Oxygen Air Limited v LG Electronics Australia Pty Limited
[2019] NZHC 2786
•6 November 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2015-404-2184
[2019] NZHC 2786
BETWEEN OXYGEN AIR LIMITED
Plaintiff
AND
LG ELECTRONICS AUSTRALIA PTY LIMITED
Defendant
Hearing: 13-17 May, 20-24 May, 27-31 May, 4-6 June
and 10-11 June 2019
Appearances:
M C Black, N J M Devery and J M Schiphorst for the Plaintiff
S J Mills QC, T D Mahood and T S Kelderman for the Defendant
Judgment:
6 November 2019
JUDGMENT OF POWELL J
This judgment was delivered by me on 6 November 2019 at 3.30 pm pursuant to R 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Solicitors/Counsel: Craig, Griffen & Lord, Auckland
M C Black, Auckland
Hudson Gavin Martin, Auckland S J Mills QC, Auckland
OXYGEN AIR LIMITED v LG ELECTRONICS AUSTRALIA PTY LIMITED [2019] NZHC 2786 [6
November 2019]
Contents Paragraph Number
Background [2]
Issue One – how and when was the Distribution Agreement terminated? [12]
Conclusion – Termination [31]
Issue Two – what were the consequences of the termination? [32] Conclusion – Consequences of termination [39] Issue Three – Did Oxygen have a solar distribution contract? [40] Discussion – A solar distribution contract? [85] Issue Four – LG’s counterclaim [91]
The standard trading terms and relationship to the Distribution Agreement [94]
Oxygen’s claims against LG [105]
Delivery of stock [107]
Discussion – failure to supply stock [145]
Changes to pricing structure [150]
Breach of exclusivity [156]
Supply of air-conditioning product to Icon [160]
Supply to Courts in Fiji [161]
Supply of seconds to Icon and I Fix 4U [171]
Other exclusivity issues [174]
Conclusion – breach of exclusivity [175]
Breach of obligation to act in good faith [176]
Failure to provide marketing and training support generally [181]
Issues around rollout of wifi [182]
Conclusion on issues relating to the rollout of wifi [196]
Service support and the GSFS portal [197]
Conclusion – service issues and GSFS portal [204]
The Energy Star certification [205]
The HRV issue [210]
Conclusions – LG’s counterclaim [219]
Decision [221]
[1] Oxygen Air Limited (“Oxygen”), seeks damages from the defendant, LG Electronics Australia Pty Limited (“LG”). The claim arises out of the termination of a supply and distribution agreement dated February 2010 (“the Distribution Agreement”). Oxygen also seeks damages relating to an alleged agreement to distribute solar energy products produced by LG, whether as part of the Distribution Agreement or by way of separate contract (“the solar issue”). In turn, LG has counterclaimed under the Distribution Agreement alleging Oxygen has breached its own obligations under the Distribution Agreement for which it has sought damages. LG also seeks judgment in the sum of $583,191.65, together with various ancillary orders, for air-conditioning stock supplied by LG to Oxygen and never paid for.
Background
[2] The parties first commenced a trading relationship in 2009, with Oxygen opening a credit account with LG and agreeing to be bound by LG’s standard trading terms on 15 June 2009. Shortly thereafter, on 27 July 2009, the parties entered into an initial supply and distribution agreement (“the 2009 DA”) which operated until the present Distribution Agreement came into force.
[3] The background section of the Distribution Agreement summarised the agreement in the following terms:
AThe Supplier is engaged in the manufacture and supply of various heating and air-conditioning products including (without limitation) residential and commercial heat pumps and ducted air-conditioning (Products).
BThe Distributor wishes to promote, distribute and sell the Products within New Zealand and the Pacific Islands.
CThe Supplier has agreed to supply the Products to the Distributor and to grant the Distributor an exclusive right to promote, distribute and sell the Products within New Zealand and the Pacific islands on the terms and conditions set out in this Agreement, and the Distributor accepts the grant of such rights on the terms and conditions recorded herein.
DThe Supplier has granted the right to the distributor to sell all of the LG products through its franchised stores and wholesale chain and installer network and retailers without limitations.
[4] The Distribution Agreement was to have “an initial term of four years with 2 further rights of renewal (each of four years)”. The Distribution Agreement went on
to further define the exclusive rights granted to Oxygen, and LG agreed it would not “unreasonably change its pricing structure … which may render performance of [the Distribution Agreement] not to be viable or sustainable”. In addition, in the event of having “a dispute arising from delivery, quality, merchantability or product supply”:
[Oxygen] reserves the right to withhold payment to [LG] until the dispute is resolved and rectified. [Oxygen] shall also have a right to setoff and/or counterclaim against [LG] for any defect or dispute that may arise as referred to herein.
[5]More broadly, Oxygen and LG agreed:
[LG] and [Oxygen] will at all times act in good faith with respect to their dealings with each other so as to assist each party in achieving their commercial objectives under the agreement. Such good faith obligations shall include (without limitation) keeping full and up to date records with respect to the sale of products and providing reasonable assistance with the promotion, marketing and sale of the products.
[6] The major difference between the 2009 DA and the Distribution Agreement was with regard to termination and its consequences. Specifically, section 5 of the Distribution Agreement set out a process to effect termination for breach to be followed by both LG and/or Oxygen,1 while permitting unilateral termination by Oxygen for any reason pursuant to cl 5.1c(iii). Section 6, in turn, spelt out the consequences of termination, providing for a run out period in which supply was required to be maintained to Oxygen in order to service its business customers, and in the same period preventing LG from supplying Oxygen’s business customers, wholesalers or independent installers and/or affiliated companies/individuals that install heat pumps/air-conditioning and other products subject to the Distribution Agreement. Clause 6.3 in turn set out a mechanism for calculating damages where the Distribution Agreement was terminated as a result of a default by LG based on Oxygen’s previous two years trading figures.
[7] Within a couple of years of signing the Distribution Agreement issues were raised by Oxygen with regard to LG’s performance on a range of matters. Default notices were then issued by Oxygen, pursuant to cl 5.1c(i) of the Distribution Agreement. Efforts to resolve these issues led to a mediation (in terms of cl 5.1c(ii))
1 These clauses set out a process of filing notices to rectify default, followed by mediation and if that was unsuccessful, arbitration.
in 2012 which, whilst ostensibly unsuccessful, eventually resulted in specified changes implemented by LG which resulted in Oxygen withdrawing its default notice in July 2012.
[8] By the end of 2013 and throughout 2014, further issues emerged which have formed much of the focus of the present proceedings. These included the solar issue, issues regarding supply of air-conditioning product by LG to Oxygen; breaches of LG’s exclusivity obligations to Oxygen; servicing and warranty issues; a lack of product training; and issues around the introduction of Wi-Fi controllers; Bluestar Energy certification; and LG’s heating recovery ventilation product, EcoV.
[9] These issues came to a head in February 2015. The key issues were whether LG had complied with its obligations to supply Oxygen with a forecast order of air- conditioning stock, placed in September 2014, or whether Oxygen had failed to meet its own obligations to LG to clear long-term inventory (“LTI”) stock, at which time Oxygen took delivery of air-conditioning stock for which it then refused to pay.
[10] There is no dispute that the relationship between Oxygen and LG never recovered after a meeting that took place on 27 February 2015 and that the Distribution Agreement was subsequently terminated. There is, however, a fundamental dispute over when and on what basis the Distribution Agreement was terminated:
(a)Oxygen contends that the Distribution Agreement was terminated for breach on 14 August 2015, thereby entitling it to damages in terms of cl 6.3 of the Distribution Agreement; but
(b)LG’s position is that the Distribution Agreement was not in fact terminated until 14 June 2018 after notice was given by Oxygen on 17 April 2018 pursuant to cl 5.1c(iii), meaning that Oxygen is not entitled to damages pursuant to cl 6.3 of the Distribution Agreement.
[11] These fundamental differences with regard to the termination of the Distribution Agreement and the consequences that flow from the termination therefore stand to be the first two issues to be addressed in this judgment. The focus will then
shift to the solar issue, before considering LG’s counterclaims against Oxygen, which will also require consideration as to whether any of the defaults alleged by Oxygen provide a basis for setoff or counterclaim against the amounts claimed by LG.
Issue One – how and when was the Distribution Agreement terminated?
[12] There can no doubt that the meeting between Oxygen and LG on 27 February 2015 was a watershed moment in the history of the relationship. The LG minutes of that meeting recorded:
Eddy and John from Oxygen Air came into the office, and met with Ivan, Raymond and I. The outcome of the meeting is as follows:
·Oxygen Air no longer want any dealings with the LG brand.
·Eddy referred to Clauses 4.1 and 4.2 in his contract, which is attached, stating that there will be no further payments to LG, until all ongoing legal disputes are settled by both parties lawyers, most probably in court.
·Eddy informed us that we are to expect a formal communication from his Lawyer, Michael Black sometime next week.
·Eddy stated that he will, nor will Oxygen Air ever deal with LG again, and also stated he had email evidence referring to the way LG deal with Harvey Norman here in NZ, from historic records, which he will be using to discourage Harvey Norman from buying from LG too.
·Eddy informed us that he is now dealing with Panasonic for the supply of A/C and he has moved his LG stock to a different warehouse, to sell to fund his legal costs. He did not offer to return any stock either.
·Eddy instructed us that he wants no further verbal written or verbal communication directly, and wants everything to be communicated via his lawyer.
·The last cheque of $30,000.00 cannot be banked, and there will be no further payments going forward.
We did not comment on any of the points above, and stated that we would send this information to all stakeholders and our legal division accordingly. Eddy stated for the record that he had no issue with anyone in the room from LG, and had appreciated our support to date.
[13] Notwithstanding the apparent finality of Mr Rotteveel’s position his statements at the meeting could not terminate the Distribution Agreement and it is not suggested by Oxygen that the advice provided by Mr Rotteveel at the meeting in any way
constituted a termination. This is because cl 5.1c of the Distribution Agreement provided:
c.This agreement shall not be terminated unless one of the following events occur:
(i)[LG] or [Oxygen] materially and substantially defaults in performing any of the obligations specified herein and that default has first been the subject of a written notice to rectify that default allowing not less than 40 working days for the party receiving the notice to remedy the default.
(ii)That following the 40 working day period, the parties shall then refer the dispute and matters giving rise to the default, to mediation and failing resolution at mediation that the dispute be referred within 14 days to resolution/determination by a sole arbitrator appointed pursuant to the provisions of the Arbitration Act 1996. Such arbitration is to occur in New Zealand, there being no right of appeal.
