Mechanical Plastics Corp v Holdfast NZ Limited HC Auckland CIV 2007-419-845
[2010] NZHC 1712
•16 September 2010
IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY
CIV 2007-419-000845
UNDER the Fair Trading Act 1986
IN THE MATTER OF breach of the Fair Trading Act 1986, Passing off, and Breach of Distribution Agreement
BETWEEN MECHANICAL PLASTICS CORP Plaintiff
ANDHOLDFAST NZ LIMITED Defendant
Hearing: 14 September 2010
Counsel: DL Marriott for plaintiff
BP Henry and PJ Knapp for defendant
Judgment: 16 September 2010 at 3:00pm
JUDGMENT OF ASSOCIATE JUDGE FAIRE [on application to strike out]
This judgment was delivered by me on 16 September 2010 at 3:00pm pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
Solicitors: James & Wells, Private Bag 11 907, Auckland
Dennis J Gates, PO Box 222, Whangaparaoa
MECHANICAL PLASTICS CORP V HOLDFAST NZ LTD HC HAM CIV 2007-419-000845 16 September
2010
The application
[1] The defendant applies to strike out those parts of the third amended statement of claim which pleads a contract cause of action against the defendant. The specific paragraphs are paragraphs 2.1 to 2.11 and 5.1 to 5.2 of the third amended statement of claim.
[2] Although not specifically pleaded as such, the application was advanced on the basis that, in respect of the alleged contract cause of action no reasonably arguable cause of action is available.
The court’s approach to a strike out application:
[3] A defendant who seeks an order striking out all or part of a pleading must satisfy the requirements of r 15.1. Rule 15.1 provides:
The court may strike out all or part of a pleading if it –
(a)discloses no reasonably arguable cause of action, defence, or case appropriate to the nature of the pleading; or
(b) is likely to cause prejudice or delay; or
(c) is frivolous or vexatious; or
(d) is otherwise an abuse of the process of the court.
[4] The court’s approach to a strike out application was summarised in Attorney- General v Prince and Gardner[1] as follows:
[1] Attorney-General v Prince and Gardner [1998] 1 NZLR 262 (CA) at 267.
A striking-out application proceeds on the assumption that the facts pleaded in the statement of claim are true. That is so even although they are not or may not be admitted. It is well settled that before the Court may strike out proceedings the causes of action must be so clearly untenable that they cannot possibly succeed. (R Lucas & Son (Nelson Mail) Ltd v O’Brien [1978] 2 NZLR 289 at pp 294-295; Takaro Properties Ltd (in receivership) v Rowling [1978] 2 NZLR 314 at pp 316-317); the jurisdiction is one to be exercised sparingly, and only in a clear case where the Court is satisfied it
has the requisite material (Gartside v Sheffield, Young & Ellis [1983] NZLR
37 at p 45; Electricity Corporation Ltd v Geotherm Energy Ltd [1992] 2
NZLR 641); but the fact that applications to strike out raise difficult questions of law, and require extensive argument does not exclude jurisdiction (Gartside v Sheffield, Young & Ellis).
[5] The principles referred to above were endorsed in Couch v Attorney- General.[2]
[2] Couch v Attorney-General [2008] NZSC 45, [2008] 3 NZLR 725.
[6] The court can have regard to evidence either put forward in opposition or support of the application provided it does not contradict that which is pleaded in the statement of claim: Attorney-General v McVeagh.[3] Although r 15.1 permits a striking out of part of a pleading the court discourages partial strike out applications: Apple Fields Ltd v New Zealand Apple and Pear Marketing Board[4] and Whitman v Airways Corporation of New Zealand Ltd.[5]
[3] Attorney-General v McVeagh [1995] 1 NZLR 558 (CA) at 566.
[4] Apple Fields Ltd v New Zealand Apple and Pear Marketing Board HC Wellington CP35/94, 21 April 1994.
[5] Whitman v Airways Corporation of New Zealand Ltd (1994) 8 PRNZ 155 (HC) at 158.
