Cottonsoft Limited v Creative Hotpot Limited HC Dunedin CIV 2010-412-741
[2011] NZHC 264
•29 March 2011
IN THE HIGH COURT OF NEW ZEALAND DUNEDIN REGISTRY
CIV 2010-412-741
BETWEEN COTTONSOFT LIMITED Appellant
ANDCREATIVE HOTPOT LIMITED Respondent
Hearing: 3 and 4 March 2011
Counsel: R Kelly and K Jarvis for Appellant
J K Goodall for Respondent
Judgment: 29 March 2011
JUDGMENT OF MILLER J
TABLE OF CONTENTS
Background.........................................................................................................[ 2] The remuneration agreement............................................................................[ 4] Creative’s request for more money ..................................................................[15] Cottonsoft’s response: the relationship had run its course ...........................[21] Creative’s rejoinder: additional remuneration was justified.........................[27] Cottonsoft’s acceptance of Creative’s “repudiation” and cessation of ........[29]
payment
The issues ............................................................................................................[33]
The District Court judgment.............................................................................[35] The appeal...........................................................................................................[44] Repudiation.........................................................................................................[50] Creative’s repudiation [52] Cottonsoft’s repudiation [56] Loss of profits for tasks three and four ............................................................[59] Compensation for work done on tasks one and two .......................................[68] Decision ...............................................................................................................[84]
[1] Cottonsoft Limited, a manufacturer and retailer of paper based household products such as paper towels and toilet tissues, was ordered in the District Court to
COTTONSOFT LIMITED v CREATIVE HOTPOT LIMITED HC DUN CIV 2010-412-741 29 March 2011
pay damages of $111,191.56 to its former advertising agency, Creative Hotpot
Limited. From part of that judgment Cottonsoft now appeals.
Background
[2] From 2002 until 2007 Creative supplied Cottonsoft with consultancy, strategic, creative and administrative services on a project by project basis. Its principal, Ronald Davidson, also assisted with branding and marketing. Cottonsoft did not have specialist in-house expertise in these subjects.
[3] For the first four years the relationship was productive and amicable. It generated “CottonSofts” toilet tissue, Cottonsoft’s most successful product. Mr Davidson saw Creative as a business partner of Cottonsoft’s. But in 2006
Cottonsoft appointed an in-house marketing manager, Nicola Johnston, bringing an end to Mr Davidson’s status as a significant strategist. Cottonsoft then sought closer control over its advertising and marketing and branding expenditure. That in turn led in September 2006 to a written agreement, known as the remuneration agreement, which lies at the heart of this litigation. It is an unusual and inexact document, in form a letter to Ms Johnston, and in style a series of questions asked and answered by Mr Davidson. Although the letter was never signed by Cottonsoft, the parties agree that it governed their relationship until 2007, when the agreement was terminated, and that Creative’s claim to damages rests on it.
The remuneration agreement
[4] The agreement was designed to cover four projects over a two-year period which began in September 2006. These were identified as tasks one to four:
1) Task one: to create a new premium toilet tissue brand;
2) Task two: to create a new facial tissue brand;
3) Task three: to create a new paper towel brand and relaunch the
existing “Tuffy” brand;
4) Task four: to develop the Cottonsofts toilet tissue brand.
[5] The parties also contemplated that Cottonsoft might add other tasks, for which an additional fee would be payable. It is now common ground that one additional task was created: the double length roll, which as its name suggests was a Cottonsofts toilet roll of double length.
[6] The agreement provided that the fee payable for each of the four tasks was
$85,000 (excluding GST). That included $10,000 (spread across the four tasks) for the relaunch of the Tuffy brand. The aggregate fee was $340,000.
[7] The components of the per-task fee were described as follows:
What is the breakdown of the various cost centres within the $85,000 per key project fee? Strategy = $6,750, Core concept and concept development =
$16,750, Meetings, presentations, research groups and account management
= $7,000, Pack design core concept and pack art supervision = $5,500, TV production supervision and TV production agency fee = $36,000 and Peripheral concept work, General artwork supervision, account management, meetings, presentations and general production agency fee = $13,000. (Notes omitted)
[8] It will be seen that a substantial part of the fee for each task would be earned as it neared completion, including the “production agency” fee to which I must return. However, Creative was to be paid by monthly instalments of $14,166.67, which began in October 2007 and continued for two years. The agreement identified the Creative staff who would do the strategic and creative work, and explained what the retainer would cover:
What sort of work does this monthly figure cover? Built into this figure is an allowance for; strategy (brand architecture, strategy paper, communication plan), core concept, concept development, pack design (this is core concept only as we understand you prefer Red Cactus to handle all pack design development and subsequent artwork), account management, meetings/presentations, attending research groups and/or presentations, peripheral brand concept work, TV production supervision, pack art supervision, general artwork and production supervision.
[9] Included in the monthly retainer, as Mr Davidson called it, were any separate “small to medium size tasks”, but any tasks of “much more significant natures” would be done on a project by project basis.
[10] The agreement outlined what would happen if Cottonsoft decided not to pursue one of the four tasks. If it was cancelled before it was “briefed in” Creative would not be paid, but if it was cancelled after the initial strategic and concept work but before production, Creative expected Cottonsoft to pay “the relevant proportion” of the work “created and accepted”:
What happens in respect to the agreed monthly retainer if one of the planned “4 key projects” unexpectedly gets dropped by Cottonsofts Limited before it has been briefed in? Assuming two of the 4 projects are completed and we are entering the second year of the agreement and you find that project three has to be cancelled for some sort of production reason, I would think that the remaining retainer figure would be halved across the last 12 monthly payments. That way at the end of 24 months you will have only paid for the three key projects we have created. If however a project is cancelled after the strategic and concept work, but before production, then I would expect you to pay the relevant proportion of the work created and accepted.