(iii)[Oxygen] can in its sole discretion (and for any reason) give 40 working days written notice that it is no longer willing to continue with the distributorship and perform the terms specified herein. If [Oxygen] elects to give such notice then no compensation or any amount by way of damages shall be payable by [Oxygen].
[14] Instead, in a response to a letter of demand issued by LG for unpaid stock, Oxygen’s solicitor, Chris Lord, wrote to LG on 5 March 2015 and gave notice pursuant to cl 5.1c(i) of the Distribution Agreement of “breaches and ongoing default by LG under the distribution agreement which have not been resolved or remedied by LG”. In particular, Mr Lord gave notice of issues under the following headings:
·Product supply, stock and distribution problems;
·Warranty issues;
·No support or technical support and training;
·Breach of exclusivity;
·LG restrictions relating to “HRV”;
·Imposition of “drop shipping”, increased costs and freight;
·LG supply of second hand units in market place;
·The solar panel dispute.
[15] Mr Lord went on to formally give notice pursuant to cl 5.1c(i) giving LG 40 working days to remedy the defaults identified. He also gave notice that Oxygen was exercising its rights pursuant to cl 4.2 of the Distribution Agreement and was “not obliged to pay any amount claimed by LG until the dispute was resolved and rectified”. Mr Lord made it clear that if the disputes identified were not remedied they would be referred to mediation, and if unsuccessful, arbitration in accordance with the Distribution Agreement.
[16] Correspondence between the parties’ solicitors resulted in an unsuccessful mediation on 5 August 2015. Shortly after, on 14 August 2015, Mr Lord wrote again to LG’s solicitors. After setting out what had occurred to that point, Mr Lord noted that LG’s actions had “undermined any viability of the [Distribution Agreement]” and that, in consequence, Oxygen was facing claims from its sub-distributors appointed under the Distribution Agreement. Mr Lord then advised:
Oxygen's claim for damages
7.Attached with this letter is a Schedule which on a provisional basis sets out Oxygen’s claim for damages as a result of LG’s breaches of the Distribution Agreement (“DA”) and the solar distributorship in New Zealand.
8.The attached Schedule itemises at this preliminary stage the following claim by Oxygen.
(a)Damages for loss of profit resulting from non-supply and breach of DA: 20%: $705,649.
(b)Loss of LG Electronics solar business for two years (2014- 2015): $291,066. This calculation assumes that the claim falls under the DA. It is expected that this claim will increase once the relevant sales information is provided by LG/Harrisons. It presently is the minimal amount being claimed with Oxygen reserving its right to claim a higher sum.
(c)In the event that it is established that the solar claim does not form a component of the DA, then Oxygen will be claiming
damages for loss of the dealer/distributorship on the usual contract principles where a distributorship has been wrongfully terminated without reasonable notice. This will involve an accounting of profits and an enquiry into damages.
(d)Expenditure incurred in reliance upon DA contract: $552,550. Oxygen give notice that the details for this item in the Schedule are presently limited. They do not include additional amounts that are likely to be claimed once a full accounting has been completed.
(e)As the Schedule prescribes under a, b and d above the total claim now demanded is presently: $1,549,265 (plus GST in any).
(f)As also notified, there are also the sub-distributorship claims and other costs and interest. These have yet to be fully quantified given the outstanding position that remains with the sub-franchisees.
9.Oxygen therefore reserves its entitlement to claim additional losses under all heads of damages once further accounting and an enquiry into damages has been concluded. Oxygen also reserves its entitlement to claim for loss of the value of the company, and other costs incurred such as accounting and legal costs.
10.In accordance with Oxygens rights under the DA and as notified in prior correspondence, Oxygen rely upon its contractual right of set- off and/or counterclaim in rejecting any demands made by LG for past stock supplied.
11.Oxygen therefore requires and demands LG to make payment of the amounts scheduled to this letter within fourteen days following receipt of this letter. In the event that payment is not made or other arrangements for proper compensation satisfactory to Oxygen, proceedings will be filed in the High Court at Auckland.
[17] Oxygen relies on this letter as being sufficient to terminate the Distribution Agreement from 14 August 2015. In Mr Black’s submission:
No objective reader, having received notice of this letter, could be under any misapprehension that Oxygen was terminating the future primary obligations under the [Distribution Agreement] (excluding residual obligations preserved by the [Distribution Agreement] and referred to next). Three points conclusively support this proposition:
(a)The August notice refers specifically to a compensation claim advanced under cl 6.3, the premise of cl 6.3 is that the SDA has been terminated;
(b)The August notice followed from the mediation which is a compulsory step in the termination process under cl 5.1(c)(i)-(ii);
(c)Following the August 2015 Notice the relationship thereafter was fundamentally different. No further orders were placed or fulfilled, and the only obligations acted upon were the post-termination residual primary obligations.
[18] There are a number of fundamental problems with Mr Black’s submission, however. First, nowhere in the letter of 14 August 2015 is there any reference to the Distribution Agreement being terminated. Instead, as with the 5 March 2015 letter from Mr Lord, the letter of 14 August 2015 simply notes that the breaches and default by LG remain outstanding, before going on to set out a claim for damages on a provisional basis. Although as Mr Black noted in his submissions, the calculation undertaken appeared to have been based on cl 6.3 of the Distribution Agreement, the two year period identified for the calculation of damages under that clause,2 was identified as running from February 2015 (a point at which it is clear that the Distribution Agreement had not been terminated) rather than August 2015 which would have been the case had the Distribution Agreement been terminated by the letter of 14 August 2015 as now alleged.
[19] In any event, Oxygen’s submission ignores the fact that cl 5.1c did not provide for termination by letter. Although, as Mr Black noted, Oxygen had followed the termination procedure to that point through the issue of notices of default and in pursuing mediation, there is nothing in cl 5.1c(ii) that then allowed Oxygen to terminate by giving notice. Instead, the clause appears to envisage proceeding to arbitration to determine if the substantive grounds for termination have been established – a substantial default in terms of cl 5.1c(i) and 7.1.
[20] Such a procedure, while onerous and somewhat lacking in flexibility, was nonetheless consistent with Mr Rotteveel’s stated objectives at the time the Distribution Agreement replaced the 2009 DA. In particular, his stated objective of securing a long-term distribution agreement was achieved given LG was unable to terminate at any point until the conclusion of an arbitration pursuant to cl 5.1c(ii), while at the same time Oxygen’s own ability to terminate the Distribution Agreement at any time was preserved pursuant to cl 5.1c(iii).
2 See [34] below.
[21] Even more importantly, and contrary to Mr Black’s submission, the subsequent history of the relationship between Oxygen and LG simply does not support Oxygen’s contention that the Distribution Agreement was terminated by the letter of 14 August 2015. First, when the present proceedings were issued one month after the 14 August 2015 letter Oxygen did not plead that the Distribution Agreement had been terminated.3 On the contrary, for a further period of some two and half years Oxygen continued to maintain that the Distribution Agreement remained in force. In particular, Mr Rotteveel continued to request stock lists from LG as well as the need for training on new model air-conditioning units throughout 2016 and, on 8 July 2016, in particular advised:
As a distributor and to launch a product we require more than just an email that says, What technical data do you need ? and training will from part of the roll out plan, or a quick on line training session.
In my emails of 2/11 and 12/11 2015 and again 5 February 2016 to you I have specifically asked for information relating to a roll out, but all I seem to get as a reply is,What stock are we going to take .. and what information do we need? simply sending us a brochure and asking for a forecast of stock is absurd especially considering you still have not confirmed all the remaining outstanding issues : Ie drop shipping, the price increases, the non performance of stock delivery by LG , the lack of technical support or training , which again is very evident in this future product release, let alone the energy star requirements, that you keep mentioning that “Oxygen should sort out”
As a NZ Distributor, we need proper representation and regular contact, I would expect someone to visit us at least once a week with product updates (not several months apart) we need a technical manager from LG to train all of our staff.
On a side note, your own NZ support technical staff have not received any training on the new product.
Which ASC’s in NZ have had training, please advise
So without going over old ground over and over again and again.
As a distributor, we require!
(Emphasis added.)
3 The first reference in the pleadings to the Distribution Agreement having been terminated on 14 August 2015 was set out in Oxygen’s supplementary reply filed on 14 August 2018. For earlier references to termination by Oxygen see [27] above.
[22] Similar correspondence continued into 2017 which prompted the following request from LG’s solicitor, Tim Mahood, on 10 November 2017. Mr Mahood’s letter made it clear that LG understood the Distribution Agreement remained in force and provided:
1. We refer to the February 2010 distribution agreement between our clients in respect of air-conditioning products (the DA).
2. As you know, and as is the subject of current proceedings between the parties, both parties say they have been dissatisfied for some years with the way the other has performed under the DA. Most significantly, Oxygen says LG was insufficiently supportive of its previous efforts to make sales in the Exclusive Territory while LG says it is Oxygen that is in breach by failure to order and sell products in the Exclusive Territory.
3. The most recent correspondence between Mr Heo of LG and Mr Rotteveel of Oxygen (attached) makes clear that the impasse has not been overcome: Mr Rotteveel accuses LG of failing to offer products and training while Mr Heo has invited orders from Oxygen, and advised that training would be provided on the products ordered. Despite Mr Heo’s invitation, Oxygen has not placed any orders, or even responded.
4. As a result, it is clear that the relationship is no longer beneficial to either party. As long as Oxygen continues not to order air-conditioning products for sale into the Exclusive Territory, LG is completely shut out of that market. LG’s reputation and value in the Exclusive Territory is being rapidly diminished due to the lack of retail air-conditioning presence. At the same time, Oxygen’s exposure to LG’s claim for damages for failure to order, market and sell LG air-conditioning products is continuing to accrue. The longer LG is out of the market, the greater that exposure for Oxygen, particularly given that the longer the status quo prevails, the longer it will take for LG to recover its market share and therefore the further into the future LG will be entitled to recover losses from Oxygen.
5. As you know, clause 2.1 of the DA:
a.provides for a four-year term (to February 2014) with two further four-year renewal terms. The first of the renewal terms is due to end in February 2018; and
b.allows the parties to make a different agreement in writing.
Against the background of the litigation regarding the DA, LG invites Oxygen to agree, by responding in writing, that the DA will not renew in 2018. That is, as of close of business on 28 February 2018, the DA will expire and come to an end.
