suggesting that Mr Hughes missed the scope of Mr Quirk's requests for reassurance as extending beyond the price of kegs. It was common ground that Mr Quirk never revealed his OSAs in either of those meetings.[37] There is no doubt in my mind that the balance of probabilities favours the version of these two telephone conversations given by the two Tasman witnesses. This follows from a reflection of the position Mr Ricky Quirk was in. [38] As far back as 11 May 2004 Mr Quirk had promised that Mr Jones' company would be the exclusive supplier to the bars, for a period of ten years (May 2004) repeated in the Liquor Supply Agreement in 2005 and reduced to a further five years from 2007. He had given those assurances and had the entities commit to them in contract, and in return received the benefit of an advance of $250,000, notwithstanding the fact that he did not have a counterpart assurance from Lion Nathan that Lion Nathan because of the OSAs was in a position to mandate a direct supply. Mr Quirk had taken a risk that his entities would breach that agreement. On the probabilities he took that risk without disclosing the nature of the risk to Mr Jones. [39] It was Mr Jones' repeated refrains that he would not have entered into those agreements and advanced $250,000 of his own monies had he been aware of the vulnerable position Mr Quirk's companies were in in that regard. [40] At the time of Mr Jones' negotiations with Lion Nathan therefore it was not in Mr Quirk's interest to reveal the existence of the OSAs and that CEA was vulnerable to a request from Lion Nathan to impose direct supply. Apart from his personal position, at that time he was a manager of CEA and such a revelation would immediately expose CEA to the prospect of litigation with Edge (2004). It appears that Mr Quirk's solution was to seek assurances on supply which were wider than the kegs, but were not understood by Tasman to be wider than the keg pricing because they had been blindsided by the presence of the CEA distribution agreement to the risk that CEA's business operation was subjected to the constraints of OSAs with Lion Nathan. As Mr Simpson said in his evidence, Tasman had gone into the deal relying on the CEA distribution agreement. He said:There was just no reason for us to think that the exclusive supply agreement between Edge and CEA was anything other than that, or that it depended on a completely different agreement we knew nothing about.[41] However, Tasman argued through counsel in this case that the existence of a completely different agreement between CEA and Lion Nathan was something that this Court should find on the probabilities that Mr Jones did know about. Indeed, part of the argument at an early stage in the case, advanced by Mr Flanagan, was that the arrangements were not put in writing originally because Mr Jones knew they could not be because Lion could pull the plug on him but they were put in writing at the time of the sale of the business. Here is the line of questions:Q. And having been assured that that business would continue the reason you didn't put any arrangements in writing at that time was you knew you couldn't because Lion could pull the plug on you. A. Definitely not. You're talking about a verbal when I first started, I tied it up with a contract a supply agreement with NZH, I loaned them money for that ability, it was a big fish for us, it was our lucky break. That's what I did Nick. Q. Well my suggestion to you Mr Jones is you only put the arrangements in writing when it came time for you and Mr Quirk to sell your businesses. A. That is incorrect. The document the supply agreement and the loan was the original was done in 2005 I believe, August 2005, it then flowed through to CEA upon them purchasing Ricky's business, a new contract was put together supply agreement and a new loan document was put together for $250,000.[42] The 2005 documents were found and produced the next day. There was no suggestion in the evidence that the Edge business was for sale in 2005. On the contrary Mr Jones' evidence was that his business was growing at this stage with the general boom in the economy and his decision to sell came when the economy plateau'd in 2007. On the probabilities that makes sense. [43] I find that Tasman has failed to prove that Mr Jones knew at the time of the CEA exclusive distribution agreement or earlier that CEA or its predecessors had OSAs with Lion Nathan and the consequences thereof. It follows, given that all the incentives were the other way to Mr Quirk that Mr Quirk would not have revealed that information later on in 2007 to Mr Jones prior to or during the negotiations he was having with Tasman.[44] The issues which decide the case then turn on whether such knowledge as Mr Jones did have, that Lion allowed continuity of supply by Edge was information sufficient to breach warranty 14.1, of itself and which should have been disclosed pursuant to warranty 13.1.Issue 2: Did the CEA distribution agreement and term loan agreement, between Edge Distribution (2004) Limited and CEA "contain the entire agreement between the parties" (warranty 14.1(d))?