Miraka Limited v Milk New Zealand (Shanghai) Co. Limited
[2017] NZHC 2163
•8 September 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV 2017-404-000794 [2017] NZHC 2163
BETWEEN MIRAKA LIMITED
Plaintiff
AND
MILK NEW ZEALAND (SHANGHAI) CO. LIMITED
Defendant
Hearing: 28 August 2017 Appearances:
L A OʼGorman/A N Birkinshaw for the Plaintiff
M R Heron QC/L H Mau for the DefendantJudgment:
8 September 2017
JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSEN [REDACTED] VERSION
This judgment was delivered by me on
08.09.17 at 3:30pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
MIRAKA LIMITED v MILK NEW ZEALAND (SHANGHAI) CO. LIMITED [2017] NZHC 2163 [8 September
2017]
Background
[1] The plaintiff (Miraka) applies for summary judgment seeking payment from the defendant (MNZ) of [redacted] (subject to a deduction for any amounts found to be properly set off against that debt).
[2] Miraka is a New Zealand company and supplies UHT milk products to MNZ, a Chinese owned company, by an agreement dated 13 February 2013 (the UHT Agreement).
The claim
[3] The statement of claim pleads two causes of action. It is by the first that summary judgment is applied for in respect of the minimum volume purchase obligations under the UHT Agreement for season two (which ran from 1 August 2015 to 31 May 2016).
[4] Miraka contends MNZ is liable to pay the following (plus interest accruing since 24 August 2016):
(a) Peak Months Shortfall;
(b) Pursuant to clauses 3.6(b) and 8.2, being liquidated damages of
[redacted] for the Peak Months Shortfall; and
(c) Season Shortfall: Pursuant to clauses 3.2 and 8.2, in respect of the Season Shortfall, the balance not already paid by MNZ for the minimum volume specified for season two.
[5] Miraka claims [redacted] being the amount invoiced on 24 August 2016 for payment by 7 February 2016, together with interest at [redacted] per cent per annum to 28 August 2017 amounting to [redacted]. The total judgment sum sought is [redacted].
[6] If Miraka’s claim of a set off succeeds then it will seek judgment for the balance due namely, [redacted] inclusive of interest.
[7] By its second cause of action Miraka seeks a declaration as to whether or not it is entitled to set off against that liability, the balance of certain payments made by/on behalf of MNZ.
The defence
[8] In response to the summary judgment application, MNZ has filed a protest to jurisdiction based on an arbitration clause contained in the UHT Agreement. MNZ contends it is entitled to refer Miraka’s claim in this proceeding to arbitration under clause 13 of that agreement.
[9] MNZ also opposes summary judgment on the basis that:
(a) MNZ’s liability, if any, is capped by clause 3.6(b) which limits compensation by reference to maximum sums payable for two months in the preceding supply season;
(b)Miraka’s maximum production capacity for season two was limited and therefore its entitlement to compensation was also capped;
(c) MNZ has counterclaims, including:
(i)Second season shortfall supply in the sum of [redacted] under clause 3.4 for failing to supply the Minimum Volume;
(ii)Quantity and supply issues for which compensation has not been calculated.
[10] It is Miraka’s position that MNZ is out of time to refer the matter to arbitration.
[11] Miraka says clause 3.6(b) relates to MNZ’s payment obligations in the event it did not purchase the minimum volumes to be produced in each of the months of
October and November in an amount equal to [redacted] per cent of the prevailing price of the shortfall volume. MNZ claims this provision limits – caps its liability. Miraka’s position is there is no basis for alleging that clause 3.6(b) calculations amount to a code that would override the effect of clauses 3.2 and 3.3(a) which inter alia required MNZ to purchase and take delivery of not less than [redacted] litres of product in the second production season requiring the purchase of monthly volumes equal to that [redacted] litre annual total calculated by dividing by 10 each of the months of October and November in each season.
[12] Miraka asserts MNZ cannot take advantage of its own failure to order the required amounts and incurred a debt obligation regardless and is obliged to pay “without set off or deduction”, because Miraka’s plant was capable of producing amounts above the minimum volumes it was required to produce.
[13] Regarding MNZ’s counterclaim it is Miraka’s position that clause 3.4 claims of short supply cannot be raised when MNZ failed to order the minimum volumes for the obligation to pay was “without set off or deduction” meaning that any claims about quality and supply are to be dealt with separately. Further it claims certain quality and supply issues are discrete from MNZ’s liability to pay for the shortfall.
[14] In summary, it is Miraka’s position the terms of the parties’ contract are clear and unequivocal; that MNZ did not order product to the minimum levels required; and those obligations are discrete to claims of short supply and quality claims.
