Smith & Davies Limited v Auckland Council
[2017] NZHC 999
•16 May 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-3020 [2017] NZHC 999
BETWEEN SMITH & DAVIES LIMITED
Plaintiff and Counterclaim Defendant
AND
AUCKLAND COUNCIL
Defendant and Counterclain Plaintiff
Hearing: 13, 14, 15, 16 and 28 March 2017 Appearances:
C A Murphy for Plaintiff/Counterclaim Defendant
S J M Mount and K F Quinn for Defendant/Counterclaim
PlaintiffJudgment:
16 May 2017
JUDGMENT OF FOGARTY J
This judgment was delivered by Justice Fogarty on
16 May 2017 at 3.30 p.m., pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Solicitors:
Gregory Simon Law, Auckland
Auckland Council Legal Services, Auckland
SMITH & DAVIES LIMITED v AUCKLAND COUNCIL [2017] NZHC 999 [16 May 2017]
Introduction
[1] The plaintiff sues the Auckland Council for a sum of $175,888.63 for unpaid services and general damages in excess of $250,000 for wrongful termination of contract. The Council defends and denies any liability and counterclaims for
$36,750.51.1
[2] Smith & Davies (SDL) and the Council were parties to a contract for services being the supply of essential refuse transport services to Auckland Council at the Waitakere Transfer Station. The transfer station typically receives several hundred tons of incoming refuse per day. SDL agreed to load and remove that refuse, from the transfer station using specialist equipment, and to ensure that the municipal refuse levels did not build up on the tipping floor beyond 75 tons per day.
[3] In 2014 the Auckland Council had run a lengthy procurement process for the loading and transport work at the transfer station. SDL was successful and the contract was worth up to $70 million in revenue over five years, with potential for extension for two years. The volume of work was growing as the population of Auckland grew. The underbidder, by a narrow margin, was Waste Management New Zealand (WMNZ).
[4] SDL was one of a group of companies together owned by four men in equal shares: Messrs Chalmers, Cleaver, MacKinnon and Grove. Mr MacKinnon’s family had been providing rubbish removal services for the Auckland Council for decades, under the name Smith and Davies. Smith and Davies merged with a business Harvest Pro and formed a company Kiwi Forestry International Ltd (KFI). The subsidiaries of KFI included: KFI Leasing Ltd, KFI Asset Management Ltd and SDL. It was always intended that SDL was likely to be sold on, out of the group. At the time this dispute arose much of the machinery SDL used was leased from financiers, Mercedes Benz and General Electric, by KFI Leasing and KFI Asset
Management.
1 See below at [32].
Narrative of events prior to the Council’s termination
February 2015
[5] In February 2015 the intended sale of SDL was put into effect by an agreement between KFI as vendor and Jellicoe North Ltd, a company owned by Messrs MacKinnon and Grove.
12 March 2015
[6] About 12 March 2015, GE Finance and Mercedes Benz Finance repossessed various assets leased to KFI group companies. These included some assets used by SDL in the rubbish removal business. SDL, however, was able to continue to perform its contract with the Auckland Council.
13 March 2015
[7] On 13 March, Mr Grove and Mr MacKinnon resigned as directors of SDL and of the other Kiwi companies. There are two conflicting reasons why they did that. Mr MacKinnon said they did it on legal advice because they believed the group might be technically insolvent. Mr Chalmers said they did so, so they could be truly independent of any decision, to be made by SDL, on whether or not to assign its valuable Auckland Council refuse contract to them, via their company Jellicoe North Ltd.
Thursday 30 April 2015
[8] On Thursday 30 April 2015 the prospect of Mr MacKinnon and Mr Grove (via SDL) acquiring the refuse contract with the Auckland Council came to an end. There are two competing versions. Mr Chalmers said the bid was rejected. Mr MacKinnon says he and Mr Grove had told Mr Chalmers on Thursday 30 April they would not be proceeding with the purchase. Whichever story is correct Mr MacKinnon was in his own words “devastated”.
Friday 1 May 2015
[9] Mr MacKinnon and Mr Grove told the finance companies, GE and Mercedes Benz, that they (SDL) would not be proceeding with the purchase of the business. They took this step without advising the directors of SDL. Mr MacKinnon did not justify taking the step as manager of SDL. In answer to a question, from myself at the end of his re-examination, he gave as a reason a sense of loyalty to the finance companies.
Monday 4 May 2015
[10] At 12 noon on Monday 4 May 2015, Mr MacKinnon advised the Council by email that SDL was very unlikely to have any plant or vehicles to service the contract “from tonight”.
[11] Shortly thereafter, the Council, through Mr Blair, the senior manager on site, confirmed directly with Mr MacKinnon that SDL was ceasing trading that night. By
2 pm, SDL drivers had parked up their vehicles and walked away.
[12] The Council urgently sought assistance from WMNZ and asked trucks used to collect rubbish from individual properties to make longer journeys than usual, diverting them away going from the transfer station.
[13] At 1.43 pm on the same day an Auckland Council executive, Mr Dale Anthony, was reporting to colleagues requesting their co-operation to divert as much of commercial third party WMNZ volumes to other facilities as an interim reduction to waste entering the RTS (refuse transfer station). He identified WMNZ “to be the conduit to arrange bulk transport of waste from the RTS to Redvale using its own fleet or any other hired in fleet”. He also identified WMNZ to take over the contract:
We would like to meet to discuss arrangements for WMNZ taking on the contract as number two supplier.
[14] The same day Mr MacKinnon and Mr Grove signed a letter to contractors letting them know that SDL was ceasing trading on Tuesday 5 May.
