Intelact Limited v Fonterra TM Limited
[2017] NZHC 1086
•6 June 2017
THIS IS A REDACTED VERSION OF THE JUDGMENT FOR PUBLICATION. AN UNREDACTED VERSION HAS BEEN DELIVERED TO THE PARTIES.
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
COMMERCIAL LIST
CIV-2016-404-002465 [2017] NZHC 1086
BETWEEN INTELACT LIMITED
First Plaintiff/First Respondent
NUTRINZA LIMITED
Second Plaintiff/Second RespondentAND
FONTERRA TM LIMITED First Defendant/First Applicant
RD1 LIMITED
Second Defendant/Second Applicant
Hearing: 24 March 2017 Appearances:
D M Hughes and J V R James for Plaintiffs/Respondents
D R Kalderimis and K Yesberg for Defendants/ApplicantsJudgment:
6 June 2017
JUDGMENT OF VENNING J
This judgment was delivered by me on 6 June 2017 at 4.00 pm, pursuant to Rule 11.5 of the High
Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: Chapman Tripp, Wellington
Anthony Harper, Auckland
Copy to: D McLellan QC, Auckland
INTELACT LIMITED v FONTERRA TM LIMITED [2017] NZHC 1086 [6 June 2017]
Introduction
[1] The plaintiffs and defendants were involved in proceedings in this Court (the
2014 proceedings) and also in trade mark opposition proceedings before the
Commissioner of Trade Marks.
[2] Following a mediation the parties agreed to settle both sets of proceedings. They entered a settlement agreement on 16 October 2015. The plaintiffs subsequently discontinued the 2014 proceedings.
[3] The plaintiffs consider that the defendants have breached the terms of the settlement agreement. They have sought to cancel the settlement agreement and have issued these proceedings against the defendants. The defendants apply to strike out the proceedings or, in the alternative, seek summary judgment.
The parties
[4] The plaintiffs, Intelact Limited and Nutrinza Limited (called SourceNZ Limited at the time of the settlement) both carry on business as suppliers of goods and services to farmers. Fonterra TM Limited (Fonterra) is a wholly owned subsidiary of Fonterra Equities Limited which in turn is a wholly owned subsidiary of Fonterra Co-operative Group Limited (Fonterra Co-op), the global dairy business. Fonterra owns all Fonterra Co-op’s intellectual property including trade marks relevant to this proceeding. RD1 Limited carries on business as a supplier of goods and services to farmers.
Background
[5] Since approximately September 2014 RD1 has traded using the marks New Zealand FarmSource and FarmSource under licence from Fonterra. Intelact owns New Zealand trade mark registration numbers for the word mark SourceNZ and Source World. It owns the domain name SourceNZ.com. Intelact also owns trade mark registration numbers for Source World. Intelact also claims the right to trade mark registration for the Source World logo. Nutrinza used the SourceNZ logo.
[6] Between 19 and 22 September 2014 Fonterra applied to register trade marks involving the wording and mark FarmSource. In November 2014 Intelact and Nutrinza issued proceedings against Fonterra and RD1 relating to the use of the FarmSource and New Zealand FarmSource by Fonterra and RD1 (the 2014 proceedings) and also filed opposition proceedings to Fonterra’s attempt to register the FarmSource trade marks in New Zealand.
[7] The parties went to a mediation on 16 October 2015. Following that mediation the parties concluded the settlement agreement. After recording the parties and referring to the 2014 proceedings the settlement agreement included the following clauses:
2.Intelact, SourceNZ [now Nutrinza], Fonterra and RD1 have agreed to settle all issues arising out of the [2014] proceedings, and other issues between them, including the trade mark opposition proceedings filed by Intelact against the FARM SOURCE trade marks in New Zealand, on the following terms:
3. Payment by Fonterra/RD1 to Intelact/SourceNZ of [REDACTED].
4.Intelact/SourceNZ may continue to use SOURCE until June 2016, and may use SOURCE in conjunction with any new brand until that time.
5.Intelact/SourceNZ will discontinue all use of SOURCE as a brand by June 2016 provided however that Intelact/SourceNZ may continue to have a link through from the SourceNZ website to their new website until November 2016 and from the SOURCE WORLD website to its new website until 1 November 2017.
6. [REDACTED].
7. Information sharing: [REDACTED].
8.Toll manufacturing: The parties will use their best endeavours to reach agreement, negotiating in good faith, on the sharing of capacity in New Zealand including Fonterra/RD1 giving Intelact/SourceNZ the first right to provide or access toll manufacturing opportunities (or vice versa) [REDACTED].
9.The parties will discontinue the High Court proceedings, as well as the trade mark opposition proceedings upon the payment of the sum in clause 3(a), with no issues as to costs (each party to cover their own costs). There are no issues as to damages.
…
11. This agreement is binding on the parties, as well as the Source World companies named in the statement of claim in the proceedings, but subject to the parties acknowledging that clause 8 will require further negotiation and agreement to provide the necessary detail.
12.This agreement is in full and final settlement of the proceedings and any issues between the parties arising from the subject matter of the proceedings, subject to the parties’ obligations in clause 8.
[8] The parties also agreed that the terms of the settlement agreement were to remain confidential to them.
[9] The defendants made the payments provided for under cl 3 and
[REDACTED]. The plaintiffs discontinued the 2014 proceedings on 30 October
2015.
