TURNOVER LIMITED v BUY RIGHT CARS (2016) LIMITED [2021] NZHC 2217

TURNOVER LIMITED v BUY RIGHT CARS (2016) LIMITED [2021] NZHC 2217 [27 August 2021]IN THE HIGH COURT OF NEW ZEALANDAUCKLAND REGISTRYI TE KŌTI MATUA O AOTEAROATĀMAKI MAKAURAU ROHECIV-2017-404-003072[2021] NZHC 2217BETWEEN TURNOVER LIMITEDPlaintiffAND BUY RIGHT CARS (2016) LIMITEDDefendantBRANDON ORLANDINICounterclaim DefendantHearing: 10-12 August 2020; 17-20 August 2020; 21-23 September 2020Appearances: D Bigio QC and D MacRae for the Plaintiff and CounterclaimDefendantM Arthur, D Kalderimis and L Bercovitch for the DefendantJudgment: 27 August 2021JUDGMENT OF WALKER JThis judgment was delivered by me on 27 August 2021 at 3 pmPursuant to Rule 11.5 High Court RulesRegistrar/Deputy RegistrarIntroduction [1]Issues for determination [8]Admissibility of expert evidence [10]Background [20]The Buy Right Cars business at acquisition [20]Negotiations for the acquisition [30]Overview of the APA [43]Consideration [45]Schedule 3 of the APA — the key to the dispute [51]The mutual intention clause [54]The restriction on proposed changes to the business [61]Restrictions on employment and engagement [65]The fundamental covenants [67]Material events post settlement [72]The May Variation [78]Financial performance in EO1 [88]Financial performance in EO2 [93]Interpretation issues [101]Principles of contractual interpretation [101]Submissions on the interpretation controversy [107]How should clause (f)(iv)(C)—the proposed change clause—be understood? [116]The effect of the May Variation on the APA: when did the Orlandini interestscede operational control of the Buy Right Cars business? [121]Schedule 3(f)(iv)(B)(bb): a proscription on employing or engaging contractors[133]Clause (f)(iv)(D)(bb)—distort or adversely impact—a fundamental covenant [140]Clause (f)(vi)(D): any change to the scope or nature of the business, or themanner in which the business is carried on [150]Personnel decisions [156]Does this allegation fail on procedural grounds due to lack of notice? [159]What notice was given? [173]Did the staffing decisions breach a fundamental covenant? [183]Conclusion on alleged breach of fundamental covenants by personnel changes[196]Alleged stock composition breaches [199]Summary of Turnover's case [199]Summary of BRC16's case [214]Discussion [216]Conclusion on stock composition [228]Stock management — a systematic policy of reducing aged stock? [229]Discussion [237]Counterclaims against Turnover and Mr Orlandini [254]Alleged mismanagement of aged stock in EO1 [254]The Dodge Hellcat [268]Summary of result [278]Costs [281]Introduction[1] This is a dispute between the seller and purchaser of a business which imports,certifies and sells used cars. The dispute is the product of a culture clash between anagile, entrepreneurial business and a disciplined corporation. The plaintiff, TurnoverLtd ("Turnover"), is the vendor along with an associated company called I&JCompliance Ltd.1 It is a closely held company owned by Brandon Orlandini togetherwith family members and associates.2 The defendant, Buy Right Cars (2016) Ltd("BRC16"), is the purchaser. It is a subsidiary of the Turners Automotive GroupLimited ("Turners"), the listed parent company of a wholly New Zealand owned andoperated automotive financial service group.3[2] In this judgment, I refer to the business which was purchased as the Buy RightCars business.[3] The consideration payable for the business under the asset purchase agreementbetween the parties ("APA") comprised a payment payable on completion (splitbetween cash and shares) and deferred consideration, known as earn out consideration,calculated in two twelve month periods after acquisition. The earn out considerationpayable (if any) was tied to the financial performance of the Buy Right Cars business.However, an acceleration clause in the APA required payment of the full amount ofthe earn out consideration if BRC16 breached a fundamental covenant as defined inthe APA. In that event, and if the breach could not be or was not remedied, financialperformance was no longer relevant—BRC16 was obliged to pay the full amount ofthe earn out consideration stipulated in the APA and Turnover did not need to provecausation or loss.[4] There is a second significant outcome if a breach of a fundamental covenant isestablished. The restraints of trade will cease to apply. Mr Orlandini and the other1 The plaintiff was formerly named Buy Right Cars Limited but changed its name to TurnoverLimited following sale of the business. I&J Compliance Ltd operated the certification side of thebusiness. It plays only a minor part in the events at issue. I refer to "seller" in the singular to referto the plaintiff and "sellers" to refer to both the plaintiff and I&J Compliance Ltd.2 A report by PWC before the acquisition records that the majority owner is the trustees of theBrandon Orlandini Lifestyle Trust with Qiuchee Wong a minority shareholder. The shareholdingsubsequently changed but the changes are immaterial for the purposes of this dispute.3 At the time of the acquisition, Turners Automotive Group Limited was named Turners Limited.key individuals associated with Turnover will not be restricted in any way fromcompeting with BRC16.[5] Turnover claims BRC16 has breached a fundamental covenant. It says that thefull amount of the earn out consideration is payable. No conduct by BRC16 designedto suppress earnings to avoid payment of the deferred consideration is alleged.However, Turnover contends the purchaser has breached two of the five fundamentalcovenants in the APA by:4(a) implementing changes to the scope or nature of the Buy Right Carsbusiness, or the manner in which that business was carried on, withoutthe prior written consent of Turnover;5 and(b) directly or indirectly taking action or omitting to take any action thatcould distort or adversely affect the financial performance of the BuyRight Cars business without Turnover's prior written consent.6[6] BRC16 denies breach of any obligation under the APA, let alone of afundamental covenant. Suffice it to say, the parties are at odds about the meaning ofmany of the terms of the APA and particularly of the fundamental covenants. Turnoversays the fundamental covenants are expressed in broad and encompassing languagewhich plainly says what it means. BRC16 argues the actions it took did not fall withinthe type of conduct contemplated by the fundamental covenants which were onlyintended to prevent material strategic or governance changes to the business.Consequently, the acceleration provision is not engaged.[7] BRC16 also counterclaims. First, it contends that it overpaid earn outconsideration for the first 12 month period after acquisition. It seeks to recover thatoverpayment. Second, it claims compensation from Mr Orlandini in respect of thepurchase price of a Dodge Hellcat vehicle. It contends Mr Orlandini had BRC16 buy4 The third amended statement of claim dated 23 July 2020 pleads the defendant had directly orindirectly taken actions and/or omissions that had the purpose of inhibiting the achievement,realisation or maximisation of the performance of the Buy Right Cars business to avoid or reducethe amount of any earn out consideration. Turnover did not pursue this allegation at trial.5 Schedule 3(f)(vi)(D) of the APA.6 Schedule 3(f)(iv)(D)(bb) of the APA.this for his personal use and the vehicle is unable to be made compliant for registrationin New Zealand.Issues for determination[8] The issues evolved during trial as is often the case. Some pleaded claims werenot pursued. The issues are broadly:(a) Whether any of the following actions by BRC16 breached afundamental covenant:(i) personnel changes during the relevant period;(ii) changes in stock composition through the purchase of NewZealand-new vehicles and lower grade vehicles, reduction inEuropean stock and ceasing to market for sale vehicles under$10,000; and/or(iii) the sell down of aged stock for reduced margins.(b) Whether Turnover is precluded from asserting breach of thefundamental covenants due to lack of compliance with noticerequirements in the APA.(c) Whether Turnover is in breach of the APA by failing to dealappropriately with aging stock and/or managing its stock properly inthe first earn out period and, if so, the consequences.(d) Whether Mr Orlandini is required to repay the purchase price of theDodge Hellcat which the Buy Right Cars business paid for and whichis unable to be made compliant for registration in New Zealand.[9] Each issue in turn raises a host of sub-issues.Admissibility of expert evidence[10] Turnover sought leave to lead supplementary evidence which was servedapproximately three and a half weeks before trial. BRC16's counsel described two ofthose briefs as "egregiously late". In the end BRC16 did not object to late provisionof two of those briefs, but maintained opposition to the application for leave to servethe brief of evidence of Jeffery Wesley.[11] Mr Wesley's evidence was described as expert industry evidence in reply tothe expert evidence of David Vinsen to be led by BRC16. BRC16 argued that the lateservice of a purported expert brief was prejudicial. It challenged the admissibility ofthe proposed evidence relying on r 11 of the High Court Rules 2016, and s 25 of theEvidence Act 2006.[12] By agreement of the parties, I heard oral argument immediately after Turnoveropened its case. I granted leave to serve the brief late but heard the evidenceprovisionally, meaning I would determine admissibility in the context of all theevidence and after the fact.7 I indicated that BRC16's expert would have anopportunity to supplement his brief during the trial to overcome any potentialprejudice.[13] Mr Wesley holds a Master of Business Administration from the University ofAuckland. He spent eight and a half years as Chief Executive Officer of TurnersAuctions Ltd during which time he oversaw, among other things, the importation ofused cars from Japan to sell through dealers and at public auctions.8 Turners AuctionsLtd was the largest seller of used motor vehicles and largest auction house in NewZealand. He says that he visited Japan multiple times to attend vehicle auctions andmeet vehicle exporters. He then spent approximately seven years as managing directorof Turners & Growers Group, an integrated fruit and vegetable marketing company.In retirement, it appears he has been consulting on an ad hoc basis including to twobusinesses involved in New Zealand new vehicle sales. He states that he hasmaintained his interest in the industry, reads industry publications to keep his7 Turnover Ltd v Buy Right Cars (2016) Ltd HC Auckland CIV-2017-404-3072, 12 August 2020(Results).8 At that time, Turners Auctions had no retail car yards. It was essentially a wholesale business.knowledge generally current and has discussed industry issues with contacts in theindustry.[14] Mr Wesley's brief of evidence records that he has read the Code of Conductfor expert witnesses contained in sch 4 of the High Court Rules and agrees to complywith it. Mr Wesley's brief comments on various aspects of what he described as theBuy Right Cars business model, describes changes to the business in the second earnout period against the backdrop of the market and comments on the reducedprofitability of the Buy Right Cars business during the relevant period.[15] Mr Kalderimis challenged the admissibility of the brief. The challenge was onthe basis that Mr Wesley's evidence would not be substantially helpful to the factfinder in understanding the other evidence in the proceeding or ascertaining any factthat is of consequence to the determination of the proceeding. Objection was chieflydirected at the fact that Mr Wesley had not worked in the industry for 15 years.Without more recent experience, Mr Kalderimis submitted that the proposed evidencedid not meet the relevance or substantial helpfulness thresholds in ss 7 and 25 of theEvidence Act.[16] An assessment of substantial helpfulness under s 25 of the Evidence Actrequires a consideration of the relevance, probative value and reliability of theevidence.9 The assessment is ultimately that of the trial judge, not the parties, and acourt need not accept the opinion of an expert even where it is uncontradicted.10[17] Mr Wesley acknowledged when he gave evidence that he had no experiencerunning a retail car yard and that keeping up with trends in an industry is not the sameas the experience of being engaged in the industry. He proffered the view that manythings have changed in the industry but many things have not.[18] Mr Wesley is an informed and astute observer but such evidence will notnecessarily meet the s 25 threshold. After considering his evidence in context, I haveconcluded that his evidence meets the threshold in respect of some but not all areas9 Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd [2016] NZCA 67, [2016] 2 NZLR 750at [94] citing Mahomed v R [2010] NZCA 419 at [35].10 Prattley, above n 9, at [94].that he sought to address. I consider the question of his lack of more recent experienceand direct involvement in the industry as matters going to weight. I admitted and readhis evidence where that involved recasting (or re-presenting) data adduced by otherwitnesses to which he applied his specific business experience to draw conclusions orchallenge conclusions reached by others. I put to one side observations which weregeneralised and impressionistic,11 referenced other used vehicle businesses withoutexplanatory or evidential foundation,12 or drew conclusions in the absence of reliabledata.13[19] In short, I approach the question of admissibility of Mr Wesley's evidence onan issue by issue basis, accepting that it reaches the requisite threshold on some issuesbut not on others, as identified in the relevant parts of this judgment.BackgroundThe Buy Right Cars business at acquisition[20] Mr Orlandini is an entrepreneur who has spent his working life in the used carindustry. He set up the Buy Right Cars business in around 1997 and was the soledirector of Turnover from 2010. He built it into a highly successful venture which, by2016, operated eight car yards across Auckland. It was one of the largest used carretailers in the Auckland market. In or around 2014, Mr Orlandini also set up I&JCompliance Limited. This company operated a compliance workshop to enable theimported vehicles to be registered in New Zealand after their arrival. This was asynergistic business with its profit dependent on the used vehicle importations of therelated company.14 It was also acquired by BRC16.11 An example is evidence in his brief relating to what "would have been known" in the market aboutthe proportion of European stock in the Buy Right Cars business at relevant times and loss ofcompetitive advantage if stock composition altered predicated on the observations of peopledriving past the front of a car yard.12 Commentary about higher than typical proportions of old stock held in the pre-acquisitionbusiness.13 Advancing a proposition about comparative market prices in the relevant periods withoutsufficient data for example.14 I&J Compliance has since been struck off the Companies Register.[21] The Buy Right Cars business attracted the attention of Turners in late 2015.Turners saw an opportunity consistent with its growth strategy. Turners engaged PWCto prepare a due diligence report.[22] The general manager of the Buy Right Cars business at that time was QiucheeWong. Nicholai Orlandini, Mr Orlandini's son, also had a management role in thebusiness.15[23] Mr Wong had been Turnover's client manager at Westpac. He joined Turnoverin 2014, initially on a contract basis. Mr Orlandini described Mr Wong's role asprimarily dealing with the financial side of the business. It is apparent fromcontemporaneous documents that he was integral to the management of the businessin that he had oversight of—and brought necessary financial discipline to—all areasof the business. It is also apparent that Turners saw him as the 'hands on' operator ofthe business, albeit reporting to Mr Orlandini.[24] Mr Orlandini on the other hand has a very different skillset. My impressionfrom the evidence is that his entrepreneurial flair and instinct for buying and sellinghad been a main driver of the success of the Buy Right Cars business. However, hehad little interest in business administration. He readily acknowledged that he seldomread or sent emails, a quirk that was well known to those at Turnover with whom heworked closely. Over the years he had developed working relationships with agentsin Japan which he leveraged to maximise buying opportunities. AlthoughMr Orlandini and Mr Wong had different attributes and skillsets they worked togethereffectively enough until late 2016.[25] Mr Orlandini, while acknowledging Mr Wong was his "right hand man",insisted that it was he who oversaw the business, including managing the cost ofvehicles, overall margins and discounting. His evidence was that his managers at thecar yards had only limited authority to discount to achieve sales. Any discount beyond"on-road" costs or add-ons (such as new stereo devices) had to be referred up to him15 Nicholai Orlandini was also known as Nicholai Waara. I will refer to him in this judgment asNicholai to distinguish him from his father.for approval. As vehicles were 'priced to the market' in the first place, he had only afew requests each day for discounting.16[26] This account of the discounting practices was largely consistent with otherwitnesses such as Nicholai and Vipul Bhatnagar, a manager who worked for Turnoverbetween 2004 and July 2016 and then in the business under BRC16's ownership.However, it transpired there were various ways in which the retail price of vehicleswas adjusted from time to time and the term "discounting" incorporated differentpractices. A discount from the sticker price was only one method. Other methodswere sometimes termed "re-pricing" or "special" pricing. Mr Bhatnagar accepted thatMr Orlandini would reprice cars "quite a lot". Pricing adjustment was one of thefactors considered in constantly monitoring stock levels.[27] I pause to note the challenge to the reliability of Mr Bhatnagar's evidence intwo respects. First, he now works for Nicholai Orlandini. Second, he accepted he wasloyal to Mr Orlandini as a result of a long and close working relationship and wantedto help him out. Third, some of his observations related to events after the relevantperiods in question. In my assessment, Mr Bhatnagar was an honest witness but onewhose evidence was impressionistic rather than based on any of the contemporaneousdata. The reliability of his evidence was uneven in consequence.[28] Mr Orlandini's evidence was that in 2016 almost all of the stock of the BuyRight Cars business was imported from overseas. The exception was a small numberof trade-in vehicles. About 98 per cent of the imports were from Japan, with the restfrom the United Kingdom. Around 30 to 35 per cent of the total stock importedcomprised European models. Mr Orlandini described this stock make up as one of thekey attributes of the business, along with the quality of the imported vehicles. He saysthat the imported cars from Japanese auction houses were predominantly graded 4 to4.5, based on a Japanese auction grading system, and competitively priced. He furthersays that his business never had any policy of prioritising sale of "aged stock".According to BRC16's expert, David Vinsen, as an industry standard, stock that is 120days or older would be considered extremely old stock.16 Discounting in this context means negotiated reductions from the sticker price on the vehicle ratherthan periodic adjustments of price or other forms of price adjustment.[29] Mr Orlandini said his business was self-funded—meaning it did not use creditfacilities through buying agents. This, he said, meant less external pressure to sellexisting stock. It appears that the Buy Right Cars business had a higher risk approachin relation to aged stock than was typical in the industry.Negotiations for the acquisition[30] From the outset, the challenge was determining the value of the Buy Right Carsbusiness. This challenge was the genesis of the earn out model which saw part of thepurchase price deferred and dependent on actual profitability over a defined period.This model had many advantages for BRC16. It incentivised the Orlandini intereststo remain in the business for the period of the earn out. It introduced an element ofself-funding to the acquisition. Most importantly, it was a mechanism for ascertainingprice or value when, from BRC16's perspective, there was uncertainty over futureprofitability.