Kiwimilk Limited v Kiwimilk Distribution Limited
[2015] NZHC 2604
•23 December 2015
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-531 [2015] NZHC 2604
BETWEEN KIWIMILK LIMITED
Plaintiff
AND
KIWIMILK DISTRIBUTION LIMITED Defendant
Hearing: 2 - 4 June and 11 December 2015 Appearances:
B P Henry for Plaintiff
H M Lim and K M Moon for DefendantJudgment:
23 December 2015
JUDGMENT OF M PETERS J
This judgment was delivered by Justice M Peters on 23 December 2015 at 12 pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date: ...................................
Solicitors: Shanahans, Auckland
Forest Harrison, Auckland
Counsel: B P Henry, Auckland
KIWIMILK LIMITED v KIWIMILK DISTRIBUTION LIMITED [2015] NZHC 2604 [23 December 2015]
Introduction
[1] The Plaintiff and Defendant (“KML” and “KMDL” respectively) are parties
to three agreements.
[2] The first two are referred to as the Shareholder Agreement and the Distributorship Agreement, and each is dated 11 October 2011.1 The third is an “Agreement for Funds to be held in Lawyers Trust Account” dated 22 May 2013 (“LTA Agreement”).2
[3] By the Shareholder Agreement KMDL was to acquire 10 per cent of the shares in KML for $1 million, this sum to be paid in three instalments. KMDL has paid two instalments, totalling $500,000, but it has not paid the third of $500,000. KML seeks an order requiring KMDL to pay this sum.
[4] By the Distributorship Agreement KML appointed KMDL the exclusive distributor of “Kiwimilk”, a baby milk formula, in China. KMDL counterclaims for losses that it alleges it has suffered as a result of breach by KML of three provisions of this agreement. KMDL also seeks the return of the $500,000 that it has paid to date under the Shareholder Agreement.
[5] Pursuant to the LTA Agreement KML deposited “stakeholder funds” of
$200,000 in the trust account of KMDL’s solicitors, Forest Harrison (“stakeholder funds”). The funds are now held by a firm unrelated to either party. Each party claims to be entitled to the funds and accrued interest.
[6] The parties chose to draft the Shareholder Agreement and Distributorship Agreement themselves. Mr Marco Marinkovich, who gave evidence for KML, said that KML had “dumbed [the agreements] down for simplicity”.3 In their efforts to “keep it simple”, however, the parties have not adequately provided for what each party was to do and when they were to do it. Their failure to do so has been the
cause of much dispute.
1 Shareholder Agreement dated 11 October 2011, at CB 001 and Distributorship Agreement dated
11 October 2011, at CB 003.
2 Agreement for Funds to be held in Lawyer’s Trust Account dated 22 May 2013, at CB 149.
3 Evidence of H Sun, Notes of Evidence at 145.
[7] For the reasons set out below I:
(a) decline to order KMDL to pay the $500,000 to KML;
(b)dismiss KMDL’s counterclaim. KMDL has not proved that KML breached its obligations under the Distributorship Agreement. If I am wrong in that, I am not satisfied that KMDL has suffered loss as a result. I accept KML’s submission that, to the extent any loss may have been caused, it would have been suffered by KMDL’s sub-distributor, Sinokiwi International (Qingdao) Limited (“Sinokiwi”), which is not a party to this proceeding;
(c) order that the stakeholder funds and all accrued interest be paid to
KML forthwith.
Background
[8] KML was/is a “start-up” company producing “Kiwimilk” (the “product”). It was a distinguishing and important feature of the product that it was to be produced by a wholly owned New Zealand company, solely from New Zealand milk.
[9] The evidence of Ms Hewen Sun, KMDL’s sole director and shareholder, was that many milk powder products on the Chinese market are manufactured exclusively for export to China and that Chinese consumers are suspicious of them as a result. Given that KML’s product was to be made entirely from New Zealand milk, Ms Sun and her partners (referred to below) believed that the product should succeed in China, particularly if the product were being sold in New Zealand. I mention this because one issue in the proceeding is whether KML breached a warranty that it would establish a market for the product in New Zealand.
[10] Discussions between the parties led to their execution of the Shareholder and
Distributorship Agreements.
KML
[11] KML is a company incorporated in New Zealand. Mr Marinkovich was the sole witness for KML. Mr Marinkovich and his son, Mr Seb Marinkovich, had the day to day dealings with KMDL. Mr Marinkovich is an advertising executive who has provided brand and other advice to various companies. Mr Seb Marinkovich was not called as a witness, although he was the author of much of the correspondence in issue. Neither party objected to the admission of correspondence on the grounds of hearsay.
[12] At all material times Mr Marinkovich and Mr Phillip Pavis jointly have held
50 per cent of the shares in KML, with the other 50 per cent held jointly by Yu Mai and Hua Wen. The shareholders hold the shares on trust for the Marinkovich and Wen family trusts. At all material times, Mr Marinkovich and Mr Wen have been KML’s directors.
KMDL
[13] KMDL was also incorporated in New Zealand. Ms Sun was the sole witness for KMDL. Ms Sun’s partners in KMDL were Yang Lu (“Luki”) and Yuanfang Liu (“Bonny”). At all material times Ms Sun and Luki were resident in New Zealand. Bonny was in China and, on Ms Sun’s evidence, “in charge [of the product] in the Chinese market”.4 Bonny was also a director of Sinokiwi, at least until about September 2012, when the first shipment of product, LC1, was cleared for import into China.5
Appointment of Sinokiwi
[14] In November 2011, KMDL appointed Sinokiwi as its sub-distributor in
China. Sinokiwi is a company incorporated in China. KMDL owns 40 per cent of the shares in Sinokiwi.
4 Evidence of H Sun, above n 3, at 125 and 127.
5 At 134.
[15] KMDL appointed Sinokiwi without referring first to KML, although at the very least KMDL was required to notify KML of the appointment in advance.6
Again, no point has been taken on this.
Distributorship Agreement
[16] The Distributorship Agreement was entered into by KML as principal and KMDL as distributor. It was executed by KML; by its directors Mr Marinkovich and Mr Wen; and by KMDL.
