Central Dairy Goats Limited v Bubs New Zealand Pty Limited

[2021] NZHC 1230

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE

CIV-2021-485-15

[2021] NZHC 1230

BETWEEN

CENTRAL DAIRY GOATS LIMITED

Plaintiff

AND

BUBS NEW ZEALAND PTY LIMITED

Defendant

Hearing:

18 May 2021

Appearances:

R J B Fowler QC for plaintiff

T B Fitzgerald and S J Leslie for defendant

Judgment:

28 May 2021

JUDGMENT OF ASSOCIATE JUDGE JOHNSTON

[1]        On 21 December 2018 the plaintiff, Central Dairy Goats Ltd (CDG), and the defendant, Bubs New Zealand Pty Ltd (Bubs), entered into an agreement whereby CDG agreed to sell and Bubs agreed to purchase goat milk.

[2]        The initial term of the agreement was five years. The first “year” was a period of five months commencing on 1 January 2019 and concluding on 31 May 2019, so that the second year ran from 1 June 2019 to 31 May 2020.

[3]Definitions in the agreement included:

(a)“Annual Average Milk Price” which was defined as “… the average price the Purchaser has paid for or will pay for Milk (per kg TMS) during that Contract Year”.

CENTRAL DAIRY GOATS LIMITED v BUBS NEW ZEALAND PTY LIMITED [2021] NZHC 1230 [28 May 2021]

(b)“Milk” which was defined as “… raw goat’s milk produced by the Seller”.

(c)“TMS” which was defined as “… total milk solids”.

[4]        Clause 1.2 was headed “Rules for interpreting this document”, and one such rule was that:

“Headings are for convenience only, and do not affect interpretation.”

[5]        Pricing was dealt with in cl 6 and sch 2 of the Agreement. Materially, these provided as follows:

6.PRICE

6.1Prices

(a)The prices for Milk supplied under this Agreement will be determined in accordance with the pricing methodology set out in Schedule 2 for the Milk Delivered.

(b)Subject to clause 6.1(c), the parties acknowledge that the prices payable for Milk per kg TMS is seasonal and may vary from month to month.

(c)The Annual Average Milk Price for the first two (2) Contract Years will be no less than $14.00 / kg TMS.

(d)If the Annual Average Milk Price for any Contract Year subsequent to 2019 is reduced by 10% or more of the Average Annual Milk Price for the previous Contract Year, the Seller may terminate this Agreement by notice in writing to the Purchaser in accordance with clause 16.1.

6.2Price Review

The prices for Milk will be reviewed in accordance with the procedure set out in Schedule 2.

…

SCHEDULE 2

Pricing

1.Price

1.1Methodology

(a)Subject to the review procedures under Item 3 of this Schedule 2 and having regard to the pricing principles set out in Item 2 of this Schedule 2, the price for Milk will be set according to a total milk solids (TMS) basis being the sum of:

(i)fat; plus

(ii)protein; plus

(iii)lactose; plus

(iv)minerals,

as will be determined by an accredited third party laboratory.

(b)The price for Milk may be determined seasonally by the Purchaser so long as the Annual Average Milk Price in the first two Contract Years do not fall below $14.00 / kg TMS.

1.2Price reduction

(a)If Laboratory Tests show that the Milk is Grade 2 once within a month, the price of the Milk will not be reduced.

(b)Subject to Item 1.2(c) below, if Laboratory Tests show that the Milk is Grade 2 more than one time within a month, the price of all Grade 2 Milk in that month will be reduced by 50c / kg TMS.

(c)Unless the Seller has been informed that Milk is Grade 2, the Milk will be considered to be Grade 1 and no price reduction may apply to the price.

2.Pricing principles

The price of Milk will be determined by having regard to the price at which other goat milk is priced in New Zealand.

3.Price review procedures

(a)Subject to clause 1.1(b), the basis or methodology for determining the price of Milk will be subject to review, by agreement of the Purchaser and the Seller, provided that either party may request a review not more than once during each Contract Year in the Term.

(b)On such a request, the Purchaser and the Seller must use their reasonable endeavours to arrange for a duly authorised

representatives of each of them to meet and negotiate on a reasonable basis having regard to each party’s submissions.

(c)If a price review is requested, it will be negotiated on or around the end of January of each year and will apply for the following Contract Year.

[6]        The contract operated unremarkably during the first and second years (or     17 months).

