Hi-Tech Limited v Waikato Milking Systems Partnership Limited

[2018] NZHC 1413

IN THE HIGH COURT OF NEW ZEALAND

HAMILTON REGISTRY

CIV 2017-419-371

[2018] NZHC 1413

BETWEEN

HI-TECH LIMITED

Plaintiff

AND

WAIKATO MILKING SYSTEMS PARTNERSHIP LIMITED

Defendant

Hearing:	1 June 2018
Appearances:	M D Branch and C Bunce for the Plaintiff J A MacGillivray for the Defendant
Judgment:	14 June 2018

RESERVED JUDGMENT OF ASSOCIATE JUDGE SMITH

This judgment was delivered by Associate Judge Smith on 14 June 2018 at 9:30am, pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

Solicitors: Harkness Henry Tomkins Wake

HI-TECH LTD v WAIKATO MILKING SYSTEMS PARTNERSHIP LTD [2018] NZHC 1413 [14 June 2018]

[1]The plaintiff (Hi Tech) applies for summary judgment for the sum of

$1.5 million said to be owing under an agreement for the sale to the defendant (WMS) of a business previously carried on by Hi Tech under the name "Hi-Tech Enviro Solutions" (the Business).

The Agreement

[2]    The agreement under which WMS agreed to purchase the Business (the Agreement) was signed on 22 September 2015. The purchase price was $6,250,000 but payment of two separate tranches of the purchase price (one of $600,000 and the other $900,000 – together, "the Contingent Sums") was conditional on certain events occurring (trigger events), to which I refer below. The balance of the purchase price (ie $4,750,000) was described as the "Completion Amount", and it was to be paid on 30 October 2015 ("the Completion Date").1

[3]    The trigger events were defined in cl 4.3 of the Agreement (wrongly numbered "4.2"), as follows:

4.2In addition to the Completion Amount payable on the Completion Date, the Purchaser will pay to the Vendor:

(a)on 30 April 2018, the sum of $600,000 plus GST if any, provided:

(i)The EBITDA² of the Business for the financial year ended 31 March 2018, as disclosed in the management accounts for the Business for that financial year, is not less than $1,650,000, or

(ii)The final farm gate milk price (excluding any dividend on shares) announced by Fonterra Co-operative Group Limited ("Fonterra") for the 2017/2018 season is not less than $7.25 per kilogram of milk solids.

provided that if subclause (ii) applies, subject to clause 9.2 the date the sum in clause 4.3(a) is to be paid to the Vendor will be 5 Business Days after the final farm gate milk price in subclause (ii) is formally announced by Fonterra.

(b)on 30 April 2019, the sum of $900,000 plus GST if any, provided:

1      Any GST on the purchase price, including on the Contingent Sums, was payable by WMS.

2      Earnings before interest, tax, depreciation, and amortisation.

(i)The EBITDA of the Business for that financial year, as disclosed in the management accounts for the Business for that financial year, is not less than

$2,250,000, or

(ii)The Fonterra final farm gate milk price (excluding any dividend on shares) for the 2018/2019 season, is not less than $8.50 per kilogram of milk solids.

provided that if subclause (ii) applies, subject to clause 9.2, the date the sum in clause 4.3(b) is to be paid to the Vendor will be 5 Business Days after the final farm gate milk price in subclause (ii) is formally announced by Fonterra.

[4]    Clause 22.1 of the Agreement set out definitions of a number of expressions used in the Agreement. The definitions (which were to apply unless the context indicated otherwise) included the following:

"Business" means the business of designing, manufacturing, marketing and selling dairy effluent systems, equipment, products and services carried on by [Hi Tech] at the Agreement Date under the name "Hi-Tech Enviro Solutions".

[5]    Hi Tech  does not suggest that either of the trigger events provided for in     cl 4.3(a) has occurred – indeed, it appears to be most unlikely that any trigger event will occur. What Hi Tech says is that WMS has become liable to pay the Contingent Sums under an acceleration clause in the Agreement.

[6]The acceleration clause was cl 9.2. It provided:

9.2The Purchaser will pay any future earn out payment in clause 4.3 within 5 Business Days of:

(a)a Change of Control of the Purchaser; or

(b)a sale, transfer, assignment or disposal of the Business by the Purchaser, or of part of it (excluding assets sold in the ordinary course of business), or an interest in it, or if the Business ceases to operate.

If clause 9.2(a) and/or (b) applies, any future earn out payment in clause 4.3 shall be deemed to be earned by the Vendor and shall be payable by the Purchaser to the Vendor within the 5 Business Days period referred to in this clause.

[7]    Hi Tech relies on cl 9.2(b), contending that there has been a transfer or "disposal" of part of the Business by WMS.

[8]Clause 5.2 of the Agreement provided:

5.2If either party defaults for any reason in payment of any amount on   the due date (time being strictly of the essence), that party will pay to the party entitled to receive such amount on demand interest at the Default Rate calculated on a daily basis on the amount so unpaid from the due date for payment until payment in full is made, but without prejudice to any of the other party's other rights or remedies under this agreement or otherwise in respect of such default.

[9]    "Default Rate" was defined in cl 22.1 of the Agreement. It was 12 per cent per annum.