[17] By the agreement and “upon payment for the Distribution Licence”, KML appointed KMDL its exclusive distributor to promote, market and sell KML’s products in China and its undisputed territories on the terms and conditions in the agreement, commencing from 11 October 2011.7 The appointment was to subsist pending termination of the agreement.8
[18] If “upon payment for the Distribution Licence” is a reference to the
$1 million due under the Shareholder Agreement, then of course it has not been paid. No submission was made to me as to the consequences that might follow from a failure to pay in full, for instance that KMDL’s appointment did not take effect until the sum were paid. Accordingly, I proceed on the basis that no issue arises on that ground.
[19] The Distributorship Agreement made provision for matters such as KMDL’s and KML’s obligations as distributor and principal respectively; terms of sale and purchase; minimum annual quantities of product to be ordered by KMDL; payment; freight; risk and ownership; confidentiality of intellectual property and the like; termination; product quality; warranties given by KML; and amendment (not effective unless in writing, agreed to and signed by all the parties under the
agreement)9.
6 Distributorship Agreement, above n 1, at [4.2].
7 At [1.1] and [1.2].
8 At [5.5].
9 At [9.1].
[20] The Distributorship Agreement also recorded that the parties were contemplating what I take to be the Shareholder Agreement and made provision for KML “to reimburse” KMDL “all reasonable costs” if KML were “not able to comply with the terms” of the Distributorship Agreement. KMDL relies on this provision in seeking a refund of the $500,000 it has paid under the Shareholder Agreement to date.
[21] The parties varied, or purported to vary, the Distributorship Agreement on
25 January 2012. I say purported because the variation consisted of revisions to the affected pages, which were then initialled by Mr Seb Marinkovich (who was not a director of KML) and Ms Sun and inserted into the original agreement. All concerned have proceeded on the basis of the amendments and I shall do likewise.
[22] By the variation, the parties reduced the minimum quantities that KMDL was required to order, to 200,000, 400,000 and 600,000 cans in each of Years 1, 2 and 3, the first year running from the date the first order arrived in the territory. That date was 3 August 2012. Previously the quantities were 600,000, 1,000,000 and
1,500,000 and the obligation commenced on the date of the first order.10 The parties
also made inconsequential amendments to KML’s warranty that it would promote the product.
[23] As matters transpired, KMDL did not order anything close to the minimum quantities but KML has not alleged breach in that respect and so it is unnecessary to say more about the matter.
Shareholder Agreement
[24] The Shareholder Agreement (verbatim) is as follows, with the Court asked to enforce clause 3:11
SHAREHOLDER AGREEMENT
This Agreement is made on 11 day of Oct 2011 hereinafter called (“The
Commencement Date”), between:
10 Distributorship Agreement, above n 1, at [3.2.1]. See also the Distributorship Agreement prior to amendment, at CB 139.
11 Shareholder Agreement, above n 1.
[KML] (hereinafter called “The Principal”)
and
[KMDL] (hereinafter called “The Distributor”).
1. This Agreement is to be read in conjunction with [the Distributorship
Agreement].
2. This Agreement acknowledges that [KMDL] will buy 10% of [KML] for
NZ$1,000,000.
3. Payment will be as follows:
NZ$50,000 as non-refundable deposit payable on signing of this agreement.
NZ$450,000 payable within 28 working days of signing.
NZ$500,000 (the balance) payable before the first order arrived the territory.
4. In exchange [KMDL] will grant [KML] 5% of [KMDL] known as the
Distributor for NZ$1.
5. Details of the Shareholders Agreement and exchange will be detailed in a further agreement to be finalised within 4 weeks of signing of this Agreement.
[25] There is no dispute that, initially, KMDL was to pay the $1 million referred to in clause 3 as a fee in consideration of KML granting KMDL the exclusive right to distribute in China. However, for tax or other reasons the parties came to structure the agreement as one for the acquisition(s) of shares by KMDL in KML. It is common ground that KMDL was to acquire shares and not 10 per cent of KML’s assets.
[26] KMDL paid the first two instalments to KML on 12 October and 17
November 2011 respectively.12 It has not paid the third. The exchange referred to in clause 4 has not occurred and the parties have not attended to the matters referred to
in clause 5.
12 ASB Bank Payments Detail dated 12 and 17 October 2011, at CB 152 and 153.
KML’s claim for the sum of $500,000 under the Shareholder Agreement
[27] I turn now to KML’s claim for the sum of $500,000 pleaded to be due under the Shareholder Agreement.
[28] KML’s claim is that the time by which KMDL was to pay the third instalment has long passed and the company should be ordered to pay the outstanding sum.
[29] KMDL’s pleading on this issue, which is different from the defence advanced at trial, is that the parties agreed to defer payment of the third instalment pending KML’s compliance with clause 8.1.4 Distributorship Agreement. Clause 8.1.4 is a warranty by KML that it will promote the product in New Zealand.
[30] At trial KMDL’s defence was that, at or about the time the first shipment arrived, the parties agreed that KMDL might delay payment of the $500,000 and that, in some unspecified way, KMDL’s obligation to pay the $500,000 subsequently lapsed or the obligation to pay was waived. I accept the first of these submissions for KMDL but not the second.
[31] In an email to Luki and Ms Sun dated 14 August 2012, Mr Marinkovich referred to the fact that the first order had arrived in China and he asked for an explanation as to the “hold up” in payment of the third instalment and confirmation as to when payment would be made.13
[32] In response to a question from counsel for KMDL, Mr Marinkovich confirmed that he had agreed that KMDL might defer payment of the $500,000 but he denied any agreement to waive the requirement for payment.14 Ms Sun’s evidence was consistent. Her evidence was that the parties had agreed that KMDL could delay payment of the $500,000.15
[33] There is no evidence, however, that KML agreed to waive the obligation to pay, whether by words or conduct. On the contrary, Mr Marinkovich’s evidence is
13 Email M B Marinkovich to Y Lu and H Sun dated 14 August 2012, at CB 274.
14 Evidence of M B Marinkovich, Notes of Evidence at 52 – 54.
15 Evidence of H Sun, above n 3, at 81.
that he repeatedly raised the issue of the outstanding $500,000 but that KMDL did not pay the sum due.