Protest to jurisdiction
[15] MNZ has filed the protest under Article 8 of Schedule 1 to the Arbitration Act
1996 (the Act) on the basis that the disputes in this proceeding are subject to an arbitration agreement. Article 8 provides:
8 Arbitration agreement substantive claim before Court
(1) A Court before which proceedings are brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting that party’s first statement on the substance of the dispute, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative, or incapable of being performed,
or that there is not in fact any dispute between the parties with regard to the matters agreed to be referred.
(2) Where proceedings referred to in paragraph (1) have been brought, arbitral proceedings may nevertheless be commenced or continued, and an award may be made, while the issue is pending before the Court.
[16] The UHT agreement included a dispute resolution clause. Clause 13 provided:
If any dispute arises in relation to this Agreement, the dispute must be referred to a senior representative of each party. If after 30 days the dispute remains unresolved, the dispute shall be referred to the arbitration of a single arbitrator appointed by the parties or failing such agreement by an arbitrator of the New Zealand International Arbitration Centre; such arbitration to be carried out in accordance with the provisions of the Arbitration Act 1996. The place of arbitration shall be Wellington, New Zealand and the cost of the arbitration shall be borne equally by the parties. The parties shall enter into arbitration in good faith, but should the parties fail to reach an accord or there is no arbitral determination within 30 days of commencing arbitration, then either party may pursue its remedies in Court.
[17] The evidence is that there are several disputes which have arisen under the UHT agreement. For consideration upon the protest application the Court is to consider whether a stay of this proceeding be ordered and a direction be made requiring the parties to refer their disputes to arbitration.
[18] Miraka’s position is that the arbitral process is already over regarding those disputes which are the subject of its statement of claim. Miraka says the 30-day period referred to in clause 13 of the UHT agreement is already over for that period ran from “commencing arbitration” in respect of those matters as defined by Article 21 of Schedule 1 of the Act, which provides:
21. Commencement of arbitral proceedings
Unless otherwise agreed by the parties, the arbitral proceedings in respect of a particular dispute commence on the date on which a request for that dispute to be referred to arbitration is received by the respondent.
[19] MNZ’s position is that Miraka has breached the good faith requirement in clause 13 of the UHA agreement, in seeking to have some (but not all) of the disputes determined in the High Court when the arbitration process envisaged, and agreed to by the parties is yet to be “commenced” (in terms of clause 13 of the UHT agreement).
[20] The parties have separate views concerning how clause 13 applies, and whether the arbitral process was ever commenced, for if it did not then the parties may still be bound to commit to that process, and this proceeding may have to be stayed.
[21] In Zurich Australian Insurance Ltd ta Zurich New Zealand v Cognition Education Ltd1 the Supreme Court considered the test for whether a dispute exists for the purposes of a stay application, and the order in which such issues should be addressed in a summary judgment proceeding.
[22] In that case the Supreme Court held2:
[52] … A stay must be granted unless the Court finds that the arbitration agreement is null and void, inoperative or incapable of being performed or is immediately demonstrable either that the defendant is not acting bona fida in asserting that there is a dispute or that there is, in reality, no dispute. It follows from this that an application for summary judgment and an application for a stay to permit an arbitration to take place, are not different sides of the same coin. In principal, the stay application should be determined first and only if that is rejected should the application for summary judgment be considered.
[23] In this regard, it is clear that the Court’s focus should be upon claims on behalf of MNZ that there is a genuine dispute and for present purposes the Court’s focus should not be on whether or not there is an arguable case that an arbitration agreement exists because questions of its existence and scope are matters for the Arbitral Tribunal to determine once a stay of the Court proceedings has been granted.3
[24] For present purposes Mr Heron submits that the granting of a stay is not discretionary where the subject matter of the proceedings is the subject of an arbitration agreement and the request for stay is made before or when the party submits its first statement on the substance of the dispute. Conversely, that the Court retains a discretion not to grant summary judgment even where the grounds for summary judgment have been made out.
[25] It is Miraka’s position that considerations of stay need to be assessed and determined in its summary judgment proceeding for only if there is a dispute which
1 [2014] NZSC 188.
2 Zurich at [52].
3 Donaldson v Donaldson [2016] NZHC 3039 at [18] – [19], citing Ursem v Chung [2014] NZHC 436.
falls within the arbitration clause should inter alia the Court consider deferring consideration of the summary judgment application.
[26] It is Miraka’s position that the arbitral process is already over; that clause 13 of the UHT agreement provided that if there was no arbitral determination within the
30-day period it was entitled to pursue its Court proceeding.
[27] Ms O’Gorman for Miraka refers to the decision of the High Court in Scenic Circle (Rotorua) Ltd v Princes Gate Hotel Ltd4. In that case, it had been agreed between the parties that the arbitration could be terminated if no award had been made or conciliation effected “within three (3) months after the day on which the difference of dispute was referred to arbitration by either party for the first time”. In that case, Scenic invoked an arbitration clause in respect of disputes as to liability for a purported termination of a hotel management agreement. Discussions between the parties ensued for four months and then there was a year of inaction before Scenic gave notice terminating the arbitration process and issued Court proceedings. Princes Gate applied for a stay and for an order for reference to arbitration. The Court held that if the parties were within the time provided under contract then it was bound to stay the proceeding, but if that time was over then Article 8(1) no longer applied. The Court there held that the arbitral proceedings had not yet commenced as the dispute had not yet been “referred” to arbitration.