[31] Mr Wong was a key player in negotiating and concluding the sale to Turners.He acted as the 'go between' and represented Mr Orlandini's interests. He was also aminority shareholder in the Buy Right Cars business at that stage. AlthoughMr Wong's role in the narrative was instrumental, he did not give evidence at trial.His absence was not explained but I infer that Mr Wong has fallen out withMr Orlandini.[32] For Turners, Paul Byrnes and Campbell Smith drove the acquisitionnegotiations. Mr Byrnes was then Group CEO of Turners and Mr Smith was GeneralManager Sales and Channel Development for the Group. Todd Hunter of Turnersbecame responsible for the implementation of the acquisition, having taken on the roleof CEO of Turners Automotive Group Ltd.[33] Overall, the negotiations were protracted and volatile. In hindsight that was aharbinger of what was to come. Negotiations faltered more than once. Finally,Turners, BRC16 as purchaser, I&J Compliance Limited and Turnover as vendorsentered into the APA on 12 July 2016.17 Three covenantors—Mr Orlandini, Mr Wong17 At the time of entering into the APA, Turnover was still formally Buy Rights Cars Ltd.and Nicholai—were also parties. Under the APA, the sellers sold the Buy Right Carsbusiness together with related assets. The acquisition was valued at more than $37million, of which approximately $22 million was for the purchase of inventory(subject to adjustments).[34] BRC16 paid an upfront sum of $9.18 million in cash and shares as completionconsideration. Inventory consideration was also paid on settlement subject to a smallsum held in escrow. The balance (notionally $6.12 million) was to be paid over thecourse of two one-year "earn out" periods. Each earn out period had a targetprofitability measure which had been the subject of negotiation. The first period targetof $4 million sat between the two FY2017 forecasts recorded in the due diligencereport prepared by PWC. The second period profit target was $4.2 million. The earnout consideration payable in respect of each period depended on the ratio of actualprofit to that target measure according to a non-linear scale.[35] The first earn out period ran from 29 July 2016 to 28 July 2017 ("EO1"). Thesecond ran from 29 July 2017 to 28 July 2018 ("EO2").[36] Materially, the APA provided that the three covenantors (collectively "theOrlandini interests") would continue to have day-to-day responsibility for operationof the Buy Right Cars business during the two year earn out period. Nicholai andMr Wong would be employed by BRC16, while Mr Orlandini's services would beprovided through a contractor's agreement.[37] Following settlement, Nicholai and Mr Wong entered into employmentagreements with BRC16. On 12 July 2016, Mr Orlandini signed a contractor'sagreement as required under the APA. It stipulated his obligation to provide adviceand expertise to Turners in return for an annual contracting fee of $100,000. He wasrequired to work at least one day per week on average to provide the services. Eitherparty was entitled to terminate the agreement on 14 days' notice. The duration wasindefinite. The contracting period was to remain in force until terminated by eitherparty in accordance with its terms.[38] The key part of the contractor's agreement was the nature of the services to beperformed by Mr Orlandini, expressed in these terms:The Contractor will:• participate in advisory board meetings;• provide advice on the establishment of new car yards;• provide expertise, know-how, contacts relating to purchasing vehiclesfrom Japan; and• do such other things reasonably requested by the Company that arereasonably incidental to the above services.[39] On the eve of settlement, Mr Orlandini communicated to Turners that he didnot want to be bound by the contractor's agreement. Turners agreed to waive therequirement and terminated the contractor's agreement. In an email setting outTurners' position, Paul Byrnes wrote:I know we will continue to have your full support and the advantage of youradvice, expertise and know-how on all matters relating to the business. I'msure there will be an appropriate opportunity to recognise your valued inputwhen we celebrate delivery of the 2 year earn-out performance milestones.[40] The inventory in the Buy Right Cars business was categorised and valued todetermine its inclusion in the acquisition. Turners says it expected the stock level atsettlement to be around $22 million with an upper limit of $25 million. Between thecategorisation and valuation exercise and signing of the APA, Mr Orlandini purchasedadditional stock, outside the inventory included in the acquisition. The value isdisputed. Turners consider it was nearly $6.8 million of additional stock bought in a"last-minute buying spree". Mr Orlandini said he bought this stock at a time when theacquisition was off the table. How to deal with the additional stock caused somefriction early on.[41] Ultimately, the parties resolved this issue by two side letter amendments to theAPA dated 29 July 2016 and 29 August 2016. The first side letter created a newconcept of "additional excess inventory". This was the amount by which the totalinventory exceeded the cap in the APA. Turners agreed to pay this amount to Turnover180 days after completion with Turnover funding it for the first 180 days. The secondside letter obliged Turnover to pay Turners an amount equivalent to the holding costif Turners' funding exceeded the cap in the APA. As it turned out, the working capitalcommitments did not exceed the cap and so the payment on account of interest costwas not required.[42] The two side letters do not play a major role in the issues for determinationsave that they are part of the factual matrix which led to a level of distrust between theparties. Mr Orlandini in particular was upset when he learned that he would essentiallybe funding the additional stock which he saw as "handing back some of the purchaseprice" and Mr Wong misconstrued the potential obligation to pay Turners the holdingcost. All of this is to say that tensions were rising at an early stage.Overview of the APA[43] I will begin with an overview of the APA before analysing the competinginterpretations of its key provisions.[44] Among other things, the background recitals state Turnover would sell andTurners, through BRC16, would purchase the business and assets on the terms set out.The covenantors are described as shareholders or senior employees of Turnover whohad given certain undertakings to the purchaser. The business is defined as thebusiness known as "Buy Right Cars" owned and operated by Turnover untilcompletion.Consideration[45] The purchase price is provided for in cl 3 of the APA. Clause 3.1 reads:3.1 ConsiderationThe consideration for the Business and the Assets is:(a) the Completion Consideration, plus any Earn Out Consideration(Purchase Price);(b) the assumption of the Assumed Liabilities; and(c) the payments to be made in accordance with clauses 3.3(c), 3.3(d),3.3(e) and 3.3(f).[46] The Completion Consideration is defined as the sum of $7,344,000 cash plusthe cash sums payable to the sellers under cl 3.3(c)(i) and 3.3(c)(ii) plus the issue ofshares in Turners at a stipulated price.[47] The Earn Out Consideration is defined as:Earn Out Consideration means the payment of cash by the Purchaser, and theissue and allotment of shares in [Turners] to be made by [Turners], in eachcase to the Sellers in accordance with clause 3.3(g) and Schedule 3.[48] Clause 3.3(g) stipulates that BRC16 "will procure that the Earn OutConsideration is satisfied in accordance with Schedule 3".[49] The APA sets out a mechanism for determining inventory amounts whichbroadly involved allocating each item of inventory at the valuation date into one ofthree categories. BRC16 would pay full carrying value for stock units that wereassessed by an independent valuer as realisable for more than the carrying value(Category A); pay realisable value for stock units valued lower than carrying value butwithin $3,000 of it (with the difference held in escrow) (Category B); and not purchasestock units where the realisable value was more than $3,000 lower than carrying value(Category C). BRC16 characterises this mechanism as one which provided it with noreal choice about the individual vehicles it purchased as part of the acquisition.[50] Clause 16 provides for restraints of trade for ten years from the completiondate in respect of Mr Orlandini, and three years for each of Nicholai and Mr Wong.Turnover expressly acknowledges in the APA that the restraints are material to thepurchaser's decision to enter into the APA. The APA includes boiler plate clauses inrelation to waiver, rights and remedies and an entire agreement clause.Schedule 3 of the APA — the key to the dispute[51] A series of schedules completes the APA. The material schedule for thepurposes of this dispute is headed "Schedule 3: Earn Out". It sets out the obligationsof the parties during the earn out periods. It also describes the mechanism forcalculation of the earn out consideration. Nothing turns on the actual mechanism,however, to provide some context the key provisions of the mechanism are:(a) the earn out consideration in each period is an applicable percentage of$3,060,000;(b) the applicable percentage is a percentage of the "performancepercentage" achieved in each earn out period;(c) the performance percentage is the percentage of the actual net profitbefore tax in relation to the target net profit before tax—the target being$4 million for EO1 and $4.2 million for EO2;(d) as the performance percentage increases, the applicable percentage of$3,060,000 increases but the performance percentage needs to be morethan 65 per cent before earn out consideration is payable; and(e) if the performance percentage is above 120 per cent, the amount to bepaid is calculated on a 3:1 ratio up to the cap, being a maximumaggregate earn out consideration of $27.5 million.[52] Clause (f) of sch 3 sets out certain agreed exclusions and adjustments to the netprofit before tax ("NPBT") calculation. It reads in part:Matters affecting NPBT(f) For the purpose of this Schedule 3, the Sellers and the Purchaser agreeas follows:(i) The NPBT for each Earn Out Period will be determined fromthe consolidated statement of financial performance of thePurchaser for the Business for the relevant period, to beprepared in accordance with GAAP, after:(C) excluding the following, except where such matter isapproved by the Sellers or two Covenantors inwriting:(aa) Any additional governance costsimplemented by the Purchaser (which, for theavoidance of doubt, does not include anycosts incurred under the Contractor'sAgreement or remuneration for othermanagement employed by the Purchaser).(bb) The effect of any difference in the capitalstructure of the Purchaser on or followingCompletion which affects the NPBT(including a change in the degree of externalleverage or Interest rate(s) payable merely asa result of the change in ownership of theBusiness) compared to the capital structure ofthe Sellers in the 12 months prior toCompletion (being the average equity valueImplicit in the Business of $8.5 million), theintent of the parties being that the NPBT forsuch periods shall be calculated as if suchchange in the capital structure had notoccurred (i.e. the Sellers shall be giveninterest relief on the amount of $8,500,000).(dd) The effect of any voluntary change in the coststructure or margin structure of the Businessimplemented by the Purchaser betweenCompletion and the end of the Earn OutPeriods which reduces the NPBT (excludingany costs associated with complying withGAAP (other than any audited costs whichare dealt with above) or implementing anyrisk management policies (includinginsurance costs) that are reasonable for thenature of the Business at market basedpricing, which will be taken into accountwhen calculating NPBT), the intent of theparties being that the NPBT for such periodsbe calculated as if such change in theBusiness had not occurred.[53] The effect of these carve outs is that the NPBT for the earn out periods is to becalculated as if those changes in the business had not occurred, unless "such matter"is approved by Turnover or two of the three covenantors in writing.18 In context, "suchmatter" is best construed as referring to the changes, differences or additional costsreferred to in the sub-paragraphs. In short, the parties anticipated BRC16 might wishto make changes to the cost or margin structure of the business and agreed to thispractical response. This tells against the proposition that any and all changes in coststructure or margin structure breached the APA.18 Different provisions in the APA record the necessary consents in different terms. Some requirethe consent of at least one covenantor. Others require the consent of Turnover or two covenantors.Turnover argues that this is an indicator of the hierarchy of covenants.The mutual intention clause[54] Clause (f)(ii) is described by the purchaser as analogous to a purpose provisionin a statute. It addresses the inherent tension in an earn out between the longer-terminterests of BRC16 as purchaser of the business and Turnover's interest to maximiseprofit in the short term. It reads:(ii) The mutual intention of the Sellers and the Purchaser is to enhance thecustom and goodwill of the Business, and to maximise its futureearnings and profitability in a manner consistent with goodcommercial practice. Consistent with this mutual intention, theSellers and the Purchaser agree that they will each act reasonably andin good faith to one another in relation to any matter, decision, act oromission that could adversely affect:(A) the NPBT for the Earn Out Periods; or(B) the custom, goodwill, or future earnings or profitability, of theBusiness.[55] The two elements in subparagraphs (A) and (B) represent those differentinterests. Enhancement of custom and goodwill and maximising future earnings andprofitability in a manner consistent with good commercial practice representsBRC16's interest in sustainable profitability over the longer term. Turnover's interestsare represented in the obligation to act reasonably and in good faith to one another inrelation to any matter, decision, act or omission that could adversely affect NPBT.[56] Both parties had an interest in earnings in the earn out periods. Turnover'sinterest was to maximise earn out consideration. Mr Byrnes and Mr Hunter, bothsenior Turners' executives, gave evidence that BRC16 and Turners were also focusedon ensuring profitability to demonstrate value to shareholders.19 This perspective wasnot challenged on cross-examination. But common sense suggests that demonstratingvalue to shareholders may not be as sharp as Turnover's interest in maximisingperformance. This is seen most acutely when, post-acquisition, the business was facedwith the problem of selling aged stock. BRC16 had two options: address the problemin EO2 or over a longer time period. The latter course would likely exacerbate lossesas stock continued to age but crystallise those losses outside the earn out periods. This19 A second aspect of profitability over an earn out period is that it means the acquisition is self-funding to the extent of the profitability.illustrates the perennial tension in any earn out and particularly this earn out. Themutual intention clause was the drafter's attempt to resolve the tension.[57] Clause (f)(vii) in sch 3 is an important clause providing that the covenantorswould continue to have day-to-day responsibility for operation of the business duringthe two year earn out period. It states:(vii) The covenantors will:(E) continue to have day-to-day responsibility for the operationof the Business from Completion to the end of the Earn OutPeriods in accordance with the terms of the Contractor'sAgreement and their employment contracts, except asrequired by this agreement or where the Purchaser consentsotherwise in respect of any specific matter; and(F) use reasonable endeavours to ensure that the Business tradesand operates in the usual and normal course of businessconsistent with past practice.[58] The effect of this clause was to give a wide degree of operational autonomy tothe Orlandini interests, the only limits being past practice and the employment andcontractor's agreements. It meant that operational decisions were their preserve andTurners would be separated from day-to-day operations. This clause reflects a keyfeature of the bargain and the commercial context.[59] Schedule 3 sets out two kinds or classes of obligations: fundamental andordinary covenants. The ordinary covenants were for the mutual benefit of the parties.The fundamental covenants were inserted for the benefit of Turnover.[60] The class is also differentiated by the remedial response. Breach of an ordinarycovenant either has a stipulated consequence short of triggering the acceleration clauseor, in theory, contractual damages are available. Breach of a fundamental covenanttriggers the acceleration provision in sch 3(i), once the preconditions are met.The restriction on proposed changes to the business[61] The key ordinary covenant for present purposes is (f)(iv)(C):[T]he Purchaser will not make any proposed change to the Business duringthe period between Completion and the end of the Earn Out Periods that(except where such change is made in accordance with good commercialpractice to achieve the parties' mutual intentions set out in paragraph (f)(ii) islikely to (other than in an immaterial way) adversely affect the achievementof the Earn Out Consideration or result in the Sellers otherwise failing tomaximise the Earn Out Consideration (including, but not limited to, theintegration or imposition of extra costs or accelerated capital expenditure),must not be implemented during such period unless with the prior writtenconsent of the Sellers or a Covenantor; and [62] There are drafting errors in the clause. BRC16 describes these as minorsyntactical issues and argues that its meaning can be fairly discerned. While allcounsel accept that 'red ink' is needed, they differ on the nature and extent of theproposed corrections. The result of their endeavours on this score providesfundamentally different constructions. I return to this issue later.[63] If any party considers that any matter in sch 3(f)(i), (ii), (iii) or (iv) is not beingcomplied with, sch 3(g) requires that: it will promptly provide written notice of that belief to the other parties andthen, unless the parties reach agreement on the matter (either agreeing that therelevant requirement is being complied with, or agreeing an adjustment to theNPBT to reflect such matter) within 20 Business Days the matter in disputewill be referred by either the Sellers or the Purchaser for ExpertDetermination.[64] Curiously, the process in (g) is, on its face, available in respect of both ordinarycovenants and some of the fundamental covenants. I say curiously since there is thetailored remedy for breach of a fundamental covenant—namely the accelerationprovision is triggered.Restrictions on employment and engagement[65] Schedule 3(iv)(B)(bb) of the APA provides:[T]he Purchaser will not employ or engage any new person to work in theBusiness without the prior written consent of the Sellers, provided thatBrandon Pino Orlandini complies with the requirements of the Contractor'sAgreement [66] The respective obligations are interdependent. The prohibition on employingor engaging new persons without consent is subject to the express proviso—Mr Orlandini's compliance with the contractor's agreement. I apprehend thecommercial reason to be that if BRC16 could not rely on Mr Orlandini, it would needto employ management in the business.The fundamental covenants[67] There are five fundamental covenants restricting BRC16's autonomy. Byclosing submissions, only two were relied on by Turnover. As the meaning of thesecovenants is informed by their immediate context, I reproduce the relevant paragraphsbelow. The fundamental covenants are identified with italics and those relied on inbold italics:(iii) During the Earn Out Periods:(A) the Sellers will use reasonable endeavours to utilise thefinance, capital and insurance provided by other members ofthe Purchaser's group, where possible, subject to the fees andcommissions to be provided by the Purchaser not financiallydisadvantaging the Sellers by adversely affecting the NPBTof the business during the Earn Out Periods;(B) the Purchaser will procure that the Business has sufficientworking capital to continue to carry on the Business in itscurrent form and at its current level of turnover, includingprocuring that Inventory levels are maintained within a range[of] $22,000,000 to $25,000,000, except where otherwiseagreed in writing by the parties;(C) NPBT will continue to be calculated on the basis of currentarrangements for fees and commissions in place with currentproviders.