Herbert Construction Company Limited v Carter Holt Harvey Limited
[2013] NZHC 780
•16 April 2013
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV-2012-441-368 [2013] NZHC 780
BETWEEN HERBERT CONSTRUCTION COMPANY LIMITED
Applicant
ANDCARTER HOLT HARVEY LIMITED Respondent
Hearing: 23 August 2012
Appearances: D J O'Connor for Applicant
J D McBride and A G Skinner for Respondent
Judgment: 16 April 2013
JUDGMENT OF ASSOCIATE JUDGE BELL
This judgment was delivered by me on 16 April 2013 at 4:00pm
pursuant to Rule 11.5 of the High Court Rules.
...................................
Registrar/Deputy Registrar
Solicitors:
Lunn and Associates Limited, P O Box 846 Napier 4140, for Applicant
Email: [email protected]
Copy for:
D J O’Connor, P O Box 137 Napier 4140, for Applicant
Email: [email protected]
Josh McBride, P O Box 1008 Auckland 1140, for Respondent
Email: [email protected]
Carter Holt Harvey Ltd (A G Skinner) Private Bag 94027 Manukau 2241 (Respondent) Email: [email protected]
HERBERT CONSTRUCTION COMPANY LIMITED V CARTER HOLT HARVEY LIMITED HC NAP CIV-
2012-441-368 [16 April 2013]
[1] Carter Holt Harvey Ltd, a builders’ merchant, served a statutory demand for
$404,317.64 on Herbert Construction Company Ltd. Herbert applied to set aside the demand on the grounds that there is a substantial dispute whether or not the debt is owed and that it has a counterclaim for damages which exceeds the amount specified in the demand.1
[2] The debt in the statutory demand is for money payable for building products supplied. Most of the debt is for the supply of “Ampelite” roofing material made up of an invoice of 7 February 2012 for $265,926.59 and an invoice of 27 February
2012 for $72,790.14, a total of $338,716.73. The rest of the demand, for $65,600.91, is for other building materials. The argument is over the “Ampelite” roofing material. Herbert says that the product supplied was defective and that it faces a demand from its customer for which it faces a liability for more than the statutory demand. It says that it is not liable to pay for the price and that it has a claim against Carters for indemnity for an amount more than $403,370.642 – its counterclaim. Carters’ answer is that its terms of trade stop Herbert running those arguments.
[3] These questions arise:
(a) Does Herbert have a defence to liability and a counterclaim without the terms of trade?
(b) Do the terms of trade apply?
(c) What is the effect of clause 12.1 of the terms of trade?
(d)Do the terms of trade take away or reduce any defence or counterclaim available to Herbert?
(e) How should the court exercise its discretion under s 290(4)?
1 The grounds under s 290(4)(a) and (b) of the Companies Act 1993.
2 The formula under s 290(4)(b) is that an eligible counterclaim is one where the statutory demand less the amount of the counterclaim is less than the prescribed amount of $1,000.
Background
[4] Herbert had the contract to build the canopy and rock store building for Ravensdown Fertiliser Co-Operative Company Ltd at Awatoto. It bought the “Ampelite” roofing material for that contract. Herbert entered into the contract with Ravensdown in April 2011. The contract specified roof cladding as “Alysnite
2.5mm Topglass GC ULTRA-Safe roofing (or similar) to comply with AS4256.3”.
[5] Ampelite (NZ) Ltd supplies a roofing material called “Webglas GC”.3 The product is said to embody a heavy gauge woven glass mat polyester sheeting, which provides continuous reinforcement in every direction so that wire safety mesh is not required. This is said to be an important feature in aggressive and corrosive environments which can destroy metal. Ampelite promotes the product as complying with New Zealand and Australian roofing standards AS/NZ4257.3 and
4256.3.
[6] For the Ravensdown contract Herbert ordered the “Ampelite” roof glass as being similar to the “Alysnite” roofing in the specifications. Ampelite does not sell directly to construction companies. Herbert arranged for Carters to order the “Webglas GC” from Ampelite and to on-sell it. It is common ground that Ampelite sold “Webglas GC” to Carters and Carters on-sold it to Herbert, which in turn used it on the Ravensdown contract.
[7] Invoices in evidence show that the product is identified variously as “Webglas Super 6 titanium”, “Webglas Super 6 opal-tinted”, “Wonderclad Titania S/6”. There is no evidence that Herbert expressly required Carters to supply a roofing material that complied with New Zealand and Australian roofing standards (AS/NZ4256.3 and 4257.3). The roofing materials were supplied in late 2011 and early 2012.
[8] Neither side gave particular attention to the description under which Carters sold the roofing material to Herbert, but the best indications in the evidence are that
it was ordered and supplied by reference to its product name.