[7] A partial strike out of a pleading may be justified where the portions to be struck out support a cause of action which relies on different facts to the remaining causes of action in the claim. That is because both the preparation for trial and the time of the trial itself may be substantially reduced thus justifying the benefit of the interlocutory examination.
Background
[8] Before analysing the specific matters advanced in support of the application and the grounds for opposing it, I set out the background summary from the judgment delivered on an application by the defendant seeking summary judgment.[6]
[6] Mechanical Plastics Corporation v Holdfast NZ Ltd HC Hamilton CIV 2007-419-845, 9 February 2009.
[9] The plaintiff is an American corporation carrying on business as a manufacturer and exporter of building products, including wall anchors.
[10] The defendant is a New Zealand company which carries on business as an importer and distributor of building products, including wall anchors.
[11] On 20 October 1994 the plaintiff and the defendant entered into an agreement. That provided for the defendant purchasing particular products of the plaintiff for distribution and sale in New Zealand. Those products included the plaintiff’s hollow wall toggler and alligator anchors. They are both marketed under the ‘Toggler’ trademark.
[12] The formal agreement was for an initial period of one year. It could be renewed for a second year if the defendant purchased a minimum value of product. It could then be further extended subject to mutually agreed minimum purchase benchmarks.
[13] The formal agreement contained the following terms:
a) The defendant was required to package the products in accordance with conditions which were specified in the agreement;
b)The defendant was required to use its best efforts to develop effectively the maximum volume of sales of the product continually throughout the market in the territory reserved for the defendant;
c) The agreement gave the defendant an exclusive territory, being New Zealand and certain South Pacific Islands not actually revealed in the copy of the agreement provided to the Court;
d)The agreement specified the defendant’s marketing area of responsibility for the sale of the products as:
i)The “do-it-yourself (DIY)” market which means the consumer orientated retail trade (including retail hardware stores, home centres, lumberyards, supermarkets, drug stores, department stores, etc); and
ii)The “construction trade” market which means the non- consumer orientated distribution to the construction and industrial trade (including speciality fastening wholesalers, contractors, job-site tradesmen, electrical wholesalers, plumbing wholesalers, mill supply houses, etc);
e) The agreement covered the use of trademarks and patents and provided for any situation where there was an infringement of same. It also has specific provisions dealing with what was to happen on the termination of the agreement;
f) The agreement set out the terms and conditions of sale in an exhibit annexed to it;
g) There is also a choice of law provisions nominating the laws of the State of New York, United States of America and an arbitration provision; and
h) The agreement provides that it is an entire agreement.
[14] The formal agreement was not renewed on expiry of the initial one-year period on 20 October 1995. The plaintiff pleads that the formal agreement terminated at that date. That is common ground.
[15] The plaintiff pleads that the agreement was replaced by an informal distribution agreement which came into operation from 20 October 1995.
[16] The plaintiff further pleads that it terminated the agreement in 2006 by advising the defendant that it would cease to supply the plaintiff’s products to the defendant. It has an alternative pleading, however, that it terminated the agreement by letter dated 30 April 2007.
[17] It is common ground that trading between the plaintiff and the defendant continued after 20 October 1995. The defendant denies, however, that that was
pursuant to an informal distribution agreement on the same terms as the formal agreement, which had not been renewed.
[18] Ray Staiger Limited on 22 November 2006 was appointed the exclusive New Zealand distributorship agency for the plaintiff’s hollow wall toggler and alligator anchors.
The pleaded contract
[19] In its third amended statement of claim, the plaintiff pleads a new or informal distribution agreement in paragraph 2.6. Paragraph 2.6 provides:
Informal Distribution Agreement
1.1Upon the termination of the Formal Agreement, the parties intended that they should henceforth be bound by the terms of a new agreement incorporating at least those terms of the Formal Agreement set out in paragraph 2.3 herein (“the Informal Agreement”).