(iv) Without limitation to paragraphs (f)(i) and (ii), except as the Sellersor at least two Covenantors may approve in writing:(D) the Purchaser will not, and it will procure its Representativesdo not, in relation to the conduct of the Business, directly orindirectly take any action, or omit to take any action, that:(aa) has the purpose of inhibiting the achievement,realisation or maximisation of the Earn OutConsideration;(bb) could distort or adversely affect the financialperformance of the Business;(cc) divert or redirect any trading, business opportunitiesor revenues or any customer, client or supplier awayfrom the Business; or(dd) has the purpose of avoiding or reducing the amountof any Earn Out Consideration.(vi) The Purchaser will not, without the Sellers' prior written consent:(A) declare, make or pay a dividend or distribution betweenCompletion and the end of the Earn Out Periods without theprior written consent of the Sellers (not to be unreasonablywithheld, and such consent will not be consideredunreasonably withheld if the Sellers reasonably believes thatsuch dividend or distribution will have a negative impact onNPBT);(B) sell, transfer or otherwise dispose of all or any part of theBusiness;(C) cease to carry on all or any material part of the Business; or(D) implement any change to the scope or nature of theBusiness, or the manner in which the Business is carried on.[68] The acceleration clause in (i) reads:Acceleration(i) If the Purchaser breaches any Fundamental Covenant, and suchbreach is:(i) not capable of remedy by the Purchaser or, if capable ofremedy, not remedied by the Purchaser within 20 BusinessDays of being specifically required to do so in writing by theSellers; or(ii) confirmed by the Expert to be a material breach after havingfollowed the Expert Determination Procedure, and either notcapable of remedy by the Purchaser or, if capable of remedy,not remedied by the Purchaser within 20 Business Days ofbeing specifically required to do so in writing by the Sellers,then, notwithstanding any provision to the contrary in this agreement:(iii) the full amount of the Earn Out Consideration shall beimmediately due and payable by the Purchaser to the Sellersfor each Earn Out Period regardless of whether or not anyapplicable performance targets have been met at the time; and(iv) clause 16 shall not apply, with the effect that the Covenantorsshall not be restricted in any way from competing with theBusiness.[69] Thus the seller is entitled to an immediate or accelerated payment of the fullamount of the earn out consideration in the case of an unremedied breach of afundamental covenant regardless of whether the business is on target. There is norequirement to establish that the breach caused loss or that the performance percentagewould have been reached but for the breach.[70] The parties have different perspectives on the purpose and meaning of theaccelerated payment clause. BRC16 describes it as a provision which displaces theagreed earn out mechanism—disqualifying BRC16 from relying on actual profitresults to determine the value of the business. Thus it has the characteristics of apenalty. Only an action which significantly and fundamentally compromisesTurnover's ability to fairly satisfy the conditions for the earn out payment or fairlyvalue the purchase price was intended to be caught.[71] Turnover on the other hand characterises the acceleration clause as amechanism allowing BRC16 to change and even transform the business by two routes.One with the consent of Turnover. The other by paying to exit. The provisionrecognises that BRC16 may want to more quickly align the business with the valuesof Turners Group for longer term benefits but would have to pay a price to do so withinthe earn out periods.Material events post settlement[72] Monthly Advisory Board meetings were the main formal reporting channel forthe Buy Right Cars business to communicate with Turners. Each month, Mr Wongwould prepare a formal report and representatives would then meet to discuss thereport. The reports included a summary of the monthly financial position. Reportswere prepared for each calendar month and distributed early the following month.Usually Mr Byrnes, Mr Smith and Turner's CFO would attend on behalf of Turners.Mr Wong, Nicholai Orlandini and Steven Orlandini attended on behalf of the seller.Mr Orlandini himself did not attend those meetings.[73] Everyone expected Mr Wong would carry on as general manager through theearn out periods. However, in November 2016 Mr Wong told Mr Orlandini that hehad decided to resign from the business. After discussion, it was agreed he wouldreduce his commitment to the business to two days a week. Mr Wong emailedMr Hunter on 24 November 2016. He confirmed "changes in management". He saidhe would step down as general manager. He explained that his role would now involveforeign exchange management, cash flow management and reporting to the AdvisoryBoard each month. He indicated Nicholai would step into the operational and humanresources part of Mr Wong's former role and Mr Orlandini would take a more activerole in buying again to fill the gap. Asked by Mr Hunter who was the overall "boss",Mr Wong responded: "Brandon is and I will be there to give him the info he needs tomake decisions."[74] The extent of Mr Wong's role in the business from that time is disputed.Turners says that, from its perspective, Mr Wong continued carrying out his duties asgeneral manager notwithstanding this communication. As stated, Mr Wong was notcalled by either party to give evidence. Contemporaneous documents authored byMr Wong suggest that he carried on with the same or broadly similar role for sometime thereafter, regardless of what he had written to Mr Hunter or even what he hadintended. In the absence of Mr Wong, this is not a conflict which I can, or need, toresolve.[75] In late 2016 or early 2017, Turners proposed the Buy Right Cars businessestablish a new car yard on a site owned by Turners in Gavin Street, Penrose.Discussions proved fruitless.[76] In March 2017, the Buy Right Cars business, under the control of the Orlandiniinterests, engaged Doug Rogers as sales trainer.[77] In April/May 2017, Mr Orlandini went on a buying trip to Japan. He bought asignificant number of vehicles. He says he bought approximately 273 in April and 41in May. Turners says Mr Orlandini bought 433 vehicles. Tension within therelationship increased.The May Variation[78] The outcome of the increasing tension was that the parties negotiated avariation to the APA in May 2017 ("the May Variation"). BRC16 argues this was acritically important development because under this agreement, the Orlandini interestsceded operational and day-to-day control of the Buy Right Cars business to Turnersfrom the commencement of EO2.[79] Mr Orlandini instigated the discussions. In March 2017 he spoke withMr Hunter and indicated he wanted payment of the full earn out consideration in returnfor Turners taking control of the Buy Right Cars business. Mr Hunter would not agreeto that proposal but countered with a proposal for a non-refundable $1 million advanceof the final earn out consideration in return for release of control by the covenantors.[80] The key terms of the May Variation were:(a) The clauses in sch 3 of the APA continued to apply in respect of EO1and the calculation of EO1 consideration.(b) BRC16 agreed to make a non-refundable advance payment to Turnoverin respect of EO2 consideration and a further progress paymentcalculated in accordance with a formula stipulated in the May Variation.(c) Subject to payment of the advance payments, and to Mr Wong'semployment by BRC16 from 1 August 2017 to 31 July 2018 for twodays a week on his then terms and conditions of employment (pro-rated), cl (f)(vii) of sch 3 would cease to apply in respect of EO2.20(d) Except as set out, sch 3 would continue to apply in respect of EO2 andthe calculation of the consideration in EO2.(e) If the NPBT actually achieved by the business for both Earn OutPeriods met or exceeded the relevant target NPBT, BRC16 would,promptly, provide to Turnover two new Rolex Daytona Platinumwatches (model 116507 or equivalent).20 This was the provision stipulating that the covenantors were to have day-to-day control of thebusiness.(f) Except as varied by the May Variation, the terms of the APA wereconfirmed and continued in full force and effect.[81] In June 2017, the business trialled a roster for reduced staffing on the car yardson Sundays and Alan McCarrison was engaged by the business as a consultant. On26 June 2017, Mr Wong advised that he was resigning from the business. That led todiscussions between Mr Hunter and Mr Wong on a plan going forward. Turnersdecided that the business would start recruiting for a new general managerimmediately; Mr Wong would work out a notice period of about eight weeks;Mr Rogers would no longer have any involvement and Mr McCarrison would limithis focus to buying instead of involving himself in sales or sales management. Thedecisions relating to Mr Rogers and Mr McCarrison form part of Turnover's claimsaround personnel changes.[82] Nicholai and Mr McCarrison re-priced all stock held to meet the market in lateJune 2017. By this time, Turners had real concerns about stock levels going into EO2.Mr Hunter announced that all buying decisions were to be reviewed by Mr Smith tomanage overall volumes. On 13 July 2017, Mr Smith emailed managers and seniormanagement advising that the Buy Right Cars business would implement a salesincentive scheme for stock that was 300 or more days old. He stated: I have spoken with Brandon directly to clear this campaign with him, andhe is in full support.[83] Mr Orlandini disputes this. His evidence was that no details of the schemewere conveyed to him and he was led to believe it was only a short term arrangement.[84] By late June/early July 2017, the relationship between the parties haddeteriorated to such a level that, on 24 July 2017, Mr Hunter emailed Mr Orlandiniand others in these terms:(a) Mr Smith had been appointed acting general manager after discussionwith Mr Orlandini who lent his support;(b) the business had initiated a recruitment process to appoint a permanentgeneral manager;(c) Turners no longer required or wanted any involvement fromMr Orlandini in the business on a day-to-day basis;(d) Mr McCarrison would assist for one month to help Nicholai procureJapanese commercial stock; and(e) Turners still wanted to try and agree a lease deal on 622 Great SouthRoad.[85] It is fair to say that Mr Orlandini's frustrations with the turn of events boiledover. He sent a number of abusive and offensive text messages to Turners'representatives. Although he subsequently apologised, this confirmed in their mindsthat his erratic behaviour justified the actions they took. BRC16 deny this was part ofa scheme by Turners to "strong arm" itself into the business. Rather, it characterisesthe communication to Mr Orlandini as a measured response which clearly set out hisfuture involvement in the Buy Right Cars business in accordance with goodcommercial practice.[86] Mr Wong left the business around the end of EO1 and Mr Smith assumed theinterim general manager role. The June 2017 Advisory Board report relating to theMay period recorded that Mr Smith had been filling the role of "head of BRC as QWwill be moving on". It went on to record Mr Orlandini (and Mr Wong) believed it wasin the best interests of the business for Mr Smith to continue filling this role for theforeseeable future.21 Mr Orlandini denied in his evidence that this report accuratelyrepresented his views on the matter.[87] In his evidence, Mr Orlandini contended that Mr Smith took over Mr Wong'sspecific role in the business which, by this time, was limited only to financial andforeign exchange matters. Mr Smith was thus only responsible for these functions.This was not however Turners' understanding. Nor was it consistent with thecontemporaneous records authored by Mr Wong. While I do not doubt thatMr Orlandini chose to see Mr Wong's role as limited, the reality was that he simply21 I accept this report was prepared by Mr Wong. He was still with the business at that stage and hadalways had the responsibility of preparing the reports to the Advisory Committee. There was noevidence to suggest it had been authored by someone else.did not appreciate the full extent of Mr Wong's involvement. On cross-examinationhe equivocated, described the situation as confusing and had to concede that Mr Wongwas involved in stock issues including sending "stop buy" notices. He suggested thefull scope of Mr Wong's work on stock management "flew under the radar" becausehe did not pay much attention to Mr Wong's emails.22Financial performance in EO1[88] The first earn out period ended on 28 July 2017. The Buy Right Cars businessachieved 113 per cent of the performance target in the APA. On 31 August 2017, anearn out payment of over $3.4 million was made after a short period of discussion andfinal agreement on the calculation for EO1. The non-refundable advance of $1 millionfor EO2 was paid at the same time.[89] Thereafter, Advisory Board meetings shifted to informing the seller about thetrading performance of the Buy Right Cars business. Responsibility for preparing thereports also shifted from Mr Wong to Mr Smith. The last report prepared by Mr Wongwas the July 2017 report.[90] Sometime in August/September 2017, the lease at the Papatoetoe yard wasterminated by the landlord. The business established a new yard at Lambie Drive,Manukau. This was regarded as an inferior site in terms of display opportunity andlocation. The yard focused on lower value vehicles.[91] After a recruitment process run by external consultants, Julian Stone wasappointed to the role of general manager in November 2017.[92] In February 2018 stink bugs, a biosecurity threat, were discovered on vesselscarrying cars into New Zealand. This caused an initial blockage of cars into NewZealand and then an influx once the problem was resolved.22 I doubt that Mr Wong's role by the end of EO1 is particularly relevant to the analysis. Turnerssays the appropriate reference point is what the Buy Right Cars business looked like at acquisition.Financial performance in EO2[93] It is not disputed that financial performance in EO2 was poor, particularlywhen compared with EO1. BRC16 argues it was the financial performance in thefinancial year ending 2016 ("FY16") which is more relevant since it was the businessrepresented by the FY16 result which was acquired and which the earn out provisionswere designed to keep in place.[94] BRC16 relied on expert evidence from Grant Graham to show the comparativefinancial performance and other financial aspects of the Buy Right Cars business.Mr Graham is a chartered accountant and partner of Calibre Partners with specialistexpertise in valuation, litigation, insolvency and financial restructuring.[95] The data relied on by Mr Graham came from the inventory and salesmanagement software then used by the Buy Right Cars business, known as 'TopGear'.TopGear is an integrated vehicle stock management, sales processing and accountingsystem designed for motor vehicle dealerships.[96] Some of the data had been extracted, collated and analysed by James Kerin, asoftware consultant who developed TopGear. He provided evidence of his dataanalysis in various categories.[97] Helpfully, Mr Graham and Mr Kerin, produced a joint expert's report for trialresolving discrepancies in data.23 The joint report addressed analytical differencesacross seven issues, of which five remained in contest during the trial—aged stocksales, New Zealand new vehicles, lower grade vehicles, European vehicles and under$10,000 vehicles.[98] Mr Graham compared the profit and loss statements of Turnover and thenBRC16 across five periods to provide some financial context. His comparisonshowed, among other things:23 For the most part, Mr Kerin's evidence was factual rather than proffering opinion on the dataextracted. To the extent that any opinion evidence was given, he confirmed compliance with theCode of Conduct.(a) EO2 sales were higher than FY16 but lower than EO1. Sales weredown $3.1 million or 5.3 per cent in EO2 as compared to EO1.(b) EO2 commission income was higher than FY16 but almost identical toEO1.(c) EO2 gross profit was very similar to FY16 (it was $302,000 lower) butlower than EO1 by $2 million.(d) EO2 overheads were higher than in each of FY16 and EO1 (with yearon year increases of approximately $1 million). The largest contributorto the increases was staff costs.(e) The drop of $2.244 million in gross profit (FY16 to EO2) is explainedby changes in staff costs, increases in advertising, rent and otherexpenses, decreases in net contribution from the compliance centre andoffset by decreases in depreciation and interest expenses.[99] In short, Mr Graham's evidence is that the overhead cost is a major componentof the difference in financial performance between EO1 and EO2. BRC16 says thiswas a factor which received scant attention in this trial. It argues the focus in this caseon matters affecting the gross profit ignores the reality that the material impact on thebusiness leading to the poor result was not stock composition or pricing decisions butoverhead changes. The extent to which, or even whether, the materiality or effect ofany alleged changes relied on by Turnover is relevant to analysis of the fundamentalcovenants is contested by the parties.[100] What is not in doubt is that the financial performance of the Buy Right Carsbusiness in EO2 did not satisfy the conditions in the APA for payment of earn outconsideration. On 23 August 2018, Mr Hunter sent Mr Orlandini the calculation forEO2 and advised him no earn out consideration was payable. By this Mr Hunter meantthat, other than the $1 million progress payment paid on 31 August 2017, there wouldbe no further payment.Interpretation issuesPrinciples of contractual interpretation[101] As signalled, the parties disagree on how the fundamental covenants should beconstrued. I begin the analysis of the relevant terms with the principles of contractualinterpretation.[102] The parties are largely in agreement as to the approach to contractualinterpretation established by the authorities and particularly by Firm PI 1 Ltd v ZurichAustralian Insurance Ltd.24[103] After the hearing but before judgment, the Supreme Court delivered itsdecision in Bathurst Resources Ltd v L & M Coal Holdings Ltd.25 The Supreme Courtdid not revisit the principles set out in Firm PI, which it regarded as settling the generalapproach.26 But it examined what evidence outside the words of the contract shouldbe allowed to assist with the task of interpretation. It also examined the distinctionbetween interpretation and implication and the appropriate test for the latter.[104] I summarise the relevant principles of contractual interpretation as follows:(a) The approach is an objective one, the aim of which is to ascertain themeaning which the document conveys to a reasonable person havingall the background knowledge reasonably available at the time thecontract was entered into.27(b) The objective meaning is taken to be that which the parties intended.(c) The context provided by the contract as a whole and any relevantbackground informs meaning.24 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432.25 Bathurst Resources Ltd v L&M Coal Holdings Ltd [2021] NZSC 85.26 At [43] referring to Firm PI, above n 24, at [60]–[63].27 Firm PI, above n 24, at [60] adopting the test formulated by Lord Hoffman in InvestorsCompensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912–913.(d) A purposive or contextual interpretation is not dependent on there beingan ambiguity in the contractual language.(e) While context is a necessary element of the interpretive process and thefocus is on interpreting the document rather than particular words, thetext remains centrally important.28(f) If the language at issue, construed in the context of the contract as awhole, has an ordinary and natural meaning, that will be a powerful,albeit not conclusive, indicator of what the parties meant. However,the wider context may point to some interpretation other than the mostobvious one.(g) If a particular interpretation produces a commercially absurd result, thatmay be a reason to read the contract in a different way than the languagemight suggest.29(h) That does not mean that a court should conclude that a contract doesnot mean what it says simply because this interpretation would beunduly favourable to one party.30(i) Evidence of what a party intended words to mean which wascommunicated during negotiations and shows a common mutualunderstanding as to the meaning is relevant and, subject to the s 8Evidence Act assessment, admissible.31(j) Evidence of uncommunicated subjective intent is irrelevant to theobjective approach to contractual interpretation.3228 At [63].29 At [89].30 Bathurst, above n 25, at [45].31 At [76].32 At [48].