Tuesday 5 May 2015
[15] The following day, all of SDL’s equipment was repossessed by Mercedes
Benz and GE.
[16] The effect of SDL ceasing to remove rubbish from the RTS on the Monday afternoon was immediate. It can be illustrated by the fact that by Tuesday morning there were 200 tons of refuse, on the floor, 125 tons in excess of the legal limit of 75 tons under the RMA consent.
[17] After their immediate focus on putting in place temporary arrangements for the removal of the rubbish, still on Tuesday 5 May, senior officials within the Auckland Council, and in particular Mr Kel McBeath, examined the Council’s ability to terminate its contract with SDL. Mr McBeath focused particularly on cl 23.1(b).
[18] Clause 23.1 reads:
23.1Termination by Council: Council may immediately terminate (or suspend Supplier’s performance of) this Agreement in whole or in part by written notice to Supplier if any of the following applies:
(a) The Supplier commits a material breach of this Agreement and fails to remedy the breach within ten (10) Business Days of written notice of the breach from Council. Without limiting the definition of material breach, breach of any of clauses 3.1(a)(iii), 5.1, 12.1, 13.1 or 13.4 is a material breach for purposes of this clause 23.1(a);[2] or
(b) The Supplier suffers an Insolvency Event or a Probity Event occurs; or
(c) The Supplier has breached any of clauses 3.2, 10.1, 14.5,
20.1, or 28.3, or Supplier has breached clause 4.1(e) in respect of any material misrepresentation or non-disclosure prior to the date of this Agreement.
(Emphasis added)
[19] Insolvency event is defined in cl 1.4:
2 I note here it did not rely on 23.1(a) because the Council gave notice to terminate the co ntract within ten business days of the default on Monday 1 May.
Insolvency Event means, in relation to a person, anything that reasonably indicates that there is a significant risk that the person is insolvent or is or will become unable to pay its debts as they fall due including:
(a) any step being taken to make the person bankrupt, wind up the person’s business or to have a receiver, receiver and manager, administrator, liquidator or statutory manager appointed to or in respect of the person or any of its assets;
(b) any statutory demand being served on the person, or any proceedings being brought or threatened against the person for recovery of a liquidated or undisputed debt;
(c) the person ceasing to carry on its business; or
(d) a meeting of the person’s creditors being called or held or the person entering into any type of arrangement with, or assignment for the benefit of all or any of its creditors;
[20] Mr McBeath also advised Mr Naya, who was the Auckland Council’s point of contact with SDL, that he had noted that Mr MacKinnon was no longer a director of the company.
[21] Still on Tuesday 5 May, Mr McBeath gave internal instructions to Mr Dale
Anthony, another senior Council executive, as follows:
Dale, had a quick catch up with Warren. We discussed the way forward and appropriate next steps prior to engagement with WMNZ about a longer term solution. Some of the following may be clear however if not, we suggest we understand SD’s formal position. Can you give us feedback around points 1 and 2 in particular?
1.Confirm who the appropriate contact person is at S&D to discuss the contract (noting that Graham McKinnon is not listed on the Companies Office site as a Director of SD currently.
2. Confirm with the appropriate person at SD:
a. that SD are now insolvent (relevant to clause 23.1(b),
b.what S&D’s ability/intention/capacity is regards the contract noting that they are in breach and can be terminated in line with clause 23.1(b) (the supplier suffers an Insolvency Event or a Probity Event occurs),
3. Post confirmation of 2:
a.as appropriate, issue a letter of termination per 23.1(b) or require written confirmation of timings and actions to resume performing services. Noting that satisfactory bond would have to put in place as part of the recover activity.
Wednesday 6 May 2015
[22] Mr Dale Anthony reported to his colleagues about the diversion of rubbish to
other RTSs and reported on activities of WMNZ who were “looking at securing a 14-
18T excavator and driver to work on the loading out, and as having secured Regal
25T truck and trailer units in addition to another truck and trailer from WMNZ, with
WMNZ then securing a fleet of four Gleeson and Cox vehicles for Thursday.
[23] The same email, disclosing intensive assistance by WMNZ, also discloses Council consideration of WMNZ being awarded the contract, on an assumption that SDL’s contract would be terminated. Under the heading “New Procurement with WMNZ”:
As previously communicated Kel and Warren have had a discussion around award to WMNZ as number 2 through the procurement and this is progressing. A meeting is being held Friday afternoon to discuss. However, this comes with its issues as the lead time for bulk fleet is 6 months as discussed today with Ian Mayes. There is however some potential hope that M&H (supplier to WMNZ) have two 100cum3 walking floor trailers on order which they could deliver to this contract from late ay/early June. This is being considered.
Thursday 7 May 2015
[24] Neil McBeath’s instructions to Chris Naya and Dale Anthony were re-stated in an email from Chris Naya to one of the directors of SDL, Zane Cleaver, on Thursday 7 May at 10.10 am:
Hi Zane,
Thanks for giving me a call back earlier to discuss the current situation with Smith and Davies. As confirmation of our conversation and to ensure clarity, my understanding is as follows:
GE Finance and Mercedes Benz Finance have removed their financial support from S&D
The above has resulted in all capital assets and plant being removed from S&D and its associated contracts
S&D are now considered to be insolvent
Graham Mackinnon no longer plays any part of S&D, with yourself and Andrew Chalmers now being the new company directors on companies Office
Your intentions as S&D’s new company Directors are not to carry on the contract for Disposal, Haulage and Processing Services under contract number 6000007774
If you could please let me know whether my understanding of the situation is correct by return email then I’d beappreciate it [sic]. If you could also please confirm the address that official paperwork should be sent to if different to S&D’s previously registered address then please let me know.