[11] The agreement also addressed what would happen to the retainer if Creative failed to “deliver against the brief”:
What happens in respect to the agreed monthly retainer if Creative Hotpot failed to deliver against the brief? Our philosophy on that is very simple – if a task doesn’t deliver against the brief, you don’t pay. If it were the same scenario as above, then the remaining retainer figure would also be halved across the last 12 monthly payments. But if for example you believe the strategic work met the brief but the creative answer failed to, then again as above we would expect you to pay the relevant proportion of the work created and accepted.
[12] The agreement contemplated that it would be reviewed six-monthly to ensure it was working fairly for both parties:
What about some sort of periodical review? I think we both see the need to ensure the agreement is working fairly for both parties – i.e. fair reward for the money paid out and/or the work done. We have talked about six monthly reviews, how about March 31, 2007 and then September 30, 2007 (or as close to those as practical) as the first two review dates?
[13] Creative was not to receive an “agency mark-up” on external work that it commissioned for Cottonsoft in addition to the television production supervision and agency component of the per-task fee:
What happens to agency mark-up? As part of this new agreement Creative HotPot would supply all external invoices, relating to the agreed tasks, through to Cottonsoft Limited for payment direct. These invoices will first be checked and authorised by us. As part of the agreement we will continue
covering quality control and general responsibility of these tasks, but not the financial responsibility.
[14] Mr Davidson concluded the letter by emphasising that a high level of mutual trust was necessary if the agreement was to work effectively.
Creative’s request for more money
[15] The parties envisaged that two of the four tasks would be completed in the first year and the other two in the second. As matters turned out, Cottonsoft decided that all four tasks would begin almost immediately. So too did the double length roll campaign.
[16] On 19 July 2007 Mr Davidson wrote a very long letter to Ms Johnston seeking more money. The letter was prepared for a meeting convened to review how the agreement was working. He began by noting that Creative had put a lot more time and money into the four tasks and peripheral work than he originally estimated. As at 30 June, Creative had completed the following percentages of the four tasks:
62 per cent, 62 per cent, 67 per cent and 20 per cent. He detailed what had been done on each task, noting that Cottonsoft had put tasks one and two on hold until it identified the most appropriate opportunity to bring them to life. On task three, work had been done both on creating a new paper towel brand and on the Tuffy brand. A concept called “Grip Factor” had been created and embraced as part of task three, while other concepts or brand campaigns had been developed but not pursued.
[17] By that time Cottonsoft had decided to stay with the Tuffy brand rather than pursue the new paper towel brand. Mr Davidson characterised the rebriefed Tuffy paper towel brand as an additional task. He stated that 49 per cent of the task had been completed. He also identified the Cottonsofts double length roll as an additional task, which was said to be 81 per cent complete.
[18] Mr Davidson advised that for the tasks that did not go any further, Creative intended to charge a percentage of the agency fee of $36,000 per task, which was “where an agency makes its money on any given project”. The percentage would be equal to the percentage of the commissioned work done.
[19] The amounts said to have been earned were $178,412.50 for the four original tasks, $40,600 for the relaunched Tuffy brand, and $69,450 for the Cottonsofts double length roll. After an allowance of $16,550 to complete the double length roll task, just $34,988 of the contract price remained for further work. To complete either task one or task two would cost $32,550, and to complete task four would cost
$68,437.50.
[20] Mr Davidson explained that in a spirit of partnership he was happy to keep the monthly retainer as it was until September 2008; that is, he was not asking for more money at the time. But the retainer was running out and:
… it is important at this point that the extra work done and the associated fees be acknowledged and accepted by you.
Cottonsoft’s response: the relationship had run its course
[21] Ms Johnston did not take kindly to the Creative proposal. She did not think the tasks were substantially complete, nor did she think much of some of Creative’s work. She immediately noted by email that Mr Davidson was seeking recovery of the agency fee on a basis that was inconsistent with the remuneration agreement.
[22] The parties met on 18 September 2007. The meeting was held on a without prejudice basis, but notes taken at it were put in evidence by Cottonsoft without objection. Mr Davidson was recorded as saying that he wanted to continue working with Cottonsoft. He was looking for acknowledgement of the extra work and had never suggested that Creative would “turn the tap off.”
[23] On 3 October, Steve Silvey, Cottonsoft’s chief executive, wrote to Mr Davidson. The letter was headed “without prejudice” but it too was put in evidence without objection. Mr Silvey took issue with the quality of Creative’s performance and the value it had delivered:
The focus of our recent meeting was primarily around value. However, not only are our respective views on value fundamentally different, but this process has highlighted irreconcilable differences in approach that question the viability of the relationship moving forward.
We have paid your agency $155,000 to date and calculate that we have received considerably less than that in value. Your claim that the work to date should be valued at over $289,000 (representing some 85% of the agreement work) simply does not accord with the reality. We recognise that you are not currently claiming payment to this amount, but this sort of discrepancy is fundamental and cannot be sustained.