3 GC means “gel-coated surface”.
[9] Ravensdown’s engineers, Stratagroup, had the “Ampelite” roofing material tested in April 2012. Under the standard in the contract specifications, the roofing material had to be 2.5 mm thick and had to weigh 3,660 grams per square metre. Those are the same standards for thickness and weight as in the roofing standards AS/NZ4256.3 and 4257.3 The test report provided to Stratagroup in April 2012 showed the weight of the material to be 2,806 grams per square metre, with the material having a thickness of between 2.1 mm and 2.4 mm. Further test results in May 2012 showed sheet weights of 2.77 grams per square metre, and a thickness of
1.9 to 2.1 mm. On 5 April 2012, Ravensdown recorded its concerns that the “Ampelite” product was inferior compared to the “Alysnite Ultra-Safe” material and did not meet the contract requirements. It gave notice that the use of the “Ampelite” product was in breach of contract, resulting in a loss to Ravensdown. It gave a direction that Herbert should desist from installing any further roofing material that did not comply with the contract specifications.
[10] In a notice to contractor of 23 May 2012, Stratagroup confirmed its view that the roofing material did not comply with the contract specifications. It gave an instruction to provide a proposal to remedy for consideration. On 19 June 2012
Ravensdown terminated its contract with Herbert, while reserving its position.
[11] For its part, Ampelite contests the rejection of its product. It maintains that its product complies with the applicable standards. It obtained samples of the roofing material supplied for the Ravensdown contract, and tested it itself. It says that its internal testing shows compliance with AS4256.3 and is within the allowable tolerance, plus or minus 10 per cent of the specified rate of 360 grams per square metre. It has also had samples tested by an independent testing laboratory. These test results also confirm compliance. Ampelite also contests the tests carried out for Ravensdown, suggesting that the methods used did not comply with the standards.
[12] The position at the date of hearing was:
(a) Some of the roofing material had been used on the Ravensdown contract. There was approximately 3,000 m2 of roofing material on site which had not been installed. Ravensdown has not paid for that
roofing material. Ravensdown has not paid retentions to Herbert, said to be more than $100,000. As against Ravensdown, Herbert challenges the rejection of the roofing material. Herbert and Ravensdown have agreed to the appointment of an arbitrator for the determination of their differences. However, in a memorandum filed after the hearing, Carters complained that the arbitration was not being pursued promptly.
(b) Herbert had installed about two-thirds of the roof, about 5,500 m2
before Ravensdown suspended the work and terminated the contract.
(c) Herbert says that if it is required to remove the “Ampelite” roofing
material and install a new roof, that is likely to cost more than
$500,000. Ravensdown has reserved its position against Herbert for that cost.
(d)Herbert says that if it had been able to complete the Ravensdown contract, it would have made a profit of more than $300,000.
(e) Herbert says that it has potential liability to Ravensdown, for which it seeks indemnity from Carters.
(f) It says that its potential claim against Carters is the lost profit of
$300,000, the retentions of $100,000 it has lost and potentially the cost of installing a new roof, at more than $500,000. It says that sum is more than the amount of the statutory demand.
(g)For its part, Carters says that it has paid Ampelite for the roofing material, but has not been paid by Herbert for the roofing material or for other building materials supplied. It is owed $404,370.64.
(h)Carters has put in evidence a credit account application and terms of agreement for supply between it and Herbert of 25 August 2005. Carters relies on the terms of agreement to say that it never gave any
warranties as to the roofing material, that Herbert must pay the price of the material in full, that Herbert cannot maintain any claim against it for its losses under its contract with Ravensdown, and that in any event the no-deduction and set-off provisions of the terms of agreement require payment in full.
[13] While Herbert maintains against Ravensdown that its engineer’s rejection of the Webglas was not justified, its refusal to pay Carters is on the basis that the Webglas arguably did not comply with the specifications in the Ravensdown contract. If it has to carry the consequences for any non-compliance, it wants to pass them back to Carters. On the other hand, Carters says that it can resist that.
[14] Ultimately, Ampelite NZ Ltd and Ravensdown are in dispute as to the merits or otherwise of the Webglas product, but they are at different ends of the supply chain. Ravensdown is unlikely to have a claim in tort directly against Ampelite for alleged defects in the product.4 Instead its claims are in contract with the party it engaged with, and that party may in turn claim in contract against the party it dealt with, so that claims in contract follow the chain of supply back to the ultimate
supplier. Herbert and Carters are intermediate parties in the chain. Their rights and liabilities are determined by the terms of their contract. That will determine which of them carries the risk for any product defects. However, if Carters is arguably liable, it may in turn have a claim against its supplier, Ampelite.
[15] For this case it is not possible to say whether the roofing materials complied with the standards. There is a conflict in the evidence. For Herbert it is arguable that they did not comply.
Does Herbert have a defence to liability and a counterclaim without the terms of trade?
[16] Herbert says that the terms of trade do not apply in this case. It is therefore helpful to see what arguable defences and counterclaims are available to it, even
without the terms of trade.
4 Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZLR 324 (CA).
[17] It cannot claim the benefit of any guarantees under the Consumer Guarantees Act 1993, as it is not a consumer under that Act. It did not acquire the roofing material for personal, domestic or household use or consumption, but did acquire them for use in a commercial building project.5 Nor does it assert any claim against Carters under the Fair Trading Act 1986. It does not allege any misrepresentation by Carters. Instead the inquiry is about the parties’ rights and liabilities under the sale
of goods.
