PAE (NEW ZEALAND) LTD V MARK DAVID BROSNAHAN, MICHAEL RALPH CARTER, WAYNE ALBANY PATTINSON CA CA616/2008

PAE (NEW ZEALAND) LTD V MARK DAVID BROSNAHAN, MICHAEL RALPH CARTER, WAYNE ALBANY PATTINSON CA CA616/2008 21 December 2009IN THE COURT OF APPEAL OF NEW ZEALAND CA616/2008 [2009] NZCA 611BETWEEN PAE (NEW ZEALAND) LTD Appellant AND MARK DAVID BROSNAHAN, MICHAEL RALPH CARTER, WAYNE ALBANY PATTINSON RespondentsCA755/2008AND BETWEEN MARK DAVID BROSNAHAN First Appellant AND MICHAEL RALPH CARTER Second Appellant AND WAYNE ALBANY PATTINSON Third Appellant AND PAE (NEW ZEALAND) LTD Respondent Hearing: 18 November 2009 Court: Ellen France, Gendall and Harrison JJ Counsel: D M Salmon and P W O'Neil for PAE (New Zealand) Ltd A S Butler and M F Mabbett for Brosnahan & others Judgment: 21 December 2009 at 2.15 pmJUDGMENT OF THE COURTA The appeal and cross-appeal are dismissed. B No order as to costs.REASONS OF THE COURT(Given by Harrison J)Table of ContentsPara NoIntroduction [1]High Court [3](1) Contractual Remedies Act(a) Contractual Provisions [9](b) Section 4(1) [13](c) Appeal [16](d) Decision [19](2) Fair Trading Act(a) Introduction [26](b) Decision (i) Unreasonable Reliance [33](ii) Implied Warranty [41]Renewal [49]Cross-AppealIntroduction [55]Interest [57]Costs [65]Result [81]Introduction[1] This appeal and cross-appeal from decisions in the High Court relate to a claim for damages arising from an agreement for sale and purchase of shares. [2] The appeal raises issues about the effect of what is known as an entire agreement clause and the relationship between the Contractual Remedies Act 1979 (CRA) and the Fair Trading Act 1986 (FTA). Secondary issues derive from the interpretation of a renewal provision in the agreement, giving rise to a counterclaim for damages. The cross-appeal relates to a consequential award of interest and costs.High Court[3] Messrs Wayne Pattinson, Michael Carter and Mark Brosnahan ("the directors") owned the shareholding in and were directors of Central Property Services Ltd (CPS), a maintenance company based in Palmerston North. PAE (New Zealand) Ltd (PAE) is a facilities management company in Lower Hutt. In April 2004 PAE entered into a written agreement to purchase all the directors' 100 shares in CPS for $1.25m. Execution of the agreement followed a process of negotiations commencing in November 2003. In that intervening period the directors had made representations about CPS's turnover and profitability and provided copies of financial statements. [4] PAE issued proceedings against the directors in 2005, alleging that they made misrepresentations during the negotiation period on which it relied in deciding to enter into the agreement. The company claimed consequential loss of $964,000, representing the difference between the purchase price of $1.25m and the true value of CPS's shares of $286,000. PAE pleaded four discrete claims for fraud, misrepresentation, breach of warranty and misleading or deceptive conduct. [5] The directors denied liability and counterclaimed for damages of $350,000. The agreement obliged PAE to pay this additional amount if CPS renewed a contract with Housing New Zealand (the HNZ contract) on certain terms. [6] Mallon J delivered a lengthy judgment following trial in the High Court at Wellington in September 2007: PAE (New Zealand) Ltd v Brosnahan HC WN CIV 2005-485-843 10 September 2008. In summary the Judge found for PAE on its breach of warranty claim of $235,606. She dismissed its fraud, misrepresentation and breach of the FTA causes of action. She found for the directors on their counterclaim for $350,000 together with interest. [7] It is unnecessary for us to say anything more about PAE's fraud claim because Mallon J's dismissal of it is not challenged on appeal. It is relevant, though, to record her finding that the financial statements provided by the directors to PAE for the year ended 31 March 2004 were materially incorrect in representing a profitmargin for CPS's activities, initially at 9 per cent and then at 7 per cent, when it was in fact 5 per cent or less: at [212] and [281]. The accounts receivable balance was overstated at $969,468 when in fact it was $256,442; the accounts payable balance was understated at $538,539 when in fact it was $763,314. [8] Mallon J concluded that, while PAE did not rely on this statement of profitability, it did rely on the financial statements generally in deciding to proceed with the purchase and on the price. She dismissed PAE's misrepresentation cause of action (s 6 CRA), however, on the basis of cl 19, the entire agreement clause. The company challenges that conclusion and the Judge's dismissal of its FTA claim.(1) Contractual Remedies Act(a) Contractual Provisions[9] Mr Salmon, who appears for PAE on appeal but did not represent the company in the High Court, does not dispute that on its plain meaning cl 19 excludes the directors' liability for PAE's misrepresentation claim under the CRA. He submits, however, that Mallon J erred in finding it was fair and reasonable that the provision should be conclusive between the parties: at [292]-[299]. [10] Clause 19 provided as follows:This agreement (and any Schedules to it) constitutes the entire agreement between the parties and supersedes all prior agreements, understandings, negotiations, representations, and discussions, whether oral or written, of the parties. The vendors make the representations and warranties set forth in clause 7 and no others. The obligations of the vendors under this agreement are joint and several. Any and all implied warranties are expressly excluded. No supplement, modification, or waiver of this agreement is binding unless in writing and signed by the parties. The vendors and/or the purchaser may, at its or their option, waive, in writing, any or all of the conditions in this agreement to which its or their obligations are subject. No waiver of any of the provisions of this agreement is to constitute a waiver of any other provisions (whether or not similar), nor shall such waiver constitute a continuing waiver unless otherwise expressly provided.[11] Clause 7, the representation and warranties provision, stated:The vendors jointly and severally warrant with the purchaser that: (a) the vendors have full corporate power and authority to sign and perform this agreement; (b) the vendors are the legal and beneficial owner of all the shares in the capital of the companies; (c) all liabilities of the companies have been disclosed in the financial statements as at 31 March 2004 supplied to the purchaser; (d) there are no undisclosed liabilities in respect of taxation, goods and services taxation and fringe benefit taxation; (e) there are no undisclosed pending or potential litigation or personal grievance claims; (f) as at the settlement date, the shares will be held by the vendors free of all security interests; (g) there is no right or option for any person to take shares in the capital of the companies; (h) the vendors do not directly or indirectly own, nor are beneficially entitled to, any of the assets normally employed in the day to day operation of the business of the companies; and (i) as at the settlement date the vendors will have repaid to the companies any and all outstanding inter-company indebtedness, other than such debts as may occur during, or arise out of, the normal course of business, and that no such debts will be owing by the companies to the vendor.