Protocol Limited v New Image Natural Health Limited HC Auckland CIV-2011-404-258

[2011] NZHC 1129

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2011-404-258

BETWEEN  PROTOCOL LIMITED Plaintiff

ANDNEW IMAGE NATURAL HEALTH LIMITED

First Defendant

ANDNEW IMAGE GROUP LIMITED Second Defendant

Hearing:         29 June 2011 and 10 August 2011

Appearances: Mr D Chisholm for plaintiff

Mr S Cook and Ms G Mayes for defendants

Judgment:      16 September 2011 at 3:00 PM

JUDGMENT OF ASSOCIATE JUDGE DOOGUE

This judgment was delivered by me on

16.09.11  at  3 pm, pursuant to

Rule 11.5  of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Counsel:

Mr D Chisholm, Barrister, Auckland - [email protected] for plaintiff

Buddle Findlay, P O Box 1433, Auckland – email:  [email protected] /

[email protected] for defendants

PROTOCOL LIMITED V NEW IMAGE NATURAL HEALTH LIMITED & ANOR HC AK CIV-2011-404-258

16 September 2011

Background

[1]      The individual who stands behind the plaintiff company is Mr Clive Lewis. Mr Lewis has had an extensive career in business and marketing and at one point established  a  well-known  brand  of  bottled  water.     In  2007,  he  entered  into discussions  with  Fonterra  Co-Operative  Group  Ltd  (“Fonterra”)  with  a  view  to taking  a  licence  of  the  technology  that  that  company  had  developed  for  the production of a colostrum beverage, “COL+”.  Mr Lewis considered that the product had  vast  potential  for  sale  in  Asian  countries  including  China.    The  plaintiff company in due course obtained the rights in the technology and a licence to manufacture and sell the product.  It was not able to harness this opportunity on its own and required a commercial partner for that purpose.   Eventually its enquiries took it to the second defendant and in due course agreements were entered into between the two entities.  In outline, the structure of the arrangement was that a new company which the parties were to each have an interest in was to be incorporated, which  would  be  the  owner  of  the  licences  to  make  and  market  the  product. Thereafter a sub-licensing arrangement would be entered into with the licensee being the second defendant.   The plaintiff was concerned to ensure that it retained management of the colostrum beverage business because it had expertise in the area of marketing the class of products to which COL+ belonged, whereas the New Image companies did not.  The plaintiff was to receive:

a)        Royalty payments equivalent to the royalties that were payable  to

Fonterra;

b)Share options in the first defendant, New Image Natural Health Ltd, that were exercisable on the attainment of certain volume targets;

c)        A base fee of $140,000 plus GST per annum and expenses; and d)     Full management of the colostrum beverage business.

[2]      The last of these was to be arranged by means of a management services

agreement (“MSA”) which the parties duly entered into.

[3]      In detail, the parties entered into four written contracts.   These were the “commercial agreement”, the “shareholders‟ agreement”, the “sub-licence agreement”, and the MSA.  All four contracts were entered into on the same date, 15

May 2009.

[4]      As a result of the arrangements entered into, the second defendant became the party which would in effect manage the COL+ business.  The second defendant agreed, amongst other things, to meet the obligations which the sub-licensee was under to Fonterra.  Some equipment was to be purchased from Fonterra as part of the arrangement which would be used to manufacture the product.

[5]      The plaintiff‟s general stance, in summary, was that these two parties brought different items of value “to the table” when negotiating the agreement.  Mr Lewis was said to have marketing skill and knowledge of the so-called Fast Moving Consumer Goods (“FMCG products”) as well as the access to the Fonterra license. The defendants had the financial and corporate resources to harness the proposal and would make the product a commercial reality.

[6]      However, at its initial stages, the intended project was not a success.   The first stage was the launch of the COL+ product in the Singapore market.   Sales undershot those projected by a wide margin.   On 12 November 2009, following a directors‟ meeting, the defendants wrote to the plaintiff advising that the company was of the view that it ought to suspend the MSA and in particular proposed:

a)        The  plaintiff  would  be  released  from  its  obligation  to  provide services;

b)The defendants would continue to pay the plaintiff the fee to which it was entitled under the agreement; and

c)        The parties would otherwise continue to be bound by their obligations under the agreement.

[7]      The  letter  further  stated  that  the  proposal  in  the  letter  was  intended  to address:

… our short term needs and is without prejudice to the [defendants‟] legal rights under the Agreement or otherwise.   In saying this, I am not suggesting that we intend to exercise any rights in particular.  I simply want to make it clear that the above proposal is confined to the present situation.