[18] Carters’ sale of the roofing materials was a sale by description under s 15 of the Sale of Goods Act. At the time Herbert placed its orders, the roofing materials were unascertained.6 Carters were required to supply roofing materials corresponding to the description. The condition under s 15 goes only to identity, not to quality.7 Herbert’s complaint is not with the identity of the product it received – it did get the Ampelite roofing material that it had ordered – but with its quality. It does not have a claim for a breach of s 15.
[19] Putting to one side the terms of trade, Herbert does not contend that Carters gave an express promise as to the quality of the roofing material. Here it is useful to bring out further how Carters came to be involved. Herbert had an existing account with Carters. When Ampelite NZ Ltd would not supply directly to Herbert, Herbert used its Carters account to arrange the supply of the roofing material. Carters’ evidence is about the credit issues arising out of the large order which was for more than Herbert’s credit limit. It denies that it was involved in any other negotiation over the contract. It denies giving any express warranty or guarantee as to the Ampelite roofing material. It points out that it arranged for Ampelite to deliver the roofing material to a building site without it ever passing through its hands. It did not know about the contractual arrangements between Herbert and Ravensdown.
[20] When there is not an express contract term as to quality, the starting point is caveat emptor. But it is only the starting point. Section 16 of the Sales of Goods Act
5 See definition of “consumer” in Consumer Guarantees Act 1993, s 2.
6 Taylor v Combined Buyers Ltd [1924] NZLR 627 (SC) at 633:
It is clear that all sales of unascertained goods are necessarily sales by description, inasmuch as in the absence of any description of the goods to be delivered there would be nothing to determine the subject-matter of the contract or the obligations of the vendor.
7 Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441 (HL) per Lord Diplock at 503–504.
provides for certain implied terms. Herbert does not claim any term as to quality implied by custom under s 16(c).
[21] Section 16(a) provides for an implied condition as to fitness for purpose where the buyer makes known to the seller the particular purpose for which the goods are required, so as to show that the buyer relies on the seller’s skill or judgement and the goods are of a description which it is in the course of the seller’s business to supply. While Carters does supply building materials, including roofing materials, there is nothing in Herbert’s case to show that it relied on Carters’ judgement or skill to supply roofing materials that were reasonably fit for the Ravensdown contract. Carters denied any such reliance and Herbert did not claim that there was. The implied condition under s 16(a) does not apply in this case.
[22] Section 16(b) provides:
(b) Where goods are bought by description from a seller who deals in goods of that description (whether he is the manufacturer or not), there is an implied condition that the goods shall be of merchantable quality:
Provided that if the buyer has examined the goods, there shall be no implied condition as regards defects which such examination ought to have revealed:
[23] Carters says that it did not proffer a description of the roofing material, but that is beside the point. Given that the goods were unascertained, its submission seems to be that as Herbert ordered the roofing materials and specified the product, then the condition does not apply. However, s 16(b) is not so limited. It applies whenever there is a sale by description, no matter who supplies the description. Section 16(b) would lose much of its usefulness if it were held not to apply whenever a customer told the seller the description of the goods to be supplied. Carters did not cite any authority for its proposition and I am not aware of any.
[24] Carters says that it does not deal in roofing material of that description. By that I understand it to mean that it had not dealt in this particular product before. However, Carters deals in building products generally, including roofing materials. “A seller who deals in goods of that description...” is not confined to the particular
product, but refers to someone who deals in goods of that kind: Ashington Piggeries
Ltd v Christopher Hill Ltd.8 Further in that case Lord Wilberforce held:9
Moreover, even if this is wrong, and “description” is to be understood in a technical sense, I would have no difficulty in holding that a seller deals in goods “of that description” if he accepts orders to supply them in the way of business; and this whether or not he has previously accepted orders for goods of that description.
As Carters does deal in goods of that kind and this was a sale by description, the implied condition as to merchantability applies.
[25] “Merchantability” means commercially saleable. On a claim for breach of a condition as to merchantability, relevant considerations are the description under which the goods were sold, the uses to which the goods can be put and the price they were sold at.10 In Henry Kendall & Sons Ltd v William Lillico Ltd,11 Lord Reid tweaked a dictum of Lord Wright in Cammell Laird and Co Ltd v Manganese Bronze and Brass Co Ltd.12 While his amendment is commonly cited, his following words are also valuable:13
“What subsection (2) now means by 'merchantable quality' is that the goods in the form in which they were tendered were of no use for any purpose for which goods which complied with the description under which these goods were sold would normally be used, and hence were not saleable under that description." This is an objective test: "were of no use for any purpose …" must mean "would not have been used by a reasonable man for any purpose.
