Chatham Hardware Limited v Chatham Island Management Limited
[2022] NZHC 3227
•5 December 2022
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2022-485-326
[2022] NZHC 3227
UNDER section 290 of the Companies Act 1993 IN THE MATTER
an application to set aside a statutory demand
BETWEEN
CHATHAM HARDWARE LIMITED
Applicant
AND
CHATHAM ISLAND MANAGEMENT LIMITED
Respondent
Hearing: 31 October 2022 Appearances:
E J Tait for Applicant
P R W Chisnall and M R G van Alphen Fyfe for the Respondent
Judgment:
5 December 2022
Reissued:
13 December 2022
JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
[1] This is an application by Chatham Hardware Ltd (“CHL”), pursuant to s 290 of the Companies Act 1993, for an order setting aside a statutory demand served on it by Chatham Island Management Ltd (“CIM”).
[2] Section 290(4) provides that the Court may set aside a statutory demand if satisfied that:
(a)there is a substantial dispute as to whether the debt alleged in the demand is payable;
CHATHAM HARDWARE LIMITED v CHATHAM ISLAND MANAGEMENT LIMITED [2022] NZHC 3227
[5 December 2022]
(b)the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount ($1,000); or
(c)the demand ought to be set aside on other grounds.
[3] In its originating application CHL identifies the grounds on which it invites the Court to set aside the statutory demand in these terms:
That there is a substantial dispute as to whether or not the alleged debt is owing and/or the Applicant has a counterclaim set-off or cross-demand in the amount specified in the said Statutory Demand is less than the amount claimed by the Applicant.
There are no fewer than sixteen affidavits before the Court.
[5]However, the essential background is not complicated:
(a)CIM is a wholesale supplier of diesel to the Chatham Islands. Its customers include CHL, a retail supplier which on-sells diesel to Chatham Island consumers;
(b)the arrangements between the parties are conducted pursuant to an agreement dated 1 January 2016;
(c)since 16 December 2021 CIM supplied and invoiced CHL for fuel with a value of $219,885.82 (GST incl) for which it has not been paid;
(d)on 2 June 2022, CIM served its statutory demand for that amount;
(e)on 15 June 2022, CHL filed and served its originating application to set aside the statutory demand.
[6] On what basis or bases, then, does CHL contend that there is a substantial dispute or cross-claim and invite the Court to set aside CIM’s statutory demand?
[7] Mr Tait’s submission on CHL’s behalf began by focussing on the history of the supply of diesel to the Chatham Islands, and the commercial relationships involved.
[8] CIM’s shareholders are the trustees of the Chatham Island Enterprise Trust, a charitable trust originally settled in December 1991. The overarching purpose of the trust is to provide for the welfare of the Chatham Islands and its residents. In furtherance of that objective the trustees have, over the years, through various companies, become involved in a number of business activities. As already said, CIM is one of those companies. It is involved in the supply of diesel at both the wholesale and retail levels.
[9] It is common knowledge that shipping services to the Chatham Islands have been problematic. Once upon a time, the Union Steamship Company ran a service. More recently a service was run by Cook Island Shipping. When that ceased, a concern by the name of Black Robin Freighters operated a service. For a time, that service operated in competition to a shipping service established by the Trust through a company by the name of Chatham Islands Shipping Ltd. Black Robin Freighters failed in late 2015. This left Chatham Island Shipping as the only service.
[10] CHL was established in August 1995. As already said, it operates as a retail supplier of diesel, acquiring stock from CIM and on-selling to Chatham Island consumers.
[11] The evidence is that in the period leading up to 2009, there was a degree of disquiet amongst the trustees, and quite possibly more widely, about the cost of diesel on the Chatham Islands. Diesel is a particularly significant resource there, not least because it is the primary means of generating electricity.
[12] The view seems to have emerged that the Trust should enter the retail diesel market to ensure that there was competition. Reports were commissioned and delivered. None of those reports appear to have levelled any particular criticism at CHL. Certainly there was no suggestion of impropriety on the company’s part. Nevertheless, CIM entered the retail diesel market in late 2009.
[13] Mr Tait emphasised that from that point on the Trust, through the companies that it owned and controlled, had a monopoly on shipping diesel to the Chatham Islands, a monopoly on the wholesale sale of diesel to retailers, and also competed with CHL in the retail market.