The Dispute

[10]   Hi Tech alleges that in mid-June 2017 WMS made some significant changes to the Business. The changes were said to have included the closing down of the servicing and parts operations previously carried out from the Business' premises in Morrinsville. It considered that the closing down of the servicing and spare parts operations constituted a transfer or disposal of part of the Business, and that cl 9.2(b) of the Agreement applied.

[11]   WMS denies liability. It says that there has been no transfer or disposal of part of the Business within the meaning of cl 9.2(b).

The evidence

Hi Tech

[12]   By 2006 Mr McCollam, Hi Tech's director, had identified an opportunity in the agri-tech field, arising out of the rapidly-changing environmental laws affecting the dairy industry. Many farmers would have to change their practices to comply with the new laws.

[13]   Hi Tech   was  established  to  service this  market.    Mr McCollam said the Business covered:

(i)design, manufacturing and installation of equipment and effluent systems;

(ii)sales of equipment, products, and parts; and

(iii)servicing.

[14]   The manufacturing was done at the manufacturing plant in Morrinsville. In addition to the products it manufactured itself, Hi Tech also supported a range of other products, including a range of pumps and travelling irrigators, and a rain gun, which was an alternative to the traditional travelling irrigator. Hi Tech could supply parts for these products.

[15]   Hi Tech established a network of dealers throughout New Zealand, and it sold its products to these dealers at wholesale. However in its local Waikato market, it preferred to sell direct to farmers, not only for the extra profit, but also to create or maintain a relationship with the farmers.

[16]   Mr McCollam described servicing as a key part of the Business. By "servicing", he said that he meant "going on to the farm to deal with maintenance of the equipment and systems, or farmers dropping broken or run down products or equipment into our [Morrinsville] workshop for servicing or repair". He said that it became clear early on that the servicing division of the business was going to be very profitable.

[17]   Mr McCollam's evidence was that Hi Tech offered to service any and all kinds of effluent management equipment, products and systems. The demand was both high and constant, and showed no signs of slowing down. He said the work was also profitable, estimating the gross profit from the servicing work to be in excess of 30 per cent of gross revenue. In addition, the maintenance work carried out often required replacement of parts, and Hi Tech could make a mark-up of between 50 per cent and 100 per cent on the parts.

[18]   Mr McCollam said that the Business under Hi Tech's management was structured so that the servicing staff were also involved in the manufacturing side. If requirements for servicing were slow, the staff could build up stocks through manufacturing.

[19]   Mr McCollam said that a big up-side of the servicing business was that it created a lot of sales opportunities, not only of replacement or upgraded equipment, but also of new systems.

[20]   Mr McCollam stated that in mid-June 2017, while he was catching up with a former Hi Tech manager who had gone with the Business to WMS, he learned that WMS had relocated staff from the Morrinsville plant to a new factory it had opened in Horotiu, north of Hamilton. Some staff members at the Business were said to have been made redundant, and the parts and servicing operations (previously operated from the Morrinsville site) had been assigned or disposed of.

[21]   Mr McCollam considered that that constituted a significant change, especially for Waikato farmers who had previously dealt direct with Hi Tech (and then WMS) for their parts and equipment servicing requirements. While the Business would continue to sell parts to Hi Tech dealers on a wholesale basis, it appeared that farmers would no longer be able to buy parts direct from the Business. The servicing part of the business had apparently been assigned to selected dealers.

[22]   Mr McCollam later acquired a copy of a letter sent by WMS to customers of the Business, informing them that the Business would no longer be providing servicing or parts direct to farmers, as they had assigned that part of the Business to selected dealers  around  the  country.   The  letter,  a  copy  of  which  was  produced  by    Mr McCollam, read:

RE: Servicing and Spare Parts Counter Closing

Dear valued client,

Hi-Tech Enviro Solutions would like to take this opportunity to thank you for your valued support and loyalty.

Hi-Tech is known for our commitment to exceptional customer service and to achieve this, our expert dealer network plays an integral role. Part of this ongoing commitment to improvement is to offer you, our valued customer, more choice and flexibility when you need products and/or parts for your effluent system.

With effect from Monday 10^th April 2017 Hi-Tech Enviro Solutions servicing and spare parts will no longer be available from the Morrinsville depot. From our network of 60 dealers nationwide we have selected a small group of dealers which are local to you that will be stocking these parts. These dealers

are listed on the attached flyer for your convenience. Like we mentioned above, this will give you more choice and flexibility when you need service to maintain your effluent system.

Your local dealers are outlined on the attached flyer, and I am sure there will be one close to your farm.

As always, please do not hesitate to contact us by phone if you have any questions.

With best wishes

…

[23]   Mr McCollam acknowledged that one of Hi Tech's strategies had been to continue to expand the dealer network nationally, but it had continued to sell to local farmers around the Morrinsville area, and into areas where Hi Tech had limited dealer support, such as across the Hauraki Plains, down past Matamata, and over towards Putaruru. He took the view that, by going away from the direct part of Hi Tech's overall selling model, WMS had given up a revenue and profit stream that had previously been one of the more profitable parts of the Business.

WMS

[24]   Mr Robert Johnson, now the business development manager of the Business, provided an affidavit for WMS.

[25]   Mr Johnson explained that the core business of WMS is the manufacture and supply of milking systems, and components for milking systems. Since it acquired the Business, it has been operated as a separate business unit under the "Hi-Tech Enviro Solutions" brand.

