JK Trading Limited v Rimpro-Tec Limited (in liquidation)
[2019] NZHC 1989
•15 August 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2016-044-239
[2019] NZHC 1989
UNDER the Patents Act 1953, the Patents Act 2013, the Trade Marks Act 2002 and the Fair Trading Act 1986 BETWEEN
JK TRADING LIMITED
Plaintiff and First Counterclaim Defendant
AND
RIMPRO-TEC LIMITED (IN LIQUIDATION)
Defendant and Counterclaim Plaintiff
K J QUIGLEY
Second Counterclaim Defendant
Hearing: 25 July 2019 Appearances:
S Maloney for the Plaintiff
No appearance by or on behalf of the Defendants
Judgment:
15 August 2019
JUDGMENT OF GORDON J
This judgment was delivered by me on 15 August 2019 at 10 am, pursuant to
r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Solicitors: Wynn Williams, Auckland
Ewart & Ewart, Auckland
Counsel: E St John, Auckland
JK TRADING LTD v RIMPRO-TEC LTD (IN LIQ) [2019] NZHC 1989 [15 August 2019]
[1] In October 2009, the plaintiff, JK Trading Ltd (JK Trading), was licensed to manufacture and sell the defendant’s, RimPro-Tec Ltd’s (RimPro-Tec), product in Australasia. The product is a plastic fitment which is intended to adhere to the wheels of cars to protect the rims from damage by contact with road kerbs.
[2] JK Trading claims against RimPro-Tec for breach of an implied warranty that the product would be of merchantable quality and fit for purpose and says that RimPro-Tec’s cancellation of the licence agreement amounted to an unlawful repudiation of the agreement.
[3] In its statement of defence, RimPro-Tec denied liability and raised a number of counterclaims claiming damages for breaches of contract, patent, trademark, confidentiality and the Fair Trading Act 1986 and alleged injurious falsehoods by Kenneth Quigley, JK Trading’s director.
[4] A trial was set down for 30 April 2018. However, on 21 March 2018 RimPro-Tec directors put the company into voluntary liquidation. JK Trading made its claim for damages as an unsecured creditor in the liquidation, but this was rejected by the liquidators. JK Trading is the only unrelated creditor to file in the liquidation. JK Trading therefore applied for leave under s 248(1)(c) of the Companies Act 1993 to continue its proceeding against RimPro-Tec. That application was granted by this Court on 8 March 2019.1
[5] Counsel for RimPro-Tec then advised that RimPro-Tec did not intend to call evidence in defence or to appear at any hearing or trial. The claim was therefore set down for formal proof. RimPro-Tec reserved the right to file a memorandum before the formal proof hearing. It did so by memorandum dated 4 July 2019 addressing matters relative to JK Trading’s claim. RimPro-Tec has also advised the Court, by way of a subsequent memorandum, that the counterclaim was abandoned.
1 JK Trading Ltd v RimPro-Tec Ltd (in liq) [2019] NZHC 376.
JK Trading’s case
[6] In its claim, JK Trading alleges that it purchased from a company, RPT Holdings Ltd, the licence to carry on the business within New Zealand of the manufacture and sale of a product styled “RimPro-Tec” (the product). There was an implied term of the licence that RimPro-Tec would license a product of merchantable quality and fit for purpose. There was a breach of this implied term.
[7] Because of this alleged breach, there were issues with the product that meant JK Trading did not meet minimum sales targets. The licence was then terminated by RimPro-Tec for asserted failure to meet minimum sales targets. The termination of the licence was unlawful because the failure to meet minimum sales targets was as a result of the issues with RimPro-Tec’s product.
[8] JK Trading claims judgment in the sum of $200,000, being $130,000 as the value of the goodwill purchased and $110,000 as the value of stock (estimated), together with interest and costs.2
RimPro-Tec’s response
[9] RimPro-Tec, in its memorandum, says, in short, that the licence only permitted JK Trading’s exploitation of RimPro-Tec’s intellectual property rights. Therefore, JK Trading’s claim that the physical product was not of merchantable quality or fit for purpose lacks any foundation.
[10] It says JK Trading needs to establish, on the balance of probabilities, that the plain words of the agreement are capable of supporting an interpretation that there was a term of the agreement that required RimPro-Tec to ensure that the physical product was fit for purpose when responsibility for manufacture seemingly rested with JK Trading. RimPro-Tec says, in the alternative, if JK Trading cannot establish the interpretation it contends for, then the only other way its case can succeed is to establish that there was a term implied into the agreement that the physical product would be fit for purpose. It says that the issue for the Court is whether there is any
2 It is immediately apparent that the two individual amounts total more than the $200,000 claimed. I address this discrepancy in the section on Relief at the end of the judgment.
scope at all to imply a term as to RimPro-Tec’s responsibility for the manufacture or fitness of the physical product when the parties have allocated roles and risks between them in the agreement.
JK Trading’s reply
[11] JK Trading responds to RimPro-Tec’s memorandum saying that RimPro-Tec’s assertion that JK Trading was the manufacturer rests on the sole basis that the licence grants JK Trading manufacturing rights. However, in reality, JK Trading never relied on its manufacturing rights and, at all times, RimPro-Tec controlled the design and manufacture of the products. In short, JK Trading was a distributor and sales agent, not a manufacturer. It says the design of the produce was inherently flawed and not fit for purpose or merchantable quality.
[12] As to its legal claim, it rests on there being an implied term that the product was fit for purpose and of merchantable quality.