[14] CHL says that between 2009 and 2015 it became increasingly concerned that its business was in a precarious position. As a result of concerns expressed by the company there were protracted discussions or negotiations between CHL and CIM in which the former was looking for a degree of comfort that it would remain sustainable into the future. In these exchanges, CHL’s overarching contention was that because the Trust had the ability to manipulate cost centres amongst its various companies, it was in a position of significant influence within the diesel markets and in a position to influence CHL’s margins.
[15] CHL negotiated for a contractual arrangement that would enable it to achieve a margin that was certain and which would ensure that its business was sustainable. That margin, it contended, needed to take account not only of gross profit — the difference between the wholesale and retail prices — but also its costs of sale including very significant provision for maintenance and replacement of plant and equipment such as storage tanks. There was nothing especially innovative about this thinking. The same principles apply to every business. Any retail business must earn a margin over and above the wholesale cost of its stock which takes account of the need to provide for the maintenance and replacement of plant and equipment as necessary.
[16] On or around 3 February 2016, CIM and CHL executed an agreement that has since governed the supply of diesel by the former to the latter.
[17]Here is what the agreement says about pricing:
4.Price
4.1The price payable by the Purchaser for Diesel supplied under this Agreement shall be set from time to time by CIML in its discretion, and shall be notified by CIML to the Purchaser and such price shall take effect from the time set out in the notification. CIML’s intention is that the price payable by the Purchaser for Diesel supplied under
this Agreement will be set and notified to the Purchaser at the Price Notification Frequency (which is, as at the Commencement Date, as set out in Item 8 of the Specific Terms of and Conditions, but which may be changed by CIML with immediate effect by CIML giving notice).
4.2The price shall be the price charged or chargeable from time to time by CIML to the Purchaser in effect at the time of each order being confirmed by CIML.
4.3CIML may engage a third party to develop a pricing model. If CIML does this, the model will then b used by CIML to set the price from time to time and will be based on the landed cost of the Diesel to CIML. CIML will provide, on request at reasonable intervals, pricing information to the Purchaser if it asks for it. The Purchaser shall have no ability to have any input into, nor require changes to, any pricing model used from time to time by [CIML]
4.4The Purchaser acknowledges and agrees that:
(a)CIML has structured its initial pricing model on the assumption, amongst others, that the Purchaser will purchase, under this Agreement, not less than the Minimum Annual Volume per each rolling 12 month period from the Commencement Date;
(b)if the Purchaser fails to purchase not less than the Minimum Annual Volume in any such 12 month period, then this may directly cause CIML loss because of its pricing arrangements with its supplies; and
(c)if CIML (which must act reasonably and transparently) considers that the Purchaser will purchase less than the Minimum Annual Volume during any 12 month period, or the Purchaser does purchase less than the Minimum Annual Volume during a 12 month period, CIML may take this into account into its pricing model for determining the Price of the Diesel for future orders made by the Purchaser, to protect itself against any failure on the part of the Purchaser to purchase the Minimum Annual Volume for that 12 month period, provided that CIML is fully transparent with the Purchaser in advising the Purchaser of any changes to the Price.
4.5CIML shall advise the Purchaser of the price payable from time to time (including any components of the price) and any changes to the price (including any changes to any components of such amended price) for the Diesel payable by the Purchaser to CIML.
[18] Thus, the terms of the agreement did not expressly guarantee that the price charged by CIM to CHL would ensure that the latter would achieve any particular margin. Quite the reverse. Clause 4 expressly provided that CIM was free to vary its pricing and that it was not obliged to consult CHL.
[19] CHL’s primary argument is that, at or around the time that they executed the agreement, the parties also entered into a collateral agreement or arrangement to the effect that CIM would, during the currency of the same, charge CHL for diesel at a price that would enable the company to secure a margin of 19.3 per cent. It says, quite correctly as far as I can see, that, in recent times, CIM has not done so. It alleges that this constitutes a breach of the overall contractual arrangements giving rise to a genuine dispute as to whether the alleged debt is payable, or a cross-claim which it is entitled to set off against its debt.
[20]In my assessment, this argument faces significant difficulties.
[21] The 3 February 2016 agreement deals with pricing comprehensively, in terms that would be entirely inconsistent with the propounded collateral agreement or arrangement. Obviously, pricing was a critical component. It seems to me to be unlikely in the extreme that these two commercial entities, both of which were advised by solicitors in their protracted negotiations, would have elected to enter into an agreement in circumstances where they had an additional arrangement relating to a critical matter such as pricing without including any such arrangement in the agreement itself.