…"
That would produce a sensible result. If the description in the contract was so limited that goods sold under it would normally be used for only one purpose, then the goods would be unmerchantable under that description if they were of no use for that purpose. But if the description was so general that goods sold under it are normally used for several purposes, then goods are merchantable under that description if they are fit for any one of these purposes: if the buyer wanted the goods for one of those several purposes for which the goods delivered did not happen to be suitable, though they were suitable for other purposes for which goods bought under that description are normally bought, then he cannot complain. He ought either to have taken the necessary steps to bring subsection (1) into operation or to have insisted that a more specific description must be inserted in the contract.
8 Ashington Piggeries Ltd v Christopher Hill Ltd [1972] AC 441(HL) at 473–474, 485 and 495.
9 At 495.
10 For the relevance of price, see B S Brown & Son Ltd v Craiks Ltd [1970] 1 WLR 752 (HL).
11 Henry Kendall & Sons v William Lillico Ltd [1969] 2 AC 31 (HL).
12 Cammell Laird and Co Ltd v Manganese Bronze and Brass Ltd [1934] AC 402 (HL).
13 At 77.
[26] Carters sold the roofing material under its product name. Under that description it has only one use – as a roofing and cladding material, suited for corrosive environments. No other use was suggested. For that use there are standards it is expected to comply with. While the standards may not be legally binding, there is arguably a commercial expectation that the product will meet the standards set for it by AS/NZ4256.3 and 4257.3, as shown by Ravensdown’s rejection of the product. Webglas GC that does not meet the standards has no other use. Herbert has an arguable case: that the Webglas that Carters supplied for the Ravensdown job did not comply with the standards; that it was therefore not commercially saleable; and that Carters breached the implied condition as to merchantability.
[27] If a buyer has accepted goods within s 37 of the Sale of Goods Act but the goods are later found not to be merchantable under s 16(b), the seller’s breach of the condition is treated as a breach of warranty – s 13(3) of the Sale of Goods Act. Here Herbert accepted the goods by using them on the Ravensdown job, but that acceptance does not take away its rights to claim a breach of s 16(b).
[28] Under s 54 of the Sale of Goods Act, Herbert’s remedies for breach of the condition are to abate the price and to sue for damages for breach. The right to abate gives it a defence to a claim to pay the price, as the extent of its loss is arguably as much as the price. That defence is a ground for saying that the debt in the statutory demand is subject to a substantial dispute under s 290(4)(a) of the Companies Act. The right to sue for damages arguably gives rise to a claim for an amount in excess of the sum in the statutory demand. That is a counterclaim or cross-demand under s
290(4)(b). Accordingly if Carters’ terms of trade do not apply, Herbert has grounds
to set aside the statutory demand.
Do the terms of trade apply?
[29] Under s 56 of the Sale of Goods Act the parties’ contract may negative or vary terms implied by law, including conditions as to quality under s 16 and remedies under s 54. Carters relies on its terms of trade. In August 2005 Herbert signed Carters’ application for the credit account. Under it, it agreed that goods were
supplied subject to Carters’ standard terms and conditions of sale. These are set out on a separate page on the application. They cover a range of matters that are typically addressed in standard form agreements for sales of goods, such as price, payment, delivery, risk and force majeure. Carters agreed to give credit to Herbert on its acceptance of those terms.
[30] Herbert says that the terms do not apply in this case. For that it relies on clause 1.2:
A contract is created and the Customer is bound to pay the price when CARTERS accepts the Customer’s order in writing. Subject to clause 3.2,14 each accepted order shall constitute a separate contract. A quotation does not create a binding contract until the Customer places an order which is then accepted by CARTERS.
[31] Herbert’s argument is that it placed its orders for the roofing material orally, not in writing. It notes that “in writing” could apply to Carters’ acceptance of the order rather than to its orders, but it says that a setting aside application is not the place for resolving such ambiguities. It also says that Carters did not accept its orders in writing. As the contract was not created by the means set in clause 1.2, the terms of trade do not apply.
[32] It also notes that Carters set up a “sub-account” for this sale, with a customer number which was different from that used for Herbert’s normal purchases. That went to show that this sale was outside the normal terms of trade governed by Carters’ standard terms.
[33] Clause 1.2 is not exhaustive of the ways Carters and its customers can enter into contracts. The terms of trade are intended to apply generally to sales by Carters to its customers. The introductory words to the terms say:
The following terms shall be incorporated into each contract entered into between the Customer and CARTERS for the supply of Goods except to the extent expressly varied by signed agreement in writing between them.
[34] The first sentence of clause 1.2 makes it clear that a contract does not come into effect only by the customer placing an order. Acceptance of the order by Carters
14 Clause 3.2 is not relevant here.
is required. The sentence allows Carters to say that there is no acceptance if its acceptance is not in writing. It provides for cases where there is a dispute whether the parties have contracted. The second and third sentences address respectively the effect of each accepted order and the need for a quotation to be followed up with an accepted order. Obviously there will be cases where the parties have undoubtedly contracted without order or acceptance being put in writing. A purchase of a bag of nails by one of Herbert’s staff going into Carters’ premises and dealing directly with one of Carters’ staff is covered. The fact that the parties may not have made the order or the acceptance in writing does not take the sale of the roofing material outside Carters’ terms of trade, which Herbert agreed to accept.