[8]      The writer of the letter, Mr Lyttelton, also stated his view that the company

understood that it had the power to issue “directions” of this kind pursuant to clause

7.2(d) of the MSA.

[9]      In the response that Kensington Swan wrote on behalf of the plaintiff dated

17 November 2009 it was contended that under cl 7.2(d) there was no power of the sort claimed to give those directions.   In a later letter dated 8 December 2009

Kensington Swan made the following comments:

Notwithstanding the purported suspension, Protocol expects to continue to be provided with usual monthly reports, any plans and performance information in relation to the colostrum shot business.  Furthermore, we assume that New Image will continue to honour all other agreements with Clive and Protocol, including in relation to the reimbursement of [expenses] … .

At this stage New Image has indicated that the purported extension [sic] is until 1

March 2010.   We require confirmation that the purported suspension will not be extended beyond that date.  If such confirmation is not forthcoming, then Protocol is

not prepared to wait and see what may eventuate, and may commence an action for

specific performance of the Agreement or any other legal action it considers appropriate.

[10]     Mr  Stewart  who  was  a  director  of  both  the  defendant  companies  gave evidence.   He said  a decision to suspend the MSA was made at  the directors‟ meeting on 11 November 2009.  At that meeting, he said, Mr Lewis had proposed that a further $20 million be invested in order to get the project to the point where it was viable.  There was also concern that the strategy of developing the product on the basis that it was of the category apparently referred to in the relevant industry of FMCGs was flawed.   That and the failure of the Singapore launch, amongst other things, caused alarm bells to ring.

[11]     The letter of 12 November 2009 and the background to it (including material relating to the board meeting which preceded the sending of the letter) show that by

that date most, if not all, of the scale of the Singapore problem had emerged and the defendant companies were aware of the inaccuracy of the forecasts which had been prepared.   Because of the terms on which the suspension letter was couched, it would seem that they also took the view, even at that stage, that the plaintiff had caused or contributed to the problems.   The proposal which they made in their suspension letter was that the contract should be “suspended” for the period 18

November 2009 to 1 March 2010, that is, a period of three and a half months.

[12]     Over the following approximately six-month period, the plaintiff continued to receive the appropriate proportion of the $140,000 annual fee.  It did not receive royalties.  No steps were taken in furtherance of the option which the plaintiff had to buy shares in the first defendant.

[13]     However, on 5 May 2010, the second defendant wrote saying that it was

giving eight weeks‟ notice of termination of the MSA which would take effect on 30

June 2010.  The reasons given were that the defendant had not made progress with the Singapore market, it no longer required the services provided under the MSA and other staff were able to fulfil the role of the plaintiff.   The notice did not make reference to the plaintiffs alleged defaults.

Submissions

[14]     The plaintiff essentially seeks to have the defendants perform the terms of their contracts with it.  The obligations of the defendants, if they are enforceable, are to:

a)        pay to the plaintiff royalties for the use of the Fonterra licence;

b)       pay the plaintiff what it is owed under the MSA; and

c)        permit the plaintiff to exercise certain share purchase options in the first defendant.

[15]     The plaintiff seeks a declaration that the contract is still on foot.

[16]     The defendants say that they validly and effectively cancelled the contract. They say that cancellation was justified on the grounds that:

a)       the  MSA  ought  to  be  constructed  as  though  it  contained  a  term providing for the right for either party to cancel the contract on reasonable notice; or

b)alternatively, because of the sub-standard performance of the contract on the part of Mr Lewis, the most important of which was the alleged incompetence or negligence in the preparation of consumption forecasts for the COL+ product in the Singapore market, and because of the cost that the defendants would need to budget for in bringing the product to the Singapore market.

[17]     The defendants also say, in the alternative, that the declaration the plaintiff is trying to obtain is in effect an order for specific performance, which would require that the defendant carry out the terms of a contract that is in substance an agreement for personal services.  The law will not permit this.

[18]     In answer, the plaintiff says:

a)       the MSA provided for termination of the contract on a number of grounds but termination on reasonable notice was not one of them;

b)it is not necessary for the Court to determine the breach issue and if it had to, the plaintiff denies that there was any breach of the kind alleged in regard to the Singapore market projections because:

i)the defendants misunderstood the significance and effect of certain evidence, and are mistakenly viewing production forecast figures as sales forecasts;

ii)sales forecasting was the defendants‟ responsibility and they had  employees  who were responsible for such  forecasts  as were made; and

iii)the  defendants  never  carried  out  proper  marketing  of  the product in Singapore and, seemingly, the plaintiff contends that whatever projections were made were contingent upon that occurring; and

c)       even  if  there  was  a  breach  (which  is  denied),  the  defendants,  by electing to continue to make the payments that it owed to the plaintiff under the contract after it discovered the alleged breaches, affirmed the contract and therefore lost any right of cancellation they may have had.