6. Although it makes this offer, and would prefer it, LG otherwise remains committed to performing the DA. Oxygen has been provided with a list of the current available models and LG advised that relevant training would be provided once Oxygen places an order. Again, we invite Oxygen to place an order that is consistent with its obligation of good
faith under clause 3.1, and the implied term to place orders for air- conditioning products.
7. It is consistent with LG’s obligation to mitigate its losses that it seeks to reach agreement on this issue with Oxygen. Of course, should Oxygen insist on its right of renewal, the accruing losses will continue through the further four-year period (and into the future past 2022 for the period it will take LG to recover) and Oxygen will not be able to attempt to discount those losses for lack of mitigation.
8. We look forward to your response. (Emphasis added.)
[23] Mr Black responded on behalf of Oxygen on 15 November 2017. Far from contending that the Distribution Agreement had already been terminated, Mr Black advised:
Oxygen does not accept your proposal to terminate the distribution agreement early and without compensation. Oxygen continues to maintain all its rights and remedies under the distribution agreement and otherwise at law in all respects, including (inter alia) whether your notification constitutes anticipatory breach.
(Emphasis added.)
[24]Mr Black went on to add:
Even recently, Oxygen, on numerous occasions has asked LG for information as to current models, training and technical details. Typically, there has been no constructive reply or any replies by LG. Attached to this letter is “Schedule 3” which is a selection of examples relating to current models, training and technical details. There are numerous other occasions involving unexplainable delays and even no replies at all from LG to important aspects involving performance of the distribution agreement.
Again, it is not appropriate nor necessary in open correspondence to exhaustively enunciate all of these instances. If you wish to obtain some details in the early stages of the dispute, you should have already contacted Mr Schirnack regarding discoverable documents. We assume that Mr Schirnack as indeed other LG staff, were made aware by you and your predecessor of their obligations to retain all information concerning the dispute(s).
The email attached by LG from Mr Sean Heo (dated 12 September 2017) is a mere example of one occasion of untimely communication. Importantly, this email was in fact a reply to Oxygen’s own requests for information sent on 28 August 2017. This represents a delay of 15 days to Oxygen, which is obviously unsatisfactory and not in good faith.
Oxygen is still yet to be informed of product availability in New Zealand, including (but not limited to); LG Energy Star Ratings; Promotional items;
Technical support and training manuals; as well as Warranty support. In fact, regarding warranty issues, LG advised Oxygen on 31 July 2017, that Oxygen was no longer eligible for warranty and servicing claims, despite LG’s obligations under the distribution agreement.
Additionally, Oxygen is still to receive correspondence regarding an appropriate LG representative in New Zealand who can provide it with the necessary information required regarding new product. The significant (not merely “insufficient”) lack of support and failures to reply constructively to simple requests in a timely manner continue to evidence breaches by LG which have and continue to undermine Oxygen’s rights and interests under the distribution agreement.
[25] Mr Black’s response makes it clear that, as at November 2017, Oxygen did not consider the Distribution Agreement had been terminated.
[26] Following this exchange, correspondence to LG from Mr Rotteveel continued to assert that Oxygen was a distributor and requested a range of information from LG so that it could resume placing orders. Indeed, as late as 14 February 2018 Mr Rotteveel continued to maintain in an email to LG that Oxygen was the “exclusive distributor in NZ”. As a result, when Mr Rotteveel wrote to LG’s solicitors on 17 April 2018 purporting to terminate the Distribution Agreement, this was in fact entirely consistent with all of the correspondence between the parties since the 27 February 2015 meeting. Specifically, Mr Rotteveel wrote:
1. This letter is sent to you both as the solicitors representing LG and directly to LG, due to the matters referred to below.
2. As you are aware from prior correspondence Oxygen Air Ltd is the distributor under a Distribution Agreement (“DA”) with LG. There remains unresolved disputes and issues between the parties which are detailed and referred to in prior notices of default issued by Oxygen under the DA and pursuant to cl 5.1(c). There is also the unresolved disputes concerning the solar distribution.
3. Without prejudice to all of Oxygen’s rights and remedies in relation to those defaults, the purpose of this letter is to confirm and notify LG, that Oxygen in its sole discretion under the DA hereby gives 40 working days written notice under cl 5.1(c)(iii) that it is no longer willing to continue with the distributorship.
4. Please acknowledge receipt of this notice in due course.
[27] Mr Rotteveel’s letter of 17 April 2018 is utterly unequivocal. It makes it clear that notice has been given to terminate the Distribution Agreement, that the termination was made pursuant to cl 5.1c(iii) and, therefore, was not a termination for
breach. That this was a deliberate choice made by Oxygen was confirmed when on the same day as notice was given it filed its Amended Statement of Claim in these proceedings confirming that notice had been given and that at that time termination was pending.4 This was further confirmed when on 15 May 2018, Oxygen filed its second amended statement of claim in these proceedings which referred to termination of the Distribution Agreement pursuant to cl 5.1c(iii), on 17 April 2018.
[28] Following Oxygen’s letter, on 20 June 2018, Mr Mahood wrote to Mr Black querying whether Oxygen sought a run out period pursuant to clauses 6.1 and 6.2 of the Distribution Agreement, noting in particular:
As you have not provided any notice and/or responded to the queries in our 10 May 2018 letter, it follows that Oxygen will not be relying on clause 6.1/6.2 of the distribution agreement, and or electing to continue to supply existing business customers under those clauses.
[29] By way of clarification, Mr Rotteveel wrote a further letter on behalf of Oxygen, dated 3 July 2018, which provided:
Thank you for your recent correspondence and in particular your email of 20 June 2018, to our legal counsel.
Oxygen replies as follows.
Oxygen accepts that it no longer has existing rights to be the exclusive sole distributor under clause 6.1 of the distribution agreement. Oxygen also accepts that the supplier (LG) is no longer restrained under clause 6.2.
Oxygen maintains all its rights and remedies including damages following LG’s defaults and as a result of cancellation of the distribution agreement.
[30] In the course of the hearing Oxygen, and in particular Mr Rotteveel in his evidence, attempted to argue that Mr Rotteveel’s correspondence in 2018 related solely to the “run-out period” being the three years following termination of the Distribution Agreement in August 2015.5 Such an interpretation is clearly untenable. Not only is it entirely inconsistent with the wording of Mr Rotteveel’s two letters, it
4 Paragraph 23 of the Amended Statement of Claim filed on 17 April 2018 provided:
On or about 17 April 2018 pursuant to cl 5.1(c)(iii), [Oxygen] gave written notice to [LG] that it was no longer willing to continue with the distributorship. Following expiration of that notice and pending termination, the agreed compensation provisions under the [Distribution Agreement] then apply.
5 See [6] above.
was in any event not at the end of a three-year period post 14 August 2015. More broadly, the correspondence in the intervening period was, as noted, consistent with the Distribution Agreement remaining on foot rather than the more limited rights available to Oxygen, had the contract been terminated in August 2015 and a run-out period applied. Finally, the 3 July 2018 letter makes it clear that Oxygen did not elect to exercise its right to a run out period in terms of cls 6.1 and 6.2.
Conclusion – Termination
[31] The evidence is utterly overwhelming that, notwithstanding the breakdown of the working relationship between Oxygen and LG, the Distribution Agreement remained in force until notice of termination was given by Oxygen pursuant to cl 5.1c(iii), on 17 April 2018. This means that the Distribution Agreement remained in force until 18 June 2018.
Issue Two – what were the consequences of the termination?
[32] Both parties are in agreement that cl 6.3 of the Distribution Agreement is a remedy expressly provided in the contract for the purposes of s 34 of the Contract and Commercial Law Act 2017. As Mr Black submitted:
By cl 6.3 the parties agreed a formula to cover the losses that were contemplated as likely to occur on a material breach by LG. Under the provision LG agrees to compensate Oxygen for the expenditure incurred and wasted by reason of the breach. In addition, Oxygen is entitled to receive loss of bargain compensation (net profit for products that could have been supplied under the DA in the remaining term).
[33] As a result, there is no dispute that Oxygen seeks to rely upon cl 6.3 in order to calculate damages payable from LG upon termination of the Distribution Agreement.
[34] As has been noted however, Oxygen, in giving notice to terminate the Distribution Agreement on 17 April 2018, did not terminate for breach but rather pursuant to cl 5.1c(iii). Termination under cl 5.1c(iii) has two important consequences. First, it precludes LG seeking damages or compensation from Oxygen for breach of the Distribution Agreement. As Mr Mills QC accepts, this means LG’s fourth course of action in its counterclaim against Oxygen must therefore fail.
Secondly, and of significance to Oxygen’s claim for damages, cl 6.3 provides for compensation only where there has been termination for breach:
Compensation: By entering into this agreement the supplier acknowledges and confirms that the distributor has expended significant costs on marketing, advertising, promotion and other expenditure of and incidental to the distributor implementing, carrying out and performing this agreement.
In the event that this agreement be terminated by any default by the supplier, the supplier agrees to pay reasonable compensation to the distributor for the expenditure incurred. In addition, the distributor shall be entitled to receive compensation representing the net profit for products that could have been supplied under this agreement for a period of two years following termination. The amount of compensation payable for future product supplies shall be determined from reviewing the distributor’s previous two years trading figures.
In determining the quantum of compensation, the parties agree that 20% of the purchases for each year (comprising a total of two years) fairly represents the reasonable compensation payable by the supplier to the distributor in fulfilling this clause.
(Emphasis added. Italics in original)
[35] Clause 6.3 cannot be interpreted otherwise. If compensation were payable for termination under cl 5.1c(iii), it would mean Oxygen would be entitled to compensation calculated under that clause if Oxygen terminated the Distribution Agreement at any point prior to its expiry, whether or not LG was in breach. In addition to being inconsistent with the clear wording of the clause, such an outcome would be quite simply commercially unreal and untenable.
[36] The result is that Oxygen is not entitled to damages under cl 6.3 of the Distribution Agreement.
[37] Even if I am wrong in concluding that termination pursuant to cl 5.1c(iii) precludes damages under cl 6.3, the timing of the termination of the Distribution Agreement has the same effect in any event. Specifically, the accounting experts appointed by the parties to assess the damages payable pursuant to cl 6.3, Marnus Beylefield on behalf of Oxygen and Shane Hussey on behalf of LG, were in agreement that if the Distribution Agreement was terminated at any point after February 2018 (which I have concluded is the case), then no lost profit arises. This is because Oxygen rapidly ran down its business in the months following the
27 February 2015 meeting, and did not make any significant orders from LG after April 2015. Instead, in July 2015 a new company, Oxygen New Zealand Ltd (“Oxygen NZ”), was incorporated and since that time has carried on business as an air- conditioning dealer for a number of air-conditioning manufacturers including Fujitsu, Panasonic, Carrier and Aspen. Oxygen’s “previous two years trading figures” in terms of cl 6.3 are therefore zero if termination occurred after February 2018.