Background
[13] Mr Quigley says that he had a history of dealings with Chris and Debbie Chester, the owners of RimPro-Tec, through Mr Quigley’s freight forwarding company, Jacanna Holdings Ltd. In the course of those dealings, the Chesters told him in various discussions that they had designed RimPro-Tec and proposed to roll it out around the world. They said it was a world first and believed it to be revolutionary. They told Mr Quigley that it could be produced cheaply and they had already organised the manufacturing and necessary promotional material. There was nothing left for any licensee to do but to sell the product, “RimPro-Tec”.
[14] “RimPro-Tec” was a plastic product to be adhered to the wheels of cars. The adhesion of the product was designed to be achieved by strips of double-sided tape made by 3M. The process to be followed by the customer would be to remove the cover from one side of the tape which the customer would adhere to the plastic product. The customer would then remove the other side of the tape to adhere to the car wheel. The product came with alcohol wipes to clean the surfaces before applying the tape.
[15] The Chesters told Mr Quigley that the product had gone through extensive testing in New Zealand and overseas, and they had worked closely with 3M’s New Zealand distributor, Unimark, to develop an adhesion product.
[16] Around September 2009, Mr Quigley met with the Chesters who came to his office to see him to offer him a licence to distribute the product for New Zealand and Australia. The Chesters told Mr Quigley that they had run all the testing, they had the manufacturing process set up through two Auckland companies, Imagin Plastics and Dotmar Plastics. Mr Quigley went out to the factory premises of both those two businesses and met those in charge.
[17] Mr Quigley says the proposal was that he would return a 15 per cent royalty (which the Chesters later changed to 20 per cent) on sales he made to retailers. That would normally have been around $40 in respect of which he would return $8 to the Chesters. He says, however, that no-one had any idea about what numbers JK Trading could expect to sell. He says the Chesters were very enthusiastic and believed JK Trading would sell hundreds of thousands a year throughout Australasia when everything was up and running. However, these numbers were not calculated with any precision. It was more the “back of a beer coaster” type of calculation.
[18] Mr Quigley says that in terms of their discussion about a minimum number of sales, it was loose, and Mr Chester said words to the effect that JK Trading was not to worry about the number, but that they had to put a number in as a starting point. On that basis the minimum number of sales in Australasia was 50,000 units every 12 months, with a holiday of 12 months to get things up and running. But Mr Chester was clear that that number would be revisited when more was known about the market.
[19] Mr Quigley says he was enthusiastic about the product and the chance to be the licensee for Australasia. He was told it would cost him $150,000 to buy the licence, which had no end date, and all he had to do was return the royalties.
[20] Mr Quigley says the Chesters were anxious that he come in as a licensee and he and his wife decided to accept the offer. The Chesters prepared the sale and purchase documentation (which I will refer to below). The agreements were signed
in October 2009, which meant that the minimum sales would be judged at the end of October 2011.
[21] In anticipation of sales, including to The Warehouse, the Chesters encouraged Mr Quigley to order 5,000 sets. He did this. However, the product was not ready. It turned out (but had not been advised to Mr Quigley) that the sample products had been machine lathed as one-offs. The tooling for the plastic extrusion was not ready and mass production could not begin. The product did not come through to JK Trading until December 2009. The delay meant that JK Trading could not get much product into The Warehouse for the lead up to the Christmas sales, which Mr Quigley says was a loss of a great selling opportunity.
[22] Mr Quigley says they launched the product at Auckland’s Top Gear Live show on 18–21 February 2010. They set up cars on which they showed how to install the product and explain what it did. They used the Chesters’ vehicle. The Chesters helped Mr Quigley man the stand over the weekend, as did some of their friends and family.
[23] Mr Quigley says the launch was a disaster. The 3M adhesion tapes did not come apart easily and the tape was sticking to itself. This meant that demonstrations were confused and sometimes embarrassing because the product plainly was not a simple one to install. Mrs Chester directed that JK Trading stop selling the packages they had at the show because the issue with the tape needed to be fixed. Unimark staff later went to JK Trading’s premises, opened the (around) 5,000 boxes and replaced the adhesive tape. Mr Quigley said they were then able to fill on-line orders. But another problem was then exposed. The product was falling off wheels. This again was an adhesive problem. Mr Quigley personally noticed the problem. One came off his car and one came off his wife’s car.
[24] There were two solutions proposed to remedy this problem. One was to add a primer obtained from 3M and the other was to replace the current strips with one long strip. The primer was a liquid adhesion and was applied to the PVC and to the new long continuous tape. Thus, the customer was then being sold a product that came with the tape already on it, and the customer only had to remove one side of the tape for installation.
[25] Mr Quigley says this remedy did help the problem but did not solve it. There was an issue that the tape would come away from the PVC joins when the PVC contracted.
[26] Mr Quigley says that by June 2010, Denish Kumar, from Unimark was saying that they could not produce tape that would adequately adhere to the PVC. In fact, Mr Kumar himself complained that three wheels from his vehicle lost their RimPro-Tec in three weeks.
[27] Mr Quigley says when he expressed his frustration to the Chesters in August 2010, they responded that he should not “get stresses [sic]” about the licence and “its [sic] not a problem to move times and goals”.
[28] In mid-2010, the Chesters announced that JK Trading was to stop selling the “D Shape” which was the internal name for the initial version of the product. At that point, Mr Quigley still had 4,750 units of the D Shape for which he had paid
$106,897.84 (GST exclusive). He had sold 165 units and 85 sets were given away in promotions and samples and returns.
[29] The Chesters refused to take the units back but also said that Mr Quigley was not to sell them.
[30] The new version was described internally as the “Clip It”. Mr Quigley says that when they were told to stop selling the D Shape the Clip It was said to be ready for distribution but, in fact, it was not ready until February 2011. The Clip It was a modified product being a two-part system with overlay pieces which prevented the joins coming apart. By the time the Clip It became available, the 12 month holiday on the minimum sales had expired.
