Hwadro International Trading Limited v Moa Brewing Company Limited

[2023] NZHC 2555

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2023-404-255

[2023] NZHC 2555

BETWEEN

HWADRO INTERNATIONAL TRADING LIMITED

Plaintiff

AND

MOA BREWING COMPANY LIMITED

Defendant

Hearing:

5 September 2023

Appearances:

P S Kim for Plaintiff

G D Simms and N F D Moffatt for Defendant

Judgment:

13 September 2023

JUDGMENT OF ASSOCIATE JUDGE LESTER

(Strike out and security for costs)

This judgment was delivered by me on 13 September 2023 at 3.30pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

……

HWADRO INTERNATIONAL TRADING LIMITED v MOA BREWING COMPANY LIMITED [2023]

NZHC 2555 [13 September 2023]

Introduction

[1]Moa Brewing Company Limited (Moa) is a brewer of craft beers.

[2]        In 2017, Hwadro International Trading Limited (Hwadro) wished to obtain an exclusive right to market Moa’s products in China. In December 2017, the parties entered into a three year Import and Distribution Agreement (the Agreement) under which Moa appointed Hwadro the exclusive distributor of its products.

[3]        Under the Agreement, Hwadro, in exchange for the right of exclusive distribution, had to make specified ‘Minimum Payments’ and ‘Minimum Purchases’ (the Requirements). The Agreement specified the timing of the Minimum Payments, which increased annually in each of the three-year term of the Agreement, which expired on 14 December 2020.

[4]        Moa says Hwadro failed to meet both of the Requirements. By the time the Agreement expired, Hwadro had paid $458,794.65 more for product than it had purchased. Two years after expiry of the Agreement, Hwadro commenced these proceedings seeking to recover what it considers to be an “over payment”.

[5]        Moa applies for summary judgment or to strike out Hwadro’s claim on the basis that it is inconsistent with the terms of the Agreement and in the alternative it seeks security for costs.

Strike out/summary judgment principles

[6]        These are not in dispute. In respect of the strike out application, it proceeds on the assumption that whether the allegations in the statement of claim are admitted or not, the pleaded facts are assumed to be true. Before a proceeding can be struck out, the claim must be so “clearly untenable’ that it cannot succeed.1 A claim capable of being repleaded, that is, it is not a write-off, will not be struck out.2

1      Attorney-General v Prince [1998] 1 NZLR 262 (CA), Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725.

2      Marshall Futures Ltd (in liq) v Marshall [1992] 1 NZLR 316 (HC).

[7]        Under r 12.2(2) of the High Court Rules 2016 (the Rules), the court can give summary judgment against the plaintiff if the defendant satisfies the court that none of the causes of action in the plaintiff’s statement of claim can succeed. Summary judgment should only be used in the case of a defendant’s application where the defendant has a clear answer to the plaintiff which cannot be contradicted.3

[8]        Mr Simms, counsel for Moa, submits that given both Moa’s application for strike out and for summary judgment is based on the Agreement, there is no real difference between the two applications which Mr Simms did not address separately.

[9]        I agree with Mr Simms that the outcome of this application does not depend on whether it is approached as a strike out or a summary judgment.

Key contractual provisions

[10]      Under the Agreement, Hwadro was to pay the Minimum Payment amounts, as defined in a schedule to the Agreement, by way of cleared funds to Moa’s nominated account by the specified payment dates. Clause 5.1(b) of the Agreement provided:

(b) Moa shall maintain a [Hwadro] customer account (Customer Account) and credit any Deposit or any additional amount paid by [Hwadro] in accordance with clause (c) to this Customer Account.

[11]Upon Hwadro placing an order with Moa:

Moa shall, prior to debiting the Customer Account, provide [Hwadro] with an invoice, breaking down the price for the Products ordered … Moa shall debit the Customer Account for the amount for the amount stated in each invoice once the invoice has been sent to [Hwadro].

[12]      Hwadro’s role as exclusive importer distributor would only be renewed under the Agreement if Hwadro met the Minimum Purchase Requirement in each of the years as set out in the schedule to the Agreement and the parties to the Agreement agreed in writing not less than two months prior to the expiry date. If these pre-conditions were met  there would then be good faith discussions  in relation to    a renewal. Accordingly, there was no right to a renewal. The pre-conditions for

3      Westpac Banking Corp v M Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA).

renewal negotiations were that the Minimum Purchase Requirement had been met and the parties had agreed in writing prior to the expiry date that there would be renewal discussions. Presumably, the two month notice requirement was to give Moa notice that Hwadro did not wish to continue with a renewed Agreement and to give Moa time to find a new distributor.