[28] In that case the focus was upon when the dispute had been referred to arbitration. Ms O’Gorman submits this case is different because the relevant time period in clause 13 of the UHT agreement expressly began from “commencing arbitration” (as defined by Article 21 of Schedule 1). Counsel submits there is no relevant agreement to the contrary; that the relevant date in respect of the disputes referred to in the statement of claim is 23 December 2016 – when MNZ received a request that such disputes be referred to arbitration; and accordingly the 30-day time period for achieving an arbitral determination has long since expired and Article 8(1) can no longer apply. Therefore counsel submits Miraka is entitled to pursue its
remedies in the High Court, in terms of clause 13.
4 HC Rotorua, CIV 2006-463-658, 19 September 2006.
Considerations
[29] Article 21 shall apply unless the parties agreed otherwise. In Scenic Circle Keane J held that the arbitral process had not begun because the terms of appointment of the arbitrator had not been agreed and therefore there was no express agreement on the date the arbitration commenced. Therefore, there was no express agreement of an arbitration commencement date.
[30] Ms O’Gorman submitted the present case is quite distinct because Article 21 drew a clear distinction between the ‘commencement date’ (when a request was received for reference to arbitration) and a referral to arbitration – which was that which subsequently occurred. Ms O’Gorman submits that in Scenic Circle the relevant time period expressly commenced when the dispute was referred to arbitration and that was quite a different process because that did not require any “request to be received by the respondent”. Clause 13 of the UHT was different because it refers to commencing arbitration which counsel submits occurred on 23
December 2016.
[31] Clause 13 requires reference of a dispute to arbitration if, the matter having been referred to senior representatives of each party beforehand, the dispute remained unresolved. The clause provided the parties were to enter into arbitration in good faith but if there was no arbitral determination within 30 days then either party may pursue its remedies to Court.
[32] In the present case the parties never reached an agreement on appointing an arbitrator. Arguably the arbitral process never commenced. In the Court’s view it is arguable that MNZ and Miraka had agreed and that it was intended for time to run from when the terms of reference were settled and an arbitrator was appointed. The reference in the last sentence of clause 13 should be read as meaning the point at which the substantive arbitration process actually began.
[33] Mr Heron submits and the Court agrees that the term commencing arbitration must run from that time the appointment of an arbitrator was conclusively secured. The evidence in this case is that no substantive arbitration process was commenced
for it is clear that as at 23 January 2017 Miraka’s solicitors were still asking MNZ’s solicitors for proposed amendments to the terms of reference.
[34] The Court agrees with Mr Heron’s submission therefore that an interpretation of “commencing arbitration” requires at least an arbitrator to be appointed for such is consistent with the contractual requirement to “enter into arbitration in good faith – as clause 13 provides”. Otherwise clause 13 would require little more than for a party to nominally refer a dispute to arbitration, do nothing, and then wait for the 30-day period to expire before commencing Court proceedings. Such an interpretation would, as Mr Heron submits, flout commercial common-sense and render the parties’ election of arbitration as the preferred primary dispute resolution mechanism nugatory.
[35] It will also avoid issues being raised in connection with the date upon which
MNZ received a request for dispute issues to be referred to arbitration. That date was
23 December which itself was likely to cause issues with appropriate opportunities to reach any agreement regarding referring issues to arbitration.
[36] Clause 13 requires that arbitration shall occur where disputes arise. Miraka’s position seems to be that that requirement encompasses little more than sending a letter purporting to commence arbitration before waiting 30 days to litigate.
[37] Mr Heron submits that while elements of clause 13 are clearly mandatory, the final sentence of clause 13 uses permissive language:
Then either party ma y pursue its remedies in court.
[38] As counsel submits there is no mention in clause 13 of a right to terminate the arbitral pleadings. It appears to be Miraka’s case that notwithstanding its commitment to engage arbitration it retains the power to do little more in that regard whilst reserving its right after 30 days to pursue the Court proceedings process. It does not appear that was the mutual intention of the parties created by clause 13. Also it is far from clear that clause 13 permits the proceeding that has been filed by Miraka when there is no reference in clause 13 to a right to terminate the arbitral proceeding process.
[39] The Court agrees with Mr Heron that clause 13 retains a right to pursue remedies in Court in addition to the requirement that all disputes be arbitrated. The Court process was designed to be a backup where proper attention to arbitral recourse failed.
[40] It appears to be Miraka’s position that it need only agree to arbitrate for 30 days but after that it could cease arbitration entirely.
