Disputes - Parry Field Lawyers

Business can be complicated but it doesn’t have to be. We have helped thousands of clients and know about the key legal areas that will affect you and have just released our fully revised and updated “Doing Business in New Zealand” free handbook. You can download it here.

New Zealand consistently ranks as one of the most business-friendly nations in the world. Given this appealing status and the interest we receive both from local and international investors, as well as form businesses and entrepreneurs, we produced the “Doing Business in New Zealand” handbook a few years ago and now have fully updated it. It is intended to introduce and provide information for those who may be unfamiliar with how business is done here. The handbook provides introduction on business structures, investment rules, employment, disputes, property, intellectual property, immigration, privacy and social enterprise, just to name a few examples.

If you have further enquires please contact Steven Moe at stevenmoe@parryfield.com or on 021 761 292 or Kris Morrison at krismorrison@parryfield.com.

Be sure to check out our other free guides too, such as Startups: Legal Toolkit and Social Enterprises in New Zealand: A Legal Handbook. We also provide free templates for resolutions, Non Disclosure Agreements and other resources on our site as well as many articles on key topics you should know about.

On 30 June 2020, the long-awaited Privacy Bill received Royal Assent, with the changes coming into effect on 1 December 2020.

Privacy Commissioner John Edwards has said “The new Privacy Act provides a modernised framework to better protect New Zealanders’ privacy rights in today’s environment.”

Some of the key changes include:

• All agencies will be required to report serious privacy breaches to the Office of the Privacy Commissioner. If the breach is likely to cause serious harm, the people affected must also be informed. This is consistent with international best practice.

• If an agency uses service providers based outside New Zealand, they will need to make sure the providers meet New Zealand privacy laws.

• Criminal offences will be introduced. An agency could be fined up to $10,000 for misleading an agency about someone’s personal information and/or intentionally destroying requested personal information.

• The Privacy Commissioner will have the power to make binding decisions when someone requests access to their personal information. These decisions may be appealed to the Human Rights Tribunal.

• International digital platforms that obtain New Zealanders’ personal information through business in New Zealand must comply with New Zealand privacy law, regardless of where the servers are based.

• The Privacy Commissioner will have the power to issue compliance notices. Non-compliance with the notice could result in a fine of up to $10,000.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation. If you think your privacy policy is insufficient (or non-existent!), we would strongly encourage you to get in touch with us. Contact Steven Moe at StevenMoe@parryfield.com

If a former Prime Minister of New Zealand is involved in a case then you know it is going to attract interest. Dame Jenny Shipley was the Chair of the Board of Mainzeal and it was found that the directors had breached their duties – what happened, and most important, what can we learn from this?

As a director of a company you must act honestly, in the best interests of the company, and with reasonable care at all times. You must not act or agree to the company acting in a manner that is likely to breach the Companies Act 1993, other legislation or your company’s constitution. The outcome of the Mainzeal case comes as a timely reminder to company directors of their duties and obligations.

Founded in 1968, Mainzeal was one of the leading construction companies in New Zealand, responsible for projects such as the ASB Sports Centre in Wellington and Spark Arena in Auckland, just to name a few. However, the construction industry was sent into shock when Mainzeal collapsed and was placed into liquidation in February 2013. Unbeknown to many, Mainzeal had been struggling financially for a number of years. So much so, that Mainzeal’s liquidators brought proceedings against the former Mainzeal directors, claiming they had breached their duties under section 135 of the Companies Act 1993.

What Happened?

The details are summarised at the start of the case: “In 1995, an investment consortium with a focus on investments in China acquired a majority shareholding in Mainzeal’s then holding company. This investment consortium was associated with the first defendant, Mr Richard Yan. The company group came to be known as the Richina Pacific group. In 2004, the group established a new independent board for Mainzeal with the third defendant, Rt Hon Dame Jennifer Shipley, as Chairperson. It operated for nearly 10 years under this board until the company collapsed in February 2013. Its collapse left a deficiency on liquidation to unsecured creditors of approximately $110 million. The unpaid creditors were sub-contractors ($45.4 million), construction contract claimants ($43.8 million), employees not covered by statutory preferences ($12 million), and other general creditors ($9.5 million). Mainzeal’s secured creditor, BNZ, was fully paid out.”

