Kiwi Packaging Ltd v Isaac

IN THE COURT OF APPEAL OF NEW ZEALAND

CA106/99

BETWEEN	KIWI PACKAGING LIMITED
Appellant

AND	A R ISAAC & M S MORRIS
Respondent

Hearing:	16 February 2000
Coram:	Blanchard J McGechan J Fisher J
Appearances:	K W Berman and S Robertson for Appellant M G Sloan and S Leibowitz for Respondents
Judgment:	23 February 2000

JUDGMENT OF THE COURT DELIVERED BY BLANCHARD J

When the freezing works operator Weddel New Zealand Ltd (Weddel) went into receivership on 19 August 1994, upon the appointment of the respondents, Messrs Isaac and Morris (“the receivers”), Weddel owed $285,915 to the appellant, Kiwi Packaging Ltd (“Kiwi”) and a subsidiary, Nova Packaging Ltd, for corrugated case packaging supplied to five Weddel plants in the North Island. The packaging had been acquired for the purpose of packing meat and other products which were sold by the Weddel group in the ordinary course of business. Kiwi and Nova have subsequently been amalgamated with the result that all rights and obligations of Nova are now vested in Kiwi.
The packaging had been supplied subject to standard terms and conditions which included a reservation of title, or Romalpa, clause in the following terms:
7         Property
(a)       Property in the goods shall be retained by the Company until the goods are resold by the buyer pursuant to the authority grants (sic) by sub-clause (b) hereof provided however that if the goods are being purchased by the buyer otherwise than for the purpose of re-sale property in the goods shall pass from the Company to the buyer when the contract price and all other moneys payable to the Company by the buyer (whether under the contract or otherwise) have been paid in full.
(b)       Notwithstanding that property in the goods is retained by the Company, the buyer is hereby authorised to sell the goods in the ordinary course of business provided that such authority may be revoked by the Company at any time if the Company deems the credit of the buyer to be unsatisfactory or if the buyer is in default in the performance of its obligations under the contract or any other contract between the Company and the buyer and shall be deemed automatically revoked if the buyer shall be declared bankrupt or enter into any composition or arrangement with its creditors or (in the case of a company) a resolution is passed or a petition is filed for the winding up of the buyer or a receiver is appointed in respect of all or any assets of the buyer.
(c)       When goods in respect of which property has not passed to the buyer are sold by the buyer pursuant to the authority granted by sub-clause (b) hereof, any book debt created upon the sale of such goods and the proceeds of sale of such goods, when received by the buyer, shall be held upon trust by the buyer for the Company and any proceeds of sale so received by the buyer shall be placed in a separate bank account and shall first be applied towards the satisfaction of all indebtedness of the buyer to the Company and thereafter shall be retained by the buyer. Notwithstanding anything herein before contained, the Company hereby authorises the buyer to deal with any such proceeds of sale received by the buyer as if such proceeds of sale were the absolute property of the buyer PROVIDED THAT such authority may be revoked by the Company at any time if the Company deems the credit of the buyer to be unsatisfactory or if the buyer is in default in the performance of its obligations under the contract or any other contract between the Company and the buyer and shall be deemed automatically revoked if the buyer shall be declared bankrupt or enter into any composition or arrangement with its creditors or (in the case of a company) a resolution is passed or a petition is filed for the winding up of the buyer or a receiver is appointed in respect of all or any assets of the buyer. [Emphasis added]
It will be observed that, in terms of para (b), the appointment of the receivers automatically revoked Weddel’s authority to resell the packaging or to deal with the proceeds of sale. This was confirmed by Kiwi in a letter to the receivers three days after their appointment. At first sight, a sale by the receivers after the company’s authority to re-sell has been revoked may be thought not to come within either (a) or (c). Thereafter, in terms of (c), it is not a sale “by the buyer pursuant to [an] authority” granted under (b). But it would be perverse if (c) applied only if the goods were re-sold pursuant to authority. The seller would be worse off because the authority had been revoked. That can never have been the contractual intention. We heard no argument on this point, the parties apparently having concluded that by analogy either (a) (“the contract price and all other moneys”) or (c) (“all indebtedness”) applied and they are to the same effect. At issue between them was that effect: the application of an “all moneys” provision in the circumstances of this case.
At the commencement of the receivership Weddel held approximately 246,944 cartons, the invoiced sale price of which had been $445,473. Some of the cartons had already been paid for. Weddel owed Kiwi and Nova a balance of $285,915.
In the course of the receivership 166,944 cartons with an invoice value of $309,384 were sold by the receivers packed with meat. It is common ground that in proceeding with those sales the receivers committed the tort of conversion.
The remaining cartons, about 80,000 with an invoice value of $136,089, were returned to Kiwi by arrangement made with the receivers. Because when supplied by Kiwi they had already been printed with labelling specific to Weddel, they were of no use to Kiwi for any commercial purpose, Kiwi sold them as scrap for $10,190. It has recognised an obligation to credit this amount towards the Weddel debt.
Weddel had prior to the receivership paid Kiwi $67,976 on account of the purchase price of the unused cartons. It is the significance of that payment which is in dispute on this appeal.
The receivers paid Kiwi a further $149,826 which they calculated as follows:

Balance owing at date of receivership  $285,915
Less invoice value of returned cartons  $136,089
  ________
$149,826
________

The receivers claimed that this satisfied their obligations to Kiwi (other than payment of interest and costs).
All sums have been stated exclusive of GST but there was agreement between the parties that any claim would attract GST.
In the High Court the dispute over the amount owing by the receivers was the subject of an oral judgment of Doogue J delivered at Wellington on 17 February 1999.
The position taken by Kiwi before Doogue J was that it was owed a balance of $125,899. The receivers claimed that the balance was an unsecured debt owing by Weddel for which they had no personal liability.
Doogue J recorded that there was no dispute between the parties over the normal measure of damages for conversion of the cartons sold by the receivers: it was the value of those goods at the date on which they were converted and this was to be measured on the basis of the invoice value. The starting point was therefore the sum of $309,384. The receivers argued that they were entitled to a credit for the invoice value of the unused cartons. The Judge correctly rejected this argument, saying that those cartons were the property of Kiwi and that they were “quite irrelevant to the calculation of the damages payable to Kiwi unless Kiwi is required to give credit to the receivers in respect of the scrap value received for them”. This finding is accepted by the respondents, Kiwi having given credit for the scrap value.
But the Judge considered that a credit had also to be given by Kiwi for moneys paid by Weddel prior to the receivership. It is not readily apparent from the judgment how the Judge went about making his calculation. The credit figure of $91,582 which he attributed to the used cartons was not one referred to in the agreed statement of facts nor, we are told, in the submissions of either party. It appears that he had noted that the invoice value of all cartons was $445,473 and that the balance due after payment on account was $285,915 and that therefore the payment on account had been $159,558. He seems then to have taken into account the $67,976 which had been paid on account of the unused cartons returned to Kiwi. From those figures the Judge appears to have deduced that $91,582 had been paid on account of the cartons that had been used by the receivers (i.e $159,558 less $67,976). The Judge said that if Kiwi were to receive from the receivers the invoice value for the used cartons of $309,384, then in his view it must give credit for the sum paid by Weddel “in respect of the used cartons” of $91,582 as well as the sum paid by the receivers of $149,826.
Doogue J recorded that counsel for the parties had each made submissions based on the “all moneys” provision of the Romalpa clause but he did not consider that it assisted at all in the calculation of the damages for conversion. He saw nothing in the clause directed towards the appropriate measure of damages when it was agreed that certain property had been converted as a result of a breach of the clause. He concluded that for Kiwi to be put in the position of being fully paid for the used cartons required payment to it of $67,976, to which was added GST making a total of $76,473.
From that judgment both sides appeal. In their cross-appeal the receivers raise a point which must logically be dealt with first and which they say the Judge failed to cover, namely that the “all moneys” Romalpa clause created a charge which is voidable as against the liquidator of Weddel, now in liquidation, because it was not registered under the relevant provision of the companies legislation.
In support of the cross-appeal counsel for the receivers sought to rely upon remarks made by this Court in ICI New Zealand Ltd v Agnew [1998] 2 NZLR 129. That was, however, a case in which the goods supplied, pellets of a chemical, had been transformed in a manufacturing process into transparent plastic jars and bottles. The Romalpa clause, which appears at p131-2 of the report, said that if goods were incorporated or used as material for other products “so as to lose their separate identity”, then ownership of a proportion of the new products was to “vest” in ICI (sub-clause 10.2). The Court said that it was an “unanswerable conclusion” that the pellets had lost their identity as such. An analysis of sub-clause 10.2 led the Court to the view that the true meaning and effect of the clause was to create a charge.
The circumstances in the ICI case are readily distinguishable. There was in the present case no transformation of the goods. They remained as they were supplied, save that some were packed with meat. The claim by Kiwi was for conversion of goods passing into the control of the receivers, not a claim for proceeds. Therefore there is no need to try to apportion the sale price of the meat to arrive at a price for the cartons in which it was packed.