[26]   Mr Johnson referred to the negotiations that led up to the Agreement, and to a business summary provided by Mr McCollam to WMS (the Business Summary) in the course of the discussions. Hi Tech had also provided WMS with a memorandum enclosing financial and other information relating to the Business, and on the completion of the sale it provided WMS with a copy of its strategic plan for the Business for the period 2015 to 2018 (the Strategic Plan).

[27]   The Business Summary recorded that the Business had two key areas of income. One was the supply of product, equipment and parts through an established dealer network around New Zealand. The second was the design, manufacture and installation of customised dairy effluent systems, and the supply of products and equipment, along with a range of services direct to dairy farmers across the wider Waikato region.

[28]   Mr Johnson noted a statement in the Business Summary that Hi Tech then had a network of 139 dealers around New Zealand, but that it provided a direct range of services to customers in the Waikato region. Effectively, Hi Tech operated as its own dealer in the Waikato region.

[29]   The Business Summary recorded that Hi Tech was then focused on growing its national dealer network – that, combined with Hi Tech's new product offerings, was seen as the key to growth for sales in the New Zealand market.

[30]   The Business Summary explained that Hi Tech did not have exclusive arrangements with its dealers. Its policy was to create strong relationships with the dealers, relying on the support and income that Hi Tech helped generate for them. The dealer relationships accordingly did not preclude Hi Tech from dealing direct with customers, or with other dealers, if it wanted to. However, the Business Summary did say that Hi Tech was changing its strategy of selling direct in areas near the Waikato (like the Bay of Plenty and the Central Plateau), and was increasingly trying to sell through dealers.

[31]   Consistent with that approach, the Business Summary recorded Hi Tech's intention to increase the number of dealers in the Waikato region, which would eventually become a bigger dealer market (although Hi Tech would retain the right to sell direct to customers in this region).

[32]   The Strategic Plan also referred to Hi Tech's plan to develop a strong dealer network.

[33]   Mr Johnson challenged Mr McCollam's evidence that, before the Agreement, Hi Tech had a services division. He described references in the Business Summary to a "service department" as misleading, referring to a diagram (attached to the Business Summary) showing Hi Tech's staff structure at the time of sale. The diagram showed that Hi Tech had a production manager, and beneath the product manager a workshop foreman. Beneath the workshop foreman, there was a workshop team of six workshop technicians/installers. There were no separate service staff. Mr Johnson contended that serving was very much a secondary role of the workshop team.

[34]   The workshop team worked in Hi Tech's premises at Morrinsville. Mr Johnson said that their core role was to manufacture or assemble effluent systems or components for systems, for supply to meet customers' orders. When a customer who had purchased direct from Hi Tech had a system that needed repairs or maintenance, a member or members of the workshop team would leave the workshop and visit the farm to carry out the servicing. Occasionally this would involve a member or members of the workshop team visiting farms as far afield as Taranaki. Customers who had purchased systems through Hi Tech's dealers would have their systems serviced by the dealer.

[35]   According to WMS' analysis, servicing sales in the period 2008/2009 to 2016/2017 accounted, on average, for around nine per cent of the Business' total revenue. By the time WMS closed down the direct servicing and parts operations in 2017, that percentage had increased to 11.67 per cent. But those percentages relate to revenue: Mr Johnson challenged Mr McCollam's statements about the profitability of the servicing work. He said that Hi Tech's system and its financial reports did not allow it to separately allocate costs of sales against income derived from servicing.

[36]   Mr Johnson said that the Business continues to provide a full design and consultancy service to clients. However WMS has advanced and accelerated Hi Tech's strategy of expanding the dealer network. For example, there is now a dealer for the Business in the Morrinsville area. WMS has followed Hi Tech's practice of not making exclusive arrangements with its dealers, and it continues to make a "significant number" of direct sales of systems to farmers.

[37]   On the issue of what led to the decision to stop carrying out the direct servicing work, Mr Johnson said that WMS carried out a review of the way the workshop team was operating, focusing on how it was allocating its time and effort to the work that needed to be done. The conclusion, reached in 2017, was that it was not in the interests of the Business for the workshop team to be spending time leaving the workshop to visit farms to carry out repairs and maintenance of effluent systems. He said that WMS found that a culture had developed under which the important thing was to get things out the door, and that culture was creating product quality issues. Interruptions as a result of staff being called away to deal with servicing was a core reason for the problems with timeliness and quality within the workshop.

[38]   WMS concluded that it would be better to direct customers to the dealer network for their servicing requirements, whether or not the sale to the customer had originally been made direct from the Business or through a dealer. But Mr Johnson emphasised that WMS has not given away or granted any legal rights to dealers in this respect: it is a business decision WMS has made for the present, but it has retained the right (if it ever chose to do so) to resume the servicing functions previously undertaken by its workshop team.

[39]   Mr Johnson said that, far from closing a team down, WMS has increased the size of the workshop team since purchasing the Business. When it relocated the workshop team to its new premises at Horotiu, an additional technician was added to the workshop team.

[40]   WMS has retained the Morrinsville premises. They are now used to house the Business' front line sales and administration team. The old workshop space at Morrinsville is used for another WMS division.

