Lanocorp Pacific Pty Limited v Farmers Corner Limited HC Christchurch Cp.117/00

[2001] NZHC 616

IN THE HIGH COURT OF NEW ZEALAND
CHRISTCHURCH REGISTRY CP.117/00

BETWEEN LANOCORP PACIFIC PTY LIMITED
Plaintiff

AND FARMERS CORNER LIMITED
Defendant

Hearing: 18, 19, 20, 21, 26, 27 June 2001

Counsel: M F McClelland and H Lim for Plaintiff
P F Whiteside for Defendant

Judgment: 6 July 2001

JUDGMENT OF FRASER J.

Solicitors:
Wynn Williams & Co., DX WP 21518, Christchurch
KPMG Legal, DX SP 26517, Wellington

[1] This is a claim for an injunction and damages arising out of a supply agreement between a wholesaler and a retailer.

Background and course of events:

(a) Pre-August 1996:

[2] In 1985 Mr J A McKenzie established in Ashburton a business known as Farmers Corner. Initially it was a tea rooms but it developed into a retail shop as well, catering particularly for tourists travelling in tour buses.

[3] In 1991 Mr McKenzie came into contact with Mr J J Blakely who through his company, Lanocorp Pacific Ltd (Lanocorp Pacific), manufactured, distributed and exported a range of lanolin skincare products marketed under the brand “Lanocreme”. Mr McKenzie commenced stocking some of the products and found that they were popular with his customers, especially tourists from Taiwan where Mr McKenzie had business connections with wholesale tour operators.

[4] In 1992 Mr Peter Huang emigrated to New Zealand from Taiwan and commenced working for Mr McKenzie in Farmers Corner. On 1 March 1993 Farmers Corner Ltd, the Defendant (Farmers Corner), was incorporated for the purpose of purchasing and operating the business formerly carried on by Mr McKenzie. Mr Huang was a shareholder and director, and managed the business. It continued the former business, including the sale of lanolin products sourced from Lanocorp Pacific.

[5] On 19 March 1993 Mr Blakely and Mr Huang signed a document setting out the terms of trade. One of the provisions of the agreement was that Farmers Corner was not to sell other product lines in competition with Lanocreme.

[6] At some stage, (the exact date is not clear but is not material), the tea rooms business was discontinued and, later, another retail outlet was opened in Rotorua. At all material times Farmers Corner has operated the two retail outlets one in Ashburton and the other in Rotorua, selling woollen goods, lanolin skincare products and souvenirs to overseas tourists. It has contracts with some 30 tour companies operating out of Taiwan. As a result of these (and ancillary arrangements with tour leaders and drivers) a large number of Taiwanese tourists travelling in organised tours visit Farmers Corner’s retail premises and make purchases, one of the major lines being lanolin skincare products.

[7] On 27 July 1995 Mr Blakely and Mr Huang signed another document setting out what are said to be various arrangements agreed between the two companies. It dealt with the Taiwan home delivery market, discounts, rebates, a possible “in-house label” and included an agreement by Farmers Corner not to deal in products competing with Lanocreme either in New Zealand or Taiwan.

[8] On 15 May 1996 Mr Blakely and Mr Huang, on behalf of their respective companies, signed a further document, which is said to record matters previously discussed. The provisions dealt with prices (which were to be on a special basis more favourable to Farmers Corner than standard wholesale prices), rebates, advertising, and under the heading “Obligations of Farmers Corner Ltd” paragraphs 1, 2 and 3 are as follows:

“1. Not (for as long a Farmers Corner continues to deal in Lanocorp’s products, and for a further period of 3 years thereafter) participate in anyway, either directly or indirectly, or through any associate or intermediary, in the manufacture, promotion, sale or distribution of any products which at any time compete (now or in the future) with any of the Lanocorp’s present or future skin care product lines.

2. Only sell Lanocorp’s products at retail through its own retail outlets, and not be engaged in on-selling or distributing those products at wholesale or otherwise at retail.

3. Whenever it identifies new products or market demands, give to Lanocorp the first opportunity to manufacture the new products.”

(b) August 1996 - October 1999:

[9] On 30 August 1996 Mr Russell Hogg and Mrs Carol Hogg of Melbourne, who had owned and operated the Australian agency for Lanocorp Pacific, purchased Lanocorp Pacific from Mr Blakely and thereafter operated the business through their company Lanocorp Pacific Pty Ltd, the Plaintiff (Lanocorp).