[22] The evidence is that prior to the execution of that agreement CHL had proposed a clause which would have provided that the price to be charged for diesel would be determined by an objective model based on prices charged by major oil companies on the mainland. CIM was not prepared to agree to an objective pricing model, insisting on retaining clauses 4.1–4.4 in the form that they are in the agreement.
[23] As already said the agreement provides in effect that CIM is entitled to determine the price at which it sells diesel. Further, as Ms van Alphen Fyfe submitted, in cl 15 the parties represented to the each other that they had reviewed and understood the provisions of the contract and not relied on any external arrangement. What CHL is doing in this case is attempting to rely on a collateral agreement or arrangement which contradicts core aspects of the written agreement.
[24] The key document to which CHL points as evidencing the collateral agreement for which it contends is a spreadsheet heading “Chatham Islands Bulk Fuels Pricing” which was plainly in currency between the parties in the lead up to the execution of the agreement. On its face, this is nothing more than a recitation of the prices that CIM was charging various entities (including CHL). There is nothing in the document guaranteeing that CHL will achieve any particular margin.
[25] In relation to this spreadsheet, CHL contends for it. Rather, CHL relies on the evidence of the company’s accountant who has calculated — no doubt correctly — that as at the date of the fuel supply agreement, the pricing set out in the spreadsheet effectively allowed for a margin of 19.3 per cent.
[26] On the basis of that evidence, the argument is that at the time that the parties entered into the agreement the pricing then in place gave rise to a particular margin, and that that margin was to apply for the duration of the agreement. At the risk of repetition, this contention ignores important terms of the agreement.
[27] This, in my view, is an artificial analysis upon which it would be dangerous to place any reliance.
[28] Finally, it is CHL’s case that from the end of 2016 CIM has breached the alleged collateral agreement by charging for diesel at a level which does not guarantee the 19.3 per cent margin. Thus the contention is that this alleged breach, or series of breaches, has taken place for close to seven years. Yet the correspondence between the parties before the Court over that time is devoid of any reference to this. On the contrary, throughout that time, CHL has continued to order and take delivery of diesel at the prices charged without complaint, as far as I am able to see. CHL’s account with CIM has been in arrears time and time again. There is correspondence in which CIM remonstrates about this and numerous promises on the part of CHL about bringing its account into order provided they can continue to receive diesel to on-sell. Yet the argument now advanced only surfaces following CIM’s service of its statutory demand.
[29] It is important to acknowledge, as Mr Tait emphasised more than once in the course of argument, that CHL’s case received some support from Mr Smith who was the Chair of the Trust, and Mr Pellikaan who was the Chief Executive Officer of both the Trust and CIM at the relevant period of time. Both Mr Smith and Mr Pellikaan said in their evidence that it was their view that the parties had an understanding as to the pricing of fuel which was designed effectively to ensure CHL’s viability. I do not doubt that both hold that view. However, they are talking about their impression of arrangements made between the parties more than seven years ago, and against the backdrop of an application in which they are no doubt conscious of the position being taken by CHL and the analysis carried out by Mr Soutar. In my view, their impressions are not reliable when viewed against the contemporaneous material and objective considerations to which I have referred.
[30] For those reasons, I reject CHL’s argument founded on the existence of a collateral contract or arrangement.
[31] The second argument advanced on CHL’s behalf by Mr Tait was based on the Fair Trading Act 1986.
[32]Section 9 also concerns misleading and deceptive conduct:
9 Misleading and deceptive conduct generally
No person shall, in trade, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.
[33]Section 13 provides:
13 False or misleading representations
No person shall, in trade, in connection with the supply or possible supply of goods or services or with the promotion by any means of the supply or use of goods or services,—
…
No person shall, in trade, in connection with the supply or possible supply of goods or services:
(g)make a false or misleading representation with respect to the price of any goods or services; or
…
[34]How, then, is it said that CIM engaged in misleading or deceptive behaviour?
[35]Mr Tait’s submission was that:
… the Fuel Supply Agreement was entered into in reliance upon the representations made by the Trust and CIML in relation to a Fair Pricing Agreement and in relation to the Trust exiting the diesel retail market on Chatham Island. That the representations and the conduct of CIML and the trust were false, misleading and deceiving.