Conclusion
[41] Provided therefore that the Court agrees that the issues in the substantive proceeding may the subject of an arbitration agreement that is not null and void or inoperative or incapable of being performed then the Court may order a stay because Article 8 of Schedule 1 to the Act precludes the Court’s jurisdiction.
[42] The proviso concerns whether in any event there is any defence to Miraka’s claim. That is a matter for consideration upon Miraka’s summary judgment application.
Summary judgment
[43] Miraka needs to satisfy the Court MNZ has no defence. If evidence is sufficient to indicate there is a genuine dispute then summary judgment will not be granted.
[44] Summary judgment may be entered on part of a debt where that part is not in dispute. Likewise, judgment can be entered as to liability even though there is insufficient evidence to determine the extent of liability.
[45] On the other hand, it may be inappropriate to enter judgment where the ultimate determination turns only on a judgment able to be properly arrived at after a full
hearing of evidence.5
5 Westpac Banking Corp v MM Kembla New Zealand Ltd [2001] 2 NZLR 298 (CA) at [62].
[46] Issues between the parties in this case focus upon an interpretation of the parties’ UHT agreement. Usually a Court adopts an objective approach in interpreting contract terms, with a view to ascertaining the meaning of a document as it would present to a reasonable person having a background knowledge of matters that prevailed when the contract was entered into. In that regard reference to prior contractual communications may assist but usually evidence of a parties’ subjective attention is not relevant and usually issues raised regarding pre-contractual negotiations are avoided. That said, of course reference to a wider background in circumstances may be important and context may assist where particular words and terms may appear unclear or are in dispute.
[47] Earlier the Court referred to Miraka’s claim having been advanced pursuant to contract clauses by which MNZ was required to meet minimum volume purchase obligations, and reference was made to how those ought to be calculated. Such clauses are not uncommon in commercial dealings. Those are intended to provide an assured income stream whilst prohibiting the use of set off claims – sometimes reserving those for consideration after payment is made. These are sometimes referred to as “pay now, dispute later” terms.
[48] As those provisions operate, claims of rights to a set off are usually excluded.
[49] As Ms O’Gorman submits, another legal principle of relevance is that a party cannot benefit from its own default and should not be entitled to rely on its own breach of duty to avoid its contractual obligations.
[50] Mr Heron submits that such a principle must apply equally to both parties and thus in this case would prevent Miraka claiming compensation for shortfall where quantity and supply issues have affected MNZ’s ability to purchase the minimum volume and where Miraka itself did not and was not in a position to supply the
minimum volume.
The contract
[51] Clause 3.6 of the parties’ contract provides:
In the event that the Purchaser does not purchase:
(a) The Minimum Volume of Product in the first Production Season, at the expiry of that Production Season it shall be liable to pay to the Vendor an amount equal to [redacted] of the Prevailing Price of the shortfall volume of Product purchased compared to the Minimum Volume in that first Production Season; and
(b) The minimum volumes to be produced in each of the months of October and November in each Production Season (determined by the provisions of paragraph 3.3), at the expiry of that Production Season it shall be liable to pay the Vendor an amount equal to [redacted] of the Prevailing Price of the shortfall volume of Product purchased compared to the minimum volume to be purchased in each of October and November in that Production Season; provided that the payment shall be at the rate of [redacted], rather than at the rate of [redacted], if the Vendor can resell or redirect the shortfall volume of milk purchased but not yet processed into Product to another process or processor on normal commercial terms before it is manufactured into Product.
[52] MNZ says clause 3.6(b) provides a code setting out Miraka’s exclusive remedies in the event MNZ failed to order the minimum volume in the entirety of season two and beyond; and on that basis MNZ would only be required to pay compensation to Miraka at the agreed rate ([redacted] per cent, reducible to [redacted] per cent) of the prevailing price for the shortfall volume purchased in October and November (if any) rather than for the shortfall volume of product purchased over the entire production season. MNZ says this caps Miraka’s claim at [redacted] for season two.
[53] It is the position for Miraka that pre-contractual correspondence does not support that interpretation because, inter alia:
(a) The agreement required MNZ to take or pay the price for the annual minimum volume commitments;
(b)MNZ wanted a liquidated damages provision inserted to protect it from that type of liability by defining and restricting the full extent of the consequences;
(c) Miraka did not agree to that, except to a limited extent which permitted a “right to purchase less than the annual minimum volume” during season one only;
(d)The concept captured in clause 3.6(b) of the final agreement was different for it was added partway through negotiations and at Miraka’s request in order to impose an obligation on MNZ to purchase specific monthly volumes in October and November of each year, regardless of whether or not MNZ could achieve the season’s minimum volume requirements by ordering in the other months. Miraka says the rationale for this was that those months represented the peak milk production period from Miraka and a failure to take the minimum volume in those specific months would result in an undue burden on Miraka.