[10] It was a condition of that purchase that the 15 May 1996 agreement with Farmers Corner be assigned to Lanocorp. That had actually been done prior to the date of the formal agreement for sale and purchase, for on 15 August 1996 Mr Huang, on behalf of Farmers Corner, signed an endorsement on a copy of the 15 May 1996 agreement reading:

“Farmers Corner Ltd now agree that Lanocorp Pacific Ltd has assigned its interest under the foregoing agreement to Lanocorp Pacific Pty Ltd and Farmers Corner Ltd and Lanocorp Pacific Pty Ltd agree that they will continue to be bound by the foregoing agreement.”

The endorsement was also signed by Mr and Mrs Hogg on behalf of Lanocorp on 20 August 1996.

[11] In September 1996 Mr and Mrs Hogg and Mr Huang made a trade promotion visit to Asia, and at the same time Mr Huang gave to Mr and Mrs Hogg an audio tape, which he had made before the sale and originally intended to give to Mr Blakely, in which he set out various concerns and problems which he considered required attention. It included comments as to the “three years’ penalty” and acknowledged that “Farmers Corner cannot carry any skincare” in the event of it not buying its lanolin skincare product range from Lanocorp.

[12] On 28 September 1996 Mrs Hogg wrote a long letter to Mr Huang headed “Your tape and the many marketing issues we have spoken about”. In one section, under the subheading “New Zealand domestic market’’, she said:

“We propose, commencing on the 1st October 1996 to withdraw the Lanocreme Souvenir Range of products from all other customers in New Zealand, with the exception of the OK Gift Shops, which we believe are for the Japanese tourists. We have not yet identified a reliable Korean retail outlet, but when we do, will confirm with you that this will not be a problem for you.

You will confidently be able to say in the future that you have an exclusive agreement to sell Lanocreme in New Zealand with the exception of the Japanese and Korean shops mentioned. Should any of these outlets become a problem in the future, we will restrict the product to Farmers Corner and Lakesyde entirely. No one will be able to buy Lanocreme in any duty free or air port shop or other outlet.”

[13] By April 1997 Lanocorp was involved in a dispute with a competitor which Lanocorp considered was passing off its products as Lanocreme. On 7 April 1997 Mrs Hogg wrote to Mr Huang telling him of these difficulties and saying that because of the advice they had received:

“We have no choice except to make the Lanocreme Scenic Range of products available in the wider marketplace and then we can take action against the manufacturers of this “copy” product, before it proves to be too late for us all - this we will have to do immediately.”

[14] During 1997 and 1998 trade continued, although not without difficulties. One recurring theme was a complaint by Farmers Corner that other retailers were undercutting its prices, and thereby not only taking trade but damaging its reputation and its relationship with tour leaders who promoted Farmers Corner as, amongst other things, selling at the lowest prices in the market. Ms N.M. Atkinson, Sales Manager for Lanocorp and New Zealand Agent for sales of Lanocreme said that:

“. . . in order to alleviate the pricing issue in part numerous retailers were not supplied with the same product as Farmers Corner.”

[15] In early 1999 there were communications between the parties regarding a price increase. In a letter dated 28 February 1999 Mrs Hogg referred to a six percent price increase which was the outcome of those discussions and said:

“I confirm that nothing will change in our distribution arrangements and we will not be opening the market regarding the scenic range of products that you stock at this stage and certainly not before the discussions that we will have with you.”

[16] Trading continued throughout 1999. The nature and extent of the business is described both by Mr Huang and Mrs Hogg. Farmers Corner stocked and sold 11 particular products in the “Scenic” range, part of a wider and more extensive range of products manufactured by Lanocorp. Mr Huang says, however, that Farmers Corner was the dominant retailer of Lanocreme products in New Zealand because of the market share position it had in relation to Taiwanese tourists, details of which he gave. He estimated that the total value of retail sales in Lanocreme products in New Zealand in 1999 amounted to $3 million, of which Farmers Corner sold $2.2 million worth of product. Lanocreme sales constituted about 25 to 30% of the company’s revenue. From Lanocorp’s point of view Mrs Hogg says that for that year Farmers Corner purchased 70% by value of Lanocorp’s total New Zealand domestic market Lanocreme sales. The Lanocorp/Farmers Corner Lanocreme sales are to be seen in the context of an overall New Zealand market for lanolin skincare products in which there are approximately 12 wholesalers, 30 brands, 30 retail souvenir shop outlets and an unstated number of department store and pharmacy outlets.