Particulars
(a) The termination of the Formal Agreement on 20 October 1995 occurred without notice or mention by either party;
(i) Prior to and subsequent to 20 October 1995 the parties were engaged in regular communication, yet the termination of the Formal Agreement was not mentioned by either party to the other at any time prior to that date, after that date or at any time prior to these proceedings being already in contemplation;
(ii) Prior to and subsequent to 20 October 1995 the parties were engaged in a continuing course of conduct that was unaltered and unaffected by the termination of the Formal Agreement, including, but not limited to, an order placed on 12 October
1995 by the defendant for stock of the plaintiff’s products with specific intructions requiring supply “on 1st November”
1995.
(b)Subsequent to 20 October 1995 the parties continued to act towards each other as if they were both still bound by at least those terms of the Formal Agreement pleaded in paragraph 2.3 herein;
(i) It was the plaintiff’s understanding that the obligations pleaded in paragraph 2.3 herein continued in force as between the parties;
(ii) The plaintiff continued to demand compliance with its requirements for packaging and promotional material and the
defendant continued to seek the plaintiff’s approval prior to undertaking any changes to packaging or promotional material;
(iii) The defendant continued to seek and obtain promotional artwork, material and stock from the plaintiff;
(c) Subsequent to 20 October 1995 the parties continued to represent to each other that the parties were bound by the terms of a “Distribution Agreement”;
(i) On at least 10 June verbally and in writing and 11 July 1996 in writing, the Plaintiff expressly demanded the defendant comply with its obligation under “the distribution agreement” to supply market information and reports.
(ii) The defendant responded by supplying the information sought without questioning or challenging the assertion that it was a party to, or obligated under, a distribution agreement.
(d)From 20 October 1995 the relationship between the plaintiff and the defendant continued to be that of manufacturer/appointed
distributor;
(i) Both the plaintiff and the defendant continued to represent to each other, and to third parties, that the defendant was the plaintiff’s New Zealand distributor of the plaintiff’s products;
(ii) The Plaintiff sought and obtained at its own expense, at the defendant’s request, BRANZ approval for some of its products;
(iii) The defendant assisted with registration requirements for the plaintiff’s New Zealand trade mark portolio;
(iv) All requests for the plaintiff’s products received by the plaintiff from third parties within New Zealand were referred to the defendant as the plaintiff’s New Zealand distributor. The defendant acknowledged all such referrals and contacted the third parties on that basis;
(e) The defendant continued to purchase the plaintiff’s products from the plaintiff, and continued to sell the plaintiff’s products within the territory identified under the formal agreement;
(f) The plaintiff continued to allow the defendant to use, and the defendant alone continued to use, the plaintiffs trade marks identified in the Formal Agreement (‘the plaintiff’s trade marks”) in relation to the plaintiff’s goods;
(g) The plaintiff continued to direct, and, save as expressly pleaded elsewhere in this Third Amended Statement of Claim, the defendant continued to observe, the manner in which the plaintiffs trade marks could/could not be used and the manner in which the plaintiffs products could be packaged and marketed including that the plaintiffs products could only be packaged in the plaintiffs packaging or such other packaging as the plaintiff had approved;
(h)The parties thus recognised that at least the terms of the Formal Agreement set out in paragraph 2.3 herein, continued to apply under the Informal Agreement in all material respects, in the same way as they had whilst the Formal Agreement remained in force.
[20] The third amended statement of claim contains in paragraph 2.3 the alleged terms of the formal agreement which are as follows:
a)The Formal Agreement included the following terms: “2 Appointment
MPC grants Distributor the right to distribute the Products for the
Market in the Territory.
3.1 Packaging
Distributor shall package the products in accordance with the conditions specified in Exhibit B, entitled “Packaging Requirements", which is attached to this Agreement…
3.2 Sales Efforts
Distributor will use its best efforts to develop effectively the maximum volume of sales of the Products continually throughout the Market in the Territory.
Distributor will use all available means to promote the Products effectively, including but not limited to such means as advertising and direct sales promotion throughout commerce and industry, and also to promote resale through its retailer and wholesaler network throughout the Territory.
3.3 Inventory
Distributor shall maintain at all times a sufficient inventory of the Products to satisfy the anticipated demand for the Products in the Territory.