[13]Upon the Agreement coming to an end, cl 11.1 provides:

11.1     Effect of termination

Upon the expiry or termination of this agreement, all the rights of [Hwadro] under this agreement will immediately cease and terminate but without releasing [Hwadro] from liability for payment for any Products supplied under this agreement or for any breach of any of the provisions of this agreement, and [Hwadro] will not be entitled to claim against Moa for anything, including compensation or damages.

Moa’s case summarised

[14]      Moa says that with the fixed term of the Agreement ending and with Hwadro not having satisfied the Requirements, Hwadro has no entitlement to a refund of the ‘over-payment’, as all payments should have been exhausted by purchases. Moa also relies on cl 11.1 of the Agreement, saying its effect is clear and is a bar to any claim. Following the Agreement expiring, Moa says Hwadro has no claim against Moa for “anything”.

[15]      Upon Hwadro satisfying the Requirements, there would be no credit balance at expiry of the Agreement and so Hwadro’s claim relies on its own default.

[16]      The Agreement placed responsibility on Hwadro to develop the Chinese market and order sufficient product from Moa. If Hwadro failed to develop sufficient market demand the Requirements, then that was a matter for Hwadro. There was no provision for the repayment of any amount paid under the Minimum Payment Requirement obligation not applied to purchases.

[17]      Mr  Simms  submits  Hwadro  was  financially  incentivised  to  purchase     a sufficient volume of Moa products to grow the brand in the Chinese market. If Hwadro failed to purchase sufficient product it could not benefit from its own default

by requiring Moa to repay amounts Hwadro had to pay under the Agreement, Hwadro’s default being its failure to meet the Minimum Purchase Requirement which would have been fully funded by the Minimum Payment Requirement obligations.

[18]      Of the Minimum Payment Requirement of $6,000,000.00 during the term of the Agreement, Hwadro paid only $1,014,710.50, a shortfall of $4,985,289.50. Hwadro only ordered $596,029.51 of product from Moa.

[19]The Requirements were as follows:

“Contract Year”	“Minimum Purchase Requirement” (excluding GST)	“Payment Date”	“Minimum Payment Amount” (excluding GST)
15 December 2017 to 14 December 2018	NZ$1,000,000	15 December 2017	NZ$500,000
15 May 2018	NZ$500,000
15 December 2018 to 14 December 2019	NZ$2,000,000	15 December 2018	NZ$500,000
15 March 2019	NZ$500,000
15 June 2019	NZ$500,000
15 September 2019	NZ$500,000
5 December 2019 to 14 December 2020	NZ$3,000,000	15 December 2019	NZ$750,000
15 March 2020	NZ$750,000
15 June 2020	NZ$750,000
15 September 2020	NZ$750,000

When did the Agreement come to an end?

[20]      Mr Kim, on behalf of Hwadro, does not assert an agreed variation to the expiry date. Clause 11.1 of the Agreement only comes into effect on the expiry of the term of the Agreement. Absent a variation to the expiry date in the Agreement, it came to an end on 14 December 2020. Mr Kim submitted there was evidence the Agreement ran on, relying on an April 2021 transaction addressed below. Mr Yang asserts, in his evidence on behalf of Hwadro, that the Agreement continued for a further nine months until it was brought to an end by Moa without prior notice at a meeting in August 2021.

[21]      There was only the one small further transaction between Hwadro and Moa in April 2021, prior to the August 2021  meeting.  The best  case  for Hwadro is  that the Agreement ran on despite the express expiry date. If such was the case, then the Agreement would be terminable by either party. Hwadro does not assert a lack of reasonable notice (if such was required) caused it any prejudice.

[22]      Accordingly, even on Hwadro’s view, the Agreement came to an end in August 2021 at the latest. As will be seen from Hwadro’s solicitor’s letters discussed below, when its claim was first raised, it was accepted the Agreement had expired.

[23]Hwadro pleads:

6.As a result of the market in China having stagnated from early 2018, the defendant:

(a)Did not require the plaintiff to satisfy the minimum purchase requirements and/or minimum payment amounts under the Agreement; and

(b)Accepted and supplied orders for Moa beer to the plaintiff on an ad hoc basis.