[41]   As for the profitability of servicing work, Mr Johnson said that WMS' view was that servicing was unlikely to be highly profitable. One of the reasons for that was that a portion of the work would be under warranty, and could not be charged at all. In other instances, having staff travel long distances for minor service jobs would be uneconomic. But the principal concern was that it did not make sense to take workshop staff away regularly from the core manufacturing work.

[42]   WMS now has a member of the Business' team specifically responsible for technical development and training. Part of that role is training the end user in the use of the systems, to avoid breakdowns and other problems arising. Another part of the role is to provide training and technical support to dealers carrying out servicing for customers. Mr Johnson said that, by supporting end users and all of the dealer network in that way, WMS is doing more, and delivering a better outcome in terms of servicing, than Hi Tech had been doing before the sale.

[43]   Mr Johnson said that WMS considered that it was entitled to make whatever changes it wanted to the way the Business operated, including making different strategic decisions and different calls on the best allocation of time and effort in the workshop team. Any lost opportunities as a result of staff members no longer servicing effluent systems are outweighed by the benefits of contracting out the servicing work.

Mr McCollam's reply affidavit

[44]   In a reply affidavit, Mr McCollam noted that the Business Summary included, under a heading "Waikato Direct Range of Services", a reference to a "Service Department". He repeated his view that it was efficient with a business with only six or seven employees based in the workshop, for the workshop staff and technicians to undertake all tasks, including the servicing of effluent systems. He repeated that the servicing part of the business was a regular provider of profitable revenue, and an important offering to clients in terms of keeping their effluent systems and equipment operating on an optimal basis.

[45]   Mr McCollam produced a copy of a photograph of the front of the Business' old Morrinsville depot, taken at around the time of the sale. The photograph shows a separate entrance way to the building, above the heading "Parts and Service".

Counsel's Submissions

Hi Tech

[46]   In his written reply submissions, Mr Branch abandoned any submission that the steps taken by WMS in 2017 in relation to the sale of parts amounted to a disposal

or transfer of part of the Business. The sole focus of the argument at the hearing was accordingly whether there had been a transfer or disposal of the servicing part of the Business.

[47]   Mr Branch noted that there are no issues of quantum or causation for the Court to consider in this case. And while the question of whether there has been a transfer or disposal of part of the Business is a mixed question of fact and law, the facts necessary to answer the question are not in dispute.

[48]   Mr Branch referred to the following Oxford English Dictionary definition of the word "disposal":

Get rid of by throwing away or giving or selling to someone else.

[49]   He then submitted that it is clear that the Business no longer provides servicing support to farmers as it did at the date of the Agreement. He noted that the description of the Business in the Business Summary included, as one of two key areas, the provision of services direct to dairy farmers in the wider Waikato region. The Business Summary had also referred to the "Service Department".

[50]   The terms of the letter WMS sent out to its clients advising them of the closure of the Morrinsville Parts and Service desk are consistent with the fact that servicing is no longer part of the Business.

[51]   On the issue of whether the alleged transfer of the income stream from servicing to dealers amounted to a "disposal" for the purposes of cl 9.2(b), Mr Branch submitted that WMS chose to give away (dispose of), or transfer, an income stream that represented close to 12 per cent of its sales revenue.3 Giving up, or gifting, an income stream for whatever period of time, constituted a "disposal" for the purposes of cl 9.2(b). Alternatively, the shutting down of a part of the Business generating an income stream of nearly 12 per cent of total revenue constituted a disposal of part of the Business (even if there was no transfer to a third party).

3      The figure is derived from the 2015/2016 year, in which Mr Johnson said the sales generated by the service division of the Business were 11.67 per cent of total revenue.

WMS

[52]   Mr MacGillivray submitted that cl 9.2(b) must be read in context, and the relevant context is that Hi Tech was selling the bundle of assets and legal rights that made up the Business. There have been no legal rights (exclusive or otherwise) given or transferred to any dealers in relation to servicing, and the decisions WMS has made in relation to the operation of the Business have been made in the interests of improving the financial performance and profitability of the Business as a whole.

[53]   Mr MacGillivray noted that the words "disposal of" appear as part of a list of related concepts in cl 9.2(b) (sale, transfer, assignment, disposal). The expression "disposal of" must take colour and meaning from the other terms in the list. In the context of a clause dealing with ownership or legal interests in property, the words "disposal of" should therefore be read as meaning the same as "disposition of". On that basis, there had to be a recipient, or beneficiary, of a "disposition", before cl 9.2(b) could apply. The cessation of the servicing work in 2017 did not involve any recipient, or beneficiary, so cl 9.2(b) cannot apply.

[54]   Mr MacGillivray then referred to a number of statutory contexts in which the expressions "disposed of", or "disposal of", have been used, in circumstances where the concept has been regarded as interchangeable with the concept of a "disposition" of property.

[55]   Mr MacGillivray also relied on the final part of cl 9.2(b), under which liability to pay the Contingent Sums will be triggered if "the Business ceases to operate". The Business "ceasing to operate" must be read as referring to something distinct from the earlier part of cl 9.2(b), and in particular it cannot be the same as a "disposal" of the Business. In this case WMS may have "ceased to operate" part of the Business (the servicing part), but the latter part of cl 9.2(b) only applied if WMS ceased to operate the Business as a whole.