[35] Similarly Carters’ use of a sub-account with a different customer number does not change the position. It only goes to Carters’ internal accounting and administrative treatment of this contract. It does not take the transaction outside the terms of trade. Accordingly the terms of trade apply to the sale in this case.
What is the effect of clause 12.1 of the terms of trade?
[36] Herbert says that it has a claim for breach of clause 12. of the terms of trade, which says:
All customary building industry tolerances shall apply to the dimensions and measurements of Goods unless Carters and the Customer agree otherwise in writing.
[37] Herbert says that this is a warranty which it can apply against Carters. It says that there was a breach by Carters because the testing for Ravensdown showed that the roofing material did not meet building industry tolerances.
[38] Clause 12.1 gives Carters a defence if a customer complains that the goods supplied do not match the required dimensions and measurements. The defence is that even if there is not an exact match, the goods are acceptable when they are within industry tolerances. It is arguable that “dimensions and measurements” include the weight and thickness requirements under AS/NZ4256.3 and 4257.3 as being applicable industry standards. Those standards appear to allow for defined
tolerances.15 If the roofing material is outside those tolerances (as Ravensdown contends), then Carters cannot raise clause 12.1 in its defence. However, the clause operates only as a defence to a claim by Herbert of breach of some other term of the contract. So far in this case, Herbert has an arguable claim for breach of the implied condition as to merchantability. Clause 12.1 does not give an independent cause of action, but it is relevant in establishing whether Carters have breached the implied condition.
Do the terms of trade take away any defence or counterclaim available to
Herbert?
[39] The particular terms Carters relies on are:
2.3 The Customer may not withhold payment or make any deductions from or set off any amount against any Amount Owing without Carters’ prior written consent.
5 WARRANTIES
5.2 The only guarantees applying to the Goods agreed to by CARTERS
relating to the Goods are those confirmed by CARTERS in writing.
5.3 The Customer may only reject non-conforming or defective Goods if the Customer notifies CARTERS in writing within seven days following delivery and CARTERS can inspect the Goods.
5.4 Defective Goods or Goods which do not comply with an order shall at CARTER’s discretion be repaired or replaced, or CARTERS may refund the price.
5.5 To the extent permitted by law, CARTERS excludes any liability for any Claim by the Customer or by any other person relating to or arising from the supply of Goods not confirmed by CARTERS in writing, and the Customer indemnifies CARTERS against any Claim. CARTERS’ liability for any Claim shall not exceed the price of the Goods.
The terms include these definitions:
16.1 “Amount Owing” means the price charged by CARTERS for the Goods, and any other sums which CARTERS is entitled to charge under these terms which remain unpaid.
16.3 “Claim” includes any claim:
15 Ampelite’s correspondence and test reports refer to a maximum variation allowed of ± 10% for thickness.
(i) For damages of any kind, including, but not limited to damages for breach of contract;
(ii) For loss of profits; or
(iii) For any consequential, indirect or special loss, damage or injury of any kind suffered by any person arising directly or indirectly; and
(iv) For compensation, demand, remedy, liability or action.
[40] Carters says that the effects of these terms are:
(a) There are no terms as to the quality of the roofing material because
Carters did not give a written guarantee under clause 5.2;
(b) The time for rejecting the roofing material as defective under clause
5.3 has passed, so that Herbert can no longer claim that it is defective;
(c) Clause 5.5 effectively excludes any claim for damages for breach of a term of the contract, as it gave no relevant confirmation in writing. That exclusion also goes to any claim for loss of profits and consequential losses;
(d)In any event under clause 5.5 its liability is limited to the price of the goods;
(e) Herbert is required to pay the price of the roofing material in full – its right to abate is excluded under clause 2.3;
(f) Herbert’s complaints as to the quality of the roofing material do not give it any grounds to decline payment or to bring any cross- proceeding against Carters. Carters have effectively transferred the risk of defects in the Webglas to Herbert; and
(g)None of the terms of trade give Herbert any right to withhold payment for the other building materials supplied by Carters, as Herbert has no complaint with them.
[41] Carters’ case relies on the parties’ freedom to agree on the terms on which they will do business.
[42] The application of these terms raises questions of interpretation. The terms are not to be construed standing alone, but in the context of all the terms, read in the light of the commercial context. The terms of trade were to apply to Carters’ sales of building products to limited liability companies. That makes it more likely that its customers would not be householders, but businesses. The customers might range from large to small. The terms would apply to customers who could have ongoing dealings with Carters, potentially over extended periods. The range of products supplied by Carters under these terms would also be extensive. Some might be those Carters dealt in regularly, others only rarely. As shown by this case, the values of products sold under these terms could be significant. The terms are not to be considered in the light of the facts of just one case, but on the basis that they are to be applied in a wide range of circumstances.