[25] The reply to that inquiry was sent in the middle of the same day, not by Mr Cleaver, but by Mr Brent Hempel to Chris Naya. Apart from Mr Cleaver’s conversation with Mr McBeath earlier in the day,3 this was the first significant communication on Thursday by SDL to the Auckland Council following the cessation of work by SDL, on Monday afternoon.4 The reply read:
Hi Chris,
I have been retained by the directors of Smith & Davies Limited to assist with the orderly wind down of the company. I act completely under their instruction. In terms of your and my understanding at this time (appreciating that there is a lot going on right now), I can confirm the following:
GE Finance and Mercedes Benz Finance have removed their financial support from S&D and are in the process of enforcing their position on the company by securing their assets that they purport to have security over.
Graham Mackinnon and Robert Grove resigned as directors on or about 13 March 2015, whilst remaining in managerial control of the business to date. The remaining directors of record are Andrew Chalmers and Zane Cleaver.
The directors are seeing advice on the current status of the solvency of Smith and Davies Limited.
The directors are reviewing and taking advice on all current contracts as they acknowledge they are still in force, and will advise accordingly with due cognisance that time if of the essence. I would expect to have some indication of the status as soon as possible.
Official paperwork can be sent to S&D’s registered address and also e- mailed to me so I can distribute accordingly.
[26] It can be seen, by comparing the scope of the inquiry in [21] and the reply above in [25], that Auckland Council/Mr Naya had not received the appropriate
confirmation from a director of SDL that SDL were now insolvent. Nor as to what
3 See above at [24].
4 See above at [11].
SDL’s future intentions and financial capacity would be. Those confirmations appear to have been judged by Mr McBeath to be needed for the application of cl 23.1(b) before the Council could terminate the contract.
[27] On the same day, 7 May, at 4.56 pm, Chris Naya advised Dale Anthony that he had:
Just received a phone call from a person at the Semenoff group who have just purchased 100 of S&D’s vehicles. They wanted to meet at the RTS (Refuse Transfer Station) tomorrow so I agreed to more because it took me by surprise than anything else, but also they’ve just purchased a large portion of S&D’s fleet and my details were passed on by the new S&D directors.
Not sure what you think or feel about it but I thought it’d better to meet them
than just fob them off with nothing to gain. Meeting them at 11am.
Friday 8 May 2015
[28] It is not clear whether that or any other meeting ever took place. But it appears nothing came of this or any contacts. There is no evidence as to why not. I infer that neither party considered that it was in their interests to give evidence on these matters.
[29] On the same day the Council sent a letter to SDL terminating the agreement:
We hereby notify you that the Agreement is immediately terminated in accordance with clause 23.1(b) and/or by your repudiation of the Agreement as follows:
(a) Termination under clause 23.1(b) for Insolvency Event: S&D
has suffered an Insolvency Event based on advice that:
(i) S&D’s funders have removed financial support from the company and are re-possessing S&D assets over which they have security (including plant, vehicles and equipment that was being used in providing the Services under the Agreement) (see emails dated 4 and 5 May 2015 between Council and S&D and email dated 7 May 2015 from Brent Hempel to Chris Naya (Council)); and
(ii) S&D have retained Management Logistics (NZ) Limited to “assist with the orderly winding down of the company” (refer to email dated 7 May 2015 from Brent Hempel to Chris Naya (Council)).
(b) SD repudiation of the Agreement: S&D has ceased performing the Services (as of 4 May 2015) and has advised Council that it no longer intends (and/or is able) to perform the Services required under the Agreement (refer to emails dated 4 and 5 May 2015 between Council and S&D). Council accepts this repudiation by S&D of the Agreement.
[30] SDL’s principal contention is that the Council did not have right to terminate the agreement. That SDL had not repudiated. As a result of the Council’s termination it has suffered loss. This is disputed and met with a counterclaim for the increased costs assumed by the Council as a result of having to engage WMNZ on an urgent basis.
17 June 2015
[31] A permanent contract with WMNZ was entered into no later than 17 June
2015. Thereafter the Council refused to pay its current liability to SDL of
$175,888.63. Rather, it claimed it was owed money as a result of having to engage WMNZ on a temporary supply basis, resulting in an additional cost of $212,639.14 and so a net liability of SDL of $36,750.51.5
The trial issues
[32] The trial issues can be formulated from the pleadings as follows:
(a) Was there an “insolvency event” entitling the Council to terminate the
contract?
(b) Did SD repudiate the contract?
(c) Did the Council breach its duty “to act in good faith with respect to
[its] respective rights and obligations” (Clause 14.1.) by:
(i)Failing to properly assess whether an Insolvency Event justifying termination had occurred or that the SDL conduct
was repudiation?
5 That is, the additional cost of WMNZ’s services of $212,639.14 less the outstanding account
owed to SDL of $175,888.63, resulting in a balance owing to the Council of $36,750.51.
(ii) Withholding its consent to SDL’s request for an assignment of
the contract to Semenoff?
(d)Did SDL fail to act in good faith by not immediately communicating with the Council, that its solution was an assignment of the contract?
If the above issues are decided in favour of SDL –
(e) Did the Council breach the contract by failing to pay SDL for work completed before 8 May 2015, in the sum of $175,888.63?
(f) Is SDL entitled to general damages?