[19]     The defendants say in response that they did not affirm the contract following the plaintiff‟s breach  but  were  simply keeping  their options  open  as  they were entitled to.

[20]     The plaintiff accepted that the question of whether there had been a breach or not could not be determined at summary judgment stage but asserted that the affirmation point could be determined.

A right to termination on reasonable notice

[21]     The position which the defendants took was that although the contract did not provide for a right to terminate on reasonable notice, the Court would be able to come to the conclusion that there was such a right as a matter of construction of the contract or by means of an implied term.  The defendant‟s case was that while the agreement had been entered into between the defendant and an incorporated body (Protocol), the true substance of the agreement that it was in substance a contract to provide personal services of the principal of that company, Mr Lewis, who elected to conduct his business by means of the vehicle of a corporation.  The reality was that the  agreement  was  akin  to  an  employment  agreement.    Such  agreements  are inherently unlikely to be of indefinite duration.  They will not be effective without continuing trust, confidence and fidelity.   Such qualities might cease to exist in circumstances  quite  separate  from  the  case  where  there  had  been  a  breach  of contract.  That is, the cause of the loss of confidence, etc was not due to a breach

which would justify termination of the contract for cause.  For that reason, a right to terminate on reasonable notice was in no doubt intended by the parties.

[22]     The plaintiff submitted that the parties here had negotiated this contract over a period of weeks with the assistance of lawyers on each side.  The contract included an “entire agreement” clause and such a clause precluded the addition of further terms which had not been expressly agreed to.

Legal authorities

[23]     Mr Chisholm said that because the agreement which was negotiated between the parties and their lawyers actually contained provisions covering eventualities which would justify termination of the agreement, such as insolvency on the part of the  consultant,  the  Court  should  not  conclude  that  the  parties‟  unexpressed contractual intention was to also provide for a right of termination on reasonable notice.   He told me that even the consideration that the agreement would run in perpetuity in the absence of the Court concluding that there was a right to cancel on reasonable notice rather than cause had been upheld in the English authority of

Llanelly Railway and Dock Co v London and North-Western Railway Co.1

[24]     That   case   concerned   an   agreement   between   two   railway   companies providing, amongst other things, for one party to have the right to run its trains over the other party‟s line, agreement to cooperate in through bookings and other matters. As part of the arrangement, the company which gave the right to the other company to run on its lines also advanced to it the sum of £40,000.  After the agreement had been acted on for some time, the borrowing company gave three months‟ notice to determine the agreement.  The Court concluded that because there was no express provision of the contract conferring a right to determine on notice, the agreement was to run in perpetuity.  A number of reasons were given why that conclusion was arrived at.   James LJ was of the view that in this type of contract described as providing “running powers”, what the parties were effectively contracting to do was to provide a permanent arrangement for the party which did not own a railway to get

access over a railway line without having to go to the trouble of constructing its own.

1      Llanelly Railway and Dock Co v London and North-Western Railway Co (1873) 8 Ch App 942.

The arrangement being in substitution for the permanent rights that it would have if it could build its own railway line, the contract itself had to be construed as permanent.

[25]     In the New Zealand context, the Court of Appeal considered the issue of indefinite contracts as against those which contained a right of termination on notice in the decision of Minister of Education v De Luxe Motor Services (1972) Ltd.2

[26]     That  case  involved  contracts  to  provide  services  to  the  government  for carriage of schoolchildren by bus.  While other contracts that other contractors had entered into did contain a termination date 10 years from commencement, typically, the De Luxe contracts did not make any provision for that to occur.   De Luxe asserted that that meant that the contracts were to run indefinitely.

[27]     There  were  some   particular  aspects   of  the   contractual   and   business background in that case which were influential to the Court‟s decision.  One of those was that the Director-General of Education had an obligation to contract such transport services as were necessary.   It was inherently unlikely that, given that background, it was intended that he would enter into contracts which would run indefinitely without regard to what was actually required.

[28]     In another case, Anchor Butter Co Ltd v Tui Foods Ltd,3 Penlington J in the High Court considered similar arguments about whether a contract ran indefinitely or was terminable on reasonable notice.   The Judge concluded that even though no provision  was  included  in  the  contract  providing  for  termination  on  reasonable notice,  that  is  what  the  parties  must  have  intended.    The  contract  in  that  case contained provisions for termination in a number of  different circumstances but made no reference to termination on reasonable notice.  This point was relied upon by the party opposing the contention that reasonable notice for termination applied. Notwithstanding the presence of such other rights to terminate, the Court was not deterred  from  implying  into  the contract  a term  that  it  was  also  terminable on

reasonable notice.