Were the directors reckless?

The crux of the claim came under section 135 of the Companies Act . This section specifies that a director of a company must not—

agree to the business of the company being carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors; or
cause or allow the business of the company to be carried on in a manner likely to create a substantial risk of serious loss to the company’s creditors.

Ultimately, the court had to consider if Mainzeal’s directors had been reckless in continuing to trade while Mainzeal’s balance sheet was in deficit, thus placing the company’s creditors at a substantial risk of serious loss?

Mainzeal had been trading as insolvent from as early as 2005, when Richina Pacific group extracted considerable funds from Mainzeal by the way of loans for investment in China. However, Mainzeal continued to operate as a going concern, as Richina Pacific provided letters of support for when Mainzeal’s accounts were audited. The directors were also given assurances by email and in meetings that support would be provided by the parent group if it was needed. These representations of financial support were relied on by the directors – but they should have done more. It is important to note that the promise to provide financial support when necessary was never formalised or legally binding (eg loan agreements or guarantees).

The ability for Richina Pacific to provide financial assistance when needed was also limited due to stringent foreign exchange controls exercised by the Chinese governmental authorities. Therefore, this made it extremely difficult to take money back out in China, once it had been taken from Mainzeal.

Mainzeal continued to trade, largely relying on funds that were owed to sub-contractors. It must have been a difficult balancing act to work out how long to continue trading in those difficult circumstances. Ultimately, Mainzeal was unable to pay its debts and was placed into liquidation on 28 February 2013.

Looking at the case there are some fascinating exchanges by email between the Directors and representatives of the parent company. For example, Dame Jenny Shipley wrote:

“While I note your desire to run a central treasury function for the NZ interests it is unreasonable to ask Mainzeal Directors to approve the associated related party transfers without the clear understanding if we are liable for these decisions and the associated obligation or of other persons or Directors are legally responsible. We are not informed as to the purpose of these transfers and would not need to be so if we had a clear indication from those responsible for the group that the request had been approved…”

So the directors were asking some questions – which is always good. But they relied too much on answers like this one that came in reply to these comments above:

“Again, there are no independence issues here as it is ultimately the shareholders who are on the hook for everything. Mainzeal is no in way compromised and Richina has always supported it to the full extent even during its more dire situations…”

Another experienced director, Sir Paul Collins, wrote: “I would have to say I’m at my wits end. I joined the board under the impression Mainzeal was solvent … I accepted all your representations re support and more recently redomiciling in NZ later this year and taking out the BNZ. As you will well appreciate I have dealt with a lot of bad news stories over the years and have found that matters can be worked through when you have all the cards on the table. I don’t have that confidence here. …”

What should the directors have been doing? Asking questions – like they did. What they failed to do was getting the answers documented in binding legal agreements.

The court found that the directors had breached their duties under section 135:

“Whilst all the factors I address below are relevant, there are three key considerations that cumulatively lead me to conclude the duties in s 135 were breached:

Mainzeal was trading while balance sheet insolvent because the intercompany debt was not in reality recoverable.

(b) There was no assurance of group support on which the directors could reasonably rely if adverse circumstances arose.

Mainzeal’s financial trading performance was generally poor and prone to significant one-off loses, which meant it had to rely on a strong capital base or equivalent backing to avoid collapse.”

It was held that those were the three key elements in establishing that there had been a breach by the directors. The Court then went on to confirm:

“The policy of trading while insolvent is the source of the directors’ breach of duties, however, such a policy would not have been fatal if Mainzeal had either a strong financial trading position or reliable group support. It had neither.”

As the directors had been found in breach of section 135, the court awarded $36 million in damages. A large sum of money for anyone. The Court found that three directors, Dame Jenny Shipley, Mr Peter Gomm and Mr Clive Tilby had acted honestly and in good faith, therefore each were held liable for up to $6 million jointly with Mr Yan.

This did not go unchallenged. The court left the door open for the parties, if they believed there had been a miscalculation in the amount of damages awarded. Both the liquidators and former directors believed there had been, however both parties had their cases dismissed. An appeal and cross-appeal were filed by the liquidators and former directors.