[33] While the pleadings can be separated out in this way, the good faith obligations of the Council and SDL colour the question of whether SDL repudiated the contract. Further the nature of the plea of repudiation can on the facts be seen as asking the same questions to be addressed as to whether there was an insolvency event. For these reasons the following analysis ultimately reaches conclusions on (a) through to (d) only after considering all of these “issues”.
[34] I start first with the interrelationship between an insolvency event and the pleading of repudiation. The letter of termination splits termination cl 23.1 for insolvency between “(a) termination under clause 23.1 for insolvency and (b) repudiation of the agreement”.6 An insolvency event, as defined in cl 4.1,7 is addressing the inability of a person to pay its debts. When the Council counterclaimed alleging repudiation it was a shorthand reference to s 7(4)(b) of the
Contractual Remedies Act 1979. It was the Auckland Council’s proposition that
SDL had repudiated the contract. Section 7 of that Act provides:8
7 Cancellation of contract
(1) Except as otherwise expressly provided in this Act, this section shall have effect in place of the rules of the common law and of equity governing the circumstances in which a
6 Set out in paragraph [29] above.
7 See [19] above.
8 The Contractual Remedies Act 1979 is now revised in the Contract and Commercial Law Act
2017. The 1979 Act continues to govern these proceedings, however.
party to a contract may rescind it, or treat it as discharged, for misrepresentation or repudiation or breach.
(2) Subject to this Act, a party to a contract may cancel it if, by words or conduct, another party repudiates the contract by making it clear that he does not intend to perform his obligations under it or, as the case may be, to complete such performance.
(3) Subject to this Act, but without prejudice to subsection (2) of this section, a party to a contract may cancel it if—
(a) He has been induced to enter into it by a misrepresentation, whether innocent or fraudulent, made by or on behalf of another party to that contract; or
(b) A term in the contract is broken by another party to that contract; or
(c) It is clear that a term in the contract will be broken by another party to that contract.
(4) Where subsection (3)(a) or subsection (3)(b) or subsection (3)(c) of this section applies, a party may exercise the right to cancel if, and only if,—
(a) The parties have expressly or impliedly agreed that the truth of the representation or, as the case may require, the performance of the term is essential to him; or
(b) The effect of the misrepresentation or breach is, or, in the case of an anticipated breach, will be,—
(i) Substantially to reduce the benefit of the contract to the cancelling party; or
(ii) Substantially to increase the burden of the cancelling party under the contract; or
(iii) In relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for.
(5) A party shall not be entitled to cancel the contract if, with full knowledge of the repudiation or misrepresentation or breach, he has affirmed the contract.
….
[35] It will be noted that subs (1) puts to one side the rules of common law and equity.
[36] At common law the term “repudiation” was confined normally to what is
described in s 7(2). As the learned authors of Law of Contract in New Zealand say:9
Unfortunately, the expression (repudiation) is sometimes loosely used: for instance the phrase “repudiatory breach” is sometimes used to describe any serious breach which justifies cancellation.10 But its proper and exact usage is as has been discussed: it is when one party “makes quite plain his own intention not to perform the contract”.11
[37] One fact is crystal clear in this case. The directors of SDL wanted to perform the contract. SDL was prevented from performing by the repossession of its plant by the two finance companies. The Council’s termination notice makes no reference to s 7 of the Contractual Remedies Act. To give the notice effect it has to be interpreted as relying upon s 7. In the notice, the draftsperson conflates intention not to perform and inability to perform with “(and/or is able)”:
S&D has ceased performing the Services (as of 4 May 2015) and has advised Council that it no longer intends (and/or is able) to perform the Services required under the Agreement (refer to emails dated 4 and 5 May 2015 between Council and S&D). Council accepts this repudiation by S&D of the Agreement.
(Emphasis added).
[38] The party to a contract can breach it because of an inability to perform which is something separate from an intention not to perform. Section 7(1) distinguishes “repudiation or breach”. Subparagraph (b) of the council’s notice can be rescued by substituting breach for repudiation in sub-paragraph (b). Where a contract cannot be performed because a party is incapable of performance that situation is covered by s 7(4)(b) — in which, it will be noted, the word repudiation is not mentioned, but the term “breach” is used to describe a past event and to anticipate a future event. This is not and cannot be a common law pleading of repudiation. Rather, it is a pleading
for relief under the Contractual Remedies Act relying upon s 7(3)(c) and s 7(4)(b)(i).
9 John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (5th ed, LexisNexis, Wellington, 2016) at 668 (footnotes in original).
10 MacIndoe v Mainzeal Group Ltd [1991] 3 NZLR 273 at 281 per Cooke P.
11 Spettabile Consorzio Veneziano di Armamento e Navigazione v Northumberland Shipbuilding
Co Ltd (1919) 121 LT 628 (CA) at 634 per Atkin LJ.
[39] That being the case, issues (a) and (b), as pleaded,12 essentially merge when the facts fall to be proved and analysed. There is no doubt that the central fact in this case is that the repossession of SDL’s plant rendered it incapable of performing the contract with the consequence that it led to SDL “ceasing to carry on its business”. SDL’s one hope was to obtain the Council’s consent to an assignment of the contract to Semenoff for value to SDL.
[40] The two trial issues (a) and (b) lead to the conclusion that the Council had the power to give a notice of termination on the basis that SDL had suffered an insolvency event under cl 23.1 subject only to a possible restraint on the Council by reason of the Council’s duty to act in good faith.