We strongly disagree with your assertions as to percentages of tasks completed. We also strongly uphold our right as the client to determine the acceptability of the work and therefore its worth to the business. The problem seems rooted in your insistence that each idea has been a good one, while we have very little by way of useful or usable outcomes. Your refusal to accept our views on the merits of the concepts you submit does not inspire confidence that future performance might improve. Moreover, your insistence on re-submitting concepts and inability to “let go” of those that we have previously rejected, and claiming payment for them is difficult to understand in view of the acknowledgement in the agreement that work which is not accepted will not be charged for. As a result we have experienced delays in achieving business outcomes and frustrations in day- to-day working relations.
[24] He also remonstrated with Mr Davidson for claiming part of the agency fee component for uncompleted tasks when no external agencies had been engaged.
[25] As the Judge observed, it is evident from the tenor of the agreement that
Cottonsoft had taken legal advice. Mr Silvey sought to characterise the letter of 19
July as a repudiation of the agency agreement. He stated:
We believe that we would be entitled to insist upon a much improved performance for the remaining 12 months of the agreement term. Alternatively, we could regard your 19 July letter as a statement of intention to repudiate the agreement. And while either course remains an option for us, we would prefer to settle with you on a walk away basis in recognition of the relationship we have had over the last five years.
[26] Cottonsoft then proposed to end the relationship, which had “run its course”, by agreement. It proposed that the double length roll project would be completed, Creative’s work on brands, logos, packaging and artwork would be delivered up, a deed of settlement would be negotiated, and Cottonsoft would pay one further monthly instalment.
Creative’s rejoinder: additional remuneration was justified
[27] Mr Davidson replied by letter datestamped 11 October, saying that he was at a loss to see how his letter of 19 July repudiated the remuneration agreement. Far from it, he remained willing to honour the agreement. He rehearsed the work that had been done by Creative and claimed that almost all of it had been accepted by Ms Johnston, albeit that she had put some tasks on hold. At no time had there been any suggestion that the relationship was in jeopardy. He claimed that the agency fee component had no direct connection to the mark-up on actual external fees that would be incurred; the fee was to cover loss of normal income for his business. A good deal of additional work had been done without payment. He concluded by repeating that he was more than happy to complete the remaining tasks, but added:
I also enclose an updated review of costings given that we are now at the half way point of our agreement and that the CottonSofts Double Length project is all but complete. I hope that you can now see from the content of this letter that these costs are totally justifiable and are no more than what are genuinely and honestly owed after doing the work requested by Nicola. But to proceed we need acknowledgment from you that you will honour these fees.
[28] In the event that Cottonsoft wanted to withdraw, Mr Davidson indicated that he might agree, but only if a realistic amount was paid for the work done to date.
Cottonsoft’s acceptance of Creative’s “repudiation” and cessation of payment
[29] Mr Silvey responded on 20 November, setting out Cottonsoft’s estimate of value. He explained that he had used Mr Davidson’s methodology, assessing the percentage completion of each component of each task rather than value to Cottonsoft. He accepted that the now-completed double length roll was a separate task, although it was merely a brand extension and should not be costed on the same basis as “more fundamental brand development projects”, and set out the competing
estimates as follows:
Comparison of value of work completed Creative Hotpot
Assessment
$
Cottonsoft
Assessment
$
Premium Toilet Tissue 52,450
15,259
Facial Tissue 52,450 18,296 Paper Towel 83,800 43,783 CottonSofts Generation 3 26,125 5,625 CottonSofts Double Length Roll 69,450 73,500 Total 284,275 156,464
[30] He proposed to settle for $170,000, being the amount paid to date, and made it clear that Creative’s claim for excessive payments amounted in his view to repudiation:
As at the end of October Cottonsoft has paid Creative Hotpot $170,000 net. While this is in excess of our estimate of the value of work completed, for the sake of settling amicably I am prepared to consider this as fair payment for the work completed. I repeat the views expressed in my earlier letter that our assessments of value are so far apart, our views and interpretations of the process so divergent, and our ability to complete projects in a timely and smooth manner, based on history, so difficult, that it is questionable whether continuing the relationship is realistically viable. But we consider that you have resolved that issue unilaterally, by making claims of performance far in excess of what has actually been delivered in accordance with the agreement, and demanding that we acknowledge and accept your claims of extra work and associated fees. Your advice that the work to date has consumed all but $34,988 of the contract sum is clear evidence of your intention to repudiate future performance for the remainder of the 2 year term. Given our views on future viability, as expressed above, and given that there is no further work underway, I propose to accept your repudiation, such that the October payment represents the final payment and that we part amicably.
[31] Finally, Mr Silvey invited Creative to hand over all master copies of television commercials that it had made, asking that they be delivered by 30
November.
[32] It is common ground that retainer payments were halted unilaterally in October, and that Creative later accepted the agreement was at an end. The Judge found that Creative accepted termination on 15 February 2008.
The issues
[33] Creative sued in contract, seeking damages which by the time the trial ended were calculated as:
(a) compensation of $30,750 apiece for work done on tasks one and two, including a claim for a share of the production agency fee. Creative accepted that Cottonsoft had cancelled these tasks, but it nonetheless pursued until judgment a claim for a further $60,000 for a lost opportunity to complete replacement tasks; and
(b)loss of profits on tasks three and four, which Cottonsoft completed after termination, calculated on the basis that Creative would have earned $85,000 for each task; and
(c) $77,800 for one additional task, being the double length roll campaign. At a late stage Creative appears to have abandoned a claim for a further $23,450 which presumed the rebriefed Tuffy campaign was an additional task rather than a dimension of task three; less
(d)$23,308.44 being costs that Creative avoided by not completing tasks three and four; less
(e) $170,000 being the total actually paid by Cottonsoft.