[7]        Not long after the end of the second year, on 10 July 2020, Bubs wrote to CDG. In this letter Bubs proposed that the parties vary the agreement. The proposal was, first, for a  revised price  of $11.00 / kg TMS (reduced  from $14 / kg TMS) from     1 October 2020 until 30 September 2021, and, secondly, for a review to be undertaken in mid-2021 to establish a new price to apply from 1 October 2021 until 31 May 2022. This proposal was said to be open for acceptance until 17 July 2020. Bubs said that, if its proposal was not accepted by CDG, then Bubs’ assessment was that the milk price payable from 1 June 2021 would be no greater than $9 / kg TMS. As I read the letter, Bubs was saying that if CDG did not accept their proposal then Bubs would not be paying $14 / kg TMS from 1 October 2020.

[8]        This proposal — if that is what it was — was not acceptable to CDG. Much correspondence between the parties and their solicitors followed. A great deal of attention was focussed on the terms of the agreement, especially cl 6 and sch 2. CDG took the position that the $14.00 / kg TMS price could not be altered except by agreement. Bubs asserted that, at least after the conclusion of the second year of the contract, it was entitled to determine the price it was prepared to pay. The arguments developed in the correspondence were of course more detailed and sophisticated than that description suggests. But that is what they boiled down to.

[9]        In the absence of any resolution, since 1 October 2020, CDG has continued to invoice Bubs for milk supplied at the rate of $14.00 / kg TMS, and Bubs has, as I understand it, paid for that milk at the rate of $11.00 / kg TMS.

[10]      In the end, CDG commenced this proceeding in order to break the impasse, seeking declaratory relief in the following terms:

a.     A declaration that the Annual Average Milk Price under the Agreement for the period of 1 June 2020 to 31 May 2021 is $14.00 / kg TMS;

b.     A declaration that the Defendant does not have a power to unilaterally determine the Annual Average Milk Price under the Agreement.

[11]      Mr Fowler and Mr Fitzgerald were on common ground in relation to the principles that govern summary judgment applications. Mr Fowler did not challenge Mr Fitzgerald’s submission as to the important principles:

Summary judgment principles

5.The principles applicable to summary judgment applications are well-established. Rule 12.2 of the High Court Rules 2016 provides:

12.2 Judgment when there is no defence or when no cause of action can succeed

(1) The court may give judgment against a defendant if the plaintiff  satisfies the court that the defendant has no defence to any cause of action in the statement of claim or to a particular cause of action.

6.The words “no defence” contained within rule 12.2 have been interpreted as “no bona fide defence, no reasonable ground of defence, no fairly arguable defence”. The concept underlying all of these expressions is the absence of any real question to be tried.

7.In some circumstance, it may be possible to resolve questions of contractual interpretation at the summary judgment stage. However, that will often not the [sic] be the case. It is well established that it is inappropriate to resolve interpretation disputes in circumstances where the factual matrix is relevant, or where discovery or cross-examination may be relevant, or where the discovery or cross- examination may be relevant. As the Court of Appeal recently confirmed:

… factual matrix evidence is relevant (indeed, sometimes critically so) to the contractual interpretation exercise. As a result, questions of contractual interpretation may not be able to be adequately addressed in a summary judgment context, particularly where there is either insufficient contextual evidence before the Court, or it is necessary to resolve disputes regarding the matrix of fact.

8.Summary judgment is particularly inappropriate where expert evidence is to be called, or whether the meaning may be affected by other extrinsic evidence, including prior negotiations and subsequent conduct.

[Footnotes omitted]

[12]That appears to me to be a fair analysis.

[13]      Thus, CDG’s application for summary judgment depends on it being able to establish that the defence advanced on behalf of Bubs is not reasonably arguable.

[14]      The dispositive issue is one of contractual interpretation, and both Mr Fowler and Mr Fitzgerald approached it on just that basis.

[15]      Mr Fowler’s starting point was the plaintiff’s prayer for relief and the terms of the declarations sought. He invited the Court to have regard to the fact that the first declaration (that the $14.00 per kg / TMS floor price could not be changed except by agreement) would only apply down to 31 May 2021, being the end of the third year of the contract. This is because, in terms of the procedure set out in cl 3 of sch 2, the deadline by which either party could trigger that process for the third year of the contract has come and gone. Mr Fowler accepted that a declaration in those terms would not have any impact on the ability of the parties to take whatever steps were available to them in respect of the fourth year of the contract commencing on 1 June 2021. I am not convinced that this takes matters very far. The contention is predicated on the proposition that cl 3 of sch 2 is the mechanism for setting price, which is the contention that Bubs does not accept.

[16]      Insofar as cl 6 is concerned, Mr Fowler emphasised that both cl 6.1(a) and 6.2 indicate that the price to be paid to CDG by Bubs is to be determined pursuant to sch 2.

[17]      Turning to sch 2 Mr Fowler noted that in cl 1.1(a) the parties agreed on the methodology by which total milk solids would be measured and emphasised that in

(b) of the same clause.