[38] Although Mr Black has, in the course of the hearing, asserted that the two years to be assessed for the purposes of cl 6.3 can be any two trading years, such an interpretation is plainly untenable. It is not only inconsistent with the clear wording of the clause (as applied by the experts) but indeed Oxygen’s own previous calculations,6 and if correct would mean that Oxygen was always entitled to its best two years profits upon termination for any reason pursuant to cl 5.1c(iii).
Conclusion – Consequences of termination
[39] As a result of termination occurring pursuant to cl 5.1c(iii), no compensation is payable by LG to Oxygen pursuant to cl 6.3 of the Distribution Agreement, and LG is not entitled to damages/compensation from Oxygen.
Issue Three – Did Oxygen have a solar distribution contract?
[40] Oxygen asserts three alternative bases for its claim to have obtained rights to distribute LG’s solar product in New Zealand. First, Oxygen asserts that LG’s solar products were within the category of products defined in the Distribution Agreement and, therefore, were always within the ambit of the Distribution Agreement. Alternatively, Oxygen have pleaded that it was granted solar distribution rights in October 2013 and these rights were either subsequently incorporated into the Distribution Agreement or formed in a stand-alone contract.
[41] There are fundamental problems with each of these formulations, whether the claimed rights were exclusive (as pleaded consistently by Oxygen) or non-exclusive (as asserted by Oxygen’s witnesses at the hearing).
6 See [16] above.
[42] As a preliminary issue it will be apparent that if any solar distribution rights were incorporated into the Distribution Agreement then, for the reasons set out in Issue One and Issue Two above, these were terminated with effect from 18 June 2018,7 and no compensation is therefore payable.8
[43] There is, however, no basis whatsoever for Oxygen to argue solar distribution rights were incorporated into the Distribution Agreement. In asserting that the solar distribution rights had always been part of the Distribution Agreement, Oxygen relied on the fact that internally within LG, air-conditioning and energy products (including solar) form part of the same division of the company. This issue was picked up by a number of Oxygen witnesses, including both Kane Silcock, formerly the Marketing Manager at LG between April 2008 and April 2011 and Richard Taylor, who had been a Sales Manager at LG from April 2008 to late 2010, and who had been heavily involved in the negotiation of both distribution agreements. As a result of their evidence, Oxygen submitted that if the category of products contained in the Distribution Agreement was wide enough to encompass LG’s solar products, then Oxygen would have had exclusive rights to distribute those products from the time the Distribution Agreement was executed.
[44] Oxygen’s contention, however, cannot stand as the definition of products contained in the Distribution Agreement is simply not wide enough to permit the interpretation advocated. In particular, the definition of “products” set out in Recital A to the Distribution Agreement provides:
… heating and air-conditioning products including [without limitation] residential and commercial heat pumps and ducted … air-conditioning …
[45] The definition not only does not encompass solar products but does not refer to any type of “energy” products of the type that could encompass LG’s solar products. Likewise, the reference to “without limitation” in the definition, upon which Mr Black placed some weight, refers to the types of heating and air-conditioning products manufactured and supplied by LG, and is clearly not wide enough to include LG solar products. Moreover, as Mr Mills noted, the fact that LG had energy products at the
7 See [31] above.
8 See [39] above.
time the Distribution Agreement was entered into but chose nonetheless to limit the definition of products to “heating and air-conditioning” would appear to indicate that energy products were specifically excluded from the ambit of the Distribution Agreement. Taken together, it is absolutely clear that LG’s solar products did not come within the definition of product for the purposes of the Distribution Agreement and, therefore, Oxygen cannot claim distribution rights to LG’s solar products as a right arising out of the Distribution Agreement.
[46] There is equally no doubt that LG solar products were not otherwise subsequently incorporated into the Distribution Agreement. Clause 7.2 of the Distribution Agreement specifically provides:
Modification: Except as otherwise expressly provided in this agreement, its terms are complete in all respects, no amendment to this agreement will be effective unless it is in writing and signed by both parties.
[47] Quite clearly, any subsequent modification of the Distribution Agreement to enable Oxygen to distribute LG’s solar products would have required a written amendment signed by both parties. This point was accepted by Mr Rotteveel in the course of his evidence. No such amendment was ever agreed or executed and, therefore, any distribution rights acquired by Oxygen could never have formed part of the Distribution Agreement.
[48] The question then turns to whether there is evidence of any other contractual arrangement granting distribution rights to Oxygen in respect of LG’s solar product, said by Oxygen to have been granted in October 2013, whether exclusive or otherwise.
[49] Pressed for details of any solar contract, Mr Black submitted that such came about as a result of the “following representations and actions” set out in Oxygen’s closing submissions:
The following representations and actions were undertaken by LG’s representatives, in reliance Oxygen also performed according to the representations:
(a)On 13 December 2012, LG, through its representative Mr Lambert, sent Oxygen LG’s key solar marketing material and a brochure where Oxygen could apply its distributor information to the back page. LG
claims this was an “information pack” only, however Oxygen received multiple copies of each marketing tool;
(b)In January 2013 Messrs McKenzie and Rotteveel, at Oxygen’s expense, participated and completed LG’s solar training at LG’s head office in Australia. This training was provided by Mr Lambert, where the intention to form a subsequent solar distributorship agreement was again confirmed by Mr Lambert;
(c)On 29 July 2013 Mr Rotteveel, on behalf of Oxygen, met with LG’s representatives in New Zealand and discussed Oxygen’s future solar distributorship. LG’s representatives present included Messrs Brian Kim and Sunderland and Ms Rangihuna;
(d)A necessary “solar panel account” was specifically opened for Oxygen by LG on 26 September 2013;
(e)On 26 September 2013, Ms Rangihuna confirmed that Oxygen’s first solar panel order would arrive in New Zealand by the end of October 2013. The container was duly delivered to Oxygen;
(f)Prior to the first solar panel shipment to New Zealand for the benefit of Oxygen, LG’s MD, Brian Kim verbally confirmed Oxygen’s right to distribute solar panels in a conversation with Oxygen’s principal representative, Mr Rotteveel;
(g)On 23 October 2013 a second container of solar panels was ordered by Oxygen for delivery by the end of January 2014. LG duly performed under the solar distributor agreement and delivered the container to Oxygen;
(h)In support of Oxygen’s solar distributorship rights, on 18 November 2013 LG’s B2B Sales Manager, Mr James Harwood responded positively to Oxygen’s solar website, lgsolar.co.nz;
(i)LG’s representatives, failed to disabuse Oxygen of its belief that it was granted a solar distributorship in October 2013, until March 2014;
(j)On 18 February 2014 Mr Lambert thanked Oxygen for its support in growing LG’s solar business in New Zealand and confirmed a meeting would occur whereby training and product information would be provided to Oxygen.
(Citations omitted.)
[50] At the outset, it is difficult to see, even if all of these matters were established, that that would provide sufficient evidence of the formation of a contract, particularly given the complete lack of any detail as to the terms of such a contract.
[51] It is likewise difficult to reconcile the propositions relied upon by Oxygen in closing with what had been pleaded in the Third Amended Statement of Claim, as
recently as 31 July 2018. At that time, Oxygen pleaded that it had been “introduced to [LG’s] solar products and market in New Zealand” between December 2012 and April 2013, and in October 2013 had been granted distribution rights for LG’s solar products in New Zealand pursuant to a partly written partly oral contract.
[52] Oxygen then went on to plead that “initial negotiations with regard to LG’s solar products had been undertaken by Mr Rotteveel and Mr Silcock in 2011 and 2012 whereupon:
… it was represented and agreed by Silcock that the plaintiff would be the exclusive distributor of … LG’s solar products in New Zealand.
[53] The pleading with regard to solar prior to the end of 2012, in its suggestion that commitments were made, is somewhat problematic given that Mr Silcock in fact had left LG by April 2011. It also became clear, during Mr Mills’ cross-examination of Mr Silcock, that any suggestion from Mr Silcock that a commitment was made to Oxygen in respect of solar was based upon the misconception that the category of product identified in the Distribution Agreement was wide enough to encompass solar, which, as noted above, was not the case. I am also satisfied having heard the evidence of Mr Rotteveel, Mr Silcock and Markus Lambert (LG’s Solar Product Manager from September 2011) that the first specific information about LG’s solar product was provided not by Mr Silcock to Mr Rotteveel, but by Mr Lambert to Mr Rotteveel in December 2012. In reaching this conclusion I accept Mr Lambert’s evidence that there simply was not any information about LG’s solar products available in Australasia until Mr Lambert took it in hand to commission such information on those products, after his arrival at LG in September 2011.
[54] By the time that information was provided to Oxygen by Mr Lambert there was already a solar distributor in place in New Zealand – NZCES who appeared to have been distributing LG solar products from mid-2012. Upon finding out that NZCES was a distributor of LG’s solar products, Oxygen took no steps to argue that this was inconsistent with any assurances given by Mr Silcock to Oxygen, notwithstanding the fact NZCES was distributing solar products fundamentally undermines any suggestion that an exclusive distributorship could have been given by LG to Oxygen in October 2013.
[55] Instead, it is clear that throughout 2013, Mr Lambert, assisted by Martina Rangihuna in particular, did provide ongoing encouragement to Oxygen, not only in terms of providing product information but in encouraging Oxygen to obtain the necessary training and accreditation. There is also no doubt that the Managing Director of LG in New Zealand, Brian Kim, supported Oxygen’s enthusiasm for LG’s solar product in New Zealand and, to this end, supported and facilitated this involvement through opening a solar account for Oxygen with LG, and being instrumental in advocating for the sale of two containers of solar panels to Oxygen. The first of the containers was ordered on 26 September 2013, the second on 23 October 2013, with Oxygen free to utilise the product as it saw fit through its existing networks or, as occurred, through direct sales through TradeMe.
[56] Mr Lambert, in his evidence, indicated that rather than any formal agreement, what occurred throughout 2013 was more in the nature of a trial which allowed him to observe how Oxygen responded to the different demands of solar product as opposed to LG’s air-conditioning product. While, as Oxygen have correctly noted, there is no documentary evidence to suggest that this was a trial, Mr Lambert made clear that he regarded the selection of distributors for New Zealand to be important and needed to have confidence that anyone appointed as a distributor would be suitable.