[34] Cottonsoft responded that, among other things, it was entitled to cancel any of the projects and if Creative failed to deliver against its brief, Cottonsoft was not obliged to pay. Its obligation was to pay only for the relevant portion of the work created by Creative and accepted by Cottonsoft. Further, remuneration depended upon the work or value of the work to Cottonsoft. Cottonsoft claimed that while some of the work was done, it was inadequate and of relatively little value; specifically it was worth less than the $170,000 already paid. Nor did Cottonsoft accept work to that value. It pleaded that Creative repudiated the agreement in or about July 2007 as part of a scheduled review of its performance, and that Cottonsoft had accepted the repudiation. There was no counter-claim for recovery of money overpaid.
The District Court judgment
[35] The action was tried over four days in July 2010, and the judgment was delivered on 28 September.
[36] The Judge rejected Cottonsoft’s defence that Creative had repudiated the agreement. He reviewed the correspondence, and found that the 18 September meeting had ended with Mr Davidson stating that both parties needed time to respond to each other. In its correspondence and at the meeting of 18 September, Creative was doing no more than identifying issues that had arisen out of the remuneration agreement, forcefully putting its position but maintaining its willingness to work things through and continue the relationship. It did not deliver an ultimatum. He found that Cottonsoft had repudiated the agreement by its letters of 3 October and (more particularly) 20 November 2007. The statements made in that correspondence were confirmed by its failure to pay the retainer after October. It followed that Creative was entitled to damages.
[37] The Judge rejected Cottonsoft’s claim that work had not been accepted. Cottonsoft personnel had difficulty dealing with Mr Davidson’s personality and his high opinion of his own work. They found him insistent that whatever he produced in response to a brief was correct. This characteristic Cottonsoft staff called “Ron’s rule”. They dealt with it by and large by initially approving of what he produced and later trying to debate the issues objectively. That left Mr Davidson with the belief that Cottonsoft had accepted what had gone before. Noting that the contractual processes were fluid and that work was not clearly assigned to cost centres, the Judge reasoned that if work under one component was permitted by Cottonsoft to progress to work under another, then Cottonsoft had “accepted” the former work. That fitted with the contract as a whole and with the evidence of the Creative witnesses which, by and large, the Judge preferred. In short, if by its conduct Cottonsoft accepted what had gone before to the extent that it was prepared to move to the next step, it ought not to be allowed to rely on the lack of any formal acceptance.
[38] Dealing with tasks one and two, the Judge found it impossible to determine the exact stage of completion and what was and was not accepted by Cottonsoft, but held that detailed analysis of the work done was not required because of concessions that had been made by the parties. In particular, Cottonsoft had accepted that even if it had not accepted work it would remunerate Creative at a proportionate level. It will be necessary to return to the details of that concession. The Judge approved of Cottonsoft’s willingness to pay pursuant to Creative’s interpretation methodology, albeit using its own rather than Creative’s assessment of the work completed. It was a reasonable approach given that with respect to tasks one and two it was Cottonsoft which had halted development. The difference between the parties with respect to those tasks was the percentage completed and the production agency cost centre.
[39] With respect to the production agency claim, the Judge rejected Creative’s argument that Creative’s profit should be spread according to the proportion of the tasks completed at the time the relevant task was cancelled or replaced. He also rejected Mr Davidson’s evidence that Cottonsoft knew that the total profit factor in any of the tasks was built into the agency fee. Creative does not challenge those conclusions on appeal.
[40] The Judge accepted Creative’s percentage completion of each task; by and large they were the figures initially proposed by Mr Davidson in his letter of 19 July, when he was genuinely attempting to negotiate a solution; they appeared reasonable on the evidence about the work that had been done; timesheets corroborated Mr Davidson’s account; and Cottonsoft personnel were not so involved in the day to day operation as to observe exactly what had been done. As a result, damages payable for the work done on tasks one and two were fixed at $30,750 apiece. The claim to damages for a lost opportunity to complete alternatives to these cancelled tasks was dismissed as speculative.
[41] With respect to tasks three and four, the Judge noted that these tasks had come to fruition after the cancellation of the remuneration agreement, albeit using other advertising agencies. Creative was entitled to damages on the basis that it would have completed these tasks to a standard acceptable to Cottonsoft. He accordingly assessed damages on a loss of bargain basis, being the contractual
remuneration of $85,000 per task less costs to complete. The only evidence as to costs came from Mr Davidson, and it was unchallenged. Damages for tasks three and four were accordingly $85,000 apiece, less costs totalling $23,308.44. From that must be deducted the $170,000 paid under the remuneration agreement, leaving a balance of $38,191.56.
[42] To that the Judge added the sum of $73,500 in quantum meruit for the double length roll, which he found was an additional task. He rejected Cottonsoft’s claims that quantum meruit ought to be denied because no quote had been provided; alternatively, that the quote procedure in the remuneration agreement amounted in some way to an estoppel by representation. The figure of $73,500 was drawn from Cottonsoft’s own letter of 20 November 2007, and it was very close to Creative’s claim, leading the Judge to express disappointment that Cottonsoft had not conceded the issue. The quantum meruit aspect of the judgment is not challenged on appeal, although it is said that the double length roll ought to have been treated as a substituted task.
[43] In the result, the total damages awarded were $111,191.56. Interest was payable on that sum from the date on which Creative accepted Cottonsofts repudiation (15 February 2008), and costs were awarded on a 2B basis.