[17] In an e-mail which, on its face, bears the date 11 August 1999, but which I think (from its content and by reference to preceding and following communications) must have actually been sent on 10 August 1999, Mr Huang replied to an e-mail of 9 August from Mr Hogg dealing with certain arrangements for an advance payment on account of future purchases and then went on to say:

“We have been approached by another manufacturer of Lanolin here in New Zealand with a very attractive offer to purchase their product. We have been offered a good quality product at a very reasonable price and also to stock the product exclusively in New Zealand. This to me is an offer I have to look at seriously for the sake of our business. I need to know what your company marketing policies are going to be for the seasons to come, especially in regards to the opening of the market and selling product to the local Chinese shops. I need some kind of guarantee of what you are doing for the season to come urgently as I now have many things to work out.

Could you please get back to me as soon as possible with your reply so I can continue my planning.”

[18] In an e-mail from Mr Hogg to Mr Huang on the same day, 10 August 1999, Mr Hogg responded on the question of the advance payment and then went on to say:

“I confirm and guarantee that our position has not changed, and we will not open up the market with the NZ scenic range to the local Chinese shops. I understand that Noeline has kept you regularly informed, and has sought your advice on many issues we have not been sure about. I also understand that you are totally happy with the market situation as it stands today.

Please advise if this is not the case.

Regarding the offer you have from the other manufacturer. If you feel there is a need to stock an additional brand to give your customers a wider choice, then you must allow us to manufacture it for you. Peter, this is the essence of our relationship.

We could develop a range for you under the ‘Farmers Corner’ brand or we could let you use exclusively our registered trademark ‘Lanocare’. Alternatively, you could register and use any other ‘brand’ that you owned.”

[19] Mr Hogg and Mr Huang spoke on the telephone later on 10 August following the exchange of e-mails. Various matters were discussed and Mr Huang intimated that he would get Jason Neale (a senior employee) to write to Hide Shop saying that he would not proceed and that he would send Mr Hogg a copy of the letter.

[20] On 11 August 1999, in accordance with what Mr Huang had said the previous day, Farmers Corner wrote to Hallifax Tourist Products declining an offer to supply Hide Shop lanolin products. On the same date, Mr Huang communicated with Mr Hogg about various details and sent him a copy of the letter to Hallifax Tourist Products.

[21] On 3 October 1999 there was a meeting between Mr and Mrs Hogg and Mr and Mrs Huang. Thereafter various e-mails passed between the parties and between the Australian and New Zealand offices of Lanocorp, including references to prices and retailers to whom products could be supplied.

(c) November/December 1999:

[22] In November/December 1999 there was a series of communications between the parties, which are the focus of a vital section of this case: Farmers Corner’s allegation that the 1996 agreement was discharged by an agreement constituted by this correspondence.

[23] On 24 November 1999 Mr Huang wrote to Lanocorp detailing instances of sales by other retailers at lower prices than Farmers Corner and saying:

“Customers are seeing these prices and thinking we are ripping them off and they believe our whole shop is expensive, which it is not.

We cannot continue to lose sales and our hard earned reputation especially when time and time again over the many years Lanocorp have told us the problem will be fixed. We will not let one product line ruin our business and therefore we are going to have to fix the problem ourself by opening our shop to other suppliers.

. . .

It is essential for retailers be [sic] confident in their products and pricing but up until now this has never really been possible. I tell you this now because of friendship, after much time and thought, so it can give you time to plan your future business. I am sorry it has come to this but we have no other choice.”

[24] Mrs Hogg replied at some length on 30 November. In the opening paragraphs of the letter she said that she and her husband were disappointed and saddened by the decision and then went on to say:

“Having said that, we know that business is business and you must make decisions to protect your business, as we must do also - the world is changing and business is becoming more competitive every day and governments legislate to protect the consumer and make sure they can get the best deal. Some of the results of your decision have been listed below, as we believe that it is important that you are fully aware of the impact in the marketplace.