[24]      The pleading at paragraph 6(b) of the statement of claim is not of a change to the expiry date of the Agreement.

[25]      In respect of paragraph 6(a) of the statement of claim, Hwadro would normally be entitled to the presumption that pleaded facts can be proven but the presumption does not apply if the pleading is entirely speculative and without foundation. The question for the Court is whether Moa’s challenge to Mr Yang’s skeletal evidence is enough to show the presumption does not apply.

Were the Requirements varied or suspended?

[26]      Hwadro’s lawyers (Glaister Ennor) first made demand for the return of the funds subject to this proceeding, in a letter dated 25 March 2022. That letter makes no mention of any variation to the Agreement. The letter asserted there was no basis upon which Moa could retain the credit balance. Glaister Ennor wrote that the expiry of the Agreement did not give Moa “the right to unilaterally seize the funds of [Hwadro] held by Moa as trustee”.

[27]      Accordingly, initially the claim was put on the basis that Moa was a trustee and in the absence of any provision permitting retention by Moa it could not retain Hwadro’s funds. Moa’s solicitors replied rejecting the idea of a trust. Glaister Ennor replied on 21 April 2022 asserting that had the parties agreed that the Requirements were to be of a “take or pay” nature, then that is what the Agreement would have said.

[28]      Glaister Ennor wrote again on 23 June 2022. Moa’s solicitors had referred to Hwadro’s failure to complete the balance of the Minimum Purchase Requirements and referred to the possibility of making a damages claim in the amount of the unpaid Minimum Payment Requirement.

[29]      Glaister Ennor, in their 23 June 2022 letter, rejected Moa’s entitlement to claim damages and pointed out that even if Moa could claim damages, it would have to prove loss in the usual way. The letter noted Moa had raised no objection to Hwadro not making the Minimum Payment Requirements and the letter asserted:

At all times before that, [December 2018] [Hwadro] reasonably understood that Moa did not require the Minimum Purchase Requirements to be met as the market in China had become stagnant from early 2018 which [Hwadro] made known to Moa before 5 November 2018. Moa cannot now resile from that concession and unilaterally re-impose the Minimum Purchase Requirements after the termination of the Agreement.

[30]      The significance of 5 November 2018 and December 2018 is not explained. The above passage is not a claim of contractual variation having more the flavour of an estoppel argument, that is, Moa suspended the Requirements or led Hwadro to believe such would not be insisted on.

[31]Hwadro made the following payments under the Agreement: (a) $500,000.00 on 5 December 2017;

(b) $10,000.00 on 4 January 2018.

(c) $4,710.50 on 4 January 2018.

(d) $150,000.00 on 14 June 2018.

(e)       $150,000.00 on 18 June 2018.

(f)       $150,000.00 on 20 June 2018.

(g)       $50,000.00 on 5 July 2018. Total: $1,014,710.50.

[32]The second payment was due on 15 May 2018. Why payments in June totalling

$450,000.00 and a further $50,000.00 in July were made when it is claimed the obligation to do so was suspended or varied at meetings in March and May 2018 is unexplained. The payments are inconsistent with Hwadro’s case that the decline in the craft beer market meant it did not have to meet the payment due 15 May 2018. The staggered payments of June/July 2018 are consistent with Moa only having granted time for payment of the 15 May 2018 instalment.

[33]      Mr Yang, a sales manager4 with Hwadro, gives evidence as to Moa’s agreement to forego the Requirements is limited to say the least. After saying China’s beer market was struggling and in decline with reference to two news articles, which I will refer to below, Mr Yang’s evidence is:

7. [Hwadro’s] concerns about China’s declining  beer  market  was  discussed at meetings held remotely through WeChat with Moa throughout 2018 in March and another meeting in Chengdu, China in May 2018. It was for this very reason Moa stopped requiring [Hwadro] to meet the Minimum Payment Amounts or Minimum Purchase Requirements after [Hwadro] made its initial payment of

$500,000 to Moa on 5 December 2017.

[34]      Mr Yang does not say who the WeChat messages were with, nor does he produce any of the messages. One of the newspaper articles Mr Yang relies on to support his position that the Chinese beer market declined in 2018, is from the Sydney Morning Herald of 21 February 2017, so it does not  support Mr Yang’s  claim  that  a drop off in the Chinese market in early 2018 was the reason why Moa released the

4      Mr Simms was critical of Hwadro’s evidence having come from a sales manager and not a director. Mr Yang swears he is authorised to give evidence on behalf of Hwadro. This is not a strike out point.