(e) That there was no credible basis for alleging 3.6(b) was intended to extinguish the consequences of and render nugatory the annual minimum volume obligations expressly provided for in clause 3.2 and
3.3(a). Miraka says they make no commercial sense in the context of:
(i)The heavy initial capital outlays incurred by Miraka to get the plant to the required production capacity for the volumes contemplated by the UHT agreement, and
(ii) The guarantee by the purchaser in the sum of [redacted].
[54] Ms O’Gorman submits the only reasonable interpretation of clause 3.6(b) on its clear words, and having regard to the above described factual matrix, is that it provided Miraka with a quantified remedy in the event that MNZ failed to meet the specific thresholds required in respect of October and November (even if the annual minimum volume in clauses 3.2 and 3.3(a) were not breached). Therefore, it is submitted the consequences of MNZ’s failure to order the minimum volume for season two as a whole are not limited by the specific liability that could separately arise under clause 3.6(b).
[55] Ms O’Gorman submits that regardless of clause 3.6(b) the wording of the minimum volume obligations expressly provided for in clauses 3.2 and 3.3(a) created a “take or pay” type of debt. Those clauses provided:
3.2 Minimum Volumes
The Vendor shall produce and the Purchaser shall purchase and take delivery of at least the following Minimum Volumes in the following Production Seasons.
(a) [redacted] litres of Product in the first Production Season;
(b) [redacted] litres of Product in the second Production Season; (c) [redacted] litres of Product in the third Production Season;
(d) During any subsequent Production Season, notwithstanding any other provision in this agreement to the contrary and subject to sub-clause 3.5 below, the Minimum Volume for each Production Season; shall be the minimum purchase volume specified in the Purchaser’s Pre-Season Notification, provided the Minimum Volume in any given Production Season will be no less than the Minimum Volume in the previous Product Season or at least [redacted] litres for each Production Season after the third Production Season.
3.3 Order to be for at least the Minimum Volumes
The Purchaser shall:
(a) Not issue a Rolling Purchaser Forecast containing a Binding Order, Confirmed Order and Expected Order that would, when taken together with the amount of Product expected to be purchased in that Production Season to date, and the amount of Product purchased in the remaining months of Production Season as detailed in the Pre-Season Notification (excluding the three months covered by the Rolling Forecast) result in the Purchaser purchasing less than the Minimum Volume in that Production Season;
(b) Purchase monthly volumes equal to the total annual Minimum Volume for any season divided by 10 during each of the months of October and November of each season.
[56] It is Miraka’s position that although the additional words “take or pay” were included in early drafts of the contract document and those did not carry through to the final agreement, those words were merely “belt and braces” because there is no material difference in meaning between “take or pay” and “shall purchase and take”. The intrinsic background does not, Ms O’Gorman submits, provide any basis for
overriding the express terms of the agreement which counsel submits is an “entire agreement” pursuant to the agreement’s own terms.
[57] Regarding MNZ’s claims of issues concerning production capacity, it was Miraka’s evidence, as deposed by its Mr Wyeth, that its plant was designed to be and was capable of producing amounts above the minimum volumes, but that MNZ failed to provide preseason notifications and rolling forecasts that complied with clauses 5.1 to 5.3 of their contract. More importantly in April 2015 MNZ’s projected volume for season two was at an amount [redacted] litres short of the relevant minimum volume. Although projected and actual volumes improved during the course of that season they fell well short of the minimum volume obligations. Therefore, Ms O’Gorman submits MNZ cannot take advantage of its own default in this respect to allege that Miraka failed to give preseason notification of its expected maximum production capacity, and incurring the expenses it did.
[58] Miraka’s position was that it was prepared always to do whatever was necessary to meet MNZ’s production needs and it was always able to meet all orders posted by MNZ during season two but that MNZ purchased [redacted] litres of product that season. Miraka says there is no basis for MNZ claiming that it ordered and Miraka failed to supply the minimum volumes for season two. Issues about quality and supply were to be dealt with separately by clause 15.4 or by clause 13 but without effecting payment obligations.
[59] Miraka says there is evidence to address MNZ’s façade of good faith by its claims of quality and supply issues. Apparent claims by a MNZ customer appear minor and in any event Miraka claims the parties’ agreement excludes liability for direct or consequential damages or loss. No issues have been raised in relation to credit notes MNZ said it has had to issue. MNZ has refused to particularise or quantify these claims.
MNZ’s case in opposition
[60] MNZ says it had identified six issues requiring the Court’s determination before judgment is given on Miraka’s two causes of action. MNZ says Miraka will not be able to do this by convincing a Court that it has no defence to the claims.
[61] MNZ says there is little background evidence to support Miraka’s claims of a take or pay obligation; as to what its actual production capacity or production volume was at the relevant times; around the background to Miraka’s email of 14 August 2015 [containing predictions of forecasts and milk availability and at that time estimated a maximum volume availability of [redacted] litres; that there is sufficient evidence to determine whether Miraka’s breaches of agreement were causative of production shortfalls; and there is little evidence as to the previous course of dealings between Miraka and other companies from which the Court could assess the terms of payment on which the payment was made by MNZ Dairy (a related company) on 19 October
2016.