[34] KMDL also submitted that KML had failed to make demand for payment. The short answer to this is Mr Marinkovich’s evidence that numerous demands were made subsequent to the email of 14 August 2012. In any event, service of the statement of claim would suffice. Accordingly, but for what follows, I am satisfied that the $500,000 claimed is due and owing.
Section 40 Companies Act 1993
[35] In the course of reaching that conclusion as to the third instalment, I considered what additional orders I ought to make if I found that KMDL were obliged to pay the outstanding sum. At the very least it would be necessary to ensure that KMDL received the shares to which it was to be entitled on payment of the purchase price.
[36] That raised a fresh issue because the Shareholder Agreement does not make express provision for the transfer of shares to KMDL. The agreement is silent on the point. No argument was advanced that the Shareholder Agreement was void for uncertainty because of its failure to make express provision for this fundamental aspect of the transaction.
[37] Putting KMDL in the shares to which it would become entitled on payment might be achieved in one of two ways. Either KML could issue a sufficient number of new shares to KMDL or one or more of KML’s shareholders might transfer sufficient shares to give KMDL the 10 per cent required. However, KML’s shareholders are not parties to the Shareholder Agreement.
[38] In the former case, s 40 Companies Act 1993 (“Companies Act”) would fall to be considered. Section 40 provides that a contract under which a company is or may be required to issue shares is an illegal contract for the purposes of the Illegal Contracts Act 1970 (“ICA”) unless certain criteria are met:
40 Contracts for issue of shares
A contract or deed under which a company is or may be required to issue shares, whether on the exercise of an option or on the conversion of securities or otherwise, is an illegal contract for the purposes of the Illegal Contracts Act 1970 unless–
(a) The board is entitled to issue the shares; and
(b) Either –
(i) The board has complied with section 47 or section 49; or
(ii) All entitled persons agree or concur with the issue of the shares under section 107(2); or
(iii) The contract or deed expressly provides that the contract or deed is subject to–
(A) The board complying with section 47 or section 49;
or
(B) All entitled persons agreeing to or concurring with the issue of the shares under section 107(2).
[39] I raised this issue with the parties after the hearing.16
[40] KML’s first response was that KMDL had not pleaded the possible illegality. That is correct. Pleaded or not, however, s 6(1) ICA provides that every illegal contract shall be of no effect.
[41] KML also submitted that KMDL had not asked the Court to make orders providing for the transfer of shares if it were ordered to pay the $500,000. That too is correct. It is inconceivable, however, that the Court would require KMDL to pay the remaining $500,000 to KML and not at the same time consider how the shares were to pass to KMDL.
[42] As to the substance of the matter, KML did not contend that the criteria in s 40 were met so that KML was entitled to issue shares. Rather KML’s submission was that it was an implied term of the Shareholder Agreement that, on receipt of the total purchase price, KML would procure its then shareholders to transfer 10 per cent
of the shares on issue, that is transfer their own shares to KMDL.
16 Telephone conference convened at 10 am, 22 October 2015.
[43] KML also applied to adduce further evidence, which KMDL did not oppose. That led to further evidence from Mr Marinkovich which was to the effect that KML’s shareholders were, and always had been, ready, willing and able to transfer sufficient shares to KMDL on receipt of payment. That further evidence did not include KML’s constitution and so I do not know whether the requirements of s 40 may have been met or indeed other potentially relevant matters such as whether KML’s shareholders have pre-emptive rights.
[44] In considering counsel for KML’s submission, I have considered recent authorities as to the circumstances in which the Court may recognise an implied term.17 This is not a case, however, that turns on which legal test is applied. It is enough to say that I do not consider the proposed term sits well with clause 4 of the Shareholder Agreement in particular or with what I consider to be the commercial realities of the transaction.
[45] As to the former, clause 4 of the Shareholder Agreement refers to an “exchange” whereby KMDL “will grant” KML 5 per cent of KMDL. To me that suggests that KMDL will issue shares to KML and, as it is an “exchange”, that KML will do likewise.
[46] As to the commercial realities of the transaction, I consider it most improbable that a party in KMDL’s position would agree to pay $1 million in return for an undertaking from the recipient to procure a transfer of shares by whichever third parties held them at the time. The probability of parties’ ready agreement to the suggested implied term is an important factor in considering the issue.
[47] I asked counsel what would happen if KMDL paid the funds and the shareholders declined to transfer the shares. Counsel submitted that, at the very least, KML would have to refund the $1 million. Even if that submission is correct (and the first instalment of $50,000 is expressed to be “a non-refundable deposit”), it does not address the possibility that KML might no longer have the necessary funds
or that, for instance, the value of the 10 per cent might exceed the $1 million.
17 Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988; and Marks & Spencer Plc v BNP Paribas Securities Services Trust Co (Jersey) Ltd [2015] UKSC 72; [2015] 3 WLR 1834.
[48] The willingness of KML’s existing shareholders to co-operate is irrelevant, although it may become relevant if either party were to apply for relief under the ICA. I accept KML’s point that Mr Marinkovich and Mr Wen (who, with their fellow trustees, are shareholders) executed the Shareholder Agreement. However they did so in their capacity as directors of KML. I also accept that clause 5 contemplates a “shareholders agreement” and that, of course, would be an agreement between KMDL and KML’s shareholders.
[49] Counsel for KML also submitted that it was a mathematical impossibility for KML to issue 10 per cent of its shares to KMDL, given that it has 100 shares already on issue. Counsel put before me various calculations that were said to evidence this. Subject to compliance with s 40, however, it would have been open to KML to issue sufficient shares to achieve the necessary ratios.
[50] Counsel for KML’s submissions on this point do not persuade me that the Shareholder Agreement includes the implied term for which KML contends. If any term were to be implied to address this fundamental omission, I consider that a term imposing an obligation on KML to issue shares better accords with what I consider to have been the parties’ intention.