Relevance of good faith dealing
[41] The parties have two distinct approaches to the application of cl 23.1(b). The plaintiff’s argument depends on reading the power given to the Council to terminate by reason of an insolvency event with the Council’s obligation to deal with the plaintiff at all times in good faith as provided by cl 14.1 of the agreement.
[42] The contract has a chapter 14, titled “Parties’ Relationship”. The following
two clauses from that chapter are relevant:
14.1Good faith: The parties shall act in good faith with respect to their respective rights and obligations under this Agreement, and to progress effective implementation of the purposes of this Agreement.
…
14.3No surprises: The Supplier shall communicate regularly with the Council about performance of the Services, including promptly raising and escalating any issues relating to the Services, this Agreement or of likely concern to the Council.
[43] Mr Mount, for the Council, submitted that the wording of insolvency event in cl 1.4 is to be interpreted objectively, so that the test of whether there was “a significant risk that the person is insolvent” can be defended at trial by reliance upon
facts not known to the Council at the time it relied on an insolvency event.
12 See [32] above.
[44] The submission for the Council was
Whether the necessary risk existed must be assessed by the Court objectively based on the evidence established at trial, and is not limited to what the Auckland Council subjectively knew at the time.
Mr Mount cited Air National Corporate Ltd v Aiveo Holdings Ltd.13 That is a decision of Asher J resolving the scope of discovery. The context was one of application of s 7(4) of the Contractual Remedies Act.
[45] The objective application of that Act, which enables reliance on facts not known to the cancelling party at the time, was established by the decision of the Court of Appeal in MacIndoe v Mainzeal Group Ltd, where Richardson J said:14
The question for consideration against that background is whether any one or more of the subparagraphs of s 7(4)(b) is satisfied on the facts of the case. Substantiality in that statutory context is a matter of fact, degree and impression. It has the same flavour as "significantly" and "considerably". It is equally incapable of any kind of arithmetical analysis. One must stand back and, assessing the matter objectively, determine whether the effect of the breach will be, to take the most obvious provisions subparas (i) and (ii), substantially to reduce the benefit of the contract to Mainzeal or substantially to increase the burden on Mainzeal under the contract.
(Emphasis added.)
[46] Much of the defendant Council’s argument justifying an insolvency event relies on facts not known to the Council at the time, including the fact that SDL had not been paying its debts as they fell due for some time.
[47] I apprehend that there was heavy reliance by counsel for the Council upon subsequent knowledge because of the speed with which the Council terminated the contract. The argument of defence counsel did not dwell on the fact that satisfactory interim arrangements remedying the breach were put in place from the outset, with WMNZ. These arrangements restored the Council to compliance with its RMA consent in a matter of a day or two, well before the termination notice. It was not necessary in any compliance sense to terminate the contract with SDL in short order to secure the services of WMNZ. There was and remains a distinction between, on
the one hand, the interim arrangement entered into by the Council for remuneration
13 Air National Corporate Ltd v Aiveo Holdings Ltd [2012] NZHC 2258.
14 MacIndoe v Mainzeal, above n 10, at 284-285.
of WMNZ at premium rates, for stepping into the breach and shouldering the lion’s burden of the moving of the rubbish, and on the other hand, the long term new contract with WMNZ, which was not entered into until mid June.
[48] Not surprisingly, the plaintiff relied heavily upon the Council’s obligation of good faith contending that it was breached through the way in which the Council responded to the contract. By terminating the contract before even 10 days had elapsed, the plaintiff submitted the Council effectively ended any prospect of the contract being assigned for value with the Council consent, to the detriment of SDL.
The Council’s dealings with SDL — any breach of contract?
[49] At the time the Council first suffered cessation of services by SDL, through to when it terminated its contract with SDL, it was dealing with four men. The Council was at first particularly dealing with Messrs Graham MacKinnon and Bob Gore, who had previously been directors of SDL and at the material times were only managers. The directors of SDL at the time the events took place were Zane Cleaver and Andrew Chalmers.
[50] The Council soon appreciated, however, the distinction in status of these SDL executives. As we have seen, Mr McBeath identified that Mr MacKinnon was not listed as a director and instructed Mr Dale Anthony, who in turn instructed Mr Naya, to obtain confirmation from a director of SDL:
(a) That they are insolvent understood within the Council to be particularly relevant to the application of cl 23.1(b); and
(b)As to SDL’s ability and intentional capacity as to continued performance of the contract.
[51] The argument for the Council, defendant and counterclaim plaintiff, was that although they did not get clear assurances in that regard from Mr Hempel, the fact of the matter was that there was overwhelming objective evidence consistent with cl 23.1(b) of the contract that as from the first week of May SDL had become unable to pay its debts as they fell due.
[52] If it were as simple as that, the Council has a strong argument. The Council would not have to follow the more conservative advice given by Mr McBeath. However, as already noted,15 there is a good faith obligation as a term of the contract, cl 14.1.
[53] In neither MacIndoe nor in Air National Corporate had the parties agreed to mutual obligations of good faith dealing.
[54] Section 7(4)(b) of the Contractual Remedies Act does not displace the good faith obligation on the part of the Council. Conduct in good faith is conduct animated by current knowledge and cannot be rescued by an objective subsequent analysis.
[55] Good faith obligations have a natural, and an implied, setting in relationships of mutual trust such as partnerships. They are not normally found in the general run of contracts. The United Kingdom Court of Appeal had an occasion recently to consider express terms to act in good faith in a services contract. In Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd, the Court of
Appeal considered the following term:16
The Trust and Contractor will co-operate with each other in good faith and will take all reasonable action as is necessary for the efficient transmission of information and instructions to enable the Trust … to derive the full benefit of the Contract.