Mr Sloan emphasised a passage appearing at p136 of ICI in which the Court approved an observation of counsel for the receivers that if the buyer continued to purchase on credit the seller would never “receive payment in full of all sums” owing and the buyer would never obtain title to the new product it manufactured and sold. The Court said that could not have been the true intention of the parties. Mr Sloan sought to apply that remark to the present clause but, as we read the judgment in ICI, it was directed to the buyer’s inability to get title to goods which it had manufactured, new goods, which were under sub-clause 10.2 to be vested in the seller.
The present “all moneys” clause certainly could prevent Weddel getting title to the goods it purchased (the cartons) while it continued to buy on credit. That is the obvious purpose of such a clause. But it is not an unworkable arrangement. Until the authority to re-sell was revoked Weddel was permitted to deal with the cartons in the course of its business and could pass title to purchasers of its meat. The arrangement certainly provided a security interest (as it is now to be called under the Personal Properties Securities Act 1999) for all indebtedness, but there is high authority for the proposition that a security in the form of a reservation of title is not a charge, even where, as in the particular case, supplies were made under a series of contracts linked by the “all moneys” clause. Delivering the leading judgment in the House of Lords in Armour v Thyssen Edelstahlwerke AG [1990] 3 All ER 481, 485, Lord Keith of Kinkel said:
I am, however, unable to regard a provision reserving title to the seller until payment of all debts due to him by the buyer as amounting to the creation by the buyer of a right of security in favour of the seller. Such a provision does in a sense give the seller security for the unpaid debts of the buyer. But it does so by way of a legitimate retention of title, not by virtue of any right over his own property conferred by the buyer. [Emphasis added].
Therefore, until the coming into force of the Personal Property Securities Act the form, rather than the economic substance, of the transaction is to be determinative of whether a charge has been created. A charge involves the creation by the chargor of an interest by way of security over its own property. In contrast, a reservation of title clause ensures that the goods do not become the property of the buyer until and unless its stipulated obligations have been performed. Where the goods are mixed with other property or transformed into some new thing and the Romalpa clause purports to give the seller title to the mixture or the new thing, the Courts, as a matter of policy, are inclined to say that what has occurred is no longer a mere reservation of title in the seller, but that the buyer, having done with the goods something permitted by the contract of sale, has created a new thing, of which it is the owner, and in respect of which it has granted an interest by way of charge to the seller. For the reasons given, this is obviously not such a case. The cross-appeal must therefore fail.
The argument between the parties on Kiwi’s appeal concerns whether in its claim for conversion relating to the cartons used and resold by the receivers credit has to be given for the amount which Weddel had been paid prior to the receivership. Counsel for Kiwi, Mr Berman, put his client's claim in the following way:
[a]Kiwi had a provable claim in the Weddel receivership of $285,915 less $10,190.
[b]Kiwi has a claim in conversion against the receivers for $309,384 but has reduced it to $285,915 less $10,190.
[c]The claim is further reduced by the payment on account by the receivers of $149,826.
[d]The claim before this Court is further reduced by $67,976, being the further GST exclusive sum paid following the High Court decision.
[e]Kiwi seeks on appeal the balance of $57,923 plus GST (being $65,163.37) plus interest from 1 January 1995.
Mr Berman accepted that a Romalpa seller is obliged to account to the buyer for any over-recovery where goods are taken back and sold for a price which exceeds the contract price less any part of it which has already been paid by the buyer (Clough Mill Ltd v Martin [1985] 1 WLR 111, 117-8). But he argued that where there is an “all moneys” clause the seller is entitled to account to the buyer using a global approach and that where Robert Goff LJ in Clough Mill speaks of the seller being bound to repay any part of the price already paid by the buyer “which must be appropriated to the goods so sold because such sum would be recoverable by the buyer on the ground of failure of consideration”, his Lordship was not addressing the application of such a provision.