[56]   There is nothing in cl 9.2(b) to suggest that the clause was intended to be triggered by mere changes in the Business, and nothing in the clause can reasonably be read as imposing a restriction on WMS' freedom to make changes in the Business, for example by discontinuing or adding product lines or services, changing pricing, or

restructuring the way in which the Business was organised, so long as WMS retained the ownership of the assets and legal rights transferred to it. If a person remains able, at any time, to exercise or exploit a right or opportunity, then that person cannot be said to have "disposed" of that right or opportunity.

[57]   Mr MacGillivray submitted that there is a factual dispute between the parties as to whether the Business, before the sale, had anything that could properly be described as a separate service department or division. If there was no such department or division, Hi Tech's contention that the department or division has been "closed down" (and therefore "disposed of") cannot be sustained. There were no staff dedicated to providing repairs and maintenance services to customers, and far from closing down the workshop team, WMS has increased its size. It is also providing a different array of "services", including training for end-users of its products.

[58]   Finally, Mr MacGillivray submitted that, if Hi Tech's reasoning were correct, any expansion of the dealer network of the Business, or any material increase in sales through dealers, would trigger cl 9.2(b). The effect of expanding the dealer network, or dealer sales, would be to increase not only the sales of equipment through dealers, but also the provision of repairs and maintenance services by dealers (and a consequent reduction in the provision of these services by the Business). On Hi Tech's logic, that would involve the "disposal of" part of the Business to dealers. But at the time the Agreement was made, both parties were aware of Hi Tech's strategy of growing the dealer network. It could not have been the intention that cl 9.2(b) would be triggered by WMS simply continuing to follow what was an established strategy of the Business at the time of sale.

Reply submissions for Hi Tech

[59]   In reply, Mr Branch submitted that it is irrelevant whether there was a "service division", or "service department", within the Business at the time of the Agreement. What matters is that the servicing function was generating nearly 12 per cent of the income of the Business when WMS stopped providing that function. In those circumstances, servicing must have been  "part of the business" for the purposes of  cl 9.2(b).

[60]   Mr Branch disagreed with Mr MacGillivray's submission that, for cl 9.2(b) to apply, there must have been some disposition of assets or legal rights.  Interpreting  cl 9.2(b) in that way would place an unjustified gloss on the wording of cl 9.2. Clause 9.2 is dealing with an earn-out situation, the application of which was (relevant to the present circumstances) dependent on the Business' EBITDA in the years to March 2018 and March 2019. EBITDA is not concerned with assets, but with the profitability of the Business, and although the disposal or transfer of an asset could effect EBITDA, that may not always be the case. Therefore, the sale of an asset, however large its value, may well not be considered a disposal of part of the Business. In short, there is no basis for reading into cl 9.2 a requirement that Hi Tech must identify some asset or legal right that is being disposed of. It is simply a question of looking at what has been disposed of, and determining whether it was part of the Business, as the expression "Business" was defined in the Agreement.

[61]   Alternatively, if cl 9.2 requires that there must have been a disposal of an asset or legal right, there has been a disposal of the goodwill existing between the Business and those farmers who have built up a relationship with the Business, in that they have been told, in no uncertain terms, not to return to the Business for servicing. Instead, they have been told to take their return business to a nominated dealer. In those circumstances, the goodwill in that part of the Business has been transferred to the dealers, just as it would have been if there had been a sale of that part of the Business with goodwill attached. The only difference is that WMS did not get paid anything for the goodwill disposed of or transferred.

[62]   Mr Branch also submitted that there is no basis in this case for the meaning of "disposed of" in cl 9.2(b) to take its colour, or meaning, from the words that precede it in the clause (sale, transfer, assignment). Sale, transfer, assignment and disposal are all separate categories, and "disposal" is placed at the end of the list as it is the more general term (reflecting the common drafting technique of having a "catch-all" expression at the end of the list). "Disposal" will include, but is not limited to, sale, transfer, or assignment.

[63]   There has been no bare cessation of business here; rather, part of the Business has been directed elsewhere. That part of the Business can never be recovered, and if

WMS decides to start offering servicing again it will have to attempt to recover the goodwill it has previously disposed of or transferred. If it does that, it will create new goodwill, not recover the goodwill that it transferred for zero consideration.

[64]   Mr Branch accepted that it was for WMS to decide whether it restructured the Business (in the belief that ultimately the restructure would make the Business more profitable). But if it did that (by sale, transfer, or disposal of part of the Business) it had to either pay the Contingent Sums, or wait until the end of the earn-out period before it did the restructuring.

[65]   Mr Branch submitted that cl 9.2 was intended to provide a simple mechanism, where the parties would not have to be concerned with issues such as whether a sale, transfer, assignment, or disposal of part of the Business may have been counter-balanced by financial benefits in the remaining parts of the Business.

The issue in the case

[66]   The single issue is whether it is reasonably arguable for WMS that it did not transfer or dispose of part of the Business, within the meaning of cl 9.2(b), when it ceased providing the servicing function in 2017.