[56] The Court of Appeal reversed a finding at first instance that the clause was a general obligation to co-operate in good faith. Rather, it confined the obligation to the last two aspects of the clause: the transmission of information, and the ability for the Trust to derive full benefit of the Contract. Beatson LJ considered “care must be taken not to construe a general and potentially open-ended obligation such as the
obligation to ‘co-operate’ or ‘to act in good faith’ as covering the same ground as
15 Paragraph [42], above.
16 Mid Essex Hospital Services NHS Trust v Compass Group UK and Ireland Ltd [2013] EWCA Civ 200.
other, more specific provisions”.17 The court emphasised the importance of assessing the surrounding context of a good faith term.18
[57] Ms Murphy, for SDL, argued that this obligation of good faith was breached by the hasty cancellation of the contract by the Council, less than 10 working days after the breach. It was made at a time when the immediate requirements of the Council were being met by a short-term contract with WMNZ. That there was no commercial need or necessity for the Council to bring that contract to an end. And that the Council knew SDL wanted to assign the contract, as it was a valuable asset.
[58] Under Chapter 28 of the contract, titled “General”, we find the assignment
power in cl 28.2:
28.2Assignments and transfers: Supplier must not assign or transfer any of its rights or obligations under this Agreement without the prior written consent of the Council. Any change in effective control or beneficial ownership of the Supplier shall be deemed as assignment for purposes of this clause 28.2. If Council consents, supplier will pay Council’s reasonable legal and other costs relating to consent and assignment.
[59] There is no express presumption of entitlement to assign in cl 28.2. Nor, following Mid Essex Hospital Services, does the good faith obligation impose any presumption not present in cl 28.2 that an application for assignment will be approved. But, the general obligation of good faith between the parties would apply to the exercise of cl 28.2. However, consistent with cl 28.2 there is a corresponding obligation to consider seriously an application for an assignment. It can be seen that the good faith obligation falls into two parts:
(a) Acting in good faith with respect to their respective rights and obligations; and
(b)To progress effective implementation of the purposes of this agreement.
[60] Guided by the dictum of Beatson LJ, I consider that I should take care not to impose any duty on the Council to consent to a suitable assignee of a benefit of the contract. On the other hand the agreement contemplates assignment in whole or in part of the benefits and obligations of the contract. It follows that the Council cannot without good reason refuse to consider an assignment. That would breach its obligation of good faith dealing. In normal circumstances this would include giving the contractor a reasonable opportunity to present a proposed assignment for approval.
[61] In my view it is artificial and ultimately impossible to separate the issue of the entitlement of the Council to rely upon an insolvency event and the obligation of the Council to deal with SDL in good faith. Likewise SDL had a good faith obligation to communicate urgently with the Council the whole of the week from the time the directors knew of the repossession of the leased plant, not to wait four days.
[62] Good faith dealing in respect of assignments on these set of facts needs to be placed in the context of Chapter 23 dealing with termination and expiry. Clause
23.1,19 envisages a minimum period of 10 business days from breach before the
contract can be terminated on the grounds that the supplier has committed a material breach. But there is no time limit if the supplier suffers an insolvency event.
[63] Insolvency is defined in cl 1.4.20 It could be drafted better. The core meaning of insolvency, in commercial affairs, is the inability to pay one’s debts as they fall due. It does not follow that the person or corporation cannot realise in due course assets and thereby clear all its debts.
[64] I have considered whether or not there are two standards in clause in 1.4, due to the phrase “is insolvent; or, is or will become unable to pay its debts as they fall due”.
[65] In my view a person is insolvent when they are unable to pay their debts as they fall due. An insolvency event in this contract is defined to be broader than that
19 See [18] above.
to include a situation where the person will (in the future) become unable to pay its debts as they fall due. That second clause reinforces the common meaning of insolvent as the inability to pay debts as they fall due. Then we come to the “including” part the definition. For convenience, I reproduce part of clause 1.4:21
(a) any step being taken to make the person bankrupt, wind up the person’s business or to have a receiver, receiver and manager, administrator, liquidator or statutory manager appointed to or in respect of the person or any of its assets;
(b) any statutory demand being served on the person, or any proceedings being brought or threatened against the person for recovery of a liquidated or undisputed debt;
(c) the person ceasing to carry on its business; or
(d) a meeting of the person’s creditors being called or held or the person entering into any type of arrangement with, or assignment for the benefit of all or any of its creditors;
[66] Part (b) can be seen as another application of insolvent. Part (d) is likely only to occur where there has been an insolvent event.
[67] The question then becomes, what is meant or intended to be meant by “(c) the person ceasing to carry on its business”. A person can cease to carry on its business and still be able to pay its debts as they fall due.
[68] It will be recalled that the termination of contract was by letter of 8 May, the relevant terms of which are set out in paragraph [30] above.
[69] Counsel for the plaintiff submitted in closing:
92. SDL’s submission is that, whilst it can understand the Council’s
immediate operational response to the disruption to the Services on 4
May 2015, it cannot fathom what followed thereafter as regards the status of the Agreement or specifically how the Council can
genuinely contend that it fulfilled its good faith obligations under
clause 14.1 when dealing with the situation.
93.Specifically, and as already noted, it was open to the Council to take a variety of steps which would have preserved its legal position pending the prompt clarification of SDL’s contractual position. It could have:
93.1 Suspended SDL’s performance [Clause 12.2];
93.2Appointed an independent contractor to rectify the disruption to the Services [Clause 2.3];
93.3 Consented to the assignment of the Agreement to Semenoff
Transport [Clause 28.2]; or
93.4Given SDL 10 days to rectify the material supply breach as contemplated by the Agreement [Clause 23.1(a)].