[45] Mr Flanagan began his closing submissions with warranty 14.1(d). This is set out above but on this occasion I set out the entire warranty 14.1 together with its heading:14 CEA DISTRIBUTION AGREEMENT/TERM LOAN AGREEMENT14.1 The Vendor and the Covenantor warrant that: (a) There has been no breach of the CEA Distribution Agreement or the Term Loan Agreement; (b) The Vendor has fully complied with all the terms and conditions contained in the CEA Distribution Agreement and the Term Loan Agreement; (c) The CEA Distribution Agreement and the Term Loan Agreement remain in full force and effect; and (d) The CEA Distribution Agreement and the Term Loan Agreement contain the entire agreement between the parties relating to the subject matter of this CEA Distribution Agreement and the Term Loan Agreement respectively and there have been no variations or amendments thereto.[46] Given the context it is of no surprise that a special warranty is devoted to the performance of these two agreements, for an exclusive dealing arrangement with a customer who provides half of the turnover of the business is clearly going to be of central importance to the decision to buy the business and to the calculation of the amount of money the buyer is prepared to pay. [47] Mr Flanagan argued that there had been a breach of warranty 14.1(d). He contended that the entire agreement included the relationship between Edge Distribution and Lion. Of course Lion Nathan is not a party to either of thedistribution or the term loan agreement. The phrase "the entire agreement between the parties" naturally refers to the parties to those agreements. Mr Flanagan argued that there was another agreement between Lion Nathan and Edge (2004) which related to the subject matter of the CEA distribution agreement in the term loan agreement. He was referring to the arrangement entered into between Mr Hinton and Mr Quirk just prior to the original sale of the business of Edge Distribution Ltd to Edge (2004) which allowed Edge to supply outlets which were otherwise contracted to purchase directly from Lion. This agreement is described by Mr Hinton in his letter of 17 March 2008, which I set out in full:Dear Andrew, In reference to the letter sent by Nick Flanagan to AWS Legal dated February 21st which has been forwarded to me I will take this opportunity to clarify my position as per the arrangements and discussion that have gone on between Stan Jones and I with reference to the agreements between Lion Nathan and Edge Liquor. 1) Two separate agreements/arrangements existed. The first was a written agreement regarding the transportation of keg beer. This agreement was in writing, was for a defined term and clearly spelt out the implications if Stan were to sell the business. There had been discussion with Stan around this issue. 2) The second arrangement was one of allowing Edge to supply outlets who were otherwise contracted to purchase directly from Lion. This arrangement was verbal, was on an ad hoc basis, and was terminable at any time by either party. To my knowledge there was no discussion between Stan Jones and any Lion representative as to the "assignment" of this arrangement should he sell the business. It is Lion's view that this arrangement was terminable at will by either party and that while it would be reasonable to expect that Lion would wish to terminate this arrangement upon a sale of Edge, this was not considered nor discussed with Stan Jones.Mr Hinton amplified this in a subsequent email of 11 April where he said: As a wholesaler Edge was able to distribute our products to anyone they wished. The difference in this arrangement was that CEA bars (and a few others) asked us for permission to buy their beer through Edge and for us to agree to allow this volume to contribute to their contractual volume. We were prepared to do this on an ad hoc basis at our discretion.[48] Mr Flanagan submitted that Mr Ricky Quirk entered into this agreement for the benefit of whatever entity overtook the business and that the agreement withMr Quirk continued for the benefit of Edge (2004) which was accordingly bound. There is no evidence that this agreement was adopted by Edge (2004). Rather, Mr Jones was simply told by Mr Quirk that Lion allowed Edge to supply product to his bars, in the context of also saying that it suited Lion for Edge to be the distributor of its products in Central Otago. That policy was readily understandable because Lion Nathan did not have a warehouse in Central Otago from which a variety of product could be distributed to the bars. The Lion products extended beyond there to include spirits and RTDs (spirit and soft drink mixes). [49] It needs to be kept in mind that Edge (2004) purchased the goodwill and plant of Edge Distribution. There was no provision in the contract for the purchase of goodwill. The assurance of continued business came as a personal undertaking of Mr Quirk. Persons do not become bound to contracts made on their behalf simply by in fact taking advantage of those contracts without knowing of the existence or terms of the contract. The Contracts (Privity) Act 1982 allows an intended beneficiary of a contract (here, Edge (2004) to obtain the benefit. But, as the learned authors of Law of Contract in New Zealand say nonetheless:The doctrine of privity still operates to forbid the contracting parties to enforce obligations against a stranger. It has long been an axiom of the common law that a contract between A and B cannot impose a liability on C. (Law of Contract of New Zealand 3rd ed 2007, at 15.3)[50] Such third parties only become liable when they ratify a contract made on their behalf. Ratification is a deliberate decision. There are