RML Engineering Limited v Cheese Solutions NZ Limited

[2014] NZHC 3246

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

CIV-2010-019-000780 [2014] NZHC 3246

BETWEEN

RML ENGINEERING LIMITED

Plaintiff

AND

CHEESE SOLUTIONS NZ LIMITED Defendant

Hearing:	5 December 2014
Appearances:	Ms A Iles for Plaintiff Mr D Shore for Defendant
Judgment:	18 December 2014

JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE

This judgment was delivered by me on

18.12.14 at 12 noon, pursuant to

Rule 11.5  of the High Court Rules.

Registrar/Deputy Registrar

Date……………

RML ENGINEERING LIMITED v CHEESE SOLUTIONS NZ LIMITED [2014] NZHC 3246 [18 December

2014]

Background

[1]      This judgment is concerned with an application for directions concerning discovery.

[2]      The difficulties  that  the  dispute presents  for  resolution  are linked  to  the reasonably complicated factual and legal background.   As with all discovery applications, it is necessary to start from a position of understanding what issues arise in the case so that an understanding can be arrived at as to what the relevant documents are and whether any directions are required with respect to discovery of those documents.

[3]      Messrs Danny Ryan and Larry Greene were once in business together and were directors and shareholders of the plaintiff company.   The business involved designing and manufacturing innovative technologies for food handling amongst other things.   In the course of time they produced a machine which could automatically portion and package cheese.

[4]      Following differences between the two shareholders, it was agreed that they would go their separate ways and Mr Ryan established the defendant company. Comprehensive agreements were then entered into between the plaintiff company which remained under the control of Mr Greene.  The agreements were concerned with dividing up various assets including intellectual property owned by the plaintiff company.  Provision was also made for what in effect amounted to a partial restraint of trade to which the defendant company was to be subject.  The agreement for sale and purchase entered between the two companies and shareholders on 17 March

2005 provided at cl 10.1 that Mr Ryan and the defendant company agree not to compete  with  the  plaintiff  company  for  a  period  of  seven  years.    Clause  10.2 provides:

10.2Nothing in clause 10.1 restricts or prevents [the defendant] from carrying on business exclusively in the cheese industry, provided that the following conditions are met:

a.that business does not directly or indirectly (and whether wholly or partly) involve the design, manufacture, sale or supply, of machines for wrapping cheese, or for erecting cardboard  or  packing  product  into  cardboard  packaging,

boxes  or  other  containers  or  for  closing  and  glueing cardboard boxes and containers (other than as part of a joint venture with [the plaintiff]), except to the extent that in a specific case:

i.         the [plaintiff] cannot supply an appropriate option from its product range; or

ii         [the   defendant’s]   customer   does   not   want   the relevant machine(s) to be manufactured by [the plaintiff], and [the plaintiff] agrees in those circumstances, to that machine or those machines being manufactured by another manufacturer. [The defendant] will not unreasonably withhold that agreement; or

iii        if [the plaintiff] cannot supply a competitive option for such a machine provided that if the price payable by [the defendant] under the Supply Agreement for that machine is more than the price for any other person or company to design and manufacture that machine, [the plaintiff] is to be given the first option to match that lower price; or

iv        [the plaintiff] cannot deliver the machine according to a reasonable delivery schedule for that machine, required by [the defendant]’s customer; and

b.Any machines or equipment designed, manufactured, sold or supplied by [the defendant] are not machinery or equipment designed, manufactured, sold or supplied by [the plaintiff] at the date of this agreement, or enhancements, developments or  improvements  to  those  machines  all  that  equipment (unless any of clauses 10.2 a i - iv applies); and

c.[The  defendant]   complies   with  the   Supply  Agreement attached as schedule 3; and

d.[The defendant] complies with the Vendor's obligations in clauses 10.1 iii to v, as if [the defendant] were a Vendor; and

e.        [The  defendant  does  not  infringe  any  of  [the  plaintiff’s]

intellectual property rights….

[5]      The  “supply  agreement”  contemplated  that  the  defendant  would  wish  to purchase from the plaintiff cheese portioning machines which it manufactured for sale and distribution.  The agreement was entered into on 4 May 2005.  The supply agreement provides a comprehensive statement of the terms which would govern any supply of products which the plaintiff manufactured and which the defendant purchased.   It contains rates which the plaintiff would be entitled to include in its

charges including making provision for materials to be on charged at cost plus 15 per cent and labour to be charged at $52 per hour.