[70] As already found, there is no doubt that within 24 hours of SDL ceasing to perform the contract, the Council had put in place a temporary, but completely effective, alternative provider of services namely, WMNZ.
[71] There was no pressing commercial need for the Council to enter into a long term agreement with WMNZ. There is no evidence that there was any obligation in this regard imposed or agreed by the Council in its dealings with WMNZ. There is evidence that WMNZ was the preferred long term replacement for SDL by the
Council officers from as early as 1.43 pm on Monday 4 May.22
[72] Focusing on the insolvency event and coupling the application of that focus with cognisance of the good faith obligation of the Council, the question becomes whether the Council should have come back to SDL to discuss why it was not going to enter into an agreement with Semenoff, before terminating the contract.
[73] To judge this issue it is necessary to set out in some more detail the connections between Semenoff and SDL.
The Semenoff relationship
[74] Semenoff Transport Group is a very large transport business having its head office and northern base in Whangarei. Evidence of Semenoff’s interest in this contract came principally from the evidence of Mr DG Turner, currently the manager of Stan Semenoff Logging Ltd. But up until March 2015 he was employed by SDL in Whangarei. So as a witness he has the advantage of familiarity with both the personnel of SDL and the operations of Semenoff Transport.
[75] It was Mr Turner’s evidence that Semenoff was looking for expansion opportunities because in December 2014, when SDL issued an information memorandum as part of looking for a purchaser, he was tasked with putting together the document bundle to go to Semenoff Transport. He knew that Semenoff Transport had an interest in acquiring SDL’s business operations from at least in or around December 2014. In March 2015 there were some negotiations about transferring certain logging contracts. They extended to discussing the transfer of SDL’s refuse haulage contract with Auckland Council. By late April 2015, Semenoff had become keen to secure the services contract and had undertaken due diligence on SDL and completed site visits. It had pursued negotiations with SDL as to the price, scope and time of the proposed sale and had confirmed it wanted to agree to proceed with the purchase of SDL pending fulfilment of several standard conditions including confirmation that the valuable services contract would be assigned to it.
[76] It was Mr Turner’s view that if the Council had granted Semenoff an assignment of the services contract Semenoff would have been able to resurrect supply of the services within one day of execution of the assignment. As already noted there was evidence that the Council knew that Semenoff had bought over 100 vehicles/machines from those re-possessed from SDL and/or placed with Turners Auctions for sale.23 [27] (Mr Naya).
[77] Turning particularly to the relationship between Semenoff and the Council,
Mr Turner’s evidence was:
I do not know why the Auckland Council refused to consent to the assignment to Semenoff Transport as it was ready, willing and able to take an assignment of the services contract and perform the services through to the completion of the term.
[78] Mr Turner said he had been made aware that the Council says it contacted him in or around mid-May 2015 to discuss whether Semenoff might want to become involved in the supply of the services. He says he has no recollection of this discussion and that had he been contacted he would have referred the inquiry to Mr Semenoff, who was frequently in Auckland while he, Mr Turner, was in
Whangarei, and it was Mr Semenoff who had the ultimate responsibility for the decision.
[79] It was Mr Turner’s evidence:
As far as I am aware, any genuine opportunity Semenoff Transport had to obtain a contract for the services was lost when the Auckland Council refused to grant an assignment of the services contract.
[80] That completed Mr Turner’s evidence.
[81] As the reader will find below, there is no doubt that a meeting was set up for a discussion between Auckland Council and Mr Semenoff. Mr Semenoff did not give evidence. No witness from the Council gave evidence as to whether that meeting took place, let alone why the Council would not allow Semenoff to take an assignment of SDL’s contract.
[82] Both sides had an opportunity to call evidence as to what happened. The plaintiff and/or the defendant could have summoned Mr Semenoff.
[83] Mr Naya gave evidence for the Council on this opportunity. He confirmed that shortly before 5.00 pm on Thursday 7 May, he received a call from someone of the Semenoff group, he believed it was Mr Stan Semenoff himself, who said that they had purchased 100 vehicles from SDL and that they wanted to meet at the Transfer Station.24 Mr Naya said he agreed to do that at 11.00 am the next day and he advised his colleagues. He then records he had a follow-up call from Andrew Chalmers, a director of SDL, just after 5.00 pm who said SDL would like to assign the whole contract to Semenoff with the Council’s approval. He confirmed he sent an email after those calls at 5.13 pm on Thursday, which included the comment:
I imagine that we’ve already made our decision on this one and may want to cut our losses from the fiasco, but still worth listening to what they have to say.
[84] But then he says:
I do not recall meeting Mr Semenoff or anyone else from his company on the Friday. There was never any written request from Smith & Davies to assign the contract to Semenoff Group, or anyone else.
[85] Under cross-examination Mr Naya was not challenged on those two facts. The Council’s position seemed to be that they only had to respond to a written application.
[86] The oral request by Mr Chalmers for an assignment was discussed between Mr Naya, his boss Mr Dale Anthony, “Laurie” and Kel McBeath. Mr Naya said the discussion was:
Just around the situation at the time that we were in at the transfer station, the potential around using the Semenoff group in light of the procurement process which we had already been through and was very expensive and the fact that we have approved reliable contractors set up with the Auckland Council.
[87] This answer obscures, ignores, or overlooks the fact that WMNZ was in place on a short term contract.