(k) If a contract does not provide for an eventuality, the usual inference isthat no contractual provision was made for it.33[105] Of the three types of material extrinsic to the written contract which theSupreme Court identified, only the commercial context and purpose of the contract isin issue in the case at hand. Neither party relied on evidence of prior negotiations(other than in a generalised way) or subsequent conduct to interpret the APA.34 Thisis unsurprising since on one view, none of the parties anticipated the turn of eventswhereby the Orlandini interests would cede operational responsibility to BRC16during the earn out periods.[106] As to implication, the Court said:35We agree that the issue of implication only arises after the express terms ofthe contract have been interpreted and found not to provide for the eventuality.This process of interpretation we refer to includes any logical or necessaryinferences from the expressly agreed terms. However, where the contract doesnot address the eventuality through express language or necessary inferencesfrom that language, the court then moves on to address whether a term shouldbe implied.Submissions on the interpretation controversy[107] I turn now to the submissions made by Mr Arthur and Mr Kalderimis on behalfof BRC16. They submit that the purpose of the fundamental covenants was to restrainTurners while the Buy Right Cars business was under the direct operational control ofTurnover to ensure that Turnover had a fair opportunity to earn the deferredconsideration. The covenants were designed to prevent BRC16 from doing anythingof a governance or strategic nature that rendered the business so different that financialperformance during the earn out periods became an unsuitable way of determining thevalue of the business. Only then would accelerating the earn out be warranted.[108] They draw on the context of the APA as a whole, the wider factual matrix andcommercial common sense to submit that the intention, objectively ascertained, was33 At [116].34 Mr Bigio made the point that there were too many "stops and starts" and last minute modificationsto the APA to rely on the prior negotiations and particularly the term sheets prepared duringnegotiation.35 Bathurst, above n 25, at [113] (footnotes omitted).never to restrict operational decisions since these were the sole preserve of theOrlandini interests at the time of execution of the APA.36[109] They also submit that differences of degree are not alterations to the nature andscope of the business nor the manner in which the business is carried on and BRC16decisions under Turners' control were ones made in accordance with good commercialpractice.[110] They point to four elements which provide the immediate context and shedlight on how the fundamental covenants are to be construed.[111] The first is the clause restricting proposed changes by the purchaser.37 It willbe recalled that this was an ordinary covenant with some errors in expression. Thesecond is the mutual intention clause which they submit places good commercialpractice at the heart of what was intended by the parties.38 The third is the MayVariation which removed the obligation and right of the Orlandini interests to continueto have day-to-day responsibility without introducing any restriction on operationalmatters for BRC16. The fourth is the language in which the surrounding fundamentalcovenants are expressed which speak to matters of governance or structure.[112] Mr Bigio QC, conversely, submits that none of the contextual argumentsovercome the primacy of the text—the plain and natural meaning of the words usedby the draftsperson. He contends these place stringent obligations on the purchaserfor good reason. He refers to the evidence of BRC16's own expert witness,Mr Graham:A relatively small percentage drop in sales in EO2 of 5.3% resulted in a 73%drop in profit. This is because it is difficult for a business of this nature tosimply change its overhead structure (up or down) in reaction to changes intrading levels.36 As to the role of commercial common sense in contractual interpretation, counsel relied on RainySky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900 at [21]; and Arnold v Britton [2015]UKSC 36, [2015] AC 1619 at [17]–[20].37 Schedule 3(f)(iv)(C).38 Schedule 3(f)(ii).[113] Thus, because there is no such thing as a de minimis change with no impact,even the smallest change can be relevant. The acceleration clause recognised this byremoving the burden on the seller to prove the effect of breach or the extent of the losscaused.[114] Mr Bigio describes the invocation by BRC16 of commercial common sense as,in reality, putting a gloss on the plain and natural meaning—injecting qualifiers suchas "substantial" or "significant" or "governance" or "operational" when those wordsare plainly not there. He illustrates the proposition by reference to the express words"any change" in sch 3(f)(vi)(D) which he submits have no qualifying reference to thelevel or intensity of change. He submits that recourse to commercial common sensecannot rewrite the APA in the absence of a claim for rectification. Further, he sayscommerciality is not to be assessed from BRC16's perspective alone.39[115] He also submits that where it is not possible to reconcile inconsistenciesbetween ordinary obligations in the APA and fundamental covenants, then the latterhas priority over the former. He suggests this hierarchy is supported by therequirement of Turnover's consent to actions proscribed by fundamental covenantsrather than the consent of merely one or two of the covenantors. In short, the "goodcommercial practice" clause cannot directly or indirectly override, or dilute, afundamental covenant. More particularly, an ambiguous clause which is reconstructedcannot trump a fundamental covenant expressed in plain English.How should clause (f)(iv)(C)—the proposed change clause—be understood?[116] Although not a fundamental covenant, both counsel spent time on cl (f)(iv)(C).Mr Bigio submits that the clause should be read in the following way (his proposedmodifications underlined):[T]he Purchaser will not make any proposed change to the Business duringthe period between Completion and the end of the Earn Out Periods that(except where such proposed change is made in accordance with goodcommercial practice to achieve the parties' mutual intentions set out inparagraph (f)(ii)) which is likely to (other than in an immaterial way)adversely affect the achievement of the Earn Out Consideration or result inthe Sellers otherwise failing to maximise the Earn Out Consideration39 I record that BRC16 expressly disavowed any reliance on rectification.(including, but not limited to, the integration or imposition of extra costs oraccelerated capital expenditure), and any such proposed change must not beimplemented during such period unless with the prior written consent of theSellers or a Covenantor; and [117] The result is that no proposed change could be implemented by the purchaserduring the earn out periods without the prior written consent of the sellers or acovenantor,40 even where the proposed change is "in accordance with goodcommercial practice to achieve the parties' mutual intentions".[118] Mr Bigio's submission is superficially attractive. But, in the end, I cannotaccept it. It rewrites the clause in an internally inconsistent way. It renders the openingsentences, the 'good commercial practice' exception and the 'de minimis' exceptionredundant. It is common ground that there is a typographical error by the omission ofa closing parenthesis after the reference to "paragraph (f)(ii)". I accept the words"must not be implemented" are superfluous. These essentially reproduce the intent ofthe opening words. I am not persuaded that "implemented" is intended to deliberatelycontrast "proposed" in this clause or that striking out the words "must not beimplemented during such period" does too much violence to the clause as Mr Bigiosuggests. The addition of 'which' after the parenthesis is also redundant.[119] In my assessment, the limitation is to be understood this way. The purpose ofthe clause is to restrict BRC16's ability to make changes with adverse effects on thebusiness to those which accord with good commercial practice or where the effects areimmaterial. The examples of change given in the clause—integration or impositionof extra costs or accelerated capital expenditure—suggests the focus was on changesof an ownership or structural nature, consistent with the limited management role forBRC16 which was anticipated by the parties at the time of acquisition.41 Morematerially, the clause is an indicator that some changes to the Buy Right Cars businessby BRC16 were anticipated by the parties when they entered into the contract.40 The wording of (f)(iv) states two covenantors, whereas the last clause of (f)(iv)(C) states only "a"covenantor. No logical distinction between making changes and implementing changes wasadvanced.41 In this regard imposition of costs in isolation is not necessarily indicative of decision-making byan owner but takes colour from the reference to "integration of costs" implying integration of theowners' other businesses.[120] However, BRC16's argument goes further. Counsel submits that thefundamental covenant restrictions ought not be construed as prohibiting actions byBRC16 that are permitted by cl (f)(iv)(C). In other words, changes in accordance withgood commercial practice within the ambit of cl (f)(iv)(C) cannot be understood tobreach a fundamental covenant. I accept that internal coherence in a contract informsmeaning (provided that coherence can reasonably be found) but consider thissubmission is a stretch. It would too significantly undercut the purpose of thefundamental covenants. I do not accept cl (f)(iv)(C) was intended to carve out spacefor the purchaser to make whatever material strategic or governance changes it wishedso long as they were in accordance with good commercial practice and the parties'mutual intentions.The effect of the May Variation on the APA: when did the Orlandini interests cedeoperational control of the Buy Right Cars business?[121] The May Variation required BRC16 to pay Turnover $1 million towards theEO2 consideration in exchange for the Orlandini interests ceding control of the BuyRight Cars business.42 It was seen as a solution to the escalating tension between theparties.[122] Clause 7 of the May Variation is the key clause as it brought cl (f)(vii)—theday-to-day control provision—to an end. Clause 7 reads:Subject to (i) payment under paragraphs 3 and 4.1 above and (ii) paragraph 16below, clause (f)(vii) of Schedule 3 to the Agreement will cease to apply inrespect of Earn Out Period Two.[123] The parties do not agree on when the May Variation came into effect. Turnoverargues it came into effect on 31 August 2017 when BRC16 paid the earn outconsideration and progress payment for EO2. This is because of the introductoryphrase "subject to" in the clause. The payments were conditions precedent tooperational control. Yet, it is said that BRC16 took 'de facto' control prior to thepayments on 31 August 2017. Mr Bigio referred to an internal email from Mr Hunterwhich recorded:42 There were two payments required under the May Variation. The first was the non-refundableadvance and the second was a further progress payment calculated by the same methodology as atyear-end but calculated half way through EO2.In May we all signed up to a variation to the Earn Out structure which meantcontrol of the business was handed to Turners once we paid the ProgressPayment 1. This will be paid on Thur[sday].[124] On cross-examination Mr Bigio put to Mr Hunter that his email recorded"explicitly there that control of the business was to pass on payment". Mr Hunterappeared to agree that this was what the email recorded. This did not however takethe point of whether this was the correct construction any further. His agreement waslimited to affirming what he recorded in his email only. A parties' subjectiveunderstanding of a contractual term, in the absence of a foundation to show a commonmutual intention, does not answer how it should be construed in fact.43[125] BRC16 argues the important words in cl 7 are "will cease to apply in respectof Earn Out Period Two". Mr Arthur submits that this refers to the entirety of EO2and that the payment obligations were not conditions precedent but mutual andconcurrent obligations.[126] In my assessment, cl 7 of the May Variation is ambiguous but Mr Arthur'ssubmission strains the language. The express words "subject to" clearly import someform of conditionality before operational control is ceded to BRC16. I consider thatthe use of the future tense "will cease to apply" is more consistent with the partiesanticipating that the May Variation would become operative during EO2, rather thanfor the entirety of EO2, otherwise words such as "will not apply" would have beenused. Only when the payment condition was met would operational control pass.[127] The significant difficulty with this clause is the second condition because cl 7also reads "Subject to (ii) paragraph 16 below." Paragraph 16 of the May Variationstipulates that, for the period from 1 August 2017 to 31 July 2018, Mr Wong would beemployed by BRC16 for two days a week on his current terms and conditions. Thatforces the employment condition relating to Mr Wong to be interpreted as only arequirement BRC16 offer continued employment to Mr Wong. Mr Wong, on the otherhand, was not obliged to accept employment. Nor was he obliged to continueemployment until the end of EO2. If he did not accept, neither party could argue that43 Bathurst, above n 25, at [48].the variation came to an end. I note that when Mr Wong did resign at the end ofJune/early July 2017, neither party suggested the May Variation came to an end.[128] In short, I accept Mr Bigio's submission on the objective meaning of the MayVariation. Mr Wong's continued employment was designed to protect Turnover'sinterests—a form of counterbalance to the ceding of operational control because ofMr Wong's experience and know-how, given that he too had a stake in the earn out asshareholder at that time. There is no evidence suggesting BRC16 did not discharge itsobligation to offer Mr Wong ongoing employment.[129] It follows that the formal ceding of control occurred on 31 August 2017, onpayment of the earn out consideration for EO1 and the progress payment for EO2.[130] This does not mean however that Mr Hunter's email to Mr Orlandini on 24 July2017 recalibrating his involvement in the business was premature, or outside the termsof the APA. Although it caused genuine distress to Mr Orlandini, it was withinBRC16's rights. Once BRC16 waived the requirement for Mr Orlandini to adhere toa contractor's agreement at Mr Orlandini's request, his on-going involvement in andresponsibility for the Buy Right Cars business was informal and unstructured. Theemail dated 29 July 2016 from Mr Byrnes to Mr Orlandini captured the informalitywhen it stated, after confirmation that the agreement was deemed terminated and ofno effect between the parties:I know we will continue to have your full support and the advantage of youradvice, expertise and know-how on all matters relating to the business.[131] Mr Orlandini's evidence on cross-examination was that he understood this tomean that he would carry on supporting the business for no cost. I agree that,objectively speaking, it was as loose as this. It recognised Mr Orlandini's capacity tobe a positive force in the post-acquisition period and benefitted Mr Orlandini. Itprovided him with the flexibility he clearly wanted. It minimised the risk that hewould be in breach of any contracting arrangements.[132] In my assessment, the controversy over the May Variation is a distraction fromthe core issues. Turnover does not plead that taking over operational control was abreach of a fundamental covenant. Nor is it pleaded as a separate breach of the APA.BRC16 also has a ready and practical answer: the business necessity of a transitionperiod which was in everyone's best interests. The only relevant observation aboutthe May Variation is that the parties did not introduce new restrictions on operationalcontrol by BRC16 while the restrictions set out in the fundamental covenants werepreserved.Schedule 3(f)(iv)(B)(bb): a proscription on employing or engaging contractors[133] Clause (f)(iv)(B)(bb) of sch 3 of the APA provided that Turners would notemploy or engage new persons to work in the Buy Right Cars business without priorwritten consent, provided Mr Orlandini complied with the requirements of hiscontractor's agreement. While not asserted as a breach, Turnover refers to the clauseas part of its case relating to BRC16's hiring decisions.[134] A question arises about the effect of waiver of the requirement for Mr Orlandinito enter into a contractor's agreement on BRC16's autonomy in employment decisionsin the Buy Right Cars business. When BRC16 acquired the Buy Right Cars business,it anticipated Mr Orlandini would constructively work with BRC16 as owner. Whilethat was the case, BRC16 was not entitled to engage or employ anyone in the businesswithout the prior written consent of Turnover.44[135] There are two possible constructions of cl (f)(iv)(B)(bb). The first is thatterminating the contractor's agreement meant Mr Orlandini was not complying withits terms for the purposes of sch 3. BRC16 was consequently not bound to obtainTurnover's consent to employ staff. The alternative construction is that, havingwaived the contractor's agreement, BRC16 also by implication waived Mr Orlandini'sobligation to comply with it.[136] At the time that Turners waived the requirement for a contractor's agreement,Mr Wong on Mr Orlandini's behalf queried the effect on the prohibition on hiringanyone. On 22 August 2016, he sought confirmation that so long as Mr Orlandinisupported the continued successful operation of the Buy Right Cars business and44 It was also anticipated Mr Wong would stay with the business during the earn out periods.worked towards achieving the earn out, he would be complying with the requirementsof the contractor's agreement for the purposes of cl (f)(iv)(B)(bb).[137] The response from BRC16 was, at best, non-committal. Mr Hunter's emailresponse suggested that the parties deal with that issue later, that there was enoughprotection for Mr Orlandini in the other clauses of the APA and that Turners wouldcome back to the Orlandini interests on the point.[138] Mr Wong and Mr Smith discussed this again on 25 August 2016. Mr Smithemailed Mr Wong that day reiterating that BRC16 considered the Orlandini interestshad sufficient protection through cls (f)(iv)(C), (f)(iv)(D), (f)(vi) and (f)(vii). On26 August 2016 Mr Wong emailed Mr Smith, again seeking confirmation that so longas Mr Orlandini did the work covered by the contractor's agreement, then BRC16would not employ or engage any new person in the business. The issue was notresolved. It was not followed up and was overtaken by other events.[139] While counsel argued the construction of this clause, in the end its meaning isalso a side-issue. It is unnecessary to rely on this provision as a stepping-stone toestablish breach of any fundamental covenant and it would not necessarily follow thatany breach of this provision qualifies as a breach of a fundamental covenant.Clause (f)(iv)(D)(bb)—distort or adversely impact—a fundamental covenant[140] This is one of the fundamental covenants relied on by Turnover. The contestis over its ambit. For ease of reference, I repeat the clause here:(iv) Without limitation to paragraphs (f)(i) and (ii), except as the Sellersor at least two Covenantors may approve in writing:(D) the Purchaser will not, and it will procure its Representativesdo not, in relation to the conduct of the Business, directly orindirectly take any action, or omit to take any action, that:(aa) has the purpose of inhibiting the achievement,realisation or maximisation of the Earn OutConsideration;(bb) could distort or adversely affect the financialperformance of the Business;(cc) divert or redirect any trading, business opportunitiesor revenues or any customer, client or supplier awayfrom the Business; or(dd) has the purpose of avoiding or reducing the amountof any Earn Out Consideration.