[10] The parties then engaged in discussions about a toll manufacturing agreement as contemplated by cl 8 of the settlement agreement. Toll manufacturing is where a party with a manufacturing plant provides the service to a commercial customer (business to business) at a discounted price rather than the normal retail price. The discount over the retail price allows the purchasing party to charge a margin to their end customer while remaining competitive with pricing in the market.
[11] The discussions also involved International Nutritionals Limited trading as Agrifeeds. Ultimately the plaintiffs did not accept that the toll manufacturing agreement proposed by the defendants (and Agrifeeds) satisfied the defendants’ obligation under cl 8 of the settlement agreement. The plaintiffs filed proceedings on 22 September 2016 alleging breach of cl 8 of the settlement agreement and, in the alternative, breach of the Fair Trading Act 1986. The plaintiffs sought damages of
$2 million.
[12] Later, on 2 November 2016 the plaintiffs issued a breach notice and then, on
8 December 2016, issued a cancellation notice. The plaintiffs then subsequently filed an amended statement of claim on 15 December 2016. They abandoned their earlier claims based on breach of cl 8 and pleaded the same three causes of action raised in the 2014 proceedings: trade mark infringement, breach of the Fair Trading
Act, and passing off. All three claims are based on the defendants’ use of the brand
or mark FarmSource.
[13] The defendants advance their application to strike out on the basis that each cause of action in the amended statement of claim was discharged by the settlement agreement. Alternatively they seek summary judgment on the basis the plaintiffs cannot establish a breach of cls 7 or 8 of the settlement agreement. I record Mr Hughes’ concession that, consistent with their pleading, the plaintiffs do not rely on a breach of cl 7 of the settlement agreement for present purposes.
Evidential issues
[14] The evidence in support of the applications was given by Jason Minkhorst, a director of RD1 and Braden Waite, the General Manager of International Nutritionals Limited, which is a 50/50 joint venture between RD1 and another entity. Mr Waite is employed by Fonterra and seconded to RD1.
[15] The evidence on behalf of the plaintiffs was given by Benjamin Cain and James Hazel, both from James and Wells, the firm which represented the plaintiffs in the 2014 proceedings and at the mediation, and Warren Morritt, Managing Director of Intelact.
[16] Mr Kalderimis initially objected to aspects of the plaintiffs’ pleadings and parts of Mr Morritt’s evidence which referred to the discussions held between the parties at the mediation leading up to the settlement. Mr Kalderimis submitted the privileged material did not fall within the limited exception in s 57(3)(b) of the Evidence Act 2006 to the without prejudice rule in respect of “evidence necessary to prove the existence of such an agreement in a proceeding in which the conclusion of such an agreement is in issue”. He submitted the settlement agreement was not in issue in the present case.
[17] However, during the course of argument Mr Kalderimis conceded that he could not maintain the objection to the evidence of the discussion at the mediation. That concession was properly made.
[18] Even before the 2016 amendment to the Evidence Act 2006, the evidence of discussions leading up to the settlement would have been admissible under s 57(3)(a) to the extent that the communications and discussions provide evidence of objective facts necessary to assist the Court to interpret the settlement agreement in accordance with the parties’ true intentions.1 Where the interpretation of a settlement is in question, disclosure of the negotiations may be necessary to ensure substantive justice. In such a case disclosure of the discussions does not undermine the mediation process but is for the purpose of determining the specific terms of an
agreement the parties arrived at following the process.
[19] To the extent there may have been any residual doubt, the 2016 amendment to the Evidence Act has removed it. Section 57(3)(d) confirms that privilege does not extend to a communication in connection with settlement negotiations if the Court considers that, in the interests of justice, the need for the communication to be disclosed outweighs the need for the privilege, taking into account the particular nature and benefit of the negotiations. That is the position in the present case. I reject the objection to those aspects of Mr Morritt’s evidence and the related challenge to the pleadings.
[20] Mr Kalderimis noted that Mr Minkhorst had prepared a third affidavit in reply to respond to the evidence about the negotiations in the event the Court ruled Mr Morritt’s evidence admissible.
Strike out principles
[21] The application to strike out is made out under r 15.1. The legal principles governing strike out applications are well settled. As relevant to the present case they are:2
(a) A strike out application proceeds on the assumption that the facts pleaded in the statement of claim are true.
1 Oceanbulk Shipping & Trading SA v TMT Asia Limited [2010] UKSC 44, [2010] 3 WLR 1424 cited in Sheppard Industries Ltd v Specialized Bicycle Components Inc [2011] NZCA 346, [2011] 3 NZLR 620 at [24]–[27]; and Rudd v Trossacs Investments Inc (2004) 72 OR (3d) 62, (2004) 244 DLR (4th) 758 (SCJ) at [19].
2 Attorney-General v Prince [1998] 1 NZLR 262 (CA); and Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725 at [33].
(b)Before the Court may strike out a claim the causes of action must be so clearly untenable that they cannot possible succeed.
(c) The jurisdiction is one to be exercised sparingly and only in a clear case where the Court is satisfied it has the requisite material.
(d)The fact that the application raises difficult questions of law and may require extensive argument does not exclude jurisdiction.