[31] JK Trading purchased 5,748 units of the Clip It. The first problem to emerge with the Clip It was one that JK Trading had been familiar with from their involvement with the D Shape, namely problems with the product falling off wheels. Mr Quigley provides many examples of customer complaints.
[32] The next problem they encountered was with the PVC inserts splitting. Mr Quigley’s view is that this problem was systemic and could not be blamed on customer error.
[33] A part of the fix for the problem was to stop using PVC as the material and move to another compound, ASA. But, despite the acknowledged problems with the PVC, the Chesters said to Mr Quigley he should keep selling the PVC version.
[34] As to the ASA, which was manufactured by Imagin Plastics, it suffered serious problems with discolouration. The Chesters then required JK Trading to source the ASA from the United States.
[35] A problem also arose with wheel alignments. It turned out that frequently the Clip Its would have to be removed when wheel alignments were done. This was a constant source of irritation for customers.
[36] Sales of the Clip It were poor. Mr Quigley says that when Clip It was introduced he hired one dedicated salesman, but any sales into car dealerships are described by Mr Quigley as modest successes and they always turned out to be fleeting. Other sales came from the website, but sales were poor and people were not buying the product. The feedback from customers was unenthusiastic. The emerging issues were that the product did not really work and was unnecessary. Customers would complain that they had hit a kerb but their wheels had still suffered damage.
[37] Mr Quigley’s summary of sales of Clip It shows that they sold 4,140 sets which contrasts with the sales target over that period of 250,000 sets.
[38] In January 2013, Mr Quigley had commenced discussions with a person by the name of Ron Latham, who ultimately became JK Trading’s sub-licensee for Australia. Mr Latham suffered the same sort of product failures as described above. He raised them with both Mr Quigley and direct with the Chesters. Those problems were cracking, discolouration and problems with fittings.
[39] By June 2013, the Chesters wanted JK Trading to sign a new licence agreement for two years with full rights of renewal of two years each. Mr Quigley refused. The Chesters continued to press and threatened to cancel his agreement.
[40] The end result was that RimPro-Tec cancelled the Licensing Agreement, by letter on 27 October 2015, and told Mr Quigley that he was to have nothing more to do with the RimPro-Tec products. He was expected to destroy all the product that he had without any compensation.
[41]The final result as to what JK Trading spent and sold is as follows:
Total sales $229,109.85 Purchase $150,000 Purchase of D Shape and materials $106,897.84 Purchase of Clip It $104,334.26 Advertising and promotion $125,725.33 Patents $5,171.80 Patent claim in Australia $2,500 Royalties $45,554.33 Total spent $540,183.56 (excluding cost of staff that JK Trading employed)
The agreements
[42] There are three agreements. The first agreement I refer to is headed “Licensing Agreement”. The preamble states:
LICENSING AGREEMENT
RIMPRO-TEC LIMITED at Auckland (hereinafter referred to as LICENSOR) has given RPT HOLDINGS LIMITED at Auckland (hereinafter referred to as LICENSEE) the exclusive production and marketing rights to their new product concept as herein described and as per drawings, patent applications, and/or prototype samples previously submitted. In exchange, LICENSEE, agrees to pay LICENSOR a royalty in the amount and under the terms outlined in this Agreement.
[43] However, although RPT Holdings is referred to as the licensee, on the signature page under the word “Licensee” the words typed in are “Kenneth John Quigley, JK Trading Ltd”. The document is signed by Mr Quigley as director. Under the
heading “Licensor” the typed words read “Christopher John Chester, RimPro-Tec Ltd”. There is a signature below those words. The document is dated 27 October 2009.
[44] The second document purports to be a Deed of Assignment of Licence Agreement. It is also dated 27 October 2009. RPT Holdings is the purported Assignor, JK Trading the Assignee, and RimPro-Tec the Licensor.
[45] In the background section, it is stated that the Assignor is the present Licensee under the Licensing Agreement (which is the document I have already referred to in
[42] above). The background further records that the Licensor is the present Licensor under the Licence. The background then states:
The Assignor has agreed to the transfer to the Assignee all its interests in the Licence pursuant to an Agreement for Sale and Purchase dated on or about 27 October 2009 including the exclusivity of the territory as per the Licence.
[46] The Deed of Assignment is signed by JK Trading by two of its directors. It is said to be signed by the Licensor, RimPro-Tec, by two of its directors. However, there is only one signature. There is no signing by the purported Assignor, RPT Holdings.
[47] The third document is an Agreement for Sale and Purchase of a Business, again dated 27 October 2009. The vendor is expressed to be RPT Holdings and the purchaser JK Trading. On the signing page there is a signature purporting to be that of the vendor and two signatures purporting to be those of the purchaser. The sale price of the tangible assets is $20,000, those assets being “Plant and Equipment – tooling and materials”. The sale price for the intangible assets was $130,000, being “The rights (and obligations) as Licensee under the RimPro-Tec licencing agreement between Christopher and Deborah Chester as Licensors and the Vendor as Licensee”. The total purchase price was $150,000.
[48] On one view of things, JK Trading entered into the Licensing Agreement direct with RimPro-Tec on the basis that JK Trading signed the agreement as Licensee. On another view, the licence was assigned to JK Trading under the Deed of Assignment by RPT Holdings, that latter company being described as the Licensee in the Licensing Agreement.
[49] The Chesters were directors of both RimPro-Tec and RPT Holdings, and the Chesters provided the documents. In the end, the exact legal mechanism does not matter as JK Trading accepts that it operated under the licence and that it paid
$150,000 for the purchase of the business.
