RML Engineering Limited v Cheese Solutions NZ Limited

[2015] NZHC 2288

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2010-019-000780 [2015] NZHC 2288

BETWEEN

RML ENGINEEERING LIMITED

Plaintiff

AND

CHEESE SOLUTIONS NZ LIMITED Defendant

Hearing:	10 September 2015
Counsel:	JA MacGillivray and A Iles for Plaintiff
Judgment:	10 September 2015

JUDGMENT OF ASHER J

Solicitors:

Tompkins Wake, Hamilton. McCaw Lewis, Hamilton.

RML ENGINEEERING LTD v CHEESE SOLUTIONS NZ LTD [2015] NZHC 2288 [10 September 2015]

[1]      This is a judgment by way of formal proof.  I have been assisted by a full synopsis of submissions from counsel for the plaintiff Mr MacGillivray.  I have also been assisted by three affidavits that have been filed in support of the summary judgment to formally prove it, and by oral submissions.

[2]      The plaintiff RML Engineering Ltd (RML) is an engineering company.   Its original principal was Mr Danny Ryan, who now is the principal of the defendant Cheese Solutions NZ Ltd (Cheese Solutions).   Under Mr Ryan’s leadership RML achieved success in the production of automated product processing and package machinery including machines that partitioned cheese.

[3]      In 2005 Mr Ryan sold his shareholding in RML to Messrs Larry Greene and Peter Botting.   They have both sworn affidavits.   It was proposed that Mr Ryan would set up his own company and part of its business would be the supply of the same  cheese  cutting  machinery  that  RML had  developed.    That  new  company ultimately was Cheese Solutions.

[4]      It was agreed that the new company would take ownership of the cheese technology that enabled cheese cutting machines to be made.  The question was what was to be paid for the transfer of this cheese technology.

[5]      Ultimately in 2005 when an agreement was signed it was on the basis that the cheese technology would be given a low value, but on the condition that should Cheese Solutions sell any machines, they would be supplied by RML which would have the exclusive right to manufacture those machines sold during the term of the agreement.   The term was the default date of 31 March 2015 or the supply of 20 machines.

[6]      Unfortunately the happy plan of Cheese Solutions selling and RML supplying these cheese cutting machines did not eventuate.   To RML’s knowledge only one cheese processing machine was sold following the signing of the agreement, and this was not ordered through RML.  This proceeding concerns the failure to order that machine through RML.

[7]      The 2005 supply agreement was an exclusive agreement that required Cheese Solutions to purchase machines from RML.   Cheese Solutions was prohibited by cl 6.1 of the agreement from supplying machines other than through RML.  The one sale that did occur was to Bega Co-operative, an Australian cheesemaker and processer.   When RML became aware that this supply had taken place and not through  it,  it  initiated  proceedings,  initially in  the  District  Court.    Following  a judicial settlement conference it was agreed that an expert would determine whether the machine supplied to Bega Co-operative was a machine within the meaning of the supply agreement.   The parties agreed to be bound by the determination of that expert.

[8]      The expert appointed was a Mr David Simunic.   He viewed the machine supplied and the machines manufactured prior to 2005 by RML.   He released a determination finding that the Bega machine clearly fell within the scope of the supply agreement.

[9]      That   determination   effectively  resolved   the   issue  of   whether   Cheese Solutions had breached the agreement with RML in favour of RML.  For the record I find that Cheese Solutions breached the  supply agreement when it supplied the machine to Bega Co-operative and did not arrange for that supply through RML.

[10]     The proceedings were transferred to the High Court for a determination of the damages claim.  The proceedings were contested right up until several weeks ago. The case was set down for hearing for a six day hearing on 31 August 2015.  It did not proceed.   Cheese Solutions has failed to comply with unless orders and its counsel today sought leave to be excused.  I was told by its counsel that the director of Cheese Solutions, Mr Ryan, is aware of today’s hearing.  He did not appear on

31 August 2015 and has not appeared today.

[11]     So the question that I have to determine today is the amount that Cheese

Solutions must pay RML for damages, interest and costs.

[12]     The supply agreement sets out a formula for payment at cl 7.   It reads as follows:

7.1  Subject to clause 7.2, the price payable by the Company for a Machine, or for spare parts for a Machine will be the aggregate of the following:

a.The cost to the Supplier of the materials used in the manufacture of the relevant Machine(s), or spare parts, plus a margin of 15%, and

b.The hours agreed by the Supplier and the Company, before manufacture of a Machine or spare parts, is commenced, to be taken by the Supplier to design and manufacture the relevant machine or spare parts at the Supplier’s standard hourly rate at the time (presently $52.00 per hour plus GST).  (The Supplier and the Company may, before manufacture starts, review the hours taken by the Supplier to manufacture the last Machine or spare parts, designed and manufactured by the Supplier for the Company, and

c.The aggregate of the sums in subclauses (a) and (b), plus a margin of 15% except that for spare parts supplied by the Supplier this margin will be 50%.