problems here. Normally such contracts are made on behalf of the person who intends to incorporate the company. This is not the case. The contract was made, assuming it was a contract, by Mr Quirk, not by Mr Jones. Second, ratification of contracts pre- interpretation are enabled by s 182 of the Companies Act 1993. This is simply not one of those cases and in fairness to Mr Flanagan he did not demonstrate how this could be a pre-incorporation contract. [51] The letter of Mr Nathan of 17 March describes the "second arrangement" (first in time) as an agreement between Lion Nathan and Edge Liquor. It was in the sense that it was an agreement with Edge Distribution Ltd. I am satisfied that thereis no applicable principle of law whereby Edge (2004) is a party to and bound by this second arrangement. Certainly, it effectively obtained the benefit of it. But it did not know its full character. It did not know that it was inconsistent with the undertaking given by Mr Quirk and the two solemn agreements entered into by Otago Hospitality in 2005 and later CEA. As a result there is no factual substratum making relevant the question as to whether the phrase "the entire agreement" between the parties extends to Lion Nathan which is not a party to CEA distribution and the term loan agreement. [52] But even if Edge (2004) Ltd were a party to a contract with Lion Nathan I think it unlikely that I would have found that warranty 14.1(d) included such a contract. [53] If Tasman is to succeed in this case it must be by way of breach of warranty 13.1 to which I now turn.Issue 3: Did Mr Jones breach warranty 13.1 by failing to disclose either: i. That Lion had agreed that Edge be the distributor; or ii. Because warranty 13.1 makes the vendor and the covenantor guarantors to disclose all material contracts, so that any failure to disclose will breach the clause whether or not the vendor and/or the covenantor know they have failed to disclose. iii. Whether Mr Jones ought to have known the details of the variation of the OSAs between CEA and Lion and therefore is in breach of warranty 13.1 for failing to have disclosed these details he ought to have known?[54] Warranty 13.1 is set out above but appears as part of the whole of warranty 13 which I set out:13 CONTRACTS13.1 The Vendor and the Covenantor have disclosed to the Purchaser details of all material contracts which relate to the Business or to which the Vendor is a party in relation to the Business.13.2 To the Vendor and the Covenantor's knowledge, the Vendor is not in breach of any material contract to which it is a party, which relates to the Business. 13.3 The Vendor does not have any contracts committing it to capital expenditure in excess of $10,000.00. 13.4 The Vendor, with respect to the Business, is not a party to any contract with a Related Company other than on normal commercial terms and which has been entered into in the ordinary course of business.[55] Mr Flanagan submitted that warranty 13.1 is an absolute obligation. It does not depend on the vendor and covenantor's knowledge. It is to be contrasted with warranty 13.2 which does so depend. The contrast is a material one. By entering into an agreement containing warranty 13.1 the vendor and the covenantor take the risk that they have not disclosed to the purchaser details of all material contracts which relate to the business. Such contracts include contracts to which the vendor is not a party. This is because warranty 13.1 is in this respect in two parts, the last clause being: or to which the Vendor is a party in relation to the Business.[56] By contrast Mr Hitchcock argues that Mr Flanagan's construction of warranty 13.1 does not give adequate weight to the natural meaning of the verb "to disclose". He argues you cannot disclose what you do not know. Accordingly, there is an implicit assumption within warranty 13.1 that it is an obligation to disclose what you do know. Mr Flanagan said that warranty 13.1 has not to his knowledge been interpreted and applied in any reported cases, that it was in fact a one-off clause drafted for the circumstances of this contract. [57] He acknowledged that warranty 13.2 did pose a difficulty to this construction but said that warranty 13.2 should be understood as just an alternative drafting method and not intended to be in contradistinction to an absolute character in 13.1. Warranty 13.2 is directed to whether or not there is any breach of a contract to which it is a party. [58] Mr Flanagan had an alternative argument which was that the disclosure required by warranty 13.1 included knowledge which should have been known.Mr Flanagan raised this as a fourth point, which is one of the reasons why when framing the issues I set it out last as issue 3(iii). But on reflection, in my view, the point is best considered at the time of examining the character of the obligation to disclose. [59] There is no doubt that the intent of warranty 13.1 is that it should include not only contracts to which the vendor and/or covenantor are parties but to any and all contracts of materiality to the business. These would include the OSAs with Lion Nathan, and the variation thereto whereby the volumes of Lion product bought through Edge were allowed to contribute to their contractual volume (for the purpose of obtaining rebates to be applied to the loans). [60] There is no doubt whatsoever that the existence of the OSAs and the existence of