[6]      In  2010  the  defendant  manufactured  a  cheese  apportioning  machine  for supply to Bega Cheese Limited.  It did not purchase that machine from the plaintiff. In terms of the restraint of trade agreement which the parties had entered into, it would seem likely that the defendant was in breach of that provision unless it could bring itself within one of the exceptions in cl 10.2 of the agreement for sale and purchase which I have set out above in this judgment.

[7]      The  plaintiff  issued  proceedings.    In  March  2011,  the  parties  agreed  to appoint an expert to determine whether the cheese apportioning machine that the defendant  manufactured  was  caught  by  the  supply  agreement.     The  expert determined that the machine was a “machine” within the scope of the supply agreement.  Of course by this stage it was well past the time where the plaintiff could actually insist upon the provisions of the supply agreement being activated and observed by the defendant.  The supply of the machine to Bega Cheese Limited was by then a fait accompli.  In its statement of claim, the plaintiff seeks damages instead with the amount that is claimed being $580,245 (with GST if any).

[8]      The defendant pleads that notwithstanding the expert finding, the plaintiff must still establish that it has suffered loss as a result of the breach.  The defendant denies that the plaintiff has suffered loss and says that in the event that the plaintiff was entitled and able to supply the machine, the profit earned would be less than is alleged.

Issues

[9]      The approach that must be adopted to the calculation of any loss which the plaintiff may have suffered as a result of the breach is to place the plaintiff in the position that it would have been had there not been a breach of contract.   The plaintiff alleges that had the contract been performed it would have manufactured the machine  which  the  defendants  sold  to  Bega  Cheese  Limited  rather  than  the defendant making its own machine and selling it.  Notwithstanding that the plaintiff in its reply to the statement of claim denied that any of the exceptions in 10(2)(a)

applied, the plaintiff, for the purposes of this argument, appeared to accept that cl 10.2(a)(ii) is the provision, if any, that would be activated.

[10]     For the purposes of this application I therefore proceed on the assumption that the plaintiff was unable to supply a cheese portioning machine from its product range that met the requirements of Bega Cheese Ltd.   The plaintiff then became entitled  to  submit  a  price  for  manufacturing  the  machine  in  question.    Clause

10.2(a)(iii) contemplated that the price that it would submit would be based upon the rates specified in the supply agreement.

[11]     The reference to the supply agreement seems to envisage that if the defendant was able to sell a machine of certain specifications, it could look to the plaintiff to provide a quote for it.   Because the default position was that the price that the plaintiff would charge to the defendant would be calculated in accordance with the supply agreement, the initial quotation, if I can call it that, would be based upon the rates and margins set out in the supply agreement.

[12]     If however, the price quoted proved not to be competitive, clause 10.2(a)(iii) contemplated that the next step that the defendant would take would be to invite other parties to  quote  on  the supply of  the  machine  and  once prices  had  been received, an opportunity would be given to the plaintiff to match thelower price.

[13]     Because of the fact that the present dispute is taking place after the event, it is necessary to interpret the agreement mutatis mutandis to make it applicable to the situation where in place of performing the contract, the plaintiff is seeking damages to compensate it for the breach of contract it alleges occurred and the loss flowing from that breach.

[14]     In my understanding, the first step is that it was possible for the plaintiff to establish that it was able to "supply a competitive option".  Quite what comprises a competitive option is not clear.  Obviously it would include a price but might also relate to delivery time, maintenance warranties, site service and all the other factors normally considered by the purchaser of a substantial and expensive piece of equipment as this machine was.   So far as price is concerned the intention would

seem to be that this is a reference to the best price at which other suppliers in the market would be able to provide a like machine.  But as I have noted there may have been other factors which would bear upon the question of whether the plaintiff's offering was a competitive one.   It could be that competitiveness included consideration of what market price the defendant was hoping to sell at.  That would however involve the defendant disclosing what its price point at which it hoped to sell to Bega Cheese Limited was.  In the end, no doubt suppliers of machines when submitting prices for manufacture would have one eye on what margin the on-seller would wish to achieve and would factor that into the price that they quoted for supply.

[15]     Reverting to the hypothetical situation that the plaintiff was invited to price the contract before manufacture, the next step would be that, having provided its price, the plaintiff would expect that the price would either be accepted or that alternatively the defendant would come back to it and advise what price it had to beat to get the contract.   In the circumstances of this case, that price was what it would cost the defendant to manufacture the machine.

