Eco Maintenance Ltd v Leighton Contractors Pty Ltd
[2014] NZHC 2340
•25 September 2014
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-001273 [2014] NZHC 2340
BETWEEN ECO MAINTENANCE LIMITED
Plaintiff
AND
LEIGHTON CONTRACTORS PTY LIMITED
Defendant
Hearing: 15 September 2014 Counsel:
A R Baker and A Steel for Plaintiff
A M Callinan and G K Holm-Hansen for DefendantJudgment:
25 September 2014
JUDGMENT OF KATZ J
This judgment was delivered by me on 25 September 2014 at 11:00 am
Pursuant to Rule 11.5 High Court Rules
Registrar/Deputy Registrar
Solicitors: Wackrow Williams & Davies, Auckland
Simpson Grierson, Auckland
Counsel: A R Baker, Shortland Chambers, Auckland
ECO MAINTENANCE LIMITED v LEIGHTON CONTRACTORS PTY LIMITED [2014] NZHC 2340 [25 September 2014]
Introduction
[1] Leighton Contractors Pty Limited (“Leighton”) has a contract to provide road maintenance services to the Wellington City Council (“Council”). The term of the contract (“Council Contract”) is three years, from 1 July 2013 to 1 July 2016, with rights of renewal.
[2] ECO Maintenance Limited (“Eco Maintenance”) provides services to Leighton as a sub-contractor. It carries out part of the road maintenance services that Leighton is contracted to provide to Council. Eco Maintenance has been providing these services to Leighton since the Council Contract commenced on 1 July 2013. On 20 May 2014 Leighton advised Eco Maintenance that it was terminating its services with effect from 31 May 2014. The termination appears to have been price driven. Leighton had obtained a quote from an alternative contractor for provision of the same services. Based on that quote, Leighton believed that it would make significant savings if it switched sub-contractors.
[3] Eco Maintenance says that Leighton was not entitled to unilaterally terminate its services. It says that it has a sub-contract with Leighton that runs for the same term as the Council Contract, namely three years. Leighton, on the other hand, says that its sub-contract with Eco Maintenance was on a month to month basis. It was therefore entitled to terminate Eco Maintenance’s services as at the end of the month in which notice was given.
[4] Eco Maintenance applied for interim orders, initially on a “without notice” basis, to prevent Leighton from taking any further steps to terminate its sub-contract, pending the trial of these proceedings. A without notice injunction was granted in late May, in order to protect the status quo until the full hearing of the injunction application could take place. I must now decide whether the existing interim orders continue until trial, or whether Eco Maintenance’s “on notice” injunction application should be dismissed and the current interim orders lifted.
[5] In order to determine this issue I must consider:1
(a) whether Eco Maintenance can show there is a serious question to be tried;
(b) where the balance of convenience between the parties lies; and
(c) whether the overall justice of the case favours the granting of an interim injunction or not.
[6] I will consider each issue in turn.
Is there a serious question to be tried?
Relevant legal principles
[7] The first question I must determine is whether Eco Maintenance can show that it has raised one or more serious questions to be tried. The following explanation of what is meant by a “serious question to be tried” was given by Lush J in Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd:2
In order to determine whether there is a serious question to be tried, it is necessary to consider what is the applicable law and whether there are arguable differences concerning it, what the facts are said to be on the opposing sides, and where the issues lie, and whether there is a tenable combination of resolutions of the issues of law and fact on which the plaintiffs could succeed.
[8] This statement has been affirmed on numerous occasions by New Zealand
Courts.3
[9] The statement of claim sets out two alternative causes of action:
(a) The first cause of action alleges that there was a legally binding sub-contract agreement between the parties that was to run for the full
1 Klissers Farmhouse Bakery Ltd v Harvest Bakery Ltd [1985] 2 NZLR 129 (CA) at 133.
2 Henry Roach (Petroleum) Pty Ltd v Credit House (Vic) Pty Ltd [1976] VR 309 at 311.
3 See for example, Sutton v The House of Running Ltd [1979] 2 NZLR 750 (NZSC) at 753, Simons Bakery Ltd v Tiffany Frozen Foods Ltd (1981) 1 TCLR 54 (HC) at 57-59, and Development Consultants Ltd v Lion Breweries Ltd [1981] 2 NZLR 258 (HC) at 261-262.
term of the Council Contract. Leighton was therefore not entitled to unilaterally terminate the Council Contract as it has purported to do.