1. Firstly, you must know and understand that by stocking another lanolin product from another supplier we will have no choice but to aggressively open the New Zealand market, including the duty free shops, in order to survive;

2. We will, of course, continue to provide Farmers Corner with Lanocreme, however, you will understand that the pricing benefit and terms given to you are an acknowledgement of your exclusivity, our special relationship and to provide uniform good margins for you with the buy 3 get 1 free marketing policy. We will have no alternative but to supply you at the published price list less a volume discount.

3. We would be happy to commence developing a Farmers Corner range as discussed in October. This would give you ultimate exclusivity as you develop your own range. Please advise if you would like us to urgently move to formulate this proposal.

4. We will immediately re-assess our marketing/selling policy in Taiwan and other countries such as Thailand as we would have to obtain alternative markets and could no longer afford to protect your New Zealand business as has been done in the past by both Jerry Blakely and ourselves.

5. The legal contract in place between us was a ‘condition precedent’ set by the National Australia Bank before advancing the loan to buy the business. This agreement states that you will sell Lanocreme exclusively and if you decide to stop selling Lanocreme then you are unable to sell any other lanolin product for three years. We are dismayed that your planned action is completely disregarding this commitment. But we have always believed that our relationship was far more important than any legal agreement and we also know that only the lawyers would get rich in any conflict between us, so we are hesitant to do this. We cannot speak for the National Australia Bank though as they may consider your decision a risk to their security.

6. We are right now just bringing to an end the legal challenge to that company on the north island who thought they could put a pink cap and a mountain scene on their product and make it look like Lanocreme. The lawyers keep charging their fees and in the end the company who has copied us will end up paying for all of these costs and our costs too.

Peter, after all the exciting plans about your new complex and the new Lanocreme range which was put in place less than four weeks ago we are somewhat shocked by your decision. Nevertheless, perhaps you are right and the time has come for the special arrangement between our companies to come to an end, so we will accept your choice, but sincerely hope that our friendship will continue into the future.

Please consider the points we have raised and confirm to us in writing the exact date you wish our arrangement to end. We will not make any marketing changes before this date and would expect that Farmers Corner would honour this date also.”

[25] On 8 December 1999 Mr Huang responded, and after dealing with a number of detailed matters, said in the last two paragraphs of his letter:

“As I mentioned, I am also disappointed at having been forced to make this decision, but time and time again the same problems arise and the credability [sic] of Farmers Corner is shot to bits. We are tired of being knocked all the time by Lanocorps actions and inevitably we have to react for the well being of the company. Why should we sell Lanocreme exclusively if you continue to sell to shops who can undercut us?? I have not said that I will not continue to sell Lanocreme but I will be opening up to the market to other suppliers so we can compete on the same level as the others. In todays business world we also need to be competitive and follow our long standing principles and policies.

This letter is really to let you know why I have been forced to this decision to open the market up and I hope you can understand why. I get the feeling from your response [sic] that our friendship has gone, Is this the case?? Business and friendship are two different things in my eyes, I hope you can see it that way too. I will be in touch soon with the final decision and timing.”

[26] Mrs Hogg’s next communication was on 12 December 1999. The concluding portion of the letter reads:

“Russell and I have considered your comments and it seems as if there is no alternative now except to concede to your wishes and accept that our special business agreement has to be brought to an end. You appear to be absolutely convinced that you have to have an additional range to Lanocreme and you are going to form a relationship with Halifax.

Please advise whether you wish us to advance the idea of producing a Farmers Corner range for you, as mentioned in my letter of 30th November and discussed previously.

You will understand the difficulties in forward estimating products to manufacture and that we are unable to plan ahead with the uncertainty of exactly when you will nominate a date for the arrangement to change. We cannot afford to delay our business requirement to open up the market beyond [sic] 1st January 2000 and we consider this the appropriate date for Lanocorp so we can start the new millennium under the new arrangement.

We will be reviewing out entire product range and pricing structure, however, we will not make any change to your purchase price until the end of January to allow you the time to have your changes in place. As soon as the new pricing structure is finalised, which we plan to take effect for Farmers Corner on 1st February 2000, we will discuss it with you and issue a new price list.

Once again, it is with regret that Russell and I accept your decision that your method of business has to change, but on a personal note we both wish you well for its success.”

[27] On 24 December 1999 Mr Huang wrote and said (in part):

“I wish to stress yet again that I have been forced to make my decision due to the number of times we have come under attack from other small retailers throughout New Zealand in the past and especially more recently. We can not stand back with our hands tied and pretend that nothing is happening when in actual fact our business is being detrimentally effected [sic] . . . .