Principles of contract law
Contractual interpretation
[50] The traditional plain meaning rule of contractual interpretation has been overtaken by a more common sense purposive approach. The modern approach was summarised by the Supreme Court in Vector Gas Ltd v Bay of Plenty Energy Ltd:3
The ultimate objective in a contract interpretation dispute is to establish the meaning the parties intended their words to bear. … The necessary inquiry therefore concerns what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean. The court embodies that person. To be properly informed the court must be aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties’ minds.
[51] Extrinsic material can be used by the courts to interpret a contractual provision without first finding it to be ambiguous. Meaning is to be ascertained having regard to “all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”.4
[52]The background (or matrix of fact) may include:5
… the nature of the industry or market concerned and the practices adopted by it; the history of dealings between the parties; the relative states of knowledge and experience of the parties; the legal background, including any Acts of Parliament; the origins of the contract; particular concerns and needs of the parties; other interconnected contracts or subcontracts; and … “the commercial purpose” of the contract.
3 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [19].
4 Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 (HL) at 912.
5 Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand (6th ed, LexisNexis, Wellington, 2018) at 191.
Implication of terms
[53] There are two types of implied terms: those implied by law and those implied in fact. Terms implied by law are terms implied in contracts of a certain class. Terms implied in fact are terms implied in particular contracts. This case concerns the latter.
[54] The traditional test in BP Refinery (Westernport) Pty Ltd v Shire of Hastings is that before a term may be implied it must:6
(a)Be reasonable and equitable;
(b)Be necessary to give business efficacy to the contract, so no term will be implied if the contract is effective without it;7
(c)Be so obvious to go without saying;
(d)Be capable of clear expression; and
(e)Not contradict any express contractual term.
[55]This test has routinely been applied in New Zealand.8
[56] However, the Privy Council later adopted a different approach in Attorney-General of Belize v Belize Telecom Ltd.9 Lord Hoffman remarked that the criteria in BP Refinery are simply a collection of different ways in which judges previously tried to express the idea that the proposed implied term must spell out what the contract actually means, effectively reducing the implication exercise to one of contractual interpretation.10 To this end, the ultimate question is: what would the instrument, when read as a whole against the relevant background, reasonably be
6 BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 180 CLR 266 (PC).
7 The United Kingdom Supreme Court in Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72, [2016] AC 742 at [21] subsequently said that this factor can more helpfully be put as asking whether, without the implied term, the contract would “lack commercial or practical coherence”.
8 Finn, Todd and Barber, above n 5, at 217, n 243.
9 Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988.
10 At [26]–[27].
understood to mean?11 This approach was subsequently adopted by the New Zealand Supreme Court in Dysart Timbers Ltd v Nielsen.12
[57] More recently, however, the United Kingdom Supreme Court has signalled a retreat from Lord Hoffman’s approach. In Marks and Spencer plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd, Lord Neuberger expressed the view that interpretation and implication are different processes governed by different rules:13
[27] When one is implying a term or a phrase, one is not construing words, as the words to be implied are ex hypothesi not there to be construed …
[28] … given that it is a cardinal rule that no term can be implied into a contract if it contradicts an express term, it would seem logically to follow that, until the express terms of a contract have been construed, it is, at least normally, not sensibly possible to decide whether a further term should be implied. …
[58] The decision in Marks and Spencer plc was noted by the New Zealand Supreme Court in Mobil Oil New Zealand Ltd v Development Auckland Ltd.14 It stated that the Belize approach had been “significantly qualified” by Marks and Spencer plc, but the Court declined to express a firm view on whether Marks and Spencer plc now represents the law in New Zealand.15
[59] Recently, the Court of Appeal in Ward Equipment Ltd v Preston declined to address the issue as it was not dispositive of the particular case; the same conclusion was reached regardless of the test applied.16 However, Kós P’s separate concurring judgment is helpful. He observed that:17
In New Zealand for the foreseeable future the conditions nominated in BP Refinery — best viewed as guidelines — will remain a prominent part of analysis where the construction advanced by a litigant involves a sufficiently substantial change to the express contractual words as to trigger the implication of a term.
11 At [21].
12 Dysart Timbers Ltd v Nielsen [2009] NZSC 43, [2009] 3 NZLR 160.
13 Marks and Spencer plc, above n 7.
14 Mobil Oil New Zealand Ltd v Development Auckland Ltd [2016] NZSC 89, [2017] 1 NZLR 48.
15 At [81].
16 Ward Equipment Ltd v Preston [2017] NZCA 444 at [46]–[47].
17 At [94].
[60] The learned authors of Burrows, Finn and Todd on the Law of Contract in New Zealand are similarly minded:18
High Court cases take a similar view: in virtually all of them the BP Refinery criteria are treated as relevant in ascertaining the meaning of the contract. We are unlikely to see any different results in cases on the implication of terms as a result of Belize. The traditional approach is too well entrenched, and too useful, to be abandoned.
(footnotes omitted)
Did JK Trading bear sole responsibility and risk of product quality control under the express terms of the Licensing Agreement?
[61] RimPro-Tec, relying on the Licensing Agreement, says in its memorandum that JK Trading was a manufacturer and therefore bore the responsibility and risk of quality control. On the other hand, JK Trading says that, despite being given “exclusive production and marketing rights”, it was merely a distributor and sales agent.
[62] The issue is one of contractual interpretation. RimPro-Tec says that the parties allocated the roles and risks between them in the Agreement. The question is who bore the responsibility and risk of quality control under the Agreement? If JK Trading was the manufacturer, then it bore the responsibility and risk of ensuring that the product was fit for purpose and of merchantability quality (if those terms are implied). Thus, it is necessary to resolve the issue of the allocation of roles and risks under the Agreement, prior to discussing whether the terms proposed should be implied.
[63] In light of the above, I turn to examine the roles played first by RimPro-Tec and then by JK Trading in getting the final product to the customer:
(a)The price was dictated by the Chesters.