Parties’ cases
[22] The defendants’ case is that the amended statement of claim discloses no reasonably arguable cause of action because the present claims are identical to the claims in the 2014 proceedings, so that, even accepting the plaintiffs’ allegations in the amended statement of claim to be true, they have been compromised and discharged by the settlement agreement.
[23] The plaintiffs’ response is that cl 12 arguably made the settlement and discharge of their claims in the 2014 proceedings conditional on satisfaction of the defendants’ obligations under cl 8. The plaintiffs say that as the defendants have breached their obligations under cl 8 they are entitled to renew the claims from the
2014 proceedings.
Interpretation of the settlement agreement
[24] The defendants’ application to strike out does not depend on whether the defendants have satisfied their obligations under cl 8 or not. It turns on whether the plaintiffs’ claims against the defendants in the 2014 proceedings were compromised and discharged in the settlement agreement so that, if the defendants are in breach of their obligations under cl 8 of the settlement agreement, the plaintiffs’ only remedy is to sue for breach of cl 8.
[25] Resolution of that issue requires the Court to construe the true meaning of the settlement agreement. What did the parties intend by it?
[26] In Firm PI 1 Limited v Zurich Australian Insurance Ltd the Supreme Court noted that in interpreting a clause the court is simply attempting to ascertain the meaning of the clause interpreted in the context of the contract as a whole. The approach is that of a reasonable person taking account of the fact of the parties’ positions and interests and understanding.3
[27] As confirmed in the judgments in Vector Gas Limited the approach is objective.4 The aim is to ascertain the meaning which the document would convey to a reasonable person having all the background knowledge that would reasonably have been available to the parties in the situation in which they were at the time of the contract.5 A contextual or purposive approach is appropriate. Where there is a genuine ambiguity a court is entitled to prefer the interpretation which best accords with commercial common sense as a means of determining how reasonable people in the position of the parties would have interpreted the words. Subsequent conduct can be taken into account if the court can be confident from such conduct what the parties mutually intended the words to mean.6
[28] The issue is whether the plaintiffs agreed to discharge and release their claims in the 2014 proceedings in return for the promised performance by the defendants of their obligations under the settlement agreement. If so, then the plaintiffs’ original claims in the 2014 proceedings cannot now be revived. If however the settlement agreement merely involved suspension of the claims in the 2014 proceedings pending the carrying out of the acts by the defendants the plaintiffs’ claims may not have been lost forever and could be revived in these proceedings.
[29] The defendants’ case is that there was a clear agreement to discharge the plaintiffs’ rights under the 2014 proceedings in exchange for the payment of [REDACTED]. The discharge was not conditional upon performance of any ongoing obligations under cl 8. A practical recognition of the discharge was the
plaintiffs’ agreement to discontinue the 2014 proceedings [REDACTED].
3 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432.
4 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444.
5 At [19] per Tipping J, at [61] per McGrath J. at [119]–[124] per Wilson J.
6 At [30]–[31] per Tipping J.
[30] The plaintiffs rely on cls 11 and 12 of the settlement agreement, cl 12 in particular. Mr Hughes submitted that if the obligations in cl 8 had not been performed then arguably the effect of cl 12 meant the settlement agreement was not a full and final settlement of the 2014 proceedings.
[31] The first issue is whether the Court can resolve this interpretation issue at this interlocutory stage of the proceeding. Mr Hughes submitted that consistent with the Court of Appeal’s judgment in Trustees Executors Ltd v QBE Insurance (International) Ltd issues of contractual interpretation such as this are unsuitable for summary determination and should be determined at trial.7
[32] In the Trustees Executors case Ronald Young J at first instance had considered that a declaratory judgment would be a simple and inexpensive way to resolve a fundamental question of interpretation of an insurance policy. The Court of Appeal however considered that the interpretation of the policy in that case should be undertaken at full trial rather than in what was, in that case, a factual vacuum. The case is not an authority for the proposition that the Court cannot rule on the interpretation of a contract at the stage of a strike-out application. In Trustees Executors the Court needed further information about a number of relevant factors including the exact extent of the investment business of Trustees Executors and how much QBE knew about that business. The Court had no information about the pricing of the policies compared to other policies with similar alleged coverage or for those with more extensive coverage. There was limited information on marketing practice. The Court considered that further information about how the losses had eventuated and the basis of the link with the alleged breaches of contract was required.
[33] The Court of Appeal has considered this issue on other occasions. I note for example that in the course of its decision in Trustees Executors the Court referred to
the case of Lumley General Insurance (NZ) Ltd v Body Corporate No 205963 where
7 Trustees Executors Ltd v QBE Insurance (International) Ltd [2010] NZCA 608, (2010) 16 ANZ Insurance Cases 61-874.
the Court of Appeal had resolved the interpretation of an insurance contract on a preliminary question basis.8
[34] In Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd the Court of Appeal declined to deal with the interpretation of a contractual provision in the abstract as it did not have sufficient background evidence before it.9 But in TTAH Ltd v Koninklijke Ten Cate NV it is implicit in the Court’s reasoning that it would have been prepared to deal with the question of interpretation of a contractual provision if it had sufficient information before it.10 In that case in discussing the principles to apply to a strike out the Court noted:
[28] … Even where the case turns largely on the interpretation of contractual provisions, some evidence may be necessary to inform the context and elaborate on the factual matrix.