4 Trade Marks and Patents
Distributor agrees that it will not use any of the marks and/or patents of MPC or any of its affiliates mentioned in Article 1.1 or any reproduction, counterfeit, copy or colourable imitation thereof, or any mark and/or patent confusingly similar thereto, except with the permission of and, upon specifying that, they are acting as a distributor of the Products for MPC.
In no event shall Distributor use any such marks and/or patents as part of a company or trade name nor in any manner which, in the opinion of MPC, could indicate that Distributor is associated in any way other than as a distributor of the Products.
5.1 Infringement of Trademarks and Patents
Distributor shall not at any time do, or knowingly allow to be done, any act or thing which will impair ownership and rights of MPC in and to the said trademarks and/or patents.
Distributor agrees that it will not obliterate, remove, conceal, or modify any mark of MPC appearing on any of the Products, nor will it append any additional marks thereto without the prior written consent of MPC.
6 Marketing and Sales Information
Distributor agrees to furnish MPC in regular intervals, when available, with all information and statistics as set out in Exhibit C in order to enable MPC to follow the sales and to be aware of the market development in the Territory.
10.1 Legal Situation of Distributor
Distributor buys and sells in its own name and for its own account. It acts as an independent trader as regards both MPC and the customers. It shall effectively promote the sale of the Products in the Territory, without being authorised to act in the name of MPC. Furthermore, it shall safeguard the interests of MPC with the due diligence of the responsible businessman. Distributor shall bear all of its own expenses for its operation and staff, except for such items as MPC shall by prior written agreement undertake to pay.
10.5 Waiver of breach
The failure of either party to require the performance of any term of this Agreement, or the waiver by either party of any breach of this Agreement, shall not prevent a subsequent enforcement of such term nor be deemed a waiver of any subsequent breach.”
[21] What is pleaded in paragraph 2.3 of the third amended statement of claim are some of the express terms contained in the terminated formal agreement but not all. The following articles which were contained in the formal agreement are not alleged to be part of the informal agreement:
a) Article 3.4 dealing with sales outside the territory;
b) Part of Article 5.1 dealing with trademarks and patents;
c) Article 10.2 dealing with confidentiality;
d) Article 11 dealing with dispute resolution; and
e) Article 12 the entire agreement provision.
Choice of law
[22] The formal or written agreement which was terminated, contains in clause
10.4, a statement that the agreement is to be construed according to the laws of the state of New York, United States of America. Neither counsel relies on that provision. The application therefore must be decided by reference to the law of New Zealand. The law of the state of New York is presumed, in these circumstances, to be the same as the law of New Zealand: Mount Cook (Northland) Ltd v Swedish
Motors Ltd.[7]
The defendant’s case
[7] Mount Cook (Northland) Ltd v Swedish Motors Ltd [1986] 1 NZLR 720 at 727.
[23] In summary the defendant’s position is:
a) The parties expressly agreed that the distribution agreement would terminate on 20 October 1995;
b)There is no evidence of the parties forming the necessary intention to enter into an informal agreement to extend some of the terms of the formal agreement beyond 20 October 1995;
c) There were no specific negotiations from which a court could determine that the parties had agreed to enter into a new contract on some of the terms previously specified in the formal agreement. The defendant says the provision in the formal agreement providing for a patent protected product was essential to it and without that term it would not be prepared to be bound by terms which were onerous to it;
d)The position post the termination of the distribution agreement was nothing more than a commercial arrangement where orders for the
supply of goods were placed by the defendant with the plaintiff. The plaintiff made the supply. The defendant paid for the goods supplied; and
e) When the position set out in (d) is considered against the terms which were set out in the formal agreement there is no basis for concluding that the parties entered into a new contract following termination of the written contract in 1995.
The plaintiff’s opposition
[24] The plaintiff’s position in summary is that there is a body of correspondence between the parties which read in conjunction with the actions of the parties, both immediately before and after termination of the formal written contract, provides a basis for pleading that a further agreement exists and as to the terms of that further agreement.