[51] In those circumstances, and in the absence of evidence of compliance with the requirements of s 40, I decline to make an order requiring KMDL to pay the (otherwise outstanding) $500,000. It will be for KML to bring proceedings seeking relief under the ICA if it wishes or for KMDL to do so if it wishes to recover all or part of the $500,000 paid to date.
KMDL’s counterclaim for breach of Distributorship Agreement
[52] KMDL alleges that KML breached its obligations under clauses 7.2, 8.1.4 and 8.1.5 Distributorship Agreement. Clause 7.2 is a warranty by KML that the product is merchantable and fit for purpose. Clauses 8.1.4 and 8.1.5 are warranties by KML that it will promote and establish the product in New Zealand. This latter warranty, clause 8.1.5, is consistent with Ms Sun’s evidence that it was an important part of the sales strategy in China that the product be for sale in New Zealand.
[53] KMDL seeks the following relief in its first cause of action:18
A. Damages for loss set out in paragraph 39 or alternatively return of the shareholding fee under clause 11.2 of the Distributorship Agreement;
B. Interest pursuant to section 87 of the Judicature Act; and
C. Costs.
[54] The losses referred to in [39] of the counterclaim are as follows:19
39. As a result of the Plaintiff’s breach:
a) the Defendant incurred additional costs for the release of
LC 1 and LC 2 products from the Chinese customs;
b)the Defendant could not sell the Kiwimilk products for the price it was anticipating; and
c)the Defendant suffered loss of profit from the sale of the Kiwimilk products in China which the Defendant estimated to be in the sum of RMB2,000,000.
[55] Clause 11.2 Distributorship Agreement (see A in [54] above) provides:20
11.2 In the event that the Principal is not able to comply with the terms of this Agreement (such as the principal fail[s] to deliver the product within 4 month[s] of the first order being placed by the distributor.) The Principal agrees to reimburse The Distributor all reasonable costs incurred by the Distributor leading to the signing of this agreement including shareholding fee, the costs of hosting investors from China for the purpose of inspecting the manufacturing facilities and the costs of hosting the Principal’s representatives in China for the purpose of the Agreement and reasonable ancillary costs.
[56] In its second cause of action, KMDL seeks similar relief, as follows:21
A. Repayment of the sum of $500,000 [also pursuant to clause 11.2
Distributorship Agreement];
B. Interest pursuant to section 87 of the Judicature Act; and
C. Costs.
18 Statement of Defence to Second Amended Statement of Claim and Amended Counterclaim dated 27 November 2014 at [39].
19 At [39].
20 Distributorship Agreement, above n 1, at [11.2].
21 Statement of Defence to Second Amended Statement of Claim and Amended Counterclaim, above n 18, at [44].
Summary of KML’s case on KMDL’s counterclaim
[57] KML’s case in response to KMDL’s counterclaims may be summarised as follows.
[58] First, KML submits that there is no evidence of any breach of clause 7.2. I
accept that submission for the reasons given below.
[59] Secondly, KML submits that KMDL has not proved a breach of clauses 8.1.4 and 8.1.5, principally because no time was stipulated for performance of the obligations imposed by these clauses. In the absence of a stipulation as to time, KML would have “a reasonable time” in which to perform; KMDL had not made out any case as to what constituted “a reasonable time” and so there could be no finding that KML was in breach. I accept this submission also.
[60] Thirdly, KML makes two additional submissions as to clause 8.1.5. The first is that the parties agreed that performance of the obligation imposed by clause 8.1.5 would be deferred pending KMDL’s third order (“LC3”). The second is that the parties varied clause 8.1.5 by clause 3.7 of the LTA Agreement. I accept the second of these submissions but not the first.
[61] Fourthly, KML submits that, even if it were in breach of any of clauses 7.2,
8.1.4 or 8.1.5, KMDL has not proved that such breach caused loss, alternatively that it caused loss to KMDL rather than Sinokiwi. I accept that submission also.
Alleged breach of clause 7.2
[62] Clause 7.2 provides:22
7.2The Principal warrants that The Products are merchantable and fit for its purposes and meet the concerned regulation in The Territory.
[63] KMDL alleges that KML breached clause 7.2 in respect of LC1 and LC2.
22 Distributorship Agreement, above n 1, at [7.2].
[64] KMDL placed its first order, LC1, in or about March 2012. The product was shipped in July 2012 and it arrived in Qingdao on about 3 August 2012.23
[65] In September 2012, Chinese Inspection Quarantine (“CIQ”) tested a sample of LC1 and advised that it did not meet local specification. Having taken advice from New Zealand food safety firms, KML advised that CIQ had tested too small a sample and used an incorrect testing method. KML provided various reports to KMDL to this effect in October and November 2012.
[66] This information was provided to CIQ which subsequently cleared the product. However, Mr Marinkovich’s evidence was that KMDL and Sinokiwi relied on the CIQ test results to decline to complete Customs clearance and to withhold payment to KML. Although eventually the shipment was cleared and payment to KML was made, on Mr Marinkovich’s evidence this occurred only after KML had agreed to discount the price of future orders very substantially.24 There is no dispute that KML agreed to give these discounts but Ms Sun’s evidence was that they were required to compensate KMDL and Sinokiwi for losses said to have been incurred.
[67] LC2 arrived in Qingdao on 24 February 2013. Issues arose as to the shipping documentation and KMDL declined to release payment. In April 2013, Mr Marinkovich went to China to negotiate the release of payment with Sinokiwi’s officers. Mr Marinkovich’s evidence was that, in the course of discussions, KML agreed to pay approximately NZ$22,000 for what were said to be “storage fees”, on the basis that this would result in payment for the shipment.25 It did not. Rather, KML was asked to, and agreed to, execute the LTA Agreement which required KML to deposit the stakeholder funds of $200,000. The LTA Agreement provided that, once KML had deposited the funds, KMDL would clear LC2 through CIQ and
Chinese Customs. KML deposited the funds and then LC2 cleared customs on or about 15 July 2013.