Requirements. The other article is from 28 September 2021 so again, it does not relate to the March-May 2018 period in which Mr Yang says the Agreement was varied.

[35]      The claim that the Requirements were released was not initially raised by Hwadro’s solicitors in the correspondence referred to above.

[36]      Mr Yang does not in fact say the Agreement was varied; he says “Moa stopped requiring [Hwadro] to meet” the Requirements. Mr Yang does not explain why, when on his case the Chinese beer market deteriorated dramatically between when the Agreement was signed in December 2017 and the Requirements being relaxed in March/May 2018, Hwadro then paid Moa a further $500,000.00 in June/July 2018.

[37]      Hwadro points to the fact that after the last payment was made on 5 July 2018, Moa did not raise any issue with Hwadro not making further payments. Moa does not accept that but there is nothing in writing showing Moa chased up any of the missed Requirements. There is evidence that after the expiry period specified in the Agreement, a further order on 22 April 2021 for NZ$4,947.60 was placed by Hwadro, the cost of which was deducted by Moa from the credit balance. Hwadro’s point is, that if as at the expiry date the credit balance was lost, as Moa now argues, the credit would not have been available to meet this small post expiry order. Moa’s response was that this was a very small ad hoc order and it was up to it whether it permitted the use of the credit.

[38]      Mr Yang’s evidence is so limited, it is tempting to conclude that it does not rise above bare assertion. The market evidence he produces to explain why the concession was made by Moa does not relate to early 2018.   Mr Yang  does not explain  why     a further $500,000.00 was paid. If Hwadro’s position is correct, it retained exclusive rights in the Chinese market and was under no obligation to pay anything further or purchase anything. This is such a fundamental departure from the structure of the Agreement as to be an inherently unlikely change to have been made informally.

[39]      However, Moa does not explain why it did not follow up Hwadro’s failure to meet the Requirements, albeit there is the bare assertion the issue was taken up. There is a conflict of evidence on this point. Breach of the Requirements gave Moa grounds

to terminate the Agreement. That Moa may not have chased the Requirements is some

support for Hwadro’s position.

[40]      I conclude that I cannot find Hwadro’s case that the Requirements were suspended in some way, is entirely speculative and without foundation.

Does the exclusion clause apply in any event?

[41]      Mr Simms submitted the question of whether Requirements were suspended was a red herring as once the Agreement expired, Moa could rely on the exclusion.

[42]      The meaning of a contract is ascertained at the time the contract was made.5 Contractual context is important. The original contractual context is that the Requirements would cancel each other out, that is, payments would be exhausted by purchases and there would be no credit available to Hwadro at the end of the term.

Could the relaxation of the Requirements impact on Moa’s right to rely on cl 11.1?

[43]      In short, is there an argument that if the Requirements were suspended, Moa would have to account for monies received after that suspension? If there is, then can Moa rely on cl 11.1 to resist having to account for any surplus when the suspension of the Requirements may have created an expectation it would account for a surplus if Hwadro did not purchase enough product to extinguish payments made?

[44]      Hwadro’s case could be put on the basis that if the Requirements were suspended then the parties were no longer working on the basis that all of the money paid by Hwadro would be exhausted by the Minimum Purchase Requirement as such no longer applied. That might create a situation where the intention was that Hwadro would receive the money back if it was not applied to purchases. Such a conclusion would be inconsistent with paragraph 6(b) of the statement of claim that Hwadro was permitted to trade on an ad hoc basis – again, if that was the agreement, why was the

$500,000.00 paid in June/July 2018?

5      Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60].

[45]      Hwadro was entitled to make purchases on an ad hoc basis. All the Minimum Purchase Requirement  specified  was  the  minimum  total  value  of  purchases  in  a calendar year. The possible argument I have outlined is based on my conclusion that Hwadro’s case that the Requirements were at least suspended cannot be dismissed.

[46]      Hwadro’s currently pleaded causes of action are that there is an implied term that upon the expiry of the Agreement, Moa would account for any credit balance,    a cause of action in debt essentially relying on the implied term, and a cause of action in unjust enrichment. The claim of an implied term cannot survive the presence of the Requirements in the Agreement. The pleaded implied term would contradict the Requirements. An implied term that applies only in the event one party has breached an express term is hardly tenable. Similarly, the claim in debt relying on the implied term is also untenable.