[12] The structure of cl 7 is relevant. It reflects PAE's concern to obtain warranties of disclosure of liabilities: cl 7(c), (d) and (e). The directors' breach was actionable because accounts payable were understated (see [7] above). But the company did not require a warranty relating either to accounts receivable, the largest component of the error in CPS's financial statements, or to profitability.(b) Section 4(1)[13] Section 4(1) CRA materially provides:If a contract, or any other document, contains a provision purporting to preclude a Court from inquiring into or determining the question— (a) Whether a statement, promise, or undertaking was made or given, either in words or by conduct, in connection with or in the course of negotiations leading to the making of the contract; or(b) Whether, if it was so made or given, it constituted a representation or a term of the contract; or (c) Whether, if it was a representation, it was relied on— the Court shall not, in any proceedings in relation to the contract, be precluded by that provision from inquiring into and determining any such question unless the Court considers that it is fair and reasonable that the provision should be conclusive between the parties, having regard to all the circumstances of the case, including the subject-matter and value of the transaction, the respective bargaining strengths of the parties, and the question whether any party was represented or advised by a solicitor at the time of the negotiations or at any other relevant time.[14] Section 4(1) applies where a contractual provision excludes the scope for a factual inquiry into any one of the three qualifying elements of liability for misrepresentation – i.e. (1) whether a statement was made during the negotiation period, (2) whether if made it constituted a representation or term, and (3) whether it was relied upon. Clause 19 concerned the second element. It acknowledged the existence of the first element, preceding representations by the directors, but they were superseded or replaced by the terms of the agreement. Only the nine representations listed in cl 7 "and no others" were to be operative or effective; they were elevated accordingly to the status of express warranties. To reinforce the emphatic nature of this provision, "any and all implied waivers [were] expressly excluded". [15] An entire agreement clause, however, is not absolute or conclusive. Section 4(1) recognises a wide judicial discretion to determine whether it is "fair and reasonable that the provision should be conclusive". While the issue is to be determined "having regard to all the circumstances of the case", the specified criteria focus the inquiry on an assessment of the relative positions of the parties and their access to independent legal advice. Its apparent purpose is to protect one party's relative vulnerability from another party's power to impose an exemption from liability which is contrary to the factual reality or an existing legal obligation and is thus unreasonable and unfair. Section 4(1) is a mechanism for striking balances, both individually between parties and conceptually between freedom of contract and unfair or unreasonable commercial conduct. (See also Dawson and McLauchlan The Contractual Remedies Act 1979 (1981) at 36-40.)(c) Appeal[16] Mr Salmon accepts a judicial reluctance to go behind entire agreement clauses in commercial transactions without a finding of fraud: Brownlie v Shotover Mining Ltd CA181/87 21 February 1992 at 33. However, he submits that a positive finding of fraud is not necessary to show unfairness or unreasonableness; and that s 4(1) creates a presumption that a Court will look beyond such provisions unless it deems it fair and reasonable not to do so. Mr Salmon acknowledges a judicial tendency to exercise the statutory discretion in what he describes as "the context of small parties": Snodgrass v Hammington (1995) 10 PRNZ 672 (CA). But he says the same approach may also be appropriate between larger parties. [17] In conducting the s 4(1) inquiry Mallon J placed particular weight on PAE's size, sophistication and access to professional advice in these terms:[297] There was no imbalance in the bargaining power between the parties. PAE was a substantial company. It was making a not insignificant investment and it had the time and opportunity to make whatever inquiries it wished to make. It had access to accounting advice (internal and external). It had access to legal advice in the course of due diligence. That legal advice raised whether the accounts receivable were collectible and whether the Agreement should contain a minimum guarantee in this respect but Mr Leslie and Mr Wearne apparently did not see that as necessary (see [66] and [67] above). The Agreement was drafted by PAE's lawyers. PAE says that the lawyer's involvement in drafting the Agreement was minimal, but that does not matter. The point is that PAE had access to its lawyers and instructed lawyers to assist with the Agreement and could have obtained greater assistance if it wished to. PAE could have included a warranty in respect of the financial position or negotiated an adjustment in price if the audited position was materially different from the accounts supplied. It did none of these things. It considered that it had a good opportunity to check that profits were sustainable and apparently did not want to pay a higher price to obtain increased certainty about that (see [96] above. See also [81].) There is nothing inherently unfair about the content of clauses 7 and 19. [298] The size of the errors in the accounts, and that they were negligently, and perhaps even recklessly, prepared and that some assurances were provided about them via Mr Carter are an insufficient basis in my view to not hold the parties to what they agreed. The defendants' subsequent actions in seeking to conceal the errors that were made are actions after the Agreement was entered into. I do not think these are relevant to the assessment of whether it is fair and reasonable to hold PAE to what it agreed (although these actions may well be relevant to costs).