[68] KMDL relied on the CIQ test results for LC1 and the various delays which occurred in the shipments clearing customs in support of its case that there had been
23 Evidence of M B Marinkovich, above n 14, at [22].
24 At [18].
25 At [23].
a breach of clause 7.2. The thrust of Mr Marinkovich’s response, which KMDL denied, was that KMDL and Sinokiwi manufactured or at least exploited the delays in relation to both shipments, thereby hindering clearance through customs, keeping KML out of its money (payment was not required to be made until the product cleared customs) and positioning itself to extract financial concessions from KML.
[69] Whatever the position may have been, I accept counsel for KML’s submission that no breach of clause 7.2 has been established in respect of either shipment. As to LC1, evidence that CIQ initially advised that a sample of the product was outside local (Chinese) specification does not establish that KML breached clause 7.2. Likewise in respect of LC2. In each case, CIQ cleared the product, as did Chinese Customs. There is simply no evidence of a breach.
Alleged breach of clauses 8.1.4 and 8.1.5
[70] By clauses 8.1.4 and 8.1.5 KML warranted that:26
8.1.4It shall promote the Products in New Zealand by way of and including:
A) Hosting an official opening party of the plant when appropriate to promote the Brand with suitable official dignitaries’ for promotional purposes to support the Brand in New Zealand and The Territory.
B) Make arrangement with the Prime Minister and Trade Minister of New Zealand to officially acknowledge that they support and endorse KiwiMilk, The Brand, such as through official announcement, press release and to be present at the Brand’s marketing activities within six months of placing the first order.
C) Establishing a website for the promotion, sale and marketing of the Products in New Zealand before launch into the product in the territory.
D) Advertising and promoting The Products in local and national media on a monthly basis.
8.1.5It would establish a local market for the Products including having The Products available for sale in local supermarkets chains and specialist retail outlets including duty free outlets.
26 Distributorship Agreement, above n 1, at [8.1.4] and [8.1.5]. Prior to amendment the period allowed in [8.1.4](B) above was “... within six months of signing this agreement.”
[71] As to clause 8.1.4, there was some promotional activity by KML. The gist of Mr Marinkovich’s evidence was that KML sought to hold an “official signing” of the Distributorship Agreement and launch of the product during the 2011 Rugby World Cup but that this did not proceed as KMDL did not provide a list of invitees and indeed asked that the event be deferred; that he appeared in presentations on TV One, TV3 and on CCTV, a Chinese television channel with a very substantial audience; that KML supplied promotional material and sought, but did not receive, information as to KMDL’s and Sinokiwi’s retail strategy in China so that it could assist.
[72] Mr Marinkovich and KML also played a role in efforts to shore up Chinese confidence in New Zealand milk products after the Fonterra “botulism” scare in August 2013, but that was as much for KML’s benefit as anyone else’s.
[73] Some of the activities to which Mr Marinkovich referred are encompassed by clause 8.1.4 but most of the required activities were not undertaken. Little turns on clause 8.1.4(A) because there was no “plant”. As to clause 8.1.4(B), there is no evidence that KML made the necessary arrangement with the Prime Minister and Minister of Trade, if indeed such an arrangement could be made. KML did not establish the website referred to in clause 8.1.4(C) and nor did it advertise or promote the product in local and national media on a monthly basis, as required by clause 8.1.4(D).
[74] As to clause 8.1.5, Mr Marinkovich gave evidence that KML had the product for sale at a duty free outlet or outlets at Auckland International Airport. I accept counsel for KMDL’s submission that this does not constitute establishing a local market for the product.
No time stipulated for performance
[75] Notwithstanding these omissions, counsel for KML submitted that KMDL had not proved breach. That is because the warranties are as to future conduct and, with the exception of clause 8.1.4(B), no time was stipulated for performance in clauses 8.1.4 and 8.1.5.
[76] Counsel contrasted clauses 8.1.4 and 8.1.5 with other warranties in clause 8.1. For instance, clause 8.1.1 is a warranty by KML that “it has” the ability to supply 10 million cans of product annually. Clause 8.1.2 is a warranty by KML that it “has” sole and exclusive rights to trademarks and the like. Clause 8.1.3 is a warranty by KML that it “has or will have” a particular agreement with manufacturers of the product.
[77] In contrast, clauses 8.1.4 and 8.1.5 contemplate future events – “shall promote” and “would establish”. As I have said, the only provision within clause 8.1.4 which nominates a specific period of time for compliance is clause
8.1.4(B) – “within six months of placing the first order”.
[78] Counsel for KML submitted that, given the absence of a stipulation as to time, KML would only be in breach of either provision if it had failed to comply after “a reasonable time” had lapsed. Counsel also submitted that what constitutes a reasonable time for performance is to be assessed by reference to all the circumstances of the particular case.
[79] I accept that, in the absence of a stipulation as to time, performance is required within a reasonable time and that what constitutes a reasonable time will depend on all the circumstances of the case, including the nature of the obligation to be performed.27 For myself, I have some sympathy for KMDL’s submission that the performance of the warranty in clause 8.1.5 in particular was of considerable importance to the company and that it made that clear to KML. However, counsel for KMDL did not address me on the issue of what might have constituted a reasonable period for compliance with either clauses 8.1.4 and 8.1.5. This is an
important point on which counsel’s assistance was required. In the absence of such submissions, I am unable to determine what would constitute a reasonable time for
performance and, accordingly, find that KML has not been in breach.
27 HG Beale (ed) Chitty on Contracts (31st ed, Sweet & Maxwell, London, 2012) vol 1 at [21-
021].
Points specific to clause 8.1.5
[80] I turn now to the two alternative submissions that KML advanced as to clause
8.1.5.
[81] The first was that the parties agreed in November 2011 that KML would not be required to comply with clause 8.1.5 until KMDL’s third order, LC3. The third order was never placed. This agreement was said to have been reached in or about November 2011 when, at KMDL’s request, KML agreed to package the product in a can printed with the text in Mandarin.