the side agreement, particularly the fact that it was of no fixed term and so terminable on reasonable notice, would be highly material to the purchaser. [61] The term "allow" comes from the written brief of evidences, which are always read with some caution by trial Judges who know that they are often in fact written by lawyers, reducing to writing what they have been told orally by the witness. In his cross-examination Mr Jones said he did not know there was a specific agreement between Lion and CEA. He said he relied on the supply agreement between himself and CEA Trading and the earlier one with Otago Hospitality. He appeared to suggest that outlet supply agreements tend to go to small bars and not to a large operator such as here:Q. There's nothing unusual of course about such an [OSA] arrangement in this industry is there. A. You are talking about a client who has 27 to 32 bars. Outlet supply agreements go with honest Bob's bar down the end of the road, a little operator, this was a big operator, this was our lucky break and it formed the basis for us to grow Edge substantially and we had a supply agreement through the, with CEA and we lent them the, well there was a term loan with that as well and we had, I had no idea that there was supply agreement underneath that between Lion and CEA because I lent them $250,000.He reiterated this in one way or another throughout his evidence.[62] After a hypothetical party reflects on the duty to disclose and the knowledge that Lion Nathan was allowing the supply from Edge, it is possible to infer that there must be a reason why Lion Nathan allows it because Lion Nathan products are sold variously in the market place by a number of distributors. It is not a case where Lion otherwise supplies all its products directly by itself to all its customers. [63] The person who has a duty to disclose must also appreciate that such an inferred agreement is also of materiality to the business, for practical terms to the value of the business. In this context we need to couple two other facts. First, Mr Jones knew that Lion did not have a warehouse in Queenstown so would incur extra costs were it to supply its Lion product directly to retail buyers in Queenstown. It would have to invest. Second, Mr Jones knew that he had an agreement with CEA promising exclusive purchasing to 2012 which in turn replaced an agreement from Otago Hospitality granted in writing in 2005 which in turn replaced a written undertaking obtained from Mr Ricky Quirk at the time of the purchase and relied upon by Mr Jones when deciding to purchase the stock and plant of Edge Distribution. [64] As I have already had occasion to note, Mr Simpson, the very experienced head of Tasman was quite naturally blindsided to the possibility of OSAs by the presence of the CEA distribution agreement and the term loan agreement. The combined effect of those two agreements was to rule out the presence of a power on the part of Lion Nathan to redirect supply of the product. [65] I have not been persuaded that a similar logic does not apply to Mr Jones' position. Right from the outset, he obtained assurance of continuity of supply from the bars when he first bought the plant and stock from Mr Quirk. That assurance was bolstered by the manifest fact that Lion Nathan was simply not in a position to offer the same quality of service in Central Otago at the time. He was not put on notice that Lion Nathan might intervene. [66] There was some evidence that Tasman was known in the industry to be more aligned with DB. But even the Tasman witnesses protested that they dealt with allsuppliers of liquor in the market place and were regular buyers of Lion products, to many millions of dollars per annum. [67] Applying the test of actual knowledge, coupled with knowledge that could be reasonably inferred from actual knowledge, I have to judge whether it was a failure "to disclose" his knowledge that Lion allowed supply of Lion products from Edge. I find on the probabilities that Tasman has not proved that Mr Jones knew or ought to know that that position of Tasman reflected an agreement, of materiality, so that his failure to advise Tasman of Lion's position was a failure to disclose within the meaning of warranty 13.1.Conclusion[68] For all these reasons Tasman has not proved breach of warranties 13.1 and 14.1(d). Accordingly, its counterclaim fails and is dismissed. The plaintiff's claim was opposed only on the grounds that there was a set-off available from a successful statement of claim. It follows that the plaintiff is entitled to judgment on its claim as adjusted for $222,948. The plaintiff also claims interest at 12% from 7 January and full solicitor/client costs. I assume that those claims are based on the terms of the agreement for sale and purchase. I have not been taken to the relevant clauses, nor have I heard the parties on that. For that purpose alone they are reserved. I will hear further submissions from the parties if they cannot agree on those two items. Otherwise, I will assume the parties can agree and are in a position to either finally settle this transaction without the need for a final order or the plaintiff will submit a final order for sealing coupled with a memorandum of counsel in agreement on the calculation of interest and costs.Solicitors: AWS Legal, Invercargill, for Plaintiff and Counterclaim Defendant Kensington Swan, Auckland, for Defendant