[36] Thus, the suggested application of ss 9 and 13 of the Fair Trading Act is predicated on the same contention as the contractual claim, that is to say that CIM agreed to the collateral arrangements propounded by CHL and has not adhered to the same. I have already concluded that I do not accept there was any such collateral agreement or arrangement.
[37] On behalf of CHL, Mr Tait advanced a third argument based on the Commerce Act 1986. His submissions in relation to this argument were brief. In this respect, I will follow his lead.
[38] Sections 27 and 36 of the Commerce Act cover different ground, though they can intersect in their application.
[39] Section 27 deals with “restrictive trade practices”. It is generally referred to in the commentaries as the Act’s “catch all provision” in relation to such practices. It provides:
27 Contracts, arrangements, or understandings substantially lessening competition prohibited
(1)No person shall enter into a contract or arrangement, or arrive at an understanding, containing a provision that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market.
(2)No person shall give effect to a provision of a contract, arrangement, or understanding that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market.
(3)Subsection (2) applies in respect of a contract or arrangement entered into, or an understanding arrived at, whether before or after the commencement of this Act.
(4)No provision of a contract, whether made before or after the commencement of this Act, that has the purpose, or has or is likely to have the effect, of substantially lessening competition in a market is enforceable.
[40] Section 36 on the other hand is concerned with the abuse of market power. It provides:
36 Taking advantage of market power
(1)Nothing in this section applies to any practice or conduct to which this Part applies that has been authorised under Part 5.
(2)A person that has a substantial degree of power in a market must not take advantage of that power for the purpose of—
(a)restricting the entry of a person into that or any other market; or
(b)preventing or deterring a person from engaging in competitive conduct in that or any other market; or
(c)eliminating a person from that or any other market.
(3)For the purposes of this section, a person does not take advantage of a substantial degree of power in a market by reason only that the person seeks to enforce a statutory intellectual property right, within the meaning of section 45(2), in New Zealand.
(4)For the purposes of this section, a reference to a person includes 2 or more persons that are interconnected.
[41]Mr Tait developed his argument in the following terms:
32.It is submitted that:
a.There is ample evidence that the Chatham Islands by reason of its geographic isolation is a specific market;
b.CIML/CIET has/have a substantial degree of power in that market;
c.CIML/CIET took advantage of that power to eliminate CHL from that market;
d.CIML/CIET [was] aware of CHL’s vulnerability in 2015/2016 and induced [its] entry into the fuel supply agreement by representations that:
i.A fair pricing collateral agreement would be in place;
ii.CIML/CIET would exit the Chatham Island diesel retail market.
CML/CIET being aware of that then sought to rely upon provisions in that contract that [were] likely to have the effect of substantially lessening competition [in the] Chatham Island diesel retail market. Those provisions include:
i.A 5% margin in favour of CIML and against CHL;
ii.A contention clause 4.1 gave CIML/CIET the power to unilaterally [sic] and without any restriction alter the pricing of diesel supply. This[was in] a situation where clauses 9.1 and 13.1 provided an indemnity to CIML/CIET in relation to contamination requiring CHL to repair/replace infrastructure (fuel tanks/ bowsers/fuel tankers) which on the price it could charge with margins and turnover squeezed, it could not do;
iii.CIML used its power to undercut CHL squeezing its margin and turnover.
[42] Accordingly, the thrust of the argument is that CIM induced CHL to enter into the same agreement or arrangement as is relied on in the first and second arguments, and then failed to abide by it. Again, this adds nothing. It is a third iteration of the argument for the existence of the agreement or arrangement that I have already rejected. To the extent that there is scope for an additional argument based on a more straightforward assertion that CIM deployed market dominance for one or more of the proscribed purposes identified in s 36 of the Commerce Act, I am not persuaded that there is any evidence which would support that contention.
[43] I reject the arguments advanced on behalf of CHL to the effect that it has an arguable defence to the claim articulated in CIM’s statutory demand dated 2 June 2022, or an arguable cross-claim as asserted.
[44] CHL’s application is dismissed. The company is to pay the debt of $219,885.82 within 15 working days of 13 December 2022. If the debt is not paid within that timeframe, CIM may make an application to put CHL into liquidation.
[45]Costs are reserved. I expect counsel to be able to resolve these. If that proves
impossible they may file memoranda in the usual way.
Associate Judge Johnston
Solicitors and counsel:
E J Tait, Christchurch for Applicant
Macalister Mazengarb, Wellington for Respondent
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