[35] In that case the parties accepted that the affidavit evidence was limited and did not discuss the background to the relevant agreement nor was there any elaboration on the context to the relevant contractual provisions.
[36] The issue in each case must be whether there is sufficient information before the Court to enable it to interpret the agreement in issue in its proper context. There is no factual vacuum in the present case. There is really no issue between the parties about the procedural background leading to the mediation nor on the admissible aspects of the evidence from the mediation. The parties have different views about the interpretation of the settlement agreement but their subjective views of the correct interpretation of the settlement agreement are inadmissible.
[37] The admissible evidence for the plaintiffs is that during the mediation Mr Morritt informed Mr Minkhorst that [REDACTED] was the value the plaintiffs placed on the Source trade mark and the price they wanted to forego their claims and
withdraw from the 2014 proceedings.
8 Lumley General Insurance (NZ) Ltd v Body Corporate No 205963 [2010] NZCA 316, (2010) 16
ANZ Insurance Cases 61-853.
9 Rolls-Royce New Zealand Ltd v Carter Holt Harvey Ltd [2005] 1 NZLR 324 (CA).
10 TTAH Ltd v Koninklijke Ten Cate NV [2015] NZCA 348.
[38] The plaintiffs’ witnesses (including Mr Morritt) acknowledge that Mr Minkhorst did not accept that figure. Mr Minkhorst countered by saying Fonterra had just rebranded RD1 to FarmSource and it did not cost anything like [REDACTED]. The defendants were prepared to reach a settlement that included cash payments and in kind support together with providing the opportunity for the plaintiffs to generate a profit from toll agreements.
[39] Essentially the plaintiffs’ position is that they would not have agreed to a settlement unless they were going to receive [REDACTED] in full settlement. Mr Morritt says that he required a specific dollar figure to be ascribed to cl 8 and that cls
11 and 12 of the settlement agreement were drafted to ensure the realisation of [REDACTED]. That last aspect of his evidence is inadmissible. It is in any event, incorrect as the settlement agreement does not provide any guarantee of a profit of [REDACTED]. The express words of cl 8 provide for the agreement contemplated by that clause to provide the plaintiffs “the opportunity” to realise [REDACTED] in profit. There was never any guarantee such an outcome would be achieved. I note that Mr Hazel who represented the plaintiffs at the mediation recorded the caveat that the plaintiffs’ business would have to deliver on the opportunities provided. Mr Morritt also conceded in his evidence that he did not expect the [REDACTED] profit to be guaranteed.
[40] I return to the fundamental question. In entering the settlement agreement, did the plaintiffs agree to compromise and discharge the 2014 proceedings so that if cl 8 is breached their only remedy is to sue for damages or does cl 12 preserve their right to reassert the claim in the 2014 proceedings in the event of a breach of cl 8?
[41] In David Foskett’s text The Law and Practice of Compromise the learned author discusses the nature of a compromise in the following way:11
8-01 The purpose of a compromise is to put an end to the disputation in which the parties had hitherto been engaged. Such cause or causes of action as each had, or may have had, prior to the conclusion of the agreement are discharged … . New causes of action arise from the existence of the compromise. Do these principles mean that the original claims of a party can never be reasserted in the event of the compromise being disregarded by the other?
11 David Foskett The Law and Practice of Compromise (7th ed, Sweet & Maxwell, London, 2010).
8-02 Given the normal meaning, purpose and effect of a compromise, the natural inference is that the common intention of the parties is that the compromise will henceforth govern their legal relationship in connection with the disputes in which they had been engaged and that, accordingly, those disputes would still be regarded as “dead” even in the event of breach of the compromise. In these circumstances, recourse to the original claims will not be permitted unless, upon a true construction of the compromise, it is clear that this is what the parties intended. In this context, whilst the matter is primarily one of construction, the nature of the consideration furnished by the parties may operate as a pointer.
[42] Compromises have been identified as falling into three categories. The two extremes are accord executory and accord and satisfaction. There is a third type identified in Osborn v McDermott which is characterised as accord and conditional satisfaction.12 In Humphries v Carr the Court of Appeal cited with approval the following passage from the judgment of Phillips JA in Osborn v McDermott:13
[20] Thus, there are three possibilities, not two. First, there is the mere accord executory which, on the authorities, does not constitute a contract and which is altogether unenforceable, giving rise to no new rights and obligations pending performance and under which, when there is performance (but only when there is performance), the plaintiff’s existing cause of action is discharged. Secondly, at the other end of the scale is the accord and satisfaction, under which there is an immediate and enforceable agreement once the compromise is agreed upon, the parties agreeing that the plaintiff takes in satisfaction of his existing claim against the defendant the new promise by the defendant in substitution for any existing obligation. Somewhere between the two, there is the accord and conditional satisfaction, which exists where the compromise amounts to an existing and enforceable agreement between the parties for performance according to its tenor but which does not operate to discharge any existing cause of action unless and until there has been performance. [Emphasis added.]
[43] The third category of accord and conditional satisfaction had previously been considered by Fullagar J in Scott v English.14
[44] Under the third type of compromise, an accord and conditional satisfaction, there is an immediately binding agreement for a compromise but satisfaction and
discharge of the existing rights is deferred until performance of the condition.