[18] Mr Salmon accepts that the parties were relatively sophisticated and had access to legal advice. Nevertheless, he challenges Mallon J's conclusion on the grounds that (1) PAE made clear its reliance on the directors' representations during the negotiation process; (2) the errors in the accounts were significant and resulted from the directors' negligence and/or recklessness; (3) the directors deliberately tried to conceal accounting errors after the agreement was signed; and (4) there is no evidence that cl 19 was specifically drawn to the attention of either party or even discussed, its contents being entirely inconsistent with the parties' actions throughout the negotiation period.(d) Decision[19] The first and last grounds can be considered together. The agreement for sale and purchase including cl 19 was prepared by PAE's solicitors. The same provision was included in earlier drafts. Whether it was discussed by the parties is irrelevant. It is not a case where the party to be bound alleges it was unaware of or unfamiliar with the relevant provision. By contrast, discussion was material in Brownliebecause the agreement including the exclusionary provision was prepared by the solicitors for the vendor, the party seeking to uphold the clause (but against a finding of fraud). It is sufficient to observe the incongruity of an assertion by the party which stipulated for cl 19 that its apparently intended effect should be negated because of an absence of evidence of its discussion with the accepting party. [20] We are not satisfied there was an inconsistency between cl 19 and the parties' conduct during the negotiation period. By the time it came to conclude an agreement, PAE's position was clear. At its stipulation all preceding representations were "superseded" by the express terms. The directors agreed that, whatever had occurred previously, the only operative representations and warranties were the nine listed in cl 7 and no others. As McKay J observed in Brownlie at 33:It would be a matter of concern if commercial people acting in good faith could not, in entering into a transaction such as this, achieve certainty by a written contract excluding liability for prior statements by one of them if that is what they wished to do.[21] The errors in CPS's accounts may have been significant and the result of negligence, even recklessness, by the directors, one of whom deliberately tried to conceal the errors after the agreement was signed. But again we agree with Mallon J that these factors are irrelevant when considered against the plain words of cl 19. In this respect we do not accept Mr Salmon's analogy with undefined equitable principles of fairness. [22] PAE had every opportunity to require warranties relating to accounts receivable, the principal source of the error, and profitability, if it regarded either as sufficiently important to justify a right of recourse in the event of a material error. To deny cl 19 its natural meaning would have two contrary effects. First, it would resurrect or reinstate a representation which the parties had agreed was inoperative or of historical importance. Second, it would convert the alleged representations about profitability into an implied warranty when they were expressly excluded. [23] Moreover, as Mallon J found, there was no imbalance in the respective bargaining strengths of the parties; if anything, PAE's position was stronger. It is, as Mr Butler points out, a subsidiary of a multinational, experienced in takeovers and acquisitions and familiar with the due diligence process. The company had access to and obtained independent financial and legal advice. It had ample opportunity to safeguard itself against the adverse consequences of any pre-contractual misrepresentations other than those specified if that was its objective. It would not be fair and reasonable, we think, to allow PAE to invoke the statutory protection to circumvent the effect of provisions which it had deliberately structured for its own benefit. [24] In conclusion we agree with Mr Butler that McKay J's words in Brownlie at 31-32 are apposite:There can be nothing inherently unfair in such an exclusionary clause. It is highly desirable that written contracts should be so drawn as to state all the terms of the intended contract, and so avoid the uncertainties which can arise from allegations of verbal representations or collateral warranties. If parties have not agreed to include express warranties in their written contract, then it is reasonable for them to state expressly that verbal warranties are excluded.[25] This ground of appeal must fail.(2) Fair Trading Act(a) Introduction[26] Mr Salmon submits alternatively that Mallon J erred in dismissing the FTA cause of action. He says there can be no doubt on the Judge's finding that the directors' conduct was misleading or deceptive in terms of s 9 and that PAE was misled. He submits that Mallon J erred by applying cl 19 to defeat PAE's claim. He submits, and Mr Butler accepts, that it is not possible to contract out of liability under the FTA, referring to a series of High Court authorities commencing withSmythe v Bayleys Real Estate Ltd (1993) 5 TCLR 454. He submits that Australian authority is to the same effect: see Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (1988) 79 ALR 83 (FCA). [27] Mr Butler supports Mallon J's conclusion. He says that it is correct in law and fact. His written synopsis goes further, postulating that s 4 CRA applied to all causes of action including the FTA claim, requiring a reconciliation of the relevant statutory provisions. He also submits that some of the authorities following Smythewere wrongly decided. [28] Before considering Mr Salmon's argument, we record the directors' admission in the High Court of PAE's threshold allegation that for the purposes of the FTA cause of action they were "in trade" when negotiating the sale of their shares in CPS. In this Court Mr Butler did not resile from that concession. We are proceeding on the agreed premise that the directors were in trade. [29] In what is now an orthodox approach, PAE brought concurrent claims against the directors under three distinct heads. This judgment is restricted to the CRA and FTA causes of action. The essential elements are the same or similar. Each is based upon the existence of a misstatement or misstatements, whether categorised as a misrepresentation under the CRA or misleading and deceptive conduct under the FTA. Each requires proof of reliance, which must be reasonable, and thus causation of loss.