Applications for summary judgment – legal principles

[67]Rule 12.2 of the High Court Rules materially provides:

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

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

…

[68]   The proper approach to be taken to such applications was considered by the Court of Appeal in Krukziener v Hanover Finance Ltd, where the Court said:4

4      Krukziener v Hanover Finance Ltd [2008] NZCA 187 at [26].

… The question on a summary judgment application is whether the defendant has no defence to the claim; that is, that there is no real question to be tried: Pemberton v Chappell [1987] 1 NZLR 1 at 3 (CA). The Court must be left without any real doubt or uncertainty. The onus is on the plaintiff, but where its evidence is sufficient to show there is no defence, the defendant will have to respond if the application is to be defeated: MacLean v Stewart (1997) 11 PRNZ 66 (CA). The Court will not normally resolve material conflicts of evidence or assess the credibility of deponents. But it need not accept uncritically evidence that is inherently lacking in credibility, as for example where the evidence is inconsistent with undisputed contemporary documents or other statements by the same deponent, or is inherently improbable: Eng Mee Young v Letchumanan [1980] AC 331 at 341 (PC). In the end the Court's assessment of the evidence is a matter of judgment. The Court may take a robust and realistic approach where the facts warrant it: Bilbie Dymock Corp Ltd v Patel (1987) 1 PRNZ 84 (CA).

[69]   The Supreme Court has held fairly recently that the fact that the Court may be required to determine questions of law (including issues of contractual interpretation) does not preclude summary judgment. In Zurich Australian Insurance Ltd v Cognition Education Ltd, the Court said:5

… in other situations falling within the broad test (that is, the "no arguable defence" test applied on summary judgment), there will be what can properly be described as "disputes" even though they are ultimately capable of being determined by a summary process.

[37] To explain, it has been well established in New Zealand since Pemberton v Chappell that a court can properly determine questions of law on a summary judgment application, and that this includes issues of contractual interpretation. The Court of Appeal has accepted that such a determination may be made even though the question of law is difficult and requires argument (including reference to authority). In International Ore & Fertilizer Corp v East Coast Fertiliser Co Ltd, a case under the old bill writ procedure, Cooke P, by analogy with the summary judgment procedure which had just been introduced in New Zealand, said that where the facts were adequately ascertained and the Court could be confident that the point at issue turned on pure questions of law or interpretation, it should be prepared "to determine, on adequate argument, even difficult legal questions". Similarly, in Jowada Holdings Ltd v Cullen Investments Ltd, McGrath J, delivering the judgment of the Court of Appeal, said that a court should be prepared to grant summary judgment "even if legal arguments must be ruled on to reach the decision".

[70]   In some cases the Court may consider that further investigation of the factual matrix is necessary, and in those cases summary judgment will be refused.6 And if there are credible arguments that the plaintiff's preferred interpretation of a written

5      Zurich Australian Insurance Ltd v Cognition Education Ltd [2014] NZSC 188, [2015] 1 NZLR 383 (footnotes omitted).

6      See for example Trustees Executors Ltd v QBE Insurance (International) Ltd [2010] NZCA 608 and Commercial Metals Ltd v Wright [2015] NZCA 450.

agreement flouts business common sense, or is commercially absurd, it will normally be inappropriate to grant summary judgment.7

Discussion and conclusions

[71]   Clause 9.2(b) will apply if there was a transfer or disposal of part of "the Business". Under the definition of "Business" in paragraph 22 of the Agreement, "Business" included "…marketing and selling… services carried on by [Hi Tech] at the Agreement Date under the name "Hi-Tech Enviro Solutions"".

[72]   On the face of it, then, the servicing work Hi Tech had carried out from its Morrinsville depot came within that description, and so constituted "part of the Business". The issue is whether it is reasonably arguable for WMS that that part of the Business was not transferred or disposed of in mid-June 2017 as Hi Tech alleges.

[73]   Clause 9.2(b) must be read in the context of the Agreement as a whole,8 and in particular with cl 4.3, which is expressly referred to in the introductory part of cl 9.2. Clause 4.3 provides for payment of the Contingent Sums, and appears to reflect a not unusual commercial situation where parties cannot agree on the value of a company being sold, and so provide for the payment by the purchaser of an additional sum or sums at some future time, payment of which will be conditional on the company meeting stated financial performance targets within a stated period. In such cases, the intention is to "put to the test" the vendor's contention that the business being sold is worth the full amount (including the contingent sum or sums), and the purchaser's contention that it is only worth the "base sum", that it is prepared to pay up front. The purpose of the earn-out period and the contingent sums in such cases would obviously be defeated if the size of the business being sold were significantly reduced during the earn-out period by the transfer or loss of part of the business.

[74]   Under "earn-out" clauses of this kind, the vendor is likely to be heavily dependent on the purchaser managing the business competently, and using its best endeavours to maximise its profitability and so meet the stated financial performance

7      E&E Developments Ltd v Housing New Zealand Ltd [2012] NZCA 7 at [21].

8      Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147 at [60].

targets. The vendor in such circumstances is required to put some trust in the purchaser's executives who will be managing the business after the sale, and for that reason is likely to be particularly concerned by any change in the control of the purchaser. Achieving the financial performance targets that will trigger the purchaser's obligation to pay the contingent part of the purchase price might well be compromised if management and control of the purchaser were taken over by individuals who did not have the competence or experience to properly run the business.