[82] The evidence at trial, which I accept, was that the parties initially agreed that the product container or can would be printed with the text in English, with an “over- sticker” in Mandarin recording the product ingredients and instructions. Mr Marinkovich’s evidence was that KML could have placed the product for sale in
New Zealand in that format.28
[83] However, by email from Ms Sun dated 4 November 2011, KMDL asked KML to print the text on the container in Mandarin. This request is said to have led to numerous telephone calls and meetings, with KML ultimately agreeing to the change but with:29
[9] … the comment that the change would impact our ability to supply product in the New Zealand market (which was going to be sold in Gilmours) …
[84] Mr Marinkovich’s evidence was that KML was unable to place a can printed in Mandarin for sale in New Zealand supermarkets. It would have had to undertake a separate production run in an English can, the minimum quantity of which would be 27,600 cans. This quantity was too great for Gilmours, the proposed retailer, to take and, in addition, the cost of the separate run was prohibitive from KML’s
perspective.
28 Brief of Evidence of M B Marinkovich dated 31 October 2014, at [8].
29 At [9].
[85] Mr Marinkovich’s evidence was that KML agreed to the change on condition that it would not be required to place the product for sale in New Zealand supermarkets until LC3. LC3 was to be the parties’ first “wet-blend” shipment which in itself would require significant changes to the text on the container. The third order was never placed.
[86] Ms Sun’s evidence was that no such agreement was reached, that performance of the warranty was highly significant to KMDL and that the parties could have been expected to record any such agreement when they amended the Distributorship Agreement in January 2012.30
[87] I am not satisfied that KML has proved an agreement to defer performance of clause 8.1.5. A “comment” that the change to the can in Mandarin would affect KML’s ability to comply does not constitute an agreement to waive performance, if it were due. And although I take KML’s point that KMDL ordered LC2 notwithstanding KML’s alleged non-compliance with clauses 8.1.4 and 8.1.5, I am not satisfied that on its own is sufficient evidence of the alleged agreement to vary.
Clause 3.7 LTA Agreement
[88] There is more force in counsel for KML’s submission that clause 3.7 LTA Agreement discharged or amended clause 8.1.5. This was another submission to which counsel for KMDL did not respond.
[89] The issue of whether clause 3.7 LTA Agreement discharged or amended clause 8.1.5 would depend on the parties’ intentions, viewed objectively.31
[90] Clause 3.7 LTA Agreement provides:32
3.7KML will organize and have KiwiMilk product on shelf in the New Zealand supermarkets (excluding airport duty-free stores or single small supermarkets) within four-month time that starts from the date LC2 finished custom clearance and has been in condition for sale. In order to fulfil this requirement, KMDL will not hinder or delay the approval and signing of artwork and over-print stickers for
30 Evidence of H Sun, above n 3, at 105 and 106.
31 H. G. Beale Chitty on Contracts, above n 27, at [22-034].
32 Agreement for Funds to be held in Lawyer’s Trust Account, above n 2, at [3.7].
the Chinese Market. If KML fails to fulfil this requirement, the remaining funds ($50,000) in the LTA set aside for the purpose of securing the sale of KiwiMilk product in the NZ Market will be transferred to the nominated account of KMDL.
[91] Again, in the absence of submissions by counsel for KMDL, I accept the submission of counsel for KML that by clause 3.7 the parties discharged clause 8.1.5
Distributorship Agreement. Clause 3.7 imposes an express time limit on performance; makes it express that placement of the product in a duty free store will not constitute compliance; and imposes an obligation on KMDL to refrain from hindering or delaying approval and signing of artwork etc.
No loss to KMDL
[92] I come now to KML’s submission which is that, even if KML were in breach of any of clauses 7.2, 8.1.4 or 8.1.5, KMDL has not proved that it suffered loss.
[93] In [54] above I referred to the losses claimed by KMDL. These comprise additional costs said to have been incurred in the release of LC1 and LC2 and loss of profit on resale of the product in China.
[94] Taking the first of these, there is no evidence that KMDL incurred the costs referred to, let alone as to quantum.
[95] KMDL’s second claim, for lost profit on resale of the product in China, faces two principal obstacles.
[96] First, the usual measure of damages for breach of warranty is the difference between the value of the goods or contract as warranted and the value in fact. Had it established a breach, KMDL would have had to adduce expert evidence proving that difference. This would have included evidence as to how the proceeds of sale were likely to have been greater had KML complied with the obligation in question. There was no such evidence.
[97] The second and even more significant obstacle concerns the arrangements between KMDL and Sinokiwi.
[98] Sinokiwi, not KMDL, purchased the product directly from KML. Ms Sun’s evidence was that Sinokiwi acted as the distributor in China because it held the necessary licence to import milk powder into China.33 KMDL did not have such a licence.
[99] Ms Sun’s evidence was as follows:34
Q. What was your arrangement, what was KMDL’s arrangement with
Sino Kiwi regarding [LC1]?
A. Regarding what product (inaudible 10:54:31)?
Q. KML milk powder, regarding the distribution of it?
A. Sino-Kiwi took place for taking all the distribution channel and making and re-selling in China.
Q. So was Sino-Kiwi going to buy the product from KMDL?
A. KML, directly from KML. They don’t add any margins, Sino-Kiwi directly buy from KML, yeah.
[100] That Sinokiwi was purchasing directly from KML is also apparent from invoices and shipping documentation the parties exchanged.35
[101] Moreover, Sinokiwi was selling the product in the Chinese market and so any loss of profit must have accrued to Sinokiwi. Bonny made this point to Mr Marinkovich in an email dated 20 November 2012. In that email Bonny complained that KML still did not have the product available for sale in New Zealand supermarkets and that KML had not supplied promotional materials.
She said:36
The points above mentioned are very important for sales in China. If [KML]
does not fulfil the promises, Sinokiwi will suffer the huge loss.
33 Evidence of H Sun, above n 3, at 135.
34 At 134.
35 Invoice Number SK220712A dated 22 July 2012, at CB 358, Certificate and Shipping (Export) Documentation, at CB 395 and Invoice Kiwimilk Ltd to Sinokiwi International (Qingdao) Ltd dated 17 December 2012, at CB 417.