[25] Mr Marriott relied specifically on the following matters to support the position outlined in the previous paragraph, namely:
a) The expiry of the formal agreement passed without either party noting any change in position;
b)On the expiry of the formal agreement both parties continued to transact and behave towards each other in a manner that showed that each intended to continue to be bound by certain terms of the previous agreement;
c) Intention to be bound by a new agreement can be inferred from the parties’ conduct and, in particular, from the conduct subsequent to the termination of the formal agreement;
d)The parties at times acknowledged the existence of a formal agreement including the existence of specific obligations; and
e) That the parties continued to act as if they were bound by the agreement subject, of course, to those areas where it is alleged that the defendant was in breach.
The possible explanations for the parties’ actions post termination of the written contract
[26] Two possibilities arise, namely
a) Either there is a new contract on terms similar to the distribution agreement which form the basis for the continuing steps taken by the parties and which included the supply of product and the payment for the product and the distribution of the product; or
b)The parties’ subsequent actions are simply explained on the basis that the defendant would make an order for the supply of the plaintiff’s products and the plaintiff would thereafter supply the products in return for payment for same by the defendant.
The issue
[27] Do the pleaded facts and the material contained in the affidavits provide a foundation for the existence of the contract which is alleged? In short, is there a basis for a possible finding that a contract of the sort pleaded exists?
[28] In Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand
Ltd[8] the prerequisites to the formation of a contract were listed as:
[8] Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433 (CA) at 444 [53].
a)An intention to be immediately bound (at the point when the bargain is said to have been agreed); and
b)An agreement, express or found by implication, or the means of achieving an agreement (eg an arbitration clause), on every term which:
(i) was legally essential to the formation of such a bargain;
or
(ii) was regarded by the parties themselves as essential to their particular bargain.
At [54] and [56][9] guidance is given as to the width of inquiry when considering the issue of whether a contract has been formed, namely:
[9] Ibid.
[54]Whether the parties intended to enter into a contract and whether they have succeeded in doing so are questions to be determined objectively. In considering whether the negotiating parties have actually formed a contract, it is permissible to look beyond the words of their “agreement” to the background circumstances from which it arose – the matrix of facts. This can include statements the parties made orally or in writing in the course of their negotiations and drafts of the intended contractual document.
[56]It is also permissible when considering contract formation (or rectification) to look at subsequent conduct of the parties towards one another, including what they have said to each other after the date of the alleged contract.
The contract pleading analysed
[29] Paragraph 2.6(a)(i) of the third amended statement of claim provides:
2.6Upon the termination of the Formal Agreement, the parties intended that they should henceforth be bound by the terms of a new agreement incorporating at least those terms of the Formal Agreement set out in paragraph 2.3 herein (“the Informal Agreement”).
Particulars
a. The termination of the Formal Agreement on 20 October 1995 occurred without notice or mention by either party;
i. Prior to and subsequent to 20 October 1995 the parties were engaged in regular communication, yet the termination of the Formal Agreement was not mentioned by either party to the other at any time prior to that date, after that date or at any time prior to these proceedings being already in contemplation;
[30] It is self-evident from this pleading that there is no precise offer to contract on the new terms which are pleaded which is followed by an acceptance of that offer.
[31] The formal agreement which the parties signed provides evidence of an express intention that there would be no extension unless the extension was in writing.
[32] The relevant parts of article 12, the entire agreement provision provide:
No change, modification, extension, renewal, revision, discharge, abandonment, waiver or termination of the agreement or of any of the provisions herein contained or any notice of termination hereof given by MPC shall be binding upon MPC unless made by a duly authorised in writing. Any modification or amendment of any provision of this agreement must be in writing and bear the signatures of the authorised representatives of both parties.
[33] Although the plaintiff pleads that the formal agreement was terminated, Mr NH Garfield, its director, in his affidavit, in referring to the formal agreement says that it was “never expressly terminated or renewed”. He goes on to say that “neither party turned their minds to the termination provisions of the formal agreement”. He adds though that the obligations created under the formal agreement continued in force on an informal basis between the parties. He claims his understanding is supported by the course of dealing between the parties subsequent to the October 1995 termination.