[75]   Clause 9.2(a) of the Agreement appears to have been designed at least in part to address that issue, and it does so by providing that WMS is to become liable to pay the Contingent Sums immediately if there is a "Change of Control" of WMS.9

[76]   Of course, I am not here concerned with any Change of Control of WMS. In the context of the present dispute, the importance of cl 9.2(a) is simply to underline the linkage between cl 9.2 as a whole and the provisions of cl 4.3; in particular the provisions relating to EBITDA under with the Contingent Sums would become payable.10 Clearly if WMS were to sell the Business during the earn-out periods prescribed by cl 4.3, its ability to meet the EBITDA targets in cls 4.3(a) and (b) would be lost. A sale, transfer, assignment, or disposal of part of the Business could have the same effect, or at least make it more difficult for WMS to achieve the EBITDA targets.

9      "Change of Control" was defined in the Agreement as follows:

(a)less than 50.01% of the partnership interests in the Purchaser (as defined in the Limited Partnerships Act 2008) are held by Pioneer Capital Waikato LP Limited, and/or TDL No. 2 Limited and/or Ngai Tahu Capital Limited (or their respective related companies or related entities); or

(b)less than 25% of the partnership interests in the Purchaser (as defined in the Limited Partnerships Act 2008) are held by Pioneer Capital Waikato LP Limited; or

(c)less than 50.1% of the shares with voting rights at any shareholders meeting and/or allowing the holder to appoint or remove a director of WMS GP Limited are held by Pioneer Capital Waikato LP Limited, and/or TWH Venture Capital Limited and TGH Direct Investments Limited (or their respective related companies or related entities

(d)less than 25% of the shares with voting rights at any shareholders meeting and/or allowing the holder to appoint or remove a director of Waikato Milking Systems GP Limited are held by Pioneer Capital Waikato LP Limited.

10   Clause 9.2 was clearly not concerned with the Fonterra milk price triggers contained in cl 4.3 –   the Fonterra milk price would presumably remain the same regardless of any Change in Control of WMS, and regardless of whether WMS sold, transferred, assigned or disposed of the Business or any part of it.

[77]   In short, I consider that the broad commercial purpose of cl 9.2 was to protect Hi Tech against the possibility of the EBITDA performance targets in cl 4.3 not being met because of the occurrence of any of the events referred to in cl 9.2.

[78]   With that commercial purpose in mind, I accept Mr Branch's submission that cl 9.2(b) did not necessarily require the sale of some asset, or legal right, by the purchaser, for liability to pay the Contingent Sums to be triggered. Consistent with that interpretation, cl 9.2(b) itself provided that a cessation of the Business would be sufficient to trigger liability for the Contingent Sums – cessation of the Business could clearly occur without any sale or transfer of any asset or legal right of the Business.

[79]   Nor do I consider that I need be at all concerned with the merits of WMS' decision to stop carrying out the servicing work, and direct that work to selected dealers. I accept Mr Branch's submission that one of the whole points of the peremptory nature of a clause such as cl 9.2(b) was to avoid potential argument over such matters as whether a disposal of part of the Business, say, might have been countered by corresponding savings or increased profitability in some other part or parts of the Business that have been retained. On that point, I think the plain, clear words of cl 9.2(b) itself must prevail: if part of the Business was transferred or disposed of, liability for the Contingent Sums would arise regardless of whether the transfer or disposal might have been commercially sound, or in the long-term interests of the Business.

[80]   Mr MacGillivray submitted that the expression "disposal of" should be read as requiring a "disposition" of property, with at least a "recipient", or "beneficiary". He submitted 11 that the meaning of the expression "disposal of" in cl 9.2(b) is coloured by the preceding expressions "sale, transfer, assignment", each of which contemplates that there will be a transferee or assignee. I do not accept that submission. In my view the intention of the first part of cl 9.2(b) (before the brackets in the subclause), and the "common thread" in the expressions "sale", "transfer", "assignment" and "disposal of", was the creation of a list of all possible ways the purchaser might relinquish possession of the Business (or part thereof), and thus actively or potentially put it out of its power

11     Citing the UK Court of Appeal decision in Tektrol Ltd v International Insurance Co of Hanover Ltd [2005] 2 Lloyds Rep. 701.

to meet the cl 4.3 EBITDA targets. Selling, transferring or assigning the Business were obvious ways in which that might happen, but so too was giving up the business or part of it, by allowing or empowering others to take it over. The need for a recipient, or beneficiary, was not the common thread.

[81]   One of the meanings of "disposal", referred to by Mr Branch, is "get rid of by throwing away …", and clearly there is no recipient or beneficiary if something is "thrown away". But WMS' ability to meet the EBITDA targets set out in cl 4.3 could certainly have been compromised if it elected to "throw away" part of the Business that had been producing a significant revenue stream.

[82]   I do not consider that Mr MacGillivray's reference to the use of "dispose", or "disposal", in various unrelated statutory contexts is of assistance. What is important is what an objective third party observer, with all the background knowledge shared by the parties, would understand the words to mean in the context of this Agreement.12 The broad commercial intention of cl 9.2 was to protect Hi Tech from certain eventualities that might prevent WMS achieving the EBITDA targets in cl 4.3, or potentially compromising its ability to do so, and that purpose suggests that a wider reading of "disposal of" is appropriate, which would include the giving away of part of the Business, whether to an identified recipient, or in the sense of simply allowing another supplier to take up the opportunity to sell the services.