[30] The two causes of action diverge on relief. The CRA compensates for expectation damages to reflect loss of a bargain. By contrast, a FTA claimant is restricted to reliance damages, similar to the tort, and subject to the Court's wide discretionary powers: see s 43. Differences between the two measures can be substantial, as illustrated by this case. Mr Salmon accepts that FTA damages must be fixed on the basis of PAE's capital loss: Cox v Leipst [1999] 2 NZLR 15 (CA). He quantifies this head of claim at $290,000 plus interest, represented by the difference between the value of the CPS shares of $960,000 as found by Mallon J and the purchase price of $1.25m. [31] We are satisfied that it is unnecessary to follow the detailed process of statutory reconciliation advocated by Mr Butler. In our judgment PAE's appeal is to be determined by applying settled principles of law to the relevant facts. Furthermore, as we shall explain, one of Mallon J's two alternative grounds for dismissing the FTA claim does not depend on cl 19 at all. We shall deal with that ground first. [32] Mallon J dismissed the FTA claim for these reasons:[321] I consider that if there were liability under this cause of action then s 9 would be turned into a general warranty despite the parties' agreement to clause 19 and the specific warranties in clause 7. I consider that this cause of action can be looked at in two ways. One way is to say that the defendants' conduct as a whole was not misleading and deceptive because, although it made misrepresentations, the parties agreed that the only relevant representations were those in clause 7. The other way is to say that if it was misleading and deceptive it did not cause PAE's loss. Either way, the defendants supplied accounts and financial information that misrepresented the financial position of CPS, but PAE had the opportunity to make further inquiry and did not do so. Moreover, they agreed that there would only be liability in respect of representations that were included as warranties in clause 7. In both cases it is relevant to take into account the commercial context of the negotiations. In my view this cause of action fails on either basis.(b) Decision (i) Unreasonable Reliance[33] First, Mr Salmon criticises the Judge's finding that, if the representation was misleading and deceptive, it did not cause PAE's loss. That was because the company had the opportunity to make further inquiry into CPS's financial information. Mr Salmon points to the Judge's earlier finding that PAE did rely on the directors' conduct and suffered loss as a result. He asserts an underlying inconsistency between Mallon J's reliance findings within her discrete CRA and FTA inquiries. [34] Consideration of this submission requires an examination of the judgment as a whole, incorporating both causes of action. As noted, Mallon J found that PAE was not induced by the directors' profit representation to enter into the contract: at [284]; but that the company did rely on the financial statements in a general sense in deciding to proceed with the purchase and in fixing the appropriate price: at [285], [288], [289] and [291]. This was what the directors intended: at [286]-[287]. In that CRA context the Judge expressly noted that a finding on reliance did not depend on "whether PAE carried out any of its own investigations and review": at [289]. If the accounts had accurately represented CPS's financial position, PAE would have paid about $250,000 less for the shares (excluding for these purposes the contingent sum of $350,000 payable upon renewal of the HNZ contract): at [288]. [35] Mallon J made these findings when determining the CRA claim. Having found the element of reliance, the Judge considered the question of its reasonableness within the s 4(1) inquiry: at [295] and [296]. In summary, when concluding that it was fair and reasonable to hold the parties to their cl 19 bargain, the Judge found that PAE had not acted reasonably in protecting its position: at [297]. She returned to the same subject when conducting her FTA inquiry. She confirmed that PAE acted unreasonably in relying on the accounts by failing to make proper inquiry into their accuracy: at [321]. What is important is that, despiteMr Salmon's focus on cl 19, the integrity of Mallon J's finding does not depend on that provision. It is a standalone conclusion, based solely on the facts. [36] Mr Salmon challenges that finding of unreasonableness. He says the magnitude of the misrepresentation, and the directors' intention that they should be relied upon, trumps other considerations. [37] However, Mr Salmon's argument conflates two different concepts. Mallon J's inquiry into the reasonableness of reliance was directed to the conduct of the purchaser, not the vendor. The nature and extent of one party's reliance may, of course, be influenced by the other party's conduct. But in this case Mallon J distinguished the two. Her conclusion was based solely on PAE's omissions, and the reasons for them, which were independent of and unrelated to the accounting errors. [38] Mr Salmon does not challenge the Judge's finding that PAE should have made further inquiry. He accepts that a reasonable purchaser, especially one experienced in commerce, should have made appropriate inquiries when contemplating a purchase of this type. Mallon J had earlier recorded:[282] PAE must establish that it was induced by the representations to enter the contract. The defendants say that PAE was not induced because it took a deliberate risk as to the truth of the matters stated, it would have entered the transaction even if the true position were known and it relied on its own information. The defendants say that PAE had advice that Mr Carter's predictions as to profitability were not reliable, that PAE had full access to CPS' records and so could make its own assessment, that PAE was aware that there were problems with the accounting system, that PAE ignored the advice that it should check the veracity of the information with Housing New Zealand and that PAE would have been able to verify the information had it taken the appropriate steps. These are matters that go more to the reasonableness of any reliance on the accounts and are better assessed elsewhere (see [292] to [298]).[39] Mallon J returned to this theme of unreasonableness, finding as follows:[295] What is an appropriate level of due diligence is not an exact science, and a full audit will not always be appropriate. Mr Leonard confirmed this when he said 'how far you go with enquiries is difficult'. However if PAE was not intending to conduct a full audit of the accounts, PAE had the opportunity to discuss the accounts with Mr Watson in order to be satisfied as to how they were prepared. Ms Yi said that she would have wanted to speak with Mr Watson if she had been doing the due diligence. Mr Wearne said in re-examination that initially Mr Carter did not want him to meet withMr Watson (although there was no reference to that in his reports to Mr Leslie and it contrasts with his view that Mr Carter was forthcoming – see [38] above) and that later in the negotiations he was not back in Palmerston North to do so. But the fact remains that Mr Wearne (or someone from PAE) could have done so. [296] Mr Carter expressed his confidence about the accounts, and passed on comments said to have come from Mr Watson which provided PAE with some comfort. But these assurances must be balanced against the statement that the accounts were a compilation only, the disclaimer, that the accounts were unaudited and that PAE could have but did not discuss them with Mr Watson directly.