In 2021 the Court of Appeal found that the directors had breached s 135 of the Act, which exposed the company’s creditors to a substantial risk of serious loss. However, that loss did not materialise and the court therefore no compensation should be payable by the directors.

The court also found the directors had breached s 136 of the Act when they entered into four significant construction contracts. The matter was remitted to the High Court to determine the compensation payable. The former directors are seeking to overturn the decision and the matter is currently before the Supreme Court.

What can we learn: What should the directors have done?

There were a number of red flags for the directors throughout the years. With the benefit of hindsight, there are some important lessons that can be taken from this case:

It’s really simple, but ask questions. Understand the answers and document them well. If someone says there is support, get it in writing.
If you are questioning the information you are receiving from others or it makes you feel uncomfortable, seek independent advice from a professional.
When relying on assurances from others, ensure these are in writing and legally binding.
Understand your duties as director. Ensure it is clear to whom your legal duties lie with. This is particularly important if your company is part of group of companies.
If you are facing financial difficulty, continue to review the situation and be extra-vigilant.
If you have been provided of assurances of financial support, ensure such assurances are clear – ask questions.

Examples of questions could include: How much financial support is available? Are the finances readily available and if not, how long will it take? What are the barriers that need to be overcome? How can we ensure we can legally rely on these assurances?

A recent United Kingdom case of interest

The Supreme Court of the United Kingdom ruled for the first time in October 2022 on what triggers the directors’ duty to have regard for creditors’ interests ahead of shareholders interests (that is the company). The case is BTI 2014 LLC v Sequana SA and others.

Conclusion

The final outcome of Mainzeal is outstanding. However, what can be taken away from this case is the importance of the obligations and duties directors have to a company and creditors. The case really emphasised the care that is required, especially if a company is in financial difficulty. It also highlighted, if ever in doubt, seek independent advice, as it is better to be safe than sorry. Also, ask questions and document the answers so there is a clear trail.

This article is not a substitute for legal advice and you should contact your lawyer about your specific situation.

Please feel free to contact Steven Moe at stevenmoe@parryfield.com or Kris Morrison at krismorrison@parryfield.com should you require assistance.

The High Court decision in Lee v IAG[1] provides clarification both on what measure of indemnity should be used, and how to calculate it.

An ‘indemnity’ policy is short hand for a policy that obliges an insurer to pay the insured enough to put them back in the position they were in before the loss happened (old for old basis). The occurrence of the peril (like a fire or earthquake) puts an obligation on the insurer. When do they have to pay? In an indemnity policy, the payment trigger is the happening of an insured event. This is unlike ‘replacement’ policies. In these policies, only once the insured has incurred the cost of repair must the insurer reimburse.

So, what does it mean to be indemnified? What does it mean to be put back into the position you were in before the loss happened?

As with all contractual relationships, the starting point is the contract itself. Some indemnity policies explain how the indemnity is to be calculated.

But what if the contract does not explain the measure and says “We will indemnify you for any insured loss”?

Fortunately, we have the benefit of centuries of common law authorities to guide us. It is ancient law that where an indemnity policy is silent on the appropriate measure, the indemnity is a question of fact. The question will be answered with particular regard to the nature and intentions of the insured party and the purpose served by the insured property.[2]

Lee v IAG concerned a three-story commercial building on Manchester Street. IAG originally paid $672,750 being its estimate of the ‘market indemnity value’.[3] By the time the proceeding came to Court, IAG had accepted that the appropriate measure of indemnity was actually the “estimated cost of restoring [the] business assets as nearly as possible to the same condition they were in immediately before the loss or damage happened using current materials and methods.”

The question before the Court was how that ‘estimated cost’ was to be calculated. The Court was asked to give guidance about the extent to which betterment should apply. The Court concluded that the estimated cost is found by allowing to restore “the property to the same condition as it was before the event that caused the damage or loss, and deducting for any betterment to the insured because the restored building in whole or in part be in new condition rather than old.”[4]

The critical point is that betterment should be deducted by reference to the extent which the restored building is in a better physical condition.