[57] Despite the assistance freely given by LG to Oxygen, there is no evidence of any broader contract being entered into giving Oxygen the right to distribute LG solar products. In particular, at no time did LG ever refer to Oxygen as a solar distributor. Instead, certain circular emails/correspondence provided by LG to Oxygen did refer to Oxygen as an authorised LG solar dealer, an accurate reflection of Oxygen’s role at that point in the absence of any broader agreement on Oxygen’s right to distribute LG solar product. Likewise, Oxygen’s reliance upon brochures provided by Mr Lambert and Ms Rangihuna which provided a space for “LG distributors details” to be entered is also misplaced. The reference to “distributor” in these documents does not provide any support for the suggestion that Oxygen had some form of agreement to distribute solar product with LG. First, the particular brochures were in draft form and it is not clear whether or when they were finalised, and, if so, in what form. Secondly, I accept Mr Lambert’s evidence that that part of the brochure was intended to contain the
contact details of whomever the end customer was dealing with, in that case the company or individual from who the product was being obtained, more likely a retailer than a distributor.
[58] Towards the end of 2013, Mr Lambert gave evidence that he began to be concerned that prior to him reaching a decision on the appropriate market strategy for LG’s solar products in New Zealand, and decisions on who the distributors should be, the decision would be pre-empted by Brian Kim in New Zealand. Such an interpretation was supported by the evidence of Ms Rangihuna who had noted Mr Rotteveel “schmoozing” Brian Kim for a formal agreement to distribute on LG’s solar products, notwithstanding Mr Rotteveel was well aware of Mr Lambert’s pre- eminent role with regard to LG solar products. Mr Lambert was also concerned with the way in which another party, Harrisons, a key air-conditioning client of Oxygen, was being pushed into LG solar products by Brian Kim, notwithstanding Mr Lambert did not, at that point, consider it had the expertise to handle a purchase order of solar product.
[59] Mr Lambert brought this to a head via an internal email he sent in the early hours of 12 December 2013. The email went to LG management in Korea and Australia, as well as Brian Kim in New Zealand. The email began by setting out the background to the launch of LG’s solar product in New Zealand which he described as follows:
NZ solar market is still in its beginning and is equivalent as a future opportunity of approx 10% of the Australian market ( $2 million in sales as opportunity for LG solar if we do well) – while right now possibly only installing 5% of Australian market ($1 million opportunity pa for LG if we do ok) If LG enters market wisely a relatively solid market share of approx 20%, being $4 million per annum is a possibility in the future.
The original plan for NZ which was agreed by all was as follows.
As LG NZ staff have limited solar expertise and employment of solar specialist is not an option due to low ROI, the NZ model would need to rely on experienced solar distributors to handle our panels. The Australian dealer model is not suitable for NZ. We explained this to NZ solar staff and asked for this to be passed onto senior management and also communicated this to our solar managers in Korea and did gain their agreement.
Over the past 15 months we grew the first distributor NZ CES gradually (They are an Australian solar client of ours who moved to NZ in late 2012 and has a
good reputation) and we tested their expertise, financial stability and capacity. They offered a stable foundation for the NZ business expansion, have grown steadily and have for example orders for January 2014 of more than $130,000.
The agreed expansion plan included the skilling up of LG’s NZ sales staff in solar (I held training course in Australia with Martina Rangihuna and Kelly Sunderland in Q3 – 2013) and then in Q1, 2014 find a 2nd solid solar experienced distributor. The reason why the 2nd distributor needed to have solar skills was that LG’s solar skill capacity in NZ is limited and Australian staff can assist, but need to also focus on the Australian business. This plan was agreed to with NZ solar staff and by all feedback also with senior management in NZ.
Given the harmonious state of affairs Australia supported LG NZ solar staff and NZ solar distributor with special NZ solar brochure, marketing support, brochure printing and ongoing product training re new NeON solar product during Q3 and Q4 in 2013. All was good.
LGEAP solar division asked LG NZ solar staff to identify suitable 2nd distributor(s) and a list was developed including Able Solar in Waitakere City, Auckland, Alternative Power NZ Ltd, in Nelson, EcoInnovation in New Plymouth, Falcon Electrical Limited in Onekawa, Napier, Renewable Energy Solutions in Nelson, etc
The plan was then for Australian solar staff and NZ solar sales staff Martina Rangihuna to vet the opportunities and decide on a suitable 2nd partner. This exercise was to be conducted in late 2013 or Q1, 2014 with the additional help of HQ solar staff.
Both distributors, NZCES and the 2nd distributor were to be given access to a NZ copy of the Australian website, to be hosted as a NZ site, so that they could use the dealer search function to recruit experienced NZ solar dealers to their network and focus on selling LG panels with the help of the website. The advantage of this model was that the distributors were offering product support and solar expertise in an environment where LG’s solar resources were stretched.
[60]Mr Lambert then advised:
Suddenly without any consultation to the Australian solar business which had invested considerable time into the NZ channel expansion it was announced in October 2013 that [Oxygen] was to be LG NZs 2nd solar distributor. There has been no written agreement on this matter with [Oxygen] yet.
This was followed by a third party being involved in solar in NZ being Harrisons. Again no discussions with Korea or Australia. Both of these new distribution parties had never installed solar before and had not provided LG NZ with any written channel strategy as how they could gain the appropriate expertise quickly. Any request by LG solar Australia for any written material to show channel plans were rebuffed, even though initially NZ had agreed to the solar rollout partnership with Australia, when Australia’s expertise was required.
[61]Mr Lambert then expressed some concerns with Oxygen generally:
The issue with [Oxygen] is, that they already hold a powerful position with the exclusive air-conditioning distribution agreement for LG air conditioning product. This exclusive arrangements still has many years to run. LGEAP approx 15 months ago was in court against this company to change the agreement, but eventually LGEAP backed down. This has given [Oxygen] added confidence. I consider it unwise to give a party which has had no solar experience, no written channel strategy and a history of court action with LG any new additional benefits – via a solar product distribution agreement. when more suitable alternatives appear to exist.
I do have problems to understand why LG NZ is not pursuing a risk diversification strategy, and avoids dealing in solar with [Oxygen].
The arrogance of [Oxygen] can be seen when it comes to their behavior regarding the solar domain lgsolar.co.nz
LGEAP solar division was approached by NZCES if LGEAP would mind if NZCES would buy the web domain.
LGEAP solar indicated that LG would want to purchase the domain ourself. NZCES respected LG’s wishes. LG solar instructed LGEAP marketing to purchase the valuable domain in Q2, 2013 and was told in word and email that the domain had been purchased 6 weeks later. Unfortunately this was not correct and [Oxygen] subsequently purchased the domain and designed the site as to make it look like it was an official LG site. See [Oxygen’s] official NZ solar website below. This brazen act shows in my opinion the disrespectful and wild west attitude of [Oxygen].
[62] After reviewing Oxygen’s solar website Mr Lambert also criticised advertisements placed by Oxygen on TradeMe. He summed up his view of the situation in the following terms:
The above actions alone by [Oxygen] as well as relationship history and lack of solar experience give me reason to conclude that [Oxygen] is not the most suitable candidate for the role of 2nd NZ solar distributor.
I strongly recommend that in February 2014 solar staff from LG Korea, LG NZ and maybe LG Australia meet in NZ to visit suitable 2nd solar distributors to determine the best possible candidate. In the meantime I strongly recommend not to sell any solar stock to [Oxygen].
I also strongly recommend that [Oxygen] be requested to stop the misleading solar website lgsolar.co.nz immediately and hand the domain to LG NZ.
[63] Later the same morning, Mr Rotteveel emailed James Harwood and Brian Kim of LG New Zealand regarding solar and in particular the position of Harrisons, his advertisements on TradeMe, Oxygen’s solar website and Oxygen’s intention with solar. Mr Rotteveel began by noting that he had “introduced Harrisons [to LG] as one
of [his] clients and they opted to go direct to LG and consequently LG are now providing goods to them”. Mr Rotteveel did not suggest that this was in breach of any solar distribution rights awarded to Oxygen but was concerned that the supply by LG of solar products to Harrisons might jeopardise Oxygen’s own supply of heatpumps to Harrisons, when Oxygen had exclusive distribution rights through the Distribution Agreement. With regard to the TradeMe advertisements, Mr Rotteveel explained that it was “relatively inexpensive to get a name out there via that avenue”, and he denied that there was any problem with having a website that “looks very LG” given Oxygen was “representing the brand”. With regard to Oxygen’s intentions with solar, Mr Rotteveel commented:
Well we are looking to broaden and expand our horizons with LG products and keep our customers happy. I believe we have done a very good job with the AC products and have represented this well and there is no reason why we won’t the same of solar.
[64] At some stage during the day it appears that Mr Harwood met with Mr Rotteveel, possibly in response to Mr Lambert’s email. Following the meeting, Mr Harwood reported to Brian Kim, and Brian Kim in turn almost immediately reported to the Australian Managing Director, Deok Hyeon Moon, adopting Mr Harwood’s record of his discussion with Mr Rotteveel as his own. Specifically, Brian Kim advised Mr Moon:
Dear Mr. Moon,
We have clean up the issue from Oxygen Air as follows.
1.I requested that Eddy switch off the search engine optimisation on his Solar web site, and he confirmed that he would do that immediately.
2.I informed Eddy that it is highly likely, after LG has inspected his web site more formally, that there will need to be a name change, as it currently looks as if the site is a LG site. He has agreed to make any changes on our request.
3.Eddy is going to remove any current adverts on Trade me, and will not advertise any LG Solar panels on Trade me in the future.
4.He has stated that he is going to tone down his activity in Solar business in NZ, and concentrate more on his Air conditioning business growth. Any sales he will do will be ordered directly from LG in container load, and will be sold in on opportunities that are a combined sale of Air con and Solar only.
Thanks.
[65] Although Oxygen was not aware of Mr Lambert’s internal email of 12 December 2013 at that time, since it was made available in the course of discovery it has been relied on as being only written confirmation that Oxygen had been granted distribution rights in October 2013. In his evidence, Mr Lambert indicated that he had exaggerated the position for effect because he wanted to ensure that no distribution rights were granted, knowing, as Ms Rangihuna confirmed, that Mr Rotteveel and Brian Kim were close. While such a statement sounded somewhat implausible given the clear reference in the email to rights having been granted, there is in fact no suggestion from Mr Lambert that the course of action that he proposed in the email would cut across any rights that had already been given to Oxygen. Likewise, there is no suggestion in Mr Rotteveel’s 12 December email that any distribution rights had in fact been granted at that point, notwithstanding the reference to being the “NZ distributor” in the TradeMe advertisements. There was equally no protest from Brian Kim that rights had already been granted to Oxygen. On the contrary, as noted, Brian Kim adopted Mr Harwood’s report confirming the steps Oxygen had apparently agreed to, to “tone down” its solar business – making changes to the website from removing the advertisements on TradeMe and concentrating on the air-conditioning business.