(b)The artwork on the promotional material, which described and pictured the product, was the Chesters’. The Chesters prepared a promotional DVD. This material had already been prepared when the Chesters approached Mr Quigley to become licensee.
18 Finn, Todd and Barber, above n 5, at 222.
(c)The instruction material for adhering RimPro-Tec to the car wheel was prepared by the Chesters.
(d)The product was manufactured using plastic injection moulding. This was done by injecting molten plastic into a mould called a tool. The Chesters had commissioned the design and construction of the tool.
(e)The Chesters had designed and launched the website to cover the product globally. (JK Trading was later charged $4,000 for what was described as its share of the development and use of the site). The Chesters were responsible for maintaining the website.
(f)The Chesters told Mr Quigley they would have a budget for marketing on a global scale. They said they would support the product and liaise with the manufacturers.
(g)The product was to have a 12-month warranty. The Chesters wrote the warranty.
(h)The alcohol wipes to go into the kit were ordered by JK Trading through a company organised by the Chesters.
(i)JK Trading purchased the adhesive tape directly from 3M using its local distributor Unimark. The Chesters directed Mr Quigley to purchase the adhesive tape from Unimark.
(j)The reason for the product not being ready for sales immediately following the signing of the agreements was because the tooling for the plastic extrusion was not ready and mass production could not begin. Mr Chester was in charge of this issue.
(k)At the product launch at Auckland’s Top Gear live show, the video which was shown had been prepared by the Chesters. It was also the Chesters’ artwork on the promotional material.
(l)The issue with the 3M adhesion tapes that arose at the product launch was caused by the adhesive tape that the Chesters had designed and ordered specifically for the product.
(m)Mrs Chester took charge of resolving the tape issue which had arisen at the launch with Mr Kumar of Unimark. Unimark attempted to rectify the issue by reperforating and replacing the adhesive tapes. Unimark went to JK Trading’s premises and replaced the adhesive tapes in the (around) 5,000 boxes that were there. When the further issues with the tape arose (ostensibly solved by adding a primer from 3M), Mr Chester supplied a machine to JK Trading to push the tape directly onto the PVC and he supplied the primer. When this remedy did not solve the problem, Mr Quigley was in constant contact with the Chesters about this.
(n)3M invoiced the Chesters for the primer and the tape which was intended to fix the adhesion issues. The Chesters sent the invoice on to JK Trading to pay.
(o)When in June 2010 Mr Kumar from Unimark said they could not produce tape that would adequately adhere to the PVC, he also said in the same communication that Unimark had made it clear that they had warned the Chesters about this problem.
(p)In relation to the Clip It, the Chesters organised all the manufacturing and promotional material and the Chesters were responsible for the testing of the product.
(q)When the problems emerged with the Clip It, namely the product falling off wheels and the PVC inserts splitting, it was dealt with by the Chesters.
(r)It was the Chesters who decided the fix for the issues with the Clip It was to stop using PVC as the material and move to another compound, ASA.
(s)All the tooling for the plastic moulding was created and owned by the Chesters who had discussions with all the component suppliers, including Imagin Plastics, Unimark and Boxkraft.
(t)When important manufacturing decisions were made, such as developing the Clip It or moving to ASA, Mr Quigley had no input into those decisions. He was just told. He had no input into manufacturing the products other than to order the products.
(u)Imagin Plastics was told by RimPro-Tec to add a “secret commission” onto each set of the product sold to JK Trading to recoup the cost of the forming machine designed and patented by the Chesters.
(v)Some of the sets sold by the Chesters to JK Trading were complete retail sets. In other words, these were sets that RimPro-Tec had assembled, using the same components from the same manufacturers, for export to other markets.
[64] Turning to JK Trading’s role, it placed the finished product, namely the plastic protective item, the instruction manual, the adhesive type and alcohol wipes into a box and sealed the box with tape ready to be sold. The product was intended to be finally assembled/installed by the customers at home. Also, as noted, some of the Clip It sets were received by JK Trading already boxed up from RimPro-Tec ready for retail.
Analysis of subsequent conduct
[65] The terms of the Licensing Agreement provided that the licensee (signed by Mr Quigley of JK Trading) was to have “exclusive production and marketing rights”. The plain meaning of “production” includes “the action or process of making goods from components or raw materials; the manufacture of goods for sale and
consumption”.19 The agreement also confers possession of equipment, including tools and material, to JK Trading. On the face of the express terms of the agreement, JK Trading was the manufacturer and accordingly bore sole responsibility and risk for quality control. But Mr Maloney says that the reality of how the agreement was performed is important and contradicts the plain meaning of the express terms.
[66] Traditionally, the conduct of parties subsequent to making the contract was not admissible in construing the contract. However, New Zealand has departed from this position. The Supreme Court in Gibbons Holdings Ltd v Wholesale Distributors Ltd held that the parties’ subsequent conduct is relevant to the interpretation of contracts.20 Tipping J commented that the focus must be on the objective conduct of the parties rather than expressions of subjective intention or understanding. The purpose of examining subsequent conduct is “to elucidate, not alter, meaning”.21 The fact that the parties have acted consistently with a particular interpretation may enable an inference that they attached that meaning to the contract at the time it was made.22
[67] JK Trading’s role was generally confined to packaging the various components of the final product in a box and sealing that box for sale and advertising. It was RimPro-Tec and the Chesters that organised the manufacture of the product and the various components to be packaged. All tooling for the plastic moulding was created and owned by RimPro-Tec. And it was RimPro-Tec that worked with the component suppliers such as Unimark and Imagin Plastics. RimPro-Tec also made key manufacturing decisions such as the creation of Clip It, moving from PVC to ASA and sourcing the ASA from the United States. Mr Quigley, in his affidavit, deposes that the Chesters had arranged for the manufacture of the product prior to the Licensing Agreement; there was nothing left for the licensee, JK Trading, to do but to sell the product. Moreover, under the warranty, RimPro-Tec “undertakes at its sole discretion to repair or replace any faulty product within the warranty period”. Evidently, RimPro-Tec played a significant and central role in the manufacturing.