This requires a qualitative comparison between what was there at the time of loss and what will be put back. For example, if a brick wall collapses, the replacement of it with a new brick wall, while ‘new’ may not necessarily be any better than the previous wall; in such a case, it may not be appropriate to make a deduction for betterment.

By contrast, if the same wall being replaced previously had old, decaying lime mortar that was now being replaced with new cement, the new mortar is better than the old and would justify a better deduction.

The case makes four key points:

Reduction in market value is not necessarily the correct measure of ‘indemnity’;
When the indemnity is to be calculated by reference to estimated building costs, betterment will only apply to parts of the repair that leave the building better off than it was;
Assessing whether a repair leaves the building ‘better’ is a qualitative exercise, made by evaluating the extent to which new parts of the building are any better than the parts of the building they are replacing.
It follows that allowing for secondhand materials may obviate the need for deducting for betterment.

Should you need any assistance with these, or with any other Dispute matters, please contact Paul Cowey at Parry Field Lawyers (+64 3 348 8480).

[1] Lee & Or v IAG New Zealand Limited [2018] Llyod’s Rep. IR 345

[2] Earthquake Commission v Insurance Council of New Zealand [2015] 2 NZLR 381 at [109];

Reynolds v Phoenix Insurance Co Limited [1978] 2 Llyod’s Rep 440 (QB) at 451.

[3] Lee & Or v IAG New Zealand Limited [2018] Llyod’s Rep. IR 345 at [4].

[4] At [54]

INSURERS EXPOSED TO PAYING INTEREST FOR DELAY

Lee v IAG[1] is the first Canterbury earthquakes decision to give substantial guidance on interest for payment delay.

Both the Judicature Act (for proceedings pre 1 January 2018) and the new Interest on Money Claims Act give the Court the power to decide when interest should apply to insurance monies owed to an insured party.

The starting point is to identify from when can the insurer be said to be default of its obligation to pay.

The Court set out some of the key factors, noting that “every case turns on the individual insurance contract and the facts. Insurance practice will be relevant but not decisive.”[2]

Importantly, the Court confirmed that interest can be available from a date prior to the filing of proceedings.[3]

The Court observed that “there is a well arguable case that a reasonable time to assess the claim must be allowed before it can be said that the insured is wrongly without its money, and the insurer wrongly benefitting from that money.”[4]

However, noting the other side of the same coin, the Court also noted that interest may run from the date of the loss or damage. The Court particularly referred to situations where the insured needs to quickly replace the loss. The Court held “the loss or damage is immediate and although it may take time to investigate and assess, the economic effect of loss or damage is immediate. That may influence an award of interest from that date.”[5]

The starting point when considering from which date to award interest is the date of loss. The Court recognised, however, that this may not be “necessarily the end point for assessing interest” because other factors may mitigate or justify delay in the running of interest.

Statutory interest is an issue that particularly arises in indemnity insurance policies which impose a payment obligation. This is quite different from a reimbursement obligation which is more often a feature of replacement insurance policies. However, the same principle applies to both: interest is a live issue once the obligation to pay arises – but the timing of that obligation will be quite different between indemnity insurance contracts and replacement insurance contracts.

When insureds are settling their claims they should be alert to the issue: have I been kept out of my money, and has the insurer wrongly been benefitting from it?

Should you need any assistance with these, or with any other Dispute matters, please contact Paul Cowey at Parry Field Lawyers (+64 3 348 8480).

[1] Lee & Or v IAG New Zealand Limited [2018] Llyod’s REP. IR 345

[2] At [86] (a)

[3] At [86] (d)

[4] At [86] (2)

[5] At [86] (f)

Can I get legal costs when I settle out of court?

Since the limitation period of 6 years became a live issue for insurance claims arising from the Canterbury earthquakes homeowners have had a difficult choice, begging for an extension of time or pay the extra cost of filing court proceedings.

The High Court, in Black Rock Administration Ltd v IAG New Zealand Limited[1], shows that an insurer’s decision to refuse a limitation extension will carry adverse consequences.