[66] Towards the end of 2013, Mr Lambert had confirmed that he would be coming out to New Zealand to meet with Mr Rotteveel accompanied by executives from LG Korea to discuss solar issues. While Mr Lambert’s 12 December email had included his recommendation “that in February 2014 solar staff from LG Korea, LG NZ and maybe LG Australia meet in NZ to visit suitable 2nd solar distributors to determine the best possible candidate”, such a process was not initially advised to either Oxygen or Harrisons. Instead, Mr Lambert advised Oxygen that he would be coming out accompanied by executives from LG Korea to discuss solar issues in the New Year. There was no suggestion in any of the emails sent to Oxygen that this was other than for sales and marketing purposes.
[67] On 16 January 2014, Mr Harwood and Brian Kim met with Mr Rotteveel. In his report of the meeting, sent to both Harrisons and NZCES but not copied to Mr Rotteveel, Mr Harwood advised:
We had a very productive and open meeting with Eddy yesterday. The results of our meeting are as follows:
· Eddy confirmed to Brian and I that his main focus of working with LG is still and will always be Air Conditioning, as our key partner going forward.
· Solar for Oxy was purely a value add part to his business to service his existing customers with another service / solution, but does not see it to be the key to his growth with LG moving forward.
· That being said, he would like to meet with Sue and Ian at NZCES to discuss any plans openly, so there is no conflict nor misunderstandings on what he wants to do.
· He agreed to hand the URL to LG, for the launch of the new web site which is due to be launched end February, early March 2014.
· Eddy was adamant that his intentions were always to protect the LG brand, and this has been reflected in his actions from our meeting.
I trust you are all happier with the outcome of our many meetings, and hope we can all move forward with the one goal in mind, to increase sales in LG’s Solar business moving forward, so we can all have a productive and profitable 2014 and beyond.
Brian and I are very keen to understand whether NZCES and Harrisons are going to be working together, or whether we are dealing with you both individually? We do not plan to look for any other Distribution arm for Solar in NZ going forward, and would love to understand how we can best add value to working with you all going forward.
[68] Phillip Harrison of Harrisons responded to Mr Harwood’s report on 17 January and advised:
Thanks for that. When you rang on Monday, you made it quite clear that Eddy would be told to focus on aircon and that the 2 x distributors of LG solar in NZ would be ourselves and NZCES. It’s unclear in the email below whether that is the case, so can you please clarify. For us to spend millions of dollars promoting solar and LG and to move forward it’s a non-negotiable with Eddy having any access and if he only wants to use for the odd job he can buy thru us. This way we have some insurance that LG won’t become a commodity brand by being promoted and sold at low prices by some type of aircon distributor or the like. Regarding NZCES, we are working thru an arrangement where we potentially buy the panels etc thru them at an agreed price, this is still to be finalised and agreed upon.
As you can appreciate, we don’t want to lock ourselves into having to buy LG panels thru NZCES so as you discussed on Monday, being the other distributor then gives us the option to buy direct if the need arises. This also fits your model of wanting 2 x distributors. We really need to resolve this as a matter of urgency as we have all wasted enough time on trying find a solution. We have other opportunities re solar to pursue at present which will have a major impact on us having any further relationship with selling LG products.
We like you guys and we are very confident of being the dominant, market leader in the solar category, in turn promoting LG to the no.1 selling panel in the market in a very short timeframe – in fact our sales to date, with a very small team, would put us already as the biggest seller of solar in NZ and that’s with us only operating in Auck and Waikato.
Patrick and I are planning to head overseas later next week, so we would appreciate it if you can come back to us in writing by end of play Monday.
[69] Mr Harwood responded on 20 January and advised Mr Harrison (again not copying Mr Rotteveel into the email):
In answer to your email it has been agreed that there are to be only 2 distributors of Solar in NZ, being NZCES and Harrisons. I don’t think I made myself as clear as I had hoped, but Eddy has agreed to back away from Solar for the future, with his efforts going more into his core business air- conditioning.
We are going to broker a meeting between NZCES and Eddy, to discuss his ideas on servicing his existing customers only, but we are going to be part of that meeting, and NZCES will be the distributor at this stage. Obviously, if you are working with them then you will be kept in the loop 150%. Eddy has met with Ian from NZCES pre Xmas, and Ian was more than comfortable on what Eddy initially discussed with him.
Eddy has agreed whole heartedly that he will not create any conflict with yours and NZCES go to market plan. As you know he has agreed to hand the LG Solar website to LG for future use.
I believe you are meeting with NZCES in the next couple of days, we are very keen to find out if you’re going to work together or not. Either way LG is happy, but as discussed before, we see you working with NZCES as only a positive.
I know Eddy’s activity has stirred up concerns for you and NZCES justifiably so too, but Eddy is happy to meet all concerned to put your minds at rest.
Anyway, I hope this email is clearer for you to make the decisions you need to.
[70] Against this background a meeting took place between Oxygen, LG and Harrisons on 22 January 2014. On 23 January 2014, in an email commenting on the meeting Mr Rotteveel objected to Harrisons apparently dictating terms and while
describing Oxygen as a “supplier/distributor” or a “distributor” or “supplier”, did not refer to any pre-existing agreement between LG and Oxygen giving any form of ongoing distribution rights to Oxygen. At the end of the email Mr Rotteveel stated:
i want the best outcome for all, and that is for Harrisons to be happy NZCES to be happy and for Oxy to supply our base and some commercial customers, and first and foremost for LG to be happy
This is what I'm proposing:
that we on our solar website ( put a link for "full solar packages" this link would go directly to Harrisons and generate leads for retail, We also have a wholesale tab, anyone (providing they are wholesale commercial customers) Ie resellers etc, they can obtain panel pricing. As a trade to harrisons "they" also have to be generating sales for us for aircon in the areas applicable.
[71] Although not asserting pre-existing distribution rights, Mr Rotteveel’s comments did make it clear that Oxygen was still interested in a distribution role, even if it was limited to its existing air-conditioning clients.
[72] On 26 January 2014, Mr Rotteveel emailed Brian Kim and Mr Harwood, again complaining about Harrisons, and commented:
I would have thought our website (lgsolar) was a refreshing change something the actually put the panels out there in a positive way, but all of a sudden Harrisons don't like it, we have already invested time and money into bringing LG solar to market as you can tell from our website and the marketing we have been doing.
I know LG wants the business out of Harrisons however at what cost, someone should advise them that this is the status quo and we are here to stay. (I'm happy to do so as we are not getting any business out of them anyway and their attitude is starting to aggravate me.)
It would be great at this point to get your support on this
I have bent over backwards offering them all sorts but nothing is good enough so if the conversation fails with Phil we will just go about our business and everyone is competition.
[73] Some weeks later Mr Lambert emailed Mr Rotteveel and in addition to raising further concerns with the LG solar website, confirmed that he was planning to come to New Zealand on 4 March 2014 and “would have time to see [Mr Rotteveel] in person in the afternoon for sales training, product information etc”, and asked for confirmation that the date would suit.
[74] Mr Lambert went on to confirm to Mr Harwood and Brian Kim that he wished to meet with Oxygen, Harrisons and NZCES while he was in New Zealand. When Brian Kim suggested that meeting Harrisons was not necessary as Harrisons was a NZCES customer, Mr Lambert responded by advising “if they sell – I think they could benefit from our sales and product training. If you do not want us to meet them – fine no issue”, but asked Brian Kim to consider the following:
The issues I wanted to discuss/ train on are:
·Future product roll out –which model/when
·How to sell against other brands
·LG solar vision in the future
·Australian market experience and relevance to NZ market
·the advantages of the LG solar website and how to use it when it goes into a special NZ version
·existing available marketing material and how it could be used in NZ
·LG solar panels – strength and weakness
·Warranty procedures
·Return on investment calculations.
I know in their early sales efforts there were some issues with incorrect information given to the customer and now the NZ solar regulatory body I believe is watching them closely.
I would consider it to be proactive/smart to provide appropriate training to them.
If something goes wrong in the future at least LG did their job. Please confirm if you still do not want us to meet them.
[75] Mr Rotteveel responded on 20 February 2014 and confirmed that Oxygen was happy to change the LG solar site, but it would take “a bit of time”. Mr Lambert responded immediately and, after explaining why the changes to the website were necessary, advised:
I look forward to see you and your team early March in NZ to discuss the complete transition to your fully independent looking website speedily.
Naturally there will be opportunities to use LG brochures and datasheets as downloads on your site, but that’s where the brand similarities/ familiarities should stop.
I hope you can understand this position. It is an absolute non-negotiable for LG – worldwide.
I hope that this issue does not overshadow our upcoming discussions as I was hoping to focus on the great opportunities for solar in NZ right now and for future years.
These opportunities and a growing partnership should be the focus of our path forward.
I look forward to achieving this goal together.
[76] At some stage, between Mr Lambert’s email of 20 February 2014 and 4 March 2014, Mr Lambert substantially changed the focus of the proposed meetings with Oxygen, Harrisons and NZCES from the sales and marketing focus he had earlier communicated to both LG in New Zealand and Oxygen to a formal selection process with Oxygen, Harrisons and NZCES to determine which of those companies should be given ongoing distribution rights to solar in New Zealand. There is no written evidence to show when Oxygen (or indeed Harrisons and NZCES) were advised that the purpose of the meeting had changed to a formal interview situation. Despite this, LG’s notes of the meetings, and in particular the notes of the meeting with Oxygen, do not disclose any surprise at the purpose of the meeting, nor was any issue raised by Mr Rotteveel in his emails to LG that followed the meeting. In the end, LG met with NZCES and Harrisons on 4 March and Oxygen on 5 March 2014. LG’s notes of the meeting with Oxygen recorded:
Oxygen Aircon is LGs key air conditioning dealer in New Zealand and have an exclusive contract for LG air-conditioning till 2025. LGEAP tried in 2012 to change the contract but was threaten [sic] with a multi-million-dollar damages bill and withdrew the action.
Oxygen Aircon ‘s experience in installing solar in minimal, but they indicated they would be willing to learn.