I think we need to set up a meeting between yourselves and I so we can discuss the pricing changes for the future. This is very important for us, to know how to approach the market for the peak season ahead and what margins are available.  . . .”

The letter concludes:

“I do respect your decision to do what you need to in the market as you understand your own business best and I wish you luck for he [sic] growth you are looking for. Please advise me when it is suitable to meet and discuss the pricing and please also advise when you would like us to finish ‘buy 3 get 1 free’. I await your reply.”

(d) From January 2000:

[28] On 24 January 2000, Kiwicorp Products Ltd, effectively an arm of Farmers Corner and managed by Mr Huang, entered into an agreement for sale and purchase under which it bought from Hallifax Tourist Products Ltd and Peter Hallifax Ltd a lanolin skin care business which marketed its products under the name, Hide Shop.

[29] On the same day, 24 January, there was a meeting at Farmers Corner between Mr Huang, Mr and Mrs Hogg and other representatives of Lanocorp when Mr Huang told them of the purchase of the Hide Shop business and various matters were discussed. Mr Hogg recorded in a letter of 25 January to Mr Huang the points dealt with at the meeting, including discussion about a continuing sale of Lanocreme and the marketing of it by Farmers Corner on certain conditions.

[30] On 28 January 2000 Mrs Hogg who had been advised by her New Zealand agent, that it was now understood that Farmers Corner would not be continuing to deal with Lanocorp, wrote to Farmers Corner, a letter setting out various matters, and including the following statement:

“Our lawyers, Kensington Swan, Wellington have requested that we remind you ‘that all of the rights under the written Agreements, particularly that of May 1996, were assigned and novated on our taking over the business in 1996 and that the parties have continued to act in accordance with those Agreements. Also, that although we have referred to a possible need to discuss the terms of the current agreement, such a discussion has not taken place and we have not agreed to waive or otherwise forego any of Lanocorp’s rights, particularly the three year restraint provision.’”

The letter concluded:

“So where do we go from here? How can we compromise? Would you please respond to me in writing, as a matter of urgency before any irreversible decisions are made.”

[31] On 3 February 2000 solicitors acting for Farmers Corner wrote to Lanocorp setting out a proposal which repeated substantially what had been put forward at the meeting on 24 January and dealing with other matters.

[32] Another meeting was held on 7 February 2000. Mrs Hogg says that Mr Huang “wanted to negotiate a new agreement between us” and said that on that basis she “was clearly of the belief that our relationship was still salvageable”.

[33] On 16 February 2000 Lanocorp presented a proposal to Farmers Corner offering to make the Lanocreme products which Farmers Corner purchased, exclusive to Farmers Corner and providing further details in connection with that proposal.

[34] Later in February there were meetings at which the parties’ solicitors were present, the discussions being carried out on a without prejudice basis.

[35] Farmers Corner continued to purchase Lanocreme products, although in diminishing amounts, until May 2000. At that stage Mr Hogg spoke with Mr Huang saying he and Mrs Hogg would visit him in New Zealand in August 2000 to present another proposal and that they would telephone when they arrived to arrange a meeting with him. Such a proposal was prepared, with a new price schedule, but was never actually put to Farmers Corner. The trip was delayed until September and, in the event, despite their attempts to arrange it, no meeting ensued.

[36] Farmers Corner still deals in lanolin skin care products, but these are the former Hide shop products now rebranded as Southern Isles. This product is supplied to Farmers Corner by Kiwicorp Products Ltd which has it manufactured and packaged by Shieling Laboratories Ltd of Auckland.

Pleadings:

[37] The present proceedings were commenced on 5 October 2000. The plaintiff alleges breach of the restraint of trade provision and of the obligation to give Lanocorp the opportunity to manufacture new products. It seeks an injunction and damages. The defendant contends that the supply agreement was discharged by subsequent agreement between the parties in November/December 1999, or alternatively that it is entitled to rely on estoppel or waiver. In addition, it contends that the restraint of trade clause is unenforceable at common law, and also by reason of the provisions of s 27 of the Commerce Act 1986. If, however, the defendant is liable, it contends that damages (the quantum of which is in dispute), would be an adequate remedy and that the plaintiff is not entitled to an injunction.