(b)The second (alternative) cause of action says that if Leighton did have a right to terminate the sub-contract early, then it could only do so on the provision of reasonable notice. Eleven days notice was not reasonable in the circumstances. Eco Maintenance submits that a reasonable period of notice would be six months.
First cause of action
[10] Eco Maintenance’s position is that although no formal sub-contract agreement was entered into (despite the parties’ intention to do so) the parties agreed the essential terms of the sub-contract agreement through the provision of services, an exchange of correspondence and a meeting between the parties’ representatives. The key sub-contract terms so agreed were that:
(a) Eco Maintenance was the agreed sub-contractor to Leighton and was to provide specified services to the Council on Leighton’s behalf under the Council Contract.
(b)The price Eco Maintenance would be paid for those services was as set out in an email dated 27 March 2013.
(c) In providing the services, Eco Maintenance was required to meet the various requirements of Leighton in respect of the services as set out in the head contract.
(d)The term over which Eco Maintenance would provide the services would be the same as the term of the Council Contract.
[11] Eco Maintenance says that the parties’ agreement was not “subject to contract”. The creation of binding legal relations did not therefore depend on the execution of a formal sub-contract agreement. The Court can and should look to the surrounding factual matrix, including the content of negotiations between the parties.
The conduct of the parties in performing the contract in accordance with the agreed terms is a strong indicator that they were considered the essential terms of their agreement. It is not necessary that the parties have reached agreement on all terms, only the terms they regarded as “essential”.4 The parties are able to leave some terms for future agreement.5 Although some details were yet to be agreed, Eco Maintenance’s position is that all of the essential terms of a three year sub-contract
had been agreed prior to termination.
[12] Leighton does not deny the existence of a contract with Eco Maintenance. It says, however, that the contractual arrangements between the parties operated on a month by month basis, governed by Leighton’s purchase orders. Leighton was therefore within its rights to terminate those services at the end of the month.
[13] Leighton noted that at issue is a commercial transaction of significant complexity and value. The normal inference is that parties do not intend to be bound before an agreement is drawn up and executed by both sides.6 Indeed it is undisputed that the parties intended that a “formal” sub-contract to be completed in due course. Leighton submitted that this was in itself strong evidence that there was no prior binding agreement for a three year term, prior to the formalisation of such a
contract. Further, the three year sub-contract envisaged by the parties required negotiation of much more than price, scope and term, as reflected in draft sub-contracts exchanged in September and October 2013. Leighton submitted that the correspondence between the parties, viewed objectively, supports the view that no three year sub-contract was concluded, informally or otherwise.
[14] There are good arguments that can be made in support of both parties’ positions. I am therefore satisfied that Eco Maintenance has established that there is a serious question to be tried on its first cause of action. It is difficult at this preliminary stage to assess the strength of Eco Maintenance’s claims. They will no doubt face some obstacles at trial. Equally, however, Leighton’s argument that the
purchase orders governed the contractual relationship between the parties will not be
4 Electricity Corporation of New Zealand Ltd v Fletcher Challenge Ltd [2002] 2 NZLR, (2001)
7 NZBLC 103,477 (CA) at [233].
5 See Pagnan SpA v Feed Products Ltd [1987] 2 Lloyds Rep 601 at 619.
6 Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd [1981] 2 NZLR 385 (CA) at 388-389.
without difficulty. Ultimately, I am satisfied, adopting the words of Lush J in Henry Roach (Petroleum) Pty Ltd that there is “a tenable combination of resolutions of the issues of law and fact on which [Eco Maintenance] could succeed”.7
Second (alternative) cause of action
[15] Counsel for Eco Maintenance made it clear that the second cause of action was very much a “fall back” option. Essentially, it alleges that if the “interim” agreement entered into by the parties pending finalisation of a written contract did not include the same term as the Council Contract, then it was subject to an implied term that it could only be terminated on reasonable notice. Eco Maintenance says that a reasonable notice period would be at least six months, given the expenditure it has incurred in gearing up to perform the sub-contract.