Introduction A. LG 2014 product roll-out and models available
B. Marketing plans and support available
C. Chanel strategy explained – purpose of meeting/interview reiterated
Attendees Eddy Rotteveel – Oxy Air, John Mckenzie Oxy Air, Markus Lambert – LGEAP, James Harwood, LG NZ, DB Kim, LG solar Korea, Se Hwan Jang, LG solar Korea Location: Oxy Air Office, Auckland (invited to LG office
– but shifted meeting on OA’s request) 5 March 2014, 11.00 am – 12.45pm
Key questions regarding customer and channel strategy
1. Could you please summarize your current background and business model to advance the sale of LG solar modules? How much invested already and much possibly to invest to grow the business.
• Oxygen Air suggests to sell the modules via web based advertising and some direct mail campaigns. Is not able to spell out the full range of activities till LG can clearly communicate what support LG will give to Oxygen Air and what dealer channel model LG will pursue. Is waiting for LGs decision, then
will give us information.
2. What would be your preferred channel strategy?
• Claims to have 130 resellers in air-conditioning, which could be trained up for solar installations as well. While new to solar willing to acquire the necessary skills to teach others. (Note: previous committed to acquire skills to install quickly – but seems not to have followed up on that commitment)
• Proof of his capabilities via the air-conditioning dealer /re seller channel he
has set up. (Note according to LG NZ MD Mr Kim briefing, sales in air- conditioning have been flat for last few years)
3. Why do people buy a solar system in NZ?
His customers because they want to be reseller. End customer because of
• Environmental reasons – 1st reason
• Electricity bill 2nd
Note: He wants to be reseller of the panels, not real solar distributor and not end-customer dealer/installer. Where is value proposition?
4. What is the split of residential versus commercial sales 90% residential /20 % small and larger commercial
5. What other solar brands are available in NZ?
Kyocera, Hyundai, Mitsubishi, Panasonic (Note: These brands used to dominate – but now more Chinese – historical knowledge, but not current)
6. What is LG’s market share currently and what do you see as the annual potential?
Not sure as just starting with solar – would initially order 6 pallets, being 162 panels a month (note: This is dealer/installer volume – not distributor)
7. How do you ensure the system is installed safely?
Struggled with answer, using air conditioning as sample of two people run through their check process, would use checklist of how it is done, still learning
Good customer satisfaction survey document developed and supplied.
8. What does LG need to do to increase/strengthen you plans? What do you want in return?
Needs to know what is LGs direction re channel strategy. Needs more training from LG in the technology.
Would like training in what is LG solar product’s key strength against the competition.
9. How important is in your opinion that installers/distributors are member of Sustainable Energy
association of NZ?
Maybe useful. Young organization, not to well known. Is in the process of becoming a member.
10. Could you please supply a 12 month and beyond business expansion strategy?
Can be supplied, but he would need time as he would need to contact all the resellers. In approx. 4 month this information wold be available, would have 20% of final customer base in the 1st year. (Note: was subsequently not
supplied)
[77]LG’s notes concluded:
Summary: Competent Air-conditioning Installation company. Indicated in interview that solar is more likely their smaller business string. Still needs to learn a lot about solar. Not sure if they will have either the time, or the financial interest to invest into LG solar to able to supply fast channel and volume growth, has to be slow and steady.
Indicated strongly that if they cannot buy direct, then they will not buy from any appointed LG distributor. Not interested in solar then.
Recommendation: Not suitable to be key distributor, due to lack of solar knowledge and due to competing air conditioning business, which is their priority. Air-conditioning is their main and dominant business and their willingness to invest in solar business details and active marketing campaigns limited. Business expansion plan very single dimensional. Old way to do business. Only interested in re-selling the panels. Not a true solar distributor in the true worldwide model. Limited value proposition for LG solar. Could be considered as a local dealer only, if finally starts to commence self- education/training – but now expressed – not interested – if he has to buy from others.
[178]As Mr Mills pointed out:
The case law on good faith makes it clear that unless the contract says otherwise, neither party is required to devote itself entirely to the others interest. It can, in appropriate instances, act in its own self interest.
[179] Clause 3.1 therefore cannot be interpreted so as to require LG to provide whatever was sought by Oxygen, but by directing the parties to act in good faith provided for a broader discretion as to what was reasonable in light of the circumstances prevailing at the time.
[180] Against that background the following claims of Oxygen stand to be considered:
(a)LG’s failure to provide marketing and training support generally;
(b)issues around the rollout of wifi;
(c)issues around service support and the Global Service Front System (“GSFS”) portal;
(d)LG’s obligations to provide Energy Star certification; and
(e)issues around LG’s HRV product.
Failure to provide marketing and training support generally
[181] With the exception of training and marketing as it related to the introduction of wifi (addressed from [182] below), there are no specific allegations of any failure by LG to provide either marketing or training in breach of its obligations under cl 3.1.
Issues around rollout of wifi
[182] From the end of 2013, Oxygen raised issues arising with regard to the rollout of LG’s wifi controllers for air-conditioning units. Initially, Oxygen complained of a lack of training. This was followed by issues identified with the wifi technology itself and the lack of marketing support provided to Oxygen with regard to wifi. Oxygen claimed that LG “has breached the distribution agreement and its obligation to act in good faith”.13 Oxygen also asserted that the goods, presumably the wifi controllers, did not match a sale by description, were not reasonably fit for purpose and not of merchantable quality in breach of the Contract and Commercial Law Act 2017.
[183] LG accepts that there were issues with the wifi technology from the beginning, but in the absence of any express obligations, deny that there has been any breach of LG’s obligation to act in good faith pursuant to cl 3.1, whether with regard to training, the technology issues and/or the marketing of the new wifi technology. As Mr Mills noted:
While the Wi-Fi issues undoubtedly vexed Oxygen, disappointed Mr Rotteveel in not having the smooth, market leading position he was determined to have, and lead to some customer dissatisfaction and time costs incurred by Oxygen, the evidence of Oxygen is not sufficient to make out the claim they rely on, that LG did not act in good faith in their dealings with Oxygen over this issue and did not provide reasonable assistance in relation to the release of wifi to Oxygen and with the problems that then emerged.
[184] Given that Oxygen’s claims are based primarily on good faith it is not necessary to go through the evidence in detail if there is in fact no evidence that LG did not, at all times, act with good faith in relation to the issues as they emerged but, rather, proceeded to provide more than reasonable assistance throughout.
[185] The evidence is clear that in 2013 Mr Rotteveel became aware that LG was developing wifi controllers for air-conditioning units and these were about to be released in Australia. Mr Rotteveel persuaded Brian Kim to release these in New Zealand, despite quality control testing not having been carried out in
13 Oxygen also alleged that LG “has unreasonably and arbitrarily failed to perform the express terms and common purpose, ideals and expectations expressed in the agreement”. As Mr Mills submitted, this was a somewhat incomprehensible statement and no express terms were identified in relation to this issue.
New Zealand, at a time when the LG factory in Korea was still writing the software. Because the product was not complete there was a lack of support available: the website was under construction, and training and marketing materials had not yet been written.
[186] Perhaps, unsurprisingly, in addition to Oxygen’s complaints about a lack of training and marketing support four principle technical issues also emerged:
(a)an issue with regard to the app timing out;
(b)an issue with the software on the wifi dongal;
(c)an app upgrade which prevented users from using their mobiles to connect with the wifi controller; and
(d)a specific issue in relation to ducted air-conditioning units.
[187] The starting point for LG’s responses to the various issues must be seen in the context that it had provided the wifi product in good faith to Oxygen, at Mr Rotteveel’s request, before it would otherwise have been rolled out in New Zealand. In such circumstances, which were known to Oxygen, teething problems were inevitable and the mere fact that addressing the issues that arose took time is not of itself evidence of any bad faith on the part of LG.
[188] From that starting point, it is clear that training was provided by LG. This was undertaken by Ben Price who came over from Australia on two occasions, first on 12 May 2014, and again on 26 November 2014. Although Oxygen did raise an issue with regard to the second training, as to how much advance notice was given to Mr McKenzie prior to the training taking place, such concerns did not, however, activate any issues around good faith; the training had been requested by Mr McKenzie and had been discussed for some time and ultimately not only was Mr McKenzie able to attend the training it covered off all of the issues that he wished to raise.
[189] Likewise, the evidence is clear that marketing materials were made available to Oxygen as a priority as soon as these were available. While Oxygen questioned whether LG had sent out a press release confirming the release of wifi in New Zealand, the contemporary correspondence supports the contention that indeed such a release was sent.
[190] The technical issues were addressed by LG as they emerged. Some, including the timing out issue, were able to be addressed relatively quickly. The most serious which involved software issues with the wifi “dongle” were not able to be resolved until June 2014, after LG sent a senior software engineer to New Zealand to address the problem. There is no evidence whatsoever to indicate that LG did not take the technical issues seriously, or indeed did not provide all reasonable assistance to identifying and implementing solutions, as soon as these could be achieved.
[191] Taken together, I am therefore satisfied that there was no breach of cl 3.1 of the Distribution Agreement with regard to the issues around the rollout of wifi.
[192] The alternative claim that there was a breach of the Contract and Commercial Law Act 2017 can be addressed very briefly.
[193] First, the evidence is clear that the issues were limited to the wifi controller units; the air-conditioning units that were wifi capable remained throughout fully functioning units.
[194] Secondly, there is no evidence before the Court that the wifi controllers in respect of which problems were experienced were not all repaired or replaced as required.
[195] Finally, there is ultimately no evidence before the Court that Oxygen has suffered any loss as a result of any of the wifi issues referred to above. In this regard, it is noted that Oxygen issued an invoice to LG for 46 hours of work required by Oxygen to address the wifi issues up until the resolution of the wifi dongle software issues in June 2014. Oxygen argued in the hearing that this invoice was limited to attendance on a single customer, the invoice makes clear that this was not the case, not
only naming four customers but referring also to “numerous phones to and from other customers and other Oxygen Air branches”. There is no dispute that this invoice was ultimately paid by LG, and no further invoices were ever issued by Oxygen claiming any further time expended in the resolution of wifi issues.
Conclusion on issues relating to the rollout of wifi
[196] For the reasons set out above, I conclude that the issues around the rollout of wifi provide no basis for Oxygen to set-off or counterclaim against the amounts owed to LG.