[47]      Hwadro must demonstrate that representations or assurances made by Moa in relation to the Requirements mean that it is unjust for the surplus to be retained. Alternatively, it must plead with care, a variation of the Agreement that deleted the Requirements or somehow suspended them. The claim requires significant repleading. However, I am not convinced that the claim is completely untenable.

[48]      Earlier in this judgment, I noted that counsel for Moa considered there would not be a different outcome whether Moa’s application was approached as a strike out or as a summary judgment. I would have to dismiss Mr Yang’s evidence in its entirety to enter summary judgment for Moa.   By a narrow margin, I have concluded that     I cannot dismiss Mr Yang’s evidence. However, the fact that I consider Mr Yang’s position to be weak, will be relevant to the alternative application made by Moa and that is for security for costs.

[49]      Accordingly, the application to strike out and/or for summary judgment is dismissed. Hwadro must replead its claim. If it asserts a contractual variation then such must be express with full particulars of what the new contractual terms are. If it asserts Moa is estopped from relying on the Requirements then the basis of the estoppel must be expressly pleaded with full particulars. The amended statement of

claim is to be filed within 20 working days of the payment of security along with proper initial disclosure.

Security for costs

[50]      Rule 5.45 of the Rules empowers the Court to order the giving of security for costs where there is reason to believe that a plaintiff will be unable to pay the defendant’s costs if the plaintiff does not succeed in the proceeding.

[51]      As to the threshold in this case, I am satisfied there is reason to believe that Hwadro would be unable to meet Moa’s costs if Hwadro’s claim was unsuccessful. There is no evidence as to the financial position of Hwadro. Mr Yang’s evidence is that Hwadro had to deal with a failing beer market in China. Moa called for Hwadro to provide disclosure of its financial position. Hwadro was unwilling to do so “for confidentiality reasons”. Mr Yang says:

However, I can confirm that a substantial amount of [Hwadro’s] current assets are made up of the credit balance of approximately $456,370 that Moa has refused to pay …

[52]      I have already said that in my view, Hwadro’s claim as presently pleaded that it has a right to recover the “over payment”, is weak. The last of the payments was made to Moa nearly five years ago. Disclosure of Hwadro’s financial position could have been made on a counsel-to-counsel basis to address concerns about confidentiality.

[53]      Given Hwadro’s financial position, on its case, is tied up with the merits of its claim against Moa, it is unconvincing for Hwadro to in effect assert that its lack of liquidity is due to Moa’s actions. In any event, such cannot be assessed in the absence of evidence as to Hwadro’s financial position.

[54]      The threshold has been satisfied. The next question is whether security should be ordered and if so, in what amount. Again, the very limited nature of the evidence put forward by Hwadro, in my view, means security is appropriate. Hwadro survived the strike out/summary judgment application by a narrow margin. Its case as presently framed is not strong. Moa’s costs calculation based on Schedule 2 costs (based on

a three day hearing and assuming second counsel), comes out at approximately

$48,000.00. That figure assumes there will be an interlocutory application, which may not occur. It also assumes an award for second counsel, which may not be allowed.

[55]      I consider it appropriate to fix a figure for security to apply up until the completion of discovery and inspection. Clearly, this is a case where discovery is going to be important, in particular of the WeChat messages I have already referred to above.

[56]      I order Hwadro pay security for costs in the sum of $20,000.00 to see the proceeding through to the end of inspection of documents. This is greater than the sum mentioned by me during the hearing, given the repleading Hwadro must undertake will require a further defence from Moa.

[57]      Leave is reserved to Moa to seek further security following inspection when the scope of the matters in issue and the need for further applications can be better assessed.

[58]This proceeding will be stayed if the security is not provided within

15 working days of the date of this judgment.

Costs

[59]      Hwadro has largely been successful even though the formal order of the Court is that its challenge to the claim has been dismissed. The claim as it stands justified the challenge made but may be capable of being repleaded. Submissions on costs may be filed within five working days. If no submissions are filed, Moa is entitled to costs on a 2B basis plus disbursements as fixed by the Registrar.

Associate Judge Lester

Solicitors:

Glaister Ennor, Auckland (for Plaintiffs) Wynn Williams, Auckland (for Defendants)