2      Minister of Education v De Luxe Motor Services (1972) Ltd [1990] 1 NZLR 27 (CA).

3      Anchor Butter Co Ltd v Tui Foods Ltd [1997] 3 NZLR 107 (HC).

Plaintiff ’s submissions

[29]     Mr Chisholm emphasised that the term of the contract was defined in the MSA by stating that it continued until the contract was terminated in accordance with the parties‟ agreement.  There was no provision in the contract for termination on reasonable notice.

[30]     It was part of Mr Chisholm‟s argument that the four agreements entered into by the parties needed to be construed together.  He pointed out that the licence to use the Fonterra technology which was entered into between Fonterra and another of Mr Lewis‟s companies was for a period of 10 years commencing 29 May 2008.  The sub-licence to the New Image companies was to continue as long as the head license did, which would therefore be a minimum of 10 years.  He submitted that the various agreements which the parties entered into were interdependent.  That being so, the inference to be drawn from considering the contractual arrangements as a whole, was that the parties would not have intended that one of those contracts, the MSA, would be terminable on reasonable notice.

[31]     Another consideration was that the parties had been advised by their own lawyers on the agreements which were entered into.  Drafts  had been exchanged and the parties had each had legal advice at every step along the way to completion of the final agreement.   In those circumstances it is unlikely that they would have overlooked making provision for termination on reasonable notice if that is what the parties had in mind.

Defendants’ submissions

[32]     Mr Cook submitted that the duration of the head licensing agreement with Fonterra was not persuasive because Protocol was not a party to that agreement.  The recitals to the MSA did not mention the other agreements at all.  They were separate agreements and intended to be treated as such.  The various agreements had different purposes.

[33]     Mr Cook submitted that it is conceded that Mr Lewis continues to have share options in the company which was to own the COL+ business.

[34]     Mr  Cook  referred  me  to  the  case  of  Bobux  Marketing  Ltd  v  Raynor

Marketing Ltd, where the Court of Appeal stated:4

In the end, although in a mercantile or commercial contract the Court will favour an interpretation which enables the relationship to be terminated on reasonable notice, the question remains whether the language actually used by the parties admits of an implication or interpretation to that effect.

[35]      This view drew my attention to the passages in Bobux Marketing where it was stated that reasonable notice was not precluded by: 5

“the mere statement that a contract is to continue „for an indefinite period‟”;   “express provisions enabling termination in defined circumstances, such as

material breach by the other party”; or

“that the other party is alone expressly given [the right of termination]”.

[36]     As well, Mr Cook referred to the De Luxe case which I have mentioned above and the statement in that case that contracts of service, agency or partnership are “commonly terminable” on reasonable notice, and that contracts entailing continuing relationships of trust, confidence and co-operation are sufficiently analogous to lead one to expect them to be terminable also.6

[37]     He submitted that the Llanelly case which Mr Chisholm relied upon should be viewed as being a different category as those cases involving “a contract of partnership,  …  master  and  servant,  …  principal  and  agent,  …  employer  and employed in various modes”7  which are intended to be determinable because they involve trust and confidence, delegation of authority, mutual satisfaction with each other‟s conduct and/or personal relations between the parties.

[38]     Mr Cook argued that the MSA in this case belonged to that latter category because  while  it  was  structured  as  an  agreement  for  services,  in  substance  it

resembled an employment contract.

4      Bobux Marketing Ltd v Raynor Marketing Ltd [2002] 1 NZLR 506 (CA) at [68].

5 Ibid, at [67].

6      De Luxe, above n 2, at 27.

7      Llanelly, above n 1, at 950.

[39]     Mr  Cook  also  referred  me  to  the  speech  of  Lord  Hoffman  in  Attorney General of Belize v Belize Telecom Ltd,8  submitting that the test for implication of terms of contract is now the simplified reformulation that:

[T]he question for the court is whether such a provision would spell out in express words what the instrument, read against the relevant background, would reasonably be understood to mean.

Discussion

[40]     The  contract  did  not  contain  an  express  provision  which  specified  its duration.  The contract would continue until it was terminated in accordance with its terms.  The central issue is whether the provisions for termination ought to be read as including an implied term to determine the MSA on the grounds of reasonable notice.

[41]     In  construing  the  contract  against  the  background  circumstances,  the following circumstances seem to me to be relevant.  The contractual arrangements gave expression to a number of different commercial objectives.  They provided for New Image to get access to the COL+ technology which would provide New Image with access to the necessary expertise to embark upon the manufacture of the type of product that could well be profitable.   Because of the financial resources which would be provided by New Image and which Mr Lewis did not have, what might have otherwise remained an interesting commercial possibility could become reality. Mr Lewis could not have launched the product commercially on his own.   If the project was successful, the company that owned it would increase in value.   Mr Lewis‟s interests could participate in that increase by means of the share options agreement.   That agreement would also secure a share of the profits as they were earned.