[40] We are satisfied, having reviewed the evidence, that there was no inconsistency in Mallon J's finding of PAE's unreasonableness in relying on the representations. The finding was properly based on an objective evaluation of the evidence, and that as a result the directors' conduct did not cause PAE's loss: seeLane Group v DI & L Paterson Ltd [2000] 1 NZLR 129 at [72] (CA), followingAMP Finance NZ Ltd v Heaven (1998) 6 NZBLC 102,414 at 104,420 (CA);David v TFAC Ltd [2009] 3 NZLR 239 at [67] (CA). As Elias J observed inDes Forges v Wright [1996] 2 NZLR 758 at 765 (HC), the FTA:... is not designed to provide a guarantee to purchasers who fail to look after their own interests in a manner which is reasonable in the circumstances .(ii) Implied Warranty[41] Given that Mallon J's dismissal of the FTA claim is sustainable on the ground of unreasonableness, it is strictly unnecessary to consider Mr Salmon's alternative submission. However, in deference to his argument and that of Mr Butler, we shall address it. Mr Salmon submits that Mallon J was wrong to hold that the directors' conduct as a whole was not misleading and deceptive. He says that if the conduct, as a matter of fact, was misleading and deceptive, then the presence of an entire agreement clause cannot alter its character. Otherwise the purpose of the Act would be defeated. Furthermore, he says, if as a matter of fact the representations were offered to induce PAE to enter into the contract, and they had that effect, they must be relevant.[42] It is settled that a party cannot contract out of the s 9 FTA prohibition on misleading or deceptive conduct: see Body Corporate 202254 v Taylor [2009] 2 NZLR 17 at [63] (CA), approving Smythe. The phrase "contracting out" is wide but its purport is obvious. As has often been said, the FTA is designed to protect the consuming public. Its policy would be defeated, for example, by allowing false contractual acknowledgements that a person who had sold goods to another person in trade had not indulged in misleading or deceptive conduct when the opposite was true, or by exempting the trader from liability for the financial consequences of such conduct. [43] But that important policy factor is a starting point, not an absolute. The circumstances are decisive. As this Court said in David:[61] While that [policy] justification has force in relation to consumer transactions, it has less force in the context of commercial transactions involving substantial independently advised parties negotiating from positions of equality. In the latter case, any resulting contract can be expected to reflect the parties' wishes as to the allocation of risk and it is difficult to see why they should not be permitted to allocate risks between them by contracting out of the FTA. [62] Drafters have attempted to circumvent the restriction on contracting out through various mechanisms. For example, there may be a requirement that parties take their own independent advice, or a clause which states that the parties (or one of them) have entered into the transaction on the basis of their own judgment and not on the basis of anything said or done by the other, or an "entire agreement" clause, or a clause which states that any information that one party has provided to the other was supplied in good faith on the basis of information provided by an identified third party. [63] While such mechanisms are not determinative, it has been accepted that they are relevant to the s 9 analysis. For example, in Kewside Pty Ltd v Warman International Ltd (1990) ATPR (Digest) 46-059, French J said at p 53,222:"A disclaimer or exclusion clause will affect liability for misleading or deceptive conduct only if it deprives the conduct of that quality or breaks the causal connection between conduct and loss. Whether it has that effect in a given case is a question of evidence and not a question of law."See also Butcher v Lachlan Elder Realty Pty Ltd (2004) 218 CLR 592 at paras [50] – [51]. But a disclaimer or similar clause may be overwhelmed by oral assurances or other conduct (see Phyllis Gale Ltd v Ellicott (1997) 8 TCLR 57 at pp 65 – 66 and Cornfields [Ltd v Gourmet Burger Co Ltd(2000) 9 TCLR 698 (HC)] at para [41]).[44] Mr Salmon accepts that s 9 of the FTA should not be treated as a general warranty. But he submits that Elias J's statement to that effect in Des Forges, which Mallon J adopted, was made in a different factual context. Whether that was so is immaterial. Mallon J was simply applying a statement of principle from which Mr Salmon does not dissent. The argument then returns in circular fashion to the Judge's conclusion, based on cls 7 and 19, that the parties had agreed there should be no general or implied warranties, and that only the express warranties were of operative force. It would be odd if the FTA mandated the contrary result, especially given Mr Salmon's acknowledgement that s 9 cannot be elevated to the status of a general warranty and the parties' agreement to exclude "any and all implied warranties": see David at [61]. [45] When read together these two contractual provisions did not purport to affect or alter the legal character of the directors' pre-contractual conduct. Instead they acknowledged the existence of representations, without commentary on their accuracy or otherwise, and recited the parties' consensus that, first, the contract constituted their entire agreement, superseding or replacing all previous representations and, second, for contractual purposes the vendors made nine specific material representations. [46] The parties were agreeing, in unequivocal terms at PAE's instigation, that what the directors had said and done before the agreement no longer mattered. Effectively, they drew down the curtain of liability, excluding from it all preceding conduct. By this means, they also broke the chain of causation: s 43 FTA; David at [63]. There is nothing in this agreement and in its particular commercial context which was contrary to public policy, or to the underlying purpose of the FTA, as Mallon J found. [47] Mr Salmon submits alternatively that Mallon J's finding of a breach of warranty is inconsistent with her conclusion about unreasonable reliance under the FTA claim. However, we agree with Mr Butler. Clause 7(c) stated absolutely that "all liabilities of the companies have been disclosed in the financial statements as at 31 March 2004 supplied to the purchaser". It was a guarantee of a certain state of affairs. Liability followed once a breach was established, regardless of its character.Reliance was assumed and liability was strict. That was the end of the question. The Judge's inquiry was limited accordingly. The only other issue was to fix the amount of damages: at [310]-[315]. [48] This ground of appeal must fail also. It is thus unnecessary for us to consider Mr Butler's submission seeking to support Mallon J's findings on other grounds.Renewal[49] PAE also appeals against Mallon J's finding for the directors on their counterclaim for $350,000. Clause 5.2 of the contract provided:In the event that the [HNZ] contract is renewed for a period of not less than 12 months on terms no less favourable than those in that contract, [PAE] shall pay the additional [$350,000] to [the directors] within 5 working days of formal renewal or extension of the [HNZ] contract.