[18]      Mr Fowler went on to submit that the “… guiding principle …” for pricing is sch 2 cl 2 which creates a mandatory obligation that the parties will have regard to “the price at which other goat milk is priced in New Zealand”.

[19]There is nothing in those submissions that is controversial.

[20]Mr Fowler then submitted:

Schedule 2, clause 3 explicitly sets a price review of procedure which is stated at [the] beginning of sub-cl (a) as being subject to the seasonal variation that Bubs can utilise under clause 1.1(b). The procedure set by clause 3 is:

21.1Attempted agreement;

21.2Either party may request a review, but not more than once in any contract year;

21.3If a review is requested, the parties must use reasonable endeavours to meet and negotiate;

21.4If a price review is requested, it must be negotiated on or around the end of January to apply for the following contract year.

[21]      Finally, Mr Fowler applied his interpretation of the contract to the facts of this case in the following terms:

23.Bubs first sought to vary the contract price on 10 July 2020 to be effective from 1 October 2020.

24.However, on what is submitted to be the correct interpretation of the contract, that could not possibly have been an effective request in terms of Schedule 2 Clause 3 for implementation on 1 October 2020. What Bubs has purported to do does not accord with either the timing required by the contract or the process that has been agreed.

25.Additionally, and as to substance, there is no evidence that the guiding principle of Schedule 2 Clause 2 has been applied.

[22]      As already foreshadowed, the critical aspect of Mr Fowler’s argument (in relation to both declarations sought) is the contention that in order for there to be any change to the price to be paid to CDG by Bubs, that change can only take place via the process set out in cl 3 of sch 2. He submitted that if that is the position then any change must be achieved by agreement because that is what the cl 3 process contemplates. He added that although there is no obvious mechanism within cl 3 to overcome a failure on the part of the parties to agree, this is one of those cases of the sort dealt with by the Privy Council in Money v Ven-Lu-Ree Ltd where the Court will step in and perfect any loose ends left by the parties in their agreement by implying such a mechanism (arbitration, expert determination or something along those lines).1

[23]      Mr Fitzgerald, like Mr Fowler, submitted that cl 6.1(a) and 6.2 directed the reader to the sch 2 in relation to the price to be paid by CDG to Bubs.

1      Money v Ven-Lu-Ree Ltd [1989] 3 NZLR 129 (PC).

[24]      Turning to sch 2, Mr Fitzgerald submitted that cl 1.1 deals with two related but distinct things:

(a)In 1.1(a) it deals with how total milk solids are to be measured, namely inclusive of the components enumerated in 1.1(a)(i)–(iv). In relation to this he referred me to the affidavit of Bubs’ General Manager Dairy, Mr Paine whose evidence is that this is an unusual way of assessing total milk solids, and that the more common methodology is to have regard only to fat and protein.

(b)In 1.1(b) it deals with the price to be paid to CDG by Bubs for milk.

[25]Mr Fitzgerald placed particular emphasis on the opening passage of cl 1.1(b):

The price for milk may be determined seasonally by the purchaser.

[Emphasis added.]

[26]      Like Mr Fowler, Mr Fitzgerald also placed some importance on cl 2 in which the parties agreed that price was to be determined by reference to “… the price at which other goat milk is priced in New Zealand”.

[27]      As to cl 3, which Mr Fowler relied on in advancing his contention that the price to be paid to CDG by Bubs could not be altered except by agreement between the parties, Mr Fitzgerald submitted that this deals with the arrangement for the measurement of total milk solids (the first element of paragraph 1.1) as opposed to the price to be paid to CDG by Bubs (the second element). In this regard, he directed me to the opening passage of cl 3(a):

Subject to clause 1.1(b), the basis or methodology for determining the price of Milk will be subject to review …

[Emphasis added]

[28]      Mr Fitzgerald’s submission was therefore that this so-called price review procedure was not the mechanism by which the price to be paid for milk to CDG by Bubs was set or reviewed.

[29]      In relation to this Mr Fitzgerald referred to the affidavit evidence indicating that these parties had agreed to measure total milk solids in an unusual way. His submission was that in those circumstances, and having regard to that evidence, it should not come as a matter of surprise that the parties included in their contract a process for revisiting that methodology should either of them conclude that it was operating inappropriately or unfairly. I reach no view about this, except to observe that it appears to me to be a situation in which a Court may be assisted by independent evidence of industry norms that both parties may be regarded as having been aware of at the time that they entered into the contract as an aid to its interpretation.