To do as the Judge did in the present case, Mr Berman submitted, would require an appropriation of a payment of purchase price to the particular goods to which it related and would deny an “all moneys” provision any practical effect. (In the course of argument Mr Sloan appeared to concede this point.) The Judge had, in effect, said to Kiwi that to the extent that it had received part of the price of a particular shipment of cartons, it had suffered no loss by reason of the receivers’ conversion of those goods. Kiwi had, however, suffered from the conversion in its capacity as a holder of a security interest and was entitled to claim for the loss caused by being deprived of the opportunity to resort to its security. Its position was no different from that of a vendor mortgagee whose charge over goods secured both purchase price and other debt owing by the mortgagor.
Mr Sloan argued that the “all moneys” clause has performed its function in the present case and is no longer of any effect. He described Kiwi’s claim as one for repudiation of contract by non-payment of price. He said Kiwi had been paid in full for the cartons the receivers had used and that, pursuant to the Romalpa clause, Kiwi has recovered the unused cartons.
We agree with Mr Berman’s analysis. The usual measure of damages for conversion is the full market value of the goods at the time of the conversion even when the plaintiff is a party with a limited interest, such as a mortgagee or bailee. It is irrelevant that the plaintiff may be under a liability to account to the owner for part of the money recovered (The Jag Shakti [1986] AC 337). In this instance the seller remains the owner for the purpose of retaining a security interest and the party guilty of the tort of conversion is the agent of the buyer. In theory the same measure of damages still applies for tortious interference with the Romalpa seller’s limited interest. However, in recognition of its obligation to account immediately to Weddel for any amount recovered from the receivers in excess of Weddel’s overall indebtedness, Kiwi has reduced its damages claim to the residual amount secured by means of the Romalpa clause.
In our view the respondent’s argument is fallacious and, as Mr Berman says, would deprive the “all moneys” clause of any effect. Plainly it was intended to enable Kiwi to have resort to all shipments of goods as a source of recovery of the contract price of any of them. In our view it has that effect. The clause has not ceased so to operate merely because the unused cartons have by arrangement been physically restored to Kiwi. Contrary to Mr Sloan’s submission, that did not involve any restoration of Kiwi’s title, for that title had always remained with Kiwi. The balance of the indebtedness secured by the Romalpa clause remained outstanding. By taking back physical possession Kiwi was mitigating its position but was not accepting any repudiation. It was doing exactly what the clause contemplated it might have to do in the event of Weddel’s default. The voluntary return of the goods did not remove or reduce Weddel’s obligation to pay what was owing to Kiwi, except to the extent that Kiwi was thereafter able to recover all or some of the debt by finding another buyer at scrap value. When the accounting is done on a global basis as the clause permits it can be seen there is no double recovery, notwithstanding that a payment had been made before the receivership on account of a particular shipment.
We are satisfied that the Judge erred in approaching the matter on the basis that Kiwi was entitled only to be put in the position of being fully paid for the used cartons. Kiwi is entitled to the further sum of $57,923 plus GST. The rate of interest which must be paid on the GST exclusive amount was in issue in the High Court. The sum in dispute had by agreement between the parties been placed on deposit earning interest at 8.5% pa. The Judge awarded interest at that rate. No argument was advanced in this Court seeking a different rate. We therefore order that the receivers are to pay interest on $57,923 at that rate from 1 January 1995.

The appeal is allowed. Kiwi is awarded costs in this Court of $3,000 together with its reasonable disbursements, including travelling costs of counsel, to be fixed by the Registrar if the parties are unable to reach agreement.

Solicitors

Kensington Swan, Auckland for Appellant

Simpson Grierson, Wellington for Respondents

[2000] NZCA 25

23 February 2000