[16]     In the context of the reality of the case, that is that this is a contractual breach claim, the plaintiff would have to provide evidence to show what the cost would be for the defendant to make the machine.   In this case the defendant actually manufactured the machine and no doubt retained cost records attributable to the cost of designing and building the machine.  It is this information to which the plaintiff seeks access by means of discovery.

[17]     The next step would be to establish that the plaintiff would have wished to supply the machine at a price which was the same as, or less than what it cost the defendant to make the machine itself.   Of course, the defendant would be able to scrutinise the claimed price at which the plaintiff could have made the machine, again by pre-trial procedures such as discovery and interrogatories.

Scope of discovery

[18]     The next issue concerns the documents that the defendant is required  to produce.  As I understand that counsel for the defendant, Mr Shore, it is of the view that while it would be incumbent upon the defendant to disclose to the plaintiff  the costs involved to build the machine, the underlying information ought not to be provided, or at least not at this stage.  The defendant is concerned that the plaintiff’s costing exercise would become distorted if the defendant’s total costs of manufacturing the machine are disclosed from the outset as, the defendant says, the exercise would become a “peer review” as supposed to a “true costing”.

[19]     I am unable to accept that that is the correct position. There may be different reasons why any view that the defendant has concerning the cost of manufacturing the machine does not actually represent the true cost for the purposes of determining whether there has been a breach of contract and what if any damages are called for by way of compensation.  It might for example be that there are taxation implications affecting the cost which for accounting purposes consideration for the machine is recorded in the defendant's accounts.  It is therefore beyond argument, in my view, that proper discovery ought to be made of documents bearing upon the cost to the defendant of making the machine.   I am confident that in light of a ruling to this effect, the parties will be able to use the good sense to ensure that the range of documents which are called for in discovery are reasonable and that discovery is proportionate to what is at stake in the proceedings.

Staged discovery

[20]     It was the defendant’s  position that the plaintiff ought to be required  to commit itself to a figure for the cost at which it would have been able to manufacture the machine before the defendant discloses its costs incurred.   I understand from Mr Shore’s submissions that what he was proposing was that the plaintiff ought to provide an affidavit from an expert or from some other source establishing this point. The object behind this submission was that unless the plaintiff was required to commit to a particular figure, it would change its position after seeing what the manufacture of the machine actually cost the defendant.

[21]     I do not consider that the proposal is one that is consistent with accepted norms of procedural practice.  There is no requirement on the part of either side to put forward evidence until they have had assistance from all legitimate sources including information obtained by them in the course of discovery.

[22]     The defendant is not without safeguards.   It too will have the advantage of discovery.   Because the question of the cost at which the plaintiff could have manufactured the machine is a live issue, then it would seem that discoverable documents that relate to the costs of supply of materials and labour rates, overhead costs, reasonable profit margins and all of the other inputs would have to be made available to the defendant to enable it to critically scrutinise the figure that the plaintiff says it could have manufactured the machine for.

[23]     As well, there is no doubt that the defendant will be able to obtain an opinion from an expert witness who will be able to state their reasons why the cost which the plaintiff claims are not achievable.   Similarly, the plaintiff will no doubt wish to support its case by calling an expert witness.  As with all expert witnesses, it is to be expected that such witness will give his or her evidence in accordance with the code of conduct for expert witnesses contained in the High Court Rules.1   Ascertainment of the facts in this case does not present any unique problems.  The Court would be well placed to detect any tendentious evidence.

[24]     My conclusion is that the defendant ought to provide documents relating to the costs that were incurred in designing and constructing the machine for the Bega Cheese Limited contract to the plaintiff within 15 working days from the date of this judgment.

Other matters

[25]     I  understand  that  there  has  been  discussion  about  the  possibility  of  the plaintiff having access to the contract price at which the defendant sold the machine to Bega Cheese Limited.  There would not seem to be any basis for concluding that that information is relevant to the claim that the plaintiff makes.  The plaintiff never

had any entitlement to involve itself in the contract between the defendant and Bega

1 High Court Rules, r 9.43.

Cheese Limited.  It is correct that the machine that it says it was entitled to construct for the defendant was ultimately destined to be supplied to Bega Cheese Limited. That is however only a matter of incidental background.   The profit which the defendant would make on the sale to Bega Cheese Limited would not seem to be a matter that is relevant to the present proceeding.

[26]     I reserve leave to the parties to apply for further directions on the question of discovery.  The registrar is to arrange for this matter to be placed in the March 2015

Chambers list for review so that attention can be given to trial arrangements for this proceeding and also completion of interlocutory steps, close of pleadings date and

pre-trial program.

J.P. Doogue

Associate Judge