[50] In summary, Mallon J accepted that, first, the HNZ contract was renewed and, second, its terms were "no less favourable" than the existing contract: at [323]- [348]. She summarised the relevant factual background and the competing arguments as follows:[325] The evidence is that at the time the contract was entered into there were two contracts in place with Housing New Zealand (see above). They were due to expire on 30 June 2005. They were not rolled over. Instead, later in 2004, Housing New Zealand advised that it would require tenders in respect of all housing areas throughout New Zealand. CPS won a further year at this re-tender (taking the contract through to 30 June 2008). This was for different areas because Housing New Zealand divided the Taranaki and King Country regions. Taranaki joined the Manawatu and Wairarapa regions (while the King Country joined the Waikato and Coromandel areas). CPS tendered for and won the contract for the Taranaki, Manawatu and Wairarapa regions. [326] There are two issues: was this was a 'renewal'; and was it on terms 'no less favourable than' the Housing New Zealand contract. PAE contends that the Housing New Zealand contract was not renewed. It says that a renewal meant a 'rollover' and that a rollover is an extension of the existing contract obtained without the need for a re-tender. It says that a renewal assumes a continuation of that which previously existed. It further says that even if a renewal could occur by re-tender (which is denied) the new contract was materially different from that which it replaced, and therefore was not a renewal.[327] The defendants submit that a 'renewal' is concerned with re- establishing or restoring a contract that was in existence. They say that renewal means that a similar relationship between the parties will exist in the future as existed at the time, and that it is irrelevant how this comes about. They contend that a renewal might occur by re-tender or by a rollover without the need for a re-tender. They also say that the new contract was on terms no less favourable.[51] Mr Salmon's argument in this Court is essentially a repetition of the submission made by PAE and rejected in the High Court. He submits that the HNZ contract was not renewed because on the plain meaning of that word the replacement agreement was not essentially the same as its predecessor. He says that the purpose of cl 5.2 is clear on its face; namely, that PAE was willing to pay a premium of $350,000 for the benefit of being spared an open and competitive retender process, thus running the risk of not winning the contract. He accepts that CPS did win the HNZ contract as part of a competitive tender but says that is not the issue. What PAE paid for, he says, was a figure which eliminated cost, risk and uncertainty. Furthermore, he says that there were significant differences between the original and renewed contract in geographical coverage, rates and additions to special conditions. [52] It is unnecessary for us to subject Mr Salmon's detailed argument to close analysis. We agree with Mr Butler that the word "renewed" in its contractual context simply means that CPS's future relationship with HNZ was to be similar to that which existed at the time of the contract. The provision was, as Mallon J found, directed towards the result, not the process by which it was achieved, whether by tendering or direct negotiation: at [331]. In our judgment, Mr Salmon's argument introduces an artificial degree of refinement which is at odds with the clause when construed as a whole in its context. [53] Mr Salmon also submits that the Judge erred in finding that the terms of the renewed contract were "no less favourable" than those in the original contract. However, he was unable to point to any evidence to show that the net effect of the new HNZ contract was less financially favourable than its predecessor. We agree with Mallon J that PAE has failed to discharge its evidential burden: at [346]. [54] PAE's appeal against Mallon J's finding on the directors' counterclaim must fail.Cross-AppealIntroduction[55] In a separate judgment, delivered later, Mallon J awarded the directors interest at statutory rates on the counterclaim judgment for $350,000 but dismissed their application for costs: PAE (New Zealand) Ltd Brosnahan & Ors HC WN CIV 2005-485-843 7 November 2008. [56] The directors cross-appeal against both decisions.Interest[57] Mr Butler submits that Mallon J erred in fixing interest at statutory rather than contractual rates on its counterclaim. At the date of the High Court judgment the difference between the two measures was $76,000. [58] Mallon J found against the directors for these reasons:[8] In my view the defendants propose a rewriting of the clause that is not warranted. The drafting of clause 6 is not the most precise. Although the Agreement had defined share purchase price and additional share price, these defined terms were not used in clause 6 to indicate which money payable it applied to. Despite this, clause 6 read as a whole is not referring to the additional share purchase price, but only to money payable by the settlement date. It provides for default interest in respect of money not paid on the settlement date. The only money payable by the settlement date is the share purchase price. That it does not refer to the additional share purchase price is confirmed by the date the default interest rate is payable from. It cannot have been intended, as the defendants accept, that default interest could run from the settlement date in respect of money not yet owing. [9] The placement of clause 6 after the clauses relating to payment of the share purchase price and the additional share purchase price is an inadequate basis on which to read in the additional words the defendants contend for. Nor does the factual matrix or 'practical business outcome' provide such a basis. While there may have been reasons why the parties could have provided for default interest if the $350,000 was paid late, the court's task is not to interpret contracts in a manner that would have made sense if the parties had turned their mind to an issue, but to ascertain what the parties using those words against the relevant background would reasonably have understood them to mean. TheAgreement makes sense without adding in words to provide for default interest to be payable on the balance of the purchase price, and I was not referred to any evidence that the default interest rate was discussed or that indicated that the wording of clause 6 was intended to apply to the $350,000. [Emphasis added][59] Clause 6 of the agreement for sale and purchase materially provided:Except where it is the vendor's fault, if any money payable to the vendors pursuant to this agreement is not paid on the settlement date then the purchaser agrees to pay to the vendors interest on such money at the interest rate, for the period from the settlement date until payment is made. Interest will be calculated on a daily basis without prejudice to any of the vendor's rights and remedies under the agreement.The settlement date was nominated as 30 April 2004. [60] The interest rate was defined as:'Interest rate' means a rate of interest calculated by taking the 90 day prime commercial bill rate on the relevant date, or the nearest business day, and adding an additional 6 per cent.