The appeal
[44] On appeal, Ms Kelly complained first that the District Court erred by awarding damages on the basis that Creative would have completed tasks three and four to a standard acceptable to Cottonsoft. Specifically, the bargain allegedly lost was only ever a contingent one, in that Cottonsoft might cancel a project at any time and Creative’s right to carry on was further contingent on Cottonsoft’s acceptance of its work to that stage. In the event of cancellation, non-acceptance or failure to deliver against the brief, Cottonsoft was to pay only the relevant proportion of the work created and accepted.
[45] Further, the contract especially contemplated that one project might be substituted for another, in which case double recovery was expressly disallowed.
The claim to substitution was advanced on the footing that, Cottonsoft having put tasks one and two on hold in the first few months of the contract, and later tasks three and four, the double length roll task was a substitution for one or more of the uncompleted tasks. (Counsel was unable to say which.) The Judge accordingly erred by awarding a quantum meruit for the double length roll task in addition to the other damages. Creative was doubly remunerated.
[46] The second ground of appeal was that Creative, rather than Cottonsoft, repudiated the agreement. It did so in its letter of 19 July 2007 by evidencing an intention not to complete the contract unless it was paid a vastly increased sum to which it was manifestly not entitled. Cottonsoft did not repudiate in its correspondence. Further, the 3 October letter was marked without prejudice and privilege had never been waived. The letter ought not to have been pleaded and relied upon by Creative. Alternatively, Cottonsoft had the right to discontinue any given task, and it is immaterial whether the outcome is called contract termination or project cancellation.
[47] The third ground of appeal was that the Judge erred in his treatment of three concessions made by the parties. The Judge mis-stated a concession made by Mr Silvey in evidence and a second made by Ms Kelly in argument. Ms Kelly accepted before me that she had confirmed at trial that Cottonsoft would abide by the proposals made in its letter of 20 November 2007 notwithstanding that Creative could not prove acceptance. She maintained that these were only concessions as to the dollar amounts offered in Cottonsoft’s letter of 20 November. They were not concessions to be applied to Creative’s claim, as she put it.
[48] The third concession was made by Mr Goodall. He advised the Judge that Creative was willing to accept Cottonsoft’s assessment of the percentage it would have completed on tasks one and two, provided that Creative’s position with respect to the agency fee was accepted. Having rejected the proviso, the Judge ignored the concession and adopted Creative’s assessment of the percentage of those two tasks completed. Ms Kelly complained that it was improper to attach the proviso to the concession, and that the Judge ought to have ignored the proviso. His handling of it was inconsistent with his treatment of her own concession, and so unfair.
[49] Logically the first question to be determined is whether Cottonsoft repudiated the remuneration agreement as to found its claim in damages. Accordingly, I deal with ground two first.
Repudiation
[50] It was not essential to Ms Kelly’s case that she show Creative repudiated the remuneration agreement, merely that she show Cottonsoft did not. However, she placed repudiation by Creative at the forefront of her argument on this aspect of the case.
[51] Before dealing with it, I address a preliminary question: whether the Judge ought not to have referred to the letter of 3 October on the ground that it was sent without prejudice. The obvious difficulty with this proposition is that both the letter of 3 October and the meeting notes of 18 September were admitted in evidence without objection. Indeed, I was given to understand that the letter was included in the agreed bundle. Ms Kelly then shifted ground, arguing that the letter could not be treated as a repudiation because that would be prejudicial and the letter was sent without prejudice. That is an admirably simple argument but it misconceives the point of the privilege, which is to make evidence of negotiations inadmissible. The parties having admitted it, the letter was evidence of its content. Faced with that, Ms Kelly argued finally that the “without prejudice” caption was evidence that the sender was in negotiation, which would be inconsistent with repudiation. I accept that a without prejudice caption is evidence of negotiation, but negotiation is not logically incompatible with repudiation. A party might baldly announce its repudiation yet offer on a without prejudice basis to settle the resulting liability.
Creative’s repudiation
[52] Ms Kelly argued that the letter of 19 July repudiated the remuneration agreement, and that was confirmed by Mr Davidson’s letter of 11 October. She emphasised that: Creative claimed an entitlement to the agency component that was wholly different from the agreement; it asserted very high percentage levels of
completion on three of the four tasks, when Cottonsoft had already halted work on all four tasks; the exaggerated percentages claimed were then applied to the agency fee component to claim a similar percentage, compounding the excessive claim; the letter denied that two alternative concepts for task three had always been commissioned, by claiming the alternative concept as a new extra task; the double length roll work was claimed as an extra task although no quote had been given and the completion percentage was absurdly high; Creative claimed that 84 per cent of the contract value had been delivered although Cottonsoft at that point had forestalled projects with essentially unusable ideas; and “most profoundly”, the letter required that the alleged extra work be acknowledged and accepted. To this she added that in the October letter Mr Davidson took an uncompromising stance, insisting that before Creative proceeded it required an acknowledgement that Cottonsoft would honour the additional fees demanded. These strident demands, as she characterised them, amounted to repudiation.
[53] Section 7(2) of the Contractual Remedies Act 1979 provides:
Subject to this Act, a party to a contract may cancel it if, by words or conduct, another party repudiates the contract by making it clear that he does not intend to perform his obligations under it or, as the case may be, to complete such performance.