In Black Rock, proceedings were commenced after IAG wrote to Black Rock’s solicitors denying cover to a significant part of property claimed by Black Rock for earthquake damage, and after IAG expressly declined a Limitation extension. Ultimately, IAG accepted cover, and paid Black Rock for its repair costs. The Court found that “the need for Black Rock to initiate proceedings was precipitated by IAG’s refusal to waive its rights under the limitation statutes.”[2]

This led the High Court to conclude that “it is indisputable that Black Rock had to initiate the proceeding as a result of how matters stood between the parties prior to its commencement.”[3] While the High Court accepted that IAG’s decision to reserve its limitation rights was “a legitimate choice”, that choice “has ultimately carried with it, consequences.”[4] In this case, costs against IAG.

Who is the successful party where the dispute settles out of Court? The relevant issue is “the position between the parties at the time the proceeding commenced, rather than the history of the matter to that point.”[5]

The Court found that the amount Black Rock obtained after filing its claim was “significantly more than was on offer at the time the proceeding was commenced.”[6]

IAG’s decisions to both deny cover and not offer a limitation extension, were relevant factors in determining that costs should be awarded against IAG.

IAG had already agreed to pay the repair costs, plus $20,535.86 claims preparation costs. In addition it was ordered to pay Black Rock’s legal Court costs of $26,495,.

Should you need any assistance with these, or with any other Dispute matters, please contact Paul Cowey at Parry Field Lawyers (+64 3 348 8480).

[1] [2018] NZHC 3450.

[2] At [17].

[3] At [21].

[4] At [23].[5] At [22].

[6] At [20]

Can it be fair for everyone?

Making sure everyone you care about gets a fair share of your property after you die is an issue most of us grapple with. This may also have additional complications when you have a blended family. It’s not always as easy as just writing your Will and specifying who gets what. There are several statutes that give family members and/or your new partner’s family, a right to contest your Will. The two main statutes are the Family Protection Act 1955 (FPA) and the Property (Relationships) Act 1976 (PRA).

Leaving it all to your partner?

A common way of structuring your affairs is to leave everything to your partner or spouse, knowing they will provide for your children as well as their own in their Will. These are often called ‘mirror Wills’. Unfortunately, this structure doesn’t always satisfy all the children involved, as we have seen in several recent court cases. You also run the risk of your partner or spouse changing their Will at a later date after you have died.

• Claims from the children: The FPA allows family members to make a claim against your estate if they believe they have not been properly provided for. This can happen even if your spouse has a ‘mirror Will’ which will leave the whole estate to your children as well as their own when they die. An example of this blended family situation is the Chambers case, which has recently received media attention. Lady Deborah Chambers QC was left everything by her husband, Sir Robert Chambers, on the understanding that when she died, her estate would be split into four parts, going equally to Sir Robert’s two sons and to Lady Deborah’s two daughters. One of Sir Robert’s sons successfully brought a claim against his father’s estate under the FPA, despite having his own lucrative income and not being in any financial need.

• Your spouse could change their Will: If your partner or spouse outlives you by some time, there is the possibility that they may change their Will as their circumstances change. They may remarry, have a new relationship, or more children may be brought into the family. This could mean that the portion of your estate that you envisioned being left to your biological children is now eroded by your partner leaving more to new partners or children than you had never anticipated.

Leaving it all to your children?

In light of these two options, it may be tempting to consider leaving your estate entirely to your children. Unfortunately, doing this can bring similar problems. Your partner could bring the same claim that your children could under the FPA or they could make an application under the PRA.

Property (Relationships) Act 1976

The PRA allows your partner to make an application to have your estate divided as relationship property, rather than in accordance with your Will. Under current law, you have a duty to provide for the partner you leave behind. If an application is made under the PRA, any relationship property is divided accordingly and the balance of the estate is distributed according to your wishes. Again, this may leave your loved ones with a different portion than you envisaged. You also need to know that jointly-owned property is automatically transferred to the survivor and does not form part of your estate.

Possible solutions

To find a solution that works best for your family and fits your wishes, do discuss this with us as one size definitely doesn’t fit all. Some options are:

• Contracting out agreements: you come to an agreement with your partner which overrides the PRA;

• Setting up trusts in your Will or before you die: if established correctly, trusts can be effective in defeating claims through the FPA and the PRA; and

• Life interest Wills: leaving your spouse an interest in your property during their lifetime, but that interest will expire on their death and the property will be distributed to your children. The above points merely brush over some issues in what is an incredibly murky and complex area of law. If you are in a blended family situation, let’s discuss the options in order to structure your affairs in a way that works best for you and your family.