[43] At the same time, the terms are set out in a standard form contract, drawn by Carters with a view to protecting its interests to the utmost. It is a one-sided document. There is no need to give the terms an expansive interpretation in Carters’ favour, as Carters has tried to go at least as far as it can, if not further, to limit or exclude any liability. The traditional approach is to apply a strict construction contra proferentem.
[44] Carters contended that the traditional approach has liberalised in recent years. It referred to the decision of the Court of Appeal in i-Health Ltd v iSoft NZ Ltd:16
[43] We commence by referring to the approach to be adopted in interpreting a limitation clause of this kind. We agree with the Judge that the general approach to the interpretation of such a clause should be the same as that applying to the interpretation of contracts generally as discussed in Investors Compensation Scheme Ltd v West Bromwich Building Society and by the Supreme Court in Vector.24 The interpretation of a contract involves an inquiry as to what a reasonable and properly informed third party would consider the parties intended to mean. The overall commercial context is relevant and the contract is to be construed as a whole.
[44] In principle, the position should be no different in relation to limitation clauses as Richardson J observed in DHL International (NZ) Ltd v
16 i-Health Ltd v iSoft NZ Ltd [2012] 1 NZLR 379 (CA) at [43] – [45].
Richmond [[1993] 3 NZLR 10 (CA) at 17]. This general approach was confirmed in the Dairy Containers case [[2004] UKPC 22, [2005] 1 NZLR
433 at 443] but with the following additional observations by Lord Bingham
(delivering the advice of the Privy Council) as to the approach to limitation or exemption clauses:
[12] … This clause must be construed in the context of the contract as a whole. The general rule should be applied that if a party, otherwise liable, is to exclude or limit his liability or to reply on an exemption, he must do so in clear words; unclear words do not suffice; any ambiguity or lack of clarity must be resolved against that party: Homburg Houtimport BV v Agrosin Private Ltd (The “Starsin”) [2003] 2 WLR 711, para [144], per Lord Hobhouse of Woodborough. There may reasonably be attributed to the parties to a contract such as this such general commercial knowledge as a party to such a transaction would ordinarily be expected to have, but with a printed form of contract, negotiable by one holder to another, no inference may be drawn as to the meaning it would convey to a reasonable person having all the background knowledge which is reasonably available to the person or class of persons to whom the document is addressed (Homburg, at [73] per Lord Hoffmann), which would certainly include a holder such as Dairy Containers.
[45] While we are in general agreement with Lord Bingham’s remarks, we have reservations about his comment that, in the case of ambiguity, a clause such as this is to be construed against the party seeking to rely on it. Rather, general principles of contractual interpretation should apply to establish what the parties intended. However, we do agree that where one party seeks to argue that the other has agreed to waive or limit a right of significance to that party, the Court would ordinarily look for clear language or necessary implication before reaching that conclusion. In particular, the Court should not lightly attribute to the parties an intention to waive a statutory right such as the right to seek statutory interest. That is because it may be inherently improbable that the affected party would agree to such a waiver or limitation given the remedial nature of this discretionary power, the object of which was to relieve against injustice through delay in the plaintiff receiving the damages to which it may be entitled. However, sight must not be lost of the ultimate objective of ascertaining the meaning the parties intended their words to bear in the factual context in which the contract was made.
When saying that where one party’s case was that the other had agreed to waive or limit a right of significance, the court would ordinarily look for clear language or necessary implication before reaching that conclusion, the Court of Appeal was doing no more than echoing the approach of Lord Diplock in Photo Production Ltd v
Securicor Transport Ltd:17
My Lords, an exclusion clause is one which excludes or modifies an obligation, whether primary, general secondary or anticipatory secondary,
17 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 (HL) at 850–851.
that would otherwise arise under the contract by implication of law. Parties are free to agree to whatever exclusion or modification of all types of obligations as they please within the limits that the agreement must retain the legal characteristics of a contract; ... Since the presumption is that the parties by entering into the contract intended to accept the implied obligations exclusion clauses are to be construed strictly and the degree of strictness appropriate to be applied to their construction may properly depend upon the extent to which they involve departure from the implied obligations. Since the obligations implied by law in a commercial contract are those which, by judicial consensus over the years or by Parliament in passing a statute, have been regarded as obligations which a reasonable businessman would realise that he was accepting when he entered into a contract of a particular kind, the court's view of the reasonableness of any departure from the implied obligations which would be involved in construing the express words of an exclusion clause in one sense that they are capable of bearing rather than another, is a relevant consideration in deciding what meaning the words were intended by the parties to bear. But this does not entitle the court to reject the exclusion clause, however unreasonable the court itself may think it is, if the words are clear and fairly susceptible of one meaning only.
My Lords, the reports are full of cases in which what would appear to be very strained constructions have been placed upon exclusion clauses, mainly in what to-day would be called consumer contracts and contracts of adhesion. As Lord Wilberforce has pointed out, any need for this kind of judicial distortion of the English language has been banished by Parliament's having made these kinds of contracts subject to the Unfair Contract Terms Act 1977. In commercial contracts negotiated between business-men capable of looking after their own interests and of deciding how risks inherent in the performance of various kinds of contract can be most economically borne (generally by insurance), it is, in my view, wrong to place a strained construction upon words in an exclusion clause which are clear and fairly susceptible of one meaning only even after due allowance has been made for the presumption in favour of the implied primary and secondary obligations.