36 Email Y Liu to M B Marinkovich and H Sun dated 21 November 2012, at CB 289.
[102] These points were also made in a memorandum executed by KML and
Sinokiwi dated 20 November 2012 in which it was said that:37
… If KiwiMilk does not fulfil the promises, Sinokiwi will suffer the huge loss …
[103] Accordingly, even if KML had proved a breach, it could not establish that such breach caused it a loss. Any loss that may have accrued to KMDL as a shareholder in Sinokiwi is insufficient.
Clause 11.2 Distributorship Agreement
[104] The alternative remedy KMDL sought was for a refund of the $500,000 that it has paid to date pursuant to the Shareholder Agreement. KMDL claims this relief pursuant to clause 11.2 Distributorship Agreement, which provides:38
11.2 In the event that the Principal is not able to comply with the terms of this Agreement (such as the principal fail[s] to deliver the product within 4 month[s] of the first order being placed by the distributor). The Principal agrees to reimburse the Distributor all reasonable costs incurred by the Distributor leading to the signing of this agreement including shareholding fee, the costs of hosting investors from China for the purpose of inspecting manufacturing facilities and the costs of hosting the Principal’s representatives in China for the purpose of the Agreement and reasonable ancillary costs.
[105] Counsel for KMDL submitted that the reference in clause 11.2 to the “shareholding fee” is a reference to the purchase price to be paid by KMDL under the Shareholder Agreement and that, by clause 11.2, KML agreed to reimburse that sum to KMDL on a breach of the Distributorship Agreement.
[106] Given my conclusion that no breach has been proved, I decline to grant the relief sought. I would, however, have declined relief even if KMDL had established one or more breaches.
[107] Assuming for the sake of argument that the words “is not able to comply with” mean “is in breach of” and that the reference to the “shareholding fee” is a
reference to the purchase price under the Shareholder Agreement, I am not satisfied
37 Memorandum dated 20 November 2012, at CB 230.
38 Distributorship Agreement, above n 1, at [11.2].
that clause 11.2 is to be construed as KMDL proposes. Counsel submitted that proof of any breach of any obligation would suffice to trigger the obligation to repay.
[108] On that submission, matters such as the nature of the term breached, the consequences of the breach, the period for which the breach had subsisted and the duration of the parties’ relationship would be irrelevant. With respect, it cannot be expected that KML would be required to repay the purchase price for the shares irrespective of such matters. Such a construction would put the clause at risk of being a penalty. I note also that there is no provision in clause 11.2 for KMDL to surrender or relinquish such shares as it may have been issued, in the event of repayment.
[109] For myself, I am unclear as to what is intended by clause 11.2. At the very least, there is force in the submission of counsel for KML that the example given in clause 11.2, that is “the principal fails to deliver product within 4 months …”, indicates that the clause requires a substantial and early breach of the Distributorship Agreement. I am not persuaded that a breach of any of the warranties at issue in this case would suffice.
[110] If I had come to a different conclusion, I would have had to consider whether I could enforce clause 11.2 given the decision I have reached as to the consequences of s 40 Companies Act. I did not hear submissions on this point.
[111] To conclude, I decline to order KML to refund the $500,000 that KMDL has paid to date under the Shareholder Agreement.
Conclusion on KMDL’s counterclaim
[112] To conclude on KMDL’s counterclaim:
(a) I am not satisfied that there was any breach of clauses 7.2, 8.1.4 or
8.1.5 Distributorship Agreement;
(b) I do not accept that the parties agreed in or about November 2011 that
KML need not perform clause 8.1.5 pending LC3;
(c) I accept that the effect of clause 3.7 LTA Agreement was to discharge or amend clause 8.1.5 Distributorship Agreement;
(d) If I am wrong on the matter of breach, I am not satisfied that:
(i)KMDL has proved that a loss was caused or, if caused, that the loss was suffered by KMDL;
(ii)clause 11.2 Distributorship Agreement entitles KMDL to a refund of the $500,000 paid to date under the Shareholder Agreement.
LTA Agreement
[113] The competing claims to the stakeholder funds fall to be decided under the
LTA Agreement.
[114] The LTA Agreement, entered in to in the circumstances referred to in [67] above, provided for KML to deposit the stakeholder funds. The funds were to be repaid to KML if it performed two principal obligations, failing which they were to be paid to KMDL.
[115] The first obligation was to sell 50 per cent (13,713 cans) of LC2 within four months of it clearing CIQ and Customs. LC2 cleared CIQ and Chinese Customs on or about 15 July 2013, and so KML was required to sell by the end of 2013, although the parties agreed extensions up to February 2014. The effect of clauses 3.1 to 3.5 of the LTA Agreement was that $150,000 of the stakeholder funds would be repaid to KML in tranches of $50,000 as it produced orders for the product.
[116] KML’s second obligation was to have Kiwimilk for sale on the shelves of
New Zealand supermarkets within the same four month period. The remaining
$50,000 would be paid to KML on compliance. These matters are provided for in clauses 3.6 and 3.7 of the LTA Agreement.
[117] The relevant terms of the LTA Agreement are:39
2.2No party will act to impede any transaction or hinder the sale or transportation of the ‘LC 2’ Products (namely the 2,286 cartons) in any way.
...
3.1KML will transfer NZD200,000 into the LTA. These funds are to secure payment for the 50% of products in LC 2. KML are responsible for organizing the sale of these 2,286 cartons (6x cans per carton) at the agreed price of RMB130 per can once the shipment is released from Customs/CIQ in China.
3.2Upon presentation of confirmed order(s) and full and clear payment to the equivalent of at least the first 333 cartons (from the total of
2,286 cartons), KMDL will organise the transfer of $50,000 from the
LTA to the account nominated by KML on the same working day.
3.3Upon presentation of confirmed order(s) and full and clear payment to the equivalent of at least the following 1,190 cartons, KMDL will organise the transfer of $50,000 from the LTA to the account nominated by KML on the same working day.