[16] Leighton denies the existence of any such interim agreement or implied term and says that the parties’ contractual relationship was governed by Leighton’s purchase orders. Further, even if there was such an interim agreement, Leighton says that a reasonable notice period would have been less than six months, possibly three months. More than three months has now elapsed since notice was given.
[17] I am satisfied that it is seriously arguable that the interim contractual arrangements between the parties included an implied term that they were only terminable on reasonable notice, and that such a reasonable notice period was more than 11 days. This is particularly so given that Eco Maintenance had been undertaking sub-contract services for almost a year and had expended significant capital outlay (including employing staff) to provide the required services.
[18] Given that there is a serious question to be tried on both causes of action, it is necessary to consider where the balance of convenience lies.
Where does the balance of convenience lie?
Would damages be an adequate remedy for Eco Maintenance if it were to succeed at trial?
[19] The first consideration under the assessment of the balance of convenience is to determine whether damages would be an adequate remedy for Eco Maintenance if it were to succeed at trial. The relevant principle is stated in American Cyanamid Co v Ethicon Ltd as follows:8
…the court should first consider whether, if the plaintiff were to succeed at the trial in establishing his right to a permanent injunction, he would be adequately compensated by an award of damages for the loss he would have sustained as a result of the defendant’s continuing to do what was sought to be enjoined between the time of the application and the time of the trial. If damages in the measure recoverable at common law would be adequate remedy and the defendant would be in a financial position to pay them, no interlocutory injunction should normally be granted, however strong the plaintiff’s case appeared to be at that stage.
[20] While there will occasionally be cases where courts grant injunctive relief notwithstanding that damages may be an adequate remedy for a plaintiff, such cases are relatively rare and tend to involve exceptional circumstances.
[21] The sub-contract between Eco Maintenance and Leighton generates significant revenue for Eco Maintenance. Further, Eco Maintenance appears to have invested a significant amount of resource and money into the Council Contract. It has employed 15 staff and leased premises. If the sub-contract is terminated, there is going to be significant disruption to Eco Maintenance. It is going to have to shut down all of its facilities and services that it offers. Staff will likely have to be made redundant.
[22] Eco Maintenance submitted that damages would not be an adequate remedy in such circumstances. It says that the damages it will suffer if the contract was wrongfully terminated early would be difficult to calculate. It did accept, however, that the largest component of any damages claim would be lost profits, which could be fairly readily quantified. That is because the work to be performed is clearly identified and there are prescribed contract rates for defined services. These could
be projected forward for the remaining term of the contract, although the resulting figure, Eco Maintenance submitted, would always have “some degree of uncertainty associated with it”.
[23] The difficulty in quantifying damages arises, Eco Maintenance submitted, because it would also be entitled to seek other heads of damage. For example, it will incur costs associated with the relocation of plant and equipment. It may have costs associated with the termination of staff. It has premises that would need to be sublet. It may be able to mitigate some of these losses, but the reality is that its ultimate loss is going to be some combination of loss of profit, plus extraordinary expenses, less mitigation steps it could take. Eco Maintenance submitted that it will be difficult to calculate the overall damages figure. Finally, Eco Maintenance submitted that early termination of a contract could damage its reputation, and that such reputational damage would be difficult to quantify.
[24] I do not accept Eco Maintenance’s submission that damages would not be an adequate remedy for it in this case, due to alleged difficulties in calculating quantum. This is a relatively straightforward breach of contract case. The profit margin on the contract should be readily capable of assessment, as Eco Maintenance accepted. That will likely be the most significant loss to Eco Maintenance, should it succeed at trial. Similarly, any costs associated with the relocation of plant and equipment or subletting leased premises should be capable of ready calculation. Indeed, by the time of trial it is likely that most or all of such costs will have been incurred and will therefore be able to be calculated on an actual, rather than a hypothetical, basis.