[61] Mr Butler advances the novel proposition that the Court should construe cl 6, to adopt Mallon J's words, "in a manner that would have made sense if the parties had turned their mind to [the] issue" because, to use Mr Butler's words, in this case "the ordinary meaning of the clause does not make sense". Mr Butler says it does not make commercial sense for a default rate of interest to apply to the first payment of the share price but not the second, postulating that commercial parties would expect agreed amounts to be paid on time "unless there were good reasons for it to be otherwise". He refers to orthodox principles of contractual construction and the contra proferentem principle. He relies upon Lord Diplock's well known statement:Antaios Cia Naviera SA v Salen Rederierna AB [1985] AC 191 at 201:... if detailed semantic and syntactical analysis of words in a commercial contract is going to lead to a conclusion that flouts business commonsense, it must be made to yield to business commonsense.[62] We can deal briefly with this submission. It is not the Court's role to reconstruct or recast an unambiguous contractual provision in terms designed to suit one party's perspective of what makes commercial sense. If the directors wished toassert that cl 6 does not accurately reflect the parties' common intention by omitting a reference to the contingent payment, the appropriate course was to apply for a decree of rectification. They did not take that step. The words used in cl 6 must be construed according to their ordinary meaning and within their context. [63] We agree with Mallon J that, objectively construed, cl 6 means that the penalty provision did not extend to the additional payment of $350,000. As the Judge found, the money payable to the directors on settlement date was the agreed share purchase price of $1.25m. Settlement date was defined as 30 April 2004. There was no ambiguity. The inference properly to be drawn from cl 6 is that the parties agreed that any default or delay in payment of the contingent $350,000, which was not payable by settlement date, would attract interest at statutory rates. It follows that we reject Mr Butler's characterisation of the Judge's construction as absurd. [64] This ground of cross-appeal must fail.Costs[65] The directors cross-appeal also against Mallon J's refusal to make an order for costs. She concluded, after taking all factors into account, that the just outcome was for costs to lie where they fall (at [22]):The plaintiff had a measure of success and would ordinarily be entitled to costs and disbursements on the claim on which it succeeded. While it also brought claims that failed, the actions of one of the defendants led to real difficulties in the plaintiff seeking to establish what had occurred. Against that, the defendants succeeded on the counterclaim and successfully resisted the principal claim made against them.[66] The directors claimed costs and disbursements of $192,396, calculated on a 2B basis for eight hearing days with a 50% uplift for steps taken after PAE rejected a settlement offer of $100,000. [67] Mr Butler has advanced lengthy and detailed written argument in support of the directors' appeal. He accepts that the Judge correctly found as follows (at [12]):The starting point to considering the defendants' claim for costs is r 52 of the High Court Rules [1985]. It provides that where the plaintiff succeeds in its proceeding and the defendant succeeds in its counterclaim, the Court awards costs as if each party had succeeded in an independent proceeding. This applies unless the justice of the case otherwise requires.[68] However, Mr Butler submits that the Judge made three reviewable errors when exercising her statutory discretion. We shall deal with each sequentially. [69] First, Mr Butler submits that the Judge erred in failing to treat this case "as four wins for [the directors] and one win for [PAE], or otherwise appropriately acknowledging the scale of [PAE's] loss in the proceeding". He acknowledges that PAE succeeded on its claim for breach of warranty of $230,524. But against that he points out the company's unsuccessful claims for $960,994 for fraudulent misrepresentation, negligent misstatement or breach of the FTA, and the directors' successful counterclaim for $350,000 for breach of the renewal provision. He accepts, though, that as a result PAE is regarded as having "succeeded" in its proceeding: r 3(1) and r 47(a). [70] Mr Butler points to the Judge's acknowledgement that much of PAE's evidence and submissions were directed to its unsuccessful causes of action: at [16]; and that this factor would ordinarily justify a reduction in an award of costs: r 48D(d). However, Mr Butler submits, the Judge did not go far enough and adopt what he calls the principled approach of treating PAE as failing on its three substantive causes of action but succeeding only on a secondary claim (which the directors conceded in their opening at trial), so that when the respective amounts are set off only the directors are entitled to costs. [71] Mallon J expressly considered and rejected this argument: at [13]-[16]. It is relevant to recite her finding (at [15]):Turning first to consider the plaintiff's proceeding against the defendants, the plaintiff succeeded to an extent. It established its claim for breach of warranty. The concession from the defendants as to the understatement of the accounts payable came late – it was made in the defendants' opening submissions. Even then quantum remained in dispute because, in part, the defendants claimed (unsuccessfully) that 'off-setting debtors' were to be taken into account. To establish its claim the plaintiff was required to call expert evidence to prove the amount of the understatement of the accounts payable (this not having been conceded before the plaintiff's case waspresented), to have its expert review the defendants' expert evidence as to the claimed 'off-setting debtors' and to make submissions on the scope of the warranty. The plaintiff's costs in pursuing this claim would have been not insignificant. Applying the general principle (r 47(a)) the plaintiff would be entitled to costs and disbursements in pursuing this claim.