[54] It is settled that a party is not generally regarded as being in repudiation by asserting that a dispute exists and seeking to negotiate pursuant to a review mechanism provided for in the contract.[1] Nor does the good faith assertion by one party of its interpretation of the contract afford grounds for the other party to terminate a contract, even if the assertion turns out to be wrong.[2]
[1] Oxborough v North Harbour Builders Limited [2002] 1 NZLR 145 at [11].
[2] The Edge Buying Group (Queenstown 2000) Ltd v Coca-Cola Amatil (NZ) Ltd CA145/02 25 November 2002.
[55] In my view, the Judge was plainly correct in his conclusion that Creative was merely trying to negotiate additional remuneration pursuant to the review mechanism in the contract. That is evident from the language used, and it is confirmed by the minutes of the meeting of 18 September. Creative did claim sums to which it was not entitled, notably the agency fee, but although that claim was
without justification the Judge was not invited to find that it was advanced in bad
faith, and more generally Creative was eventually held to be entitled to much of what it claimed. Although Creative eventually insisted, in response to Cottonsoft’s stance, that its demands for more money be addressed, it never delivered an ultimatum but rather repeatedly expressed its willingness to continue the relationship.
Cottonsoft’s repudiation
[56] Ms Kelly was on somewhat firmer ground in her argument that Cottonsoft did not repudiate the agreement in its letters of 3 October and 20 November. She argued that the language of the 3 October letter was “soft”. Mr Silvey wrote in the hope that an amicable separation could be agreed, and expressed the view that the parties were evidently at an impasse given their very divergent views on value. He expressed doubt whether Creative intended to perform on the terms agreed, and he did not insist that the 19 July letter was a repudiation. Instead, he suggested a settlement. And in its letter of 20 November Cottonsoft merely accepted Creative’s repudiation.
[57] However, I conclude that the Judge was right to find that Cottonsoft repudiated the remuneration agreement in its letters of 3 October and 20 November, and by cancelling the monthly retainer from October. In the 20 November letter Creative emphasised that no further work was underway, that the parties’ views on value were far apart, and that Creative’s claims for further remuneration were clear evidence of its intention to repudiate future performance. These assertions were exaggerated or unfounded: Cottonsoft had halted work, in part at least for reasons having nothing to do with Creative; there was a substantial gap between Creative’s and Cottonsoft’s assessments ($284,275 and $170,000), but that might have been bridged had Cottonsoft accepted that the double length roll, which it assessed at
$73,500, was an additional task, as it plainly was; and the evidence does not justify the conclusion that Creative would have refused to complete tasks three and four if the retainer continued, particularly once it was accepted that the double length roll was an additional task. By taking the stance in its letters of 3 October and 20
November that Creative had repudiated, Cottonsoft was in my opinion seizing what
it saw as an opportunity to terminate the agreement without additional compensation. Consistent with that analysis, it unilaterally ceased payments.
[58] This ground of appeal fails. It follows that Creative was in principle entitled to damages for Cottonsoft’s breach of contract.
Loss of profits for tasks three and four
[59] Ms Kelly argued that the expectation measure of damages is unavailable because of the contingent nature of Creative’s rights under the remuneration agreement. She submitted that there is no case in which loss of bargain damages have been awarded on termination of what she characterised as a contract for good ideas. Further, there is no difference between contract termination and project termination, for both result in Creative being denied expectation damages; since Cottonsoft had the right to cancel projects, expectation damages are unavailable. On the facts, Creative’s “loss” arose from Cottonsoft’s exercise of its contractual rights to not proceed with the four tasks or to substitute others for them. The Judge was wrong to find that Creative would have completed tasks three and four to a standard acceptable to Cottonsoft; after all, all tasks except the double length roll had been stopped by Cottonsoft before termination.
[60] I do not accept that expectation damages are unavailable for wrongful termination merely because Cottonsoft enjoyed a right to cancel the tasks for which Creative would have earned its revenue. The questions are whether Cottonsoft had cancelled the tasks before it repudiated the contract and, if not, whether but for its repudiation it would have cancelled them or rejected Creative’s work.
[61] Creative accepts that the two tasks had been put on hold at the date of repudiation, but Ms Kelly was unable to point to any evidence that Cottonsoft had cancelled them. Indeed, she conceded that there is no evidence of “classical” or “orthodox” cancellation, as she put it. The most she could say is that Cottonsoft had manifested an intention to not have Creative complete them, which is a very different point and no answer to Creative’s claim. I agree with the Judge that the tasks had not been cancelled, and note that both were completed by other agencies after
termination. On one of them, task three, the campaign which was eventually launched made use of Mr Davidson’s “grip factor” concept. On the other, task four, there is no evidence that the work done by Creative was used in the final product, but as Mr Goodall submitted that task was put on hold at an early stage and in any event use of Creative’s work is not the point. The point is that task four, the very same task, was not cancelled.