[25] As for the costs of terminating staff, Ms Tarlton’s evidence on behalf of Eco Maintenance was that there are thirteen staff that cannot be redeployed and would need to be made redundant, which requires four weeks’ notice. This would presumably have been the case at the end of a three year term, in any event. However, to the extent that any additional costs are incurred as a result of early termination, they will be able to be ascertained and readily calculated. Indeed, as Leighton pointed out in submissions, the orderly transition of the provision of services from Eco Maintenance to a new sub-contractor may well take four weeks or so in any event.
[26] There is nothing unusual in this case that would give rise to any particular difficulties in the assessment of contractual damages. The only potential head of damages that is in any way unusual or potentially difficult to ascertain would be any damages for reputational loss. That particular claim, however, is highly speculative and weak. If it is later found that Leighton wrongfully terminated the sub-contract early, this would be more likely to detrimentally impact on Leighton’s reputation in the market, rather than Eco Maintenance’s.
[27] It was not disputed that Leighton is in a financial position to pay any award of damages to Eco Maintenance. Leighton is part of the Leighton Group, which is listed on the ASX. Its latest financial reports show total equity of $1.3 billion.
[28] It necessarily follows that damages would be an adequate remedy for Eco Maintenance in this case. This is accordingly a factor that weighs very heavily against the continuation of the interim injunction. In accordance with the legal principles I have outlined above, an injunction will not normally be granted where damages would be an adequate remedy for the plaintiff.
Would damages be an adequate remedy for Leighton if it were to succeed at trial?
[29] If damages would not be an adequate remedy for a plaintiff (contrary to my conclusion above) then the next step is usually to consider whether damages would be an adequate remedy for the defendant, if the defendant were to succeed at trial. As the Court in American Cyanamid stated:9
If, on the other hand, damages would not provide an adequate remedy for the plaintiff in the event of his succeeding at the trial, the court should then consider whether, on the contrary hypothesis that the defendant were to succeed at the trial in establishing his right to do that which was sought to be enjoined, he would be adequately compensated under the plaintiff’s undertaking as to damages for the loss he would have sustained by being prevented from doing so between the time of the application and the time of the trial. If damages in the measure recoverable under such an undertaking would be an adequate remedy and the plaintiff would be in a financial position to pay them, there would be no reason upon this ground to refuse an interlocutory injunction.
9 Above n 8 at 408.
[30] It was not seriously disputed that, if the injunction was granted, Leighton’s losses could be readily quantified and compensated by an award of damages. Leighton’s losses will essentially be the difference between what it has to pay Eco Maintenance to provide the relevant services, and what it would have to pay someone else to provide the same services. Leighton has obtained a quote from an alternative sub-contractor, as a result of which it is able to quantify the losses it says it will incur. Leighton says that its total damages are likely to be approximately
$1 million.
[31] The real issue is whether Eco Maintenance, which is a privately held company, would be able to meet such an award of damages if it were to fail at trial.
[32] There are some unfortunate gaps in the information that Eco Maintenance has provided to the Court regarding its current financial position. Nevertheless it appears likely that, with the backing of related entities (who have provided evidence of their support) Eco Maintenance would be able to meet a significant award of damages. Doing so would, however, likely put the company under very significant financial pressure. Its ability to continue trading would be at serious risk. Indeed it seems fairly clear Eco Maintenance would be unable to meet any award of damages from cash-flow alone, but would have to realise most or all of its assets to meet any judgment debt.
[33] Leighton expressed concern that in such circumstances Eco Maintenance would have little incentive to pay any judgment debt. It could take various steps to frustrate any attempt by Leighton to enforce a judgment in its favour, for example any income in the lead up to trial could be readily dispersed. Further, the costs associated with this litigation are likely to be a significant drain on Eco Maintenance’s income and cash resources.
Status quo
[34] Maintaining the status quo favours Eco Maintenance, given that it has been providing the relevant services for the past 11 months.
Impact on third parties
[35] Another consideration relevant to the overall balance of convenience is the potential impact on third parties, including in particular Eco Maintenance employees whose contracts are likely to be terminated if the injunction is not granted.