Service support and the GSFS portal
[197] Oxygen alleges in its third amended statement of claim that LG had failed to remedy or address product warranty claims and to ensure its ASC were responsive to resolving warranty problems within acceptable timeframes. Oxygen likewise alleges that part of the issue with warranty claims involved the non-functionality of LG’s global warranty claim system or GSFS.
[198] LG, in its evidence, disputed that there was any significant issue with the service support provided by Oxygen at any time and that the GSFS portal was functional and easy to use. More broadly, LG submitted that much of the criticism made by Oxygen was outside the ambit of the Distribution Agreement. In particular, LG noted that Oxygen undertook a considerable amount of installation work with regard to product supplied direct to consumers, and it also undertook service work as an ASC with any difficulty obtaining payment though the GSFS portal being outside the Distribution Agreement, governed instead by a separate ASC contract between LG and Oxygen. In LG’s submission, the attempt to allege breach of the Distribution Agreement was:
A classic illustration of Oxygen’s overreach in expanding its functions well beyond the [the Distribution Agreement] and then seeking to attribute liability to LG on the basis of the [Distribution Agreement].
[199] Quite clearly, in order to successfully distribute LG’s air-conditioning products under the Distribution Agreement Oxygen needed to be able to rely upon a comprehensive service network. However, like the other claims it has made under this
category, in order to succeed it is not enough to show that there were issues with the LG service network and its ability to address warranty claims, but that LG did not act with good faith, including providing reasonable assistance to Oxygen.
[200] The evidence is in fact clear that LG did have a comprehensive service network made up of contracted ASC located around New Zealand, which had been in place before the 2009 DA. The service network was not limited to air-conditioning but covered the full range of LG products, with those ASC able to undertake air- conditioning installation and repair, including warranty work, a minority of the total ASC network. Over time, Oxygen and its sub-distributors all applied to become, and became, ASC in their own right.
[201] The ASCs’ contracted to LG, including Oxygen and its sub-distributors, warranted as part of their ASC contract that each was competent to do the work contracted for. The ASC also contracted to follow specific requirements for doing that warranted work, including the process to be followed in obtaining the payment for such work and the parts necessary to undertake the repairs. Specifically, the ASC’s, including Oxygen, agreed that warranty claims would be paid subject to “warranty claims being correctly submitted to [LG] through GSFS”.
[202] While Oxygen had assembled a range of documentation recording complaints about aspects of the service network, the evidence from LG, particularly that from the Service Manager, Kevin Rijns and the Technical Officer for air-conditioning and whiteware at LG during the relevant period, Nicholas Griffen, presented a compelling picture of a fully functional service network, indeed one that has won a number of awards within the industry. There is certainly no evidence to suggest that any of the issues claimed to have been experienced by Oxygen were the result of LG not acting in good faith towards Oxygen and, on the contrary, it is clear that Mr Rijns and Mr Griffen did everything they could to support Oxygen.
[203] I am likewise satisfied from the demonstration given by Mr Rijns with regard to the functionality of the GSFS portal that the problems experienced by Oxygen were in fact largely of its own making. More fundamentally however, as LG submitted, any difficulties experienced by Oxygen and/or its sub-distributors in using the GSFS portal
came within their respective ASC contracts and did not fall within the ambit of the Distribution Agreement.
Conclusion – service issues and GSFS portal
[204] There are no issues arising with regard to the service provided by LG or warranty claims generally, including the use of the GSFS portal that would have entitled Oxygen to set-off or counterclaim against the amounts owed to LG.
The Energy Star certification
[205]Oxygen alleges:
Since 16 July 2010, the defendant failed and was unwilling to provide Energy Star certification for its products although it had the means as the manufacturer to provide the certification as it did for its other product lines and in other counties.
[206] There is no dispute that Energy Star certification was a voluntary system designed to identify appliances that were “super energy efficient”. The Energy Star certification is different to the compulsory energy rating label which all appliances must have which explains to customers how much energy a particular product uses.
[207] Notwithstanding the breadth of the pleading set out in the third amended statement of claim Oxygen, through Mr Rotteveel, conceded in evidence that not only was LG not required to provide Energy Star certification, such certification had in fact been obtained for the R-series air-conditioning units at the request of Oxygen. Mr Rotteveel also conceded that a contribution to the costs incurred by Oxygen obtaining this certification had been included in the $30,000 payment made by LG to Oxygen following the 2012 mediation. As a result, it appears that the air-conditioning units being supplied by LG to Oxygen up until the breakdown of the relationship in February 2015 all had the Energy Star certification.
[208] While the new P-series air-conditioning units did not have Energy Star certification, at the time of the breakdown in the relationship negotiations were ongoing and LG had indicated that it was not opposed to sharing any costs incurred with obtaining that certification, but that it was for Oxygen to pursue the certification.
[209] It is difficult to see how LG’s actions around the Energy Star certification could be seen as breaching its obligation to act in good faith in accordance with cl 3.1 of the Distribution Agreement. There was clearly no direct obligation on LG to obtain the certification, but it had not ruled out supporting Oxygen, should Oxygen proceed in obtaining the certification itself. In any event, there was no identifiable loss arising from the fact that Energy Star certification was not obtained for the P-series, given that none of these models were ever ordered by Oxygen. In the circumstances I conclude there is no basis for Oxygen to claim a set-off or counterclaim against LG for the amounts owing to LG.
The HRV issue
[210]In relation to this issue Oxygen alleges:
LG’s products carried the acronym “HRV” and during August 2014 Oxygen was formally notified by HRV’s representatives to desist using the acronym “HRV” on LG’s products. Although this issue was notified by Oxygen to LG, it failed to support Oxygen to resolve and indemnify it, pursuant to cl 4.5 of the distribution agreement.
[211]And further:
On 15 August 2014 [Oxygen] was approached by HRV’s legal team protesting the use of the “HRV” acronym on LG’s products, claiming it to be in breach of its trademark. Although [LG’s] ventilation units are imported and advertised worldwide as “LG HRV”, [LG] refused to cooperate and assist [Oxygen] in resolving this issue.
[212] HRV is an acronym for “heat recovery ventilation” and can refer to a type of air-conditioning system or a particular product. In this case, Mr Rotteveel discovered that LG had a heat recovery system product, EcoV which he sought to introduce into New Zealand. At Mr Rotteveel’s request, Oxygen began distributing this product and created its own marketing material. This described EcoV as “HRV”, “LG HRV” and “HRV by LG”. This led to a response by Cristal Air International Ltd trading as HRV (“CAIL”) and its solicitors. CAIL noted it had trademarks for HRV in New Zealand and therefore required Oxygen (and LG) to cease and desist from referring to the EcoV product as HRV.
[213] The evidence is clear that the decision to market the EcoV product as HRV, LG HRV or HRV by LG was entirely Oxygens. LG had in fact never attempted to refer to the EcoV product in New Zealand, as HRV had provided no encouragement for Oxygen to do so, noting in particular that the EcoV product itself contained no reference to HRV whatsoever.
[214] In those circumstances, in the absence of any evidence to suggest CAIL did not in fact have the trademarks it claimed, it is difficult to see on what basis Oxygen could assert that the consequences of the decision to market EcoV as HRV was in any way LG’s responsibility, let alone that it was in breach of LG’s responsibility to act in good faith in terms of clause 3.1 of the Distribution Agreement.
[215] It is likewise difficult to see on what basis Oxygen could claim it was entitled to an indemnity pursuant to cl 4.5 of the Distribution Agreement as it has pleaded. Clause 4.5 sits under the heading Intellectual Property in the Distribution Agreement, which provides:
4.3Intellectual Property
4.4Ownership: [Oxygen] acknowledges that [LG] is the sole owner of the intellectual property rights with respect to the Products/excluding marketing material designed and printed by the supplier (including any trade mark or goodwill associated with such marks) but shall exclude any customer databases created by the Distributor. The rights in such customer databases shall irrevocably remain the sole property of the Distributor at all times.
4.5Indemnity: [LG] indemnifies [Oxygen] against any claim , suit, action or proceeding (collectively called "action") brought against the Distributor, including under the Consumer Guarantees Act and by the Distributor's wholesalers, consumers or customers. Should the action be based on a claim that the Distributor's sale of any Products constitutes a breach of a third party's intellectual property, provided that the Supplier may at its option (and at its cost) defend or settle the action but must give two weeks prior notice in writing to the Distributor.
[216] Quite clearly, the purpose of cl 4.5 is to require LG to indemnify Oxygen if one of its products breaches the intellectual property of a third party. In this case, there was no suggestion that the EcoV product in any way breached the intellectual property of a third party. Rather, it was the marketing initiated by Oxygen which led to the action by CAIL.
[217] Taking these matters together, there was no basis for LG to support Oxygen in its dispute with CAIL which, as noted, also threatened LG, let alone for LG to repurchase unsold EcoV units from Oxygen. In particular, there was no reason those units could not continue to be sold in New Zealand as heating recovery system type products, as long as they were not referred to as HRV.
[218] In the circumstances, it is clear that the HRV issue provides no basis for any set-off or counterclaim with regard to the amounts owing from Oxygen to LG.
Conclusions – LG’s counterclaim
[219] For the reasons set out above, it is clear that none of the issues raised by Oxygen give rise to any set-off or counterclaim against the amounts owed to LG for stock supplied to Oxygen and not paid for. As a result, LG is entitled to judgment on its counterclaim in full in the sum of $583,191.65, together with interest from the due date of each invoice. In addition LG is entitled to the declarations sought in the second and third causes of action.
[220] For completeness, it is clear, having analysed the claims raised by Oxygen against LG, that none of these issues would have entitled LG to terminate for breach pursuant to cl 5.1c(i) and (ii). Quite clearly none of the issues raised involved any breach by LG, let alone a material substantial default in terms of the Distribution Agreement, namely “a default that fundamentally and materially affects and undermines the performance of this agreement and does not include any particular supply or consignment of the products”.
Decision
[221]Oxygen’s claims fail in their entirety and LG is entitled to judgment.
[222] LG is entitled to judgment on the counterclaim in the sum of $583,191.65, together with interest pursuant to cl 6 of the amended terms from the date payment fell due.
[223]LG is entitled to the following declarations:
(a)a declaration that Oxygen has breached its obligation to put the Sale Proceeds into a separate account on trust for Oxygen;
(b)a declaration that Oxygen is liable to account to LG for the Sale Proceeds; and
(c)a declaration that Oxygen holds on constructive trust for LG all assets now or previously in its possession acquired directly or indirectly with LG’s Sale Proceeds.
[224] LG is also entitled to costs. If these cannot be agreed within one month I will determine the issue following the filing of memoranda.
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