[62] The next question is whether Creative would have completed tasks three and four to Cottonsoft’s satisfaction had the contract not been repudiated by Cottonsoft. Ms Kelly submitted that it would not. Cottonsoft might have cancelled them, and Ms Johnston had made it clear that she was unhappy with aspects of Creative’s work; indeed, that was one reason, perhaps the most important one, for putting all four tasks on hold. However, I find that the Judge was correct to conclude on the balance of probabilities that Creative would have completed the work to Cottonsoft’s satisfaction. The probability that the tasks would have been cancelled by Cottonsoft for reasons having nothing to do with the quality of Creative’s work could properly
be assessed by reference to the evidence that they were eventually completed.[3] And
generally speaking, performance did not involve Creative coming up with fully developed “good ideas” that Cottonsoft would take or leave; it might develop a number of concepts one of which would then be developed in conjunction with Cottonsoft. That Creative was capable of doing this, despite a difficult working relationship, is not in doubt. Its track record with Cottonsoft confirmed that, and Cottonsoft was very happy with its work on the double length roll campaign which was completed about the time Cottonsoft repudiated the contract. As Mr Goodall submitted, task three was substantially completed before termination using the “grip factor” concept which was ultimately used in the finished product, and task four involved developing an existing brand that Creative had previously built for Cottonsoft. Creative also had a strong incentive to see these tasks through to completion since it would earn its agency fee at that time.
[3] Golden Strait Corpn v Nippon Yusen Kubishika Kaisha [2007] UKHL 12, [2007] 2 AC 353.
[63] Counsel approached this aspect of the case before me, as in the District
Court, on the basis that it sufficed if Creative could show on the balance of probabilities that tasks three and four would not have been cancelled and Creative
would have gone on to complete them to Cottonsoft’s satisfaction. Before me Mr Goodall acknowledged that the case might have been approached on a lost chance basis, but he submitted that the evidence justified the Judge’s conclusion. Ms Kelly did not disagree, presumably recognising that the Judge’s approach held Cottonsoft to a higher standard of proof of quantum than would a lost chance
assessment. I accept that the Judge’s approach was appropriate in this case.[4]
[4] Compare for example Cemix Ltd v Flowcrete Asia SDN BHD HC Auckland CIV-2006-404-
1537, 2 April 2008 at [91] – [95].
[64] Turning to the quantum of damages, no issue was taken before me with the Judge’s calculation. Mr Davidson’s was the only evidence of avoided costs, and it was unchallenged notwithstanding his allegation that the agency made its profit on the agency fee component.
[65] I find that the Judge was right to award loss of profits for tasks three and four, and that the measure of damages was correct.
[66] Finally, Ms Kelly argued that damages should not have been awarded because Cottonsoft was entitled to substitute another task for any of the four original tasks, all of which she argued had been cancelled. She conceded that the double length roll was a new task, but submitted that it was commissioned in substitution for one of the others.
[67] However, Ms Kelly was unable to identify which task was the subject of substitution by the double length roll, unsurprisingly so for it is not now in dispute that Cottonsoft initially pursued all four tasks. Substitution under the agreement was to happen if Cottonsoft cancelled one task and replaced it with others, and a task would be cancelled without fee only if Cottonsoft cancelled it before the task was briefed in, meaning before the initial strategic and concept work was done. The agreement also contemplated that Creative might get additional remuneration for substituted tasks where that was “fair”. On the facts, tasks one and two were not completed, but there is no dispute that they were pursued to a point where Creative
was entitled to some payment for them. The issue was what that payment ought to
be. And as noted, tasks three and four were not cancelled at all; they were completed albeit by another agency.
Compensation for work done on tasks one and two
[68] The question at trial, as I have just noted, was how much Creative ought to be paid for the work it had done. The parties’ competing views were summarised in a table which the Judge reproduced, stating that it broke down their positions by reference to the “cost centres” (which I have called components) referred to in the remuneration agreement. I note that “Premium” is task one and “Facial” is task two:
Remuneration Agreement Creative
Cottonsoft
$ per task
Premium
Facial
Premium
Facial
Strategy
$6750.00
$6750.00
$6750.00
$6750.00
$6750.00
Core Concept
$8750.00
$8750.00
$8750.00
$6125.00
$7000.00
Concept Development
$8000.00
$6400.00
$6400.00
$0
$0
Pack Design Core Concept
$3500.00
$1750.00
$1750.00
$0
$0
Account Management
$3000.00
$2400.00
$2400.00
$1431.00
$1528.00
Meetings/Presentations
$2000.00
$1600.00
$1600.00
$0
$0
Research Groups/Meetings
$2000.00
$2000.00
$2000.00
$0
$0
TV Production Supervision
$6000.00
$600.00
$600.00
$0
$0
Peripheral Concept Work
$2000.00
$500.00
$500.00
$0
$0
Pack Art Supervision
$2000.00
$0
$0
$0
$0
General Artwork Supervision
$2000.00
$0
$0
$0
$0
Account Management $3000.00
$0
$0
$0
$0
Meetings/Presentations
$1000.00
$0
$0
$0
$0
Agency Project Fee
$35000.00
Nil
Nil
Nil
Nil
TOTAL
$85000.00
$30750.00
$30750.00
$15259.00
$18296.00
[69] It will be seen that both parties accepted that certain components had been completed or commenced. The Judge found on the facts that Creative’s percentage completion was appropriate, for the reasons summarised at [40] above. He accordingly fixed Cottonsoft’s liability for tasks one and two at $30,750 apiece.
[70] The principal question on appeal was whether in reaching that conclusion the Judge relied upon and misapplied concessions made in evidence by Mr Silvey, and in argument by Ms Kelly.
[71] I begin by identifying the concessions and the use that the Judge made of them.
[72] In cross-examination Mr Silvey was asked what would happen if a task was cancelled for reasons having nothing to do with the quality of the work done by Creative at that point. Ms Kelly objected that the question was hypothetical, but it was allowed. Mr Silvey responded that there would have been some discussion about a “fair remuneration basis” in those circumstances.