12 Hollyburton UK Ltd v Irani [2006] VSC 403 at [23], citing Osborn v McDermott [1998] 3 VR 1 (CA).
13 Humphries v Carr [2012] 1 NZLR 742 (CA), citing Osborn v McDermott, above n 12, at 10 (emphasis added).
14 Scott v English [1947] VLR 445.
[45] The suggestion that an accord executory does not constitute a contract and is unenforceable was questioned by Whelan J in Hollyburton UK Ltd v Irani, but as the Judge observed, it is all an issue of construction and the important thing is to carefully identify what has been agreed and what has not been agreed.15
[46] Mr Kalderimis referred to two decisions of Associate Judges of this Court which considered Humphries v Carr: About Health Supplements Ltd v Charnley and Angland v Mower.16 In Angland v Mower the parties agreed to discontinue the proceedings on the payment of a certain sum. The defendant had also agreed to use best endeavours to seek to have a judgment from the Nevada courts set aside. Matthews AJ held that the settlement agreement operated to discharge the existing causes of action upon payment, notwithstanding the obligations under the best endeavours clause. The Judge noted that the agreement:17
… could have provided, but did not provide, that the proceeding would be discontinued only after Mr Mower had taken the steps required on his part in relation to the Nevada judgment.
[47] Mr Hughes submitted those cases were distinguishable as cls 11 and particularly 12 of the settlement agreement in the present case made it clear that the entire agreement was contingent on the obligation under cl 8 being fulfilled. There were no such clauses in the settlement agreements referred to in the cases of About Health Supplements Ltd and Angland. Mr Hughes is correct that a clause similar to cl 12 was not present in the other cases discussed. That is the plaintiffs’ best argument, a matter which I now discuss.
[48] The parties both suggest the settlement agreement is an accord and conditional satisfaction. They differ however on the performance condition required to discharge the plaintiffs’ claims under the 2014 proceedings. Fonterra and RD1 take the view that on the payment of the [REDACTED] and the discontinuance of the 2014 proceedings the conditional aspect of the settlement was concluded, the plaintiffs’ rights under the 2014 proceedings were discharged and the plaintiffs were
then left to their rights under the settlement agreement. Relying on cl 12 the
15 Hollyburton UK Ltd v Irani, above n 12, at [28]–[30].
16 About Health Supplements Ltd v Charnley [2013] NZHC 1168; and Angland v Mower [2016] NZHC 1014.
17 Angland v Mower, above n 16, at [27].
plaintiffs argue that the compromise recorded in the settlement agreement did not operate to discharge the plaintiffs’ rights under the 2014 proceedings until cl 8 was satisfied.
[49] The plaintiffs’ argument relies on the concluding words of cl 12: “This agreement is in full and final settlement of the [2014] proceedings … subject to the parties’ obligation in clause 8”.
[50] As the authorities referred to above confirm, ultimately the issue is the construction of the particular agreement in the context in which it was made. As Tipping J observed in Tag Pacific Ltd v The Habitat Group Ltd in the context of construing a release clause “[t]he ultimate objective is always to ascertain the intention of the parties from the words they have used, interpreted in the light of the
objective circumstances known to them at the time.”18
[51] In my judgment, read as a whole and in context, the parties intended the settlement agreement to be a full and final settlement of the 2014 proceedings and the opposition proceedings before the Commissioner. Despite counsels’ approach, it may be that the better interpretation is that the settlement agreement was an accord and satisfaction in that the plaintiffs’ rights in their trade marks were subsumed in the settlement agreement in exchange for the fresh obligations created by that settlement agreement.
[52] I consider the following factors support that conclusion. At the outset of the settlement agreement, cl 2 records that the parties had agreed to settle all issues arising out of the 2014 proceedings and any other issues between them, including the trade mark opposition proceedings. I note counsel confirmed there were no other proceedings or issues between the parties other than those 2014 proceedings and the opposition proceedings. Clause 2 is a clear statement of the parties’ intention as to the purpose of the settlement agreement.
[53] The parties wanted to resolve issues between them at the conclusion of the mediation. They would have known that the negotiations contemplated by cl 8
18 Tag Pacific Ltd v The Habitat Group Ltd (1999) 19 NZTC 15,069 (CA) at 15,074.
would take some time. It is in that context that cl 12 must be construed. Considered in context, the negotiation required under cl 8 comes within the category of issues between the parties “arising from the subject matter of the proceedings” referred to in cl 12. The settlement agreement is thus in full and final settlement of the 2014 proceedings and all other issues between the parties arising from the subject matter of the proceedings, save for the parties’ obligations in respect of the ongoing negotiations required under cl 8. But cl 12 does not mean that full and final settlement of the 2014 proceedings and the opposition proceedings was subject to or conditional upon a successful outcome to the negotiation under cl 8. The purpose of cl 12 is not to preserve the plaintiffs’ rights under the 2014 proceedings (which were subsequently discontinued) but rather to acknowledge that despite the settlement and the discontinuance of the 2014 proceedings the parties continued to have ongoing obligations under cl 8.
[54] Next, the settlement was structured on the basis the plaintiffs would cease using their mark and would rebrand. The plaintiffs put a value of [REDACTED] on the trade mark and the rebranding exercise that would be required if they changed their mark. Fonterra did not accept that. However, to see the matter resolved Fonterra agreed to effectively pay the plaintiffs [REDACTED] and, by cl 8, give the plaintiffs the opportunity of concluding a further agreement which might provide them the opportunity of achieving a [REDACTED] profit.