19 Definition of “production” in the Oxford English Dictionary (online ed) < Holdings Ltd v Wholesale Distributors Ltd [2007] NZSC 37, [2008] 1 NZL 277.
21 David McLauchlan “Contract interpretation and subsequent conduct” [2009] NZLJ 125.
22 Finn, Todd and Barber, above n 5, at 199.
[68] Against this background, the word “production” should be interpreted to mean something other than the plain meaning, which includes manufacturing. An example of an alternative meaning, in the circumstances, would be to limit “production” to packaging the various components into a box ready for sale; this would generally be consistent with the parties’ subsequent conduct. Given RimPro-Tec’s significant role in manufacturing the product, I find that RimPro-Tec, rather than JK Trading, bore the responsibility and risk of product quality control.
Should terms of fitness for purpose and merchantable quality be implied into the Licensing Agreement?
Application of the BP Refinery and Belize tests
[69] As discussed above, the approach to the implication of terms is unsettled. But this case does not turn on the approach adopted; whichever approach is adopted, the result is the same. For completeness, I address both the BP Refinery and Belize tests.
[70]First, the proposed implied terms satisfy the five factors from BP Refinery:
(a)Reasonable and equitable: RimPro-Tec had control over all aspects of the design and manufacture of the product; JK Trading paid valuable consideration to purchase that licence. There is no reason why the proposed implied terms would not be reasonable and equitable.
(b)Necessary to give business efficacy to the contract: If the products are not required to be fit for purpose and of merchantable quality, then the agreement is worthless. The Agreement, which confers a licence to sell the products, would lack commercial and practical coherence without the proposed implied terms.
(c)So obvious to go without saying: The purpose of the Licensing Agreement is essentially to sell the product. It goes without saying then that the product should be fit for the purpose for which it is marketed and of merchantable quality.
(d)Capable of clear expression: The terms are common in commercial contracts and capable of clear expression.23
(e)Do not contradict any express terms: The proposed implied terms do not contradict the express terms of the Agreement. First, I have found that the words “exclusive production … rights” does not mean that JK Trading bore sole responsibility and risk of product quality control, having regard to the parties’ subsequent conduct, namely RimPro-Tec’s central role in manufacturing the product. Second, as will be discussed below, the implication of terms does not contradict the entire agreement clause (cl 12 of the Agreement).
[71] Second, the Belize test is also satisfied. The ultimate question is: what would the agreement, when read as a whole against the relevant background, reasonably be understood to mean? As mentioned above, the purpose of the Licensing Agreement was essentially for JK Trading to sell the licensed product. The parties’ intention is evident from the fact that they set an initial minimal sales goal of 50,000 units for the first 12 months. Against this background, the Agreement would reasonably be understood to mean that the licensed design would result in a product that was fit for the purpose advertised and of merchantable quality.
Analysis of case law
[72] Next, I turn to consider the case law. Mr Maloney for JK Trading was unable to refer the Court to any case law in which terms of fitness for purpose or merchantability quality have been imported into licensing agreements for intellectual property. But RimPro-Tec has referred this Court to three cases, which it says illustrates the court’s general hesitance to imply into a contract terms that would effectively re-write the bargain struck by the parties.
[73] All three cases involve licensing arrangements. As a preliminary matter, I note that I do not attach any particular weight to the fact that the present case involves a
23 See, for example, the Contracts and Commercial Law Act 2017, ss 318 and 319. See also related commentary in Gault on Commercial Law (online ed, Thomson Reuters) at [SI6.04] and [SI6.05].
licensing agreement. This is consistent with Ward Equipment Ltd v Preston, the first of the three cases, where the Court of Appeal disagreed that a “licensing contract of intellectual property classically falls within a contract involving a degree of trust and confidence between the parties” such that the fact of being a licensing agreement should be afforded particular weight.24 The Court continued that:
[70] … The agreement provides merely for the grant of rights in return for the performance of agreed obligations and payments. The issue remains one of the application of the conventional principles of contract construction [including interpretation and implication] …
[74]With this in mind, I turn to the relevant cases.
[75] First, I consider the Court of Appeal’s decision in Ward.25 That case involved an agreement whereby the appellant was licensed by the licensor to import, hire and sell a range of patented construction products. Another party then claimed to be a sub- licensee under that agreement. The issue before the Court was whether a term should be implied entitling the licensor to terminate the licensing agreement on reasonable notice. The Court of Appeal held that such a term could not be implied, given that the agreement expressly provided for termination.
[76] However, that case is distinguishable from the instant case. In Ward, the Court held that the parties carefully constructed a bargain between them as to termination.26 Therefore, the proposed implied term was neither necessary nor reasonable. By contrast, the Licensing Agreement between RimPro-Tec and JK Trading was not carefully drafted. The Agreement, for example, names RPT Holdings as the licensee but is signed by Mr Quigley of JK Trading as licensee. Also, the Agreement was drafted by the Chesters of RimPro-Tec with little to no input from JK Trading. This was not a case where the parties reasonably expected that the written agreement would contain the whole of the bargain between them, notwithstanding the entire agreement clause.