[45] Under that approach, the party relying on any provision that excludes or limits liability has the onus of showing that the words clearly apply to the case before the court. I follow that approach here to see whether under s 56 of the Sale of Goods Act the terms of trade expressly negative or vary the implied condition as to merchantability.
Clause 5.2
[46] Clause 5.2 provides that the only guarantees applying to goods sold are those Carters has confirmed in writing. Clause 5.2 is in a part of the terms of trade headed “Warranties”. The clause is apt to limit guarantees or warranties to those given in writing but it does not extend to conditions implied under the Sale of Goods Act.
That was recognised in Wallis, Son & Wells v Pratt & Haynes,18 the well-known sainfoin case. There the term of contract was: “Sellers give no warranty expressed or implied as to growth, description or any other matters”. The sellers were held not to have a defence to claim for breach of an implied condition. The English Court of Appeal applied that approach in a recent decision, The Mercini Lady.19 In that case the term was: “There are no guarantees, warranties or representations, express or implied, or (sic) merchantability, fitness or suitability of the oil for any particular purpose or otherwise which extend beyond the description of the oil set forth in this agreement.” It was held ineffective to exclude the condition as to satisfactory quality implied by the English Sale of Goods Act. Similarly in this case clause 5.2 does not expressly exclude the implied condition as to merchantable quality.
Clauses 5.3 and 5.4
[47] Clauses 5.3 and 5.4 address the questions of acceptance and rejection of goods. Clause 5.3 sets the time for rejection at seven days after delivery and requires the buyer to advise Carters in writing. Clause 5.4 gives Carters the option of repairing/replacing or refunding the price. However the clauses do not address the rights of the parties if the goods are not rejected but are later found to be defective by reason of a breach of an implied condition. The Sale of Goods Act continues to apply: under s 13(3) the buyer may treat the breach of condition as a breach of warranty. In this case the buyer is entitled to rely on s 13(3), notwithstanding
clause 5.2.20
Clauses 2.3 and 5.5
[48] These two clauses address the remedies under s 54(1) of the Sale of Goods Act for breach of warranty, including where the buyer treats a breach of condition as a breach of warranty. Clause 2.3 is a no set-off provision. It takes away the right to abate the price under s 54(1)(a). Clause 5.5 is directed at the right to sue for
damages under s 54(1)(b). Carters says that it applies here. If Carters is right, then
18 Wallis, Son & Wells v Pratt & Haynes [1911] AC 394 (HL).
19 KG Bominflot Bunkergesellschaft für Mineralöle mbH & Co KG v Petroplus Marketing AG [2010] EWCA Civ 1145, [2011] 2 All ER (Comm) 522.
20 Wallis, Son & Wells v Pratt & Haynes [1911] AC 394 (HL) at 395 per Lord Loreburn LC.
the buyer has no remedy under s 54 for a breach of a condition which the buyer is required to treat as a breach of warranty. Clause 5.5 does not have the effect that Carters contends for because:
(a) To say that the seller may have breached a term of the agreement but should not have a remedy for the breach is an unnatural interpretation of the agreement.
(b)Clause 5.5 appears in the warranties part of the agreement. “Claims” in 5.5 are claims for breach of warranty, not for breaches of conditions.
(c) To allow clauses 2.3 and 5.5 combined to exclude any remedy for breach of an implied condition as to merchantability cuts across the commercial purpose of the parties’ agreement. There may be some contracts where a party may agree to pay significant sums of money, regardless of the quality of the goods supplied. A lucky dip comes to mind. But Carters is a building merchant. It is not running a lucky dip operation. Carters does not supply building products on the basis that its customers may have to lump whatever they receive, no matter how useless it is. Its customers should have some effective remedy.
(d)“To the extent permitted by law...” in clause 5.5 allows for an interpretation which ensures that the implied condition as to merchantability does have real effect and is not just a declaration of intent.21
[49] For these reasons, the first sentence in clause 5.5 does not apply to a claim for damages by Herbert for breach of the implied condition as to merchantability. Notwithstanding the last sentence in clause 5.5, Carters’ liability for breach of the
implied condition is not limited to the purchase price of the goods. The availability
21 See Lord Wilberforce in Suisse Atlantique Société D’Armement SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 (HL): “One may safely say that the parties cannot, in a contract, have contemplated that the clause should have so wide an ambit as in effect to deprive one party’s stipulations of contractual force: to do so would be to reduce the contract to a mere declaration of intent...”.
of a claim for damages, notwithstanding clause 5.5, means that the buyer does have a remedy for breach of condition. Clause 2.3 continues to apply as an effective ouster of the right to abate the price.
How should the court exercise its discretion under s 290(4)?