Discharge by subsequent agreement:

[38] It is trite law that an existing contract may be discharged by subsequent agreement. The principle is set out in the following passage in Burrows, Finn & Todd Law of Contract in New Zealand p 646 para 18.2:

“What has been created by agreement may be extinguished by agreement. An agreement by the parties to an existing contract to extinguish the rights and obligations that have been created is itself a binding contract, provided that it is either made under seal or supported by consideration.

Consideration raises no difficulty if the contract to be extinguished is still executory, for in such a case each party agrees to release his or her rights under the contract in consideration of a similar release by the other.”

(a) The respective cases:

[39] Farmers Corners case with regard to the correspondence in November/December 1999 was fully argued by Mr Whiteside but the basic proposition he contended for is encapsulated in his submission that:

To a reader having reasonable knowledge of the circumstances available to the parties in November/December 1999, these documents can only be interpreted one way - ie that the parties have reached agreement that the special arrangements of May 1996 are now at an end.

[40] In the course of his submissions for Lanocorp, Mr McClelland took the point, without elaborating it, that Farmers Corner’s pleading was that the restraint of trade provision (not the agreement as a whole) was terminated and discharged by agreement. Farmers Corner’s response is that it was pleading to a claim for damages for breach of a restraint of trade provision in a contract and that the particular provision being sued upon was terminated by the discharge of the whole contract. Farmers Corner’s case was opened and conducted on that basis. It was not suggested that Lanocorp had been prejudiced or that its case would have been presented any differently. Farmers Corner’s case, as put, was fully canvassed and argued by Mr McClelland in his final submissions. I do not think that para 23 in the amended statement of defence does plead the full extent of Farmers Corner’s case. But I consider that it is appropriate to amend the para to refer to the whole agreement on the ground that it is necessary to do so for determining the real controversy between the parties, the substance of which was fully dealt with by both in the cases which they presented.

[41] Lanocorp’s response to the affirmative defence raised is that no agreement to discharge arose from the correspondence. Mr McClelland reviewed a number of relevant cases and then analysed the course of dealing between the parties.

[42] He submitted that it was relevant and material that the context was Farmers Corner’s ongoing strategy of threatening to stop stocking Lanocreme, or to stock competing products as well as Lanocreme, if problems identified by Farmers Corner were not “fixed’. The letter of 24 November 1999 was not, he said, an offer to terminate or discharge the agreement, but notification of an intention to breach the contract by stocking a competing product. In the context of the history of the relationship between the parties, this is to be seen as a threat bringing pressure to bear on Lanocorp to do as Farmers Corner wished. Alternatively, if it was an offer, it related to the first limb only, that is to stock Lanocreme exclusively, and not to the second limb relating to the period following termination. Moreover there was no consideration for the offer of 24 November 1999 and the letter of 30 November 1999 from Mrs Hogg was not an acceptance.

[43] Objectively, he argued, the letter of 30 November was an indication that Lanocorp would continue to supply but that the special arrangement regarding pricing benefits would cease. Alternatively it was an invitation to treat, or at its highest, a counter offer to alter the existing arrangement for supply, the basic premise being that a continuing relationship remained. If it was an offer there is no evidence of a clear and unequivocal acceptance.

[44] In Mr McClelland’s submission: Mr Huang’s letter of 8 December is such that the actual stance taken is unclear and the relationship existing between the two parties is at the very least clouded and uncertain; Lanocorp’s letter of 12 December is an invitation to treat or, if an offer, it was no more than an offer to vary the first limb of the restraint of trade and in any event there is no evidence of any communication of the acceptance of such an offer.

(b) Consideration of the issue and decision:

[45] I shall set out what I see as the essential features of the supply contract and then proceed to a consideration of whether the November/December 1999 correspondence amounted to an agreement to discharge the earlier contract.

[46] In respect of the first point, as at 24 November 1999, although the dollar amount of the wholesale prices, and ancillary terms such as those relating to rebates, incentives and advertising had varied from time to time, the essential features of the 15 August 1996 agreement remained namely:

1. Lanocorp would supply the Lanocreme products which Farmers Corner wished to sell at a wholesale price less than normal to enable Farmers Corner to compete effectively in the retail market; and

2. While being so supplied and for 3 years thereafter Farmers Corner would not sell competing products.

3. Whenever Farmers Corner identified new product or market demands, it was to give Lanocorp the first opportunity to manufacture the new products.