[55] It is also relevant, although not determinative, that when the plaintiffs first issued proceedings alleging breach of the settlement agreement they did so seeking to enforce the provisions of cl 8 rather than suggesting as they now do that they were entitled to claim again the rights under the trade mark. The proceedings were issued by the same legal advisers who attended the mediation. That provides further
evidence of the parties’ understanding of the agreement.19
[56] Next, the words of cl 9 are clear. It provided for the plaintiffs to discontinue the 2014 proceedings upon the payment of the sum in cl 3(a). The terms of the
discontinuance itself were clear and without any rights being reserved. That is
19 Vector Gas Ltd v Bay of Plenty Energy Ltd, above n 4, at [30]–[31].
inconsistent with a suggestion that despite the discontinuance the plaintiffs’ rights
under the claims in the 2014 proceedings were preserved.
[57] There are further difficulties with the plaintiffs’ proposition. As Mr Hughes conceded, the settlement agreement did not provide a time frame for concluding the negotiations under cl 8. Even accepting that the obligation was to reach an agreement which gave the plaintiffs the opportunity to realise [REDACTED] rather than providing that such a profit would be forthcoming, what was to happen if, under the negotiated agreement the plaintiffs only realised a profit of say [REDACTED] over the two years following the conclusion of the further agreement? Would that enable the plaintiffs to reissue the claims in the 2014 proceedings? It would be contrary to the expectation of a reasonable person (particularly in a commercial context) that the claims raised by the 2014 proceedings could be reinstated after such a delay.
[58] Related to this point, it is also relevant as noted, that apart from the payments of the initial [REDACTED], the subsequent [REDACTED], the settlement agreement called for the plaintiffs to discontinue the use of Source as a brand and to rebrand their product from June 2016. That has occurred. If the plaintiff was able to reassert its rights in that brand by restating the claims from the 2014 proceedings the rebranding would have to be “unwound”.
[59] There is a further and related point concerning cl 8. The defendants submit that in any event cl 8 is unenforceable in its terms to the extent that it requires the parties to use “best endeavours to reach agreement, negotiating in good faith …”.
[60] In Fletcher Challenge Energy Limited v Electricity Corporation of New Zealand Limited the Court of Appeal considered the enforceability of a clause which obligated ECNZ to use all reasonable endeavours to agree a full sale and purchase
agreement within three months.20 The Court referred with approval to the following
20 Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR
433 (CA).
passage of Millett LJ’s judgment in the UK Court of Appeal decision of Little v
Courage Ltd:21
An undertaking to use one's best endeavours to obtain planning permission or an export licence is sufficiently certain and is capable of being enforced: an undertaking to use one's best endeavours to agree, however, is no different from an undertaking to agree, to try to agree, or to negotiate with a view to reaching agreement; all are equally uncertain and incapable of giving rise to an enforceable legal obligation.
[61] The New Zealand Court of Appeal then held:
[115] The end in view (the full agreement) is insufficiently precise for the Court to be able to spell out what the parties must do in exercising their reasonable endeavours. Where the objective and the steps needing to be taken to attain it are able to be prescribed by the Court, a best endeavours or reasonable endeavours obligation will be enforceable. That may be possible in relation to some contractual negotiations of relative simplicity and predictability (Coal Cliff Collieries). But a negotiation of complex contractual terms is such a variable matter, both in process and in result, and so dependent on the individual positions which each party may reasonably take from time to time during the bargaining, that it is impossible for a Court to define for them what they ought to have done in order to reach agreement. The Court neither knows the result nor is able to say how each offer should have been made, nor whether it should have been accepted. If ECNZ had sat on its hands and absolutely declined to bargain – which was not the case – it would have been necessary, in order to provide a remedy to be able to state what, as a minimum, it was obliged to do as part of the bargaining process. That may have been possible, as can be seen from the presumption for good faith bargaining now to be found in s32 of the Employment Relations Act
2000 and the Code promulgated pursuant to s35 of that Act, but in fact
ECNZ did actively participate in a lengthy bargaining process.
[62] The Court concluded that in the case before them the agreement was incomplete and incapable of enforcement. The rationale for such a conclusion was explained by Lord Ackner in his opinion in the Privy Council in Walford v Miles:22
The reason why an agreement to negotiate like an agreement to agree is unenforceable is simply because it lacks the necessary certainty.
[63] Courts have recognised obligations under process contracts but even then, whether such a process contract is enforceable or not will depend on the terms of the
21 At [114], citing Little v Courage (1994) 70 P & CR 469 at 476.
22 Walford v Miles [1992] 2 AC 128 (PC) at 138.
contract. In Wellington City Council v Body Corporate 51702 the contract provided:23
Council officers will negotiate, in good faith, sales of Council’s leasehold interests to existing lessees at not less than the current market value of those interests.