[36] Leighton submitted that this is a risk that is inherent in any contract termination dispute. Further, there is some prospect that any new contractor appointed would look to hire Eco Maintenance staff, which is what Intergroup (who have previously provided a quote) had planned to do.
Overall justice
[37] The ultimate and overarching consideration is overall justice.10 All of the matters I have previously considered may impact on where the overall justice of the case lies.
[38] There can be little doubt that termination of the current contractual arrangements between Eco Maintenance and Leighton will result in significant disruption to Eco Maintenance’s business. That will give rise to a significant damages claim in the event that Eco Maintenance succeeds at trial. I have found, however, that Eco Maintenance’s losses will be readily quantifiable. There is no question that Leighton has the financial means to meet any judgment, if Eco Maintenance succeeds at trial. Damages are, accordingly, an adequate remedy for Eco Maintenance. In normal cases an injunction will not be granted in such circumstances. In my view, there is nothing in this case that takes it outside the normal range.
[39] If Leighton were to succeed at trial its losses could also be readily quantified. I think it probable that Eco Maintenance would be able to meet an award of damages, although (unlike in the case of Leighton) there is some degree of risk around this, particularly given the failure to provide Eco Maintenances most recent
accounts.
10 E R Squibb & Sons (NZ) Ltd v ICI New Zealand Ltd (1988) 3 TCLR 296, (1988) 2 NZBLC
103,382 (HC).
[40] Leighton has concerns over Eco Maintenance’s performance and the value for money they were delivering prior to the notice of termination. Since that time there have been further performance issues raised by Leighton and disputed by Eco Maintenance. Extending the current interim orders would force the parties to continue to work together in circumstances where at least one party no longer wishes to do so and the relationship is strained. I accept Leighton’s submission that in such circumstances a clean break is usually preferable, with the respective contractual claims for damages being determined in the substantive hearing in due course.
[41] Although the status quo favours Eco Maintenance, the status quo usually only comes into play where other factors are fairly evenly balanced between the parties.11
Given the adequacy of damages as a remedy for the plaintiffs, that is not the case here.
[42] The purpose of an interim injunction is generally to maintain the status quo until the substantive issues can be determined. It is therefore usually incumbent on a plaintiff seeking such equitable relief to pursue their substantive claims with some vigour. Almost four months have now elapsed since Eco Maintenance obtained a without notice injunction. During that time Eco Maintenance has taken no steps to advance the substantive proceedings. On the contrary, Eco Maintenance submitted that the outcome of the injunction application will effectively determine the substantive proceedings. However, that is not the case. The substantive issue in the proceedings is whether Leighton was entitled to terminate the contractual relationship between the parties on 20 May 2014 or not. That issue will not be determined by the injunction application and will need to proceed to trial. The outcome of the injunction application impacts on the available remedies only. If an injunction is not granted, Eco Maintenance will still have its remedy in damages. If Eco Maintenance were successful at trial Leighton will be required to make good all of its losses.
[43] At this preliminary stage at least, it appears to me that Eco Maintenance’s
second cause of action is stronger than its first cause of action. In particular, Eco
Maintenance’s claim that 10 days notice was insufficient in all the circumstances
11 American Cyanamid Co above n 8 at 408.
may well have merit (although that is obviously an issue for trial). However, four months have now elapsed since notice was given and it is likely to take at least several further weeks to transition to a new sub-contractor. I accept Leighton’s submission that, in such circumstances, a continuation of the current interim orders would likely place Eco Maintenance in a significantly better position than it would have been in if it succeeded at trial in establishing that a reasonable notice period was six months.
[44] Taking all of these matters into account, it is my view that the overall justice of the case does not favour the continuation of the existing interim injunction.
Result
[45] The plaintiff’s application for an interim injunction preventing the defendant from taking steps to terminate the sub-contract agreement between the parties is dismissed. The existing interim injunction, made on a without notice basis on
28 May 2014, now expires with immediate effect.
[46] Costs are reserved, to be determined following substantive determination of the proceedings.
Katz J
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