[42]     The MSA was not concerned with the proprietorship of the concept.  It was concerned with provision of expertise in assessing market opportunities and, if the decision was made to proceed, how the marketing would be undertaken.   The company that owned the business agreed to buy this business/marketing expertise

from Protocol.  What I might call the “proprietorship opportunity” could uniquely be

8      Attorney General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1988 at [21].

acquired from Mr Lewis or his companies.  It does not necessarily follow that the marketing expertise was similarly unique to Mr Lewis.   From the point where Mr Lewis engaged with New Image, he had to accept that he had relinquished the exclusive right to control how the COL+ technology and business opportunity would be managed.  Obviously New Image was interested in who would be involved with the project in a management capacity because that person had the potential to affect adversely the major investment which it was to make.

[43]     While Mr Lewis wanted to maximise the commercial advantages he got from the arrangement by making money from both the proprietorship aspects and the marketing expertise, and while New Image was no doubt prepared to contractually engage with him in both matters, it is unlikely that the parties would have understood New  Image  to  say  that  Mr  Lewis  was  being  retained  indefinitely  to  provide marketing services.     There is no reason to suppose that any other marketing/management organisation would have enjoyed such a privileged tenure.  It is possible that New Image was prepared to pay that price but such an indefinite arrangement could well prove to be hazardous.   Given the adverse potential consequences that could flow if the joint venture vehicle found itself stuck, for example, in a dysfunctional relationship with the project manager, it would be unlikely that it would place itself in that potential peril by agreeing to an indefinite arrangement.

[44]     Looking at the matter from another perspective, just because New Image were to enter into a proprietorship agreement with Mr Lewis, that did not logically entail an additional commitment to retain him to provide professional services to the company indefinitely.

[45]     Indeed, the MSA contained a further provision clause 11.1(b)(ii) which I have not mentioned so far which entitled the first defendant to terminate in circumstances where it transferred the colostrum business to a third party on an arms length basis.  The implication of this is that the company was going to be free to exit the enterprise for which Mr Lewis‟s company was retained if, in its discretion, it determined to do so.  The presence of such a provision no doubt contemplated that the defendants should be at liberty to quit the business if, for example, a suitable

offer was forthcoming for it.  The fact that there was no assurance that the MSA was to continue indefinitely undermines the argument that an indefinite tenure of the position of the adviser was part of the composite consideration which the plaintiff was assured under the bundle of contractual agreements that the parties entered into.

[46]     Had  the  parties  thought  about  it,  they  could  not  have  lost  sight  of  the possibility that while they might commence their joint venture with  the mutual spirit of cooperation, the required spirit of cooperation could break down.  Of course, they could have included some express provision in their contract to deal with this exigency and they did not.  But it is in those circumstances that implied terms are usually required.

[47]     I have not overlooked that there are express provisions entitling the defendant to terminate the agreement with Protocol.  The MSA provided at clause 11.1(a)(iv) that either party could terminate the agreement in, inter alia, the circumstance that the other party fails to perform:

Failure to Perform:  If the defaulting party fails duly and punctually to perform any of the conditions and obligations on its part under this Agreement and such failure or breach is incapable of remedy, or if capable of remedy is not remedied within fourteen days after the non-defaulting party gives written notice to the defaulting party.

[48]     In clause 7.2(b) of the agreement, it was provided that the obligation of the “Executive” (meaning Mr Lewis or such other executive substituted in accordance with the contract) was to:

… devote such of his or her time and attention as is necessary to ensure that the Services are performed in a timely and professional manner so as to promote and further the interests of [the first defendant] and to achieve the key performance indicators set out in [the agreement]

[49]     I also note that the agreement could be terminated in the event of Mr Lewis being adjudicated bankrupt.  So to that extent the parties did cater for what was to happen if the relationship with Mr Lewis or Protocol proved to be unsatisfactory. The explicit catering for this particular situation does not give rise to an inference that the parties deliberately decided also that the loss of confidence and trust would provide either side with a right of redress.

[50]     The question that does arise is whether the fact that the parties made explicit provision for discharge for cause in the circumstances to which I have referred leaves any room for implication of a right to terminate without cause on reasonable notice.