[64] The Court of Appeal concluded that in the context of a process contract good faith was essentially a subjective concept which did not give sufficiently certain objective criteria by which the Court could determine whether either party was in breach of that good faith obligation. The contract was unenforceable. It was a contract to negotiate in good faith with no more definition than that what the obligations of the parties were. Tipping J summed up the position in the following way:
[30] … The essence of the common law theory of contract is consensus. It follows that for there to be an enforceable contract, the parties must have reached consensus on all essential terms; or at least upon objective means of sufficient certainty by which those terms may be determined. Those objective means may be expressly agreed or they may be implicit in what has been expressly agreed. …
[65] Mr Hughes responded to the difficulties created for the plaintiffs by the above authorities by referring to the cases of Sheffield District Railway Co v Great Central Rail Co and Jet2.com Ltd v Blackpool Airport Ltd.24
[66] The Sheffield District Railway Co case involved the working of a leased railway. The lessees had an obligation to use their best endeavours to develop the through and local traffic of the lessors. The Court held that the clause meant the lessee was bound to treat the applicants at least as well as they treated themselves in the matter of traffic. It is of no particular assistance to the plaintiffs in the present case.
[67] In Jet2.com Ltd v Blackpool Airport Ltd the claimant was a low cost airline operating flights from Blackpool Airport pursuant to a 15 year agreement. A clause
of the agreement provided the airline company and airport were to “co-operate
23 Wellington City Council v Body Corporate 51702 [2002] 3 NZLR 486 (CA) at [6].
24 Sheffield District Railway Co v Great Central Rail Co (1911) 27 TLR 451; and Jet2.com Ltd v
Blackpool Airport Ltd [2012] EWCA Civ 417.
together and use their best endeavours to promote [the airlines’] low cost services from [the airport] and [the airport] will use all reasonable endeavours to provide a cost base that will facilitate [the airlines’] low cost pricing.” An issue arose as to whether the airport was entitled to decline to accept flights outside normal operating hours which led to it incurring further expense. In a majority decision the Court of Appeal held the clause was not so uncertain as to be incapable of giving rise to a legally binding obligation, accepting that it might be difficult to determine in any given case whether there had been a breach. The obligation to use best endeavours obliged the airport to do all that it reasonably could to enable the airline’s business to succeed and grow, which extended to keeping the airport open to accommodate flights outside normal hours subject to any right it might have to protect its own financial interests. A significant difference between that case (and the Railway case) and the present is that the best endeavours in the present case were related to the negotiation of a further agreement.
[68] Clause 8 of the settlement agreement requires the parties to use best endeavours to reach agreement, negotiating in good faith, in relation to what is a complex commercial agreement involving the possibility of a toll manufacturing agreement. The only assistance the clause provides as to the possible outcome is that the agreement is to be in relation to “the sharing of capacity in New Zealand including Fonterra/RD1 giving [Intelact/Nutrinza] the first right to provide or access toll manufacturing opportunities (or vice versa) to provide [Intelact/Nutrinza] the opportunity to realise [REDACTED] in profit over the two years following agreement”.
[69] The difficulties with the proposed negotiation are apparent from Mr Morritt’s evidence. Mr Morritt noted the proposal that Agrifeeds charge a blending fee of [REDACTED] a ton was not satisfactory given that it was at the time [REDACTED] per ton more than the fee Agrifeeds charged their direct clients. [REDACTED].
[70] Another example is the parties’ discussion about [REDACTED]. Mr Morritt said there were several reasons for not accepting the [REDACTED] offer. [REDACTED].
[71] Mr Morritt says that as the negotiations took an exceptionally long time, from November 2015 to August 2016 with no suggestion of an agreement in the near future, he considered that Nutrinza needed to find a blending solution and decided to remain in its existing premises in Whangarei. In Mr Morritt’s opinion the opportunities in the South Island would require considerable investment from Nutrinza and sales representatives.
[72] As Mr Kalderimis noted, cl 8 has the following defects:
(a) It provides no time period, method or procedural machinery to be followed by the parties in seeking to reach agreement. They are simply to negotiate and use best endeavours to reach agreement.
(b)There is no defined objective or specified content to the negotiations other than a general reference to including a first right to provide or access toll manufacturing opportunities to enable the plaintiffs to make a profit of [REDACTED].
(c) There are no objective criteria or benchmarks for measuring compliance.
(d)The plaintiffs have not in any event provided any information regarding revenues or profit margins.
(e) On the evidence in practice it requires the involvement of a third party, Agrifeeds, albeit a third party controlled by the defendants.
[73] There is insufficient information to enable the Court to determine on behalf of the parties what such an agreement should or could possibly be. There is no means by which the Court can enforce the obligations under cl 8. It is unenforceable for lack of certainty.
[74] As the plaintiffs contend that the discharge of their rights was dependent upon the parties reaching an agreement under cl 8 and as cl 8 is void for lack of certainty then cl 12 itself must be, to that extent, uncertain and unenforceable.
[75] For those reasons I accept the defendants’ submission that the plaintiffs have compromised their rights and are not able to pursue the claims made in the amended statement of claim. The strike out must succeed.
Trade Marks Act 2002, s 93
[76] In the alternative the defendants rely on s 93 of the Trade Marks Act 2002 to strike out the claim. Section 93 provides:
93No infringement where more than 1 identical or similar registered trade marks used
A registered trade mark is not infringed by the use of another registered trade mark in relation to any goods or services for which that other trade mark is registered.
[77] It is common ground that Fonterra registered FarmSource as a trade mark and RD1 has a licence to use it. The defendants submit that such use cannot have infringed the plaintiffs’ mark.