[141] The preamble to this clause links back to cl (f)(i) and (ii) by stating "[w]ithoutlimitation to paragraphs (f)(i) and (ii)". Clause f(i) deals with exclusions andadjustments to the NPBT. One such exclusion, cl (f)(i)(C)(dd), is the effect of anyvoluntary change in the cost structure or margin structure of the business, the intentbeing that the NPBT is calculated as if such change in the business had not occurred.This suggests that BRC16 is not prevented from making changes to cost structure ormargin structure otherwise cl (f)(i)(C)(dd) would be redundant; the parties anticipatedthe potential for such changes and negotiated the express consequence. Clause (f)(ii)is the mutual intention clause so that (bb) is subject to the requirement to actreasonably and in good faith to one another in relation to anything that could adverselyaffect NPBT or the custom, goodwill or future earnings or profitability of the business.[142] The approval in writing of the sellers or at least two covenantors is required toovercome the prohibition. Compared with other provisions in the APA, this is a moreonerous approval requirement which arguably suggests it is intended to cover the mostsignificant actions or omissions.[143] Turning now to the surrounding context of this fundamental covenant. BRC16argues there is also a relationship with cl (f)(iv)(C) (the proposed change clause)because of the conjunction "and" at the end of cl (f)(iv)(C). Use of the conjunctivemeans that the prohibited action must not only be a change which could distort oradversely affect the business but it must also offend good commercial sense. I do notaccept that submission. Any suggested relationship does not arise merely by virtue ofthe conjunction. The use of "and" merely signifies the last item in a list separated bysemi-colons.[144] Mr Bigio contends that the words "could distort or adversely affect" impose avery low threshold which does not require any distortion or adverse effect to beestablished in fact.[145] There are three problems with that construction. The first is that while "could"theoretically encompasses any action including those which carry only a one per centchance of adversely affecting the financial performance of the business, that is plainlyuntenable as it would preclude in effect every possible action. Reading the clause insuch an unvarnished way makes cl (f)(iv)(C) (the proposed change clause) obsolete.There are also many actions which would be in accordance with good commercialpractice, so permissible under (C), that would carry some risk of adverse consequencesand therefore be barred by (D)(bb), which cannot have been intended. Some changeswere clearly envisaged and it seems much more likely that it was not intended to be atotal prohibition on any type of change. I agree with BRC16's argument that wherethe effect of actions is known, it does not make commercial sense to ignore the actualeffect on financial performance in favour of a hypothetical possibility that has not infact eventuated.45[146] The second problem is that the word "distort", in its context, at least coloursthe words "adversely affect" which follow. "Distort" imports the notion ofmanipulation creating a false impression of financial performance which does notreflect actual performance. It is not therefore to be read effectively as a totalprohibition against any type of change.[147] The third problem is that (bb) sits alongside other actions which have theflavour of purposeful or intentional actions or omissions aimed at inhibiting theachievement of the earn out consideration. Sub-clause (aa) speaks of actions having"the purpose" of inhibiting the achievement, realisation or maximisation of theconsideration. Sub-clause (cc) refers to actions or omissions that "divert or redirectany trading, business opportunities or revenues" and (dd) refers to actions or omissionswhich have "the purpose of avoiding or reducing the amount of any Earn OutConsideration".4645 It is arguable that the prospective language in the clause by use of "could" provides an opportunityfor Turnover to notify a breach in anticipation of an adverse consequence, providing a prophylacticopportunity to give notice in respect of actions which run the risk of adverse consequences andshifting the commercial risk to BRC16.46 This appears to replicate the effect of sub-cl (aa).[148] I consider this provision is to be construed as prohibiting actions or omissionsdirected at distorting or adversely affecting financial performance, these not being inaccordance with good commercial practice. By directed at, I mean an action whichhas as its aim or purpose conveying a false impression about the financial performanceof the business.[149] Construed this way, Turnover's allegations at trial do not fall within the ambitof this fundamental covenant. It has made clear that it does not allege BRC16 tookactions intending to reduce, or with the objective of impeding, the earn outconsideration or otherwise giving a false impression. It follows that Turnover cannotrely on (D)(bb) to accelerate payment of the earn out consideration.Clause (f)(vi)(D): any change to the scope or nature of the business, or the manner inwhich the business is carried on[150] This fundamental covenant proscribes implementation of any change meetingthe description otherwise than with Turnover's prior written consent. Unlike theprevious covenant, the consent of covenantors is insufficient. Mr Bigio makes thepoint that this is in reality a requirement that Mr Orlandini as sole director giveconsent.[151] Again for convenience I reproduce the clause:(vi) The Purchaser will not, without the Sellers' prior written consent:(A) declare, make or pay a dividend or distribution betweenCompletion and the end of the Earn Out Periods without theprior written consent of the Sellers (not to be unreasonablywithheld, and such consent will not be consideredunreasonably withheld if the Sellers reasonably believes thatsuch dividend or distribution will have a negative impact onNPBT);(B) sell, transfer or otherwise dispose of all or any part of theBusiness;(C) cease to carry on all or any material part of the Business; or(D) implement any change to the scope or nature of the Business,or the manner in which the Business is carried on.[152] Mr Bigio stresses the words "any change". However, those words areinextricably linked to the words which follow. The change must be to "scope","nature" or the "manner in which the business is carried on". I accept Mr Kalderimis'argument that these are words of "kind" rather than "degree".[153] This conclusion is also supported by the other sub-clauses in (f)(vi). Sub-clause (D) is the fourth sub-clause in (f)(vi). The character of the other sub-clauses(of which only three of the four are fundamental covenants) is telling. The other sub-clauses preclude declaring, paying or making a dividend or distribution; selling,transferring or otherwise disposing of all or any part of the business or ceasing to carryon all or any material part of the business. These are structural or governance actionswithin the preserve of any business owner which have a meaningful impact on thebusiness as a whole, as distinct from operational, business as usual or day-to-daymatters. Strategic or governance decisions will inevitably affect the operation of abusiness but operational decisions will not of themselves change the scope or natureof a business.[154] This is unsurprising given the architecture of the acquisition. It was intendedthat the covenantors would continue to have operational control and autonomy duringthe earn out periods. This was the bargain the parties reached. Turners had ownershipoversight but not control over the day-to-day decisions required to run the business.Operational decisions were never intended to be caught by the fundamental covenantsbecause the APA did not contemplate or even anticipate Turners taking over the day-to-day operation of the business during the earn out periods.[155] Having construed the fundamental covenants, I turn now to the matters reliedon by Turnover. It alleges that BRC16 assumed de facto control of the Buy Right Carsbusiness from around 24 July 2017 without entitlement and set about implementingchanges without any consent and without regard to the fundamental covenants.Personnel decisions[156] Turnover particularises the alleged personnel breaches as:(a) excluding Mr Orlandini from the business on 24 July 2017, which itdescribes as a sudden and unexpected unilateral decision by removinghis oversight of the business;(b) dispensing with the contracted services of Doug Rogers in about Juneor July 2017 and of Alan McCarrison in about August 2017;(c) appointing Campbell Smith in the role of acting general manager inJuly 2017; and(d) appointing Julian Stone as general manager in September 2017.[157] Mr Bigio was critical of these personnel decisions. He submitted thatindividuals appointed did not have the relevant experience; the business wasunderstaffed; the removal of key buyers left only Nicholai as an experienced buyer;and no one was driving sales for the business, leading to poor results in August andSeptember 2017. He contends that any agreement by Mr Orlandini to Mr Smith'sappointment was limited to replacing Mr Wong. Mr Orlandini did not agree toMr Smith stepping in as "head of business".[158] BRC16's substantive response is two-fold. First, personnel decisions did notrequire approval or consent and were not caught by the fundamental covenants.Secondly, the decisions at issue were made in accordance with good commercialpractice and its obligations under the APA. This included removing Mr Orlandini fromday-to-day operations, as this was consistent with the May Variation and goodcommercial practice because of what Turners perceived as his increasingly disruptivebehaviour.Does this allegation fail on procedural grounds due to lack of notice?[159] A preliminary issue is raised by BRC16. It argues:(a) there can be no reliance on Mr Smith's interim appointment as a breachbecause notice was only given on 11 October 2017. The recruitmentprocess for a permanent general manager to step in was virtuallycomplete in the following 20 day working period;(b) notice of breach in respect of Mr Stone's appointment was not givenuntil 22 June 2018, on the eve of the expiry of EO2; and(c) no notice at all was given in respect of Mr Rogers.[160] Lack of requisite notice for some of the alleged breaches was a recurring themeadvanced by Mr Arthur in his closing submissions. Mr Arthur submits none of thecomplaints raised were incapable of remedy provided notice was given during the earnout period and, on its proper construction, notice had to be given during the earn outperiods. It was implicit in the submission, though not a primary part of the argument,that notice was required as soon as Turnover became aware of the facts. ThereforeTurnover has the onus of showing contractually compliant notice and that an allegedbreach was not remedied. This, he submits, is a fatal procedural flaw in respect ofsome of the complaints.[161] I accept that the onus is on Turnover to demonstrate there was a contractuallycompliant notice because this is expressed as a precondition to triggering theacceleration clause.47 This is implicitly recognised in the amended statement of claimbecause Turnover pleads the issue of notice.48 This raises two sub-issues: first,whether the adequacy of notice is an affirmative defence which ought to have beenpleaded by BRC16 but was not, and secondly, whether notice can only be given duringthe earn-out period since notice outside the period is no longer practically capable ofbeing remedied.[162] An affirmative defence must be pleaded.49 What constitutes an affirmativedefence is not defined in the High Court Rules. It is generally considered to be onewhich relies on material outside the admissions and denial of the facts alleged in the47 RWE Nukem Ltd v AEA Technology plc [2005] EWHC 78 (Comm) at [10].48 See [69]–[70] and [73] of the third amended statement of claim. BRC16's responses are bareadmissions or denials.49 High Court Rules 2016, r 5.48(4).statement of claim.50 The requirement to plead an affirmative defence is to avoidsurprise so that a party may prepare evidence in rebuttal in advance of trial.51 Anapplication to amend a defence may be made to rectify any omission, even potentiallyat trial, but only if there is no prejudice to the party or if there is some mechanism toameliorate that prejudice.[163] In this instance there was no application to amend the defence because BRC16did not accept the issue is properly characterised as an affirmative defence. However,neither was it raised in opening submissions. It was not until closing submissions thatit was explicitly put in issue. I would be hesitant to permit the issue to be raised at allin these circumstances but for three matters. First, documentary evidence of the noticerelied on was before the Court and no submission was made that further additionalevidence would have been led or that there was other prejudice. Secondly, Mr Bigiowas able to and did (ably) address the adequacy of notice in his written and oral closingsubmissions. Thirdly and even more materially, the issue of notice is in no waydispositive of the claims for reasons that will emerge. For that last reason, I willdiscuss the issue of notice only briefly.[164] The requirements for notification of claims for breach of warranty under saleand purchase agreements for property was examined by the Court of Appeal in therecent case of Lendlease Capital Services Pty Ltd v Arena Living Holdings Ltd.52 Theissue there arose in the context of an application to strike out a cause of action forbreach of warranty on the ground of insufficient notice to the vendor before expiry ofthe contractual time limit. Although the agreement was for the sale of property ratherthan a business, and involved warranty provisions, the discussion in the case isapposite. Sale and purchase agreements do not fall within a special category for noticepurposes.53[165] The Court accepted that there are no New Zealand authorities on therequirements for notification of claims for breach of warranty under sale and purchase50 Manukau Golf Club Inc v Shoye Venture Ltd [2012] NZCA 154, (2012) 21 PRNZ 235 at [21].51 See Andrew Beck and others (ed) McGechan on Procedure (online looseleaf ed, ThomsonReuters) at [HR 5.48.15].52 Lendlease Capital Services Pty Ltd v Arena Living Holdings Ltd [2021] NZCA 386.53 At [39].contracts.54 It drew on a number of English authorities dealing both with warrantyclaims arising from sale and purchase of shares and property. The Court distilled thefollowing principles:55(a) A notice is intended to ensure the recipient knows a timely claim isbeing made, or a right is being exercised, under the contract.(b) For that reason, the notice must comply sufficiently with the contractspecifications as to timing, form and particulars. If it does not—forexample, if it is given out of time—the notice is ineffective.(c) Compliance is a question of interpretation of the contract.(d) The reasonable recipient must be credited with knowledge of the noticeprovision, including the date by which notice must be given and thecommercial context.[166] There are two key requirements in cl (i) of sch 3 of the APA:(a) if the breach is capable of remedy, there must be notice in writing; and(b) the notice must specifically require remedy.[167] Mr Bigio's submission is two pronged. First, he says Turnover is entitled togive notice after the expiry of the earn out period though, at that stage, it becomeslogically incapable of cure. I apprehend his argument to be that if the notice provisionrequired that notice of breach of a fundamental covenant be given during the relevantearn out period to trigger the acceleration obligation, then it operates as a back doorlimitation. It cannot have been intended to operate this way he says since informationabout some breaches only came to light after receipt of data for EO2. He submits thatit is also relevant that Turnover ceased to have operational control after August 2017.54 At [23].55 At [41].This meant that decisions made by the Buy Right Cars business under Turners' controlwere not necessarily known to it.[168] Secondly, he submits that there is no obligation to give notice if the breach isnot capable of being remedied, including where there is no retrospective cure becauseadverse impacts on NPBT are already locked in. He cites the example of excludingMr Orlandini from the business from 24 July 2017 which he says deprived the businessof effective management oversight for many months. While that could theoreticallybe cured going forward, it was incapable of retrospective cure. It was simplyhistorical.[169] Despite Mr Bigio's persuasive advocacy, I do not accept either proposition.The commercial purpose of the notice provision is to give the purchaser theopportunity of taking remedial action. It can be no excuse to say that giving noticewould have been futile. Neither is it relevant that the purchaser has not pointed to anyprejudice from denial of the opportunity to remedy. It cannot be right that Turnoverwas entitled to sit back and await the end of the earn out periods before providingnotice of breach to take advantage of the practical impossibility of remedying thosebreaches. The possibility for some "locked in" impact underscores the point thatnotice of breach ought to be given as soon after any breach as practicable, precisely toavoid manufacturing a situation where BRC16 could not address that impact.[170] The end of operational control under the May Variation cannot inform theinterpretation of the notice provisions because the relevant time to construe the parties'objectively ascertained intention is the time of entry into the APA.[171] Further, Nicholai remained in the business until February 2018. He thereforehad at least imputed if not direct knowledge of decisions taken after Turnover cededcontrol until that time. There was also scope for Turnover to know what washappening in the business once Nicholai left. There were the monthly Advisory Boardreports during EO2 and BRC16 had also expressly extended an invitation to MrOrlandini to meet weekly to answer any questions and provide any requestedinformation. That invitation was repeated from time to time. There is no evidencethat Mr Orlandini ever took up that opportunity. Turnover cannot realistically say thatby handing over the day-to-day responsibility they were at such an informationdisadvantage that the notice provision could not be complied with.[172] Of some relevance factually to the issue of notice is Mr Orlandini's evidenceabout the way he went about identifying the causes of the poor performance by thebusiness in EO2:Q: Well the evidence from Mr Hunter, as I think you know, will be that thecompany followed a very careful, a very professional, recruitment process inhiring Mr Stone and they had a shortlist of seven candidates and there weretwo candidates who were at the top and Mr Stone was the one who succeededand everyone was expecting him to succeed, do you disagree with that, or canyou disagree with that?A: I guess the proof's in the pudding, you know, and there just doesn't seemto be any results so we're working our way backwards to try and find out whythe results were so dismal?What notice was given?[173] On 11 October 2017, Turnover's solicitors, Morgan Coakle, wrote to BRC16.The stated objective of the letter was to put BRC16 on notice of concerns about theway the Buy Right Cars business was trading. It was sparked by a reportingmemorandum for the August 2017 period which anticipated NPBT in August of$62,303 before workshop compliance losses were included. The letter attributed thepoor performance to changes which it described as "significant":The most significant change is the removal of key senior management staff,namely Brandon Orlandini, Alan [McCarrison] and Steve Orlandini, which weare instructed was instigated by Grant Baker and Todd Hunter. This hasresulted in, amongst other things, a significant loss of institutional knowledgeand directive within the company. Crucially, they have not been replaced withanyone with remotely similar experience or expertise, capable of the day-to-day responsibility of operating the company.Further, the former General Manager, Qiuchee Wong, who resigned and leftthe company at the end of August, has not yet been replaced. Our clientsconsider the acting General Manager does not have adequate expertise (orday-to-day presence) to effectively operate the company.[174] The letter then referred to other changes which Turnover contended adverselyaffected the profitability of the business. These were the incentive scheme for sellingaged inventory, a "stop buy" decision for the August period resulting in reduction ofthe volume of vehicle compliance through the service centre and the severing ofrelationships with existing financial providers, leaving Turnover without a second tierlending facility on offer to buyers.