How can we help?

We have dedicated teams based in our Riccarton, Hokitika and Rolleston offices who give advice on a variety of different asset protection, succession planning, family and relationship property matters. If you have any questions arising out of the issues raised in this article, please feel free to contact Nicole Murphy – nicolemurphy@parryfield.com or give us a call on (03) 348 8480.

How might this impact you?

As much as we like to think we are living in the modern day, there are still a large number of relationships that follow the more ‘traditional’ practice of having one party act as the ‘homemaker’, while the other acts as the ‘breadwinner’. If the relationship breaks up, economic disparity is likely to be an issue. With the divorce rate in New Zealand sitting at around 50%, chances are you have friends and family members who have structured their relationship in this more traditional sense and have now separated. The result is often that the ‘homemaker’ is left in a worse position financially because they have been out of the workforce for a long time and will struggle to get back into their career. The breadwinner, meanwhile, who could focus on their career during the relationship, is now earning at their full potential. This is economic disparity – one party is advantaged over the other. One of the principles of the Property (Relationships) Act 1976 (PRA) is that a de facto relationship, civil union or marriage is a partnership of equals and that financial and non-financial contributions to that relationship are equal; the homemaker’s contributions are equal to the breadwinner’s. There is also a presumption of equal sharing of relationship property; but what about the earning potential of one party over the other? If that earning potential has increased during the relationship, should that be considered an asset of the relationship or relationship property?

Can we ‘fix’ the disparity?

Section 15 of the PRA allows for one party to be compensated if the income and living standards of the other party are likely to be significantly higher due to the ‘division of functions’ within the relationship – the role of breadwinner and homemaker.
Parliament acknowledged that an equal division of relationship property doesn’t always achieve fairness if one party is able to walk away with not only half the assets, but also a considerable income-earning ability, while the other has foregone theirs and supported the breadwinner in the process. While statistically the party left worse off after separation is almost always female, as the Prime Minister, Jacinda Ardern and her partner, Clarke Gayford have recently shown us, women can be breadwinners too and economic disparity can affect men. Same-sex couples can also be vulnerable to economic disparity, which can arise in any relationship where one party has been able to progress their career while the other looks after the home. The Law Commission recently reported that s15 has had limited success in achieving its objective. It found that sharing property equally doesn’t always result in an equal outcome. Following a separation, on average, mothers who are caring for children have their household income reduced by 19% while men in employment increase their household income by 16%. Economic disparity and how to address the issues arising from the more ‘traditional’ relationship roles is a significant focus of the Law Commission in its current review of the PRA.

Recent boost to claims

Economic disparity claims have been given a boost by the recent Supreme Court decision of Scott v Williams. This case involved a couple who structured their relationship in the ‘traditional sense’. Ms Scott, who had accounting and law degrees, put her career on hold to look after the couple’s children while Mr Williams built up a successful legal practice.
When they separated after more than 25 years of marriage their incomes were vastly different. The court ultimately found (after eight years of court battles) that in a long-term relationship, where there is the traditional split of roles between homemaker and breadwinner, and a significant disparity in income, an economic disparity claim can be presumed and compensation should be paid. The amount of compensation is determined on a case-by-case basis. There is no set method for determining the compensation, which does make it difficult for parties to agree. Since s15 made its way into law in 2001, there have been about 100 cases go through the courts on this point, with only around 40% having been successful. Economic disparity remains a difficult, complicated and emotional topic for separating couples to discuss and on which to agree.

If you have separated and believe economic disparity is an issue, please talk with us to discuss whether this is a claim that may affect you, and how you either negotiate or defend such a claim. A contracting out agreement (colloquially known as a ‘pre-nup’) may assist, if prepared properly from the outset. Please feel free to contact Nicole Murphy – nicolemurphy@parryfield.com or give us a call on (03) 348 8480.