24 Ward Equipment Ltd v Preston, above n 16, at [69].
25 Ward Equipment Ltd v Preston, above n 16.
26 At [77].
[77] Second, Precast NZ Ltd v Any Step Ltd involved an express term in the licensing agreement that prevented sale of the product to a third party where the defendant licensee “knew” the product would be on-sold by the third party.27 The plaintiff argued that the contract included an implied term that knowledge included constructive knowledge. The High Court rejected this argument, as such a term would extend the express terms and alter the bargain struck by the parties.
[78] Again, I find that this case is distinguishable. The proposed implied term in Precast did not satisfy the five-factor analysis of BP Refinery.28 Notably, the proposed implied term was not necessary to give business efficacy to the agreement; absent such an implied term, the agreement still retained commercial and practical coherence. Also, the proposed implied term was not so obvious as the concept of constructive knowledge is distinct from actual knowledge. By contrast, the proposed implied terms in the instant case satisfy the BP Refinery factors, as discussed above. If the product is not fit for purpose and of merchantable quality, then the whole agreement, the purpose of which is sales, would be worthless.
[79] Third, in Harris v GTV Holdings Ltd, there was an agreement for the sale and purchase of shares in a company that licensed television programmes for broadcast.29 Part of the purchase price was payable on settlement and the balance six months thereafter. The deferred portion of the purchase price was subject to an adjustment. The defendant argued that a term should be implied into the contract making it clear that any licensing arrangements would need to comply with the usual terms on which the parties did business, thereby reducing the deferred amount payable. The High Court refused to imply a term.30 It held that the detailed way in which the agreement was drafted left no room to imply the purported obligation; such a term would change the whole thrust of the parties’ agreement.
[80] However, the present Licensing Agreement was not drafted with such detail or care as in Harris — therefore, that case is distinguishable. In Harris, the agreement was negotiated between sophisticated business parties; each party was represented by
27 Precast NZ Ltd v Any Step Ltd [2017] NZHC 1371.
28 At [49].
29 Harris v GTV Holdings Ltd [2016] NZHC 3123.
30 At [78].
experienced commercial solicitors; each had financial and taxation advisers to address the fiscal implications of the agreement; and there was no imbalance in the respective parties’ bargaining positions.31 By contrast, as discussed already, the Agreement was prepared by RimPro-Tec with little to no input from JK Trading; in the words of Mr Quigley, the license structure was “convoluted”; and the Agreement does not appear to be carefully drafted, RPT Holdings being named the licensee when in fact the Agreement was signed by Mr Quigley of JK Trading.
[81] Moreover, cl 5 of the Licensing Agreement provides that the licensee, JK Trading, is to sell no less than 50,000 units every 12 months. But by reference to the matrix of fact, this number was not calculated with any precision. It was a more the “back of a beer coaster” type calculation, as, at the time, the parties lacked an understanding of the market and demand for (or lack thereof) the product. This is not a case like Harris, where the agreement was drafted in a such a careful and considered manner so as to leave no room for implication of terms. Nor would the proposed implied terms change the whole thrust of the parties’ agreement. Rather, the terms are consistent with the parties’ common intention, namely that the designs will be used to manufacture a marketable product.
[82] Finally, in relation to Harris, I note that Heath J considered the existence of an entire agreement clause relevant to the question of whether a term should be implied into contract, observing that such clauses were designed to ensure that courts are limited to the written terms of the contract.32 In the present case, cl 12 of the Licensing Agreement provides “that this agreement records the entire agreement between the parties”. But the existence of an entire agreement clause is not dispositive of the issue. The Court of Appeal in Ward, for example, did not make any reference in its reasons, to the entire agreement clause despite it being argued by counsel.33 Further, Fitzgerald J in Precast, in responding to the argument that implication of a term is inconsistent with an express entire agreement clause (one of the five BP Refinery factors), observed that:
31 At [30].
32 At [32].
33 Ward Equipment Ltd v Preston, above n 16, at [28](a).
[50] … An entire agreement clause is simply confirmation that the parties’ agreement is captured solely by the terms of an agreement between them. An implied term is as much a part of an agreement as an express term.
(footnotes omitted)
[83] Instead, I consider that the English case of Greaves & Co (Contractors) Ltd v Baynham Meikle & Partners, relied on by JK Trading, is more helpful.34 There, the plaintiffs hired the defendants to design a warehouse which was later found to be defective. The source of the defects was found to be in the designs and not the construction of the warehouse by a third party. The floor had not been designed with sufficient strength to withstand the vibrations caused by the heavy machinery used by the plaintiffs, despite the plaintiffs having told the defendants of its use. Lord Denning held that the agreement contained an implied term that the design would be fit for its intended purpose, as the common intention of the parties must have been that the defendant would design a warehouse in which heavy machinery could be used.35
[84]Lord Denning reasoned that:36
… both parties were of one mind on the matter. Their common intention was that the engineer should design a warehouse which would be fit for the purpose for which it was required. That common intention gives rise to a term implied in fact. … there was an implied term in fact that if the work was completed in accordance with the design it would be reasonably fit for the use of loaded stacker trucks. The engineers failed to make such a design and are, therefore, liable.
[85] Similarly, in the instant case, the parties must have intended that RimPro-Tec’s design would, when manufactured in accordance with the specifications, produce a product that was fit for its intended purpose. The purpose of the design was to produce a product that would protect car wheels from damage resulting from hitting the kerb. The purpose of the licence was to sell the product in Australasia. The parties must have intended that the product would be fit for purpose and of merchantable quality. That intention is evident, for example, from the fact the parties set an initial minimum sales target of 50,000 units in the first 12 months (after the first 12-month holiday). They intended for the product to sell. However, the proposed terms are not expressed
34 Greaves & Co (Contractors) Ltd v Baynham Meikle & Partners [1975] 1 WLR 1095 (CA).
35 At 1100.
36 At 1100–1101.
in the agreement. Thus, those terms must be implied into the agreement to give effect to the parties’ common intention.