[50] To sum up so far, Herbert has an arguable case for breach of the implied condition as to merchantable quality. Herbert cannot now reject the roofing materials because the time for rejection has passed. Its remedy is a claim for damages. Its right to abate the price has been effectively excluded by clause 2.3. It has not shown that there is any arguable dispute as to the other building materials supplied by Carters which it has not paid for. Its damages claim against Carters is arguably for more than $403,370.64.
[51] Herbert has not shown that there is a substantial dispute whether or not the debt is owing under s 290(4)(a), because under clause 2.3 of the terms of trade it must pay the price without deduction or set-off. On the other hand, its claim for damages is arguably a counterclaim or cross-demand under s 290(4)(b). Carters refers to the Court of Appeal’s decision in Browns Real Estate Ltd v Grand Lakes Properties Ltd22 as authority that a counterclaim or cross-demand should not be a ground for setting aside a statutory demand when the contract between the parties contains a contractual no set-off provision. The Court said:23
In our view a contractual no set-off provision of the type at issue in this case would normally result in the court's discretion being exercised against an applicant if the sole grounds for an application to set aside a statutory demand was the existence of a set-off, counterclaim or cross-demand which a party had expressly agreed could not be raised. We consider that commercial parties should be required to honour the bargain they have made, absent other grounds that tell against the recognition of a statutory demand.
[52] The court was not laying down a black letter rule. Instead it was indicating how the court should exercise its discretion in the general run of cases, where there
are contractual no set-off provisions.24 Because the matter lies within the court’s
22 Browns Real Estate Ltd v Grand Lakes Properties Ltd [2010] NZCA 425, (2010) 20 PRNZ 141.
23 At [17].
24 Simply Logistics Ltd v Real Foods Ltd HC Auckland CIV-2011-404-3497, 14 September 2011 at
[42]–[43]; Bountiful Holdings Ltd v University of Auckland [2012] NZHC 1076 at [17]–[19].
discretion, cases may arise where a counterclaim may still run, notwithstanding the no set-off provision.25 A typical case for the court not to exercise its discretion in favour of the counterclaim is where the creditor is owed an undisputed debt, but the company asserts a claim for unliquidated damages based on some matter that is not directly connected to the debt the subject of the demand.
[53] The part of Carters’ debt owed for other building supplies, $65,600.91, is such a typical case. Herbert does not dispute that debt, but is withholding payment because of an unrelated claim for unliquidated damages. There is no good reason to exercise the discretion in Herbert’s favour on that part of the statutory demand.
[54] The matter is different with the $338,716.73 for the supply of the roofing materials. The question here is whether Herbert’s failure to pay this sum or to secure or compound for it within fifteen working days of service should be allowed to give rise to a presumption of insolvency under s 288(1) of the Companies Act. This is what Nicholls LJ was getting at in dealing with the corresponding provision under the English Insolvency Rules in Re A Debtor, ex parte the Royal Bank of Scotland,
when he said:26
... the circumstances which normally will be required before a court can be satisfied that the demand “ought” to be set aside, are circumstances which would make it unjust for the statutory demand to give rise to those consequences in the particular case. The court’s intervention is called for to prevent that injustice.
[55] In my judgment, there are factors that make it unjust for the statutory demand to give rise to the presumption of insolvency, notwithstanding the contractual no set off provision:
(a) Herbert’s counterclaim is directly related to the same matter as the debt claimed by Carters – the supply of the roofing materials;
(b)Herbert’s liability to pay the price turns on a matter of timing – if the defects in the roofing materials had been identified within the seven
days for rejection, Herbert could have required Carters to repair,
25 See Simply Logistics Ltd v Real Foods Ltd as an example.
26 Re A Debtor, ex parte the Royal Bank of Scotland [1989] 1 WLR 271 (CA).
replace or refund. The delay in the defects being identified may have triggered liability, but there is an element of hardship in treating that liability as grounds to create a presumption of insolvency;
(c) The defects in the roofing materials resulted in Herbert not being paid by Ravensdown, which must have caused cash flow difficulties. It is hardly fair for Carters to press for payment when its supply of the roofing materials caused those difficulties; and
(d)There is a genuine and major dispute as to the quality of the roofing materials. Such genuine disputes are going to cause the parties difficulties at various points along the supply chain. Such difficulties should not be used by suppliers to threaten purchasers with insolvency.
[56] For these reasons I exercise the discretion in favour of Herbert on its counterclaim and set aside the statutory demand to the extent of $338,716.73.
Outcome
[57] I make these orders:
(a) I reduce the amount payable under the statutory demand to
$65,600.91;
(b)I order Herbert Construction Company Ltd to pay Carter Holt Harvey Ltd the sum of $65,600.91 within fifteen working days of this decision, failing which Carter Holt Harvey Ltd may apply for it to be put into liquidation; and
(c) Herbert Construction Company Ltd shall pay the costs of Carter Holt
Harvey Ltd on a category 2 basis. If the parties cannot agree costs, memoranda may be filed.
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Associate Judge R M Bell
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