[30]      Drawing the threads of this analysis together, Mr Fitzgerald submitted that in terms of price (as opposed to the measurement of total milk solids) the correct starting point was cl 1.1(b) of sch 2, which provides that price may be determined “by the Purchaser …” and that the seller was adequately protected by a combination of cl 2 — which says that the price will be determined by reference generally to the price of goat milk in New Zealand — and cl 6.1(d), which provides that if the purchaser proposes a price reduction of 10 per cent or more the seller will be entitled to terminate the agreement.

[31]      On those bases, Mr Fitzgerald submitted that Bubs’ letter of 10 July 2020 proposing a reduction to commence on 1 October of that year (which was certainly above 10 per cent) was entirely open to Bubs and that, ultimately, CDG’s options were either to accept the proposal or cancel the contract.

[32]      At the conclusion of his submissions Mr Fowler sought to identify problems with Bubs’ interpretation, and it is instructive to touch on these.

[33]At paragraph 26, Mr Fowler said:

The Bubs interpretation focusses on Schedule 2 Clause 1.1(b) as allegedly entitling Bubs to unilaterally effect a variation by determining the price itself, without reference to the procedure stipulated in Schedule 2 Clause 3.

[34]      That is correct. Mr Fitzgerald’s submission is that cl 3 of sch 2 does not apply to the setting of price, or, rather, does not apply directly in the way that is relevant in this case.

[35]At paragraph 27 Mr Fowler says:

If the Bubs interpretation were correct, the Schedule 2 Clause 3 procedure would be redundant. It is unlikely the parties would have intended these provisions they had agreed upon to have no effect.

[36]That does not follow. On Mr Fitzgerald’s argument cl 3 of sch 2 applies to the

process for measuring the total milk solids, not to the price to be paid to CDG by Bubs.

[37]At paragraph 28 Mr Fowler says:

Further, it is to be noted that Schedule 2 Clause 1.1(b) uses the word “seasonally”, which is surely in tune with the principle stated in Clause 6.1(b) and points to the purpose of the sub-clause (effectively to allow seasonal cash flow variation within a year) and distinguishes that sub-clause from the other provisions intended to apply to the pricing for the overall contract year.

[38]      There is something in this point. In the end, though, the confusion around the use of the word “seasonally” in this clause just casts further doubt on the proper interpretation of the contract.

Discussion

[39]      The agreement between CDG and Bubs is certainly not a model of clarity. It appears to me to contain a number of ambiguities and inconsistencies. This has enabled both parties to develop respectable but diametrically opposed arguments. I need not resolve these. Nor, for that matter, need I reach any concluded views as to the proper interpretation of the contract in order to deal with CDG’s application.

[40]      It appears to me to be open to Bubs to argue that cl 1.1 of sch 2 deals with the agreed basis for measuring total milk solids which is different from (although certainly closely related to) the price that CDG is to be paid by Bubs for milk ,which is what is addressed in cl 1.1(b), and that it is only the former that is capable of being challenged by either party pursuant to cl 3.

[41]      At that point, cl 1.1(b) stands alone in stating that the price to be paid for milk is determined “by the Purchaser”.

[42]      As Mr Fitzgerald submits, that interpretation of the agreement would be bolstered if a Court were to accept at trial the evidence currently offered in affidavit

form on Bubs’ behalf that the methodology for determining total milk solids is an unusual one and that the parties, being aware of this, provided a mechanism whereby either could challenge that methodology in the future — cl 3. That, it seems to me, is not a view that one can reach on the basis of untested affidavit evidence at this stage.

[43]      However, in the end, CDG has not established that the argument advanced on behalf of Bubs is untenable. In other words, I am satisfied that the interpretation advanced by Mr Fitzgerald on behalf of Bubs is at very least capable of serious argument.

[44]      That conclusion is enough to dispose of the plaintiff’s application for summary judgment.

[45]      Additionally, it appears to me that in order properly to interpret the contract, the Court will require independent evidence of industry standards concerning the determination of milk prices, and that the course of negotiations between the parties before the contract was signed may also be relevant to the Court’s enquiry.

[46]      For those reasons, the plaintiff’s interlocutory application for summary judgment is dismissed.

[47]      Costs are reserved. Conventionally, an unsuccessful application for summary judgment does not result in a costs award in favour of the successful respondent, unless there are unusual circumstances. If either party wishes to invite the Court to make a costs order then counsel should file memoranda in the usual way and I will deal with costs on the papers. Otherwise, they will simply be costs in the cause.

[48]      The Registrar is to set this matter down for a case management teleconference as soon as possible so that the necessary directions can be made to deal with the interlocutory stages of the case so as to enable it to be set down for trial.

Associate Judge Johnston

Solicitors:

Cullinane Steele Ltd, Levin for plaintiff Bell Gully, Wellington for defendant