The Purchase Price will be payable in accordance with the Supplier’s standard terms and conditions of trade, as notified from time to time by the Supplier to the Company and as agreed between the Supplier and the Company prior to the Supplier commencing construction of the machines.  The terms and conditions of trade are to include provisions for penalties for failure of the Supplier to meet the Completion Date deadlines agreed to by the Supplier and the Company.

[13]     In summary the cost of manufacture of the machine was to be as follows:

A	Labour	At current rates
+ +	B C	Materials Margin	Cost plus 15% 15% of A + B

=         Cost

[14]     As can be seen, the margins are considerable and indeed there is an effective doubling of the margin in cl 7.1(c).  However, I am informed that this was because the return on the machines was more than just the usual manufacturer return and had an element of payment for the transfer of the intellectual property.  That is why the high rates were agreed to.

[15]     I have a good deal of information on the file about efforts that were made by RML to get details of the machines supplied by Cheese Solutions to assist it in assessing likely costs.  Unfortunately it seems that there were some real difficulties

in  this  regard  and  even  today  RML has  not  had  all  the  information  it  sought. Nevertheless, a calculation has been done as follows:

(a)       Total materials = $541,798

(b)      Mark-up on materials = $81,270 (c)     Labour

Assembly technician	2000	$62/h	$124,000
CNC technician	0	$62/h	0
Fitter	1142	$62/h	$70,804
Machinist	893	$62/h	$55,366
Supervisory Project manager	125 350	$70/h $70/h	$8,750 $24,500
Other	137	$62/h	$8,494
Tradesman 1	845	$62/h	$52,390
Quality assurance	400	$62/h	$24,800
Administration	200	$50/h	$10,000
Electrician	400	$70/h	$28,000
Automation engineer	700	$100/h	$70,000
Total labour	$477,104

(d)      Sub-total labour plus mark-up = $1,100,172 (e)          Mark-up (15 per cent) = $165,026

(f)       Total machine price = $1,265,197

That pricing was GST exclusive.

[16]     This calculation is based on a pricing spreadsheet and supporting information provided  by  an  independent  expert  retained  by  RML,  a  chartered  accountant Mr Anthony Weber.    Mr Weber’s  evidence  explains  how RML’s  sale  price was arrived at, discusses the cost of materials, the labour content, and the loss of profit calculations.  Material, labour and variable costs are deducted from the sale price. He arrives at a final loss figure of $505,708.

[17]     Mr Weber’s calculations appear to me to be coherent and professional.  I have no reason to doubt them.  I find that on the balance of probabilities $505,708 is the loss suffered by RML for the breach of the supply agreement by Cheese Solutions in failing to supply the Bega Co-operative machine using RML as it was obliged to do. I am therefore prepared to enter judgment for damages for that amount.

Interest

[18]     The agreement provides for a penalty rate of 15 per cent.  There may be a question as to whether that rate is payable given the wording of cl 7.5, although I do not need to determine that point.  There may also be a question as to whether the rate of 15 per cent is a penalty, given the low bank rates of today.

[19]     Mr MacGillivray, after having taken instructions, does not press for judgment based on the default rate and would be content for an order that the judgment bear interest at the maximum prescribed rate provided by the Judicature Act 1908.  I am prepared to make such an order.

[20]     There will be interest at that maximum prescribed rate (which will adjust through the period) from 1 November 2010 to the date of this judgment.

Costs

[21]     The final  issue is costs.   The  agreement  provides  at  cl  13.1  for Cheese Solutions indemnifying RML against all costs and expenses including as between solicitor and client caused by any breach of the agreement.

[22]     The costs have been very considerable.  Costs at the District Court involving the appointment of the expert of approximately $89,000 have already been paid on an indemnification basis by Cheese Solutions.   The question is what should be ordered for the costs incurred in this Court.

[23]     In this regard I have an affidavit from RML’s solicitors.  The total legal costs and disbursements are $93,646.50, plus Court disbursements of $313.04 for filing

fees.   In addition, RML has incurred experts’ costs of $12,689 exclusive of GST.

Thus RML seeks the total sum of $106,648.54 excluding GST.

[24]     In my view RML is entitled to these costs under cl 13.1.  The costs are high, but I can see that the course of the litigation has been complex with many interlocutory attendances, and of course the case had to be largely prepared for trial.

Result

[25]     The defendant Cheese Solutions NZ Ltd will pay damages to the plaintiff

RML Engineering Ltd in the sum of $505,708.

[26]     The defendant will pay interest on that sum to the plaintiff at the prescribed rate under the Judicature Act from 1 November 2010 to the date of this decision.

[27]     The defendant will pay the plaintiff its costs on an indemnity basis being a total of $106,648.54 excluding GST.

……………………………..

Asher J