[175] The letter characterised these changes as breaches of the earn out provisionsbecause they comprised changes to the cost and margin structure of the business, wereinconsistent with the mutual intention clause in breach of the good faith obligationsand breached cl (f)(iv)(C) of sch 3. The letter also asserted noncompliance with thefundamental covenants in (f)(i),(ii) and (iv). It required BRC16 to advise what stepsit had taken and would take to address the concerns and to take all necessary steps toremedy breaches of the fundamental covenants. The letter concluded:We note, without prejudice to the above, that our clients are happy to considerproviding any reasonable assistance to ensure that future profitability of thebusiness is maximised and that the existing business practices, cost structuresand margins are not adversely changed so as to adversely affect the NPBT.[176] On 24 October 2017, Chapman Tripp sent a comprehensive response on behalfof BRC16. The key points in this response were:(a) The August 2017 and September 2017 results were attributable toexcess and aged stock as a result of poor purchasing in EO1.(b) Discounting and sales incentives were required to dispose of the excessand aged stock.(c) The market was increasingly competitive and overstocked.(d) Margins were compressed due to previous purchases at higher thancurrent replacement costs and inferior exchange rate contracts.(e) A stop buy was necessary to correct the overstock position caused byerratic purchasing in EO1 with consequent significantly lowercompliance volumes in the workshop.(f) One-off costs relating to prior periods, including a write-back of foreignexchange gains incorrectly booked in the year to 31 March 2017.(g) Mr Orlandini's purchase of 433 vehicles earlier in the year well inexcess of planned requirements "caused considerable disruption tonormalised workshop operations and profitability" when the companywas under a "no buy" instruction from management.56(h) BRC16 did not accept the performance of the business would have beenor could be significantly improved with the continued engagement ofMessrs Brandon Orlandini, Alan McCarrison or Steve Orlandini.[177] The letter concluded:It follows from the corrected factual description above that there has been nochange made by the Purchaser (or for that matter Turners), which has or islikely to adversely affect achievement of the earn-out and therefore the Earn-Out Consideration, and there have been no breaches of the FundamentalCovenants.[178] There was a further exchange of correspondence between 9 November 2017and 7 December 2017 in which Morgan Coakle reiterated Turnover's demands andpointed out that removal of cl (f)(vii) of sch 3 by the May Variation did not entitleBRC16 to operate the business as it saw fit.[179] On 22 December 2017 Turnover commenced these proceedings. Thestatement of claim particularised the removal and replacement of senior staff as breachof the fundamental covenants, referencing Mr Orlandini, Mr Smith, Mr McCarrisonand Steven Orlandini.57[180] On 22 June 2018, just over a month before the end of EO2, Morgan Coaklewrote again in response to the "results commentary" report for May 2018. It allegedthe following breaches of provisions in sch 3:(a) excess inventory levels exceeding $25 million in breach of cl (f)(iii)(B);56 The figure of 433 is disputed by Turnover. Mr Orlandini says he purchased around 260 vehicles(but accepts 433 may have been the total number of vehicles). He also says he was not aware ofany "stop buy" at that time and that this number of purchases over a six week period was notunusual.57 The seller does not include Steven Orlandini in its claim relating to personnel.(b) purchase of New Zealand vehicles in breach of cl (f)(vi)(D);(c) failure to act reasonably and in good faith; and(d) employment or engagement of new/additional people to work in thebusiness with resulting increase in wages and overheads affectingNPBT in EO2 in breach of cls (f)(ii)(A), (f)(iv)(B)(bb) and (f)(vi)(D).[181] The letter does not mention any particular staff employed by BRC16 by name.[182] I conclude that adequate notice of alleged breach in respect of personnelchanges was given both in form and substance. The language of the letters fromMorgan Coakle was sufficient to convey to a reasonable recipient notice of breach. Itwas not necessary to identify each particular staffing decision in circumstances whereBRC16 maintained its entitlement to make staffing decisions without Turnover'sapproval.Did the staffing decisions breach a fundamental covenant?[183] Turnover's focus on whether or not appointees by BRC16 had the requisiteexperience to run the Buy Right Cars business or the extent of Mr Orlandini's approvalto bring Mr Smith into the business in the critical period is beside the point. The onlyquestion is whether or not the personnel changes were changes BRC16 was entitled tomake. This depends on whether they amounted to changes to the scope or nature ofthe business or the manner in which the business was carried on.58[184] Messrs Rogers and McCarrison had been brought into the Buy Right Carsbusiness by Mr Orlandini post-acquisition. Mr Orlandini's perspective was exploredin cross-examination:Q: you didn't change the nature or the scope of the business byemploying Mr McCarrison as a buyer in March 2017?A: Obviously it was an improvement, it was a change to the scope, it wasan improvement. He was replacing another buyer.58 For the reasons given above, it is unnecessary to determine whether personnel changes breachedcl (f)(iv)(D)(bb) of sch 3.Q: A normal business improvement?A: Yeah, well, was it normal? It was a, he was a replacement for(inaudible), but he was, he was an owner operator, so I wouldn't saythat that was normal.Q: But you would agree it is a business improvement?A: Yes.Q: And it's one that was perfectly appropriate for you to make?A: I thought so.Q: The same is true of bringing Doug Rogers on as a sales trader in June2017, correct?A: Yes.Q: It's normal business improvement.A: Well that was the efficiencies that we were looking at. So we werealways improving the business. I mean, was the BRC business in itselfnormal? I don't know.Q: When Mr (inaudible) was let go, that didn't change the nature or scopeof the business?A: No.Q: Nor did the nature or scope of the business change when Mr Rogersand Mr McCarrison's contracts were ultimately not renewed?A: Well, that's something that I put in place so they had changed.Q: But just as the business hadn't changed when they were brought on,the business didn't change when they were let go?A: You mean back to square one?Q: Back to square one.A: But with no replacement or not an adequate replacement we wereimproving the addition, an improvement not going backwards.Q: But of course there were other staff changes too. The point is thatbringing a staff member on or off doesn't change the nature or scopeof the business?A: It certainly does if they're key people.Q: So your position, just so I have it, is that you didn't change thebusiness as such by bringing him on, but Turners did by letting himgo. Is that your position?A: They changed what I had set up, yes.[185] There can be no realistic suggestion that the decision not to renew the contractsof Messrs McCarrison and Rogers was anything other than routine and operational.Just as bringing them on during EO1 was a business as usual decision, bringing theirengagement to an end was similarly an ordinary business decision. The purchaser wasentitled not to renew their contracts once it took operational control of the business inEO2. Mr Hunter's evidence was that at the time Mr Wong agreed Mr Rogers' contractwould not be renewed and that Mr Orlandini agreed when spoken with.[186] Mr Bigio submits that from the commencement of EO2 and through August,September and October 2017, Mr Smith was the principal decision maker in the BuyRight Cars business. This despite a background in financing rather than operating aretail vehicle business. Further, that Mr Orlandini did not agree to Mr Smith steppingin as head of business at a time when Mr Orlandini did not envisage he would nolonger be involved with the business. It was not until November 2017 that a permanentgeneral manager, Julian Stone, was appointed and there was no consultation with theseller about his appointment.[187] I apprehend the sting of the complaint is that no one with the requisite expertisewas running the business at least from August to October 2017.[188] Although the Orlandini interests claimed Mr Wong had a more limited roleafter November 2016, the reality was different. I accept Mr Wong continued tofunction as the general manager so far as outward appearances were concerned. It isindisputable that there needed to be a general manager once Mr Wong departed. I donot accept that the fundamental covenants capture qualitative matters rather thanmatters of kind but I note Mr Smith's professional background was similar to that ofMr Wong. I accept the evidence of Mr Hunter and Mr Smith himself that he steppedin full-time on an interim basis. Mr Wong confirmed in the June 2017 Advisory Boardreport that he and Mr Orlandini believed it was in the best interests of the business forMr Smith to continue filling the role of 'head of BRC' for the foreseeable future. Therewere differences in perspective as to precisely what this meant to each of them, andpotentially a disjunct between Mr Orlandini's appreciation of Mr Wong's intended andactual role, but ultimately in my assessment this is not material.[189] Whether or not Mr Orlandini would have made the same personnelappointments in EO2 is also beside the point. Mr Orlandini's role in the dailyoperations of the business at and after the acquisition was controversial during thetrial. I accept he was detached from the operational detail of the business. His valuelay in his instinctive deal making prowess. His contractor's agreement did not placeparticularly onerous obligations on him. It was written in high level terms. Once hewas no longer bound by the contractor's agreement, his role became even moreunstructured. This was not to devalue his experience or unique skills. The partiesobviously anticipated his involvement would be constructive during both earn outperiods. But, after termination of the contractor's agreement, it is material that, at leastin contractual terms, he had no responsibility for or obligation in the operation of thebusiness. That was contractually left to Mr Wong and Nicholai as covenantors. Hisinvolvement in the business was not by virtue of the day-to-day responsibility clausein the APA.[190] Mr Orlandini gave evidence that in January 2017 he decided he would have amore active role in the Buy Right Cars business to help his son after Mr Wong hadstepped down from his full time role. It was likely this desire for closer involvementwhich increased tension between him and BRC16 as they jostled over the control anddirection of the business. Mr Orlandini considered BRC16 and Turners wereinterfering in the day-to-day running of the business. There was a discussion betweenthe parties about taking on more yards to grow the business, a proposal which MrOrlandini initially resisted due to increased overhead costs but then reconsidered. Hetook the initiative by starting discussions with Mr Hunter in early March 2017 aboutTurners taking over the Buy Right Cars business in return for full payment of the earnout consideration. On 16 March 2017, at Mr Orlandini's direction, Mr Wong emailedBRC16 stating:It appears as though we have diverging strategies when it comes to thedirection of Buy Right Cars over the next 16 months. The attitude towardsBuy Right Cars from Turners' senior management is unwelcome.[191] This divergence, along with other tensions in the parties' relationship, was thecatalyst for the May Variation.[192] In his report to the Turners' board dated 12 May 2017, Mr Hunter wrote:Relationship wise it has been positive since the break-down last month.Brandon has been communicating well and actually cohesive in theinteractions. Brandon is personally trying to buy a large 12,000m2 site at 622Great South Road which has been the home of Enterprise Cars for the last 20years. Assuming the deal goes ahead he is keen to support the BRC footprintextended to include this site.[193] Any "cohesion" was not to last. The relationship became increasingly strainedin the transition period between the May Variation and EO2. That the relationshipbetween Mr Orlandini and Turners was "difficult" was acknowledged by Nicholai inhis evidence. The purchaser's witnesses gave evidence that Mr Orlandini'sinvolvement in the business was unsettling and demotivating. Mr Orlandini tookumbrage at the way he perceived he was treated. An incident arose in whichMr Orlandini dismissed a member of staff in circumstances which Turners consideredunfair and unlawful.[194] On 13 July 2017, the seller's solicitor emailed Mr Smith pointing out thatBRC16 was not running the business until after the payment for EO1 was made. By24 July 2017, BRC16 had had enough. A few days before the start of EO2, Mr Hunteremailed Mr Orlandini, copying senior Turners managers, the covenantors and parties'respective solicitors. The email stated in part:If there is information that Brandon wants to understand or know about theday to day operations of the business we would require this to be directedthrough Campbell Smith or Todd Hunter. We are also more than happy tohave a regular weekly meeting with Brandon to update him on operationalmatters.We no longer require or want any involvement from Brandon in the businesson a day to day basis. We do not want him on our yards, or talking directly topeople in the business. We note that Brandon's "Contractor's Agreement" wascancelled at Brandon's request.[195] Mr Orlandini did not take this well. He responded in offensive and abusiveterms on multiple occasions, something which he later regretted and apologised for.Conclusion on alleged breach of fundamental covenants by personnel changes[196] I consider that once Mr Orlandini was not subject to his contractor's agreement,BRC16 was not bound to obtain Turnover's consent to engage staff and it could hardlybe a breach to replace one general manager with another once the former resigned.The role was necessary and vital to the ongoing business. Although Mr Orlandini'sinvolvement in the business was of a different kind to the other personnel, I concludethat altering his ongoing involvement was not a matter caught by the fundamentalcovenants. I also accept that the intention on the part of BRC16 was not a 'completeouster'. It was a decision to receive his input in a controlled way with the offer of aregular weekly meeting to update him on operational matters.[197] It is therefore unnecessary to make findings about whether the steps BRC16took were warranted or justified. They are not within the compass of the fundamentalcovenants because they did not amount to implementing changes to the scope or natureof the business, or the manner in which the business was carried on. They werequintessentially operational matters, in the same way that Turnover had operationalautonomy to engage personnel while it had day-to-day control before the MayVariation.59 Whether or not they were decisions in accordance with good commercialpractice does not need to be determined because the claim is not one for breach of cl(f)(iv)(C) of sch 3. Nor is it relevant that they were not decisions that Mr Orlandiniwould have made. As Mr Kalderimis succinctly put it, Turnover's claim is not anegligence claim.[198] It follows that the personnel changes were not breaches of any fundamentalcovenant and consequently do not trigger the acceleration clause.59 There were no restraints on BRC16 in exercising its own operation or control imposed by the MayVariation such as that imposed on the covenantors in cl (f)(vii)(F) of sch 3 to "use reasonableendeavours to ensure that the Business trades and operates in the usual and normal course ofbusiness consistent with past practice".Alleged stock composition breachesSummary of Turnover's case[199] Turnover alleges the Buy Right Cars business under BRC16's control andwithout consent changed the type of vehicles sold in four material ways, namely:(a) introducing vehicles first registered in New Zealand;60(b) reduced stocking of European vehicles;(c) ceasing to sell vehicles with a retail price of under $10,000;61 and(d) increased purchasing of lower grade (in other words lower quality)vehicles.[200] The pleaded allegation in respect of vehicles first registered in New Zealand isthat BRC16 not only purchased a significant number for a total purchase price ofaround $10 million, but also purchased vehicles from Turners with a total combinedpurchase price of approximately $4 million. The average cost of each vehicle was saidto be significantly higher than the average cost of each vehicle purchased by thebusiness before and during EO1. These purchases resulted in a reduction in volumeand profits for the vehicle compliance part of the business.[201] By trial, the focus was on the buying and selling of vehicles first registered inNew Zealand rather than on the source of those vehicles. Turnover resiled from anallegation that BRC16 shifted loss from Turners to the Buy Right Cars business. Iagree that any such allegation is not made out on the evidence.60 Described as "ex New Zealand new vehicles" in the pleadings. This is a vehicle that is firstregistered in New Zealand as opposed to overseas. New local vehicles are a different category.They are also referred to as "buy ins" and could include New Zealand new vehicles and usedimports.61 Mr Bigio modified the allegation on opening while not formally amending the pleading. Noobjection was made. The case for the seller is that this refers to the cessation of marketing for salevehicles for a price less than $10,000 rather than ceasing to sell vehicles below this price point.[202] Mr Bigio submitted that individually or collectively these changes were achange to the business model. Vehicles first registered in New Zealand had never beena feature of the business although there had been an aborted attempt to get into thismarket in around 2015 when Kenneth Bertrand was hired by the Buy Right Carsbusiness. Mr Bertrand's unchallenged evidence was that he purchased about 10 or sovehicles first registered in New Zealand in 2015 but "the plan to get into New Zealandnew cars never really worked".[203] The joint expert report records that during EO2, the Buy Right Cars businesspurchased 407 'local vehicles' of which 381 were vehicles first registered in NewZealand. Mr Graham's evidence is that the margins achieved on selling the localvehicles in EO2 exceeded the margins achieved on selling ex Japan sourced vehiclesin EO1. However, as Mr Bigio pointed out, the issue is not how profitable each vehiclesold was but whether this was a change to the scope or nature of the business, or themanner in which the business was carried on.[204] Turnover relies on Mr Wesley's evidence that introduction of vehicles firstregistered in New Zealand was a significant change to the business. He considers thatsourcing a high volume of used vehicles locally on a regular basis, while producingsatisfactory profit, is more difficult than sourcing Japanese imports. The lack ofgrading system means it is more time consuming and difficult to source suitablevehicles. Such vehicles are typically more expensive to buy and tend to be sourcedfrom lease and rental companies so are more basic and less attractive to the market.Salespeople may have little knowledge of the different makes, models and typesavailable and there would have been less throughput in the compliance operation sincevehicles first registered in New Zealand do not require compliance.[205] Mr Bigio points to a series of reports to the Turners' board and Advisory Boardreports which he submits show the purchase of vehicles first registered in New Zealandwas a change in strategic direction. The report to the Turners' board dated14 December 2017, prepared by Mr Smith, described the November results in theseterms:A loss making month in retail, principally due to depressed vehicle marginsand reduced F&I commissions, resulting in an adjusted loss of $169k. Agedstock, much of which now has negative margins, continues to materiallyimpact the underlying profitability of the business, whereas sales volumes andoverheads remain relatively consistent.Buying – Reduced ex-Japan purchasing in November to offset the NZ newstock strategy and associated purchasing required to build this inventory, perpoint 3 below.NZ New stock – Since Julian's arrival, we have further invested in the NZNew stock strategy, with a [sic] approximately 70 NZ Utes, Sedans and SUV'snow in pre-retail processing and/or stock. We are still developing a strategyfor how we inform the marketplace that we are a destination NZ New Carretailer (as well as a longstanding and trustworthy quality import retailer).