[62] MNZ claims the contract is wholly unclear; and there is doubt about what the parties’ intention, recorded in writing, actually was. MNZ says there is a disagreement over the parties’ intentions regarding liquidated damages and there is a lack of information available regarding the arrangement between the parties for the October
2016 payment – which is the subject of the set off cause of action. Further discovery is yet to be completed.
[63] Resolution of factual disputes is Mr Heron submits, important for determining the shortfall compensation and set off issues.
[64] MNZ claims Miraka has failed to provide sufficiently the basis to identify the extent of its claim for liquidated and nonliquidated damages and that Miraka’s decision to invoice MNZ for shortfall in the second production season on the same basis as the first production season is not based on any enforceable contractual right to do so. MNZ’s position is Miraka was not in a position to supply its services as and when needed. Miraka’s position is that the UHT agreement contains a “take or pay” obligation. In the circumstances Mr Heron submits this difference of position is considered by Miraka to provide options for payment recovery.
[65] Mr Heron submits the liquidated damages clauses resulted from an agreement of the parties as to a commercially acceptable remedy for breach of contract; and they provide for an agreed amount of damages to be paid in place of actual damages and those damages constitute that amount the plaintiff is entitled to cover without being required to prove actual damage.
[66] MNZ says regarding Miraka’s claim that it accepts Miraka has the ability to seek further uncertain sums. MNZ submits that the best interpretation of the liquidated damages provisions of the UHT agreement is that Miraka is entitled to a shortfall compensation for the peak months, and no more. It submits it has (at least) an arguable defence to the application for summary judgment.
[67] Alternatively, MNZ submits Miraka’s entitlement to recover compensation should be limited to reflect its production capacity for the second production season because by email on 14 August 2015 Miraka informed MNZ that its estimated production capacity for the entire second production season was [redacted] litres and that the peak month was [redacted] litres of product per month.
[68] As such MNZ submits this was a contractual variation of the minimum volume MNZ was required to purchase and that Miraka’s entitlement to recover the shortfall was limited to the difference between what it could produce in the peak months and what MNZ purchased.
Claim of an offset
[69] Miraka’s second cause of action is about whether it reached an agreement with MNZ Dairy, MNZ’s related company that a payment of [redacted] made by MNZ Dairy would be promptly refunded to MNZ once Miraka received payment of the same amount form MNZ.
[70] Miraka wants to claim this sum by way of offset of the amount it says is due from MNZ.
[71] MNZ’s position is that MNZ Dairy is not a party to the UHT agreement and that it would be inappropriate for Miraka to be allowed a set off in the circumstances. It is MNZ’s position the [redacted] payment was made with the understanding it would be returned to MNZ Dairy when MNZ paid its own payment; that the agreement between Miraka and MNZ Dairy was entirely separate to the UHT agreement but did concern payments made due to banking delays between China and New Zealand.
Overview of MNZ’s position
[72] MNZ submits it has several cross claims which are at least arguable and these arise out of the UHT agreement and are, it is submitted, inextricably linked to the claims forming Miraka’s first cause of action.
[73] Claims of a breach of contract are about short supply claims; about a sum of [redacted]; quality and supply issues; and cross claims providing, MNZ says, a defence and in an amount which exceeds, it says, the total of claims able to be pursued by Miraka [redacted]. Further MNZ said its cross claims are not precluded by clause 8.2 of the UHT agreement because that clause only applies to amounts that are admittedly or indisputably owing which is not the case here. Therefore, such cross claims are not MNZ says excluded by clause 19.3 of their contract.
[74] In summary, it is MNZ’s position that there are significant disputes of fact and law that require consideration of the disputed factual matrix; and that there is insufficient information before the Court on which a determination can be made. MNZ submits the proper interpretation of the UHA agreement will require discovery and that this will likely result in a finding that the UHA agreement does not entitle Miraka to the amount it claims. There are, Mr Heron submits, serious questions as to whether set off can constitute a cause of action but even if it could, whether Miraka has a right to set off a payment made by a third party against a disputed liability.
Considerations
[75] The rationale for take or pay minimum obligations, is relatively routinely commercial. It means issues regarding quality and service do not override obligations
to make payment if as much is clear from the contract terms. If a definite sum of money is required to engage the services of another then that obligation must be met within the timeframe required. Indeed, even if the service has not been provided – if a contract anticipates that outcome, and even if the provider suffered no loss if claims as to damage and mitigation of loss are clearly excluded by contract terms.
[76] Miraka says its position is reinforced by MNZ’s failure to order minimum supply volumes and as contract terms infer, MNZ could not rely on its own breach of duty to avoid the contract in order to obtain a benefit under it i.e. by not having to pay that which it was contracted to.