Special wholesale prices and no competing products at retail were the twin pillars of the trading arrangement: they were the basis on which trade was actually conducted. Para 3 was never implemented. It did, however, remain in existence and was mentioned from time to time. For example, it was referred to inferentially, by Mr Hogg in an e-mail of 19 August 1999 to Farmers Corner (set out in paragraph [19] of this judgment) although he appears to misinterpret the right to first opportunity as a right to manufacture saying “you must allow us to manufacture it for you”.

[47] In addition to the basic elements of special wholesale prices and no competition at retail discussed above, Lanocorp agreed, or at least maintained a policy, to not supply at least some of the retailers objected to by Mr Huang, for the purpose of meeting his complaints about other retailers undercutting him. Examples of statements to this effect by Lanocorp to Farmers Corner are communications on 28 February 1999 and 10 August 1999 (paragraphs [15] and [19] of this judgment). Mrs Hogg’s reference in her letter of 30 November 1999 (paragraph [25] of this judgment) to Lanocorp having “no choice but to aggressively open the New Zealand market, including the duty-free shops in order to survive” is to be seen against that background.

[48] As to the second point, of whether the November/December 1999 correspondence amounted to an agreement to discharge the earlier contract, I take the law to be as stated by Cooke J (as he then was) in Meates v Attorney-General [1983] NZLR 308 at 377 that:

“As indicated in Boulder Consolidated Ltd v Tangaere [1980] 1 NZLR 560 and having regard to the authorities there cited, I would not treat difficulties in analysing the dealings into a strict classification of offer and acceptance as necessarily decisive in this field, although any difficulty on that head is a factor telling against a contract. The acid test in a case like the present is whether, viewed as a whole and objectively from the point of view of reasonable persons on both sides, the dealings show a concluded bargain.”

[49] I do not read the letter of 24 November 1999 (paragraph [24] of this judgment) from Mr Huang as a threat, a bargaining chip, a step in negotiations or a bluff as it was interpreted by Mrs Hogg. It seems to me to be simply and plainly a communication to Lanocorp of Farmers Corner’s decision that in future it would be stocking competing products.

[50] The next letter, Mrs Hogg’s response of 30 November 1999 (the relevant parts of which are set out in paragraph [25] of this judgment) has several strands. First she says that they are disappointed, but they acknowledge that Mr Huang must make decisions to protect his business - and she makes the point that they must do the same. She then sets out what she says are some of the results of his decision.

[51] Items 1 and 2 of the numbered list of results are to the effect that if Farmers Corner goes ahead and sells competing product the outcome will be that Lanocorp will “aggressively open” the market and although it will continue to supply Lanocreme to Farmers Corner, it will be at normal wholesale prices not at the previous special rate. Items I and 2 accordingly contemplate Farmers Corner selling competing products as well as Lanocreme which Lanocorp would supply at normal wholesale prices.

[52] On the other hand, in item 5 in the numbered list, Mrs Hogg raises the restraint of trade provision which, if it were enforced according to its terms, would mean that if Farmers Corner sold Lanocreme, it could not stock a competing product and, if it stopped dealing in Lanocreme, it could not sell lanolin skincare products for three years thereafter. The two different possible outcomes, one under items (1) and (2) and the other under item (5) are incompatible and I think have to be read as alternatives.

[53] Reading the letter as a whole it seems to me that the substance of it contains two separate but related parts. In the first, Mrs Hogg spells out the varying consequences which she says would or might ensue if Mr Huang maintains his position. She is saying that it could be that Lanocorp will aggressively open the market and will only sell Lanocreme to Farmers Corner at normal wholesale prices or it could be that their bank would require them to enforce the restraint of trade. The underlying message, I think, is that she is conveying to Mr Huang, and endeavouring to persuade him, that it would be in Farmers Corner’s best interests to continue the existing arrangement. The second part of the letter is to the effect that if he is not persuaded to reverse his decision, then, “perhaps” he is right and “the time has come for the special arrangement . . . to come to an end”. In that event she asks to be informed in writing of the exact date Mr Huang wishes the arrangement to end.

[54] Mr Huang’s letter of 8 December is confirmation by him that his decision stands and that he will be in touch as to timing. I read this as equivalent to saying that he had read and considered the various points made in Mrs Hogg’s letter of 30 November but that he was standing by what he had said before, because he had “no choice”.