[51]     In my view, arrangements that involve continuing cooperation and mutual trust of the kind here can break down for any number of reasons.  Ascribing blame for the occurrence of such a failure may be very difficult.  In any event, it is the fact that it has broken down and not which party is responsible for that outcome which can be of central importance.  Indeed, the loss of mutual confidence and trust may occur without any demonstrable breach of contract also occurring.  It may simply be that differences of opinion have arisen between the two proprietors of a business about the direction they should take, to give one example.

[52]     I do not therefore consider that it logically follows from the fact that the contract made provision for termination — both circumstances involving a breach and those that do not — that it is not reasonably arguable that the parties also intended to provide for termination in other circumstances.

[53]     This was not a case, either, as in Bobux Marketing,9 where the contract said that the specified grounds for termination contained in the contract were the only ones that the parties could rely on.10

[54]     I do not consider that because other elements of the suite of agreements that the parties entered into were long-term contracts, it necessarily follows that the same approach would consistently be expected in every case including in the MSA.  There are such inherent differences between the nature of an intellectual property licensing agreement, on the one hand, and a contract to provide important management services, that I see no reason in principle why the differences should not be reflected, inter alia, in the circumstances in which they could be terminated, with it being

easier for the parties to escape from the latter type of arrangement than the former.

9      Bobux Marketing, above n 4.

10The contract in that case provided that it was to continue for an indefinite period and “may only be terminated” in two specified circumstances: ibid, at [71].

[55]     It is also relevant to consider the appropriateness of reaching conclusions about matters such as this in the context of a summary judgment application.   As with any summary judgment application, the enquiry which the Court must make is whether it can rule out the existence of an arguable defence.  The issue of whether the MSA contract included a provision for termination on reasonable notice is, of course, a matter of contractual interpretation.  It is no doubt correct that the Courts often take the view that the relevant background facts which should inform the process of contractual interpretation have been sufficiently revealed in the affidavits and  documentary  evidence  placed  before  the  Court  for  the  summary  judgment hearing  to  enable  the  Court  to  come  to  a  firm  conclusion  about  the  parties‟ contractual intentions so that arguable defences can be excluded.   Not every case, though, is in this category.   The genesis of the parties‟ commercial arrangements may require an investigation of a degree and extent which cannot be confidently undertaken in circumstances where there has been no discovery and where there has been only a summary hearing.  A careful review of the evidence which the case calls for may be impossible to undertake in such a context.

[56]     It  is  my view  that  the  present  case  is  of  this  kind.    Exploration  of the commercial objectives, the extent of the services which were to be provided, the apportionment of responsibility between offices/employees of the defendants on the one hand and the plaintiff on the other — all these matters have potential relevance which is not confined to the issue of whether there has been a failure on the part of Mr Lewis to meet the contractual standards of care and competence which were required,  but  they  may  also  throw  light  on  whether  a  ground  for  termination additional to those explicitly stated in the contract was to be expected.

[57]     My overall view is that this is not a case where the Court can determine this aspect of the dispute on a summary judgment basis.  Even if it could, my conclusion would have been likely to be that an arrangement of indefinite duration between the defendants and Mr Lewis/Protocol was inherently unlikely.

[58]     The proposition that the MSA was of indefinite duration is the cornerstone of Protocol‟s claim under this head.  Consistent with the view that I have expressed on this question, the summary judgment application under this head must fail.

Breach of contract

[59]     The conclusion that I have come to in the preceding section is sufficient to dispose of the plaintiff‟s claim.  But in case I am wrong in that conclusion, I will go on to consider the issue of cancellation for breach.

[60]     Mr Cook made the submission that alternatively, if there was no implied right to terminate on reasonable notice or the notice was not reasonable in the circumstances, New Image was contemporaneously entitled to terminate the MSA in accordance with the express terms of the MSA (specifically, for Protocols‟ failure to perform, per clause 11.1(1)(iv) of the MSA).

[61]     The broad position taken by the defendant is that the plaintiff disastrously miscalculated the level of demand for the COL+ product in the Singapore market. The plaintiff denies that there was any such breach on its part.   Amongst other things, it says that the defendants misunderstood some of the statistical data which was produced for board meetings in late 2009.   The plaintiff further says that the Singapore project miscarried because the defendants failed to make sufficient and timely provision of financial resources to enable the Singapore launch to be carried out successfully.

[62]     In detail, the plaintiff asserts:

a)       the alleged breaches as the basis for defences were not pleaded in the notice of opposition and accompanying particulars;

b)there  were  no  relevant  breaches  of  obligation  on  the  part  of  the plaintiff;

c)       the  defendants  themselves  repudiated  their  obligations  under  the contract and so, being in breach of contract at the relevant time were not entitled to therefore to cancel the contract;

d)in any case, the defendants affirmed the contract at a point where it had full knowledge of the alleged breaches.