[77] It is clear from the above that the parties are far apart in their understanding of the meaning and effect of clause 3.6(b).
[78] Significant evidence has been provided of communications between lawyers evidencing discussion regarding final contract terms. That evidence includes attempts by MNZ to try to insert a minimus regime. One such attempt was provided by an email from MNZ’s solicitors dated 18 December 2012 seeking to limit liability to a sum of [redacted] per cent of the prevailing price shortfall. That attempt did not feature in the final contract yet it appears to support in some degree Miraka’s claims that MNZ was better aware of the extent of its liabilities then, rather than now, when advanced on its behalf to this Court.
[79] The response to the 18 December email, the following day, notably however, included the addition of a right to purchase less than the annual minimum volume than prescribed by paragraph 3.6. Eventually and by its final form clause 3.6 provided relief for the first season only and included a regime to pay for the months of October and November regardless whether minimum supply was provided and any right MNZ to limit liability to actual losses incurred by Miraka, was rejected.
[80] Ms O’Gorman relies on the authority of Port of Tilbury (London) Ltd v Stora
Enso Transport and Distribution Ltd6. That case too was about an agreement to pay a price on any shortfall product supplied. It was claimed the shortfall was the fault of
6 [2009] 1 CLC 35.
the supplier and said it was willing and able to import the minimum tonnage. The Appeal Court reinstated a lower Court’s grant of summary judgment. It held claims of implied terms were inconsistent with the contract’s no set-off requirements. It held the minimum obligation rationale is explained by a situation where it is associated with the need for an assured income stream and despite claims of disputes.
[81] Although MNZ’s right to pursue claims for short supply are preserved by the parties’ contract it does not, Miraka contends, mean that Miraka cannot pursue when payment obligations fall in arrears.
[82] While clause 3.4 imposes liability on Miraka in the event it did not supply the minimum volume of product in any production season that penalty in an amount equal to [redacted] per cent of the prevailing price of the shortfall was not payable until the expiry of the particular production season.
[83] Ms O’Gorman submits that MNZ cannot in this case take advantage of its own default to seek compensation under clause 3.4 for the shortfall issue it now raises by its defence to this proceeding. In any event Ms O’Gorman’s submits there is no basis for alleging that MNZ ordered but Miraka failed to supply the minimum volumes for season two and therefore that clause 3.4 does not apply.
[84] As was important in the Port of Tilbury decision so too on behalf of Miraka it is claimed there was an important commercial reason why the parties’ contract clauses were drafted as they were; mainly because Miraka had to invest heavy initial capital outlay for the plant to have the required production capacity to ensure it would meet its contractual obligations and could not be subject to cash flow risks – particularly, it is said, with an offshore counterparty against which enforcement would not be straightforward.
[85] Part of MNZ’s defence alleges its failure to on-supply product because of Miraka’s short supply to it. Miraka says those issues are irrelevant because to the extent the quality and supply claim genuinely arise they can be and have been addressed as provided for in the UHT agreement as discrete claims, but meanwhile the minimum volume payments must be made “without set off or deduction”.
[86] Ms O’Gorman submits there is no sufficient evidence provided in opposition to Miraka’s claims of an ability to set off against the debt due from MNZ of that payment provided on behalf of MNZ.
Review
[87] The Port of Tilbury decision emphases that cases are to be decided on their own contractual language. Miraka contends for a take or pay interpretation. Mr Heron queries then why, if Miraka was entitled as it says to claim for a total shortfall in excess of [redacted], it invoiced just [redacted] per cent of that sum when that [redacted] per cent rate did not feature in the parties’ terms of contract. It is arguable submits Mr Heron that therefore there was an understanding that payment rates for the second season were not agreed, much less that it was a matter of discretion for use by Miraka.
[88] It was Mr Lee’s evidence on behalf of MNZ that, inter alia, clauses 3.6(a) and (b) of the UTA agreement anticipates Miraka would have special difficulties in dealing with milk supplies in October and November of each production season, and therefore if MNZ failed to order the minimum volume for those months in each subsequent production season, it would be liable to pay compensation equal to [redacted] per cent (or [redacted] per cent if Miraka is able to redirect the product on normal commercial terms).
[89] Later at paragraph 28 Mr Lee deposed:
The parties ultimately agreed to a reduced liquidated damages rate of [redacted] per cent (for shortfall volume in the first production season and shortfall volume in October and November of each production season where Miraka is able to resell or redirect the shortfall volume to another process or processor.
[90] Mr Heron submits this is unanswered evidence and calls into question Miraka’s own claim of an unarguable interpretation. Mr Heron submits there is an absence of full contextual evidence and calls into question Miraka’s own claim of an unarguable interpretation. Mr Heron submits it is arguable there is an absence of full contextual evidence in this case.