[206] The Advisory Board report dated 20 December 2017 refers under the headingof 'Stock Summary' to an overstocked position in part due to the strategy to build aninventory of stock first registered in New Zealand and the bulk purchasing required toimplement this strategy.[207] The minutes from a February 2018 Advisory Board meeting, copied toNicholai among others, recorded that the component of stock first registered in NewZealand was to be 7.5 per cent maximum of stock mix going forward. It also recordedthat the stock first registered in New Zealand was performing well with acomparatively high average margin.[208] Mr Bigio submits these reports show that BRC16 and Turners recognised themarket perception of stock first registered in New Zealand and ex Japan stock isdifferent. If it required the business to reposition itself, it was therefore a change toeither the scope or nature of the business or the manner in which the business wascarried on. That required the consent of the seller.[209] Next, Mr Bigio submits that the evidence shows a deliberate reduction bymanagement of European branded vehicles in stock to about 20 per cent in EO2. Hesays whether or not there were good commercial reasons for this change is not relevantto the fundamental covenants. Stock holdings of European vehicles during the courseof EO1 peaked at 38 per cent of inventory in February 2017. The buying pattern inthe period ending 30 November 2017 shows figures ranging between 14 and 22 percent, consistent with a drive toward a cap on European vehicles of around 20 percent.62[210] The $10,000 price point issue was pursued in a different sense to that pleaded.On 4 January 2018, Mr Stone, then general manager of the Buy Right Cars business,directed Nicholai and other employees to start repricing every vehicle listed below$10,000 up to $10,000 and to let the yards know. In short, the issue became thecessation of marketing or advertising of vehicles on the yards with a sticker price ofless than $10,000.[211] Mr Bigio submitted that this pricing approach created a psychological barrierfor pedestrian traffic attracted to lower prices and was a change to the pricing strategypreviously used by the business. He referred to Mr Kerin's evidence in the joint expertreport which in summary was:63(a) In EO1 there were 179 vehicles sold with an asking price of less than$10,000 and no vehicles sold with an asking price of $10,000.(b) In EO2, prior to February 2018, there were 113 vehicles sold with anasking price of less than $10,000 and 27 vehicles sold with an askingprice of $10,000.(c) In EO2, from February 2018 to July 2018, there were eight vehiclessold with an asking price of less than $10,000 and 213 vehicles soldwith an asking price of $10,000.[212] Turning to the last particular pleaded, Mr Bigio contends the business had aclear policy about the minimum grade vehicle it would purchase from auction houses62 A discussion summary document prepared by Mr Hedgepeth on 20 July 2018, following anAdvisory Board meeting, states that the percentage of European vehicles was tracking towards 20per cent. Notably, the document records that Mr Orlandini attended that Advisory Board meetingfor the first 45 minutes. Mr Orlandini asked why the business was purchasing less European cars,as it is known for selling European vehicles, to which the response was "it is lower as thepreference was not to buy older European vehicles e.g 2004-2006 the rationale was that mostof the vehicles we are seeing brought back to BRC with mechanical issues, are generally Europeanand costing the business significant expense to fix".63 The experts in their joint report agreed that the slight differences in Mr Graham's analysis werenot material.as seen by an email from Mr Wong to Mr Smith on 22 February 2016 during the duediligence phase of the acquisition. He stated:As a rule we only buy auction grade 4 or better. The grading system does varyfrom auction to auction so it is also [dependent] on that. Brandon is the onlyperson authorised to buy less than auction grade 4 and he rarely does it [213] Data in respect of purchasing by grade of vehicle is provided in the joint expertreport. During EO2, 315 grade 3.5 vehicles were bought by the business compared to150 vehicles in EO1. There was an overall increase in reconditioning costs betweenEO1 and EO2.Summary of BRC16's case[214] BRC16 argues there is no entitlement to rely on any of the complaints in thiscategory to trigger the acceleration provision due to lack of contractual notice or, inthe case of the issue of vehicles first registered in New Zealand, late notice.64 It saysthat, at its core, the alleged breach is about stock mix on the yards rather than buyingdecisions and stock mix can always be remedied. As to notice, it argues that notice byletter in June 2018 that purchases of vehicles first registered in New Zealand breachedthe APA requires analysis of whether the breach persisted between 21 July 2018 (being20 working days after the relevant notice) and the end of EO2. Mr Arthur submitsthere was no attempt to present evidence at this granular level.[215] Next, BRC16 characterises all the decisions relating to the type of vehiclesstocked as operational matters of degree falling outside the fundamental covenants ordecisions which could not even be characterised as changes. It points out that none ofthose changes made any material contribution to the drop in profit in EO2 becauseaverage margins on stock less than 300 days old was similar across the financial years2014, 2015 and also in EO1 and EO2. The average margin on New Zealand localvehicles in EO2 was "considerably higher" than the margin on Japanese importsduring both earn out periods. Mr Graham's evidence was that the margin comparison64 Notice was given in the letter dated 22 June 2018, just a month or so before the end of EO2.Turnover contends it also gave notice in the first statement of claim filed in December 2017,relying on Chatfield v Jones [1990] 3 NZLR 285 (CA). The statement of defence filed in February2018 denied any obligation to obtain consent, no breach and nothing to be remedied. Similarly,Turnover contends that notice of the lower grade vehicle purchasing was given in October 2018on the filing of the amended statement of claim.showed the average margin on New Zealand local sales in EO2 was $2,502 and on ex-Japan vehicles in EO2 was $1,762 and in EO1 was $2,368.65 Interestingly, however,the margin on both ex Japan vehicles and New Zealand local sales was lower in EO2than EO1.Discussion[216] It is unnecessary to determine the issue of compliance with contractual noticerequirements because I have determined the stock composition decisions made byBRC16 in EO2 were not captured by the fundamental covenants. Stock-mix questionsare decisions which are operational in nature and part of 'business as usual',principally because buyers need to respond flexibly to changing market conditions.Just as the Orlandini interests had autonomy for stock-buying in EO1, BRC16 had thesame autonomy after the May Variation.[217] There is no cogent evidence of a firm policy pre-acquisition around the stockcomposition (other than in respect of the grade of vehicle). The yards stocked a widevariety of vehicles and the mix fluctuated according to market circumstances.Nicholai explained the buying policy in these terms: "if the car's on, it's on if itworked we'd buy it, that's what we were known for". This fits with my impression ofMr Orlandini's flair and buying instinct.[218] Mr Orlandini on cross-examination acknowledged that vehicles first registeredin New Zealand were always an area of potential focus for the business rather than'the' business (by which I took him to mean not the core business). That is, another"string to the bow" of the business. He also said the business was "[a]lways lookingat improving."[219] Similarly, the evidence does not show a strong brand proposition dependent onthe relative composition of European cars. Neither Mr Orlandini nor Mr Bhatnagar incross-examination expressed the Buy Right Cars brand in those terms. Mr Orlandini65 A New Zealand local vehicle is one purchased from the New Zealand market but which could beeither a New Zealand-new vehicle or a used import.said the brand was all about the "real deal". Asked what was meant by that slogan heanswered:Meaning that we dealt real, there was no sugar-coating, what you see is whatyou get. We were priced to market, we had a good reputation, good gradedcars and we were known in the industry for being good operators and payersand that eventually manifested through to the public.[220] The vehicles first registered in New Zealand did not cannibalise the sale of ex-Japan vehicles but augmented them. The New Zealand units remained a relativelysmall proportion of overall units in stock. Mr Graham's evidence is that 3,093 ex-Japan vehicles were sold in EO1 compared with 2,989 in EO2. Thus, if the stockcomposition was a change, it was one of degree (and relatively modest), rather than asignificant change in the nature, scope or the manner in which the business was carriedon.[221] While it is accurate to say that the number of European vehicles purchasedfluctuated, in my assessment, any shift was not a change which engages any of thefundamental covenants. Again, it was a difference of degree or emphasis. Theevidence showed that the percentage of European vehicles stocked fluctuated over theyears. Even Mr Orlandini had to accept on cross-examination there was no rigidpercentage of European vehicles compared with other types of cars. He stated that heused his intuition and it depended on what was on offer—he would "be flexible". Thepercentage stocked in EO2 was generally consistent with previous years. The experts'joint report agreed that the total stock of European vehicles comprised on average 32per cent for EO1, 26 per cent for EO2 and 21 per cent in the last four months of EO2.[222] The practical impact of these numbers can be seen when looking at individualyards. Based on the "Group Make Mix" data from TopGear showing stock numbersbroken down by branch and location of manufacture, the Manukau yard had 34European make cars at the start of EO1 and 28 at the end of EO2. The Morrin Streetyard had 61 at the start of EO1 and 85 at the end of EO2. Even Mr Orlandini agreedon cross-examination that these numbers seemed minimal. He went on to say "but allthese little things put together, in my opinion, [were] a different business".[223] Also instructive is the fact that in the period in which the seller had operationalcontrol over the business, Mr Wong was himself proposing consideration of a cap onEuropean stock. He wrote in an Advisory Board report for July 2017:We are now selling circa 70% Japanese stock and 30% Euro. It may be prudentto put a 25%-30% cap on Euro stock holding moving forward.[224] Finally, I have put to one side Mr Wesley's evidence on this topic asinadmissible in terms of s 25 of the Evidence Act. It will be recalled that to meet thetest as expert evidence it must be relevant, probative and reliable. Mr Wesley did notprofess to be a marketing expert and indeed accepted that he was not. He did not haveany market data about the Buy Right Cars brand on which to base his views. Hisopinion was impressionistic and generalised. He was not prepared to accept that ifwrong on his view on brand, his conclusions about competitive advantage would alsobe wrong.[225] There is a contest of data relating to the allegation about the effect of removingmarketing of vehicles under $10,000. More vehicles were sold at $10,000 and belowin EO2 than in EO1. This contradicts the pleaded breach but not necessarily the issueas it evolved at trial. But in any event, this is a marketing or pricing approach that inno way reaches the level of a change in nature, scope or manner in which the businessoperated.[226] Finally, the allegation as to lower grade vehicles fails on the evidence. Theevidence from Messrs Vinsen and Ching, the latter a senior buyer for the Buy RightCars business from October 2017, was that different auction houses can grade vehiclesdifferently. There are also differences in quality between cars of the same grade.Mr Ching says he started to buy more vehicles though franchise auctions wherevehicles were graded harder. He suggested a grade 3.5 at those auctions could be agrade 4 at another auction. His evidence was also that vehicle auction grades aremainly based on the vehicle's appearance and not an assessment of mechanical quality.[227] The grade variation in purchased stock fluctuated from year to year. There wasan increase in volume of ostensibly graded 3.5 vehicles between EO1 and EO2 but theimpact of this, if any, is not possible to assess on the state of the evidence. By that, Ido not mean any impact on profitability but rather how the decision can becharacterised. Although the volume changed, these buying decisions did not in myassessment amount to changes to the scope and nature of the business or manner inwhich the business was carried on.Conclusion on stock composition[228] In conclusion, none of the allegations about stock composition, individually orcollectively, fall within the ambit of a fundamental covenant because they areoperational decisions of a character not objectively intended to be caught by thosefundamental covenants. Just as the seller had operational autonomy in respect of stockcomposition in EO1 (subject to the business as usual requirement), so too did BCR16once it was in control.Stock management — a systematic policy of reducing aged stock?[229] Turnover pleads:(a) the purchaser instigated a scheme in EO2 to sell vehicles which hadbeen in stock for 300 days or more (referred to variously as "agedstock" or "excess stock" or "300+ day old stock");(b) implemented an incentive scheme whereby salespeople would be paidadditional commission for selling aged stock (referred to as "Plus300"); and(c) the scheme to sell aged stock resulted in those vehicles being sold for asignificant loss. The difference in profit between sales of vehicles over300 days for EO1 and EO2 was approximately $1.26 million.66[230] The substance of this claim is a contention that the Buy Right Cars businesswhen managed by the Orlandini interests did not have a policy to deal with aged stock.Its modus operandi was simply to price stock to meet the market. In my assessment,66 See [46]–[47] of the third amended statement of claim. The seller also pleads at [48] that BRC16commenced selling vehicles between 0 and 299 days in stock for reduced profits with an adverseimpact on NPBT but in closing Mr Bigio stated this was not specifically pursued.this is a semantic difference only. Even Mr Orlandini accepted in his evidence that asstock becomes old it is more likely to sell at a lower margin or even at a loss. WhenMr Kalderimis put to him in cross-examination that sometimes the business has toburn margin to get stock levels down, Mr Orlandini responded by saying "[t]hat's howit works, yes" and "[y]ou could argue that. That happens on a daily basis."[231] Mr Vinsen's evidence is that vehicle retail companies typically have a policyrequiring regular monitoring of the age of stock units. Turnover adopted a higher riskstrategy in relation to old stock. It follows, submits Mr Bigio, that imposing a morecorporate business structure and reducing the risk by systematically reducing the agedstock amounted to a change in policy within the meaning of the fundamentalcovenants. It was a change to the manner in which the business was carried on andone made without approval or consent.67 Moreover, it was a change which led to poormargins which reduced the NPBT in EO2, a proposition which BRC16 itselfrecognised in December 2017 when Mr Hunter emailed Nicholai in the followingterms: for now we need to slow down on dealing with the older stock and focuson selling a bit more of the newer stuff at good margins to make up for thelosses on the older stock.[232] Turnover argues that the period in early 2018—termed the "Stink Bug" crisis—was an ideal time to liquidate much of the aged stock while holding or maintainingprices. It relies on Mr Wesley's view that an experienced motor vehicle trader wouldand should have recognised that the undersupply in February and March 2018 createdan opportunity. Instead, the Buy Right Cars business sold a higher volume of agedstock in May, June and July 2018 with significant losses. This was at a time when themarket was oversupplied due to release of vehicles on vessels which had been held upby the stink bug issue. In particular, Mr Bigio submitted that Mr Hunter's statementunder cross-examination that BRC16's purpose was to manage '300 day plus' stockdown to the level it was when BRC16 acquired the business (around 80 units) reflectedan arbitrary decision, made without regard to good commercial practice or thefundamental covenants.67 Mr Orlandini accepts he was consulted by telephone about the introduction of a limited and short-lived sales incentive scheme in July 2017.[233] BRC16's response in summary is that buying decisions by the Orlandiniinterests in EO1 created a significant problem which needed to be addressed in EO2to ensure the business could operate sustainably. Aged stock levels consistently rose,and indeed ballooned, in EO1. By the beginning of EO2 the business had too muchold and problematic stock which had increased beyond normal levels.[234] Mr Arthur submits that the policy of dealing with aged stock was nothing new;the business had always been alive to stock management issues under Mr Wong'soversight. He referred to examples where Mr Wong had, both before the acquisitionand during EO1, addressed the need to manage old stock and keep average days unsoldwithin parameters. He says that shows there was no change to the business by BRC16.Rather it was a continuation of the pre-acquisition mode of operation for the obviousreason that aged stock can pose serious problems for car dealerships.68[235] He submits that it was Turnover's purchasing and pricing decisions in EO1 thatresulted in the EO2 losses and that most of the losses complained about were lockedin by the end of EO1 with some vehicles already priced to incur a loss before EO2.The losses were predictable if not inevitable, were always going to negatively affectprofitability and BRC16 could not be criticised for crystallising those losses.[236] Mr Arthur also submitted that discounting of vehicles in EO2 was not a changein business practice but a continuation of a practice of re-pricing to meet the market.He relied on data analysis by Mr Kerin which showed discounting (in the sense ofdiscounting from a vehicle's sticker price) in both EO1 and EO2.Discussion[237] It is not disputed that the seller gave notice of the alleged breach under thishead by letter dated 11 October 2017 and subsequently by letter dated 22 June 2018.[238] The key issue is whether the way in which the purchaser and BRC16 dealt withthis stock was a change to the nature, scope or manner in which the business wascarried on in breach of a fundamental covenant.68 This point was made clearly by Mr Vinsen.[239] It is common ground that the margins on aged stock were different in EO1 andEO2, with aged stock incurring greater losses in EO2. The data shows negativemargins on sales of aged stock in EO2 and that the gross margin on units dropped thelonger a vehicle remained unsold. It is also common ground that the average days instock number increased between 31 July 2016 and 31 July 2017. The monthlyAdvisory Board reports recorded stock age increasing during EO1. Though there wasno consensus on precise numbers, there were approximately 83 units older than 300days at the commencement of EO1, peaking at well over 250 units during EO1, at 199at the commencement of EO2 and dropping to around 80 at the end of E02.69[240] The so-called 'scheme' at issue was an incentive scheme introduced in July2017 for senior managers to earn additional commission per quarter if targets inrelation to reducing the number of 180 and 300 day old stock were met. In additionthere were letters to management addressing key performance indicators or metrics toincentivise addressing old stock. The commission scheme was discussed in broadterms with Mr Orlandini by telephone only. In contemporaneous documents,Mr Smith recorded in an email introducing the scheme that "I have spoken withBrandon directly to clear this campaign with him, and he is in full support".Mr Orlandini took issue with that description.