[55] In Mrs Hogg’s communication of 12 December 1999 she says that having considered Mr Huang’s comments:

“. . . . it seems as if there is no alternative now except to concede to your wishes and accept that our special business agreement has to be brought to an end.”

And in a later portion:

“We cannot afford to delay our business requirement to open up the market beyond 1st January 2000 and we consider this the appropriate date for Lanocorp so we can start the new millennium under the new arrangement.

We will be reviewing our entire product range and pricing structure, however, we will not make any change to your purchase price until the end of January to allow you the time to have your changes in place. As soon as the new pricing structure is finalised, which we plan to take effect for Farmers Corner on 1st February 2000, we will discuss it with you and issue a new price list.

Once again, it is with regret that Russell and I accept your decision that your method of business has to change, but on a personal note we both wish you well for its success.”

[56] This letter seems to me to be an intimation that of the different outcomes which were seen as possible at the time of the letter of 30 November, Lanocorp did not intend to enforce the restraint of trade provision to prevent Farmers Corner selling competing products. On the contrary, it was choosing to accept that Farmers Corner would be stocking competing products, and saying that Lanocorp would continue to supply Lanocreme, but on normal wholesale prices, and that Lanocorp would be aggressively opening the market. Her conclusion is that the “special business agreement” (which I think means the contract of 15 August 1996, and the arrangement or policy by which supplies to other retailers were restricted) is “brought to an end’”.

[57] Mr Huang’s letter of 24 December contains the following passages:

“I think we need to set up a meeting between yourselves and I so we can discuss the pricing changes for the future. This is very important for us, to know how to approach the market for the peak season ahead and what margins are available. As I have also said, I will not be giving up selling Lanocreme in our shop, but we defin[i]tely have to stop the ‘buy 3 get 1 free’ promotion. We will continue to sell Lanocreme but it will be at the price set by the market place, thus if other retailers sell at $60.00 we will also but in doing this we still require an acceptable margin, if not we will have to look seriously at the whole situation again. When would you like us to finish the ‘buy 3 get 1 free’ promotion and when would you be prepared to meet??

. . .

I do respect your decision to do what you need to in the market as you understand your own business best and I wish you luck for [t]he growth you are looking for. Please advise me when it is suitable to meet and discuss the pricing and please also advise when you would like us to finish ‘buy 3 get 1 free’. I await your reply.”

[58] Although not set out in so many words, I think it is necessarily implicit in this letter that Mr Huang is accepting and agreeing to the “special business agreement” being “brought to an end” so that the parties were now in a different relationship and that future trading and pricing remained to be discussed.

[59] It is true that the communications of November/December do not readily fit into “the marked slots of offer, acceptance and consideration”, a phrase used by Lord Wilberforce in New Zealand Shipping Co Ltd v A.M. Satterthwaite & Co Ltd [1975] AC 154, 167; [1974] 1 NZLR 505, 510. Applying the words of Cooke J in the passage earlier quoted from Meates v Attorney-General (supra) that is a factor telling against a contract although not necessarily decisive.

[60] However, as noted in the next portion of that quotation:

“The acid test in a case like the present is whether, viewed as a whole and objectively from the point of view of reasonable persons on both sides, the dealings show a concluded bargain”.

[61] Applying that test, it is my opinion that there was a concluded bargain that the supply agreement was terminated and discharged. The consideration was that each was released from its obligations under the former contract, including: in respect of Farmers Corner, its obligation (a) not to sell products competing with Lanocorp while dealing in Lanocreme and for three years thereafter; and (b) to give Lanocorp first opportunity to manufacture new products; and in respect of Lanocorp, its obligation to sell at a special price below the normal wholesale price. In addition (although an ancillary issue and not essential to my finding) Lanocorp was released from any obligation there might be on it, to restrict supplies to certain retailers leaving it free to pursue its announced policy of aggressive marketing. Thenceforward the trading relationship between the parties was at large. They contemplated further trading but while each, no doubt, had expectations as to what might ensue, and there were various discussions and proposals, there was no agreement as to price and no commitment on either side eventuated.

[62] The conclusion reached is determinative of the plaintiff’s claim and it is unnecessary to consider the other defences raised.

[63] There is to be judgment for the defendant together with the costs of the action. Provisionally, I consider that these should be on a 2B basis but there was some suggestion at the pre-trial hearing of the application for increase of security for costs, that a different basis might be appropriate. I reserve leave to apply by memorandum in respect of costs if either party wishes to do so.