[91] It is Miraka’s position that their interpretation of a take or pay clause is unarguable and that there can be no set off or deduction as the terms of clause 8.2 of the UHT agreement reinforces.
[92] That clause provides:
8.2 Miscellaneous invoices
Any amount which the Purchaser is liable to pay the Vendor under this Agreement and which does not arise from the sale and delivery of Product to the Purchaser shall be invoiced by the Vendor to the Purchaser on the last day of the month in which the liability arises and shall be payable by the Purchaser within 10 Business Days of receipt, without set-off or deduction, in New Zealand dollars by electronic transfer to the account to the Vendor as it shall advise to the Purchaser in writing from time to time.
[93] Mr Heron submits it is unclear whether the invoice for consideration in this proceeding is covered by clause 8.2 because it is predicated on one party “being liable to pay” the other party and because clause 8.4 allows for a dispute as to the amount of invoices and refers back to clause 8.2.
[94] Clause 8.4 provides:
8.4 Dispute as to amount of invoice
Where the Purchaser disputes the amount contained in any invoice rendered by the Vendor for the supply of Product, it shall, within 10
Business Days after the customs clearance of the Product to which the
invoice relates:
(a) pay the Vendor the undisputed portion of the invoice in accordance with sub-clause 8.2;
(b) notify the Vendor of its dispute in writing, giving explicit, detailed reasons for its dispute;
thereafter enter into the dispute resolution process set out in clause 13. Upon the determination of any dispute under this clause, the party determined to be obliged to make payment to the other shall pay the amount determined to be owing to the other party within 10 Business Days of the date of determination (Payment to be made in accordance with sub-clause 8.2).
[95] In short it is Mr Heron’s point that cross claims are not precluded by clause 8.2 which only applies to amounts that are admittedly or indisputably owing. That counsel
says is not the case here; that the sum claimed by Miraka is not an easily ascertainable, indisputable sum, in return for which MNZ enjoys an immediate benefit.
[96] Regarding Miraka’s claims of a set off, MNZ submits it is not entitled to do this because there is a lack of identity of parties regarding the payment made and the purpose for which it was paid given that the payee was not a party to the contract and further was made on the understanding that it would be returned when MNZ made payment. Further there had been previous similar arrangements when Miraka promptly refunded the payments to the payee in instances of payment delays.
[97] Regarding MNZ’s cross claims, MNZ says Miraka plainly failed to produce and supply the minimum volume for the second production season for which it is liable to pay compensation to MNZ of [redacted]. Miraka submits these claims can be dealt with in separate proceedings and should not preclude summary judgment.
[98] MNZ says Miraka is also liable to it pursuant to clause 19.2 of the UHT agreement by which Miraka is liable to indemnify against any claim relating to Miraka’s acts or omissions, including, without limitation, claims arising out of its processing of the product or a failure of the products to conform with the specifications in schedule 1 to the UHT agreements.
[99] In the circumstances MNZ claims such cross claims provide a defence to Miraka’s summary judgment application. MNZ considers its cross claim for supply compensation pursuant to clause 3.4 will exceed Miraka’s entitlement to liquidated damages pursuant to clause 3.6(3).
[100] Mr Heron submits these cross claims qualify as a set off and provide a defence to a summary judgment application because properly interpreted clause 8.2 only applies to amounts that are admittedly, or are indisputably owing. That Mr Heron submits is not the case here.
Result
[101] The Court’s focus is upon written contractual terms. Considerable evidence has been provided by affidavits of persons involved for both parties about how those terms were intended to apply. An assessment of those differences is too difficult by reference to affidavit evidence alone.
[102] The foundation for take and pay clauses is well established and understood. While not using precisely that term in its contract, Miraka says there could be no misapprehension about what the relevant clause is provided. For reasons reviewed by reference to particular clauses the Court cannot be sure on the basis of evidence presently available that clause 3 was intended to provide the means to invoice a claim exceeding [redacted] in absence of the supply of milk product for which that amount was claimed.
[103] The fact that Miraka invoiced for just [redacted] per cent of that sum is not easily explained by reference to agreement clauses.
[104] The Court considers the different points of view of affidavit deponents needs to be tested in a hearing process.
Judgment
[105] This judgment concludes:
(a) The Court cannot be satisfied on the basis of the affidavit evidence provided that there is not an arguable dispute to claims of a requirement to make payment in terms of Miraka’s demand and in absence of consideration of MNZ’s cross claims.
(b)It is arguable the parties’ dispute is, by their contract, required for reference to the arbitral process the Court considers the parties have agreed to.
[106] There will be an order accordingly that the proceeding is stayed and Miraka be restrained from continuing with it until the disputes arising out of and in relation to
the UHT agreement have been resolved by arbitration in accordance with clause 13 of the UHT agreement.
[107] Costs will, in due course, be determined upon application.
Associate Judge Christiansen
2
2
1