[63]     An argument was also advanced that the defendants now seek to justify their cancellation of the contract for reasons which it did not advance at the time when it purported to cancel, but only at a later stage.

Discussion

[64]     The defendants did not give any detail of the allegation that breaches of contract on the plaintiff‟s part led to the setback in launching the product in the Singapore market, or the other alleged breaches including the forecasting errors. This information ought to have been provided in the notice of opposition filed by the defendants.   In the submissions made by the defendants, and in affidavits subsequently filed, the defendants went into some detail about the plaintiff‟s supposed failings.

[65]     Dealing with the first point that there was insufficient pleading at a summary judgment stage of the various alleged breaches, I consider that overall it is not unfair for the defendant to advance arguments that the plaintiff was in breach of its contractual obligations.   The plaintiff had an opportunity to provide its account of matters and to make submissions on this point.

[66]    The position taken by the defendant is that Mr Lewis of Protocol was responsible for the preparation of grossly misleading forecasts as to how the COL+ product would perform in the Singapore market.  This issue was hotly contested at the hearing before me and in the memoranda which the parties filed after the hearing.

[67]     For the defendant, Mr Cook submitted that the evidence showed that, the post-launch  presentation  that  Mr  Lewis  and  Ms  Burt  gave  to  the  Board  on  11

November 2009 showed negligible actual sales and substantially downgraded the projected sales figures.   Their presentation showed actual sales for the month of October 2011 (the first full month following the launch in September) of just 19,872 bottles.  The revised sales projections (now shown in indexes of 20,000, as opposed to the 2,000,000 indexes used in the August 2009 presentation) predicted sales of

approximately 10,000 bottles in December 2009, compared with the prediction in the August presentation of over 500,000 by that time.  The sales figures for October are repeated in Ms Burt‟s October 2009 Marketing Report for the November 2009 Board meeting.   Mr Cook submitted that the actual sales figures continued to deteriorate from October 2009 onwards and that the November 2009 Marketing Report that Ms Burt prepared for the Board referred to November sales of just 6,750 bottles and only

1,782 bottles for the first week of December.

[68]     It was submitted for the defendant that Mr Lewis had held himself out as possessing the required skills and experience to make the project a success.  But the project was a complete failure under Mr Lewis‟ stewardship, it was claimed.   His performance failures were incapable of remedy, so entitling New Image to terminate without giving any notice to remedy.

[69]     Whether a breach had occurred that was of such a fundamental nature that the defendant was entitled to summarily terminate the contract of service without notice to remedy does not in the end matter.  If in fact the shortcomings under the contract could not be remedied, it would be idle to complain that the fact that a notice to remedy was not given is a fatal flaw in the termination process.  One has to ask what remedies would have been sought in such a notice that had any practical prospect of being achieved.  If the defendant is right about Mr Lewis‟s part in the failure of the product, irreversible harm had already been done at the point where notice of termination was given.

[70]     Mr Chisholm on the other hand submitted that the defendants‟ submissions misconstrued what the evidence said on these points.   He pointed to what he said was a glaring error in the affidavit filed on behalf of the defendants by one of the directors, Mr Stewart.

[71]     Mr Chisholm  said  that  the case  for  the defendants  seemed  to  involve a misunderstanding of some graph material which, rather than showing the sales which would be expected in the Singapore market, actually had to do with assessments prepared for the Board which showed aggregate production requirements that the

defendants would have to have the capacity to meet based, not just on Singapore, but to enable projected sales figures to be met in other markets as well.

[72]     I consider that it was never going to be possible for the Court at a summary hearing to resolve factual disputes of this dimension.  I agree that while the plaintiff did not guarantee that the venture would be successful, the defendant may have a defence grounded on the results achieved being so far divergent from what both sides anticipated that it is arguable that the plaintiff‟s performance did not meet the required standards in the contract.

[73]     It does not follow that because the venture in Singapore was a failure, this was necessarily due to faulty contractual performance by the plaintiff.  However, a conclusion would be open to the Court that the plaintiff‟s role in the planning and execution of the Singapore launch was of central and vital importance.  From that point, it is not a great distance to a further conclusion that if something went wrong with the Singapore launch, the plaintiff may be wholly or partly responsible.

[74]     I acknowledge that both parties make complaints about the other.  Mr Lewis is apparently of the view that the principal problem was that the defendants did not agree to his requests for additional resources for the launch into Singapore.   And again, where the fault actually lay cannot be determined on a summary judgment basis.

[75]     I conclude that the defendants have satisfied the element of an arguable defence.

Breach relied on not raised at time

[76]     Mr Chisholm submitted that when the defendants gave notice of cancellation, that it was incumbent upon them to specify the grounds for same.