[34] Mr Garfield observes that the plaintiff’s standard conditions of sale contained no obligations on a distributor to:
a) Promote the plaintiff’s products;
b) Provide the plaintiff with marketing and sales information; or c) Comply with the plaintiff’s packaging requirements.
[35] Mr Marriott took me through a series of email correspondence between the parties spanning over some ten years or more wherein reference is made to promotion of the plaintiff’s products, marketing and sales information and the need to comply with the plaintiff’s packaging requirements. Certainly, there is evidence of the defendant responding to requests which are made by the plaintiff on the basis that the agreement was extended. That, however, is not the full picture.
[36] If one goes to the correspondence relied upon by Mr Marriott which starts prior to the termination of the agreement, reference is made in particular in the facsimile of 10 May 1995 from the plaintiff to the defendant’s director, of the plaintiff’s responses to threatened action by the defendant. The response is to refer to the specific provisions of the formal agreement which apply on its termination. Far from supporting the position that the formal agreement was effectively being extended or rolled over, this correspondence clearly supports the opposite position. That is, that the terms of the formal agreement apply with the result that there would be no extension of it.
[37] The same correspondence evidences complaints by the defendant about the plaintiff’s compliance with the contract. That is inconsistent with there being any intention on the defendant’s part to extend the formal agreement.
[38] I invited both counsel to refer me to any authority where an agreement had been rolled over, that is where the court had been asked to find that a new agreement on similar terms to that which previously existed could be inferred from a course of conduct only. Counsel advised me that their research had not turned up any specific example.
[39] The pleading itself does not provide a proper outline of the essential requirements for the formation of the contract. The evidential material that has been placed before me, which would seem to include all the surrounding matrix of facts, does not provide any support for the formation of a contract on the terms alleged in the third amended statement of claim. The plaintiff has now had three attempts at amending its pleading. I drew specific attention to the problem about the contract
pleading in the 9 February 2009 judgment[10] on the defendant’s application for
summary judgment. There does not therefore appear to be any further basis that might found a proper factual foundation for the proposition that the plaintiff and defendant intended to enter into a further contract on the terms pleaded.
[10] Mechanical Plastics Corporation v Holdfast NZ Ltd, above n 6.
[40] The plaintiff appears throughout to have set the rules as to how it wished its relationship with the defendant to proceed. The formal contract itself is evidence of
that. It set out the rule for variations or extensions which clearly has not been followed. I am satisfied that there is no reasonably arguable contract cause of action available to the plaintiff on the basis pleaded. On that basis, clearly, paragraphs 5.1 to 5.2 of the third amended statement of claim must be struck out.
[41] Mr Marriott, in his notice of opposition, pleads that paragraphs 2.1 to 2.11 are relevant to the other two causes of action. In view of the fact that counsel did not expressly address on the point, despite the fact that I raised it at the time, I do not strike out those paragraphs of the third amended statement of claim. Their significance, however, is limited to the remaining causes of action.
Orders
[42] I order that the contract cause of action be struck out and, in particular, paragraphs 5.1 to 5.2 of the third amended statement of claim are struck out.
Costs
[43] At the conclusion of the hearing I invited counsel to indicate whether they required to make separate submissions on the question of costs. Both confirmed to me that they accepted that Category 2 and Band B for the steps taken were appropriate in this case. They however asked me to reserve the question of costs in the first instance on the basis that if they could not agree memoranda would be filed. Accordingly, I reserve costs and order that if counsel are unable to agree memoranda in support, opposition and reply on the question of costs shall be filed and served at seven-day intervals.
Further conference
[44] I allocate a case management conference by telephone with counsel for 9am on Friday, 22 October 2010. The following matters will be addressed at that conference:
a) disposal of, or allocation of a fixture for, any outstanding interlocutory application;
b) whether the issues requiring resolution at trial recorded in paragraph
1(d), (e), (f), (g) and (h) of my minute of 2 July 2008 require revision;
c) settlement and whether a mediation or a Judicial settlement conference should be ordered;
d)trial duration, the fixing of the trial date and the making of any special trial directions that are required.
Counsel shall file and serve memoranda dealing with these items two working days before the conference.
JA Faire
Associate Judge
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