[73] In closing argument, Ms Kelly contended that only the completed components of each task were compensable if a task did not proceed, and added:
Now Your Honour will recall that in the 20 November letter Cottonsoft made some level of concession as to that. We don’t resile from that concession but we just say that’s, that’s a fair recognition of the effort rather than a construction of the contract imposed upon, which imposed that duty on Cottonsoft. Nobody denies that Mr Davidson put in a lot of work on a couple of projects and simply because the project got stopped before he could tweak it to the point of acceptance didn’t mean that Cottonsoft was
going to deny him compensation for those things at the 20th of November last year and that remains the case.
[74] The Judge recorded these concessions as follows:
In negotiations at the time of cancellation Cottonsoft was prepared to concede that, although it disagreed there had been acceptance of various parts of each task, it would remunerate at a proportionate level. It is still prepared to do so. Silvey conceded that should there be cancellation unrelated to Creative’s creative work (i.e. accepted but not carried on with for another reason) then Creative was entitled to a fair remuneration. In other words, in such a case, the completed components of each stage were what was compensable if a project did not proceed ...
[75] It will be seen that the first sentence addressed the letter of 20 November. The second sentence was drawn from counsel’s submissions, while the third dealt with Mr Silvey’s concession. The final sentence recorded Ms Kelly’s argument. The Judge went on to illustrate Creative’s entitlement to remuneration by reference to task three, finding that Cottonsoft permitted Creative to proceed with extensive work much of which was ultimately not utilised for reasons having nothing to do with any deficiency in Creative’s work.
[76] The Judge then said:
Notwithstanding a good deal of cross-examination and counter evidence, Cottonsoft has maintained that concession in closing. In other words, although it does not accept Creative’s interpretation methodology, it is prepared to pay pursuant to that methodology but using its own, rather than Creative’s, assessment of the work completed.
This is a reasonable approach on the part of Cottonsoft given that for tasks 1 and 2 it was Cottonsoft which (for whatever reason) ceased their development. The difference between the parties is the percentage of completion and the application of the cost centre referred to as “production agency”.
[77] The Judge went on to dismiss Creative’s agency fee or “production agency” claim before addressing the proportion of work completed for tasks one and two, as to which he accepted Creative’s assessment, as noted above.
[78] I accept Mr Goodall’s submission that the Judge did not mistake the critical concession, which is that made by Ms Kelly. She abandoned Cottonsoft’s point that Creative could not recover anything for a given component unless Cottonsoft had
accepted the work. It necessarily follows that Creative’s entitlement to remuneration must be assessed on some proportionate basis. In its letter of 20 November Cottonsoft arrived at the dollar figures offered on just such a basis, and it maintained at trial that it was still prepared to pay on that basis. Counsel did not specify that the concession was confined to the dollar amounts, such that acceptance must be proved to the extent that Creative wanted more. Accordingly, I do not accept that the Judge misinterpreted the concession. The better view is that Cottonsoft has tried to resile from it on appeal. I observe that while it is arguable that the Judge read too much into Mr Silvey’s concession, Mr Silvey having said only that there would be discussions about fair remuneration if a task was cancelled for reasons having nothing to do with Creative’s performance, he does not appear to have taken it as anything more than confirmation of what Ms Kelly had said.
[79] I observe finally that it is not clear how much significance the concession ultimately had. Although the Judge had found that it was impossible to determine the exact stage of completion and acceptance, he had also found that Cottonsoft accepted work by allowing Creative to move to the next component. He had outlined the work process: commissioning product research; preparing a communication brief, carrying out creative work, receiving Cottonsoft’s feedback, preparing package designs and artwork and overseeing production of the television or other advertising. The table at [68] indicates that he accepted Creative’s evidence that both tasks had reached peripheral concept work stage, albeit that the table does not in fact correspond exactly to the components set out in the remuneration agreement. Accordingly, had it been necessary to do so, he might well have been able to estimate the degree and stage of completion and acceptance.
[80] I deal finally with the Judge’s treatment of Mr Goodall’s concession.
[81] As noted above, the concession was that Cottonsoft’s completion percentages for tasks one and two could be used by the Judge if he also accepted Creative’s case on the agency fee. Having rejected the proviso, the Judge did not rely on the concession.
[82] Ms Kelly recognised that the Judge could not ignore the proviso without justification. She argued that the proviso was improperly attached to the concession, for it was not directly connected to the subject matter of the concession. Unsurprisingly, Ms Kelly advanced no authority for that submission. The parties frame their dispute for the Court’s decision, and it is always open to one of them to indicate that if one issue is decided in its favour it is content to accept the other party’s position on another. A conditional concession may detract from the credibility of the party’s case, and the Judge may discount it when fixing costs, but that is not to say that the party may not offer it or the Judge may not choose to adopt it.
[83] Ms Kelly’s ultimate point was that the treatment of this concession was inconsistent with that accorded the Cottonsoft concessions, hence unfair. The premise of this argument is that Cottonsoft’s concessions were similarly conditional; specifically, they were confined to the dollar amounts that it offered in the 20
November letter. But for the reasons given at [78] above, the premise is wrong.
Decision
[84] I find that the Judge was correct, essentially for the reasons he gave.
[85] The appeal is dismissed with costs on a 2B basis. Counsel must seek agreement on costs. They may file memoranda if they cannot agree: Mr Goodall’s must be filed by 29 April and Ms Kelly’s by 13 May 2011.
Miller J
Solicitors:
Wilkinson Adams, Dunedin for Appellant
Ellis Law, Auckland for Respondent
0
1
0