[72] Moreover, Mallon J did not regard this factor as decisive of itself, and neither do we. It was one of a number of factors properly calling for consideration on a totality basis. [73] Second, Mr Butler submits that the Judge took into account factors which were plainly irrelevant to PAE's pleaded causes of action. He is referring to a finding of misconduct by one of the directors, Mr Michael Carter, after PAE raised its claims. Having reviewed the evidence, we are not satisfied that the Judge erred in concluding that Mr Carter attempted to conceal the material errors in CPS's accounts and to mislead PAE when conducting inquiries: see the substantive judgment at [181]-[196], [237]-[247] and [349]. His misconduct, which was designed to benefit all directors, is attributable to them for the purposes of assessing costs because of its effect on PAE's preparation of its case for trial against all three. [74] Mr Butler submits that this factor was irrelevant in any event: r 48D(d), r 47. He says the guiding presumption is that a successful party is entitled to costs. He relies on the award of costs to the respondent in Lai v Chamberlains [2007] 2 NZLR 7 (SC). Alternatively, he submits that even where there is an element of moral opprobrium, a denial of costs is not justified: Scales Trading Ltd v Far Eastern Shipping Co Public Ltd CA61/99 28 September 1999. That is because the purpose of the costs regime is to reflect the costs of the proceeding, not to punish an immoral act. He submits there is a presumption that costs follow the event of success, regardless of the reasonableness of suspicions or conduct of the parties. [75] However, we agree with Mr Salmon that the Judge was entitled to take account of Mr Carter's misconduct within the category of "some other reason" (r 48D(f)) when exercising her discretion on costs. (In a written submission made in the High Court on 10 October 2008 Mr Butler expressly accepted that this factor may be relevant to a costs award.) It is appropriate to recite the Judge's finding in full (at [17]):This is not, however, a case where I would reduce an order for costs on this basis. That is for the reason I indicated in my judgment, namely that one of the defendants (Mr Carter) had taken steps after the Agreement to conceal the errors. In their submissions the defendants accept the conduct in deliberately concealing errors could be relevant to the costs discretion (under r 48D(f)). It does not matter whether all of the matters that gave me concern were part of the deliberate concealing of the errors or which of them were. Nor does it matter, as the defendants submit, that it was only one of the defendants who engaged in this conduct or that the plaintiff is part of a multi-national group and the defendants are individuals. In my view what is relevant here is that Mr Carter deliberately made it difficult for PAE to determine the full extent of the errors in the accounts. In so doing PAE's view that the accounts were deliberately manipulated prior to its purchase was not unreasonable and the costs to PAE in seeking to establish the true position were increased.[76] We do not accept that the weight which Mallon J gave to this factor of misconduct was inappropriate. We cannot identify an error in her approach. [77] Third, Mr Butler submits that Mallon J erred in her treatment of an offer by the directors to pay PAE $100,000 in settlement and to abandon their $350,000 claim. He submits that the Judge was wrong to find that PAE was reasonably justified in rejecting the offer. [78] Mallon J's finding on that argument is as follows:[18] The defendants refer to an offer of settlement that was made on a 'without prejudice except as to costs' basis. The offer was to pay the plaintiff $100,000 and for the defendants to relinquish their claim for $350,000. It was made on 21 August 2007 and was initially open for acceptance until 24 August 2007. That was extended at the plaintiff's request to 31 August 2007. The extension was sought because the plaintiff had learned of the existence of Mr Carter's laptop and was pursuing an application for its production and inspection and also because it wished to have and consider the defendants' briefs. In the time period that the offer was open for acceptance, the plaintiff succeeded in obtaining orders for production and inspection only to then find that the laptop had crashed in circumstances viewed by its expert to indicate deliberate sabotage. Given these events, and that the trial was imminent and substantial costs had already been incurred, it cannot be said that the plaintiff failed without reasonable justification to accept the offer that was made (r 48D(e)(v)). [19] Nor do I accept the defendants' submission that the settlement offer was evidence that the warranty claim would have been conceded earlier had that been the only claim the defendants were facing. The settlement offer was made in light of the defendants' assessment of the risks and costs which it then faced. It cannot be inferred from that what offer, if any, would have been made if the claim did not include the larger and more serious claim for fraudulent misrepresentation.[79] Mr Butler subjected the Judge's finding to minute analysis for the purpose of showing that her factual conclusion was wrong. In summary he submits that she erred principally in two conclusions. He says the Judge was mistaken in accepting that PAE had insufficient time to consider the directors' Calderbank offer. However, that was not the foundation for her conclusion. Mr Butler submits also that Mallon J relied on the irrelevant factor that trial was imminent and PAE had already incurred substantial costs, instead of inquiring whether PAE's position would have been improved by accepting the offer at that stage. We agree with Mr Salmon that in the circumstances prevailing on the eve of trial, with evidence that Mr Carter was actively engaged in concealing, destroying or altering relevant documentary material, it was open to the Judge in her discretion to find that PAE's rejection of the offer was not unreasonable. [80] We are not satisfied that Mallon J erred, on this ground or any other grounds for her decision on costs. Accordingly, this cross-appeal must also fail.Result[81] In the result we dismiss PAE's appeal against the substantive judgment and the directors' cross-appeal against the decision on interest and costs. [82] Both parties have been unsuccessful in this Court. Each must bear its own costs and disbursements.Solicitors: Russell McVeagh, Wellington, for Brosnahan, Carter & Pattinson Lee Salmon Long, Auckland, for PAE (New Zealand) Ltd