[83]   The evidence of Mr Johnson suggests that revenue from the servicing work constituted 11.67 per cent of the total revenues of the Business at the time WMS elected to quit the servicing work. I have held that the servicing work came within the definition of "Business" in cl 22 of the Agreement, and in those circumstances I consider that the words "sale, transfer, assignment, or disposal of" in cl 9.2(b) should be construed in such a way that they are capable of applying to the servicing work, just as they might apply to the plant or equipment of the Business or to any intellectual property rights and goodwill associated with that part of the Business. Clearly those parts of the Business would be capable of sale, transfer, or assignment, but it is not at all clear how the servicing work could have been sold, transferred, or assigned. There

12 Above n 8, at [60].

is nothing in the evidence to suggest that WMS (or Hi Tech for that matter) held any intellectual property rights which gave it the exclusive right to perform the servicing work, and it might also be said that if WMS thought it had rights in the servicing work that were capable of being sold, it would have sold them. Instead, it simply stopped carrying out the work, and referred farm customers to particular dealers.

[84]   I think the commercial purpose of cl 9.2, as I have identified, could be defeated if a significant part of the Business revenue (which might conceivably have been well in excess of 11.67 per cent of total revenues if WMS had elected to put more effort and resources into the direct servicing  work) were  somehow outside the  ambit  of cl 9.2. The result of the loss of the servicing work in those circumstances could well compromise WMS' ability to meet the EBITDA targets prescribed by cl 4.3, and that is an outcome that I do not consider the parties could have intended.

[85]   I do not consider I need be concerned with whether there was a separate "division", or "department", for the servicing work. In light of the commercial purpose of cl 9.2, what is important is that the giving up of the direct servicing work could have affected WMS' ability to meet the cl 4.3 EBITDA targets. The evidence, including the photograph of the separate "Parts and Services" entrance at the Business' old Morrinsville depot, shows that part of the Business being carried out by Hi Tech was readily identifiable as "servicing work", and that work was clearly part of the Business. The terms of the letter WMS sent out to its clients advising them of the closure of the Morrinsville Parts and Service desk also make it clear that WMS had no difficulty identifying this work as (a separate) part of the Business, that it was able to quit when it deemed it necessary or appropriate to do so. The result was that the revenue from the servicing function of the Business could no longer contribute to the EBITDA of the Business.

[86]   For all of those reasons, I am of the view that the parties intended the expression "disposal of" in cl 9.2(b) to be given a broad construction, which would include a decision by WMS to shut down a part of the Business which, at the time of the shut down, was contributing 11.67 per cent of the total revenues of the Business.

[87]   It remains to consider Mr MacGillivray's submission based on the last words of cl 9.2(b), "or if the Business ceases to operate". Here the argument is that, if it has done anything, WMS has "ceased to operate" a relatively small part of the Business (the direct servicing work). So it is to the last words of cl 9.2(b) we should look to see if the clause has been triggered. But the last words do not refer to the cessation of only part of the Business. If the parties had intended that a sale of only part of the Business would be sufficient to trigger cl 9.2(b) the draftsperson of the clause would have said so.

[88]   I do not accept that submission. In my view, the latter part of cl 9.2(b) was designed to cover the situation where WMS had retained possession of all of the Business, but for some reason had elected not to operate it. In that situation WMS' ability to meet the EBITDA targets of cl 4.3 would obviously be compromised, but there would have been no sale, transfer or assignment of the Business or any part thereof. Nor would any part of the Business have been "disposed of", in the sense of having been "gotten rid of" or "thrown away". In this case, WMS has not retained everything, because it has disposed of the direct servicing work. Other parties will now be carrying out that work, and earning money accordingly, and that is not money that can now contribute to the EBITDA of the Business.

[89]   In all the forgoing circumstances, I am satisfied that WMS has no reasonably arguable defence to Hi Tech's contention that there has been a disposal of part of the Business, and that the Contingent Sums have  therefore become due and payable.   Hi Tech is entitled to summary judgment accordingly.

[90]   Hi Tech claims interest at the default rate of 12 per cent per annum, calculated from 20 April 2017. Clause 9.2 of the Agreement provided that if the Contingent Sums became payable under the clause, they were to be paid within 5 Business Days of the relevant cl 9.2 "triggering event".

[91]   In its letter to clients advising of the shutting down of the servicing and spare parts operations, WMS advised that the relevant changes took place with effect from 10 April 2017. I take that to be the date of the relevant triggering event for the purposes of calculating Hi Tech's interest claim.

[92]   With Easter Friday falling on 14 April 2017, I accept that the last day for payment of the Contingent Sum under cl 9.2 was 19 April 2017, and that interest is payable at the contractual Default Rate from 20 April 2017. There will accordingly be judgment for Hi Tech for interest from that date to the date of judgment, at the agreed default rate of 12 per cent per annum.

Result

[93]   I give summary judgment for Hi Tech in the sum of $1,500,000, together with interest on that sum at the rate of 12 per cent per annum under cl 5.2 of the Agreement, from 20 April 2017 to the date of this judgment, in the sum of $207,123.25.

[94]   Hi Tech is entitled to costs, which I award on a 2B basis, together with disbursements as fixed by the Registrar.

Associate Judge Smith