[86] The only question that remains is whether the design was in fact fit for purpose and of merchantable quality.
Was the design fit for purpose and merchantable quality?
[87] Mr Maloney submits that fitness for purpose in this case means that the product would: adhere to car wheels; provide reasonable protection for car wheels/rims from kerb damage; be easy for customers to install; and be durable and not crack, discolour or otherwise fail.
[88] He submits that merchantable quality means something similar, with particular emphasis on the aesthetic qualities such as cracking and discolouration.
Fitness for purpose
[89]The product need only be reasonably, not absolutely, fit for purpose.
[90] First, the product was falling off wheels. Mr Quigley, in his affidavit, deposes that RimPro-Tec specially designed the adhesion tapes for the product. He says that is a design error, namely in the specially designed tape. Unimark had warned RimPro-Tec of the adhesion issues. However, RimPro-Tec says that the product falling off wheels was due to customer error in applying the adhesion tapes. In his affidavit, Mr Booth, owner of Imagin Plastics, similarly stated that he thinks the D Shape falling off wheels is attributable to customer error in installation. However, the second iteration of the product, Clip It, had the same issue. Thus, Mr Quigley says the problem was systemic and could not be blamed on customer error. In any event, Mr Maloney says that the product was designed to be easy for customers to install, and fitting instructions were provided with the product for that purpose. Therefore, even if the product was falling off due to customer error, that also means that the design was not fit for the purpose advertised.
[91] Second, the product was not durable, contrary to the warranty which provides that the product “is made from durable and hard wearing plastic”. There were issues with cracking, discolouration and problems with fitting. The PVC inserts on the Clip It were splitting and the ASA, which replaced the PVC, suffered serious discolouration. The product was not fit for the purpose advertised, which described the product as “Aesthetically pleasing” and “improv[ing] the appearance of your wheels”. There were also problems with wheel alignment. The Clip Its had to be removed when wheel alignments were done — the packaging, designed by RimPro-Tec, did not warn of this.
[92] Third, the product did not work; it did not protect the wheel from kerb damage. RimPro-Tec says that the product did not purport to prevent damage. The warranty provides that the product “may reduce the severity of damage to rims for some minor incidents”, but it does “not guarantee that the [product] will prevent all or any damage for every incident”. However, I note that the packaging states that the product “Helps to prevent kerbing damage to your wheels” and describes the product as “rim protection to help prevent kerb damage to your wheels.” There is evidence by way of customer complaints that the product did not work.
[93] Clearly, the product had problems. Mr Maloney says this is evident from the various customer complaints as well as the fact that RimPro-Tec took its D Shape product off the market. RimPro-Tec designed a new iteration of the product, Clip It. But even that product had its issues, which were rooted in the design. The design was inherently flawed.
[94]Accordingly, I find that the design was not reasonably fit for purpose.
Merchantable quality
[95] There is significant overlap between the facts relevant in assessing fitness for purpose and merchantable quality. Thus, I refer to the above discussion.
[96] Additionally, I acknowledge Mr Maloney’s submission that the product was advertised not only as rim protection but also as a cosmetic accessory to customise car wheels. The advertising, for example, places significant emphasis on the fact that the
product is available in multiple colours. The product is described as “Aesthetically pleasing” on the packaging. The discolouration of the ASA Clip Its, for example, is contrary to this description.
[97] For the above reasons, I find that the design (and resulting product) was also not of merchantable quality.
Alternatively, can terms of fitness for purpose and merchantable quality be implied under the Contracts and Commercial Law Act 2017?
[98] At the hearing, Mr Maloney sought to amend the statement of claim by adding a pleading under the Contracts and Commercial Law Act 2017 (CCLA) on the basis that there was a sale of goods from RimPro-Tec (through its agents) to JK Trading. The amendment sought relied on ss 138 and 139 of the CCLA, which automatically imply terms of fitness for purpose and of merchantable quality.
[99]However, given my principal finding, it is not necessary to address this issue.
Conclusion
[100] I have found that there was an implied term in the Licensing Agreement that the design licensed was to be fit for purpose and of merchantable quality. RimPro-Tec bore the responsibility of ensuring product quality. RimPro-Tec breached the implied terms. The design was defective such that the resulting product was not fit for purpose and of merchantable quality. JK Trading failed to meet its minimum sales targets. But RimPro-Tec was not entitled to cancel the Licensing Agreement as JK Trading’s breach was caused by RimPro-Tec’s own breach of the implied terms.
Relief
[101] JK Trading claims judgment in the sum of $200,000 together with interest and costs. That sum is said to be made up of $130,000 for goodwill and $110,000 as the estimated value of stock (as at 13 July 2016, the date of the Amended Statement of Claim). There is now clarification as to the value of the stock left in hand. Mr Quigley says in his affidavit of 19 July 2019 that the value of the stock he was left with is
$93,165.70. I will substitute that amount for the $110,000 in the claim. I will not
restrict the award to $200,00037 but rather it will be for the correct total of $130,000 and $93,165.70, that is $223,165.70. I enter judgment for that amount.
[102]I make the following orders in favour of JK Trading against RimPro-Tec:
(a)Judgment in the sum of $223,165.70;
(b)Interest on the sum in (a) at the rate of 7.5 per cent38 per annum from 27 October 2015 to judgment; and
(c)Costs on a 2B basis.
Gordon J
37 As noted earlier in the judgment at n 2, that was an incorrect total even using the amounts in the Amended Statement of Claim).
38 The rate of 7.5 per cent is the rate in s 87 of the Judicature Act 1908 which continues to apply under the transitional provisions of the Interest on Money Claims Act 2016.
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