3.4Upon presentation of confirmed order(s) and full and clear payment to the equivalent of the remaining 763 cartons, KMDL will organise the transfer of $50,000 from the LTA to the account nominated by KML on the same working day.
3.5KML will organize the sale of the 50% of product within four-month time that starts from the day LC2 finished custom clearance and has been in condition for sale. If KML fails to fulfil this requirement, the remaining funds of $150,000 in the LTA set aside for the purpose of securing the sale of the 2,286 cartons will be transferred to the nominated account of KMDL.
3.6 Upon confirmation that KiwiMilk product is on sale in
New Zealand, KMDL will organize the transfer of the remaining
$50,000 from the LTA to the account nominated by KML on the same working day.
3.7KML will organize and have KiwiMilk product on shelf in the New Zealand supermarkets (excluding airport duty-free stores or single small supermarkets) within four-month time that starts from the date LC2 finished custom clearance and has been in condition for sale. In order to fulfil this requirement, KMDL will not hinder or delay the approval and signing of artwork and over-print stickers for the Chinese Market. If KML fails to fulfil this requirement, the remaining funds ($50,000) in the LTA set aside for the purpose of securing the sale of KiwiMilk product in the NZ Market will be transferred to the nominated account of KMDL.
39 Agreement for Funds to be held in Lawyer’s Trust Account, above n 2.
Sale of the 50 per cent
[118] KML did not sell 50 per cent or indeed any part of LC2 and, on the evidence before me, it did not begin to take steps to do so until late February/March 2014, when Mr Marinkovich again went to China.
[119] During that visit, Mr Marinkovich met representatives of two more established, Chinese distribution firms who expressed interest in distributing the product. Mr Marinkovich asked Sinokiwi’s senior representatives to supply samples of LC2 for delivery to those other distributors. Mr Marinkovich’s evidence was that Sinokiwi’s senior representatives informed him then or shortly afterwards that Sinokiwi had sold all of LC2 to a state owned enterprise in China, and that it had
done so at RMB60 per can.40 That advice led Mr Marinkovich to ask for the
release of the stakeholder funds to KML.
[120] In subsequent communications KMDL and Sinokiwi denied that LC2 had been sold. For instance, by email dated 1 April 2014, Bonny advised that 4,800 cartons of LC2 remained unsold and Ms Sun repeated that advice in a subsequent meeting with Mr Marinkovich.41
[121] Whether or not Sinokiwi had or has sold LC2 is unclear on the evidence. Regardless, I accept the submission for KML that the provisions of the LTA Agreement requiring KML to sell 50 per cent of the shipment are predicated on KMDL having title to LC2. KML could not commit to sell product on behalf of KMDL if KMDL did not have title, and it did not. Sinokiwi had title, at least whilst it retained the product. In those circumstances, it is not open to KMDL to enforce clause 3.5 LTA Agreement. Accordingly, $150,000 of the stakeholder funds and accrued interest must be repaid to KML forthwith.
Clause 3.7 LTA Agreement
[122] KMDL also alleges that KML breached clause 3.7 LTA Agreement because it failed to have the product for sale in New Zealand supermarkets within the agreed
40 See also Email M B Marinkovich to Y Liu dated 25 March 2014, at CB 90.
41 Email Y Liu to M B Marinkovich, H Wen and S Marinkovich dated 1 April 2014, at CB 101; and
Brief of Evidence of M B Marinkovich, above n 28, at [30].
time period. Accordingly, KMDL seeks an order that the $50,000 referred to in clause 3.6 LTA Agreement be paid to KMDL. Again, I decline to make the order sought.
[123] KML submits that its obligation under clause 3.7 was expressed to be conditional on two matters.
[124] The first was KMDL not hindering or delaying the “approval and signing of artwork and over-print stickers for the Chinese market.” KML submits, and there is no dispute, that the artwork and over-print stickers referred to were in respect of the proposed LC3 order.
[125] The second matter was KMDL placing that third order. KML submits that “In order to fulfil this requirement …” in clause 3.7 must be construed so as to make KML’s obligation conditional on KMDL placing the LC3 order, which it did not do. This submission is consistent with clause 3.2.1 Distributorship Agreement by which KMDL was required to order a minimum of 200,000 cans by August 2013. KMDL had not ordered the minimum quantity by the time of the LTA Agreement and the correspondence the parties exchanged at the time anticipated a third order.
[126] KML submits that KMDL did not give the necessary approval and/or sign the artwork and stickers, let alone place an order for LC3, and in those circumstances the
$50,000 referred to in clauses 3.6 and 3.7 must be repaid to KML.
[127] There is no real dispute that KML’s obligation to place the product for sale would not arise until KMDL had at least approved the artwork. The issue is whether KMDL did so. Ms Sun’s evidence was that KMDL did give the necessary approval. However, the documents to which she referred me predate the LTA Agreement.42 I accept KML’s submission that there would be no reason for the parties to make provision for approval to be given in those circumstances. Moreover, it is clear that
KML was still awaiting KMDL’s approval in July 2013.43
42 Evidence of H Sun, above n 3, at 87; and Email H Sun to S Marinkovich dated 25 March 2013 , at CB 304.
43 Email S Marinkovich to H Sun and Y Lu dated 11 July 2013, at CB 506. See also Email
S Marinkovich to Y Liu, M B Marinkovich and H Wen dated 28 February 2014, at CB 107.
[128] I am satisfied that time did not start running against KML under clause 3.7
LTA Agreement until, at the very least, KMDL had approved the artwork and over- print stickers, and that KMDL did not give that approval. There being no prospect now of that approval being given or sought, the balance of the funds and accrued interest must be repaid to KML forthwith.
Result and costs
[129] I make the orders referred to in [7] above. I reserve leave to apply if any issue arises as to the release of the stakeholder funds.
[130] Neither KML nor KMDL can claim success in this proceeding. My preliminary view is that costs and disbursements should lie where they fall. The parties may, however, submit memoranda if they disagree and are unable to resolve the matter between themselves.
..................................................................
M Peters J
2
1