[241] I have concluded that decisions on how to deal with aged stock wereoperational decisions rather than decisions falling within the fundamental covenants.Any difference in approach between Turnover's management of stock and BRC16'smanagement of stock were differences of degree only. I do not accept they amountedto a change within the meaning of the APA but, even if they were, they were notchanges to the nature or scope of the business or the manner in which the business wascarried on. They were simply decisions of a 'business as usual' character in a businesswhich, at its core, had to manage and turn over stock. I reach this conclusion for thefollowing reasons.69 Mr Kerin produced a spreadsheet (Exhibit 1) showing the numbers of 300+ day old stock as at16 August 2016 and the quantity sold, unit margin and the change in quantities by month to July2018.[242] First, I accept that it was not unusual in EO1 for vehicles to be re-priced, eitherby way of steady adjustments over a period or by significant reductions from time totime. BRC16 continued that in respect of cars purchased by the Orlandini interests inEO1 which were always going to negatively affect profitability.[243] Second, while I accept that from Mr Orlandini's perspective Turnover did nothave a 'policy' around aged stock, nor indeed a stock management policy at all, thepractice was different. This was a part of the business which was Mr Wong's preserve.It is clear that he was alive to, had oversight of, and regularly advised the business on,stock management issues including aged stock.70[244] For example, on 17 January 2016, prior to the acquisition, Mr Wong emailedNicholai under the heading "Stock Target" (copying Mr Orlandini): we need to drop our stock levels by 150-200 units in Feb and March andpreferably those units need to be mainly made up of 150 day plus stock. Yourkey measurements are:Average days in stock for all landed cars to be 120 days or lessAverage days in stock per branch to be less than 90 daysWe need to achieve our target stock level by March so we need to beaggressive. Sometimes we have to burn margin to get our stock levels downlike we are doing at the moment.[245] This email was put to both Mr Orlandini and Nicholai on cross-examination.The exchange with Mr Orlandini is telling:Q. Yes. Another part of that directive from Mr Wong is that, "We needto achieve our target stock level by March so we need to be aggressive,average days in stock should be less than 120 days at all times. Theclock starts ticking when the cars land" et cetera, et cetera. And is ityour position that no one paid any attention to this or is it your positionthat you didn't pay any attention to this?70 The PWC due diligence report noted that the business carried a number of units aged over 210days. Some of those older units would not have been included in the inventory bought by BRC16,but not through the exercise of any choice by BRC16. Rather, that would have been the effect ofthe stock valuation methodology in the APA whereby BRC16 did not purchase category Cvehicles—stock units where the realisable value was more than $3,000 lower than carrying value.A. Well this is not how we ran the business previously, so you know, it'sobviously Todd needed feedback so it was a new thing, but it is myposition that –Q. The date of this is 17 January 2016?A. Yes.Q. By my reckoning that's six months before?A. Sorry, sorry, sorry, say – okay. But no, I wouldn't pay too muchattention to his emails.Q. So your position is you didn't pay much attention.A. No.Q. He goes on to say in the third line under the fourth bullet point, hesays, "Can you please make sure your buying and selling is in linewith the above criteria, sometimes we have to burn margin to get ourstock levels down like we are doing at the moment," and that'sactually what happened?A. Was it? Okay. Well, you know, that flew under the radar –[246] Nicholai on cross-examination did not recall this email. He described the emailas unusual as "[his] dealings were with Brandon on stock and stock levels and whattype of stock, never [Mr Wong]". This email may have represented more rigorousefforts to manage stock precisely because of the potential for acquisition except that itwas sent at a time when any deal was off the table according to Mr Orlandini.71[247] Further, when Mr Bertrand was brought into the Buy Right Cars business inabout May 2015, his formal job description included responsibility to manage a "stockaging system". Among other tasks, he was to develop strategies for keeping averagestock age less than 180 days, identify all stock that was 180 days or older and create asell down strategy. This suggests a growing focus on business discipline, possiblyintroduced by Mr Wong.[248] I also note Mr Wong's email to managers on 15 June 2017 which was copiedto Mr Orlandini. Mr Wong characterised overstocking as a "reasonably large 71 On 23 December 2015 Mr Orlandini emailed Mr Smith in response to receipt of a finalised termsheet: "It's a no from Buyright and a no from Turners.we [sic] will not move now ether [sic] Timeto put it to rest mate."problem" causing pressure on cash flow, operating rhythm and "our aged stock". Hewrote:This weekend please call Nicholai or Brandon on all deals. We need the salesto pick up and there is some willingness on our part to discount at the momentespecially on stock greater than 300 days old. We simply have to move thesecars otherwise we will be dealing with a much larger problem in a few months.Stock sales over 300 days old will not be treated as a discounted deal if soldbetween now and the end of the month.[249] Third, the age of stock was a regularly reported business metric through EO1at a time when Mr Wong was preparing these reports. This shows it was central to thebusiness in a day-to-day operational sense. This is hardly surprising because of thecorrelation between age of a stock unit and margin. It is inconceivable that Mr Wong,who clearly imposed discipline on the business, would not have had a close eye on theage of stock. Indeed, Mr Wesley accepted that the Buy Right Cars business had anaged stock problem and 300 day old stock is extremely old.[250] The expert witness, Mr Vinsen, gave evidence that aged stock leads to reducedprofit margins and higher holding and reconditioning costs which can pose seriousproblems for car dealerships. This accords with common sense as Mr Orlandiniacknowledged.72[251] Fourth, the discounting of aged stock in EO2 amounted to differences in degreebut not kind. There was already a deteriorating trend on margins for 300 day plusstock from August 2016 to July 2017.73 At a Buy Right Cars fourth quarter planningmeeting on 15 December 2017, the BRC16 representatives talked of developing andpresenting three scenarios for the next quarter forecast for the business: conservative,mid and aggressive. Mr Smith emailed Turners' management later that day. Hereferred to the modelling of three scenarios:Scenario A – Exiting the aged position in a moderate fashion, with the aim tohave a normalised stock position by December 2018 (which as an approachmay be too protracted)72 Refer [230] above.73 It was put to Nicholai on cross-examination who accepted a deterioration of $200 between August2016 to July 2017 on aged stock although the data demonstrates it was significantly higher thanthis.Scenario B – Greater focus on exiting the aged position by July 18 (Earn Out2)Scenario A [sic] – Actively correcting the stock holding via retail sales andwholesaling aged stock, with the aim to have a normalised stock position byMarch 2018 (which as an approach may be too aggressive)[252] It was decided a few days later to pursue the first scenario—a conservativeapproach—with no further price reductions until the subsequent direction to Nicholai.As it transpired, it seems the conservative approach was adopted for about threemonths because in the last three months of EO2 a significant number of 300 plus dayold vehicles were sold.[253] It follows that there was no breach of a fundamental covenant under this headof claim.Counterclaims against Turnover and Mr OrlandiniAlleged mismanagement of aged stock in EO1[254] There are two counterclaims pleaded. Both received relatively limitedattention at trial. The first alleges that Turnover's mismanagement of aged stockduring EO1 deferred the crystallisation of inevitable losses and artificially inflated theNPBT in EO1. Had NPBT not been inflated by this practice, the EO1 considerationpayment would have been lower. BRC16 alleges this breaches the APA although thepleading does not identify the clause relied on. Its reliance on cl (f)(ii) of sch 3—themutual intention clause—was only articulated during submissions at trial.74[255] The amended particulars in the pleading relied on at trial are:75(a) It was an historical practice of the Buy Right Cars business to ensurethat it maintained manageable levels of aged stock.74 BRC16 did not rely on cl 5.1 of the APA which imposes an obligation on the sellers to maintainnormal levels of inventory nor cl (f)(vii)(F) of sch 3 which obliges the covenantors to usereasonable endeavours to ensure the business trades and operates in the usual and normal courseof business consistent with past practice.75 Statement of defence to third amended statement of claim and counterclaim dated 23 July 2020.(b) During EO1, the seller and/or the covenantors, including Mr Orlandini,focussed on selling high margin, newer stock.(c) As a result of the focus on selling newer stock, Turnover and/or thecovenantors allowed aged stock to significantly increase beyondnormal levels.(d) The seller and/or the covenantors, having day-to-day responsibility forthe operation of the business, failed to ensure that the businessmaintained manageable levels of aged stock.[256] This counterclaim has morphed since it was first pleaded. The first iterationalleged the use of inaccurate and inappropriate accounting treatment in relation to agedstock leading to an overstatement of EO1 consideration. The current iteration was firstpleaded in or around December 2019.[257] BRC16 calculates that, but for mismanagement, the EO1 payment would havebeen $319,723 lower. This is effectively acknowledged to be a 'rough and ready'calculation based on a comparison of the number of stock units aged 300 days or olderat the beginning of EO1 and the number of stock units aged 300 days or older at thebeginning of EO2.76 The total stock units aged 300 days older at the beginning of EO2were sold at a total gross loss of $689,541. BRC16 argues that the proportion of thisloss incurred through the sale of the 120 excess units at the beginning of EO2 was$417,904. Reducing the NPBT by that amount leads to correspondingly differentinputs to the earn out formula and an alleged overpayment of $319,723.[258] Consistent with Turnover's case on its claims, both the seller and Mr Orlandiniadmit only that the stock held by the business was monitored and priced to market.They deny there was any historical practice to maintain manageable levels of aged76 There was a slight numerical discrepancy in the evidence in respect of these stock numbers.Exhibit 1 produced by Mr Kerin refers to 83 units of stock aged 300 days or older at the beginningof EO1. Mr Hunter's evidence refers to 78 units of stock. Mr Hunter's evidence was that therewere 198 such stock units at the beginning of EO2 and Exhibit 1 refers to 199. The parties agreethat the differences in these figures are modest and immaterial.stock. They also deny focussing on selling high margin, newer stock during EO1 andraise a number of contractual and notice issues as impediments to the counterclaim.[259] In my assessment, there are fatal flaws with this counterclaim.[260] First, Mr Orlandini has no personal liability under the APA except in respect ofspecific undertakings as covenantor. There can be no claim against him personally forbreach of the mutual intention clause because it does not create a personal obligation.Only the "Sellers" are bound. The "Sellers" are defined as the companies, Buy RightCars Limited (now Turnover) and I&J Compliance Limited.[261] Second, there is a contractually prescribed remedy for breach of the mutualintention clause in cl (g) of sch 3 which I read as mandating prompt provision ofwritten notice of a belief that it is not being complied with and referral for expertdetermination if there is no agreed adjustment to the NPBT assessment. There is nosuggestion notice was given under this clause. Nor is there any suggestion that BRC16referred the issue for expert determination despite being aware of the aged stock issueat the commencement of EO2. The mandatory language signals that this is theprescribed and only remedy for breach of the clause in the first instance.[262] Third, cl 10.4 of the APA provides that "[t]he Sellers have no liability for anyClaim unless the relevant Claim is notified in writing to the Sellers before 29 July2019." The counterclaim, as advanced at trial, was only notified after 4 December2019 when counsel for BRC16 on this date sent written notice of its intention to'amend' the counterclaim. Although the new counterclaim bore a relationship to thesubject matter of the original counterclaim, it cannot fairly be characterised as merelyan amendment. Thus, this time bar is engaged.77[263] Fourth, cl 10.5 of the APA excludes specified types of liability. It reads in part:The Sellers will not be liable to the Purchaser for any Claim to the extent that:77 "Claim" is defined in the APA in broad terms: "a reference to a claim means a claim, demand,action or proceeding however arising and whether present, unascertained, immediate, future orcontingent" unless the context otherwise requires.(a) the right to make such Claim arises as a direct or indirect result ofanything done, or omitted to be done, by the Sellers under anyprovision of this agreement;(b) it would not have arisen or occurred but for any voluntary act, event,default, omission, transaction or arrangement after Completion by thePurchaser, [Turners] or any person connected with the Purchaser;[264] Fifth, there is insufficient evidence about Turnover's actual aged stock holdinglevels before EO1 on which to make any assessment. Mr Arthur submitted that allthat matters is the figure at the commencement of EO1. But this did not necessarilyreflect typical stock inventory for Turnover since that level was affected by theinventory process under the APA.78 It has to be remembered that the obligation on thecovenantors was to use reasonable endeavours to ensure the business traded andoperated in the usual and normal course of business consistent with past practice.[265] Sixth, it is unlikely Mr Orlandini would have deliberately adopted a strategyof accumulating aged stock in the first year of a two year earn out unless he had alwaysintended to force an exit and bring the earn out period to an early end. There is noevidence of this. The contemporaneous documents indicate the discussions which ledto the May Variation only started in around March 2017.[266] Finally, I have doubts about the broad brush calculation approach.[267] Accordingly, I dismiss this counterclaim.The Dodge Hellcat[268] BRC16 pleads that in around April 2017, Mr Orlandini agreed to buy a DodgeChallenger Hellcat for his own personal use. After learning it did not comply withNew Zealand regulations and could not be made compliant, he caused BRC16 topurchase and pay for the car. BRC16 contends this was not the kind of vehicle thebusiness would have imported for sale in the ordinary course and Turnover and/or78 BRC16 was not obliged to purchase Category C vehicles as part of the acquisition. It canreasonably be assumed this category comprised older stock but the actual stock numbers by agein Category C did not feature in the case. The PWC due diligence report recognised the businessheld high levels of aged stock.Mr Orlandini have breached obligations under the APA. The vehicle is unable to besold and is sitting in storage. BRC16 alleges that it has incurred a loss of $113,899.It claims interest and costs on that sum.[269] The counter-claim as pleaded does not identify the particular clause of the APArelied on. In its evidence, BRC16 identified the vehicle by a stock number "30053"based on contemporaneous documents extracted from the internal inventory softwareof the business in which the vehicle is described as a "Challenger 6.2L SRT8 Hellcat".[270] BRC16 principally relies on an email dated 13 April 2017 to Mr Wong in whichMr Orlandini wrote:I bought a dodge 2016 for myselfFor 7 mill don't pay for it till rate goes backUp to close to 80.[271] The email was in a chain in which Mr Wong had earlier stated "[j]ust toconfirm, we are now on a stop buy until at least the 18th of May when we will reassess."[272] The purchaser also relies on the cross-examination of Nicholai. I reproducethe exchange in full:Q. And can I ask you to turn two pages along and you'll find a pagenumber that's numbered 1564.1 and this also is a Dodge isn't it?A. Yes.Q. Is this the orange Dodge that you're talking about?A. No, this is Dodge Hennessey not a [Dodge] Hellcat.Q. And this one is clearly not the one being referred to in the email is itbecause it's a 2011 version?A. Yes.Q. And if you can see the price there that it was sold for $57,000 that'sconsiderably lower than the price we've just been looking at?A. Correct.Q. So I suggest to you that the white Dodge on page 1564 is the vehiclethat Brandon Orlandini had decided to buy for himself?A. It's the one that he's talking about, yes.[273] Mr Orlandini's evidence in chief was that he decided to fund the purchasepersonally to assist with cash flow because the price of the vehicle was significantlyabove the average price the business paid for other vehicles. He said he had nointention of keeping the Dodge for himself as he owned an almost identical vehicle atthe time. However, he knew this was a good deal and there was a reasonable profit tobe made by selling it in New Zealand. The Buy Right Cars business advertised thevehicle within two weeks of its arrival, knowing it was not compliant. For this reason,any sale would be subject to compliance. He explained these types of vehicles canonly be 'complied' when owned by a New Zealand resident and that the business didthis from time to time, typically with no issues.[274] More materially, he says the Buy Right Cars business had an existingarrangement with its supplier that if any vehicle could not comply within six monthsof arrival, it could be returned to the supplier for a full refund. He says the first helearned of the compliance issue was on or about 3 July 2018 when BRC16 counter-claimed, well after the period in which it could be returned.[275] Mr Arthur referred in closing to cl (f)(ii) of sch 3—the mutual intentionclause—as the clause of the APA relied on. He emphasised the obligation for Turnoverand BRC16 to each act reasonably and in good faith to one another in relation to anymatter, decision, act or omission that could affect NPBT or the custom, goodwill, orfuture earnings or profitability of the business. But, as discussed, Mr Orlandini has nopersonal obligations under the APA except as a covenantor and none of his obligationsas covenantor are here relied on. This provides a defence to the claim for breach ofthe APA against him personally.[276] In my assessment, this counterclaim is also flawed for the same or similarreasons given in relation to the first counterclaim. Most importantly, the evidencedoes not establish a breach on the balance of probabilities. Nicholai's answers oncross-examination are equivocal and do not establish any evidential foundation.Although the email from Mr Orlandini on its face is ambiguous, I accept that it waslikely to be a shorthand explanation in response to the "stop buy" direction toMr Wong.[277] I dismiss this counterclaim.Summary of result[278] In the end, Turnover was understandably disappointed by the bottom lineperformance of the Buy Right Cars business in EO2. The explanations for thatperformance are many and varied. The financial performance may or may not havebeen the same had the Orlandini interests been responsible for the business. But, asBRC16 argued, this is not a breach of duty case or a negligence case and Turnover'sgrievances do not translate into breaches of a fundamental covenant.[279] I dismiss Turnover's claims for breach of fundamental covenant against thedefendant. Consequently I find the acceleration clause in the APA has not beentriggered by any of the pleaded claims.[280] I further dismiss the counterclaims against the counterclaim defendants.Costs[281] I reserve the question of costs. In the ordinary course BRC16 is entitled to costson the claims it defended and the counterclaim defendants are entitled to costs on thecounterclaims they successfully defended. If the parties are unable to agree costs, theymay file memoranda of no more than five pages plus schedules within 28 workingdays of this judgment.[282] Finally, I commend all counsel for the quality of their written and oraladvocacy.............................................................Walker J