Consequential loss is a loss that arises as a result of a breach of contract. In contracts, parties often exclude liability for consequential loss which is provided for in an exclusion clause.

If you are entering into negotiations for a contract, it is important that you understand what consequential loss is, when damages can be claimed for consequential loss, and how to effectively exclude liability.

A question that arises when dealing with consequential loss is how far you can actually go in claiming damages for a consequential loss? Where do you draw the line?

Say, for example, that Mrs Smith has purchased a freezer for her catering business from Mr Jones, which she has filled with ice cream. This ice cream is for a stall that she has been running at the local fair for a few years now, and is a favourite for many fair-goers. Unfortunately, the freezer broke the day before the fair causing all of the ice cream to melt and meaning that Mrs Smith cannot serve ice cream at her ice cream stall and would therefore not make any profit. The lack of ice cream at the stall meant that there were a lot of grumpy children, and grumpy children meant grumpy parents which resulted in a lot of backlash on the fair.

The following year, the fair suffered a 50% reduction in attendance as a direct result of the grumpy children and the lack of ice cream, and the organisers then had to cancel the fair in subsequent years and claimed the amounts they lost from poor Mrs Smith.

Mrs Smith now wants to sue Mr Jones in damages for the loss of profit and the amounts claimed by the fair organisers, which were losses resulting from the breaking of the freezer. But how far can Mrs Jones actually go in claiming these damages? Let’s look at some cases and see what they say.

Hadley v Baxendale

In an 1854 English Court of Exchequer decision Hadley v Baxendale, Alderson B famously established the remoteness test, which is a two-limb approach where the losses must be:

Considered to have arisen naturally (according to the usual course of things); or
Reasonably considered to have been in the contemplation of the parties at the time when they made the contract as a probable result of the breach of it.

Alderson B said that in order for a party to successfully claim damages on the grounds of consequential loss, the loss must fall into either of those two categories.

McElroy Milne v Commercial Electronics

In 1992 in New Zealand, Cooke P said this test no longer applied in modern law, and he established a multi-factorial discretionary approach in which a range of factors are to be taken into consideration, including foreseeability.

Transfield Shipping v Mercator Shipping (The Achilleas)

This is more recent English House of Lords decision concerning the late return of a ship. In this case, the judges established that while Hadley v Baxendale is generally a good approach, there are certain circumstances where it may not necessarily apply.

These judgments create confusion in determining what actually constitutes a consequential loss and where to draw the line. Generally speaking, however, the loss must have been in the contemplation of the parties for it to amount to a consequential loss.

A way forward: What should the clause say?

In our view there are three ways forward:

No exclusion of consequential loss – this means that the parties are leaving it up to the interpretation of the Courts;
Include a general consequential loss clause; or
Incorporate a bespoke clause for the specific contract.

Where possible, we recommend a general exclusion of consequential loss with some examples of specific situations (essentially a bit of both 2 and 3 above).

Other options available:

Remember that a contract is ultimately a give and take from each side and another way that a party can limit liability in a contract is by putting a total cap on their liability.

Another option is that a party could limit liability by stating a time period in which the other party can bring a claim. A small company negotiating with a large multinational will have less scope and a template agreement is much more difficult to get changes made to it.

Ultimately, whichever route is taken depends on the preference of the parties, and their negotiations will also play a role in determining what liability is excluded.

Every situation is unique and how much Mrs Smith could claim for will depend on what the contract said and the circumstances of the situation. Whatever your scenario, we have a dedicated commercial team at Parry Field Lawyers who can give you personalised advice on all aspects of your business ventures. This article is also based on a more detailed analysis of the cases mentioned above – contact us if you would like a free copy of that.

This article is not a substitute for legal advice and you should talk to a lawyer about your specific situation. Please contact Kris Morrison or Steven Moe at Parry Field Lawyers (348-8480).

Can it be fair for everyone?

Leaving it all to your partner?

Leaving it all to your children?

Property (Relationships) Act 1976

Possible solutions

How can we help?

Hadley v Baxendale

McElroy Milne v Commercial Electronics

Transfield Shipping v Mercator Shipping (The Achilleas)

A way forward: What should the clause say?

Christchurch CBD

Christchurch

Rolleston

Hokitika