[77]     Mr Cook disputed that that was so and referred to the authority of Thompson v Vincent 11 where the Court of Appeal said:

11     Thompson v Vincent [2001] 3 NZLR 355 (CA) at[82] and [87].

A rescission for inadequate reasons could be justified at common law by the subsequent discovery and invocation, at least before trial, of adequate reasons.

…Why should a party which, by the time of trial, can demonstrate it was entitled to cancel, nevertheless be held to have acted wrongfully in doing so because it was unaware of that position at the earlier time? That question can be asked with particular  force  given  that  there  is  no  requirement  to  state,  at  the  time  of cancellation, the reasons for doing so. Revelation is not required before pleadings in proceedings issued, and some might say before the trial itself. It is not a situation where reasons must be given at outset with reliance likely to follow…

[78]     In my view, the same reasoning applies in this case.   Although the letter dated 5 May 2010 made no mention of clause 11.1(a)(iv) of the MSA,  it would be open to the defendants to raise this issue at trial. The omission to refer to that clause of the contract specifically does not deprive the defendants of a reasonably arguable defence.

Other issues raised in the proceedings

[79]     There were numerous other issues raised by the proceedings.  These included whether the defendant, allegedly having repudiated its obligations under the agreement, was itself entitled to give notice of cancellation.  That in turn raises the question of whether the steps taken by the defendant amounted to a repudiation.

Repudiation

[80]     In the plaintiff‟s submissions dated 22 June 2011, the plaintiff raises the issue of the “legality of the purported termination on 8 weeks notice”.   The plaintiff submits:

In the circumstances, it is submitted that it is trite that the defendants‟ letter dated 5

May 2010 amounted to a repudiation of the MSA.  The defendants are making it clear that they do not intend to complete performance for the “Term” of the MSA. [In a footnote: “Protocol‟s election to cancel under section 7(2) of the Contractual Remedies Act accordingly arises.”]  Given that Protocol has repeatedly reinforced that it is holding the defendants to the MSA by rejecting the notice of termination and forwarding monthly invoices, the repudiation is a continuing one by the defendants.

[81]     Protocol says that accordingly, the defendants were not entitled to cancel on

30 June 2010 (expiration of 8 weeks‟ notice since 5 May) because it had already

repudiated the contract on 5 May 2010.

[82]     The defendant, on the other hand submits:

New Image had not repudiated the MSA on 5 May 2010 by the act of giving notice that the MSA would terminate with effect from 30 June 2010 (this is supported by the fact that Protocol did not seek to allege any breach until a month after the termination had taken effect, by its solicitors‟ letter of 28 July 2010).

The MSA remained “on foot” (albeit that the services had been suspended since November 2009), until the termination actually took effect.  Further, New Image‟s termination, notice of termination and suspension all stemmed from Protocol‟s existing breach of the MSA — unlike the lessee in Ingram, Protocol was already in default and its failure to perform was incapable of remedy.

[83]     I can set out my brief conclusions on this point.   The argument for the plaintiff relies on a finding that the defendants were not entitled to terminate on 5

May 2010.   I have already concluded that there is a reasonably arguable case the defendants were allowed to do so (either under an implied term of “termination on reasonable notice” or cl 11.1(a)(iv) “failure to perform”).  If at trial the Court upheld the plaintiff‟s argument, it would follow that the notice of termination would not be a repudiation.

Affirmation/Election

[84]     Mr Chisholm submitted that at all times from 12 November 2009 until 5 May

2010, the defendants were purporting to act in accordance with the MSA and their solicitors repeatedly confirmed the same, even after a threat of specific performance. He said that objectively considered, their conduct (payment over eight months and solicitors‟ correspondence confirming performance) was unequivocal affirmation.

[85]     The letter of 12 November 2009 is again influential, although it is only part of the evidence which the Court may consider informative of the intentions of the defendants at this time.   It is an open question whether that letter in fact has the significance that the plaintiff attributes to it.   This is not an issue which can be suitably resolved on a summary judgment basis either.

Conclusion

[86]     The Court is persuaded by a considerable margin that there are arguable defences available to the defendants in this case.  They include:

a)        the  possible  implication   of  a  term   authorising  termination   on reasonable notice;

b)        that the defendants were entitled to terminate for breach of contract.

[87]        Further, it is at least arguable that at the time when the notice of termination was given the defendant had not repudiated the contract and did not unequivocally affirm it.

Result

[88]     The result is that the application for summary judgment is dismissed.  The parties should confer on the question of costs.  They should also submit proposals

(preferably on a joint consent basis) for progressing the proceeding.

J.P. Doogue

Associate Judge