[78] The plaintiffs’ response is that the defendants’ registered trade marks can be declared invalid under s 73 of the Trade Marks Act. That is correct, but that has not occurred. At present no application has been made to have the Farm Source registration declared invalid. Mr Hughes submitted that the plaintiffs had taken a pragmatic approach in delaying any challenge under s 73. They had agreed not to use the trade mark pending the outcome of these proceedings. Notwithstanding that, at the present time, s 93 in its terms provides a defence to the plaintiffs’ claim to the extent it is based on the use of the FarmSource trade mark by the defendants from September 2014 on. As that is the basis of each of the causes of action in these proceedings they must be struck out on that ground also.
Summary judgment
[79] In the alternative the defendants seek summary judgment on the grounds: (a) the plaintiffs cannot establish a breach of cl 8;
(b)even if the defendants had breached cl 8 the plaintiffs were not entitled to cancel.
Principles – defendants’ summary judgment
[80] The defendants’ application for summary judgment is made under r 12.2. On a defendants’ application for summary judgment the following apply:25
(a) The defendant must show on the balance of probabilities that none of
the plaintiffs’ causes of action can succeed.
(b)The Court may take a robust and realistic approach to the evidence but must also be fair. The applicant must show there is no real counter-argument requiring trial evidence.
(c) Summary judgment will not be appropriate where defects identified by the application may be remedied by pleading amendment.
Resolution – summary judgment
[81] Given the above findings this matter can be dealt with briefly. On the basis of the above reasoning cl 8 is an agreement to negotiate and is unenforceable. That supports the entry of summary judgment for the defendant on the basis that the plaintiffs cannot rely on the breach of cl 8 to negate the terms of the settlement agreement.
[82] The alternative ground for summary judgment can be dealt with briefly as well. The defendants submit that the plaintiffs were not entitled to cancel the agreement under s 7 of the Contractual Remedies Act 1979. Section 7(4) sets out the grounds upon which a party may exercise the right to cancel:
(4) Where subsection (3)(a) or subsection (3)(b) or subsection (3)(c)
applies, a party may exercise the right to cancel if, and only if,—
25 Body Corporate 90315 v Redican Allwood Ltd [2014] NZHC 1212 at [24].
(a) the parties have expressly or impliedly agreed that the truth of the representation or, as the case may require, the performance of the term is essential to him; or
(b) the effect of the misrepresentation or breach is, or, in the case of an anticipated breach, will be,—
(i) substantially to reduce the benefit of the contract to the cancelling party; or
(ii) substantially to increase the burden of the cancelling party under the contract; or
(iii) in relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for.
[83] Even accepting for present purposes that cl 8 is an essential term, which for the reasons discussed above is problematic, there is an issue whether the plaintiffs have done sufficient to make time of the essence. Where, as here, the agreement is silent as to when the obligations are to be performed, a party seeking to cancel the contract for non-performance will have to make time of the essence. In O’Brien v Dawson Jordan CJ set out the procedures for making time of the essence before
cancelling:26
If, however, there be no express or implied essential stipulation that the act is to be done by a certain time, so that it may be done within a reasonable time, and more than a reasonable time has elapsed, or if a time fixed by the contract and not of the essence has gone by, it is prudent, if indeed it be not necessary, for a party who desires to be relieved from the contract by reason of non-performance of the act, to give notice to the party in default that if it is not performed by a prescribed time he will put an end to the contract. … The time prescribed by such a notice must be reasonable; and the notice must state with reasonable explicitness what it is that is being required to be done … and that if it be not done within the time prescribed the party who has given the notice will treat the contract as at an end, or treat himself as entitled to put an end to it. …
[84] The plaintiffs rely on a letter from their solicitors of 2 November 2016 which purported to make time of the essence in the following way:
6.While Clause 8 does not include a defined time for fulfilment, we consider that 12 months is a reasonable time in which to expect an agreement to be reached. Our clients are of the view that your clients have not used their best endeavours during that time.
26 O’Brien v Dawson (1941) 41 SR (NSW) 295 at 304.
7.Accordingly, this letter gives notice to [Fonterra] and [RD1] to use their best endeavours to reach agreement with our clients to achieve the objective of Clause 8, by 30 November 2016.
8.Should there be no agreement reached by 30 November 2016, our clients will assess whether your clients have used their best endeavours to reach agreement. If not, our clients intend to cancel the Agreement under section 7 of the Contractual Remedies Act
1979 and seek damages accordingly. …
[85] This is a real issue whether it can be said that the letter stated with “reasonable explicitness” what was required to be done. Clause 7 of the letter is in general terms. Also, on the evidence before the Court about the length of the negotiations between the parties, it is difficult to see that the period of time given to conclude an agreement was realistic or reasonable.
[86] I am not satisfied that the letter was sufficient to make time of the essence in a way which enabled the plaintiffs to cancel as they have purported to do.
[87] For those reasons also the application for summary judgment should be granted.
Summary
[88] The application for strike out is granted. The defendants are also entitled to summary judgment against the plaintiffs.
Costs
[89] The defendants are entitled to costs. Category 2 is appropriate. If counsel are unable to agree they may exchange memoranda. Defendants are to file within 10
working days and plaintiffs to reply within five working days.
Venning J
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