[88] It was put to him that the Council did not speak to or seriously negotiate with any other provider other than WMNZ. He disagreed and said there was discussion with another potential provider, Ward Demolition. On Mr Naya’s evidence he spoke to Mr Semenoff by telephone but, never met him or any other person from his company.
[89] As already recorded, the Auckland Council terminated the contract with SDL the next day, 8 May. The probability is that the Council did not want to assign the contract to Semenoff, nor to get into protracted negotiations with SDL as to whether or not the contract could be assigned.
[90] The obligation of good faith in clause 1.4 is mutual. When examining the good faith of the Council, responding to a crisis, it is necessary at the same time to examine the conduct of the directors of SDL.
[91] As the narrative of events shows, SDL ceased moving the rubbish by 2.00 pm on Monday 4 May. This was apparently on the direction of either Mr Graham
MacKinnon or Mr Grove, as managers. Yet the directors of SDL did not contact the Council at all until the email from Mr Brent Hempel, sent three days later on Thursday 7 May. Mr Hempel was not known to the Council. So there was no direct contact by directors of SDL, Messrs Chalmers and Cleaver, with Council officers, until a telephone call between Mr Naya and Mr Chalmers on Friday 8 May. This sequence hardly encouraged any sympathy let alone confidence in SDL by the Auckland Council.
[92] One of the explanations given by SDL was that the directors were fully engaged mid-week in examining whether or not the company could continue. That included looking at the opportunity for Semenoff to take an assignment of the contract. On the probabilities the only option being seriously considered by the directors of SDL was to ensure the Council found Semenoff to be a suitable assignee to take the contract, in return for a capital sum paid by Semenoff to SDL.
[93] However, the Council’s internal emails already noted suggest that the Council’s mind was already made up, namely that from the outset of the non- performance, the Council’s senior staff wanted the next contractor to be WMNZ. As already noted, WMNZ had been the under-bidder, and by only a very close margin, for SDL’s contract in the first place. The reason that the contract went to SDL was not because of the slightly favourable margin in price, but in recognition of the fact that the MacKinnon family had been collecting rubbish for the Auckland Council entities for over 80 years and was a New Zealand company.
[94] On the probabilities it is clear that the Council did not want to undertake a good faith negotiation with the directors of SDL as to the possibility of an assignment to Semenoff. That point of view was enunciated prior to the Council’s discussions with Semenoff to the extent there were any at all. It is more probable than not that that point of view of the Council was taken into such discussion with Mr Semenoff, as may have taken place. Such conduct is a breach of its good faith obligations.
Ultimate issue
[95] I therefore proceed upon the basis that the Council was in breach of its good faith obligation when sending the notice of termination on the Friday after the Thursday of contact removing any prospect of an assignment. But also that SDL had breached its good faith obligation by not engaging at director level with the Council until the Thursday, nearly a week after the debacle began to unfold.
Consequence of the mutual breaches of good faith
[96] The next question is whether or not SDL incurred a loss by reason of the Council’s breach. SDL has the onus to prove this. SDL had an opportunity at the trial to develop the proposition that Semenoff was a suitable assignee of the contract. However, Mr Semenoff was not called, by either the Council or by SDL. No explanation was led or capable of being led from Mr Turner as to whether Mr Semenoff and Mr Naya met or why not. In the absence of any explanation I infer that SDL had the opportunity of subpoenaing Mr Semenoff. Presumably SDL decided Mr Semenoff would not help the case.
[97] There is no obligation on the Council in the assignment clause to give preference to the assignor being able to assign to another party. There is no term for example saying such assignment would not be withheld unreasonably.
[98] Such a qualification would be unlikely in a contract such as this, which is for essential services. The Council has a legal and public health imperative in running efficient rubbish removal systems.
[99] Semenoff is a leading haulage company, particularly in forestry products. But there no evidence was before the Court that it has any expertise in rubbish removal. WMNZ was easily, on any picture, going to be the lead contender to take over the contract, in the presence of a good faith obligation or not, were there to be a competitive market to be the successor to SDL. In a head to head between Semenoff and WMNZ, WMNZ was highly likely to be the Auckland Council’s preferred operator.
[100] I conclude that the Auckland Council was in breach of its good faith obligation but SDL has not discharged its onus of proving that the want of an assignment of the contract by SDL to Semenoff was a consequence of that breach. It was at best the loss of a chance. But it was not a chance causative of loss. The Council positively wanted the contract to go to WMNZ from the outset, i.e. from 4 or 5 May, and were entitled to have that policy. SDL’s only possible assignee was Semenoff. On the probabilities I find that even if SDL or Semenoff had applied for an assignment, the Council would have preferred WMNZ. Therefore SDL is not entitled to compensation for the loss of the value of the contract.
[101] The remaining issue is whether SDL is entitled to recover the balance owing, to it as at the date of cancellation of the contract.
[102] SDL was in breach of contract. To continue the rubbish services on an interim, emergency basis, the Auckland Council had to pay a premium price to WMNZ of around $400,000. There is nothing unusual about this. This is a reflection of market forces. Essentially, the Council sought and obtained an urgent, virtually same day, response from WMNZ, which would in any commercial circumstances result in a premium price for the work. I find the Council was entitled to set off the sum owing to SDL against the premium price it had to pay for SDL’s breach of contract.
[103] Accordingly, the claim by SDL fails and the Council are entitled to their counterclaim sum of $36,750.51, interest, plus costs on a 2B basis. If the parties cannot agree interest and/or costs, I will receive memoranda to be exchanged in draft before filing, of no more than five pages each.
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